Flow Beverage Corp.

Good morning, everyone. Welcome to FLO Beverage Corps' fourth quarter and year-end 2021 financial results conference call. As a reminder, this conference call is being recorded on January 31, 2022. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question and answer session. instructions will be provided at the time for research analysts to queue up for questions. We ask that all callers will limit themselves to two questions and return to queue. I will now turn the call over to Devon Pennell, Chief Financial Officer. Please go ahead, Devon.

Thank you, operator. Good morning, everyone, and thank you for joining us today. Flo's fourth quarter and year-end 2021 financial results were released this morning. The press release, financial statements, and MDA, MD&A are available on CDAR, as well as the company's website, investors.flohydration.com. Before we begin, I'll refer you to slide two of our presentation, which contains our caution regarding forward-looking statements. I'm joined on the call today by Nicholas Richenbach, Flo's founder and executive chairman, and Maurizio Paternello, Chief Executive Officer. I will now pass the call over to Nicolas.

Good morning, everyone, and thank you for joining us today. Flo is one of the fastest growing premium water companies in North America. Founded in 2014, Flo's mission since day one has been to reduce environmental impact by providing sustainably sourced, naturally alkaline spring water in a sustainable 100% recyclable and up to 75% renewable plant-based package. Today, the brand is B Corp certified with one of the best in class scores of 126.5, offering a line of diverse health and wellness orientated beverages, naturally occurring alkaline spring water, an award-winning line of organic flavored water, and are collagen-infused flavors in size ranges from 330 ml to 1 liter. All products contain naturally occurring electrolytes and essential minerals and supports FLOW's overreaching purpose to bring the wellness to the world through the power of positive water. Looking back on the fiscal 2021 the flow brand made tremendous progress and we achieved several milestones that will propel our company through the next leg of its growth in addition to record revenues in 2021 we also achieved an incredible operational milestone over a hundred million packs produced this is a remarkable achievement by our team and demonstrates the traction of the Flow brand and that our infrastructure is in place to support future growth. As you all know, we also became a public company in July 2021, listing on the Toronto Stock Exchange after successfully raising $98.9 million. Once again, we would like to thank our shareholders for their support every day we feel to to make the progress in improving Flow's KPIs and driving shareholders' value. We ended 2021 with almost 25,000 points of distribution across North America. While our store count isn't the primary metric we use to measure the success of the business, It does indicate that our DSD, direct store delivery strategy, we implemented in April 2021, is quickly gaining traction. Our DSD strategy is meant to complement Flo's internal sales team to reach thousands of grocery, drug, convenience, and franchise stores located across North America that are not currently carrying our products. remember a key pillar of our strategy is adding these products into traditional grocery and convenience locations our dsd partners added over 4 000 locations across the united states of america in 2021 a big contribution in less than a year with most of these partners additionally Our increasing brand recognition in Canada has driven higher and higher rates of sales, velocity, which has allowed us to enter into gas and convenience channel in a significant way. The execution of our strategy is being led by Mauricio, who we appointed as the Chief Executive Officer in early 2021. having been recently or previously appointed as the CEO and Executive Director of Nestle Waters. With over 30 years experience in CPG and 20 years running highly successful bottled water operations, Maurizio is the right person to lead the team as we scale. Maurizio will provide more details on our operational progress later in the presentation, but I would like to highlight that he has been very successful at driving velocity at sales, which means we have more and more repeat buyers of flow products. He is also responsible for our strategic framework, which gives our team clear goalposts for how we measure the success and where we focus our efforts. Looking forward, our opportunity remains abundant. We have only scratched the surface on accessing traditional retail channels. We have a very strong innovation pipeline to access new segments of the water market. Our e-comm business is going very well, and the macro trends supporting our growth will continue unabated. With that, I will pass the call over to Maurizio.

