The Alkaline Water Company Inc.
Q3 2020 Earnings Call Transcript

Published: 11 Feb 2020

[Operator:]

Greetings. Welcome to the Alkaline Water Company's Third Quarter Fiscal 2020 Results Conference Call. [Operator Instructions]. Please note, this conference is being recorded. I will now turn the conference over to your host, Sajid Daudi, Director of Investor Relations. Mr. Daudi, you may begin.

[Sajid Daudi:]

Good afternoon, everyone, and thank you for joining us for The Alkaline Water Company's Third Quarter Fiscal 2020 Earnings Conference Call. During the call, 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 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 factors or assumptions applied in making forward-looking statements, please consult the company's Form 10-Q, which is filed today 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 projections as to the company's future performance represents management's estimates as of today, February 10, 2020. The company does not undertake to update any forward-looking statements or projections, except as required by applicable laws, including securities, laws in United States and Canada.Actual results could differ materially from these 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 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 results discussed on today's call. I will now turn the call over to our CEO, Ricky's Wright, who will give an overview of the company's third quarter fiscal 2020 financial results. Following Ricky's comments, David Guarino, our Chief Financial Officer, will provide an overview of the company's third quarter operating results and the business outlook for fiscal 2020. Ricky will follow David, again, providing closing remarks. We will then open the call for Q&A after management's update. And now I'd like to turn the call over to Ricky.

[Richard Wright:]

