Mama's Creations Inc

NASDAQ:MAMA

Earnings Call Transcript 2018-Q4

[Operator]

Good morning, and welcome to the MamaMancini's Fourth Quarter and Fiscal Year 2018 Financial Results Conference Call. [Operator Instructions] Please note that this event is being recorded. I would now like to turn the conference over to Mr. Joe Diaz of Lytham Partners. Please go ahead.

[Joe Diaz, executive]

Thank you, Cole, and thank all of you for joining us to review the financial results of MamaMancini's Holdings, Inc. for fiscal year 2018, which ended January 31, 2018. With us on the call today representing MamaMancini's are Carl Wolf, Chairman and Chief Executive Officer; Matt Brown, President and Chief Operating Officer; and Larry Morgenstein, Chief Financial Officer. At the conclusion of today's prepared remarks, we will open the call for a question-and-answer session.

Before we begin with those prepared remarks, we submit for the record the following statement: statements made by the management team of MamaMancini's Holdings, Inc. in the course of this conference call that are not historical facts are considered to be forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 as amended and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements describe future expectations, plans, results or strategies and are generally preceded by such words as may, future, plan, planned, will, should, expected, anticipates, draft, eventually or projected. You are cautioned that such statements are subject to a multitude of risks and uncertainties that could cause future circumstances, events or results to differ materially from those projected in the forward-looking statements, including the risks that actual results may differ materially from those projected in the forward-looking statements as a result of various factors and other risks identified in the company's 10-K filing for the fiscal year ended January 31, 2018, and other filings made by the company with the Securities and Exchange Commission. Forward-looking statements reflect management's analysis only as of today. The company undertakes no obligation to publicly release the results of any revision to those forward-looking statements.

Let me now turn the call over to Carl Wolf, Chairman and Chief Executive Officer of MamaMancini's Holdings. Carl?

[Carl Wolf, executive]

Good morning. Thanks for joining us on today's call. We appreciate your continued interest in MamaMancini's Holdings, Inc. Fiscal 2018 was a very solid year for MamaMancini's. For the year, revenue increased 53% to $27.5 million and 45% to $7.8 million for the fourth quarter. In terms of revenue growth, we continue to build on the momentum of the past 2 years as we remain focused on our efforts on developing larger grocery retail accounts and to feature our products in the perimeter of their respective stores, where we earn a more reasonable profit margin.

It was also great to achieve profitability for the entire year. We believe we are now well positioned to drive consistent revenue growth and profitability in the coming years. With the successful integration of the Joseph Epstein Foods Enterprises, Inc. acquisition, we expect consistent operational efficiencies going forward. We also paid off approximately $1.35 million of remaining balance of our Manatuck Hill Partners note in fiscal 2018, and we believe that we will benefit from additional flexibility once that financial obligation is retired.

Given these developments, we believe we are well positioned to achieve our goal of $40 million to $50 million revenue run rate by the end of fiscal 2018 -- I'm sorry, '19. Management benefits by being at the leading edge of an ongoing cultural shift in family dynamics as it relates to meal preparation. It is estimated that upwards of 70% of all consumers decide what is for dinner within 3 hours of the meal.

Also, due to extremely busy work and family activity schedules, people are increasingly eating separate easy-to-prepare meals from the rest of their family, so take-out prepared food makes sense. We believe we are in the right segment of the industry. Fresh food and prepared ready-to-serve meals are taking market share from more traditional food product brands, which we believe are decreasing 1% to 2% a year.

The quality of food and the timeliness of preparation is now more important. We are also seeing that the cost of prepared foods in supermarkets and club stores is very competitive with the cost of take-out dining in regular food service establishments. MamaMancini's is very well positioned.

Our strategy of developing larger retail accounts and our product being sold in their delis and prepared meal sections is having a beneficial effect to all properties involved. Nationally, sales on the periphery of the grocery store continue to grow at an estimated 8% per annum, while the traditional packaged good center of the store is estimated to be decreasing at 1% to 2% per year.

