Reed's CEO Discusses Q4 2012 Results - Earnings Call Transcript

| About: Reed's, Inc. (REED)

Reed’s Inc. (NASDAQ:REED)

Q4 2012 Earnings Conference Call

March 26, 2013; 04:15 p.m. ET

Executives

Chris Reed - Chairman & Chief Executive Officer

Jim Linesch - Chief Financial Officer

Neal Cohane - Senior Vice President of Sales

Analysts

Ken Moss (ph) - Moss Management (ph)

Joe Mondillo - Sidoti

Torin Eastburn - Monte Sol Capital

Operator

Ladies and gentlemen, welcome to the 2012 year-end results conference call. Your host today Mr. Jim Linesch will now begin.

Jim Linesch

Good afternoon everyone. My name is Jim Linesch, the Chief Financial Officer of Reed’s. I would like to welcome all of you to our year-end earnings conference call. With me today is Mr. Chris Reed, Reed’s Chairman and CEO; and Neal Cohane, our Senior VP of Sales.

I would like to remind our listeners that in this call management’s remarks may contain forward-looking statements, which are subject to risks and uncertainties, and management may make additional forward-looking statements in response to your questions. Therefore the company claims to protection of the Safe Harbor for forward-looking statements that are contained in the Private Securities Litigation Reform Act of 1995.

Actually results may differ from those discussed today due to such risks, but not limited to risks related to demand for the company’s products, attendance of third party distributors, changes in the competitive environment, access to capital and other information detailed from time-to-time in the company’s filings with the United States Securities and Exchange Commission.

In addition, any projections as to the company’s future performance represent management’s estimates as of today, March 25, 2013. Reed’s Inc. assumes no obligation to update these projections in the future as market conditions change.

Now I’d like to make a few brief comments about our financial performance for the year and for the fourth quarter. This will be followed by Chris Reed, who will give us an outlook of the company’s business at this time.

Our 2012 results continue to reflect the strength in momentum throughout our business in primary areas. Revenues continue to increase broadly among our brands. The cost of our premium products are being managed well in relation to our sales prices. We have two primary long-term brands that are healthy and growing, while we also introduce new brands with the capability of accelerated growth.

Our fourth quarter continued our momentum, however the results also reflect some cost of our expansion. Our future rollout has involved an high level of promotions and our earlier batches had conservative shelf dating, resulting in shot date returns. Our fourth quarter results also reflect lower than anticipated private label revenues, primarily from a single customer.

Due to the other lighter purchases, we did not earn the margin contribution that we planned for in the quarter and we also have to sell off raw materials at a loss, resulting in our overall gross margin percentage come down by approximately 1% in the fourth quarter. The increased costs and lower margins in the fourth quarter are largely due to non-recurring costs, although our promotional costs will continue with higher levels into 2013.

Our revenue and cased volumes increases average 20% in 2012 with our Virgil’s and Reed’s Ginger Brew lines continuing to contribute approximately the same volume of revenues. Before discounts and allowances, our gross margin percentage on branded product sales increased by about 2% in 2012.

Our DSD distribution network revenues increased by about 50% in 2012, bringing that channel to over 10% of our overall sales. We have added a number of key DSD’s and we continue to expand our sales support. Large natural food distributors continue to be our primary customers, representing over 50% of our sales revenues and most of our sales revenue growth, direct to cans represent about one-third of our revenues.

Our organizational cost structure has not increased substantially in 2012. With direct operating cost increasing less than 10% we are progressively increasing the size of our sales staff, however the direct cost of those increases are increasing at a far lower percentage than what we are experiencing in revenue increases and gross margin increases, so we are gaining economies of scale.

Our EBITDA earnings were approximately $1 million in 2012. From that our interest costs were about $660,000 and our CapEx spending was about $507,000. Our net working capital was $2.3 million at year-end, with cash of $1.1 million and this year we are adequately capitalized to carry out our continued expansion into 2013.

Now, I’d like to turn this call over to Chris Reed, our President and CEO. Thank you.

Chris Reed

Thanks Jim. Jim, can I ask for one clarification. When you said the branded sales for 2012, it almost sounded like they were flat year-over-year, but I don’t think that’s what you meant. I think they…

Jim Linesch

Oh no, they’ve grown at a rate of over 20% and what I meant was that they are split pretty much evenly between our Reed’s Ginger Beer and our Virgil’s line.

