Q3 2023 Reed's Inc Earnings Call

Participants

Norman Snyder; CEO; Reed's Inc

Joann Tinnelly; CFO; Reed's, Inc

Presentation

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)
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 environments, the economic impact of the war in Ukraine, and other information detailed from time to time in range filings with the United States Securities and Exchange Commission.
These statements including 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 that 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 10K, which was filed with the SEC on May 15, 2023. Although management believes that the expectations reflected in forward-looking statements are reasonable management, I 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 Reeds 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 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 rationale for using them can be found and in this morning's press release. In Reed's SEC filings and posted on reads investor website at investor.reed'sinc.com. I will now turn the call over to Mr. Snyder.

Norman Snyder

Thank you, Drew, and good morning, everyone. We appreciate your 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 Ternium modified Ebitda profitable.
We also hit our target of realizing $6 million in annual operating expenses 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 shorter 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 its products remain strong, our ongoing efforts to augment inventory levels to reduce the rate or short order shipments with our improved profitability, we believe we are well positioned to more effectively fulfill demand and return the growth in 2024.
Turning to a few updates on our key product categories based on Loulo 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 are they tracking software for distributor base 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 cans sales grew 56% year to date and 100% to 4% for the four weeks ending October 8, compared to the year 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, again, 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 remainder, driven by new retail accounts such as Minor, Roundy's and Target. As we've mentioned before, they're ready to drink alcohol category remains a compelling growth opportunity for reads, given our brand awareness, the segments consistent growth, 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 verticals craft soda portfolio are nude zero Sugar slim cans sales or a buyback share to date in 86% for the four weeks ending October 8, compared to the same periods last year. Offset by lower standard cans sales as we similarly have work to emphasize a 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 4,100 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. Infact we lowered our average cost of goods sold by, 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 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 have come down further on a cost per case basis. Additionally, we brought down our selling and Mark 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 profitability, profitable growth and lower cereal sales price for our consumers.
Since the conversion sales volume improvements have eclipsed 38% unit growth week-over-week. Given the positive results, we plan a 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 Recharge Ginger Ale and classic Mule.
For the 12 week period ending October 15, alcohol sales have increased over 120% year over year, and 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, and CG is one of our highest velocity chains with rates 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 representing a small portion of our business today, we are taking 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 last conference call, in July, we partnered with Somerset cider Solutions, a leading UK beverage manufacturer, to produce virtual soda in market in more cost-effective manner.
We began production and started distributing products in the UK during the third quarter. And although we're only a few months in, we are encouraged by the early results as (technical difficulty) assets and as a new export model enables us to be more price competitive.
We are positioning rates for further expansion overseas as we evaluate additional EU distribution partners. A quick 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. For experience in finance and accounting for both public and private companies as well as our execution of Interim CFO makes her the ideal candidate to lead our finance team.
And we're 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 utilized cash to increase our inventory in the fourth quarter.
However, we expect to maintain our modified Ebitda profitability exceed our guidance, 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 one-time packaging inventory valuation adjustments in the fourth quarter of 2023, that impact our gross margin for the year.
Excluding these non-cash accounting adjustments, we continue to expect surpassing 30% gross margin for 2023. Before wrapping up the call with closing remarks, Joann will cover our financial highlights for the quarter in more detail. Joann, over to you.

Joann Tinnelly

Thanks, Norm. Guiding into our results. All variants 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 the late seasonal shipment and to lesser 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, improve 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 $2.1 million or a loss of $0.03 per share, compared to an operating loss of $2.5 million or a loss of $1.9 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 use and operations was approximately $1.8 million compared to $0.2 million for the same period in 2022. The increase in cash use was primarily driven by higher inventory purchases compared to the year-ago period.
Has 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 has $3.1 million of additional borrowing capacity. I will now turn the call back to Norm for closing remarks.

Norman Snyder

Thank you, Joann. I'm grateful for the hard work to each team has put in this year, and I'm excited to build on this foundation in 2024 as we reach as we return to sales growth, expand margins further improve our bottom line. With ongoing efforts to bolster inventory levels and optimized cost structure and continued strong demand for our robust product portfolio. We are well position mission to deliver on these objectives. Operator, we'll now open the call for Q&A.

Operator

We will now begin the question-and-answer session.
(Operator Instructions)
This concludes our question and answer session. I would like to turn the conference back over to Norman Snyder for any closing remarks.

Norman Snyder

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.

Operator

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