Flow Beverage Corp.

Good morning, everyone. Welcome to Flow Beverage Corps Third Quarter 2021 Financial Results Conference Call. As a reminder, this conference call is being recorded on September 13th, 2021. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question and answer session. Instructions will be provided at the time for research analysts to queue up for questions. I will now turn the call over to Devin Pennell, Chief Financial Officer. Please go ahead, Devin.

Thank you, Operator. Good morning, everyone, and thank you for joining us today. Flow's third quarter 2021 financial results were released this morning. The press release, financial statements, and MD&A are available on CDAR, as well as the company's website, investors.flowhydration.com. Before we begin, I'll refer you to slide two of our presentation, which contains our caution regarding forward-looking statements. I'm joined on the call today by Nicholas Richenbach, Flo's founder and executive chairman, and Maurizio Patandalo, chief executive officer. I will now pass the call over to Nicholas.

Thank you, Devin, and welcome everyone to Flo's first quarterly conference call as a public company. When Flow was founded in 2014, it was to change the way that we consumed water. We knew that there was a better way for consumers and the environment. We have stayed true to our mission by protecting the source of our water, employing innovative plant-based packaging by partnering with Tetra Pak, developing carbon neutrality operations and ensuring sustainability across our supply chain. we have become a global leader in sustainability. Our recent B Corp certification and score of 126.5 ranks us in the top five percentile of all B Corp certified companies around the world. We are very proud of this accomplishment and believe the integrity of our products and integration with our customers. customer base is growing and they love flow with over 18 million plus customers in North America having tried flow there are more and more people making flow a part of their normal course of the grocery run and signing up to our innovative subscription based online delivery service at our website not only are to the naturally occurring minerals and electrolytes in our water that provides functional benefits to our consumers. Our consumers believe that our water tastes great and have established an emotional connection with our customers. Our net promoter score is 82, which is proof that our customers love our products and services. Now, seven years later, Flo's branded water can be found in over 20,000 retail locations across North America. Both our premium alkaline spring water and award-winning flavors, together with our collagen-infused water available in six flavors, we have two springs with abundant supply of naturally alkaline mineral water, two bottling plants with eight tetraline manufacturing lines, 44 distributors and over 200 employees and we continue to be the fastest growing water brand in our category. With all the progress we've made, it's time for the next generation of flow. As we transition from a privately run company to a public company, we have enhanced our systems, processes and the experience of the management team to take it to the next level. I always said that I would be there to take flow all the way, and this is still true. And now, with Maurizio having been the former executive chair and CEO of the world's largest water company, Matt Lee's Water, has come on as our new chief executive officer to take flow all the way. Maurizio has the industry knowledge and deep experience in developing and distributing of premium enhanced water brands across the world. Today, Maurizio is going to share with you all the focus strategy he has refined in order to maintain our elevated growth levels while being disciplined with our investments. Before I pass the call over to Mauricio, I have to say the outlook of Flow has never been better. We have a strong brand, the demand for premium and functional beverages are rising steady, and our consumers are demanding environmental stewardship more and more. Flow's well-established infrastructure, with the capacity to fulfill the revenues for the year to come, has positioned the company for success. With that, I will now pass it over to Maurizio.

