Reed's Inc (REED) 2021 Q3 法說會逐字稿

Good afternoon, and welcome to Reed's Third Quarter Fiscal 2021 Earnings Conference Call for the period ending on September 30, 2021. My name is Anthony, and I will be your conference call operator for today. Today's call is limited to 1 hour, and we will have prepared remarks from Norman Snyder, Reed's Chief Executive Officer; and Tom Spisak, Reed's Chief Financial Officer. Following management's remarks, they will take your questions.

Before we begin today's call, I have a safe harbor statement to read to our listeners. I would also like to remind you that this conference call will include forward-looking statements. Forward-looking statements are only current predictions and are subject to known and unknown risks, uncertainties and other factors that may cause our actual results, levels or activity, performance or achievements to be materially different from those anticipated by such statements.

These factors include, but are not limited to, Reed's ability to manage growth, manage debt and meet development goals; Reed's ability to protect its supply chain in light of disruption caused by elevated freight costs and other impediments; the availability and cost of capital to finance our working capital needs and growth plans; reduction in demand for products, dependence on third-party manufacturers and distributors; changes in the competitive environment; future business outlook, including the potential impact of COVID-19 on Reed's business and results of operation; and other information detailed from time to time in Reed's filings with the United States Securities and Exchange Commission.

These statements, including financial guidance, involve risks and uncertainties that may cause actual results or trends to differ materially from the company's forecast. The achievement or success of the matters covered by such forward-looking statements including future financial guidance involves risks, uncertainties and assumptions, many of which involve factors or circumstances that are beyond Reed's control.

Fiscal 2021 guidance reflects year-to-date business trends, including the ongoing operating environment related to COVID-19. The COVID-19 pandemic and its related impacts could continue to create many incremental potential business risks, including potential impacts to Reed's ability to access raw materials, production, transportation and/or other logistics needs as well as potential inflation related to all aspects of supply chain and logistics, which cannot be reasonably estimated and may not be completely factored into current fiscal 2021 guidance. Gross margin guidance assumes our known pricing for ingredients, packaging and production costs, each of which has been and could continue to be impacted by factors related to COVID-19.

Financial guidance should not be viewed as a substitute for full financial statements prepared in accordance with GAAP. For more information, please refer to the risk factors discussed in Reed's most recently filed annual report on Form 10-K and the Form 10-Q to be filed with the SEC today.

Although management believes that the expectations reflected in forward-looking statements are reasonable, management cannot guarantee future results, levels of activity, performance or achievements. In addition, any projections as to the company's future performance represents management's estimates as of today, November 9, 2021. Reed's assumes no obligation to update any forward-looking statements or information which speaks as of their respective dates.

Additionally, please note non-GAAP financial measures referenced during this call are reconciled to the comparable GAAP financial measures in the press release and supplemental materials filed with the SEC and is posted on Reed's investor website at investor.reedsinc.com.

Modified EBITDA is presented because management believes it assists investors and analysts in comparing our performance across reporting periods on a consistent basis by excluding items that we do not believe are indicative of core operating performance.

The presentation of this non-GAAP financial information is not intended to be considered in isolation or as a substitute for or superior to the financial information prepared and presented in accordance with GAAP. And Reed's non-GAAP measures may be different from non-GAAP measures used by other companies. Reconciliations of non-GAAP measures to GAAP measures, as well as the definition of each measure, their limitations and our rationale for using them can be found in this afternoon's press release and in Reed's SEC filings.

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

Thank you, and good afternoon, everyone. We appreciate you joining us today to discuss our third quarter 2021 results.

Before I begin, I would like to thank Scott Grossman for serving on our Board for the past 4 years. He has been a valued adviser, and I wish him the best. I'm also pleased of Rhonda Kallman's nomination to the Reed's Board. I have known her for close to 2 decades and admire her knowledge of the industry, her tenacity and the success that she has experienced throughout her career.

Her beverage experience and counsel will be invaluable in joining the Reed's Board. We are in an exciting time as we continue to expand our presence in the RTD alcohol segment with our Reed's Ginger renewal.

I will now highlight the key takeaways from the third quarter and then move on to a more detailed discussion of our results before turning the call over to Tom to cover our financials.

