Flow Beverage Corp.

Good morning, everyone. Welcome to Flow Beverage Corps Fiscal Q1 2025 Conference Call. As a reminder, this conference call is being recorded on March 18, 2025. At this time, all participants are in a 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 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 public 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, 2025 and the company's management's discussion and analysis for the year ended October 31, 2024, which are available under the company's profile on CDER+. Your caution 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 event or for any reason. Any forward-looking statement contained herein or discussed during today's session is expressly qualified in its entirety ready above cautionary statement. I will now turn the call over to Nicholas Richenbach, founder and chief executive officer of Flow. Please go ahead, Nicholas.

Thank you, operator. Good morning, everybody. I'm joined today by Trent McDonald, Flo's Chief Financial Officer and EVP of Operations. On today's call, I'll start by providing an update on our quarter and our recent milestones, and then I'll pass the call to Trent to review the quarter in greater detail. After Trent's remarks, we'll open the call for questions from our analysts. In Q1 2025, Flo continued to improve its financial performance. Revenues increased 38% to $11.4 million. This revenue increase was driven by a 216% increase in our co-packing revenue. Flow branded revenue was down 5% in the quarter. Even with our recent production challenges, we continue to close the gap on our flow branded revenue growth and the impact of exiting unprofitable channels. on the details of our efforts to optimize our production during his remarks. Gross margins were 21%, a 36% improvement from the prior year. This is a result of our focus on profitable channels for the Flo brand and profitability for our co-packing contracts. However, we will still well below our potential. As we shared last quarter, and in our press release this morning, we are still dealing with challenges of scaling the operation, which means we've had demand for our flow brand in excess of what we could produce, and the more we produce, the higher our gross margins. We are still confident that we will achieve gross margins in line with our financial targets once we refine our production process. We have already seen gradual improvements. SG&A decreased by $3 million down to $5.5 million, a 35% improvement. Our selling and marketing expense did include some one-time marketing rebates, but general administration expenses were down 50%. and now represent a more sustainable run rate. These factors led to an adjusted EBITDA improvement of $7.1 million compared to Q1 2024.

In the six weeks since our last conference call, we have made a few operational milestones.

Flo is now the official spring water partner of InterMiami, The MLS season kicked off this over the weekend, and Inter-Miami will be having their first home game in March 29th. We've also added Jose Bautista as a strategic advisor, investor, and shareholder. Joey Batts is a well-known in our home commodity and is a six-time All-Star and three-time Silver Slugger for the Toronto Blue Jays. Now in retirement, he has become an entrepreneur with a keen interest in sports, health, and wellness. He is the owner of the Las Vegas Lights Football Club, and Flow is also the official sponsor of that soccer league. The Lights won their first game of the season last Saturday, and we're delighted that Flow will be available for all the fans throughout the season. We feel that Flow partnering with athletes and sports franchise aligns very well with the Refresh brand as flows mineral content and alkalinity offers a natural health benefit for those living the active lifestyle. With that, I'll pass it over to Trent.

