Reed's Inc (REED) 2020 Q4 法說會逐字稿

Good afternoon, and welcome to Reed's fourth quarter and full year fiscal 2020 earnings conference call for the period ending on December 31, 2020. My name is Hilary, and I will be your conference call operator 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 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, March 30, 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. We hope you are well and remain safe. I'm very pleased to discuss our fourth quarter results which exceeded guidance for the fourth consecutive quarter. The senior management team and I will continue to be transparent with you as we achieve our growth plans and profitability goals, and are excited about Reed's future.

Let me begin by sharing 5 key highlights from the fourth quarter. First, we delivered strong sales growth and higher margins as demand for our core products accelerated further and we continue to focus on driving operational excellence across the entire organization.

Second, we had impactful product launches in 2020 that contributed to our success and put us in a solid position entering 2021. Quality, innovation, authenticity and on-trend or key attributes of the Reed's brands and the introduction of our Reed's Real Ginger Ale in April 2020 exemplifies these qualities. Similarly, our Zero sugar products performed well in 2020 and continue to have considerable momentum. We are seeing marked growth across both of our core brands and our new innovation for the Reed's brand is not only adding to growth but also lifting demand across the entire Reed's portfolio.

Third, our expanding distribution has been a critical factor in the company's growth. In part, reflecting the positive impact of new products on broadening overall demand for our core brands. Our ACV, the best measure of distribution, increased approximately 7 points for the 4-week period ending December 27, 2020, and approximately 10 points year-to-date.

We are focused on strengthening our DSD network, launching our 20 ounce pet line and partnering with full sale to lead the distribution of our Ready-to-Drink Mule in the Central and eastern parts of the United States. We are also looking forward to additional innovation launches.

Fourth, our relentless focus on optimizing our supply chain enabled us to increase capacity and mitigate potential disruptions while ensuring a sound inventory position to support accelerating demand from our customers. Our 6 co-packers are all reliable operators, geographically diversified and able to grow with us.

Finally, we strengthened the company's financial position with an equity offering in the fourth quarter, raising $11.3 million. We retired the Raptor harbor debt and paid off our equity line with our senior lender. Accordingly, Reed's is well capitalized to support significant growth in 2021 and beyond.

Our entire team is demonstrating a commitment to excellence that is driving our performance and effectively overcoming the inherent challenges with today's environment. We are well positioned to continue to drive growth, enhance profitability and build our brands.

Continuing with fourth quarter results. The accelerating trend in net sales growth continued with a 49% increase for the 3 months ending December 31, up from 21% in Q3 and 14% in the second quarter. We experienced pronounced growth across our core products, including a 49% increase in Reed's brand volume, reflecting the introduction of Reed's Real Ginger Ale, and experiencing triple-digit growth of our Zero Sugar products. Volume growth in Virgil's was similarly impressive, rising 38% on a year-over-year basis. At retail, syndicated data remains solid.

For the 4 weeks ending December 27, 2020, Reed's was up 32% in dollar sales and Virgil's 34% as reflected in IRI sales data. Year-to-date, IRI sales on Reed's increased 36% and Virgil's 34%. These gains continue to be partially offset by lower sales in non-measured channels, which have been directly impacted by COVID-19.

Robust sales growth, coupled with our ongoing focus on expense controls, drove a sharp improvement in gross margin. For the fourth quarter, our gross margin was 33%, more than 4x the 8% reported in the year earlier period, reflecting lower input costs, greater production efficiencies and lower inventory-related reserves. We also lowered delivery and handling expense by 485 basis points year-over-year as well as selling and marketing expenses by 70 basis points.

As I noted in the opening, we continue to see broad-based demand for our core products during the fourth quarter. Reed's really Real Ginger Ale as a key contributor aided by substantial underlying demand and expanding distribution. But we still have considerable opportunity to further grow our distribution.

Since we last spoke, we have expanded distribution for the Reed's really Real Ginger Ale and the following retailers: Publix, Harris Teeter, all divisions of Kroger, Southeast Grocers, Total Wine, Smart and Final, Safeway's Portland division, BJ's Wholesale Club, HEB, United Supermarkets, Spartan Supermarkets, Woodman's Stores, Fresh Thyme Markets, Natural Grocers, Akins Chamberlains and in many more local and regional chains.

We also saw healthy performance from rate Zero extra during the fourth quarter as each of our most recent innovations are performing well. Our ultimate ready-to-drink mules are in the early stages of distribution but we continue to see growth, including adding Costco regions in the Western Mountain states during the second half of the year.

Building on our recent distribution gains, we are now expanding our DSD relationships across the country. We are currently bringing on new DSD partners in New York, Colorado, Massachusetts, Utah, Delaware, Kentucky, Indiana and Ohio, and starting to build out further closing additional white space.

