Reed's Inc (REED) 2021 Q1 法說會逐字稿

Good afternoon, and welcome to Reed's First Quarter Fiscal 2021 Earnings Conference Call for the period ending on March 31, 2021. Thank you for standing by. My name is Tom, and I will be your conference operator for today. Today's call is limited to 1 hour, and we'll have prepared remarks from Norm Snyder, Reed's Chief Executive Officer; and Tom Spisak, Reed's Chief Financial Officer. Following management 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 like to remind our listeners that during this call, management's remarks may contain forward-looking statements and that management may make additional forward-looking statements in response to your questions.

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 of activity, performance or achievements to be materially different from those anticipated by such statements.

These factors include, but are not limited to, the company's ability to manage growth, manage debt and meet development goals, reduction in demand for our products, dependence on third-party manufacturers and distributors, changes in the competitive environment, access to capital and other information detailed from time to time in our filings with the United States Securities and Exchange Commission.

Although we believe that the expectations reflected in forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. In addition, any projections as to the company's future performance represent management's estimates as of today, May 17, 2021. We assume no obligation to update these projections in the future as market conditions change.

Additionally, please note non-GAAP financial measures referenced during this call are reconciled to their comparable GAAP financial measures in the press release and supplemental materials filed with the SEC and as posted on our website at investor.reedsinc.com. Non-GAAP financial information is not meant as a substitute for GAAP results but is included solely for informational and comparative purposes.

We present modified EBITDA because we believe 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.

I will now turn the call over to Mr. Snyder. Please go ahead, sir.

Thank you, and good afternoon, everyone. We appreciate you joining us today to discuss our first quarter results. Let me start by sharing several key highlights. First, our strong sales momentum continued, reflecting solid execution against our core growth strategies. Second, consumers' response to our new products remained decidedly positive, further underscoring the strength of our positioning around brand equity and quality.

During the first quarter, we saw solid growth trends in several products, including Reed's Real Ginger Ale, both full sugar and zero sugar varieties, Virgil's Zero Sugar cans, Reed's Zero Sugar Extra bottles and Reed's Extra and Zero Extra cans. In addition, our new line of mocktails in our 20-oz package have been well received by retail and are rapidly gaining new authorizations.

Third, distribution expanded further in the first quarter with a 5% increase in ACV for the year-to-date period ended April 18, 2021, while sales velocity improved approximately 29%. We also continued the build-out of our DSD network, including Canada, as well as key incremental retail authorizations, specifically at Publix, Walmart, Kroger, Safeway, Albertsons, Food Lion, CVS, Sprouts and DeCA, the U.S. Army Commissaries.

We are also excited to be expanding in the convenience, drug, food service, liquor store and on-premise channels as they reemerge from COVID-related volume reductions and/or shutdowns. Both our Reed's and Virgil's baseline glass business is experiencing steady, high single-digit growth as well.

Fourth, we continue to implement our e-commerce strategic plan, including platform additions, fulfillment expansion that reduces shipping costs and improves delivery times, product offerings and a broadened direct-to-consumer solution that will give all consumers access to our full portfolio of products.

Fifth, gross margin showed improvement versus last year. However, additional gains were tempered by unexpected sharp increases in delivery expenses, repackaging costs and higher raw material costs.

Finally, given our rapid growth and broadening distribution, the surge in transportation costs, coupled with added complexities of procuring raw materials against the backdrop of challenging supply-demand dynamics in the transportation markets, was particularly impactful on our first quarterly profitability.

As we continue to build out our infrastructure and further optimize our supply chain, I'm confident our delivery expenses will trend back towards normal levels. In addition, we are implementing several initiatives to further mitigate related risks, which I will discuss shortly.

Let me now provide a brief overview of first quarter results. Net sales grew 28% to over $12 million, the highest quarterly amount in company history. Core products continue to drive gains, including a 30% increase in Reed's brand volume, as well as a 29% increase in Virgil's volume.

