Reed's CEO Discusses Q4 2013 Results - Earnings Call Transcript

Mar.25.14 | About: Reed's, Inc. (REED)

Reed's, Inc. (NYSEMKT:REED)

Q4 2013 Results Earnings Conference Call

March 25, 2014 04:30 PM ET

Executives

Dave Williams - Interim CFO

Chris Reed - Founder, Chairman and CEO

Neal Cohane – SVP, Sales

Analysts

David Cohen - Raymond James

Alec Jaslow - Midtown Partners

Vipul Sagar - Blash Capital

John Curti - Singular Research

Gordon Hodge - Tracker Research

Operator

Ladies and gentlemen, welcome to Reed’s, Inc. 2013 Earnings Call. Your host, Dave Williams, Interim Chief Financial Officer for Reed’s, Inc. will begin.

Dave Williams

Good afternoon everyone. And welcome to our year-end earnings conference call. My name is Dave Williams and I am the Interim CFO at Reed’s. Joining me today is Chris Reed, our Founder, Chairman and CEO, and Neal Cohane, our Senior Vice President 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 protection of the Safe Harbor for forward-looking statements as contained in the Private Securities Litigation Reform Act of 1995.

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

In addition, all projections related to the company’s future performance represent management’s estimates as of today, March 25, 2014. Reed’s, Inc. assumes no obligation to update these projections in the future as market conditions change.

Now, I would like to take a few brief comments about our financial performance for the year 2013. This will be followed by Chris Reed who will give us an outlook for the company’s business at this time.

2013 gross revenues grew 28% over last year climbing to $42.2 million. However net sales grew just 24% to $37.3 million due to increases in promotional activities throughout the year. This promotional activity includes launch related costs for our kombucha line and general marketing incentives given across the board totaling nearly $5 million for the year, an increase of $2 million over 2012 from 9% in 2012 to 12% in 2013 of gross revenue.

This 3% increase in top-line erosion was mitigated by improvements made to our cost of goods sold bringing the effect of these promotions down to only 1% loss in gross margin year-over-year. In 2013 our gross margins increased to $10.8 million, an 18% increase over 2012.

In 2014 we are focusing on promotional campaigns and programs that stimulate top-line revenue growth and improved gross margins that continue to build our brands and stimulate growth. We will be redirecting and reducing these spends, Chris will talk more about it later.

In 2013 the economies of scale within G&A expenses enabled us to grow these expenses at a lower rate than our revenue growth. This amounted to 140 basis point improvement over last year coming in at 9.4% of revenue in 2013, down from 10.8% in 2012. Sales and marketing costs for 2013 were approximately 11.2% of revenues which is an increase from 10.5% in 2012. This increase is consistent to the intention our sales team gave to increase distribution channel and efforts allocated to growing sales and distribution of kombucha.

Turning our attention to working capital; our working capital at year-end 2013 was $1.3 million. This was nearly $1 million below our last annual report and this decrease is attributable to net losses, pay downs on long-term debt and investments made in 2013 to increased inventory levels.

We currently have enough capital for operations and we have access to more if needed. Our 2014 forecast shows that by year-end we will have replenished our working capital. By managing inventory levels and marketing spends, we believe the business will achieve an increase to its working capital of over $2 million in 2014. Therefore we believe there is no current need to approach the capital markets to improve our liquidity.

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

Chris Reed

Well thanks Dave, I appreciate that. Dave, the new Interim CFO here. The intention behind Dave is we are hoping this is a good fit and Dave will become the permanent CFO at some point this year.

I’d like to stay a little bit more focused than I normally am and I like to first start out with the operational highlights for 2013. We began shipments of four new flavors of Kombucha, the Coconut Water Lime, the Cabernet Grape, the Pomegranate Ginger and the Mango Passion Ginger. So we increase the lines from four to eight SKUs. We opened up Kombucha markets throughout the U.S. The surprising, probably unexpected business for Kombucha last year was the DSD, the beer distributors, the Pepsi distributors that brought on kombucha into the marketplace. This now included the Midwest, New York Metro markets, Maryland, San Francisco, Pacific Northwest and Southeast markets. So that’s continuing to happen throughout 2014.

We’ve gained a Kombucha distribution, again kind of surprising our focus for kombucha launch was into the core, hardcore natural food market, the whole foods of the world and independent sprouts type markets around the country. And we found ourselves -- we found that the supermarket industry had started dabbling in Kombucha and from 2012 to ‘13 the Kombucha grew market - in supermarkets grew by 70% and that’s kind of a data driven industry quickly everybody started building Kombucha sets. And we have a pretty compelling argument for bringing our Kombuchas in, a few of them are just -- they just taste a whole lot better to a [Neo 5] [ph] buyer who is trying to get up to speed on it, but also they like the fact that our shelf life is five months versus one month of the number one Kombucha company.

But we picked up supermarket chains Wegmans, Kroger’s, Fresh Market, Giant Eagle, JewelOsco. And I think one point that's not here, I'm kind of reading the press release a little bit, but the one point is that we became the number two selling kombucha in the country last year.

So, I guess that makes it the world because there is really no market outside of the U.S. for kombucha. Well, that's not totally true there is the – Europe has a Kombucha market and Germany we're looking at.

All right. So, other operational highlights, we started selling Reed's and Virgil's in the WinCo Foods, kind of a club store outfit in the Northwest. We established the distribution relationship early in 2013 with Lassonde. They are Jones Soda’s probably largest distributor. We discovered them at the time we were looking to acquire Jones and we've been in conversation with them since. It's a slow but very large relationship and we have just translated all of our products and it looks like one year later at the speed of the food industry, we are going to be starting to launch into Lassonde this year in a significant way. So, that's a big opportunity for the company, I believe with a significant portion of Jones's sales.