Thank you, Nicolas, and good morning, everyone. I'll begin my presentation today with an overview of our financial highlights for fiscal year 2021 and Q4 2021. Flow remains one of the fastest growing brands in North America. Recent data shows that Flow brand grew 83% in the US multi-outlet channels in 2021, and 92% in the Canadian Food and Drug and Mass channel. The driver of the growth in the U.S. multi-outlet market is increasing velocity as we focus our resources in in-store activations and promotions and introduce new multi-unit SKUs. In Canada, higher All Commodity Value, ACV, drove our results. Since we have been in the Canadian market a couple of years more than in the U.S., our brand has developed a lot of consumer recognition, and this makes it easier to enter gas and convenience stores and hit the ground running. In fiscal year 2021, net revenue increased 86% as compared to prior year, and net revenue increased 74% in Q4 2021. Net revenue growth was driven by flow-branded product sales in retail and e-commerce channels across North America and a very strong year for co-packing, especially in Q2. Net revenue growth of flow-branded products is one of the most important metrics to measure our success. Flow-branded retail and e-commerce net revenue increased 47% in fiscal year 2021. This growth rate accelerated in 2024, increasing 69% as compared to the prior year. The drivers contributing to accelerated net revenue growth in the retail channels are the loss in the U.S. market and growth in Canada through increased all-commodity value, ACV. Our e-commerce sales benefited from improved direct-to-consumer performance in both the US and Canada. We made significant gross margin improvements relative to 2020 as well, increasing to 26% in fiscal year 2021 and 21% in Q4. With a high growth volume for floor products and co-packing, we were able to improve assets utilization and we are getting more efficient on production runs. Additionally, our unit costs are remaining stable. We first shared our strategic framework during our Q3 call, and I will now take you through some updates, including our update financial targets for fiscal year 2022. We have increased our target for slow branded products revenue in fiscal year 2022 from a range of 35 to 45 to 45-55. We are very encouraged by the performance of the brand in both Canada and the U.S. through both retail and e-commerce channels. In Q4, we saw an increase in number of doors and a significant increase in velocity across the U.S. In fiscal year 2022, our plan is to drive ACV growth to over 30% in the U.S. as a result of three drivers. increasing the number of large-format natural and food truck mass retailers, increasing penetration with independent regional retailers through DSD relationships, and continued penetration of the convenience store channels in both the U.S. and Canada. Going forward, we'll be approaching co-packing on an opportunistic basis. We are convinced that the real value in the flow is in the flow brand. The co-packing business is a separate business model, but we do have capacity to employ in order to help absorb fixed costs as long as the margins are appropriate. We are confirming our target to reduce ABD day losses by 45-50% in fiscal year 2022. This is a top strategic priority for our company and it would be driven from increased gross profit and a focus on discipline cost management. Lastly, we are also focused on improving capital efficiency. This has two components. First, we expect to improve net trade working capital through discipline in account receivables and inventory management. Second, we have been very selective in capital expenditure, especially considering that our infrastructure is already in place. Next, I'll turn to some trends in the shelf-stable water in our key channels. I'm happy to report that all key trends continue to be favorable for flow. The shelf-stable water market in North America is currently over $14 billion, and it grew over 10% last year. The fastest-growing segments within shelf-stable water are enhanced and flavored. This is where flow competes. These two segments are growing 19% and 13% respectively, and these trends are expected to maintain in 2022. We have said before that FLOW is benefiting from strong tailwinds in the premium, sustainable and functional enhanced water segments. Growth in all these three segments has further accelerated in recent months. The colored lines in the presentation represent the segments that we mentioned. And you can see that premium is growing at a rate of over 20% Sustainably packaging water is growing now at over 50% and functional enhanced water is growing at the rate close to 20%. These three trends are very encouraging for our outlook for the Flow brand and support our increased outlook for net revenue growth. Moving on to our performance with our core channels. As I stated earlier, Flow grew 83% in the US multi-outlet channels and this is all velocity driven from increased brand awareness, in-store activations, promotions and our multi-pack products SKUs. Flow is growing at almost double the rate as the next highly growing direct competitors brand in this channel. Our ACV was flawed in the U.S. MULO channel, and I will discuss this shortly. Flawed growth in the U.S. natural channel has also rebounded to become in line with its primary competitors. Again, Velocity is the big contributor here. The natural channel has been a challenge in the last two years as people have migrated outside urban areas where natural stores are generally located as those customers change their purchasing habits online. Turning to Canada, flow is also showing solid progress. In Canada, ACV is the driver as our brand recognition has allowed us to pick up big retailers' wins in the gas and convenience channels. Looking at some key metrics with Whole Foods, this shows also an example of how increased SKU per door drive results. As you can see, for