Thank you, Nick, and good morning, and thank you for joining our Q3 earning call. Let me start to give you the highlights of the Q3. First of all, Flow Brand has confirmed to be the fastest growing brand in the U.S. in the multi-outlet food and drug mass in natural channels combined with a 94% growth and in Canada in the food and drug mass with 76% growth driven by distribution expansion and higher velocity and I'll come back to it with more details. This was possible thanks to the establishment of our sales distribution expansion network we reached more than 40 distributors across North America with the latest distribution agreement signed with Onikman in Northeast. Our net sales for the Q3 were up by 79% and 90% for the year-to-date nine months of the year, driven by distribution expansion, velocity and increase on the number of SKU per store, which are the three KPIs the company is actively going after, and our sales in the co-packing services. The gross margin in the Q3 was 22%, significantly up compared to the same period of last year, where it was at 2% and 28% for the first nine months year-to-date versus 6% of the previous period last year. And this was as a result of the strong growth impact in terms of gross margin associated with some impact coming from the seasonal promotional activity and the decision that the company has taken to clean up some inventory elements in line with our accounting policies. The company has also decided to introduce a focused strategic framework for 2022. I will give you here the highlights and more details later on in my presentation. The company is targeting to continue to be the fastest growing brand in multi-outlets food and drug mass and natural channels in the U.S. and food and drug mass in Canada as a result of expanding the old commodity volume, ACV, expansion associated with increased velocity and number of SKU per store. We are targeting a growth for slow branded product within a range of 35 to 45% in the retail and e-commerce channels that are the main channels of flow-branded products. We are targeting to have a reduction of ABDA losses between 45% and 40%, driven essentially by a good balance of growth impact and cost discipline in three areas, SG&E, advertising, and stock-based compensation. The company is also taking steps to deploy efficiently its capital in two important elements, the net trade working capital, where we are planning to have improvements, and the capex reduction by supporting in a targeted way our need in terms of production in the two facilities that we have in Canada and in the US. Let me give you a little bit more details concerning our growth in the three main channels where we compete. As you can see, in the multi-outlet channels, food and drug masks in the US, we continue to grow very fast. In the upper hand of the slide, you will see a growth of under 46%. In the natural channel, which has been our historical channel, we continue to grow. I have to say that this channel has been affected significantly by the COVID. This is referring to the latest 52-week scaling. In the latest period, we have been growing faster than this, which shows that we are coming back also in this channel. And in Canada, you can see in the food and drug mass channel a growth of 76%. This was possible essentially thanks to two factors. a significant increase of our old commodity volume in the two channels, in multi-outlet channels in the US and Canada, and associated with a significant increase in our growth in the US multi-outlet and draft mass channels. The brand continues to be loved by our target consumers, which I remind is the health and wellness women. All the recent researches continue to confirm that the brand is loved by our consumers for three differentiating factors. The first is the functionality of the brand. The brand is a spring alkaline water, which is very well accepted and loved by our consumer, associated with a great taste, which is uncommon for a functional water. And the third element of differentiation is the sustainability that this brand is bringing to the market, proposing a solution to go beyond the plastic bubble. These three elements are creating a strong emotional association with our target consumers. We continue to confirm our strategy of growing in the three main pillars, e-commerce and then innovation associated also our support to give to brands that are willing to enter in the state of Prisma premium solution for co-packaging. I hand over now to David Pennell, who is the CFO of the company, who will give you some highlights concerning the latest three-month results and year-to-date, the nine months of the fiscal year 2021.

David? Thank you, Mauricio, and good morning, everyone. In fiscal Q3 2021, Flo increased net revenue by 79% to $12 million. This is a result of increased sales of Flo branded products in both retail and e-commerce channels, as well as increased co-packaging revenue. The increase in net revenue translated to an increase in gross profit to $2.6 million for the quarter, or a gross margin of 22%. The gross margin is 20% higher than this time last year, reflecting high utilization for this period. In addition, input costs, raw materials, and packaging have been stable on a per-unit basis as compared to the prior period. Going forward, we are targeting gross margin in the range of 30% to 35%, excluding the impact of unexpected repair and maintenance costs and other one-time items. In Q3 2021, we realized an EBITDA loss of $13 million. Our higher gross profit was offset by higher sales and marketing costs, which are attributable to investment in trade and digital marketing programs to support our DSD and e-commerce expansions, particularly in the United States. We believe the time to invest in capturing market share is now, and we have invested accordingly. Share-based compensation expenses also increased as we rolled out an RSU plan for new company hires. On an adjusted basis, we realized an adjusted EBITDA loss of $8.3 million. Adjusted EBITDA excludes the impact of RTO costs, reverse takeover transaction, termination fees, and share-based compensation. Turning to our year-to-date results, Flo increased net revenue by 90% to $32.3 million. Consistent with our Q3 results, the increase is attributable to Flo's branded sales over retail and e-commerce platforms, as well as our co-packaging revenue. Gross margin over this period increased to 28% from 6% in the comparable period in 2020. Again, we are increasing utilization at our facility, which allows us to allocate our fixed costs across a greater number of units sold. For the year to date in 21, we have also incurred elevated general and administrative expenses, as well as share-based compensation costs, much of which is attributable to our recent private placement costs and the costs of becoming a public company. I will now pass the call back to Maurizio to discuss our strategic framework for fiscal 22.

