Reed's Inc (REED) 2012 Q1 法說會逐字稿

Ladies and gentlemen, thank you for joining Reed's first quarter 2012 earnings call. Your host for today, James Linesch. Mr. Linesch, you may begin.

Hi. 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 quarterly earnings conference call. With me today is Mr. Chris Reed, Reed's Chairman and CEO. I would 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 related to demand for the Company's products, dependence 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, May 14, 2012.

Reed's assumes no obligation to update these projections in the future as market conditions change. Now I'd like to take a few moments to, have 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. Our 2012 first quarter financial results reflect strong growth in revenues from both of our primary brands. Our Ginger Brew line expanded a little bit ahead of our Virgil's line during the first quarter with both contributing approximately equal portions of our overall branded revenues. Our Virgil's line extensions in ZERO and other sodas are performing well.

Our overall revenues are up over 27% in 2012, driven mostly by branded product revenue growth supported by approximately 15% private label revenues. We anticipate that private label revenues will probably be around 17% to 20% of our total 2012 overall sales based on the current contracts that we have. Our gross profits are expanding faster than our sales, with a gross profit increase of 40% to about $2 million in our first quarter. Our gross margin percentage went from 28% last year to 30% in our first quarter. Based on cost reductions that we have achieved in the first quarter, we believe that further margin improvements will be reported throughout 2012.

Delivery and handling costs increased by 23% to $479,000 in the first quarter. As a percent of sales, delivery and handling costs were about 7% compared to 8% last year and we anticipate that they'll run about the 7% to 8% range throughout the year. Sales and marketing costs increased by 25% to $722,000. The increase is primarily due to our return to the important Expo West national food trade show this year, and to our participation in an elite marketing program with UNFI, our largest customers, which is providing us with marketing support services in a number of areas. G&A expenses increased by 13% to $740,000 during the first quarter, which is mostly due to increased loan fees and certain professional fees and depreciation. Our total G&A compensation costs decreased by 7%.

Overall, our net loss in the first quarter reduced to $124,000 from $365,000 in 2011. Our EBITDA income of $392,000 exceeded our interest costs of $168,000, plus our capital improvements of $110,000 during the quarter, creating a positive contribution from operations to working capital. Our cash decreased to $101,000 at March 31 from $713,000 at year end. This primarily due to inventory increases that occurred in the fall of 2011 in both ingredients and in certain finished goods. During the first quarter, we reduced our ingredient over stocks as well as certain finished goods. However, we also increased our purchase of packaging inventory due to normal demand for the year coming up. Since quarter end, we have reduced our overall inventory by about 10% and we have a defined plan for reducing inventory further, thereby, freeing up more cash for our operations.

On May 11, we increased our revolving line of credit from $3 million to $4 million. Prior to the increase, our collateral assets were exceeding our overall line of credit, so we were limited on our overall line of credit borrowing. Our lender, PMC Financial, could see that our working capital borrowing requirements have increased due to our business expansion and not from operating losses. As a result, they felt comfortable with the higher limit. As we look to the balance of 2012, we feel that we are adequately capitalized to achieve the growth targets that we have set. Reed's has a solid base of recurring and expanding branded business, and we have a number of new and exciting products yet to be introduced this year. Now I'd like to turn this call over to Chris Reed, our President and CEO. Thank you. Chris?

Hi, sorry, thank you, Jim. I had (multiple speakers) --

No problem.

Anyway, thank you for everybody who could join with us today. Obviously, as the CEO of a public Company it's a pretty exciting day when you can sit back and reflect on a quarter and see a 40% growth in the gross profits of your Company. Sales outperformed the operations for this scorecard but just barely. Operations, we got into a program, an official margin improvement program in the fourth quarter of 2011.

I am kind of anticipating a moving up of the economy, not a cooling off, and possible inflationary pressure. We have gone in and renegotiated some key contracts for some of the cost of good components, and it's, basically, the effect of it is that we have a pretty excellent improvement in margin. A lot of the concessions and renegotiations came to fruition in January, so we ran with more expensive product inventory through most of the first quarter. We are anticipating products produced after January were probably cheaper and those will be more reflective in the margins for second quarter.