the 52 weeks ended in December, Flow experienced 31% growth in value versus 21% growth in volume. This is a function of introducing the multipath to a market that is already familiar with our single-service GU to drive incremental sales. We are also very encouraged by the velocity at Whole Foods, which grew 84%. As Nicolas mentioned, we ended 2021 in almost 25,000 points of distribution. We had a number of new authorizations in the year and we are very encouraged by the success at Target and Publix in particular. We are also in over 50 BJs locations as well. The reason why our ACV was unchanged in the U.S. Moodle channel was that we experienced some losses over the year. In 2022, we had three months listing with Sam's to run a short-term promotion for flavor products, similar situation with Albertson Safeway. Both short-term listings were not renewed in 2021, but we are actively discussing with Sands and Albertson on how to approach the relationship in a more structured way over the long term. Looking at Walmart, we went from 1,100 stores in 2020 to approximately 400 in 2021. When we first launched in 2020, we noticed velocity was not consistent across the points of distribution. Flow tended to perform better more in urban areas, so we kept the products on shelf in those higher performing locations. And in Q3 2021, we took the initiative to get out of stores with lower velocity, particularly rural locations. We have regrouped with Walmart to support new stores through merchandising and brand new store activation where we can maintain elevated velocity. In Canada, we had very strong performance in the convenience stores and gas channel, adding Circle K and Couch Start in Quebec. This represented over 2,400 additional doors in 2021, and we reiterate that our success in the gas and convenience channel is because we have developed a brand that is gaining awareness so that we can enter these small locations and deliver high velocity without strong in-store activations. Here is the breakdown of our current store count. We have highlighted the contribution of just over 4,800 stores in the U.S. that we can attribute to the DSD, Direct Sale Distribution, rollout. In Q2, we introduced our direct sales distribution strategy, and this was really important because in 2021, the larger accounts have generally been slowed with the new authorization due to COVID. Our DSD partners have been very effective at hiding new and smaller locations that we would not otherwise be able to cover without our DSD partners. Again, in Canada, you can see how important were the convenience stores as a driver contributing almost 2,500 additional locations in 2021. Looking forward, we have three pillars that will drive our growth. First, as I mentioned earlier, ACV in the US is expected to be the big driver in 2022 because of increasing the number of large-format natural and food drug and mass retailers, increasing penetration with independent regional retailers through DSD relationships, and continued penetration of the convenience store channels in both U.S. and Canada. Velocity will also still be a factor in the U.S. multi-outlet channels and Canadian food and drug and mass. Since 2021, we expect a continued impact from multipath SKUs in store activation and brand awareness initiatives. Turning to e-commerce, we have two sub-channels, Amazon and direct-to-consumer through flowhydration.com. We plan to increase subscribers through paid media, generating high traffic and partners like New York Marathon, Lifetime Fitness, and SoulCycle. We also have plans to increase the average order value through bonding and other upsell tactics, encouraging customers to buy higher amounts of our products. Lastly, we are introducing loyalty programs and promotions, as well as perfecting the service experience to drive repeat purchases. Our third pillar of growth is new opportunities. We still believe there is a big opportunity to add doors in the food service channel as customers are planning to replace plastic products with more sustainable packaging. Similar to other retail partners, these larger organizations have been a bit slower at introducing new products because of COVID, but we are still very optimistic because of our value proposition. Our other new growth opportunity is through innovation. This includes launching vitamin water in April and introducing our one liter flavor SKUs. Our infused vitamin water will be launched in three SKUs, citrus, elderberry and cherry. These are great tasting organic flavor and sugar-free products with an immunity claims to added vitamin C and zinc. We are planning to produce our vitamin water in the natural and convenience store channel first, starting from mid-April. We have said in the past that we are focusing our marketing strategy on retail activations, events and strategic partnerships. The priority here is activation. We will have significant awareness campaigns around the third day, which aligns very well with the values of our brand, and we will be using influencers to help amplify our awareness. We will also be driving traffic through Activation with a variety of initiatives over the very busy summer months. We are very excited for our sponsorship with the New York Road Runners and the New York Marathon. We have a very solid plan through all 2022 to activate our partnership, which will lead us to be in front of millions of participants in a number of events. Before passing the call over to David to review the financial results in greater detail, I would like to show you some examples of our retail activations. These displays are very important in driving velocity at new locations. You can see a display at Target in Dallas, where we had great traction. You can also see displays in Publix locations in Boston, Miami, and Tampa. And on the top right, you can see a pilot display of flow water in BJ's location in New York. I will now pass The call over to David. Thank you.

