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spk05: 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.
spk03: Thank you, and good afternoon, everyone.
spk02: 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.
spk01: Thanks, Norm. Turning to our results, all variants referenced are on a year-over-year basis unless otherwise noted. Net sales for Q3 was 12.1 million compared to 13.4 million in the year-ago quarter. The decrease was primarily driven by a delayed shipment of Swing Lib bottles, shifting 3.8 million of net sales from the third quarter to the fourth quarter. As of today, we have shipped over 3 million of these delayed Swing Lib bottles and expect to ship the remainder before quarter end. Gross profit during the third quarter of 2022 was 2.4 million compared to 3.9 million in the year-ago period. Gross margin was 20.1% compared to 28.9% in the third quarter of 2021. The decrease was driven by lower revenue as well as higher promotional spend and sales mix. On a performer basis, gross profit including the aforementioned 3.8 million in sales would have been approximately 3.9 million or 26.1% of net sales.
spk03: Delivery and handling costs. Sorry.
spk01: Gross profit during the period was 3.9 last year. Gross margin was 20.1% compared to 28.9 of the prior quarter, 2021. The decrease was driven by lower revenue as a result of higher promotional spend and sales mix. On a performer basis, gross profit, including the aforementioned 3.8 million in sales, would have been approximately 3.9 or 26% in net sales. Delivery and handling costs in Q3 reduced by 27% to 2.2 million compared to 3.1 million in the year-ago period. driven by a continued reduction in freight rates and fuel costs, as well as improved efficiencies. Delivery and handling costs were 19% of net sales, or $3.38 per case, compared to 23% of net sales, or $3.89 per case, in the year-ago quarter. Selling and marketing costs were reduced by 54%, to 1.2 million compared to 2.6 million in the third quarter of 2021. As a percentage of net sales, selling and marketing costs were reduced to 10% compared to 20% in the year-ago period, reflecting our vigilance in managing our spend. Our general and administrative expenses during the third quarter were reduced by 21% to 1.4 million compared to 1.8 million in the prior year period. As a percentage of net sales, general and administrative expenses were reduced to 12% compared to 13% in the year-ago period. Taking all of these together, operating expenses improved by 35% to $4.9 million, or 40% of net sales. compared to 7.5 million or 56% of net sales in the year-ago period. Operating loss during the quarter improved to 2.5 million or 3 cents per share, compared to 37 million or 4 cents per share, which reflects our lowest quarter operating loss since Q3 of 2020. Modified EBITDA loss in Q3 improved to $2.2 million compared to $3.1 million in the year-ago quarter, with the decrease in loss primarily driven by our cost reductions and diligent focus on improving profitability. Q3 modified EBITDA loss of $2.2 million was an improvement of 43% versus Q1 and a 50% sequential improvement from Q2. Turning to our balance sheet and liquidity, Cash used in operating activities was approximately $177,000 for the third quarter of 2022, compared to $5 million for the same period in 2021, a significant year-over-year improvement. As of September 30th, we had approximately $25,000 of cash and $3.5 million of availability on our revolving line of credit. The total facility has a borrowing capacity of $13 million. but 9.5 million outstanding as of September 30th. It's important to note that the low cash balance at September 30th is a function of timing, as well as lowering our payables by more than 3 million versus the June quarter. As of October 31st, our cash balance is back up to approximately $253,000. Looking to our guidance for 2022, we now expect net sales to range between approximately 56 million and 59 million, reflecting growth of approximately 13 to 19% from 2021. We also now expect gross margins for 2022 to be approximately 25% compared to 27.4 in 2021. Despite the lower revenue and gross margin outlook, we continue to expect modified EBITDA to improve in 2022 as a result of revenue growth and cost savings initiatives, and we continue to expect turning modified EBITDA and cash flow positive during the second half of 2023. I will now turn the call back to Norm for closing remarks.
spk02: Thanks, Tom. While we were disappointed by some of the timing-related issues that impacted the third quarter and affected our top line and gross margin, we remain encouraged by the overall performance of the businesses. especially in the face of continued inflationary pressure on consumers and residual supply chain challenges. We remain on track to deliver solid top-line growth for the year, and we expect the execution of our cost-saving initiatives will improve modified EBITDA for the year and continue into 2023. We reduced operating expenses by more than 30% in Q3, and they were down 12% year-to-date, with even more cost reductions anticipated over the next six months. We have captured significant savings in our supply chain and anticipate meaningful gross margin expansion beginning in Q4 and accelerating in 2023. Additionally, we have depleted a significant amount of raw materials and finished goods inventory on our balance sheet and will continue to convert additional inventory balances into cash. Between our planned gross margin and OpEx improvements, coupled with our various product and channel initiatives, We have made significant progress from the challenges we faced during the COVID-19 pandemic that began two and a half years ago. Despite these impediments, we are well positioned to continue executing on our plan and deliver on our commitment to making REITs a profitable company. Operator, we will now open the call for Q&A.
