Flow: Virginia Facility Sale Sets Company on “Path to Profitability”

Flow Beverage Corp. CEO Nicholas Reichenbach said this week’s sale of the company’s Verona, Virginia production facility to sports drink maker BioSteel is primed to create a “path to profitability” for the Canadian alkaline water company.

The alkaline spring water brand announced Tuesday it had entered a definitive agreement with BioSteel, a subsidiary of Canadian cannabis conglomerate Canopy Growth Corporation, to sell its 55,000 square foot Verona manufacturing plant in a deal valued at $19.5 million ($13.2 million in cash and $6.3 million in debt). Flow products will continue to be manufactured at the facility under a co-packing agreement with BioSteel, which also uses Tetra Pak cartons for its beverages.

Speaking with BevNET on Wednesday, Reichenbach said the divestment will remove one of the leading sources of Flow’s cash burn and is likely to “greatly improve” P&L and adjusted EBITDA for 2023.

Citing a difficult fundraising environment on the Toronto Stock Exchange, where Flow is publicly traded, he noted that the sale also allows the company to direct resources back into the business and restructure the balance sheet heading into 2023.

“We’ve now eliminated the cost structure issue, we’ve capitalized the business with cash and we’ve increased our margin profile,” Reichenbach said. “So every dollar we get in, we’re maxing it out. So it basically fundamentally changes the way that our P&L and balance sheet look in the future and it really strengthens the company moving forward.”

Flow first opened the Verona facility in 2019, investing $15.5 million into the site. The plant currently has about 75 full time employees who will be retained by BioSteel following a 90 day transition period, Reichenbach said.

BioSteel first began co-packing its products at the plant in 2020 through an exclusive partnership with Flow that allowed the water brand to invest around $20 million into expansions to facilitate significant scaling for BioSteel over the past two years. Reichenbach said the company has added numerous new machines to the site in that time, including tubular sterilization devices.

Now, Reichenbach said the two companies are effectively switching places through the sale, with Flow entering a three-year exclusive co-packing partnership to continue using the facility for the foreseeable future. He noted that, as a subsidiary of a multi-billion dollar company, BioSteel will be able to invest more deeply into the site to continue expansion.

The new co-packing agreement, he added, is poised to help Flow increase its margin profile as pricing outputs and the cost of goods are stabilized.

While Flow may be saying goodbye to one major asset, the company is retaining other key properties including its 114-acre artesian spring in Virginia and a production facility in Ontario, Canada where the company intends to increase its co-packing business going forward.

“When we started talking about the long term view of our contract, and their desire to expand in the U.S. rapidly, it became very clear that they were the partner of choice for us to partner with by selling them the facility … flipping the script on co-packing and allowing us to have the same favorable rights that they’ve had to be able to build their market share in the U.S.,” he said.

In its Q2 FY2023 earnings report Wednesday, Canopy Growth announced net revenue in the quarter fell 10% to $118 million. However, net revenue of BioSteel increased 299% to around $30 million as U.S. ACV rose to 34%, up from 6.5% the year before, with new retail gains in Walmart, Rite Aid and Winn Dixie among others. In Canada, the brand increased its sports drink market share to 7.4%.

“The acquisition of this facility from the brand’s existing contract manufacturer will support the rapid growth strategy and expansion of U.S. footprint for BioSteel,” Canopy Growth CEO David Klein said on the earnings call. “This is a natural next step for the brand and creates additional business value as BioSteel continues its accent to the top of the sports hydration category.”

During its Q3 earnings report in September, Flow reported a strong return to growth with consolidated net revenue up 36% year-over-year to CAD$12.7 million, following a double-digit decline in the second quarter. At the time, the company noted that new production lines at the Verona facility were being “under-utiliized.”

Looking ahead, Flow is keeping its focus on increasing sales and growing distribution across North America, including retail expansion, according to chief revenue officer Tim Dwyer. The brand is currently sold in around 36,000 doors, of which roughly 8,000 are in Canada, and has already secured a number of new activations set to launch in the coming months including Winn Dixie in the Southeast.

New innovations such as Flow’s vitamin-infused line will be a key part of the company’s growth strategy next year, Dwyer added, noting the functional product has tested well in retailers like Fred Meyer where it will launch chainwide in Q1, as well as a bulk of Flow’s Canadian accounts. As well, foodservice is another top priority for the company.

“As an organization we are super bullish that we’re in a lead position [in food service] with some managed service agreements that are going to be coming forward,” Dwyer said. “We see a strong opportunity within food service to be a leader within sustainable formats, in a premium way, with a quality water.”