We moved the company from NASDAQ at the end of last year to, not last year, a year before to New York Stock Exchange MKT that move one can wonder why, but it was a lot of natural food companies growing and moving on to the NYSE, Annie’s, Natural et cetera.

So, we continued the Los Angeles plant upgrade, it's been a kind of drag on earnings for a while, what we call the plant unused lying time, one of the numbers that we -- parameters, numbers that we share in our financials. And so the plant upgrades have allowed us to improve production from the second to the fourth quarter by 25%. Year-over-year, I think we are up somewhere around 70% to 80% January-to-January on production to move from 40,000 cases to around 70,000 to 75,000.

The other changes going on Reed’s, well, the big announcement was our certifying, not certifying but announcing our GMO free products. And if you’ve been out in the marketplace, you’ll probably see the packaging now sports a new logo on the four-pack announcing this is GMO free product. Whether you understand the value of that or not in the marketplace that we are doing business being GMO free is a very important factor. And I think that it will be hard to measure it but I can predict that this year’s sales will go up just from that one fact alone to our core customer base.

There aren’t too many other players on the natural soda aisle with GMO free on their packaging. We promoted our products in a different way in 2013, very exciting shift in the company. I like to say we’re a bunch of engineers and what we understand is going out and pushing the products on the shelves around the country but the more sophisticated, probably even more powerful way to market our products in the marketplace is to start trying to come -- to enter the mind of the consumer and create more of a pull campaign and a push to the market campaign. So that started with a number of large events including a Taste of Soul event in LA where 200,000 people came in for a day and we were there with our 1948 milk truck all duded up looking like a Ginger Brew mobile handed out a truck load and a half of product to somewhere around 50,000 or 60,000 people.

So, we started the process of introducing the U.S. market, more mainstream market to our products. We also had a little partnership with Snoop Dogg and his new organic gardening non-profit called MindGardens. Snoop was blasting out to his 22, I think it’s now 25 million Facebook followers, letting him know that buying Reed’s will support the inner city organic gardens for inner city youth at risk. So that was interesting. Life is Good, a very successful company started out as a t-shirt concept; I learned a little bit about them last year and it’s gone on to making TVs and all kinds of stuff. I think by now everybody knows who Life is Good is. They have a big concert and it reached out to Reed’s to be the soft drink for that concert of 30,000 people.

So as we get bigger, more interesting partnerships have come our way and we envision more of that kind of marketing happening in 2014. So staying focused on my outline here. Sales were up 28%, obviously on a gross level, 24% on a net level, very exciting. Of that, kombucha sales were up 372%. That’s not really fair; 2012 was a launch year and we have probably got less than a half year sales out there, but it’s nice to repeat a number like that. Reed’s and Virgil’s were up 21%. The brands and private label were up 42%. And so the solid growth on every category, very happy with the way things went there.

I will say that towards the end of the year, I started to feel that the time in the launch and the aggressive spends that we had gone into in 2013 needed to attenuate and we’ve -- but not just across the board, what I started doing was working with some people in the company and analyzing some of the marketing efforts that were going on and certain market efforts were out performing others. So we started to unwind the less profitable marketing efforts and stay, and funnel more funds into more successful marketing efforts.

So, but we ultimately are going to unwind the heavier spends of 2013 and 2014, where we want to maintain our generation of capital here - cash and stay ahead of a need to raise funds in the capital market. And that’s not a completely fair statement. I mean there are few things going on that might encourage us to do a capital raise but I’ll get into those in a minute, actually so we don’t forget it.

The analysis we’re doing on some of the marketing we’re performing right now, some of the test marketing that we’re running nationally we are going to continue to divert the $5 million of marketing spend that’s happening mostly at the level of the sales force, offering deals to new distribution or distributors or retail supermarket chains or even individual accounts, now we’re going to consolidate those funds and use them more nationally because we believe that we’ll get a bigger bang for our buck instead of co-opting a bunch of little ads with whole lot of stores around the country, running a national ad I believe we’re going to spend about one fifth the dollars that the markup on individual advertisement that they go on.

And it made sense to do that as we were smaller, but we can be more efficient as we grow. And so, I’m hoping to unwind that $5 million spend which is roughly a 12% of gross sales and unwind it back to somewhere between 9% and 10% for 2014, helping us to generate some capital, but also recognizing that the spend, I think we can actually be more effective with 9% than we were with 12% this year based on the analysis we’ve been doing and some of the results of the analysis showing that there are much smarter ways, there are better things that we’re doing than some of the other things we are doing. So, it makes sense.

So the advertising, we’re reaching out to more of the creative types and agencies out there to start to see what kind of programs we could be doing in a more focused national level as opposed to more of the -- not so random but letting the budget, the advertising marketing budget stay on the level of sales force.

So that is already producing some very interesting results, it’s very exciting for us. And the other thing is I’d like to reiterate that Dave brought up is that the overall year-over-year discount gross to net sales that went from a 9% in 2012 to a 12% in 2013. And yes, that 3% erosion in top line only resulted in a 1% erosion of gross profit. So that’s happened because of a 2% increase, improvement in the cost of purchasing in building product.

Any year we can come up with 2% is a damn good year from an operational standpoint and the fact that we’re going to unwind the spend a bit this year, we believe we kept continual improvement in the cost structure, the West Coast plant coming on board and being more efficiently used. There are other things that are going on that we’ve discovered on our products and the way we make our products, they are going to increase the efficiency of production and the flavor too.

So, we’ve had some breakthroughs in the R&D department that I’m not sure we’ll announce it, I think that you’ll probably just notice it as the year goes on there is a change in the products a little bit and an improvement from it. So that’s an exciting -- also a cost savings for us on that. We look forward later in the year, in the late second and third quarter, for some of the benefits that we’re looking for from a production side.

