Reeds Inc

Good afternoon, and welcome to Reed's fourth quarter and full year 2021 earnings conference call for the period ending December 31st, 2021. My name is Tom, and I will be your conference call operator for today. We will have prepared remarks from Norman Snyder, Reed's chief executive officer, and Tom Spizak, Reed's 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 risks 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, greed's ability to manage growth, manage debt, and meet development goals, Reed'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 our working capital needs and growth plans, reduction in demand for products, dependence on third-party manufacturers and distributors, changes in the competitive environment, future business outlook, including the potential impact of COVID-19 on Reed's business and results of operation, and other information detailed from time to time in REITs 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, involves risks, uncertainties, and assumptions, many of which involve factors or circumstances that are beyond REITs control. Fiscal 2022 guidance reflects year-to-date business trends, including the ongoing operating environment related to COVID-19. The COVID-19 pandemic and its related impacts could continue to create many incremental potential business risks, including the potential impacts to REIT's ability to access raw materials, production, transportation, and or other logistics needs, as well as potential inflation-related material inflation related to all aspects of supply chain and logistics, which cannot be reasonably estimated and may not be completely factored into current fiscal 2022 guidance. 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. 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 READS Form 10-K and Form 10-Q to be filed with the SEC today. Although management believes that the 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 represents management's estimates as of today, March 31st, 2022. READS assumes no obligation to update any forward-looking statements or information which speaks as of their respective dates. Additionally, please note non-GAAP financial measures referenced during the call are reconciled to the comparable GAAP financial measures in the press release and supplemental materials filed with the SEC, and it's posted on Reed's investor website at investor.reedinc.com. 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 them with what 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 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 afternoon's press release and in Reid's SEC filings. And I will now turn the call over to Mr. Snyder.

Thank you, and good afternoon, everyone. We appreciate you joining us today to discuss our fourth quarter and full year 2021 results. 2021 was another year of solid growth and execution. We faced many obstacles with our supply chain and logistics, but we persevered. I would also like to note that several improvements we made in 2020 and 2021 offset many of the supply chain impediments that we encountered last year, lessening the potential impact. We are continuing to strategically reduce the cost of our products to recover from the margin growth we experienced during 2020. We had two primary goals last year to drive our growth, distribution expansion and brand launches through innovation with an emphasis on new, larger, and faster growing categories. Regarding distribution, we increased our retail coverage footprint by 10% from the prior year with Reed's products sold in over 45,000 retail locations nationwide. Specifically, this increase was driven by ACV growth, or all comedy volume, a measure of distribution based on total store sales. That was up 5% over last year, while velocity increased by 11% for the 52 weeks ending December 26, 2021. The same measures increased even further as ACV grew 14% and velocity was up 5% in the latest four-week period, according to IRI MULO scan data. During the year, we continued to build out our direct store distribution, or DSD network, by adding 30 new distributors in Florida, Texas, Ohio, Colorado, New Mexico, Oklahoma, Minnesota, and Pennsylvania. Overall case volume through our DSD network increased 60%, during 2021. We plan to continue to augment our DSD network during 2022 and are rapidly closing existing white space. Let's turn to our second goal for last year, brand launches. When I joined Reed's in 2019, it was clear that we had significant brand heritage and brand equity. However, the majority of sales were driven by ginger beer, which in our opinion is too narrow of a category for such a strong brand. While we have not seeded any market share, we are critically focused on innovation to meet our goals within our established timeframe. Shortly thereafter, we launched our first ginger ale, which stands in a category 10 times the size of ginger beer. In 2021, we are proud to say that ginger ale sales were up 150% year over year in the significantly larger category, with ACV increasing 102% and Velocity up 34%. It is still early for Reed's Ginger Ale, and we are intently focused on further growing velocity in our distribution network to keep the momentum going. We also soft-launched our Ginger Ale mocktails in securing 1,000 doors last year, which has increased to 5,000 doors so far in 2022, with multiple new flavor offerings in our portfolio. We look forward to bolstering Ginger Ale mocktail distribution with the addition of drug and convenience stores. Another notable category expansion was our entrance into the ready-to-drink, or RTD, and flavored malt beverage, or FMB, category in 2020. The RTD and FMB category are the fastest-growing verticals in the beverage industry and already five times the size of ginger ale. Our first product launch was our Reed's Classic Mule in 2020, and in 2021, we reacquired the distribution rights. In the RTD segment of our business, we initially converted 42 distributors on the eastern half of the United States and are in the process of converting an additional 10 in the east and are adding 12 in the west coast. We anticipate increasing doors that carry our alcohol lines by approximately tenfold during 2022 by leveraging our DSD network, which we will discuss later in the call, along with our upcoming launch of hard ginger ale.

