Flow Beverage Corp.

Good morning, everyone. Welcome to Flow Beverage Corps Fiscal Q1 2023 Conference Call. As a reminder, this conference call is being recorded on March 17, 2023. 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. Before we begin, we would like to remind you that today's presentation and discussion contains forward-looking statements that involve known and unknown risks and uncertainties and other factors that could cause actual events to differ materially from current expectation and may cause actual results, performance, or achievements to be materially different from those implied by such statements. The forward-looking statements are based upon and include the company's current internal assets, plans, expectations, opinions, forecasts, projections, targets, guidance, or other statements that are not statements of fact. Any statements contained herein or discussed during today's session that are not statements of historical facts may be deemed to be forward-looking statements. A number of factors could cause actual events, performance, or results to differ materially from what is projected in the forward-looking statements. A more complete discussion of the risks and uncertainties facing the company appear in the company's annual information form dated January 29, 2023, and the company's management's discussion and analysis for three months ended January 31, 2023, which are available under the company's profile on CDAR. You are cautioned not to place undue reliance on these forward-looking statements, which only speak to the date of this presentation. The company disclaims any intention or obligation except to the extent required by law. To update or revise any forward-looking statements as a result of new information or future event or for any reason, any forward-looking statement contained herein or discussed during today's session is explicitly qualified in its entirety by the above cautionary statement. I'll now turn the call over to Nicholas Richenbach, Chairman and Chief Executive Officer of Flow. Please go ahead, Nicholas.

Thank you, Operator. Good morning, everyone, and thank you for joining us today. I'm joined today by Trent McDonald, Flow's Chief Financial Officer. I'll begin today's call with a summary of our recent strategic and operational milestones, and I'll pass it over to Trent to review our financial performance and valuations. We'll then open the call for questions from our analysts. 2023 is off to a great start. We are delivering expected results from our strategic initiatives and operational improvements. We're starting to see proof that the sale of our Virginia facility and our internal restructuring are significantly improving our financial performance. First, we have cash of $26 million at the end of the quarter. Our gross margins are up by 30% or 230%. This is a 4% improvement over year over year. And we're demonstrating improvements in our operational expenses, particularly salary and benefits expense. Secondly, our cash flow improvement has an over 60% improvement from the year over year. Most importantly, The flow branded net revenue increased 40% in Q1 2023. This growth is driven by the increased revenue in the club channel, growth in our food service channel, and the launch of our vitamin infused water, which is outperforming our expectations. These are the signs for the year ahead. As we mentioned in our operational update call in January 2023, we believe the Most of our cost savings are going to come through the second half of this fiscal period as we implement changes to our logistic shipping and warehouse. Not to mention, we're expected strong sales from our seasonal summer hydration period. Turning to our operational highlights, as you are aware, our big news in Q1 was the sale of our Virginia Verona production facility for $19.5 million US. The sale of the production facility is expected to continue to improve our financial performance as we transition to a more asset light model. We also secured up to $20 million from a senior debt facility, which we have drawn $15 million which leaves us the option to draw another $5 million. Our strong momentum in the U.S. retail channel has allowed Flo to maintain its 45% market share in the carton water format and resulting in an 89% increase in store count compared to last year. Flo is now sold in over 46,000 stores. Turning to our food service, our most recent contract win has been with Foodbuy, which represents a potential 11,000 locations across North America, and Starbucks Canada, which added an additional 1,000 locations carrying float. We've completed the rollout of our Starbucks locations in Canada. Our hospitality partners, such as Accor and Norwegian Cruise Line, are experiencing high sell-through of flow contributing to the increase in net revenue. We expect to continue traction in the food service as we move forward, primarily due to our positioning as a premium, sustainable water choice. As mentioned earlier, our vitamin water launch is going fantastic. If you have not tried our vitamin water, please visit flowhydration.com to see our full suite of products. Our Canadian launch includes 22 retailers in over 800 locations. Most recently, we have gained authorization in over 2,200 locations across Albertsons Vaughan Safeway, the second largest grocer in the US. We have only begun our rollout in vitamin-infused water. We expect to add more retail partners throughout the year and are also expecting to announce new production innovations in the near term in fiscal 24. Now I'll pass it over to Trent.

