Reed’s, Inc. (NASDAQ:REED) Q3 2023 Earnings Call Transcript

Reed’s, Inc. (NASDAQ:REED) Q3 2023 Earnings Call Transcript November 10, 2023

Reed’s, Inc. beats earnings expectations. Reported EPS is $-0.34, expectations were $-0.4.

Operator: 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.

Joann Tinnelly: 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.

A colorful display of sparkling waters, juices, energy drinks and carbonated soft drinks on a convenience store shelf, emphasizing the company’s impressive beverage portfolio.

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.

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Q&A Session

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.

Norman 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.