Thank you, Maurizio. Good morning, everyone. I'll now take a few minutes to walk you through our overall revenue performance by category of revenue. Flow increased net revenue 86% in fiscal 21 compared to 42.7 to 42.7 million and increased net revenue 74% in Q4 2021 to 10.4 million. The overall net revenue growth for both periods is a result of increased sales of Flo branded products in both retail and e-commerce channels, as well as increased co-packaging revenue. On a more granular level, Flo experienced high growth rates for Flo branded products, increasing 47% on the year and accelerating 69% on the quarter, which is consistent with our focus on continuing to grow the portfolio of Flo branded products. Our co-packing business was also a large contributor in both periods, particularly in Q2 when we benefited from large orders from one customer in particular. Although we have large multi-year contracts, the revenue profile of our co-packing business is subject to the inventory needs of our co-pack partners. Our results in 2020 also included sales through our barter channel, which did not recur in 2021, and we do not expect to utilize this channel going forward. The increased net revenue translated to increased gross profit to 11.3 million for the fiscal year 2021, or a gross margin of 26%. Our gross margin improved significantly from the prior year as the higher sales of Flo branded products and the co-packing business improved utilization. We became more efficient on production runs and we've been successful at stabilizing our unit costs. Turning to operating expenses, Sales and marketing increased as we supported our DSD rollout with marketing campaigns and in-store activations, as Maurizio just showed you. These costs were highest in Q2 and Q3 in line with our busiest seasons at retail and the activation of our new DSD partners. Our general and administrative includes increased professional fees that we've incurred as we transitioned to a public company, which partially offset improvements in our warehousing and other operating costs during the period. Share-based compensation expenses also increased as we rolled out an RSU plan at the beginning of fiscal 21. The expense recognized in the year in relation to this plan is accounted for under IFRS using graded vesting, which front loads the expense over the three-year vesting period. As a result, the expense going forward will be reduced substantially in conjunction with overall reductions in new grants. We have factored this increased discipline into our overall EBITDA guidance as we want to make it clear we are focused on all lines of the P&L. On an adjusted basis, we realize EBITDA adjusted EBITDA loss of $27 million for fiscal year 2021. Adjusted EBITDA excludes the impact of RTO costs, termination fees, and share-based compensations. Turning to our quarterly results, consistent with our fiscal year results, the increase in gross margin is attributable to flow-branded sales over retail and e-commerce platforms, as well as co-packaging revenues, which improve utilization, efficiency on product runs, and stable unit costs. Additionally, with respect to gross margin, in Q4 2021, we realized elevated shipping costs higher than in Q2 and Q3. This was the result of higher fulfillment costs for a specific contractual obligation with lower order quantities during the period as order volumes recovered from COVID-related impacts. The factors that influenced operating expenses in fiscal year are largely the same as those that impacted the quarter, but I will add that in Q4, we incurred higher professional fees and insurance costs. Additionally, salaries and benefits also included a higher rate of variable compensation paid in cash versus share-based compensation in the prior year. Additionally, I draw your attention to the run rate for share-based compensation during the quarter, which more clearly articulates the narrative that those expenses will continue to come down period over period. As of October 31st, we had $51 million in cash. With our plan to increase net revenue for Flow-branded products, improve EBITDA and capital efficiency, as well as extending the maturity of our debts, we can support our growth for the next 18 to 24 months. We are also actively considering other funding options to further support our growth. That concludes our prepared remarks. Operator, you can now open the line for questions.

