Alkaline Water Company Inc (WTER) 2021 Q4 法說會逐字稿

Greetings, and welcome to The Alkaline Water Company Fiscal 2021 Results Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

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

Good morning, everyone, and thank you for joining us for The Alkaline Water Company's Fiscal 2021 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 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 implied 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-K and its other reports filed with the Securities and Exchange Commission on EDGAR and the Canadian securities regulators on SEDAR.

In addition, such forward-looking statements and any projections as to the company's future performance represent management's estimates as of today, July 6, 2021. The company does not undertake to update any forward-looking statements or projections except as required by applicable laws, including the securities 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 its Form 10-K 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 a moment, I will turn the call over to our President and CEO, Ricky Wright, who will give an overview of the company's fiscal 2021 highlights and the business outlook for fiscal 2022. Following Ricky's comments, David Guarino, our Chief Financial Officer, will provide an overview of the company's operating results. Ricky will follow David to provide closing remarks. We will then open the call for Q&A.

I will now turn the call over to our CEO and President, Ricky Wright.

Thank you, Jeff. Hello, everyone, and welcome to The Alkaline Water Company's Fiscal 2021 Conference Call. We're excited to share with you another great year and our positive expectations for fiscal 2022. Despite the obvious challenges faced by the entire beverage industry during our fiscal 2021, this was our 7th consecutive year of record sales. Our revenue was approximately $46 million. This represented a year-over-year growth of approximately 20%.

As the fiscal year ended, we continue to see strong organic and new store growth and significant acceleration into the first quarter of fiscal 2022. Although Q1 just ended last week, and we have not officially closed the books, we feel confident with the strength of our current sales and our current initiatives to forecast fiscal 2022 top line revenue of $62 million. This would represent a year-over-year growth of 35%. There were a lot of contributing factors that allowed us to increase sales in fiscal 2021. Let me share a few.

In early 2020, management had the foresight to redundantly source all our raw materials domestically. This reduced the distance between our raw material providers, our co-packers, our customers and our consumers. Alkaline88 was one of the few water companies in the country able to meet customer demands every month of fiscal 2021. With the help of our supply chain, we earned the trust and appreciation of our retailers. Our shelf presence in early fiscal 2021 resulted in the largest sampling program in our company's history, and one major chain alone, 135,000 new households tried Alkaline88 for the very first time.

Our fiscal 2021 performance accelerated our product offerings in new channels and new retailers. We are now in over 75,000 retail locations nationwide. Our expansion included major customers such as Rite Aid, 99 Cents Only, Lidl and convenience stores across the country. Recently, one of the largest retail customers told us that we were rated as the best of the best suppliers throughout the calendar year 2020 and into 2021. Our superior performance is confirmed by multiple industry-backed third-party data sources. I'd like to share a few of those highlights.

The Nielsen extended all outlet combined xAOC data through March 27, 2021, confirms that Alkaline88 is the only major value-added water company that grew double digits in sales and units every 4-week period since 2019. Also during the 52-week period ending March 27, 2021, Alkaline's growth was 11% over category in dollar volume and 15.5% over category in unit volume.

The IRI MULO multiple outlet data for total U.S. over the 52 weeks ending May 6, 2021, shows Alkaline88's 1 gallon is the third best-selling SKU amongst all branded 1 gallon water SKUs in the United States, not just value-added water. In fact, we were the only value-added water brand to be in the top 10 1 gallons sold.

Finally, according to SPINS data, which tracks the natural food channel for the 52 weeks ending April 24, 2021, Alkaline88 is the second largest brand in the enhanced water category in both dollars and unit sales. This is an amazing accomplishment considering that just 4 short years ago, we barely registered as a brand in the natural food channel. More good news from the same SPINS data shows that Alkaline88 is 21.8% above the category in dollar volume and 24.8% in units sold. For the last 3 consecutive years, Alkaline88 has been the fastest-growing alkaline water company across the U.S. year-over-year. All of our water products, including single-serve, flavored infused and eco-friendly aluminum bottles are outperforming the category and showing positive growth per that same SPINS data.

