Reed's, Inc. (REED) Q3 2023 Earnings Report, Transcript and Summary

Good morning, and welcome to Reed's Third Quarter 2023 Earnings Conference Call for the Three Months Ending September 30, 2023. My name is Drew, and I will be your conference operator for today. [Operator Instructions] Please note, this event is being recorded. We will have prepared remarks from Norman Snyder, Reed's Chief Executive Officer; and Joann Tinnelly, 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, the company's ability to manage growth, manage debt and meet development goals, 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 Reed's filings with the United States Securities and Exchange Commission. These statements include 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 exacerbate 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 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 more information, please refer to the risk factors discussed in Reed's annual report on Form 10-K, which is filed with the SEC on May 15, 2023. 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 represent management's estimates as of today, November 10, 2023. Reed's 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. 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 morning's press release, in Reed's SEC filings and posted on Reed's investor website at investor.reedsinc.com. I will now turn the call over to Mr. Snyder.

Thank you, Drew, and good morning, everyone. We appreciate you joining us today to discuss our third quarter 2023 results. I am pleased with the progress our team has made during the third quarter as we continue to lower input costs and operating expenses across the board, enabling us to materially expand gross margin and achieve our guidance of turning modified EBITDA profitable. We also hit our target of realizing $6 million in annual operating expense reductions, reflecting our prudent cost management of the business. We still see additional savings opportunities in the near term and now expect to save over $8 million for the full year. Although we made strong improvements to our profitability, net sales were impacted by a delay in our seasonal programs and, although declining, short order shipments. We expect to capture the delayed seasonal sales in Q4 and have resumed shipments of these products in October. To further mitigate the impact from short order shipments, we have been taking the appropriate steps to build up inventory levels. With consumer demand for Reed's products remaining strong, our ongoing efforts to augment inventory levels to reduce the rate of short order shipments and with our improved profitability, we believe we are well positioned to more effectively fulfill demand and return to growth in 2024. 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 and VIP data, which is a tracking software for distributor-based shipments. Ginger Ale sales have increased 13% year-to-date and 15% for the four weeks ending October 8, compared to the same periods last year. Ginger Beer can sales grew 56% year-to-date and 104% for the four weeks ending October 8, compared to the year-ago periods, offset by lower bottle sales as we work to transition from bottles to cans. In fact, in 2024, we are introducing new configuration extensions, including a 7.5-ounce Ginger Beer can which has recently received authorization from Costco, numerous DSD partners and on-trade accounts. Our ready-to-drink alcohol portfolio sales have grown 136% year-to-date compared to the same period last year, led in large part by Trader Joe's, Whole Foods and Sprouts. These three outlets alone were up 118% year-to-date, with the remainder driven by new retail accounts such as Meijer, Roundy's and Target. As we've mentioned before, the ready-to-drink alcohol category remains a compelling growth opportunity for Reed's given our brand awareness, the segment's consistent growth and the more than $9 billion total addressable market. We look forward to expanding our distribution into new regions and channels as we continue to grow this area of our business. Within our Virgil's craft soda portfolio, our new Zero Sugar slim can sales are up 5x year-to-date and 86% for the four weeks ending October 8, compared to the same periods last year, offset by lower standard can sales as we similarly worked to emphasize the new slim cans over standard cans. Throughout the year, we've made steady progress on our cost-cutting and optimization initiatives, which is reflected in our Q3 margin expansion of almost 1,400 basis points and 15% reduction in total operating expenses, compared to the third quarter of 2022. From a margin standpoint, we work to optimize pricing discrepancies across various sales channels, become more efficient with our trade spend, and complete the remaining items from our cost savings programs implemented in 2022 and early 2023. In fact, we lowered our average cost of goods sold per case by 11% from $13.40 in the first half of the year to $11.98 in the third quarter. As a percentage of net sales, cost of goods now accounts for only 66% of net sales compared to 76% in the first half of 2023. In Q3, we reduced delivery and handling costs by 15% year-over-year to $2.98 per case, driven by improved throughput, freight contract renegotiations and our streamlined distribution orbit model. We expect delivery and handling costs to come down further on a cost per case basis. Additionally, we brought down our selling and marketing expenses by nearly 30% during the quarter by optimizing our marketing campaigns and streamlining our sales process. Turning to our third quarter and recent sales and operational highlights. In Publix, we converted from a DSD model to a direct distribution, enabling us to take more control of our distribution to drive profitable growth and lower sales prices for our consumers. Since the conversion, sales volume improvements have eclipsed 38% unit growth week-over-week. Given the positive results, we plan to leverage this model with other retail partners in the future. In August, we received authorization from Whole Foods for our Hard Ginger Ale and launched our first ever national alcohol promotional showcasing our Reed's Hard Ginger Ale and Classic Mule. For the 12-week period ending October 15, alcohol sales have increased over 120% year-over-year. We're excited to continue deepening our ready-to-drink alcohol presence and look forward to generating more wins ahead. Also in October, we've added over 450 points of distribution to our core products with National Co-op Grocers, a business service cooperative for retail food co-ops with stores across 39 states, serve over 1.3 million customers. NCG is one of our highest velocity chains with Reed's being the number one supplier in the beverage category. During October, we restructured our online Shopify store to enable customers to access and purchase our fan-favorite products work efficiently. As part of our Shopify relaunch strategy, we have added a monthly subscription option and thus far, the results have been extremely positive. Although our e-commerce sales represent a small portion of our business today, we are taking the important steps to build this channel and expect to see further growth as we invest more resources in the coming year. As we mentioned on the last conference call, in July, we partnered with Somerset Cider Solutions, a leading U.K. beverage manufacturer, to produce Virgil's soda in market in a more cost-effective manner. We began production and started distributing products in the U.K. during the third quarter. And although we are only a few months in, we are encouraged by the early results, and as this new export model enables us to be more price competitive. We are positioning REITs for further expansion overseas as we evaluate additional EU distribution partners. A quick update on our team. In late October, we officially appointed Joann Tinnelly as Chief Financial Officer of Reed's. Joann joined the company in 2018 and throughout her tenure has stepped into the role as interim CFO on two separate occasions. Her experience in finance and accounting for both public and private companies as well as her execution as interim CFO makes her the ideal candidate to lead our finance team. And we are all thrilled that she has accepted the role on a permanent basis. She has and will continue to be a key member of our executive team, and I look forward to working with her as we execute our growth and profitability initiatives. Given the inventory challenges faced year-to-date, we are revising our net sales guidance for 2023 to a range between $45 million and $47 million and now expect to turn cash flow positive in 2024 as we utilize cash to increase our inventory in the fourth quarter. However, we expect to maintain our modified EBITDA profitability and exceed our guidance of realizing $6 million of operating expense reductions for the year. As I mentioned earlier, we still see additional savings opportunities and now expect to save over $8 million for the full year. Additionally, as a result of modifying the use of certain beverage ingredients, we anticipate onetime packaging inventory valuation adjustments in the fourth quarter of 2023 that will impact our gross margin for the year. Excluding these noncash accounting adjustments, we continue to expect surpassing 30% gross margin for 2023. Before wrapping up the closing remarks, Joann will cover our financial highlights for the quarter in more detail. Joann, over to you.

