Flow Beverage Corp. (FLOW) Earnings Call Transcript & Summary

Hello, everybody. So for our next panel here today, we have Nicholas Reichenbach from Flow Spring Water. Thank you again for joining. Before we get started, I just again have a quick disclosure to read. The views expressed or represented by non-Morgan Stanley speakers do not represent the views of Morgan Stanley or Morgan Stanley Research. For important disclosures, please see the Morgan Stanley Research Disclosure Website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative. So, Nicholas, thanks so much for joining.

Thanks for having me, Mark. Thanks.

Maybe just to get started, maybe you can just introduce yourself and then an overview of Flow.

Excellent. Yes. So I'm Nicholas Reichenbach, that's the English way of saying it, the Founder and Executive Chairman of Flow Beverage, Inc. listed on the TSX under FLOW. And I founded the company in 2014 on the back of my family owning a very large artesian mineral water spring in Canada that releases about 1 million liters a day of the highest quality still, mineral water sold domestically here in North America against international competitors like Fiji or Evian or VOSS. And I decided to do something totally different with my family's property and spring. I wanted to be the first company in the world to put it into a plant-based renewable resource aseptic package. And so we chose versus plastic bottles specifically. And so we chose Tetra Pak Prisma and Tetra Pak is our format of choice. And Tetra Pak is a very large privately held Swedish company operating out of Switzerland. Globally, they produce well over 200 billion packs a year using paperboard and sugarcane as their 2 ingredients to make the most environmentally forward and friendly package for RTD, ready-to-drink beverages. And the format for those that are listening that can't see all the Flow in the room is the format that got famous for breaking coconut water, which is the Tetra Prisma format. But we've advanced the package substantially from the launch of coconut water in the early 2000s by making sugarcane and getting rid of the PET plastic on the top. So that's the genesis of Flow, and it's been an amazing ride. Today, we have 30 million-plus customers and 25,000 points of distribution in North America. And we're sold all into the grocery stores and food and drug and mass that we all know and love from Walmart, Target to Whole Foods and Sprouts and all of the great grocery chains up and down, both coasts in both Canada and the United States.

Great. One thing that I noticed about the packaging too is how -- it's, lot of times when you use sort of more sustainable packaging, you lose sort of the use case to some extent, and this seems to work just as good as plastic -- any plastic bottle.

Yes. Well, Mark, the #1 reason and the #1 quality attribute I'd put to this package and challenge Tetra Pak for was to come up with an inner liner that was plant-based that also had 0 taste aggregation because I knew that no one is going to drink out of a cardboard box high-quality water, especially one that taste as great as Flow from its mineral composition and we also do organic certification and infusion of flavors as well. We have 6 different flavors. So we actually came up with a proprietary inter-liner, that's specifically made for water and for Flow Water with Tetra Pak in R&D before we launched, so you can taste that. And when we have high repeat purchases, it's because we put so much time and effort into making sure that the taste quality of the product matches the sustainability goals.

Great. Nicholas, you sort of alluded to this, but can you talk a bit more about the operations, what channels you sell through, and then maybe just the scope of your overall manufacturing capacity?

Yes, yes. So not only do we produce this product with our partner, Tetra Pak, they and we are both vertically integrated on our supply chain and manufacturing, which is actually quite rare for a beverage company unless you're a large multinational beverage company like Coke, Pepsi, Nestle, smaller brands like Flow tend not to own their own operations because they're very capital-intensive and it's an asset-heavy model. However, because the package format is so innovative and unique, we have no co-packers to be able to package with. So together with Tetra Pak, we had to build our own facilities with our own Tetra Pak packaging lines, both in Canada and in the United States. And Canada, it's in Toronto area, and in the United States, it's in Virginia, in the Shenandoah Valley, where our spring releases about 3 million liters a day of the same quality water, but we also have 5 Tetra lines or 15 minutes away from the spring, producing all of our products domestically sold and sourced here in the U.S. So we're very proud to be able to support the Virginia community, but also provide our U.S. customers with a domestically sourced and responsibly packaged water. And at that point, when we opened up our U.S. facility here, we actually became carbon-neutral as a company, which was a huge ESG goal of ours. And we're able to do that because in Virginia, it's one trucking day away from 60% of the population of the U.S. So our carbon emissions went down substantially on our trucking. We're able to reaudit the company on our B Corp Certification, and one I'm sure we'll talk about. We have the highest score of any beverage company in the world for our ESG standards with our B Corp Certification. And as an overall whole, we're one of the top 5% companies in the world with B Corp just under Patagonia and other amazing brands like Seventh Generation, and so we're super proud of that.