Thank you. As a reminder, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. Once again, if you would like to ask a question, just press star one on your telephone keypad. Our first question comes from the line of Sean McCowan from Roth Capital Partners. Your line is now open.

Good morning, guys. Can you hear me okay? Yes, Sean. Good morning, Sean. Great. Thanks. A couple of questions. How steady do you think we'll see that 45% to 55% growth throughout the year? Or conversely, will there be some material seasonality or variation in that growth as the year goes on?

I think it's going to be relatively steady. Now, there is some seasonality in this category, as you know very well shown. But we don't see a big difference going forward quarter by quarter. So we see that this should come, let's say, at this range throughout all the year.

Okay, thanks. That's helpful. I mean, I imagine that saying that on the last day of the first quarter is a sign that we shouldn't be looking for things to be materially different from that range. I know you probably don't want to get into quarterly guidance, but we are pretty deep in the quarter. Next question. I know that you've said many times that co-packing is both opportunistic and outside of your control, but you must have some kind of sense internally of what to expect there. Should we be looking for a big drop in income or revenue from that or a

sizeable increase just be helpful to have some kind of sense of what you're expecting there first of all let me reconfirm that strategically in our strategic framework and we flow is the priority so we we want to create value through flow and and the increased guidance we are giving to flow uh uh branded sales uh is uh it's confirming that our focus is on flow Now, it's a bit hard to give you a very precise direction about co-packing. We consider co-packing an important part of our business as long as it is in line with the margins of flow. So we will not go after volumes that do not have margins in line with what we have in flow. But we continue to consider an important part of this business. Some of our customers do not have an exact alignment in terms of quarters because they have different periods compared to us, so it's hard to give you a view about co-parking. If we continue to have opportunity to grow the co-parking, we will do. At this point in time, it's a little bit difficult to give you an announcement for the co-parking. Rest to ensure that as long as we find co-packing volumes that are in line with our technologies and are in line with our margins, we will certainly take it on board as it's part of our business today.

Okay, thank you. I'll go back in queue.

Our next question comes from the line of Martin Landry from Stifel GMP. Your line is now open.

Hi. Good morning, guys. Good morning, Martin. Good morning, Martin. Good morning, Martin. I would like to know a little bit more details on what's driving the increase in your revenue guidance. it sounds like your multi-packs are doing well. It sounds like your ACV is strong, maybe a little stronger than what you had anticipated. So maybe if you can just give us a bit of color as to what's changed versus September in your outlook that's driving your increase in your revenue guidance on flow-branded products.

