Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Reed’s, Inc. (NYSEMKT:REED)

Q1 2014 Earnings Conference Call

May 14, 2014 4:30 PM ET

Executives

David Williams – Interim Chief Financial Officer

Chris Reed – Chairman, President, Chief Executive Officer

Analysts

Alec Jaslow – Midtown Partners & Co., LLC

Joseph Munda – Sidoti & Company, LLC

John Curti – Singular Research

Vipul Sagar – Blash Capital

Operator

Good afternoon, and welcome to the Reed’s First Quarter 2014 Earnings Conference Call. My name is Claudine, and I’ll be your conference call operator. Participating in today’s call, we have Chris Reed, the CEO and Founder of Reed’s, and David Williams, the Interim Chief Financial Officer.

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 the protection of the Safe Harbor for forward-looking statements that are 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 relating to demand for the Company’s products, dependence on third-party distributors, changes in 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, May 14, 2014. Reed’s, Inc. assumes no obligation to update these projections in the future as market conditions change.

During the presentation all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. (Operator Instructions) As a reminder, this conference is being recorded, Wednesday May 14, 2014.

It is now my pleasure to turn the conference over to David Williams. Please go ahead, sir.

David Williams

Thank you, Claudine. Good afternoon, everybody, and thanks for joining us today. I’m Dave Williams, the Interim CFO at Reed’s. Let’s turn our attention to the first quarter results.

For the three months ending March 31, 2014, gross sales were $10.1 million. This is a record for any first quarter in our history and 11% higher than first quarter 2013. Promotional expenses for the quarter were $1.2 million, which was about 12% of gross sales and a significant reduction over Q4 of 2013 and only slightly higher than Q1.

This brought our net sales down to about $9 million for the quarter, which was a 10% increase over last year. Extreme weather conditions in Q1 affected our growth rate as it did every retail sales across the sector in the country, but this 10% growth rate was only due to $500,000 decrease in private label sales, otherwise sales from our core branded products grew 19% over Q1 last year. That was through a 143% increase in Kombucha sales and a 12% increase in our branded Reed’s and Virgil’s product lines.

Cost of goods sold decreased 1% and was comprised of an increase in tangible cost of goods sold and a decrease in idle capacity cost. Tangible cost of goods sold increased 200 basis points to 62% or $5.6 million. This increase is primarily due to price increases from key vendor on the East Coast. However, this increase is more than offset by decreases in idle capacity cost. That decrease amounted to savings of over $200,000 and brought idle capacity cost down to 5% of net sales from 8% last year.

This improvement was driven by better plant utilization that has increased production in our Los Angeles bottling plant. We anticipate that this cost will continue to decline as plant production increases.

Gross profit for Q1 increased to $2.9 million, 15% over Q1 last year. Our margins improved 120 basis points to 32.4% of net sales.

Operating expenses grew for the period $161,000. Reductions were realized in both delivery and handling expenses and G&A expenses, which both decreased over last year by 1% and 2% respectively. Selling and marketing expenses on the other hand grew 21% to $1.1 million as we hired more salespeople and increased marketing and advertising activities.

Our loss from operations was reduced to 32,000, which was an improvement of over $200,000 from last year. Our interest expense affected this number to the extent of $188,000, bringing our net loss for the quarter to $220,000 or $0.02 per share, an improvement like I said of over $200,000 from last year.

Our adjustment to net loss to arrive at a modified EBITDA for Q1 consisted of add backs for depreciation and amortization, interest expense and stock option compensation expense, all totaling $468,000 thus arriving at a modified EBITDA of 248,000 for the first quarter, nearly a 10-fold increase over Q1 last year.

Liquidity remained strong. We ended the quarter with $1,100,000 in cash. This net cash was provided by our operating activities in the amount of $85,000 for the three months, an improvement of over $1 million compared to Q1 last year, it’s primarily responsible or pointing towards improved operating performance, reductions in inventory, and increases in accounts payable. Our net working capital at quarter end was $1.3 million.

Covenants in our credit facility are triggered when availability of the line falls before $100,000 at any quarter end. We did fall below that availability at quarter end, and hence triggered a debt service covenant ratio that we failed to meet. However, subsequently we received a waiver from our lender regarding this default.

Looking ahead, our forecast for the remainder of 2014 is as follows. We anticipate an overall sales growth for the year between 15% and 25%. This will be seen from a 15% to 20% growth in our core brands Reed’s and Virgil’s and a 50% to 100% growth in our Kombucha product line.

We expect to recover from Q1 declines in private label sales and reach 10% to 15% growth by year end. We believe that continued efforts to manage cost and productivity in our Los Angeles bottling plant will further reduce idle capacity costs from last year. EBITDA by year end is expected to range between $1 million and $1.5 million.

Thank you for your time. I’ll turn the call now over to our Founder and CEO, Chris Reed.