And can we talk about the packaging a bit more? So can you maybe just elaborate on some of the sustainability characteristics of it, how it compares to PET or aluminum or some of those key factors that investors are looking at?

Yes. So the -- there's kind of 3 types of packaging. One is just plastic PET, the other is glass and the other ones can be bucketed into sustainable packaging, which would be aluminum cans, paper or cartons are the 2 primary drivers of that and then glass also fits into the sustainability format. That category as a whole is growing almost at 100% year-over-year. So it's in a rapid growth category. What makes Flow's package unique across all of those different sectors is that we're the only ones using plant-based material that's compostable for the majority of the package. So, 75% of this package is from renewable resources. And our commitment by the end of 2025 is to have it at a 100% plant-based renewable resources. And that's what makes us unique compared to aluminum, which is definitely not plant-based. And for those that don't know the aluminum industry, they're the second largest carbon emission industry in the world outside of agriculture. So that production is not super environmentally friendlier, and then also we have almost the same recycling rates as aluminum cans in the U.S. with our carton. So when it doesn't end up in the recycling, which is above 40%, most of this package [ bound degrades ], and our goal is to get it to 100%. But we have to also make sure that we have food safety as our #1 concern versus equal to the environmental is that it has to be safe, and that's why it's an aseptic pack. And we have tin foil in the middle of it between the 2 paperboards to protect and make it aseptic. So no oxygen or air gets in. So that's the safety aspect of it. And it keeps all the ingredients inside fresh for years. And it's shelf-stable non-refrigerated, which makes it even more unique, so that we can do more infusions of complex organic nutritional materials like our collagen water line that we launched in 2020. And we're just about to launch the first organic certified vitamin water, 0 sugar, 0 calories in that same package format.

It's interesting at same recycling rates as aluminum, that's why typically investors...

Within a couple of points, yes, either way.

Would prefer aluminum in many cases. But to your point, you have a greater carbon intensity that goes into manufacturing it?

Yes. And I think people are starting to, I think there's a lot of education that needs to happen with the decision-making, which is the purchasing of these packages that they understand the entire supply chain of like what goes into that. We try to do a good job at understanding -- can go on our website, flowhydration.com to see the end-to-end environmental story, where from the tree farms to the sugarcane farms to the processing, so you can really understand what you're buying in for the package and obviously the quality inside, and the aluminum and plastic and PET, they don't have an end-to-end supply chain. That's why no one gets the same ESG ratings as Flow because we have an end-to-end vertically integrated supply chain that we can actually manage from an ESG perspective.

Maybe we can talk about that, where you can elaborate on that supply chain, where are you getting these plant-based materials from, are you getting those...

Yes. And I wish it was us, but we happen to have a very large strategic partner behind Flow, which is called Tetra Pak, which spend hundreds of millions of dollars every year on their R&D and their sustainability goals as a whole globally. So Tetra Pak packages milk, they package coconut water, they package soups, broth, they're a very large company, but their sustainability and vertical integration that's been going on for 70 years. And so they actually own the tree farms. They manage the tree farms. They have the highest accreditation of their forestry, FSC-certified paper. And its first use paper, which means that the recycling of the first use paper is much more valuable on a resale market. That's why we have such higher recycling rates of this carton versus using recycled paper or second or third use recycled. And then the farms are also integrated from, I believe Brazil on this package format or this cap with the sugarcane and then they vertically integrate. And they manage their supply chain, they audit their entire supply chain from an ESG perspective and then give us that information that allows us to pass through our audits with B Corp Certification, as well as the NASDAQ 1, which is our other certifications that we go through as a public company as well.

So on the B Corp Certification, there's only a handful of public companies that have that. I know you've actually seen, I think 1 or 2 that did have it that had ended up dropping it. So just curious what drove that decision to incorporate as a B Corp and really what does that mean in practice for you?