Thank you, Nicholas. I'm glad to be here with everyone. Consolidated net revenue increased 38% in Q1 2025, which we're very pleased with. As Nicholas mentioned, the increase in net revenue was driven by a 216% increase in our Copac business, as all of those beautiful manufacturing services agreements have really started to kick in. Flow brand net revenue, however, did in fact decrease by 5% as compared to the prior year. As mentioned by Nicholas, this is the result of us overlapping prior year results, which included many of the unprofitable channels that we had to exit as part of our decision-making during the restructuring phase of the organization over the past two years. But this does represent the fourth quarter in a row that we've been able to narrow that comparison to prior year results, even though those comps did have those revenues in it from the unprofitable channels. Also, as we mentioned six weeks ago, during our Q4 earnings call, we continue to tackle production issues at the Aurora Production Facility, which led to missed sales opportunities due to unfulfilled demand. While we now have four lines running, staffing and establishing standard operating procedures has been a bit of a challenge. As exposed to Q4, we have made new senior-level hires to help establish sufficient processes, and we have also engaged industry-leading consultants with knowledge of Tetra Pak manufacturing. We've already been seeing marked improvement in Q2, but the plant won't ultimately be producing at our target efficiency until the beginning of Q3. As you can see from our financial statements, flows cost of goods sold was $9 million in the quarter versus $9.5 million last year and $9.4 million just last quarter. This reflects our full cost of operating four production lines 24-7. Our team has done a really good job holding line of fixed costs, and it's this fixed cost base that will provide operating leverage once we establish fully scaled and consistent productions. However, due to these production challenges, volume was not where we had expected, which leads to absorption issues. And when we're not getting the absorption per unit that we expected, of course, our gross margins aren't as high as we would have liked. That being said, gross margin did increase to 21% from a negative 15% margin last year. So while that's a 36% improvement, it's still not where we know we need to be, but we have the opportunity to get there and see a very, very near-term path to doing just that. Selling general and administrative, as well as salaries, continue to show improvement as a result of all of the time and effort we put into the restructuring efforts and have been a real highlight, becoming very predictable and controllable. A great example of this is logistics costs, which in total, between cost of goods sold, where some of our logistics is allocated, and SG&A, were $2.7 million for the quarter, which is down to almost just one half of pre-restructuring run rates. EBITDA loss was $2.6 million in the quarter. Now, that's compared to a $9.7 million loss in Q1 2024. which is a $7.1 million improvement year over year. I'd also like to mention, though, that on a trailing 12-month basis, we have improved adjusted EBITDA by over $27 million, of which 16 came from the SG&A costs just mentioned, which have now declined by about 40% on a trailing basis. So these are all great things that we've been able to accomplish, but again, we know we need to focus on fulfilling our top line demand that we have the actual demand for and being able to make sure we're in market all the time and in full. So we have our work cut out for us that way. Our financial targets, however, as we disclosed them back in the Q4 earnings fall, do in fact remain intact for the year at this point. And we believe strongly we can get there. So just to reiterate what those were, net revenue between $72 and $82 million for the year, gross margin between 38% and 48%, and adjusted EBITDA between $6 and $11 million for the whole year. What is also unchanged is how we plan to accomplish our financial targets. Once we solve for production optimization, gross margin and adjusted EBITDA should follow accordingly given the work we've done on the rest of the P&L. That being said, as we always talk about is, is the valuation out there for us, which again is, is, you know, a fraction of what our peer group sells at. Even after the tumultuous last couple of months of the market, we're at, we're at 0.7 times revenue in our, in our peer groups, you know, about 3.6 on a weighted average basis. So we have a lot of room that we need to continue to grow towards, but you know, that's on us to, to continue to execute and, on our plan and show that there's this legitimate path that we know we have. And while we see all these marked improvements, there's still a ways to go and we're up to the challenge and we will continue to constantly move in that direction. So that being the case, we do expect investors to hold tight and help support where we're trying to go with this. But in the meantime, we're going to open up the live for any questions. Thank you, operator.

Ladies and gentlemen, we will now begin the question and answer session. To ask a question, you may press the star followed by the number one on your telephone keypad. To withdraw your question, please press the star followed by the number two. Once again, please press the star one to rejoin the queue. Your first question comes from the line of Martin Laundrie with People. Please go ahead.

Hi, good morning, guys. Morning, Martin.

Trent, I was glad to hear you reiterate your financial targets because I didn't see them in any of your documents today. Maybe I've missed them. So you're still aligned to generate $72 to $82 million of sales, gross margin of $38 to $48 million, and then adjusted EBITDA of $6 to $11 million. for the full year. I mean, can you walk us through a little bit how that would play out, maybe at the EBITDA level on a quarter-by-quarter basis? Because it does, you know, require a significant turnaround. I understand, you know, fixed cost leverage and all that stuff. But, you know, given the production challenges that you've talked about in your opening remarks, you know, how does Q2 look like? And then how does it ramp up in Q3 and Q4?