Thanks, Norm. Diving into our results, all variance commentary is on a year-over-year basis, unless otherwise noted. Net sales for Q3 2023 were $11.9 million, compared to $12.1 million in the year-ago quarter. As Norm mentioned, the decrease was primarily driven by delayed seasonal shipments and, to a lesser extent, short order shipments. We expect to recognize the delayed shipments in the fourth quarter of 2023. Gross profit for the third quarter of 2023 increased 66% to $4 million, compared to $2.4 million in the same period in 2022. Gross margin increased 1,390 basis points to 34%, compared to 20.1% in the year-ago quarter. The increase was primarily driven by lower supply chain and input costs. As Norm briefly mentioned, we are expecting a onetime noncash inventory valuation adjustment of approximately $625,000 in the fourth quarter, which will impact our gross margin for the period. Delivery and handling costs were reduced by 15% to $1.9 million during the third quarter of 2023, compared to $2.2 million in the third quarter of 2022. The decrease was primarily driven by renegotiated freight contracts, improved throughput, and our streamlined orbit distribution model. Delivering and handling costs were reduced to 16% of net sales or $2.98 per case compared to 19% of net sales or $3.38 per case during the same period last year. Selling, general and administrative costs decreased 14% to $2.3 million during the third quarter of 2023, compared to $2.6 million in the year-ago quarter. As a percentage of net sales, selling, general and administrative costs were reduced to 19%, compared to 22%. Altogether, operating expenses were $4.2 million or 35% of net sales compared to $4.9 million or 40% of net sales in the year-ago period. This reflects our relentless work to right-size our cost structure and consistently find ways to optimize our business. Operating loss in the third quarter of 2023 improved to $0.1 million or a loss of $0.03 per share, compared to an operating loss of $2.5 million or a loss of $1.09 per share in the third quarter of 2022. Modified EBITDA improved to positive $0.2 million in the third quarter of 2023, compared to a loss of $2.2 million in the third quarter of 2022. This represents our first quarter of generating positive modified EBITDA since 2016. For the third quarter of 2023, cash used in operations was approximately $1.8 million, compared to $0.2 million for the same period in 2022. The increase in cash used was primarily driven by higher inventory purchases compared to the year-ago period. As of September 30, 2023, we had approximately $1 million of cash and $26.8 million of total debt, net of capitalized financing fees. This includes $17.1 million from a convertible note and $9.7 million from our revolving line of credit which had $3.1 million of additional borrowing capacity. I will now turn the call back to Norm for closing remarks.

Thank you, Joann. I'm grateful for the hard work the Reed's team has put in this year, and I'm excited to build on this foundation in 2024 as we return to sales growth, expand margins further, and improve our bottom line. With ongoing efforts to bolster inventory levels and optimize cost structure and continued strong demand for our robust product portfolio, we are well positioned to deliver on these objectives.

I want to thank everyone for participating in this morning's call, as well as our employees, customers and, of course, our shareholders. We appreciate everyone's support. We have made significant progress on our 2023 initiatives and look forward to closing out the year on a strong note.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.