Reed's, Inc. (REED) on Q1 2023 Results - Earnings Call Transcript
Operator: Good morning, and welcome to Reed's First Quarter 2023 Earnings Conference Call for the period ending March 31, 2023. My name is Jason. I will be your conference call operator for today. We will have prepared remarks from Norman Snyder, Reed's Chief Executive Officer; and Joann Tinnelly, Reed's Interim Chief Financial Officer. Following their remarks, they will take your questions. I would like to remind listeners 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 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, the company's ability to manage growth, manage debt and meet development goals, the company'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 working capital needs and growth plans, the company's dependence on third-party manufacturers and distributors, changes in the competitive environment, the economic impact of the war in Ukraine 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 involve risks, uncertainties and assumptions, many of which involve factors or circumstances that are beyond the company's control. Reed's 2023 guidance reflects year-to-date and our expectation that inflationary trends and supply chain pressure will continue throughout 2023. However, new supply challenge -- excuse me, however, new supply chain challenges that may develop and factors that could exasperate inflation cannot be reasonably estimated and are not factored into current fiscal 2023 guidance. These risks could materially impact our ability to access raw materials, production, transportation and/or other logistic needs. Gross margin guidance assumes our known pricing for ingredients, packaging and production costs, each of which have been and could continue to be impacted. 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 Annual Reports Report on Form 10-K, which was filed with the SEC on May 15, 2023. Although management believes that 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 represent management's estimates as of today, June 1, 2023. Reed's assumes no obligation to update any forward-looking statements or information, which speaks as of their respective dates. 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 morning's press release in Reed's SEC filings and posted on Reed's investor website at investor.reedsinc.com. I will now turn the call over to Mr. Snyder.
Norman Snyder: Thank you, and good morning, everyone. We appreciate you joining us today to discuss our first quarter 2023 results. Q1 was our third consecutive quarter of year-over-year operating expense and modified EBITDA improvements, combined by the implementation of various cost cutting and optimization initiatives. We continue to see solid demand from our retail partners. However, net sales fell short due to tight credit terms from several suppliers that impacted our ability to purchase inventory and fulfill order volume, which resulted in an inflated rate of short order shipments. We believe this offset net sales by more than $1.6 million during the quarter. To alleviate the working capital challenges, we recently closed a series of financing transactions for an aggregate $5.6 million, which includes a strategic investment from D&D Source of Life Holding, a Hong Kong based investment company that has made several investments in consumer product companies, including Waldencast, a global multi-brand beauty and wellness platform that is currently valued at over $1 billion. Our largest shareholder and Chairman of the Board also participated in the financing and our secured lender augmented their current bridge note and extended the repayment date to September 29, 2023. Joann will provide additional details on the terms later in the call. The $5.6 million investment will drastically improve our working capital position to accelerate growth as we can now build up inventory to fulfill the ongoing demand for our products. In addition to the investment, we entered into a strategic alliance with D&D to import their innovative beverage products into the United States market as well as export our Reed's products portfolio into Asia. We plan to lean on their strong market presence overseas to distribute our products while utilizing our 45,000 store network here in the United States to bring their natural, better-for-you products to market. We look forward to the mutual growth of our businesses and are excited to see how the Asian market receives our fan favorite natural ginger beverages. Turning to a few updates on our key product categories based on MULO scan data, which is defined as multi-outlet and convenience in the food, grocery, drug, mass, Walmart, Club, dollar stores and military channels. For the first quarter, the most representative period was year-to-date through April 9, 2023. Sales at retail were as follows: Ginger ale sales grew by 20% year-to-date through April 9 compared to the same period last year, while our ginger ale based mocktails also grew more than 2x over that same period. Ginger Beer cans grew 31% year-to-date through April 9, while Ginger Beer Glass declined 11%. This shift was driven by the prioritization of cans over bottles from several of our retailers. Zero Extra generated increased sales in both bottles and cans reflected by 10% and 20% -- and 26% year-over-year growth, respectively. Overall, we have continued to prioritize cans over bottles in our product mix as they grew from 28% of sales in Q1 of last year to 34% in Q1 of 2023. Given the strong sell-through from our retail partners, we expect solid order demand going forward as we replenish inventory levels. We are starting to see strong momentum for our RTD beverages, our