Reeds Inc

Good afternoon, and welcome to the READS Second Quarter 2022 Earnings Conference Call for the period ending June 30, 2022. My name is Sarah, and I will be your conference call operator for today. We will have prepared remarks from Norman Schneider, READS Chief Executive Officer, and Tom Cizak, READS 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 and 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 Reed's ability to manage growth, manage debt, and meet development goals. Reed's ability to protect the supply chain and light up destruction caused by elevated freight costs and other impediments. The ability 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 competitive environment, future business outlook, including the potential impact of COVID-19 on READ's business and results of operation, and other information detailed from time to time in READ's filings with the United States Securities and Exchange Commission. These statements, including financial guidance, involve risks and uncertainties that may cause actual results and trends to differ materially from the company's forecast. The achievement or success of the matters covered by such forward-looking statements includes future financial guidance, involves risks, uncertainties, and assumptions, many of which involve factors or circumstances that are beyond READ's control. Fiscal 2022 guidance reflects the 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 potential impacts to READ's ability to access raw materials, production, transportation, and or other logistics needed, as well as potential 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 Reed's most recent filed annual report on Form 10-K and the 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 achievement. In addition, any projections as to the company's future performance represents management's estimates as of today, August 11, 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 this call are reconciled to the comparable GAAP measures. financial measures, and the press release and supplemental materials filed with the SEC and is posted on Reed's investor website at investor.reedsinc.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 items that we do not believe are indicative of of core operating performance. The performance 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 afternoon's press release and in Reed's SEC filings. 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 second quarter 2022 results. During the second quarter, we returned to more than 20% revenue growth driven by strong demand across our product portfolio, specifically Reed's Ginger Beer, Reed's Ginger Ale, Reed's Classic Mule, and our Virgil Zero Sugar line. While net sales were generally in line with our expectations, the effects of various unprecedented supply chain headwinds that began during the latter half of 2021 and continued into 2022 resulted in one-time elevated cost of goods sold and transportation expenses, offsetting the benefit of our cost-saving initiatives implemented earlier this year. We believe that we have strategically navigated through these turbulent times, and during the second half of 2022, we anticipate lower costs of goods, resulting in improved gross margin and lower freight expenditures. We will also continue to tightly control sales and marketing and general and administrative costs, resulting in improved operating results and positive cash flow. We'll have more to discuss on the supply chain and the key factors driving margin and cash flow for the second half of the year, but let's first take a closer look at our product portfolio. Core ginger beer sales continued to perform well during the quarter and were up nearly 15% year over year, led by 113% growth in ginger beer cans as contained in year-to-date multi-outlet and convenience, or MULO, retail scan data. MULO contains the following channels, food grocery, drug, mass, Walmart, club, dollar stores, and military. Our relatively new ginger ale business was also up as sales increased 60% from the year-ago quarter. In addition, as reflected in MULO scan data, Our ginger ale is up 57% year-to-date and 48% in the four weeks ending at the close of Q2, reflecting the consistently growing demand for this new product line. As a reminder, the ginger ale category in measured sales is approximately $1.2 billion and growing, which represents a significant opportunity for REITs to capture additional market share. We have also made significant headway in our RTD alcohol portfolio. both from a sales and product development perspective. I'm happy to share that as of last month, we are now registered to sell our alcohol portfolio in 46 states, with the remaining four states coming online shortly. During the second quarter, our classic mule sales were up 5x compared to the prior year and up more than 60% sequentially from Q1 2022. Over the last eight months, we added an estimated 3,300 doors that purchased Reed's Classic Mule and, more recently, Stormy Mule. We are currently identifying the doors that are generating the highest velocity per week, and we are developing more localized marketing plans with our distributors to broaden our reach through retail post-ops, sales incentives, and in-store consumer demos. Some chains where you will find our new mules include Whole Foods, Total Wine, Sprouts, Smart & Final, Food City, Raley's, and Natural Grocers, just to name a few, with many more to follow. We are currently meeting jointly with our distributors with many national and retail chains, and we head into category review season in the fall. The RTD cocktail and hard seltzer categories in measured sales is approximately $7 billion plus and growing, which also represents a significant opportunity for Reeves. At the end of the second quarter, as planned, we launched our new hard ginger ale with several of our distribution partners in California, Florida, New York, Massachusetts, and many other states. Although shipments were