Chris Reed

Okay, thanks. I just wanted to make sure and clarify that. Thanks for coming to the Reed’s conference call for the year-end 2012. I appreciate everybody taking the time. Also this will be recorded and up on our website or our IR site for anyone who wants to go over more closely or share it.

So definitely an exciting time for Reed’s. I’m proud of another great year of growth here. Obviously you can never grow enough to totally make all of the path you would – nothing we’ve seen about 20% growth and even more growth with the gross profit, which is probably the higher focus here. As we want to fuel more and more growth of our company here, you got to do it both ways, revenue and gross profit.

The Kombucha is probably the highlight of what’s going on here. Although the branded business continues to surprise us, actually I think the January was our record-breaking month for the extra Ginger Brew one. January is not seasonally a really strong month for our soft drink sales, so we are very excited to see the brand’s really still being and continuing to be the driving force of the company.

We have some very exciting things going on. Private label that were coming as slow, the slow long lead private label projects; we should see a number of them dip in 2013 that will be material. So we are excited about what’s going on with private label.

We love it for what it does for gross profits, but definitely we like the relationships that we build with key retailers around the country and I think we have one new one that’s with a $12 billion company. It’s just nice to marry up with these large enterprises that can be significant players or partners for us in the future. But the most exciting thing is the kombucha. I think most people on the call are trying to figure out what’s happening with us and what to expect.

We ended the year running at about $2.5 million run rate. Well, the first productions were late June and the first sales in July and the actual hard launch was November 1. So we had 60 days to show our rate of sales there by the end of the year and we received a tremendous amount of trials, but there’s surprisingly a large number of people, as we found over the years in the grocery industry that have said yes and are still waiting to put it into full distribution, so.

Anyway we are very excited by what we see as the pipeline of people who’ve agreed to and are still waiting to carry the product and for ourselves, my guidance on the kombucha for the year is that we feel comfortable and we’re working very, I don’t know, say scientifically, the very focused way towards reaching a run rate closer to $7 million to $8 million by the end of year, and for us that translates to about $30,000 cases, a month of sales at about $21, $22 a case, and if we reached that at the end of the year, in theory that would produce somewhere around $150,000, close to $200,000 of gross profit for the quarter or per month.

So as we covered our nickels here or covered the overheads so to speak, there has been a lot of pent-up pressure to expense, so particularly sales and marketing. There’s been a lot more time and energy spent on knowing as we have crossed that threshold of being a company in 2007 that lost $5 million a year to a company that’s now generating cash and crossing a threshold in 2013, looking likely we’ll generate a significant amount of cash this year.

We’re obviously concerned or sensitive to the Wall Street shareholder who is interest in seeing earnings and only value the company on earnings, but we kind of know that we’ll be valued by our revenues and the core business of our company and probably more of gross profit than anything, in any kind of an acquisition that will happen in five to seven years. And so that’s kind of the goal of the company, is to take the starting point that we finally reached here and start accelerating growth that way.

So what I’m trying to say is there is a sense of interest into funding and fueling more aggressive marketing than the lien years through the said economy, have kind of constrained our sales and marketing.

We are trying to curtail it, so that we don’t use up all of the newly found gross profit. So we expect to show profitability in 2013, but we also expect to continue to reach out to marketing experts and brand experts to try to supplement what we have in-house here and you’re starting to see a little bit of the marketing going on, but there’s a tremendous amount going on behind the scenes on how to position this company for a large amount of exposure to the U.S. consumer popular.

So it’s going to – probably won’t be serious programs launched this year, but tremendous amount of testing of different marketing theories will be going on. Most of the marketing dollars and acceleration in expense on sales and marketing will be coming and be happening with the kombucha launch.

I think that last year when I was giving guidance on what was going on, we really jumped into a category running at 30% to 35% growth clip, without any marketing or advertising, just organic growth, mostly being driven by the number one lead company running over $200 million in sales.

So jumping into this large pool, with horsepower in the background of the Reed’s company being the coke of the natural soda industry and dominating the natural soda component of it, we had high expectations that maybe this would be a roll over and we would just quickly jump into full distribution and be running probably even at the end of the year or probably even gave guidance that we were running somewhere between $5 million and $7 million a year in 60 days.