Consumers are increasingly adopting prepared meals that offer a superior nutritional profile, require minimal prep time, enabling a growing segment of the population to maximize use of their time and devote that time to activities they deem important for them and their families. Over the past 2 years, this has led to a consistent expansion in our most important growth metrics, and we have every expectations of continuing progress.

Grocery retailers appreciate having nutritious and delicious new products to offer in those increasing popular sections of their stores. Customers benefit by having the ability to choose ready-to-serve meals to accommodate their very busy work and family schedules. MamaMancini's benefits by being at the leading edge of the cultural shift in family dynamics as it relates to meal preparation.

We continue to add more stores, and we are increasing the number of SKUs of each store. In fiscal 2018, we had placements of additional product in major grocery retailers, including Sam's Club; Costco; Publix; Whole Foods; The Fresh Market; Ahold, which is Stop & Shop; and QVC. Placement on grocer's shelves increased at the end of fiscal 2018 to 43,800, up from 38,700 as of January 31, 2017.

Sales per placement per retail food shelf location increased 35% from prior year. Our various sales and distribution channels continue to do a great job in getting our products in the right stores throughout the country that can support increasing unit sales at reasonable margins.

New product developments will continue to be a central focus for MamaMancini's. Development of new products for our target markets of prepared food and delis are important in that they support our grocery store partners in keeping those sections fresh, vibrant, relevant and driving increased sales. Some of our new products include sausage, sausage and peppers, sauce and vegetarian meatballs. We also are introducing a number of pasta entrées.

We believe we have expansion opportunities into about 70% of the retail grocery store markets as we estimate we are only in 30% of all retail location at present. So we've got a long way to go and lots of headroom to grow this business in the retail grocery segment.

Our manufacturing team is also doing a great job in meeting the growing demand for our products. Matt Brown, our President and Chief Operating Officer, and his team continually meet the challenge of producing our products with the highest quality in the most efficient manner possible. Matt is overseeing the addition of new equipment, personnel and product recipes and has not missed a beat in getting product ready to meet our delivery schedules.

As always, we continue to value our association with QVC and its extensive audience. This is an important partner for MamaMancini's as it moves a lot of our product but also enhances our brand on a national scale. We expect to continue to expand on that experience for many years to come. In fact, Dan Mancini, our spokesperson and co-founder, will be on QVC tonight, Wednesday, between 4 and 6 p.m. and will be on QVC from -- at least 4x this month and possibly 6 live.

At this point, let me turn the call over to Larry Morgenstein, our new Chief Financial Officer. Larry joined the company on April 1, and we are delighted to have him on the senior management team. We'll then hear from Matt Brown, our President and Chief Operating Officer on Operations. Upon the conclusion of Matt's remarks, I will provide some final thoughts, and we will open the call for your questions.

Larry?

[Lawrence Morgenstein, executive]

Thank you, Carl. Revenue for the fiscal year ending January 31, 2018, was $27.543 million, a 52.6% increase compared to revenues of $18.049 million for the fiscal year 2017. Fiscal 2018 gross profit decreased as a percentage of sales from 40% last year to 33.6% this past fiscal year of 2018. This was caused by a change in product mix, which saw the firm sell greater volume to larger accounts that were net of all operational merchandising fees.

Total operating expenses for fiscal year 2018 increased by approximately $1,435,000 to $8.197 million versus fiscal year 2017. This was an increase of 21.2% for the fiscal year 2018 even though sales increased by 52.6%. We continue to closely monitor our spending and have implemented tight internal controls to enhance fiscal oversight.

Operational income for fiscal 2018 increased by approximately $607,000 to $1,063,000 as compared to the same period in 2017. In 2018, net income was $320,000 as compared to a loss of $301,000 for the comparable period in 2017. Net income/loss per share was a $0.01 gain in 2018 as compared to a $0.02 loss for fiscal year 2017.

The company's cash position on January 31, 2018, was $581,000. The firm reported long-term debt of $1,551,000 on January 31, 2018. The Manatuck Hill Partners note was renewed through November 1, 2018. The company continues to pay down the principal. During fiscal year 2018, the firm made principal payments of $1,350,000. Cash flow from operating activities for fiscal year 2018 was $1.316 million as compared to $0.357 million a year ago.

