Q2 2025 Reed's Inc Earnings Call

Speaker #3: Good morning, and welcome to REED's second quarter 2025 earnings conference call for the 3 and 6 months ending June 30th, 2025. My name is Dennis, and I'll be your conference call operator for today.

Enes: Good morning and welcome to REED's second quarter 2025 earnings conference call for the three and six months ending June 30, 2025. My name is Enes and I will be your conference call operator for today. We will have prepared remarks from Cyril Wallace, REED's Chief Executive Officer, and Doug McCurdy, REED's Chief Financial Officer. Following their remarks, I will take your questions. Before we begin, please take note of the company cautionary statement. Today's call will include forward-looking statements, including statements about REED's business plans. Forward-looking statements inherently involve risks and uncertainties and only reflect management's view as of today, August 13, 2025, and the company is under no obligation to update them. When discussing results, the presenters may refer to non-GAAP measures, which exclude certain items for reporting results.

Speaker #3: We will have prepared the remarks from Cyril Wallace, REED's Chief Executive Officer, and Doug McCurdy, REED's Chief Financial Officer. Following the remarks, I will take your questions.

Speaker #3: Before we begin, please take notes of the company cautionary statement. Today's call will include forward-looking statements, including statements about REED's business plans. Forward-looking statements inherently involve risks and uncertainties and only reflect management's view as of today, August 13th, 2025.

Speaker #3: And the company's under no obligation to update them. When discussing results, the presenters may refer to non-GAAP measures, which exclude certain items for reported results.

Speaker #3: Please refer to REED's second quarter 2025 earnings release on REED's investor website at investor.reedsinc.com. And its quarterly report on Form 10Q for the period ending June June 30th, 2025.

Enes: Please refer to REED's second quarter 2025 earnings release on REED's investor website at investor.reedsinc.com and its quarterly report on Form 10-Q for the period ending June 30, 2025, expected to be available on the website soon. For definitions and reconciliations of non-GAAP measures and additional information regarding results, including the discussion of factors that could cause actual results to materially differ from forward-looking statements, I will now turn the call over to Mr. Wallace.

Speaker #3: Expected to be available on the website soon. For definitions and reconciliations of non-GAAP measures and additional information regarding results, including discussion of factors that could cause actual results to materially differ from forward-looking statements.

Speaker #3: I will now turn the call over to Mr. Wallace.

Speaker #4: Thank you, Dennis. And good morning, everyone. We appreciate you joining us today to discuss our second quarter 2025 results. We are in the early stages of strengthening our commercial execution, and better positioning REED's for long-term growth and profitability.

Cyril Wallace: Thank you, Enes, and good morning, everyone. We appreciate you joining us today to discuss our second quarter 2025 results. We are in the early stages of strengthening our commercial execution and better positioning REED's for long-term growth and profitability. Although we saw softer order volumes during the quarter, we are making meaningful progress in streamlining operations, refining our marketing approach, and investing in channel development initiatives. We believe these efforts will help restore key placements and open new growth avenues in underpenetrated channels such as convenience and food service. In Q2, we began to see downstream effects of last year's supply chain disruptions, which impacted order volumes during the quarter. To mitigate further disruptions, we are investing in sales personnel to rebuild key relationships and have taken steps to rebalance manufacturing to better align with updated demand forecasts.

Speaker #4: Although we saw softer order volumes during the quarter, we are making meaningful progress in streamlining operations, refining our marketing approach, and investing in channel development initiatives.

Speaker #4: We believe these efforts will help restore key placements and open new growth avenues in under-penetrated channels, such as convenience and food service. In Q2, we began to see downstream effects of last year's supply chain disruptions, which impacted order volumes during the quarter.

Speaker #4: To mitigate further disruptions, we are investigating and sales personnel's rebuild key relationships and have taken steps to rebalance manufacturing to better align with updated demand forecasts.