Chris Reed

Well, thank you, David. We’re going to try to keep this call to approximately an hour today. So I’m going to try to keep my side short and keep most of it to the time for questions, Q&A. I think the first blush, people look at the 10% net revenue growth and start to feel if there is a slowdown going on here, and I reiterate what David said that without a $500,000 reduction in private label from $1.1 million to $600,000, we would have had about 19% growth for the quarter that was affected by some of the most severe weather. And there is seasonality with beverages and definitely the warmer season tends to increase sales.

So we – and I guess the main reason we also feel strongly that it was a weather related situation on top of private label – the private label is obvious, is the fact that this is quite a strong recovery in sales in the second quarter. So we are – the guidance that David mentioned, the 15% to 25% growth for the year, still feels very much on track, based – kind of continuing the conversion from the last earnings call, we are looking at the way we spend money or erode the top line from gross to net sales; many years ago we were running a 5% to 6% erosion and as we went public and got more aggressive with grocery, and slotting, and marketing, advertising dollars, with a larger sales force, the natural progression has, going to [90%] [ph] in 2012, erosion up to 12% in 2013, but progressively through 2013 it moved from about 10% to 10.5% in the first quarter, up to 14% in the fourth quarter. So there was a continual ramping up and one of the projects was definitely to bring it under control, score card it, analyze it, figure out where the smart spends are happening and unwind those that weren’t really benefiting the company.

We started that process approximately mid-February and we were able to unwind a bit of spend in the first quarter bringing it down, David mentioned 12%, I think it was somewhat 11.5%, but rounded at 12%. So, and it seems to be coming down from that. So I guess we are not going to be price specific on the guidance, but we’re excited that sales are remaining high in the second quarter, and the spend is reducing in a great way.

So that effectively [re-creases] [ph] margin in its own right. And anything that doesn’t erode the top line goes into that. It is not that we don’t look at net sales, but I would say that I continue to reiterate gross profit growth is more important to the company than net sales growth because ultimately I believe we’ll be valued on the basis of our gross profits because a larger beverage company will take those gross profits and put it to their bottom line.

The plant idle capacity costs dropping from 8.4% to 5.3% in its own right changed the gross profit margin by 310 basis points. There were - a pushback from an East Coast facility raised prices on us. And we anticipate unwinding that increase at some point in the year otherwise our margins would have been considerably better.

So the combination of unwinding the increased cost of the East Coast plant, the plant idle capacity improvements and the reduction in top line erosion, I’m not going to give specific guidance, and I’m sure there will be questions on it, but it will have a significant impact on our gross profit margins in 2014 probably in a way that has more significance than in any other year in the history of the company.

So those are very exciting projects, I would say plant idle capacity cost reduction is at the half way point from clear - I clearly can see the reduction from 8.4% to 5.3% should be able to unwind it in equal amount in the future. I alluded to you in the last earnings call that part of the inspiration, the cost increase on the East Coast plant has inspired us to develop a process that pulls it out of the more expensive brewing environment to a more of a regular bottling plant.

So we are anticipating significant improvements in margin from that modification of our process, the first in 25 years. And the good collateral news is that, it produces a superior product which is probably even more exciting than the cost savings, because there is no marketing like better products.

Operational highlights, obviously very excited about Kombucha. 143% increase year-over-year, we would expect an improvement, and so we are very pleased with that. What do we anticipate going forward? Right now in the second quarter to be frank, we’re having issues with keeping up with production. We switched to glass anticipating a certain growth rate to a new supplier and we were caught short. So we are scrambling to catch up with the sales of Reed’s Culture Club Kombucha. But the great news is just the consumer acceptance seems to be growing well. And we mentioned in prior quarters and prior press releases, we are now the de facto number two in the Kombucha category up against the – behemoth GT Kombucha.

And we continue to make inroads on that, and that still remains a very large opportunity. Some of the wins during the quarter were Safeway started a – they have a number of divisions and they started putting us in, I believe it started with a couple of hundred stores and moving out into more and more stores at the – [inaudible] trying to slot the – and change the planograms to put our products in.

We were picked up by one of our largest distributors Manhattan Beer which is Coors largest distributor in the country with 25,000 accounts. And so they picked up Kombucha and I believe they are under four truckload which is a very nice launch. Also FreshDirect has given us the thumbs up to move from just the Ginger Brew to more of our items including Kombucha, yet I did search the website and it’s not up there on the website yet, but I have been given direction that it would be up and running here in the next month or so.

Also, there was a pretty exciting - for those who travel the OTG, which is the second largest airport food operator, started carrying, Reed’s Extra Ginger Brew and a couple of our Kombucha SKU, so travelers are reporting back to us that they are buying our Kombucha in 70 locations, from JFK to LaGuardia, to Philly, Newark, Minneapolis, Washington D.C., and Toronto.

