Reed's, Inc. (REED) on Q1 2021 Results - Earnings Call Transcript
Operator: 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 one hour, and will 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.
Norman Snyder: 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, consumer's response to our new products remained decidedly positive, further underscoring the strength of our position around brand equity and quality. During the first quarter, we saw solid growth trends in several products including Reed’s Real Ginger Ale, both plus 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 and our 20 ounce pack package have been well received at retail and are rapidly gaining new authorizations. Third, distribution expanded further in the first quarter with a 5% increase in ACB for the year to date period ended April 18, 2021, while sales velocity improved to approximately 29%. We also continued the build out of our DST network including Canada as well as key incremental retail authorization specifically at Publix, Walmart, Kroger, Safeway, Albertsons, Food Lion, CVS, Sprouts and DeCA, the U.S. Army Commissaries.
Tom Spisak: Thank you very much Norman. It is a pleasure to speak with everyone today. As Norman 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 the $9.5 million in the prior year. Core brand sales, gross sales increased 27% year-over-year driven by 33% increase in volume. Volume growth was driven by 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 in the prior year, reflecting sales growth and improved the 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 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 light 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 tradeshows 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.
Norman Snyder: 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 margins. Our entry into the larger Ginger Ale category with our Reed's Real Ginger Ale, this contributing to our growth, that we still have considerable opportunity to fill out a distribution for this promising new product. We remain flexible and prudent as we navigate the current environment and will 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: And the first question comes from Anthony Vendetti with Maxim Group. Please go ahead.
Unidentified Analyst: Hi, this is Matt Bullock on for Anthony Vendetti. Thanks for taking my questions. 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 will be helpful? And then, if you could mention if there are any major convenience brands you guys have in the pipeline that you're open to expand into?
Norman Snyder: Yes. Well, we first I think we, we put a – we just recently put out a press release where our first major entry with our 20 PET went into 1000 CVS stores. And then 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 who want to see some history and experience with our brands in those, in that channel. So we're simultaneously working on both, and believe through the balance of the year, you'll start to see more activity, pick up on that channel, but we're confident that we will continue to gain distribution, and we will be successful with those products.
Unidentified Analyst: Excellent, thank you. And then just quickly on product placement, if 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? I need to those channels?
Norman Snyder: Now you mean to how do we think I'm not sure what I understand what you mean, how we think about product placement?
Unidentified Analyst: Right, you know, shelf space towards the front of the store and convenience stores at the counter. That's what I mean?
Norman Snyder: Well, obviously, we – our primary objectives and where we want to start off is cold. And then we will go from there, so if securing the proper space in the proper location and the cooler set. And then we'll look to do as we get into look to do programming. I mean, obviously each retailer has different programs or different philosophies on how they work. And we've discussed several those, and are exploring what our options are right now, but there's no one size fits all.
Unidentified Analyst: Okay, that's helpful. And then you mentioned this earlier, but if you could talk a little bit more about your progress in DSD, the network expansion. And then if you've observed any kind of different trends with your locations that do have DSD, just distribution in terms of product velocity, or sales momentum?
Norman Snyder: Well, I'd 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 geology 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, then that direction, then there were previously have to put it that way.
Unidentified Analyst: Okay, great, great. And then just lastly from me, could you just give us a general sense for what you expect as far as product resets? Go for the rest of 2021? Are those spring resets on the horizon? Maybe which particular flavors or skews are you expect?
Norman Snyder: Yes, that's why it's constant. The resets are constantly , it seems that, I don't know if it's COVID related, but everyone's schedules have been thrown off quite a bit. And we're seeing staggered fact that we had a senior meeting today, and we're going through new resets, and it just seems like that list is staying continually fall, 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 happening on the phone on Zoom. So the frequency of conversations have really picked up, which I think has benefited us.
Unidentified Analyst: Okay, great. I'll hop back in the queue. Thanks for taking my questions.
Norman Snyder: You're welcome.
Operator: The next question comes from Dan Joseph with Corridor. Please go ahead.
Dan Joseph: Hi, Norm.
Norman Snyder: Hi, Dan.
Dan Joseph: Couple of things first of all, congratulations on your wins. The Canada and CVS distribution wins and your revenue progress. Second, I have a three part question, if you don't mind. First one is from a cash and liquidity standpoint, you're 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?
