The Alkaline Water Company Inc. (WTER) on Q3 2021 Results - Earnings Call Transcript
Operator: Greetings, and welcome to The Alkaline Water Company's Fiscal 2021 Third Quarter Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host and Director of Investor Relations, Sajid Daudi.
Sajid Daudi: Good afternoon, everybody, and thank you for joining us for The Alkaline Water Company's Third Quarter Fiscal 2021 Earnings Call. Shortly, you will hear from Ricky Wright, our President and CEO; and David Guarino, our Chief Financial Officer.
Ricky Wright: Thank you, Sajid. Hello, everyone, and welcome to The Alkaline Water Company's Third Quarter Fiscal 2021 Conference Call. The momentum, we saw over the summer and into our second quarter continued right through the third quarter. Fiscal 2021 has been a challenging yet very rewarding year for the company. We believe our core business is stronger than ever. Alkaline88 is once again, the fastest-growing top 10 value-added water brands in the country.
David Guarino: Thank you, Ricky. Before I begin, I'd like to encourage interested listeners to review the Form 10-Q that we filed with the SEC earlier today, for a more detailed explanation on some of the quarterly results, I will be highlighting. For the three months ended December 31 2020, we reported revenue of approximately $10.2 million, which increased approximately 20% year-over-year. And for the first nine months of our fiscal year, we delivered growth of 21%, compared to the same period last year. The increase in sales is due to continued strength with our existing customers and expanded distribution of our product to additional retailers throughout the country. Our gross profit from sales in the third quarter ended December 31st, 2020 was $4.2 million versus gross profit of $3.4 million, in the quarter ended December 31 2019. Our gross margin percentage of 41.2% increase, compared to the prior year quarter, primarily due to a positive change in sales mix and lower cost of goods sold. Total operating expenses for the three months ended December 31st 2020 was approximately $8.4 million, compared to the approximately $6.1 million in the prior year quarter. Specifically for the three months ended December 31st 2020, sales and marketing expenses was approximately $4.7 million, compared with approximately $4.1 million in the prior year quarter. The increase in sales and marketing expenses resulted from higher freight and promotional expenses due to the increased sales. During the same period general and administrative expenses were approximately $3.5 million, compared with approximately $1.8 million, in the prior year quarter. G&A expense of approximately $3.5 million this fiscal quarter ended December 31st, 2020 consisted primarily of three items. Approximately $2 million of professional media and legal fees, approximately $800,000 of wages and wages-related expense, and approximately $400,000 in non-cash stock option compensation expense. Net loss per share in the quarter ended December 31st, 2020 was approximately $0.06 per share, improving approximately 14% from the quarter ended December 31 2019. The net loss per share was negatively impacted by roughly $700,000, in net non-cash items which resulted in a negative $0.01 impact on our bottom-line. Cash used by operations during the nine months ended December 31st, 2020 was approximately $9.6 million, as compared to the approximately $8.9 million in the prior year period. The increase was primarily, due to increase in inventory specifically related to our A88CBD line. Importantly our cash position, as of December 31st was approximately $1.7 million. Specifically, we believe that between the cash on hand, as of December 31st, 2020 our expected conversion of our outstanding warrants and our credit line, we will have sufficient cash to sustain our operations, at least through December 31st 2021. And with that, I'll turn it back to Ricky. Thank you.
Ricky Wright: Thanks David. Once again, I would like to thank you for participating in our call today. In closing, I would like to say this past year has been an incredible nine months for us. With the global pandemic in early 2020, the disrupted global economies we have managed to maintain the company's revenue growth and added exceptional talent. We are coming out of it stronger than our competitors. Our efforts resulted in increased brand awareness with our flagship brand Alkaline88, emerging as the fastest-growing brand and our product category this past year. As of 01/23/2021's Nielsen report, we continue to be the only top 10 value-added company in the country, that has grown double digits on both, sales and units every month since December 2019. We have innovated based on consumer demand with new and unique products, gained market share, expanded our omni-channel presence and quickly adjusted to the changing market dynamics. This is a testament to our team, our partners, and our resilient business model. I couldn't be more proud of our brand's journey, through today. And genuinely believe that the best is still ahead of us. I would also like to thank you our shareholders and our Board, for their contribution and continued support. We are making great strides in making Alkaline88, Alkaline88 flavored-infused and A88CBD, the most trusted lifestyle brand in America.
