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

Ladies and gentlemen, welcome to the Annual and Special Meeting of Flow Beverage Corp. Please note that the meeting is being recorded. I would like to introduce Mr. Nicholas Reichenbach, Chairman of today's meeting. Mr. Reichenbach, the floor is yours.

Good afternoon. It is now 1 p.m. The meeting will now come to order. I'm Nicholas Reichenbach, Chairman and Chief Executive Officer of the corporation, and I will act as Chairman in this meeting. On behalf of the Board of Directors, I welcome you to the Annual and Special Meeting of the Shareholders of Flow Beverage Corp. Once again, this year, we will conduct -- we'll be conducting this meeting virtually. Please bear with us if we encounter any technical difficulties with the platform during the meeting. We will move as quickly as possible to resolve them. I've asked Mathieu Socqué, the Corporation's General Counsel and Corporate Secretary, to act as the Secretary of the meeting. And I ask Lori Winchester of the TSX Trust to act as the scrutineer. If anything should happen with my Internet connection during the meeting, the secretary will continue conducting all formal meeting, business, until my connection is reestablished. As you will have noted from the management information circular and notice calling this meeting, we have 3 items of business to conduct today. Votes will be conducted electronically through the meeting. Please pay attention to your screen to participate. All polls will remain open until polls are instructed to close. To make the best use of our time, certain people have been asked to move the resolution that we are considering. Once we've concluded the formal part of the meeting, our Chief Financial Officer, Trent MacDonald, will deliver an update with our most recent strategic milestones. This is the meeting -- is being held online via webcast. It is appropriately -- it's appropriate to set out a few rules of online participants for orderly conduct of the meeting. For the purpose of this meeting, voting of all matters will be conducted by electronic ballot. Voting will be open upon commencement of the formal portion of the meeting, and remain open for the registered shareholders or duly appointed proxy holders that have logged in with a valid control number to vote at that time until polls are closed. You may choose to vote on each resolution immediately or wait until the conclusion of the discussion on all resolutions prior to casting your vote. When you are asked to vote, once voting is declared open, shareholders can click Voting button on the left menu of the start -- and start voting. You will only have a certain number of amount of time to do so and then -- when the polls are open. If you are a registered shareholder or a duly appointed proxy holder and have already voted by proxy prior to the proxy cutoff time and do not wish to change or revoke your previous vote, please do not vote again when the ballots appear on your screen. By voting again, you will revoke and -- your previous vote. Notice of the meeting. Notice of this meeting was sent out to all shareholders of record as of the close of business on March 18, 2024. I direct a copy of the notice will be filed -- copy of the notice with proof of mailing will be kept on record of this meeting. I now direct the Secretary to read the notice calling the meeting unless I have a motion to dispense with this reading.

Mr. Chairman, I move that the reading of the notice calling this meeting be dispensed with.

I second the motion.

Thank you. I've been advised that the prerequisite number of shareholders for the quorum is present. The notice calling this Annual Meeting of Shareholders and the company management information circular, form of proxy, financial statements of the corporation and auditor's report were mailed to the security holders of the corporation entitled to receive notice and were filed on SEDAR on January 29, 2024, as it pertains to the financial statements and auditor's report, and on March 28, 2024, for the proxy materials. As notice of the meeting has been given in accordance with the articles of the incorporation and bylaws of the incorporation and we have quorum, I now declare that this meeting has been properly called and is regularly constituted for the transaction of business. We have received the preliminary scrutineer's report, which indicates that the requisite number of shareholders have voted by proxy in favor of each of the resolutions to be brought forward before this meeting. The resolutions require a majority of the voting cast. The final scrutineer report will be indexed into the meeting -- into the minutes of this meeting. I direct the scrutineer report on attendance to be attached to the minutes of this meeting. Before we start the business of the meeting, I have the following comments on voting procedure. Each shareholder is entitled to 10 votes for each multi-voting share and 1 vote for each subordinate voting share, held by the shareholders in respect to all matters to come before the meeting. To be effective, all resolutions require an affirmative vote of the majority of the votes casted. We will conduct the votes on a matter before us by a poll. The poll will be open for all resolutions at the same time. This will allow us to choose to vote on each resolution immediately or wait until the conclusion of the discussion of all resolutions prior to the casting of the vote -- your casting to vote. Once discussion of all items of business has concluded, I will give you time to enter your votes and then declare the voting closed for all resolutions. The results of the meeting will be publicly released and available on our website after the meeting is concluded. I now instruct the scrutineers to open the polls for all resolutions. I now place before the meeting, the financial statements of the corporation as at the end of the year ending October 31, 2023, together with the auditor reports to the shareholders. Copies of these documents are also available for review on SEDAR. As the financial statements have been delivered to all shareholders with notice of this meeting, I'll ask someone to move the reading of the financial statements and auditor's report be dispensed with.