Norman Snyder: All right, Dan I'm going to answer those in the reverse order. We don't expect to run out of cash. In fact, we never did. I think what got overlooked to 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 a $4 million, that we $4 million, we drew down on the line, so that 4 of the 7.3 went to repay that the rest of it stayed 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 race, I think does is it provides a little bit more of an insurance policy against uncertainty, and certainly provides more ability to grow faster and to take advantage of opportunities as they present themselves.
Dan Joseph: So Norm, kind of based on that, and your internal projections, when do you expect to achieve breakeven and then profitability?
Norman Snyder: Well, we're staying a little with our position that we've been with is the latter half of next year and 2022. That we expect to have great cash flow break even.
Dan Joseph: And you expect that your current cash on hand and your current revolver will allow you to get there?
Norman Snyder: Absolutely.
Dan Joseph: Okay. Thank you. Last question, what is your innovation schedule for the remainder of the year? What in other words, what products do you have planned for release and at what point in time?
Norman Snyder: Well, coming up in this quarter, we have our Mocktails which are Ginger Ale based, surely tempting and transfusion and that as I said earlier in my comments, we have received numerous authorizations and gaining more, as well as our 20 ounce Pat. 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 ounce cans for Flying Cauldron, which has been one of our top sellers. But we've only been able to sell that in glass package. And now we have a canned solution. And then back by popular demand in the third and fourth quarter, our 16 ounce half liter swing led bottles. Now last year, we came back with our very 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 that same package Flying Cauldron. And I believe at this stage most of that product is the demand for that product is taking up, will take up the majority of our production. So we're really feeling good about that. And in fact, have doubled what we did last year.
Dan Joseph: Got it. Great thanks so much. I appreciate your answering all the questions and keep up the good work.
Norman Snyder: All right, thank you.
Operator: The next question comes from Chris , who is a private investor. Please go ahead.
Unidentified Analyst: Hello, and thanks for taking my questions. And congratulations on great revenues.
Norman Snyder: Thank you.
Unidentified Analyst: So I guess about those freight costs increases. But do you see any of with now, now that we are in, while in the second quarter, they see those costs, freight prices rising or going down.
Norman Snyder: 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 they'll 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.
Unidentified Analyst: So what is the normal kind of delivery cost as a percentage of revenue that you're shooting for?
Norman Snyder: It what last year it was, I think, what, 13% to 14%. And we wanted that to be just slightly below that number is what we're working towards.
Unidentified Analyst: Okay. All right. And now about revenue, you had great revenue numbers this quarter. And as you said, in your press release, there was 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 RB? Okay.
Norman Snyder: All the above what I mean, what we're down, 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 can 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.
Unidentified Analyst: 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 the seasonal growth there?
Norman Snyder: Well, I can't really I really can't comment on that at this point of view – we remain cautiously optimistic.
Unidentified Analyst: Okay, that's fair, all right. And one concern about investors has been the stock offerings, which are kind of worrying, can become worryingly regular lightly, you talked about this in for the previous questions, Should they take your answers to the previous questions to mean that though, we're done with the stock offerings now.
Norman Snyder: Yes, that's exactly what I meant.
Unidentified Analyst: Okay, thanks. That's good to hear. Well, thanks, that's all from me and good luck.
Norman Snyder: Thank you very much Chris.
Operator: The next question comes from Waleed Jamal, who is also a private investor. Please go ahead.
Unidentified Analyst: Thank you for taking my question. I had just two questions, a question about the logistics, the freight. I'm trying to get an understanding relationship we have with our copackers is the product coming from the copacker direct to our customers or is it going to a centralized warehouse and then were having outbound shipments to customers?
Norman Snyder: It goes to a distribution center; there we have shipments to customers.
Unidentified Analyst: Okay, wonderful. And just a breakdown of the sales, what percentage of the Reed's brand was alcoholic sales?
Norman Snyder: None in the first quarter.
Unidentified Analyst: None in the first quarter. Okay, pretty simple question, I appreciate it and I am rooting for you guys and keep on doing a great job.
Norman Snyder: Thank you.
Operator: As we have no further questions, this concludes our question-and-answer session. I would now like to hand the conference back over to management for any closing remarks.
Norman Snyder: Thank you, Tom.
Tom Spisak: 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.
Operator: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