These stats are all impressive, but our sales organization knows that they are supported by forward-looking operational people. That team's efforts in fiscal 2021 enabled us to bring online 2 raw material manufacturers to supply the eastern half of the country. They also upgraded our proprietary technology in each of our plants, which increased our daily production capabilities and capacity. Furthermore, they added several new strategic co-packers. The operational team also identified 3 new co-packers that will begin producing Alkaline88 in the third and fourth quarter of this fiscal year, doubling our throughput.

In fiscal 2021, we also doubled our employee count, strengthening the company in virtually every area. Together our employees, new and old, adjusted to meet the unprecedented demand and unique work environments that materialized last year. As a result, today's production capacity has never been greater, and our sales opportunities have never been stronger.

The entire consumer goods channel is feeling significant inflationary pressure. Working together, our sales and operational teams have already implemented strategies to ease that pressure. We've created strategic partnerships with co-packers and suppliers to increase efficiencies. Recently, for the first time in our company's history, we asked our customers for a wholesale price increase. This was not an easy decision, but a necessary one based on the rising cost of our entire supply chain. We have closely examined our product pull-through and price sensitivity at the consumer level and do not believe our price increases will slow down our growth trajectory.

With Nestlé's recent acquisition of Essentia, we are now the largest independent nonflavored water company in the country. In order to reach our long-term goals of becoming a household brand, the company continues to focus on regional expansion of our core brand, product innovations and large consumer channels. The Alkaline Water Company has always been dedicated to superior hydration, purity, quality, taste and value. This past fiscal year, we strategically expanded our product offering to include eco-friendly aluminum bottles, a 2-liter Alkaline88 6 pack, CBD powders and chews, and developed 6 new, soon-to-be launched functional CBD waters.

Since January, our new offerings have gained significant momentum in the marketplace. Major retailers such as H-E-B, Harris Teeter, Sprouts and others are carrying one or more of Alkaline88's new SKUs for the first time ever. Our CBD water and adjustables also gained traction in the convenience and CBD specialty stores, including Yesway and CBD Emporium.

Over the next 3 months, our flavored-infused aluminum 2-liter, 6-pack, single-serve and CBD water will be in more stores than ever before. Even with an expanding denominator, our non-bulk offerings are growing faster than any other segment of our business. Our major initiatives in fiscal 2021 were to increase direct store delivery distribution, c-store expansion, e-commerce sale, hospitality, international expansion, CBD and to find an A-listed brand ambassador to build a national marketing campaign around.

I'd like to spend a few minutes discussing our success in each area. At the end of fiscal 2021, we hired a director of national sales of convenience stores. In fiscal 2021, we made great strides with the addition of a number of direct store delivery partners, including Mahaska, Nevada Beverage Company and Hensley Beverage Company covering Nevada, Arizona and the Midwest region. Combined, they service over 16,000 customers in 5 states. Each one carries our full line of non-CBD waters. We had an established goal of bringing in over 25,000 convenience stores. We feel we are well on our way to meeting that goal by the end of fiscal 2022.

In fiscal 2021, we also put together a plan for us to enter the Northeast, Northwest and Mid-Atlantic regions with a major DSD partner or partners by the end of our third quarter fiscal 2022. We expect to make a formal announcement sometime next quarter on our new DSD partners. It is important for us to stay focused on the Northeast, Northwest and Mid-Atlantic markets as they represent the largest brick-and-mortar sales opportunities for this company. We continue to aggressively pursue these regions in fiscal 2022.

On the e-commerce front, throughout fiscal 2021, Alkaline88 and CBD e-commerce sales grew significantly. We have worked with outside third-parties to increase our Amazon sales, more than doubling our fiscal 2020 Amazon sales. We honed our marketing initiatives and our cost per acquisition on the water side is now less than a single average Internet sale. We have recently hired a new dedicated employee who will be exclusively focused on the e-commerce strategy. As our focus and expertise has been primarily brick-and-mortar expansion, this new hire should make e-commerce one of our largest growth area over the next 2 years.

