Good afternoon, welcome to Reed's second quarter 2023 earnings conference call for the three months ending June 13th, 2023. My name is Colin, and I'll be your conference operator for today. We have prepared remarks from Norman Snyder, Reed's Chief Executive Officer, and Joann Tinnelly, Reed's Interim Chief Financial Officer. Following the remarks, they'll take your questions. I would like to remind listeners that this conference call will include forward-looking statements. Forward-looking statements are only current predictions and are subject to known and unknown risks, uncertainties, and other factors that may cause actual results, levels or activity, performance, or achievements to be materially different from those anticipated by such statements. These factors include, but are not limited to, the company's ability to manage growth, manage debt, and meet development goals.
The company's ability to protect its supply chain in light of disruption caused by elevated freight costs and other implements. The ability and cost of capital to finance working capital needs and growth plans. The company's dependence on third-party manufacturers and distributors. Changes in the competitive environment, the economic impact of the war in Ukraine, and other information detailed from time to time in Reed's filings with the United States Securities and Exchange Commission. These statements include finance guidance, involve risk and uncertainties that may cause actual results or trends to differ materially from the company's forecast. The achievement or success of the materials covered by such forward-looking statements, including future finance guidance, involves risk, uncertainties, and assumptions, many of which involve factors or circumstances that are beyond the company's control.
Reed's 2023 guidance reflects your year to date and our expectation, expectation that inflation trends and supply chain pressure will continue throughout 2023. However, new supply chain challenges that may develop and factors that could exacerbate inflation cannot be necessarily estimated and are not factored into current fiscal 2023 guidance. These risks could materially impact our ability to access raw materials, production, transportation, and/or other logistics needs. Gross margin guidance assumes our knowledge, pricing of ingredients, packaging, and production costs, each of which has and could continue to be impacted. Financial guidance should not be viewed as a substitute for full financial statements prepared in accordance with GAAP. For more information, please refer to the risk factors discussed in accordance with GAAP.
For more information, please refer to the risk factors discussed in Reed's annual report on Form 10-K, which was filed with the SEC on May 15th, 2023. Although management believes that the expectations reflected in forward-looking statements are reasonable, management cannot guarantee future results, levels of activity, performance, or achievements. Any projections as to the company's future performance represent management's estimates as of today, August 10th, 2023. Reed's assumes no obligation to update any forward-looking statements or information which speaks as of their respective dates. Modified EBITDA is represented because management believes it assessed investors and analysts in comparing our performance across reporting periods on a consistent basis by excluding items that we do not believe are indicative of core operating performance.
The presentation of this non-GAAP financial information is not intended to be considered in isolation, or as a substitute for, or superior to the financial information prepared and presented in accordance with GAAP and Reed's non-GAAP measures may be different from non-GAAP measures used by other companies. Reconciliations of non-GAAP measures to GAAP measures, as well as the definition of each measure, their limitations, and our rationale for using them, can be found in this morning's press release in Reed's SEC filings and posted on Reed's. I will now turn the call over to Mr. Snyder. Please go ahead.
Thank you. Good afternoon, everyone. We appreciate you joining us today to discuss our second quarter 2023 results. We continue to execute on our cost-cutting and optimization initiatives in Q2, which led to our fourth consecutive quarter of year-over-year operating expense and Modified EBITDA improvements. We experienced another quarter of strong order volume across all retail channels. In fact, we recently surpassed our previous single week order record with $2.2 million in orders. We, however, were unable to fulfill all the demand during the quarter due to lower inventory levels and an inflated rate of short order shipments. We estimate this offset net sales by approximately $1.6 million in Q2 and $3.2 million year to date.
