Flow Beverage Corp.

Welcome to Flow Beverage Corp's fiscal Q2 of 2023 conference call. As a reminder, this conference call is being recorded today, June the 15th, 2023. At this time, all participants are in listen-only mode. Following the presentation, we will conduct a question and answer session, and instructions will be provided at that time for research analysts to queue up. Before we begin, we would like to remind you that today's presentation and discussion contains forward-looking statements that involve known and unknown risks and uncertainties and other factors that could cause actual events to differ materially from current expectation and may cause actual results, performance or achievements to be materially different from those implied by such statements. The forward-looking statements are based upon and include the company's current internal estimates, plans, expectations, opinions, forecasts, projections, targets, guidance, or other statements that are not statements of fact. Any statements contained herein or discussed during today's session that are not statements of historical facts may be deemed to be forward-looking statements. A number of factors could cause actual events, performance, or results to differ materially from what is projected in the forward-looking statements. A more complete discussion of the risks and uncertainties facing the company appear in the company's annual information form dated January 29, 2023, and the company's management's discussion and analysis for three months ended April 30th, 2023, which are available under the company's profile on CDAR. Listeners are cautioned not to place undue reliance on these forward-looking statements, which only speak to the date of this presentation. The company disclaims any intention or obligation except to the extent required by law, to update or revise any forward-looking statements as a result of new information or future events for any reason. Any forward-looking statement contained herein or discussed during today's session is expressly qualified in its entirety by the above cautionary statement. I would now like to turn the conference over to Nicholas Reichenbach, Chairman and Chief Executive Officer of Flow. Please go ahead, sir.

Thank you, operator. Good morning, everyone, and thank you for joining us today. I'm joined by Trent McDonald, Flow's Chief Financial Officer. I'll begin today's call with a summary of our recent strategic and operational milestones and pass it over to Trent to review the financial performance and valuation. Then we'll open our call to the questions from our analysts. Today, Flow is laser focused on achieving our path to profitability. To deliver profitability, we are transforming Flow into an asset light operation. And we've identified four strategic steps to execute our goal. Number one, the sale of our Virginia production facility, which was achieved last November. Number two, securing strategic financing from our Aurora facility, which happened in January. Three, simplifying and optimizing our entire operation. And as announced this morning on our press release, the execution of our strategic alternative to our Aurora production facility. Trent will provide more details to update on also a bullet point as he prepared his remarks. Since the execution of the first two steps, Flo Brand has delivered excellent growth. Most recently, we reported 98% Flo Brand net revenue growth in fiscal Q2, which brings us to 68% year to date. We also made progress with increasing our gross margins closer to our potential, increasing to 18% in Q2 and 23% year-to-date. We are moving quickly to streamline our operations, bolster our balance sheet, and demonstrate profitable growth. And we've just begun. As of April 30th, Flo was located in 54,000 stores in North America. Our biggest addition to the store count has been our club channel with household names like Dollar General and Family Dollar. We've also added 2,000 Albertson Safeway locations across the United States, which is one of the largest grocery chains in the US. Looking at Flo branded revenue on a quarterly basis, you can see that we're achieving significant breakthroughs in Q2. Our growth in store count, product innovation, and food service business has led to a record quarter net revenue growth of 98%. We are also seeing in the market today that our retailers, food service companies, and consumers are demanding sustainable products. Flow remains the highest B Corps certified beverage company in the world when it comes to sustainable beverages. Flow is second to none. Our market share in the carton format water in the U.S. has also reached 51% in Q2. This is a significant increase from 45% in Q2 2022. This gain in market share against other beverages in similar packages, we think that this means consumers are choosing Flow because of its amazing taste, our zero-calorie flavors, and of course our innovation with our vitamin infused water. Not only is revenue growing from our food service partners, it's also promoting trial for new consumers with a transferring to a high margin channel after trial. Most recently, we introduced a strategic partnership and have become the official water of Live Nation Canada, whereby flow will be available this summer to over 1.8 million annual concert goers in 825 concerts across Canada every year. This multi-year partnership will continue the momentum of flow in our food service segment, will also provide an amazing opportunity for sampling and brand partnerships. We are delighted to partner with Live Nation and its Green Nation touring program. Our partnership with Live Nation is a natural fit given our roots in music and entertainment, flows influencer relationships with artists, and our strong sustainability goals and joint core customer base. Vitamin infused water continues to be very good in its growth and performance. Our innovation is now in over 5,000 stores across North America. As we've seen in the past decade, there's been very little innovation in this space. And with our water as the base, a high alkaline, naturally occurring mineral water with electrolyte levels that are higher at par with most hydration products, plus the fact that we're infusing daily doses of vitamin C and zinc without sugar, juices, or any artificial products, we will continue to see growth in this product innovation and expanded product line. With that, I'll pass it over to Trent. Thank you, Nicolas.

