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

Ladies and gentlemen, welcome to the Annual and Special Meeting of Shareholders 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's now 1:00 p.m. The meeting will now come in order. I'm Nicholas Reichenbach, Executive Chairman and Chief Operating Officer of the Corporation. I will act as Chairman of this meeting. On behalf of the Board of Directors, I welcome you to our annual and special meeting of the shareholders of Flow Beverage Corp. Once again, this year, we'll conduct the meeting virtually. Please bear with us if we account technical difficulties with the platform during the meeting. We'll move as quickly as possible to resolve them. I ask Mathieu Socque, the company's corporation's General Counsel and Corporate Secretary, to act as the secretary during the meeting, and I ask Lori Winchester of TSX Trust to act as the scrutineer. If anything should happen to my internet connection during this meeting, the secretary will continue to conduct all formal parts of the meeting until my connection is reestablished. As you have noted in the management information circular and the notice calling the meeting, we have 3 business items to discuss and conduct today. Votes will be conducted electronically through the meeting. Please play attention to your screen to participate. All polls will remain open until polls are instructed to be closed. To make the best use of our time, certain people have been asked to move the resolution that we are considering. Once we've conducted the formal part of the meeting, our Chief Financial Officer, Trent MacDonald, will deliver an update on recent strategic milestones. As this meeting is being held online via live webcast, it is appropriate to set out a few rules on online participation for orderly conduct of the meeting. For the purpose of the meeting, voting on all matters will be conducted via electronic ballot. Voting will be open until commencing of the formal portion of the meeting and will remain open for all registered shareholders and duly appointed proxy holders who have logged in with a ballot control number to vote at any time until the polls are closed. You may choose to vote on each resolution immediately or wait until the conclusion of the discussion for all resolutions prior to casting your vote. When you're asked to vote, once voting is declared open, shareholders can click voting button on the left menu at the start and start voting. We will only have a certain amount of time to do that when the polls are open. If you are a registered shareholder or 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. You do not have to vote again when the ballot appears on your screen. By voting again, you will revoke your previous vote. Notice of the meeting. Notice of this meeting was sent to all shareholders of record as of the close of business on March 19, 2025. I direct a copy of the notice with proof of mailing be kept with the record of this meeting. I now direct the Secretary to read the notice calling the meeting unless I have a motion to dispense the reading.

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

May I have a motion seconded?

I second the motion.

Thank you. Quorum. I've been advised that the requisite number of shareholders for a quorum is present. The notice calling the annual meeting of the shareholders and accompanying management information circular, form of proxy, financial statements of the corporation and auditor's report were mailed to security holders of the corporation entitled to receive notice and were filed on SEDAR on January 29, 2025, as it pertains to the financial statements and auditor's report and on March 28, 2025, for all proxy materials. As notice of the meeting has been given in accordance with the articles of incorporation and bylaws of the corporation, and we now have a quorum, I now declare the meeting has been properly called and is regularly constituted for a transaction of business. We have received preliminary scrutineer reports, which has indicated that the requisite number of shareholders have voted by proxy in favor of each of the resolutions that have been brought before this meeting. The resolution requires a majority of the votes cast. The final scrutineer's report will be [ indexed ] to the minutes of this meeting. I direct the scrutineers' report on the attendance to be attached to the meeting -- to the minutes of this meeting. Voting protocols. Before starting business of this meeting, I have the following comments on voting protocol. Each of the shareholder is entitled to 10 votes for multi-voting shares and one vote for subordinate voting shares held by the shareholder 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 all matters before us by a poll. The poll will be open for all resolutions at the same time. This will allow you to choose to vote on the resolution immediate or wait until the conclusion of the discussions on all resolutions prior to the casting of your vote. Once discussion of all items of business have been concluded, I will give you time to enter your votes and then declare the voting closed on 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 scrutineer to open the polls for all resolutions. Presentation of the financial statements and auditor's report for the year ending October 31, 2024. I now place before the meeting the financial statements of the corporation as at and for the year ending October 31, 2024, together with the auditor's report 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 the notice of the meeting, I'll ask someone to move that the reading of the financial statements and the auditor's report be dispensed with.

I so move.

May I have a motion to second?

I second the motion.

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

I so move.

May I have a motion seconded?

I second the motion.

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

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

I so move.

May I have a motion seconded?

I second the motion.