Most consumers don't realize that the U.S. food service industry is nearly equal in size to the grocery retailing and accounted for $970 billion in sales in 2019. We began to focus on this channel in the fourth quarter of fiscal 2020. In fiscal 2021, despite obvious challenges, we made great strides in our hospitality initiatives by signing up with distributors Dot Foods and broker IBA Foodservice. As the economy recovers, on-premise beverage sales are returning to normal in all hospitality channels. We have several large announcements pending that include additional national distributors and brokers.

We have recently hired a consumer packaged good hospitality expert with an outstanding record of expanding brands into our on-premise channels. This is an area where our relationship with Shaquille O'Neal and Authentic Brands Group will give us an opportunity for early acceptance. We know our aluminum bottles are already a perfect match for a number of name brand hospitality banners and venues such as national parks, airports, universities and other on-premise establishments. Our new product extensions, including our flavored infused and CBD water should find a spot in restaurants, resorts and health clubs.

During fiscal 2021, we reignited our international expansion efforts. We received new export certificates from the FDA and have 3 strategically located co-packers that are certified to export into a number of countries, including Canada, Mexico and parts of Asia. The global market value for Alkaline Water is estimated at over $2.2 billion and is expected to reach over $3.8 billion by 2026.

In March 2021, we announced that we have entered into an agreement with Tiendas Sindicales, one of Mexico's largest grocery banners, serving 1.5 million customers in the Mexican free trade zone. In addition, we have recently expanded our presence into the Caribbean and Puerto Rico. We continue to look for opportunities in Mexico and are working to establish broker relationships there as Mexico is one of the largest per capita consumers of bottled water in the world. We have also begun negotiating with a beverage plant in Canada that would allow us to produce both our Alkaline88 and CBD water for distribution in Canada. We are confident that the Canadian market will be our next international endeavor during fiscal 2022.

Because of political dynamics, we were not able to expand into the Asia markets in fiscal 2021. We now believe that we will be able to expand into Asia during the last half of fiscal 2022. The Alkaline Water Company continues to innovate with products that have attracted not only international e-commerce and hospitality customers, but we have also successfully expanded into specialty retailers. In fiscal 2022, we hope for the first time with our 2-liter Shaq pack to be able to penetrate big box and club. We do think that Shaquille and his team will help smooth the way.

Our CBD subsidiary is continuing to make great strides. As primarily a beverage company, we are particularly excited about our CBD water. It will soon expand from a single offering to include 6 functional CBD waters. We had record shipments in fiscal 2022 first quarter as many retailers are now offering CBD beverages to consumer. Per Brightfield data, CBD beverages are expected to grow from an estimated $163 million in 2020 to over $1 billion by the end of 2023. Thus making it the fastest CBD product category for growth. We're also developing new first-mover functional CBD waters and delivery systems that we believe will also allow us to gain significant market share in the coming year. We're in conversations with a major distributor to carry our new line.

As one of the country's leading functional beverage companies, we expect A88CBD water to be one of the countries leading CBD water brands. Our recently launched ingestibles, particularly our gummies are experiencing great consumer acceptance both in brick-and-mortar and e-commerce.

We have launched a number of marketing initiatives, including a partnership with Barstool Sports to support our e-commerce sales. Our brand loyalty is some of the highest in the industry. With the momentum we have gained since the country has reopened, we believe that fiscal 2022 will be the year of A88CBD.

