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Edited Transcript of REED.OQ earnings conference call or presentation 9-Nov-20 9:30pm GMT

·13 min read

Q3 2020 Reed's Inc Earnings Call LOS ANGELES Nov 19, 2020 (Thomson StreetEvents) -- Edited Transcript of Reed's Inc earnings conference call or presentation Monday, November 9, 2020 at 9:30:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Norman E. Snyder Reed's, Inc. - CEO & Director * Thomas J. Spisak Reed's, Inc. - CFO ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Good afternoon and welcome to Reed's Third Quarter Fiscal 2020 Earnings Conference Call for the period ending on September 30, 2020. My name is Doug, and I will be your conference call operator today. Today's call is limited to 1 hour, and we'll have prepared remarks from Norman Snyder, Reed's Chief Executive Officer; and Tom Spisak, Reed's Chief Financial Officer. (Operator Instructions) 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 during this call, management's 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, levels 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 developmental development goals, reduction in demand for our products, dependence on third-party manufacturers and distributors, changes in the 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 represents management's estimates as of today, November 9, 2020. We assume no obligation to update these projections in the future as 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 is posted on our website at investor.reedsinc.com. Non-GAAP financial information is not meant as a substitute for GAAP results but is included solely 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 will now turn the call over to Mr. Snyder. Please go ahead, sir. -------------------------------------------------------------------------------- Norman E. Snyder, Reed's, Inc. - CEO & Director [2] -------------------------------------------------------------------------------- Thank you and good afternoon, everyone. We appreciate you joining us today. We hope you are well and safe. I'm very pleased to discuss our third quarter results and would like to point out, for the third consecutive quarter, we have met or exceeded guidance. The senior management team and I will continue to be transparent with you as we achieve our growth plans and profitability goals and excited about Reed's future. I will begin with key third quarter highlights. First, net sales growth accelerated during the third quarter. We are seeing strong growth across both of our core brands, and our new innovation for the Reed's brand is not only adding to the growth but also lifting demand across the entire Reed's portfolio. As we will outline shortly, we experienced continued sales strength in October and now in November that has led us to increase our sales guidance, as Tom will address. Second, we are driving significant distribution expansion and are broadening our DSD distribution partnership nationally. Our ACV, the best measure of distribution, was up over 7 points for the 4-week period ending October 4, 2020, and over 10 points year-to-date. Our Reed's Really Real Ginger Ale launch is providing new distribution opportunities. Third, our focus and enhancements over the last year to our supply chain continue to support our growth while allowing us to successfully navigate the COVID-19 pandemic. We added another co-packer to our network during the third quarter, providing further capacity, flexibility and the ability to service our customers. Fourth, we continue to tightly control spending and have removed significant cost from our system while driving gross margin improvements and improving our cash flow profile. We remain focused on driving enhanced profitability. Finally, we continue to deliver results in line with or exceeding market guidance this year and remain confident in our ability to achieve future guidance. Our entire team has demonstrated a commitment to excellence that is driving our performance and effectively overcoming inherent challenges for today's environment. We are well positioned to continue to drive growth, enhance profitability and build our brand. Turning to the third quarter. Net sales growth accelerated to 21% from 14% growth in the second quarter. The Reed's brand is generating significant volume growth, up 32% in the quarter, reflecting recent launches of new innovation as well as strong performance across all Reed's branded products. Virgil's also contributed strong volume growth of 6% despite comparing to last year's rollout of new innovation. At retail, syndicated data indicates an even stronger sales trend. For the most recent 4 weeks, Reed's was up 49% in dollar sales and Virgil's was up 28% as reflected in the IRI sales data. This continues to be partially offset by lower sales in nonmeasured channel sales which have been directly related to the impact of COVID-19. Our strong sales momentum is being augmented by our continued focus on improving gross margin and tightly controlling spending. We have generated 350 basis points of gross margin improvement year-over-year, with improvements in delivery handling, sales and marketing and G&A expenses as a percentage of sales. Achieving positive cash flow remains a key focus, and we are making progress, as is evident in the third quarter results, which will only be improved by the accelerated net sales momentum. We are confident in our ability to fund current and future growth. As I noted, during the third quarter, we added our 6th co-packing partner and are on pace to expand our capacity by approximately 1/3 since the beginning of the year. Our supply chain and co-packer redundancies have proved to be the significant assets as the industry continues to encounter increased production demand, while supply capacities have been negatively impacted by COVID-19 challenges. We are confident with the network we have built, adding both capacity and capabilities on East Coast, which not only supports demand but is reducing transportation costs to offset heightened cost amid the current pandemic. Additionally, we enhanced our team this quarter, adding Rich Hubli as Vice President of Operations. Rich has proven success in end-to-end supply chain management and driving strategic operational practices. Rich adds strength to our operational team at a key time in our growth trajectory. As I noted in the opening, we saw strong demand across our product offerings, led by the Reed's brand. The rollout of Reed's Really Real Ginger Ale contributed significantly to the growth during the third quarter, and we still have considerable opportunity to fill out our distribution. We have a strong list of retail authorizations and are shipping to align with resets, many of which have been delayed by COVID-19. This quarter, resets of our 2 SKUs of Ginger Ale included H-E-B, Stop & Shop, Southeast Grocers, additional select Albertsons regions, Kroger divisions and Harris Teeter. We also saw strong performance from Reed's Zero during the third quarter as each of our most recent innovations are performing well. Our ultimate ready-to-drink mules are in early stages of distribution, but we continue to see growth, including adding Costco regions in the West during the third quarter. Building on our most recent distribution gains, we are now expanding our DSD relationships across the country. We