We're also partnering with the Anheuser-Busch network in the southeast to support our retail sales growth at Publix and Winn-Dixie.

Our e-commerce activities, including Amazon, are generating rapid quarter-over-quarter growth. E-commerce sales were up 43% over the third quarter, and we see continued opportunity for further expansion.

To summarize, Q4 capped off a significant year of growth and success for REITs. From a sales standpoint, we have some of the most significant momentum in recent memory, reflecting positively on our aggressive innovation and new product development efforts, focus on core SKUs and broader distribution. Our margins and profitability are showing solid improvement, helped by volume growth and ongoing efforts to drive efficiencies.

Finally, our financial position is secure, providing a stable platform for significant future growth. During the first quarter of 2021, trends have remained consistent with 2020 as we strive for 5 consecutive solid quarters. I'm very optimistic about the balance of the year relative to our strategic objectives.

Before I turn the call over to Tom to cover the financial results, let me comment on the impact of COVID-19. First of all, I want to thank all of our employees and partners for their quick action and continued support as we work towards the new normal this pandemic. Safety remains our top priority as we navigate the constantly changing environment, and continue to comply with all our regulatory mandates. Our supply chain is not only secure but enhanced. And the entire industry continues to see positive impacts on retail volumes. We are successfully overcoming the challenges, including delays in reset activity that impacts the pace of new innovation rollout, and have added costs from freight to packaging to production. We will continue to monitor the environment and leverage our capabilities to overcome any challenges.

With that, let me turn the call over to Thomas 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, the fourth quarter was another successful quarter for Reed's. We continue to add to the momentum that has been building in the past few quarters. We are seeing broad acceptance of our new innovation as well as continued growth across each of our core brand products.

Fourth quarter net sales increased 49% to $10.7 million compared with $7.2 million in the prior year. Core brand growth sales increased 38% year-over-year driven by a 43% increase in volume.

The volume growth was driven by 49% case growth for the Reed's brand, and 38% case growth for the Virgil's brand. Volume growth, coupled with lower discounts, reflecting higher retail pricing drove overall net sales growth in the fourth quarter.

Gross profit dollars increased 490 basis points to $3.5 million compared to $600,000 in the prior year, reflecting sales growth and improved expense control as well as the impact of several discrete items on the year earlier period. Gross margin was 33% in the first quarter of 2020, an increase of approximately 700 basis points versus normalized results in the fourth quarter of 2019.

On a reported basis, gross margin in the fourth quarter of 2019 was 8%. Delivery and handling costs increased 17% to $1.9 million during the fourth quarter of 2020 compared to the prior year driven by volume growth. Delivery and handling costs were 18% of net sales and $2.99 per case compared to a 23% of net sales and $3.55 per case during the same period last year. This improvement was driven by improved staging of inventory, partially offset by increased distribution costs associated with COVID-19.

Selling and marketing costs increased 44% to $2.1 million during the fourth quarter. The increase is driven by higher stock and compensation expense, partially offset by reduced expenditures on trade shows and sponsorships.

General and administrative expenses were $2.2 million in the fourth quarter compared to $1 million in the prior year period. As a percentage of sales, general and administrative expenses were 20% in the fourth quarter of 2020 versus 14% in the year earlier period. This year-over-year increase is driven by increased stock and compensation expense and bad debt expense, partially offset by the elimination of SOX compliance audit fees.

The fourth quarter operating loss was $2.7 million, down from $3.5 million in the prior year. Interest expense was consistent with the prior year at $300,000, and the net loss improved to $3.3 million or $0.05 per share in the fourth quarter of 2020 compared to a loss of $3.8 million or $0.09 per share in the same period last year. A weighted average share count was 72.2 million in the fourth quarter of 2020 compared to 43.6 million a year ago, reflecting capital raises over the past year to strengthen our balance sheet.

Modified EBITDA loss improved to $2 million compared to a loss of $3.8 million in the prior year.

Moving to the balance sheet and cash flows. We ended the fourth quarter with $600,000 of cash and $5.2 million of availability on a revolving line of credit. During fiscal year 2020, we used $9.5 million of cash in operating activities, a significant reduction from the $18.2 million of cash used in operating activities during the prior year.

The decrease in cash used in operating activities during 2020 is attributable to a reduction in our net loss on a year-on-year basis as well as changes to working capital accounts. As Norm mentioned earlier, we retired the Raptor/Harbor debt, paid off our equity line and renewed our facility with our senior lender.

