Reed's, Inc.
Q2 2020 Earnings Call Transcript

Published: 11 Aug 2020

[Operator:]

Good afternoon, and welcome to Reed's Second Quarter Fiscal 2020 Earnings Conference Call for the period ending on June 30, 2020. My name is Laura, and I'll be your conference call operator today. Today's call is limited to one hour, and we will have prepared remarks from Mr. Norm Snyder, Reed's Chief Executive Officer; and Mr. Tom Spisak, Reed's Chief Financial Officer. Following management's remarks, they will take your questions. Before we begin today's call, I have a safe harbor statement to read to our listeners. I would like to remind our listeners that this call, management remarks may contain forward-looking statements and that management may make additional forward-looking statements in response to your questions. Forward-looking statements are only current predictions and are subject to known and unknown risks, uncertainties and other factors that may cause our actual results, level of 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, reduction in demand for our products, dependence on third-party manufacturers and distributors, changes in competitive environment, access to capital and other information detailed from time to time in our filings with the United States Securities and Exchange Commission. Although we believe that the expectations reflected in forward-looking statements are reasonable, we 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, August 10, 2020. We assume no obligation to update these projections in the future as the market conditions change. Additionally, please note non-GAAP financial measures referenced during this call are reconciled to their comparable GAAP financial measures in the press release and supplemental materials filed with the SEC and as posted on our website at investor.reedsinc.com. Non-GAAP financial information is not meant as a substitute for GAAP results but is included solemnly for informational and comparative purposes. We present modified EBITDA because we believe 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. I would now like to turn the call over to Mr. Snyder. Please go ahead, sir.

[Norman Snyder:]

Thank you and good afternoon, everyone. We appreciate you joining us today. We hope that you are well and safe and adjusting to this unprecedented time in our history. I'm very pleased to discuss our second quarter results and we'll begin with four key messages. First, we are seeing strong demand across each of our core brands and all of our product lines. Second, the enhancements we have made over the last nine months to our supply chain, especially the build out of our co-packer network, and production redundancies are the real driver of our ability to operate effectively amid the challenges of the COVID-19 pandemic. Third, we continue to have significant distribution opportunities across our portfolio and recent new product launches have only commenced roll out to retail. Finally, we are tightly controlling spending by removing significant costs from our system, improving our cash flow profile and remaining focus on driving enhanced profitability. I am proud of the entire team's effort to build and optimize Reed while quickly adapting to broader challenges from the global pandemic. Now I will discuss our second quarter. We had a strong quarter delivering 14% net sales growth driven by 19% volume growth with the Reed’s brand, reflecting strong demand across all Reed SKUs, including the incremental growth from recent launches of new innovation, as well as 4% volume growth of the Virgil's brand. We're seeing strong demand at retail, which is evident in the most recent syndicated data. For the most recent four weeks ended July 12, Reed’s was up 37.5% in dollar sales, and Virgil's was up 25.2%. This is partially offset by lower non-measure channel sales which are running down over 20% this year directly related to the impact of COVID-19. We made improvements on margins with gross margin increasing 350 basis points versus the prior year, reflecting our strong growth and supply chain initiatives, our supply chain and co-packer redundancies proved to be invaluable as the industry faced increased production demands while supply capacities across the industry has been negatively impacted by COVID-19 challenges. Additionally, our efforts to build out co-packer network has allowed us not only to overcome the challenges of the environment, but to ensure that we have the right products in the right place with improved staging of inventory to help combat elevated shipping and handling costs also a result of COVID-19. In the quarter we saw a positive response to new product launches including Reed’s Real Ginger Ale Reed’s Extra Zero Sugar, and Reed’s Wellness Ginger Shots as well as an encouraging initial response to our new ultimate ready to drink meal with a real ginger can, which last late in the second quarter. Most notably was the launch of Real Ginger Ale, providing entry into a $1.2 billion category with an 8% compound annual growth rate over the last four years. The challenges presented by COVID-19 delayed many retailer’s plans to execute reset, which has impacted the pace of affiliate new distribution. But we saw solid demand from retailers and significant authorizations for new retail space that will materialize as the retail environment begins to normalize. Our enhanced focus on the e-commerce channel is also performing very well, including both sales on our branded websites, as well as significant girls on Amazon. We launched with a select product offering included can beverages, flying cauldron and butterscotch, cream soda, Reed’s Ginger Shots and Reed’s Ginger Candy. We saw a positive response and accelerated growth throughout the quarter. As I touched on briefly a moment ago, if we continue to grow volumes redundancies on our supply chain and copacker network become increasingly more valuable. This was certainly the case in this quarter, especially as the industry faced increased demand and labor constraints due to the pandemic. We're in the process of bringing our sixth copacker online in the third quarter, and then to bring one more online by the end of the year. But network we have built has proven to have ample capacity and inflexibility contributed to the higher order fulfillment rates, and the ability to keep up with demand and overcome COVID-19 challenges. Our robust network also helps with strategic placement of products, allowing us to have products in the right place at the right time, reducing delivering handling expenses, as well as allowing us to enhance the ability to plan and forecast. In addition, we continue to have ample ingredient supply as we secured a long-term supply agreement earlier this year. Before I turn the call over to Tom to run through the financial results, let me comment on the impact of COVID-19. First, I want to thank all of our employees and partners for their quick action and continued support as we work towards the new normal with this pandemic. Safety remains our top priority as we navigate the constantly changing environment and continue to comply with all regulatory mandates. Our supply chain remains secure and is operating with social distancing measures in place. We continue to see positive impact on our volume given the strong grocery mass and natural segment sales trends, partially offset by retailer reductions to in store merchandising the trade promotion and delays and resetting stores as retailers work diligently to keep up with demand. As a result, many of our new distribution authorizations are awaiting the start of reset activity. We will continue to monitor the environment and we'll be nimble as this situation evolves. With that, let me turn the call over to Tom Spisak to discuss our financial results in more detail, Tom?

