Greetings, and welcome to the Alkaline Water Company's First Fiscal Year 2023 Conference Call. [Operator Instructions] As a reminder, this conference is being recorded..

I would now like to turn the call over to Jeff Wright, Director of Investor Relations. Thank you. You may begin. .

Good morning, everyone, and thank you for joining Alkaline Water Company's First Quarter Fiscal Year 2023 Conference Call. Shortly, you will hear from Frank Lazaran, 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. security 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 applied in making forward-looking statements, and actual results may differ materially from those expressed or implied in such statements.

Additional information about factors 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-Q, which was filed yesterday 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 projection as to the company's future performance represent management's estimates as of today, August 16, 2022.

The company does not undertake to update any forward-looking statements or projections, except as required by applicable laws, including the security 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 the 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 the results discussed on today's call..

In a moment, I will turn the call over to our CEO, Frank Lazaran, who will give you an overview of the company's first quarter highlights. Following Frank's comments, David Guarino, our CFO, will provide an overview of the company's financial results. Frank will follow David again, providing closing remarks.

They will then be joined in the Q&A portion of our call by our Chief Marketing Officer, Tom Hutchison; and Frank Chessman, our Executive Director of Sales and Operations. .

Frank, the call is yours. .

Thank you, Jeff. Hello, everyone, and welcome to the Alkaline Water Company's First Quarter Fiscal 2023 Conference Call. .

Every first quarter in company history, we've been able to say that we are coming off of our best year ever. Today's call is no exception. We're pleased to announce that the momentum from last year has continued through the first quarter of fiscal year 2023, and we have delivered another record sales quarter.

Our top line revenue for our first quarter of fiscal 2023 and was approximately $16.9 million. This represents year-over-year growth of nearly 20%..

This growth rate right out of the gate in the first quarter establishes a great pace toward achieving our fiscal year revenue guidance. These record sales enable us to pivot toward reducing expenses and enhancing margin while still maintaining a keen focus on sales..

Prior to my arrival as CEO, the company had already begun to throttle down some G&A expenses to start the new fiscal year. However, in the last month of Q1, we began our new pathway to profitability, review and evaluation. During that review, we froze all nonessential spending on the G&A side of the business.

As a result of this approach, there was a year-over-year G&A improvement of over 42% in the first quarter of fiscal 2023..

Due to the timing of our full review and the implementation schedule for the rollout of our new cost-saving measures and margin enhancements, we did not anticipate seeing many of the benefits of enhanced gross margin in the first quarter. Building gross margin, while not negatively impacting sales requires a very measured approach.

And as we carefully navigate this, we anticipate seeing gross margin improve more in future quarters..

Last week, we announced that we finished our thorough and extensive review of our entire operation, and we project up to $15 million in annual cost savings and margin enhancements compared to last year once these changes are fully implemented.

Rest assured, while we have completed this extensive review to now focus on the execution of our pathway to profitability initiatives, as additional opportunities arise, we will continue to take full advantage of them.

Brand growth, higher sales volume and future partnerships can all lead to more opportunities that benefit both the top and bottom lines of the business..

We'll continue to implement changes to reduce G&A spending and we'll also begin to see improvement on the operations statement in sales and marketing expense while still investing appropriately in advertising to promote the Alkaline88 brand.

And perhaps most importantly, as I just mentioned, our gross margin will start to climb again as we initiate various changes with our production processes and partners to begin reducing cost of goods throughout the rest of fiscal year 2023 and beyond..

We know that increasing gross margin is essential to the operational future of Alkaline88. Even as we reduced our operating expenses by almost 20% year-over-year in Q1, we also experienced the highest fuel cost in our history, adding to rising inflationary pressures.

Despite company foresight to mitigate these external forces as early as last year, the cost increases associated with the raw materials we use in our production, and increase in shipping and handling clearly outpaced any changes we made earlier this calendar year.

In other words, as paper, plastic and gas prices all surged dramatically, we were unable to respond quickly or extensively enough to maintain a healthier gross margin..

Now after the results of our company-wide review, we are moving swiftly to enact the necessary changes to generate annual margin improvement of up to $7 million compared to last fiscal year.

As we shared last week in a press release, these measures include packaging changes, improved manufacturing efficiencies, pricing and promotional optimization, and production network enhancements to decrease shipping and handling costs. .

Let me reiterate. It is our plan to improve profit while continuing to drive sales, as evidenced by record July sales exceeding last year by nearly 30%. Our packaging changes, which we are working to enact as quickly as possible, we'll use more cost-efficient materials and less of it, allowing us to save money on most of the cases we ship.

Over the course of the year, that savings realized across millions and millions of cases. .

