Reed's Inc (REED) 2011 Q4 法說會逐字稿

Ladies and gentlemen, thank you for joining the Reed's Inc 2011 Company earnings conference call. Your host for today, Jim Linesch, will now begin.

Good afternoon everyone. My name is Jim Linesch, the Chief Financial Officer of Reed's. I would like to welcome all of you to our fiscal 2011 earnings conference call. Today with me is Mr. Chris Reed, our Chairman and CEO. I'd like to remind our listeners that in this call, Management's remarks may contain forward-looking statements which are subject to risks and uncertainties and Management may make additional forward-looking statements in response to your questions. Therefore, the Company claims the protection of the Safe Harbor forward-looking statements that are contained in the Private Securities Litigation Reform Act of 1995.

Actual results may differ from those discussed today due to such risks but not limited to risks relating to demand for the Company's products dependent on third-party distributors, changes in the competitive environment, access to capital, and other information detailed from time to time in the Company's filings with the United States Securities and Exchange Commission. In addition, any projections as to the Company's future performance represent Management's estimates as of today March 25, 2012. Reed's Inc. assumes no obligation to update these projections in the future as market conditions change. And now I'd like to make a few comments about our financial performance which will be followed by Chris Reed who will give us an overview of the Company's business today.

The 2011 results reflect significant expansion of our sales distribution networks and our presence with existing chain of customers. While our existing revenue base continues to expand, we are also adding key distributors in select regions that are helping fuel our growth. Our revenues are up over 23% in 2011 with double-digit growth for it continuing into 2012. In rough terms overall our branded business increased by about 20% and our private-label business increased by about 50%. Private-label revenues comprised about 15% of our revenues in both 2011 and 2010. Our cost of goods remain constant overall as a percentage of sales and our gross profit contribution increased by about $1.3 million to $7.4 million in 2011. Our branded product gross margins are not being eroded by inordinate promotional spending as we continue to grow.

Combined selling, general, and administrative expenses decreased a little overall before the one-time charges of $327,000 which were due to legal and settlement costs on a lawsuit that is now fully complete. Delivery and handling costs increased by 34%, a little bit ahead of our corresponding revenue increases, an area to be managed better in 2012. Our Los Angeles plant production volume increased by over 20% in 2011 despite downtime experienced during plant improvements and the SQF certification gained during the year. We anticipate production volume to increase further in 2012 and we are looking on to further improvements in plant efficiency. Our overall net loss reduced to $941,000 in 2011 from $1.4 million in 2010.

If we eliminate non-cash items and one-time costs we had pro forma income of $470,000 for the year which exceeds our capital expenditures of $356,000. With our new revolving line of credit and term loan we are adequately capitalized for our current level of business. We anticipate a positive contribution to working capital from profitable operations in 2012 as we invest in the introduction of additional new products and line extensions through our great brands. Now I'd like to turn this call over to Chris Reed, our President and CEO. Thank you.

Thanks, Jim. Appreciate that. Thank you for everyone who's joined us today on the conference call to take time out to listen about Reed's Inc. 2011 continued the acceleration from effectively a flat business economy for us during the worst part of the national economy to starting growth in I believe it was the fourth quarter of 2009, I believe. And we have reported nine straight quarters of approximately 20% to 25% growth. I think Jim just gave -- cat's out of the bag. The first quarter we are still on a pretty good clip, so we will be reporting 10 quarters here in a row of approximately 20%, 25% growth.

The business model shift that happened during the worst part of the economy where we decided that we weren't going to be able to count on raising money and selling stock to grow the Company, particularly with a bad climate that was going on and also the valuations we were getting for the stock, as Management, due to the fact that they are major shareholders in this enterprise, decided that we would come up with a better way of doing it. I know we've talked about this and mentioned it plenty, but we started to reach out to our customers and offer more services than just our branded products and offering private label development for them.

The 2011, the branded and private label both kind of grew equally, which I would say is somewhat of a surprise because private label is relatively new business for us. And the private label, in a certain sense I think we had a sense that it would accelerate faster than the branded business and then the gross profits generated from private label would slingshot the brands forward as we pumped cash, gross profits into marketing programs to do the first real consumer pull campaigns around the cult brands that we have out in the marketplace and make them more of a household name. And, we are not upset with the performance of private label. Much of our growth in private label from last year were existing customers who, after we had created the initial brands for the initial products, have come back to the till and have asked us to produce more.