Cash EBITDA for fiscal 2018 was $1,821,000 as compared to $767,000 in 2017. Cash EBITDA as a non-GAAP fiscal measure is defined as EBITDA plus stock payments in lieu of cash expenses. The integration of Joseph Epstein into MamaMancini's allows the company to recognize operating efficiencies at the point of production. This passes increased profitability to the firm.

That completes my comments. Let me turn over the call to Matt Brown, our President and Chief Operating Officer. Matt?

[Matthew Brown, executive]

Thanks, Larry. As you have heard from Carl and Larry, revenue for MamaMancini's increased 52.6% in fiscal year 2018 versus a year ago. The plant, which is now officially merged with MamaMancini's, continued to work overtime at year-end to maximize the efficiencies and productivity during that time period.

I'm going to date myself here and say that growing up and listening to 45s as a kid, the B side was always a neglected side of the record. However, at the plant, what we referred to as our B side, has been anything but neglected. The B side or back side of the building became a critical component in helping us obtain the production growth that we needed at year-end.

This new space has been configured to handle our growing food service prepared food kit business that Carl mentioned earlier, while the A side of the plant continues to focus on cooking meatballs, meatloaf and other proteins that contributed to our overall increase in revenue.

Regretfully, Q4 fiscal 2018 saw a delay in our expansive construction project. So while we were successful in upgrading equipment throughout the year and creating the initial layout of that B side of the plant, the utilities and the refrigeration freezing upgrades were slowed, mostly due to town permitting constraints. All that's been resolved, and we began this phase of the upgrade in fiscal Q1 2019.

So while I'm getting a little ahead of myself here with current production, I can say that this coming summer will be a cold one at the plant with the completion of our temperature-controlled packing room and our new state-of-the-art 500-square-foot blast freezer. These colder temperatures will mean faster chill-down rates for the product and more throughput in the operations. Ultimately, this will open up capacity in previously bottlenecked parts of the process.

With our increase in production, we continue to see strength in our purchasing power. Where distributors were the key source of raw materials 8 to 10 months ago, we're now finding ourselves negotiating most of our ingredients directly with the manufacturers. So by cutting out the middleman, it's enabled us to get tighter pricing from our vendors, making us more competitive when seeking new business or growing existing business. Q1 fiscal 2019 has already proven this, but that's a story for another day, which we will discuss.

One final note, we added 2 more people under our quality control department in fiscal Q4 2018 as we prepared, at that time, to utilize the new space in the plant. The new manager started to oversee the B side of production and, of course, continue to enforce the same GMPs or good manufacturing practices, as we call it, that are implemented daily on the A side, all in a continuing effort to ensure that the product is of the highest quality and that we ensure the highest level of safety while producing them.

So at this point, I will now pass the call back to Carl.

[Carl Wolf, executive]

I just want to add to Matt's point, we are officially a level 2 safe quality foods plant, which is a very small percentage of plants are for our size, and we're very, very proud of that. I believe this is our third year at that level.

Before we open the call for your questions, I would like to say that we are pleased with the financial results of fiscal 2018. We had strong revenue growth and we're profitable for the fiscal year. We have every expectation of continuing to grow our business in the coming quarters and years.

With the completion of the integration of the Joseph Epstein Foods Enterprises, Inc. and the continuing payoff of the Manatuck Hill note, we are better positioned to pursue our operational and financial goals.

In the near future, we will look to enter the food service and convenience store segments. We believe these segments are as large as the supermarket segment, and thus, they represent a 100% growth opportunity. Moreover, as I said earlier, our products are still in only 30% of total supermarkets and club stores nationwide. We believe we have the opportunity in the coming years to be a company that can generate several hundred million in annual sales and EBITDA in the 20% range. This is a goal and not a projection.

It is our intent to uplist to NASDAQ as soon as we meet its requirements. We believe that we are making measurable progress as we continue to exhibit double-digit revenue and -- revenue growth and profitability. We look forward to fiscal 2019 continuing the positive trends of the past 2 years.

With that, let's open the call for your questions. Operator, please begin the process.