beverage line as well primarily in Trader Joe's, Sprouts, Whole Foods, Roundy's and Meijer. Our fastest-growing product within our RTD portfolio as our Classic Mule, which is showing strong growth in Trader Joe's. We are currently selling in 287 Trader Joe's stores and will add 50 stores in the near term. Sales are up by more than 4x in Trader Joe's year-over-year. We continue to believe the RTD category presents a compelling growth opportunity for Reed's given our brand equity, the larger total accessible market and consistent growth of the segment. Our swing-lid program experienced 47% year-over-year growth year-to-date through April 9 as well as increased order volumes from channel partners. Virgil's Glass declined by 15%, largely due to price increases and short shipments. We are confident that we can reverse these trends with improved inventory and pricing adjustments at retail. Our Virgil Zero Sugar sleek can transition continues to progress as we have completed the shift from standard 12-ounce cans to sleek 12-ounce cans in the natural channel and have converted approximately 1/3 of our grocery account base. We look forward to transition additional channels over to our new sleek cans in the future. Looking below the top line, we continue to emphasize our cost-cutting and optimization initiatives to drive further savings as reflected by our 26% year-over-year reduction in operating costs for the quarter. As I mentioned earlier, this is our third consecutive quarter of year-over-year operating cost and modified EBITDA improvements. In Q1, we experienced a 25% decrease in delivery and handling costs, driven by renegotiated freight contracts, improved throughput as well as our streamlined distribution orbit model. Moving forward, we expect additional savings in freight and transportation as we reduce our short order shipment volume, which in turn will enable us to generate sales growth more effectively. As I stated earlier, our mix of cans versus bottles has increased, and we are anticipating it to reach over 40% by year-end. This change in mix will have a material impact on both gross margin and shipping and handling as product costs are lower for cans than bottles and freight input increases by 43%. We also significantly reduced marketing spend as well as general and administrative expenses, which resulted in a 27% year-over-year reduction in SG&A cost. Further, our team has been extremely mindful and cost efficient with our sales and marketing dollars to ensure maximum effectiveness of each campaign. We look forward to further optimizing our cost structure to drive additional operating cost savings throughout the remainder of the year. Turning to our Q1 and recent operational highlights. In February, Chris Burleson was brought on to serve as our new Chief Commercial Officer. Over the past several months, Chris has led the sales organization as well as partner with our operations department to further streamline supply chain and cost reduction initiatives. His role has a focus on the execution of our commercial objectives. These objectives include margin improvement, while delivering robust top line results and building long-term brand equity. As such, Chris is concentrating his efforts on strategic partnerships that can drive new consumers to our brand in both new and existing channels of trade. Chris brings a fresh perspective for new growth opportunities for Reed's. In early March, we expanded our product offerings with Whole Foods by adding 7 new Reed's products to its shelves, including our Virgil Zero Sugar Root Beer, Zero Sugar Vanilla Cream and Zero Sugar Black Cherry cans. Virgil is in every Whole Foods location across the country. Additionally, we have secured national secondary distribution in August on our classic Zero Sugar Mule and our Hard Ginger Ale variety pack. Whole Foods continues to be a key partner and long-time supporter of innovation for the Reed's portfolio. A few weeks after our Whole Foods product expansion, we are also authorized in Loblaws, Canada's largest retailer to begin distributing products to more than 500 stores across Canada, which will anchor their new craft soda department. We look forward to our mutual success in serving the natural focused consumers across Canada. This authorization is the starting point of our development in Canada. Subsequent to the quarter end, in April, we announced a new distribution partnership with Roundy's Supermarket in Wisconsin. Roundy's is a leading Midwest grocer and wholly owned subsidiary of Kroger, operating over 100 locations throughout the State of Wisconsin under the banners Pick n' Save and Metro Market. The engagement kicked off with the launch of our new Reed's Hard Ginger Ale to over 100 stores across the state. Early sell-through has been encouraging, and we're excited to grow our presence in this market by adding additional products to Roundy's shelves in the future. Most recently, we expanded our offerings in Meijer a leading Midwest retailer with our Reed's Classic Craft Mule, Stormy Mule and Hard Ginger Ale. These products will now be available in over 190 Meijer locations across Kentucky, Ohio and Indiana. We look forward to serving the customers in the Midwest with our leading RTD product line. Adding to our confidence in the sales team ability to deliver net sales growth for the full year, we've been pleased to see some of the largest impactful distributors and retailers leaning to our request for implementation of our inventory recovery plan as we enter the summer period. This will ensure the highest levels of product availability for our consumers in a key selling period. Walmart supported our request to implement our inventory