Reeds Inc

Good morning and welcome to Reed's first quarter 2023 earnings conference call for the period ending March 31st, 2023. My name is Jason. I will be your conference call operator for today. We will have prepared remarks from Norman Snyder, Reed's chief executive officer, and Joanne Tinley, Reed's interim 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 the company's ability to manage growth, manage debt, and meet development goals and the company'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 working capital needs and growth plans, the company's dependence on third-party manufacturers and distributors, changes in the competitive environment, the economic impact of the war in Ukraine, and other information detailed from time to time in REITs filings with United States Securities and Exchange Commissions. 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, involve risks, uncertainties, and assumptions, many of which involve factors or circumstances that are beyond the company's control. Reed's 2023 guidance reflects year-to-date and our expectation that inflationary trends and supply chain pressure will continue throughout 2023. However, new supply chain challenges that may develop and factors that could exasperate inflation cannot be reasonably estimated and are not factored into current fiscal 2023 guidance. These risks could materially impact our ability to access raw materials, production, transportation, and or other logistic needs. Gross margin guidance assumes our known pricing for ingredients, packaging, and production costs, each of which have 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 more information, please refer to the Risk Factors Discussed and Reads Annual Reports. excuse me, report on Form 10-K, which was filed with the SEC on May 15, 2023. Although management believes that 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 represent management's estimates as of today, June 1, 2023. REITs assumes no obligation to update any forward-looking statements or information which speaks as of their respective dates. 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. The 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 reads, 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 morning's press release. in REIT's SEC filings and posted on REIT's investor website at investor.reitsinc.com. I will now turn the call over to Mr. Snyder.

Thank you and good morning, everyone.