And our book of private-label business or potential business is very large right now. I can't say how -- the timing of the growth that we're going to have in private label but the enthusiasm around it being a source of income and capital for growth has not diminished. Our capability in that area has not diminished. Right now, we are currently gearing up for the annual audit for SQF which is our certification standards set by companies like Tesco and Wal-Mart. We picked the high certification; we reached it last year and we're certified. And we reiterate it this year.

And quite frankly, a lot of the players that we are talking to like to see longevity in their partners in the industry. So the more we are out there with private label the more private label business we will continue to reach and get. I don't think as shareholders, most probably are shareholders listening in, you don't get the pulse of the Company to the degree that we living it day to day get it. And I'm here to tell you that our capability for private label is definitely another quantum leap higher than it was last year. The kinds of things we are contemplating right now are larger. Some of the -- and we can't tell you when or if some of the business comes in, but the deals that we are negotiating and in the process of chatting up are very large and very material, game-changing, business-changing business that we are hoping to land in 2012.

Some of these deals are very long-lead items and some of them we have been granted and might not see our first sales for a year. So we are still excited about that business model. It's still an integral part of our thinking and moving forward with our Company. I'd like to also talk a little bit about the branded business. I know Jim alluded to the increased DSD distribution network.

And in our press release you can see that we mention Las Vegas and Michigan and Florida and Arizona, Louisiana, and Georgia as being key places that we brought on beer distribution networks to distribute our products outside of our core competency, our core market which at this time is natural foods plus the natural foods set in supermarkets around the country, roughly around 100 supermarket chains. We also have brought our products into Stop & Shop in a very large way. Probably if you look at that press release and you're following us, you will know that we have launched before and we've gotten into chains before, but never like Stop & Shop where they basically embraced us like a mainstream beverage onto the mainstream aisle with some very mainstream middle-of-the-summer, Fourth of July-type promotions.

So I think you are going to see an acceleration of our relationships building in these supermarket chains that we're in. You will see new chains coming on board with our brands this year. You'll see an acceleration of our expansion in DSD, the beer distribution network for all of you who don't know the acronym, is basically the Miller, Coors, or the Anheuser-Busch distribution network throughout the country. The more success we have at the individual DSD accounts that we are in -- it's a real good ol' boy network and they talk to each other and you can mention so-and-so's name, you can ask the guy who owns the distributor you are in and say, who are your buddies around you regionally, can you help us outreach and bring on that DSD.

So success is, it's not so much important to us just to go get a bunch of distributors on board. What is really important at this juncture is to have really good successes with these DSD. And we have the DSD we brought on 5, 10 years ago and we have the new DSD coming on so we've been able to -- in this topsy-turvy world especially of the small emerging beverage companies, one thing they really like to sink their teeth into is a guy who's not going away. They put a lot of time, energy, and money into partnering up with brands, and brands that are on shaky footing or brands that are just really new to the market, they are going to have strikes against them because we are constantly, in our sales pitch, letting the DSD know that we have been here for 23 years and we are still on a very steady clip of growth internally generated.

So we have some very interesting dialogues going on for people that are out reaching out to us based on our success, some major chain action recently. But I guess in a global way, what I'm saying is that DSD will continue, the focus will be on quality growth of that network and not just grabbing press releases. I'm sure we could in very fast action go out and bring on the whole US DSD network, but that won't necessarily stick us and make it work. So a bit of the focus this year will be, like our focus has been for the last two years in grocery, will be to get the DSD network starting to pump even more volume of our brands out there in what we call the up-and-down street business, the delis, the mom and pops, the convenience store business.

So, new product launches have included, this last year, our Dr. Better. That brand -- it's not materially -- it's doing pretty good for us. But I think at the beginning of this year, if you are following the Company you'll notice the UNFI announcement on the improved relationship with our largest distributor UNFI, another public company on NASDAQ. What this does for the Company, and I think we are seeing this a bit in the first quarter is that they partner up with us in a very aggressive manner and allow us to launch new products and make sure that they get a wide distribution and a strong initial launch into the natural food industry. So Dr. Better Zero line, the Zero Stevia-sweetened diet sodas, which continue to grow very well for our Company -- those brands will really see an improvement in 2012 as they get deeper into mainstream. It won't just be our top five to eight products that are moving and carrying most of the brunt, but we will see some of the lesser, newer product launches getting some acceleration.