Thank you, David. Let me go back to my introduction, to the strategic framework focus for 2022 that I introduced at the beginning of my presentation. I go back to the four elements that constitute our strategic framework for 2022. First of all, the net revenue growth on flow-branded products. We are targeting a growth between 35% and 45%, which is a strong growth which will allow us to continue to be the fastest growing brand in North America in the water category. This will come as a result of essentially three factors. Expanding our distribution, and we have a plan for doing this in the whole commodity volume, which is the expanded distribution, increasing the velocity, and increasing the number of SKUs stored. This will be done in key channels and regions with a specific focus in four regions, West, Southeast and Ontario for Canada. At the same time, we are targeting to reduce our ABDA losses between 45% and 50%. This will come as a result of the following factors. First of all, the positive impact of the growth in terms of gross margin associated with the reduction of our selling and general expenses and an optimization of our advertising budget and a reduced stock-based compensation cost. The other two elements are related to the deployment of our capital. We are planning to improve our net trade working capital as a result of focusing on our collection and on managing our inventory levels, and at the same time reducing our capex as a result of the target investments to support our production capabilities and revenue when it's needed. Let me share with you our marketing strategy for 2022. First of all, it will be made of three elements. Omni-channel activation that will start in Q2 with our Heart Day. We are planning to activate in stores where we are distributed with a strong support to our brand, off-shelf activity supported by social media amplified by the activities of our influencers. The message will be traditionally, as we have done also in the past, to support our sustainability strategy and carbon neutrality. For the summer, we also plan to have a strong activation in the point of sale to increase the velocity and attract consumers in the store to choose and prepare our brand. This also will be supported by strong digital media and marketing activity amplified by our influencer. I am proud also to tell you that we have signed two strategic partnerships for two very high profile sport events. We will be the designated official water partner of the New York Marathon. We signed a four-year contract which will allow us to be the designated official water partner for the New York Marathon. This will allow to increase our awareness and to be a very high-profile sport activity in Northeast where also we have recently signed a new distribution agreement. It's a very important event for us. It will attract more than 670,000 participants with a significant exposure in terms of media in all North America and outside of North America. At the same time, we also have signed to be the exclusive partner of the Montreal Canadiens. So we will be the water Montreal Canadiens team. in the stadium, the Bell Center, and this will be supported by digital media activities to give a high profile to this initiative. The last also very important marketing event for us is the launch of our Vitamin Water, which will take place in Q1 2022 calendar, with the message of immunity support in three SKUs with vitamin C, zinc, and B vitamins in cherry, citrus, and elderberry, and with a strong activation in the point of sale and in social media. Let me also give you some more details concerning our retail strategy for the floor-bended product. Our focus is to expand our whole commodity volume and velocity. We are targeting to increase our all commodity volume to 30-40% by heading a number of new authorizations, which this will allow us to accelerate the distribution in key channels, and this will be executed also thanks to our direct sales distribution network that will be built throughout the course of all 2021. We also plan to increase the SKU per door at two levels. First of all, increasing the presence with the flow water in single and multi-pack format in all accounts, but at the same time, increase the distribution of our flavored water, our collagen water, and at the same time, introducing our vitamin water. We also plan to increase the velocity in the point-of-sale as a result of all the activation that I mentioned before and especially a number of off-shelf activities that will give a presence in the store and visibility which will certainly increase the interest towards our brand and enhance the velocity. Some more details concerning our e-commerce strategy. We are focusing on growing the subscribers base and increase the customer lifetime value. we intend to increase the traffic on our transactional website for vibration.com through a specific and targeted media that will increase the acquisition and the traffic in our website we are planning to grow the subscriber base and to convert no subscribers in subscribers increase the basket size because the subscribers have a higher order compared to the non-subscribers, so we will also increase our basket size and optimize the customer experience. We are also planning to increase the subscribers' average order value, which is already higher than the non-subscribers, through multi-case offer incentives and subscription product bundles. Last point, very important, is to improve their retention through a loyalty program and target customer segmentation. These are the main strategic initiatives in marketing and retail and e-commerce for the Flow Branded brand. And this also ends my presentation. Again, thank you for your attention and your participation. And now we open for questions and answers.