The plant improvements just are ongoing continuous by the end of the year. We will probably have equal improvements to what we did from 2012 to ‘13, from ‘13 to ‘14. So, that’s exciting for the company.

So the 2014, trying to give an overview, the analysis that started towards the mid to late last year is refocusing the company in ways that are going to be a big game changer for the company. In terms of the way we spend and the return on investment from those marketing spends - so better, smarter and more effective marketing, use of marketing dollars. We have new products coming out; we have immediate new products coming out which we’ll be announcing soon. And Kombucha product that again we think is -- we are working to extend the line with this flavor as kind of screaming to go out the door; it’s a very innovative and exciting flavor that will continue to add that excitement to the Kombucha line. Kombucha is on a tear for this year, so we are very excited about how things are going and working hard to stay ahead of the curve on that.

We are unwinding prior administration, the inventory levels by $1 million to $1.5 million which is happening relatively quickly and that also is part of the reason we can have cash go down by $1 million and not be in any kind of a cash crunch. So it looks like -- so the excess inventory, the smarter spend, the sales growth that’s all helping with the cash generation this year.

We are predicting more of the same distribution, more large distribution companies, DSD, Anheuser-Busch, Coors Miller type outfits coming on board this year. More large events, a shift into more national advertising and basically based on our results that some of the advertising that we are doing that we started to drill down in 2013 was extremely effective. And I think it caught us by surprise, so we are diverting more of that spend that erosion of the top-line, we’re stopping that and moving the dollars over to the smarter spend, I guess that’s a simple way to say it.

I think at this point, I know I forgotten something here that’s important, but I always find that if I forget it, I am going to have people ask questions that are going to allow me to speak on it anyway. So at this point, I would like to open the line to questions around the 2013 year-end financials.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question is going to come from David from Raymond James. Please go ahead.

David Cohen - Raymond James

It’s David Cohen, like ice cream. Hey Chris, how are you?

Chris Reed

Good. How are you doing, David?

David Cohen - Raymond James

I am fantastic. I have a couple of questions for you. I am enamored with your business and your opportunity, I am not enamored with your presentations; long winding difficult to follow, and your last presentation was very similar. It would be much better to do a scripted presentation. What do you anticipate for 2014 with respect to profitability and revenue growth?

Chris Reed

Well, the Reed’s and Virgil’s, at the ROTH conference, good example, about 80% of our sales, this will be last year, I think Kombucha is now 14% -- it’s about 9% of sales, 80% of sales is our brand Reed’s and Virgil’s brands, about 10% is private label and about 10% is the Kombucha. And the Kombucha, we’re giving guidance -- our goal is 50% to 100% growth for kombucha for the year. Private label has been growing from -- anywhere from 30% to 40% a year. And the Reed’s and Virgil’s brands are core brands which make up about 80% of sales, are growing between 15% and 20% a year.

So I think we are going to stay with that guidance for the year. I will say that we had an extreme winter with the effects of global warming I am sure. And so we haven’t finished the first quarter. We definitely felt like it has slowed up a little bit during the really cold season, but it seems like the data that we are generating, the IRI, the Nielson type data looks like we are still at a very nice clip moving into 2014.

In terms of profitability, I find it hard to believe if we stay to the plan that I have outlined in this presentation, I believe it will be hard for us not to end up with a profitable year. I said that last year, we definitely opted for a more aggressive spend, and to capture and make sure that we capture the kombucha market, continue that in a very fast clip. But I believe that this year we are unwinding spend. We are making improvements to the cost of producing our products that will be significant. And I think that we stay on track with everything. We should generate a pretty good profit; there are some profitable quarters definitely, but overall I would expect to be profitable for 2014.

I am not sure I am going to come up with an exact number on that. I think we’re still very focused on aggressive top-line growth, internally generated capital model for the moment.

Operator

And our next question is coming from Alec from Midtown Partners. Please go ahead.

Alec Jaslow - Midtown Partners

Hey Chris, how are you?

Chris Reed

Good. How are you doing Alec?

Alec Jaslow - Midtown Partners

I am good, thanks. Just we had about I think around $10 million expectations for the fourth quarter, I think you’re a little bit below on the top-line. Were any of the products not -- did they do weaker than expected or can you give us maybe a rough breakdown of the percentages for the fourth quarter?

Chris Reed

Neal, could you do that?

Neal Cohane

Yes. I can tell you that primarily the growth of our brands, our top-line brands, our Reed’s Extra which is our number one SKU, Virgil's Root Beer, the top brands grew extremely strong. And when I say extremely strong, we’re talking 30% plus 40% plus growth. Where we gave it back is in some private label cycling. So private label that we had the year before, we didn’t make up in 2013.

Alec Jaslow - Midtown Partners

Okay. All right, that’s helpful. And I guess if you could talk about your expectations for pricing next year, do you see maybe more about if there is going to be any promotions, discounts or just a general sense of the pricing for this year, 2014?

Chris Reed

Alec, as I said, the erosion, the spend, marketing spend that was from 2012 that ran at 9% of gross sales to net sales, the 12% that we reduced our gross sales to net sales in 2013 we’re looking to be somewhere between 9% and 10% in 2014. So, we’re going to back-off the heavier spend of last year and partly it’s because we feel like we can still accomplish the results we’re looking for by just smarter spend in marketing.

Alec Jaslow - Midtown Partners

Okay. And if you can maybe give an update on where you are for hiring a CFO and maybe talk about what you are looking for and maybe how that person could bring the brand to the next level?