The response has been tremendous. The amount of feet dragging by large retailers has been – probably shouldn’t surprise us, but I’d like to make the excuse that every time we’ve launched a product in our company; we’ve always launched individual products. Even the first product was launched individually and Virgil is when I thought that was a root beer and we added a cream soda. This is really the first time we’ve reached out to our industry and said, you know we’d like a pretty large section in the store for our brand and for our line.

The good news, really if you were to pull aside people like Neal Cohane, the National Sales Manager or any of the sales people in Reed and you were to secretly get a conversation with them, you would see just the tremendous amount of enthusiasm about the response on this product.

Two weeks ago, three weeks ago we announced the doubling up of the flavor line into four more very exciting flavors of kombucha and there were some pretty surprising new flavor choices. Some of the most exciting to me are the kombucha Coconut Water Lime and that product, the response at the trade show was tremendous and its because we feel like we really outdid ourselves a bit with the flavors, the Cabernet Grape Kombucha and then we have a Passion Mango Ginger and a Pom, not a Pom, but Pomegranate – I wanted to say POM Wonderful, but a Pomegranate Ginger, where by the way we buy from POM Wonderful, organic single string pomegranate juice.

It is an amazing pomegranate product. They make their own products from concentrate. So this is actually a higher level Pomegranate product than the POM Wonderful. And these products, the strength of that selection of flavor has our customer base, the early adaptors like earth there saying yes, we want to four new flavors; Jimbo's, yes; Airone, yes. So we are hearing a tremendous amount of yes, which is exciting for us.

Now even here, I think I probably beat Neal up quite a bit during the last quarter asking for data. We’ve also found or bought ourselves some portals that will allow us to look into the retailers and see what’s happening in a store on a weekly or monthly basis and to watch the sales happening in real time.

And what we found is in an A-account, what we call an A-account, which is like the whole food style, natural supermarket, we are running somewhere between 15 and 20 cases a month right now and on an annual basis, a couple of hundred cases times 20 plus boxes, around 4,000 a year and there are around 3,000 super independent or chain oriented natural food supermarkets alone and outside of that is probably an equal number of accounts, the equivalent type business.

So we feel like we are looking at with the first four flavors, based on the current sales without any advertising on a steady, full margin basis. We are somewhere between $15 million and $25 million worth of new business, that we feel pretty comfortable that we’re staring at and it needs to be executed.

So it’s blocking and tackling and grabbing stores. We have a certain amount of marketing yet to do. It doesn’t always work every time we just throw it on the shelf, although a lot of times it does probably somewhere around five out of seven. Just putting on the shelf is enough, but generally speaking we do a little marketing and after that the stores tend to be running at a pretty good cliff with the products.

We’ve seen a lot of data. I’ve seen somewhere around 100 stores individual data and its coming out pretty much across the board in that schematic or that kind of sales figure; about 15 to 20 cases a month.

So based on those numbers and the fact that we’re at our infancy with the brand, I can of imagine trying to evaluate Reed’s Extra Ginger Brew 25 years ago and projecting where that’s going to go, saying that that’s the mature level for a product that’s pretty much unknown to the Kombucha customers.

We would hope to see acceleration. We definitely will hope to see more people bringing on the full line, going up to eight products this year, but most of the new business that we’re going after for Kombucha, its still waiting to come on. I think right now to give some numbers out, we’re in 60 of the whole foot stores into 300 plus of them, so they believed the change and said yes to us. Even last year in November they were telling us yes and telling us, well we have a time of the year where we reorganize that shelf and you’re going to have to wait till April, May.

We feel pretty comfortable with the guidance that by the end of the year our run rate will triple from where it is now and we can taste or see or extrapolate the numbers of the current sale to a very significant win with kombucha, without the numbers accelerating from this point. I mean, just looking at the current numbers and the four new products.

So that is what all of us want to our employers, with management owning so much stock and the key employees are very well positioned in our stock options that they are tasting success and we hope that next year when we’re sitting down having this conversation that our 2013 will be something in a different, even different than the normal year-over-year results that we currently see.

And quite frankly, probably I would say, my guidance would be that kombucha will add at least as much new business as our brands have on a regular basis here. Obviously its not hard to fix, but our best guess of things is that whatever our core brands have been generating on an annual basis, Kombucha is going to equal that this year.