The distributors continue our rollout into DSD and more importantly we continue to revise and improve the way we go-to-market through these DSD beer distributors. And the return on investment analysis that we’ve started to kind of scorecard the different marketing techniques, models that we are using are showing that we should be moving towards hiring a significant staff to manage the DSD network.

I used to call it Phase 2; Phase 1 being to go into the grocery supermarket trade, and then move into the up and down street that the DSD beer network allows us access to. Grocery, the fastest growing premium soft drink brands in the U.S, Reed’s and Virgil’s, 31% growth in the last 24 weeks. We are – the category is relatively flat, all the growth is coming from Reed’s and Virgil’s. At this rate in 2015 we will be the number one premium bottled soft drink company. We started running the IRI data, Nielsen data for supermarkets, we’re number eight I believe and not doing more than 1 million or 1.5 million of business, and I guess we reached 15 million in grocery growing at 31%, we have a 35%, 36% ACV that’s the percentage of stores we’re in, roughly 15,000, actually that’s about a third - 36,000, it’s about 12,000 or 13,000 additional 3,000 supermarkets that are outside of mainstream, the Whole Foods, Trader Joe’s, Sprouts of the world.

So the people we are moving up into, we just surpassed Goya, in fact a very strong ethnic brand Stewart’s, I think we are getting – we passed Stewart’s and that’s pretty impressive. I am looking at the notes from my sales manager and we are ranked behind IBC and Jarritos another ethnic brand, the Jarritos brand of Mexican soda that does quite well.

We are the growth of that category right now, so it’s a very exciting time, we still remain unique entity, we not only are a great premium brand, but we are also all natural. And generally speaking the chains like to kill two birds with one stone, and they can have both in one brand, or two brands, Reed’s and Virgil’s are very excited about it.

So that’s - actually we’re probably growing faster in grocery - in mainstream than we are in our core area, which is the natural food industry, which is very exciting. Our Root Beer showed up in the Food Factory in Canada and will shortly be [appearing] [ph] in the U.S. So there’s been a bit of PR and IRs had some great successes during the quarter.

We also started running more advertising, print advertising. So, I think that as the margins improve, especially with strong top line growth and as even stronger margin growth we’re going to be affording a budget that’s going to get more significant and allow us to not only branch out of our current PR and I would say select print advertising to move into more aggressive advertising and there will be more announcements on that in the future.

I’ll probably go for a couple of more minutes here and then open up the questions, so I’m just taking a quick look at some of our wins. We were Vegetarian Times has given us a finalist and their fizzy drink category. So right now there is votes for that and we anticipate some more awards for the Kombucha in 2014. But we were picked up on MSN and the Examiner, San Jose Mercury gave our Kombucha a big thumbs up, that was in turn picked up by a tremendous amount of press, LA business Journal wrote about us.

So there is about –14.5 million impressions from our public relations efforts in the first quarter. We go to a number of events around the country, which is a continuation of our marketing from 2013, so we are seeing a large ramp up. We are seeing an acceleration of the Reed’s brand over Virgil’s, which is exciting for us at a time we were about to bring our cost down significantly with the new process and produce a superior products.

Some of the fun we are having out in the marketplace is we are running a copper mug program for those of you who come to the investor conferences like ROTH Capital and the B. Riley Conference coming up shortly, will be more familiar with the copper mugs, but it’s being a very successful rollout of using the Reed’s Extra Ginger Brew as a mixer in bars and clubs and so we are getting a lot more food service and that’s working well with the rollout in the DSD beer network.

So there is a growing presence or our brand in a very high profile way with the signature of copper mugs and our product being featured a lot of times with a display built in the back of the bar. So that’s an exciting - there is no end to how we can go with that, there’s really – we’re still somewhat in our infancy with the DSD rollout, grocery and the natural foods definitely has opportunities to grow by multiples and is still the feeling here with the company. So, it’s exciting time probably one of the most exciting years in for since I can remember. And we will talk about more of the marketing programs that I’ve been trying to launch for many years and finally with the budgets and the margins coming in are going to allow us to have a start in earnest in 2014.

So, it’s a great time. I appreciate those of you who could make it call today and I am going to now open up the lines for any questions you may have.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) And our first question comes from the line of Alec Jaslow with Midtown Partners. Please go ahead.

Alec Jaslow – Midtown Partners & Co., LLC

Hey guys, how are you doing?

Chris Reed

Good, how are you doing Alec?

Alec Jaslow – Midtown Partners & Co., LLC

I am good, thanks. Just wanted to get a little bit more color on what happened with the tangible goods, it seemed like a pretty big increase, about 200 basis points kind of what happened, and when can you see the impact of improvement there over the course of the rest of the year?

Chris Reed

David would you like to comment on the tangible goods component of 200 points for this Q.

David Williams

We still have to analyze some of it but we did have a significant increase from our East Coast producer.

Chris Reed

You’re talking about the cost of goods, okay, I thought he was talking about inventory. I apologize.