Let's say the three drivers are those that we have highlighted in our strategic framework. ACV in the U.S., in large formats on one hand, where it's a little bit slower to get authorization because of COVID, and at the same time, and the importance of the DSD, regional retailers that we will reach through our DSD network. So it's the number one pillar. Velocity, it's coming from the activations, the brand awareness increase, the activations of the brand both in the US and Canada. And at the same time, as you mentioned, Martin, the SKUs per store, especially the multi-pack SKUs, that comes naturally with the evolution of the brand. The brand is introduced in the U.S. with a single serve. You create, first of all, a trial. You create brand awareness, and then naturally comes the repetition, and the repetition comes together with the multi-pack. So these are the three the three drivers and of course ACV also in Canada especially we see a good acceptance in the convenience store channel which is made of thousands of new doors or point of distribution. What is encouraging us to increase the guidance is we see that our strategy is well accepted by both the retailers and the consumers. We see the results of it. We have seen an acceleration in Q4 of both the velocity and the ACV, especially in Canada. We have seen that we have a good response by the strategy of the multipack so this acceleration together with the plan and the three pillars that I mentioned before is what is giving us the confidence to grow and increase our guidance for the rest of the year okay so you're still assuming an ACV penetration of 30 to 40 percent this hasn't changed I was trying to get a bit of understanding what what's changed I guess

you're expecting a little bit better penetration and growing velocity, right?

I think we... Again, say that our target is to get at least 30% ACV in the U.S., right? While in Canada, we are already at the higher level of ACV, mostly due to the convenience stores. We consider the velocity still very important. You have seen the velocity growth, especially in the multi-output channels. Also, we were very encouraged through the comeback of the natural channel, both, let's say, excluding whole food and including whole food. So I think it's the combination of these three factors that gives us encouragement. So we have not changed our view about ACD nor velocity. And also, we see that the strategy on the multipack is paying off.

OK. In your presentation, you had an interesting slide that talks about your changes in your point of sales 2020 to 2021. Like Sam's Club, some were short-term promotions that got dropped off. I'm wondering, currently, when you list your fiscal 21 locations, are there any short-term promotions ongoing

right now that could be at risk of dropping in the coming months no there aren't and and the reason is exactly that we see that establishing a relationship with large retailers it's a strategic move that requires having all the key drivers in place so having a what we call in in in the market and, let's say, an in-out promotion as the one we had with SAMS, it's very beneficial for our sales, but it's not establishing a long-term relationship with these big retailers. So we will move structurally and strategically when we enter and we penetrate large retailers with a full strategy including a clear activation, a clear portfolio and range, to make sure that once we enter, we turn, we have velocity, and we can build with these retailers. So in the plan of 2022, there are no these kind of short-term relationships.

Okay. That's helpful. And maybe one last question for me. On your co-packing business, Have you been able to add new clients in recent months? Is this a segment where you're prospecting to get new clients? Just a bit of understanding on maybe also where your capacity of utilization is at this point.

Yes. Let me start with the last one. As Nick alluded, we produce 100 million parts, which essentially represents one-third of our total capacity. Now, as we are a fast-growing company, I mean, this obviously is good because we are ahead of the curve, but on the other hand, let's say we want to make sure that we fill this capacity as fast as possible. Now, as you know, the co-parking business is a very particular business. It requires a specific business model, including having multi-technologies, which is not our case. So, of course, we continue to do business development, provided this business development fits well with our technologies, which is Tetra Pak essentially, and that at the same time provides us comparable margins to SLO. So yes, we continue to do business development there, we continue to look at new customers, we see opportunities there. We will not go in technologies where they would require additional investments. We will stay with our technology. But within this range, there are opportunities to grow, to bring new customers. So we continue to consider this business as part of our, let's say, revenue opportunities. Simply, I would say, as I said, the focus is more on flows.

Martin, just to answer your first questions very clearly, yes, we have onboarded new customers in our co-packing business and new verticals in product innovation, including plant-based protein drinks that are coming out in market in the US. We're very actively making sure that the capacity is filled as well as obviously prioritizing Flow, but also prioritizing our other branded manufacturing partnerships to produce amazing products in market. And we'll continue to do so throughout 2020, but also supporting our core contractual relationships with some of the other branded products.

