Flow Beverage Corp.

Good morning, everyone. Welcome to Flow Beverages Corp's first quarter 2022 financial results conference call. As a reminder, this conference call is being recorded on March 15, 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 that time for research analysts to queue up for questions. I will now turn the call over to Devin Pinnell, Chief Financial Officer. Please go ahead, Devin.

Thank you, Operator. Good morning, everyone, and thank you for joining us today. Flow's first quarter 2022 financial results were released this morning. The press release, financial statements, and MD&A are available on CDAR, as well as the company's website, investors.flowhydration.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 Reichenbach, Flo's founder and executive chairman, and Maurizio Patronello, our chief executive officer. I will now pass the call over to Nicholas. Take it away, Nicholas.

Good morning, everybody. It's been just over a month since our last update but we're thrilled to provide a number of positive developments for flow. Not only are we making great strides on improving profitability, but we are well positioned for our seasonal strong summer growth months with new authorizations from some very large retailers in the US and Canada. We have near-term activations with one of our primary strategic partners, the New York Marathon, and our product innovation pipeline is on track. In January, we reported at the end of 2021 with almost 25,000 points of distribution across North America. Again, it's not the only primary KPI we use to measure our performance, but it does indicate that our DSD direct store delivery strategy that we've implemented in 2021 has been very effective. Within the first two months of this fiscal period, we have added over 800 new stores to our distribution channels. We expect that our points of distribution will grow as we add new distribution partners across Canada and the United States of America. both through our DSD strategy and through our internal sales team. You will see that Flow is getting a bit busier with our marketing and activations in April and May. We are making a big marketing push amongst a number of initiatives around Earth Day. This is a pretty important time of the year for Flow as it aligns with Earth Day, which is which aligns very well with our mission and values of our company and our consumer. We also have some exciting activation campaigns with the New York Roadrunners and the New York Marathon. The New York Marathon Half Marathon is this Sunday, March 20th, and the Brooklyn Half Marathon is Sunday, April 24th. If you're in the area or participating in the event, please keep a lookout on our co-branded products that are being activated at the races. At this time, I'll pass it over to Maurizio to give you our highlights of Q1 2022.

