Alkaline Water Company Inc (WTER) 2022 Q1 法說會逐字稿

Greetings, and welcome to the Alkaline Water Company First Quarter Fiscal Year 2022 Earnings Call. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Jeff Wright, Director of Investor Relations. Thank you, Jeff. You may begin.

Good afternoon, everyone, and thank you for joining us for The Alkaline Water Company' First Quarter Fiscal 2022 Earnings Conference Call. Shortly, you will hear from Ricky Wright, 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 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 today and its other reports filed with the SEC and EDGAR and the 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, August 16, 2021. 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, 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 discussed on today's call. In addition, because our results for the first quarter of fiscal 2021 were significantly impacted by COVID-19, this presentation will also include certain comparisons to results in the first quarter of fiscal 2020.

I will now turn the call over to our CEO, Ricky Wright, who will give you an overview of the company's first quarter fiscal 2022 results. Following Ricky's comments, David Guarino, our Chief Financial Officer, will provide an overview of the company's operating results. Ricky will follow David begin providing closing remarks. Then we'll open the call for Q&A after management update.

And now I would like to turn the call over to Ricky.

Thank you, Jeff. Hello, everyone, and welcome to The Alkaline Water Company's First Quarter Fiscal 2022 Conference Call.

It's been a very exciting quarter as we have continued to expand our presence throughout the country. We remain one of the fastest-growing Alkaline Water companies in the country with even bigger and better days ahead. I'm pleased to announce that we delivered another record quarter of strong growth. Even with last year's pantry loading, we were able to achieve our 33rd straight comparable quarter of record sales.

As highlighted on last month's call, the $1 billion markets that we are targeting this year and beyond continue to be Big Box, Club and specialty retailers, E-Commerce, Hospitality, Convenience Stores, International and CBD. With Alkaline88's current brand equity and grocery, coupled with our new partnership with Shaquille O'Neal and Authentic Brands Group, we expect to strive in each of these channels. As always, these objectives can only be met because we have a great team of dedicated employees and executives executing against the plan. David will discuss our quarterly results in greater detail momentarily. But I'm pleased to announce our sales for our first quarter of fiscal 2022 were $14.1 million. This represents growth of approximately 5% year-over-year. And on a 2-year stack basis, this represents 19.6% growth. We reported a loss of $7.4 million this quarter, which included over $4.2 million of nonrecurring expenses associated with corporate sales and marketing and stock compensation. It also reflects a $1.3 million increase in expenses from our supply chain and logistics-related to the aftermath of COVID-19.

To help offset rising costs, we implemented our first-ever wholesale price increase, which should partially offset some of the impact of these expenses beginning third quarter fiscal 2022. Many of the nonrecurring sales and marketing expenses were planned based on our partnership with Shaquille O'Neal and Authentic Brands Group. We view this partnership as a strategic investment in the future growth of our company.

Despite some significant onetime expenses, our cash position at the end of the first quarter of fiscal 2022 was $4.5 million. We believe our cash position will be stronger at the end of our second fiscal quarter based on our anticipated $5 million in funds from a private placement, in which Shaquille O'Neal and our Chairman personally invested and funds from the warrants exercised during the second quarter. Furthermore, we also still have a $20 million ATM with ROTH Capital Partners from which we have not taken down any money.

Our strong balance sheet will allow us to continue to optimize our new partnership and accelerate our growth over the next 12 months as we launch our first-ever omni-channel marketing campaign. With the resources and person in place, we are reiterating our guidance for the full fiscal year 2022 of $62 million in revenue, which would represent a year-over-year growth of 35%.

We've had a tremendous amount of positive activity in marketing since our July call. Last month, we hired our first ever Chief Marketing Officer, Tom Hutchison. Tom is an exceptional talent, and he was brought in to develop our overall brand and marketing strategy and to maximize our new partnership with Shaquille O'Neal. [Tom and his team] completed our first commercial production work with Shaq. After full days production in Las Vegas, we are all incredibly pleased with the quality and quantity of what we captured.

We can now begin post-production that will create content across all digital media channels. Working with Shaq is great, not only is he an incredible talent and businessman, but he was also delighted to have on the set and he elevated the spirit of the entire production company. Big thanks to him and his team for joining us on this journey.

As you look forward, Tom is just starting to get acquainted with our Authentic Brands Group and all the value they bring to the equation. They have elite marketing capabilities in general and over 6 years of data and insights from managing Shaq the brand. They will be invaluable to us in delivering world-class marketing and ROI and the Shaq partnership.