[Operator]

[Operator Instructions] And the first question comes from Howard Halpern from Taglich Brothers.

[Howard Halpern, analyst]

Just looking into this current fiscal year, when the new customers come online, approximately what quarter should we expect that little bump in revenue from the initial stocking that those customers will undergo?

[Carl Wolf, executive]

You'll see the second quarter will -- seasonality and -- is less merchandising on our type of products. And also, there's some rotation where you're in and out for 6 to 9 months of the year. You're in for 6 to 9 months, you're out for 3 to 4, where grilling items are featured. So we will -- while we are in active negotiations for a very, very significant new business, it will show up between August and November, which will show up in the third quarter. The second quarter will not show that and the fourth quarter.

[Howard Halpern, analyst]

Okay. And now in terms of, I guess, the integration costs, which hurt a little bit in the gross margin, what was that level? And when do you pick up to get back to that 38% level?

[Carl Wolf, executive]

We're -- we believe we're at that level right now or very close to that level, and it's pretty much done. Most of that integration costs occurred in the latter part of fiscal 2018.

[Howard Halpern, analyst]

Okay. And in terms now of the plant with everything completed, I guess, in Q1, what is the capacity -- revenue capacity of the plant that is currently configured?

[Carl Wolf, executive]

Depending on the product mix, between $60 million and $70 million, with some minor supplemental co-packers.

[Howard Halpern, analyst]

Okay. And you talked about you're in talks with some very large customers. Is that going to expand your footprint nationally, including the West Coast?

[Carl Wolf, executive]

Yes. The West Coast has been relatively a less productive area for us, and that will definitely increase our national presence.

[Operator]

[Operator Instructions] And our next question comes from [ Anthony Gulu ], private investor.

[Unknown Attendee]

Thank you for such a wonderful report and growth [indiscernible].

[Carl Wolf, executive]

Thank you, [ Anthony ].

[Unknown Attendee]

First, your company is unique in that you're not just selling frozen peas. You're incorporating many ingredients to make a meal. This is a sophisticated endeavor. And quality control is a key. So what effort do you make to make sure that your product is a standard product, doesn't have that much variation from store to store? And in terms of your distribution, how do you know when a shelf is empty? What is the procedure? Does the store report to you? Yesterday, I called one of the stores here on Long Island, trying to get one of your product, and the clerk told me that they sold out fast and they were waiting for another shipment. So my question here is, how do you know when you're vacant and you should be filling up a particular space? One other question with reference to your balance sheet. Could you kindly explain the preferred stock? I don't understand it because you show, I believe, 23,300 -- excuse me, 23,400 preferred. I noticed that the interest on the preferred dropped from -- not the interest, but the dividends dropped from 204,000, down to 91,000. So I'm trying to understand why the drop. And looking at 2017, I don't see any preferred. So if you could help me with that, I'd appreciate it.

[Carl Wolf, executive]

Right. I'm going to -- there's 3 questions. I'm going to answer the out-of-stock question, the preferred, and Matt will answer the quality assurance question. As far as the out-of-stock is concerned, most supermarkets now have a computerized system at the cash register. Every time there's a sale, it goes into their computer and it's perpetual inventory and they know to order. So we also -- since, in some cases the clerk will help, doesn't properly -- handle this properly, so we have periodic merchandising promotions, especially in the prepared food section, because sometimes, it may not be labeled at the cash register. So we run periodic merchandising events to assure distribution. Ahold Stop & Shop is one chain that we've instituted this over the last 2 years, and we've been seeing their out of stocks move from around 20%, 25% to about 10%. So we're very, very aware. We also have brokerage firms that have retail people that go to stores and they look and see if product is in stock. Some chains are better managed than others, and it's very, very difficult to tell them what to do. But we are aware of them, and as a result, we will step up the merchandising activities. As far as the preferred stock is concerned, the preferred stock was converted on July 27. So you see stock dividends from preferred stock for a part of the year, of this year. And I believe last year, there was preferred stock dividends given out for the whole year. And so right now, there is no preferred stock outstanding on the books as of today. Matt, you want to handle the quality assurance question?