All in favor of the motion, please vote for on the poll. And if you disagree, please vote withhold. [Voting]

Next item is the omnibus incentive plan. The next item of business to be considered and if deemed advisable to be resolved is the authorization and approval of the amendment to the corporation's omnibus incentive plan. For the reasons set forth in the circular, the Board believes to obtain shareholders' approval of an increase from 3% to 5% -- to 7% to the maximum percentage of subordinate voting shares that may be reserved for the exercising or settlement of rewards to the eligible directors under the omnibus incentive plan is in the best interest of the corporation and that the shareholders and the shareholders. Accordingly, the Board recommends that the 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 an increase from 3% to 7% to the maximum percentage of subordinate voting shares that may be reserved for the exercise or settlement of rewards to eligible directors under the omnibus incentive plan as more particularly described in the circular be approved?

I so move.

May I have the motion seconded?

I second the motion.

All in favor of the motion, please vote for on the polls. And for those who disagree, please vote withhold. [Voting]

The last item of business to be considered and if deemed advisable to be resolved is the authorizing and approving of the extension of the maturity date of the secured term loan from RI Flow LLC by the initial period of 6 months and subsequently an additional period of 6 months up to a maximum term of 3 years as may be deemed advisable by the corporation's management for the reasons set out forth in the circular, the Board believes to obtain the shareholders' approval to extend the maturity date of the secured term loan from RI Flow LLC by the initial period of 6 months and subsequently by an additional period of 6 months to a maximum term of 3 years as may be deemed advisable by the corporation's management is in the best interest of the corporation and its shareholders. Accordingly, the Board recommends that the shareholders vote their shares for this resolution. May I have a motion moving the extraordinary -- sorry, the ordinary resolution, the full context of which was set out -- fourth in the circular, approving the extension of the maturity date for the secured term loan from RI Flow LLC by the initial period of 6 months and subsequently by the additional period of 6 months to a maximum of 3 years as it may be deemed advisable of the corporation's management be approved?

I so move.

May I have a motion seconded?

I second the motion.

All of those in favor of the motion, please vote for on your poll. And for those who disagreed, please vote against. [Voting]

Now I instruct the polls to be closed. The scrutineer has closed the polls and will compile the votes. On the second item of business pertaining to the election of the directors of the corporation, I declare the motion carried and that 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 the 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 approval of the addendums to the corporation's omnibus incentive plan, I declare the motion carried and it is resolved that the maximum percentage of the subordinate voting shares that may be reserved for the exercising or settlement of rewards to eligible directors during -- under the omnibus incentive plan be increased by 3% to 7%. On the fifth item of business pertaining to the extension of the maturity date of the secured loan by RI Flow LLC, I declare the motion carried and it is resolved that on the maturity date of the secured loan with [ RI ] Flow LLC be extended by the initial period of 6 months and a subsequent additional 6 months to a maximum of a term of 3 years may be deemed advisable by the -- as it may be deemed advisable by the corporation's management. If there is no further business to be brought before the meeting, that concludes the formal part of the meeting, and I thank you all for taking the time to attend. The secretary will move for the final resolution.

I move that the meeting be terminated.

May I have the motion seconded?

I second the motion.

