Flow Beverage Corp.

Good morning, everyone. Welcome to Flowbridge Court's fiscal Q4 and year-ended 2023 conference call. As a reminder, this conference call is being recorded on January 30th, 2024. At this time, all participants are in listen-only mode. Following the presentation, we will conduct a question and answer session. Instructions will be provided at that time for research analysts to queue up for questions. Before we begin, we would like to remind you that today's presentation and discussion contain forward-looking statements that involve known and unknown risks and uncertainties and other factors that could cause actual events to differ materially from the 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 of different material movies from what is projected in the forward-looking statements. A more complete discussion of the risks and uncertainties facing the companies appear in the company's annual information form dated January 29th, 2024. And the company's management discussions and analysis for 12 months ended October 31st, 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 events, or for any reason. Any forward-looking statements contained herein or discussed during today's session is expressly qualified in its entirety by the above cautionary statements. I will now turn the call over to Nicholas Reichenbach, Chairman and Chief Executive of Flo. Please go ahead, Nicholas.

Thank you, Operator. Good morning, everyone. I'm joined by Trent McDonald, Flo's Chief Financial Officer and EVP of Operations. I'll begin today's call with an overview of Flo's milestones in fiscal 2023 Then I'll provide a review of the fiscal 2024 strategic growth priorities. We have a lot to go to drive shareholders' value. Trent will then take you through a detailed review of the 2023 financial results, update on our strategic priorities, and provide a financial outlook of fiscal 2024. After Trent's remarks, we'll open up the call to questions from our analysts. The Flo brand achieved significant milestones in fiscal 2023. Retail locations carrying Flo increased 28% over the year. This was driven by thousands of new locations with household names like Family Dollar, Dollar Tree, Elverson's Safeway, Save-On Foods, and Circle K. Our food service channel benefited from over 1,100 Starbucks Canada locations adding Flo to their shelves. as well as rollouts from Foodbuy and most recently Live Nation. And we launched vitamin infused water, which made a solid contribution to our growth. Our store count additions and innovation launches in the United States helped Flo achieve 50% market share in the US carton format water, which was up from 44% this past year. Our market share continues to indicate that consumers are gravitating towards our value proposition for a premium and functional beverage with the highest level of environmental standards. Also, Flo's brand net revenue increased 27% in fiscal 2023, and our gross revenues of branded products increased 32%. We also announced two major contract wins with Beatbox, and Joyburst on our co-packing business in fiscal 2023. And just last week, we announced a new partnership with a very familiar brand, BioSteel. Partnering with these high-growth brands to deliver their beverages in Tetra Prisma format is expected to earn Flo $148 million with minimum contracted revenues over the terms of these agreements. That's a boon. We are entering fiscal 2024 with a leaner and more focused operational model. We have clear priorities of delivering revenue growth and move towards profitability. As always, the flow brand is the core. We expect to continue our growth at both retail and food service. After a tough second half of 2023, we expect profitability of our e-comm segment to improve significantly. Furthermore, with the investments we made with promoting trial and the expansion of our food service business, we expect ECOM to resume as a key growth driver in our revenue. Expanding capacity in our Aurora facility is going to be a major priority for the Flow team. Given the volume growth of our new co-packing agreements and the ongoing growth of the Flow brand, we can easily justify the additional fourth line in Aurora. Once this line is commissioned in this month, February, next month, we expect Aurora production to increase by 25%. We are very optimistic about improving financial fundamentals. The last three co-packing agreements have come with a benefit of contractually secured revenue. Additionally, we are focused on stabilizing our working capital position. And our operational transformation has led to a foundation for a solid road towards adjusted EBITDA profitability and cash flow positive in Q4 2024. This concludes my remarks, and now I'll pass it over to Trent. Thank you very much, Nicholas.