Chris Reed

Well, David is -- we’re kind of dating. We’re trying -- David’s got a lot of skills in the areas that I’m looking for. The transformation I’m looking for in the CFO position is into -- I want to get a little bit deeper to the analysis. We’ve had a lot of eye-opening analyses that happened towards the end of last year that’s really had a dramatic impact on the model and the orientation of the company moving into 2014. And I want to make sure, the new CFO here is going to be up to that challenge of kind of analyzing how we’re spending, what we’re doing, what’s working, return on investment and to stay not just in terms of creating the financial reporting as expected as a public entity but also to dig and drill much deeper into the business models that we have going here and direct from a financial scorecard method some of - the direction that the company is taking. So, it's just something, I feel very strongly about, it sounds kind of obvious, I'm sure, it's not something that we've been strong at in the past.

So, I'm looking for a lot more information, we're buying a lot more information streams from different Nielsen type data services. And that information is shedding a light on our products in ways that are extremely important to directing traffic here. So, requiring the new CFO to have those skills, to have the ambition to step up and implement all the projects that I want in that regard.

And Dave is on Board for a short period of time now, and obviously have to get the K done, and we will be hitting the ground very -- well we won’t be hitting the ground very fast, but we have a lot of work to do here. And I would say, we hope that it works out with Dave, and don't mean to be like that, but it's just very important to me that we have the right people on Board here. This company has a huge upside potential, and it is somewhat going to be very -- it's going to be dependent on management team that comes on Board to do this.

So, we can see the future, we believe that there is a huge upside for what we do as a business being the coke of natural foods with being the first super premium soft drink company in America, the first craft soda company in America. We know this category is going to be huge, and we want to make sure the team that we have on Board is the right team to take us through the levels we envisioned for our sales.

Operator

Our next question is coming from Michael, an investor. Please go ahead.

Unidentified Analyst

Yes. Hi Chris.

Chris Reed

Hi Mike.

Unidentified Analyst

What I was (inaudible) talking about the CFO, what about your Chief Operating Officer, what’s the development there?

Chris Reed

Nice question, you know there has been a lot of pressure here. I want just to make that comment that there has been a lot of pressure to transform this business into 2014, and I can say maybe I was a little bit aggressive with my management team and expectations et cetera, but quite frankly I am not in a hurry to hire a COO at this point. We have a number of younger talent that was working with the COO. They stepped up to take over a number of the areas that he was managing, scheduling, inventory control, and purchasing. And so, we have elevated some people, and we have unwound the position for the moment and more likely to hire a Chief Marketing Officer right now.

I can’t say it’s all the COO’s fault at all. I am an engineer, I pretty much – I’ve hired people to run the plant, but I tend to like to manage operations somewhat, but we also have a lot of young talent that -- again that have taken over much of the chore. So it doesn’t seem necessary instantly to go knee-jerk and bring us COO, but we are keeping an open mind to it, but the talent I am looking to bring on Board right now is probably more at analysis and marketing of skill sets.

Unidentified Analyst

Okay. If I may have one more question.

Chris Reed

Sure.

Unidentified Analyst

Do you guys have a target gross margin that you are looking at? Is there something that you can -- strategy you can lay out to achieve a gross margin allowing you to be profitable?

Chris Reed

Well, I think we could be profitable at our current gross margins, but I want to give you a bigger vision on the company. As the company grows from East and West Coast production orientation as it gets into the $70 million, $80 million, $90 million range, it starts having more regional production, the 10% of margin that we give up for freight and warehousing, we should be able to reclaim somewhere between 5% and 6%, and the heavy spends that we are running right now, 12% of sales should be able to run in the 5% to 7% range.

So, the 30% that we are running right now in margins at the -- when the company is twice as big as it is today should be running in the low 40s and ultimately the kind of smart margins you see at a company like Pepsi, Coke, or a Monster, when they are up in the high 40s and low 50s, we can expect to see those when the company gets into the much higher levels.

But part of it is taking the company instead of putting out deals in the marketplace to get into the marketplace; the company would like to educate the consumer on the way Ginger Ales were made 200 years ago, brewed from fresh ginger to ultimate craft sodas. We’d like the customer to come into the marketplace and buy like they buy their Häagen-Dazs, pay full price and love every second of it, because it’s the best there is.

So they spend a little bit more of sales, go out in the marketplace deals, deal (inaudible), align the pocket to the retailers a bit more than we will do in the future, more of that money will go into reading the consumer mindset that we’re the ultimate sodas.

Unidentified Analyst

All right. Thank you.

Chris Reed

Thank you.

Operator

Our next question is going to come from Vipul from Blash Capital. Please go ahead.

Vipul Sagar - Blash Capital

Hi Chris, this is Vipul.

Chris Reed

Hey Vipul.

Vipul Sagar - Blash Capital

So, I want to start talking about the margin because I remember last quarter you had almost a 1% margin improvement, and one of the things you mentioned was you would be surprised if Q4 would be only 1% margin improvement. What happened to the margin improvement that you were talking about in the last conference call?

Chris Reed

I said I would be surprised if we didn’t have a 1% improvement in Q3.

Vipul Sagar - Blash Capital

Q4, Q3 you had 1% improvement, you went from 32%, and you said the plant upgrade you are doing and excess freight you had to pay for bringing stuff from the East Coast, all that would start showing up in the fourth quarter, and your margins would be you would be, you’d be surprised if there was only a 1% improvement for Q4. So…?

Chris Reed

Right. So okay, now I am going to digress on you -- how is Portland looking for our products?

Vipul Sagar - Blash Capital

Expanding, yes, I see your Kombucha out there.

Chris Reed

My sales manager created a slide in the PowerPoint, kind of gave me some overview of updates. He had one slide just for Portland, in case you call.

Vipul Sagar - Blash Capital

Okay.

Chris Reed

No, just kidding. Now, you are right, and I think that I am going to use this opportunity to say another thing like a real politician here. I think it’s one of the reasons you saw those changes in my management team. It is really hard to come up with the cost savings to improve margin from whether it’s finding better sources or running plants more efficiently, it’s very easy to spend that off the top-line, it’s very easy to discount and deal and then walk into a retailer and say, hey buy 20 cases for your whole foods and we will build the display and we’ll give you a 20% or 30% off, that’s a lot easier to do.

