Reeds Inc

Good afternoon and welcome to Reed's first quarter fiscal 2021 earnings conference call for the period ending on March 31st, 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 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 and our 20-ounce 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 ACV for the year, The 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, Safely Albertsons, Food Lion, CVS, Sprouts, and DECA, the U.S. Army Commissaries. We're 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 REEDs 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 broad and direct-to-consumer solution that will give all consumers access to our full portfolio of products. Gross margins 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 risk, 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 show solid trends. For the four weeks ending April 18th, 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 Dollar sales on REITs 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 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 cost, 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 improve 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 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 related to working capital, which would ultimately limit our ability to keep pace with demand. Accordingly, when 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 risk 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 Spiesak to discuss our financial results in more detail.

Tom? Thank you very much, Norm. It's a pleasure to speak with everyone today. As Norm discussed, during the 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 37% case growth for the reeds 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 Limes 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. Cost 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 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 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 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 a revolving line of credit. During the first quarter, we used $5.8 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 canned supply has us maintaining our fiscal year 2021 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.