To mitigate further impact on net sales and reduce short order shipments, we utilized the funds from our recent strategic financing to build back our inventory levels beginning in June and expect normalized shipping volumes to return later this month. Early signs have been encouraging, with July and the first part of August showing a decline in short shipments, and we have experienced a 25% increase in quarter-to-date order volumes compared to the same period last year. Turning to a few updates on our key product categories based on MULO scan and VIP data, which is defined as multi-outlet and convenience in the food, grocery, drug, mass, Walmart, club, dollar stores, and military channels. Ginger Ale sales have increased 29% year-to-date through July 9th compared to the same period last year.
Ginger Beer cans grew 43% through July 9th, while Zero Extra cans grew 63%. Year to date, our ready to drink portfolio grew 111% compared to the same period last year, mostly driven by our Classic Mule and Hard Ginger Ale. The ready to drink category continues to present an exciting opportunity for Reed's, given our strong brand recognition, consistent growth of the segment, and larger total accessible market. swing lid bottles are now authorized for sale in outlets across the country, including Kroger, Sprouts, Wegmans, Food Lion, Woodman's, and Cracker Barrel. Year to date, through July 9th, swing lid bottles were up nearly 20%. Turning to Virgil's Craft Soda. We experienced a higher rate of short order shipments for Virgil's compared to our other product categories, and as a result of the aforementioned lower inventory levels.
However, short order shipments are declining, and we expect to return to normal levels by mid-August. As I briefly mentioned before, we have progressed on our various cost-cutting and optimization initiatives during the second quarter, as reflected by a 46% year-over-year reduction in operating costs and our fourth consecutive period of year-over-year operating expense improvement. In the second quarter, we reduced delivery and handling costs by more than 50%, down to $3.04 per case, which is driven by renegotiated freight contracts, improved throughput, and our streamlined distribution orbit model. Although transportation costs have appeared to have peaked and are trending downward, we will continue to emphasize lean practices with freight and transportation as we drive further cost savings going forward.
We also cut our selling and marketing expenses by almost 50% during the quarter as we focused on cost-effective marketing campaigns to efficiently drive sales. Looking ahead, we will maintain our prudent approach to marketing spend and expect to recognize additional savings in the back half of the year. Turning to our second quarter and recent sales and operational highlights. On the last call, we mentioned securing national and secondary distribution in August on our classic Zero Sugar Mule and Hard Ginger Ale variety pack in Whole Foods, which is now active. Additionally, we have also gained traction across our non-alcohol portfolio, having secured secondary placement in the majority of Whole Foods stores nationally. We expanded distribution of our ready-to-drink beverage line during the quarter with Roundy's and Meijer.
We have gained access to over 280 doors across Wisconsin, Kentucky, Ohio, and, and Indiana. We are excited to launch our brand into new markets to deliver our fan favorite Reed's Classic Craft Mule, Stormy Mule, and Hard Ginger Ale, alongside additional products in the future. We have successfully transitioned our route to market with Publix, migrating from our DSD network to a direct model. This chain, this change will benefit our gross margin, improve service levels, and reduce transportation costs while lowering prices for our consumers. We also recently completed our realignment of our pricing structure across all of our retail channels. This will create more consistent frontline pricing for retailers and more favorable pricing to consumers. In addition, it will positively impact revenue and enable us to leverage trade spend more efficiently.
We recently entered into a joint sales and marketing program with an ultra-premium US spirits company. This partnership includes our Reed's Ginger Ale and Ginger Beer products, alongside a selection of their ultra-premium products. We will collaborate, We'll collaboratively leverage creative assets and managed events from one another to introduce the spirits partnership to key retail buyers and non-trade operators around the country. We are excited to broaden awareness of our Reed's mixture use potential and look forward to kicking off the program this upcoming October, ahead of the holiday season. I would look for a press release sometime next week, going into more detail on this joint marketing effort. Subsequent to quarter end, we announced a new manufacturing partnership with Somerset Cider Solutions, a leading UK beverage manufacturer in Bristol.