Yeah, good question, Merton. So we don't, you know, we weren't going to disclose quarter by quarter guidance, but given the question, I can say directionally that Q2, yes, it's going to be challenged again, like Q1 on the top line and cost of goods as a result of absorption issues. We do believe that the cost of goods has actually come down a bit while sales will go up. So our operating leverage is going to start to kick in a bit in Q2 versus Q1. So while our SG&A will remain sort of intact, right? And so that being the case, you know, we can expect probably a mild EBITDA loss again in Q2, but not to the degree that we had in Q1. And then in Q3, we will, at some point throughout Q3, have another additional line operating, which will provide even more volume, throughput, and leverage on operating costs. And so we expect, and again, SG&A should come in where we've been running. And so we believe in Q3, you're going to see a decent increase a decent EBITDA, which should offset fully Q2 and a bit of Q1. Then you get into Q4 and you're going to have a full quarter of true profitability. And I think you're going to see some pretty nice leverage because you're going to have a full quarter of not only the throughput at the plant, you're also going to have a full good quarter of our sparkling mineral water, which is going to be accretive to sales and margin. And we already have a lot of, you know, as we said before, that there's a high demand for that innovation already. And we have a lot of great listings. So, you know, in Q4, you're going to see a lot of that coming through. Some in Q3 as well on the sparklings. So, you know, like I said, you're going to offset most of the first half of the year just off of Q3. And then maybe even be positive for the year of a run rate by the end of Q3 and then Q4 is going to come in quite high. So I don't know, to be honest, if we're going to get to the high end of our range, but I see us coming in a little above our low end.

Okay.

Okay.

Okay, that's helpful. And, you know, perhaps we could switch a little bit to your balance sheet. You know, you do expect still an EBITDA loss for Q2. So that means I would assume, you know, cash from negative cash from operations in Q2, your cash balance is low. So help me understand a little bit how you're going to bridge your cash needs. from now to when you become cashflow positive?

Yeah, it's the multi-million dollar question that continues to come back at us all the time. And we just keep getting creative. You know, we have the private placement that we closed on. Some of it, we still, we believe strongly we're going to be able to close on the rest of it in the next, call it six weeks. at most. We also have some other things that we unfortunately, Martin, can't talk about that are a little bit more strategic, transformative. As we all know, I think it's not easy to continue to bridge, bridge, bridge to profitability and moreover to cash flow positivity. And even when you get to cash flow positivity, the As I've said before, in my analogy, when you're not cash flow positive, you're continuously digging a hole of working capital deficit in this case. And then when you're finally done, that hole is still there. And then it's going to take a while to fill it back in. And typically speaking, you can do that slowly, surely over time, or you can do something larger, more strategic on a recapitalization event. And so we're looking at a couple of things and we consistently are looking at a couple of things, which I can't disclose, but we feel good that this, I'll say this, we feel good that this is not going to be an issue for many quarters to come here.

Okay. Okay, that's helpful. That's it for me, guys. Best of luck. Thanks, Martin.

And your next question comes from the line of Sean McCowan with Broad Capital. Please go ahead.

Morning, guys. Morning, Sean. Good morning. I don't know if this is for Nick or Trent, but can you talk about whether the production issues are exclusively in the flow branded? And if that's the case, why would it not affect the co-packing business as well? Yeah, that's a good question, Sean.

The production issues mainly are as a result of commissioning the new line. Line 4 went live early November, which is the quarter that we're talking about. And it usually takes about 90 days to commission the line to get it up above 80% utilization. And so we began the quarter optimizing a new sterilizer as well as the new line of production, which allows us to do three simultaneous lines of co-packing at the same time. And that does take about 90 days to commission up to what would be considered world-class output, which is above 80%. And we saw month over month about a 10% improvement on the line and the sterilization equipment. So we feel like it affects across the board, whether it's flow or other co-packing partners when we bring it up there. But, you know, as of Q2, the line is fully commissioned and it's going to hit within probably 30 to 45 days our standard output, which is above 80% output on it. So it's probably a temporary change. but also something that's normal in the industry when you commission new equipment.