[Matthew Brown, executive]

Yes, sure, Carl. [ Anthony ], to that question, let me say, it really starts with internally what we call specs and also Dan himself. So when we have these products that we produce, Dan has a recipe...

[Carl Wolf, executive]

Dan Mancini.

[Matthew Brown, executive]

I'm sorry, Dan Mancini, I should have prefaced that. Dan Mancini has recipes that are provided to our team. What our job is, is to be able to mass-produce that product and produce it consistently and maintaining the quality of that product. So the recipes themselves are not -- they're not rocket science. The beauty of this product is that it's clean ingredients. And as long as you take the time and care to do it the right way, you can be fairly consistent. So we know what the ingredients are from the spec list. Then it's just a matter of contracting with our suppliers to ensure that we're getting in those ingredients. And the biggest ingredients really here are the proteins. So we need to ensure the proteins coming in are consistent and at the same quality level we would expect every time out. So we have a QA team that reviews the incoming ingredients as part of our plan. And if anything is off spec at that point, it would be rejected at receiving. But we haven't had issue there as far as I've seen. And then from there, it's just a matter of following the protocol and the procedure. Once products are produced, they're sent out to a third-party lab that does a -- what's called a COA or a certificate of analysis for us, which gives us feedback on the product, ensures that we're meeting all the safety levels and then that product is released to the trade. So again, not a hard recipe, just following it closely, monitoring it along the way and ensuring that we've got the results coming back to us before we release the product.

[Carl Wolf, executive]

Plus, we have quality assurance teams that -- plus, we have quality assurance personnel, which Matt mentioned in his part of the presentation, that are in the plant watching product being produced and pulling product and doing taste cuttings and profiles and -- as well as appearance, et cetera, to make sure that product is consistent.

[Matthew Brown, executive]

But real quick, you brought up an interesting point, [ Anthony ], which is there are other manufacturers out there that can produce consistent product, but a lot of that is done through chemical and preservative additions to the product. We do not do that. So I understand there's a question of, so how do you maintain consistency? And again, it goes back to just proper protocol and having QA monitor the situation throughout the process.

[Operator]

[Operator Instructions] And our next question comes from Bernard Girma from DigiTech.

[Bernard Girma, analyst]

First of all, congratulation on the year. It's a lot nicer when you start making money for this year so we -- continue to do that. The quick question about financial control. You have a segment on the 10-K that some issue on the financial control, you have taken steps to do it. Can you expand a bit on that? I'm making sure that we're filing on time for the first quarter.

[Carl Wolf, executive]

Well, let me talk about the filing. There was a little bit of confusion in the turnover from Lou Ochs, who retired as our CFO, to Larry, who is on board. There also was, for the first time, a full year integration of Joseph Epstein Foods, and all that had to be taken into account. And with all that, we were behind and wanted to make sure our numbers were accurate. As you can see, there was not any deviation from the track we were on. So that was not an issue. It was just a question of getting our ducks in a row. We anticipate being on time or early going forward. So we do not believe that's an issue. As far as financial controls, we are having -- we have 2 levels of financial support. We have an outside SEC accounting firm, Grillo Associates, who reviews our accounting. And also, we then have a review and audit by RRBB, our SEC accountants. They are coming -- now that we finished 10-K, they are coming in and we are adopting schedules to -- and time tables to make sure that we are on time. Larry, do you have any comments on that?

[Lawrence Morgenstein, executive]

Yes, we're meeting with them, I believe, next week to set up the schedules, and I don't anticipate any issues in filing timely.

[Carl Wolf, executive]

Okay. Bernard?

[Bernard Girma, analyst]

Okay. I appreciate that. Again, great job for the year. I'm looking forward for all the negotiations you have with some big chain and to see some continued growth in the company.

[Operator]

[Operator Instructions] Being that there are no further questions, this concludes our question-and-answer session. I would like to turn the call back over to Mr. Carl Wolf for any closing remarks.

[Carl Wolf, executive]

Thank you. Again, I want to thank all of you for participating on today's call. We look forward to talking with you again to review the results of the first quarter. Have a great day. Thanks again.

[Operator]

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.