This partnership enables us to produce Virgil's Sodas close to market in a cost-effective manner. With this new export model, our go-to market capabilities will be much more efficient, allow us to be much more price competitive, and position the brand for further expansion in the UK. We plan to leverage this production model in the EU later in the near term and in Asia later in 2024. At the corporate level, in late July, we appointed Shufen Deng to our board of directors, replacing Leon Zaltzman, who has since transitioned to a board observer position. Ms. Deng brings more than 30 years of legal and capital markets experience to Reed's and is the sole shareholder and director of D&D Source of Life Holding, our largest shareholder, with which we formed a strategic alliance back in May.
We look forward to the immense value and perspective Ms. Deng will bring to our organization as we continue to execute on our goals. Shortly after Ms. Deng's appointment, we announced a partnership with Stockperks, a premier marketplace for retail investor, investor engagement. We entered into this collaboration to strengthen the relationship between Reed's and our dedicated community of ginger beer enthusiasts and investors, to offer unique benefits and rewards through the Stockperks platform. If you're interested in learning more about the program, please go to the dedicated Stockperks page on the investor relations section of our website. We look forward to engaging our shareholders in a new and meaningful ways, as we provide them with valuable and memorable rewards year round.
Given the inventory challenges we faced in the first half of the year, we are adjusting our net sales guidance for 2023, and now expect it to range between $48 million-$52 million. From a profitability standpoint, we are reiterating our targets and continue to expect gross margin to surpass 30%, as well as turn Modified EBITDA and cash flow positive in the second half of 2023. In fact, our July gross margin increased to 32%. Our operating expense reduction target of $6 million is well on track, as we've already recognized over $5 million in gross savings year to date. With our inventory nearly back to normalized levels and optimized cost structure and continued strong demand for Reed's products, we are well equipped to deliver on our financial objectives in the back half of 2023.
Before wrapping up with closing remarks, Joann will cover our financial highlights for the quarter in more detail. Joann, over to you.
Thanks, Norm. Jumping right into our results, all variance commentary is on a year-over-year basis, unless otherwise noted. Net sales for Q2 2023 were $10 million, compared to $13.7 million in the year ago quarter. As Norm mentioned earlier, the decrease was primarily due to tightened credit terms from select suppliers that impacted our ability to purchase inventory and fulfill order volume, which offset net sales by approximately $1.6 million. Gross profit for the second quarter of 2023 was $2.5 million, compared to $3.3 million in the same period in 2022. Gross margin increased 105 basis points to 25.1%, compared to 24% in the year ago quarter.
Delivery and handling costs were reduced by 56% to $1.7 million during the second quarter of 2023, compared to $3.8 million in the second quarter of 2022. The decrease was primarily driven by renegotiated freight contracts, improved throughput, as well as our streamlined direct distribution model, and partially offset by implementing a surcharge for less than full truckload orders. Delivery and handling costs decreased to 17% of net sales or $3.04 per case, compared to 28% of net sales or $5 per case during the same period last year. Selling general and administrative costs decreased 36% to $2.6 million during the second quarter of 2023, compared to $4 million in the year ago quarter.
As a percentage of net sales, selling general and administrative costs were reduced to 26%, compared to 29%. Taking all these together, operating expenses improved by 46% to $4.3 million, or 43% of net sales, compared to $7.8 million or 57% of net sales in the year-ago period. This reflects our work to rightsize our cost structure and consistently find ways to optimize our business. Operating loss during the second quarter of 2023 improved to $1.7 million, or a loss of $0.55 per share, compared to the operating loss of $4.5 million, or a loss of $2.01 per share in the second quarter of 2022.
Modified EBITDA loss also improved significantly to $1.6 million in the second quarter of 2023, as compared to a loss of $4.3 million in the second quarter of 2022. For the second quarter of 2023, we used approximately $3.4 million of cash from operating activities, compared to $14.1 million for the same period in 2022. The decrease was driven primarily by lower inventory purchases compared to the year ago period. As of June 30, 2023, we had approximately $0.4 million of cash and $22.8 million of total debt, net of capitalized financing fees. This includes $16.2 million from a convertible note and $6.6 million from a revolving line of credit, which has $6.4 million of additional borrowing capacity.