[Tom Spisak:]

Thank you very much Norm. It's a pleasure to speak with everybody today. As Norm discussed, we're very pleased with our progress in the second quarter. We have continued to build our momentum led by new innovation, as well as growth from all of our core brands skews and a very effective response to the COVID-19 pandemic. We are executing on our strategy of sell, save simplify and are seeing the results in our financials. Second quarter net sales increased 14% to $10.9 million compared with $9.5 million in the prior year. Core brands gross sales increased 14% over the prior year, including 12% core volume growth, driven by 19% case growth for the Reed's brand and 4% case growth for the Virgil’s brand. Gross profits dollars increased 31% to $3 million compared to $2.3 million in the prior year, and gross margin increased 350 basis points to 27.5%. Gross Margin was negatively impacted by mix as our most advanced margin enhancement efforts were on the Virgil’s brand, and the higher cost Reed's brand throws significant growth in the quarter. Delivery and handling costs increased 3% to $1.5 million during the second quarter of 2020 compared to the prior year, driven by the volume growth and short term market forces associated with COVID-19. However, costs fell 150 basis points year-over-year as a result of improved staging of inventory partially offset by the elevated costs for market forces impacted by COVID-19. Selling and marketing costs decreased 50% to $1.6 million during the second quarter and as a percentage of net sales decreased to 14.6 from 33.7 in the prior year. The decrease reflects our ongoing cost control and marketing programs that were executed in the second quarter of 2019 but not in 2020. General and administrative expenses decreased 23% to $1.4 million in the second quarter compared to $1.7 million in the prior year period. The year-over-year decrease largely reflects reduced non-cash stock-based compensation, the exit of the Los Angeles facility and the reduction of temporary staffing, as well as production of spending on travel related expenses in the quarter. The second quarter operating loss narrows to $1.4 million from $4.1 million in the prior year. Interest expense was consistent with the prior year as 300,000. And then that loss includes to $1.8 million or $0.03 per share in the second quarter of 2020, compared to the loss of $4.5 million or $0.13 per share in the same period last year. Modified EBITDA loss improves to $1.4 million compared to a loss of $3.4 million in the prior year. Moving through the balance sheet and cash flows, we ended the second quarter was $6.7 million of availability on our revolving line of credit. During the second quarter we use $5 million of cash in operating activities compared to using $11.5 million in the prior year period. The decrease in cash used in operating activities during the second quarter of 2020 relates primarily to a lower net loss and a reduction in the spending in a quarter. Turning to guidance. We maintained our 2020 outlook as we continue to anticipate generating 10% core brand net sales growth over fiscal year -- fiscal 2019 or approximately $37.2 million. We also continue to anticipate a gross margin of approximately 32% for the full year compared to 23.3% in the prior year. Our gross margin guidance assumes a normalized pricing environment for ingredients packaging, and production costs [indiscernible] which has been and continue to be impacted by COVID-19 and thus the pace of our gross margin enhancements. Now, let me turn the call back to Norman for some concluding remarks. Norman?