Speaker #4: We believe these actions will better position us to recapture lost placements as retailers enter formal reset periods in the fall and spring. At the same time, internal execution is improving, and we're actively pursuing new distribution opportunities to diversify our channel mix and support long-term growth.

Cyril Wallace: We believe these actions will better position us to recapture lost placements as retailers enter formal reset periods in the fall and spring. At the same time, internal execution is improving, and we are actively pursuing new distribution opportunities to diversify our channel mix and support long-term growth. To support this initiative, in July, we appointed Rachel Fox-Greenwood as Vice President of On-Premise Sales to lead our expansion into food service and convenience channels. Rachel is a seasoned commercial executive with a proven track record of driving market expansion, forging strategic partnerships, and building scalable programs across the beverage industry. She has held leadership roles at French Bloom, Atlanta Wines, and Empire Merchants, where she consistently delivered strong results in both on-premise and retail environments. Her expertise will be instrumental as we broaden our reach, strengthen channel execution, and further elevate the REED's brand.

Speaker #4: To support this initiative, in July, we appointed Rachel Fox-Greenwood as Vice President of On-Premise Sales to lead our expansion into food service and convenience channels.

Speaker #4: Rachel is a seasoned commercial executive with a proven track record of driving market expansion, forging strategic partnerships, and building scalable programs across the beverage industry.

Speaker #4: She has held leadership roles at French Bloom, Ted Later Wines, and Empire Merchants, where she consistently delivered strong results. In both on-premise and retail environments, her expertise will be instrumental as we broaden our reach, strengthen channel execution, and further elevate the REED's brand.

Speaker #4: Our growth strategy pairs channel expansion with ongoing product innovation. Our new REED's functional soda has been well-received within the grocery and natural channel. Velocity is steadily ramping, and the most recent data has shown encouraging signs of acceleration.

Cyril Wallace: Our growth strategy pairs channel expansion with ongoing product innovation. Our new REED's functional soda line has been well received within the grocery and natural channel. Velocity is steadily ramping, and the most recent data has shown encouraging signs of acceleration. Consumer feedback also has led us to believe that our functional soda line will be successful in the months and years to come. Since launching in April, our team has amassed more than 9,000 points of distribution, including national distribution at Sprouts and placement at retailers such as Kroger, Giant Eagle, Hannaford, and Duane Reade. In addition, Harris Teeter added all four of our functional SKUs chain-wide, while National Co-op Grocers, or NCG, incorporated the full lineup into its core assortment. Our formulations combine REED's signature bold flavors with functional wellness ingredients, including organic beer, prebiotic fiber, and adaptogenic mushrooms.

Speaker #4: Consumer feedback also has led us to believe that our functional soda line will be successful in the months and years to come. Since launching in April, our team has amassed more than 9,000 points of distribution, including national distribution and sprouts, and placement at retailers such as Kroger, John Carlisle, Hannaford, Duane Read.

Speaker #4: In addition, Harris Teeter added all four of our functional SKUs chain-wide. While national co-op grocers or NCG incorporated the full lineup into its core assortment.

Speaker #4: Our formulations combine REED's signature bold flavors with functional wellness ingredients, including organic beer, prebiotic fiber, and adaptogenic mushrooms. So far, we've seen encouraging traction on our root beer and berry bubbly SKUs.

Cyril Wallace: So far, we've seen encouraging traction on our root beer and berry bubbly SKUs. We're currently working through our initial inventory as we prepare to roll out updated formulations later this year, incorporating feedback from both retailers and consumers. This measured approach reflects our focus on rebuilding sustained velocity in a competitive category. Our goal is to deliver a product that aligns with the evolving better-for-you trend while staying true to REED's uncompromised commitment to quality. We view the functional space as a long-term opportunity and will continue to invest in the vertical as it grows. Turning to our core product sales. During the quarter, our sales team continued to deliver a solid commercial win and build momentum across both new and existing retail partners. I'd like to highlight some of these wins.

Speaker #4: We're currently working through our initial inventory as we prepare to roll out updated formulations later this year, incorporating feedback from both retailers and consumers.

