Q1 2024 Reed's Inc Earnings Call

Presentation

Operator

Good afternoon, and welcome to Reed’s first-quarter 2024 earnings conference call for the three months ended March 31, 2024. My name is Chris, and I will be your conference operator for today. 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. Before we begin, please take note of the company's cautionary statement. Today's call will include forward-looking statements, including statements about Reed's business plans and 2024 guidance. Forward looking statements inherently involve risks and uncertainties and only reflect management's view as of today, May 14, 2024, and the company is under no obligation to update them.
When discussing results the presenters may refer to non-GAAP measures, which exclude certain items from reported results. Please refer to Reed's first quarter 2024 earnings release on Reed's investor website at investor.reedsinc.com and its first quarter 2024 Form 10-Q expected to be available on the website on March 14, 2024, for definitions and reconciliations of non-GAAP measures and additional information regarding results, including a discussion of factors that could cause actual results to materially differ from forward-looking statements.
I will now turn the call over to Mr. Snyder. Please go ahead.

Thank you, operator, and good afternoon, everyone. We appreciate you joining us today to discuss our first quarter 2024 results. We continued to execute our cost-cutting and optimization initiatives in the first quarter, leading to material improvements in gross margin, operating expenses and modified EBITDA.
I'm proud of our team's hard work to consistently drive savings across our business, enabling us to achieve our seventh consecutive quarter of year-over-year operating expense and profitability improvements. As we mentioned during our earnings call in March, sales in Q1 were impacted by short orders, reducing shipments. We have taken the appropriate steps to build our inventory levels and to add capacity through a new co-packing partnerships.
As a result, we exited the quarter with healthier inventory levels and have seen a significant month-over-month reduction in the number of short shipments since January, which we expect to decline further moving forward. I would also like to add that during the four week period ending April 21, 2024. IRI unit sales increased 9% in the grocery segment, reflecting the impact of reduced short shipment orders.
Further retailers who experienced a lower level of short shipments saw strong double digit growth during that same period. By maintaining appropriate levels of inventory we remain confident in our ability to deliver on our growth and profitability targets for 2024.
Turning to a few recent updates on our key product categories based on unit sales from IRI, will scan data for the four-week period ending April 21, 2024, which is defined as multi-outlet and convenience in the food, grocery. drug, mass, Wal-Mart club, Dollar Stores and military channels, and the VIP data, which is a tracking software for distributor-based shipments.
Reed's Ginger Beer generated 8% year-over-year growth. Ginger Ale grew 9% during the four weeks ended April 21, compared to the year ago period. And our virtual craft soda portfolio will be saw solid 13% year-over-year increase in unit sales. For our ready to drink alcohol portfolio, where we experienced a 10% increase compared to the year ago period. We are making progress on our new product road map by leveraging our fresh organic Ginger to create a catalog of beverages in the better-for-you category.
We always prided ourselves on our commitment to using the highest quality natural ingredients while delivering a bold premium taste. We're excited to unveil these products later in the year and look forward to providing our customers with a new innovative portfolio of offering.
As I mentioned earlier, we made solid progress in our cost cutting and optimization initiatives in Q1, leading to a more than 1,000 basis point increase in gross margin and a 23% reduction in operating expenses compared to the year ago period.
Our strong improvement in gross margin was driven by our ability to materially lower cost, increase the mix of cans versus bottles and implement more consistent pricing applications across channels. For delivery and handling expenses we saw a 29% reduction during the quarter to a $3.1 per case compared to $3.46 per case in Q1 of 2023.
We drove these savings by renegotiating freight rates are heavily traffic lanes, improving throughput and generating efficiencies from our streamlined distribution model and new co-packing partnership. We anticipate our renegotiated freight contracts to lead to more than $1 million in annualized cost saves. We'll continue to evaluate our delivery and handling expenses to ensure that we're running as lean and efficiently as possible.
Quickly touching on our new co-packing partner Battle Co-Packing, we kicked off our partnership during the quarter, which enable us to enhanced our production capabilities for both bottles and cans in the Southeast region. In just a few weeks we've already realized operating efficiencies and cost savings from this partnership. We're pleased with our progress thus far and look forward to building a long-standing partnership with them. We also saw a 24% year-over-year reduction in selling and marketing expenses due to our efforts to create a more efficient go-to-market strategy to streamline our sales process.
Turning to our first quarter and recent sales and operational highlights. To start, we are set to kick off our first market product launches for us with Sprouts, with Virgil's full sugar handcrafted soda cans and Black Cherry, cola, vanilla cream and Root Beer flavors in both multipacks and the single cans beginning tomorrow May 15. We also expanded our alcohol assortment at Sprouts with the addition to hard Ginger Ale.