So, quite frankly, I was very disappointed in my management group from the fourth quarter, and effectively I have made commitments to myself and to the new management that we will have systems in place that look at the spend, the erosion on the top-line. The erosion on the top-line in the fourth quarter was 14%, overall for the year we had 12%, but we had our worse quarter in the fourth quarter. And I blame myself, but I’m definitely taking that moment in time and re-oriented the business in the way that tracks spend and aid basically how it spends in general.

So I think we’ve -- the first quarter here has been part of that unwinding of top-line erosion spend, and looking very closely at how we’re spending, which kind of activities they’re causing us to erode the top-line that we charge people and the cash we bring in, and I think that we started serious unwinding in March. So I don’t know if the whole quarter is going to reflect to that activity, but the second and third and fourth quarters of this year, there is a commitment to it, and there are more systems in place so that when we make a statement like you’re remembering from the third quarter conference call expecting improvements in the fourth, and it doesn’t happen, I think it’s part of the expectations of the new CFO and new management that’s on Board here to make sure that we stay very much on top of that, but I think it’s been exciting for us to see the amount of cash that we could be spending in different ways or retaining and putting to the bottom-line, and I guess you’ll have to trust us or wait to see in the second and third quarter the kind of results we generate from it. But I can tell you that there is a big effort and it’s a successful effort in unwinding the spend, and making it a smarter spend.

Vipul Sagar - Blash Capital

Okay. So my next question was remember that second quarter, private label reject order that you had to take a hit on…?

Chris Reed

Yes.

Vipul Sagar - Blash Capital

Last quarter, you said you were able to sell about 6%, and sooner or later you will recover the hit that the company decided to take, the 412,000, any update on that?

Chris Reed

We continue to sell the product, and I had that thought before the earnings call that I better get that number, and I actually forgot to get the number, but I’ll actually -- if you send me an email after this, I’ll send you that number.

We have some independent groups in the distribution end of the business who’ve been looking and developing a label that we would slap on to the product. We kind of keep the private label individual, our company’s name and logo and intellectual property on the package at the stand. But we’ve been relabeling the products, selling it actually in few other countries. So, it’s unwinding and we have a relatively large purchaser who might take the bulk of it, but right now there is no reason to believe that before the product expires in a couple of years that we won’t have it sold, but we’re attenuating the loss.

Vipul Sagar - Blash Capital

Okay. And then my next question was how much Kombucha did you sell in the fourth quarter? You were projecting about a flat compared to the third quarter, 20,000 cases a month, so about $1.2 million in revenue for Kombucha, how did Kombucha do in the fourth quarter?

Chris Reed

I think it actually -- we had a slow December in kombucha. And I think, we were running 20s until December, so it ran -- so I think we ran somewhere closer to a 50,000, 52,000 I believe.

Vipul Sagar - Blash Capital

50,000 to 52,000?

Chris Reed

Yes. But I can say that the first quarter is on a significant share, and part of that’s some of the marketing that I alluded to being more efficient spend.

Vipul Sagar - Blash Capital

Okay. So you’re looking over 20,000 cases per month in Kombucha in January and February?

Chris Reed

Yes.

Vipul Sagar - Blash Capital

Okay. Canada, is that on board right now, are they -- have they started or it won’t show up in the first quarter?

Chris Reed

Neal, what can you say about Canada, I know all the packaging’s been translated to French bilingual labeling?

Neal Cohane

Yes, thanks. There was a lot of upfront work that had been done to get involved with Lassonde. So, as Chris stated, packaging has been changed, that’s brand new for our company. We had to get GS-1 rated for Canada. We’re working directly with the CEO of Lassonde and the Senior VP of Sales.

So, what you’re going to start seeing is us gaining significantly in national chains throughout Canada. That will happen throughout beginning now and it has already started and you’ll see over the course of the next year. Little by little, we're going to gain a significant presence and we’re looking at Canada to be about at least 10% of what we do here in the U.S.

Vipul Sagar - Blash Capital

But you won’t show up until -- when do you start seeing incremental revenue from Canada? I’m talking about Kombucha and the branded.

Neal Cohane

Kombucha, not yet.

Vipul Sagar - Blash Capital

Okay.

Neal Cohane

We’re not ready for Kombucha yet. Reed’s and Virgil’s is our first goal to get that in. They are Canada’s largest juice supplier in the country.

Vipul Sagar - Blash Capital

Yes.

Neal Cohane

So, over time, they are committed to taking on Kombucha, but they are not ready just yet. So, you’ll see Reed’s and Virgil’s start going into some of their national chains, and it is beginning now.

Vipul Sagar - Blash Capital

Okay.

Neal Cohane

You probably won’t feel the effects for another, probably six months.

Vipul Sagar - Blash Capital

Okay. And then the two new flavors of Kombucha, you said are going to come out in 2014, if I remember from the last conference call; is that closer to coming out in the first quarter or second quarter?

Chris Reed

There is one flavor coming out in the second quarter.

Vipul Sagar - Blash Capital

Okay, second quarter.

Chris Reed

Yes.

Vipul Sagar - Blash Capital

And then the LA plant, you said which you had gone up to for 30 days, 100,000 in production is running about 75,000 cases a month.

Chris Reed

75,000 to 80,000s right now. It’s not -- we are working on a third shift, but like the fourth quarter, we were running 100,000 because we have orders that can only be run at this plant. In this plant, there is a number of the exotic specialty private label projects, so we just have a lot of projects that pushed us up to a 100,000 cases in the 30-day period.

We could do that right now today, but they are not necessary. They are more expensive labor wise because you are running your own staff at time and a half overtime. So we will be developing a third shift here over the year that will allow this plant to staff up without spending too heavily. It’s capable now, it’s just we are not going to do it because of the expensive overtime until we have a third shift trained.