We are hit with a price increase at the end of the year and quite frankly we are not – we had a contract with the production facility and they pulled a very novel approach with us. So you basically said we disagree that we have a contract and here is your price increase, you take it or leave it. So that’s what inspired the R&D that came up with a process that we pull it out of a production facility like the current facility and open it up to a much wider spectrum of facilities that can run the product now, which also opens it up to - tremendously easier for us to go after International export business. I guess we can now go to more ordinary non-brewing environment bottling plants and ship a pseudo-concentrate there.

So, besides the quality of the product, the wonderful new ginger flavors that we are getting through the new process, it was mainly inspired by a very poor behavior of our current East Coast plant, and I am going to be honest, I am taking a reserve not in the financials, and I am fully going to pursue this later on that they have raised prices on us without any legal basis for it, but people will do what they do.

Alec Jaslow – Midtown Partners & Co., LLC

Is the solution -- are you going to diversify to a few different plants or are you going to stick with these guys going forward?

David Williams

We are going to make them honest if we are to stick with them.

Alec Jaslow – Midtown Partners & Co., LLC

Okay. And then for private label, if you could talk a little bit about, how it affects margins in general, and then going forward should we expect private label to be pretty volatile in terms of the business you’re seeing or is it going to be pretty consistent for the rest of the year?

Christopher Reed

Well, you clearly saw volatility, and last year in the first quarter, we had loading on a very new large project with one of the largest retailers in the U.S., and we even have the same loading this year, and one of the large private label retailers -- one of our customers actually was sold, and the new owners have downplayed, so we lost a little volume there, but we continue to impress supermarket trade, and many of our existing customers are coming in or doubling down with more items for this year, and we took a moment after the first quarter for this call, and did a bit of an analysis of what we were looking at, and it looks like we will still have growth, probably not the 30% to 40% we’ve been averaging every year, especially with the [$0.5 million] (ph) already behind after the first quarter, but we’re still anticipating 10% to 15% growth for the year, and quite frankly, a lot of the private label, we don’t know -- we can see -- definitely from what we can see is going on, and there is always new stuff that come in throughout the year. So it’s pretty even improved beyond that.

Alec Jaslow – Midtown Partners & Co., LLC

Okay. And then the last one…

Christopher Reed

(Multiple Speakers) volatility there, and (inaudible) different times as we hit it in the first quarter.

Alec Jaslow – Midtown Partners & Co., LLC

Okay. And the last one is, if you could maybe give us an update on plans on adding executives. I think you mentioned last time potentially a Chief Marketing Officer or a Chief Operating officer, if you can give us more color on that and when it might come into effect?

Christopher Reed

Well, we could see the writing on the wall, there is a lot of growth in our future. We are continuing to vet talent, and specifically one of my big concerns for 2014 and 2015 will be our ability to keep up with sales, especially with some of the new marketing programs that have a modest to reasonable success. So, a lot of my time has been spent not only making sure and ensuring that the West Coast facility can move closer to its optimum, but also talking with other firms that could be producing the products.

And right now, we have three additional firms beside the East Coast facility that two of them have expressed an absolute, yes, and one of them is very close, and the reason for that is we want to stay ahead of the need. We started doing some advertising on Kombucha in the first quarter and quite frankly melted inventory.

And so, we’re starting to get that, I mentioned that after the K in that earnings call that we’re looking at how to analyze what we’re doing and move more capital into smarter spend, and we learned a little bit in the first quarter about smarter spend and also learned that we better be prepared for a bit more production just to cover that advertising effect if we do have a success, like what we did. By the way, I kind of – go ahead David, what do you want to say?

Alec Jaslow – Midtown Partners & Co., LLC

You were talking about brining on (multiple speakers)?

Christopher Reed

Yes, so right, thank you for bringing me back to the point. So, we continue to interview, we are continuing to evaluate, we know we will be bringing on probably a Chief Operating Officer to manage the production side of this. In terms of a marketing director, we are mostly interviewing agencies right now to become kind of our marketing-end branch. So, we are still is working with $1 billion consumer brand, marketing expert, who has been here for the last year and half who consults with us on the marketing.

Alec Jaslow – Midtown Partners & Co., LLC

Okay, great, thanks you guys, that’s all the questions I have.

Christopher Reed

Thanks, Alec.

Operator

Our next question comes from the line of Joe Munda with Sidoti. Please go ahead.

Joseph Munda – Sidoti & Company, LLC

Good afternoon, Chris and David. Can you hear me okay?

Christopher Reed

Yes, Joe nice to hear you.

Joseph Munda – Sidoti & Company, LLC

Chris, I was wondering if you could break out in dollar terms or percentage of revenue terms what the three categories; Kombucha, private label, and branded contributed to in the quarter?

Christopher Reed

Do you mean in dollars instead of percentages

Joseph Munda – Sidoti & Company, LLC

Either dollars yes, if you could do it in dollar terms that would be great.