Ladies and gentlemen, if you have a question, please press star 1 on your telephone keypad. Once again, that's star 1. We'll pause for just a moment to compile the Q&A roster. Okay, your first question comes on the line of Martin Laundrie from Stiefel GMP.

Hi, good morning, everyone. Good morning, Martin. My first question, I want to discuss a little bit the expected increase in your profitability in fiscal 22. You expect to cut your EBITDA losses by half. Just wondering if you can give us some color on how much of that improvement is going to come from gross margin expansion versus how much of this is going to come from OPEX reduction as a percentage of sales?

Thank you for the question, Martin. As I mentioned during my presentation, this is a balanced approach. So we are planning to do both. We are planning to transfer the significant growth into our gross margin and gross profit, and at the same time to have a disciplined approach in terms of cost, first of all in SG&E, but at the same time also to optimize our advertising expenses, and I showed there that this comes in association with supporting very high-profile sports events, and at the same time reducing significantly our cost-based compensation, as a result also the fact that we have front-loaded the stock-based compensation during Q2 of 2021. The combination of these four factors is what is leading us to significantly improve and hence reduce our EBITDA losses for the fiscal 2022. Okay.

And just to clarify, your guidance, you're talking about IFRS EBITDA and not adjusted EBITDA.

Is that correct?

I'm talking about IFRS EBITDA. Okay. Okay. I was wondering, you know, you've ruled out your DSD distribution model in the U.S., and I think you mentioned you have 44 agreements right now. I was wondering, how many doors are currently under that model? Can you share any of the results that you've seen so far? Perhaps in terms of velocity, if you've seen an impact, that'd be interesting to hear.

We have north of 20,000 doors today. I would like again to confirm one point. DSD allows us to have access to these doors. because the authorization then has to find execution in the market, and that's why the DSD will allow us to do that. We are planning to increase the number of doors, obviously, in the course of 2022, especially having new authorization in the key channels and the key regions that I mentioned before. We see that the velocity is coming up as a result of the brand well being more known in the US, in Canada is already well known. And also as a result of our strong activation in the point of sales that give more visibility to the brand and hence our consumers, they are more encouraged to choose the preferred brand. So we have seen both coming as a result of our DSD activities and the activation as two points that continue to grow and we see that these will continue also in the course of 2022.

Okay, just to be clear, Did you mention that you have 20,000 doors that are serviced under a DSD model right now? Does that mean your entire network is under DSD?

We have 20,000 doors, not only through the DSD. We have an hybrid approach. In some cases, they are served through the DSD. In some cases, we go with some retailers that require to do so straight to their warehouse. And in some cases in Canada, we have a direct sales distribution ourselves, in Ontario especially, that was traditionally built in the past and is continuing to allow us to serve food service stores and especially in the greater Toronto area. So we have an ivory boulder which allows us to serve these north of $20,000. Okay.

And I don't think I understood your answer about velocity. What kind of velocity increases are you seeing in a typical door distributed under DSD versus not under DSD model?

It's clear that the DSD allows us to have a higher velocity because this allows us to have a better execution. That's why the DSD helps us to... to have a higher velocity because the velocity is also a result of having a presence in the store, making sure that the property is always on the shelf, that there are no out of stock, that we can execute our activation with off-shelf and promotional activity, so certainly the DSD allows us to have higher velocity compared to the non-DSD, but at the same time, I would say also we have seen a significant increase of our velocity in customers, for instance, like Walmart, where we don't go with the DSD. Okay.

Is there any way for you to quantify that, or is that too early to tell?

Well, it depends a little bit. It's hard to generalize the velocity, It depends case by case, and it depends channel by channel. So it depends also from where you start. But I would say certainly a double-digit increase in our velocity, as I also mentioned in my presentation in the slides, where I show the increase of our velocity by more than 40% in the multi-outlet food and drug mass in the U.S. Okay.

Perfect.

That's it for me.

Thank you very much.

Thank you, ladies and gentlemen. As a reminder, if you have a question, please press star 1 on your telephone keypad. Okay, and at this time, presenters, we have no questions. Ladies and gentlemen, this concludes today's conference. You may now disconnect.