Well-known Australian chocolate business Yowie Group Ltd (ASX: YOW) – whose operations are now predominantly in the USA – released its half-yearly results for the 6 months to December 31 2015, this morning.
While it was a positive result overall, there were also a few yellow lights:
- Revenues rose 1,094% to US$5.7m
- Loss after tax increased 189% to US$2.6m
- Underlying loss after tax declined 28% to US$0.7m after excluding currency effects and non-cash expenses
- Positive operating cash flow
- Shares on issue soared from 139m to 170m due to issue of options
- A number of positive developments in merchandising, manufacturing, and distribution, including Angry Birds partnership
- Cash of US$11.6m as at December 31, 2015
So What?
Revenues rose as a result of the rollout across 4,400+ Walmart stores in the US and pleasingly the company reported that sales in the initial 1,500 stores have continued to grow. Yowie secured a number of new accounts during the past six months including several distributors. The company also obtained a licensing agreement to manufacture Angry Birds chocolate to coincide with the release of the eponymous movie in May this year. Early last year, Yowie also reported a successful Middle East supermarket trial but we heard no more about that in this report.
Plant and equipment expenses rose and inventory declined as a result of the shift to the Madelaine Chocolate Company facility. Although the automation should result in faster, higher volume production the launch requires up-front investment (which Yowie is fortunately in a position to provide).
On the downside, the number of shares on issue blew out by more than 20% after 31 million options were exercised, taking the total number of shares on issue to 170m. Last year, Chairman Wayne Loxton sold 3.7m shares, and used the proceeds to buy 4.05m expiring options. At the time I felt this was a warning sign because although his total number of shares grew, he was significantly reducing his risk exposure to the business by selling shares at a high price to buy options at a very low price. The issue of all these options provided a welcome boost to Yowie's cash balance, but not enough to counteract the impact of 30 million new shares on shareholder earnings.
Partly countering this was the issue of a number of performance rights to directors that will automatically exercise for nil consideration once the vesting condition is met. The vesting condition includes attracting a 'Tier One' retail account or achieving gross sales of US$650,000 per month for three months, whichever occurs first. I found this to be quite mercenary, given that management is already well paid, but it is likely to be effective and more Yowie customers would certainly be great for shareholders. There is additional information on performance rights contained within the report for interested investors.
Now What?
Yowie's achieving of positive operating cash flow was a good initial sign for investors, although I believe this could reverse again in the near future as the company lifts its raw material and inventory spend again. Thanks to the nature of the business, money must be turned into chocolate well in advance of that chocolate being sold to consumers. However, with a number of new accounts signed during the past six months and strong management incentive to sign new ones, I believe Yowie will be able to continue growing sales. Positive same-store sales growth at the initial Walmart stores also bodes well for sales as new locations mature. I will be looking to see that management reins in the issuing of options, or at least fixes them with a substantially higher offer price.
All in all it was a solid result for Yowie, although the company still has a lot of work to do to hit a home run for shareholders.