Still concerned. Things like the barrel oil prices will jump any time anyone sees any light at the end of the economic tunnel. I am worried that there will be some pressure, inflationary pressure, but we are still very diligent and have targeted and ferreted out some increased opportunities that have not been realized yet for margin improvement. And some of those are in just simple operational things such as increasing the yields on our very unique process of brewing our ginger ale. We possibly could see another percentage point of improvement this year in gross profit margins just on that alone. So anyway, that part I was heavily involved with, I feel very proud of that component of it.

Anyway, to look at the branded product, obviously, the brand is still growing very strongly. We expanded distribution into Michigan and Tennessee. You will see announcements we are bringing on new areas of the country kind of on a regular basis. We don't have a map of that to direct you to but at some point it will probably be a good idea. But we still have a pretty good portion of the US to build distribution into, and more importantly the relationships themselves are at their infancy. There is so much to do in terms of getting into the accounts and exposing the customers to the product and really building up these relationships. So we look forward to doing that.

As we generate more and more gross profits, we have an able to have a steady hiring of sales people to take over some of the regions in the country where we have distribution but not a person on the street, kind of working that relationship. So that's a very traditional beverage rollout, and we are able to participate more in that. What is considered a little more expensive way go to market than how we have been doing it in the past which is being very focused on key large national chains. We still have a very deep focus in improving our relationships with the 100-plus supermarket chains around the country that we're in. We continue to dominate the IRI scan data in terms of being the fastest growing premium, new age beverage -- premium soda, I think, is the correct category. So we are very proud of that. Those numbers, of course, are great to show to new retailers and existing retailers to engage them further because they can see when we educate them that the brands are doing very well there.

We have some very exciting news. Part of seeing us go into the UNFI ClearVue program, which we started in the first quarter, was so that we would have a very good relationship with our distribution as we launch the largest product brands launch of the history of the Company, probably since the launch of the Ginger Brews and the acquisition of Virgil's. So it's a live probiotic drink line that will be coming out, hopefully, in the next 30 days, definitely in the second quarter. We have very big plans for it. It's a very profitable branded product line, under the Reed's brand, and it's going into a very fast growing and much larger beverage category than the current one we play in, in the natural food industry, and probably runs about four or five times more sales in natural foods than the natural soda component.

So that we look forward to, we think we have done an extraordinary job with it. It has not, by any means, been easy. We are very proud of that launch coming up and hope for it to be very material in the future, and only time will tell. But we feel like we have done our homework on that. Also just for, not as material, but still a new product launch, we are launching a chocolate covered crystallized ginger product line to marry up to the crystallized product ginger line that we already have out there. That will launch in the second quarter and it's currently just being introduced. So first sales will probably be in the next couple weeks. I actually have a good feel on that. It's a good margin product. The preliminaries on it are that over time it will become significant here.

Let's see, what else did I talk to? We did run through and pass the SQF audit again which is good for our private label. Second quarter, we will be launching into one of the largest retailers in the US for a new product line jointly developed by our Company and this large supermarket chain and their creative partners which is a very large new private label customer. I don't know if the project itself, how material it will be, but it won't be insignificant. I think it is somewhere between $1 million and $2 million of new annual business. As you can see, private label still continues to grow. It's not necessarily steady growth. But a linear perfect graph kind of growth -- it is definitely going up each quarter and year-over-year it's very significant, moving into much more significant.

The one way to characterize it is that our existing private label customers want do more and more business with us. So most of the growth of that program is existing large chain customers asking for more projects to be put in the pipeline. And we are negotiating more projects. At first, it was just like let's just get projects done. Now it's like -- we are focused more on building in volume and profitability into that equation as we've become more of a proven private label partner for these large chains. And so we have a few game changing projects on the table. We can't really say if we're going to get them or not. But if we do, they are somewhere up to $1 million of new gross profits that probably could go directly to the bottom line. And we are hoping with our fingers crossed and all our shareholders out there, cross your fingers, we hope to have a game changer partnership here.