Retail data shows solid trends. For the 4 weeks ending April 18, 2021, Reed's retail scan data was up 23% in dollar sales and Virgil's grew 16% as reflected by IRI. In addition, our sales velocity is tracking ahead of overall category trends. Year-to-date, our IIR (sic) [IRI] dollar sales on Reed's increased 44% and Virgil's 22%.

Gross margin improved 160 basis points versus last year, reflecting the implementation of several cost savings initiatives and the impact of new products that are margin accretive. Due to surging freight rates and other supply chain challenges, delivery and handling expenses increased 160% compared to the first quarter of 2020. We were able to keep other operating expenses in check on a relative basis. However, the net result was still a drop in modified EBITDA on a year-over-year basis.

While we are very pleased with our top line results and the sales trajectory, we are not satisfied with our bottom line performance, which is mostly due to unexpected challenges stemming from transportation factors that are adversely affecting us as well as most of our competitors and related companies.

For the past year, we have prioritized sales growth and capacity expansion to maximize our robust pipeline of innovation that was driving accelerated consumer demand. This strategy has been very successful based on results over the past several quarters.

However, given the rapid and unexpected changes to certain factors in recent months, we have elevated efforts to optimize our supply chain and are implementing numerous initiatives to lower costs, drive efficiency and mitigate risk, including the following: improved procurement of raw materials, lower inbound freight and warehouse cost, more efficient production runs driving down production fees, production processing optimization, optimizing freight orbits in relation to distributor center locations, increasing our percentage of full truckload shipments, elimination of cross-country shipment as a result of co-packer locations and capacity, the introduction of more freight-friendly packaging configurations, and improved quality and lower obsolescence rates.

While it will take time to realize the full benefits of these initiatives, we have started to experience tangible improvements late in the first quarter and expect continued progress for the balance of the year.

Next, I'd like to provide some commentary on our recent equity offering. Based on the very strong sales trends we were seeing in the first quarter, coupled with significant headwinds across our supply chain network, including surging freight rates, we continue to monitor potential constraints relating to working capital, which will ultimately limit our ability to keep pace with demand.

Accordingly, we are presented with the opportunity to raise capital efficiently at an attractive price. We felt it was prudent to move forward with the transaction. The $7.3 million of net proceeds solidifies our balance sheet and ensures we can continue to focus on driving strong top line increases, providing incremental investment for working capital and related growth initiatives.

Before I turn the call over to Tom to cover the financial results, I want to thank all of our employees and partners for their continued support. While the worst of the pandemic is hopefully behind us, we are still facing challenges as we work within this new environment as it relates to managing supply chain risks and uncertainties.

We have a strong platform for growth, encompassing several unique brands and products, along with rapidly expanding distribution. I remain very optimistic about the future, expecting top line trends to remain strong and profitability to rebound as we implement the key initiatives I outlined earlier.

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. And it's a pleasure to speak with everyone today. As Norm discussed, during the first quarter, we continued our net sales momentum, driven by further penetration of SKUs across both Reed's and Virgil's portfolio. We also drove improvements in our gross margin, but these were partially offset by increasing inbound freight and raw material costs.

First quarter net sales increased 28% to $12.1 million compared to $9.5 million in the prior year. Core brand sales -- gross sales increased 27% year-over-year driven by a 33% increase in volume. The volume growth was driven by a 37% case growth for the Reed's brand and 29% case growth for the Virgil's brand.

Volume growth across all product categories as well as further market penetration and incremental sales from the recent product launches of Reed's Real Ginger Ale and Reed's and Virgil's Zero Sugar lines drove growth in the quarter.

Gross profit dollars increased 34% to $3.9 million compared to $2.9 million in the prior year, reflecting sales growth and improved the benefit -- benefits of improved procurement, process optimization and favorable product mix driven by recent innovation launches.

Gross margin was 32% in the first quarter of 2021, an increase of approximately 160 basis points versus 30% in the first quarter of 2020.

Delivery and handling costs increased by 160% to $3.3 million during the first quarter of 2021 compared to the prior year as a result of an unexpected increase in freight charges related to increased demand in conjunction with COVID-19 pandemic.

Although this was a disappointing setback, it brought to life further efficiencies we could implement, and are confident we have identified several areas to mitigate these risks over the balance of the year while further positioning the company for future growth.

