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.