I'd like to start by discussing growth in the flow brands. While we usually only disclose net revenue, it should be noted that Flo branded gross revenue increased 32% for fiscal 2023 and 14% in Q4. That said, Flo brand net revenue growth was 27% in fiscal 2023 and actually declined 9% in Q4 2023 compared to Q4 of 2022. As Nicholas highlighted, the Flo brand benefited from new stores, new food service partners, and innovation. This was not reflected in Q4 2023 for a couple of reasons. First, we incurred annual amounts related to contractual fees under certain distribution agreements, which totaled close to $2.2 million in the quarter, the fees of which were recorded in trade spend in Q4, which had an impact between gross down to net revenue. Second, in Q4 2023, we also identified issues with competing resellers of flow-branded products on e-comm channels which hurt our flow-branded sales, specifically in the U.S. Together, these two items swung our flow-brand net revenue growth down 17%. Of the commercial fees I just noted, we incurred a specific charge for the entire year of close to $1.6 million in relation to one commercial account, which we do not anticipate will continue past Q1 of fiscal year 24. When it comes to e-commerce, flow-branded net revenue in the U.S. was actually up 42% in the first half of the year, while we were only up 7% in Canada e-commerce. We put a lot of marketing and effort into the second half, both in the U.S. and Canada, which resulted in Canada increasing 62% in the second half of fiscal 23, fiscal But US e-commerce sales actually decreased 10% compared to the second half of fiscal 2022 as a result of these resellers. As we discussed in our last call, in Q3 2023, we uncovered issues in our fulfillment methodology and incurred a service interruption to US subscribers, which we subsequently fixed prior to Q4. However, We then face certain competitors, again, reselling slow brand of products through Q4, both in the U.S. and Canada, with the U.S. being much more impacted. We have been able to stop one such reseller completely and are working to dramatically mitigate the impact of all other resellers, which we feel will become fully effective by the end of Q2 of fiscal 2024. Consolidated revenue decreased 28% in Q4 2023 due to all the factors I just discussed, with regards to the Flow brand, while Copac revenue decreased by $3 million due to the impact of selling the Verona facility and the impact of one of our key Copac customers going into CCAA within our fourth quarter. All of that said, we expect the new Copac and partners that we announced over the past several months to ramp up throughout 2024 and contribute to significantly higher Copac revenue for fiscal 2024 compared to that of 2023. Our gross margin was 9% for Q4 2023 and 14% for fiscal 2023. In addition to the factors I just described, which all impacted gross margin, we continue to incur non-recurring expenses which have lowered gross margin. These non-recurring expenses are linked to our transition to third-party logistics, which was still in process in Q4. We have a high degree of confidence that we can significantly improve gross margin from fiscal 2023 performance. The factors impacting trade, spend, and e-commerce are not permanent, and continued increases in flow brand growth along with our new COPAC contracts will significantly improve fixed cost absorption rates at our Aurora production facility. Furthermore, we do not plan to incur any tolling costs for the manufacturing of flow brand products as long as we own the Aurora production facility, which is contrary to the current year, FY23, when we incurred tolling fees for all US production out of Verona. Turning to EBITDA, while sales and marketing expenses and salaries and benefits are trending down, our efforts to reduce general and administrative expenses are not yet visible due to the $3.9 million in non-recurring costs to that expense line. Excluding these non-recurring expenses, G&A would have been down almost 50% in Q4 2023 compared to the same quarter in 2022. Looking at Q4 2023 in greater detail, we recorded gross profit of $0.9 million. Again, this included $2.2 million in contractual fees under our distribution agreement. Normalizing for these expenses alone would have improved gross profit from last year dramatically. Recall too, we added a number of significant food service partners in fiscal 2023 and these low branded sales are the lower gross margin and revenue earned through retail or e-commerce channels. Food service remains a very important part of our revenue as it contributes to gross profit and promotes consumer trial, which should help drive revenue growth in retail and e-commerce given the thousands of new consumers trying to