So I’ve kind of jumped around. We did have some very good success with DSD in 2012. If we weren’t so damn busy with Kombucha roll out and knowing just how important and how much new business and the kind of return on sales and marketing dollars, we would be allotting more resources towards the roll out into DSD.

If not that we put it on hold, we did some tests of some interesting marketing programs with the DSD networks and had some tremendous successes and we want to continue to test this year and accelerate it, but not to the degree we would, that that would solely if we weren’t sitting here with the Kombucha opportunity.

Ideally we are pitched to the world right now, is that we’re number two and anyone who knows a lot about us, even though number two means we are trying to roll up against the guy who is number one, with over $200 million in sales. We don’t like being in the position of number two. We weren’t number two with our natural sodas.

We do feel that the quality and the taste of our products are superior. I will point out there that in the sales and marketing our pitch is pretty simple. We make our Kombucha with spring water instead of LA city water, and we used a specialty tea, we don’t just use black tea as traditionally used. We use Oolong with Mate tea both of which our foodies love to hear and also Yerba Mate is known for additional health properties and is very well and revered by the natural foodie.

The third thing is we age the Kombucha longer, instead of being a big company just mass-producing it, the longer you age it, the more special micronutrients get created in the process. So a little bit of brewing gets you X, a longer brewing gets you more of that that’s good for you.

So these factors are important to the consumer, the Kombucha consumer, particularly sophisticated ones that we are targeting with this new launch. We are not looking to be a fringe Kombucha product, we want to be Kombucha drinkers, number one Kombucha. And we are thrilled that people are getting it, they are getting the message out. It’s still in its infancy and we built a number of shelf displays and we are doing a number of advertisements on the Internet and print that are driving that message home. But its surely not a universally know message and we think it’s a very compelling story.

But the most important aspect of our Kombucha is that our formulation capability, I believe honed and developed over the years and accelerated tremendously by all of the creative work we’ve done for private label, that capability is coming to fruition with the Kombucha line and all the years we played with sodas and we played with new Ginger ALE flavors, but the pallet that we are playing with in Kombucha is phenomenal and we are holding back on a few more flavors that seems like they will be huge home runs as we settle in and kind of stabilize the market place and make sure that we are not over extending ourselves by doing even further than eight skews.

But I’m not going to on a public call like this say that exactly what we are going to do. Today I’m feeling we are stating to interest our competitors in the region to probably spend some time trying to get smart on who we are where the hell – we probably came so fast at them in the market place.

Anyway, I don’t know what else, so I think right now I’m going to open up the floor to questions. I’m sure there’s tons of questions about what’s going on, based on what I’ve said so far and Jim. So thank you.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question will come from Ken Moss (ph) with Moss Management (ph).

Ken Moss (ph) - Moss Management (ph)

Hello. Good evening fellows. Interesting quarter, interesting with what’s going on with the Kombucha. I guess I have a series of questions and if I get too long please tell me and I’ll get back into the queue. Number one, how many shares are really outstanding at this point in time after your call with the preferred.

Jim Linesch

A little over 12 million.

Ken Moss (ph) - Moss Management (ph)

Excuse me.

Jim Linesch

A little over 12 million.

Ken Moss (ph) - Moss Management (ph)

Oh Okay. Are you selling to COSCO at this point in time?

Jim Linesch

Yes, we are currently selling to COSCO.

Ken Moss (ph) - Moss Management (ph)

Well, I doubt it that you are working on the label, which I haven’t been complaint with. When you introduced that (a) when did you expect to introduce that, and (b) do you expect that you’ll recoil the ones that are out there already and have a right there (inaudible) or will you just let that one fluid that you do not know at this point in time.

Chris Reed

Well the four new flavors are launching now and they are already selling and moving to the market place, so they have the new label, and the existing products, the first four flavors will be getting a new label when they run through the labels and we’ll be changing it out.

But if we do anything, we won’t recall the product. We may touch some of the older labels just to get into the new look and feel, but as much as we can see that in the cooler they look dark, out in the sunshine, they look gorgeous and shiny. The lighting in the cooler, if you are not on the top shelf where the light bulbs are, you are two or three down, we kind of start to get lost, but even with that sales are running somewhere around 15 to 20 cases a month in an A-account.