We have actually recently been invited this month go through one of the largest retailers in the country. They had 250 management people come through and review our capability. So those are very new experiences for the Company and exciting. Because we know that we have some very unique -- our position in the private label as we build products that they can't get anywhere else. And a lot of the focus of these chains is not just to bring out another cola in a can and put a private label on it. They actually want to be cutting edge with their private label. They want more, new and interesting and better-for-you products. So we are pretty perfectly positioned. I will reiterate, we are not using our own brands and our own core competency with Ginger Brews or the Virgil's line to compete with ourself with private label. We are actually, for the most part, either knocking off competitors' products or coming up with unique new offerings for the supermarket chains.

So looking forward, I continue to see us growing as a private label producer. I see us building out VSD for the US, expanding our relationships more and more with our supermarket partners, launching the most exciting new product line launch with the most opportunity for top line and bottom line growth. I like to describe this new probiotic line as costing the same as Ginger Brew to make and being able to charge twice as much. So we are very excited about this category. It is not for the meek or mild or under capitalized. I don't think it necessarily takes a lot of capital, but it has been very good to have three chemical engineers on staff to ferret out the intricacies of this new project.

I think that kind of covers everything I would want to talk about. I hope I haven't missed anything. I am looking through my notes here. Right now I would like to open up the floor to any questions from people on the conference call.

(Operator Instructions) There are no questions in queue.

All right. Well, I thank you very much for your time today. A copy of the recording will be up on our Web --

Pardon me, a question just came into queue. Would you like to take it, sir?

Sure.

Okay, our first question is from Joe Munda. Go ahead, Joe.

Hey, Chris.

Hey there, Joe.

How you guys doing?

Oh, that's pretty exciting stuff coming, for a first quarter, so we're very happy.

Yes, sounds like it. Real quick, Jim had mentioned the UNFI marketing and they're supporting you. What exactly is that? Can you give us a little bit more color on that as far as what you are doing with UNFI?

Well, UNFI is the largest distributor to the natural food industry and the stock symbol is UNFI. They are, they control what new products go into distribution for the most part for natural foods. And by having, being a partner in this program, it allows us to get involved with some of their exclusive marketing programs, such as a consumer flyer program. It gives us full access to their sales force and getting in front of them to present and getting a top of mind, kind of, for the brands when they go out and pitch our brands to their customers, the retailers.

I think the most important thing is everything that we produce, they put us into their distribution in kind of a very, no questions asked and fast. There is a tremendous proliferation of new products trying to make their way into one of the faster growing parts of our economy in the grocery trade through UNFI. So it's nice to have that relationship, particularly when you are about to make the largest product launch of the history of the Company.

By largest product launch, you mean the probiotic? Is that what you are saying?

Yes.

And what is the market opportunity on that? What do you think year one you guys can do as far as sales?

I don't really know. I know that the leader of this category is doing somewhere north of $150 million in sales at relatively high margin. And it has gone pretty much unchallenged for a number of years.

Who is the leader?

Honest Tea came in and left with the acquisition by Coke, and [I think] Celestial came in and left. We have a better looking package, a world class award-winning bottle that we have used for our design, and a fancier package, a superior tasting product, and probably similar pricing but more aggressive marketing that's currently going on.

We'd love to just get a piece of the $200 million pie there at high margin. I'm not sure how fast it will go. We are about to launch, and we'll find out. We have one small chain in North Carolina that's already, immediate delivery of the first product off the line. We expect enthusiasm around this because it's a very hot item in the natural food industry.

So it's anybody's guess. A minor success would be -- a very minor success would be $5 million in sales, not, I would say, first year but overall. We are hoping to become the leader of this category. We wouldn't be right away, but we are making the very best. We have a very entrenched top dog there. So I can't really predict this. I just know that it has the potential for very significant growth.

And that leads me to my next question. You guys finished the quarter with $100,000 in cash. You burned $600,000 in the quarter. By my calculations, just looking at the balance sheet, you got $850,000 left on the credit revolver. You really think you guys have enough?

Okay. But first I think you are a little bit inaccurate, Joe, to say that we burned it because I did explain that we got some cash tied up in inventory. We over shot a little bit at year end and we are decreasing that inventory. If you look at it from an EBITDA standpoint our operations actually provided cash.

