Flow Beverage Corp.

Welcome to Flow Beverage Corp's fiscal Q2 of 2023 conference call. As a reminder, this conference call is being recorded today, June the 15th, 2023. At this time, all participants are in listen-only mode. Following the presentation, we will conduct a question and answer session, and instructions will be provided at that time for research analysts to queue up. 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 estimates, 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 April 30th, 2023, which are available under the company's profile on CDAR. Listeners 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 events for any reason. Any forward-looking statement contained herein or discussed during today's session is expressly qualified in its entirety by the above cautionary statement. I would now like to turn the conference over to Nicholas Reichenbach, Chairman and Chief Executive Officer of Flow. Please go ahead, sir.

Thank you, operator. Good morning, everyone, and thank you for joining us today. I'm joined 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 pass it over to Trent to review the financial performance and valuation. Then we'll open our call to the questions from our analysts. Today, Flow is laser focused on achieving our path to profitability. To deliver profitability, we are transforming Flow into an asset light operation. And we've identified four strategic steps to execute our goal. Number one, the sale of our Virginia production facility, which was achieved last November. Number two, securing strategic financing from our Aurora facility, which happened in January. Three, simplifying and optimizing our entire operation. And as announced this morning on our press release, the execution of our strategic alternative to our Aurora production facility. Trent will provide more details to update on also a bullet point as he prepared his remarks. Since the execution of the first two steps, Flo Brand has delivered excellent growth. Most recently, we reported 98% Flo Brand net revenue growth in fiscal Q2, which brings us to 68% year to date. We also made progress with increasing our gross margins closer to our potential, increasing to 18% in Q2 and 23% year-to-date. We are moving quickly to streamline our operations, bolster our balance sheet, and demonstrate profitable growth. And we've just begun. As of April 30th, Flo was located in 54,000 stores in North America. Our biggest addition to the store count has been our club channel with household names like Dollar General and Family Dollar. We've also added 2,000 Albertson Safeway locations across the United States, which is one of the largest grocery chains in the US. Looking at Flo branded revenue on a quarterly basis, you can see that we're achieving significant breakthroughs in Q2. Our growth in store count, product innovation, and food service business has led to a record quarter net revenue growth of 98%. We are also seeing in the market today that our retailers, food service companies, and consumers are demanding sustainable products. Flow remains the highest B Corps certified beverage company in the world when it comes to sustainable beverages. Flow is second to none. Our market share in the carton format water in the U.S. has also reached 51% in Q2. This is a significant increase from 45% in Q2 2022. This gain in market share against other beverages in similar packages, we think that this means consumers are choosing Flow because of its amazing taste, our zero-calorie flavors, and of course our innovation with our vitamin infused water. Not only is revenue growing from our food service partners, it's also promoting trial for new consumers with a transferring to a high margin channel after trial. Most recently, we introduced a strategic partnership and have become the official water of Live Nation Canada, whereby flow will be available this summer to over 1.8 million annual concert goers in 825 concerts across Canada every year. This multi-year partnership will continue the momentum of flow in our food service segment, will also provide an amazing opportunity for sampling and brand partnerships. We are delighted to partner with Live Nation and its Green Nation touring program. Our partnership with Live Nation is a natural fit given our roots in music and entertainment, flows influencer relationships with artists, and our strong sustainability goals and joint core customer base. Vitamin infused water continues to be very good in its growth and performance. Our innovation is now in over 5,000 stores across North America. As we've seen in the past decade, there's been very little innovation in this space. And with our water as the base, a high alkaline, naturally occurring mineral water with electrolyte levels that are higher at par with most hydration products, plus the fact that we're infusing daily doses of vitamin C and zinc without sugar, juices, or any artificial products, we will continue to see growth in this product innovation and expanded product line. With that, I'll pass it over to Trent. Thank you, Nicolas.