So we do think that especially with the new launch and trying to get peoples awareness, we are going to be a little, the new labels will improve it. We are actually looking at another evolution that might happen a little later here, which would be a much more flamboyant I would say or much more lively on the shelf. So those are some of the internal debates going on right now.

Ken Moss (ph) - Moss Management (ph)

How are you going to beat what we’re trying to receive and (Inaudible). I would appreciate if you put the new labels up on the website, so I could actually see what it looks like. I agree with what your saying is that you do get lost in the dark at the moment and I think it you really rate the service to the company in the thought of things, you labeling it and how it quickly it has (inaudible) for a new age foodie type.

Do you expect a gather of your serious investments in the kombucha line or kombucha? What is it that you’ve had the possibility in for instance, was that a normal fourth quarter to adjust the core business of your current business and your private label. Was there something in your facility running up say what’s left in those two (inaudible) and the balance in just the light of your reinvestment into Kombucha and in the lack of (inaudible) and do you expect that we can get to profitability and maintain it with a sustainable rate just in any coming quarter that you can speak in.

Chris Reed

I know my CFO wants to answer that, but I’d like to take a stab at it. First of all, the way I look at the second quarter of last year, I think it was a $0.04 earning and I would say that probably $0.03 of that were what you would expect and $0.01 of it was things, just kind of perfect storming, additional things that happened during that quarter and probably weren’t there all the time. So that’s from a very elevated height, giving you kind of an overview.

We definitely feel that if you grasp – I think I even have these slides up on the IR component of our site. If you graph the $5 million loss to where we are now, you can see that there is a steep line and it’s moving to profitability. Just the fact that it started way below zero shouldn’t scare you, you could still graph it up; its significant and this year we would really have to have some strange things go on this year to not be significantly profitably.

And the only reason we would be significantly profitably is we are looking at an opportunity to get to a run rate of not $7 million a year, but $15 million a year. If we spent $1 million, we’d have a return on investment of $20 million or $30 million.

So I’m just trying not to say yes, we are going to do it exactly this way. I’m just going to continue to say I’m a very long term player here and if instead of selling stock, if I could take some earnings and have a tremendous return on investment, I’m not just talking one or two times return on investments, we are going to be opportunistic with a situation here that we are conservatively rolling out and yes its slower than we thought. But we see an opportunity here to not just be looking at $15 million to $25 million in sales, but to be looking at $50 million to $100 million of sales over three or four years.

So maybe that’s even, we are diluting ourselves here. But we just we’re looking at the categories, its explosive, its solid and it really doesn’t have a player like Reed’s in it right now and I think we are seeing a lot of strength at the store levels.

When people start saying, you are number one skews, one-third of the other guys number one skew right now, I’m starting to get kind of excited knowing the numbers you’re fishing there. I know we have a lot more items in the market place skews, but I already know that we are playing very well, but that’s – there is many things going on outside of even kombucha that have us pretty excited here.

So just if you follow the graph of what we are doing, we should continue to see a lot more gross profit. I mean just the fact that we got to over $9 million of gross profits for the year, growing faster than the sales; I mean just start extrapolating those numbers and keeping – your sales expenses are going to go up, but not at that phase.

They are not growing as fast as revenues, gross profit, but you see your SG&A staying relatively, just not growing anywhere near even selling expenses, we are pretty excited about it and I don’t know what we’ll do in 2013, but we no long term, well (inaudible) and some day where all we are trying to do is show earnings to impress people, then we are looking to off this company and sell it off; that’s just not an orientation right now.

So our priority is growing the company, the value of this company, the true value of this company for an acquisition and not just to do what Wall Street is valuing at as. They are actually improperly valuing this company at this time for what they want to see.

If we where just players that way, we would just be showing down earnings and we would do kombucha completely differently, but we know that this is much more valuable than just showing pennies down on the shares there for earnings right now and you will just have to trust me on it, because I know how companies sell and they don’t sell because people are finding a multiple on earnings at this level.

They look at what is this company going to be to them when they acquire it, they look at $9 million of gross profit and they starting thinking of their own multiples on that, and then they start coming up with a price for this company. So look to see more earnings, but don’t look to be the focus on this company to be earnings. Its gong to be to create shareholder value whether the stock follows that or not.