I'm going to talk about our financial results. Flow branded net revenue increased to $9.5 million in Q2 2023, or 98% from Q2 2022. The growth can be attributed to the success of our food service strategy with partners like Starbucks Canada, where we launched in the second quarter, and Norwegian Cruise Lines, which continues to be a great story for Flow. While food service does have a lower gross margin, it does promote trial, with customers then coming into higher margin channels over time. To this end, we also saw growth in new retail locations and e-commerce, while the recent launch of vitamin-infused water has also been very, very successful for Flo. Consolidated revenue increased 56% in Q2 2023 to $14 million. Not only did the Flo brand growth come in above what we anticipated, we also successfully transitioned COPAC agreements from our Virginia production facility and saw higher order volumes from our key partners. Gross margins improved 18% in Q2 2023. We also incurred lower relative trade spend as compared to Q2 2022. While this was an improvement from prior year, it is not where we want to be. That said, we believe we have a path to much higher margins in the latter half of this year and into fiscal 2024. As mentioned, the expansion of our food service business resulted in temporarily lower margins, as over the long term, we believe food service will help drive revenue growth at retail locations and over our e-com platform as we are getting thousands, thousands of customers online. to try flow, and then when they pick up their morning coffee or to quench their thirst while watching their favorite band as we just announced Live Nation. We've also incurred additional costs at Aurora, our production facility, as we transition from moving production to seven days a week from five days a week. With the rampant production costs come prior, but this rampant production cost came prior to the realization of the underlying sales. That said, the production team at Aurora is getting more efficient by the day, and we believe that they will be operating at their potential in the very near term. There is also material optimization initiatives in logistics and warehousing, which we've not yet executed on, that we believe will help to improve margins once completed. Even the loss improved to $7.1 million from $8.5 million last year due to our higher gross profit and lower stock-based compensations. Turning to a more detailed review of our income statement, you can see that sales and marketing is coming in at a lower percentage of net revenue. General admin expenses include about close to $800,000 in costs relating to our operational transformation and new IT ecosystem, which will help to simplify our business going forward. Our transformation and restructuring is a massive endeavor, and we have been incurring some costs ahead of the anticipated benefits, which we feel are only a quarter or two away. Showers and benefits also increased from the prior year as a higher volume of flow sales, based on a higher volume of flow sales. But again, logistics, distribution, warehousing, and shipping has not yet been optimized, and we believe there are going to be further cost savings in this area going forward. All told, adjusted EBITDA loss improved to 6.6 million from 6.9 million in the prior year, as we still have the conviction that most significant improvements to profitability are ahead of us. Currently, flow is still trading at 0.6 times our revenue, as compared to our publicly traded beverage peers trading at a multiple of three to five on a weighted average basis. With the progress we've made against our strategic initiatives, there remains a great deal of shareholder value left to unlock. As we continue to deliver on our operational transformation and move ahead along our path to profitability, it should be pointed out that we are a growth company and have been regularly outpacing the industry average revenue growth rates by a very wide margin, having grown the flow brand by 98% in Q2 and 68% for the year to date. Given the revenue to enterprise multiples associated with our peer group, we believe we can achieve a greater valuation for our shareholders in the future. Which brings me back to our four-point plan to achieve profitable growth. As previously disclosed, we have completed the first two pillars with the divestiture of the Virginia Production Facility and through securing a $20 million credit facility January 2023. Now, with respect to the third pillar, which is Flow's comprehensive cross-functional optimization, this morning we did announce the elimination of 30% of our non-production, non-logistics corporate roles as we make Flow leaner and more focused on where we truly excel, marketing and selling Flow branded products. I would like to thank all team members who were impacted for their contribution to building this company. Although this was a part of Pillar 3, we still have yet to completely streamline our logistics, warehousing, shipping, and distribution, which is a very material cost for the company. We anticipate this happening in Q4, where we believe we'll start to see meaningful financial benefits and the P&L from that point forward. And the last step in our four-point plan is to realize full value for the Aurora Production Facility. You will see in our financial statements that the Aurora production facility is now categorized as held for sale. In April, we initiated a strategic review of this asset. The Aurora facility operates at a very high utilization and is a profit center and has a lot of ability to expand its production capacity. We believe that a successful transaction for the Aurora production facility could garner a much higher value than the Virginia facility and secure our path to profitability even further. Given the steps we have completed towards our transformation thus far, we now are happy to say that we have improved our estimates for annual cost improvements to $23 to $26 million as compared to the base of fiscal 2022. That said, we appreciate all your support as we work diligently for flow to demonstrate its full potential. With that, operator, please open the line for questions.