For example, we are looking at things as simple as using brown boxes instead of white to save money on every gallon we ship. An added benefit is that these boxes are more eco-friendly than our current packaging.

We are also going to remove cardboard trays from some of our single-serve cases and rely on a stronger wrap, reducing materials used and cutting cost per case..

As our production partners grow and optimize their processes, we are able to take advantage of their improved manufacturing capabilities. For example, as we and our partners have grown, some of our co-packers can now blow bottles within their own plants, saving us precious cents on every single one.

As these operating efficiencies scale, we will see the cost benefits multiplied across tens of millions of bottles every year..

Pricing optimization is also important, but we want to assure listeners that it's not going to be the primary means by which we will protect our margin. That being said, everyone knows that our costs are up.

And in the future, we will be more proactive about staying ahead of increased costs in our production process as well as better maintaining pace with category price movements..

Promotional optimization means that in contrast to our previous strategy and that of many other CPG companies, which was growth at all cost we will be very strategic in the use of promotional dollars..

Finally, we will see a decrease in shipping and handling costs for 2 reasons. First, we have a strong distribution network with great co-packing partners and raw material manufacturers around the country. Whereas a few years ago, we may have been shipping raw materials across the country to our co-packers.

We now have a much more strategic geographic network of manufacturers, sometimes cutting out thousands of miles on the road. Since the beginning of the first quarter alone, we've added 3 new raw material providers to become a more efficient company.

Our strategic distributed manufacturing network literally cuts costs in half on some of our production steps compared to previous years. .

The second reason we expect to see better margins on shipping and handling is simply the fact that fuel costs associated with each of these miles are beginning to normalize, and we will be seeing the benefits of that in the future. .

In addition to helping improve our gross margin, this same production network will continue to reduce freight costs, lessening sales expenses. Again, in years past, our co-packers might have been 2,000 miles away from a new client. But in order to continue to grow our top line at all cost, we shipped regardless of distance..

Now of course, we still do what it takes to expand our brand into new clients, but we now have co-packing plants within a few hundred miles of most of our clients' key distribution centers around the country. This is a game-changer, allowing us to continue to grow while improving the bottom line. .

We also are working diligently on the logistics of reducing the number of less than full truckloads that are delivering Alkaline88..

So as you can see, improving gross margin is not just about adjusting price. It is about dissecting each and every cost component of goods sold and making changes that are transparent to our retail customers. We announced in Q1 the addition of Century Springs, Alkaline88's first co-packer in the Midwest.

This is a huge advantage for us as we work to gain market share in that region. And we expect them to be at full capacity soon..

And just yesterday, we began production in [ Denman ] in Northern California, which will offer huge support for our brand expansion on the West Coast and Pacific Northwest. .

Management is working closely with department heads and our project management office to track the implementation of all these initiatives and more. Shareholders should begin to see the resulting benefits to our gross margin in Q2 and increasingly in Q3, Q4 and beyond..

New clients, SKU expansion in existing clients and organic growth..

Since April 1, we have added over 8,400 new client locations in the U.S., including many great regional retailers, like Kroger subsidiary Brown East in the Midwest, 1,000 new convenience stores, more than 700 Army and Air Force exchange service locations and 6,000 stores of national discount giant Dollar Tree..

While that's great progress so early in fiscal 2023, our target door list for the rest of the fiscal year has more than 30,000 locations on it. Our sales team is hard at work to close some of those opportunities and sell Alkaline88 on more shelves in grocers, convenience stores, Big Box, Club and specialty retailers across the country.

And as these additional stores come online, we will continue to keep you informed of our progress..

Our C-store growth is supported by our strong network of strategic DSP partners, including our most recent addition, Heidelberg in Ohio and Northern Kentucky. There are over 140,000 C-Stores in the United States, and Alkaline88 is still only in a fraction of them.

This channel represents one of our greatest opportunities for continued market share growth. .

In April, we announced that we have surpassed our forecast for our first year of DSD partnerships. And since then, we continue to add new stores, including most recently, approximately 600 AMPMs on the West Coast. In the same time frame, we expanded our SKUs in over 14,000 existing clients.

CVS has taken our 1-liter 12-pack into approximately 8,000 of their stores from coast to coast. Additionally, we recently announced that Rite Aid has added the Alkaline88 2-liter to over 2,300 stores..

With great national chains like CVS, Rite Aid, Walmart and Dollar Tree, if you are listening to this call in the United States, there's a very good chance, you can find multiple Alkaline88 products within just a few miles of your front door. .

We're also very pleased with the rollout of our first-ever Gallon Club Pack launched in Sam's Club in the first quarter. Our 1-gallon 4-pack has seen sales growth steadily since being introduced.