Operator: At this time, we will be conducting question-and-answer session. And our first question is from David Bain with ROTH Capital. Please proceed with your question.
David Bain: Great. Thanks, and nice quarter. My first question would be on the hospitality rebound. And I guess what I'm trying to get a sense of is the timing of meaningful revenue generation from the segment. And I guess maybe put differently, when could we see a run rate toward say, 100,000 cases? And is there anything different with the new potential hospitality partner in terms of revenue cadence now that hospitality is coming out of COVID? If the new partnerships will be structured differently than the first? Any kind of color around that would be great.
Ricky Wright: Hey, David, thanks for attending today. Yes, the hospitality industry is recovering. We are in some believe it or not golf courses. We're doing on test with one of the largest golf course groups in the country. Universities are opening up to us as well. We're still a little slow in the restaurant and hotel segment of it. However our new partner is extremely strong in both of those our new potential partner and it's just going to be a great add for us. I was looking at the segment reporting requirements just before the call. I think we're at least a couple of quarters out David before we have to do some segment reporting.
David Bain: Okay. That's helpful actually. Okay. Great. And then international expansion I know you Ricky you have a ton of experience there. First for Mexico. Is there any kind of TAM we can think about, I guess, we should do our own homework, but if you have something to spoon-feed us that would be great. And then if you could touch on strategy there the new partnership you spoke to is that a distributor? Or are there other strategic dynamics for penetration you can help us with? I mean, I don't know if we go into acquisitions or what we're going to be doing to sort of make a big splash in Mexico?
Ricky Wright: Yes, David, we've actually explored a number of different opportunities into Mexico. I've gotten some help from some of my Board members along those lines, excuse me to string smooth Alkaline88 water. And this particular deal, we've -- we're in the final process of negotiations. We're candidly just getting down to final pricing. And we should be able to announce in a week or two. I believe it will be that quick. It is to a very large group. It's a little different in that we're -- we'll actually be selling into a direct group that has distribution within their current locations.
David Bain: Okay.
Ricky Wright: And the details on that. It will be a substantial account though, which is the nice thing. It's kind of equivalent. If I was to look at the US market one of our mid-range groups that we already deal with probably not as big as a public, but certainly as big as some of the change we have with 200 or 300 stores. So it will be a nice -- it will be a very nice add for us, and it will be FOB US which is also a very nice thing for us.
David Bain: And lastly just as a follow-up on that if you don't mind. In terms of pricing and margins like per unit pricing and then just margins overall. Is there anything we should think about as you enter that market?
Ricky Wright: I don't think there'll be much contraction because of the FOB shipping and the -- our ability to make sure that we were priced competitively with our other retailers.
David Bain: Okay. All right. Great. Thanks so much.
Operator: And our next question is from Luke Hannan with Canaccord Genuity.
Luke Hannan: Hey, good afternoon guys. I wanted to follow-up on that point as well actually on the margins. You talked about on the call Ricky that there's -- you expect to see some sort of margin expansion from these new plants and new raw material providers that you guys are going to be adding. Can you quantify at all like what we should be thinking as far as what the margin profile increase would be there and maybe rough timing on when you expect to achieve that?
Ricky Wright: So just looked at the Excel spreadsheet a couple of days ago Luke. So internally, it's going to -- some of it's going to be predicated on if we put any working capital towards these arrangements or not from CapEx. We have not to date, but we are considering that as a company to potentially directly invest in some of ours and become a little bit more vertically integrated. We wouldn't run it, but we'd be able to get a little better pricing. The big savings initially though will come frankly from the freight cost. We are going to pick up on the freight bound end significant dollars right away, whether that's one or two points, I don't know for sure. David might be able to better answer that. But it's definitely significant and we've done our ROIs on any potential investment as well. David, anything on what you think it might be?
David Guarino: Yes. It's still too early to tell from a percentage point of view. But from a timing point of view we won't pay anything until Q1 fiscal 2022.
Luke Hannan: Okay. Thanks. That's helpful. If we look at -- one of the things that you also talked about is that you're allocating more resources towards those areas where you're seeing really high ROIs in your test markets. Can you elaborate I guess on what exactly those sort of ROIs are? Are you referring to just an average customer basket relative to the customer acquisition cost? Can you give maybe a little bit more color on what exactly you're seeing there?