It's been great starting to work with Shaquille and ABG on sales initiatives. We're thrilled about the direction we're headed, the momentum we are gaining and its future impact to our brand. It's exciting to think that the power of Shaq has yet to impact our sales numbers. We're very excited for what's to come. Yet even without our new marketing campaign activated, our current growth trajectory can be clearly seen in third-party backed data.

Nielsen data for all channels for the 13-week ended July 17, 2021, shows dollar sales have increased 32.5%, and unit sales were up 32.4% in the value-added category. Nielsen total U.S. data for the same period shows that we are now the ninth best-selling brand of the value-added water by dollar volume, surpassing LifeWtr, a Pepsi product.

Finally, the Catalina Hub360 data also shows that our momentum has continued. For the 4-week period ending August 7, 2021, based on reporting stores, our sales were up 32.7%, and our market share has increased 0.7% in only the last 4 weeks. As anticipated, Shaq and Authentic Brands Group are opening up doors for Alkaline88 in both traditional and specialty retailing.

The recently announced Shaq Paq, which should be in the market for the next 30 days, has been loved by virtually every retailer that our sales teams have introduced it to. When called upon, Shaq has been amazing at assisting our sales group.

To keep up with increased anticipated and rising demand, we have continued to expand our supply chain, bringing on a new co-packer and strengthening our current relationships. By the end of September, we should have 3 new co-packers fully operational with additional strength to our supply chain expected next quarter.

We have also continued to reach new customers through our brokerage and distribution partnerships. We have had major wins already this quarter in traditional banners, including CVS, Harris Teeter and Convenience Stores.

We're also finalizing the implementation of a new ERP system that will continue to strengthen our abilities to achieve rapid long-term growth. We've more than doubled the size of our employee team in the past 18 months. The rapid assimilation of this talent pool, including a new Board member and Chief Marketing Officer, Director of Operations, Director of Hospitality, Director of E-Commerce, Controller, Director of DSD and Director of CBD Sales and Director of Investor Relationships and many other talented members that are allowing us to bring structure necessary for long-term growth for the company.

Over the next 12 months, the new tools and employees will help us design long-term strategies for sustained growth, profitability and cash flow positivity. As product reviews and resets return to our normal cadence in retailers, we expect to see continued growth in our existing banners. Our overall sales have never been stronger at our major retail customers. We are also expected to see more and more new clients added across various channels. This includes grocery, specialty, retail and convenience.

As a sign of growing customer demand for Alkaline88, for the first time in the company's history, our single-serve products, including our new aluminum bottle, are outpacing growth of our bulk products. I'll say it again, this is all before we activated a single-market asset with Shaq. Our first product with Shaq, the Shaq Paq, a 2-liter 6-pack will be perfect for Big Box and Club stores and should be a huge fit for consumers.

We feel very good about our core brand Alkaline88 and how it is positioned in the marketplace and are looking forward to driving continued growth and exceeding our existing customers and new customers' expectations over the coming year. We are also looking to continue to stick out our claim and other high-potential channels like Big Box, Cloud, specialty retail, Hospitality, E-Commerce, International and CBD.

Before I turn the call over to David, I'd like to discuss some of the progress we've made in the last 40 days in each of these areas. For Big Box, Club and specialty retailers, we've had a number of very productive meetings with some of the largest retailers in the country. We have been able to successfully use our relationship with Shaq to [associate him] directly through participating on phone calls with buyers or through video greetings sent to specific targets, encouraging them to either expand their SKUs or bring our product online for the first time into their stores. We hope to see the first tangible benefits around this time next quarter.

At Hospitality, we hired Gary Bliss, a hospitality veteran with a phenomenal track record in the industry. Gary has been extremely active, sending out samples to his contacts and developing a plan of action that should allow us to penetrate the $1 billion-plus on-premise market. We are excited to have developed a product for Gary, a 750-milliliter white aluminum bottle that will be a deal for his eco-friendly targeted markets.

Consumers will soon be able to enjoy smooth hydration in hotels, bars, restaurants, gyms and other popular on-site venues. As we roll out our first-ever traditional marketing campaign, we know the customers will demand this eco-friendly offering.

In E-Commerce, we hired Chris Pitman as Director of E-Commerce. Chris comes to us from a major competitor and has successfully helped them grow their e-commerce strategy to account for more than 20% of their revenue. We feel confident that Chris has a knowledge, contacts and leadership skills that will allow them to bring similar success to Alkaline88.

