The Alkaline Water Company Inc.’s (TSXV:WTER) expansion nationally as well as vertically will increase the products shelf space and help drive sales
SmallCapPower | November 8, 2019: The Alkaline Water Company Inc. (TSXV:WTER) (NASDAQ:WTER) is a producer of premium bottled alkaline drinking water sold under the brand name Alkaline88®. With its innovative, state-of-the-art proprietary electrolysis process, the Company produces healthy, all-natural and great-tasting alkaline water for a balanced lifestyle. To learn more about The Alkaline Water Company, please visit www.thealkalinewaterco.com.
Recent Highlights
On September 9, 2019, The Alkaline Water Company announced that it would acquire all outstanding common and preferred stock of AQUAhydrate. AQUAhydrate is a performance lifestyle company that manufactures premium bottled water. The agreement was an all-stock deal for 19,565,217 common shares and 3,750,000 preferred shares of Alkaline (preferred shares subject to earn-outs). Management believes the transaction to be synergistic and accretive and is estimating pro forma revenue of $65.0M for F2020E. Of note, some major shareholders in AQUAhydrate include Mark Wahlberg, Sean “Diddy” Combs, and Matthew Howison of Emerald Partners, who have invested a combined $20.0M into the development and growth of AQUAhydrate.
On August 8, 2019, Alkaline Water reported Q1/20 financial results, highlighted by revenue of $10.2M, an increase of 28.8% YoY and gross profit of $4.1M with gross margins at 41%. This follows an announcement from July 1, 2019, when the Company reported F2019 revenue of $32.2M, which is a 62.5% increase over F2018, and gross profit came in at $12.9M for F2019. Management also provided F2020E guidance, with annual revenue expected to come in between $46M to $50M with an estimate gross profit of between $18M to $20M.
On May 21, 2019, the Alkaline Water Company announced its new agreement with Premier National Food Distributors (Premier DSD). This partnership will aid the Company in strengthening its presence in the convenience store channel in the Northeast market. It is expected the partnership will have a large impact on the Company’s direct store delivery and on-shelf availability in these key markets.
On April 9, 2019, Alkaline announced its launch of home delivery options for Alkaline88 through a strategic partnership with one of the largest home delivery providers in the U.S. The Company will offer 1-gallon and 3-liter sizes of Alkaline88 for customers across California.
Investment Thesis
Alkaline’s expansion of its national footprint, and development of new verticals such as home delivery, convenience and e-commerce channels (Walmart and Amazon) will increase its market share and customer touch points. The International Bottled Water Association has estimated that the home and office delivery segment makes up about 12% of the bottled water market. We believe if Alkaline also offered its soon-to-be-released hemp water and flavored water to the home and office delivery they would gain a distinct competitive advantage. In our opinion, buying water is heavily impacted by the convenience of the product. The Company’s expansion nationally as well as vertically will increase the products shelf space and help drive sales. The acquisition of AQUAhydrate should also help to attract a more diverse customer base, offering product differentiation to become a major player in the CBD beverage sector.
The signing of the U.S. Farm Bill into law by President Donald Trump on December 20, 2018, ended a five-decade-long ban on industrial hemp, which will permit nationwide legal hemp production. This legalization will allow Alkaline to legally begin its hemp extract line. As the Company already has its production facilities established, we expect it will give them an advantage in capitalizing on the CBD-infused beverage market. This has the potential to be an extremely lucrative market, as it is predicted that the CBD beverage space could generate total revenue of approximately US$4.5B by 2025 with a CAGR of about 15.6% between 2019 and 2025 (Zion Market Research, 2019).
The Company’s patented name incorporating ‘Alkaline’ as well as its expansion of offerings in the health and wellness market will give them an advantage in capturing the growing, naturally-sourced health product trend. Alkaline’s ionized water provides users with many health benefits, such as being detoxifying, restores pH balance by lowering acidity levels, mineral rich and acts as an antioxidant. As health trends are becoming more important to people, we believe the Company’s association with Alkaline will help drive sales.
Overview of Operations
Figure 1: Alkaline Water Company Product Formats
Source: Corporate Presentation, Ubika
Alkaline Water Co Inc practices marketing, manufacturing and distribution of bottled alkaline water for retail consumers that is available in 500mL, 700mL, 1-liter, 3-liter and 1-gallon sizes. The Company utilizes an electrolysis process that has specialized electronic cells coated with an assortment of rare earth minerals to produce its 8.8 pH drinking water. This proprietary technology is scalable and transferable, and no manmade chemicals are used in the process. Additionally, the water production incorporates 84 trace minerals from Himalayan pink rock salt. The Company believes what differentiates its product to its customers is the taste profile, and the preconceived health benefits (those of which they do not advertise the product to have). As of May 14, 2019, the Company was ranked as having the 10th highest water in dollar sales in the U.S. enhanced water segment, as it outperformed the enhanced water segment in the U.S. XAOC channel by 7.8 times their segment growth rate of 12.1%.
Figure 2: Alkaline Water Company: Retail Partners
Source: Corporate Presentation, Ubika
The Company’s products are available for purchase in all 50 states and the District of Columbia, but over 50% of its sales come from the Southwest and Texas. Alkaline distributes its products through multiple channels. The Company sells to large national distributors, including UNFI, C&S, KeHE, and Core-Mark. Additionally, they sell to retail clients such as retail conveniences store, natural food products stores and national retailers.
Alkaline’s operating subsidiary focuses mainly on marketing, distribution and manufacturing. The subsidiary has currently entered into a co-packing agreement to act as co-packers for its product with eight different bottling companies in Virginia, Georgia, California, Texas, Nevada and Arizona. All of the Company’s plants exceed approximately $8.3M per month wholesale.
Expansion Plans
The Company formed A88 Infused Beverage Division, a wholly-owned subsidiary operation located in Nevada. The focus of this subsidiary is to design innovative products for the wellness water category. To prepare for the new product line, the Company announced in January 2019, that it has increased its packaging capabilities with an agreement with Nevada-based Western Group Packing, which will produce flavored water products and its planned hemp extract-infused water product. The Western Group Packing has 150,000+ square feet of facility. The hemp extract infused line is contingent on the U.S. Food and Drug Administration, state laws, regulations. The hemp extract line will be marketed under the trademark SootheTM. The Company has planned to offer the option of sparkling water in a can or flat water in a bottle that will be low in, or have no, calories and be available in five flavors.
Overview of Management
Richard A. Wright, President and CEO
Mr. Wright offers extensive working knowledge from most areas of finance, and throughout his career has taken part in over 100 mergers or acquisitions and consulted for over 5000 companies on sophisticated tax and financial planning problems.
David Guarino CFO, Secretary, Treasurer
Between 2014 and 2015, Mr. Guarino was President of HTI International Holding, Inc., a technology company that creates forward osmosis water filtration technology. He was also a consultant for Alkaline between 2015 and 2017.
Frank Chessman, Director of National Sales
He has over 10 years of experience in the beverage manufacturing industry. Previously, Frank spent 25 years at Ralph’s Grocery as VP of Advertising & Marketing and later spend 14 years at Simon Marketing as Executive Vice President.
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