Speaker #4: This measured approach reflects our focus on rebuilding sustainability in a competitive category. Our goal is to deliver a product that aligns with evolving, better-for-you trends, while staying true to REED's uncompromised commitment to quality.

Speaker #4: We view the functional space as a long-term opportunity, and we'll continue to invest in the vertical as it grows. Turning to our core product sales, during the quarter, our sales team continued to deliver solid commercial wins and build momentum across both new and existing retail partners.

Speaker #4: I'd like to highlight some of these wins. First, we reached a key milestone at Costco, securing approval for our REED's winter ginger ale variety pack.

Cyril Wallace: First, we reached a key milestone at Costco, securing approval for our REED's winter ginger ale variety pack. Based on current commitments, we anticipate product sales in the second half of 2025 to reach the seven-figure range, a meaningful achievement for the brand. At Albertsons/Safeway, we built on the success of our Q1 secondary display program with expanded commitments for the second half of the year. Our sales team has secured over 25,000 cases of pre-committed secondary displays scheduled to land in late Q3 and early Q4. This program spans both seasonal and everyday items and will be launched in more than 500 stores. We also completed a shipper program at Kroger, placing over 500 displays across our legacy ginger beer and new functional SKUs. The program spanned five divisions and concluded in late Q2.

Speaker #4: Based on current commitments, we anticipate product sales in the second half of 2025 to reach the seven-figure range, a meaningful achievement for the brand.

Speaker #4: At Safeway, we built on the success of our Q1 secondary display program with expanded commitments for the second half of the year. Our sales team has secured over 25,000 cases of pre-committed secondary displays, scheduled to land in late Q3 and early Q4.

Speaker #4: This program spans both seasonal and everyday items, and will be launching more than 500 stores. We also completed a shipper program at Kroger, placing over 500 displays across our legacy ginger beer and new functional SKUs.

Speaker #4: The program spanned five divisions, and concluded in late Q2. We're encouraged by the results, and we look forward to expanding our presence across a broader Kroger footprint.

Cyril Wallace: We're encouraged by the results and will look forward to expanding our presence across the broader Kroger footprint. At Whole Foods Market, we're preparing to execute our third consecutive year of national secondary displays. Set for September, the program will support our alcohol portfolio and reflect a strong long-term partnership and consistent performance within the chain. Beyond these major retailers, we significantly grew our secondary distribution, securing meaningful displays at Sprouts, National Co-op Grocers, My Vitamin Cottage, and NCG, further reinforcing our presence in key natural and grocery channels. Finally, our direct-to-consumer channel advanced with the launch of our new website, aimed at enhancing the user experience, deepening engagement with our customer base, and driving steady subscription-based revenue growth. While this sales channel represents a small portion of business today, we will continue to invest and it has become a larger contributor in the future.

Speaker #4: At Whole Foods Market, we're preparing to execute our third consecutive year of national secondary displays. Set for September, the program will support our alcohol portfolio and reflects a strong long-term partnership and consistent performance within the chain.

Speaker #4: Beyond these major retailers, we've significantly grew our secondary distribution, securing meaningful displays at sprouts, national grocers, by Vitamin Cottage and NCG. Further reinforcing our presence in key natural and grocery channels.

Speaker #4: Finally, our direct-to-consumer channel advanced with the launch of our new website, aimed at enhancing the user experience, deepening engagement with our customer base, and driving steady subscription-based revenue growth.

Speaker #4: While this sales channel represents a small portion of our business today, we will continue to invest in it as it becomes a larger contributor in the future.

Speaker #4: Now, to dive into our second quarter operational highlights. During the quarter, we remained focused on executing the functional initiatives established earlier this year while adapting to evolving demand trends.