For International, we continue to work towards expanding our international outreach. In the last 40 days, we have begun to enter into discussions with a manufacturer distributor in Mexico and continue to exploring our opportunities in Canada to manufacture both our Alkaline88 and A88CBD beverages.

Finally, for CBD, we also have big plans for our company's future in the functional CBD water category. Last call, I mentioned that we have developed our functional CBD water formulations. I can now announce that we have finished the product design, including packaging and technology, that will allow us to have the freshest ingredients and flavor on the market. As an established beverage company that has been earning the trust of its clients for years and delivering, we expect to quickly find shelf space for this new CBD functional waters when it comes available in the next month or so.

I look forward to sharing more specific details with you about this very soon. CBD remains a very promising market for us because of the enormous amount of untapped potential in it. The BDSA market forecast cited in the August 11 addition of beverage strategies showed that while non-dispensary sales of CBD beverages are projected to be $250 million this calendar year, they are expected to be $1.9 billion by just 2026. Regulations continue to change, and the market continues to evolve, and this is why we plan on bringing more CBD functional flavored and nonflavored beverages to consumers in the future.

Now I'll turn the call over to David for the financial overview of the first quarter of fiscal 2022. David?

Thank you, Ricky. Before I begin, I'd like to encourage industry listeners to review 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 3 months ended June 30, 2021, we reported a record revenue of approximately $14.1 million, a 5% increase from the 3 months ended June 30, 2020, and approximately 39% increase from 2 years ago. Our gross profit in the quarter ended June 30, 2021, was approximately $4.8 million, almost even with the quarter ended June 30, 2020.

Total operating expenses for the 3 months ended June 30, 2021, was approximately $12.1 million compared to approximately $7.7 million in the prior year quarter. Sales and marketing costs for the 3 months ended June 30, 2021, was approximately $7.2 million compared to $3.7 million for the prior year quarter. The increase in sales and marketing expenses was primarily due to higher sales and marketing costs, higher freight costs to customers and initial nonrecurring expenses relating to our partnership, with Shaquille O'Neal and Authentic Brands Group.

General and administrative expenses for the 3 months ended June 30, 2021, was approximately $5 million compared to the approximately $4 million for the prior year quarter. The increase was primarily due to increased corporate expenses.

Net loss for the quarter ended June 30, 2021, was approximately $7.4 million compared to a net loss of $3 million in the quarter ended June 30, 2020. Net loss per share in the quarter ended June 30, 2021, was approximately $0.08 per share. Cash on hand was approximately $4.5 million at June 30, 2021.

As detailed in our Form 10-Q, since then, $5 million is an escrow from a private placement, release of which is pending stockholder approval, and we have received approximately $6 million from the exercise of warrants. We believe with the cash on hand, the release of the escrow, the warrant exercises, our line of credit and a sales agreement with ROTH Capital Partners, we will be able to fund hopefully our current planned operations and capital needs for the next 12 months.

We expect for the current fiscal year ending March 31, 2022, we will have revenue of approximately $62 million with an estimated gross profit of approximately $23 million. This represents revenue growth of approximately 35% for the full year. We expect our top line to be driven primarily by the momentum we're carrying forward, which has result in SKU expansion, a gain in traction of our single-serve and significant organic growth within our existing retail customers. This momentum should also allow us to see expanded distribution to additional retailers throughout the country.

And with that, I'll turn it back to Ricky. Thank you.

Thanks, David. Once again, I would like to thank you all for participating in our call today. As rapidly as we have grown in the first 8 years, just in the U.S.A. alone, there are still over 1 million locations that Alkaline88 should be in. It's partnerships like the ones we have with Shaq and ABG and our distributors that will help us get there.

In my opinion, there is amazing opportunity for The Alkaline Water Company to become one of the most successful start-up beverage companies in history. We are a young and hungry company that has an incredible team of talented people, advisers and business partners to help us successfully write that story.

Thank you, and I now turn you back to the operator for questions.

(Operator Instructions) our first question is from Luke Hannan with Canaccord Genuity.

Ricky, I'm just curious to know, I guess, Ricky or David, I'm just curious to know you guys can share a little bit more color on the top line growth that you saw in the quarter. Was that -- if you can just give a little bit more insight on whether that was primarily new account adds, was that more shipments to your existing customers, maybe there's channel specifically you're seeing growth? Maybe will start there.