Operator

And our next question is going to come from John from Singular Research. Please go ahead.

John Curti - Singular Research

John Curti from Singular Research, good afternoon.

Chris Reed

How are you doing, John?

John Curti - Singular Research

Just fine. Hey, could you talk about arrangements which your co-packer back east and any new arrangements that you might be developing to help reduce freight costs and improve the logistics of getting product to the customer? That’s my first question.

Chris Reed

Well last year, we were short on production, and there was somewhat of a perfect storm, and the products were taking off, and there was a hick-up on the East Coast facility, and they got behind and lost a week or two in the middle of the summer for everybody. And that -- so to avoid that this year, we have been reaching out to a number of the large contract facilities. We have also -- this plant is taking up a bit of the slack here. So, I mean this plant is probably -- we are stocking almost somewhere around a third to a 0.5 million cases of additional production out of this plant this year just for our branded products so that can support somewhere around $6 million to $10 million of additional sales.

The East Coast facility has a new management there, and they also – and the current facility, they have been telling me that they can produce about 50% over what I am asking right now because of their own improvements, because they got caught last year and are trying to improve.

We are talking to a few more facilities. We have facilities up in the Great Lakes area that we current run our energy drink with; they are capable of running our sodas. We are not ready to turn that on, but we could. And we have facilities in Indiana that are capable of running $20 million or $30 million worth of the products a year for us.

So, we are ahead, we are going to be ahead of sales this year, sort of a disaster at one of the facilities. We should be able to keep up with any of our projected sales this year. I believe we covered sales up to approximately $60 million to $70 million without an additional facility coming on board.

But we started the process last year, so we’re continuing to have great conversations with facilities in New England et cetera. Actually, I am going to say we’ve also worked on an R&D project that will allow us to build the Ginger Brew, preprocess it in LA, pre-brew and ship [soda] (ph) and concentrate to facilities that aren’t quite as exotic as our current facilities which are breweries. So we can go to regular bottling facilities now, which is a big, big step forward for our processing, the biggest step in 25 years, also allows us to talk to other countries, and shipping too. We can start producing in other countries in the future. So that’s been a very exciting change in the R&D, and the way we make our products, very excited about it.

John Curti - Singular Research

(Inaudible) with some of these other potential co-packers having them run test runs or anything like that, or you are just talking with them at this point?

Chris Reed

Some of them we run, run test. So, we run products that -- one of them are running energy drinks now, but in other one, we run the Virgil's line there, and we sold the product, very successful runs. Some of them, we’re working on getting the test runs going.

John Curti - Singular Research

It sounds a lot better than what we transpired in ‘13, how much do you think your transportation costs have come down just from kind of the one-off things where you had to spend a bunch of money moving stuff around?

Chris Reed

Well, I mean every year we like to believe that 2014 won’t include the large private label meltdown in the second quarter. We like to believe that some of the great things we had to do to accomplish some of the private label deals in the third and fourth quarter won’t be there this year, because of some late shipments of glass that they just have to -- not overnight, but to do over the road equivalent of overnight (inaudible).

So we always expect that the year is going to run a whole lot better than last one, with the growth being, our (inaudible) should be -- but there is always something that happens every year somewhere, we try to avoid them.

Yes, definitely regional production cuts out a lot of freight. Just having West Coast facility up and running cuts a lot of the cross country freight that we’re receiving. So, we are hoping to see a bit more improvement. I know last year in the first six months of the year, we were still scrambling to keep up with Kombucha running relatively and efficiently and not being able to run much of our brands here.

So this year, we are seeing a lot more of our brands running here. I don’t -- it’s too soon to say that’s had a big improvement on the freight savings, et cetera, but we’re hoping that at the end of the quarter and that’s kind of what we are seeing. I haven’t had time to let Dave, the new CFO, Interim CFO to take a look into that. But Dave, you might know, I don’t know how our freight is looking, but we’re trying to improve it.

Operator

And our next question is going to come from Gordon -- one moment please. And our next question is going to come from Gordon. Please go ahead.

Gordon Hodge - Tracker Research

Yes. Good afternoon. It’s Gordon Hodge with Tracker Research, just couple of questions. What are the distribution agreements, I think you announced in December and some in January. And so I’m just curious, I think it's safe to assume you didn’t get the benefit of those distribution agreements in the fourth quarter, presumably that’s something we have to look forward to this year.

And then the second question is; you mentioned that you might spend more nationally and I’m curious is that, are you considering TV or is that print or digital or what sort of medium are you considering there? Thanks.

Chris Reed

Well, we are interviewing different groups that have had; everybody’s got their specialty with this, a social media component, looking at TV, radio, billboards, and print. We’re looking at effectively everything and we’re testing certain of those items right now. Sorry, what was your other question besides the media’s mix that we’re looking at?

Gordon Hodge - Tracker Research

Well, it seemed that a lot of your, a lot of the announcements of the new distribution…

Chris Reed

Like Lassonde, we announced Lassonde in January of last year. Lassonde hasn't really lost enthusiasm; they are just $1 billion Corporation; it’s the same thing with Safeway. We announced we’re putting our kombucha and Kroger. Sometimes they are fast about it, sometimes okay, this quarter we’re going to put in 10%, next quarter we’re going to put another 10%.

So the way they look at these distribution announcements; we’ve started a new revenue stream, a new business partnership and they start slow and they grow. Now, I think we’re moving a little more aggressively now, so when we bring our new distributor, we tend to take go in there do a bliss and we have a bigger more to launch into those distributors. But they still in the scheme of what we are doing, they are not going to -- each distributor probably doesn’t add, maybe adds 1% year-over-year.