Thank you, Nicolas, and good morning, everyone. I'll begin my presentation today with an overview of our financial highlights for Q1 2022. Flo remains one of the fastest growing brands in North America. Recent data shows that Flo brand grew 71% in the U.S. multi-outlet channel in the last 12 months and 87% in the Canadian food, 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 e-store activations and promotions, and consumers adopted new multi-unit SKUs. In Canada, Tiger ACV drove our results with flow benefiting from big wins in gas and convenience stores over last year. In Q1 2022, consolidated red revenue increased 32% as compared to prior year. Net revenue growth was driven by flow-branded product sales in retail and e-commerce channels across North America and an increase in co-packing as compared to Q1 2021. Flow-brand retail and e-commerce net revenue increased 40% in Q1 2022. Flow brand revenue can be divided in retail, increasing 48%, and e-commerce, increasing 27%. Again, the increase in flow brand revenue is attributable to more points of distribution and higher velocity. We made significant improvements to profitability in Q1 2022, as measured by ABDA. FLO's ABDA loss for the period was 7.9 million and 20% improvement over the prior year and a 28% improvement versus Q4 2021. We believe the sequential improvement over Q4 2021 is more relevant as these reflect a cost structure of a public company as compared to Q1 2021 when FLO was still private. Our strategic framework remains unchanged, and I'm confident we are on the right path towards profitable growth. We are maintaining our target of flow brand product revenue growth of between 45% and 55% in fiscal 2022. While flow brand net revenue growth was slightly below this range in Q1 2022, we are very encouraged by the new authorization we received that will take delivery of flow branded products over coming months and especially in the back half of the fiscal year. This is when we should start to see ACB increase closer to our goal of 30%. Furthermore, we expect to continue improving velocity through innovation, but also through a more hands-on approach to merchandising. To date, our in-store activation and promotion have been successful, but they require follow-up to ensure that our products do not go out of stock following the activation. We are also confirming our target to reduce our ABDA losses by 45% to 50% in fiscal year 2022. Going forward, marketing and advertising, as well as salary and benefit expenses, should continue to improve. General and administration expenses should stabilize, and stock-based compensation should also decline. We expect for the biggest improvement to be in the back half of the fiscal year as we compare our cost structure against Beard as a public company. Regarding capital efficiency, we have significantly improved accounts receivable with net trade receivable decreasing 12% for Q4 2021. CAPEX was half a million in Q1 2022, a significant decline from two million in Q1 2021. Before we move on, I want to reiterate our confidence in executing this strategic framework. However, on a note of caution, recent geopolitical events demonstrate that there are certain factors that are out of our control. Energy and commodity prices have risen sharply in recent months and may continue to rise, and this could begin to have an impact above and beyond what is in our capacity to forecast. This could have an impact on our cost structure and households' economics for our consumers. We are managing the risk to our business with the rigor that we would expect, and we remain confident in our long-term potential. The shelf-stable market in North America is currently over $14 billion and is growing at about 11% a year. The fastest-growing segments with shelf-stable water are tenants and flavors. This is where flow competes. These two segments are growing at 20% and 13% respectively, and these trends are expected to continue for the foreseeable future. We expect the flow will be a beneficiary from the tailwinds created by growth in the premium sustainable and functional water segments. You can see that the premium segment is growing at a rate close to 25%. This is also driven by consumers continuing to move away from soft drinks and choosing premium waters instead. The trend in sustainable packaged water is now growing over 60% a year. as companies and consumers become more mindful of their impact on the planet. And functional enhanced water is also growing at a rate close to 20%. These trends all help support our confidence in achieving the financial target we have set in our strategic framework. Flow is maintaining very high growth rate in two large markets. growing 71% in the U.S. multi-outlet channels and 87% in Canada food and drug mass. These results are consistent with last quarter, where U.S. MULO is benefiting from very impressive velocity improvements, while the Canadian growth is attributable to increased ACV through big winds in the gas and convenience channels. The natural channels also have stabilized. This channel suffered the worst during COVID and is a very important channel for flow in particular. We are back to see modest growth in this channel. Whole Foods continues to be a very impressive story and illustrates the formula we try to achieve with all our retailers. As you can see on slide 10, flow water is only in 2% more stores than this time last year, as we are already in almost all Whole Foods locations. However, our retail sales have increased 41%. We have gained considerable market share at Whole Foods. You can see our velocity has improved 53%. This is due to consumer adoption of our multi-pack and successful activations. As Nicolas mentioned, We are now in over 25,800 points of distribution, and a lot of the recent growth is attributable to our DSD strategy. Looking at the U.S., Floor is now over 5,600 stores that have been accessed through our DSD strategy. You will recall from our last call, we used this slide to show where we bought and lost stores in fiscal 2021. We updated the slide to show some new authorization that we expect in the coming months. In the last call, we showed how we reduced our presence in 400 Walmart locations in the fiscal 2021 in order to focus on more strategic regions. We now have authorization in almost 300 additional Walmart stores. We will focus on urban stores and in states where consumers match flow consumer profile, like California and Texas. We have also identified stores where we expect the velocity to be high, and we have developed a strategy in order to limit going out of stores. I will draw your attention to Publix. This is one of the largest grocery chain in the US, and we have had almost 1,100 stores this last year. We now set to add another 100 in the near term. On slide 13, we have illustrated some very favorable results from the consumer survey that we perform on an annual basis. These surveys are done by an independent party and target premium water consumers with unprompted awareness exercises. As you can see, the awareness of the flow brand has almost doubled in the last two years, from 23% in 2021 from 12% in 2019. But now, 16% of consumers have tried flow, which is about two and a half times the 6% of premium water consumers that had tri-flow in 2019. And now, 13% of those premium consumers have tri-flow water in the last three months, which is over tri-flow, the 4% that had tri-flow in 2019. From my experience, this demonstrates that FlowBrain is gaining traction and successfully expanding its consumer base among premium water drinkers. Before I pass the call over to Davin, I will review our key growth pillars. First, we plan to grow the flow brand in the retail channels to increase ACV. We also plan to increase velocity through focus activation and brand awareness campaigns, as well as increasing SKUs per stores. In e-commerce, we are adding new users through paid advertising and through strategic brand partnerships. Average order values are increasing with the multi-case purchase promotions, building, and cross-selling. And we are demonstrating traction with repeat purchases with loyalty problems and active communication through emails and SMS. Lastly, we are very excited to show our innovation pipelines. We still plan to launch vitamin water in the second calendar quarter of the year, and we have a few new delicious flavors coming to market as well. That concludes my remark, and I will now pass the call over to David, Slow Chief Financial Officer. Thank you.

