Reed's Inc (REED) 2024 Q2 法說會逐字稿

Good afternoon, and welcome to Reed's second-quarter 2024 earnings conference call for the three months ended, June 30, 2024. My name is Emery, and I will be your conference call operator for today. You will have prepared remarks from Norman E. Snyder, Reed's Chief Executive Officer; and Joann Tinnelly, Reed's Chief Financial Officer. Following their remarks, we will take your questions.

Before we begin, please take note of the company's cautionary statement. Today's call will include forward-looking statements, including statements about Reed's business plans and 2024 guidance. Forward-looking statements inherently involve risks and uncertainties, and only reflect management's view as of today, August 13, 2024, and the company is under no obligation to update them.

When discussing results, the presenters may refer to non-GAAP measures, which include certain items from reported results. Please refer to Reed's second-quarter 2024 earnings release on Reed's Investor website, investors.reedsinc.com, and its second-quarter 2024 Form 10-Q expected to be available on the website on August 14, 2024, for definitions and reconciliations of non-GAAP measures and additional information regarding results, including a discussion of factors that could cause actual results to materially differ from forward-looking statements.

I will now turn to turn the call over to Mr. Snyder. Please proceed.

Thank you, operator, and good afternoon, everyone. We appreciate you joining us today to discuss our second-quarter 2024 results. We continued to execute on our growth and optimization initiatives in the second quarter as we generated double-digit net sales growth, material gross margin expansion, and positive modified EBITDA. I would like to thank the entire Reed's team for the consistent hard work and dedication in achieving these solid results.

As discussed on prior calls, our sales were previously impacted by an inflated rate of short-order shipments. We have since implemented certain measures to strengthen our inventory position and increased capacity through new co-packing partnerships. These actions have significantly reduced the rate of short shipments to a more normalized level.

Turning to a few recent updates on our key product categories based on unit sales, Reed's ginger beer sales were up 70% year over year in the second quarter. Our ginger ale sales were flat year over year in Q2. However, year-to-date [mootloaf] scan sales were up 13% compared to the same period last year. For Virgil's, we generated a 26% increase in sales for Q2 compared to the year ago period.

Reed's alcohol sales were flat for the quarter versus Q2 of 2023, but depletions in the category were up 16% over the same period.

During the quarter, we made solid progress on our cost cutting and optimization initiatives reflected by a 720-basis point increase in gross margin and a 460-basis point decrease in OpEx margin compared to the year-ago quarter.

Our gross margin expansion was driven by our consistent efforts to reduce input cost, shift our product mix from bottles to cans, and apply more consistent pricing across various channels.

For delivering handling expenses, we experienced a 60% reduction in the quarter to $2.18 per case compared to $3.05 per case in Q2 of 2023. We drove these savings by renegotiating freight rates for heavily traffic lanes, improving throughput, and generating efficiencies from our streamlined distribution model and new co-packing partnerships.

We've effectively brought down delivery and handling costs to approximately 12% of net sales compared to 17% in the year-go period, and will continue to identify opportunities to reduce costs on a per-case basis.

And lastly, with respect to cost cutting, we reduce selling and marketing expenses in Q2 by 13% year over year by creating a more focused marketing strategy and a streamlining our sales process.

We are progressing with our new product roadmap by leveraging fresh organic ginger to create a portfolio of beverages in the Better 4U lifestyle category that contains lower calories and levels of sugar. Our commitment to using the highest quality natural ingredients has been the cornerstone of our brand, ensuring a bold, premium taste for our consumers.

Although we're in the early stages of development cycle, we've received positive feedback from several key retailers across different channels on our new product profiles. We will offer this line to select customers and expect to launch in early 2025. We are excited to introduce these innovative products to the market and look forward to offering our customers an exciting new portfolio of beverages that will enable the Reeds brand to expand into a high-growth category, while allowing consumers to experience a natural plant-based functional refreshment.

While we believe that our core assortment will continue to drive stable short- and long-term growth opportunities, we also believe that this innovation will add to our yearly growth potential.

Turning to our second quarter and recent sales and operational highlights. To start, we have successfully completed an enterprise-wide price repositioning process to drive margin expansion, optimize pricing for consumers, and enhance our ability to execute a robust promotional campaign. In the second quarter, we built solid momentum with this renewed strategy, strengthen our ability to meet our 2024 net sales guidance.

As we move into the third and fourth quarters, we anticipate realizing the annualized impact of our enterprise price repositioning efforts, which have been successfully completed to date.

Next, we completed several promotions with some of our most impactful natural and grocery channel retail customers: Whole Foods, Sprouts, Publix, and Kroger amongst several others, participated in our promotional offering in the second quarter.

