Flow Beverage Corp

TSX:FLOW

Good morning, everyone. Welcome to Flow Beverage Corp.'s Fiscal Q2 2025 Conference Call.

As a reminder, this conference call is being recorded on June 17, 2025. [Operator Instructions]

Before we begin, we would like to remind you that today's presentation and discussion contains forward-looking statements that involve known and unknown risks and uncertainties and other factors that could cause actual events to differ materially from current expectations and may cause actual results, performance or achievements to be materially different from those implied by such statements. The forward-looking statements are based upon and include the company's current internal estimates, plans, expectations, opinions, forecasts, projections, targets, guidance or other statements that are not statements of fact.

Any statements contained herein or discussed during today's session that are not statements of historical facts may be deemed to be forward-looking statements. A number of factors could cause actual events, performance or results to differ materially from what is projected in the forward-looking statements. A more complete discussion of the risks and uncertainties facing the company appear in the company's annual information form dated January 29, 2025, and the company's management's discussion and analysis for the 3 months ended April 30, 2025, which are available under the company's profile on SEDAR+.

You are cautioned not to place undue reliance on these forward-looking statements, which only speak to the date of this presentation. The company disclaims any intention or obligation, except to the extent required by law, to update or revise any forward-looking statements as a result of new information or future events or for any reason. Any forward-looking statement contained herein or discussed during today's session is expressly qualified in its entirety by the above cautionary statement.

I will now turn the call over to Nicholas Reichenbach. Founder and Chief Executive Officer of Flow. Please go ahead, Nicholas.

Thank you, operator. Good morning, everyone. I'm joined today by Paul Dowdall, Flow's newly-appointed Chief Financial Officer. On today's call, I will start by providing an update on our quarter and our recent milestones, and then I'll pass the call over to Paul to introduce himself to review our results. After Paul's remarks, we'll open the questions up for analysts.

Flow continues to make steady financial progress since undertaking its operational transformation. Looking at the trailing 12 months, we have earned $47 million in revenue, which back to fiscal 2022 levels. We have exited a number of unprofitable contracts since fiscal 2022, and we were able to replace those contracts with more profitable co-packing contracts as well as more profitable retail partners for the Flow brand. You can see the results of gross margin, which has reached $11.8 million for the trailing 12-month period. Adjusted EBITDA also continues to trend in the right direction. We have incurred an adjusted EBITDA loss of $11.6 million in the trailing 12 months, which is due to the progress in gross profit and a significant reduction in overhead expenses.

We have a very active summer hydration season in front of us. We have a number of programs in conventional and natural grocery. We have promotions with Costco warehouses in Ontario and Quebec as well as national programs in the Costco Business Center. In the U.S., we have also national programs with Whole Foods, our longest-standing partner in market. The programs all reflect a strategic approach to trade spend that should allow Flow to maintain the improvements as we make it to profitability.

We'll also be returning to TIFF this fall as an exclusive hydration partner. When you hit the red carpet this year, to have a look at Flow OG and Sparkling at TIFF's theaters and venues.

We have said a couple of times that we are experiencing increased demand for Flow branded water. If you have joined the -- by webcast, you'll see the slide on your screen that shows the results of our most recent consumer survey in 2023. There is a significant gap between our target customer that are aware of the brand and those that have tried. This is the opportunity. And now that we have working capital infusion to run production and fulfill to full capacity, we think that we can get Flow into the hands of our target consumers that are aware of the brand and that want to be long-term customers.

We expect our first production run of Flow Sparkling Mineral Water this month and a launch in food service and natural food partners in fiscal Q3. Flow Sparkling is going to be available in our OG and 3 flavors. It will contain our natural alkaline mineral water, but the aluminum bottles are going to be produced and fulfilled on a contract manufacturer. The aluminum bottles will also reflect our premium brand and maintain our commitment to the environment as the bottles are made from 70% recycled material and use 60% less energy to produce.

Planet A co-packing is the brand that we created for our co-manufacturing business, and our goal is to provide the highest sustainable packaging to all of our customers. As most of you know, we have become licensed for alcohol production to service our BeatBox contract and have added an additional fourth line, and we are also making progress in building our fifth line as well. Our fifth line is now currently delivered and being installed with a targeted commissioning in Q4 2025.

So far this year, Flow has raised $14.3 million in private placements on a convertible debenture and secured business loans. These funding rounds were required to solidify our working capital position and scale production. We have plenty of demand for our co-packing partners, and we are experiencing unfulfilled demand with the Flow branded products. But we still haven't had a consistent working capital level to fund materials, people and infrastructure. These financing rounds will go a long way to scale our manufacturing in the quarters to come.