minimal, as expected, we plan to further increase distribution in the second half of the year as our Reed's Hard Ginger Ale gains entry into national and regional chains. Our consumer research indicates that Reed's Hard Ginger Ale has high purchase intent with both RTD Seltzer and current ginger ale drinkers that use it as a mixer. and the early sell-through data for July is very encouraging. In addition to our hard ginger ale, we also released our new Stormy Mule and issued a press release earlier today, which is our take on the iconic dark and stormy cocktail. The initial launch included over 180 Safeway Albertsons and Sprouts locations across the West Coast. As with our hard ginger ale, sales for the quarter were also minimal. We plan to expand distribution of the Stormy Mule with our regional partners into new regions throughout, with our channel partners, into new regions throughout the second half of 2022. Moving on to Virgil. Our sales were up more than 20% on both a year-over-year and quarter-over-quarter basis, in large part due to the launch of our new zero-sugar sleek cans that were rolled out in sprouts in April. SPIN's natural and enhanced category scan data reflects a year-to-date increase of 140% and nearly 150% increase during the forward period ending at the close of Q2. The natural and enhanced category covers U.S. supermarkets with at least 2 million in annual sales and at least 50% of sales from natural organic products, excluding whole foods. We look forward to more shelf space for the rebranded sea cans with our various channel partners in the coming months that presently include, in addition to sprouts, HEB, Stop and Shop, and Ingles, among others. We are excited about the new look as we conducted extensive research on positioning and consumer purchasing tests. The success we have had with our sleek ginger ale cans and the initial pull we are experiencing at Sprouts. Subsequent to the quarter, we announced the launch of Virgil's Bavarian Nutmeg Root Beer and our Flying Caldron Butterscotch Beer in swing-lit bottles in all 667 Cracker Barrel corporate-owned locations, which spans across 42 states. These Swing Lit bottles are margin-accretive to our overall portfolio, so we are thrilled to be serving these beverages year-round at Cracker Barrel. In addition to the Cracker Barrel relationship, we have grown our seasonal Swing Lit program from 20,000 cases in 2020 to over 200,000 forecasted cases this year. During the second half of the year, we plan to launch a Virgil's Variety Pack on e-commerce, an additional Swing Lit flavor, Harvest Spice Apple Cider, and our popular cranberry ginger ale just in time for the holidays. Returning to our supply chain. As I mentioned earlier, we experienced heightened fuel and transportation costs during the second quarter, which offset our cost-saving initiatives implemented earlier this year. Transportation fuel costs. Although our team has done exceptional work to implement lower contracted freight lanes and reduce out-of-network shipment, There was simply no way to avoid the rising fuel costs during the second quarter, which we have all seen firsthand at the gas pump this year. On a positive note, we have seen fuel costs come down over the past two months, which makes us optimistic that we can get our overall transportation costs back down to lower levels in Q3 and Q4. We have also recently negotiated lower contracted rates for many of our freight lanes. Given the strong ordered demand we experienced earlier this year, our supply chain is encountering fewer delays and more available line time at COPEX. We made the strategic decision to build up our inventory of finished goods so that we can effectively satisfy that demand moving forward. This was also a large... we were not positioned to fulfill the retail demand in a cost-effective manner. Now that we're flush with inventory, we can ship more product in Q3 and Q4 without incurring those delivery and handling costs again, which will improve operating margin and enable us to generate positive cash flow over the next two quarters. Outside of transportation and fuel, we have continued to see benefits of our purchasing efficiencies, ingredient and label optimization, reduced tolling fees in inbound freight as a result of better economies of scale. However, to meet tight deadlines with our various new product launches, we produced and utilized sleeved and digitally printed cans in our initial production runs, which are more expensive than painted cans and consequently impact the gross margins. That will no longer be repeated as we now have cycled through the majority of that inventory and have an ample supply of lower-cost painted cans and are presently using them. We also used an alternative supplier to supplement our inventory needs during the second quarter, which resulted in higher cost and incremental delivery charges. We have also cycled through that higher cost inventory, which will result in lower cost of goods through the balance of the year. We are also starting to see better rates with co-packers, and various surcharges are being reduced and or eliminated. Further, the price increase we implemented earlier this year will also take effect in the coming quarter as planned, which will provide an additional sales and market lift going forward. In summary, we continue to face residual turbulence from the supply chain headwinds in the second quarter and really the first half of the year. However, input costs and product availability appear to be normalizing, and we are optimistic that the worst is behind us. Demand for our products remains strong, and we are finally stockpiled with enough finished goods to fulfill that demand in a much higher margin. We look forward to delivering on our growth and profitability objectives in the second half of the year while generating meaningful cash from operations. With that, I'll pass the call to Tom to walk through our financial results before returning for closing remarks.