Most importantly, though, I think from a surprise standpoint, from our little group here is that we ended up really blown it out in terms of the smalls. I think our smalls are about 200% in that quarter. And I've looked at the smalls and seeing that we would be like the 14th largest based on what we're currently doing in smalls in the U.S., but we only did small. So I think the single-serve has really picked up. The other thing that's -- I think some people have questions on what stacked accounting we're talking about, and that's something that CPG companies have done to kind of take out the impact of COVID.

If you look at David's discussion, he says, we were up 39% from 2 years ago. We just took the average of the -- 2 years ago, the average of last year, and that's how we came up with our 19%. So excellent, excellent growth. I want to spend a couple of seconds on the fact that we do have a bunch of new clients coming on over the next couple of quarters here. We're getting confirmation daily almost. We will grow. If you look at the 5% actual growth year-over-year from prior quarter, you'll see that we have to average close to 46% the rest of the year.

So I want people to understand it. It's not all going to hit in 1 quarter, but we'll be some place between, I think, 30 and 50 in each quarter, to end up hitting that 46%. So that's a hyper growth. I think that's probably the most important message. And this, by the way, is before we see the impact of Shaquille O'Neal and ABG Group.

Okay. Understood. And then maybe, actually, if we just transition into the CBD waters, I saw the commentary in the press release, and I think you touched on it on your prepared remarks as well. Which channels are these going to be found in initially? Is it convenience? Maybe you can add color on that.

Yes, really good question again, Luke. Yes, that will be primarily convenient, although it's not announced yet, we will have one of the major companies we consider traditional grocery that has agreed to take it in. We're not quite there yet. We are finishing up some of our paper work there, but that will happen. And it's becoming state specific, I think. And we'll see more and more of that as we see more and more bills introducing to Congress, and people feel better about the direction that CBD is taking place in the country. I think right now, there's 3 bills in front of Congress that would allow for some sort of definition by FDA to get the green light for CBD.

Got it. Okay. I thought that the gross profit guidance for the year hasn't changed as well. I appreciate that COVID, obviously, with everything being in flux from a supply chain perspective. It sounds like just based on that, that maybe you guys have fairly good visibility on the raw materials and your supply chain, and it seems like it's fairly -- that you be able to meet that margin. Can you maybe just -- maybe give some speak -- just give some color on how we should be thinking about how your gross margin is going to progress through the balance of the year?

Yes. I think that gross margin did take a little bit of squeeze, obviously, in the first quarter. Some of that, I mean, all of it, candidly, driven by some of the inflationary figures that we're hearing out there in the marketplace. We did do our first-ever pricing -- wholesale price increase, that will begin to take effect in the third quarter. And then we've done some efficiency things within the group. Again, some of that has been pushed back because of COVID, it's amazing. We're probably about 3 months behind, but I think September will be the month in which everything comes together. And I really believe that we'll see the co-packers, the raw material supplier, our new product intro and the ERP system.

Finally, all in place after months and months waiting for people to get their final piece or part that was precluding them from opening up for us. So I see that allowing us to continue to move our gross margins back up to where we were prior to COVID. So I think we'll be in that -- I think about 42%, generally, David?

Yes.

Got it. One more and then I'll pass the line. So I mean after instituting that price increase, you mentioned it is just the first one that you've done. So I'm curious if you've done in examining the channel and maybe your customers' appetite to be able to take on the price increase? Like is there a capacity to be able to do that? Is it -- and also, I guess, is it going to be necessary just given the inflationary pressures that you're continuing to see the supply chain as well?

Really good question, again. The answer there is going to be on the U.S. this year demand. I'm a really big believer in that. We've always tried to keep our prices at a certain level because we know how to play off the shelf. We also know because we've taken a different model than most of my contemporaries. We have direct to warehouse with most of our business. So we know that there's a little outage on the shelves because we don't use DSDs in the grocery channel or at least not extensively. And therefore, I don't think we're going to get a hit at all, with respect to the amount of water we end up pulling off the shelves. But it will be interesting.

We will be up. And there is a bunch of new products out there that always compete with us. But if you looked at my numbers this week and the last couple of weeks in terms of what the data shows us, we continue to blow the doors off. I think we were up 32.7%. I don't have it in front of me in the last 13 weeks. And I think last week alone, I think, we were up 39% based on some limited data that we get from some of our data sources. So Catalina that specifically came from. So I just see our growth is still tremendous, and we see these new stores coming on over the next 12 months. And we get the Shaq impact and the Shaq Paq impact and our new hospitalities and our new e-commerce guy on. And I just see this is the year that, I guess, we grew up as a beverage company.