spk05: Thank you. If you would like to signal with questions, please press star 1 on your touchtone telephone. If you're joining us today using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, that will be star 1 if you would like to ask questions. Star 1, please. And our first question will come from Anthony Vendetti with Maxim Group.
spk00: Hi, good evening. This is actually Jeremy on the line for Anthony. I got in a little late, so I'm sorry if I'm asking questions that you already discussed. Just to discuss the DSD network, I know you said you signed up 15 states and a quarter. How many states are currently under the DSD network?
spk02: I want to say approximately 35. I mean, the remaining white space that we have is really low population centers. I mean, we have every major metropolitan area and populous state covered. So it's really filling in some of the smaller pieces.
spk00: Okay. And then just to segue from that, what percentage of your doors are now covered by DSD as opposed to none? And then what's your long-term goal to have that transition over? What percentage of your overall distribution network should be eventually covered by DSD?
spk02: You know, that's a really good question. We have... a truly hybrid network, and we are working to modify and increase the participation of our DSD coverage, and that's been going on over the past year. I'll have to come back to you on what that percentage is, but I know it's increasing because obviously we're trying to leverage more of our brand to that DSD platform, particularly with the alcohol-based products. So I'll come back to you guys. You know, I know we have, I think, a call scheduled later. We'll do a little bit more work on that. But I can tell you that the percentage is increasing, particularly where we have alcohol sales.
spk00: Okay. And then just one last question, again, more on the DSD. Have you seen, you know, the stores that have converted to DSD, do you see increased velocity, increased sales from those stores versus, you know, your traditional network or, you know, any sort of metrics you could share? Sure.
spk02: Well, right now there's so many variables going on, it's hard to isolate that. And I think it's probably early to really reach any sort of conclusion, but that's something that we are looking at and we'll continue to monitor. I mean, the conversion has been relatively new. We have a price increase embedded in it. So there's a lot of variables that I think we have to dig in a little bit deeper before we can reach any firm conclusions.
spk00: Right, I understand. Okay, thank you for taking my questions. I'll hop back in the queue. Thank you.
spk05: And once again, if you would like to signal with questions, please press star 1. Again, that is star 1. And our next question comes from Sean McGowan with Roth.
spk04: Hi, guys. That's two questions. One, just to dig in on the shift of the swing lid from Q3 to Q4. So if that's happening, What's really driving the reduction in your full-year guidance? I mean, here we are kind of mid-November, and what are you seeing that's offsetting that pickup of that third quarter revenue?
spk02: Well, I think, Sean, to answer your question on full-year guidance, I think what's driving it is a – softer than expected conversion to the rebrand of the Virgil's Zero Sugar line that I talked about earlier. And we've also a little bit behind where we want to be with respect to our alcohol portfolio. And that's been somewhat of a cause by the the regulatory compliance because, you know, we don't live in one big country. We live in 50 little countries when it comes to alcohol. And then that you need that to really sign up your DSD network. And you can see our DSD network is really kind of the additions have really followed where we have all the complete registration in those states. So we're just a little bit behind in both of those aspects. We remain bullish on where we can go, but it's just been a little bit delayed, and where we're able to get those products in, they've done well. So you'll start to see some more expansion in 2023 that we really expected to have done in 2022.
spk04: Okay, so you're not saying that the consumer is not accepting the alcohol product. You're just not able to get it to where you want it to be Correct. Okay. Correct. Great, thanks. And the second question is, it seems like Virgil's is showing more price sensitivity, you know, on the part of the consumer than some of the other products.
spk03: So that's a head scratcher. Why would that be?
spk02: You know, I could speculate. I don't know if that's going to solve anything. You know, that market has kind of moved in a lot of different directions. I mean, I think last year you saw some lower-priced competing brands that were facing supply chain issues that really restricted their ability to get to the marketplace that have come back, and I think they've recaptured a lot of their market share, and obviously being a lower-priced item in an inflationary environment, I think it's a does have its positive implications. But at the other side of the equation, if you look at our limited edition swing lid products, which are premium priced, they're still growing and doing better. So, you know, I think it all depends by market, what brands are there. And we're seeing both, you know, in this case, both high end and low end price, premium priced items, weekly as well and and maybe some in the middle that are getting squeezed somewhat okay thank you thank you and that does conclude the question answer session i'll now turn the conference back over to mr norm snyder i want to thank everyone for participating in today's call again i want to reiterate our confidence for the balance of the year and into 2023 as we continue to progress towards our plan of achieving positive modified EBITDA and cash flow next year. We appreciate everyone's support and hope you all have a wonderful evening.
spk05: Thank you. That does conclude today's conference. We do thank you for your participation. Have an excellent day.
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