The Alkaline Water Company has made its reputation with retailers and consumers by being ahead of the curve. We anticipated trends like alkaline water, clean beverages and eco-friendly packaging years ago. Per Brightfield data, most consumers of ionized water are looking for clean labels with simple ingredients from eco-conscious companies. We are the leader in this space, providing products with ingredient lists that people can trust. We are the clean beverage company. In addition to ingredients, our bottles are recyclable, PET or RPET and BPA free. Our bulk packaging already exceeds the 2022 recycling standards for the State of California. We were the first national company to introduce aluminum bottles with water. We continue to make decisions that affect us all in a positive way. For 8 years, Alkaline88 has been making a difference in the water we drink and the world we share.

Lastly, we now have a world-class ambassador. The Alkaline Water Company is now partnering with the sports icon and world-class businessman, Shaquille O'Neal. We believe this partnership with Shaquille O'Neal and Authentic Brands Group is the most significant event in the company's short 8-year history. Shaq will be an active part of our team, serving in dual capacity as an ambassador and as a member of our Advisory Board. The partnership is initial 3 years in length and very equity centric. The parties have a vested interest in working together with management and our board to enhance brand awareness, our sales and the enterprise value of the company.

Shaq is already working behind the scenes with our sales and marketing team. His mere presence is accelerating our discussions for international expansion. Of course, it's too early to have this translate into actual sales, but everyone involved believes we can become a household brand in the next 3 years. Shaq is an exceptional talent, not only creatively but he has a very high business acumen. Authentic Brands Group is the third largest brand licensor in the world. We are just beginning to scratch the surface of the great things we expect from this partnership. We should be able to fully activate our initial marketing assets sometime in the third quarter of our fiscal year.

I'd now like to pass the call on to David Guarino, our Chief Financial Officer, who will take you through the fourth quarter and the full year results. David?

Thanks, Ricky. Before I begin, I'd like to encourage interested listeners to review our press release announcing our financial results and our Form 10-K that we filed earlier today with the SEC for a more detailed explanation of some of the year-over-year variances as I will be highlighting just a few.

Our revenue from sales of our products for the fiscal year ended March 31, 2021, was $46 million, an increase of approximately 20% generated primarily by the sales of our alkaline water. This increase reflects organic growth with our existing retailer and the expanded distribution of our products to additional retailers throughout the country.

Gross profit for the fiscal year ended March 31, 2021, was approximately $16.4 million, a 25% increase over the $13.1 million in the prior year. Net loss for the year ended March 31, 2021, was approximately $16.4 million compared to a $14.8 million loss in the year ended March 31, 2020. The increase in year-over-year loss was primarily due to an increase of approximately $4.6 million in general and administrative expenses. Specifically, noncash G&A expenses was $3.5 million in the year ended March 31, 2021.

There was a net loss per share of $0.24 in the year ended March 31, 2021, compared to a net loss per share of $0.34 in the prior year. Our cash and cash equivalents on March 31, 2021, was approximately $9.1 million. Net cash provided by financing activities for the year ended March 31, 2021, was approximately $19.4 million as compared to approximately $7.6 million for the year ended March 31, 2020. The increase in net cash provided by finance activities was due to proceeds from the sale of common stock and the exercise of warrants.

While we have not yet established an ongoing source of revenue sufficient to cover our operating costs, we believe the cash on hand plus the anticipated warrant exercises, our line of credit and the sales agreement with ROTH Capital Partners LLC will adequately fund our current planned operations and capital needs for the next 12 months. However, if our current plans change or accelerated or if we choose to increase our production capacity, we may seek to sell additional equity or debt securities or obtain additional credit facilities including seeking investments from strategic investors.

The consolidated statement of operations for the prior year ended March 31, 2020, has been corrected for the following: depreciation expense related to assets utilized in the production of inventory of approximately $1 million has been reclassified to cost of goods sold. And an adjustment to reclassify sales and marketing expenses of approximately $2.7 million as a reduction in revenue as such amounts were related to consideration payable to a customer which the company determined was not for distinct goods or services received. These corrections had no impact on total operating loss and net loss.