Excuse me. Can someone mute their line? They are talking over me. Thanks. So anyway, just look at them year-over-year, right now Manhattan Bureau a large, current largest distributor in the country, they handle 25,000 accounts in New York City, we got three people on the street. We look to be moving up towards $1 million.

We launched that, maybe probably announced that in 2007 or 2008. So, because we have so many relationships, we don’t take them and just try to hammer one and say really focus on them. We have all these kind of business models with businesses developing relatively slowly. Now, we could be a lot more aggressive with these, if we figure out in our modeling here, there is an analysis that says, if you raise $5 million or $10 million, you are going to bloom these things up a lot faster and everybody wins.

That might convince us to get more aggressive, but right now -- and I think that we are getting more aggressive. Some of these data sources that I mentioned in the earnings call where we are now looking into the marketplace and buying more information. We are starting to see the way we go to market with these guys even the distributors and we are seeing almost laser focused what’s going on in those accounts and where we are doing and what we are doing and what our people are doing. So not only our sales people getting that exact feedback, so is the ivory tower here.

So, we think we are going to see some real significant business model shift this year from the fact that we now have such a deep visibility into what’s happening in the marketplace.

Gordon Hodge - Tracker Research

That’s great. Thank you.

Chris Reed

Yes, anyway. That was kind of a ramble.

Operator

And our next question is going to come from Sam. Please go ahead.

Unidentified Analyst

Good afternoon, Chris. How are you?

Chris Reed

Hi Sam.

Unidentified Analyst

A couple of questions; can you tell us in terms of the capacity utilization in the California plant where is that at, at this point? And you said you may be adding a third shift; is that for that plant or is that to an East Coast plant?

Chris Reed

The East Coast plant, the co-pack facility, they manage their facility. The West Coast plant which we own, we are working on a third shift for our plant. And where is that capacity, I mean right now with the current equipment, we can run somewhere a perfect world 150,000 cases a month, a very -- that would be pushing everything running without any failure of anything at any point.

So it’s unrealistic, but probably about 120 to the fair level and we are buttoning up around 75-80 right now; and if we had full staff and the goal of just running, we could run 100,000 a month right now running three shifts. But we I think by the end of the year, we will probably be running at the 100, able to run 120. And about $1 million of purchasing, we’ll buy equipment that allows the facility to run somewhere between 50% and 80% faster.

So the infrastructure is there to build on with small investment at least investment of $1 million, 8,000 or 9,000 per month, I don’t know that will be. We probably have the facility running significantly faster. So those are the way we think about our current facility in the West Coast.

Unidentified Analyst

What’s the opportunity and where are you at Whole Foods right now, a distribution for how many stores and is there any expectations to add more this year?

Chris Reed

Well, I mean Whole Foods we’re in full -- the top five, six items of our natural sodas are in all the Whole Foods, 98, 99%. The kombucha is in around 135 to 320 stores. And we continue to exert marketing and sales pressure for them to pick up the product chain wide and that seems to be going well. So in 2014, we should see some breakthroughs, hopefully by the end of the year we’ll be a large, enough percentage of Whole Foods. We can start the campaigns, the advertising and marketing campaigns that requires a certain minimum coverage before you can involve yourself co-op advertising with them.

If you’re asking in general about new accounts, I mean we’re constantly bringing on new distributors, new chain, new accounts; you can see the steady flow of new business that we bring on in North America. And it’ll just continue to be -- there is still a huge opportunity with the brands not only growing in existing accounts they’re in, but in new accounts all across the country, but I am not sure you asked that.

Unidentified Analyst

No I didn’t ask, just going to that message; it seems to me if you -- I mean you’ve grown the top-line nicely, but once you get a new distributor or new customer, why not have a small maybe circle of three people intensely go after that account to make sure product is in those places within three to six months instead of having some of these customers put in product a year or two later. It seems like number one, the revenue is going to grow a lot faster and with somebody’s [hyper] product it makes a lot more sense to get it in the door than to have them basically waited out or not be called on or maybe they will call you whatever?

Chris Reed

Yes, I mean we watch the go-to-market for some of the larger and more successful companies, Arizona Iced Tea, Vitamin Water, Snapple; and I will say that the aggressive behavior of like Vitamin Water who sold their company doing $250 million, $300 million in sales, but burning $250 million to get there, I mean it is a perfect kind of thing for a public company to do that in 2007 and before.

I’m not sure that the marketplace has a stomach for that kind of aggressive spend hoping that the breakeven of $250 million in sales. But I will say that when we do open a distributorship, we typically do, we’ll bring in the team and we’ll hire someone to manage distributor to be there after the bliss, but we’ll have a swat team come in, 4, 5, 10 people depending on how big the market is and they’ll spend a week there and try to just jump start the market. But then we’ll leave someone there, we can’t take all of people who have other areas to manage and keep growing away from it.

So yes, I mean you could take three people and run it for six months, there is many different ways to model that. But ultimately you are pulling people away from other opportunity. So, we’ve opted to slow grow in markets around the country, and we’ll accelerate it. But we’re also seeing in some of our analysis that $1 spent on a sales person generates so much return on investment $1 spent on advertising done properly gets a much higher return on investment. So we’re actually morphing some of our spend into more marketing dollars spend to educate the consumers who are there to bring a lot of sales around the country already as opposed to just putting more people on the streets to push us on the more shelves.

So, you might see that, we’re not aggressive with the hiring of the very expensive army, as much as we might just become more noisy like the Jones Soda for a while, so that people can hear more about this incredible product that's available in probably 30,000 or 40,000 accounts nationwide right now.

Unidentified Analyst

Very good. Thank you very much.

Chris Reed

Thank you, Sam.

Operator

We have another question from Vipul from Blash Capital. Please go ahead.

Vipul Sagar - Blash Capital

Chris, one follow-up question was private label. How much business was that in the Q4?