flow each and every day. As we move down the income statement, you can see 33% decrease in sales and marketing costs in Q4. Once we get closer to profitability, we plan to be investing even more in sales and marketing on a strategic basis to drive low branded growth. General and administrative expenses include non-recurring costs of $3.9 million. The costs include consulting and legal expenses attributable to our transformation and the Aurora facility divestiture, Temporary logistics costs as flow transitions to third-party logistics, a one-time write-off of an accounts receivable, an increase to our allowance for doubtful accounts corresponding to that, and true-up costs related to the sales of Verona Production Stability as we finalized the close well after the year end, or well after the transaction, which was in November of 2022. As we continue the final stages of our transformation, we expect meaningful declines in both non-recurring expenses and G&A. Q4 salaries and benefits were 48% lower than the prior year. While Q4 reflects a significant portion of our restructuring efforts, our transition to third-party logistics was still in progress in Q4 2023. Looking forward, we believe our investments in our transformation are about to pay off. We have restructured our organization, reducing our functional area corporate headcount by 45%. We have also simplified many of our processes, and our transition to a third-party logistics platform is materially complete. As we said before, moving to third-party logistics is the biggest cost-saving lever we had identified. I would now like to provide an update on the previously announced strategy of divesting our Aurora production facility. While the process is still ongoing, our recent co-packing contract wins have significantly improved the pro forma profitability of the Aurora production facility. And when combined with the cost savings coming from our transformation efforts, things look very different than they did at the time we made the decision to go forth to the best of the Aurora production facility. We have said all along that the Aurora production facility is a profit center. that reduces our cost of goods sold and thus improves our gross margin. It is without doubt that we always have preferred to keep it if we did not believe the divestment was a financial necessity to allow us to execute on our strategic plans for the Flo brand. With the material change in recent circumstances, we would still consider divesting the facility at the right price and with the right partner. We no longer believe it to be an absolute necessity as it relates to meeting our strategic goals and objectives. Some of you may have seen I recently took on the role of EVP of operations, in addition to my role of CFO. This new responsibility has tasked me with leading capacity utilization as we add the fourth production line and strive to run the plant as efficiently as possible to lower our cost of production pertaining to each unit. We are also now running on a new operating model. All of our manufacturing has been consolidated into Canada. We have outsourced our logistics and we have a series of operational improvements that are currently being implemented. Between continued growth of the Flow brand and Copac operations and execution of our drivers of profitability, we believe 2024 will see Flow move from operational transformation to financial transformation. More specifically, we now expect improvements between $23 to $27 million in 2024 when compared to 2023 levels. And more importantly, we believe we can, in fact, reach EBITDA and cash flow positivity by Q4 of 2024. Currently, flow is trading at one times revenue on a trailing basis, and 0.7 times revenue based on our financial outlook for fiscal 2024. This is compared to our publicly traded average peer trading at a simple average of about three times revenue and over five times revenue on a weighted average basis. Our 27% net revenue growth for the flow brand at fiscal 2023, while not as high as we would have liked, still compares very favorably to the growth of most of our peers. And we think that we can do even better in flow brand growth in fiscal 2024. Factoring co-packing revenue, we believe our path to profitability has also been substantially de-risked. Given the revenue to enterprise value multiples associated with our peer group, we see a significant opportunity to unlock shareholder value. Now, all of that said, the best way to unlock this value is to execute on our plans. which the entire team at Flow, myself included, and Nicholas included, will be focused on throughout the foreseeable future. We appreciate all of your continued support. And with that, operator, please open up the line for questions.