Turning to guidance. Although we have experienced continued strong momentum so far in 2021, we expect our 2021 net sales to increase 14% to 16%, given the potential uncertainty arising from the recent pandemic. As a result of product mix and delay in implementing all cost savings initiatives due to COVID-19, we now anticipate a fiscal year 2021 gross margin range of approximately 32% to 33%. Our gross margin guidance assumes a consistent pricing environment for ingredients, packaging and production costs, each of which has been and could continue to be impacted by 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 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, and our Reed's innovations are resonating with consumers. 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, yet 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 will continue to make any necessary changes to keep our employees and partners safe in our inventory on shelf.

We are confident in delivering our near-term and long-term outlook.

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

(Operator Instructions)

Our first question is from Grant Dunn of GHD.

First, I just want to congratulate you on the rollout of the Real Ginger Ale products. Personally, I think the flavor is a clear step above the competition. My question is that regarding e commerce. I've noticed Amazon has been ranking Virgil's among the best-selling soft drinks. Do you have specific plans to use e-commerce as a catalyst to continue to drive growth?

First of all, Grant, thank you. And the answer is yes. What we -- we see e-commerce, particularly as we continue to roll out packages that are favorable to ship in both aluminum and PET. It's a great way to, obviously, to provide access to our consumers that want product that either can't find it or want to try something new. We started, as -- if you recall, we started last year with no e-commerce activity. And now we're running well over $1 billion run rate. So we see a lot of growth opportunities and plan on doing and expanding in that area.

Our next question is from Anthony Vendetti of Maxim Group.

Sure. Can you just talk a little bit about the conversion for some of your distribution to DSD? And then I just have some questions on product resets.

Anthony, this is Norm. I'm not sure if I follow when you say -- if you could be a little bit more specific in talking about conversion?

Yes. Are you trying to convert some of your wholesale distribution to direct store delivery?

Well, I think it's a combination. As we gain new distribution, we're able to bring in the new DSD partners. And obviously, you can see that from our ACV growth that I talked about. And we are expanding -- we're going to be expanding into our plan to expand into convenience channel this year. So obviously, that's going to be a key component of that. So a lot of it is spent by expansion. So it's not necessarily just conversion from old to new. I don't know. Neal, do you want to add anything there?

Yes. Anthony, this is Neal. Just real quick, get closer to the phone. Yes, what we're finding is it's -- the new DSD network is helping us get into multiple channels, other channels of business on top of, we have converted some large retail partners to DSD network. It affords us to start putting up displays where we would not necessarily get those displays when we go direct through a regular national chain. So it's a combination of more channels and better execution at store level. So I think it's going to be nothing but a plus with our new partners.

Okay. Great. And then in terms of the channels, is the convenience channel, the biggest opportunity for you in 2021? Or are there other channels where you see significant growth opportunities?

Well, I think there's growth in all channels. I mean if we take sort of our core grocery and natural to get increased SKU count, which we're doing every day. So there's a big opportunity there. Obviously, Reed's and Virgil's has not really played in the convenience channel.

For beverage, that's huge. There's over 150,000 stores in the United States. So we see that as a big opportunity. We want to continue in club stores. We want to continue in foodservice. We're able -- we have a lot of opportunities with hospitals and universities. Obviously, e-comm, the prior question, we're looking to grow. So it's not just a focus on one. There's so much opportunity across the board that we're looking to grow and aggressively attacking. And obviously, convenience is a new frontier for us, that's a rather large frontier. Also, we're -- I didn't mention, we're expanding our coverage in drugstores. So it's really across the board.

Okay. And then in terms of the product resets, I know some of them were delayed due to COVID-19. Are all the product resets on schedule now? And are there any major ones coming up where you see SKU expansion in the near term?

I think the other thing -- the -- it really impacted us more in Ginger Ale, and a lot of them got pushed off into the fourth quarter last year. I think they've come back to be more on schedule. We're not seeing delays. We do have some new authorizations that I don't think we can really talk about today, but they're going to be pretty significant. Forthcoming later, well, there's only 1 day left in this quarter. So into Q2. So we do have some real positive news there with some major expansion.

Okay. Great. And then just lastly on the e-commerce side. What percent of sales was that in the fourth quarter? And what was the growth rate year-over-year for e-commerce?

Well, as a percentage, it's still relatively small. I think it's under 5%. And year-over-year, it's tough to measure. But when you go to 0 to whatever, you can't -- I know that in the fourth quarter, we -- the third quarter, we grew 100% over the second quarter. The fourth quarter, we grew 43% over the third quarter. And first quarter, we're still seeing continued growth.

(Operator Instructions)

There are no more questions at this time. We have reached the end of the question-and-answer session, and I will now turn the call over to Norm Snyder for closing remarks.

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

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation, and have a great day.