And Whole Foods, after a strong performance during last year's National off-shelf program, we received a second national authorization for of our alcohol assortments starting in June 2024. Additionally, after a successful test launch in the summer of 2023, our ginger ale has been subsequently added to Whole Foods core product set.
Next, we launched Virgil's Zero Sugar packs in Costco's Texas locations with plans to launch our new 7.5 ounce ginger beer mini cans and all business locations nationwide. We are also working with multiple regions to extend our club channel offerings as we look to expand product assortment and enhance our partnership with Costco.
Additionally, we expanded distribution with the Wakefern Group operating under the banner of Shoprite price right, fairway and SRS by adding more than 2,600 points of distribution for our reach product portfolio. We have also added over 1,000 stores with Giant Eagle that currently sells our ginger beer cans, Zero Sugar ginger beer cans and all four of the new Virgil's handcrafted cans.
Looking at broader channel opportunities we have identified specific customer and geographic targets for our initial rollout into the on-premise channel. We believe this channel, which has been untapped to date, will increased trial and brand awareness over each problem. We have plans to expand our on-premise efforts with the launch of our 7.5 ounce ginger ale mini cans later this year.
In our e-commerce business we continue to see promising results as we've experienced month-over-month growth since the beginning of the year. We are also in the process of launching our new Virgil's cans on both Shopify and Amazon this week with plans to add additional online sales channels over the summer. This channel represents a small portion of our business today, but we are optimistic about its progress, and we'll continue to invest resources as it becomes a larger revenue contributor in the future.
Looking ahead, we reiterating our 2024 financial outlook as we continue to expect net sales growth, gross margin expansion and modified EBITDA profitability while generating positive cash flow from operations for the full year. We have several key initiatives to drive growth as we improve order fulfillment rates, expand product authorizations, increase, increased promotional activity and launch new innovative products targeting the better-for-you category. We will maintain a lean discipline to ensure we're running an efficient operating model. Between these initiatives, our improved inventory levels and our optimized cost structure, we are poised for a strong second quarter and year ahead.
Before wrapping up with 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 Q1 2024 were $9.6 million compared to $11.2 million in the year ago quarter. The decrease was primarily driven by tightened credit terms from select suppliers that capped our purchase of raw materials, resulting in an inflated rate of short quarter shipments.
Gross profit for the first quarter of 2024 increased 26% to $3.4 million compared to $2.7 million in the same period of 2023. Gross margin increased 1,140 basis points to 35.6% compared to 24.2% in the year ago quarter.
The increase is primarily driven by lower supply chain and input costs. Delivery and handling were reduced by 29% to $1.5 million during the first quarter of 2024 compared to $2.1 million in the first quarter of 2023. The decrease was primarily driven by renegotiated freight rates for heavily traffic lanes, improved throughput as well as efficiencies generated from our streamlined distribution model and new co-packing partnership. Delivery and handling costs were reduced to 16% of net sales or $3.1 per case compared to 19% of net sales or $3.46 per case during the same period last year.
Selling, general and administrative costs decreased 19% to $2.6 million during the first quarter of 2024 compared to $3.2 million in the year ago quarter. As a percentage of net sales, selling, general and administrative costs were reduced to 27% compared to 28%.
Altogether, operating expenses reduced to $4.1 million or 42% of net sales compared to $5.3 million or 47% of net sales in the year-ago period. This reflects our tireless efforts to optimize our cost structure and improve our operating margins.
Operating loss during the first quarter 2024 improved $2.6 million or $0.16 per share compared to a loss of $2.6 million or $1.1 per share in the first quarter of 2023. Modified EBITDA loss improved to $0.4 million in the first quarter of 2024 compared to $2.3 million in the first quarter of 2023.
For the first quarter of 2024 cash used in operations was $2.4 million compared to cash flow from operations of $1.1 million in the same period in 2023. The decrease in operating cash flow was primarily driven by higher inventory purchases compared to the year ago period. As we look to improve the rate of short order shipments moving forward.
As of March 31st, 2024, we had approximately $0.3 million of cash and $26 million of total debt net of capitalized financing fees. This included $18.2 million from a convertible note and $7.8 million from our revolving line of credit, which has $5 million of additional borrowing capacity.
I will now turn the call back over to Norm for closing remarks.

Thank you, Joann. I'd like to convey my appreciation for the entire Reed's team and their consistent effort to optimize our business and lay a solid foundation for the remainder of 2024. We are intently focused on returning to growth and preserving healthy gross margins above 30% while maintaining a lean fixed cost base and drive operational leverage in our business. These initiatives, coupled with our ongoing efforts to bolster our inventory position, will enable us to deliver on our growth and profitability goals in the year ahead.
Operator, we will now open the call for questions and answers.