Cyril Wallace: Now to dive into our Q2 operational highlights. During the quarter, we remained focused on executing the functional initiatives established earlier this year while adapting to evolving demand trends. Our priorities continue to center on improving execution, enhancing commercial capabilities, and driving efficiency across the organization. As a part of our efforts to align operations with current demand trends, we evaluated inventory and determined that $1.6 million of inventory write-offs were necessary based on product portfolio optimization. Although it impacted gross margin for the quarter, we believe it was an important step to improve inventory management and working capital efficiency and to ensure our manufacturing and supply chain resources are focused on high-demand, actively supported SKUs. On the logistics and supply chain front, we rebalanced inventory across regions to improve delivery efficiency and minimize out-of-stock in key markets.

Speaker #4: Our priorities continue to center on improving execution, enhancing commercial capabilities, and driving efficiency across the organization. As part of our efforts to align operations with current demand trends, we evaluated inventory and determined that $1.6 million of write-offs were necessary, based on product portfolio optimization.

Speaker #4: Although its impact at gross margin for the quarter, we believe it was an important step to improve inventory management and working capital efficiency. And to ensure our manufacturing and supply chain resources, our focus on high demand actively supported SKUs.

Speaker #4: On the logistics and supply chain front, we rebalanced inventory across regions to improve delivery efficiency and minimize out-of-stock in key markets. While this led to elevated delivery and handling costs for the quarter, these investments are already enhancing service levels and better positioning us to support retail partners ahead of the fall reset period.

Cyril Wallace: While this led to elevated delivery and handling costs for the quarter, these investments are already enhancing service levels and better positioning us to support retail partners ahead of the fall resale period. We also continue to advance our transition from glass to can across both Reed's and Virgil's portfolios. This initiative is driving greater savings through reduced freight costs and is receiving positive feedback from both retailers and consumers. Looking ahead, our focus is on driving sales growth within our core Reed's and Virgil's portfolios, improving margins, and positioning REED's Inc. for sustained growth and profitability. Rebuilding key relationships takes time, but we are encouraged by the foundation we have established and believe we are on the right path to drive sustained improvement and long-term growth. Before wrapping up with closing remarks, our Chief Financial Officer, Doug, will cover financial highlights for the quarter in more detail.

Speaker #4: We also continue to advance our transition from glass to cans, across both REED's and Virgil's portfolios. This initiative is driving greater savings through reduced freight costs and is receiving positive feedback from both retailers and consumers.

Speaker #4: Looking ahead, our focus is on driving sales, growth within our core REED's Virgil's, and portfolios, improving margins and positioning REED's for sustained growth and profitability.

Speaker #4: Rebuilding key relationships takes time, but we're encouraged by the foundation we've established and believe we're on the right path to drive sustained, improvement, and long-term growth.

Speaker #4: Before wrapping up, we're closing remarks. Our CFO, Doug, will cover financial highlights for the quarter, in more detail. Doug, over to you.

Cyril Wallace: Doug, over to you.

Speaker #5: Thank you, Cyril. All variants commentary is on a year-over-year basis, unless otherwise noted. Net sales for the second quarter of 2025 were 9.5 million, compared to 11.9 million in the year-ago quarter.

Doug McCurdy: Thank you, Cyril. All variance commentary is on a year-over-year basis unless otherwise noted. Net sales for the second quarter of 2025 were $9.5 million compared to $11.9 million in the year-ago quarter. The decrease was primarily driven by lower volumes with recurring national customers. Gross profit for the second quarter of 2025 was $0.8 million compared to $3.8 million in the year-ago period. Gross margin was 8% compared to 32% in the year-ago quarter. The decrease in gross margin was primarily driven by $1.6 million of inventory write-offs related to changes in product portfolio optimization made by new management. Excluding these inventory write-offs, gross profit for the second quarter of 2025 was $2.4 million, or 25% of net sales. Delivery and handling costs were $1.6 million during the second quarter of 2025 compared to $1.4 million in the second quarter of 2024.

Speaker #5: The decrease was primarily driven by lower volumes, with recurring national customers. Gross profit for the second quarter of 2025 was 0.8 million, compared to 3.8 million in the year-ago period.

