Flow Beverage Corp.

Welcome to Flow Beverage Corp Fiscal Q1 2024 Conference Call. As a reminder, this conference call is being recorded on March 18, 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 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 expectations, 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 are 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, 2024, and the company's management's discussion and analysts' for the three months ended January 31, 2024, which are available under the company's profile on CEDAR+. You are cautioned not to place undue reliance on these forward-looking statements, which only speak to the date of this presentation. The company claims 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 expressly qualified in its entirety by the above cautionary statement. I will 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. I'm joined today by Trent McDonald, Flo's Chief Financial Officer and EVP of Operations. On today's call, we're going to start by providing an overview of Flo's recent milestones, which includes Flo's rebranded product line that is going to be launched on our summer hydration campaign. Before I pass the call to Trent, I'll review the strategic outlook of 2024, which will include during our year which was included during our year-end call. Trent then will take you through the details of our Q1 2024 financial results and share with you an update on our operations and priorities. After Trent's remarks, we'll open the call to analysts. Last year, last week at Expo West, we introduced an evolution of the Flow brand along with the more sustainable Tetra Pak, which we plan to launch throughout the summer on our hydration campaign. After extensive consumer research, we have updated our brand to evolve with our consumer in the premium hydration and premium water category and place an emphasis on our mineral-rich spring water with pure taste as a key differentiator. Along with our refreshed brand, we are launching a newly designed website for both the Canada and the U.S. consumers. The new version of our Tetra Pak carton contains recycled content using biopolymers and is made with over 80% plant-based renewable resources. Our carbon footprint on this package is seven times less than glass, four times lower than aluminum, and three times lower than plastic. With this innovation, we will solidify ourselves as the most sustainable beverage in the world. Our refreshed brand and new package materials relating to our original mineral water and our four organic flavors, cucumber mint, strawberry rose, peach blueberry, and blackberry hibiscus. We previously had six organic flavors, In addition to our classic OG, while working through our consumer research and brand refresh, we re-evaluated our whole product portfolio and decided to go with our four core flavors to optimize our path forward. We recently decided to exit our line of vitamin-infused products as well and focus on sustainability within our core SKUs. In addition to optimizing our product line, we made some difficult decisions to exit commercial relationships and sales channels that were not yielding expected margins. While this impacted net revenue in the near term, we believe these decisions will maximize mid- to long-term profitability. Turning to co-packing and co-manufacturing, we had two major contract wins with Beatbox and Balsio in Q1 2024. Along with Joyburst, we expect Flow will earn a minimum of $148 million in contracted revenue over the terms of these agreements. In the first quarter, we began production with Joyburst. In February, we started production of BioSteel, and we expect Beatbox production to start during fiscal Q3. We have recently announced the private placement for approximately $3.3 million. Our investor is the founder of NSF Leasing, our primary lender. Cliff of Rucker Investment and NSF have been great partners over the last eight years. And we think that their equity investment is a big endorsement in our future prospects. Turning to our strategic priorities in 2024. The game plan is the same as we presented as a part of our year-end 2023 conference call January 31st. For the Flow brand in Canada, we expect our partnerships with Starbucks and Live Nation to continue the growth of the brand through retail and e-com channels. We plan to focus our trade spend on national grocery, gas, and convenience channels where we're seeing a lot of success recently. Looking at the U.S. retail, we are maintaining the growth in our core channels of natural and conventional grocery, and we're putting together a strong summer campaign around our new brand launch. For U.S. e-com, the channel remains challenging, but we have a plan to respond to our competitive reselling and expect to mitigate this in Q3. Turning to the capacity of Aurora, our expansion is going as planned. In February, we commissioned the fourth line of production, increasing our manufacturing capacity by 25%. This was as a result of great effort from our team, and we are well positioned to scale with our new co-packing partners and contracts. Today, all four lines are running 24-7. With our contract revenue from co-packing, a return to growth from the refreshed brand, and continued financial improvement, we still expect to become adjusted EBITDA positive and cash flow positive from our operations in Q4 2024. That concludes my prepared remarks. I'll pass it over to Trent.