[Norman Snyder:]

Thanks, Tom. Before I turn the call back to the operator for questions, I want to reiterate my confidence in our business as we continue to position the company for long term growth. We are focused on controlling costs, improving growth margins leveraging our valued brands and building momentum. For the recent innovation. We have yet to see the true impact of our entry into the large Ginger Ale market and will build distribution of really Real Ginger Ale over the coming months and quarters. We remain flexible and prudent as we navigate the current environment. And we will continue to make any necessary changes to keep our employees and partners safe and our inventory on shelf. We have improved our financial flexibility significantly enhanced our supply chain and co-packer network and have an amazing team in place to take on the current challenges, while driving the company forward. I will now hand the call over to the operators to begin the question and answer session.

[Operator:]

At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of David Bain ROTH Capital. You may proceed with your question.

[David Bain:]

Great, thank you. Congratulations on basically consistently strong product momentum and the structure that you guys are doing that with. First, I guess, I'm hoping we can delve a little bit more deeply into top line guidance. It's certainly indicates stronger than maybe the stock loss will give us credit for but also seems somewhat conservative, just given the first two quarters in our checks for continued momentum. Can you delve a little bit more deeply and give us a little sense as to what were some of the factors were used to net out year in top-line guidance and margin guidance a little higher than way expected. And can you also let us know that includes anything in terms of like new products or categories. Thank you.

[Norman Snyder:]

Good afternoon, Dave. Norm here. Good question. I asked myself the same question. So I think I've got an answer for you here. So when you look at our business, you really need to look into the various components and then the dynamics of what's going on. So, what I did with was I said okay. If you look at the most recent IRI data in the MULO category, and it's showing like a 32% dollar growth. So I went back and I said, why I was going to ask? Why aren't you taking your guidance off and why is the IRI number so high but your numbers aren't as high? And there's a there's a few things going on here. One, I break our sales into you measured sales and unmeasured sales, and then the measured sales, obviously I can break down into further components to get a little bit more granular. And our measured sales are all up very strong, unfortunately are not measured, which really services the segment of the business, which was really significantly impacted by COVID-19. It's down almost 24%. So that's like a drag on our earnings. And you'd expect the independent markets, to delis, quick serve restaurants, on premise accounts have all been significantly impacted by what's going on. And obviously, that's going to that's going to translate into a reduced amount of sales for us. So when I looked at the measure data, which is up very strongly. One of the things that we said last quarter was because of retailers focus on keeping stocks their shelves well stocked. There's been very little price promotion going on and very little any sort of promotional activity, they just couldn't handle it. So their dollar sales kind of have been incredibly strong and much more stronger than ours. So I went back and looked at and match this up at case volume. And we're tracking on case volume, obviously, we've had stronger pricing too, so our pricing is up. But retail has been magnified even greater. So when we look at that, they're going to come in higher than we did, because obviously, we budgeted for this type of activity that didn't occur. So their pricing has been a lot stronger. And then you went in the negative impact on the non-measured channel. It really gets down to where we're growing. So the growth rates while stronger than what we predicted, are still not enough to say let's take the numbers off. We want to -- we feel good about what we put out there? We're still not out of this yet. I mean, I don't know what's going to happen in the second half of the year to the US economy, which hasn't impacted us. So there's still a lot of uncertainty. But we've reconciled from scan data down to our numbers, if you're comfortable with the results, and the reasons that make sense to us. So for that reason, I think we're just going to stay, we're going to stay and couldn’t got guidance, obviously, we're going to do our best to outperform that, but I do think it would be premature and a bit foolish to to really take it up at this point, because I think we're just hitting another phase that we're going to have to navigate through.

[David Bain:]

Got it. Okay, fair enough. And then, if I look at just these ginger ale bifurcating that as a percentage of overall Reed volume growth. Can you help us to understand how big a driver that is at this point? And any sort of thoughts around the category in general?

