Reed's Inc. (OTC:REED), the beverage company known for its ginger-based drinks, has reported an encouraging start to 2024 with its first-quarter earnings. Despite facing challenges with short orders that impacted shipments, the company has made significant strides in improving its gross margin and operating expenses. Reed's also reported progress in its product categories, including ginger beer and ready-to-drink (RTD) alcohol, and has taken steps to optimize cost structures and expand distribution.
Key Takeaways
- Reed's Q1 2024 net sales totaled $9.6 million, with a gross profit increase of 26% to $3.4 million.
- Gross margin improved to 35.6%, and operating expenses were cut by 23% year-over-year.
- The company's modified EBITDA loss improved to $0.4 million, and operating loss was reduced to $2.6 million.
- Cash used in operations amounted to $2.4 million, with $0.3 million in cash and $26 million in total debt as of March 31, 2024.
- Reed's has partnered with Battle Co-Packing and renegotiated freight contracts for production and cost savings.
- The company is focused on maintaining gross margins above 30% and achieving growth and profitability through inventory optimization and e-commerce expansion.
Company Outlook
- Reed's reiterated their financial outlook for 2024, expecting net sales growth, gross margin expansion, and positive cash flow from operations.
- The company plans to bolster inventory to manage short shipments and support anticipated sales growth.
- Efforts to expand in retailers like Whole Foods, Sprouts, and Trader Joe's are ongoing.
Bearish Highlights
- Q1 faced challenges due to short orders reducing shipments, which impacted sales.
- The company had a modified EBITDA loss of $0.4 million and an operating loss of $2.6 million for the quarter.
- Cash used in operations was substantial at $2.4 million.
Bullish Highlights
- Reed's saw growth in key product categories, including ginger beer and RTD alcohol.
- The company completed an equity offering and is on a path to become cash flow positive from operations.
- Plans to introduce a new product, hard ginger, are set to potentially boost sales further.
Misses
- Despite improvements, the company still reported an operating loss and a modified EBITDA loss for the quarter.
- The cash position remains low at $0.3 million, with a high total debt of $26 million.
Q&A Highlights
- The decrease in operating cash flow in 2023 was primarily due to higher inventory purchases to improve short-order shipments.
- Reed's is working on further reducing fixed costs and driving operational leverage.
- The company expressed confidence in achieving its 2024 goals, with updates to be provided in the next earnings call.
Reed's is navigating a competitive beverage market with a focus on growth and profitability. The company's efforts to improve its gross margin and reduce operating expenses, while expanding its distribution and product offerings, are central to its strategy. With a commitment to maintaining a gross margin above 30% and leveraging operational efficiencies, Reed's aims to return to growth and strengthen its financial position in the coming year.
InvestingPro Insights
Reed's Inc. (REED) has been actively managing its financials and operational strategies to steer towards growth. The latest real-time data from InvestingPro provides a clearer picture of the company's financial health and market performance as of Q4 2023.
InvestingPro Data highlights a market capitalization of $6.39 million, indicating the company's current valuation in the market. Despite the challenges faced, Reed's has managed to maintain a revenue of $44.71 million over the last twelve months. This demonstrates the company's ability to generate sales amidst a competitive landscape. However, the revenue growth shows a decline of -15.7% over the same period, which may raise concerns about the company's ability to sustain and increase sales.
The gross profit margin stands at a solid 30.38%, aligning with the company's focus on maintaining margins above 30%. This metric is crucial as it reflects Reed's ability to control production costs and manage pricing effectively, a key aspect mentioned in the article.
InvestingPro Tips suggest that investors should closely monitor the upcoming earnings date on May 16, 2024, as it will provide further insights into the company's performance and strategic initiatives. Additionally, the fair value estimated by analysts is $3 USD, while InvestingPro's fair value assessment is at $1.65 USD, offering different perspectives on the stock's potential worth.
For readers looking to delve deeper into Reed's financials and gain additional InvestingPro Tips, a subscription to InvestingPro can provide that edge. With the use of the coupon code PRONEWS24, readers can enjoy an extra 10% off a yearly or biyearly Pro and Pro+ subscription. Currently, there are several more tips available on InvestingPro that can guide investment decisions regarding Reed's Inc.
In summary, while Reed's Inc. faces challenges, the company's commitment to maintaining a strong gross profit margin and the potential for growth as indicated by the fair value assessments provide a nuanced picture for investors.
Full transcript - Reeds BATS (REED) Q1 2024:
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.