Thank you, Nicholas. Look, on the surface, it was a challenging quarter. However, we believe the foundation is now a place from which Flo will continue to build very strong momentum. With that, Flo brand net revenue was $6.6 million in Q1 2024, down 9% from last year, and consolidated revenue was $8.3 million, down 16% from Q1 2023. In Canada, the Flo brand continues to have positive retail growth, led by grocery and food service, while our e-comm channel grew significantly year over year, both benefiting from increased conversion of customers who had trialed flow of water and food service channels, a strategy that is clearly starting to pay dividends. In the United States, we made the cognizant decision to pull out of certain unprofitable channels and commercial agreements, which impacted net revenue in Q1. That said, we firmly believe this will benefit flow in the longer term and help the company reach profitability. These decisions are consistent with our efforts to simplify our business and invest in only those areas that provide a solid return. Flow brand sales in the U.S. also continue to be hampered by competitor reselling over e-commerce platforms that we described during our last call in January. We have developed a strategy to greatly mitigate this impact, and we believe the positive impact of executing on this strategy will be seen in the second half of this year. Consolidated revenue in Q1, which includes co-packing, still does not reflect the impact of most of all of our newly signed co-manufacturing agreements. As Nick mentioned, we began manufacturing Joy version Q1 and BioSteel only recently began production in Q2, while Beatbox is currently set to start at the beginning of Q3. We expect to see significantly improved consolidated net revenue in quarters to come. Due in part to the factors I just described, gross margin was a loss of 15% compared to positive gross margin of close to 30% in Q1 2023. In Q1, we ramped up our cost base to ensure we could run at full capacity in Aurora starting at the beginning of Q2, coinciding with the go-live of our fourth production line and the start of co-packing BioSeal. At the same time, the lost sales from competitor reselling, and the exit of commercial partnerships in the U.S. This all caused a near-term reduction in production volume and greatly decreased overhead absorption rates, causing more costs to be applied to each unit of production and lowering margins. We believe this is going to be a very short-lived issue. with Q2 through Q4 set to see greatly increased production volumes and much lower costs per unit produced. While costs per unit out of the ROAR were high for the quarter, the commercial relationships we exited still managed to cause negative gross profit of close to $850,000 in Q1. In addition to this, We still had inventory from our October 31 year end that had been produced in Verona under a third-party manufacturing agreement, which carried a much higher cost per unit due to the co-packing fee within its cost base. Much of this inventory ran through cost of goods sold in the United States as it was sold into the market in C1, which itself had a negative $440,000 impact on gross margin. We expect there to be one more quarter of that Varroa COPAC fee impact, but not to the degree we experienced in Q1. Also within the cost, we unfortunately incurred an extra $610,000 in e-comm logistics and shipping costs over normal run rate, which is currently being corrected. There will be another small impact in Q2, but this should be fully straightened out on a cost-per-case basis to back to or even below normal levels by Q3 and onwards. Lastly, with the exit from our line of vitamin-infused products, which Nick alluded to, we took a $1 million non-cash write-up of all raw material inventory, which also obviously impacted gross margins. All of these many issues, almost all of which do not continue in a material way from this point forward, caused us to have negative gross margins. But if removing those and normalizing, we are at or above 23%. Again, we believe gross margins are going to dramatically improve in the quarters to come, and especially over the back half of the year. Turning to adjusted EBITDA, the 3 million variance from last year is mostly explained by looking at gross margins. Again, we expect a significant improvement in this metric in the near term. Turning to a more detailed review of our P&L, you can see that sales and marketing expense has remained stable. We are very keen to be in a position to invest more in our sales and marketing activities once we hit our profitability goals. General and administrative expenses were down significantly on a sequential basis by close to $2 million from Q3 in 2023 and down close to $3 million sequentially from Q4 2023. but they were up compared to the same quarter last year. While Q1 showed substantial improvement on a run rate basis, G&A does not completely reflect all of the total restructuring we've executed on to date. We will see more reductions in Q2 and then for the back half of the year, predominantly in logistics, where we believe there's still room to remove costs over and above what has already been completed. The salaries and benefits were 32% lower than the prior year. We feel that this particular operating expense line is now running closer to a sustainable run rate, and it reflects most of the restructuring that we've done to date. Looking forward, we remain on the cusp of realizing the full impact of our operational transformation. With our functional areas restructured, we are driving efficiencies through 3PLs, to meet our cost improvement objectives. Scaling our operations to meet the requirements of our co-manufacturing agreements is also going to be a big driver of lower cost per unit of all our production now coming out of Aurora. With the resumption of flow brand growth, our focus on profitable channels and cost control, and the scaling of our co-pack operation, we still believe the best is yet to come and remain very confident we can get to positive adjusted EBITDA and cash flow by Q4 of this fiscal year. Right now, Lowe's is still trading at 0.9 times revenue on a trailing basis and even less, down to about 0.7 times looking at our forward revenue streams. This compares for our publicly traded beverage peers, trading a simple average of over three and over five on a weighted average basis. We still believe the market is pricing flow for failure, and quite frankly, fairly so. We have yet to show the total impact of our transformation in our publicly reported results. It is on the flow team to do that, and to that end, we believe we are imminently close to doing so. We see the future as very bright and look forward to delivering what we hope to be a much better result in the quarters to come. In the meantime, we do appreciate all your support. And with that, operator, please open the line for questions.