[Norman Snyder:]

It's pretty smaller than what we had anticipated. And that's largely because of delayed recess. The second quarter, it accounted for a little more than 3% of our overall activity. Obviously, we see that numbers going back. We're starting to see recess being scheduled and picking up pace. So we think we're going to end the year on a very strong note, because the consumer reaction in the fan huge, the commentary that we're receiving back from folks has been really positive. So we're still confident, but it's again, when you've been in a grocery store and you see, dials are just as crowded with store workers, restocking shelves as consumers. It's tough to ask for recess to occur and for other promotional program. So it's just fan slowed down a little bit, if we're starting to see pick back up, we think in the third quarter, it'll be a much more significant piece. But the fourth quarter, which is probably the strongest for the ginger ale market, we think we'll even do better. So we're not, we remain highly competent in it, but if there's, an impact on what pandemic had was the delayed response on ginger ale.

[David Bain:]

Okay, and then just final one, if I could. And Tom, I don't know if you mentioned this, it was an augmentation of the credit line or is there expected to be when just given well known receivable credits going up higher and momentum continuing. And then if I could also known I think you kind of stayed in my question on another new category it has, before the end of the year, or product launch that we should be buying at this stage.

[Tom Spisak:]

Yeah, you keep doing, I was doing that to keep you paying attention? We -- I don't think by the end of this year, we're obviously keeping our eyes open for a lot of things, we've made it clear that we want to expand into additional channels, in segments, particularly that convenience channel, so we're working on, we're working on something there, that's friendly into that channel. So that we are working on what we, if you've done it, David, one of the things that we've done intentionally is trying to -- we're trying not to take on too much. I'd rather be good at one or two things that satisfies. So we've really slowed down and rather than juggling multiple balls, we're focused on one thing at a time so I think the real focus is going to be entry into that could be an issue and I'm sorry, our main category like if I were you -- I apologize. Same question for Tom.

[Tom Spisak:]

Or you mean your flavor?

[David Bain:]

Yeah, I'm it's my bad.

[Norman Snyder:]

Okay. Well, we're doing we're looking at a combination of bringing back to mall, which is new, and bringing some new which is new. So part of that entry into that segment is going to be some augmentation there. And we're testing things right now.

[David Bain:]

Fantastic.

[Tom Spisak:]

I think you asked the question about the expanded volume capacity. Is that your question?

[Norman Snyder:]

So we've done a lot of work on internal properties and improved our inventory reconciliation process through gain additional borrowing capacity from that, off of our inventory asset base.

[David Bain:]

Okay. and what about now capacity?

[Norman Snyder:]

$6.7 million. Did we lose you, David?

[David Bain:]

All right. I'm sorry. I said thank you very much. All right. Perfect. Thank you.

[Operator:]

[Operator Instructions] Our next question comes from the line of [Matt Tacos]. You may proceed with your question.

[Unidentified Analyst:]

Hi, everybody. First, I want to thank John Bello and Neil for their support with these asset investor here. And I've been trying to real change around the wellness ginger shot, the craft ginger mule, just a few sips and then applying for the butterscotch sphere, and I'm really enjoying them. So without further ado, my question is about the pathway to profitability. And when you expect to have a net profit on a regular basis, thank you.

[Norman Snyder:]

Well, this year we've done better than what we planned. So we're pleased about that. And with that said, the strategy doesn't change just continuing to drive top line growth. Improving margins and spending much more strategically. I think we're going to continue to narrow the gap in 2021. And, we're working on a new three year strategic plan. Obviously, this year has not been what anybody expected. And we've gained some new insight as to our consumers and our brands and behaviors. So, the goal is really by 2022 to be at that point, but obviously, I think we're better than what we expected today. And I think we'll be moving even closer next year. We've really brought down the cash burn, but I really want to go through the exercise of planning our strategy in a little bit more detail because we're not going to go back to what we all called was normal, in my opinion, it's going to be a new world and we want to be the best position to take advantage of that. And I'm confident we'll come up with a very, very sound plan, but fundamentally, we're not going to stray from sell, save and simplify top line growth margin enhancement and really managing our expenses. And I think that's going to get us there quicker than what we thought earlier.

[Unidentified Analyst:]

Okay. Thank you.

[Operator:]

Ladies and gentlemen, this concludes today's question-and-answer session, I would like to turn it back to Mr. Norman Snyder for closing remarks.

[Norman Snyder:]

Thank you again for your continued support and participating on today's call. We remain confident with our positioning brands and opportunity and are seen strong operational execution. We look forward to sharing our progress over the coming months and years. Have a great day.

[Operator:]

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation and have a great day.