Alkaline Water Company Inc

NASDAQ:WTER

Earnings Call Transcript 2023-Q2

[Operator]

Greetings. Welcome to the Alkaline Water Company Second Quarter Fiscal Year 2023 Conference Call. [Operator Instructions] Please note this conference is being recorded. I will now turn the conference over to your host, Jeff Wright. You may begin.

[Jeff Wright, Investor Relations]

Good morning, everyone and thank you for joining us for The Alkaline Water Company’s second quarter fiscal year 2023 conference call. Shortly, you will hear from Frank Lazaran, our President and CEO and David Guarino, our Chief Financial Officer.

During the call, we will be making forward-looking statements within the meaning of the Safe Harbor provisions of U.S. securities laws and we may make additional forward-looking statements during the question-and-answer session. Forward-looking statements involve risks and uncertainties and undue reliance should not be placed on such statements. Certain material factors or assumptions are applied in making forward-looking statements and actual results may differ materially from those expressed or implied in such statements.

For additional information about factors that may cause actual results to differ materially from expectations and about material factors or assumptions applied in making forward-looking statements, please consult the company’s Form 10-Q, which was filed yesterday and its other reports filed with the SEC on EDGAR and with Canadian security regulators on SEDAR. In addition, such forward-looking statements and any projection as to the company’s future performance represent management’s estimates as of today, November 15, 2022.

The company does not undertake to update any forward-looking statements or projections, except as required by applicable laws, including the security laws of the United States and Canada. Actual results could differ materially from those contemplated by any forward-looking statements as a result of certain factors, including, but not limited to, general economic and business conditions, competitive factors, changes in business strategy or development plans, ability to attract or retain qualified professionals as well as changes in legal and regulatory requirements. The company issued a press release announcing its financial results and filed the Form 10-Q with the SEC. So participants on this call, who may not have already done so, may wish to look at those documents as the company will provide a summary of the results on today’s call.

In a moment, I will turn the call over to our CEO, Frank Lazaran, who will give you an overview of the company’s second quarter highlights. Following Frank’s comments, David Guarino, our Chief Financial Officer, will provide an overview of the company’s financial results. Frank will follow David again providing closing remarks. They will then be joined in the Q&A portion of our call by Frank Chessman, our Director of Sales and Operations.

Frank, the call is yours.

[Frank Lazaran, President and Chief Executive Officer]

Thank you, Jeff. Hello, again everyone. Thank you for joining us this morning for our second quarter fiscal 2023 call. This was the first full quarter since I began as CEO in June, and we undertook a company-wide endeavor to put The Alkaline Water Company on a pathway to profitability. As Jeff just mentioned, we filed our quarterly results yesterday afternoon. On this call, I look forward to sharing with you some of the highlights and more on the progress of our pathway to profitability.

The Alkaline Water Company has again set record revenue growth in the second quarter of fiscal year 2023, and we have done so despite mounting economic forces beyond our control and while increasing our focus on cost savings and margin improvements. Our sales revenue for the second quarter of fiscal 2023 grew 28.3% year-over-year, while we reduced our operating expenses by 37%, approximately $5.7 million.

Our record sales revenue of $19.6 million makes this our best quarter ever, leapfrogging over the $17 million and $18 million milestones and surpassing the $19 million mark for the first time in company history. Our sequential sales growth from Q1 to Q2 of 16% is also the best since fiscal year 2015 when we reached $1 million in quarterly revenue for the first time. Now 8 years later, this quarter’s revenue alone is over 5x greater than that entire fiscal year, a true testament to the rapid growth of our brand and the hard work of our employees and partners.

Within the company, we have said and believe that this would be a show-me quarter for our shareholders and the Street. We knew that we had to demonstrate that the consistent sales growth and market share gain of our great Alkaline88 brand coincides with the continued strengthening of the Alkaline Water Company’s execution and operation. We cannot control market forces, and we can’t always enact drastic changes overnight. But what we can do is show our shareholders that we are making solid progress toward becoming a better and ultimately profitable company.

