Reed's Inc. (NYSE: OTC:REED), a leading beverage company, has reported robust financial results for the second quarter of 2024. The company saw a significant increase in net sales, driven by a 70% year-over-year (YoY) surge in ginger beer sales and a 26% rise in Virgil's sales. Gross margin expanded by 720 basis points, while operating expenses as a percentage of sales decreased by 460 basis points.
Reed's also achieved a positive modified EBITDA and reduced delivery and handling costs by 16%. With a strong inventory position and the anticipation of launching a new portfolio of better-for-you beverages in early 2025, the company reaffirmed its financial targets for the full year.
Key Takeaways
- Reed's reported double-digit net sales growth in Q2 2024.
- Gross margin increased by 720 basis points; operating expenses margin decreased by 460 basis points.
- Ginger beer sales increased by 70% YoY; Virgil's sales up by 26% YoY.
- Modified EBITDA turned positive; delivery and handling costs reduced by 16%.
- Reed's is developing a new line of better-for-you beverages, set to launch in early 2025.
- The company reaffirmed its 2024 financial targets, expecting continued growth and profitability.
Company Outlook
- Reed's is confident in meeting its 2024 financial targets, including net sales growth, gross margin expansion, modified EBITDA profitability, and positive cash flow from operations.
- The company is focusing on strategic initiatives to fuel future growth and profitability.
Bearish Highlights
- Ginger ale sales remained flat, showing no growth YoY.
- Reed's reported an operating loss of $0.7 million, despite overall improvements.
- The company has $27.4 million in total debt as of June 30, 2024.
Bullish Highlights
- Strong demand and increased promotions contributed to net sales growth.
- Expanded product authorizations and reduced short order shipments bolstered sales.
- Gross profit increased by 53% to $3.8 million, with a gross margin of 32.3%.
Misses
- Despite the positive financial outcomes, there were some non-recurring items that increased general and administrative expenses, but they aligned with expectations.
Q&A Highlights
- Norman Snyder discussed cost reduction and efficiency improvements, including negotiating freight rates in six-month increments.
- Snyder spoke about the positive retailer feedback for the upcoming plant-based Ginger products.
- Reed's plans to provide a progress update in the next quarterly earnings call.
In summary, Reed's Inc. is navigating through a phase of strong growth and efficiency improvements. The company's strategic measures to optimize its product lineup and operations have started to reflect positively in its financial performance, setting the stage for a potentially successful launch of its new beverage range in the coming year. Reed's remains focused on maintaining this momentum to achieve its stated financial goals for 2024.
InvestingPro Insights
Reed's Inc.'s recent financial results indicate a company in transition, with significant growth in specific product lines and a strategy focused on efficiency and new product launches. To provide further context to the company's performance and outlook, here are some insights based on the latest data from InvestingPro.
The company's market capitalization stands at a modest $5.93 million, reflecting the market's current valuation of the business. Despite the positive sales growth in ginger beer and Virgil's, Reed's overall revenue has seen a decline of 17.05% over the last twelve months as of Q1 2024. This suggests that while certain products are performing well, the company may be facing challenges in other areas of its business.
InvestingPro Tips highlight that Reed's has a negative P/E ratio of -0.46 and an adjusted P/E ratio of -0.62 for the last twelve months as of Q1 2024, indicating that the company is not currently profitable. The negative PEG ratio of -0.01 further emphasizes this point. However, this is not uncommon for companies investing heavily in growth or undergoing restructuring.
InvestingPro also notes that the gross profit margin stands at 33.14%, which aligns with the company's reported gross margin expansion. This figure suggests that Reed's is effectively managing its cost of goods sold, which is a positive sign for potential profitability.
For investors looking for more detailed analysis, InvestingPro offers an additional 15 tips on Reed's Inc. These tips provide deeper insights into the company's financial health, stock performance, and potential investment risks or opportunities. With a fair value estimate of $1.55 from InvestingPro, compared to the analyst target of $3.00, investors should consider the range of perspectives on the company's value.
In summary, while Reed's faces challenges, its strategic focus and product development efforts could position it for future growth. Investors should monitor upcoming product launches and efficiency initiatives closely, as these could be pivotal in the company's pursuit of profitability and long-term success.