Now in prior years, 2010 before it, we would launch one, two items. Last year there's was an acceleration on that with the Butterscotch Cream Soda for Halloween, which we have not been able to shut down because we keep getting orders for it and our customers are asking to expand that product even though it was kind of, not really a joke, but it was a seasonal item. We were really hoping to partner up with the DVD sales at Christmas time with the Harry Potter franchise and get a big gig in Wal-Mart. That was the initial inspiration. We are not just completely insane putting out a flying cauldron product. And there were reasons to believe that we might have a game-changing order from them in the fourth quarter.

But anyway we launched it out to the network; we've not been able to shut it down, and now UNFI has got their claws on it and the Harry Potter people have figured it out. So lesser items -- so we launched that, we launched Dr. Better which is a vast improvement -- well, I can't say it's a vast improvement. It tastes better than Dr. Pepper, but really what it represents is the first time Dr. Pepper lovers can drink their favorite drink without consuming artificial flavors and preservatives. And that means for the first time it's available in a natural food store. So we still -- we know that's a good launch and we know that it will be material in the future as it gets the right marketing behind it and accelerates throughout our distribution network.

So we also launched a sparkling juice line -- very similar to Izze, which is owned by Pepsi, in the Whole Foods chain and that was effectively Whole Foods came to us and asked us to create the line, co-developed it with us, and put it into all of their stores. And that was also a private label attempt, so we're getting a tremendous amount of branded business from private-label. It's surprisingly so. And some of our big private label customers are actually talking to us about all of the direct distribution that we could do with them now that we are already geared up and plugged into their direct distribution network through the private-label.

But anyway, the point I was trying to make is there is an acceleration of new product launches for moving forward. Very selectively, we are going after things that we believe that have a very high probability of success and a high profit margin, even I would say stronger than the gross private margins that we currently have with our products. And with that respect, one of the more fun launches here, maybe material, probably actually is -- it's not going to sound right coming out right now, but it's a chocolate-covered crystallized ginger. We had it out a week, samples were out, everybody loves it at the office. One of our largest chains got a-hold of us and demanded immediate delivery to all of their stores. So we know what we're doing and we know that even though the candy is 10% of our businesses, this will probably be a material launch for the Company. That is just a little side thing.

The beverage launches that are happening this year is we have a four-product launch imminently ready, getting ready to launch here, hopefully second quarter we will see the first sales of a probiotic live, I won't even call it a soda, but a nonalcoholic brew line under the Reed's brand. And the product if you want to look it up is Kombucha. It is very niche; it's not very far out of the natural foods. It represents an arena of sales that is approximately five times larger than the natural soda arena. It took us 25 years to get the natural soda arena as large as it is. It took about 5 or 6 years for Kombucha to grow to 5 times larger, so it's a pretty exciting arena.

It is dominated by one single company who is making a mint, probably doing somewhere upwards of $150 million in sales. And we are launching into it. And not because we care -- we do actually -- a Jim Linesch has-been a deep inspiration for this. Jim, I know you're going to laugh, I'm blaming you. The product that we've put out, we launched it at the Natural Product Show a week and a half ago. We had the largest presence at a trade show ever in history the Company and it was very well-received. Our chains around the country in the natural food industry that have demanded immediate delivery, preemptive strike so they can be the first on the block to carry the product.

We know that our craft is accelerating and we consider the best in the world at developing a beverage. We couldn't ignore a product that was produced for cheaper than ginger brew but selling for twice as much retail, generating phenomenal margins. And we came up with a custom-mold bottle out of China, some really unique first, one-of-a-kind packagings for the beverage industry. A world-class bottle that was modeled off of a basically an award-winning bottle for the best bottle for the year. I will try to get some pictures up on the website here shortly and there will definitely be a more official press release with pictures at the time that the launch happens, hopefully second quarter here.

It will be a success. I mean we are 23 years into this and we know that it won't be a minor success, it will be material success for the Company. I'm giving guidance, I guess. It will most probably be a game-changer for the Company and will allow us, like private-label, to accelerate our growth of gross profits. So I think our sales and marketing is increasing as we speak. It's kind of a slow steady increase in the number of employees out there very consciously making sure that the Company stays in a cash-generating mode on an operational basis, that we are not only generating more cash than we need -- well definitely more than we're using in any kind of capital expenditures.