Speaker #5: Gross margin was 8%, compared to 32% in the year-ago quarter. The decrease in gross margin was primarily driven by 1.6 million of inventory write-offs, related to changes in product portfolio optimization made by new management.

Speaker #5: Excluding these inventory write-offs, gross profit for the second quarter of 2025 was $2.4 million, or 25% of net sales. Delivery and handling costs were $1.6 million during the second quarter of 2025, compared to $1.4 million in the second quarter of 2024.

Speaker #5: Delivery and handling costs were 17% of net sales, or $2.83 per case, compared to 12% of net sales, or $2.18 per case, during the same period last year.

Doug McCurdy: Delivery and handling costs were 17% of net sales, or $2.83 per case, compared to 12% of net sales, or $2.18 per case during the same period last year. Selling, general, and administrative expenses were $5.0 million during the second quarter of 2025 compared to $3.1 million in the year-ago quarter. The increase in SG&A was primarily driven by contract proceeding costs and our investments in personnel, marketing, and related services to support growth initiatives. Altogether, operating expenses were $6.6 million compared to $4.5 million in the year-ago period. Net loss during the second quarter of 2025 was $6.0 million, or negative $0.13 per share, compared to $3.2 million, or negative $0.77 per share in the second quarter of 2024. Modified EBITDA was negative $2.9 million in the second quarter of 2025, compared to $45,000 in the second quarter of 2024.

Speaker #5: Selling, general and administrative expenses were $5.0 million during the second quarter of 2025, compared to $3.1 million in the year-ago quarter. The increase in SG&A was primarily driven by contract proceeding costs, as well as our investments in personnel, marketing, and related services to support growth initiatives.

Speaker #5: Altogether, operating expenses were $6.6 million, compared to $4.5 million in the year-ago period. Net loss during the second quarter of 2025 was $6.0 million, or negative $0.13 per share.

Speaker #5: Compared to 3.2 million, or negative 77 cents per share, in the second quarter of 2024. Modified EBITDA was negative 2.9 million, in the second quarter of 2025, compared to 45,000 dollars in the second quarter of 2024.

Speaker #5: For the second quarter of 2025, we used approximately 5.0 million of cash from operating activities, compared to cash used of 0.9 million for the same period in 2024.

Doug McCurdy: For the second quarter of 2025, we used approximately $5.0 million of cash from operating activities, compared to cash used of $0.9 million for the same period in 2024. As of June 30, 2025, we had $2.7 million of cash and $9.7 million of total debt net of deferred financing fees. This compares to $10.4 million of cash and $9.6 million of total debt net of deferred financing fees at December 31, 2024. I will now turn the call back to Cyril for closing remarks.

Speaker #5: As of June 30, 2025, we had $2.7 million in cash and $9.7 million in total debt, net of deferred financing fees. This compares to $10.4 million in cash and $9.6 million in total debt, net of deferred financing fees, at December 31, 2024.

Speaker #5: I will now turn the call back to Cyril for closing remarks.

Speaker #4: Thanks, Doug. While Q2 results were challenging, they highlight the important work underway to rebuild our foundation for sustainable long-term growth and profitability. I'm encouraged by the alignment across our organization, and believe we are well-positioned to execute our on our goals ahead.

Cyril Wallace: Thanks, Doug. While Q2 results were challenged, they highlight the important work underway to rebuild our foundation for sustainable long-term growth and profitability. I am encouraged by the alignment across our organization and believe we are well-positioned to execute on our goals ahead. I look forward to sharing our continued progress later this year. With that, Enes, we are ready to open up the line for questions. Thank you.

Speaker #4: I look forward to sharing our continued progress later this year. With that, and it's out already to open up the line for questions. Thank you.

Speaker #3: Thank you, Mr. Wallace. Ladies and gentlemen, we now begin the question and answer session. Should you have a question, please press star followed by one on your touchstone phone.