It's a perfect product for the warehouse club format, and we are exploring ways to continue to capitalize on the Club channel with new clients and innovative packaging as this channel is already proven to be a significant contributor to sales. .

As our retail footprint continues to grow across all channels, we will be able to support that growth in ways that help both our top and bottom lines, thanks to the cost savings and margin enhancement measures that we are taking..

As we mentioned on our last call, the beverage industry will continue to grow, but will experience a slowdown in that growth over this next season. Despite that, we are currently optimistic in Alkaline88's future as 1 of the fastest-growing beverage category in the country, value-added water..

According to Nielsen data for the 13 weeks ending July 16, 2022, for all outlets combined, excluding convenience, Alkaline88's year-over-year dollar growth is more than 3x that of the overall category. Additionally, it was 1 of 3 top 10 brands that had positive year-over-year unit growth for the same period..

Furthermore, Alkaline88 continues to be a leader in the natural grocery channel. We announced in June that Alkaline A was the #1 best-selling at the KeHE holiday show, which took place last month. .

We expect to continue to outpace the overall value-added water category's growth throughout fiscal 2023 thanks to the strength of our brand and drivers that I've already shared with you on this call. .

We expect to do it all more cost effectively as we continue our company-wide initiatives and enhance shareholder value by finding the perfect balance between cutting cost and driving top line sales in this challenging economic climate. .

I'd now like to turn the call over to David for an overview of our financial results for the first quarter.

David?.

Thank you, Frank. Before I begin, I'd like to encourage interested listeners to view the Form 10-Q that we filed with the SEC for a more detailed explanation on some of the quarterly results I will be highlighting today.

For the 3 months ended June 30, 2022, we reported our best quarterly revenue ever of approximately $16.9 million compared to the approximately $14.1 million for the 3 months ended June 30, 2021. This represents a 20% increase in sales. .

Our gross profit for the quarter ended June 30, 2022, was approximately $3.5 million compared to approximately $4.8 million for the quarter ended June 30, 2021. The decrease in our gross margin was attributed to an increase in raw material and shipping costs.

As we've already highlighted on this call, we have proactively implemented a company-wide changes to improve our gross margins going forward..

Total operating expenses for the 3 months ended June 30, 2022, were approximately $9.8 million compared to approximately $12.1 million the same quarter in the prior year. Total operating expenses decreased primarily due to a halt in nonessential general and administrative expenses, where we saw a 42% decrease year-over-year. .

Total operating loss for the quarter ended June 30, 2022, was approximately $6.3 million, an approximately $1.1 million improvement compared to the same quarter in the prior year. Our net loss per share in the quarter ended June 30, 2022, was $0.06 per share, a $0.02 improvement over the $0.08 loss per share in the quarter ended June 30, 2021..

Our cash position at the end of the quarter was approximately $3 million. With our cash on hand plus the implementation of our cost reduction strategy, anticipated warrant exercises, our line of credit and the sales agreement with ROTH Capital Partners as disclosed in our 10-Q, it is our plan to fund our current operations and capital needs.

However, if our plans change or we -- or are accelerated or we choose to increase our production capacity, we may seek to sell additional equity, debt securities or attain additional credit facilities, including seeking investments from strategic investors. .

And with that, I'd like to turn it back to Frank. Thank you. .

Thank you, David. Before handing the call over to the operator for our Q&A, I'd like to take a moment to thank our shareholders, production and distribution partners, clients and of course our fantastic Alkaline88 employees.

We have undergone a rigorous process these past 2 months as we put everything we have into ensuring that the Alkaline Water Company is in a position for continued success, regardless of what the economic headwinds come our way. .

Everyone at this company, from the warehouse to the boardroom, is aligned with shareholder interest because equity is an important part of how we attract and reward talented, hard-working team members..

I think it is worth sharing with everyone on this call that I myself, since day 1 in my role as CEO, and consistent on taking a substantial portion of my compensation in shares and options because I, like the rest of the Alkaline88 employees, believe in this company. .

We all know that change is tough, but the Alkaline88 team has been wonderful in adapting and rallying to the cause as we all collectively work toward not only remaining one of the nation's top enhanced water brands, but also becoming a profitable one at that..

Thank you. Operator, please. .

[Operator Instructions] Our first question is coming from the line of Sean McGowan with ROTH Capital Partners. .

I have a couple of questions.

David, could you help us kind of get an order of magnitude color on the impact on gross margin? Like raw material versus shipping or any other factors in there, which is the most impactful to gross margin?.

The most impactful to gross margin is from raw material to shipping would be raw materials. And the key raw material is the price of resin or plastic. .