And hopefully we are moving into -- I don't know if Jim feels comfortable with this. We know that we are going to increase significantly -- our belief is we'll increase significantly the pace that we've been running through 2010 and 2011. We know we don't have a steady line here. But we do believe the momentum going into this year, we pretty comfortably can talk about the first quarter being at least inline with what's been going on for the last nine quarters. We don't see any reason to believe that we won't continue through the year.

We have some private label business that are game-changers that are very large pieces of new business, larger than any that we've ever received before. And the probiotic Kombucha launch, it's a very niche launch for natural foods, but a hugely popular category, much bigger than any arena that we are in currently. It won't just soar out of the gate but it will have a steady burn here and become material over the next 18 months here and hopefully will be another part of the equation. We're not going to change our tune about what we are doing. We are increasing our gross profits while not increasing our expenses significantly and moving that money towards the bottom line and also into increased marketing and driving of awareness around our core brands.

I still believe in the slingshot of a private label. But I am okay with the fact if, in hindsight we look back at 2012 and our Kombucha brand did for us what the private label was going to do for us and none of the private-label ever materialized. I doubt that will be the case; we have a very high track record of winning the business. We only go after things that we are uniquely capable of and that we can get a decent margin on so we don't waste our time just turning dollars for nothing. So I believe that private label will be the first to the slingshot, but right now I would have to say the odds are 50/50 that Kombucha will be the slingshot for the Company, but nevertheless, there will be a strong growth through 2012, is our best guess at what's going on here.

We do hope for acceleration in the future. The modest 20% to 30% growth per quarter is, while may sound enticing to Wall Street in a bad time without any infusions of capital or selling off shares, is not by any means an exciting point for us to be. It feels like status quo and we are really desperately, as a Company, trying to move and break out of that status quo at this time. And we believe the Kombucha and some of the private-label business that is lining up for us, that either one or both can provide us nominal acceleration for the Company and the brands.

Because I believe that once we finally get to throw fuel and oil and all kinds of flammables on the fire of this business in the form of pull campaigns around our core brands that really make this a household name, I think that is when we are going to see our significant growth in this Company. In the meantime, it's going to be a bootstrap operation slowly slugging it out in the marketplace, pushing our brands into supermarket chains around the country. So, we are still looking for the second slingshot that I call the push-to-pull shift in marketing. But we feel comfortable giving guidance of steady as she goes.

And we hope for breakout and, as I believe we've put into our press release, we feel that 2012 is a pivotal year. The Company is growing up. We are not the Company of 2011. And every year we basically stare at the industry with more guns and capability at basically pushing our way up into being a major beverage player. So that is my spiel on the 2011 earnings call and at this point, I am going to open it up to questions people may have.

(Operator Instructions)

George Santana, Ascendiant.

Hi Chris, Jim. Thanks for taking the question. This is interesting, this Kombucha, I hadn't really been following the story, but what do you think they got right and is it a question of a lot more marketing dollars spent? What can we learn from their example?

Well first of all I appreciate you coming to the call George and I always like to point out George is an analyst for Ascendiant and we do appreciate having analysts listening in on the Company. The Kombucha phenomenon, the individual who got behind Kombucha and decided to make a career out of it, now a very successful, highly profitable business started out by doing a tremendous amount of in-store demo-ing where he would talk up the product to the customers. And on his package, he effectively flaunted the fact that his mom had breast cancer, he served her the drink, and her breast cancer went away. He was able to do that for the first $300 million or $400 million worth of product sales on his part. And I believe that kind of language is no longer tolerated by the government agencies that make sure that there aren't any false claims on packaging.

So I believe, though, that he instilled that mythology deeply into a new generation of soda drinkers. I will say this now that you've brought it up. It's kind of surprising with the phenomenon of Kombucha that they didn't crush the sales of Ginger Brew in the natural food industry. But if you were to go into a Whole Foods store and query them on how much Kombucha they sell, you hear things like top-selling item in the store, definitely top-selling beverage item in the store. It's an acquired taste, tastes vinegary.

It's interesting though, the Japanese have a huge vinegar beverage industry. And our salespeople are a little bit like, whoa what do we have to sell now? But the product developers in-house have become addicted to it. So there is something to it. It can't -- it is not easily killed off. There was a scare a year and a half ago where the product ferments a little bit and the product in the marketplace had gone over the ATF legal limit for alcohol in the bottle. And there was a huge recall and if you were ever going to kill off a product category basically removing it for six months from the shelf ought to have done that.