Enes: Thank you, Mr. Wallace. Ladies and gentlemen, we now begin the question and answer session. Should you have a question, please press star followed by one on your touch-tone phone. You will hear a prompt that your hand has been raised. Should you wish to decline from the polling process, please press star followed by two. If you are using a speaker phone, please lift the handset before pressing any keys. One moment, please, for your first question. Your first question comes from Sean McGowan with Roth Capital Partners. Please go ahead.

Speaker #3: You'll hear your prompt that your hand has been raised. Should you wish to decline from the polling process, please press star followed by two.

Speaker #3: If you are using a speaker phone, please lift the hand so before pressing any keys. One moment, please, for your first question. Your first question comes from Sean McGowan with the Roth Capital Partners.

Speaker #3: Please go ahead.

Speaker #6: Hi, Cyril. Hi, Doug. I want to start with a question about revenue. I feel like this is the first time in many quarters where you the story isn't, "Hey, we could have done better if we had money, and if we had inventory." You had the money, you had the inventory, and yet not only are sales down, but you're actually calling out losses of placement and, you know, declining orders at national REED's.

Sean McGowan: Hi, Cyril. Hi, Doug. I want to start with questions about revenue. I feel like this is the first time in many quarters where the story isn't, "Hey, we could have done better if we had money and if we had inventory." You had the money, you had the inventory, and yet not only are sales down, but you are actually calling out losses of placement and declining orders at National REED's. What changed? I guess was it not really the money in the inventory? What has changed on the revenue side?

Speaker #6: So what changed? You know, what I guess, was it not really the money in the inventory? Like, what has changed on the revenue side?

Speaker #4: Yes. Hey, Sean. I think, first of all, I appreciate the question. It's a great question. I think what you're seeing, with retailers, right, we had some challenges, call it, in 2024.

Cyril Wallace: Yeah. Hey, Sean. I think, first of all, I appreciate the question. It is a great question. I think what you are seeing with retailers, right, we had some challenges, call it, in 2024. I think this is just building, right, where we had operational challenges and you know we lost placements and sets and stores. I think you are seeing the continuation of that, you know, being put in a penalty box, so to speak, in which you know we have lost distribution and facings across some of some key retailers, in which that is what you are seeing. I think the steady decline you saw in Q2 represents that impact, you know, from our operational challenges that you know maybe started back in 2024. The team, you know, is working to close down those voids. You know we have had some promising conversations with some retailers.

Speaker #4: And I think this is just building, right, where we had operational challenges and, you know, we lost placements and sets and stores. And I think you're seeing the continuation of that, you know, being you know put in the put in the penalty box, so to speak.

Speaker #4: and which, you know, we've lost distribution and faced things across some some key retailers. And which that is what you're seeing. And so I think the steady the decline you saw in Q2 represents that that that impact, you know, from from our operational challenges.

Speaker #4: That, you know, maybe started back in 2024. Now, the team, you know, is working to close down, you know, those voids, and we've had some promising conversations with some retailers.

Speaker #4: But one of the things that I will highlight is that, you know, it’s very difficult, right? And I think we all know, like, when you lose placements, you don’t just go back in just because we improved on our operational efficiencies overnight.

Cyril Wallace: One of the things that I will highlight is that you know it is very difficult, right? I think we all know, like when you lose placements, you do not just go back in just because we improved on our operational efficiencies overnight. That takes time, right, to rebuild. Also, there is a window and period in which you know retailers will allow you to go back in to earn your way back into that space that generally happen in the spring and the fall. I would say that you know we are pushing toward trying to reclose those voids, but it is certainly an area that, you know, in the short term, has impacted our revenue.

Speaker #4: That takes time, right, to rebuild. And also, there's a window and period in which, you know, retailers will allow you to go back in to earn your way back into that space that generally happened in the spring and the fall.

Speaker #4: So I would say that, you know, we're pushing toward trying to reclose those voids, but it's certainly an area that, you know, in the short term, is impacting our our revenue.

Speaker #6: Okay. I'd like Cyril, I understand a lot of, you know, what the commentary in the past predates your tenure, but I don't remember any of these calls somebody saying, "We lost placements." In fact, it was the opposite.

