Flow Beverage Corp. announced a 21% decline in consolidated net revenue to approximately $9 million in Q2 FY2022, compared to $11.3 million the previous year.
The double-digit slide led the company to downgrade its full year net revenue growth projection to 25% to 30% for 2022, but it is maintaining a second half growth target of 45% to 55%, citing new food service contracts and plans to drive sales at its 36,000 retail accounts.
Gross margin in the quarter was 12%, compared to 35% in Q2 2021. Year-to-date gross margin was 20%, versus 32% in the previous year. Year-to-date consolidated net revenue was up slightly year-over-year to $20.8 million, compared to $20.3 million in 2021.
“During the second quarter, Flow brand growth remained strong through our e-commerce platform and in the gas and convenience channel in the Canadian market,” CEO Nicholas Reichenbach said in a statement. “During this period, Flow also made investments in trade spend in the U.S. retail market ahead of the revenue growth curve that have added points of distribution. Although the Company has revised its growth targets, we expect velocity at these new stores to improve as our relationships with new partners mature and summer activation programs take effect. Furthermore, the operational efficiencies and cost reductions we have implemented have set us on a path of continued improvement towards profitability.”
The earnings report comes on the heels of Reichenbach returning to the CEO position after chief executive Maurizio Patarnello abruptly resigned earlier this month, citing a desire to spend more time with his family in Europe. Patarnello, who previously served as the CEO and chairman of Nestlé Waters, joined Flow last year ahead of the company’s IPO on the Toronto Stock Exchange and is remaining with the brand as a strategic advisor to the board of directors.
In addition to declining sales for Flow branded waters, the company also cited lower demand for its co-packing services at its Virginia manufacturing facility, which resulted in “under-utilization of new production lines added in Q4 2021,” while higher shipping costs offset improved efficiencies in raw materials and packaging.
Flow reported an EBITDA loss of $8.5 million in Q2, a 49% improvement year-over-year, and a loss of $16.4 million year-to-date, a 38% improvement from last year. The company cited “significant reduction in stock-based competition” and “decreases to sales and marketing and salaries and benefits expenses” as driving the improvement. Overall, the company said it has reduced capital expenditures by $4.2 million year-to-date, an 86% decline year-over-year.
On an earnings call yesterday, Reichenbach acknowledged the sales report was disappointing, but focused on how the company plans to turn around declines in the second half of the year by utilizing its expanded distribution footprint and rolling out new functional innovations.
Speaking to BevNET, Reichenbach said the trend for sustainably packaged water is working in Flow’s favor, citing Quads Trended Report data that showed the segment has grown 80% year-over-year. He also pointed to Flow’s status as the top selling brand in Tetra Pak carton water subspace, where the brand has 46% market share in MULO and natural, overtaking chief competitor JUST Water, which has a 40% share.
“The numbers are starting to add up to something that’s meaningful,” he said.
In a separate discussion today, Flow chief revenue officer Tim Dwyer said that although sustainably packaged water is continuing to grow, the segment is still underrepresented in the marketplace, stating penetration is under 30% in the North American market.
“Where it’s a mission led requirement, whether it’s from the consumer or the client – foodservice, travel – people are expecting those solutions, and those are areas that continue to drive more traffic,” Dwyer said. “Conventional, where COVID has [led to slow] category reviews, to catch up to the assortment demands of the future consumer or the consumer of today, those have been areas where it’s been slower to see these formats entered into the marketplace. When you look at where we are, sustainability is not equally weighted everywhere.”
Dwyer cited “COVID hangover” as a leading cause for the brand’s poor quarter, noting that consumers are not fully back at work resulting in fewer grab-and-go purchases. He noted that Flow added 10,000 new points of distribution at the end of 2021, including accounts like Costco Canada and Dollar General in the U.S., and said the company will work to double down on those new accounts with increased sales support.
As well, Flow recently signed exclusive contracts with North American and Caribbean hospitality group Accor and Norwegian Cruise Line.
However, beyond the carton water segment, sustainably packaged water brands have seen significant expansion this year. As of January, canned water brand Liquid Death was in around 29,000 retail stores nationwide and reported 300% year-over-year topline revenue growth of around $45 million.
While he acknowledged competition with aluminum and glass packaged water brands, Dwyer emphasized Flow’s ability to dominate the Tetra Pak packaged space, highlighting the brand’s high quality water and more limited competition within the segment.
“If you look at glass and aluminum the barriers to entry are very limited,” he said. “Anybody can go out there and find line time and find a water source to package aluminum and glass. With Tetra [there’s not] really the capacity to do that, and the advantage for us is there’s less players.”
Flow is also looking to further differentiate itself through the upcoming launch of its vitamin-infused line, as there are even fewer sustainably packaged enhanced water options available. The line was initially announced last year and is not set to hit stores in the U.S. at the end of the month and Canada in fiscal year Q4. The new line will help Flow expand its presence in existing retail partners such as Kroger and Sprouts.
As for manufacturing and co-packing, Dwyer said the industry wide supply chain disruptions have had an impact on Flow’s customers, as companies struggle to procure raw materials to go into production. Flow has worked with many of its customers to secure ingredients and resume manufacturing, but Dwyer cautioned that they “can only control a piece of the puzzle.” However, as the supply chain outlook improves for many brands, Dwyer was confident that the co-packing business will rebound.
“We have worked really hard with those partners to enhance and streamline some of their challenges on the supply chain,” he said. “We’re super confident that now as we move forward, those supply chain challenges are behind us.”