recovery plan across both categories that reach trades within the mixer category and the craft soda category. The sales team has also secured secondary distribution and promotional programs across key retailers for the summer, fall and holiday season. Secondary distribution is an indicator of future velocity improvements and same-store sales growth. The sales team executed its first national offshelf program with Sprouts following the close of the first quarter. To assist in the execution of the programs, we will be implementing an enhanced merchandising resource and strategic, cost-effective marketing programs, including partnerships across adjacent categories such as spirits. Looking ahead, our profitability trends are moving in the right direction, and we continue to expect to achieve our adjusted EBITDA and cash flow objectives. We will continue to implement additional cost cutting and optimization initiatives lower our cost of goods as well as reduce our delivery and handling charges. These efforts will continue to drive material gross margin expansion and operating expense reductions, which will positively impact our bottom line. We are adjusting our net sales outlook for 2023, given the inventory challenges in the first half of the year. However, we currently expect net sales to grow for the full year, gross margin expansion to be over 30% and $6 million of operating savings. The culmination of these results will enable us to turn modified EBITDA profitable by the second half of 2023. We also expect to turn cash flow positive in the second half of 2023. Looking ahead, our profitability trends are moving in the right direction, and we continue to expect to achieve our adjusted EBITDA and cash flow positive objectives. We will continue to implement additional cost cutting and optimization initiatives to lower our cost of goods as well as reduce our delivery and handling charges. These efforts will continue to drive material gross margin expansion and operating expense reductions will positively impact our bottom line. Before we move to Q&A, Joann will cover our financial highlights for the quarter in more detail. Joann, over to you.
Joann Tinnelly: Thanks, Norm. Jumping right into our results, all variance commentary is on a year-over-year basis unless otherwise noted. Net sales for Q1 2023 were $11.2 million compared to $12.2 million in the year ago quarter. As Norm mentioned earlier, the decrease is primarily due to tightened credit terms from several suppliers that impacted our ability to purchase inventory as a full order volume, which offset net sales by more than $1.6 million. Gross profit for the first quarter of 2023 was $2.7 million compared to $2.9 million in the same period in 2022. Gross margin was relatively flat at 24.2% compared to 24.1% in the year ago quarter. Delivery and handling costs were reduced by 25% to $2.1 million during the first quarter of 2023 compared to $2.8 million in the first quarter of 2022. The decrease was primarily driven by renegotiated freight rate contracts, improved throughput as well as our streamlined orbit distribution model. Delivery and handling costs decreased to 19% of net sales or $3.46 per case compared to 23% of net sales or $3.90 per case during the same period last year. Selling, general and administrative costs decreased 27% to $3.2 million during the first quarter of 2023 compared to $4.3 million in the year ago quarter. As a percentage of net sales, selling, general and administrative costs were reduced to 28% compared to 35%. Taking all these together, operating expenses improved by 26% to $5.3 million or 47% of net sales compared to $7.1 million or 58% of net sales in the year ago quarter. This reflects our efforts to right-size the cost structure and consistently find ways to run efficiently. Operating loss during the first quarter of 2023 improved to $2.6 million or a loss of $1.01 per share compared to an operating loss of $4.2 million or a loss of $2.15 per share in the first quarter of 2022. Modified EBITDA loss also improved significantly to $2.3 million in the first quarter of 2023 compared to a loss of $3.8 million in the first quarter of 2022. For the first quarter of 2023, we generated approximately $1.1 million of cash from operating activities compared to $2.2 million of cash used for the same period in 2022. The increase was driven primarily by lower inventory purchases. As Norm previously mentioned, subsequent to the quarter end, we announced the close of a series of financing transactions that totaled $5.6 million, which includes the strategic investment from our new Hong Kong partner, D&D Source of Life Holding. The purchase price was $2.585 per share, which is based on a premium of 10% to the average of the bid and ask prices on May 19, 2023. In addition, we issued warrants to purchase 1 share of common stock for every 5 shares subscribed. The warrants have an exercise price of $2.50 and a term of three years. Further, the holders of our secured convertible notes augmented their current bridge note by $1.5 million and extended the repayment date to September 29, 2023, subject to certain conditions. We plan to use the aggregate proceeds of approximately $5.6 million before deducting fees for building inventory, general corporate and working capital purposes. As of May 31, 2023, we have replenished our inventory and now have approximately $2.3 million of cash and $22.4 million of total debt, net of capitalized financing fees. This includes $16.1 million from our convertible note and $6.3 million from our revolving line of credit, which had $6.7 million of additional borrowing capacity. I will now turn the call back to Norm for closing remarks.