Sean McGowan: Okay. Sir, I understand a lot of you know what the commentary in the past predates your tenure, but I do not remember any of these calls somebody saying we lost placements. In fact, it was the opposite. It was, you know, despite not having the inventory and despite the sales decline and being late or whatever, we kept the placements. This is the first I think I am hearing that you lost placements, which is disappointing. What visibility do you have on when we could actually expect a sales recovery?

Speaker #6: It was, you know, despite not having the the inventory and despite the sales decline and being late or whatever, you know, we we kept the placements.

Speaker #6: So this is the first, I think, I'm hearing that you lost placements, which is disrespectful. So what visibility do you have on when we could actually expect the sales recovery?

Speaker #4: Yeah. I mean, like I said, I I think these are ongoing conversations that we're having with retailers. and there's a period in which, you know, you can regain these placements, and sets.

Cyril Wallace: Yeah. I mean, like I said, I think these are ongoing conversations that we are having with retailers. There is a period in which you can regain these placements. They happen in the spring and the fall, right? Our teams are working hard in order to reclaim those placements and also get new placements as well, too, with our new REED's functional soda line. It is ongoing, Sean. I could not really give you a time period in terms of which it will take place, but we are seeing an advent in positive conversations with retailers.

Speaker #4: They happen in the spring and the fall, right? And so, you know, our our teams are are are working hard in order to to reclaim those placements.

Speaker #4: And also, you know, get new placements as well, too, with with our new functional line. So it's ongoing, Sean. I couldn't really give you a time period in terms of which it'll take place.

Speaker #4: But, you know, we're seeing an avid and positive conversations with retailers.

Speaker #6: Okay. Thank you. looking at gross margin, even if you exclude the write-off, the margin was, you know, below a year ago and below, I think, what you'd like to see it at.

Sean McGowan: Okay. Thank you. Looking at gross margin, even if you exclude the write-off, the margin was, you know, below a year ago and below, I think, what you would like to see it at. What else is going on on the gross margin line?

Speaker #6: So what what else is going on in the on the gross margin line?

Speaker #4: Hey, Doug, you want to tackle that one?

Cyril Wallace: Hey, Doug, you want to tackle that one?

Speaker #5: That's absolutely. Sean, good morning. you know, I think the key driver for gross margin being down, obviously, was the inventory write-off. And as you point out, Sean, excluding the inventory write-off, we're probably I don't know.

Doug McCurdy: Absolutely. Sean, good morning. I think the key driver for gross margin being down, obviously, was the inventory write-off. As you point out, Sean, excluding the inventory write-off, we are probably, I do not know, 8 or 10 points below where we would like to be in the mid-30s. The primary driver of being down was trade spend being higher than expected, higher than budgeted. We are managing that, as we came out of Q2. We put a little bit tighter rein on trade spend and managing that going forward. I would anticipate that you will see us move forward now that we have done some of the housekeeping with inventory, and we are focused on trade spend and certainly cost of goods sold and the production side as well. I would imagine that you will see us get back to the 30s here soon.

Speaker #5: 8 or 10 points below where we would like to be in the mid-30s. The primary driver of being down was trade spends being higher than expected, higher than than budgeted.

Speaker #5: And we're managing that as we came out of second quarter. We put a little bit tighter rein on trade spends and managing that going forward.

Speaker #5: So I would anticipate that you'll see us move forward now that we've done some of the housekeeping with inventory and we're focused on trade spends and and certainly cost of goods sold and and the production side as well.

Speaker #5: But I would imagine that you'll see us get back to the 30s here. Soon.

Speaker #6: Okay. Thanks. That's helpful. and then my last question is, maybe you could give more color on how delivery costs could be up so much when revenue's down.

Sean McGowan: Okay. Thanks. That is helpful. My last question is, I do not know, maybe you could give more color on how delivery costs could be up so much when revenue is down. What is the spending going on there?