Ricky Wright: Yes, I can. We started out with some 700% or 800%. We run them now in I think five markets, David?
David Guarino: Yes.
Ricky Wright: Five different markets very small tests $5,000, $10,000 a pop, but we're seeing tremendous return on those investments. And I'm going to guess, David, you might have a better -- I think last time we talked it was close to 300% ROI on the investment. Is that still about...
David Guarino: A little less than that but about that.
Ricky Wright: Okay. So that's why when we look at those Luke it does -- it makes all the sense in the world to continue to pursue that until it continues to adjust downward. It won't make any sense. But right now and that's mainly digital and it's not so much acquisition. A lot of these are being done well excuse me I'll step back for two seconds. A lot of those returns and that sort of return have been in the food channel, our grocery channel. So we've done digital at Kroger's now H-E-B a number of other big companies that we've worked on in the last year Food Lion et cetera. And those have all shown tremendous returns for us on the digital side. And then on the cost per acquisition on the e-commerce sites we have run a bunch of things on that. We know what doesn't work. And we'll begin to push some additional dollars to bring that cost of acquisition down below where it is today.
Luke Hannan: Got it. And then on the CBD front Ricky, are you noticing, how is the Alkaline brand? How do you sort of differentiate yourselves on what's admittedly a pretty crowded field? Like have you noticed anything and the metrics that you're seeing or feedback that you're hearing from customers that your product is actually standing out and sort of differentiating itself?
Ricky Wright: Luke, the one big thing that I do know when I get it from my sales guys all the time is that, we're about a taste profile. And that there's nothing that we've made that people just don't think is absolutely outstanding on the adjustables. Obviously, shea butter and some of the higher cost ingredients on the topicals as well. And then finally, what really is carrying the day at least on the brick-and-mortar side is that people love Alkaline88. And it just opens those doors. I was shocked to see some meetings taking place this coming quarter, that strictly only a result of us being Alkaline88 and just opened the door for the A88CBD sales team. And hopefully some of those come in I love this time of year for us because we've had some big wins in the last couple of weeks. We don't usually announce until the PO comes. So that's why you see the kind of obfuscated answers or discussion within our actual release. Those are clear but they're not in the stores yet. We haven't gotten the firm POs, but we're in line for the planogram et cetera. And you'll see some of that coming in the CBD arena very quickly as well. So this time of the year everybody is making their decisions. The buyers are both on the CBD side and the water side, and we're getting a lot of Ws. And so over the next two weeks here, three weeks a lot of those Ws will come to fruition.
Luke Hannan: Got it. Last one for me, if I may and then I'll pass the line. With the new administration that's in place now have you noticed anything in your dealings with potential customers where you're noticing a more positive tone a more positive outlook on the prospects for some of your CBD adjustable products? Or have you heard anything from the regulators that suggest any incremental positives there?
Ricky Wright: That so much regulators, obviously, I read the legislative updates almost every day. There was a bill that passed or went in Congress, but it was same as last year's bill. But obviously with the administrative change, we do believe there'll be some additional guidance. The good news is that whether we believe it or not some of the retailers believe it. And there was a much changed after November 6 and the fact that retailers were much more likely to talk to us about ingestibles. I would have said, before November 6, we were pretty much 90-10 ingestible or topicals to ingestibles and now we're no worse than 50-50.
Luke Hannan: Got it. That's great color. Thanks a lot.
Ricky Wright: Thank you.
Operator: And our next question is from Kevin Dede with H.C.W.
Kevin Dede: Hi. Kevin Dede.
Ricky Wright: Hey, Kevin, how are you?
Kevin Dede: Can you hear me? I'm good, I'm good. And I was really happy to see your numbers. So congratulations.
Ricky Wright: Thank you, sir.
Kevin Dede: I think the big question for me Ricky and I defer to my esteemed colleagues, who probably already picked up on it. But last year, you were at 8.5%. Now you're at 10.2%. Can you just help us take it apart a little bit? I mean, I apologize, but it all seems kind of lumped in together. It's hard to see what's CBD, it's hard to see what's flavor infused, it's hard to see what was online, what's in the stores. What should we do to try to take a look at some of the parts?