That's great. Now that we're done the formal part of our annual meeting, Trent and myself would like to go through a presentation highlighting the corporation's achievements up until the end of our fiscal period last -- this past year and go through some of our recent strategic announcements ending in the fiscal quarter, January 31, 2025. Now that the formal part of the meeting is complete, Trent and I are going to provide a quick corporate update. I'll draw your attention to the disclaimer on the screen. Please refer to our MD&A and AIF for complete disclaimers and discussion on risks with respect to forward statements. Following the presentation, we will take questions from registered shareholders. If you have any questions following the presentation, please feel free to reach out to [email protected]. As most of you know, Flow has been undergoing an operational transformation since November 22, 2022. At that time, we had $2.3 million in cash and our operating expenses were much higher than our gross profit. Since then, we have taken countless measures to improve our financial performance. Most significant incentives included selling our Virginia -- Verona, Virginia production facility, restructuring all internal functions, exiting unprofitable sales channels for the Flow branded product, outsourcing logistics, distribution and marketing functions, consolidating our production and our co-packing and co-manufacturing in our Aurora production facility, significantly investing in increasing our production capacity, adding the ability to produce alcoholic beverages and signing $267 million worth of co-manufacturing contracts by the end of the fiscal 2024. While we haven't crossed the finish line on our transformation, financial results are rapidly improving. For the trailing 12 months ending January 31, Flow has achieved record net profit of $49.1 million and record gross profit of $12.9 million. While Flow branded revenue has decreased as we exited unprofitable channels, our co-packing contracts that we signed with BeatBox, BioSteel and Joyburst, amongst others, have helped Flow return to growth on a consolidated basis. Gross profit has also improved due to our focus on profitability and the measures we took during the transformation. Our overhead expenses have been dramatically reduced from a high to over $42 million in fiscal '23, down to just $25 million in the last trailing 12 months. The increase in gross profit and the reduction of overhead has resulted in our adjusted EBITDA improvements by approximately $24 million from fiscal 2023 levels. We continue to believe that our best financial performance is ahead. Throughout the transformation, we've been focused -- we focused our product line to include our 4 best-selling organic flavors and exited our vitamin-infused water. Including our newly launched Flow Sparkling Mineral Water, we now have 11 SKUs. For those joining today by webcast, our SKUs assortment is on the screen. You can see that our newly designed packaging is a clean, refreshed look. Our brand innovation was designed with the premium consumer in mind and to attract the more active lifestyle consumer. Our SKU assortments on the screen also include Flow Sparkling Mineral Water in 750 ml glass bottles. We will be launching this premium bottle in the summer ahead in our select retailers and hospitality partners. Our refreshed brand includes adding focus to Flow's functional benefits, specifically in its minerals and electrolyte content. We also -- we have a unique competitive advantage in that our water is both Canada and the United States is sourced from a naturally occurring mineral water spring. The slide on screen highlights that our functional value proposition to the consumer. What we haven't included on the slide, but we do include in the presentations to new partners is that Flow's superior -- superiority in mineral content and hydration relevant to the premium water products, for example -- other premium water products. For example, our mineral content is 319 milligrams per liter, exceeds [ Evian ], Fiji, Liquid Death, Smartwater and our electrolyte content is almost 3x more than any other premium water in market. Our PH is 8.1 is also higher than the 4 same brands of water. PH is important to the consumer because alkalinity provides superior hydration compared to purified water. Flow will always strive to be a category leader in ESG, and we've upheld our best-in-class ratings throughout our transformation. In 2024, we renewed our B Corp certification, publishing the highest ESG ratings for any beverage company in the world. B Corp is a rigid test of all aspects of ESG and results are independently audited. Turning to our recent Flow brand milestones. Flow is now the official partner of Inter Miami and the official partner of the Las Vegas Lights football clubs. We have also added Jose Bautista as a strategic adviser. Partnering with athletes and sports franchise aligns very well with our refreshed brand as Flow's mineral count and alkalinity offers a natural health benefits for people living an active lifestyle. In Canada, we've also made significant headway getting Flow added to conventional grocery aisles. At retailers like Loblaws, we have historically been in the natural food aisle, moving to conventional aisle significantly increases our sales velocity as we can sell larger volume of Flow and consumers get to see Flow next to the premium water brands. Planet A is the trade name that we use for our co-packing co-manufacturing business. In fiscal 2024, we increased the capacity of Planet A by adding alcohol production to the service, our BeatBox co-packing agreement, and we added a fourth line of production, increasing our capacity by 25%. Line 5 is still expected to be commissioned in Q3 this year to keep up with demand. We continue to improve our production efficiencies and significantly year-over-year monthly growth in volumes have produced. The production facility is continuously growing in intrinsic value since we terminated our brokered plant divested process in 2024. As previously disclosed, Aurora, our production facility, is profitable as a stand-alone asset and has scarcity value given that there's less than a dozen Tetra Pak Prisma production facilities in North America. We have estimates that would suggest that the enterprise value of the Aurora facility and the Planet A co-packing agreements is over $55 million. Before passing the call to Trent, I would like to talk about our private placement. We launched a private placement for a convertible debenture units in December 2024 and have closed approximately $2.3 million. As a part of this financing, we added Jose Bautista as an investor and a strategic adviser. Flow intends to fund the other approximate $5 million via strategic private placement to fund working capital and as we bridge towards profitability. With that, I'll now pass the Trent.