In the club channel, we launched Virgil's handcrafted variety packs in Costco's Bay Area and Midwest regions in our new 12-ounce standard can format. We also have plans to launch our new Ginger Ale Winter Variety Pack in Q4, as we look to further expand our product assortment and enhance our partnership with Costco.

With Stop and Shop, we added more than 900 new points of distribution during the second quarter for our Reeds and Virgil's product portfolios. We also launched our 12-ounce ready-to-drink classic mule in Walmart locations across California, while we are cautiously optimistic that our performance in California could lead to further expansion in the adult beverage category with Walmart.

Additionally, we added just over a thousand new points of distribution to Cracker Barrel, one of our long-time customers. Cracker Barrel has historically leaned into our unique and seasonal portfolio offerings. However, we have now expanded into our core sorbent with ginger beer.

Looking at broader channel opportunities, we have begun our initial rollout of our new 7.5-ounce ginger beer cans into the on-premise channel and select geographic territories. The initial reception has been very promising.

As a result, we have onboarded two national food service broad line distributors to enhance the geographic reach of our new and existing DSD partners and enable us to more effectively serve the on-premise channel on a national scale. We will continue to evaluate opportunities in both the traditional on-premise and food service in the coming new year.

Subsequent to quarter end, we gained several authorizations for our branded seasonal products. First, we will be launching our new 750-milliliter Harvest Spiced Cider and Sprouts. Next, we will offer our Bavarian Nutmeg Root Beer to our shared customer base in Whole Foods. We will also offer Butterscotch Beer, Bavarian Nutmeg Root Beer, and Harvest Cider with key regional partners such as Kroger, Bosch's, H.E.B., Wegmans, Hannaford, and Ingalls.

And finally, we were awarded a seasonal test with Walmart to showcase our branded seasonal products.

We expect this year's seasonal product execution to be a material contributor to our Q3 and Q4 results.

In Whole Foods, we secured a second national authorization for our alcohol assortment due to our strong performance in last year's national off-the-shelf program. In June, we launched our hard ginger and ginger mule beverages across Whole Foods nationwide locations.

We're pleased to offer these premium bowl-tasting, ready-to-drink beverages to Whole Foods customers and look forward to deepening our alcohol offerings within the channel. Quickly touching on our co-packer partner, Battle Co-packing, we kicked off our partnership with Battle in Q1 of this year, bolstering our production capabilities for both bottles and cans in the Southeast region.

We've already realized operating efficiencies and cost savings from this partnership in Q2, and have since expanded our scope with Battle in the Southeast. We're pleased with the progress thus far and look forward to further building our partnership with Battle.

We've made solid progress on our optimization initiatives thus far. However, we remain committed to uncovering additional areas in our business to drive further savings. For example, during the quarter, we began working with Unix, a premier California-based co-packer to drive efficiencies and cost savings in our packaging operations.

Shortly after the quarter, we kicked off our partnership with [DrinkPak], a state-of-the-art and non-alcoholic can beverages, providing full service support for procurement, batching, processing, packaging, and distribution. DrinkPak will supplement our ClubPak initiative, and we expect to realize the benefits from this partnership in the back half of this year.

In our e-commerce business, we launched our new virtual cans on both Shopify and Amazon in June. The early results are promising, as we are seeing consistent month-over-month volume and sales growth. While this channel currently accounts for a small part of our business today, we are encouraged by its progress and plan to invest in more resources as it grows into a larger revenue contributor in the future. Looking ahead, we are reaffirming our financial targets for 2024 as we continue to expect net sales growth, gross margin expansion, and modified EBITDA profitability, while generating positive cash flow from operations for the full year.

Our strategic initiatives are bearing fruit, setting the stage for further growth and improved profitability. With a strengthened inventory position, optimized cost structure, and continued demand for Reed's products, we believe we are well positioned to deliver on our goals in the back half of the year.

Before wrapping up with closing remarks, Joann will cover our financial highlights for the quarter in more detail. Joann, over to you.

Thanks, Norm. Diving into our results, all variance commentary is on a year-over-year basis unless otherwise noted. Net sales for Q2 2024 increased 19% to $11.9 million compared to $10 million in the year-ago quarter. The increase was primarily driven by strong demand for Reed's products, increased promotional activity, expanded product authorizations, and a reduction in short-order shipments compared to the year-ago period.

Gross profit for the second quarter of 2024 increased 53% to $3.8 million, compared to $2.5 million in the same period of 2023. Gross margin increased 720 basis points to 32.3%, compared to 25.1% in the year-ago quarter. The increase is primarily driven by higher net sales and lower supply chain and input costs.