We have fully pivoted to focus on our Pathway to Profitability, and let me emphasize we have done so while continuing to deliver record top line sales. Some of the improvements will take time before they start producing a meaningful impact on our operations, but we will show our shareholders continued progress in the operational efficiency of this company as we drive sales and improve operating results. That progress can be clearly seen in this quarter’s results. David will give a more thorough overview of our financial results.

But in addition to our top line revenue, I wanted to highlight the early progress we’ve made on our gross margin. Our gross margin improved by nearly 300 basis points sequentially over the first quarter of the fiscal year to 23.6%. At the close of last quarter’s call, I said that we had developed a plan to improve gross margin without negatively impacting sales, and that we should anticipate beginning to see a steady build on our margin rate in the second quarter. This process takes time, and we are just starting to see the positive impact of multiple efforts to reduce the cost of producing Alkaline88.

Internally, we have now modeled the bridge to regain between 500 and 600 more basis points through the end of the fourth fiscal quarter. We anticipate that to break out to a gross margin of between approximately 26% and 27% in Q3 and 29% to 30% in Q4. Last year, due to the speed at which our raw material cost rose, we could not mitigate their impact on our gross margin in a timely manner. We have since made changes to remedy this. We are aggressively negotiating new prices with multiple raw material vendors. We have already reached agreement for better pricing on various packaging options, bottles and other materials. We are still negotiating with other vendors to further reduce our COGS. Improving gross margin is a longer process than cost reduction because of the need to wait for new pricing to take effect and for inventory to turn.

Now that we have begun to substantially reduce overall inventory by over $800,000 this quarter alone, including $500,000 in raw materials. We’ll soon be able to take advantage of the newly negotiated price reductions of raw materials in our cost of goods sold. We have established a year-end goal to reduce overall inventory by $2 million from the start of Q2. We previously announced that we had identified approximately $15 million in cost savings and margin enhancements once fully implemented compared to last fiscal year. We have stated that the timeline for the full implementation of this could take us through fiscal year 2024. Yet in this quarter alone, we reduced our operating loss by more than $5 million.

Last quarter, I said that we would not stop at $15 million, and that we continue to look for more opportunities to optimize our operations, and we’ve done just that. We have now identified an additional $5 million, bringing our total to approximately $20 million worth of cost savings and margin enhancements. Again, the full benefits will be realized once all changes have been implemented throughout this fiscal year and the next. We have worked very hard to minimize inefficiencies in our operations. While continuing to grow sales, it is prudent for us to run as lean and efficiently as possible without affecting the top line. For the second quarter in a row, we have shown improvement to our operating expenses, which are down approximately $5.7 million or 37% year-over-year.

Compared to the same quarter last year, we have reduced our G&A by $2.7 million, a 51% improvement. Like in Q1, all non-essential G&A spending remains frozen. G&A for the first two quarters of this year is now down almost $4.8 million, 47% compared to the first half of fiscal 2022. Our sales and marketing spend was down almost 30% compared to last year. We have steady momentum as a brand, which gives us confidence in our ability to continue growing with a condensed marketing budget. I’ll share more in a few moments about how our brand is standing up and standing out amongst its peers.

Before that, I’d like to highlight one more way that we are seeing significant improvements in our COGS and operating expenses. As we all know, water is heavy and shipping is expensive. That’s why optimizing our production and distribution networks has been so important to improving the bottom line of the company. In our Pathway to Profitability, we have found four major ways to reduce our shipping and handling and outbound freight cost. First, as we’ve highlighted before, our production and distribution network is the strongest it has ever been geographically. We began producing this year in the Midwest and the Pacific Northwest, adding to our other partner strategically located near many distribution centers of our largest clients. The network optimization allows us to significantly reduce the costs associated with delivering raw materials for our production and final products to our customers.

Secondly, while prices are still in flux and there is some uncertainty about diesel on the horizon, fuel prices were lower on average in Q2 compared to Q1 of this fiscal year. Thirdly, we have negotiated price reductions with our primary transportation partners, added an additional option to keep pricing competitive. These reductions could save us up to $1 million a year at current shipping volumes.