Delivery and handling costs were 27% of net sales and $4.43 per case compared to 13% of net sales and $2.26 per case during the same period last year. The increase was driven by e-commerce fulfillment costs and increased freight rates due to the COVID-19.

Selling and marketing costs increased 15% to $2.2 million during the first quarter. The increase was driven by increased sales force headcount and consumer-facing marketing expenses, partially offset by reduced expenditures on trade shows and sponsorships as well as lower stock expense. However, sales and marketing expense as a percentage of net sales decreased to 18% for the quarter compared to 20% during the same period last year.

General and administrative expenses were $2.6 million in the first quarter compared to $1.9 million in the prior year period. As a result of sales -- as a percentage of sales, general and administrative expenses were 21% in the first quarter of 2021 versus 20% in the year earlier period.

The year-over-year increase was driven by legal settlements, employee costs, consulting fees, public company and licensing costs, partially offset by lower stock expense.

First quarter operating loss was $4.3 million, an increase from $2.3 million in the prior year.

Interest expense was consistent with the prior year at $300,000, and the net loss was $4.5 million or $0.05 per share in the first quarter of 2021 compared to a loss of $2.6 million or $0.05 per share in the same period last year.

Our weighted average share count was 86.6 million in the first quarter of 2021 compared to 47.6 million a year ago, reflecting capital raises over the past year to strengthen our balance sheet. Modified EBITDA loss was $3.4 million compared to a loss of $1.4 million in the prior year period.

Moving to the balance sheet and cash flows. We ended the first quarter with $200,000 of cash and $2.5 million of availability on our revolving line of credit. During the first quarter, we used $5.1 million of cash in operating activities compared to $2.4 million of cash used in operating activities during the same period a year ago.

The increase in cash use was driven by building inventory, elevated freight costs and legal settlements. Subsequent to the end of the quarter, we completed a registered direct offering, raising $7.3 million of net proceeds, which will be used for general corporate purposes and working capital, including supporting our ongoing distribution expansion.

Turning to guidance. We are reiterating top line guidance and continue to expect our 2021 net sales to increase 14% to 16%, given the potential uncertainty arising from the recent pandemic. While our margin enhancement initiatives have begun to take hold, rising input costs and the need to supplement our can supply has us maintaining our fiscal year 2021 guidance -- gross margin range of approximately 32% to 33%. 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.

We believe the initiatives we began implementing during the first quarter, coupled with our strong outlook for sales growth, puts us back on track with our pathway to overall profitability, and we expect to show measurable improvement over the balance of 2021.

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 want to reiterate my confidence in our business as we continue to position the company for long-term growth. We are seeing significant momentum across both of our core brands, our new products are resonating with consumers, and we are excited about our innovation that will enter the market during the second quarter.

We also remain focused on controlling costs, improving gross margin and enhancing our supply chain. We have built an extensive national co-packer network to support our growth and have significant opportunity to improve margin. Our entry into the larger Ginger Ale category with our Reed's Real Ginger Ale is contributing to our growth that we still have considerable opportunity to fill out our distribution for this promising new product. We remain flexible and prudent as we navigate the current environment, and we'll continue to make any necessary changes to keep our employees and partners safe, and our inventory on the shelf.

We are confident in delivering our near-term and long-term outlook. I will now hand the call over to the operator to begin the question-and-answer session.

(Operator Instructions) And the first question comes from Anthony Vendetti with Maxim Group.

This is Matt Bullock on for Anthony Vendetti. I just wanted to ask you to comment maybe a little further on distribution expansion, specifically in the convenience channel. Any more color on progress you guys have made there would be helpful. And then if you could mention if there are any major convenience brands you guys have in the pipeline that you're hoping to expand into?

Yes. Well, we're first -- and I think we put it -- we just recently put out a press release where our first major entry with our 20-oz PET went into 1,000 CVS stores. And we've been working with both small, regional and larger convenience stores in terms of DSD expansion -- or I'm sorry, distribution expansion. There's been a lot of interest in the small regional as well as the larger.