Full transcript - Reed’s Inc (REED) Q2 2024:
Operator: Good afternoon and welcome to Reed's Second Quarter 2024 Earnings Conference Call for the Three Months Ended June 30, 2024. My name is Emery and I will be your conference call operator for today. You will have prepared remarks from Norman E. 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, August 13, 2024, and the company is under no obligation to update them. When discussing results, the presenters may refer to non-GAAP measures, which includes certain items from reported results. Please refer to Reed's second quarter 2024 earnings release on Reed's investor website at investor.reedsinc.com and its second quarter 2024 form, 10-Q, expected to be available on the website on August 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 proceed.
Norman Snyder: Thank you, operator, and good afternoon, everyone. We appreciate you joining us today to discuss our second quarter 2024 results. We continue to execute on our growth and optimization initiatives in the second quarter as we generated double-digit net sales growth, material gross margin expansion, and positive modified EBITDA. I'd like to thank the entire Reeds team for the consistent hard work and dedication in achieving these solid results. As discussed on prior calls, our sales were previously impacted by an inflated rate of short-order shipments. We have since implemented certain measures to strengthen our inventory position and increase capacity through new co-packing partnerships. These actions have significantly reduced the rate of short shipments to a more normalized level. Turning to a few recent updates on our key product categories based on unit sales, Reed's ginger beer sales were up 70% year-over-year in the second quarter. Our ginger ale sales were flat year over year in Q2. However, year-to-date [indiscernible] cans sales were up 13%, compared to the same period last year. For Virgil's, we generated a 26% increase in sales for Q2 compared to the year-ago period. Reed's alcohol sales were flat for the quarter versus Q2 of 2023, but depletions in the category were up 16% over the same period. During the quarter, we made solid progress on our cost-cutting and optimization initiatives, reflected by a 720 basis point increase in gross margin and a 460 basis point decrease in OpEx margin compared to the year-ago quarter. Our gross margin expansion was driven by our consistent efforts to reduce input costs, shift our product mix from bottles to cans, and apply more consistent pricing across various channels. For delivering handling expenses, we experienced a 16% reduction in the quarter to a $2.18 per case, compared to $3.05 per case in Q2 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 partnerships. We've effectively brought down delivery and handling costs to approximately 12% of net sales compared to 17% in the year-ago period, and will continue to identify opportunities to reduce costs on a per-case basis. And lastly, with respect to cost-cutting, we reduced selling and marketing expenses in Q2 by 13% year-over-year by creating a more focused marketing strategy and a streamlining our sales process. We are progressing with our new product roadmap by leveraging fresh organic ginger to create a portfolio of beverages in the better-for-you lifestyle category that contains lower calories and levels of sugar. Our commitment to using the highest quality natural ingredients has been the cornerstone of our brand, ensuring a bold premium taste for our consumers. Although, we're in the early stages of development cycle, we've received positive feedback from several key retailers across different channels on our new product profiles. We will offer this line to select customers and expect to launch in early 2025. We are excited to introduce these innovative products to the market and look forward to offering our customers an exciting new portfolio of beverages that will enable the Reed's brand to expand into a high-growth category while allowing consumers to experience a natural plant-based functional refreshment. While we believe that our core assortment will continue to drive stable short and long-term growth opportunities, we also believe that this innovation will add to our yearly growth potential. Turning to our second quarter and recent sales and operational highlights. To start, we have successfully completed an enterprise-wide price repositioning process to drive margin expansion, optimize pricing for consumers, and enhance our ability to execute a robust promotional campaign. In the second quarter, we built solid momentum with this renewed strategy, strengthen our ability to meet our 2024 net sales guidance. As we move into the third quarters and fourth quarters, we anticipate realizing the annualized impact of our enterprise price repositioning efforts, which have been successfully completed to date. Next, we completed several promotions with some of our most impactful natural and grocery channel retail customers. Whole Foods, Sprouts, Publix, and Kroger (NYSE:KR), among several others, participated in our promotional offering in the second quarter. In the club channel, we launched Virgil's handcrafted variety packs in Costco (NASDAQ:COST)'s Bay Area and Midwest regions in our new 12-ounce standard can format. We also have plans to launch our new ginger ale winter variety pack in Q4 as we look to further expand our product assortment and enhance our partnership with Costco. With Stop and Shop, we added more than 900 new points of distribution during the second quarter for our Reed's and Virgil's product portfolios. We also launched our 12-ounce ready-to-drink classic mule in Walmart (NYSE:WMT) locations across California. While we are cautiously optimistic that our performance in California could lead to further expansion in the adult beverage category with Walmart. Additionally, we added just over 1,000 new points of distribution to Cracker Barrel (NASDAQ:CBRL), one of our longtime customers. Cracker Barrel has historically leaned into our unique and seasonal portfolio offerings. However, we have now expanded into our core assortment with ginger beer. Looking at broader channel opportunities, we have begun our initial rollout of our new 7.5-ounce ginger beer cans into the on-premise