Before I turn it back to Ricky, I'd like to reiterate our full year guidance for the fiscal year ended March 31, 2022. We expect to deliver revenue of approximately $62 million with an estimated gross profit of 38%. We expect our top line to be driven primarily by the momentum we are carrying forward, which should allow us to organically grow with our existing retail clients and expand distribution to additional retailers throughout the country.

With that, I'd like to turn the call back over to Ricky. Thank you.

Thanks, David, and thank you for all attending. In closing, we believe over the next 3 years, we have the plan and the personnel to exceed market's expectations. As a company, we are fortunate to know who we are and who our consumers are. Like us, our customers represent a broad cross-section of our society and are culturally diverse, health and environmentally conscious, and care about their families, communities and the world we live in.

As a nimble, innovative, publicly traded lifestyle company, The Alkaline Water Company is uniquely positioned to continue to take advantage of established and emerging markets. Our stated goal remains to become a household brand and the largest alkaline water company in the world. We are well on our way to realizing most of the company's strategic initiatives that we started in fiscal 2021. Clearly, each one is substantial in its own rights and can have a major impact on the company's enterprise value and shareholders' return. The addition of Shaquille O’Neal and Authentic Brands Group should accelerate our successes.

Now I'll hand the call back over to the operator for questions and answers. Thank you all for attending.

(Operator Instructions) Our first questions come from the line of Luke Hannan with Canaccord.

Yes. I just wanted to start with the performance in fiscal '21. Ricky, I think the guidance for the year was between -- you're looking for revenue between $48 million, $52 million, and it came in at $46 million. So I'm just curious maybe what caused that sort of divergence? And then also sort of as a follow-up to that, what gives you the confidence that you're going to hit that $62 million that you have forecasted for fiscal '22?

Yes. I think some of it candidly, Luke, had to do with some of the changes we had in the accounting procedures that we had undertaken this year. And so we had some additional costs go against our revenue side that we had not anticipated as we've grown so quickly. We've added a number of different programs, including digital couponing and BOGOs that go against marketing dollar -- or go against revenue directly as opposed to marketing dollars. If we'd done those through other channels, they would have gone against the marketing revenue -- or marketing expense only. Coming up with Shaq now, we're going to shift those marketing dollars away from the revenue side and into the marketing side.

So we're going to get back on track in terms of a bad slight reduction in revenue based on how we account for the Generally Accepted Accounting Principles are for marketing dollars and consumer goods. It's kind of a unique way they account for it. If I spend the same dollars outside on an ad, it goes against marketing dollars. If I spend it in store on an ad, it goes against the revenue. So we're moving away from that, and that's one of the reasons we brought in the national talent of Shaquille O’Neal.

In terms of the forecasting the future, why I think this year besides that small item, I think that this year, we're looking for great growth in the sense of 2 things. One, we had huge news today. I don't know if you guys have had a chance to read it yet, but Shaquille and our Chairman led a financing today. We raised $5 million. So we cashed up and Shaquille has put $1 million of his own money in, which I don't know if you can speak any higher of a company's potential when both your Chairman and the A-listed celebrity that you brought on, both have that kind of confidence in the company.

But number two, and more empirically we continue to just crush it on the Nielsen side. I was looking at data this morning. And overall, as we've talked about in the actual release today, those numbers have accelerated. I mean we are growing quicker than we've ever grown. When I was looking at some of the regions that we're in, we own about 4% of the -- 4.5% of the West region, we're about 3% of the East -- or Southeast region. And in the Northeast and the Midwest combined, we're less than 1%.

So we know that our huge amount of growth opportunity exists in those 2 regions. We know that we've gained market share in every region this year, and we know that we're outperforming the enhanced water category by a significant amount. So we believe that with the power of our A-listed celebrity with a national marketing program, some of the innovation products we're bringing on that we can just crush it this year. We also know that the number of cases sold in this current quarter exceeds anything but the pandemic stuffing era. So we see great, great, great momentum.

