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AW

ALKALINE WATER Co INC (WTER)·Q1 2023 Earnings Summary

Executive Summary

  • Record revenue of $16.9M, +20% YoY, with net loss per share improving to $0.06; G&A cuts drove a 19% YoY reduction in total OpEx and 42% YoY decrease in G&A spend .
  • Management initiated a Pathway to Profitability with up to $15M annual savings identified (packaging, production, pricing/promotions, freight), with gross margin improvement expected to begin in Q2 and build through FY23 .
  • July sales were approximately +30% YoY, and FY23 revenue guidance of $70M was maintained, with management open to reviewing guidance upward if the trend persists .
  • Near-term catalysts: club-channel expansion (Sam’s 590 clubs), new co-packer capacity (Midwest and Northern California), and broadened DSD footprint; resin and fuel cost normalization should alleviate cost pressures over coming quarters .

What Went Well and What Went Wrong

What Went Well

  • Record revenue quarter: $16.9M, +20% YoY; “momentum from last year has continued,” establishing pace toward FY23 guidance . “Record July sales exceeding last year by nearly 30%” .
  • Aggressive cost actions: Total OpEx down ~19% YoY and G&A down ~42% YoY; CEO: “we halted virtually all non-essential G&A spending in Q1” .
  • Strategic execution: Identified up to $15M annual savings; initiatives include packaging changes, on-site bottle blowing, optimized promotions, reduced freight miles; “we anticipate seeing gross margin improve more in future quarters” .

What Went Wrong

  • Gross profit declined to $3.5M vs $4.8M YoY; margin pressure from raw materials (resin) and shipping/fuel; CFO: “the decrease…was attributed to an increase in raw material and shipping costs” .
  • Highest fuel costs in company history and surging paper/plastic costs outpaced prior mitigations; “we were unable to respond quickly or extensively enough to maintain a healthier gross margin” .
  • Consensus estimates unavailable via S&P Global this quarter, limiting beat/miss analysis; see Estimates Context section (consensus not retrieved due to SPGI request limit).

Financial Results

MetricQ3 2022Q4 2022Q1 2023
Revenue ($USD Millions)$15.1 — (Mgmt said “strongest sales quarter yet”) $16.9
Gross Profit ($USD Millions)$5.0 — $3.5
Total Operating Expenses ($USD Millions)$15.9 — $9.8
Diluted EPS ($USD)($0.10) — ($0.06)

Notes:

  • Q4 2022 values were not disclosed in the available press releases/transcripts; management characterized Q4 as the “strongest sales quarter yet” .

KPIs and Operating Metrics

KPIQ3 2022Q4 2022Q1 2023
New doors added“Thousands of new C-store locations via DSD (over 1,400)” +600 Circle K, +400 Stop & Shop, +220 Meijer Express, +80 NEX +8,400 new client locations since Apr 1; ~6,000 Dollar Tree, ~700 AAFES, +1,000 C-stores; Brown East (Kroger subsidiary)
SKU expansionsRetailers targeting nearly 15,000 SKU adds next 6 months CVS added multiple new SKUs SKU expansions in over 14,000 existing clients
Club channelSam’s: 1L 12-pack in 587 clubs —Sam’s: 1-gallon 4-pack in 590 clubs
DSD partnershipsHensley, Nevada Beverage, Mahaska rollouts Columbia Distributing (PNW), Bill’s (Alaska); Heidelberg announced Heidelberg expanded in OH/N. KY; continued C-store growth
Co-packers footprintDistributed co-packers added; minimized supply chain issues AZ Custom Bottled Water (Phoenix); Midwest and NorCal coming online Century Springs (Midwest) live; Denman (Northern CA) began production
Cost actionsPrice +9% for FY23; margin +3–5% expected Pathway to Profitability: $4.5–$5M annual benefits identified; >$2M implemented Pathway to Profitability: up to $15M annual savings identified; G&A down 42% YoY

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
Revenue ($USD Millions)FY 2023$70 $70 (maintained; may review upward if trend persists) Maintained
Annual Cost Savings Run-Rate ($USD Millions)Ongoing~$7 identified (preliminary) Up to ~$15 identified Raised
Gross Margin TrajectoryFY 2023+3–5% margin improvement expected with pricing/freight/raws actions Margin improvement expected to begin in Q2 and build in Q3/Q4 Timing clarified