Ricky Wright: I'm not sure I can – I've been pretty firm on this Kevin that we're not providing guidance – segmented guidance. That's kind of why I went on today to see what the real answer was there when we're going to push over that line. But what I will tell you is to give you some guidance that January was our best January ever, okay? And the first two weeks of February were our best two weeks of February ever. And that was not even close second. So the momentum continues to grow with the brand and it's across all parts of the brand. I just did a survey two weeks ago actually my sales group did a survey for me and one of the things that again on a color basis you can look at where we've penetrated, the various 60,000 stores in a strictly the grocery channels. And you can see that for instance or 40% administration are one liter and another 20-some percent on the 1.5, 20% on our infused. So those are the kind of things that we metrics this against. And then on the wins coming up because it is that kind of year we have 11,000 new SKUs scheduled – 11,000 stores willing and ready to take new SKUs on the upcoming fiscal year. And I think we've said it in the release as we pick up the about 9,000 new stores that will be coming in the new fiscal year. And a lot of the SKU, I did readout today. The one I was focusing on more than anything Kevin to be frank, again, was I wanted to see how the two-liter was being accepted. I love that and it was well over 1,004s that the two-liter is scheduled to go into. And so if you look at two-liters our single-serve flavored infused aluminum well over 3,004s that are picking those up right after the fiscal year and up to 11,000, if you get lockdown if you think.
Kevin Dede: Okay. That's impressive, Ricky. It's impressive. It's just a little, I guess to use your verbiage a little obfuscated from our – at least from my perspective, I'm sure the other guys have a better handle on it. It's just hard to run numbers without sort of seeing a little more detail. I guess, the other thing maybe you can help me with is understanding what's where. I mean, I know the DSD is sort of a new strategic effort for The Alkaline Water Company. And I guess, what I'm hoping you can share with us is what you think their focus is in terms of store fronts? And what products are they helping you move?
Ricky Wright: Good question Kevin, because it is a new focus for the business. I want to add a little bit of color because I only had 17 minutes on my prepared speech. So I gave myself a little more time on the Q&A.
Kevin Dede: Yeah. No I appreciate you moving it along Ricky.
Ricky Wright: One of the things that you have to understand is that most people pull the trigger on direct store distribution way early. They have a new idea, they have a new concept, they think the only way -- the way to get in there is the higher DSD and that sits on the shelf. We kind of did it the opposite. We're looking only at strategic markets big, big markets to take in a DSD network. And we have an excellent, excellent reputation in the grocery channel. I look today at the Nielsen reports that came out on 01/23 of this year. And we have a 3% market share in grocery and the enhanced water space which just shocked the heck out of me Kevin because if you look down the list you'll see a lot of big names that are substantially less than ours that you would think would have that much share, but little Alkaline88 has that amount of share. So the name recognition is out there. That will allow us to go into really the strategy is convenience stores and up and down the street. As of the DSD is really set up to do. We've done an excellent job. Frank Chessman and his team has done an outstanding job of penetrating the grocery channels and some of the major boxes. And now it's time to have a strategy. We hired a guy last year from Essentia. We just had an additional hire in the Northeast. We haven't announced it yet, but he's a DSD guy that actually left I think Boss to come to us. And so we're serious about the efforts. And we think that the ability to penetrate the new stores is essential to growing the brand here in the US and accelerating our growth. I mean I don't like to use comparatives. But if you looked at two years ago, really about 18 months ago ourselves use to fair second place the Apple on DSD, they fell flat on their face and they did it 15 years ago when they didn't have the name recognition. But they took that via the Apple 18 months ago. I think the big guys here was their first one out of New York and they continue to roll and done very, very well. And so that's a little bit of how we view it, but we think we've just done it smarter. We think we wait until we have the name recognition and then went and had guys that literally two years ago wouldn't talk to us negotiating with us where we think we have very, very good DSD agreement.
Kevin Dede: So the other big question is what other SKUs can you pull-through, once you've established your... yes. So I'm just kind of trying to get my arms around the opportunity. It's all tantalizing. Don't get me wrong. It's hard start to see what's where and what you plan on going...
David Guarino: I think Kevin in most cases the one liter is a no-brainer for these guys, okay? Our sports cap is a differentiation. And so is our aluminum. And then they're all carrying the flavored-infuse as well. So we do have two or three differentiations in terms of product. I would like to see the 2-liter get on some shelves. And the -- I think that's a good another differentiation that we have. It's a handier size pack both for the refrigerator and the gym.
Kevin Dede: Okay.