I so move.

May I have a motion seconded?

I second that motion.

Election of directors. The next item of business to be considered and to be resolved is the election of the directors of the corporation. The directors will hold office until the close of business on our next annual meeting of the corporation's shareholders. The articles of incorporation provide for a minimum of 1 and a maximum of 10 directors. There are presently 5 directors, and the number of directors to be elected this meeting has been fixed at 5. In accordance with the corporation's advanced notice provisions and as described in the management information circular, the following individuals have been nominated and are present to be elected as directors: Nicholas Reichenbach, Patrick Bousquet-Chavanne, Stephen A. Smith, Michael Lines, Joe Jackman. In accordance with the Board of Directors' majority voting policy and the requirements for the Canadian Business Corporation Act, if any of these nominations receive 4 votes fewer than the majority of the votes casted in respect to election, he must be immediately tender his resignation to the Board of Directors. May I have a motion for the nominees be presented for election to the Board of Directors?

I so move.

May I have that motion seconded?

I second the motion.

Please cast your votes for or against each of these nominees in the poll. [Voting]

The next item of business to be conducted, and if deemed advisable is -- to be resolved, is the reappointment of Ernst & Young LLP as the auditor of the corporation. If reappointed, Ernst & Young LLP will hold office until the close of business on our next annual meeting of the shareholders. May I have a motion that Ernst & Young LLP be appointed as the auditors of the corporation until the next annual meeting of the shareholders, and that the directors of the corporation be authorized to fix the auditor's remuneration?

I so move.

May I have the motion seconded?

I second the motion.

All those in favor of the motion, please vote for on your poll, and those that disagree, please vote withhold. [Voting]

The last item of business to be conducted, and if deemed advisable to be resolved, is authorizing and approving the amendment to the corporation's Omnibus Incentive Plan and approving an unallocated awards here under. For the reasons set forth in the circular, the Board believes that obtaining shareholder approval for an increase from 1% to 3% to a maximum percentage of supported voting shares may be reserved for the exercise or settlement of reward to the eligible directors under the Omnibus Incentive Plan, and shareholders' approval of unallocated awards under the Omnibus Incentive Plan is in the best interest of the corporation and the shareholders. Accordingly, the Board recommends that shareholders vote their shares for this resolution. May I have a motion moving that the ordinary resolution, the full tax of which is set out in the circular approving the unallocated awards under the corporation's Omnibus Incentive Plan as particularly described in the circular be approved?

I so move.

May I have the motion seconded?

I second the motion.

For those in favor of the motion, please vote for on the poll, and for those that disagree, please vote against. [Voting]

I now instruct the polls to be closed. The scrutineer has closed the polls and will compile votes. On the second item of business pertaining to the election of the directors, I declare a motion carrying, and it is resolved that the nominees have been duly elected as directors of the corporation. On the third item of business pertaining to the appointment of Ernst & Young LLP as auditors of the corporation, I declare the motion carried, and it is resolved that Ernst & Young LLP have been appointed as auditors. On the fourth item of business pertaining to the improving of the amendments to the corporation's Omnibus Incentive Plan and approving the unallocated awards here under, I declare this motion carried, and it is resolved. The maximum percentage of subordinate voting shares that may be reserved for exercise or settlement of awards to eligible directors under the Omnibus Incentive Plan be increased from 1% to 3%, that the corporation shall have the ability to grant awards under the plan until April 29, 2027, and that all awards to be issued under the Omnibus Incentive Plan and all unallocated awards under the Omnibus Incentive Plan be and are hereby approved. If there are no further business to be brought up before the meeting, that concludes the formal business of this meeting, and I thank everyone for taking the time to attend. The Secretary will move the final resolution.

I move that the meeting be terminated.

May I have that motion seconded?

I second the motion.