For the seventh consecutive quarter, we delivered growth in net sales, reflecting continued consumer pull as a result of on-trend innovation and distribution expansion. Third quarter sales of $13.4 million were the highest in the company history with our second highest quarter being the first quarter of this year.

During the third quarter, net sales increased to 27% compared with the prior year period as we continue to capitalize on strong demand for our products, and we were able to recover most of the orders from the second quarter that were pushed out due to supplier delays related to labor, aluminum cans and swing-lid glass. The recognition and authenticity of our brands and strong position relative to better-for-you offerings, consumer's taste and natural ingredient preferences is clear based on our recent growth as well as other sales category data.

Supply chain challenges remain a factor. And while we are taking steps to mitigate the impact, there are many elements that remain and will likely pressure margins for the next several quarters. We are pleased with the initial progress on cost savings and operational improvement initiatives set forth earlier in the year that have partially offset these inflationary pressures in the market.

Transportation costs remain elevated. Both dry band and ocean freight costs continued above 2020 levels impacting gross margin and delivery and handling costs. We have retained a top-tier distribution consulting firm and hired an additional logistics executive to conduct a network optimization review. We expect to see the benefit of these efforts in the first quarter of 2020 -- 2022.

We are increasing our 2021 financial guidance for net sales growth to 20%. We continued to experience strong demand across our portfolio, reflecting the power of our brands, coupled with expanding distribution and ongoing innovation. Multichannel IRI scan data for the year-to-date period is up 11% overall, 14% in the natural enhanced channel, including an 18% increase in the Reed's brand, overall category growth of 7% in Mule and 9% in natural enhanced channels.

Ginger Ale continued to grow at strong rates, increasing 336% on a year-to-date basis. Reed's Extra and Zero Extra cans are up 139%, and our Reed's Zero Extra bottles are up 40% over the same period. Our Virgil's Zero line continues to perform well as scan data reflects increases of 5%, 48% in the natural enhanced category year-to-date. Velocity was up 12% on a year-to-date basis and ACV grew approximately 5%.

We were recently authorized in the Costco Southeast region with our Reed's Real Ginger Ale and are pleased with the initial results. This authorization was the result of an extremely successful Costco grand opening roadshow at their new Nashville, Tennessee club. We also added the Pacific Northwest with a Cranberry version of our Reed's Real Ginger Ale during the third quarter. These authorizations underscore the consumer reaction to our Real Is Always Better campaign.

In addition to Costco, we recently added 100 Shoprite stores and have increased our presence in the Sprouts chain by adding 9 Virgil's Zero Sugar SKUs. Ingles where we now have 22 SKUs and Stop & Shop adding Reed's Real Ginger Ale in the mocktail line. In addition, we also expanded our existing distribution at Smart & Final, Raley's, Hy-Vee, Hannaford, Wegmans, Big Y and The Fresh Market. We also have doubled sales in our seasonal swing-led program and added Flying Cauldron as an offering.

We continue to secure alcohol distribution licensing by state to capitalize on new Reed's RTD Zero Classic Real retail distribution opportunities. We are securing new meal placements at Costco Southeast region, along with Whole Foods and Sprouts stores.

I'm excited to announce the expansion of our line of Reed's Real Ginger Ale mocktails to include Lemonade Spritz and Blood Orange, in addition to our Shirley Tempting and Transfusion varieties. Also during 2022, we will introduce our rebranded Virgil's Zero Sugar line in a 12-ounce sleek can with a new improved proprietary sweetener blend in a more contemporary look. We are proud of the new look, feel and taste of this line and believe this will generate significant sales growth in a higher growth category.

Further, we will be introducing Reed's Hard Ginger Ale, an RTD product that contains 5% alcohol by volume, 100 calories, 2 grams of carbohydrates and no added sugar. We will launch with 4 flavors, mango, strawberry, watermelon, pineapple coconut and cherry lime plus a variety pack. These products will compete in the flavored malt beverage category, a $4 billion-plus market in 2020.

The expansion of our DSD network with top-tier beer distributors will be a crucial component in the introduction and growth of our RTD Mule and Hard Ginger Ale product lines.