Earnings Call Themes & Trends

TopicPrevious Mentions (Q3 2022, Q4 2022)Current Period (Q1 2023)Trend
Supply chain & freightDistributed co-packers and suppliers minimized disruption; freight distances reduced Fewer miles via network; fuel costs normalizing; fewer LTL shipments Improving cost environment
Pricing & promotions~9% price increase across banners for FY23; margin +3–5% expected Pricing optimization not primary lever; more strategic promos Strategic, less promo-driven
Raw materials (resin)Locked-in raw materials; inflation pressure acknowledged Resin tied to oil easing; supplier projections show costs “coming down a wee bit” Easing cost pressure
DSD expansionHensley/Nevada/Mahaska launched; +1,400 C-stores Heidelberg expansion; C-store remains major growth opportunity Expanding footprint
Club channelSam’s 587 clubs (1L 12-pack) Sam’s 590 clubs (gallon club pack) Growing presence
Profitability program$4.5–$5M annual benefits identified and PMO tracking Up to $15M total savings identified; gross margin build to start Q2 More ambitious savings
GuidanceFY22 $62M reiterated ; FY23 $70M issued FY23 $70M maintained; possible review upward Stable, potentially higher

Management Commentary

  • “Our record revenue of $16.9 million…represents 20% year-over-year growth…record July growth of approximately 30% YoY puts us firmly on track to achieve our fiscal year revenue guidance while focusing on our new Pathway to Profitability.” — Frank Lazaran, CEO .
  • “We project up to $15 million in annual cost savings and margin enhancements compared to last year once these changes are fully implemented.” — Management on Pathway to Profitability .
  • “We anticipate seeing gross margin improve more in future quarters…shareholders should begin to see the resulting benefits to our gross margin in Q2 and increasingly in Q3, Q4 and beyond.” — Prepared remarks .
  • “The most impactful to gross margin…would be raw materials. And the key raw material is the price of resin or plastic.” — CFO Q&A .

Q&A Highlights

  • Gross margin drivers: Raw materials (resin) were more impactful than shipping; resin costs tied to oil are easing per supplier projections .
  • Guidance posture: FY23 $70M maintained, with management willing to review upward if sales momentum persists (Q1 +20% YoY, July +30% YoY) .
  • Long-term margin outlook: No “natural ceiling” per management; margin build expected via supply chain, packaging, bottle blowing on-site, and selective pricing/promotions; more clarity expected after Q2 .

Estimates Context

  • Wall Street consensus (S&P Global Capital IQ) for Q1 2023 EPS and revenue was unavailable due to a request limit error during retrieval. As a result, beat/miss analysis versus consensus cannot be provided for this quarter. Default source would be S&P Global; unavailable this period.

Key Takeaways for Investors

  • Revenue trajectory remains strong (record Q1, +20% YoY; July +30% YoY), with maintained $70M FY23 guidance and the potential for upward revision if momentum continues .
  • Operating discipline is visible: ~19% YoY reduction in total OpEx and 42% YoY G&A reduction; expect incremental gross margin recovery starting Q2 as cost initiatives take hold .
  • Structural initiatives (packaging simplification, on-site bottle blowing, freight distance reductions) should deliver tangible COGS relief and margin expansion over coming quarters; resin/fuel normalization adds tailwinds .
  • Channel execution is broadening (club pack in 590 Sam’s, CVS SKUs, Dollar Tree, AAFES, C-stores via DSD) supporting unit growth and scale efficiencies .
  • Near-term monitoring: Q2 margin progression, resin/fuel cost trends, DSD rollout pace, and any guidance revisions; absent consensus, focus on sequential margin recovery and cash runway (cash ~$3M, LOC $10M) .
  • Trading lens: Positive setup on cost normalization plus visible cost actions; watch for delivery of margin build in Q2/Q3 and additional doors/SKUs as catalysts to sentiment and liquidity .
  • Risk flags: Inflation persistence in raws/freight, execution risk on savings initiatives, capital needs if growth accelerates beyond current capacity; management flagged potential need for equity/debt/credit if plans change .