Question and Answer Session

Operator

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. (Operator Instructions)
Sean McGowan, Roth.

Good afternoon. How are you? --
I have a couple of questions if I may. One, nice job on the gross margin recovery there. Just curious as to what degree might that be helped by the mix in other words, how sustainable is this at a more complete offering of product? Was there anything in a lower margin that wasn't shipping that might affect that? Or is this kind of a rate we might come to expect in the coming quarters.

More of the latter. Look, we've taken cost of a lot of elements in our COGS and we believe will continue to take further savings. The only aspect where product mix has been favorable is the shift from bottles to cans, and that's a trend we don't see slowing down. In fact, we've been really, I've been surprised by the pace at which we've converted and how both retailers and consumers have received our product offerings and cans.

Okay. Good to hear. Can you talk about generally the category of RTD alcohol? Like are you seeing overall trends in the category continue to be favorable? And I'd say that your sales are going quite well, but has there been any slowdown in the category?

Look, I think there's been some of the bigger players that came out really strong. I have seen pull back on their sales. But I think that's because of competition and more offerings, which I think bodes well for us and obviously why we're seeing growth.
So -- I think the overall category continues to grow. I think consumers are looking for better for you, more premium products. And I think that's something that we offer and believe we'll continue to see growth.

Great. Thank you. And then a couple of sort of housekeeping questions on the balance sheet. So this some equity offering that is on the balance sheet, I assume that just that sale is complete as of the second quarter, so that becomes kind of additional paid capital then?

Yes, that will convert to equity and we expect that to be completed during the second quarter.

And would there be additional cash raised? I seem to remember this kind of came in multiple bits or at least that's the way I built the model. Like is there some amount of cash that was raised in the first quarter and some in the second quarter?

Yes, it will be split. The majority was in the latter part of the first quarter, but they're still interest of complete that during this quarter.

That's what we have built into the model. So I appreciate that. And like how many shares outstanding are there like as of right now?

-- in the [Q], there are 4,187,000 shares that are outstanding. -- That does not reflect the save offering.

Okay. When will the Q be out, in couple of days?

Q will be out tomorrow.

Okay. Thanks a lot --.

Apologize Sean, I realize we have not files that yet. So that's field tomorrow.

And I'm trying to pull that card out here and figure out the number is. Thank you.

Operator

Your next question comes from Gary gates.

Yes, hi, Norm and Joann. Thanks for taking the call. Always glad to hear your voice. With the safe offering, do you know, at what price the shares will be converted?

No, that's to be determined. -- I mean there's a provision in there, obviously. We set a floor, but it will be the price to be the better of. So it again, that's to be finalized. I do know the floor, but the price will be the better off. And again that's to be finalized

Do you know what the floor is?

I think we set it, I want to say like at $1.50, I believe we set it at.

Here's my big question. I give you the entire company, a lot of credit for trying. And right now we're slowly headed to cash flow positive from operations, but there's very little cash on the books. And we also have interest expense, which leads to more debt and more shares ultimately being interested, in being more shares being outstanding. So where do you see this headed to and over what period of time? I'm speaking as an investor.

Well, we can't, there's the debt has a blocker on what percentage they can own. It's capped at 9.9%. So there's not a lot of additional shares that can be issued to go to pay down that debt. And remember, a lot of the interest, half of it is cash, half of it is pick. So it's not all due it immediately pay for.
I think we've righted the ship from a fundamental business perspective and are no longer burning cash from operations. Catching up with our inventory will allow us to ship more product and generate some positive cash flow. And we will continue to work with our lenders to work out a situation that's favorable to all parties in an effort to really bring that debt load down.

Recognize that part of the debt is pic. But when do you see risk getting to a point of being cash flow positive? Not only from operations but also from a debt standpoint?

That is our current focus. And I'd like to say towards the latter part of the year where we're generating enough cash to both cover our operations and service our debt requirements.

Good. That is encouraging

Obviously, we've made tremendous progress with our gross margin. We've made tremendous progress with our transportation costs, and we're not done with that. We've continued to bring down our SG&A costs, which should translate into, as we grow our top line, translates into generating more cash.

And any feedback from last year's investor [should then bang] on what she wants to do with the company. Earlier there was talk about for trying to introduce a Asian product into the US.

No, actually, I think it's the opposite way. The focus is really stabilizing and growing the business domestically and then utilizing their Asian contacts to export our products into the Asian market, not bringing Asian products into the US market. So, to continue to build Reed's and to leverage our brand equity and foreign markets where they have a lot of contacts and understand the marketplace and are willing to support that.