And lastly, we are working with our high-volume customers to decrease the quantity of less than full truckloads that we ship. Each additional delivery adds up. So we are encouraging our partners to take more inventory at once. Some key partners have already made the shift, taking a full load of 1-month supply instead of two half orders in a month, for example. We are in discussions with more clients to make similar changes. All four of these components have combined to help us reduce shipping and handling in COGS and freight in sales and marketing. As a matter of fact, even with elevated fuel prices compared to last year, our freight cost per case shipped in Q2 went down approximately 20% year-over-year. Freight cost per case shipped also decreased more than 6% sequentially compared to Q1.

As a final note on cost savings, let me say this. In the 5 months of my tenure as CEO, there have been multiple price negotiations for every single component involved in the production and distribution of Alkaline88. We are working hard for our shareholders to become the most efficient company we can be. As I have been sure to emphasize thus far on this call, Alkaline88 continues to grow. The latest Nielsen data through October 8, 2022 for all outlets and combined including the convenience channel, show that Alkaline88 grew 36.6% in retail sales over the trailing 52 weeks. This is over 2.5x the growth of the overall value-added water category for the same period.

In the most recent 13-week period, we outpaced the category by even more at 2.8x its year-over-year growth. The data also shows that Alkaline88 sold approximately $90 million at retail for the trailing 52 weeks. Even better, our trailing 13-week sales were over $26 million at retail. The same Nielsen data shows that the value-added water is still one of the fastest-growing beverage categories. Amongst the 24 non-alcoholic categories with more than $100 million in retail sales for the past year, value-added water is second only to regular water in year-over-year growth. Data from the Beverage Marketing Corp. shows us that the subcategory of alkaline water has been a leader in high-end water growth for several years and continues to be a growth driver for bottled water.

According to BMC, wholesale revenue for the alkaline water category was up more than 20% last quarter over the previous year. This is more than double the growth of the next strongest value-added water subcategory. BMC Insight shows us that the health-conscious value-added water consumer continues to pay for the benefits of enhanced beverages, especially alkaline water. Alkaline water is now a $1 billion retail category, and The Alkaline Water Company is the largest independent and a growth leader in this growth category.

There were numerous sales highlights in the second quarter of fiscal year 2023. Alkaline88 landed on thousands of new shelves across the country in and major retailers like Dollar Tree nationally, AMPM in the West, and Giant Eagle in the Midwest and Mid-Atlantic regions. Additional SKUs were added to thousands of existing clients, including adding our two leader, Rite Aid Ashley and HEB in Texas. Incidentally, we’re very pleased about the growing demand for the two-leader, which is now sold at a number of premium banners across the country in our 6-unit Shaq Paq. For the calendar year, we sold new SKUs to existing clients in approximately 18,000 locations. In the same time frame, we’ve closed deals with approximately 11,000 brand-new locations to add to Alkaline88’s growing retail footprint.

Another recent highlight for our brand and particularly for our flagship 1-Gallon is our new launch in the BJ’s Wholesale Club along the whole East Coast. After earning a limited trial in 48 clubs, the Alkaline88 1-Gallon four-pack’s performance was so strong that we were awarded full distribution within a month’s time. We are now in approximately 220 BJ’s clubs across 17 states.

So as you can see, our growth drivers, adding new stores, SKU expansion in existing clients and organic growth remains strong. We are especially optimistic about the convenience store channel for the future growth of our brand. Through the first two quarters of fiscal year 2023, our cases sold in the c-store channel are 2.5x greater than the same period last year. Our sales team is projecting this to improve even more over the final quarter of the calendar year as we continue to work with DSD partners to add more convenience stores and increase sales velocity. Our weighted distribution within the c-store channel, which contains approximately 150,000 stores in the U.S., is less than 5%. And yet, Nielsen data already shows that we are a top 15 brand in c-stores. The brands above us in this channel average 10x our weighted distribution. So, as we mentioned on prior calls, we view this as our major growth channel in the coming quarters.