Thank you. If you wish to ask a question, please dial star 1 on your telephone keypad now to enter the queue. Once your name is announced, you can ask a question. If you find it's answered before it's your turn to speak, you can dial star two to cancel. So once again, that's star one to ask a question or star two if you need to cancel. Our first question comes from the line of Martin Landry at Stiefel. Please go ahead. Your line is open.

Hi. Good morning, guys. Good morning, Martin. I was wondering if you could talk a little bit about... you know, the outlook for the flow branded products. There's lots of discussion about your, your co-packing, um, um, initiatives, but, um, how does the, uh, the outlook is for the flow branded products? I mean, you're almost done Q1 now, um, you know, could, could we see, uh, you achieve, you know, um, a similar growth rate in, in 24, then you've achieved in 23. I think in, in 23, your, your net flow branded revenues were up 27%. You know, is this, is this achievable or do you think it grows going to slow down? Any color would be super helpful.

Yeah, Martin, that's a great question. Look, we're holistically focused on the flow brand. That is who we are. That's who we're going to continue to be. Twenty-seven percent growth in net revenue for the full year was a little bit disappointing. There was a couple of things that happened to us, as I alluded to in my remarks. We were hit by resellers on our e-com channels, and I can't emphasize that enough. We were up, again, 42 percent in e-com in the U.S. through six months. And in the back half, it fell off a cliff. First, some of the things that happened were on our own, which we described last time. And I think we had some questions that you had provided, and we answered those as well in relation to that. But as we corrected all of those logistical issues, that's when we get hit by some serious retailers, specifically on one of our biggest sites online. And now we have some strategies that we're working through right now, one of which has already been implemented and looks like it's going to provide not only higher sales, but more margin accretive sales. And we're about to try to do that same thing in the U.S. And so that's going to help dramatically. Had it not been for that, if we'd just been able to maintain this same run rate, because as I said, we put a lot of money into e-commerce. both in the U.S. and Canada in the second half, and you saw it in Canada go from 9% growth in the first half to 64% growth in the second, and we had anticipated that's what was going to happen in the U.S. Had it even just maintained its run rate, our net revenue would have been increased from 27% for the year to 34% for the year. That's just that one channel. The second thing that happened was we were hit by a commercial You know, we had a very, let's say, punitive commercial relationship as it pertained to one of our major food service clients. And we've now rectified that situation. And that in itself really hurt our net revenue. So if you think about just those two things, okay, not imagining anything else, just those two things, that puts Flow brand net revenue well over 35%. And for the year. And we don't anticipate that we're going to be taking our foot off the pedal in that regard. So if you start thinking about the numbers I just said, you're getting your head around exactly what we believe FY24 will be.

Okay, that's a pretty sizable growth expectation.

Like, where is this going to come from? Is this going to come from additional doors? that you expected to win? Is this going to come from Velocity? Are you introducing new products? Just a bit of color as to where that growth is going to come from.

Yeah, so as we saw 2023 unfold, we also saw continued growth in our core channels of natural grocery, grocery, both in Canada and the United States. And the velocities within those channels maintain a very high level of growth, and they have been for the last six years. Next year, or this year, 2024, we'll be moving to profitable growth channels and anchoring in on our core channels to be able to produce the growth that we want so we can invest our marketing dollars, trade, and consumer against those profitable channels while maintaining our strategic partnerships in food service, like Starbucks and Live Nation, those are two examples, to be able to increase trial to produce larger results in e-commerce, but also larger brand awareness and putting our marketing dollars into those channels will more solidify our growth expectations next year, but also, most importantly, they will improve our margins and improve our trade spend as a result of anchoring in on those channels. And we've had a significant amount of brand awareness and trial through our successful partnerships and food service. So maintaining that strategy will actually get us to exactly where we want to be with the core flow brand, both here in Canada and the United States.

Okay, so if I understand correctly, it's more of a shift in channel mix rather than an increase in your portfolio product rather than an increase in doors. You're expecting that your channel mix is going to be translating into pure trade spend that's going to boost your growth. Is that better?

Yeah. Yeah, that's exactly right. Well maintaining our strategic food service channels may not make exactly the same margin profile, but they have a significant amount of brand equity and brand awareness attached to them in trial that has proven in 2023 to be a growth driver. So we're going to anchor into those channels as well. to get brand awareness and profitable growth in our core channels. So you're not, you may not expect we're going to add, you know, the same amount of doors as we had last year. But what we want to do is maintain our core channels and growth to ensure that flow exceeds our growth from last year and also make it more profitable by higher gross margins, through more strategic trade spending against those channels that Flow has proven for the last six years to generate both product market fit as well as great consumer margin and great consumer experience.

Okay. And then just maybe switching gears to your balance sheet. You finished October with $6.5 million of cash. You're talking about cap expanding to introduce a new line. Your operations are still generating significant losses. Your cost savings seem to be happening throughout the year and you're going to only hit profitability in Q4 as you alluded to. So how are you going to bridge now to then in terms of cash?