It not only recovered. It's in a strong growth mode. It's like it didn't skip a beat. Even though there was a lot of reformulation to make sure they didn't re-go beyond the ATF's alcohol in nonalcoholic product guidelines again. But anyway yes, the marketing is pretty much insignificant at this point. It was demos and just something on the package that effectively educated the world as, this cures cancer. At this point it's integrated; it's part of the natural food/hippie culture and it's not going away. It's accelerating and we are grabbing a piece of it.

Interesting. Okay. Thanks.

Thank you.

[Eric Rose].

Hello, Jim and Chris. I'm not with any stock company. I've just been on board since you put the stock flyers on the bottles. And I'm sitting here enjoying a Reed's Extra Ginger Brew while I'm listening to this. This is probably the fourth or fifth time I have listened to you and it's always seemed very good forward-looking statements. The Company seems good; I follow it pretty closely. And I really enjoy the product and probably am your biggest fan here in Florida.

I see it in Publix here, used to be just in one of their larger, more gourmet if you will, stores but now I'm seeing in on end caps and some other Publix in the area. But I don't see a lot of advertising. I wondered if you were going to do any pushes for advertising or is it just mainly word-of-mouth or store advertising. And gosh I hope pretty soon this starts translating into share price a little bit. Thank you.

Thanks Eric for being a fan and being a believer and ultimately we believe, as shareholders ourselves, that the fundamentals will have to have some effect on the stock price. A little bit -- we're also considering something similar to that stock -- that tag you saw on the bottle to possibly promote to the 700,000 drinkers of Reed's that there is a stock behind the product. A tremendous number of those people don't know that. And the push that you see in the Publix and the word push in marketing means exactly that. Pushing it onto the shelf, pushing it out there.

One of the things, when you want more people pull it off the shelf, you have to do advertising and that is -- we could go raise money right now and go sell a bunch of stock and have a bunch of money, have a war chest, and go out there and start advertising. But as shareholders ourselves, we are really not all that excited about the dilution it might cause. So that is why we are talking about going after the Kombucha market and going after private label opportunities to just generate that profit, those gross profits that can be directed not only to paying down the debt of the Company so that our earnings look better, but also pulling and creating some buzz in your neighborhood around the Publix stores.

And I will say the first place we will start doing is probably working directly with Publix and -- this is just to give an example of the 100 supermarket chains we are in around the country and since you are from Florida and have seen it recently expanded in Publix, that is our new salesperson in the area and he has moved into all, most of the Publix, I believe. And the next step would be to cooperatively advertise with the Publix and to be in their Sunday flyer, let's say, and let people know it's there, and definitely getting it off the shelf so that you trip over it on an end cap. As you've mentioned you've seen also is another important way of marketing. We may accelerate or adjunct to that, might we put some people in there to pour samples of it. But ultimately we want to start getting into some more serious campaigns where people are seeing it on the Food Network and places like that.

I will say that the data that we received from mainstream supermarkets, when we first started accelerating in there a couple of years ago, there were companies like Jones Soda and Boylen's that were ahead of us and we've passed both those companies in the supermarket data. And we are the fastest growing premium soda company on a percentage basis and we are the ones moving up the ranks on a fast, steady basis which makes it a lot easier for us when we go into a Publix and ask for the rest of their stores, as you've seen we've done. So anyway I think I answered your question while allowing me to tout us in a politician kind of way.

[Gary Greenberg].

Hi Chris. On a lot of these (inaudible) you have, the fundamentals do look very good. But it seems that the Wall Street is not seeing it that way and the stock is considerably undervalued. Do you have, in the future have you thought about any ways that you could increase the value of the stock to coordinate that with the fundamentals. And most -- if you go through the history of most companies like your own, Honest Tea or Hansen, they have mostly, to really grow and you just mentioned become nationwide would have to have an investor. I think Coke went into Honest Tea, and I think Budweiser made an agreement with Hansen Monster to distribute their product. Do you see Reed going that way in the future?

During the worst part of the economy we actually retained an investment banking firm to reach out and find us a big brother to partner up with because we weren't making ends meet. Honest Teas was conservatively smaller than we are, probably brand-wise we are actually the same size when they partnered up with Pepsi. But they were in a huge cash burn at that time -- not Pepsi but Coke. So they burned a lot of cash to get up there. We're actually here without a cash burn which from a plain and operating a business is actually pretty substantially more difficult than doing it without a whole lot of concern for your cash position.