I got you, but I am looking at it from a dollars and cents standpoint here. And it's showing a $600,000 burn in the quarter --

And I am explaining to you that it was due to some inventory build ups primarily.

So how much are you guys going to reduce inventory then this year?

We have already reduced it by about $500,000. We are targeting $1 million by at least the end of the third quarter, but hopefully by end of the second quarter. Right now we still have some glass on hand that we will use but maybe not until later in the year. We have elected to not liquidate it, which we could do. So those are the main reasons why we ended up where we did. We don't feel good about it, but it certainly doesn't mean that we burned through cash.

All right, I'd like to addresses that because I think it's kind of a big issue.

Yes, it is.

The COO, part of our margin improvement program is that we did renegotiate, and I'd say we negotiated aggressively in some areas. With one of our suppliers who had been giving us a bit of a line of credit above the terms, basically said, look, if you are going to hold me to this contract to the way you are, then I would like to see you hold yourself to your terms so at least my cash flow improved while you beat up my margin. So there was $200,000 that came out at that point.

The second thing, and probably more material, is that with the summertime coming, the seasonality, they started to build up inventory. But the COO started really in earnest getting the West Coast plant running all of the west of the Mississippi production, which is something we have done off and on but it's kind of held that going forward so that we can improve margins, take advantage of the freight savings by not having to ship from Pennsylvania to Los Angeles for sales, or San Francisco and Seattle. So he was building up inventories of finished goods on both coasts for the seasonality. I basically asked him to -- I have also run that area for 20 years here. And we have targeted an easy $1 million reduction in inventory by mid-third quarter.

I think you might hear a little "trust me on it." But we feel very confident that you will see that reduction. Obviously, the line of credit increase of the inventory management now that both plants are running at full. That's getting coordinated better.

And our own generation of capital here, cash through the operations, I think we are feeling that snapshot at the end of the month. We had availability. We probably should have borrowed it and threw it into the bank just so you could see it on the balance sheet. But I think it was just an unfortunate snapshot and our snapshot at the end of the second quarter will allay any fears that somehow we are, disappeared some cash here.

All right, so the inventory that you are going to knock down by $1 million, what is that? Is that branded? Or is that private label? What's the break down on the inventory?

It's mostly finished goods and packaging of branded product.

That is just waiting to be shipped?

Yes, so it would have been pretty easy to do for the first $0.5 million. I think we are probably getting closer to $700,000 or $800,000 of that. Basically it was, you know what, we are running very well on the West Coast, you are being conservative. This is me talking to the COO, and having both inventories available in case the West Coast was not going to keep up. You now can feel comfortable that we have done that, so now you can skip a production on the East Coast for May and basically not run 100,000 cases at about $800,000 because you have enough inventory on both coasts.

The answer back to me was, yes, I can see you're right, Mr. Reed. I am like, okay, now we don't want to short any customers but you now need to run at this adjusted two plants running full out mode. So he was just being very conservative. I can appreciate it, but it did suck some cash out. You will see us comfortably working with more cash in the bank at the end of the second quarter.

What you are saying then is the inventory number that we see at the end of 2011 by the end of 2012 should be $1 million less?

That's always interesting with the fourth quarter. If we do our job right, I will say that it will be down $1 million during the year and at the end of the fourth quarter, if we have predicted our fourth quarter well, we'll be down $1 million at that time, too.

I agree.

I would say it with a caveat because the fourth quarter can get very robust here.

What happens when you get an order like on this probiotic thing and you don't have the cash to finance it because the order's too big?

Yes, I have never let getting cash get in the way of us making money. So if we have a huge probiotic order and the gross profits are huge, we have a very entrepreneurial bank. And as long as we are doing what we are doing right now in the first quarter propagating through the year, I don't think we'll have any trouble financing highly profitable growth.

What are both plants running at? At what capacity?

Well, they're covering all the new production needs for the sales on the West Coast, for the West Coast plant, and the East Coast for the East Coast plant. The West Coast plant is probably still at less than 50% of the total capacity of the plant. So there is plenty of room to grow with private label.