Ken Moss (ph) - Moss Management (ph)

I hear it and I appreciate what you are saying. I also wanted to congratulate you guys on doing just a tremendous job on the distribution of the kombucha from the starting point to a penetration on the level that you’ve done. Even though they are coming up with developments of how the product looks on the shelves that are (inaudible), especially the foods which are living inside of homes. So hey, I hope that you keep your eye on following the ball, where your going to see, but sustaining some profitability as you (inaudible) hopefully building a better tomorrow.

And thank you for the quarter and all the other guys. I think you did a tremendous job. It’s nice to see the earnings back up there again.

Chris Reed

Okay I’m just telling you I’m balancing it. I’m not just going to spend everything; because there’s always too much you can spend on an advertising and marketing.

Ken Moss (ph) - Moss Management (ph)

I agree.

Chris Reed

There will be a balance, because there is actually a lot of value in paying down debt, because that doesn’t hit future earnings. So there’s a real interesting balance that I think we’ll try to be balanced here; that’s all I can say.

Ken Moss (ph) - Moss Management (ph)

Okay, thank you again.

Operator

Our next question will come from Joe Mondillo with Sidoti. Please go ahead.

Joe Mondillo – Sidoti

Hey Chris, thanks for taking my question. As one of the people that are valuing that company, I’d like to talk a little bit about the gross margin in the quarter and you talked a little bit about the decline, but I’d like to get a little bit more granularity there as to what happened as far as gross margin is concerned. I mean was it the loss of Fresh & Easy as a customer.

Chris Reed

Well, first of all Fresh & Easy is out in the market place looking for a solution and that solution is someone to acquire or a private venture group to get involved and spin it off, but they are running full-bore and they are pretty enthusiastic about what’s going on there in their prospects and that’s maybe they are just talking to us trying to sound happy, but they are doing a really good job of faking it, if that’s the case. But they are…

Joe Mondillo – Sidoti

Are you seeing any decline in the orders from them?

Chris Reed

No, not really. We are not counting on it this year. We picked up new private label business that kind of covers that piece of it at least, but its not going away right now and they don’t seem to think that it is. They seems to think that there’s going to be someone private equity wise who will be interested in the prospects, because the parent company Tesco doesn’t have the stomach for the investment with their shareholders screaming about the chain loosing money, but there are other people that aren’t necessarily against the opportunity.

Joe Mondillo – Sidoti

And then as far as gross margins concern.

Chris Reed

Jim, why don’t you jump in and you speak for...


Jim Linesch

As I mentioned in the beginning our gross margins before promotion are up. So really what’s happening for the most part is that of course that promotional dollar come off of our revenue and that impact how the margins look. And then to a lesser extent we did have to liquidate some commodities at a loss in December. I guess the most important things is that the underlying margin from product sales are up.

Chris Reed

Well, one minute. The one thing I know for certain from my own engineering time in the plant here over the last three months is that we went from a labeling situation where we were trying to do curved labels that were a first company to commercially do this convex or concave, I don’t know what it is, a curved in label with a new material from Avery, we were hand labeling that and the Kombucha filling was gong horribly and we were running up a lot more expanse in the third or fourth quarter.

I don’t know if you figured out how much that is Jim, but quite frankly the plant now is running at 2.3 times faster than it was in the fourth quarter and the labeling is gong phenomenally. So we don’t have an army of people sticking labels on by hand just to get the orders filled. We had a lot of inefficiencies going on during that time. Did you try quantifying that?

Jim Linesch

That’s correct, and I believe that its approximately 200,000 during the fourth quarter.

Chris Reed

Yes, I could see that.

Joe Mondillo – Sidoti

Yes, but I’m a little confused, you are saying the promotional is coming out of the gross margin, the promotional.

Chris Reed

Yes, that’s a standard for our industry, when we grant promotions, which is our main type of adverting, which are deductions from gross revenues and so that does effect our margins.

Joe Mondillo – Sidoti

So, it’s just a normalized rate going forward to make it to high 20 rates.