We've always run this very, very lean and mean, but we've more than doubled the staff over the last 18 months. And I think that to compete, we need to bring talent on like Tom and Gary and Chris, just to get us to that next level, and they all come from very, very good positions in the industry with years and years and years, decades of experience, some of them.

(Operator Instructions) Our next question comes from Aaron Grey with Alliance Global Partners.

So first one for me, Ricky, just referring to the new hire with e-commerce. Would love to get some color in terms of some of the initiatives you'd like to have in place there and maybe if you had a target in terms of revenue mix you'd like to have on the e-commerce side. I know it might be difficult because you have a lot of growth drives on the brick-and-mortar, too. But just in terms of any color or maybe objectives you have in terms of the new hire on the e-commerce side there?

Yes. It's a great question, Aaron, thank you. First of all, what the eye opener for us is, and we've always been centric to brick-and-mortar, and there's a lot of reasons for that. Some of it just had to be that at a certain time in the history of this country, it was really hard for people to think about ordering water because it was heavy with the freight cost online. COVID kind of changed all that. So we kind of reenergized that whole process. We've had a fairly decent amount of success relative to where we were over the last 12 months. But now it's just trying to take it up.

I think if you look at some of the stats that I've been made aware of, I think [Hint] does about 40% of their total sales online, which would put them in the $30 million to $40 million range. I think when Flow came out, and these are all public, they came out with -- they're doing about $5 million. We would not approach either one of those numbers. We do decent, but we don't go into those numbers.

So really, about 3 months ago, we began to search for the guy. Chris comes with excellent credentials. I know he's grown the company that was just within the past, about $26 million in their sales over a 2-year period. So we feel very good that he can come on in here and hopefully contribute $2 million at least this year for the rest of the fiscal year and hopefully blow past that next year when we finally figure out all the little nuances that we are just learning about to make us successful in that chain.

Okay. That's helpful. And then just second question for me, turning to the brick-and-mortar. Just because of the impact with COVID, right, and the usual kind of shelf resets that you usually have. Can you talk about any impact that might have had on timing and when that would kind of become opportune for you guys scale to capture more shelf space and how your conversations with those retailers kind of have been going?

Yes. Great question, again. I think that there's 2 things that are impacting. First of all, and I don't want to under or overemphasize it, but it just is a fact that having Shaquille O'Neal and the ABG Group on with us, Shaq has gone above and beyond, I think, in some of his interplay with us. We expect to hit pay dirt, for lack of a better word, on those opportunities in the coming 90 days. So we see -- I don't know if it's going to be 10,000 or 15,000 stores between now or 20,000 between now and next April, but there will be a big add on. We kind of got stuck last year between, I think, 70% and 75%, and that was primarily due to what you just said, Aaron, the resets did not happen. We got a little love right after COVID because we were the only company in the country, candidly, that actually supplied water during that period on a consistent basis. And because of that, some of our -- some of the guys that were in queue with us when it actually did a reset just because we were the only ones out there that seem to have the water necessary, the infrastructure necessary, as we discussed -- as we've discussed before, missed that word. We moved most of our production on all of our raws to the U.S. right before COVID hit. So we had dual international and U.S. supply chain. And because we were in U.S., we just were able to beat everybody else for that punch.

There are no further questions at this time. I would like to turn the floor back over to Ricky Wright for any closing comments.

I just want to say that it's, again, as usual, a great time to be a part of the Alkaline88 team. But even more exciting is the fact that I do believe this is the year that we finally took that next step as a beverage company. We've got talent on here that we've never dreamed of having. We have an ambassador that I don't think anybody in this room, even a short 6 months ago would have believed that they would be part of our team. Not only is he incredibly talented, but he's also a great businessman. I've had the opportunity to spend a couple of hours with them on a one-on-one basis and pick his brain and listen to him talk, and he is an absolute gold mine for this company in terms of his business acumen as well.

And in addition to that, all that's already going on, the projections we've given and everything -- the insights that we've given so far this year were based on pre-Shaq. And I just say that when Tom does his job, no pressure, Tom, that we certainly have an opportunity to blow this out this year.

And I want to thank everybody for continuing to support this company and our efforts. We are a young company. We've been around less than 10 years. And in the water company business, that's a very, very young company. And I think this year is the year that we take that next step. So thanks for your time today, and have a great week.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation. Have a wonderful evening.