are currently bringing on new DSD partners in Colorado, Massachusetts, Ohio and Utah and are starting to build out further. We're also building out the Anheuser-Busch network in the Southeast to support our retail sales growth at Publix and Southeast Grocers, led by Winn-Dixie. Our e-commerce activities, including Amazon, are generating strong quarter-over-quarter growth. E-commerce sales were up 105% over the second quarter, and we see continued opportunity for further expansion. As you will see in our Q3 results, the strength of our enhanced supply chain and our distribution activities position us well to drive continued growth. We are very pleased with our current sales momentum and confident in our ability to support it. We look forward to delivering further improvements in cash flow and profitability as was the case in the quarter. We are confident and enthusiastic about our opportunities and execution. Before I turn the call over to Tom to cover the financial results, let me comment on the impacts 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 is not only secured but enhanced, and the entire industry continues to see positive impact on retail volume. We are successfully overcoming the challenges, including delays in reset activity that impacts the pace of new innovation rollout and has added costs from freight to packaging to production. We will continue to monitor the environment and leverage our capabilities to overcome any challenges. With that, let me turn the call over to Tom Spisak to discuss our financial results in more detail. Tom? -------------------------------------------------------------------------------- Thomas J. Spisak, Reed's, Inc. - CFO [3] -------------------------------------------------------------------------------- Thank you very much, Norm, and it's a pleasure to speak with everyone today. As Norm discussed, the third quarter was another successful quarter for Reed's. We continue to add to the momentum that has been building for the past few quarters. We are seeing strong adoption of new innovation as well as continued growth across each of our core brand products. Third quarter net sales increased 21% to $10.6 million compared to $8.7 million in the prior year. Core brand gross sales increased 18% over the prior year, including 17% core volume growth and a 1% increase in price per case. The volume growth was driven by 32% case growth for the Reed's brand and 6% case growth for the Virgil's brand. Gross profit dollars increased 35% to $3.4 million compared to $2.5 million in the prior year, and gross margin increased 350 basis points to 32%. Gross margin was driven by strong volume growth and a lower cost per case. Delivery and handling costs increased 16% to $2.2 million during the third quarter of 2020 compared to the prior year driven by volume growth. As a percentage of sales, delivery and handling costs decreased 86 basis points year-over-year as a result of improved staging of inventory, partially offset by increased distribution costs associated with COVID-19. Selling and marketing costs decreased 25% to $1.9 million during the third quarter and as a percentage of net sales, decreased to 1% from 29% in the prior year. The decrease reflects our ongoing cost initiatives and marketing programs that were executed in the third quarter of 2019 but not in 2020. General and administrative expenses decreased 36% to $1.6 million in the third quarter compared to $2.5 million in the prior year period. The year-over-year decrease largely reflects a decrease in severance expense, lower stock option expense and professional and consulting fees, partially offset by an increase in other general and administrative expenses. Third quarter operating loss narrowed to $2.3 million from $4.4 million in the prior year. Interest expense was consistent with the prior year at $300,000, and the net loss improved to $2.6 million or $0.04 per share in the third quarter of 2020 compared to a loss of $4.6 million or $0.14 per share in the same period last year. Modified EBITDA loss improved to $2 million compared to an EBITDA loss of $3.3 million in the prior year period. Moving to the balance sheet and cash flow. We ended the third quarter with $900,000 of cash and $3.0 million of availability on our revolving line of credit. During the first 9 months, we used $6.8 million of cash and operating activities compared to using $14.6 million in the prior year period. The decrease in cash used in the operating activities during the third quarter of 2020 relates primarily to a lower net loss and a reduction in spending in the quarter. We have also initiated conversations with our senior lender and Raptor/Harbor to formulate a plan to improve our financial flexibility. Turning to guidance. We are increasing our 2020 core brand growth outlook. We now anticipate approximately 19% core brand sales growth, up from our prior guidance of 10% growth. As a result of product mix and a delay in implementing all cost savings initiatives, we now anticipate a fiscal 2020 gross margin of approximately 30% compared to 23% in the prior year. Our gross margin guidance assumes a consistent pricing environment for ingredients, packaging and production costs, each of which has been and could continue to be impacted by COVID-19. Now let me turn the call back to Norm for some concluding remarks. Norm? -------------------------------------------------------------------------------- Norman E. Snyder, Reed's, Inc. - CEO & Director [4] -------------------------------------------------------------------------------- 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 seeing strong momentum across both of our core brands, and our Reed's innovations are resonating with consumers. We also remain focused on controlling costs, improving gross margin and enhancing our supply chain. We have built a strong national co-packer network to support our growth and have significant opportunity to improve margin. Our entry into the larger ginger ale category with our Really Real Ginger Ale is contributing to our growth that we still have considerable opportunity to fill out distribution for this promising new product. 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 are confident in delivering our near-term and long-term outlook. I will now hand the call over to the operator to begin the question-and-answer session. -------------------------------------------------------------------------------- Operator [5] -------------------------------------------------------------------------------- (Operator Instructions) There are no questions in the queue. I'd like to hand it back to Mr. Snyder for closing remarks. -------------------------------------------------------------------------------- Norman E. Snyder, Reed's, Inc. - CEO & Director [6] -------------------------------------------------------------------------------- Thank you again for your continued support and for participating on today's call. We remain highly confident with our positioning, brands and opportunity and are seeing strong operational execution. We look forward to sharing our progress over the coming months and years. Have a great day. -------------------------------------------------------------------------------- Operator [7] -------------------------------------------------------------------------------- Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.