Christopher Reed

All right, yes, I don’t think I can right now. So, I’m going to have, I think, David just rolled into his office to see if he can grab a sheet. Why don’t you go to your next question and we will come back to that one if you have a next one?

Joseph Munda – Sidoti & Company, LLC

Okay. So, Chris, as far as the outlook is concerned, the revenue growth of 15% to 25%, that’s overall revenue growth, that’s not considering the erosion from the promotional discounts, right that you were talking about?

Christopher Reed

That’s overall growth of net sales year over year.

Joseph Munda – Sidoti & Company, LLC

Okay. And you’re saying that that number, that erosion number is coming down? Right, coming down quarter-over-quarter here as we move forward?

Christopher Reed

It is...

Joseph Munda – Sidoti & Company, LLC

Okay. So, how should we then look at that overall number going forward for the year, I mean, are you expecting it to get back to that 10% level of erosion. We’re just trying to figure out where you guys are going to be?

Christopher Reed

Well, first of all, one of the main projects that we had here since the third quarter, where I’ve been -- started hammering on the poor management, I can’t say where is this gas pedal, the spend gas pedal the sale people have their foot down on. I want you to find that gas pedal and I want you to take the foot off the gas, and then I want you to evaluate how they are spending and see which of this is necessary and which of this can be shutdown.

We shut it down pretty fast. Of course, the big concern will be, there is a certain appetite in the market place for that spend. It is lying in some pocket somewhere, whether it’s a retailer or distributor, so, you don’t want to see that your sales is tied so heavily to that deep spend, and then when you do take your foot off the gas pedal, you don’t want to see your sales evaporate and start -- reducing in growth or have backwards trend for your quarter.

So, we really didn’t know what to expect, and there is not enough data. We do have April, and we do have the preliminary May, and we do – can look at March, but I could say it’s trending down, and I don’t really want to go on record telling you exactly where it is, but I think the performance for the year that we have kind of been holding on around 11%, so from 12% to 11%. I know we’re going to beat that, but is that 8%, 9%, or 10%, I am not going to say. I think, we will have to wait for Q2, and we want to evaluate it for ourselves. We don’t know the effect of it, maybe we can get away for a short-term and then there is a repercussion in three or four months, so what we can say is there’s definitely smarter spend.

And I don’t want to make it sound like we are stupid. We are refining what we do here. We are very good at what we do, and there is not many people who have the kind of success that we have, so I noticed a lot of people picked up the fact that I am saying, yes, we should have done better. Of course, we should have been perfect from day one, we should have known all the things, but we have a unique product, unique business, and there is a lot of learning that is going to continue to go on as we do it, like how do we approach the market place, what’s going to be our proposition to the market for our marketing, our tag lines, and all that stuff is still to be determined. Yes, we should have had that all coming in 25 years ago where we didn’t. We pushed our way to where we are, but I will say it seems to not be affecting sales, we’re still moving at a very great -- nice clip here, and we have taken our foot off the gas, and I would say 11% conservatively, 10% probable, and maybe an 8% or 9%.

Joseph Munda – Sidoti & Company, LLC

Okay. As far as gross margin is concerned quarter-over-quarter for looking sequentially, do we expect an improvement off of this base of 32% going forward? I mean, it seems like you are getting nice production gains just trying -- and you talked a lot about the improvement, and I am just wondering is it going to be a steady ramp going out into the fourth quarter?

Christopher Reed

(Multiple Speakers) is the half-way point in my mind for where it is going to be, isn’t it. Okay, yes, we should be able to – we just (inaudible) effectively, I think somewhere around $80,000, $70,000 a month. I think we can [underline] conservatively $50,000 and probably more or like $80,000, so we’re somewhere at the midpoint of where we can see, and then [re-lease $1 million] worth of equipment, double the speed, and then the economics go even much better. So, there is going to be continual improvement. There is going to be a better pricing predictably by the third quarter on the new process or the bump of cost increase due to the East Coast jacking of prices up out of the (technical difficulty) contract. So there is going to be continual improvements on three different places that are going to affect that gross profit margins.

Joseph Munda – Sidoti & Company, LLC

Okay, okay, any luck with those -- with the break out -- the revenue break out?

Christopher Reed

Yes. On the $8.9 million in sales -- net sales for Q1, $3 million comes from Reed’s line, $3.4 million comes from Virgil line, and $1.2 million comes from Kombucha, private label was 600 and change, and the rest was candy and -- other things like that.

Christopher Reed

How much was the rest?

Christopher Reed

You’d have to round it, that’s like 0.25 -- 0.75 million

Christopher Reed

Okay.

Joseph Munda – Sidoti & Company, LLC

I’m sorry, what was 0.75 million?

Christopher Reed

That’s what’s the balance of non-beverage stuff that we sold.

Joseph Munda – Sidoti & Company, LLC

Okay.