I think, too, an important point of reference there is For COPAC, where we have large material contracts, those contracts are set up in such a way as to support a recovery on the CAPEX deployed to service them. um and so i think that's that's an important notion is that having long-term contracts with fixed commitments uh allows us certainty over cash flows but also the the inverse which is is not deploying capital uh for the purposes of copac without having a concept of an roi on that and then further creating the capacity uh to grow into that with our our flow branded products okay and just um

what's what's what can you just give us your your capacity utilization right now it's one it's one third uh currently the 100 million packs the last year represents one-third of our capacity so 300 million packs uh but we have to take into account martin uh the seasonality of our productions you know in the middle of the winter is uh co-packing productions uh as high as in the middle of the summer the answer is no so we take into account utilization and seasonality with our co-packing partners. So there'll be some points in time, you know, in the middle of the summer that we'll be at full capacity and some points in time that we'll be at a lower capacity. But currently right now, as of last fiscal period, we're at one-third utilization across the entire year moving into 2022. Perfect. Okay. Thank you. Okay. Thank you, Martin.

Your next question comes from the line of David Huggins from BlockRock. Your line is now open.

Thanks for taking my question, guys. Good morning, David. Good morning, guys. I had quite a few sort of very near-term questions that you've given us some color on, so thank you for that. But can we sort of span out a little bit, and can you guys talk to us about how you're thinking about the strategy from here, from the big picture for 2022 and beyond. And that'd be really, really helpful. Thank you.

Yeah. Thank you for the question because this allows me to re-articulate and re-confirm our strategic framework that we shared with you in Q4 and I think more clearly even articulated now in Q4. So our strategic framework starts from, let's say, our strong focus on growing flow as one of the fastest growing brands in the three spaces where we compete, which we see are the fastest growing segments. First of all, the sustainable packaging, you've seen how it's growing fast. and the premium because we are premium water and at the same time the functional enhance which is also growing very fast. So focus is growing flow as a first pillar of our strategic framework in these three channels to essentially expanding ACV in the U.S. but I would say what we call in the conventional big retailers at the same time with our regional deployment of the DSD. So this is the first pillar of our strategic framework. That's why we felt encouraged to increase the guidance to 45-55. The second is being very disciplined in terms of cost management. And I want to reconfirm that here we don't see a trade-off between cost, let's say, on one hand, and growth. That's why we talk about being very disciplined in cost management. We will not cut in our opportunities for growth. We will be cost disciplined to make sure that we are efficient in the operations and at the same time efficient in management of our general and administrative costs. This is what is leading us to give a guidance on reducing our ABDA losses by the guidance of which we say 45% to 50%, which is a substantial improvement, which will come, once again, first of all, for increasing our gross profit as a result of the growth, and on the other hand, and in parallel, of being very cost-disciplined. The third element of our strategic framework is the capital deployment. So we have, again, a very strong disciplined approach to net trade working capital, both in account receivable and especially inventory. Today, we have the confidence of our operations to be able to reduce our line of sight of inventory, which will improve our net trade working capital. At the same time, as we mentioned in more occasions, we have an infrastructure which is in place, which works very well and therefore we don't see the need for further CAPEX or we will be again very disciplined in deploying our CAPEX throughout 2022. The combination of these three pillars is what is making our strategic framework And I think this is what today we are very clear and we are focusing in the execution in a disciplined way of this strategic framework.

Thanks very much for that. I have just one follow-up before we go. Could you just, I might have missed it when you went through your prepared remarks earlier, but Can you just remind us where you are with cash burn and what kind of sort of line of sight you have from here and what's underpinning it?

Yeah, I will just give you a general view and then I hand over to Devin, right, who will give you more calls. I think we, as a result of the strategic framework and at the same time improving or reducing our losses and the capital efficiency, we feel confident that we are going in the right direction. Also, you've seen in the press release that we extended the maturity of one of our unsecured debts. So we feel we are going in the right direction, but I prefer that David will give you more follows about it.