I'm going to talk about our financial results. Flow branded net revenue increased to $9.5 million in Q2 2023, or 98% from Q2 2022. The growth can be attributed to the success of our food service strategy with partners like Starbucks Canada, where we launched in the second quarter, and Norwegian Cruise Lines, which continues to be a great story for Flow. While food service does have a lower gross margin, it does promote trial, with customers then coming into higher margin channels over time. To this end, we also saw growth in new retail locations and e-commerce, while the recent launch of vitamin-infused water has also been very, very successful for Flo. Consolidated revenue increased 56% in Q2 2023 to $14 million. Not only did the Flo brand growth come in above what we anticipated, we also successfully transitioned COPAC agreements from our Virginia production facility and saw higher order volumes from our key partners. Gross margins improved 18% in Q2 2023. We also incurred lower relative trade spend as compared to Q2 2022. While this was an improvement from prior year, it is not where we want to be. That said, we believe we have a path to much higher margins in the latter half of this year and into fiscal 2024. As mentioned, the expansion of our food service business resulted in temporarily lower margins, as over the long term, we believe food service will help drive revenue growth at retail locations and over our e-com platform as we are getting thousands, thousands of customers online. to try flow, and then when they pick up their morning coffee or to quench their thirst while watching their favorite band as we just announced Live Nation. We've also incurred additional costs at Aurora, our production facility, as we transition from moving production to seven days a week from five days a week. With the rampant production costs come prior, but this rampant production cost came prior to the realization of the underlying sales. That said, the production team at Aurora is getting more efficient by the day, and we believe that they will be operating at their potential in the very near term. There is also material optimization initiatives in logistics and warehousing, which we've not yet executed on, that we believe will help to improve margins once completed. Even the loss improved to $7.1 million from $8.5 million last year due to our higher gross profit and lower stock-based compensations. Turning to a more detailed review of our income statement, you can see that sales and marketing is coming in at a lower percentage of net revenue. General admin expenses include about close to $800,000 in costs relating to our operational transformation and new IT ecosystem, which will help to simplify our business going forward. Our transformation and restructuring is a massive endeavor, and we have been incurring some costs ahead of the anticipated benefits, which we feel are only a quarter or two away. Showers and benefits also increased from the prior year as a higher volume of flow sales, based on a higher volume of flow sales. But again, logistics, distribution, warehousing, and shipping has not yet been optimized, and we believe there are going to be further cost savings in this area going forward. All told, adjusted EBITDA loss improved to 6.6 million from 6.9 million in the prior year, as we still have the conviction that most significant improvements to profitability are ahead of us. Currently, flow is still trading at 0.6 times our revenue, as compared to our publicly traded beverage peers trading at a multiple of three to five on a weighted average basis. With the progress we've made against our strategic initiatives, there remains a great deal of shareholder value left to unlock. As we continue to deliver on our operational transformation and move ahead along our path to profitability, it should be pointed out that we are a growth company and have been regularly outpacing the industry average revenue growth rates by a very wide margin, having grown the flow brand by 98% in Q2 and 68% for the year to date. Given the revenue to enterprise multiples associated with our peer group, we believe we can achieve a greater valuation for our shareholders in the future. Which brings me back to our four-point plan to achieve profitable growth. As previously disclosed, we have completed the first two pillars with the divestiture of the Virginia Production Facility and through securing a $20 million credit facility January 2023. Now, with respect to the third pillar, which is Flow's comprehensive cross-functional optimization, this morning we did announce the elimination of 30% of our non-production, non-logistics corporate roles as we make Flow leaner and more focused on where we truly excel, marketing and selling Flow branded products. I would like to thank all team members who were impacted for their contribution to building this company. Although this was a part of Pillar 3, we still have yet to completely streamline our logistics, warehousing, shipping, and distribution, which is a very material cost for the company. We anticipate this happening in Q4, where we believe we'll start to see meaningful financial benefits and the P&L from that point forward. And the last step in our four-point plan is to realize full value for the Aurora Production Facility. You will see in our financial statements that the Aurora production facility is now categorized as held for sale. In April, we initiated a strategic review of this asset. The Aurora facility operates at a very high utilization and is a profit center and has a lot of ability to expand its production capacity. We believe that a successful transaction for the Aurora production facility could garner a much higher value than the Virginia facility and secure our path to profitability even further. Given the steps we have completed towards our transformation thus far, we now are happy to say that we have improved our estimates for annual cost improvements to $23 to $26 million as compared to the base of fiscal 2022. That said, we appreciate all your support as we work diligently for flow to demonstrate its full potential. With that, operator, please open the line for questions.