Understood. And then I guess as sort of a follow-up to that too on the gross margin guidance that you have, I think if I just do the quick math, it implies basically 200 basis points of margin expansion between this past year and then fiscal '22? What are -- like what's baked into those assumptions? I'm sure that there's some contributions from higher-margin products, like you'll get some mix benefits. There will be some operating efficiency benefits as well. And then also the price increase that you guys just took will factor into that as well. So I'm curious if you can just shed some light on each of those different buckets and what the magnitude of each of those have sort of in that gross margin guidance?

So we've got the other one too going against us, okay? So we are picking up some gross margin capabilities and tend to increase gross margins through bringing our supply chain closer to our plants. We will also bring up some gross margins by working out some additional arrangements with our co-packers in terms of pricing concessions based on volume. So that's coming in our favor. However, raw materials, I think, overall, and this is no news to the industry. Some of our raw materials are up 140% this year already. And so that's driving it the other way, Luke. And I think that's probably the major impact in terms of coming in at 38% relative to in prior years we're at 40%. So we've picked up some of the damage done by the price increase and some of the efficiencies we've built with our supply chain, but the -- until the country levels off a little bit on the inflationary pressures, I think the 38% is a good solid number for us.

Okay. Understood. Last one for me and then I'll pass the line. On those price increases, I'm curious, Ricky, if you can shed any sort of light on the pricing dynamics? You kind of touched on it a little bit there. But sort of where do you see your product relative to others in the space? And how much room do you see, I guess, for you to be able to take further price increases to sort of maintain that margin, assuming these sort of inflationary effects persist for a little while longer here?

Yes. Good question, Luke. We did some studies on one of our top clients. We already had a -- I think it was probably about an 8% increase at the store level at our largest client, unrelated to our pass-along but something they chose to do on their own. And we're actually up 17% in that particular client this year. So we believe that, that shows that we have some room to move some pricing into the marketplace. But I think more importantly is that we also know that about 20% of the time, in some of our major accounts, we're out of stock because candidly, their stock force can't stock fast enough some days. And so we know that there's an opportunity for us that even with a little bit of a price increase, I don't think the elasticity demand is going to hurt us. I think there'll be an opportunity for more people to see the product on the shelf and more people to pull it off.

So we've looked at, we've done some gap studies between us and the private labels that have come into our space. We believe we're positioned well, and we believe that a 5% or 10% increase at the store level is not going to affect our momentum one iota. In fact, I am hopeful with Shaquille, putting more eyes on the brand this year, driving people to the consumers that we will actually increase our sales substantially with a slightly better margin.

(Operator Instructions) There are no further questions at this time. I would like to turn the call back over to Ricky Wright for any closing remarks.

Yes. I think it's a great day to be Alkaline88 shareholder. We really have just begun the journey with Shaquille and Authentic Brands Group. They are 2 powerhouses in the consumer arena. Shaquille is absolutely the perfect ambassador for this brand. The fact that he was willing to come in today with our Chairman and bring some additional of his own capital into this brand could not speak more highly of their confidence and our capabilities to perform.

I do believe that this year, we will see some of those initiatives that we put together in fiscal '21. A lot of people have viewed fiscal '21 as kind of a waste year. I know there's some consumer product goods companies that aren't even counting it as a year when they do their comparables. But we managed to not only get through the year, but we actually excelled through the year. So I'm very proud of the team. I do believe that you'll see some tremendous announcements coming up over the next month or so. We have a lot of stuff in the pipeline that we've kind of forecast within our talk today that should enhance our shareholder value significantly.

And I want to thank everybody that is stuck with us as we continue to grow our story. We are now the #1 independent alkaline water company in the country. I do believe that we can become a household name with all our brands and all the extensions that we've had over the past 2 years, and we're just going to begin to see the fruits of those efforts and endeavors. Thanks again for your time. Everybody, have a great day.

Thank you for your participation. This does conclude today's teleconference. You may disconnect your lines at this time. Have a great day.