So we were trying to, as a company, have a North Star that could be audited and tracked and managed not just internally, we needed some sort of body to be able to say, hey, you know what, you guys are doing, you could do better or you know what you guys are doing, this is how you rate. So B Corp for us because we're native, sustainable. But the idea was incepted to be a sustainable ESG forward beverage company. And so it was a very natural fit for us because we were looking for a third-party body to be able to track, manage, monitor audits, but also advance our ESG, especially on the S part of it was social governance, which is a very big topic today on how we want to manage our workforces and our supply chains. So it was a natural fit for us. So there's no barriers for us, cost barriers. There's no capitalistic barriers. We believe in the planet, the people and the profit. So our triple bottom line was met from our B Corp Certification. Unlike other companies that are trying to back into things, we were built into a B Corp because of where we came from and the fact that we're a brand-new company only 5 years old, was much easier for us to advance our ESG in conjunction with the B Corp Certification. So we've had a great partnership with it and then because of those reasons.

And when you speak to investors, which generally the feedback on being a -- on being a B Corp from the investor perspective?

Yes. I mean it's a mixed bag. A lot of it's misunderstood. It's like, oh, does that interfere with making money? No, it doesn't interfere with making money, not for us. It would be if you were an aluminum can company because you'd have to change a lot of what you were doing to actually get a good score. So what I say to our investors and our shareholders is, number one is Mother Earth is our largest shareholder. So we have to take care of her first and then our B Corp Certification allows us just to better our triple bottom line and make the best decisions possible, at the same time as taking care of our workforce, the community around us and the planet.

So B Corporation designated you, you mentioned this earlier, the best of the world.

Best of the world for us.

So what does that mean and why did Flow receive that?

Flow, what it means is our end-to-end -- our end-to-end vertically integrated supply chain and management and how we do it is of the best of the world. And we're able to do that because we manage our springs like the eighth wonders of the world. We're completely sustainable. We never take more than what's given to us. And we make sure the renewable and the recharge rates of them are managed with the highest level all the way through to we track the recycling programs of Tetra Pak. And then in between, we offset all of our carbon emissions to be able to become carbon-neutral and hopefully in the years to come to become carbon negative in that. And that's why we got awarded the highest score. And knock on wood, we'll get a higher score in the -- in next year's audit based on advancing our social governance as a company, which is something that we're super excited to really build on our diversity and how we work with our communities and start getting into more sophisticated offsetting of our carbon emissions with green and blue credits, which are very exciting advancement, especially for a company like Flow, where we can see the credits and the money going into real practices within communities and having a real impact. And I think that's what gets everyone so excited and passionate at Flow that we can see a meaningful impact to the B Corp Certification, our scoring, but also within the communities around us where we operate. So that's exciting.

Yes. Can you talk more about the social components of your mission and sort of what the key priorities are for you?

Our key priorities are making sure, number one, that our workforce is happy, positive and healthy on all costs and that they're equally passionate to our mission and getting involved in our local practices, where we support the communities around us. And then secondly is working with our immediate communities around our facilities and our springs to be able to help support economic and social development around that. So we have many programs from barbecues in the park to having anyone in the community in Virginia come by the spring and load up as much water as they want in their bulk water packaging to even supporting native community around us, where in Canada, the weather gets pretty cold. We quite often send water up to Alaska and into the provinces of Ontario during the winter to support the social programs or programs where they need clean drinking water and don't have access to that. So there's a lot of different programs. I'd like to think of it as just meaningful little things that we do every day to make a difference, a positive impact on communities around us.

And one thing that's I think is a very powerful dynamic in the market right now is you have these major brand owners that are making sustainability commitments. I think one example of that, for instance, is Pepsi, right, when they said they're going 100% recycled content. You have -- I think there's similar dynamics at work in your business. And one, I think interesting example is the relationship you have with Accor Hospitality. Maybe can you elaborate on that and sort of how you're helping them achieve their sustainability goals?