The lower cash balance is a function of timing, as we utilized the funds from our previously closed strategic financing in May to build inventory, which was not produced until after quarter end. I will now turn the call back to Norm for closing remarks.
Thanks, Joann. Thank you for everyone for joining the call. To briefly summarize our progress and outlook, we experienced some delays in building inventory due to tighter credit terms, lead time availability, and the timing of our fundraise. However, we are now back on track, and our results halfway through the third quarter have been very encouraging. Demand is strong, and we had our highest week of orders in the history of the company a couple of weeks ago. July's gross margin was 32%, our highest mark of the year, and we expect gross margin going forward to be remain above 30% as we look to achieve our full year guidance. Overall, we are pleased with our progress and outlook for the future. We are building momentum and look forward to continuing execution on all of our objectives.
Operator, we will now open the call for Q&A.
Thank you. Ladies and gentlemen, we'll now conduct the question and answer session. If you'd like to ask a question, please press star followed by one on your telephone keypad. If you'd like to withdraw your question, please press star followed by two. If you're using a speakerphone, please lift the handset before pressing any keys. One moment for your first question. Okay, your first question comes from Sean McGowan from Roth MKM. Sean, please go ahead.
Thank you. Hi, Norm. Hi, Joann. A couple of questions. I, I assume, Norm, that you can't make up any of that lost volume, but correct me if I'm wrong on that. Flipping that around, do you feel like you lost any kind of permanent placement or facings as a result of not being able to fully fill those orders?
Yeah, Sean, hi. I think we'll make up some, but we'll not recover all of it. Obviously, you know, in the beverage space, we're not shipping widgets that can be back-ordered when, you know, days are lost, they're hard to make up. I think some of the things that we've done in terms of pricing and our, our route to market and some product authorizations, I think there's an opportunity. We're not, we're not gonna make up, you know, everything that we lost.
No, but I would assume the retailer's inventory has gotten depleted too, so could there be a little bit of, you know, replenishment? Yeah.
Yeah, there'd be a little bit more of pipeline fill to replenish, you know, inventories.
Yeah. Okay.
You know, we're starting to see velocities pick up, you know, where we, where we've been able to maintain inventory levels. I, I think both of those things will contribute.
Okay.
In terms of placements, no, we have, we have not lost any placements.
Okay, good to hear. In, and looking at the spending, you know, where there continues to be excellent progress, I guess I have to ask, do you feel like if you had the inventory and therefore had the sales, might any of these spending categories actually been higher? Like, did you cut back on any spending simply because you couldn't fill the orders? Is this a level of spending that you would have seen, you know, in, in each of these categories, even if the sales had been higher?
The only aspect of our spending that's variable would, would be, transportation.
Right.
I believe all the, yeah, SG&A, we would not have increased. I mean, there might have been a little bit of uptick in some, but, you know, I think that that wouldn't, you know, if, if our sales were up, our expenses would, would only gone up minimally.
Okay. Yeah, like the variable expense of, of delivery and shipping would have been higher, but selling and marketing would have been the same?
Yeah, yeah.
Okay. All right, cool. The last question I have for now is, were you not able to tap into that credit line earlier in the quarter? Is that what happened? Like, you needed to have other changes in the balance sheet in order to tap into that?
Well, you know, it really wasn't, it, it wasn't so much cash. You know, it was the timing of when we closed our, our, our capital raise to have the wherewithal to do it. And, you know, it's it's, it's really getting all of the vendors in line and all the line time arranged.
Ah, okay.
You know, it's like, what comes first, the chicken or the egg? I mean, you need to have the supplies there to get the line time.
Right.
It takes time to build that back up. Our, and our, credit line is targeted against AR and inventory.
Right, right.