Overall,

We are incredibly pleased with our sales execution and brand launches in 2021. On the other hand, we did have our share of challenges with respect to the supply chain. As seen across the industry, we face significantly higher costs from ingredients, packaging, labels, bottles, and cans, tolling fees, ocean freight, essentially everything. Not one category was left unaffected. And while the broader macro environment was calling for 78% inflation, we were easily seeing triple that and, in some cases, multiples higher. All that said, we needed to continue to implement the plan we established to navigate these choppy waters. Our first initiative was to reduce transportation and warehouse costs, as we have less control over the cost of ingredients and other product inputs. For product transportation, we prioritized shipping through our network and eliminated out-of-network shipments, while also focusing on direct shipments to eliminate multiple touchpoints and much more disciplined approach. For packaging, we have organically shifted to selling a greater mix of cans versus bottles, as demonstrated by our recent innovation. Not only is the aluminum cheaper than glass, but there's far less breakage, less overall weight, and the packaging is more compact, all of which enables us to ship more units per truck. We have already secured our entire can supply for 2022. To further offset the increased supply chain costs and bottlenecks, we leaned in on formula optimization, increasing lead time for key ingredients, purchasing efficiencies for labels and corrugate, and staffing improvements. We are now just beginning to realize the benefits of these various initiatives. Our margins are up considerably in Q1 relative to Q4, and we expect further improvements going forward as we still have additional work left to do in our supply chain initiatives, including further purchasing efficiencies and formula optimization, as well as a restructure of our 3PL partnerships and distribution agreements. We have also recently increased pricing across our portfolio of products, an approximate 8% increase across the board, which should provide a 4% to 5% margin benefit in 2022 by the time it flows through the network. As we look ahead to the rest of the year, we plan to emphasize many of the same growth and cost savings initiatives we started during 2021. We plan to expand distribution of ginger ale to more doors and consumers across the U.S. In addition, we are debuting our hard ginger ale in Q2 and expand our distribution of classic mule. As I mentioned earlier, we took over the distribution from Full Sail in 2021 and are now registered or waiting on executed distribution contracts in close to every state across the country. We will now fully control the sales and marketing process, and this change in distribution ownership enables us to recognize gross revenue as opposed to a royalty stream going forward. In our DSD network, we plan to increase distribution to 10,000-plus stores in 2022, a 10x increase from 2021, as I referenced earlier. In our Virgil's line, we are launching our new sleek 12-ounce zero-sugar cans next month in sprouts. Virgil's grew double digits last year and is outpacing the market growth for zero-sugar. It remains a staple in our portfolio of products as it accounts for roughly 45% of net sales and one of our more profitable products. categories given the lower cost of ingredients and packaging. And of course, we plan to continue being one of the category leaders in ginger beer and expect to continue outpacing overall market growth going forward. With all these initiatives in place, we expect our growth for the year to be back-loaded, beginning in Q2 and accelerating in Q3 and Q4. Our order volumes were up 20% Q1. However, early in the quarter, we contended with supply chain issues that carried over from last year, which have since been resolved. On our cost savings, we can still tighten up production-related waste and achieve rebate volumes, both of which will benefit gross margins over the course of the year and should contribute to getting us back to the 30% level on a full-year basis. With that, I will pass the call to Tom to walk through our financial results before returning for closing remarks.

Thanks, Norm. Jumping right into our results, all variances referenced are on a year-over-year basis, unless otherwise noted. Net revenue for Q4 was up 20% to $12.8 million, driven by continued strong demand across our portfolio of products. As Norm mentioned, gross margins were down from 32.7 to 20.4 due to an increase in supply chain costs. We expect gross margins to improve in Q1 and thereafter as we progress through the year. Delivery and handling fees in Q4 increased to $3.1 million from $1.9 million driven by volume growth and increased fulfillment and freight costs. Delivery and handling costs were approximately 24% of net sales, or $3.94 per case compared to 18% of net sales, or $2.99 per case in the year-ago quarter. Selling and marketing costs. increased to $2.2 million compared to $2.1 million. As a percentage of revenue, selling and marketing costs were 17%, down three points from 2020. Our general and administrative expenses decreased year-on-year to $1.7 million from $2.1 million, as we've been relentlessly focused on managing our overhead. Operating loss during the quarter was $4.4 million, or $0.05 per share compared to net loss of $2.7 million or $0.04 per share from the prior year's quarter. And modified EBITDA was $3.9 million loss compared to a $2 million loss in the year-ago quarter. Given the demonstrable cost increases across our supply chain, including a 60% increase in delivery and handling, We are proud of the hard work our team has put in to mitigate and offset the operating losses where possible. Turning to our balance sheet and liquidity, cash used in operating activities was approximately $17.6 million for 2021 compared to $9.5 million in 2020, with the increase driven by greater net loss and additional investment in inventory to mitigate supply chain bottlenecks. As of December 31st, 2021, we had approximately $49,000 of cash and $109,000 available on our revolving line of credit. Total facility has a borrowing capacity of $13 million with $10.2 million loan balance. Subsequent to the year end, we closed a $5.4 million private placement with officers and directors of the company purchasing approximately $1.1 million of the security in the offerings. Looking to our outlook for the year, we remain committed to improving profitability in 2022 as we now have a solid handle on the supply chain and the rate of cost increases has decelerated. We expect to improve modified EBITDA in calendar 2022 compared to 2021 and also expect to deliver gross margins of approximately 30% on a full year basis. Lastly, we expect to continue delivering on the top line with net sales ranging between 59 and 62 million in 2022, reflecting more than 20% growth at the midpoint. I will now turn the call back to Norm for closing remarks.