Thank you, Maurizio, and good morning, everyone. I'll now take a few moments to walk you through some additional details on our financial performance during Q1 fiscal 2022. In Q1 fiscal 2022, Flo increased gross revenue by 33% to $13.5 million and net revenue by 32% in Q1 2022 to $11.9 million. The Flo brand performed particularly well in the retail channel with growth of 48%. The big driver was continued strong growth in the US market as we leverage our DSD network to open new doors, focus our trade and marketing on in-store activation, and drive velocity with key retailers. Our e-commerce business delivered growth of 27% in the period. We continue to see strong growth from this important pillar and continue to focus on our direct-to-consumer subscription model. We will continue to focus on leveraging the increasing brand awareness noted by Maurizio earlier to bring new customers onto our e-commerce site to drive trial and ultimately conversion to recurring purchase. Our co-packing business grew 15% in Q1 2022 to $6.7 million. Recall, we believe long-term value will be created by focusing on flow brand revenue, And therefore, we continue to utilize co-packing on an opportunistic basis to help absorb fixed costs and complement our Flow branded products in expanding the Tetra Pak format in premium RTD beverages. Our revenues from co-packing are highly variable and recognition is driven by expected revenues and volumes over the life of the contract. This expected revenue and volumes are dependent on external variables not within the control of Flow, such as co-packing partner inventory levels, market conditions, and consumer demand for our co-packing partners' products. Moving over to our financial results for Q1 2020-2022, the increased net revenue translated to increased gross profit of $3.1 million, or a gross margin of 26%. Our gross margin was slightly lower than the 28% realized in Q1 2021. Similar to Q4 2021, we continued to experience elevated shipping costs for certain customers that had reopenings in the period. We realized the gross margin improvement as compared to the prior quarter, and we continue to improve the efficiency of our production while still absorbing some of the underutilization associated with the two additional lines installed in Verona in Q4 fiscal 2021. Turning to operating expenses. Sales and marketing increased from prior years as we supported our DSD rollout with marketing campaigns and in-store activations. In the current year, general and administrative expenses include incremental professional fees that we have incurred as we transitioned to a public company, while in Q1 2021, we had no public company costs. Salaries and benefits increased as key management additions are not included in the Q1 fiscal 2021 comparatives. Looking at sequential performance quarter over quarter and our execution against our strategic framework, you can see a 45% drop in sales and marketing expenses from Q4 2021 as we become more focused with how we allocate our marketing budget. In general and administrative expenses, we improved this expense line by over 10% in Q1, driven by disciplined spend management. In line with our commitment to optimizing our organizational structure, we've reduced salaries and benefits by 8% in the last six months. And in the last six months, our CAD count has gone from 236 to 203. In addition, stock-based compensation has reduced in line with our previously communicated issuances of equity compensations. This improved performance is a clear indication of management's focus on doing what we have committed to do to the market. As a result of the above, we've realized an adjusted EBITDA loss of $7.9 million in Q1 2022, which is a 20% improvement from Q1 2021 when we were not a public company and a 28% improvement from the prior quarter. We expect that these improvements in profitability will continue on an annual basis as we realize higher gross profits from increasing net revenue and maintaining our vigilance in our allocation of capital. As of January 31st, we had $38 million in cash. During the quarter, we made some large payments against our accounts payable. Accounts payable should stabilize from here on out. We've also seen some material non-trade receivables that we expect to collect in the coming months, and we expect additional improvements to working capital from further inventory management. Furthermore, as we enter the seasonally strong summer months in Q3 and Q4 of our fiscal, we expect to significantly reduce cash burn during those periods. As we indicated in our last call, we believe our cash position is sufficient to last 18 to 24 months. With our plan to continue to increase net revenue for floor-branded products, improve EBITDA and capital efficiency, as well as extending the maturity of our debt, we believe our cash position will support our continued growth for the next 18 to 24 months. That concludes our prepared remarks. Operator, you can now open the line for questions.