channel and select geographic territories. The initial reception has been very promising. As a result, we have onboarded two national food service broadband distributors to enhance the geographic reach of our new and existing DSD partners and enable us to more effectively serve the on-premise channel on a national scale. We will continue to evaluate opportunities in both the traditional on-premise and food service in the coming new-year. Subsequent to quarter end, we gained several authorizations for our branded seasonal products. First, we will be launching our new 750-milliliter Harvest Spice Cider and Sprouts. Next, we will offer our Bavarian Nutmeg Root Beer to our shared customer base in Whole Foods. We will also offer Butterscotch Beer, Bavarian Nutmeg Root Beer, and Harvest Cider with key regional partners such as Kroger, Bashas', H-E-B, Wegmans, Hannaford, and Ingles. And finally, we were awarded a seasonal test with Walmart to showcase our branded seasonal products. We expect this year's seasonal product execution to be a material contributor to our Q3 and Q4 results. In Whole Foods, we secured a second national authorization for our alcohol assortments due to our strong performance in last year's national off-the-shelf program. In June, we launched our Hard Ginger and Ginger Mule beverages across Whole Foods nationwide locations. We're pleased to offer these premium bowl-tasting ready-to-drink beverages to Whole Foods customers and look forward to deepening our alcohol offerings within the channel. Quickly touching on our co-packer partner, Battle Copacking, we kicked off our partnership with Battle in Q1 of this year, bolstering our production capabilities for both bottles and cans in the Southeast region. We've already realized operating efficiencies and cost savings from this partnership in Q2 and have since expanded our scope with Battle in the Southeast. We're pleased with the progress thus far and look forward to further building our partnership with Battle. We've made solid progress on our optimization initiatives thus far. However, we remain committed to uncovering additional areas in our business to drive further savings. For example, during the quarter, we began working with UNIX, a premier California-based co-packer, to drive efficiencies and cost savings in our packaging operations. Shortly after the quarter, we kicked off our partnership with DrinkPak, a state-of-the-art robotics contract manufacturer for alcoholic and non-alcoholic canned beverages, providing full-service support for procurement, batching, processing, packaging, and distribution. DrinkPak will supplement our Club Pack initiative and we expect to realize the benefits from this partnership in the back half of this year. In our e-commerce business, we launched our new virtual cans on both Shopify (NYSE:SHOP) and Amazon (NASDAQ:AMZN) in June. The early results are promising as we are seeing consistent month-over-month volume in sales growth. While this channel currently accounts for a small part of our business today, we are encouraged by its progress and plan to invest in more resources as it grows into a larger revenue contributor in the future. Looking ahead, we are reaffirming our financial targets for 2024 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. Our strategic initiatives are bearing fruit, setting the stage for further growth and improved profitability. With a strengthened inventory position, optimized cost structure, and continued demand for Reeds products, we believe we are well positioned to deliver on our goals in the back half of the year. Before wrapping up with closing remarks, Joann will cover our financial highlights for the quarter in more detail. Joann, 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 Q2 2024 increased 19% to $11.9 million, compared to $10 million in the year-ago quarter. The increase was primarily driven by strong demand for Reeds products, increased promotional activity, expanded product authorizations, and a reduction in short order shipments compared to the year-ago period. Gross profit for the second quarter of 2024 increased 53% to $3.8 million, compared to $2.5 million in the same period of 2023. Gross margin increased 720 basis points to 32.3%, compared to 25.1% in the year-ago quarter. The increase was primarily driven by higher net sales and lower supply chain and input costs. Delivery and handling costs were reduced by 16% to $1.4 million during the second quarter of 2024, compared to $1.7 million in the second 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 partnerships. Delivery and handling costs were reduced to 12% of net sales or $2.18 per case, compared to 17% of net sales or $3.05 per case during the same period as last year. Selling general and administrative costs were $3.1 million during the second quarter of 2024, compared to $2.6 million in the year-ago quarter. As a percentage of net sales, selling general and administrative costs remained flat at 26%. Altogether, operating expenses were $4.5 million or 38% of net sales, compared to $4.3 million or 43% of net sales in the year-ago period. The improvement in OpEx margin reflects our consistent efforts to optimize our cost structure. Operating loss during the second quarter of 2024 improved to a loss of $0.7 million or $0.16 per share compared to a loss of $1.7 million or $0.55 per share in the second quarter of 2023. Modified EBITDA improved to $45,000 in the second quarter of 2024, compared to a loss of $1.6 million in the second quarter of 2023. For the second quarter of 2024, cash used in operations was $0.9 million, compared to $3.4 million for the same period in 2023. The decrease in cash used was primarily driven by lower inventory purchases, compared to the year-ago period. As of June 30, 2024, we had approximately $0.3 million of cash and $27.4 million in total debt net of capitalized financing fees. This includes $18.4 million from our convertible notes and $9 million from our revolving line of credit, which has $3.8 million of additional borrowing capacity. Last week, we announced the close of a Bridge Financing [Technical Difficulty] with one piece of a profit that does not include the net piece of finance. I will now turn the call back over to Norman for closing remarks.