I will now address third quarter results. Net sales increased 27% to $13.4 million, reflecting volume gains in both brand portfolios. We are pleased with this acceleration from the second quarter but still encountered supply chain headwinds that impacted our ability to fulfill orders at an optimal level. We're able to recover most of the shortfall experienced during the second quarter, putting us ahead of our full year 2021 guidance.

The position of our brand has never been stronger. Consumers continue to be drawn to the quality, authenticity and on-trend attributes of Reed's and Virgil's and are responding favorably to our new marketing campaign, Real Is Always Better. Our strong consumer demand, expanding network of distributors and retailers, increased product offerings and the increased availability of our products on the shelf will continue to drive growth.

Core brand gross sales increased 22% in the third quarter on a year-over-year basis, driven by a 25% increase in volume. Reed's case volume increased 34% and Virgil's volume was up 16%. New launches remain a key factor in our volume growth with an emphasis on Reed's Real Ginger Ale, Zero Sugar formulations and can versions of new and existing products.

Gross margin declined by 320 basis points over the same period last year to 29%. The driver of this decline was a result of price increases in most of our raw material inputs, including corrugate, paperboard, grounds, cans, honey, pineapple juice and Stevia.

In addition to these elevated costs, our successful swing-lid seasonal program experienced a 10x increase in ocean freight that put further downward pressure on margins. While a favorable package mix and lower promotional discounts helped partially offset these increases, we continue to aggressively pursue cost savings as these margin positive items were not sufficient to offset the impact of inflation across raw materials, packaging and transportation costs.

Modified adjusted EBITDA loss was $3.1 million in the third quarter compared to a loss of $2 million in the third quarter of 2020. The significant driver of this increase was transportation costs.

We continue to seek and implement cost-saving measures to mitigate the impact of inflation in our cost of goods. We have implemented 4 stocking programs for our labels and flavors, driving that cost while protecting our supply chain. We are also introducing a new and approved proprietary sweetener blend for our Zero Sugar line that will maintain the bold taste our consumers demand while reducing costs and reducing the use of harder-to-source materials.

We are also implementing the use of alternate materials that protect us from shortages while providing pricing advantages. We're exploring a consolidation of our corrugate to use in an effort to implement a stock program similar to what we have in place for labels and flavors. These are examples of many of the initiatives we have implemented and/or are pursuing to reduce costs and improve gross margin.

We also implemented a price increase to our retail and distribution partners that will absorb a portion of these raw material and transportation increases. To reduce delivery and handling costs, as I mentioned earlier, we have retained a logistics consulting firm that has worked extensively in the beverage industry with several multinational beverage companies to conduct a network optimization study. We have also hired an experienced logistics executive to partner with the consultants to assist with their review and to implement its findings. We believe there are several significant opportunities in several areas of our logistics operations.

At the time of our last call, we believe that transportation costs would return to prior year's levels and supply chain disruptions would abate. As such, we expect to have plenty of capacity on our line of credit to make it through 2021 and even through a majority of 2022. Contrary to expectations, our assessment has changed, and we expect that freight costs will remain elevated and supply chain impediments will continue to cause disruption into 2022.

Our strategy of protecting our supply chain will not only provide a path to meet our projected growth, but will create additional opportunities. There will be -- we will be opportunistic to ensure that we can continue to operate from a position of strength. This position will allow us to take advantage of sales opportunities when others cannot meet the demand. As a result, we will continue to build inventory and invest in our operating infrastructure.

In summary, demand for our products remain very strong across our entire portfolio, and we are excited about our current and future innovation that has resulted in a strategic pivot from a company selling full sugar beverages and glass packaging to a limited number of sales channels to a more diverse portfolio that is meeting the needs of today's consumers in terms of natural and healthy attributes, great tasting, convenient, more environmentally sustainable packages in multichannel retail outlets.

Our focus on platform optimization to deliver improved profitability as we scale has also continued to show solid progress. And as we expected, we have picked up the pace from last quarter's shipment delays.

With that, let me turn the call over to Tom Spisak to discuss our financial results in more detail. Tom?

Thank you very much, Norm. It's a pleasure to speak with everyone today. As Norm discussed, during the third quarter, we continued to see strong demand from consumers and retailers across both the Reed's and Virgil's portfolios. We continue to seek and implement cost savings initiatives to offset the rising raw material costs and high freight costs, which put pressure on our margins and net income.