As a reminder, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the pound or hash key. Please limit questions to two questions, after which you may re-enter the queue for additional questions. Your first question comes from Chiff Moore with EF Hutton.

Hey, good morning, guys. Thanks for taking the question. You called out some impressive large retailer authorizations scheduled to come this year. Maybe you can expand on those. You know, how does that play into your positioning ahead of the summer season? How should we think about that ramp? And really, how much does that give you line of sight on flow-branded growth for the year?

Yeah, as you have seen from our presentation, lots of these authorizations are coming from our DSD. You have seen that already in the quarter, we have acquired additional 800 points of sales in the U.S. and also in Canada in the convenience stores. We expect that this will continue throughout the course of 2022. And especially in the second part of the year, where there will be more activation due to the summer season, where the category is more active. You've seen also a number of retailers coming back to us, especially Walmart and Publix. Also, you've seen Freddie Mayers as part of the new authorization we expect to have, starting from the end of Q2 and Q3. So, and also what gives us confidence is that in the second part of the year, we're going to have a number of activation in the point of sales that should drive velocity in US and Canada. This is what is giving us confidence that in Q3, Q4, our growth will be in line with the expectation that we have shared with the market.

That's helpful and Maybe for my second question, if I pivot, e-commerce growth nearly 2 million in what's a seasonally weaker period. It's good to see. Maybe you can just update us there on some of the things you're doing and how we should think about that as we get into the summer.

Yeah. We had a good growth in Q1 as we shared with the market, the 27% in the e-commerce, both in the U.S. and Canada. We continue to see strong traction with our subscription model, which is the large part of our e-commerce business. This is coming from our flowhydration.com website that allows us to increase our subscription base and at the same time also increasing the average ticket due to our marketing activities. We continue to see strong traction also in the coming quarters, progressively increasing the growth of e-commerce both in the U.S. and Canada as a result of our increased activities, which is coming from paid media, which increased the subscription base and transforming the subscribers into regular customers and increasing the average ticket buy rate. bundling marketing activities and creating more loyalty from our consumers. So we see that this is an important part of our business, especially, as I said, our DTC and subscription model, and we expect that this will continue to be like this throughout all 2022. Got it.

Okay, thanks. I'll hop back in queue. Thanks, guys.

Your next question.

comes from david huggings with blackrock hi guys can you hear me okay yeah okay thanks for running through all of that um could you please uh i've got a couple of questions but if you could just start on the the ebitda losses reduction quarter on quarter could you just maybe give us a little bit more detail on what you're doing internally that's driving those obviously quite nice improvements, and then maybe sort of walk us through what work there is to do still.

Yeah, I will give you a few highlights and then hand over to Devin to give you more details. So there are two main factors that are improving our ABDA losses. Number one is the gross margin as we grow and then the impact in terms of gross profits. And then a very strong cost discipline that we have started already in the last quarter, and we continue, and also in the previous quarter, and we continue now, and we start to see the results. So we see these coming, especially versus previous quarter, in all the main cost items, salaries and benefits, general expenses, and marketing and sales, and also stock-based compensations. We will see that this strong discipline in cost will continue throughout all the course of 2022, and also when we will compare our cost structure to when the company was fully public, and therefore the comparable are more, let's say, apple to apple. And I think the combination of increased gross margin and gross profits and strong cost discipline are the main items that will give us confidence that we'll be able to continue to increase and improve our ABDA losses throughout 2022. And over to David to give you more details.