Norman Snyder: Thank you, Operator, and good afternoon, everyone. We appreciate you joining us today to discuss our first quarter 2024 results. We continue to execute on 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 partnership. 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, [Loulo] [ph] 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, Walmart (NYSE:WMT), club, Dollar Stores, and military channels, and VIP data, which is a tracking software for distributor-based shipments. Reed's extra ginger beer to generate 8% year-over-year growth. Ginger ale grew 9% during the four-weeks ended April 21 compared to the year-ago period. In our virtual craft soda portfolio, Root Beer saw a 13% year-over-year increase in unit sales. For our ready-to-drink alcohol portfolio, we experienced a 10% increase compared to the year-ago period. We are making progress on our new product roadmap 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 offerings. As I mentioned earlier, we made solid progress in our cost-cutting and optimization initiatives in Q1, leading to a more than 1000 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 in the quarter to $3.01 per case compared to $3.46 per case in Q1 of 2023. We drove these savings by renegotiating freight rates for heavily trafficked 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 savings. 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 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 longstanding partnership with Battle. 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's recent sales and operational highlights. To start, we are set to kick off our first market product launch in Sprouts with Virgil's Full Sugar Handcrafted Soda Cans and Black Cherry, Cola, Vanilla Cream, and Root Beer flavors in both multi-packs and single cans, beginning tomorrow, May 15. We also expanded our alcohol assortment in Sprouts with the addition of 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 our alcohol assortments starting in June 2024. Additionally, after a successful test launch in the summer of 2023, hard ginger ale has been subsequently added to Whole Foods' core product sets. Next, we launched Virgil Zero Sugar Packs in Costco (NASDAQ:COST)'s Texas locations with plans to launch our new 7.5-ounce Ginger Beer Mini Cans in 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 banners of ShopRite, Price Rite, Fairway, and SRS, by adding more than 2,600 points of distribution for our Reed's product portfolio. We have also added over 1000 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 increase trial and brand awareness over Reed's products. 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're also in the process of launching our new Virgil's Cans on both Shopify (NYSE:SHOP) and Amazon (NASDAQ:AMZN) 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 will continue to invest resources as it becomes a larger revenue contributor in the future. Looking ahead, we are 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 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. Joanne, over to you.
Joann Tinnelly: 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 order 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 1140 basis points to 35.6% compared to 24.2% in the year-ago quarter. The increase was 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 trafficked 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 $3.01 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 of 2024 improved to $2.6 million or $0.16 per share compared to a loss of $2.6 million or $1.01 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 looked to improve the rate of short-order shipments moving forward. As of March 31, 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 Norman for closing remarks.
Norman Snyder: 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.
Operator: Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] Your first question comes from Sean McGowan, ROTH. Sean, please go ahead.
Sean McGowan: 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 was not shipping that might affect that? Or is this a rate we might come to expect in the coming quarters?
Norman Snyder: More the latter. Look, we have taken costs of a lot of elements in our COGS, and we believe we 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, I have been surprised by the pace at which we have converted and how both retailers and consumers have received our product offerings and cans.
Sean McGowan: Okay. It is good to hear. Can you talk about generally the category of RTD alcohol? Are you seeing overall trends in the category continue to be favorable? I know it sounds like your sales are going quite well, but has there been any slowdown in the category?
Norman Snyder: Look, I think there have been some of the bigger players that came out really strong have seen a pullback in their sales, but I think that is because of competition and more offerings, which I think bodes well for us and obviously why we are seeing growth. I think the overall category continues to grow. I think consumers are looking for better for you, more premium products, and I think that is something that we offer and believe will continue to see growth.
Sean McGowan: Great. Thank you. And then, a couple of housekeeping questions on the balance sheet. So this equity offering that is on the balance sheet, I assume that sale is complete as of the second quarter, so that becomes additional paid capital then?
Norman Snyder: Yes, that will convert to equity and we expect that to be completed during the second quarter, yes.
Sean McGowan: Okay. Would there be additional cash raised? I seem to remember this came in multiple bids, or at least that is the way I built the model. Is there some amount of cash that was raised in the first quarter and some in the second quarter?
Norman Snyder: Yes, it will be split. The majority was in the latter part of the first quarter, but there is still interest to complete that during this quarter.
Sean McGowan: That is what we have built into the model, so I appreciate that. How many shares outstanding are there as of right now?
Norman Snyder: I think, in the Q, there are 4,187,000 shares that are outstanding. That does not reflect the SAVE offering.
Sean McGowan: Oh, okay. When will the Q be out, in a couple of days?
Norman Snyder: Q will be out tomorrow.
Sean McGowan: Okay. All right. Thanks a lot. Look forward. Thank you.
Norman Snyder: I apologize, Sean, I realize we have not filed that yet. So that's filed tomorrow.