Third quarter net sales increased 27% to $13.4 million compared with $10.6 million in the prior year period. As Norm mentioned, core brand sales were up 22%, including a 25% increase in volume reflecting 34% case growth for the Reed's brand and 16% case growth for the Virgil's brand. Gross profit increased 14% to $3.9 million compared to $3.4 million in the prior year due to increased sales as well as lower discounts.

Gross margin was 29% in the third quarter of 2021, a decrease of 320 basis points versus the prior year period. Supply chain pressures were the primary factor affecting Q3 gross margin.

Delivery and handling costs totaled $3.1 million in the second quarter, an increase of 40% compared to last year due to volume growth, e-commerce fulfillment costs and higher freight rates. Delivery and handling costs were 23% of net sales and $3.89 per case compared to 21% of net sales and $3.46 per case during the same period last year. As Norm mentioned earlier, we have retained the distribution consulting firm that works with several of the large multinational beverage companies to perform a freight study to optimize freight costs.

Selling and marketing costs were $2.6 million during the third quarter compared to $1.9 million in the last quarter -- last year's third quarter. The increase was primarily driven by headcount growth in our sales force and higher stock compensation. As a percentage of net sales, sales and marketing costs were 20% in the third quarter of 2021 versus 18% in the prior year period.

General and administrative expenses were $1.8 million in the third quarter compared to $1.6 million in the prior year period. As a percentage of sales, general and administrative expenses were 13% in the third quarter of 2021 versus 15% in the prior year period. The year-over-year decrease was attributable to higher sales and lower professional costs.

The third quarter operating loss was $3.7 million compared to an operating loss of $2.3 million in the prior year. Interest expense was $200,000, down $100,000 versus the same period last year. On a per share basis, we reported EPS of negative $0.04, flat with a year ago. Our weighted average share count was 93.6 million in the third quarter of 2021 compared to 62.9 million a year ago, reflecting capital raises over the past year. Modified EBITDA loss was $3.1 million compared to a loss of $2 million in the prior year period.

Moving to the balance sheet and cash flows. We ended the third quarter with $900,000 of cash and $8.3 million of outstanding borrowing. The total facility has $13 million of borrowing capacity or an incremental $4.7 million, including the $1.3 million of availability on our revolving line of credit. Cash used in operating activities on a year-to-date basis was $15.3 million compared to $6.8 million during the first 9 months of 2020. Higher inventory to support our growth as well as efforts to mitigate supply chain issues drove higher use of cash year-to-date, along with the increase in our net loss.

Turning to guidance. We are raising our full year guidance for net sales growth to 20% from the prior range of 14% to 16%. While our margin enhancement initiatives have begun to take hold, rising input costs, freight and the need to supplement our can supplies have us lowering our fiscal year 2021 gross margin guidance to approximately 30% from the prior range of 31% to 32%. Our gross margin guidance assumes our known pricing for ingredients, packaging and production costs, each of which has been and could continue to be impacted by factors related to COVID-19.

Now let me turn the call back to Norm for some concluding remarks. Norm?

Thanks, Tom. Before I turn the call back to the operator for questions, I'd like to reiterate that we believe there will be constant challenges throughout the balance of this year and during 2022, but we are continuing and will continue to show strong sales growth, and we will successfully offset the pressure on gross margin and transportation costs.

Our entry into the larger ginger ale category with our Reed's Real Ginger Ale that's contributing to our growth, and we still have considerable opportunity to fill up distribution. We are excited about our new and rebranded products that will enter the market during 2022. We have built an extensive national co-packer network to support our growth and have significant opportunity to improve margin.

We are focused on controlling costs, improving gross margin and enhancing our supply chain. We remain flexible and prudent as we navigate the current environment, and we will continue to adapt to keep our employees and partners safe and our inventory on the shelf and available for our valued customers. Moving forward, we are focused on advancing our growth opportunity and defending our margins and are excited for the path that lies ahead.

I will now hand the call over to the operator to begin the question-and-answer session.

(Operator Instructions) Our first question comes from Chris Wachowski, a private investor.

Congratulations on the great results.

Thank you.