Great. Thank you. Now we'll move to our corporate update and presentation. Myself and our Chief Financial Officer, Trent MacDonald, will take you through the presentation highlighting the corporation's achievements up until the end of and including our last fiscal quarter ending January 31, 2024, and will provide an update on recent strategic milestones. Hello, everybody. We put our cameras on. Now that the formal part of the meeting has been completed, Trent and I are going to walk through a quick corporate update. And if any, -- if you have any questions, please contact us at [email protected]. Let's start by reviewing our recent milestones. In the coming months, we will be introducing a refreshed Flow brand, along with more sustainable Tetra Pak. After extensive consumer research, we have updated our brand to elevate the Flow within the premium water category and places, emphasizing our mineral-rich water pure taste as different -- as key differentiators. We are launching our new brand and packaging during the upcoming summer hydration program. And at the same time, we are launching a newly-designed website for both our Canadian and U.S. e-commerce customers. We have also had a number of success in our co-packing business. In Q1 2024, we signed agreements with BeatBox and BioSteel. The demand from these agreements have justified the expansion of our award facility, and our agreements include take-or-pay revenue as well. Along with Joyburst, we expect Flow to earn a minimum of $148 million in contracted revenue over the terms of these agreements. We have also recently announced a private placement of approximately 3.3 million -- our investor is the founder of NFS Leasing, our primary lender. Cliff of Rucker Investments and NFS have been great partners, and we think that their equity investment is a significant endorsement in our future prospects. We believe this financing is the cash bridge that we need to achieve our financial goals. Our brand refresh and new packaging material has been designed for our original mineral water and 4 organic flavors, cucumber mint, strawberry rose, peach blueberry and blackberry hibiscus. We previously had 6 organic flavors in addition to our classic OG. While working through our consumer research and refreshed branding, we reevaluated our product portfolio and decided on 4 core flavors to optimize Flow moving forward. The new version of our Tetra Pak improves our sustainability score, increases our plant-based renewable resources from 75 to 81. The carbon footprint of this package is 7x less than glass, 4x less than aluminum and 3x lower than plastic. We think our brand refresh is an important for a number of reasons. First, we are better in line with our consumer preferences and expectations. Secondly, we are more focused on the product on shelf and is consistent to focus it more on the organization. The third, we are advancing our leadership in sustainability. Turning to our strategic priorities in 2024. The game plan is unchanged. For the Flow brand in Canada, we expect our partnerships with Starbucks and Live Nation to continue to drive growth for our brand in both retail and e-comm channels. We plan to focus our trade spend on national, grocery, gas and convenience channels, where we have been seeing a lot of recent success. Looking at U.S. retail, we are maintaining our growth at our core channels of natural and conventional grocery, and we are putting together a strong summer campaign around the new brand launch. Turning to the capacity of Aurora. Our expansion is going to plan. In February, we commissioned the fourth line of production, increasing our manufacturing capacity by 25%. In the first quarter, we began producing for Joyburst. And in February, we started production on BioSteel, and we expect BeatBox production to start within the next 45 days. With all -- with our contracted revenue from our co-packers and return to growth from the refreshed Flow brand and continued financial improvements, we expect to become adjusted EBITDA positive with cash flow -- positive cash flow from our operations in Q4 2024 this year. That concludes my remarks, and I'll pass it over to Trent.