Christopher Reed

Mostly candy

Joseph Munda – Sidoti & Company, LLC

Okay. And then I guess Chris, the last question I have and I will hop back in the queue on the covenants with your debt, how are you going to resolve this issue going forward?

Christopher J. Reed

I would say, we are supposed to leave 100,000 of availability on the line at the end of a Q, and you could see from what we put and posted for cash on the balance sheet, we just need to make sure that we don’t leave 55,000, we take 45,000, don’t borrow it, and leave it in there. The banking relationship started three years ago, and we are a different company right now. I am sure November, when the line of credit is done, if the current company stays with it, there will be a much better interest rate.

They’ve been very good for us because of their tremendous flexibility when we get very large orders from a Costco or Trader Joe’s. These guys are there to go outside of the line of credit, outside of the rules of our engagement and lend us whatever we need, obviously [50%].We wouldn’t have become a much more stable company over the last three years, but we are hoping so see a dramatic reduction in interest, and hopefully at least flexible -- flexible new banking relationship with these guys.

Joseph Munda – Sidoti & Company, LLC

Okay, all right. Thank you.

Christopher J. Reed

Sure.

Operator

Our next question comes from the line of John Curti with Singular Research. Please proceed.

John Curti – Singular Research

Good afternoon David and Chris.

Dave Williams

Hey John.

John Curti – Singular Research

Question on the issue with the switch over and glass, and how that’s going to affect you both from the cost standpoint and maybe deferral of some revenues from maybe into the – from the second quarter to the third quarter, can you talk about that a little bit?

Christopher J. Reed

The glass is going to be here on Friday, and we’ve been out of Kombucha for two weeks-ish. And then, we’re going to run like hell, but we probably will get most of the product back in. But I think there is probably 15 -- about 300,000-ish that won’t be in the Q that might have been in the Q if we had been in full stock of the line without any break in continuity during this second quarter, but I think if you do the math on the second quarter, it will be -- we are seeing good growth and good margins. We’re trending against a relatively weak performance last year.

John Curti – Singular Research

Will that necessarily then have a negative impact on your gross margins because you had a very nice increase in the first quarter? With you out of Kombucha for a couple of weeks -- out of production for a couple of weeks, the plant utilization is going to be a little bit lower in the second quarter than probably you would have expected?

Christopher J. Reed

Well, I think we run that number every month, and it still seems to be trending down, and quite frankly it’s trending against -- we look at the whole year of plant utilization idle capacity. We had some months where we were running very inefficiently as we were gearing up Kombucha and some of these private label projects that were very exotic packaging that we hadn’t fully automated the plant, but we had committed to the production of trying to kind of learn to swim by throwing you in the ocean or in the lake, and learn to swim down it.

So, not to say as a great thing to do, but, sometimes you just have to bust through on some of these novel productions. And I will say, we have this year the luxury of having automated and moving a very efficient Kombucha production, probably costing us less than half of our production cost basis of what it was last year. So, we’ll be trending against the very high numbers this last year of 2013 and 2014, so there will be -- even if we started screwing up again, which we wouldn’t be, we would be seeing a tremendous improvement this year in that number. So – but we see – we continue to trend down on that number.

John Curti – Singular Research

And then in terms of the increased expense from your East Coast bottler, is that expected to continue through the full second quarter, and then you will be able to begin producing with some other people sometime in the third quarter, begin to start to (multiple speakers)?

Christopher Reed

Well, yes, it is a guess. I think right now we’re getting very ready, we’ve been commercializing the new process in the West Coast facility. We’ve had to work out some bugs on it, but we feel relatively comfortable with it. Probably within a month, we are ready to run the East Coast in the same format. We are still – we have some facilities that are expressing interest and one that’s preparing for us. So it’s – we don’t know if it will be ready, but the best guess is the third quarter, we will be up and running or have renegotiated the old good prices or better prices from our current facility. So, let me kind of to show you my hand, but I think I’ve been pretty honest them too.

John Curti – Singular Research

Okay. So, would it be fair to say that for at least a good part of the second quarter, you will be – being held to that higher price that you incurred in the first quarter at least (multiple speakers) basis?

Christopher Reed

Yes, I think that’s fair to say, I would say that if I were to think about it, we started out the year with stuff in inventory from 2013 or 2013 prices, we probably carry a month. So, I would say the first quarter got hit with two-thirds of that, and the second quarter is going to get hit with the full effect of it, that’s part of the reason to run the West Coast facility at a maximum to pull, keep their impact on our cost of goods down.

So there should be some impact, but I will say, it will be offset and see the margins will continue to trend up, because we will be taking gas, put off the gas pedal with the erosion of top line in the idle capacity cost. We will continue to roll down in terms of -- against the growth or net sales. So that those two figures will continue to outstrip whatever the third facility is doing to us.

John Curti – Singular Research

And for David, did you mention, I might have missed it or didn’t quite hear it. The impact from those price increases from your east coast [Barber], what the impact was in the first quarter?