Thank you, Sajid. Hello, everyone, and welcome to the Alkaline Water Company's Third Quarter Fiscal 2020 Conference Call. We are making great progress towards our stated goal of growing our national footprint and continuing to innovate and rejuvenate the marketplace with new line extensions and exciting in-demand products. During a seasonally slow third fiscal quarter, we delivered revenue of $8.5 million.We had one of our best third quarters ever and delivered growth still in excess of 20% compared to the first 9 months of 2019. We are off to a great start for our seasonally strong fiscal fourth quarter, and our January numbers are up 30% compared to the year-ago period. Alkaline88 remains with the top 10 best-selling brands in the country, and the fifth fastest-growing functional water among the top 20 brands.According to the Nielsen Scan data, over the 52-week ending December 28, 2019, Alkaline has solid dollar volume growth of approximately 33% compared to 9% for the overall value-added water category. For that same report, the Alkaline Water subcategory accounted for over 50% of the growth of the top 10 value-added water brands. This shows the continued strength in the consumer acceptance of Alkaline Water as a category.The Nielsen data also revealed that Alkaline88 has grown 33% year-over-year at the retail level, which is over 6x the overall bottled water categories growth. However, based on the timing of a majority of the top 20 traditional retailers' resets, representing approximately 30,000 stores being pushed into the new fiscal year, we are reducing our guidance for the balance of the year. Based on this, our independent research, I expect that we will still see accelerated growth in our flagship brand, Alkaline88 in fiscal year 2021 and beyond.During fiscal year 2020, we have continued to execute against our business plan that both strengthens our brand and our brand's position in the marketplace. With a much clearer vision of the results of fiscal 2020, including the fruition of a number of 2020 initiatives, I believe fiscal 2021 should be a transformational year for the company. This transformation should include accelerated growth in our flagship product, Alkaline88 as well as significant contributions from our flavored-infused aluminum bottles and CBD. All these new initiatives will help us achieve long-term growth and profitability.Before I begin discussing the progress we have made on the various organic initiatives underway, I feel compelled to address why we exercised our right to terminate the AQUAhydrate merger. When we extended the time line in October 2019, both parties agreed that if the deal was not consummated on or before January 31, 2020, that either party had the right to terminate the transaction. On Tuesday, February 4, 2020, after board meeting, the company elected to exercise its right to terminate. The board determined it was the best business interest of Alkaline88 to focus on our core business and the expansion of our emerging product lines, including 88 -- A88-infused flavors and A88CBD. Up until then, both parties were continuing to work through comments on the S-4 filed with the SEC. I wish AQUAhydrate's team, all the success in the future and look forward to seeing them in the marketplace.As stated in our last two calls, one of our leading initiatives this fiscal year has been to significantly increase our presence in the 150,000 convenience stores in the U.S. Based on the hard work of our sales force, help from various brokers and the addition of the second largest distributor in the country, which has the potential to reach into 11,000 c-store customers in the very first quarter of fiscal 2021, we believe by the end of fiscal 2021, we will be in over 20,000 stores nationwide. This would represent approximately 15% of the entire C-store universe.To further our commitment to the C-store strategy, we recently hired Jim Venia, former Director of National Accounts West Division at Ascentia. Jim will head up our direct-store distribution network and c-store initiatives. Jim will focus not only on the placement of our flagship brand, Alkaline88, but also our flavor-infused aluminum bottle and CBD products. I would be remiss not mentioning that the convenience stores have been early adopters of CBD products. This presents a large opportunity for growing our line of A88CBD portfolios of products, and we plan to support it accordingly with point-of-sale displays and innovative products.With a strong pipeline of commitments from customers, we believe we are well positioned for the spring planogram we set at c-stores. In addition, our new product offering increases our cash margins. The c-store strategy will play a significant role in our push towards cash flow positive position in fiscal to 2021.Our core business is also gaining new momentum. In the second quarter call, we indicated that we were expected to expand our Alkaline88 water and up to 11,000 traditional retail stores nationwide prior to the end of our fiscal year. We are proud to announce, we recently received a commitment from 2 large national Fortune 500 retailers. We have already received a purchase order from one, and expect the other purchase order very soon. We hope to get permission to announce both retailers shortly. What I can say is that the combined nationwide store count is over 10,000 stores, and we're planogram to be in all of them. Equally as important is that the larger of the two will be selling our single-service products nationwide. While one is a large retailer in a trade channel we currently service, the other is a national specialty discount retailer, which presents a new growth opportunity for us. As is often the case, we now feel we have an excellent opportunity to expand across this class of trade and hope to be in up to 15,000 new stores by fall.With an established beachhead and some high-profile retail outlets like Walmart, CVS, Kroger and Albertsons, Safeway, we are excited to see this momentum build around our core products. We expect to expand these relationships in the growing lines of SKUs and to our other portfolio of infused flavored and CBD products . Also, our infused flavored water continues to create excitement and new dialogues among existing and new customers.Despite the timing of the store schematics research challenges we experienced this last quarter, our customer engagement related to our flavor-infused water remains extremely high. Our team already has firm commitments for the March quarter, and we expect to deliver pre reset up to $1 million of our flavor-infused product to retailers across the country. Currently, we expect our flavor-infused water to be available in approximately 10,000 retail stores across the country by the end of the first quarter of fiscal 2021.We continue to receive rave reviews from customers regarding the clean and smooth taste profile of our flavored waters. And I have complete confidence that this category will be a great success as we scale this brand to our network of 60,000 stores nationwide. This product is currently being offered in 6 unique flavors which are

[David Guarino:]

Thank you, Ricky. Before I begin, I'd like to encourage interested listeners to review our 10-Q, that we have filed with the SEC for more detailed explanation on some of the quarterly results I will be highlighting today. Revenue from sales of our products for the 3 months ended December 31, 2019, was $8.5 million as compared to $7.7 million for the 3 months ended December 31, 2018. This represents an increase of approximately 10%, generated by ourselves with Alkaline Water and our infused water. This double-digit increase is due to the expanded distribution of our products to existing retailers and the addition of new retailers throughout the country.For the first 3 months ended December 31, 2019, we have cost of goods sold of approximately $5.1 million or 60% of revenue as compared to the cost of goods sold of $4.8 million or 63% of revenue in the prior year quarter. Total operating expenses for the 3 months ended December 31, 2019, was approximately $6.1 million compared to approximately $6.4 million in the prior year quarter. This decrease in total operating expenses was primarily due to decline in general and administrative expenses, partially offset by higher sales and marketing expenses related to the increase in sales.Specifically, for the three months ended December 31, 2019, sales and marketing expenses was approximately $4.1 million compared to approximately $3.6 million in the prior year quarter. The increase in sales and marketing expenses was a result of higher freight and sales promotional expenses due to increase in sales.During the same period, general and administrative expenses was approximately $1.8 million compared to approximately $2.7 million in the prior year quarter. G&A expense of approximately $1.8 million, in this fiscal quarter, ended December 31, 2019, consisted primarily of 3 items