Yeah, absolutely. Thank you very much, Maurizio. I think Maurizio's clear articulation of the strategy is the primary driver for the confidence that we deliver in terms of our cash burn rate. I think one thing that's important to note with regards to our business is as we move through Q1 and Q2 and then transition into Q3 and Q4, as a manufacturing business, we're scaling up production through those periods. and then recovering that cash as we sell through and ultimately sell out for the increase in sales that we would expect coming through in Q3 and Q4. So just being mindful of that. With all that said, with that increase in cost discipline, we expect to be reducing our cash burn rate quarter over quarter with the biggest improvements being in Q3 and Q4. Pair with that, the note that was added to the top of the press release or to the bottom of the press release, which is that we're in the process of extending our debt. That will significantly extend the timing on the ultimate settlement of those debts. And as a result, increase our cash for supporting our operations in the mid to near or short to midterm.

And David, just to be clear, the management team feels with all of that being mentioned that we'll have enough to support our growth over the next 18 to 24 months.

That's very clear. Thank you, guys. That was everything from me.

Thanks a lot, David, for your questions.

We have a follow-up question from the line of Sean McGowan from Roth Capital Partners. Your line is now open.

Thank you again. Yeah, a couple of comments or questions on outlook. First on kind of non-operating stuff, can you give us some guidance on what to expect on interest given kind of a fluctuating interest rate environment? Should we look for that line to be considerably more in 2022? And also, how does the stock-based compensation expense fluctuate with the stock price? What's the mechanic on that? Thanks.

David, maybe you want to give some thoughts there?

Yeah, absolutely. So with regards to interest, Sean, so our exposure from an interest rate standpoint is less so on interest rate fluctuations as most of the rates are fixed for the biggest portions of our debt. So the expectation around increases in interest rate impacting overall interest expense won't be material. Obviously, as we close out our potential extensions on our debt round, that will impact the profile versus what was expected if those were to be paid out. But net-net, I would say that interest rates should be relatively stable as we move forward in terms of the impact on the P&L. On stock-based compensation, there's a number of components to the stock-based compensation. The biggest one, again, is those RSUs. The RSUs are because of great investing, though they're priced at grant date and the expense is based off of grant date. So stock price does not impact the fluctuations on those items. as it relates to other aspects of stock-based comp, which would be significantly less material. The impact and movements on the stock, the volatility of the stock would have an impact, but I don't expect that to be material. And overall, we expect a significant reduction in stock-based comp as we move through fiscal 22.

Okay, thank you. And then on more of an operating line, discounts and promotions that you're seeing required is that are we in an environment where that's increasing or you know conversely does the fact that you're better able to supply some of your customers than maybe some suppliers with aluminum can constraints or whatever is there less need for you to to have promotions you know kind of in the current environment can you talk a little bit about that

Look, the trade span, it's a combination of multiple factors, including the customer mix, right? So we, let's say, most of our trade span goes into activations, right? Activations to generate velocity, and most of them, they are oriented towards activation of shell. So we create... the traction and the velocity by moving in all experience of this business, moving the product out of the shell. Moving out the product of the shell creates a significant lift up to 150%, but requires of course also to having a promotional activity. This is part of our plan to increase velocity. We, of course, let's say the brand awareness helps to, let's say, create velocity without promo activity, and this is important, but at the same time, it is part of our marketing strategy to create this activation in the stores, especially this off-shelf promotion that generates high velocity, so we do not anticipate a significant reduction of these activities.

Okay, thank you. And I think in addition to that, it's an area of enormous focus for the business to ensure that all of the trade-related activities that we're deploying are directly in line with driving that growth. So an area that the business is closely watching and looking to improve our overall efficiency in terms of how we deploy it.

Okay, thank you.

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