David Williams

We did have an impact in the first quarter like Chris said, we probably didn’t realize the full impact of those because of its scary inventory from prior lower price. But we did have intangible cost of goods sold at 200 basis points increase from 60% to 62% in the net sale.

John Curti – Singular Research

Okay.

David Williams

So, figuring that you guys enabled about 67%, so they probably go for another 100 basis points, but there will be reductions in other areas it’ll probably outstrip it. You guys can model this up if you want to– it’s still moving – it’s still developing situation here, just – it’s one -- it’s a temporary increase on (inaudible) that I am committed to deeply. You are going to have buy or build the -- facility, I will negotiate and have this production somewhere else or might (inaudible) fair for the market place.

It took a -- well almost an unusual positioning by a company to catch the REED Corporation off guard. I have a contract with them. I have a one year option to extend at my discretion and that one year would allow me (inaudible) we are no longer happy that would have given me one year to go find an alternative for it.

So, I would never allow myself to be caught like this. So it took an unusual situation. I am making excuses, but I don’t want anyone to think that we don’t know what the hell we’re doing here.

John Curti – Singular Research

Okay. Then my last question and pop off. Can you give us any kind of an update on how things are trending with (indiscernible) and then the potential rollout in Canada?

David Williams

Canada, the packaging has been converted to bilingual. The [Bahima], a very large organization has committed to it at the senior level to make sure that this thing happens faster than it has been happening and this is just an acceleration of that revenue stream and it will take time. But as we do in the U.S. there is a lot of supermarket, it is about 10% of our sales should be Canadian. At some time, we feel pretty comfortable that based on the current sales, we are talking of $4 million or $5 million should be coming out of Canada. And we look at Jones one part is running somewhere around the $10 million there in the market – they’ve matured up. I don’t know what it is today. So, we anticipate good things from it, but if the moving big machine and it’s going to move well with us.

John Curti – Singular Research

You think you’ll at least get some sales there this year?

David Williams

Yes. I think absolutely. We’ve ordered the packaging, the packaging is coming in, productions are happening. So I did ask for an update, all I’ve got -- it’s happening and -- we’re on-track.

John Curti – Singular Research

Okay, that’s good. Thanks.

Operator

And our next question comes from the line of (indiscernible) with Wells Fargo. Please go ahead.

Unidentified Analyst

Thank you. Hey, Chris and David how you’re doing today?

David Williams

Great, how you’re doing Allen?

Unidentified Analyst

Good. Just one quick question, talking about (inaudible). I was just wondering any thoughts of possibilities of some sort of joint venture with the likes of a soda stream anywhere down the road?

David Williams

I think its great idea and we’re reaching out to some of the players especially the new guys. So, it’s always a possibility. Obviously, they’re busy with larger brands I think we have a unique proposition being super premium. And you know the great thing about getting bigger overtime is more the bigger the players who come to us and want to do business with us so that I would say if it’s not happening now, will be happening in the future, it’s very exciting.

Unidentified Analyst

All right, thanks a lot.

Operator

(Operator Instructions) And our next question from the line of Vipul Sagar with Blash Capital. Please go ahead sir.

Vipul Sagar – Blash Capital

Hi, Chris, this is Vipul. You said there was $1.4 million in Kombucha sales?

Christopher Reed

I think it was 1.2.

Vipul Sagar – Blash Capital

1.2. So a 60,000 cases?

Christopher Reed

What was, I think it was over that I think we had some deals and discounting going on, which 60 or 72, 73. Yes we have to look it up for you sorry.

Vipul Sagar – Blash Capital

Okay. And I had a question about this new ginger concentrate that you’re working on and what kind of gross margin benefit can one see down the road when this is up and running?

Christopher Reed

It’s a little more efficient use of the raw materials, but there is a little more preprocessing before it gets to the plant. So, we are saying it’s a wash, but it probably isn’t or long term or probably stay with you know probably the way I look at the brand, keep it simple and landed on the floor somewhere around 10 bucks per key . So, it’s probably will save us $0.20 or $0.30 from an ingredient standpoint.

From a production standpoint, right now our contract brewery typically they’re asking for $2.50 a key and a bottling line for the same kind of production assuming you don’t have to do the brewing the extra step that we have the breweries doing right now, should be able to get in somewhere around $1.50. So, it’s about a buck on $10 a key, so 10% savings on that?

Vipul Sagar – Blash Capital

Okay. And that’s just for the Ginger Brew right nothing to do with (inaudible)?

Christopher Reed

No, but let just say the east cost facility will give us an opportunity to raise that price to, so there is a pretty immediate opportunity for the business once we line up with signed contracts with new people to get a significant reduction over the current price .

Vipul Sagar – Blash Capital

Okay. The next question was Whole Foods last time you said there was about 135 onboard with the Kombucha any update on that number?