David Guarino: It's just 4-pound pack. And so I see that as a big differentiation as well. It wouldn't surprise me that at some point in time, we have all three, the gallon the 3-liter and the 2-liter in some of our grocery channels. And then I see in the convenience store channel I do see the aluminum being a big item for us because it is a cold pack item. As I said several calls ago, if you drink our aluminum bottle cold, you'll never have a beer again. It's that good.
Kevin Dede: Well, you're talking to a wrong guy about that, Ricky. I'm wondering though can't you pull CBD through some of these retail channels as they build?
Ricky Wright: Yes. We actually hired, I don't know if you caught the nuance. We hired BettermentRS.
Kevin Dede: Right. I did hear that.
Ricky Wright: They're doing a great job for us. Not a good job, a great job. And that's some of the announcements that you'll hear some of the wins that we've recently had that will come out over the next week or two. We -- again I don't like to make announcements for flash. I'd like to be able to go out and take a picture someplace post in social media, so that they can go into their local CVS or Walmart or wherever it is and grab the product. It doesn't help sales. They have a big news flash and not have anything sitting there.
Kevin Dede: All right. Last one for me Ricky. I'm sure you just read the big sigh of relief. How many co-packs do you have now? And can you just review your rollout strategy going forward, just so I make sure I have it correct, please? I know you gave it to us on the call.
Ricky Wright: Yes. I think, we have eight total right now. I don't have the list in front of me, but easy one again Kevin we are very, very close to opening one in the East Midwest type of we're in a state we call it either one East or Midwest.
Kevin Dede: Okay.
Ricky Wright: So we're very, very close to having that open. That will open first quarter probably. I've got the actual open dates in front of me. Let me see what I think it's scheduled for the end of March. Okay, beginning of April. So that one is coming on. The raw material guys both those plants I think they went up last week. I don't know how much they're producing it whether they're still in their test.
David Guarino: Yes, they're still on a test base. So again...
Ricky Wright: QC-ing them.
David Guarino: So you won't see that economical until the Q1.
Ricky Wright: Yes. We're still QC-ing them because that's probably another 30 days before they're really operational and can face some of that cost of goods sold we talked about and David mentioned will be available for the quarter. And then the West Coast plant, we've identified, we visited, we've qualified, but it is a new build. And so they're out another 4.5 months probably Kevin before that happens.
Kevin Dede: Okay. Thank you so much, Ricky. I appreciate your patience and your indulgence as always. Congrats again.
Ricky Wright: All right. Stay safe everyone. I want to thank everybody for taking the time with us today. I appreciate it. And again I know I try to say this every quarter, but I do see rainbows and unicorns that have for this company. We're as strong as we've ever been at almost every level. We did add a bunch of people this year that have all been a players and it's just nothing, but strengthened our bench and we get better every day. And I appreciate your faith in the company.
Operator: And the next question is from David Bain with ROTH Capital.
David Bain: I'm still back on. Sorry. I did have one follow-up and I didn't mean to talk over. But if you can indulge me now, just one last one on the international again because I think that's kind of a big initiative. Can you give us kind of a capsulation, I looked up the TAM in Mexico and it looks fantastic. The growth looks great for bottled water. But I don't see anything on value add and I'm wondering how prevalent that is in Mexico relative to the US and just putting it in the flag and to the market. Is that enough of the brand building kind of initiative? Or is there going to be a CapEx requirement to kind of proliferate the Alkaline88 brand?
Ricky Wright: Well you asked all good questions. So we can explore both, okay? We think that our first trip into the Mexico and that market will actually be a much easier trip than most people experienced. We've got a unique situation. David that I think will allow us to actually get immediate sales and immediate return on investment just because of the way we're negotiating and the company we're working with. The second one will take us a little longer. We have had some discussions with different people in Mexico that obviously how do you build that brand? We think based on their business model that we would do a co-type of arrangement that maybe they'd help us and we'd help them in the states. So that's really where we're thinking about right now.
David Bain: Got it. Okay. So it would be pretty CapEx-light then correct? Is that...
Ricky Wright: Yes it will be very CapEx light. Absolutely.
David Bain: All right. Phenomenal. Thank you so much.
Ricky Wright: All right. Thank you guys. Thanks everyone.
Operator: This concludes tonight's conference. You may disconnect your lines at this time. Thank you for your participation and have a great evening.