Yeah, another good penetrative question. So look, the reality is that our cash burn has been declining outside of all these one-time costs and transformation is expensive. We said this before. Restructuring is not cheap. But, you know, through Q1, and we're, you know, one day away from it closing through Q1, they're giving much guidance. It looks a lot better, you know, than Q4 and Q3. And I can say as of today, where we sit in front of this audience, we We have, in fact, completed most of the restructuring that was set forth to complete when Nicholas and I came back into the organization or came into the organization. And so our path forward looks very different from a cash burn perspective. But we have done some things internally, too, which have not yet been announced. Some things will be announced over the next little bit. But from a cash perspective, we've been able to bridge both for our board and for other parties who obviously have a vested interest in what our next 12 months look like. We've been able to bridge it. And a lot of that COPAC, which we, under a divester model, would not have owned, comes and starts production literally now. We've already started Joy Burst and we're about to start BioSteel, which we announced publicly. All of that is cash flow accretive and obviously helps the absorption rates when it comes to the flow brand because it's taking some of the cost away from what would have been on the flow brand. There's a lot of There's a lot of cash flow implications in relation to those large, large, you know, co-packing agreements. And as we said, there are about 140, 549 in that range, million dollars over the five-year span, a couple of which are three years. So that's a lot of cash that we would not have anticipated having for us. had we divested of the Aurora facility. So, look, again, I don't want to say we're not divesting completely, but clearly it's going to come down to we need to have the right partner and the exact right price that we're looking for because we now have a very well-thought-out, detailed, granular path forward that we believe is going to get us to profitability and cash flow positive in a pretty good timeframe. I mean, fourth quarter, is, I mean, we're about to start our second quarter in two days. And so fourth quarter isn't that far away. It's only six months. So we think we've bridged it from a cash perspective, and things are looking up.

Okay, that's all. Thank you for the caller.

Thank you. Our next question comes from the line of Najib Islam of Canaccord Genuity. Please go ahead. Your line is open.

Sure. Thanks for taking the question. I was wondering if you could give me some more color as to the cadence of the $148 million in revenue that you're hoping to realize, as well as some information about the margin profile that these agreements have.

Yeah, sure. So let's start with the cadence. And these are all in the public domain. We have a five-year agreement with BBOX, who's a wonderful COPAQ line. They're in hyper growth. They're alcohol-based. malt wine-based drink in a tetra pack that people are really enjoying out there in the marketplace. So we're glad to have them as a partner. That, as we said, is 50 million units in the first year and 70 million units each year thereafter at a minimum. So that's what they were comfortable signing up for as a minimum, as a taker pay. So they don't produce, they still pay, and there's parameters around that. But it's a pretty stable source of income and cash flow. Now, we believe, and they believe, clearly, that they're going to exceed those volumes, and that's why they signed up for those minimums. BioSteel, as we announced, is a $24 million pack for the final two years, and I think it's like $20 or $21 million in the first calendar year ending this December 31st. And so, again, the new owner who we've met with and Nicholas has spent some time with, a very, very intelligent person who's had a lot of success in other businesses, really brings a different frame of mind to the business as well of BioSteel. And he and we feel very confident that that brand is going to continue to be healthy and grow. And so, again, the minimum is the minimum, but we believe, especially in the second and third year, that volume will well exceed those minimums. And then we have Joyburst, again, a beautiful product within a very good organization, doing extremely well at Costco, and it's 15 million packs per year, again, as a minimum. All of these are take or pay. So all of that's what it looks like. Now, from a merchant perspective, there's only a certain level of cost that goes against a co-packing. And when you look at a co-packing feed, the things that we have to supply the company is literally, and I don't want to tell you, is the cap that goes on top of the Tetra Pak and then the supplies when it relates to shipping. So corner boards, slip sheets, pallet wrap. But other than that, it's actually just the underlying cost of production, which is all about absorption. So running the actual plant. Allocation of rent, utilities, repairs and maintenance, casual labor, so on and so forth. And so when you have that extra volume going through the plant, it really does lower the cost of goods per unit and allow everything to have higher margins. So that's really where we are. And so it's very margin accretive, very, very margin accretive.

Sure. Thanks for the call, Aaron. Just one more question. Could you give me an idea of how much incremental revenue the fourth production line in Aurora can support and how much CapEx was required for this?