Yes, sure. So I've been asking you or trying to get you to commit to not issuing any more shares. And I have to congratulate, you're also not issuing any shares throughout these last couple of quarters while growing sales and inventory. But do you think you'll be able to hold on because while results are great, the share price isn't going up, and it will be really painful to issue shares at such low prices.

Yes. Thank you, Chris. Yes, we believe our share price does not appropriately reflect the value of this company, we're with you there. Obviously, our goal is to maintain shareholder value, and we will do the best we can to preserve and increase that value. However, we're going to remain flexible and keep as many options open. But right now, there are no plans to move forward in that direction.

Yes, one of the other thing I wanted to point out is we still -- there is approximately $5 million loss of availability that have been due on our line of credit. So there's still some flexibility there remaining.

Well, that's good to hear. And regarding supply chain concerns do you -- can you give us any kind of like directional guidance? Are they getting better or they're still as bad, are they getting worse?

It depends on the category. I think we're ahead of it. It does remain challenging, but we believe it's going to remain a challenge, but we are trying to work and mitigate as many things as possible. So there'll be less disruption.

Okay. That's good to hear. And I also wanted to ask about seasonality. When your sales grow so fast, you may not be able to rely on parts seasonality. So now that it's getting colder, do you see yourselves continuing at a strong pace or are you becoming kind of like a summer drink?

No. One of the I think benefits that we have with our portfolio is we are not a seasonal traditional beverage company. We tend to have a little bit of decline in the first quarter after the holidays, but we rebound pretty quickly. So for 3 of the 4 quarters, our sales remain pretty strong. And historically, they've been that way. And I think the products that we have, really help mitigate that seasonality.

Okay. That's good to hear. It's good to hear that, that's continuing even at your higher sales levels. That's it for me. Good luck.

Thank you.

Our next question comes from Anthony Vendetti with Maxim Group.

Yes. So as you and others are dealing with the supply chain, Norm, issues and higher prices for shipping and freight and so forth, warehousing, distribution. Can you talk about your ability to take some price increases? Have you tried to do that? If so, has there been any resistance from your customer base?

Anthony, we just implemented a price increase. And the good news is the whole world did. So we didn't really get a lot of pushback. We'll continue to look at that.

Look, I'm a firm believer -- and as I was reading off our ingredients, the quality ingredients that we use and where they come from and the painstaking process we do in preparation of our products, our products are undervalued. So I think over time, there's probably more room there. But I think we put out a great quality product.

And unfortunately, when you do that and you use the ingredients that we use, we're going to be subject to it. But I think we've been really quick to make adjustments to negotiate with our vendors and do the things that we have to do to offset those inflationary factors but also maintain the quality of our product.

Sure. That makes sense. And then on the distribution side, I know you've been trying to increase your DSD. How has that been progressing? And any updates on that?

Our sales team has done an excellent job in not just increasing our DSD coverage, but the quality of it and what we've been able to accomplish. So unfortunately, I can't put up a screen for everybody to see, but if you saw our distribution map, we call the space that's not being covered white space. And the white space on the mapping in United States is really starting to shrink, so we're really excited. Particularly as we get into that alcohol sector, we've got a great number of top-tier Anheuser-Busch and MillerCoors distributors that are really excited about our product entries and we really think can take us to the next level.

Yes. Particularly, I think you're spot on, right, with -- you're talking about Reed's Hard Ginger Ale, that's a very large category. So that's 5% alcohol. What's the exact -- can you get a little more detail and when you exactly expect to launch it? Have you circled the date yet? And when you launch it, how do you intend to roll that out?

We're going to launch it at the end of the first quarter. So to really start rolling in and have an impact in Q2. We're going to -- we have several geographic areas and we have a couple that we're going to really focus on that have executed well and then move on from there.

So we don't want to -- and you hear this a lot with companies about going -- what's -- a mile wide and an inch deep. We're going to go a mile deep and an inch wide and really go from geographic territory to geographic territory. But where we've had success, already with our RTD Mule and some other distribution opportunities.

Sure, that makes sense. And then can you talk about the different channels? The progress you're making in the convenience channel? Any update on 7-Eleven or any of the other channels that you're trying to increase penetration?