Okay, and then where does probiotic fit in there? How much capacity is that going to take up?

Hopefully, a bunch of it.

If we are lucky, the whole thing.

We are comfortable with keeping up with sales here as it grows. We are able to probably grow production at somewhere around 20% to 30% a month and start out at approximately an annualized sales of around $1.5 million, growing that at 20% to 30% a month. If we are growing faster than that, knock on wood, and we are all engineers here, and we know how to grow faster.

Okay. But you don't know what the orders look like? You only have one order right now, right?

Our distribution, UNFI is waiting for the call that says we are ready to pick up. And we are telling them somewhere around the 10th to the 15th of June we should be good with our first product. It's a pretty tricky launch. You don't want to get out there in short so we probably will start with a few regions, and this one chain in North Carolina that's asked for the product immediately. In theory, the North Carolina chain could pick up the whole first productions or $60,000 or $80,000. We are trying not do that. We are trying to get it into distribution in June so that we can capture and run a little bit during the summertime which is a very good time to trial beverages, sodas, or drinks.

I am sorry, who is the leader in this space? You had said Honest Tea?

No, they came into the category and walked out.

GT's, Synergy, they have the GT brand.

I'm sorry, what was that?

GT's -- GT. They are by far the dominant -- the name of the company is Millennium Products, they are here in LA. It's a private company. They really forged the market and they have done a great job.

Where did you get the three engineers from, GT?

No. I am one of the chemical engineers. My plant manager is another and our product development specialist is another [chemy.]

Okay. All right. You guys happen to know what they do in revenue a year or no?

I think it is somewhere between $150 million and $200 million.

Yes.

I mean, Chris, this is a whole new space. How did you decide to get into this? I'm guessing they're close. You just happened to take a look and said we can do this?

We live and breathe the natural beverage space. We have been running in parallel, our two companies, for a long time. And we are craft brewers of the finest non-alcoholic brews on planet Earth. Not non-alcoholic beer but what we do, the unique ginger brew. So it is kind of up our alley to see another individual making the same kind of brews in a lot of ways except just leaving it probiotic and live and selling it for twice as much and feeling, not envy, but knowing also that our relationship with UNFI and the market place is such that we should have a good reception.

We already took it to the trade show, Expo West, and it was very well received. It's a superior product to the products out there under Millennium. The packaging, everything about this product is better. So we believe in that. And we believe that customers will get that. We also believe in our ability to market. We see -- we are trying to make very strategic high probability success moves with the Company that generate a tremendous amount of gross profit, so that we can bulk up as a Company and execute on a business model that does not include selling stock anymore.

Another component is that we are delivering ginger through our Kombucha also. We just consider that's a part of our mission is to expand ginger. This is a new form of delivering ginger in a very, very effective way that can be used by the body. And we hope to come out with other ginger products as we go. So there is a natural thing there that we float into.

All right. So we do have kind of a big pipeline of questions, Joe.

Yes, yes, I'll hop back in the queue.

All right, thanks, appreciate it. Joe from Sidoti, you are an analyst there, I believe?

I am.

All right, thanks.

(Operator Instructions).

Didn't have a big queue. I'm sorry, Joe.

Our next question is from Neal Cohane. Go ahead, Neal Cohane.

No, operator, I was just going to tell you to please ask everybody to please press 1 on their receiver to ask a question.

Oh, thanks Neal.

Okay. (Operator Instructions).

All right, Joe, if you have more questions feel free to ask them at this point.

Go ahead, Joe.

Yes, I guess I'm the only one here.

The only one asking questions.

Yes. As far as CapEx is concerned, it looks like you guys are down a little bit year-over-year. With new business coming up, can we expect -- what are you guys forecasting for CapEx in 2012?

Well, 2011 was about getting SQF up and running in the plant. Also, we created and brought on a bit of new capability. I'd say, as we get closer to hitting full plant capacity, you will probably see us out looking for equipment that will allow us to speed up the line. The plant can probably go to a double the speed in this facility and grow into that new speed. So in terms of -- there definitely can be some CapEx with the Kombucha, the probiotic line. And yet, we are not necessarily sure that any of that's going to hit this year.