Thanks, Norm. Turning to our results, all variances referenced are on a year-over-year basis unless otherwise noted. Net revenue for Q2 increased 22% to $13.7 million compared to $11.3 million in the year-ago quarter. The double-digit increase was due to strong demand across our Reed branded products. More specifically, Reed's Ginger Beer, Reed's Ginger Ale, Reed's Classic Mule, as well as our Virgil Zero Sugar Lines. Gross profit during the second quarter of 2022 remained flat at $3.3 million. Gross margin was 24% compared to 29% in the second quarter of 2021. As Norm mentioned, our second quarter margin was impacted by higher costs related to one-time material sourcing and production. When excluding these one-time costs, Q2 gross margin would have been approximately 32% for the quarter. Delivery and handling fees in Q2 were $3.8 million compared to $2.5 million in the year-ago period, driven by higher volume, freight rates, and fuel costs, and increased finished goods production. Delivery and handling expenses were approximately 28% of net sales, or $5 per case, compared to 22% of net sales, or $3.53 per case in the second quarter last year. As Norm mentioned, the second quarter included additional expenses to building up inventory, an extra $325,000 or 45 cents per case. Since these costs were recognized in Q2, we will save on delivery and handling in the back half of the year. Outside of delivery and handling, the rest of our operating costs were managed very well. Selling and marketing costs were reduced by 16% to $2.2 million, compared to 2.6 million in the second quarter of 2021. As a percentage of revenue, selling and marketing costs were 16% compared to 23% in the year-ago period. Our general administrative expenses during the second quarter were also slightly lower at 1.8 million compared to the prior year. Total operating expenses were 7.8 million or 57% of net sales compared to 7 million or 62% of net sales in the year-ago quarter. Operating costs, excluding freight, were $4 million, which is approximately half a million dollars lower than prior year. Operating loss during the quarter was $4.5 million, or 4 cents per share, compared to $3.7 million, or 4 cents per share. And modified EBITDA in Q2 was $4.4 million, compared to 3.1 million in the year-ago quarter. Turning to our balance sheet and liquidity, cash used in operating activities was approximately 14.1 million for the second quarter of 2022, compared to 5.3 million for the same period in 2021. As of June 30th, we had approximately $280,000 of cash and $969,000 worth of current availability. The total facility, has a borrowing capacity of 13 million with 11.5 outstanding on June 30th. You may recall from our Q1 conference call that we closed a private placement of convertible notes that resulted in approximately $10 million of net proceeds. Nearly all of these proceeds were used to pay down our revolver, which we drew down again to help us stockpile the inventory as previously discussed. With ample finished goods in place, we expect to generate meaningful cash flow over the next two quarters and strengthen our cash position once again. Looking to our guidance for 2022, we continue to expect net sales to range between approximately $59 million and $62 million, reflecting growth of approximately 20% to 25% from 2021. We also continue to expect those margins for 2022 to be approximately 30% compared to 27.4 in 2021. And finally, we expect modified EBITDA to improve in 2022 as a result of our revenue growth, margin expansion, and cost savings initiatives. I will now turn the call back to Norm for closing remarks.