Delivery and handling costs were reduced by 16% to $1.4 million during the second quarter of 2024 compared to $1.7 million in the second quarter of 2023. The decrease was primarily driven by renegotiated freight rates for heavily trafficked lanes, improved throughput, as well as efficiencies generated from our streamlined distribution model, and new co-packing partnership. Delivering and handling costs were reduced to 12% of net sales or $2.18 per case compared to 17% of net sales or $3.05 per case during the same period last year.

Selling, general, and administrative costs were $3.1 million during the second quarter of 2024, compared to $2.6 million in the year-ago quarter. As a percentage of net sales, selling, general, and administrative costs remain flat at 26%. Altogether, operating expenses were $4.5 million or 38% of net sales compared to $4.3 million or 43% of net sales in the year-ago period. The improvement in OpEx margins reflects our consistent efforts to optimize our cost structure.

Operating loss during the second quarter of 2024 improved to a loss of $0.7 million, or $0.16 per share, compared to a loss of $1.7 million, or $0.55 per share in the second quarter of 2023.

Modified EBITDA improved to $45,000 in the second quarter of 2024, compared to a loss of $1.6 million in the second quarter of 2023.

For the second quarter of 2024, cash used in operations was $0.9 million compared to $3.4 million for the same period in 2023. The decrease in cash used was primarily driven by lower inventory purchases compared to the year-ago period.

As of June 30, 2024, we had approximately $0.3 million of cash and $27.4 million in total debt net of capitalized financing fees. This includes $18.4 million from our convertible note and $9 million from our revolving line of credit, which has $3.8 million of additional bar of capacity.

Last week, [we announced the close of a bridge financing program of a profitable business does not include the net needs from finance. I will now turn the call back to Norman for a closing remarks].

Thank you, Joann. As I mentioned earlier, strategic initiatives are bearing through and have been set to stage for further growth and profitability in the back half of the year. Between our [long-term base], healthy inventory levels, and strong demand to reach products, we believe we are well positioned to successfully execute our goals ahead.

Operator, we will now open the calls for questions and answers.

(Operator Instructions) Mr. Sean McGowan, Roth Capital Partners.

Good afternoon, guys. How are you?

Good, Sean. How are you?

Good, good. Yeah. I'm sure. I'm sorry -- misses the earthquake, so we're surviving. It's all fine.

Question on gross margin. Do you think that -- did this quarter come in kind of as expected or a little softer or a little stronger? And do you think that there's room for improvement from here?

It came in as we expected, Sean. And we do believe there's there's room for additional improvements. You know, we continually search for ways to reduce costs and are implementing some additional measures during the current quarter.

Okay, so those freight lane reductions you got, we haven't seen the full benefit of that yet?

Yeah. We're seeing part of it will continue to we tend to negotiate freight rates in six-month increments. So, we're seeing part of it. You know, it was also -- we mentioned earlier, the bringing on Battle co-packing inthe Southeast really helps reduce further to get to our larger customers in the southeast in Texas. So we'll see more of that play out in the latter half of the year as well.

Okay. And G&A was a little higher than we would have thought. Is there anything in there that you think drove it up unusually, or should we expect it to sustain at this level?

No, there were a couple non-recurring items that you'll see, and you'll see in the EBITDA, modified EBITDA reconciliation, that drove it up a little bit higher. But if you remove those, there were where we thought they would come out.

Okay, yeah. I thought that -- yeah, there was like that severance, would that be in GNA?

Yeah, that would be in it. There were some legal costs, some other professional costs that were in there as well.

Okay. All right. Perfect. Thank you. And then last question, the call is breaking up a little bit at times and I kind of missed what you said about products launching in early 2025. I'm wondering if you could repeat what they were and give us a little bit more color on that?

Yeah. I mean, look. At ginger, there's been a lot of pairs of plant-based food and beverages over the last five years, decade. And ginger, we really believe we were the first ones in the party. I mean, obviously, ginger is a plant-based item that has tremendous efficacy. And just looking at the current trends that have recently appeared, lower calorie and lower sugar levels have really taken a very dominant position in the beverage space.

And obviously, we believe that our ginger products, coupled with lower levels of sugar and calories would do very well. And we've shared some of those ideas with some key retailers and have received really positive feedback on our positioning, in both the taste and the efficacy and other things.

So we're really excited about, you know -- look. At Reed's, we're really about ginger and have been a leader in that category. And look forward to continue leading into the future with our innovation.

Okay, thank you.

Thank you, Mr. McGowan. At this time, there are no more questions. This includes our question-and-answer session. I would now like to turn the call back over to Mr. Snyder for closing remarks.

Thank you. I'd like to thank everyone for participating in today's earnings call, as well as our employees, customers, and of course, our shareholders. We appreciate everyone's support. We'll continue to make solid progress on our 2024 initiatives. And look forward to providing an update when we report third-quarter results later this year.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation. Have a great day.