Obviously, when your inventory is down and your, and your sales level are down, that that really puts a ceiling on how much you can borrow.
Right.
Conversely, once you start, like we are, once you start building inventory and selling more, it, it comes up pretty rapidly.
Yeah. Okay. All right, that makes sense. Thanks a lot.
You're welcome.
Your next question comes from Gary Goetz, a Private Investor. Gary, please go ahead.
Yeah. Good afternoon, Norman and Joann. Thanks for taking the question. As an investor, I appreciate what you and the entire Reed's team are doing. I'd like to talk about a transformational way of looking at the business, specifically, turning inventory to cash, to inventory to cash multiple times per quarter. Pepsi is doing this over 3.5 times per quarter. Reed's is doing this 0.7 times per quarter. It's a matter of turning things, turning the inventory over multiple times. I've seen stock, shelves go unstocked for weeks. What can you do to improve inventory turnover from a 0.7 level to a multiple level?
Well, well, naturally, building more inventory and having more inventory available to service orders. I mean, the, the, the, the demand is there. You know, we're seeing it from retailers, we're seeing it from consumers, and it's, it's, you know, to use a cliché, it's like priming the pump. It starts to build on itself and creates momentum with that. The simple solution in which we've been focused on has been replenishing inventory, but replenishing it in a profitable manner, which will generate incremental cash, obviously. From that, we can create more inventory and get back to your cycle. This is what you said, inventory to cash, inventory to cash. You'll start to see that number pick up just organically through that process.
Good . As an investor, I'd like to see it go from 0.7 to two, for example. I mean, that, that would, that would really, that would really turn the business around.
Yeah, it would. I mean, it just does. The offshoot of that is a lot of positive things, obviously. Cash flow, you know, being able to replenish inventory, take advantage of the, the, the strong demand, and it just builds on itself. Particularly as we've, you know, improved gross margin and lower transportation costs and kept our operating costs low, more cash will fall, fall to the bottom line.
Great. Looking forward to it. Again, thanks to both of you and the entire Reed's team for what everybody's doing.
Thank you, Gary.
Your next question comes from Will Bandijo, a Private Investor. Will, please go ahead.
Hey, Norm, good afternoon. A couple quick questions. First, I wanted to see if you could shed some light on the Hard Ginger expansion with Whole Foods. When do you guys anticipate that, you know, fully becoming nationwide? Then can you shed any light on what the consumer response has been thus far?
Well, in terms of Whole Foods, it is the program is nationwide, so you'll see that in every Whole Foods, right now.
Right. When do you anticipate, like, for instance, I'm in Dallas, Texas, and those products of the Hard Ginger, you know, coming to all stores? Is that something that's gonna take three months, six months, a year, or is it actively being shipped out?
Well, it's right now, there, there are certain gaps because we can't ship direct. It has to go through a third-party distributor under the federal and state, state liquor laws. Right now, where we have gaps, obviously, we're looking to sign on distributors to, to cover that territory. We're actively doing that, and we're, and we're very close. I think Texas might be one of the one remaining gaps that we have. And the other larger states, Florida, California, New York, you know, we're covered there. We're working actively to fill all those, all those spots up.
In terms of, consumer reception, I mean, where in places like Whole Foods, Sprouts, and Trader Joe's, where Reed's has a very strong presence and brand recognition, the products have done very well. We believe we continue to do that. In other stores that we've expanded to, like Roundy's and Meijer, we've actually done very well there. You know, we've had a pretty good presence of our non-alcoholic products there, but not as strong as the ones I mentioned previously. You know, we do have that advantage that people know who we are, know the quality of our products, and I think that provides a real big advantage, and so far, the reaction has been, been very positive.
Okay, great. Appreciate it. Then touching base a little bit on the UK and Asia partnerships, what are you guys forecasting for revenue there? You know, I'm, obviously, you guys know what you're doing, but it seems kinda like a big jump, maybe a big risk reward, if you can shed any light of what may be revenue forecast for 2024.