Norman Snyder: Thank you, Joann. I mentioned earlier, strategic initiatives are bearing fruit and have been set to the stage for further growth and profitability in the back half of the year. Between our safe, healthy inventory levels and strong demand to Reed's products, we believe we are well positioned to successfully execute our goals ahead. Operator, we will now open the call for questions-and-answers.
Operator: Thank you, sir. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions]. Our first question comes from the line of Mr. Sean McGowan from ROTH Capital Partners. Please go ahead.
Sean McGowan: Good afternoon, guys. How are you?
Norman Snyder: Good, Sean. How are you?
Sean McGowan: Good. Good. Yeah, I'm sure Sean [ph] mentioned this is the earthquake, so we're surviving. It's all fine. Question on gross margin. Do you think that did this quarter come in kind of as expected or a little softer or a little stronger? And do you think that there's room for improvement from here?
Norman Snyder: It came in as we expected, Sean, and we do believe there's room for additional improvements. You know, we continually search for ways to reduce costs and are implementing some additional measures during the current quarter.
Sean McGowan: Okay. So those freight lane reductions, you guys, we haven't seen the full benefit of that yet?
Norman Snyder: Well, we're seeing part of it. We'll continue to. We tend to negotiate freight rates in six-month increments. So, you know, we're seeing part of it. As also we mentioned earlier, the bringing on battle copacking in the southeast really helps reduce further freight costs to get to our larger customers in the southeast in Texas. So we'll see more of that play out in the latter half of the year as well.
Sean McGowan: Okay. And G&A was a little higher than we would have thought. Is there anything in there that you think drove it up unusually or should we expect it to sustain at this level?
Norman Snyder: No, there were a couple of non-recurring items that you'll see in the EBITDA, modified EBITDA reconciliation that drove it up a little bit higher. But if you remove those...
Sean McGowan: Okay.
Norman Snyder: You know, they're where we thought they would come out.
Sean McGowan: Okay. Yeah. I thought that, there was like that severance. Would that be in G&A?
Norman Snyder: Yeah, that would be in it. There was some legal costs, some other professional costs that were in there as well.
Sean McGowan: Okay. All right. Perfect. Thank you. And then last question. The cost is breaking up a little bit at times, and I kind of missed what you said about products launching in early 2025. I'm wondering if you could give us, if you could repeat what they were and give us a little bit more color on that.
Norman Snyder: Yeah. I mean, look at Ginger, you know, there's been a lot of parents of plant-based food and beverages over the last five years, decade. And Ginger, we really believe we were the first ones in the party. I mean, obviously, Ginger is a plant-based item that has tremendous efficacy. And just looking at the current trends that have recently appeared, I mean, lower calorie and lower sugar levels have really taken a very dominant position in the beverage space. And obviously, we believe that our Ginger products coupled with lower levels of sugar and calories would do very well. And we've shared some of those ideas with some key retailers and have received really positive feedback on our positioning and both the taste and the efficacy and other things. So, we're really excited about, look at Reed is we're really about Ginger and have been a leader in that category and look forward to continue leading into the future with our innovation.
Sean McGowan: Okay. Thank you.
Operator: Thank you, Mr. McGowan. At this time, there are no more questions. This concludes our question-and-answer session. I would now like to turn the call back over to Mr. Snyder for closing remarks.
Norman Snyder: Thank you. 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'll continue to make solid progress on our 2024 initiatives and look forward to providing an update when we report third quarter results later this year.
Operator: Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation. Have a great day.
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