[Richard Wright:]

Thanks, David. Once again, I would like to thank you for participating in our call today. In conclusion, I would like to say that I'm very proud of our team for the hard work and dedication over the last 9 months. As we continue to execute against our business plan, I see tremendous opportunities ahead for our flagship brands and product extensions. I am excited about fiscal 2021 and look forward to seeing our efforts help drive growth and profitability. I would like to, also, thank our shareholders and the board for their continued support. We are making great strides in making Alkaline88, A88-infused flavors and A88CBD, the most trusted lifestyle brand in America. Thank you. Have a great day.

[Operator:]

[Operator Instructions]. Our first question is from Neal Gilmer, Haywood Securities.

[Neal Gilmer:]

Ricky, maybe, if I could ask you to expand a little bit just on the impacts in Q3 there with respect to your comments about the schematic resets. Can you give us a little bit more color and sort of how that impacted the quarter?

[Richard Wright:]

Yes. As I discussed in the call, the impact is primarily related to timing. It's not only the resets, but new store additions, both with respect to the flavor and the flagship product. On the last call in November, we issued our guidance. We had intimated that a number of large national retail wins would come in during our third quarter and carry into the fourth quarter. None of those occurred at this time. The good news is and why I'm so bullish on our core brand, is it -- it's just a timing issue. I want to reiterate, no accounts were actually lost. In fact, with the flavored infused and A88CBD as part of current offering, more large regionals and national retailers are opening up their doors to us.The two national retailers, we did announce that we expected to come in third and fourth quarter, we've already received appeal from one of them. And it's going to put us in a brand-new trade channel. The other one is a large drug storage chain with a strong presence on both coast. Beyond these 10,000 stores, now expected -- we now expect an additional 20,000-plus stores in the next 12 months. I believe that the growth experience, we're still one of the fastest-growing water companies in the country. And we really had no major national brands added since 2018. So I really, really, really feel good about the 2021. And from the last 2 quarters, this quarter and the last quarter, it's really just a timing difference for us.

[Neal Gilmer:]

Okay. That is helpful. Yes, I know you covered a number of different things in your prepared remarks. I guess, maybe 2 things. On the topical, sort of, it sounds like you're expecting some revenue to be booked into Q4 from that. But I know you sort of walked through everything but where do you sort of see your confidence level as far as that builds into your fiscal '21? Sort of how do you, sort, of internalize what your expectations are from this far? I know what the overall broader opportunity is but any sort of comments on where you could consider a success as far as overall either penetration rates and so forth? Like how are you looking about, sort of, expand out that -- basically launched that particular channel?

[Richard Wright:]

Thanks, Neal. Good question. We're launching that on a co basis. I can't give any specific numbers. Initially, we'll be giving guidance, and we'll probably segment that in our next call. We're doing this in a two-pronged approach. We have now seen, I think, the last tally, 65 different retailers representing 72,000 stores. We think on the brick-and-mortar front, we will receive our first order, brick-and-mortar, within the next 60 days. So that's very, very encouraging. I also firmly believe that within the next 12 months, we may well be the #1 brick-and-mortar CBD-topical company in the country. So it's going to be in the millions. That's all I can say. In terms of tying it down, obviously, just like the news for this quarter, it just depends on when we get in and actually on the shelves.On the CBD e-commerce strategy, we hired Utech. They're a well known, I think they have about 800 clients. They do core beer and some other very, very large international accounts. We have complete buy-in from that company. And they -- we believe that we can compete with the likes of some of the other Pürcan and some of the other majors by the -- probably, within the next 18 months. Obviously, some of this will be driven by how quickly we can adopt into our ingestibles as well. But certainly, we think that the topicals, even though it's in a longer sales cycle and the usage is in -- is quick turnover, we believe and we found out in our shows that we've had apparently the 6 or 7 top sellers already out in the marketplace. So we feel very good about that, and it's being developed very professionally. February 20, you guys can all go on and take a look at our new website. We're focusing on the millennials. So we have a little different look than we have on our standard Alkaline88 website. It's A88CBD.com.

