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Reeds - Q3-2012 conf call notes -



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>>> Q3 Call Notes (long)


(Chris at jury duty so speaking softly and keeps jumping in and out of call, with CFO and COO picking up at various points).

Private Label (PL) up due to better contract terms

Kombucha (K) responsible for gross margin decline (plant and labor intensive)

K margins higher than others

Paid down $77,000 in long term debt

Chris:
• Q3 usually has less YOY growth
• Main activity at HQ is the launch of K
• Data suggests that they have a winner in a tough category
• One company (GT Synergy) is dominating the Kombucha market with 90% of the business
o Estimated at $150-$200 million in wholesale sales with no defined #2 competitor.
• Reed’s still tinkering with plant efficiency, but Reed’s has pushed the limits with their technology because of things like the curved glass with a label on it
• Efficiencies are working themselves out and they expect that Q1 will smooth out completely
• Results of coming in of Kombucha
• Didn’t ignore others, new distribution agreements
• Geyser agreement came because of Kombucha
• Told sales team that their whole commission structure is going to be based for the next couple months on Kombucha
• Kombucha line dollars sales could anywhere from 33% to 200% of core business, too early to tell now.

• Bidding smarter on the private labels, anticipate better margins moving forward on that
• Lots of PL accounts have come back, lots of new business for 2013.

• Hopefully Kombucha is the biggest driver of growth for the company.
• K has over 800 new accounts, the universe is probably 10,000 accounts with reed’s that they could put K in, 3,500 whole foods type stores as well.

• They will be developing new K flavors, will most likely have some new ones in Q1. Already getting lots of requests. Chemical engineers have been developing them.

• PI helped with the development of K flavors because they have been knocking off sodas for the PI.

• It would be shocking to Chris if their prediction that they move into the #2 competitor slot as they believe they will.

• Going into 2013 is the most exciting time in the company’s history.
• Haven’t even tapped into convenience yet.

Question 1:
o Insider acquisition – Why did 2 insiders buy stock that is greater than their annual salaries?
• Undervalued tremendously to start the year, switched IR to in-house, Chris is on the road talking about the stock (5-6 days this Q) and would do more but too busy, Annie’s Natural went public and that had a effect because it opened peoples eyes to natural foods.

Question 2:
o Rollout of Kombucha into Trader Joe’s or Publix?
• Have already started picking up some supermarket chains, but initial rollout in the Southeast will be with Whole Foods. TJ’s has not made up their mind on if they will sell Kombucha.

Question 3:
o Spend to launch for Kombucha for the 800 stores? Margin?
• In a perfect world it’s a little bit more per bottle to produce than a bottle of ginger brew but you can charge twice as much. To morph plant into Kombucha production facility cost some money but it should level out. Believe they are producing it more efficiently than most because of their brewing experience.
• It would be disappointing if they didn’t have at least $5 million in K sales within the first 12 months of this launch.

Question 4:
o Rolled out aggressively with K, you will see some BOGO type offers but they will be specific. No big slotting expense with K which is great, it’s a one-time slotting fee.
o Secondary pull through with K, some stores have 3-4x pull through. It’s all about taste, not even because of marketing.

Question 5:
o How many people does Reed’s reach?
• Quite frankly, whole US.
• DSD, whole west coast is covered. Pretty much covered in Maine down to Florida.
• Working our way in.
? Just opened up Chicago. Got Utah.
• Won’t be long before they have the whole country covered.

o Chris:
• Sorry, I got dropped off the call 5 minutes ago, I have jury duty today.
• In 99% of natural food stores.
• Picky about distributors, it took us a while to get into San Fran and 18 months to get into Chicago.

Question 6
o Sorry I forgot and signed up for jury duty this weekend, for K we have it as a moving target but we’re feeling better about it all the time. PL has been increasing and we can get $2-3 million more next year. Branded does about $4 million more each year.
o We’re hoping to hit $40 million this year, that’s not guidance or anything but just generally on what we think we could do. We could spend more of the revenue to increase growth but don’t want to be unbalanced.
o Our K is premium because
o We we use spring water instead of city water, oylang tea, and we age it longer for more health properties.

Question 7:
o Some of the PL business in seasonal business in celebration bottles. Skew heavy in 4th Q. But now we have picked up some good summer business so we should see it level out soon.
o Generally, our PL runs 3-4% behind margins on branded business, the thing about PL is that you don’t have fees (?), K will be higher margins could be about 5-10% higher. PL contracts could be all over.

Question 8:
o We’re brewing it so it’s not alcoholic, our recipe is proprietary. We keep alcohol under the .5% max. We usually keep it under .2%. Our K is alive and some K companies dilute their K. Ours is not diluted so the taste is good.
o We’re not making this bottle for you (caller), we want to make it for the market that is out there worth $200 million. Some people say it tastes vinegary, but we are going after those K drinkers.
o No liability if people don’t refrigerate it because it’s like OJ, milk, etc.

Question 9:
o K probably only in 15% of their accounts.
o Went into a hard launch on Nov. 1
o It’s so young into the K launch but it’s not hard to sell.
o Probably bringing in 30ish accounts new day.
o Sometimes sell K for $3.99 at full price or 2 for $5. Other company is selling it for $3.50ish.
o New flavors are already being developed for the next round. Next bring trade show in March will likely get some new flavors.

Question 10:
o We’re not putting out our specific brewing processes but we are producing 20,000+ cases (12 per case) of K and we’re gearing up for 30,000+ cases per month.

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