Absolutely. Yeah, Maurizio, I think one thing to keep in mind is that that discipline and cost management is not something that happens in one fell swoop. Obviously, the business is made up of the decisions that have been made historically and some of the systems and processes that have been put in place. And so one of the key areas of focus for us has been that consolidation of both systems, service providers, SaaS service providers primarily. That's going to allow us to continue to drive costs down as we renegotiate and ultimately consolidate. And then another key area is on the internal capability side of things versus outsourced services. As you guys can imagine, the exercise of going public has both those directly attributable costs, but then sort of the ancillary costs of building a structure that supports and sustains the growth of the organization as a public company. And as we move through the progression of the quarters, we'll continue to bring some of those skill sets in-house, and that will allow us to continue to further drive down those costs. We've talked very much within our strategic framework about how we view our sales and marketing activities. And so that's a key driver as we move through the periods that Maurizio alluded to. And then that continued discipline around salaries and benefits to make sure that we have the right sized structure as a business to both support our growth, but also to make sure that we're not incurring any expenses that aren't necessarily necessary. So in summary, I think the combination of gross margin, continuing improvements in gross margin and gross profit, and then the activities, more specifically some of the ones that I referred to, will allow us to continue to see that progression in both EBITDA and adjusted EBITDA.

Thank you for that. Just maybe one relatively quick follow-up. for you Devin regarding net receivables you mentioned non-trade receivables efforts going on there to reduce that so could you just tell us what that actually is and then the more general sort of improvements around collecting receivables and what you're doing there would be helpful as well yes

Yeah, absolutely. So a couple of things. So on the non-trade specific, we've added a disclosure in our statements, and you guys will see that it's an HST receivable. So as the corporation has transitioned through the amalgamation, et cetera, we're in the process of finalizing and filing returns that will liberate some HST that is currently sitting with the CRA. or with the government. And so that you can see the carve out there is north of $3 million. So that's a substantial portion. And then the other piece that we've carved out is um in line with uh with the revenue recognition in some cases with our contracts um the reb recognition is out in front of when the actual cash receipts are so we've carved those specific pieces out because we believe it's important that those don't get lumped into when we look at what our our trade receivable balance is as well as how quickly we are collecting on that trade receivable so That's the distinction I would call out there. In relation to our trade receivables, the team is doubling down. I think one thing that's important to note is as we rolled out as many distributors as we did, so 47 plus distributors over the past number of months, Maurizio touched a little bit about the additional trade that comes at the forefront of those relationships. And so as you navigate the start of those relationships, getting aligned on the net settlement exercise has pushed our sort of trade receivables a little bit longer as we go through that process of sort of gaining the synergies of working with our DSD partners. So we see that there'll be some improvement there. And obviously that makes up a portion, a large portion of our trade receivables at any given time. So that will continue to be an area of focus to make sure that we optimize our working capital.

Thank you. Maybe I can squeeze one last one in. Just maybe it's for Maurizio regarding the vitamin water launch mid-year. Could you talk to us a little bit more about what that entails and how critical it is or isn't for your full year 22 sales guide?

Yeah, absolutely. And I apologize, guys. I just noticed Maurizio's line dropped, so I'll respond on his behalf. In our fiscal 2022 forecast, we did not include vitamins. water as part of our forecast, so it's incremental. We wanted to be very mindful of the fact that launching during the current circumstances is a challenge, so we've left that as upside. Overall, it's critical, I think, broadening the SKU profile and continuing to expand the Flow brand and the Tetra Pak format on the shelf is important both for us and our retail partners as well as the consumer. But in terms of how it impacts our results, it's not factored into the estimates that we've provided or the guidance that we've provided.