Okay.

So to the extent that we're seeing gas prices coming down, we'll see some alleviation of the pressure in shipping, is there anything in your crystal ball that gives you an idea where resin is selling?.

Well, I mean, because resin also tied to oil, that is slowly coming down as well. So we're certainly not seeing the increases what we saw over the past 12 months. And -- so the forward-looking projections we get from our supplier actually shows costs coming down a wee bet. .

Okay. And then Frank, if I look at -- I appreciate that color on where July came up. If I look at your full year guidance, it kind of implies a slowdown from that, certainly, even from the first quarter.

So what are you seeing that's making you think that sales through the balance of the year could be less than what we saw in the first quarter, year-over-year?.

I'm sorry, the first quarter year-over-year was 20% up. July was up 30%. .

But the guidance would imply less than that increase... .

Yes. I'm sorry. Right now, we positioned the original guidance at the $70 million, which at the time, as we indicated on the call, we felt it was very prudent in terms of guidance. We have seen the first quarter being strong, July being very strong. So at this point in time, while we're maintaining our guidance, we'll keep an eye on it.

And if our sales trend continues, we could be in the position to review our guidance to The Street. .

Okay. So you're not trying to make a large statement there, it's not going to be better than that. It could just 1 quarter in. So what you create. Okay. .

And then my last question is this is long term. Assuming that you get growth over the next several years and reach your cost savings and margin enhancement goals, where -- and this is long term again.

Where do you think gross margins could go? Is there kind of a natural ceiling on how high they could get?.

I don't believe it's a natural ceiling. I believe that, as we continue to evaluate every piece of the business. And again, I want to emphasize while we'll look at strategic price changes and promotional spend, we also will be a lot more, I would guess to say, efficient on how we do it..

So I think that from pricing, we do have an opportunity that we will be able to pick up margin there. I think equally as important is that whole raw material situation because I can tell you, as I look forward, the majority of our anticipated growth is not driven from pricing or promotion. It's driven from renegotiating on raw material.

As David mentioned, we're currently looking at all that..

But as the resin went up, we, as an organization, did not react as quickly as we should have. That's hindsight. But what we have done now is we've certainly gone to each of our suppliers, and we've discussed where we believe we need to be on our costing.

And the fact that we now have facilities that blow their own bottles and we've got more facility that will come online to do that, we believe that, that also will increase our gross margin. .

So I would tell you, I'm confident I don't foresee a ceiling on gross margin. I think that how we go after getting the gross margin is going to be the key to keeping our top line growing, which is our priority, but also to push the gross margin. .

So I think that we'll have more clarity after Q2 on how we are seeing the margin grow. As I mentioned on the previous call, we're also tracking that with our PMO office. We have meetings every 2 weeks just tracking and making sure everybody is in line, but weekly updates on that..

So I think that the key thing for us internally, because we become a lot more disciplined, I would tell you, that we are -- we have actually built a bridge on how we see the margin going out. And I'm not prepared to share the bridge-build at this point. But I would tell you, we see a nice trend on a build..

And again, I would tell you, we see us moving gross margin not just raising prices, but by getting the supply chain right. And just simple things like boxes. When you look at the savings potential that we have is something as simple as going from a white box to a brown box. Aside from the equal benefit of that, it's significant opportunities for us..

So I think that we've evaluated every single piece of this. And I have to tell you, the organization is sure had a lot of patience with me because I have a tendency to poke and probe and never say no. So bottom line there is I think we'll just continue to do that. .

So long-winded response, but I'm really excited about what we're doing in the company. I'm excited by every area that we're doing -- I would emphasize. We in everything we can to move margin without hurting top line sales. .

[Operator Instructions] There are no further questions at this time. I would now like to turn the call back over to Frank Lazaran for any closing comments. .

Thank you. In closing, I would like to thank everyone for dialing in today. These are very exciting times for all of us here at Alkaline88 as we transform our company to not only being sales-driven, but also pivoting to a true pathway to profitability which we highlighted today. .

During the first quarter, while we were only 30 days into our exhaustive review of company operations, we were able to show positive results in our G&A expenses.

Now that our extensive pathway to profitability review is complete, we have begun the task of implementing the many initiatives we have outlined and are tracking them all through our project management office..

We have developed a bridge to build to each component necessary to drive gross margin without having a negative impact on sales. We anticipate seeing a steady build on margin rate beginning in Q2 and beyond. As we have previously stated, we will continue to keep you informed of our progress along the way. .

Once again, thank you for joining us today and for your continued support and interest in the Alkaline Water Company. Thank you, and have a great day. .

This does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day..