Before handing the call over to David, I would like to comment on our company’s liquidity. Since the end of our second fiscal quarter, we have executed term sheets for $6 million to $7 million of non-dilutive funding, which we anticipate closing by year-end. Combined with our continued efforts to reduce costs and increase margin, if this financing is completed as anticipated, it will give us more runway to continue to grow. Additionally, at the end of Q2, our total current liabilities were down almost $7 million from the previous quarter, with the reduction in accounts payable constituting more than $1 million of that total. As we continue to reduce our burn rate, every dollar of financing goes further than before. We are on pace and maintaining our double-digit growth rate and look forward to bringing you more good news throughout fiscal year 2023.

And now I will turn the call over to David for a brief financial summary. David?

[David Guarino, Chief Financial Officer]

Thank you, Frank. Before I begin, I would like to encourage interested listeners to view the Form 10-Q that we filed with the SEC for a more detailed explanation on some of the quarterly results I will be highlighting today. For the three months ended September 30, 2022, we have reported our best quarterly revenue ever of approximately $19.6 million compared to the $15.3 million for the three months ended September 30, 2021. This represents a 28% increase in sales. Our gross profit for the quarter ended September 30, 2022, was approximately $4.6 million or 23.6% compared to the approximately $5.2 million for the prior year quarter. The year-over-year decrease in our gross margin was primarily attributed to an increase in raw material and increase in shipping and handling costs. As we have already highlighted on this call, our gross margin improved from the 20.7% the quarter ended June 30, 2022, to 23.6% in the quarter ended September 30, 2022.

Total operating expenses for the three months ended September 30, 2022, were approximately $9.7 million compared to the approximately $15.4 million in the quarter ended September 30, 2021, and approximately $5.7 million reduction in total operating expenses. Total operating losses for the quarter ended September 30, 2022, was approximately $5.1 million, approximately $5 million improvement compared to the $10.2 million in the prior year quarter. Net loss improved by approximately $2 million, an $8.4 million loss in the quarter ended September 30, 2022, compared to the $10.4 million loss in the quarter ended September 30, 2021.

The company converted approximately $3.8 million in debt and received proceeds from the associated exercise warrants during the quarter ended September 30, 2022. While strengthening our balance sheet, these transactions resulted in a cumulative non-cash other expense of approximately $3 million. Without this non-cash charge in the quarter, ended September 30, 2022, our net income improvement would have been approximately $5 million. Net loss per share in the quarter ended was $0.06 loss per share, a $0.05 improvement over the $0.11 loss per share in the prior year quarter.

Our cash position at the end of the quarter was approximately $2.3 million. Our cash on hand, our line of credit and the sales agreement with ROTH Capital Partners is planned to fund our current operations and capital needs. However, if our current plans change or accelerated or we choose to increase our production capacity, we may seek to sell additional equity or debt securities or obtain additional credit facilities, including seeking investment from strategic investors.

And with that, I would like to turn it back to Frank. Thank you.

[Frank Lazaran, President and Chief Executive Officer]

Thank you, David. We have made clear improvements to our operating results in just a few short months. The Alkaline Water Company has maintained its consistent and unbroken streak of year-over-year revenue growth every quarter. At the same time that our revenue is up to record highs, our operating losses have been cut in half compared to last year. We are steadily improving our gross margin as we progress towards becoming a profitable growth company. Alkaline88, the largest independent enhanced water brand is outpacing the competition and showing strong growth at retail as a growing brand in a growing beverage category with products that consumers love.

Thank you. Operator?

[Frank Lazaran, President and Chief Executive Officer]

Thank you. I would like to thank everyone for attending this morning’s conference call and your continued interest in Alkaline88. Thank you to all of our employees for their hard work and dedication towards achieving our goals as we continue to drive top line sales while pivoting to our pathway to profitability. I want to wish all of you a very happy Thanksgiving. Please enjoy the time with your family and friends. Thank you and have a great day.

[Operator]

And this concludes today’s conference. And you may disconnect your lines at this time. Thank you for your participation.