Jim Linesch

Well, it depends on what period you are looking at. But say if you are looking at Q4, it’s running higher than what we hoped for the future. A lot of its coming through with the Kombucha and some of these are the initial flow that we are putting into the stores and that’s not recurring and we tried in different types of promotions and its not necessarily standard. We believe that that part of that yield is, although we are still doing the rollout, but I don’t want to say that its gong to go away or go away again, but its certainly changing and I think there is strengths in there.

Joe Mondillo – Sidoti

Okay. And Chris, what’s the current capacity utilization at the plant?

Chris Reed

Currently for the first two quarters of this year we are running two shifts five days a week. So we can go to three shifts seven days a week. I mean I can do the math on my calculator on that, but there’s defiantly another shift and there’s anther six shifts, plus five – there’s 11 shifts that we could be doing and we are doing 10, so we are at 50%.

But in the third and fourth quarter we will be running 75% to 90%, just based on the volumes that we are going on right now and the fact that we do a lot of private label in the later part of the year.

Joe Mondillo – Sidoti

Okay. You said Kombucha was rough with $2.5 million of revenue in the fourth quarter.

Chris Reed

No, the annual run rate and it was $600,000 in the fourth quarter. So annual run rate is about $2.5 million.

We are hoping by the end of this year to be running at three times that, which would be about $7.5 million run rate for the year 2013. But if you add those two figures up, that’s $10 million divided by two, we are figuring we’ll get somewhere between $3.5 million and $5 million of new business this year just form Kombucha.

Joe Mondillo – Sidoti

So, if you back out Kombucha you guys are down year-over-year in the quarter, revenues contracting quarter-over-quarter.

Chris Reed

Possibility.

Joe Mondillo – Sidoti

You are at $7.75 million for the fourth quarter in revenues, is that right.

Jim Linesch

$7.8 million.

Chris Reed

$7.8 million.

Joe Mondillo – Sidoti

You back out…

Chris Reed

$6 million it will be $7.6 million. It will be flat year-over-year and we had an $800,000 non-recurring private label from the prior year that did not hit this year, in 2012.

Jim Linesch

Yes, in Q4 private label revenues were down somewhat, but our branded continues to grow. There is nothing flat about it.

Joe Mondillo – Sidoti

All right, what was branded revenue in the quarter?

Jim Linesch

Well, there is not much to say we are breaking that out.

Chris Reed

Just the fist quarter is quite – I mean we are pretty pleased with what’s going on with the first quarter, I mean it’s running at a very nice clip, so…

Operator

Our next question will come from Torin Eastburn with Monte Sol Capital. Please go ahead.

Torin Eastburn - Monte Sol Capital

Hi, good afternoon Chris. I have a couple of questions. First one you mentioned, we’ll pick up the sales trend at some of the stores that have adopted and particularly Kombucha in the very beginning and I was hoping you could provide a little bit more detail on those stores. Specifically what would the volumes and revenue in some of the stores look like relative to the rest of your brand new portfolio and what kind of share on the shelf space in Kombucha do you think you are getting in those stores.

Chris Reed

Yes, we only have four items out, except for recently the launch of four more. So they are all practice purposes. We are four and the main competitor I believe has 26 items. So we generally speaking, you walk into a store you’ll see four full shelves of GT or Synergy Kombucha and you’ll see a small footprint for the Reed’s Culture Club Kombucha.

And if you listen to Ken Moss’s question, and they are dark and they are hard to see and it’s not really that exciting yet, and another thing we have to correct. But before any correction, before anything serious going on, the running about a case or case and a half of flavor per week, and when we talk to stores a lot of times in the top items the top four or five of the GT Kombucha are doing upwards of 3.5 to 5 cases a week.

This is a leader. This guy has been out there, started it and has been rolling at an amazing clip now on the seventh, eight, ninth year. And so we are pretty damn pleased with the results and one of the chains that we are in, 25-store chain in North Carolina, they have shared the information in our top items, there’s about one-third, they are a top item of GT.

And just to be playing in there, I mean that, their top item, they have five or six items that do, I don’t know if they do 80% of their line, but they do a bit more that’s heavily weighted towards their top five and they tend to be ginger oriented, which is one of the reasons we jumped into this category.

Its kind of like instead of drinking Ginger Brew, not that we are loosing sales, not that we can figure out what sales we lost to Kombucha over the years or how it slowed down the growth of Ginger Brew, although its still doing very robust in its growth; they marry ginger up and basically jumped into our category and the way I’m justifying this is I’m just making you Ginger Brews, they are now just probates and live.