Christopher Reed

As we stand, I don’t think it is gone up much.

Vipul Sagar – Blash Capital

Okay.

Christopher Reed

But, I will say that for all of the 320 or 340, I figure it with this

Vipul Sagar – Blash Capital

Yes.

Christopher Reed

But so much total. All that’s feeding on the Whole Foods door with all of our sales and all that money we can offer them to spend and advertise it seems that the Kombucha advertising that we started doing drove so much consumer demand that the number of the holed out regions have offered an olive branch and are negotiating with us.

It may have some immediate relief because of the shift in marketing from just pushed to pull, but if we don’t have it immediately we kind of see the writing on the wall as just make sure that the customers are screaming for it and saying well, wait a minute, sit here with a coupon on my hand and just read about the most amazing Kombucha, it just won some incredible awards with Vegetarian Times and (indiscernible) and when the health do, I get a hold of this.

So we know how to exert pressure now, like testing the new way and we’re willing and able to do that. So we will – we’ve tried to say this in the beginning. We don’t take any prisoners, we will be in whole food, maybe a scent of arrogant of us, but we are who we are and where is the coke of natural foods. We expect to be there at some point and keep your eyes out.

Vipul Sagar – Blash Capital

Okay. And so the $1.2 million in Kombucha sales you had will probably drop to approximately 900 for the second quarter because of this?

Christopher Reed

I don’t think it will drop, I just think what they will be is that, it could have been another 300,000 more.

Vipul Sagar – Blash Capital

Okay, got it.

Christopher Reed

Yes, I think that actually go up. But….

Vipul Sagar – Blash Capital

Now you have a great relationship with Trader Joe’s and they don’t seem to carry any kind of Kombucha, any talk with them?

Christopher Reed

Yes, it sounds like an opportunity when you said it.

Vipul Sagar – Blash Capital

Okay, so okay. And here is my last question, you talked about just a minute ago about, how you see the marketplace value in you on gross profit and gross margin and – what is the number that you feel is how the market should be valuing you on a gross profit and gross margin level basically. You’ve talked about it couple of times, you just mentioned gross profit valuation. What is the number you are looking at?

Christopher Reed

Well, okay. That’s a good question, maybe, I still think in terms of multiples of net sales when I think evaluations in the current multiples are at 1.5 are being valued at the marketplace that are $5 share. It’s a – it will be a pretty poor sale to someone relatively uninterested in the brand. So we would expect somewhere closer to on a private sale that would a smaller currently two, three or four, where the larger company maybe five or six.

So – but we also know that the more margins you bring, the more of a premium you will bring to the equation. So as we move into the higher 30’s and the low 40’s on this as we’ve doubled from here, that will hopefully bring us the premium. They look at two things, they look at the rate of growth, obviously they look at three things, they look at – the margins that you bring to the table and then there are upside potential through their own network.

So I don’t want to really say, I just know that the current stock price we’re being valued relatively low, and so it’s a good deal.

Vipul Sagar – Blash Capital

Sorry.

Christopher Reed

Anyway. I did promise people, I’m going to keep the earnings call down to an hour, but we’re willing to take one more question, I don’t know if you have one still.

Vipul Sagar – Blash Capital

No, those are the only questions I have right now. Thank you so much.

Christopher Reed

For us one. How is Portland?

Vipul Sagar – Blash Capital

Portland is good, nice weather and I think really hot right now.

Christopher Reed

Yes. I mean how are our product looking in Portland?

Vipul Sagar – Blash Capital

Same place as new seasons has all eight product, I haven’t seen it at any whole foods yet.

Christopher Reed

You are talking about eight Kombucha

Vipul Sagar – Blash Capital

Yes, all the eight flavors Kombucha portfolio, others flavors are already there.

Christopher Reed

The second four flavors, yes, we still….

Vipul Sagar – Blash Capital

Yes, talking about, you said there was a new flavor at Kombucha coming in the second quarter.

Christopher Reed

You don’t forget anything, do you? That absolutely, wish we could launch it problems with the current flavor supply, it has pushed it off till the future. So, we can get ahead of the demand on Kombucha right now and we are really, really wanting for launches to play or because it is a game changer and a very exciting innovation in that field. So, we can’t wait to be able to tell you whether it is enhanced people in the world try, but they’ll have to wait because we are having issues with the new marketing program and having applied to Kombucha.

Vipul Sagar – Blash Capital

Thank you, Chris.

Christopher Reed

All right, thank you everyone for being with us on the call today. And if you have any questions IR@reedsinc.com or feel free to call the company and we will be happy to answer your questions. Anyway thank you and we look forward to reporting in the next quarter.

Operator

Ladies and gentlemen that does conclude the conference call for today. We thank you for your participation. You may now disconnect your line. Have a great day everyone.

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!

Source: Reed's (REED) CEO Chris Reed on Q1 2014 Results - Earnings Call Transcript
This Transcript
All Transcripts