Well, obviously, we've done really well at Walmart and Target and then adding Costco, which was a big pickup for us. We're excited. We're focusing on on-premise. We're focusing on liquor stores. We're focusing drug. Right now, our team is meeting with convenience store buyers. And the reaction has actually been a lot more favorable than I thought in terms of the variety of products that we have and the interest.

So it's a multipronged approach going through several channels that initially we've been really excited about both authorizations, but also how our products have performed in market. So I think there's more coming in Q1 of next year.

Okay. Great. And then just on the gross margin side. For example, Reed's Hard Ginger Ale or some of the new products that you're launching, the Virgil's new product, are these going to be higher-margin products than your current corporate gross margin or in line with your current corporate gross margin?

Higher. I made a secret pact with Tom that we have a certain threshold that if we're not above, we're not going to go ahead and do it. So we're motivated to make it work, and these are all accretive in terms of gross margin. And in fact, all of our new product entries from Ginger Ale to the mocktails have all been margin accretive. So we look to -- that, that's going to really propel that number higher.

(Operator Instructions) Our next question comes from Jack Hyer, Retail.

I wanted to touch on Rhonda's nomination to the Board and kind of maybe doing a little bit of reading between the lines here is, are there any sort of plans to have a possible strategic shift to focus on SKUs that might perform better in particular kind of in the line of alcoholic beverages?

I think in recent months we've seen that's kind of -- like the hot topic in consumer beverages is who is putting out things that contain alcohol them. I know you just announced the new Hard Ginger Ale, but can we expect maybe more stuff in the pipeline related to alcohol specific drinks?

Well, I think we have to get the Hard Ginger Ale first before we really entertain any additional items. We're excited about that. We're excited about assuming a majority of the distribution for our Mule this year. So I really want to get those things off the ground and going before we think about other items downstream.

Obviously, we're trying to really leverage -- I think the key is we're trying to leverage everything ginger, right? And that's been our mantra. And if you look, what we've done is we've graduated from the $100 million ginger beer category to the $1.3 billion ginger ale category, to the over $4 billion flavored malt beverage category. And there's no real big player in there that has a ginger ale-based drink. And who represents ginger better than Reed's. So I think we're going to start there, and we believe we can drive significant growth.

Obviously, Rhonda has great beverage experience, and it's not just related to the alcohol beverage category or the beer distribution network. I mean she knows the business well. She knows the landscape. So we're going to leverage her beverage experience across all portfolios. But obviously, lean on her as we grow that distribution. And I think we'll start there first before we decide what other opportunities.

But I think the key thing that's consistent here is that we're leveraging our strength, ginger, what we do well and what we're known for and feel really comfortable about it. And we're not going into new territory that we don't have any experience in.

Sure, sure. I think that's pretty logical, and I appreciate the insight and kind of break down on it. And the only other question I was kind of curious about is, I'd be remiss if I didn't ask. But as you see compliance and with our stock price where it's at, I think primarily most people on this call both know and wish it was higher. But are there any lingering concerns with maintaining compliance going forward? I know it's pretty much asked every time we have one of these calls, and we're below $1, but I figured I'd throw it out there.

Yes. I mean if you go back in time, we were as low as $0.375, and we were able to get it over the dollar threshold. We were trading around $0.70 before this call. I'm optimistic with the progress that we've made. I mean, look, 7 consecutive quarters of really sustained growth, right? And we're feeling good about the future and about our opportunities.

Obviously, the impacts of COVID had some downward pressure on our margin, but we've bought back. We are addressing transportation. And one of the things I didn't talk about is a lot of these new products, including our Hard Ginger Ale are migrating to cans. We can get more cans on a truck than you can bottle so that will bring those costs down on a per case basis.

So we believe if we continue to execute and grow this business the way we are, that the stock price will move up. And as I explained earlier, I think it's incredibly undervalued and a great opportunity to come in and buy Reed's stock.

Cool. Thanks. I appreciate it as always. Keep up to good work and hang in there. I think it's going to get better.

Thanks, Jack.

This concludes our question-and-answer session. I would like to turn the conference back over to Norm Snyder for any closing remarks.

Thank you. Thank you again for your continued support and participating on today's call. A replay of the webcast will be archived on the company's website under the Investors section at drinkreeds.com for approximately 90 days.

We look forward to sharing our progress over the coming quarters and years. Have a great day. Thank you.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.