Yeah. It's actually very low risk because what we've done, what really, what really started this was, met with our UK distributor, our numbers were going down, the numbers were going down because the price was going up. When you looked at what the competition was doing, we were basically pricing ourselves out of business. Now, with the recent bout of inflation we've had, the, the problem became exacerbated. My thought was, why don't we migrate to a concentrate model, we'll let everything be sourced locally? What we've done is we're not selling finished product, we're selling our concentrate to a bottler who is then purchasing all the various raw materials, we're not tying up any cash. The downside to me is very low because we've freed up cash flow for those products.
Right
W e've become more price competitive. Granted, we're not making the margin, or I'm sorry, the dollars per case that we did before in terms of revenue, but the margin is much stronger. I think our margins are like 75% or 80% on the concentrate. It's much more profitable, while at the same time we're tying up very, very little cash, which to me presents a very low-risk scenario.
Certainly. Yeah. It kind of just sounds like, you know, it is much revenue at all, it's kinda all gravy on top.
Exactly. Look, the U.K. and the E.U. is an existing business we're just gonna build on. Asia, we're gonna partner, obviously, with our new, our, our new investor, D&D Life of Holdings, that has a strong infrastructure and knowledge of the local market, and we'll work with them to develop that, you know, throughout Asia. We're excited about that. Again, using the same sort of, sort of model, it'll be very, very low cost, low cash tying up, and a huge potential as, in Asia, obviously, is a high consumption of, of ginger-based beverages. We're, we're excited with that and working with our, with our new partners.
Okay, great. Appreciate it. Last quick question. I think a common theme, the last probably eight conference calls, has been the share price. I know you guys aren't happy with it and don't agree with it, and I don't think anyone on this call probably does. Here we are sitting at a $7.5 million market cap for a company that's, you know, doing $50 million in sales and projected to be cash flow positive next, or at the end of the year. You know, what are we missing here to insiders not buying hand over fist? I think, you know, a vote of confidence would be some insiders buying, so I just kinda wanna see what morale is like inside the company and if you can shed any light on that.
Well, you know, I ask myself that question every day. The morale in the company is tremendously high because people are starting to see the results of the hard work that they've done, and it makes it very uplifting. Because, you know, you, you really unless you've been operating a business for the last two years in a small business, knowing what the supply chain snafus and inflation, which outpaced our ability to raise costs, does. Nobody panicked, nobody quit. We put our heads together and put together a plan, I think morale has been very, very high in terms that we're starting to see the fruits of our labor. We're really excited, if I could fast forward three months from now, really excited to share those results with everybody. We hope that that gains everybody's attention.
In terms of insiders, I just really want to remind, John Bello has consistently participated in every fundraise, has bought shares on the open market. Lenny Zaltzman of Union Square Park Capital Management, participated also in the last capital raise. It's really been insiders that have kind of carried the water here and really been backing the company. I think that should be a huge vote of confidence because, you know, they see the good, bad, and the ugly, right? They're still buying. I think there's a real, I think there's a real high level of morale, and I think there's a real amount of optimism. You know, my view is, you know, let's just go out and show them.
That should turn heads, and that should get that price up. You know, I'm confident that we will, we will do that. I'm just as frustrated. You know, I'm a shareholder, too, like you, and I'm just as frustrated looking at that market cap, but it hasn't deterred us on our mission to, you know, to get this company to profitability, which we will believe will be the, the, the, the boost to really get the stock price moving.
Yep, got it. Awesome. Well, thanks for the update. Appreciate your time. Keep up the good work. It seems like maybe light's at the end of the tunnel.
Thank you.
There are no further questions at this time. I'll turn it back to Mr. Snyder for to close out the call.
I want to thank everyone for participating in this afternoon's call, as well as our employees, customers, and of course, our shareholders. We appreciate everyone's support. We have made great progress on our 2023 initiatives and look forward to reporting the third quarter results.