Company overview - Yowie Group Limited is a brand licensing company. The Company specializes in the development of consumer products designed to promote learning, understanding and engagement by exploiting its over six Yowie characters. The Company operates through confectionery business segment. The Company employs its rights in the outsourcing of the manufacturing and distribution of the Yowie chocolate confectionery product; in the development of a Yowie digital platform, and Yowie branded licensed consumer products. Yowie confectionery is a character-molded, 28-gram chocolate inclusion product. The Company operates Yowieworld.com, which consists of applications, three-dimensional (3D) games and other fun activities. Yowieworld.com is a multiplatform experience, which lets users build their own virtual sticker book that enables to keep track of their Playmate collection. The Company is focused on distribution of Yowie product in North America, Australia, New Zealand and throughout Asia.

 

YOW Details 
Relaunching the brand in Australia with strengthened distribution: Yowie Group Ltd (ASX: YOW) has recently received a purchase order from Universal Candy, who will be the Australian based distribution partner for Yowie product sale in Australia and New Zealand. The first containers of the order are expected to depart from the Madelaine Chocolate Company’s (MCC) manufacturing facility by the end of February. The group built a solid track record, and their confectionary was originally sold in Australia during the 1990’s and at its peak 65m units of the product were sold in a single year representing over 3 units per capita. Therefore, the re-launch of the Yowie brand in Australia is a significant milestone for the company and is a strategic choice to begin the expansion after the US. Australia has a strong residual brand awareness and affinity for the product. In addition to Australia, the company will enter an additional market before the end of FY17. YOW is developing market research for the expansion in North America, has conducted Focus Group research in Asia, is developing distribution plan for Australia, assessing the distribution partners in Europe and is exploring lower priced product for price segmentation.
 
Financial performance in the second quarter of FY 17: YOW has reported a 44% growth in the net sales to US$4.4M in the second quarter of FY 17, as compared to prior year Q2. Therefore, for 1H FY17, the net sales reached US$9.3M, which is an increase of 70%, versus 1H FY16. However, the net sales growth is below the expectations of the company due to the both planned and unplanned production downtime. Moreover, the group started the quarter with lower than desired inventory levels. Therefore, the manufacturing interruption had adversely affected the sales order fulfillment during the quarter. YOW has ended the quarter, with the manufacturing operations running at full throughput that would enable the company to build safety stocks going forward and support strong growth in the remainder of fiscal year of 2017. As per other highlights, the net operating cash outflow was US$0.45M in the second quarter due to the cash receipts of US$4.7M, which was offset by raw material purchases. Operating costs reached US$2.5 million while marketing costs reached US$1.0M. Meanwhile, the gross margin in the 1H 17 was 53% versus 52% in the corresponding period in 2016, due to lower costs of the current manufacturing partially offset the costs incurred in second quarter (Q2) 2017 leading to a manufacturing interruption of over 100 basis points.
 

Second Quarter Financial Performance (Source: Company Reports)
 
Manufacturing operations got disrupted in the second quarter 2017: Series of unexpected events impacted the manufacturing in December. The interruption to the manufacturing included a two-day local area power outage due to storm damage, which was longer than anticipated. Moreover, for the second packaging line, there was a critical part breakage on the original Yowie wrapper. Therefore, the order fulfillment was negatively affected by these events and the inventory was at its lowest due to peak season sell in and lower than desired starting inventory after the 100% growth in Q1. Additionally, the delivery into key distribution warehouses is tightly managed by customer allocated time slots during the peak pre-Holiday period that had forced the group to forfeit several customer allocated delivery windows. Overall, the planned and unplanned production shutdowns during the commissioning of the new Yowie foil wrapping line has led to less than expected output during the second quarter. On the other side, YOW has entered into a Partnership Agreement with the Wildlife Conservation Society, (WCS), in the second quarter to co-design a future Yowie WCS collectible series.
 
Continued Improvement in US sales and distribution in the second quarter 2017: YOW has continued to improve their USA market share in the second quarter as the company placed in-store merchandising during the holiday period and also added new accounts. YOW has made good progress in the important Convenience class of trade reaching 6.5% ACV versus Q1 at 4.3%. Moreover, YOW has also initiated sales in one of the major Dollar Store retailers, to further penetrate the channels with major store numbers and geographic footprint. The US Dollar stores sells many items above $1.00 which is also true for Yowie product. On the other side, in Nielsen market share data for the 52-week ending December 31, 2016, xAOC (™eXtended All Outlet Combined), that includes Food, Drug, Mass, Dollar, Club and excludes Convenience, YOW has reached 0.95% share from 0.7% share in 1Q FY17. The group continues to be the number 1 selling item. This Nielsen data shows YOW share in the total front of store Chocolate segment, normally referred to as instant consumables (single serve). YOW is a top 10 selling item in both Drug and Convenience, although the company is still in early stages with distribution in these important channels. In addition, YOW in the second quarter has continued to add new accounts including: Winco Foods, Shaw’s Market and partial roll-out at Kroger and Target stores. The company has continued to place merchandising units during the Holiday season, adding to the point of purchase strategy.


Growth Pillars (Source: Company Reports)
 
Good initial results from the Yowie Pre-Holiday marketing campaign in the Second Quarter 2017: YOW has executed a YOW Pre-Holiday marketing campaign in the second quarter of 2017 including national social media plus TV advertising in San Antonio and Chicago. The sell-through of the YOW ‘All American’ series has increased more than 103% as compared to the same period in 2015 at the same locations. Moreover, the brand awareness was enhanced by more than 30% ’Likes’ in the Facebook page within the campaign period confirming the importance of social media to YOW targeted demographics. Additionally, The Yowie World social feeds also achieved significant milestones with over 17 Million combined ‘Views’ on the Yowie World Official YouTube channel and 18.6 Million ‘Views’ on Yowie World Official Facebook. Overall, the group is pleased with the initial results from the Yowie Pre-Holiday marketing campaign, and intends to continue to invest behind brand building and raising brand awareness in fiscal year 2017. The company has plans to continue to include strong marketing investment in the Pre-Easter period.
 
Successfully commissioned the second foiler at the Madelaine: YOW was on schedule and successfully started the second-high speed foil wrapping machine (foiler) at the Madelaine Chocolate Company, US. The foiler is capable of foiling 20m units per annum; and as YOW business is growing in US, the addition of the second foiler in the US would enable the group’s manufacturing capacity to meet the anticipated demand growth. YOW has become the top selling in the US market while the second foiler has doubled the foiling capacity to 40m units per annum at manufacturing facility in the US.
 
Key Objectives for FY 17: The group is looking to post strong top line growth in FY 17 and would strengthen the brand awareness through innovative marketing. Moreover, there would be permanent planogram placement at major US retailers, further boosting the national US distribution. YOW would launch publishing in FY 17. YOW was on track for strong growth and accordingly enhancing their US sales team and add new accounts.
 
Stock Performance: YOW stock has fallen 18.9% in the last four weeks (as of February 06, 2017) impacted by the lower than estimated results. But, we believe this fall has placed the stock at reasonable levels given the group’s ongoing momentum in the key US market, and moving back to Australia and New Zealand markets. We give a “Buy” recommendation on the stock at the current price of – $ 0.56

 
YOW Daily Chart (Source: Thomson Reuters)       

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