People are respecting what’s going on with it and once we get the packaging married up right and the marketing, a little more time in the market place and the more skews out there to expand this little four skews mix to the monster shelves of the main guy, I think that will only help us from here.

But even if we just stop right now, the four skews, and just got it out into the market place, and did nothing to improve the packaging, did nothing to market any better and just ran at the steady cliff that we are seeing unprompted, you’ll are looking at $10 million to $15 million on that rollout alone. So we are definitely, our numbers for Kombucha are beyond that level with four more items coming out.

Torin Eastburn - Monte Sol Capital

Okay, and the level of sales that you are seeing in some of the early adopter space, specifically for Kombucha on a dollar basis, how are those compared to the rest of the portfolio products assignments please.

Chris Reed

Well, I have a chain local here that shares their data and they had a month of data for four stores. They ran 145 cases of sales of everything combined and 84 of them were Kombucha.

But we’ve seen other accounts where that’s kind of fair assessment, because Ginger Brew and a good whole foods account, an extra Ginger Brew is going to do about a case a week. That translates to a brand that’s doing a couple of million or an item that’s doing a couple of million a year. So each of these products are doing at lease a case a week in an A-accounts, the whole food supplies account.

So there’s four of them, there’s more of the other products and at one point. I mean on this store alone, this four store chain in Southern California, each of the cases are running roughly $20 a piece. So they are pretty much equivalent. So we are doing more Kombucha sales than we are of everything else combined in the store.

Is that happening everywhere? I’ve seen numbers here we are doing a third of what we are doing with the Reed’s brand in the stores and I’ve seen it as high as two times what we are doing with other, the rest of Reed’s Inc. products from all those years of development. But we’d still kind of around the – it’s a pretty bit variance in what’s gong on.

I will say that we expect to get the next four items, the eight skews going in the stores here. So we are really basing our expectation on just four in the store. But as we get to eight, I believe that Kombucha sales ultimately will, the natural food stores not necessary main stream, but the natural food stores, we expect it to go beyond the rest of the products combined at some point.

Torin Eastburn - Monte Sol Capital

And another question, what kind of gross margin do you think you are going to run once a lot of the promotional incentives will allow to indicate better production efficiencies.

Chris Reed

Somewhere between 5% and 10% better than we currently get on our soft drinks.

Torin Eastburn - Monte Sol Capital

Okay. And then last question, are you willing or able to give a revenue expectation for private label for 2013.

Chris Reed

My senses is that we are gong to increase it by a couple of million at this year over last year. And the branded, my guess is we are going to bring in somewhere between three and five million more and Kombucha is somewhere between tree and five. So we would love to, somewhere between $8 million and $10 million worth of new business would be what we expect, what we are shooting for based on the numbers, but of course our goal is to try to reach $45 million, something beyond that.

But its hard for us to tell as we sit here and we are spending a lot more time on Kombucha and that may affect sales at some point in the year of our branded items, having that attention diverted from the poor brands. But do far I don’t believe we’ve seen a degradation in the first quarter, but it’s still a long year ahead of us.

But many exciting things are completely signed that are game changers for Reed’s here. So we are all hopping that we’ve been daunting and running the first a lot, but we hope to get some homers here that will be significant for the company as we mature and get more respect and credibility amongst the larger players out there.

They are looking more and more at us for our unique capabilities, for development and packaging. So we are not seeing a deceleration here of interest from people for many of the things we do. So ultimately we expect a tremendous amount, more private label and we know the brands are really at their infancy in terms of what they can do in the market place.

Torin Eastburn - Monte Sol Capital

Okay, thank you Chris.

Chris Reed

Thank you.

Operator

Our next question will come from Peter Nielsen with Citigroup. Please go ahead. Mr. Nielsen, please go ahead with your question.

Chris Reed

He may have disconnected.

Operator

Okay.

Chris Reed

Well, if there are no further questions at this time, I appreciate everybody’s time and I really am looking forward to reporting what’s going to happen later in this year. I think one of the good first quarter, but I think we are going to have an acceleration through the year here and thanks for listening and we look forward to talking to you guys in the future.

Operator

Thank you. Ladies and gentlemen, this concludes your call. You may all disconnect.

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