Yeah, and to add to that, Devin, having spoken to our Chief Revenue Officer, we have some very exciting authorizations for vitamin water in some of our existing customers that will be coming online in Q3, Q4. So it's going to be a really good launch. It's an incredible product. It's delicious. It's functional. And it stands behind our sustainability goals and our retail activations. And our retailers are really excited to launch the product with us and the Q2, Q3, Q4.

I noticed Maurizio came back in. So, Maurizio, please feel free to jump in, as I know that the innovation funnel and the vitamin water product is near and dear.

Yeah, I'm sorry, Andy. The line dropped. So in terms of innovations, we already share with the market the launch of our vitamin water, which will happen in the end of Q2 2022. So this is a product that we have been preparing for now quite some time to make sure that it hits all the criteria that the consumer are expecting from us. And we have been very diligent in checking with the consumers exactly their expectation, making sure that the product respond to all the requisites. We are also in our pipeline about to launch our one liter flavors with some additional flavors that let's say, will come, and also to make sure that our flavor water is also on a more convenient one-liter pack. So these are the two main innovations coming in Q2, and we are very excited that the response from the market seems to be very promising.

Thank you very much, guys. I'll leave it there.

At this time, if you would like to ask a question, please press star one. Again, that's star one to ask a question. Your next question comes from Martin Landry with Stiefel GMP.

Hi, good morning, guys. Good morning, Martin. My first question is on inflationary pressures. You know, there's inflationary pressures everywhere in freight, and labor and input cost. And I was wondering, what's your strategy to offset these pressures? Do you expect to take on a price increase or reduce your promotional activities or any color on that would be helpful?

Yeah, I will answer at the strategic level and then I hand over to David for more details. So let's break down the inflation that obviously is coming to us like for everyone else. Let's say in packing material, which is the largest part of COGS, as you can imagine, we have been diligent in anticipating a number of purchases throughout 2021, which covered us from most of the inflation in this area, considering also that the structure of our business is vertically integrated. In a way, the relationship with Tetra Pak is such that there are no very high spikes up and down But in addition to that, we have been diligent in anticipating this inflation and covering us with higher materials, higher quantity of materials, which in a way will protect us from inflation there. Then there is inflation in shipments, of course, and in labors. We, like many other companies, we are planning to have a price increase that will come into force in our DSD and with other customers in the course of Q2 2020. 2022, which should be able to cover us from this inflationary pressure. So we have been diligent in anticipating all these things, and we believe that this should protect us from the normal course of business. Of course, in case there are extraordinarily additional inflation that are out of our capacity to forecast, this is something that would require additional measures throughout the course of 2022. David, you would like to add something?

Yeah, absolutely. So it's no secret that the costs in terms of freight and logistics are continuing to increase quite rapidly. We've been very fortunate that we've consolidated to a certain number of partners. We are seeing overall increases. At the same time, the business continues to be able to drive efficiencies in terms of optimizing full truckload versus less than truckload shipments, which as the business scales, that's an opportunity for us to continue to see some improvement. So when we look at the freight as a percentage of COGS, and we look at our overall freight cost increases to date, and as we move through the rest of the year, we expect those to be relatively in line with expectations. So we've been fortunate by our current structure not to have enormous impact as some other industries are more impacted. Maurizio did touch on that key point, which is that vertical integration with Tetra Pak, which protects us for a certain portion of the supply chain. And so we'll continue to focus on optimization to augment what we already know are some increases in the broader freight environment and other inflationary pressures.

Okay, so if I hear you well, you don't anticipate many timing issues for your price increases to impact your margins. Can you just talk a little bit what kind of price increases you're intending to put in Q2?

We're going to be in the range of the single-digit up, let's say, between 6% and 8%. This is the price increase we have considered because this is a very competitive category. You have to be mindful in doing your price increase. So this is at this stage what we have already announced, and it will come into force because it takes some time to get executed in the course of Q2 2022. If there is need for additional adjustments, because as I mentioned, this can come from above and beyond our capacity to forecast inflation rate, we will see throughout 2022. But for the time being, that's what we have planned to do and that's what we are executing.

