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spk02: 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.
spk06: 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.
spk05: 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.
spk06: 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 cost, improving gross margin, and enhancing productivity. 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 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.
spk02: We will now begin the question and answer session. To ask a question, press star then 1 on a touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, Press star, then two. At this time, we will pause momentarily to assemble our roster. And the first question comes from Anthony Vendetti with Maxim Group. Please go ahead.
spk03: 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 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 yeah um well we're first and i think we um we put it we just recently put out a press release where
spk06: Our first major entry with our 20 ounce 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 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 in that channel. But we're confident that we will continue to gain distribution and we will be successful with those products.
spk03: Excellent. Thank you. And then Just quickly on product placement, do you guys think about product placement the same way in the convenience channel or grocery, or is there a way you go about it differently in each of those channels?
spk06: No, what you mean, how do we think, I'm not sure what I understand what you mean, how we think about product placement.
spk03: Right, you know, shelf space towards the front of the store and convenience stores at the counter, that's what I mean.
spk06: 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 several of those and are exploring what our options are right now. You know, there's no one-size-fits-all.
spk03: Okay, that's helpful. And then you mentioned it 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 your locations that do have DSD distribution in terms of product velocity or sales momentum.
spk06: 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. know we did a major expansion in the southeast we just followed up with a a crew drive down there and um there's there's a lot more trucks rolling down there than in that direction than there were previously let's put it that way okay great great and then just lastly for me um just give us a general sense for what you expect as far as uh product resets go for the rest of 2021 are there spring resets on the horizon and maybe which particular flavors
spk03: Or excuse are you expecting? Yeah.
spk06: Well, it's the resets are constantly occurring. It seems that. I don't know if I don't know if it's COVID related, but everyone schedules have been thrown off quite a bit and we're seeing staggered. In fact, we 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 relationships 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.
spk03: Okay, great. I'll hop back into the queue. Thanks for taking my questions. You're welcome.
spk02: The next question comes from Dan Joseph with Corridor. Please go ahead.
spk04: Hi, Norm. Hey, Dan. A couple things. First of all, congratulations on your win, you know, 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 are 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 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?
spk06: 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 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. 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. four of the 7.3 went to repay that. The rest of it's 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 it provides a little bit more of an insurance policy against uncertainty. It certainly provides more ability to grow faster and to take advantage of opportunities as they present themselves.
spk04: So based, you know, kind of based on that and your internal projections, when do you expect to achieve break even and then profitability?
spk06: Well, we're staying we're staying with our position that we've been with is the latter half of next year in 2022 that we expect to get cash flow break even.
spk04: And you expect that your current cash on hand and your current revolver will allow you to get there?
spk06: Absolutely.
spk04: Okay. Thank you. 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?
spk06: Well, you know, coming up in this quarter, we have our mocktails, which are a ginger ale base, Shirley Tempting and Transfusion. And that, as I said earlier in my comments, we have received numerous authorizations and are 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, so now we have a can solution. And then, backed by popular demand in the third and fourth quarter, are our 16-ounce half-liter swing lid bottles, Now, last year we came back with our 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 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.
spk04: Got it. Great. Thanks so much. I appreciate your answering all the questions and keep up the good work. All right. Thank you.
spk02: The next question comes from Chris Volchewski, who is a private investor. Please go ahead.
spk01: Hello, and thanks for taking my questions, and congratulations on great revenues.
spk06: Thank you.
spk01: I guess about those freight cost increases, do you see any abatement now that we are in the second quarter? Do you see those freight prices rising or going down?
spk06: 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.
spk01: So what is the normal kind of delivery cost as a percentage of revenue that you're shooting for?
spk06: 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.
spk01: Okay. All right. And now about about revenue, you know, you had great revenue quote, great revenue numbers this quarter. And as you said, in your press release, they were far higher than what your 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 slow 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
spk06: 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 we see the numbers come in, we'll make adjustments accordingly. But we just don't want to get too far ahead of ourselves.
spk01: 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, the, you know, the expected seasonal growth from the first quarter or is there, is there some less, less the seasonal growth there?
spk06: Well, I can't really, I really can't comment on that at this point. I'll just say we remain, we remain cautiously optimistic.
spk01: Okay, that's fair. One concern about investors has been the stock offerings which have become worryingly irregular lately. You talked about this for the previous questions. Should I take... your answers to the previous questions to mean that we're done with the stock offerings now?
spk06: Yes, that's exactly what I meant.
spk01: Okay, thanks. That's good to hear. Well, thanks. That's all for me and good luck.
spk06: Thank you very much, Chris.
spk02: The next question comes from Waleed Jamal, who is also a private investor. Please go ahead.
spk00: Thank you for taking my question. I have just two questions. Questions 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.
spk06: It goes to a distribution center, then we have outbound shipments to customers.
spk00: Okay, wonderful. And just a breakdown of the sales. What percentage of the Reed's brand was alcoholic sales?
spk06: None in the first quarter.
spk00: None in the first quarter. Okay, that was a pretty simple question. I appreciate it, and I'm rooting for you guys, and keep on doing a great job.
spk06: Thank you.
spk02: 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.
spk06: 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.
spk02: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
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