Reeds Inc

Good afternoon and welcome to the Reed's third quarter 2022 earnings conference call for the period ending September 30th, 2022. My name is Justin and I will be your conference call operator for today. We'll have prepared remarks from Norman Snyder, Reed's chief executive officer, and Tom Spisak, 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 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 Reed'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 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 economic impact of COVID-19, in the war in Ukraine, and other information detailed from time to time in Reid'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, involves risks, uncertainties, and assumptions, many of which involve factors or circumstances that are beyond REED's control. REED's 2022 guidance reflects year-to-date and expected future business needs and includes continuing impacts of COVID-19 on the supply chain and logistics as of the date hereof. New supply chain challenges that may develop, the impact of the war in Ukraine, and future potential inflation cannot be reasonably estimated and are not factored into current fiscal 2022 guidance. These risks could materially impact our ability to access raw materials, production, transportation, and or other logistics needs. Gross margin guidance assumes our known pricing for ingredients, packaging, and production costs, each of which has 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 information, please refer to risk factors discussed in Reed's most recently filed annual report on Form 10-K and the Form 10-Q to be filed with the SEC. 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, November 10, 2022. READS assumes no obligation to update any forward-looking statements or information which speaks as of the respective dates. Additionally, please note that non-GAAP financial measures referenced during this call are reconciled to the comparable GAAP financial measures in 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 core operating performance. 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 a definition of each measure, their limitations, and or rationale for using them can be found in the 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 third quarter 2022 results. As mentioned in our press release earlier today, during Q3, we continue to navigate a challenging market environment, especially in comparison to our record net sales in Q3 of last year. That sales during the quarter were affected by a delayed shipment of Swinglit bottles that pushed a significant portion of sales into the fourth quarter, which impacted our gross margins as these products are margin-incretive. Below the gross profit line, we began to realize the benefit of our cost-saving initiatives, reflected by a 35% reduction in operating expenses that led to improved modified EBITDA for the quarter. We expect to see further cost reductions in the near term as we have locked in additional product costs and transportation savings that will take effect over the next few months. Despite our Q3 results, we remain on target to achieve our goal of reaching positive modified EBITDA and cash flow during the second half of 2023. Turning to a few highlights across our key product categories, beginning with Reed's Ginger Beer. We continue to develop sales growth for cans over bottles and once again experienced an increase in sales and volume mix for cans during the quarter, which benefits our margin and positively impacts free costs. According to MULO scan data, which is defined as multi-outlet and convenience in the food, grocery, drug, mass, Walmart, club, dollar stores, and military channels, our ginger beer can sales were up approximately 67% during the 12-week period ended September 30th, which partially offset our ginger beer bottle sales, which were down 5% during that same period. Our zero sugar reeds extra bottles also grew by 27% during that period. For reeds ginger ale, our price increase almost entirely offset lower volume in ginger ale, resulting in sales being roughly flat. Year-over-year sell-through at the retail level remains strong as sales were up more than 49% for the 12-week period ended September 30th, as reflected in MULO scan data. Our recent launch of Cranberry Trail for the holidays has also seen strong demand with orders up approximately 40% over the prior year, in part driven by our expanded distribution with Costco in two new regions and now totaling 26 states across the U.S. In our RT alcohol line, we are continuing to increase distribution of our portfolio. We rolled out hard ginger ale during the second quarter and experienced solid sequential growth in Q3. Subsequent quarter end, we are authorized in ShopRite to begin selling hard ginger ale in 150 stores across the Northeast. In addition, hard ginger ale can be found in Food City, Bushes, Harding's, Ingalls, and low supermarkets. We expect to add several additional retailers in the months ahead. We also launched our new Stormy Mule during the second quarter and 180 doors across Safeway and Albertsons. And in the third quarter, our sales more than doubled. We are in the process of increasing marketing and distribution for this new product given the strong initial results and consumer feedback. As of today, we have been authorized in Food City, Spartan Nash, and Lowe's, among others, and we expect to roll out additional retailers in Q4 and early next year. With our classic ginger mule, we expanded doors into several new retailers over the quarter, including Price Shopper, Smart & Nash, and Wake Fern. Similar to our other RTD products, we expect to continue expanding distribution to other retailers across the country. Looking at our regional playbook, we have selected four key regions, the Pacific Northwest, Southern California, Phoenix, and Metro New York City to focus on further market development, including a more localized marketing plan with our distributors to broaden our reach through retail sales incentives and in-store consumer demos. Moving on to our Virgil's line of craft sodas. According to Moolah scan data, Virgil's Full Sugar grew 2% while Swinglet's sales were up 33% for Flying Cauldron and up 5x for Bavarian Nutmeg Root Beer. Our new sleek can rebranding has been a bit softer than we expected, which partially contribute to lower than expected sales during the quarter. That said, our price increase did help offset the lower volumes as our volumes were down double digits, but sales for Virgil's were only down 3%. We expect to make up considerable ground in Virgil's going forward as we are finalizing new authorizations that will add over 2,000 additional doors. We anticipate that we will begin shipping these new retail accounts during the fourth quarter and plan to further increase stores in 2023. Looking at a few channel updates and limited edition launches. We added 15 new states to our DSD coverage, including Texas, New Jersey, and Colorado, building on from our increased coverage from last quarter where we added California, New York, and Massachusetts. Regarding our limited edition launches, during the third quarter, We introduced our new harvest spiced apple cider swing lids at approximately 380 Sprouts stores nationwide, supplementing our other popular Sprouts offerings, including our Flying Cauldron Butterscotch Cream Soda and Virgil's Bavarian Nutmeg Root Beer. Moving to our supply chain initiatives. As I mentioned earlier, we are realizing the benefits of our cost-saving initiatives implemented over the past year, reflected by a 35% reduction in operating expenses during the third quarter, led by a 27% reduction in transportation costs. In order to reduce transportation costs, we increase freight throughput by shipping a larger percentage of cans, significantly reducing out-of-network shipments, and increase our on-time and in-full, or ODES, performance. We also continue to generate savings through purchasing efficiencies, ingredient and label optimization, reduced tolling fees, and inbound freight. We have signed agreements for lower can pricing, improved co-packer fees, as well as better board and corrugate pricing, all of which will further reduce costs in the months ahead and improve our profitability in Q4 and 2023. We have also improved costs on our proprietary sweetener formula for our zero-sugar products and are working with key suppliers on finalizing production efficiencies to drive shared cost benefits. Quickly touching on our price increase from earlier this year, which is now being reflected at retail. According to our retail scan data for the 12 weeks ended September 30th, category pricing was up 18% year over year across Woolo, placing our 8% price increase in the mid-range compared to our peer group. That said, we have seen some softness at retail across certain products, particularly our Ginger Beer Glass and Virgil Zero Sugar, as I referenced earlier. which is consistent with the overall category trends. If we exclude Virgil's from the data set, our volume at retail was actually up mid-single digits, so we are encouraged by the continued demand for most of our products. We are in active discussions to expand current distribution into multiple new national retailers that will introduce a comprehensive promotional and sampling program to boost trial and product availability. Before I pass the call to Tom, I want to provide an update for our recent hearing with NASDAQ regarding our public listing. In October, we were granted an extension until February 2023 to regain compliance with NASDAQ's listing requirements. To summarize, we were required to meet certain interim milestones, including stockholder approval for a reverse split in order to meet the minimum $1 price bid, as well as filing of a registration statement, both of which we have successfully executed. To be clear, We have every expectation of fully regaining compliance with NASDAQ's listing standards in 2023 and look forward to putting this issue behind us. I will now pass the call to Tom to walk through our financial results before returning for closing remarks and Q&A.