And one last question regarding the Ginger Wellness Products. Any thought of offering something for weight loss, which seems to be one of the biggest categories in healthcare these days?

Well, look, I've said this a lot of times and I'll continue to say it. One of the big trends in both food and beverages have been on healthy plant-based drinks and food and Ginger is a plant-based item where the only mass ginger beer and ginger ale that uses real ginger in their products, which to me is a big point of difference, particularly compared to our competition.
And we believe that is a great point to leverage future innovation, and we're working on some pretty, I think, interesting new products that will really resonate with today's consumer and some of the benefits they're looking for and really leveraging not only ginger but some other from some advances in research that we've done to make very great product and are excited about that.
Really, again, front and center, the efficacy of Ginger being plant-based and Reed's being a leader in that category and really capitalizing on that and producing premium, natural really good products.

Good. Well, you do. And I wish you the best and thanks so much for the call.

Operator

Your next question comes from Will Randow, private.

Hey, Norm. Thanks for taking my questions. Just a few things on the [RCD] stuff. I think I caught the tail end of this, the whole foods. Is that a nationwide rollout in June? And then Sprouts nationwide as well and what's the timing on them?

They're both nationwide except for a couple of states where we have gaps with distribution. With alcohol, you can't go direct, you have to go through a three-tier distribution system. So we're trying the big gap that we're trying to build in Texas.
But in majority of their locations we're in all the stores. So, it is national. And we've been national with the Whole Foods and we're just expanding by adding the ginger ale and then doing -- .

Yes, I was really comment on the hard ginger.

Another national promotion, which we did last year very successfully. And then we're expanding our presence in Sprouts as well. So I think just to reiterate, as I've said previously, what we've done is we've kind of scaled back rather tried to be everywhere with these products. Really start in retailers that we have high brand recognition and strong consumer following and leverage that. And we've done that pretty successfully with not only Sprouts and Whole Foods, but we've done it with some with Trader Joe's as well.
So yes, and then we're building and we've picked up another bunch of new authorizations as the weather gets warmer with the chains that we've done well with and are growing with our entire portfolio. So it's a real measured rollout that we can provide the proper focus and support behind and not get too far ahead of our skis. And we've seen with a slower approach, it's paid dividends and we've had growth as a result as opposed to trying to be everywhere at once and not be able to really prioritize and focus. And these are -- retail chains that we have long-standing and very deep relationships and partnerships with and are working together to build our entire brand portfolio.

And, do you anticipate the hard ginger rolling out in Trader Joe's anytime soon?

We're working on that. I mean, they were very interested in starting with the Mule. And I think as we continue to progress there, we can make an introduction for that for the hard ginger.

And then that's good to know. Lastly, I mean, you guys have commented that you're on track to kind of hit your revenue and cost goals. Can you share what those are really primarily to a revenue sales outlook? I know, 2024 was the rollout of the new sales implementation, but calling a spade a spade we just did the same number of sales we did in Q1 of 2020. So, if you guys anticipate coming out swinging with, $15 million, $20 million quarter here later in the year?

Well, look, I think what we've said all along is that we expect double digit sales growth and we expect continued margin growth. And I think we've demonstrated the margin growth. We expected improved performance on our shipping and handling, and we've done that.
I feel good about Q2 right now. And the remaining quarters. Look at Q1 was a race to build boxes and we didn't build them as fast as we had hoped, but it takes time. We've really solidified our inventory positions in both bottles and cans on both coasts, which will drive a lot more efficiency. And there's a cause and effect relationship that we've seen pretty shortly. And I watch real closely as the amount of short shipments go down, how it translates into throughput at retail.
And also with that, we haven't even really begun any sort of promotional activity we've held off in the first quarter where I know historically, we started in the first quarter and it's going to be middle second quarter where our promotional activity will kick in.
So I think we're going to get a boost from just being in stock and reducing short shipments. We're going to get a boost from our promotional activity kicking in and these things kind of play off and created a cadence which really generates growth, and we'll start to see that in the second quarter of this year. I think when we have our second quarter call that will be a lot clearer to people.

Operator

Thank you. There are no further questions at this time. I will now turn it back to Mr. Snyder for closing remarks.

Great. Thanks. I'd like to thank everyone for participating in today's earnings call as well as our employees, customers and of course, our shareholders. We appreciate everyone's support. We've made solid progress on our 2024 initiatives and look forward to providing an update when we report Q2 results later this year. Thank you, everyone.

Operator

Thank you. Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.