Thank you, Nicholas. I'd like to start by restating that through the strategic initiatives Nicholas described earlier, we have substantially de-risked our balance sheet and have dramatically improved our financial positions. As a result, we are now in a position to invest in the Flow brand while also putting ourselves on a path to profitability. As we articulated in our operational update on January 9th, as well as on our Q4 earnings call, we expected that the best year of Verona would greatly improve our gross margins, improve operational cash flows, and free up working capital. From our results released this morning, you will see that we are delivering on these expectations. As you see in Q1 2023, our gross margins have improved to 30%, up from 26% last year, and operating cash outflows improved by $7.2 million, or 60% improvement from last year, as we freed up over $7.5 million in working capital in Q1 of 2023. The flow brand revenue growth was 40% in Q1 2023 as we continued to expand across retail, e-commerce, and food service channels. As Nicholas mentioned, the launch of vitamin-infused water is also performing much better than expectation. Consolidated revenue was, however, down 17%. This was due to the expected loss of U.S.-based co-packing revenue with the sale of the Verona production facilities. Given the purchasers of that facility were our top co-pack customer in the United States, we no longer have that revenue stream as part of our net revenue. Furthermore, while we plan to bring some of the U.S. co-packing business up to Canada, this did not take place in Q1 2023 as we expected it would not. And this instead will be transitioning specifically over the second half of 2023. Lastly, Q1 2022 results also include revenue-recognized undertaker pay agreements, which did not occur this year. Gross margins improved to 30% in Q1 2023. Our gross margins now reflect a combination of lower predictable cost of goods sold in Verona, in addition to higher capacity utilization in our Aurora, Ontario production facility. We are still aggressively working on internal initiatives that we anticipate will provide even further upside to gross margins in the back half of this fiscal year. EBITDA loss improved to $7 million from $7.9 million last year. The big driver in the profitability improvement was the differential in stock-based compensation. But we also realized a lot of year-over-year improvements in salaries and benefits, which were all part of our expected cost-saving initiatives in Q1 and further will happen in the following quarters to come. Included in the $7 million EBITDA loss is over $500,000 incurred in restructuring charges, which is part of that plan as we articulated before. Turning to more detailed review of our financial results, you can see on slide 8 that flow brand net revenue contributed $2 million in growth, while co-packing was down over $4 million. Again, this was the expected impact from the sale of the Verona, Virginia production facility. Sales and marketing expenses were slightly lower than the prior year as we realized decreased costs from trade marketing campaigns. Looking forward, however, we do anticipate further investments in marketing initiatives as we invest in the Flow brand. We do not want to take our foot off the gas pedal of the Flow brand. General and admin expenses were flat as compared to Q1 2022. As we detailed in our operational update in January, we have gone through an extensive process of identifying cost-saving opportunities throughout all functional areas of the organization. specifically in logistics and distribution. As we mentioned during that update, we did not anticipate these would be executed upon in Q1 of 2023, but rather our expectation is that we will begin to see the results of these initiatives in the second half of 2023. Salaries and benefits expenses decreased 0.3 million over the last year. Again, we expect further improvements in the second half of 2023. All told, EBITDA loss improved to $7 million from $7.9 in the prior year. Again, this includes approximately half a million in restructuring charges as we continue to deliver on our restructuring plan internally. Okay. To reiterate, we have dramatically improved our financial position. We have improved our margins and it significantly decreased our operating cash outflows while putting ourselves in a position to finally speak about our relative valuation against our peer group. Flow is trading at 0.6 times our revenue as compared to our publicly traded beverage peers trading at a simple average of between three and five times revenue on a weighted average. Sorry, three times revenue, five times on a weighted average basis. We feel this valuation for flow does not reflect the progress we have made against our strategic initiatives. Furthermore, industry average revenue growth rates are in the mid-teens, while flow brand grew 40% in Q1 2023, which is the third quarter in a row of over 35% growth in the flow brand net revenues. But, you know, look, to achieve a re-rating in our valuation, we're going to have to focus on driving growth in the flow brand, implementing even further efficiencies to improve gross margins and being vigilant in operating expenses. We have begun making selective investments into our IR program to get more investor interest across North America as well. But we know we have to deliver on the expectation that we have set forth to provide a path towards profitability, keep a strong financial position. We continue to do that. We believe we will continue to build shareholder value, which is ultimately what we are trying to achieve. With that, operator, I will open the line for questions.