Thanks, Tom. I would like to thank the team at Reeds for their dedication and perseverance throughout this unfavorable economic environment. I'm optimistic that we have turned the corner from the macro challenges we faced in 2021. We now have the right people and systems in place, having turned over nearly 60% of the management team and 100% of the finance and our operations team since I joined Reeds two years ago. Between the pandemic in 2020 and the supply chain and inflation in 2021, we have learned to adapt and respond to whatever the world throws at us. I firmly believe the best days for Reeds are ahead. Operator, we will now open the call for Q&A.

We will now begin the question and answer session. If you'd like to join the question queue, press star, then one. If you're using a speakerphone, please pick up your handset before pressing any keys. If you'd like to remove yourself from the question queue, press star, then two. We will pause momentarily to assemble the roster. And the first question comes from Sean McGowan with Roth Capital. Please go ahead.

Hi, guys. Thanks for taking the call. A couple of questions. Norm, can I ask you to repeat? There's a lot I want to repeat, but just this one thing. The ginger ale increase, I think you said it was over 100%, but I didn't get the exact number.

150%. Okay. Great. Okay.

And Tom, is this the level of interest that you see in the quarter that you're showing for the fourth quarter, is that what we should expect kind of on an ongoing basis or would you expect it to be higher over the next several quarters?

When you say interest, are you referring to sales interest? Interest expense. Oh, interest expense. Yeah, I would say that's going to be level with we've just switched to a new ABL provider. So I would expect it to be, yes, in the neighborhood of that.

And given the financing that you announced during the quarter, can you help us with what the share count is like today, the end of the last day of the first quarter, and what the average would wind up being for the first quarter?

I can tell you the count is $112,008,000. 42, but I don't have the average off the top of my head. I can work on that.

Oh, and then back to the comment that Norm made on price increases. The 8% price increase, I think you said, should provide a 4% to 5% margin benefit. I assume that's before the effects of any inflation, not on a net basis. You're not saying you're expecting gross margins to go up, but 500 basis points, are you?

No, that includes after inflation, what the impact on margin.

Oh, all right. So we are going to see an increase. Okay. All right, great. I'll probably have some others as I noodle a little bit here, but I'll pass it on. Thanks. You're welcome.

The next question comes from Anthony Vendetti with Maxim Group. Please go ahead.

Hi, this is Matt on for Anthony. I was hoping you could talk about the reception thus far of the Reed Zero Sugar Classic Mule at Costco. And then if you could remind us what percent of revenue, as of right now, the ready-to-drink or mocktails make up of your revenue and what we can expect over the next few years as you kind of drive that store count up. Thanks.

Well, right now it's still fairly early. You know, we took over the distribution footprint from full sale. We converted to a whole new distribution network outside of what they've done. So we're working on, they were basically, and I want to say a few chains like Whole Foods. They had some, we had some sporadic Costco distribution that they sprout, and we're able to assume those and then get into additional change through our network. So it's really early. Right now it's minimal, but we expect it to be roughly, I want to say, oh, between 4% and 5%. And we're being real, real conservative, 4% to 5% of total revenue for 2022.

Got it. Helpful. And then you've made a lot of progress transitioning your distribution network over to DSD. I'm curious if you can comment a little bit on the velocities you're seeing at the locations that are serviced by DSD versus the rest of your network.

Yeah, it really, it differs by geographic. I'll say this. We just recently completed a real big promotion at Publix where we worked through our DSD network.

And, you know, we had like a seven times lift, which we were really happy with. Part of it, obviously, is... showing them the power of this brand and what it can do when you get behind it. And I think that was a great first start and probably the first major promotion we've done through our new DSD network. So that spreads, obviously, and we can use those actual sales results when we go into other DSD distributors to create expectations. So we're real pleased with the initial start.

Understood. Thanks. And then apologies if I missed this, but when did that 8% price increase across your portfolio take effect in-store, or has that yet to happen?

It's been submitted. The majority of retailers have accepted it. So we're looking at the latter part of – middle of the latter part of the second quarter.

Got it. Thank you. I'll pass it on.

It appears we have no further questions, so this concludes our question and answer session, and I'll turn the conference back over to Norman Snyder for any closing remarks.

Thank you.

We thank everyone for joining and your continued support. We look forward to sharing our progress in a couple of months when we report our Q1 results. Everyone have a wonderful day. Thanks for joining us.

The conference is now concluded. Thank you for attending today's presentation, and you may now disconnect.