Sean McGowan: I am trying to pull a Karnak here and figure out what the number is. Thank you.
Operator: Thank you. Your next question comes from [Gary Gates] [ph]. Gary, please go ahead.
Unidentified Analyst: With the SAVE offering, do you know at what price the shares will be converted?
Norman Snyder: No, that is to be determined. There is a provision in there, obviously, we set a floor, but the price will be the better off. So again, that is to be finalized.
Unidentified Analyst: Do you know what the floor is?
Norman Snyder: I think we set it at, I want to say like $1.50, I believe we set it at.
Unidentified Analyst: Okay, good. Okay, here is my big question. I give you and the entire company a lot of credit for trying. Right now, we are slowly headed to cash flow positive from operations, but there is very little cash on the books. And we also have interest expense, which leads to more debt and more shares being outstanding. Where do you see this headed to and over what period of time? I am speaking as an investor.
Norman Snyder: The debt has a blocker on what percentage they can own. It is capped at 9.9%. So there is 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 [PIC] [ph], so it is not all due and immediately paid for. I think we have 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 products and generate positive cash flow. And we will continue to work with our lenders to work out a situation that is favorable to all parties in an effort to really bring that debt load down.
Unidentified Analyst: Okay. I recognize that part of the debt is PIC. When do you see Reed's getting to a point of being cash flow positive, not only from operations, but also from a debt standpoint?
Norman Snyder: That is our current focus. I would like to say towards the latter part of the year, we are generating enough cash to both cover our operations and service our debt requirements.
Unidentified Analyst: Okay. Good. Good. That is encouraging.
Norman Snyder: Obviously, we have made tremendous progress with our gross margin. We have made tremendous progress with our transportation costs, and we are not done with that. We continue to bring down our SG&A costs, which just translate into, as we grow our top line, translates into generating more cash.
Unidentified Analyst: Okay. Good. Any feedback from last year's investor, [Shufen Deng] [ph], on what she wants to do with the company? Earlier, there was talk about her trying to introduce Asian products into the U.S.
Norman Snyder: No. Actually, I think it is 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 U.S. market. To continue to build Reed's and to leverage our brand equity in foreign markets where they have a lot of contacts and understand the marketplace and are willing to support that.
Unidentified Analyst: Okay. 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?
Norman Snyder: 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 has been plant-based drinks and food. Ginger is a plant-based item. We're the only mass ginger beer and ginger ale that uses real ginger in their products, which to me is a big, big point of difference, particularly compared to our competition. 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 advances in research that we've done to make some very, very, very great products, 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, really good products.
Unidentified Analyst: Good, good. Yes, well, you do. You do. And wish you the best, and thanks so much for the call.
Operator: Thank you. Your next question comes from [Will Bandejo] [ph], private. Will, please go ahead.
Unidentified Analyst: 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 is Sprouts nationwide as well? And what's the timing on them?
Norman Snyder: They're both nationwide, except for a couple 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 are trying the big gap that we're trying to fill is in Texas. But in majority of their locations, we're in all the stores. And so, it is national. And we've been national with the Whole Foods. We're just expanding by adding the ginger ale and then doing --
Unidentified Analyst: Yes, I was really commenting on the hard ginger.
Norman Snyder: Yes. 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 try 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 Trader Joe's as well. And then we're building, and we've picked up another bunch of new authorizations as the weather gets warmer with the change 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 out 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 being able to really prioritize and focus. And these are retail chains that we have longstanding and very deep relationships and partnerships with and are working together to build our entire brand portfolio.
Unidentified Analyst: Right. Okay. That's good to know. Do you anticipate the hard ginger rolling out in Trader Joe's anytime soon?
Norman Snyder: 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 the hard ginger.
Unidentified Analyst: Okay. And then that's good to know. Lastly, you guys have commented that you're on track to 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, do you guys anticipate coming out swinging with a $15 million, $20 million quarter here later in the year?
Norman Snyder: 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 expect improved performance on our shipping and handling, and we've done that. I feel good about Q2 right now and the remaining quarters. Look, Q1 was a race to build boxes, and we didn't build them as fast as we had hoped. But it takes time, and we've really solidified our inventory positions in both bottles and cans on both coasts, which will drive a lot more efficiencies. 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've started in the first quarter, and it's going to be middle of 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 create 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'll be a lot clearer to people.
Unidentified Analyst: Okay. Awesome. Appreciate the update. Keep up the good work. I'll hop back in the queue.
Operator: Thank you. There are no further questions at this time. I will now turn it back to Mr. Snyder for closing remarks.
Norman Snyder: 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.
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