Sure. Each line typically can do 3 million units per month, so 36 million units a year, give or take. If you're running it more efficiently because you're doing longer batch runs, you can get efficiency up to 95%. Then and you can actually exceed the $3 million. If you're doing multiple Copac clients in one month on one line, it could be a little less. But $3 million is a pretty good bar to use. And from our perspective, and the total cost of that is about $11.5 million, 70% of which was financed through, I'll give them a shout out, a tremendous partner of ours from a financing perspective. NFS Leasing who have been a friendly and very supportive lender and friend to the company. So that being the case, I can tell you right now the line is actually installed. It will be operational within another week to two weeks tops and the revenue stream that goes along with it will turn itself on at that time and it's fully booked. Yeah, and it's fully booked.

Yeah, so the fourth line capacity has been sold for, well, the better half of five years. Yeah.

Sure. Thanks for answering my questions. I'll pass it along.

Thank you.

Thank you. We currently have one further question in the queue, so just as a reminder to participants, if you do wish to ask a question, please dial star 1 now. And the next person is Sean McGowan at Roth MKM. Please go ahead. Your line is open.

Good morning, Sean. Thank you. Good morning. A couple of questions. One, Trent, could you give us a sense of where in the P&L the $23 to $27 million cost improvements are likely to show up? I imagine it's kind of spread out, but if you could just sort of bracket, you know, the ballpark areas, how much of that would be in gross margin, how much in marketing, how much in G&A, et cetera?

Yeah. Yeah. And, you know, a lot of that's run rate and what we look like this year. But, yeah, G&A for sure, for sure, for sure, G&A. You know, we're going to have, I'd say, about, for the sake of argument, $8 million, you know, give or take, coming right out of G&A on a run rate basis. Salaries will be reduced by a couple million on a run rate basis over the course of the entire year. And then the rest is all in COGS. where you look at the logistics savings, a lot of which are in COGS, and some of the operational efficiencies we're putting into the Aurora production facility, it's a different day. And so those are the three areas that you'd see.

Okay. And then assuming that the plant is retained and production with its COPAC partners is rolled out as expected, How would you characterize the range of potential COPAC gross margins? I imagine because it's so sensitive to utilization and some of these ramp up, what's sort of the range of gross margins we should expect from the COPAC revenue?

Yeah, so with COPAC there, it's really what it does to the consolidated number of units that are being, including flow brand, that are being put through the facility itself. Because it's really that overhead absorption that you benefit from, in addition obviously to the revenue stream and the cash flow. But from that perspective, once you're at capacity and you're running over 100 million units over the next 12 months, you get down to a gross margin on Copac of no less than 40%. it's very margin accretive and, and, and does in fact lower that again, because it's, it's, it's going to be more than half of the volume. And when you do that and it's absorbing more than half of the cost, you can understand what it does to the flow brand when it comes to margin as well.

Yeah, that's helpful. So, I mean, that would be kind of purely incremental gross margin, you know, at full run rate.

Yep.

Okay. Um, My last question is, could you talk a little bit more with color on the trade spend hit that you took? I didn't quite follow what that was about.

Yeah, I mean, I can't get into names and details, but here's the premise. That's what I wanted. I know you do. We have a direct store delivery commercial relationship. in the United States in a very populous area that we signed into with a great partner. But one of our big food service clients, you know, happens to take a lot of the product in through that specific geographic region. And as a result of that specific thing happening, we were paying some fairly large sort of margin protection fees And now I want to start by saying that's going away. I can tell you that. That's going away. But it was very punitive for the year. By the time, because this was, you know, when we went into the year with that particular food service client, it wasn't well known or understood at all, in fact, that that would be happening. And I don't know that people understood the implications with regards to the direct service direct store delivery, the DSD partner we had. And as you work through that throughout the course of the year and late into the year, it became fairly, you know, determined that this was going to be a hit. And so we ended up taking it, unfortunately, all in one quarter for the most part, although we did restate Q3 in relation to this as well. So you don't see all of it in Q4. You can see the restatement in our MD&A. But, you know, by and large, that goes away and it was significant. It was a significant amount. Okay. Fair enough. And it happened to a food service line that we don't make money with because it's food service. So it doubled up. It was very beautiful.

Yeah. Got it. All right. Thank you.

Thank you. And currently there are no further questions on the phones at this time. So thank you all very much for attending. You may now disconnect your lines.