Norman Snyder: Thanks, Joann. With our strengthened working capital position, optimized cost structure and continued demand for Reed's products, we believe we're at a pivotal point in our business and look forward to delivering on our goals for 2023. Operator, we will now open the call for Q&A.
Operator: [Operator Instructions] Our first question comes from [Will Van Ducho from Exame], a Private Investor.
Unidentified Analyst: A couple of things just I'll rattle them off, and you can answer as you see fit. What's kind of the plan for the September note coming due? Can you provide any outlook on where we are 2/3 of the way through Q2? And then what's kind of the story with the Hard Ginger right now?
Norman Snyder: All right. Well, I'm going to answer these in reverse order. We -- you probably have heard the saying it's better to go a mile deep and an inch wide than a mile wide and an inch deep. We've really adopted that philosophy with our alcohol portfolio and are seeing real positive results. Rather than spread ourselves real thin, we're going to retailers where Reed's has a strong presence and high brand recognition. As I referenced in my comments, Trader Joe's is performing exceptionally well. So we're staying focused on five or six primary retailers in approximately five markets, the Pac Northwest, Southern California, the Metro Phoenix area, New York Metro and New England and want to build a success story that we can take elsewhere, and I think that will really help with the introduction. We'll have several learnings that we can take to those other markets. And I think it's more cost-effective way of building success. Q2, 2/3 of the way there, obviously, as we indicated, the big factor in Q1 was our inability to produce enough inventory to meet demand. Obviously, with the recent financing, we continue to struggle through that. So both April and May are going to be softer than we hoped, but we think we'll start to recover strongly in June and really be able to build on momentum for the balance of the year. The September note, we're continuing to evaluate all of our options. Obviously, cash flow, protecting our cash flow is a priority as well as minimize any potential dilution that we need to do, but we haven't really finalized our plan, and we really have, I think, several options that we're evaluating, and we want to do, obviously, what's best for our shareholders and what's best for the company.
Operator: [Operator Instructions] And our next question comes from [Garry Getz], a Private Investor.
Unidentified Analyst: So first of all, I wanted to congratulate Joann Tinnelly. She's really come up to speed quickly as the CFO, getting the 10-K out and the 10-Q out. Now three questions.
Norman Snyder: Gary, I'd like to echo on that because I agree with you. Thank you, by the way.
Unidentified Analyst: Okay. So three questions. First is, you've done so much regarding cost reduction and trying to grow sales but yet, the interest costs are very high. Again, while they've come down from Q4, they're still at about a 30% annualized rate. Can you comment on that?
Norman Snyder: We're working hard to bring both the working capital line down. And also when we get to cash flow positive, we'll be able to amortize the Whitebox secured note and bring that down. So we're working as quickly as we can. Obviously, back when we brought on that secured note the markets were just really starting to fall, and there weren't a lot of options other than a real punitive capital raise. So we chose that. And I just want to comment, Whitebox has been a great partner to work with. So we're cognizant of the high interest rates. Our Board constantly reminds us of that, and we're working as quickly as we can to bring those down. And you can see the asset-backed line has come down pretty significantly from the end of the year. So we're trying to bring that down. And obviously, as we reach cash flow positive, we can service that and pay debt down even faster.