Chris Reed

Now that’s a damn good question. You had another question there before. Why don’t you send me an email, if somebody knows Q4 private label numbers, Dave or Neal?

Neal Cohane

We got $3.6 million in Q4.

Chris Reed

So, it could not have been private label $3.6, was it?

Neal Cohane

So, we have yes, 3.6.

Chris Reed

Wow, I guess -- I mean that seems awful high.

Vipul Sagar - Blash Capital

Yes, it does seem awful, usually it’s about 1, 1.25 million. Okay.

Neal Cohane

Q3 includes other sales like candy, I think.

Chris Reed

No, no, you got to look up the numbers, that’s not accurate.

Neal Cohane

Alright.

Vipul Sagar - Blash Capital

Okay. That was a…

Chris Reed

We’ll get back to you. Send me an email on the question.

Vipul Sagar - Blash Capital

Will do. Thank you.

Chris Reed

Yes.

Operator

We have a question from John from Singular Research. Please go ahead.

John Curti - Singular Research

(Inaudible).

Chris Reed

John, you’re kind of quiet.

John Curti - Singular Research

2014 CapEx?

Chris Reed

Yes, not spending, oh God, I can’t really say that. They have a similar spend to what we spent last year, but we are mostly leasing the equipment. So it’s not really coming out of working cash reserve, working capital, we are going to lease equipment for a couple of reasons; we’re automating some of the packaging line here, reducing labor cost, nice return on investment of under six months and pay back. And we are looking at this new way of producing our sodas that allows us to preprocess in LA and ship [pseudo] constantly around the country to come up and work with cheaper bottling facilities than breweries. And that is something that we are going to have a little bit of spend on this year too.

John Curti - Singular Research

What products will be produced out of the brewery in Los Angles in 2014?

Chris Reed

What products will we be producing?

John Curti - Singular Research

Yes.

Chris Reed

A bunch of kombucha, private label and our branded products.

John Curti - Singular Research

Any of the private labels gone to co-pack?

Chris Reed

Yes. We can run some of our private label on the East Coast, it’s more -- the most, the majority of our private label is being run out in the West Coast facility because its unique packaging.

John Curti - Singular Research

How about this if larger regional distribution becomes more of an option, just kind of repeat kind of where you think that volume is, is that around $60 million to $70 million where that makes -- begins to make some sense?

Chris Reed

Yes, I mean it’s a combination of things. So right now, as we are growing a lot in the North West, so if we found a facility right now that’s pretty reasonably priced and very successful and confident, we might consider bringing on a facility. But as the volume builds up in an area, the shipping component of it, start looking at the annual cost of shipping to get there, we’ll just make economical sense to bring on facilities regionally.

Definitely twice as big as we are starts making a lot more sense. Definitely the innovation, the R&D innovation of how we have now figured out how to bypass the inter kit brewing requirement for the Ginger Brew and to pre brew in LA and ship something as much more plug and play for a simpler bottling type outfit, it’s opening up a lot more opportunities for us to get into the sooner than later.

Right now, the way we make Ginger Brew is so exotic; it limits it to brewers and not just every brewer, just a select few brewers. So, it probably limits us to about four or five facilities right now in the country. But what we have done with these two R&Ds this year and at the end of last year and morphing our Ginger Brews, we probably opened up to triple or quadruple the number of facilities around the country that could produce our product. And its exciting thing, I am not going to -- you are going to discover this throughout the year if you are a consumer.

We’ve gotten -- it tastes a little better. It’s kind of a significant improvement in flavor of it. So that’s -- I don’t know how we are going to announce that because we don’t want to have a coke, classic and a new coke kind of thing going on. So we are keeping it very similar to the current product, but it seems that everybody kind of agrees that this new direction is actually an improvement on the product. And I am not a firm believer that there is not marketing like better product.

All right, do we have any more questions, are we done?

John Curti - Singular Research

Chris, I have one more.

Chris Reed

Go ahead.

John Curti - Singular Research

With respect to meeting customer expectations in terms of deliveries and having products on the shelf, what kind of feedback are you getting from your customers? And how do you feel like you’re doing?

Chris Reed

We just sort of the kombucha, we’ve been keeping most of our products very much in stock. And kombucha is in the situation for most of the year so far where as we produce, it’s pretty much evaporated and we’re just covering orders. We’re probably doing a better job than we did last year. And not to say that it caught by surprise, it kind of caught by surprise some of our marketing, new marketing stuff we think kind of kicked it up a bit more than we expected. So, we’re learning to expect a little higher things on that.

But in terms of keeping the product in stock, we give you stock reports from our distribution partners, and for the most parts they’re keeping themselves in stock. Now the store is always an issue. When you have a product, Reed's Ginger Brew that’s in -- the coke is the natural food industry that’s outselling most of the average soda on the shelf by 5, 6, 7 times, maybe even 8 or 9 times, I don’t have the math in front me, but let’s just say it beats the next best ginger by four times.

So, it moves so much faster, its dynamics are that by new the shelf is empty and the stock people are kind of lazy. So there isn’t adequate way to keep ourselves in stock at the store level unless we convince stores to build little displays of the product. And most of time the stores say well we want you to pay for the display, I’d say look I am just trying to help the customer, you’re losing business by not putting more product out. But that’s kind of always been our problem with a very fast moving item.

All right, if there is no further questions, I want to thank everybody who is still left on the call. Thank you for your time today. I can’t really say exactly, I mean we’re very excited about 2014. We’re not sure, but we’re very excited to say Q2 and Q3 seem like they’re going to be significantly good quarters for us. Q1 should be solid, but I’m very excited about all the changes that are going on now and the way they are going to reflect in the future quarters of 2014.

So look forward to meeting with you. And have a wonderful day. The recording will be up on our website probably in a day or two for anyone who might want to listen to it again or [send us, bye]. Thank you.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!