We appreciate you joining us today to discuss our first quarter 2023 results. Q1 was our third consecutive quarter of year-over-year operating expense and modified bidon improvements. by the implementation of various cost-cutting and optimization initiatives. We continue to see solid demand from our retail partners. However, net sales fell short due to tight credit terms from several suppliers that impacted our ability to purchase inventory and fulfill order volume, which resulted in an inflated rate of short-order shipments. We believe this offset net sales by more than $1.6 million during the quarter. To alleviate the working capital challenges, we recently closed a series of financing transactions for an aggregate $5.6 million, which includes a strategic investment from D&D Source of Life Holding, a Hong Kong-based investment company that has made several investments in consumer product companies, including WaldenCast, a global multi-brand beauty and wellness platform that is currently valued at over $1 billion. Our largest shareholder and chairman of the board also participated in the financing and and our secured lender augmented their current bridge note and extended the repayment date to September 29, 2023. Joanne will provide additional details on the terms later in the call. The $5.6 million investment will drastically improve our working capital position to accelerate growth as we can now build up inventory to fulfill the ongoing demand for our products. In addition to the investment, we entered into a strategic alliance with D&D to import their innovative beverage products into the United States market as well as export our REITs product portfolio into Asia. We plan to lean on their strong market presence overseas to distribute our products while utilizing our 45,000 store network here in the United States to bring their natural, better-for-you products to market. We look forward to the mutual growth of our businesses and are excited to see how the Asian market receives our fan-favorite natural ginger beverages. Turning to a few updates on our key product categories based on MULO scan data, which is defined as multi-outlet and convenience in the food, grocery, drug, mass, Walmart, club, dollar stores, and military channels. For the first quarter, the most representative period was year-to-date through April 9th, 2023. Sales at retail were as follows. Ginger Ale sales grew by 20% year-to-date through April 9th compared to the same period last year. while our ginger ale-based mocktails also grew more than two acts over that same period. Ginger beer cans grew 31% year-to-date through April 9th, while ginger beer glass declined 11%. This shift was driven by the prioritization of cans over bottles from several of our retailers. Zero extra generated increased sales in both bottles and cans reflected by 10% and 20% and 26% year-over-year growth respectively. Overall, we have continued to prioritize cans over bottles in our product mix as they grew from 28% of sales in Q1 of last year to 34% in Q1 of 2023. Given the strong sell-through from our retail partners, we expect solid order demand going forward as we replenish inventory levels. We are starting to see strong momentum for our RTD beverages, our beverage line as well, primarily in Trader Joe's, Sprouts, Whole Foods, Roundies, and Meijer. Our fastest growing product within our RTD portfolio is our classic mule, which is showing strong growth in Trader Joe's. We are currently selling in 287 Trader Joe's stores and will add 50 stores in the near term. Sales are up by more than 4X in Trader Joe's year over year. We continue to believe the RTD category presents a compelling growth opportunity for Reed's given our brand equity, the larger total accessible market, and consistent growth of the segment. Our swing lid program experienced 47% year-over-year growth year-to-date through April 9th, as well as increased order volumes from channel partners. Virgil's glass declined by 15%, largely due to price increases and short shipments. We are confident that we can reverse these trends with improved inventory and pricing adjustments at retail. Our Virgil Zero sugar sleek can transition continues to progress as we have completed the shift from standard 12-ounce cans to sleek 12-ounce cans, in the natural channel and have converted approximately one-third of our grocery account base. We look forward to transition additional channels over to our new sleep cams in the future. Looking below the top line, we continue to emphasize our cost-cutting and optimization initiatives to drive further savings as reflected by our 26% year-over-year reduction in operating costs for the quarter. As I mentioned earlier, this is our third consecutive quarter of year-over-year operating costs and modified EBITDA improvements. In Q1, we experienced a 25% decrease in delivery and handling costs driven by renegotiated freight contracts, improved throughput, as well as our streamlined distribution orbit model. Moving forward, we expect additional savings from freight and transportation as we reduce our short-order shipment volume, which in turn will enable us to generate sales growth more effectively. As I stated earlier, our mixer cans versus bottles has increased, and we are anticipating it to reach over 40% by year-end. This change in mix will have a material impact on both gross margin and shipping and handling as product costs are lower for cans than bottles and freight input increases by 43%. We also significantly reduced marketing spend as well as general administrative expenses, which resulted in a 27% year-over-year reduction in an SG&A cost. Further, our team has been extremely mindful and cost-efficient with our sales and marketing dollars to ensure maximum effectiveness of each campaign. We look forward to further optimizing our cost structure to drive additional operating cost savings throughout the remainder of the year. Turning to our Q1 and recent operational highlights. In February, Chris Burleson was brought on to serve as our new chief commercial officer. Over the past several months, Chris has led the sales organization as well as partnered with our operations department to further streamline supply chain and cost reduction initiatives. His role has a focus on the execution of our commercial objectives. These objectives include margin improvement while delivering robust top-line results and building long-term brand equity. As such, Chris is concentrating his efforts on strategic partnerships that can drive new consumers to our brand in both new and existing channels of trade. Chris brings a fresh perspective for new growth opportunities for Reed's. In early March, we expanded our product offerings with Whole Foods by adding seven new Reed's products to its shelves, including our Virgil Zero Sugar Root Beer, zero sugar vanilla cream, and zero sugar black cherry cans. Virgil's is in every Whole Foods location across the country. Additionally, we have secured national secondary distribution in August on our classic zero sugar mule and our hard ginger ale variety pack. Whole Foods continues to be a key partner and longtime supporter of innovation for the READS portfolio. A few weeks after our Whole Foods product expansion, we are also authorized to love Canada's largest retailer, to begin distributing products to more than 500 stores across Canada, which will anchor their new craft soda department. We look forward to our mutual success in serving the natural focus consumers across Canada. This authorization is the starting point of our development in Canada. Subsequent to the quarter end, in April, we announced a new distribution partnership with Roundy's Supermarket in Wisconsin. Roundy's is a leading Midwest grocer and wholly owned subsidiary of Kroger, operating over 100 locations throughout the state of Wisconsin, under the banners Pick and Save and Metro Market. The engagement kicked off with the launch of our new Reed's Hard Ginger Ale to over 100 stores across the state. Early sell-through has been encouraging, and we're excited to grow our presence in this market by adding additional products to roundy shelves in the future. Most recently, we expanded our offerings in Meijer, a leading Midwest retailer, with our Reed's Classic Craft Mule, Stormy Mule, and Hard Ginger Ale. These products will now be available in over 190 Meijer locations across Kentucky, Ohio, and Indiana. We look forward to serving the customers in the Midwest with our leading RTD product line. Adding to our confidence in the sales team ability to deliver net sales growth for the full year, we've been pleased to see some of the largest impactful distributors and retailers leaning to our request for implementation of our inventory recovery plan as we enter the summer period. This will ensure the highest levels of product availability for our consumers in a key selling period. Walmart supported our request to implement our inventory recovery plan across both categories that reach trades within the mixer category and the craft soda category.