Unidentified Analyst: Okay. Good to hear. Again, all those other efforts are sort of counteracted by the 30% right. But moving on to the next question, in terms of exchange of products and markets with D&D going across the Pacific Ocean, generally, what companies do is they manufacture locally. Would you do that or would you actually transport product across the ocean?
Norman Snyder: Great question. We -- and you'll see a press release shortly. We're kicking off our first what we'll call a concentrate model in the UK, where we have a pretty robust market. And then we're going to go to Europe. So we are not -- we are no longer exporting finished goods. We are exporting concentrates and sourcing all the packaging materials and production locally, which brings down costs substantially. The big element in there obviously is transportation. And once we work the kinks out there, we're going to take that same model and use that for China. And now that we have an operating partner in Hong Kong that can manage that part for us, we will adopt that, and we will not ship finished goods overseas.
Unidentified Analyst: Okay. Okay. And then the third and big question is, I think -- and I'm sure people at the company probably think that you could do so much more in sales, were not for inventory restrictions. In that regard, Celsius just partnered with a well-known company and purchased New York, whom you and John Bello have been associated with. So any talk of looking at the big picture and trying to turbocharge sales, any thoughts of bringing in a really big partner?
Norman Snyder: Absolutely. I mean, obviously, that's something on our radar that we talk about daily. And I think you have to be very careful. There's a expression, be careful what you wish for. It's not as easy, and it's not the silver bullet that everybody thinks, but obviously, we're aware of it and are looking for the right partners from a strategic standpoint. So it's something we've been talking about. It's something -- and obviously, we have a Board member, Louis Imbrogno who is also a former Pepsi exec. So we do have -- with John and Louis and other Board members deep ties in the industry, but we want to be very, very strategic, and we want to make sure that we have the right plan and the right partner to really achieve our goals because like I said, it sounds good, but it's something that the doubles in the details, and you really need to pick the right partner.
Unidentified Analyst: Okay. I appreciate it. And congratulations on the progress to date and looking forward to a good second half.
Norman Snyder: All right, Gary. Thank you. We will have one more, Jason.
Operator: [Operator Instructions] Next question comes from [Richard Wu], a Private Investor.
Unidentified Analyst: Yes. Congratulations. I've questions regarding the details of the financing, was told the Chief Financial Officer will provide. But I didn't see any breakdown, how much each party participate and are the terms restricted shares or free traded? And second question, would you please provide a little bit more on D&D company that they're branding or kind of details? Any information about D&D?
Norman Snyder: Well, the details of the financing obviously are in the 8-K and the 10-Q that were filed today. So all documents and details are in there. But D&D put in $3 million and Mr. Bello and Union Square Capital Partners each put in $0.5 million but you'll see all that detail in those SEC filings. The shares are not registered. We have 45 days to file an S-1. So the shares are not tradable now but will be tradable upon filing of the registration statement. D&D is an investment company, and they've invested not an operating company and they've invested in several consumer products. I mean we highlighted one, but there's some other health-related products and beauty and health aid products that are across the world and in Southeast Asia. So you can -- obviously, there's a lot there. We vetted them pretty closely and checked into their investments and the companies that are involved with and feel comfortable that they are a solid partner and have a great track record and deal with some really strong brands. So we're looking forward to that partnership and particularly collaborating on exporting and importing products to our various regions.
Unidentified Analyst: Yes. My specific question is, do you have any of their brand name that you can provide us?
Norman Snyder: Well, if you look in Waldencast, I think they're big brand is Obagi.
Unidentified Analyst: Obagi?
Norman Snyder: Yes.
Unidentified Analyst : Okay. All right. I have no -- I didn't know any brand in China named Obagi or Asia. So I mean, I'm just curious so. But nonetheless, hopefully, even better results in the future.
Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Norm Snyder for any closing remarks.
Norman Snyder: I want to thank everyone for participating in this morning's call as well as our employees, customers and, of course, our shareholders. We appreciate everyone's support and hope you all have a wonderful day. Thank you.
Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
