Flow Beverage Corp.

Good morning, everyone. Welcome to Flow Beverage Corp's fiscal Q2 2024 conference call. As a reminder, this conference call is being recorded on June 17, 2024. At this time, all participants are in the 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 results or 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 fact 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 leaking 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 analysis for the three months ended April 30, 2024, which are available under the company's profile on CDER+. You are cautioned not to place under reliance on these forward-looking statements, which only speak to 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 updates or for any reasons. 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, Chief Executive Officer of Flo. Please go ahead, Nicholas.

Thank you, operator. Good morning, everybody. I'm joined here 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, in particular, our Aurora facility expansion. Before I pass the call to Trent, I'll also review Flo's strategic growth priorities for our fiscal 2024. Trent will then take you through a detailed review of our Q2 2024 financial results and share an update on our operational priorities. After Trent's remarks, we'll open the call for questions from our analysts. This morning, we reported the most profitable quarter since becoming a public company three years ago. We delivered our lowest adjusted EBITDA loss as a public company, and we focused on our most profitable channels for the flow branded growth. and realize the financial benefits of our restructuring and operational transformation. With this momentum, we are entering the summer hydration season with a recent, innovative Flo brand and Tetra Pak, and we are positioned to build our progress in profitability and cash flow. In November 2023, we signed a five-year contract $115 million co-packing agreement with Beatbox to produce their party punches in Tetra Prisma format. Just last week, we began commercial production on Beatbox in our Aurora facility. It took about six months to add the fourth line and additional equipment to accommodate the increased production volume that we expect from this take or pay agreement. There were also a few steps prior to starting production since this was our first contract to produce alcoholic beverages. On slide four of our presentation, you can see the first pallet of Beatbox Party Punch rolling off our Aurora facility. Since commissioning just happened last week, there was no revenue attributed to Beatbox's contract in Q2, but we have began to monetize this contract in Q3 and expect it to accelerate in Q4. Also remember, we have recently signed co-packing agreements with BioSteel and Joy Burst for a cumulative minimum net revenue to flow of $148 million over the next five years. We have also been very selective adding co-packing partners ensuring that it contributes to the revenue from these relationships is profitable for flow and provides growth based on the success of achieving by our branded partners. Our strategic growth priorities have not changed. Over the summer hydration season, we are going to be focused on our trade spend in national grocery in both Canada and the US, as well as gas and convenience channels in Canada. These channels provide an optimal mix of volume and profitability for flow and are proven channels. Scaling our co-packing business is also going to be a significant initiative over the next few months. It's going well so far. and we are evaluating a path to add additional lines in Aurora as well. With our contracted revenue from our co-packers, a return to profitable growth for a re-energized flow brand, and continued financial improvements, we still expect to achieve positive EBITDA, adjusted EBITDA, and cash flow from our operations in Q4, which begins this August, September, and October. This concludes my remarks, and now I'll pass it to Trent.

Thank you, Nicholas. As Nicholas said, Flo has achieved its most profitable quarter as a public company in Q2 2024. While the exit of unprofitable commercial partnerships in the United States did offset Flo Brand's net revenue growth in certain profitable channels in Canadian e-commerce, the real story in Q2 2024 was our gross margin increasing to 28%, versus 18% in the same quarter last year, and of course, negative 15% in Q1 of this fiscal year, 2024. There were four primary drivers for our greatly improved gross margin. Our net revenue was comprised of higher profitability channels for the Flo brand. Two, the consolidation of production of the Flo brand at our Aurora production facility, has improved profitability as we no longer outsource any of the production of flow. Three, we have realized improved production utilization at Aurora through the optimization of our operations. And four, we have increased co-packing revenue and volume, which is utilizing capacity and increasing our absorption rate. Our adjusted EBITDA loss was $3.5 million compared to $6.6 million this time last year and a $9.2 million loss just last quarter. As Nicholas mentioned, this is by far the best result we have achieved in the past three years. In addition to significantly improved gross margin, our operating expenses reflected decreased general and administrative expense, as our operational optimization is now approximately 90% complete and lower salaries and benefits reflecting our recent corporate restructuring. We believe we can still improve on profitability and cash flow in the coming two quarters, and we are reiterating, as Nick just alluded to, that our target is to have positive adjusted EBITDA and cash flow from operations in Q4 of this fiscal year. Turning to a bit more detailed review of our P&L, the 26% decrease in flow-branded net revenue is primarily of our own doing, from exiting retail and food service partnerships in the U.S. that were simply unprofitable and were not providing the return for our investment. Unfortunately, this did offset the progress we have been making in other more profitable channels, such as conventional grocery and natural foods. There are lots of good signs with regards to the flow brand, and we are growing in the channels where we deem it to be necessary to grow. While COPAC net revenue increased 13% year over year, we have yet to hit our full stride in this line of business, as these results, as Nick mentioned, do not include contribution from the box contracts. Gross profit increased by almost $1 million due to the factors I just mentioned, which resulted in gross margin of 28%. Sales and marketing expenses remained consistent with prior quarters, and I will reiterate that we hope to invest more in this item once we meet our profitability and cash flow targets. General and administrative expenses were down 26% as compared to Q2 2023, and 40% from just one quarter ago in Q1. This reflects a substantive completion in our efforts to overhaul our logistics functions and other operational transformation initiatives. Salaries and benefits are also down 35% as compared to Q2 of last year and 23% sequentially. This, again, represents the continued impact of our corporate restructuring. To achieve our targets of a positive adjusted EBITDA and cash flow from operations in Q4, we still have to continue executing in all aspects of our business. We expect to see a resumption of growth in the flow brand net revenue in future quarters as the impact of exiting unprofitable contracts and competitor reselling over certain U.S. e-commerce channels begin to abate. We are very excited about the summer hydration campaign and our focused effort to grow across Canada and U.S. grocery as well as Canadian gas convenience. Scaling our operations to meet the requirements of our co-manufacturing agreements is also going to be a big driver of both net revenue and gross profit in the coming quarters. Gross margin has lots of room to improve as we reach full capacity utilization with our fourth production line and our cost per unit produced continues to come down significantly. With our functional areas restructured and our operational transformation effectively complete, Our operating expenses should be at a level where improvements in gross profit can provide significant operating leverage to adjust to EBITDA. All of that said, and as I continuously talk to on these calls, flow is still trading at a very low multiple compared to other of our competitors within the industry. Right now, we're at 0.9 times revenue, and on a trading basis, 0.7 times revenue. Looking forward, sorry. This is compared to our publicly traded peers that have a simple average over three and well over five on a weighted average basis. Now, to close this valuation gap, we understand that the burden is on us. We have to continue to deliver on the things that we say we're going to do. What you see in Q2 is a realization of those efforts, and that is just the beginning. We believe, again, that we're going to have a stronger back half of the year and then leap off into FY25 on an extremely positive note. In the meantime, we appreciate all your support. And with that, operator, please open the line for questions.