Obviously, the larger convenience stores want to see some history and experience with our brands in those -- in that channel. So we are simultaneously working on both and believe, through the balance of the year, you'll start to see more activity pick up in that channel. But we're confident that we will continue to gain distribution and we will be successful with those products.

Excellent. And then just quickly on product placement. Do you guys think about product placement the same way for -- in the convenience channel or grocery? Or are there any -- is there a way you go about it differently in each of those channels?

No. When you mean how do we think -- I'm not sure that I understand when you mean how we think about product placement.

Right. Shelf space towards the front of the store and convenience stores, at the counter, that's what I mean.

Well, obviously, our primary objective and where we want to start off is cold. And then we will go from there. So it's securing the proper space and the proper location and the cooler set. And then we'll look to do -- as we get in, to look to do programming. I mean, obviously, each retailer has different programs and different philosophies on how they work. And we've discussed some of those and are exploring what our options are right now. But there's no one-size-fits-all.

Okay. That's helpful. And then you mentioned this earlier, but if you could talk a little bit more about your progress with DSD, the network expansion, and then if you've observed any kind of different trends with new locations that do have DSD distribution in terms of product velocity or sales momentum?

Well, I'll say this. Every board meeting, we put up a map of our coverage. And for the first time, I noticed that the filled in boxes were a lot greater than the white boxes, which means we're trending in the right way. And I think for the most part, we have, not all, but just about every major geography covered, which is good.

And do we see a difference? Yes, we're starting to see a difference. We did a major expansion in the southeast. We just followed up with a crew drive down there. And there's a lot more trucks rolling down there in that direction than they were previously. Let's put it that way.

Okay. Great. Great. And then just lastly for me, can you just give us a general sense for what you expect as far as the product resets go for the rest of 2021? Are there spring resets on horizon? And maybe which particular flavors or SKUs are you expecting to benefit from as well?

Well, it's -- the resets are constantly occurring. It seems that -- I don't know if it's COVID related, but that everyone's schedules have been thrown off quite a bit. And we're seeing staggered -- in fact, we had a senior meeting today, and we're going through new resets. And it just seems like that list is staying continually full, which is a good sign.

And we have great -- for the most part, great relationship with most of the key buyers. So we're having constant dialogues. Because of COVID and the significant reduction, if not elimination of face-to-face meetings, a lot's happening on the phone on Zoom. So the frequency of conversations have really picked up, which I think has benefited us.

The next question comes from Dan Joseph with Corridor.

A couple of things. First of all, congratulations on your wins, the Canada and CVS distribution wins, and the revenue progress. Second, I have a 3-part question, if you don't mind. First one is from a cash and liquidity standpoint. You were at $0.2 million of cash and $2.5 million of borrowing capacity at the end of the quarter. Where are you now from a liquidity -- cash and liquidity standpoint? And based on your current models, when do you expect to run out of cash, assuming that there is no more additional capital raised?

All right, Dan, I'm going to answer those in reverse order. We don't expect to run out of cash. In fact, we never did. I think what got overlooked in the last call -- earnings call that we had is we have a $13 million facility, which obviously flexes as we grow.

We've had a great partnership with our lender that has shown incredible flexibility. So if there's any sort of pitch points that we hit, they've worked through it. So we've never really worried about that. So that's still in place, and we've discussed augmenting that as we grow and responding to our needs. So although it says, I think, what, $2.5 million availability, there's $13 million available right now. So that was never a concern.

In terms of the cash that came in, obviously, we -- I think at the end of the quarter, we had $4 million we drew down on the line. So that $4 million of the $7.3 million was to repay that. The rest of it is sitting on our balance sheet. So we have that cash, plus revolver, in terms of availability. So we're not really concerned about runway and cash availability.

And in fact, one of the things that this raise, I think, does is that provides a little bit more of an insurance policy against uncertainty. And certainly -- and it provides more ability to grow faster and to take advantage of opportunities as they present themselves.

So from -- kind of based on that and your internal projections, when do you expect to achieve breakeven and then profitability?