Yes. Yes, thanks. That's a great partnership to anchor around why Flow exists in the world and what we want to accomplish with Accor for those that don't know Accor Hospitality Group. They're the third largest luxury hotel group in the world, and one of the top hotel chains and management group in the world. They own flagship brands like Fairmont and SLS and Sofitel. And we recently signed a deal with them, a multiyear deal exclusive to be their water partner, where they are displacing all of the plastic bottles beside the beds of their rooms and replacing them with Flow. So I recently had the opportunity to go to one of the Fairmont properties in Vancouver, and I was so pleasantly surprised to get in the room and see 2 Flows beside the bed with the message saying we care about the planet, we're moving away from plastic, we're moving into a more environmentally plant-based renewable resource package. And so with the Fairmont, we'll be sampling and giving Flow out to millions of customers in North America, the Caribbean and South America to actually extend their environmental goals, but also to extend our environmental goals together to be able to make a larger difference. And this is millions and millions of plastic gone. And on our website, you'll see we have like over 1 billion kilometers saved from fossil fuel emissions from cars just on what we've done today. So you can imagine with partnerships like Accor and other leading brands that want to take away the plastic consumption, moving into a more environmentally friendlier solution and work together to make it the best environmental solution in the forward. It's exciting what kind of global impact we can have together with large brands like that disbanding tens of millions of plastic bottles every year. This is very exciting. This is the first of, hopefully, many partnerships as we see the world changing in a better way introducing plant-based packaging versus plastic.

It's funny when I was asking that question, I didn't think of this, but you were talking about the water by the bedside, actually, we're just at a hotel that had global...

Come on.

It was an Accor Hotel.

That's awesome. That's awesome. I love hearing that story.

When you think about your growth efforts going forward, where are you focusing those? Do you see new markets, new sort of maybe adjacent products or opportunities?

Yes. So before COVID, foodservice was a very big channel for us. We didn't even actually know how big it was. A lot of the times, you don't get the data of your consumer and customers until well after they purchase. So before COVID, we were surprised to hear we were sold at Facebook's headquarters, Google ordered it, Morgan Stanley had Flow in their cafeterias and all of their branches too and other great financial institutions. And so that kind of started dissipating during COVID. And we're happy to [ please ] -- and this is published on our last AGM, along with the Accor deal that we believe foodservice will be a very big growth area for Flow. Because the end consumer of foodservice in your hotels or restaurants or quick serve like salad bars, like Sweet Green's is a great example of a brand that's in that sector, we believe that, that will be a huge growth area as we see that industry coming back and high growth there, double-digit growth areas within that industry. So -- and then also the consumer is demanding more now. So they're getting back into, I don't want to drink at a plastic, I want another solution, and we have the most environmentally friendlier solution, and I would say the best product for them. So we're putting a lot of effort and energy into our foodservice strategy. We want to partner with more amazing brands like the Accor Group and others to get our package format into foodservice.

Great. Maybe I'll just stop here and see if there's any questions in the room.

We've done a good job, Mark. We've done a good job.

Maybe if I can follow up on that. If you could just sort of describe the overall competitive landscape of -- for sustainable beverages and sort of how Flow fits into that backdrop?

Yes. So sustainable beverages, as I mentioned before, experiencing huge growth. Every month, we track all of the sustainable package in the -- the premium enhanced water category. That's a category that we're in, which against competitors like Fiji and Evian and VOSS and all that. And within the sustainable packaging, there's glass, there's cartons and there's aluminum cans. And within that aluminum cans and cartons, Tetra Paks are the leading growth areas. So we're seeing a lot of aluminum come in as a solution, especially in carbonated beverages. Aluminum is great for that. Tetra Paks are not so good for carbonation. So we focus on still beverages. And we're starting to see that consumers are driving that trend. And then equally retail partners like Whole Foods and other leading retail and grocery partners are starting to adopt the trend of carton and supported aluminum can products.

If you think about just your key strategic priorities going forward, what would those be?

Number one, make the world a better place for everybody in it and make sure that we can do our part as a company to hit our overall sustainability goals by 2030. We want to make sure that we're carbon negative. And we want to make sure that we have a positive impact on the planet around us. I think it will be very important for everybody on the planet and every company to be able to do their part in making sure that the entire plant is carbon negative by that point in time. And I think that's our #1 priority to drive, I would call it, 2 billion packs a year, that's my North Star by that time, but to drive a significant amount of a positive reinforcement on a carbon negative basis. And I think if we do that here in North America, we'll set a global trend to be able to have equally other companies start doing their parts, that's our #1 priority at Flow.