We are very excited to welcome Paul as our Chief Financial Officer. Paul officially joined Flow's team today with 25 years' experience as a hands-on operator finance executive. Paul's experience includes 3 years at Ice River Springs, an Ontario-based vertically integrated bottled water manufacturer serving Canada and the United States, and his experience in the alcohol sector as well with Ontario-based Diamond Estates Wines. Paul brings an experience in high-growth founder-led businesses and has exposed to -- and has exposure to public companies. I think Paul is a great fit for Flow, and we are keen to get to work and to achieve our financial goals.

With that, I'll turn the call over to Paul.

Thank you, Nicholas. I'm very excited to be joining the Flow team. Having spent some time in the water business and having frequented many retailers where the Flow brand is prominently displayed, I was well aware of the Flow brand before joining the company. My tenure in the water business was predominantly in recycled PET plastics, and I think there's a big opportunity in the Tetra Pak format given the movements towards sustainable consumer packaged goods.

Having had a chance to learn a bit more about Flow, I saw an opportunity to roll up my sleeves and to help fine-tune our processes so that this business can scale profitably. Manufacturing to me is about counting every penny and optimizing processes until you find the formula that works. Flow has made a lot of progress in the last couple of years, but it's clear to me that the best is yet to come.

Now turning to our financial results for Q2 2025. Consolidated net revenue was $10 million. Flow branded net revenue was down to prior year because of the exit of unprofitable contracts and the temporary disruptions to production and fulfillment due to the working capital constraints we recently experienced. As Nicholas mentioned, our recent funding round should make a material impact, returning the Flow brand to growth.

Planet A co-pack revenue was up 28% to last year, and we continue to see high demand from our co-pack partners. Gross margin of 23% was down due to the decrease in consolidated net revenue. Lower production volumes have resulted in increased overhead absorption in the quarter, thus increasing our cost of revenue. Once we return to higher production levels and net revenue growth, we expect to see the benefits of operating leverage. Included in the gross margin numbers is $200,000 of inventory write-offs for the quarter.

Looking at overhead expenses. Sales and marketing is down due to lower promotional activity tied to the temporary disruption in Flow brand production fulfillment. There were also marketing rebates in the quarter totaling $300,000. General and administrative expenses were consistent with last year. And similar to last quarter, salaries and benefits are up given the recent investments in the U.S. sales staff. All in all, adjusted EBITDA improved by $0.5 million relative to Q2 2024. Adjusted EBITDA profitability and positive cash flows remain the long-term financial goals for Flow.

To accomplish this, we need to return Flow to growth in branded revenue. Now that we have our working capital infusion, we can push in conventional and natural grocery and move ahead with our launch of Flow Sparkling in Canada. To that end, food service remains a key pillar of our growth, and we have Starbucks Canada expanding its SKU set by listing the 750-milliliter OG in the coming months. Second, our Planet A co-pack business remains a profitable source of revenue with ongoing demand from our partners. And lastly, we continue to hold the line on operating expenses in order to drive our adjusted EBITDA towards profitability.

And with that, operator, please open the line for questions.

[Operator Instructions] And your first question comes from the line of Sean McGowan with ROTH Capital Partners.

Question I have to start is, could you give a little bit more color on the temporary disruptions? Was it all about working capital? Or were there some other factors in there?

Yes. The main issue was working capital with the Flow branded product. We started to run out of stock in Q2, specifically February, March, April and started to correct it with the financing that we received to meet all of the Flow branded product demand throughout the summer and fall.

Do you feel like you were able to hold on to the placements that you have at retail, Nick?

Sean, this is the best part of Flow, which is the brand strength, both in Canada and the U.S. and the consumer demand has never been stronger. So throughout this period, the unfortunate period of running out of stock in certain retailers only created more demand for the product when we reentered it back in. So to date, we have not lost a single listing or facing in any of our retail partnerships, both in Canada and the U.S. So we expect a very busy summer as we refill all of those stocks and launch our summer promotions.

That's good to hear. And then could you maybe provide a little bit more color on the gross margin pressure? How much of that was absorption? Or were there some other factors in there?

It was a lot to do with absorption. As you know, Sean, our largest selling SKU for Flow is our 1 liter, and we have a dedicated line for our 1-liter production here in Aurora, Ontario. And without running that line to its full capacity, which is of the norm, that made the underutilization go up and our gross margins go down. So I envision this to be very temporary because the Flow brand is coming back online, and that machine will be running 24/7 throughout the summer to restock all of our shelves and then come back to the normalized Flow branded production, which brings a utilization of above 80% on that line.

Great. And my last question for now is, I know this is not related to the second quarter, but can you talk a little bit about any potential impact from the UNFI disruptions that we've seen?

We haven't had any experiences with the disruption in UNFI. And from our communication with them, we don't see any perceived issues with logistics. In fact, we're moving towards more volume shipments with them, which means full truckloads, lower cost to serve and faster route to market.

And we have no further questions at this time. Ladies and gentlemen, this now concludes today's conference call. Thank you all for joining. You may now disconnect.