Yeah, and I'll say this too, Sean, is that while we say that it's not affecting, that we still did really, really well in cold pack, just like flow, we didn't hit our target for cold pack. We left some stuff on the table. We have enough COPAC. The demand's there. We have manufacturing service agreements. We just couldn't, between both flow and COPAC, we couldn't get all the way to where we needed to be in Q1. And like I said, I know what Nicholas is talking about here. It's come into Q2 as well. So just so everyone expects, people don't expect that we're going to be at full efficiency as of February, March. We aren't. But I think by late April, it's been a little tougher process than we expected, but we're really getting there and getting there quickly. But we could have done a lot more co-pack, just so you know.

All right, that's helpful. And then, Trent, I have a couple of questions about cadence of expenses. So specifically, you know, your salaries and benefits in the fourth quarter were quite a bit lower than, you know, the previous quarters and quite a bit lower than this quarter. So was there something in that fourth quarter that was kind of an unusual offset? You know, why the big jump from 4Q to 1Q? Yeah.

Yeah, there was actually, Sean. We, you know, under IFRS accounting rules, throughout the course of the year, we, you know, we accrue to budget our expected bonus payouts. And we made the decision in, you know, basically during Q3, but we, we, we journalized it, you know, when we came, like when we ultimately the board came to the decision that we weren't going to be paying out any bonuses and we reversed those. back into the P&L in the fourth quarter. And so that probably makes sense to anybody listening, and that's fair game. That's what we did.

Yeah, okay, it makes sense. And then is there similarly what we see in stock-based compensation? Because that also kind of jumped up. So is that also a function of you've got a new set of annual targets and you're accruing at a higher rate, did you have greater confidence that you're going to meet your expectations for the year?

Yeah, you know, look, stock-based compensation, we feel, is a great way to incentivize our team to build value. And so for us, yes, November 1st, the beginning of the new fiscal year, is the timing under our long-term incentive plan that we allocate shares and ownership to our team members in advance of the year. It's it's a reward in many respects, but it's also incentive to go out and work hard to build value and then to be able to share in that value as you're building it.

And so if we look at those expense items, you know, GNA salary and stock based comp are, are there levels reflected in the first quarter kind of what we should expect going forward? Or, you know, is there going to be a jump up or jump down from there?

No, salaries should be in around what you see in the Q1. We did invest. They're a little higher than they were, like, if you compare to Q3 and Q2 of last year, which were post-restructuring. They're mildly higher salaries because, you know, later in the year, we were really investing in our U.S. sales force, our U.S. sales team, our leadership in that area because we believe we have a lot of untapped sales demand that we're now going to be going after with a lot of, you know, haste and putting our efforts in there. So we did increase that team, which is what you're seeing there. And so you'll see that sort of level as we go forward. And SOC-based comp, now that it's out there, yeah, you're going to see that same sort of level each quarter.

All right. Thank you very much. Appreciate it. Thanks, Sean.

And once again, if you would like to ask a question, simply press the star one on your cell phone keypad. Your next question comes from the line of the Jeev Islam with Canaccord Genuity. Please go ahead.

Sure. So I was wondering if you could share how the progress is going with the expansion into conventional food aisles and grocery stores. And are you seeing any sort of tailwinds from the bi-Canadian trend that we're kind of seeing there?

Yeah, like, you know, truthfully, that's been a highlight. Our Canadian sales team have done, and not that the U.S. is, they're on fire too. They're doing a lot of great things. But our Canadian sales team in the last quarter, you know, while we were down 5% on flow brand on a consolidated basis, we were up close to 30, and around 35% in conventional grocery, exactly what you're asking about. in canada we've been able to get a lot of movement in some of the largest retailers in canada into conventional and that's been a real win for us so you're not expanding sort of traditional doors you're you're taking advantage of the doors you're already in and so that's a that's a big big win for our sales team for flow and so we're seeing that and yeah there's there are some We're seeing some. It's too early to tell, and it certainly didn't affect our Q1 results, this by Canadian. We'll see where it goes in Q2, Q3, Q4, if it's still a thing by then. Who knows what it's going to look like, but we haven't seen a big impact just yet.

