Half year results just out, no change on valuation, key points:

·         Sales down 13% on PCP due to Covid shutdowns, $0.6m in sales backlogged at the end of the period would have addressed most of this gap.

·         GM% stable at 51%

·         Improved profitability: EBITDA +US$0.14m Vs -US$1.2m PCP, net loss -US$0.1m (-0.05cps) Vs -US$2.93m (-1.35cps) PCP.  Driven by operating cost savings and a favourable variance of 1.9m in impairment charges & inventory adjustments to the prior year.

·         US$1.9m in positive operating cash flows Vs -US$0.6m PCP with cash on had of US$7,978k (A$9,972 @ 0.80) at the end of the period or around A$0.046 a share – so still negative EV!

·         Working Capital (Inventory + Accounts Receivable – Accounts Payable) has dropped to -US$872k from +US$2,319k PCP, which is a very significant improvement in the efficient use of cash in the business.

A very strong operational result supporting a business turn around thesis and a focus on cash generation and shareholder value.

Q3 Update and 4C out at 2:47pm, a lot of buying between 12:40 and 2:47 pushed the price up from 4.8c to 5.7c before it dropped back to 4.8c after the release – bazaar… hope the ASX askes about it.

Announcement attached, notes on it:

·         YOW chalks up it’s 4th straight quarter Operating cash flow positive (+US$106k).  They say they are focused on fiscal discipline and results continue to prove they are.

·         Q3 sales up 29% vs PCP, backlog from half year has flown through.

·         Q3 EBITDA +US$151k Vs -US$683k PCP

·         Directors have taken a pay cut (~25%) welcome to reality boyz…

I still hold and am leaving my valuation at $0.14

Yowie are primarily a manufacturer of candies and games for children. Its product portfolio comprises gummy, bites, and surprise-inside the egg.

I started following this company last year, having found them because of financial numbers that had potential in them, at a very small size.

I was waiting for their annual report to see whether or not they were worth a small position. For a company with a checkered history, It was great to see them deliver this year. The group achieved profitability and revenue increase of 17%.

Given they sell in both US and AUS, their increase in revenue is mostly due to the US re-openning, and consumers buying from stores again.

With their past history, we can’t tell for certain (can we ever?) if they can maintain this growth and these good numbers.

One thing for sure however, is that balance sheet wise, with ~$8M in the bank, and a MC of ~$9M, if they continue on this trajectory, we could see a major re-rating of the stock.

AGM Notes:

·       Very strong positive voting to support new CEO (Sean Taylor) and the issue of shares as compensation (133m out of 134m support).

·       The spill resolution was defeated convincingly (108m against out of 110m eligible)

·       No questions at the meeting or updates, all done in under 15min…

YOW continues to have negative EV, Cash on hand of A$11.6m (US$8.36m @0.72) and market cap of A$10.2m (@ $0.048 as I write), FCF for Q3 was positive after a dip into the negative last quarter for the first time in a year and a half.

Trading result update was very strong, sales up 18% pcp and YTD is up 36% pcp with consumers returning to retail and improvement across all channels. Pleasingly they have been able to maintain margins by increasing prices to offset input and distribution cost increases.

Supply chain issues are providing challenges for the business, but they seem to be handling it well to date and remain focused on sustainable growth. The new Chairmans remuneration in shares only helps retain shareholder return focus.

Announcement: Quarterly-ActivitiesAppendix-4C-Cash-Flow-Report.PDF

I maintain my valuation of around A$0.14 (assume 1cps FCF discounted at 10% plus cash on hand of 4.9c)

Disc: I Own.

YOW continues to have negative EV, Cash on hand of A$11.2m (US$8.45m @0.75) and market cap of A$9.8m (@ $0.045 as I write), yet has been FCF positive for 6 straight quarters now… I maintain my valuation of around A$0.14 (assume 1cps FCF discounted at 10% plus cash on hand of 4.9c)

Notes Updates:

Q1 Update

·       Q1 Sales US$3,974k up 22% PcP due to Retail consumption in US continues to improve

·       EBITDA +US$271k (+US$47k PcP), up due to sales, cost control continues.

·       +US$122k Free Cash Flow (6^th quarter of positive FCF in a row now).

·       Have been able to secure supplies and offset price increases resulting from supply chain disruptions and remain focused on sustainable operating profitability & cash management.

·       Comment: FCF was the lowest it’s been for over a year, I suspect it is timing related on supplier payments given the good EBITDA, so I am looking for around 1m in FCF in Q2 which would indicate things remain on track.

FY21 Results:

·       Sales up 17% to US$12.6m and GP% up from 48.1% to 49.0% show a good recovery from the worst of Covid, but sales are only just back up to FY16 levels, well down on FY17-19.

·       Direct Margins (GM + Selling & Distribution) improved from 14.5% FY20 to 22.8% in FY21 but there is still a long way to go before returning to the 30%+ of FY16 & FY17.

·       Operating expenses dropped dramatically (down 23%) as management responded to market conditions to bring the operating result in at around brake even.

·       The write back of 900k of inventory adjustment and impairments taken in prior years is what provided a NPAT of US$895k.

·       FCF US$2.4m is a great turn around from -US$1.9m in FY20 with positive FCF every quarter.

·       Comment: the boards new emphasis on positive cash flows and sustainable profitability is being met despite challenging sales and general business conditions. Cost controls and “right sizing” the business is starting to provide positive returns to share holders and significant capital returns underline management confidence and commitment to operating on a cash flow positive basis. A good turn around year is trying conditions.

AGM Voting Issue

·       Last years AGM delivered a First Strike against the remuneration report – so this years is important. If Resolution 1 (Adoption of the remuneration report) has more than 25% of eligible shareholders vote No then the board will be spilled and a new meeting held in 90 days to elect all board positions.

·       New Chairman – Simon Taylor is up for election to replace Louis Carroll who is retiring and he will be compensated fully via shares (no cash). Resolutions 4-6 cover appointment requirements which inclue the issue of 10.8m shares (4.9% dilution) for employee incentive plans which are for Simon Taylor, to be issued in 3 equal annual amounts on completion of each years service over the next 3 years (fair value $154.8k per year – about twice what the current chair is on). 

·       Simon Taylor has extensive experience & success in building his own marketing and media businesses in Australia in the FMCG sector. I like the alignment and cash savings the share issue gives, but note that his experience is in Australia, not the US where YOW operates.

·       Pays for directors and the CEO dropped significantly following last years rejection of the remuneration and I think they are more in line and justifiable given the company is now profitable and generating cash. The new Chair is more expensive but I think this is also reasonable given his experience and the alignment of the share issue over 3 years offers.

·       I intend to vote in favour of all resolutions

Disc: I own YOW (RL + SM)