Well, we're staying with our position that we've bet with as the latter half of next year in 2022 that we expect to have cash flow breakeven.

And you expect that your current cash on hand and your current revolver will allow you to get there?

Absolutely.

Okay. Last question. What is your innovation schedule for the remainder of the year? In other words, what products do you have planned for release and at what point in time?

Well, coming up to this quarter, we have our mocktails, which are Ginger Ale based, Shirley Tempting & Transfusion. And that, as I said earlier in my comments, we have received numerous authorizations and gaining more, as well as our 20-oz PET. We're also taking on distribution of our RTD Mule alcohol beverage in 37 states in the central and eastern part of the United States. So we'll distribute that directly rather than going through our licensee full sale.

And then we have -- for online, we have 16-oz cans for Flying Cauldron, which has been one of our top sellers, but we've only been able to sell that in glass package. So now we have a can solution. And then backed by popular demand in the third and fourth quarter are our 16-oz half liter swing-lid bottles.

Now last year, we came back with a Bavarian Nutmeg Root Beer, which was a smashing success, and we actually ran out of product. This year, I think we've doubled our production, and we'll also be doing in that same package, Flying Cauldron. And I believe at this stage, most of that product is -- the demand for that product is taken up or will take the majority of our production. So we're really feeling good about that. And in fact, it doubled what we did last year.

The next question comes from [Chris Palczewski], who is a private investor.

Congratulations on great revenues. So I guess, about the -- those freight cost increases, do you see any abatement now? Now that we are in the second quarter, do you see those cost -- freight prices rising or going down?

No. We believe they've peaked in March, and we'll start to see them come down a little bit. Unfortunately, we're entering into the produce season. So that's going to, I think, hold for a while. And then in the third and fourth quarter, we see them returning closer to normal rates. And obviously, we are going to be implementing several initiatives to help offset those even further.

So what is the normal kind of delivery cost as a percentage of revenue that you're shooting for?

It was -- last year, it was, I think, in the 13% to 14%. And we wanted that to be just slightly below that number is what we're working towards.

Okay. All right. And now about revenue, you had great revenue -- great revenue number this quarter, and as you said in your press release, they were far higher than what your annual guidance was for the year, yet you're not increasing your annual revenue guidance. Is that because of caution, because of COVID and uncertain logistics picture? Or is there some kind of slower...

All of the above. All the above. What -- I mean, what we're now, we're cycling through COVID levels where sales really ramped up last year. And we're starting to see several competitors' numbers really decline. So although we're confident we could deliver on our guidance, we want to be cautious and conservative. And obviously, we'll continue to watch that. And as the numbers -- as we see the numbers come in, we'll make adjustments accordingly. But we just don't want to get too far ahead of ourselves.

All right. So what I want to ask is that the numbers you're seeing, and I'm sure you have some second quarter numbers coming in now. Are they showing the expected seasonal growth from the first quarter? Or is there some less than seasonal growth there?

Well, I can't really -- I really can't comment on that at this point. I'll just say we remain cautiously optimistic.

Okay. That's fair. All right. And one concern about investors has been the stock offerings, which have kind of worryingly -- have become worryingly regular lately. You talked about this for the previous questions. Should I take your answers to the previous questions to mean that they're -- we're done with the stock offerings now?

Yes. That's exactly what I meant.

The next question comes from [Walid Jamal], who is also a private investor.

I have just 2 questions. Question is about the logistics on the freight. I'm trying to get an understanding of the relationship we have with our co-packers. Is the product coming from the co-packer directly to our customers, or is it going to a centralized warehouse and then we're having outbound shipments to customers?

It goes to a distribution center, then we have outbound shipments to customers.

Okay. Wonderful. And just a breakdown of the sales, what percentage of the Reed's brand was alcoholic sales?

None. None in the first quarter.

As we have no further questions, this concludes our question-and-answer session. I would now like to turn the conference back over to management for any closing remarks.

Thank you, Tom. Thank you again for your continued support and for participating on today's call. We remain confident with our positioning, brands and opportunity and are seeing effective operational execution. We look forward to sharing our progress over the coming quarters and years. Have a great day.

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