And it worked for Izze and it worked for Honest Teas and quite frankly, it worked for Vitamin Water. They were still, I believe in a cash burn, a couple hundred million dollar cash burn, at the time they sold out, not on annual basis, but on an overall enterprise basis, at the time they sold for $4 billion to Coke. It's actually pretty responsible and unusual for a beverage company of our size to have plugged the holes and found a good way to grow without bleeding cash which means that we can pick and choose relationships.

But a relationship like Hansen's has because of Monster not because of Hansen's, probably they might have approached Anheuser-Busch and said, hey, yes, we would like to sign a deal with corporate and then have you push out to the DSD network and kind of grease the system so that we can get in there and let them know that we are now partners. We've reached out also to Anheuser-Busch at times and chatted them up about that program that they offer at the corporate level. And I think the most important thing to do -- what I mentioned earlier in this earnings call is that the DSD is not just about numbers game here. Let's go get more DSD and more DSD. It's about quality and a quality play. Because if you come up with a really great way of growing your brand up and down the street with the DSD network, the Anheuser-Busch network or the Coors Miller network, then you get invited to corporate to have a deeper relationship.

So brand performance is key and that is why we're getting invitations right now that we used to have to beat down the doors of these huge corporations to even be considered for. So now they are actually in the mind of the marketplace. We are building reputation; it's making it a lot easier for us to -- sometimes we're being invited in to do business, more often than not. And definitely when we show up they know who we are. But in terms of, if someone came to me tomorrow and said, we would like to structure a buyout over a period of time and your shareholders would benefit from that and participate in that, we would consider that. And I will give you one more historical thing. I did tell Vitamin Water at the beginning that we weren't interested. And for the shareholders that was a 200 to 1 return on investments that I made the mistake call on. So I no longer casually dismiss an outreach from other companies so we are having conversations from time to time on a regular basis.

(Operator Instructions)

Joe Munda, Sidoti.

Sorry I jumped on the call a little late. You were talking a little bit about partnering. Is there any potential to maybe do something with SodaStream and the popularity that they are garnishing? Maybe do a SodaStream offering?

Yes, I think that we have toyed with building some ready-to-drink flavors based on the inspiration of SodaStream and I have asked the sales force to reach out and just test the waters with that. And logically it makes sense for them to go out after brands that they aren't introducing to the public for the first time. There is a slight difficulty in doing natural products the way they are doing it. And it's not impossible, but it's very difficult to do a Reed's Ginger Brew that way.

We would have to fake it and simulate it because the way we brew it, it is kind of like if you could do a concentrated beer they would've done it many years ago. You really have to go through the trouble to make decent beer. And the same things with Ginger Brew. You have to go through the trouble of brewing up fresh ginger ale to make it taste the way our ginger ales do.

I was wondering what you're thoughts were on the recent report of less and less Americans are drinking soda because of the health -- just basically because of the health and natural issues involved with it. Is there an opportunity for you guys there to cross over into like a PepsiCo or a Coke and do something -- partner with them and gain more share because it's seems like less and less people are drinking soda.

Yes, I think that falls, dovetails into the prior question from Eric Rose. Joe, I think that we have an open mind to it and we don't spin our wheels a lot trying to make that model work and outreach. But we are opportunistic when an individual name, a contact or someone can reach into those huge networks -- when we find it, we will do a quick check to see if it's something we can do. And the more we perform out in the marketplace here, we can tell that we're not going unnoticed at this point. I think you noticed that Canada Dry is really starting to play up their advertisements on, we're using fresh ginger and everything. It's a $1 billion category, the ginger ale category, and I think they realize that they haven't had a strong competitor coming up through the ranks in a long time and they see the Ginger Brew as a definite threat.

But how do you fend off shelf space from a Cott or somebody else in the space marketing ginger brew as well or how do you -- because there are some other competitors that are trying to do what you guys are doing.

Well there's only one guy who walks in there with the Nielsen data that we have -- beating number two by 400% from a ginger ale category or 250%. And we are the leader of the premium soda category pretty much as a brand. And I would say that we're the only ones -- and that's a category that includes a lot of artificial flavors and preservatives. When it comes to natural sodas in a bottle we are the king. And there's not a lot of competition for that. And unfortunately for them the data is dire. We're not like Coke against Pepsi here. We're actually beating brands by 300% and 400%.