If it does, it means that we've had a pretty explosive launch for the year, and surely the sheer profitability of that line will probably cover any of the extra tanks that we might need to acquire. So it's not super expensive equipment but a lot of used stainless steel tanks could be acquired to support increased volumes there. So, I think you have seen a lot of the spending. I would expect CapEx go down this year. We acquired a number of pieces of equipment last year, that now they're up and running. We are just using and leveraging those acquisitions with our private label. They do give us pretty unique capabilities here.

Okay. Chris, you think you can get a full -- the gross margin. You go into pretty extensive detail on it. We appreciate it. Do you think that with the summer season coming, we are going to see the expansion that we usually see from first quarter into second quarter as far as gross margin is concerned?

That's a good question. I'd have go look at the seasonality of our gross profit margin, because you're right. They're doing a lot of advertising, they can push down top line number. But, again, as I mentioned in the first quarter, we had a number of renegotiations that are probably hitting more heavily, including the cost of goods in the second quarter. We still have a large product for yields that is going to yield improved gross profits also. I think that we should be able to hold the level of improvement of the first quarter, and have possible improvements on that in the second and third. So we'll see. It's a big equation. It's hard to be exactly accurate on it. But I think that we have seen a permanent shift in a better gross profit margins, based on our first-quarter results.

Do you guys expect to be profitable for the year?

I would be surprised if we don't show a quarter here with profitability in the next two. But for the whole year?

We certainly expect to be EBIT positive covering interest and CapEx, which kind of to us internally is profitable.

I mean, 168,000 -- what's the interest, what's the rate of interest that you guys are paying?

We'll go along at probably about the same rate that you saw in the first quarter.

Okay.

Here we are. We had $124,000 loss in our lightest quarter of the year. There is a lot of moving pieces that we are certainly headed in that direction.

All right. Thanks guys.

Our next question is from Evan Stern. Go ahead, Evan.

Hey, Chris, how you doing? It's Evan Stern. I am really excited about the new products coming out, especially the chocolate covered ginger.

Thanks, it's great.

Will that be on the East Coast, too?

That will launch in UNFI, it will be pretty much all across the country simultaneously.

Great. Well I have a question about the cash position being so low. I was wondering if, what your position on that -- how confident are you that you won't have to raise equity through an offering of the equity?

It's a good question. We see three things happening. One is, we are reducing inventory as we speak. We have done that very significantly already to date. That should improve our cash position. We had $100,000 in the bank and another $200,000 of availability in our line of credit. We could have borrowed and shown $300,000 in the balance sheet. And you will see the line of credit went up from $3 million to $4 million.

So we have more availability of funds. We are reducing inventory, and we are generating cash through the operation. We generated about $130,000 during the first quarter, our absolute worst quarter of the year. My rule of thumb for years has been what we do in the first quarter, we do about 20% of our business in the first quarter and times it by five and that's generally the run rate. At least that rule of thumb has played out in most of the prior years. Last year we did $5 million, $5.1 million, we ended the year at $25.3 million. It's not unusual to see that pace. We, of course, would like to accelerate from that pace with the new Kombucha launch and some of the private label we are dealing with.

But we are so confident in it that we will just -- we are saying trust us. You will see at the send end of the second quarter we'll show a more significant amount of more cash on hand. Now that we have said those kind of things, we won't go out and do some huge marketing thing or do something crazy to do that. Everything is moving the way it is moving right now. We'll show significantly more cash at the end of the second quarter.

The only reason we would feel we need to raise money is if we just felt like it was too much pressure from the shareholders to believe what we are saying. And that would have to be an extreme amount of pressure, because quite frankly, we are long-term players, and we are confident in our statement that we do not need to sell any stock to operate this business. I mean, if you can be with that, I think you will see us living by our words here.

Good. Well, thank you very much, Chris.

(Operator Instructions) There are no further questions in queue.

All right. Well, I'd like to thank everybody that's been on the call today, and I look forward to having you on future calls and providing you with more wonderful results. Have a wonderful day.