Sure. Got it. Thanks. Last quarter, you alluded to having a tariff mitigation plan in the works. Are you in the process of implementing now, and could you share some more details on that?

Yes. Look, we have two strategies. One is if we absolutely have to, we will go to the U.S. We do, as we said last time, have our own spring in Virginia and we have an avenue to have our products co-packed in the U.S. so that they're made in U.S. and that becomes a mitigation. Of course, there's a cost to that that we'd rather not have to incur. So we have to weigh that out against the you know, the impact of a tariff and what that does to velocity and margin. So that's one avenue. We actually have to go down that path. And so we're not going to go down that path until we understand full impact and really what is going to happen from a tariff perspective. But the other one, the more near term, is quite frankly the way we are set up structurally from a... corporate perspective, legally corporate perspective. We have a Canadian division and we have an American wholly owned subsidiary. And the way that we have been structured from the beginning of time is that we actually don't sell direct to consumers or direct to wholesalers or distributors out of Canada into the US. We actually sell to ourselves. So we do a transfer of products from Canada to the US at a stipulated transfer price, which is a cost-plus model, and which is accepted by customs on both sides of the border. It's accepted by the IRS. It's accepted by CRA. And because of that, we're actually being tariffed on a lower cost base, in fact, a much lower cost base than the wholesale price. So on a weighted average basis, a 25% tax to us is really only about 7.5% to 8% of the wholesale price, which we believe we can actually manage. And we may actually only have to flow a little bit of that through to the end consumer.

That makes sense. Thanks for the caller. And would you say that when I think about the carton format versus beverages and cans, would you say that something like Aluminum Terrace would make the carton format more attractively priced versus that? Or is it not much of a cost? Meaningful cost for cans.

Yeah, I think that the tariffs are probably equally applied to both tartan as well as aluminum.

There is this thing on aluminum, as you know, that they announced that they seem to be attacking aluminum, even if they don't put a 25% tariff on everything. Aluminum's a big thing. So we'll see how it plays out and what it does for us on a materials input perspective, but I don't think it's really going to be – I don't know how they're going to play it out. I think, you know, when it comes to aluminum, if it's going to be impact finished, you know, RTD beverage going across the border, if that's going to – just because it's packaged in aluminum, if that's going to be tariffed differently or if the tariff is really just on actual aluminum in a wholesale. So we're not – we just need to get our understanding around that.

Sure. Got it. And then last question for me. So how are things tracking for the launch of a flow of sparkling mineral water in the glass bottle format for the back half of fiscal 2025? Is that all on track?

Yeah, that's all on track for, I would say Q3, May onwards, although we'll actualize some revenue in Q2 on initial shipments, but the planned launch of sparkling was for the summer and, um hydration season uh and we're on track for uh not only nationally in canada but also nationally in the united states got it thank you thank you and we do have a follow-up question coming from the line of sean mcgowan with rod capital please go ahead

Thank you. As you add these additional lines and take on, you know, product to fill that, particularly if it's cold packing, is there anything inherently different about the margin structure of that incremental revenue? You know, aside from the absorption issues, there's nothing inherently different, right, about the gross margin of the new product coming into those lines relative to what you already have?

No, it's the same, Sean, but you did you didn't allude to it but mainly it's it's a very big impact on absorption because you know rent doesn't go up you know utilities you don't your indirect management costs and all that don't go up and so you know putting another line in but it is very meaningful to um volume and absorption and and cost of goods and that's why you know like we say q3 you're gonna it's it's like, it's big Q3, Q4, you got all those, you got your, your throughput and so many more sales, both call pack and you're in stock and flow. I, you know, I, I can't, I don't want to go overboard to say it's like, you know, but when I was giving Martin some, some, a bit of guidance, like we feel pretty comfortable with that. You know, that's like, it's, it's, it's meaningful.

It increases our production output by 20% overall. So it's a sizable amount of packs.

with not a huge amount of additional cards that go with it.

Right. Okay. Thank you. Thanks, Sean. And I'm showing no further questions at this time.

This will conclude today's conference call. Thank you all for joining me now. Disconnect.