Is that Jones Soda that you are referring to?

No, they don't have root beers and ginger ales. They are not really who we directly compete with, although sometimes they will consider Jones -- they will think, oh, maybe we should bring a premium soda into our set and that is where the IRI data is critical. It shows us on a like a shooting -- a star, rising star instead of a burnt-out sun.

Okay. Thanks for answering my questions.

Thanks, Joe. I always like to point out, Joe is with Sidoti and is an analyst for that company. Thank you for joining us today.

Matthew Tekulsky, TekCapital.

I didn't actually have a question. I just wanted to congratulate you on the great job you are doing. Appreciate you staying in touch with us.

Thanks, Matthew.

Yes

That was a low-pressure question. We love it and appreciate the sentiments and we're working hard for you and ourselves, and I think we have had a very steady business here and hopefully we break out for you guys this year.

I'm looking forward to it. Keep it up.

Thanks.

[Jim Regan, Global Crow Leeden]

I just had a couple of questions around the gross margin. Looking at, the gross margin was relatively flat year-over-year, just below 30%. I know Chris, you made a comment, I believe, that the goal is to increase the gross margin this year. And I know that you are now showing, for the whole year you are showing the cost of idle capacity. So obviously as you increase your volumes you have some gross margin improvement there. So I thought maybe you could just talk about, number one, what your goals for the gross margin are this year and number two, how you are going about calculating that impact of the idle capacity.

I know Jim might want to jump in here, but first I want to take a stab at it and give you my view on it because it is, even though it might seem like Jim's area as CFO it is definitely -- Management has a committee dedicated to margin improvement and we definitely will be looking at fuel cost. I think the more we see that barrel go up, the more we watched economy get attenuated in its recovery here. I'm hoping for sanity in the world. Gasoline prices are more likely to hit us on our freight cost, and gas prices, natural gas prices, hit us on the glass side. And so far, natural gas prices are still have been at really relatively low levels than historically and are not impacting glass costs. We actually still see improvements.

I think that the Kombucha, as it gets into the mix here just is a phenomenal margin improving piece of the business and I think the utilization of the plant definitely every year we're better at what we do. Plant utilization will, it also has its own committee now and those kinds of things, the more you focus on things the better you get at it. The other thing is we really have focused towards the end of the year we have a big play on just the utilization of ingredients at our east coast facility. We think there is a significant 1 to 1.5 percentage point of gross profit margin availability if we can get them to utilize ingredients and yield better than they have been. So that's a more recent find.

Maybe that will get eaten up with inflation. Who knows. But we believe for 2012, I'm going to give the guidance that we are going to improve gross margins through the threefold combination of better plant utilization, better yields overall and a focus on that, and the better margins that come in from the mix of these newer products having higher gross profit margins. Is there anything you'd like to add, Jim Linesch?

I think that we also saw in 2011, we had some periods where the plant really wasn't being utilized fully. We went through for the first time our SQF certification and we've also gone through a number of upgrades. In the midst of that, we have labor that we cannot capitalize and we have inefficiencies in what we are doing. So we have really positioned the plant for a higher volume and some of that positioning has cost us during the year. Another thought in the plant is that as we do work into the Kombucha we're -- and to a lesser extent in our private-label -- we're working into areas that other people cannot venture because they don't have the personnel production capacity like we do. And so the plant really can evolve into being a very strategic piece of our business.

Okay. You are talking about doing things like the flip-top bottles and that type of thing?

Yes, we have capability now in the ROPP caps in a variety of different bottles. And we have increased the options available that we can put through our line.

Okay great. And then if I could switch over just a question about inventory. Inventory just below $6.1 million. Still higher than what we'd maybe like to see it, although it is lower than Q3 and I know you committed to bring it down from the Q3 level. So you did do that.

Well we would like to see inventory down a little bit ourselves. We did end up the year with a little more glass and certain ingredients. The good news on that is that we are able to sell off the glass and the particular ingredients and we are doing so now, so we are able to liquidate that. And then in turn start buying glass again rather than holding the glass and having to strike a new deal with our supplier. I think we will work through that increasing inventory and we will -- we can't liquidate it overnight. But it is definitely happening.