Speaker #6: What what What's the spending going on there?

Speaker #4: Yeah. I think it I think it ties directly to, you know, some of the work that the team is doing to ensure that we're on time and full across you know all of our customers and the operations team has done a phenomenal job.

Cyril Wallace: Yeah. I think it ties directly to some of the work that the team is doing to ensure that we are on time and full across all of our customers. The operations team has done a phenomenal job in making sure that we are working directly with our sales team to pair our manufacturing costs with actual forecasts and demand. I think some of the challenges that you saw in Q2 is just with moving inventory from one part of the country to the other to ensure that we remain on time and full. As we continue to optimize our forecast, Sean, for East Coast and West Coast, I think those costs will continue to come down, right?

Speaker #4: And making sure that we're, you know, working directly with our sales team to pair our, you know, manufacturing costs with actual forecasts and demand I think some of the challenges that you saw in Q2 is just with moving inventory from one part of the country to the other to ensure that we remain in on time and full.

Speaker #4: And so as we continue to optimize our forecast, Sean, for East Coast and West Coast, I think those costs will continue to come down, right?

Speaker #4: Just making sure that we're you know being very timeful in where we're placing manufacturing based on where the forecast is so that you don't see that increase and enhance shipping costs from one end of the country to the other.

Cyril Wallace: Just making sure that we are being very timeful in where we are placing manufacturing based on where the forecast is so that you do not see that increase in enhanced shipping costs from one end of the country to the other.

Speaker #6: Okay. So so we we should expect that this is not indicative of the percent of revenue that we would see on that line going forward?

Sean McGowan: So, we should expect that this is not indicative of the percent of revenue that we would see on that line going forward?

Speaker #4: That's that's correct, Sean.

Cyril Wallace: is correct, Sean.

Speaker #6: Okay. I guess I guess another way to look at it is, in the past, I think the company kind of declined to make some shipments rather than make you know, shipments that might be less profitable.

Sean McGowan: Okay. I guess another way to look at it is in the past, I think the company kind of declined to make some shipments rather than make, you know, shipments that might be less profitable. Now, in order to keep in stock, you are making decisions that might be suboptimal at the moment but are better for satisfying customers. Is that the right way to look at it?

Speaker #6: And now, in order to keep in stock, you're you know making decisions that might be suboptimal at the moment, but are better for satisfying customers.

Speaker #6: Is that the right way to look at it?

Speaker #4: That's right. And I think it that and I think that mindset along with just ensuring that you know you're you're manufacturing product based on where the demand is so that you can minimize your shipping costs.

Cyril Wallace: That is right. I think that mindset, along with just ensuring that you are manufacturing product based on where the demand is so that you can minimize your shipping costs. There is a full-court press to ensure that we are ensuring that we remain on time and full with our customers.

Speaker #4: But yes, there is a full-court press to ensure that we're you know ensuring that we remain on time and full with our customers.

Speaker #6: Okay. All right. Thank you very much.

Sean McGowan: Okay. All right. Thank you very much.

Speaker #3: Thank you, Sean. Ladies and gentlemen, as a reminder, if you have any questions, please press star one. Down there for the questions at this time, I will turn it back to Mr. Wallace for some closing remarks.

Enes: Thank you, Sean. Ladies and gentlemen, as a reminder, if you have any questions, please press star one. There are no further questions at this time. I will turn it back to Mr. Wallace for some closing remarks.

Speaker #4: Okay. Thank you, operator.

Cyril Wallace: Thank you, operator. Thank you for joining this morning's earnings call. On behalf of the entire team, I want to extend our sincere appreciation to our employees, customers, and shareholders for their continued support. We value your partnership and wish you all a great day. Thank you.

Speaker #7: Thank you for joining this morning's earnings call. On behalf of the entire team, I want to extend our sincere appreciation to our employees, customers, and shareholders for their continued support.

Speaker #7: We value your partnership and wish you all a great day. Thank you.

Enes: Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines. Have a great day.