Thank you, Nicholas, and welcome, everybody. Thank you for having us in your lives, as always. So in fiscal 2024, Flow improved adjusted EBITDA by over $16 million as compared to fiscal 2023, a very material improvement with net revenue down 2%, primarily due to our focus on profitable channels for the Flow brand. Flow was still able to increase gross profit by 37%. The gross profit improvement was due to many changes we made throughout our transformation, including the consolidation of production at Aurora, higher capacity utilization and the focus on profitable channels. Additionally, in fiscal 2024, general and administrative expenses were down 35% and salaries and benefits were down 31% as we continue to see the positive impacts of our restructuring activities. In Q1 2025, we see more of the same trends in financial improvement. The decrease in Flow brand net revenue was only 6% as we continue to close the gap to the prior year, where, as a reminder, there were a material amount of sales coming from unprofitable customers and partners that we exited as part of our restructuring. This means Flow has actually been growing in profitable channels such as grocery and natural food. On a consolidated basis, we returned to net revenue growth as co-pack was up 216% from the prior year period. This is reflective of our ability to operationalize our fourth line and alcohol production capabilities with all of our manufacturing services agreements now seeing regular production. Adjusted EBITDA improved over $7 million in the quarter with the increase in gross margin and a 50% decrease in G&A expenses. As we continue to leverage our operational restructure and focus on spending controls and management, we still feel we are operating below our potential. Challenges remain in scaling our operations, leading to unfulfilled demand for the Flow brand. There is simply more demand for Flow than what we could physically produce, the cause of which is also related to the impacts of having a material working capital deficit. To that end, we have, as Nicholas just alluded, announced a private placement to help bridge to profitability and cash flow positivity, the closing of which will help mitigate working capital issues and allow us to improve our in-stock position. In the meantime, we are also looking at other recapitalization strategies. And as Nicholas alluded, we do have a very valuable asset in the form of our Aurora production facility. That said, as it stands, Flow is trading at a 0.1x market cap to revenue, which compares to our publicly traded beverage peers trading at a simple average of over 3.1x revenue and 3.9x revenue on a weighted average basis. Furthermore, consensus estimates call for 53% net revenue growth versus our peers at 12% on a simple average and 16% on a weighted average basis. Let it be clear, we understand this dynamic. While we are certainly on the right track and significant process has been made, investors continue to see risk. Our goal is to change this dynamic through execution on our operational plan while also looking at recapitalization alternatives. We do continue to believe there's a path to unlocking material shareholder value. But as always, we truly appreciate your support. With that, operator, please open the line for questions.

Well, it looks like we have a question that has come in. Let me -- it was when should we expect to return to Flow branded growth? And let me be clear on that one, and Nick is going to chime in here as well on when we see it. But we actually have it now. Like I said, we have it now. The -- we are overlapping from last year, sales for Flow brand that no longer exist because we chose to remove ourselves from certain partnerships and certain channels. An example would be Dollar channel, where we were not making profit and it was undermining the premium positioning of our brand. That was a cognizant decision on our part. And so now with our overall Flow brand only down 6%, that says that we actually are growing and growing significantly to close that gap because we alleviate ourselves of over 30% of our sales. To only be down 6%, that means we're growing significantly in channels that matter because they're profitable, namely, again, natural food and grocery, among others. But Nick, do you want to have anything about our Flow brand?

No. The fact that the only issue that we have with the Flow brand is we can't produce enough. And that's good. That's a champagne problem.

It is.

But we are going to get back to regular growth throughout our summer hydration season, which has proven to be a very good thing so that the Flow organic growth in the brand, both in Canada and the United States has never been more.

So another question that's being here to me. Last -- you mentioned looking at recapitalization strategies. Last year, you guys were looking to sell the plant but stopped the process. Is that back on the table? So we haven't publicly disclosed that. We haven't said anything other than, look, we know we need to do something from a recapitalization perspective. Last year, as you say, and as we publicly disclosed, we were going through a brokered process and felt at the time, we weren't getting the value for several reasons, but most notably that we were out building a model where we were filling all of our capacity and future capacity with manufacturing services agreements, but they had not actually started in terms of their production. So you're valuing something on a trailing 12 months that didn't have the benefit of all that extra volume. As such, Flow was really overweight in terms of how much it presented as the total production in the trailing 12 months. When we stop that process and decided to forgo it for the time being, I can tell you at the time we were thinking a couple of possibilities, but one being, if we decide it down the road to revisit it in the interim period, our trailing 12 months would continuously improve as we started production on each of these manufacturing services agreements as we initialized and commenced production on our fourth line, which we did not have in our trailing 12 months at the time, it was based on 3 lines. Now we have 4 lines for a significant portion of our trailing 12 months, and we have very profitable customers that are coming through that production at the same time with alcohol capabilities up and running. So now when -- like I said, when we terminated that process, we had a feeling this is what would happen if we execute it, which we have, with each passing month being better than the month prior and certainly up the prior year in the comparable month. So now the value creation has been coming to fruition, while also with all of these co-packing partnerships thriving and being as part of our production, Flow represents a much smaller percentage of the whole, which means you're not overweight with one customer with too much customer concentration. We have a varied pack of very good co-pac clients. And so from that perspective, yes, it's a possibility we could go down that path, although we have not announced anything publicly. But clearly, it's something that we have looked at and are considering. I don't think there -- are there any other questions?

No. I just want to thank everyone for joining us today at our Annual Shareholders Meeting and looking forward to our next quarter results, I think mid-June, we'll be giving them, and I look forward to seeing you guys all there. Have a great day.

Thank you, everybody.

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