Thanks, Nick. Look, Q1 represented the last full quarter of Flow's transformation in which we continue to build the foundation from which Flow can grow in a profitable way with less complexity and a much more focused strategy. With that, Flow brand net revenue was $6.6 million in Q1 2024, which was down 9% from last year, and consolidated revenue was $8.3 million, also down 16% from Q1 of 2023. In Canada, the Flow brand continued 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 have trialed Flow water and food service channels, such as Starbucks and Live Nation, and it's a strategy that is clearly starting to pay dividends. In the United States, as part of our transformation, 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 financial return. Flow brand e-commerce sales in the U.S. also continued to be hampered by the competitive reselling over certain platforms. We've 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 particular fiscal year. Consolidated revenue in Q1, including co-packaging, still does not reflect the impact of most of all our newly-signed co-manufacturing agreements. While we began, as Nick alluded to earlier, manufacturing Joyburst in Q1, BioSteel only recently began production in Q2 and BeatBox's currently set to start in Q3. We expect to see significantly improved consolidated net revenues in quarters to come. Due in part to the factors I just described, however, gross margin loss was 15% compared to a gross margin of 30% in Q1 2023. In Q1, we ramped up our cost base to ensure we could run at full capacity starting at the beginning of Q2, coinciding with the go live of our fourth production line and the start of co-packaging BioSteel. At the same time, the lost sales from competitor reselling and the exit of the commercial partnerships in the U.S., all had caused a near-term reduction in production volume and greatly decreased overhead absorption rates. This caused more cost to be applied to each unit of production, and thus lowered our margins. We believe that this is a very short-term issue, with Q2 through Q4 to see greatly increased production volumes and much lower cost per unit produced. While cost per unit of Aurora were higher for the quarter, the commercial relationships we exited still managed to cause a negative gross profit of $850,000 in Q1. In addition to this, we still had inventory sitting on our books from October 31 of last year that had been produced in Verona under a third-party manufacturing agreement, which carried a much higher cost per unit to the per unit because of the [ co-pack ] fee that was included. Much of this inventory ran through cost of goods as it was sold into market in Q1, which itself had a negative $440,000 impact on gross margin. We expect there to be one more quarter of the Verona co-pack fee and -- but not to the degree we experienced in Q1. Also within cost of goods, we unfortunately incurred an extra $610,000 of e-comm logistics and shipping costs over a normal run rate, which is currently being corrected, and has, in fact, almost been corrected as we sit and speak here today. There will be another smaller impact in Q2, but this should be fully straightened out such a cost per case should be well within normal and even below normal limits by Q3 onwards. Lastly, with the exit from our line of vitamin-infused products, we took a $1 million noncash write-off on raw materials as -- and this also impacted gross margins. All of these many issues resulted in the negative margin reported, but all are short-lived and without which would have -- we would have seen normalized gross margins in Q3 of 23%. Again, with the positive foundational impacts of our transformation efforts in Q1 and going back to Q4 and Q3 of last year, we believe gross margins are going to dramatically improve in the quarters to come and especially over the back half of this year. Turning to adjusted EBITDA. The $3 million variance from last year is mostly explained by looking at the gross margin and other impacts we just spoke about. Again, we expect significant improvement in this metric in the very near term. If you look at the current slide, there's something that we need to talk about. The past 5 quarters have been extremely transformative for Flow. And I think it's worth summarizing what has transpired since our year ended October 31, 2022, which was only 18 months ago today. At that time, to anyone assessing its financial position based on the information that has been publicly disclosed, Flow appear to be heading for certain insolvency. Since that time, we have divested the Verona Virginia production facility, consolidating all production into Aurora to make it as efficient as possible, after which we then signed more than $145 million in take-or-pay manufacturing agreements and installed the fourth production line. All of these will dramatically improve overhead absorption and lower the costs associated with each unit of production, thus having a very positive impact on gross margins going forward. We used our valuable asset base to secure loans that could help transform the company while also allowing us to invest in the Aurora production facility. We successfully installed an entirely new IT ecosystem, including the implementation of a business intelligence platform, which is now giving us much more timely and accurate information on which we can manage the business. We completely restructured every functional area of the business, getting Flow down to 40% of the head count in nonoperational and nonlogistics support areas versus what we had at the end of the fiscal '22 -- calendar '22 fiscal year. We have moved to 3PL models in logistics and warehousing, exited dozens of DSD contracts and have been working diligently on all other areas of logistics to continue to materially improve our [ cause ] to serve. We then exited unprofitable channels and terminated food service relationships that no longer made sense for the organization. We also simplified our product assortment, as Nick alluded to earlier, taking our flavor count down to 4 and exiting vitamin water, focusing on our core products, including our original water, the OG, which represents more than 2/3 of our sales. So say the past 5 quarters were transformational would be an understatement. With all of these being completed and a large part of our transformation behind us, we expect to start seeing immediate results starting in Q2, which will be over tomorrow, April 30. We now expect Q2 to have the smallest adjusted EBITDA loss in several years, and certainly since Flow went public in the summer of 2021, a dramatic improvement from Q1 in the past several quarters of costly transformation. From there, we expect adjusted EBITDA -- we expect to be adjusted EBITDA positive by the fourth quarter, which starts in just 3 months. From almost certain insolvency, incurring steep quarterly losses to adjusted EBITDA positive in this amount of time, that took a monumental effort on the part of the Flow team, and we are extremely excited about our company's future -- which gets to valuation. Flow is trading at 0.9x revenue on a trailing basis and 0.7x revenue looking into fiscal 2024. This company -- this compares to our publicly traded beverage peers, trading at a simple average of over 4.5x revenue at 5.9x revenue on a weighted average basis. We still believe the market is pricing Flow for failure. And look, fairly so, given our publicly disclosed results of the past 3 quarters. As it stands, we have yet to show the total impact of our transformation. It is on the Flow team to do that. And to that end, I reiterate our belief that we are imminently close to doing so. We see the future as very bright and look forward to delivering what we hope to be much, much better results in the quarters to come. That concludes our presentation. And again, you can please contact us with any questions whatsoever at [email protected], should you have, again, any of those follow-up questions. Thank you, and have a great day.

Thank you for joining today's meeting. You may now disconnect.