[Neal Gilmer:]

Okay, great. And maybe one last one, if I can. Just if you have any sort of comments on sort of a geographic basis? How is the East Coast been ramping up? And I guess, Southern California, is that still sort of remain strong for you? Any sort of geographic comments you can provide.

[Richard Wright:]

Yes. I think it's interesting. Southern Cal still stays strong. I just looked at our overall Kroger numbers actually before the call just so I had some view on that. We're still outperforming the category by about 2x. So I think slightly more than 2x, which Southern Cal is our largest unit there. So maybe, kind of excited. We have actually overtaken the Southern -- Southeastern United States. It has actually become our largest region with publics. And we've got some Whole-Foods down there. We have Winn-Dixie and Food Lion and Harris Teeter, and has become our largest sector. And then the Northeast, we're just starting to gain traction with Shaw's but some of these announcements that are coming up in the next, hopefully, 10 days. We're actually just waiting for a legal on one of their -- these are both Fortune 500, so on one of their legal reviews. We're just waiting for legal to release it.Otherwise, we would have had it out before today. Those are mainly at least headquartered in the east. And they have the highest concentration in the east. So we're very excited about that as well.

[Operator:]

Our next question is from Raveel Afzaal, Canaccord.

[Raveel Afzaal:]

So a few questions. First, in terms of your strategy. It's great to see that you guys are thinking about going cash flow positive in fiscal '21. But I'm wondering, is that the right strategy for the company? Or should the focus be to invest more money into the business, try to grow the top line as much as you can and that may position you guys for a potential take out down the road. What's the right strategy? How are you thinking about it?

[Richard Wright:]

So good question, again, as always. Thank you. We spent a lot of money last year. And I think the number, if you look total on special projects was between, I think, it will tally up between $4 million and $7 million by the time this year is over. And we learned from all of that. We know exactly where we want ahead and why we want to get there. We actually don't think this is going to slow us down. We've added some personnel. Our next number, we will report, I think, 27 people in the company. And I think our last reporting was 17. We've set up a CBD division. So we're full speed ahead on the growth. We're just -- we just think we're going to be smarter at it in terms of -- we brought in 2 sales guys. We brought in Utech. And so we're still pushing on the growth of 100%. We're not slowing that down.We've just taken out some of the special projects. I remember -- if everybody remembers the last couple of quarters, we've always said, we had this kind of ability to speed up special spending or take special spending back. We're taking special spending back but we're still focused on overall sales growth. So we're getting rid of some of the projects that we learn from them. And we know what works and what doesn't, and we're taking that knowledge and we're applying it through our standard business practice, which is nothing happens without a sale. And we've upped our sales functions substantially in the last 12 months.

[Raveel Afzaal:]

And just sticking with that point, then, yes, I mean, you are launching so many interesting products at this time. But when I look at your G&A spend, it's still very much in check. So is it safe to assume that it will stay at these levels, like in Q4 and going into fiscal '21? Or do you see some ramp-up in the G&A expense? Sales and marketing is understandable but the G&A expense as you get these new products to the market.

[David Guarino:]

Yes. This is David. We expect that the G&A expense will pretty much 100% basis stick with our revenue growth. Again, Ricky has mentioned, that we have hired some additional personnel. But some of the G&A and sales and marketing expense we do have, we really tried to structure it on a percentage basis. So as our sales increase, those costs will increase. But I don't expect them to increase more than the increase in sales.

[Raveel Afzaal:]

Got it. So what percentage are you targeting of revenues for G&A for fiscal '21? Or whatever you can share.

[David Guarino:]

About 5%, I think, is what we've historically have done. And that's picking out of the one thing that's somewhat uncontrollable is the noncash G&A from the stock compensation expense. So our real cash G&A.