And I'd like to say something to that. We ended the year with about $1 million of inventory that I could argue we didn't need to have.

Right.

And I think that we've really gotten a little bit of an education and we've come up with much better solutions moving forward on how to attenuate that kind of an overage. Anyway we've been able to unwind -- half of that I know we've found a customer for. And when we say liquidate, actually we made money or broke even on most of that. So it's not like we're going to have this big pit because we had to get rid of a bunch of inventory at some kind of a liquidation sale. The fact that we financially could handle that and we are unwinding it shows you how far we are from the edge of cash and capital availability. So we still ended up at the end of the year with cash availability on top of having effectively excessive inventory about $1 million.

Yes.

So anyway, every year we get better at this. We are playing bigger games. And I think the team is savvy enough to do it. But we would've preferred not to have gotten ourselves in that situation and we're just being honest about that.

Okay. Great. Thank you.

And I like to point out Jim Regan, analyst for Crow Leeden, right?

Yes.

Thank you so much for following the stock. We appreciate it and your input.

Thanks for taking the questions.

Evan Stern.

Hi Chris. I'm a big fan of the product. I met you years ago at the Fancy Food Show in New York City. And I've been hooked on a bunch of the products ever since. I have the ginger ale, the ginger beer and I have the root beer in my fridge, the Virgil's. So a daily drinker, actually. Some of the things that I wonder about are when the stock had gone down in prices to like $1.10 and $1.20, I wondered why insiders at that price are not buying more of the stock.

Thank you for joining us and being a big fan, Evan. That's a good question. We don't overpay ourselves. We try not to. We are modest for the size company it is. The Management is on a modest salary. We have stock options and stock that we do look forward and it was a great buying opportunity, still is.

And I would say that the insiders probably weren't liquid enough to jump in, the ones who would have to report it. But I can tell you plenty of insiders bought a whole lot of stock. So everyone I know who follows it, I don't always give the thumbs up -- I don't know what the hell is going on in the stock but I would get in there, kind of thing. But as we mentioned earlier in this call we are planning -- we are doing more -- I think we've made announcements on this but we went out to the MoneyShow in Orlando in February, again in June we will be at the MoneyShow. We're doing some radio IR kind of stuff. And we have an in-house IR guy. And I know we have developed a database of the 1200 brokers that were interested at different times and the 4,000 or 5,000 shareholders and we're reaching out better than we have before. We are aware of the 700,000 fans out there who probably for the most part have no idea there is a stock behind their favorite drink.

Even I didn't know that until a couple of years ago. But I had been drinking it for you know since '04, '05. It's true. It's hard to know about the stock. I've told some people about it who have purchased the stock as well. But the other question I have is have you tried to get into the store Bed Bath and Beyond? Because they have started to sell more natural food products and I notice that could be a market for you.

They are selling SodaStream.

Actually as we speak we are talking to Bed Bath and Beyond.

Great. So that's good. I thank you for taking the time.

We recently got into TJ Maxx Home Goods store. So it's similar to the Bed Bath and Beyond. But I can tell you, when I look at this Company, yes more places, more places. It really isn't about more places. It's about looking at the natural food store and saying, okay we hit a certain level, which is pretty damn high, of sales per store in natural food. And yet we know we can double or triple that with pull marketing.

It's the 8,500 supermarkets that we're just on the shelf, but we're in our infancy, that we know we start turning really much more solidly like some of the stores are. We have a real spectrum from low-level sales in supermarkets to high level where really have an active role with those chains like Fred Meyer's, part of the Kroger chain, or Krogers itself, or Stop & Shop, or Giant Eagle. We can see the writing on the wall is to make these current accounts to sell a lot more. So if we just fully matured our grocery business we would be at $60 million or $70 million on branded business alone.

So even before going up and down the street and all the gaps you see out there. And sometimes, it's not easy I wouldn't say, but it's just basics that we have to get our current customers turning a whole lot more volume like Publix, et cetera. Thanks for your time Evan, and love that you are a fan and stick with us. Long-term we will figure out the stock component.

There are no more questions at this time.

Thanks for joining us and a copy of this will be on the Internet for anyone who wants to share the audio with their constituents. And until next quarter -- I think you will be really excited in our next quarterly call. Actually that was like an ad for the next quarter. Have a great one and thanks for following Reed's.

Think you, ladies and gentlemen. This concludes your call.