What does that look like to become carbon negative, like sort of how do you -- where are you now and sort of what do you need to do...

Yes, that's a great question. We've got a lot of work to do with Tetra Pak and advancing our package format to a 100% plant-based compostable.

So as you take out that, I guess...

Take out the aluminum foil where we're going to replace it with sugarcane. We're working on that R&D right now. And then at that point, we need to go completely compostable with the sugarcane products, that will take probably a good amount of R&D and some technology. But I mean, the world is advancing at a very fast rate with regards to the elimination of plastic from RPT to compostable plastic with enzymes in it that are eating it, eating it before it gets into the ocean. So I'm very optimistic that we're going to be able to do our part to advance this package to 100% compostable by 2030. I think that, that will have a very big impact on our making our goals, and then continue to manage our supply chain and make sure that we're doing things in the most responsible way. I think those 2 things will actually get us to where -- and then obviously, we need to sell packs, right? So we need to get our brand out and our consumer awareness out in the U.S. as our primary growth market, Canada, we're already #4, and we got a long way to go to be #1, but we'll make it as the premium enhanced water brand in Canada, but in the U.S., we're just starting our journey. So we need to sell a lot more of these packages, partner with a lot more great companies to be able to achieve our goals at scale.

And the carbon negative piece of that's because the feedstock is taking carbon and then you're composting everything at the end of the...

Yes. Yes, the recycling, the recycling rates, the last-mile, the circular part of this economy getting these back end recycled. I think we've got a lot of work to do, and that's where we need to put our focus. And it's at the end -- at the end of it, not at...

Yes.

We already have the beginning of -- we manage the trees, we manage the tree -- we manage the process, things that are in our control are easier to manage, but where things could come out of our control is after we sell this packet.

Yes.

We need to work with our consumers and work with our package itself to make sure that we get to the best possible end goal.

And then in the meantime, you mentioned you're buying carbon offsets just sort of how do you -- it's a fairly opaque market, I think sometimes investors struggle to navigate that. So just curious what your approach is to that?

I think -- and I may get the term wrong and then my VP of Sustainability is going to call me right afterwards and say, you got it wrong, Nick. We buy the gold standards of carbon emissions. So we're comfortable with that now. But where we're doing a lot of research and would like to partner with companies are actually converting that gold standard carbon credits into green and blue carbon credits attached to local programs that we can deploy together with partners. So we can see that we have a meaningful impact on the environment around us, and we support the local communities around us to be able to deploy those carbon credits in a much more better way that will allow us to achieve some social governance, as well as a better place around that. So I think that's where we're going to go with that and that's how we manage our carbon emissions today.

Great. Nicholas, maybe last -- sure, question.

What are some of the opportunities and challenges that you see with a potential expansion in those markets?

Well, so if I could just repeat for the people on the line.

Yes. Okay.

So when you look at Europe and Asia, what are the opportunities that you see for expansion in those markets?

Yes. I think we're leading the charge in North America on water in cartons. And so Flow is one of the first companies and if not the first company to actually launch in cartons, but Tetra Pak as a company has a much larger market share in Asia and Europe. Europe has almost a 93% household penetration of Tetra Paks. So there's a huge opportunity in Europe for Flow and other companies to really bring our products in there and the recycling rates are much higher, the sophistication of the recycling is much higher in Greater Europe. So we see there that is definitely a huge opportunity for Flow and other companies to put beverages in Tetra Prisma in that market. And Asia obviously has a lot of scale in it, but it's got less sophistication around recycling, but a lot of consumers already buy Tetra and Tetra products in Asia. And we definitely see a larger uptake definitely in countries like Australia and Japan and other countries where they're starting to uptake on Tetra Prisma products and then water in that. But I think that that's a good way of looking at Europe's probably the next big evolution of this product and this product type and then followed by Asia.

Any other questions? I guess, Nicholas, just wanted to wrap up here.

Yes.

Anything we missed today, what gets you excited about the future?

No, Mark, we did a great job. We're doing a great job. Yes. I'm just happy to have been on the panel and maybe host you in Toronto, see one of our facilities and see where all the magic happens.

Sounds great. Well, thank you, everybody, and thanks again, Nicholas, for your time.

Yes. Thank you.