[Raveel Afzaal:]

Got it. And just to further clarify on Neal's point. So basically in the quarter then, you were expecting two new national retailers to have you guys in the stores. And one just started giving you PO orders right now, and the other one you're expecting in the near term. That's primarily what drove EBITDA revenues below your expectations, right?

[Richard Wright:]

Yes that and the flavors we had, they came on slower than we expected as well. Although we now have commitments for actually 107,000 cases and up to 10,000 stores. So I'm feeling really good about 2021 setting up very well for us because we also got into a major program with Core-Mark in terms of their Smartstock program, which is an exclusive program, which candidly is very cool because it includes all our SKUs within that program. And they actually do -- go and do store level checks and resets. So it's a pretty cool program for a company to be in, especially company our size. We're very, very thankful for that.

[Raveel Afzaal:]

And that shouldn't increase your selling and marketing as a percentage of revenues? Or do you think that will be more capital-intensive, relatively speaking?

[David Guarino:]

It will be a little bit of both. But again, the -- we expect to have a little bit more sales and marketing and at least initially with the e-commerce strategy. So I think that will offset any decline you might see in that other area.

[Raveel Afzaal:]

Perfect. And just finally, can you guys just remind us or give us some broad overview of the ingestibles regulations in the U.S.? Where do we sit today?

[Richard Wright:]

More action has occurred on the local side than it has on the federal side. The federal still is, I think, it's February 20 or 28, where they still have some guidance to give -- 22nd. I was just told 22nd. So I missed it 2/22/20, they're supposed to give some additional guidance on where they're headed. We also see some abilities to, maybe, go back to our state and local strategy. We really have to work through console but we have been working diligently on that. The good news is that we got clearance from both the TSX and the NASDAQ to do our topicals within the states that allow it. So there's no huge federal movement. But certainly, California Proposition 228, looks like it's got plenty of legs. And most of the major states are moving towards allowing CBD and ingestibles.

[Operator:]

Our next question is from Kevin Dede, Rodman & Renshaw.

[Kevin Dede:]

It's Kevin Dede, H.C. Wainwright. First one, housekeeping, David. You mentioned in your gross margin guidance, and I didn't get the numbers. I apologize. Is it $15 million, $50 million, $15.5 million? I missed it.

[David Guarino:]

Yes. We said $15.5 million to $16.5 million, based upon the numbers of $39 million to $41 million in revenue.

[Kevin Dede:]

Right. Okay. Got it. If you want to -- a lot of store numbers, I guess, predicated on where you hope to be by the end of the year, pretty much by vertical. Is that something that you'll be able to give us more color on as the year goes by?

[David Guarino:]

Yes. We've talked about that internally. We certainly hope to have enough volume in each segment to begin some segment reporting. Now obviously, there's some GAAP issues there as well, Kevin, that administratively, some additional initial administrative hours put in. But yes, we do hope that we can get some breakout on the line items, flavored, CBD topicals as well as our core product.

[Kevin Dede:]

But it'd be too much you expect that this year, right, for fiscal '20?

[Richard Wright:]

Yes. I don't think that there are going to be significant enough, as David indicated. We think now that we'll have $750,000 to $1 million of flavors, recorded this current year. I think our original goal was $3 million to $4 million. And on the CBD side, I'm not going to end up, whatever this is, I only am over here, Kevin. I do think that we will get 100 or more on the CBD topicals from e-commerce but it's not going to be significant for this fiscal year.

[Operator:]

We have reached the end of the question-and-answer session. I will now turn the call back over to Ricky Wright for closing remarks.

[Richard Wright:]

Thank you, everyone. I don't think there's anybody in this organization that has viewed this company with more bigger and lights than we have now. I think everybody's band together. I think we have the most momentum we've ever had. We have more cash in the bank. We have more initiatives. We have more projects, and we have more tailwind with very few headwinds in front of us. So I want to thank everybody for their support. We sincerely appreciate it, and we look forward to a great next year. Thanks.

[Operator:]

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