Okay. And maybe just lastly, again on the topic of logistic supply chain, Do you have any issues accessing packaging from Tetra Pak? Are there any concerns on your end to run short of packaging?

At this point in time, we do not anticipate any issues. As I mentioned also, we are well covered. We don't see any issues coming from a shortage in supply. In the normal course of business, again, Martin, in case there are some extraordinary exceptional items, this, of course, is above and beyond our capacity to forecast. But as of today, we believe that we're not going to incur any issues in terms of supply chain shortage. Okay.

Okay. That's it for me. Thank you.

Your next question comes from Sean McGowan with Roth Capital Partners.

Hi, thank you. Can you guys hear me okay?

Yes, good morning, Sean.

Great, good morning. First question maybe for Maurizio. Can you give us some color on where you stand at retail with inventory and where are you seeing, in what channels are you seeing the biggest year-over-year increase?

yeah i mean we have first of all to make a difference between u.s and canada right so uh in canada the the large increase is coming from convenience stores and increasing the number of point of sale that we are uh you know in the distribution that uh we are having there we showed it in our presentation also in the previous quarter this is the trend we see In the U.S., most of the growth is coming from adding new doors in the DSD network that we have created, but at the same time also increasing the velocity in a number of retailers like Publix that we have activated in 2021. This increased velocity is coming from new activation, but also I have to say one of the learnings that we have seen in the last few months that we This additional activation has to be followed up with making sure that the product is on the shelf because when you have an increased velocity, if the execution in the point of sale is not there, you lose traction because you go out of the stock. So we have done some measure to correct the situation, and now we can sustain this velocity in most of the retailers. So these are where we see most of our growth. We have expectations, of course, as I mentioned in the previous quarter, that the food service may activate, and we hope to have some good news in Q2. But, you know, for the time being, let's say this is a channel that is opening. There is a strong interest in this channel for products like Flow that score very high in terms of sustainability. And hopefully in the course of Q2, we're going to start to have some a large activation in this channel.

So just circling back then on some of these channels, are you pleased with the level of inventory relative to sales or would you like to be higher or lower?

We start, we are calibrating it, right? As I mentioned to you, when we have a strong velocity, you have to calibrate it because sometimes the inventory goes down. Then that's where we have to adjust and make sure that the execution is calibrated to the velocity. So I think we had to correct some in some retailers, the situation and increasing the level of inventory. I think the course of the year with this corrective action, we will be able to go back to a good level of inventory.

Okay, good. And then if I can ask Devin to give a little bit more color on the The way the gross margin commentary was worded had to do with COVID-related reopenings. Can you give us a little bit more color on that? Do you think that this is kind of a transitory pressure or something that's going to endure?

Yeah, no, that's a good question. Um, yes, it's transitory. Um, so primarily what that has to do with is, is certain, um, certain relationships that we have. Um, whereas we navigate the reopening, um, there's some sort of one-off, um, special type costs in terms of making sure that, uh, that we're filling and help and fulfilling and helping to support, uh, um, load in and reopen. And, and there's, there's been some. continued costs associated with that, which we made a conscious investment in. So that cost will be transitory in nature and I expect that the last time you'll be sort of hearing about that will be during this call in relation to the Q1 results. That will drop off. And then to the earlier question from Marte, we will continue to try and offset the increases from a freight standpoint that we're seeing in the market with continued improvement and consolidation of our routes to make sure that we're optimizing with full truckload versus partial truckloads. And so we're confident that the combination of those things will allow us to manage an overall increase, percentage increase in freight through the next quarter. And to Maurizio's point, as we navigate sort of these uncharted waters, I think if things continue on the rate that they are, that that would fall into the realm of extraordinary. And so we'll continue to deploy strategies to mitigate those costs.

Okay. Thank you very much.

At this time, there are no further questions. Thank you for participating in today's conference. You may disconnect at this time.