Thank you, sir. Ladies and gentlemen, we will now begin the question and answer session for research analysts. If you would like to ask a question, please press star followed by the number one on your telephone keypad. If your question has been answered and you would like to withdraw from the queue, please press star followed by the number 2. And if you are using a speakerphone, please lift your handset before pressing any keys. One moment please for your first question. Your first question will come from Luke Hannon at Canaccord Genuity. Please go ahead.

Thanks, and good morning, everyone. Nicholas, you had mentioned in your script there, it sounds like that food service is strategically important channel to you guys because of the capability to reach a wider audience and then bring them into those other more profitable channels. Can you give us an idea of what the conversion metrics are like for some of those new customers that you would have had in food service and then getting them into those other channels, how successful you were there? And then also, as a follow-on to that, what's your estimation of overall penetration in food service? How much more runway do you have to grow there?

Thanks for the questions, Luke, and definitely looking forward to the Canaccord tour of our facility tomorrow, which is exciting and happy to host you guys here. Yeah, to answer the first question, we are defining the core metrics of conversion as we roll out food service in a much more strategic way. But on a top level, we saw a significant bump in core SKUs associated with our Starbucks listing when we went live in Q2. Notably, Strawberry Rose is a flavor that they carry at Starbucks. And we saw significant double digit growth in our e-commerce and a significant growth across all of our retailers with our core skew, we call it OG, of the high mineral, high alkaline, non-flavored water in both the 500 ml and one liter. But we also saw specific skews that were impacted that were dedicated and listed at Starbucks. And that gave us the level of confidence in that particular retailer and the conversion rate being very high. Further that, you will see on the flow pack this summer, a QR code that will be leading to a link to a dedicated landing page to inform Flo new customers and Flo old customers on the values and attributes of drinking Flo, both from a health perspective and hydration, but also from a sustainability, along with links to our retailers and direct links to our purchases off of our website flohydration.com. this will in the quarters to come give us very quantifiable data associated with how food service is impacting the overall brand experience and flow growth so i'll look forward to reporting more on that as we roll out these important steps in our package design but also our overall consumer experience that's good color thanks

My second question here is just on one of the components of the path to profitability here is the launch of this new IT ecosystem. And I'm just curious to know what are the capabilities that you're getting with this new system that you didn't have before? And I mean, I know there's only so much color that you can give on this particular initiative, but what would be the related margin benefits that you'd get from these new capabilities?

sure let me let me answer that one um so you know look when we came in the iq ecosystem we had had never been optimized and it's not that the software platforms that were in place were bad platforms in fact they're world-class platforms uh but they weren't optimized and it was like getting a uh you know a bentley when you really needed uh you know a toyota and For us, because they were never optimized, they didn't speak to each other the way they should have, and they didn't have key components for tracking granular information on cost of goods and margins and product movement, things of that nature, we really weren't using it to make great decisions. We didn't have the information. Not only that, they were very, very high cost. The new IT ecosystem, while much more simplified, is actually tremendously comprehensive. We have our ERP, finance, but we also have manufacturing software and sales software. in addition to what we are implementing as a BI tool, as an add-on, which becomes sort of the source of all information that is true, and the one source of the truth. And so we have data, we have to really spend a lot of time on defining our data, and it all comes out of the ERP, the manufacturing platforms, and goes into the BI tool. And so that allows us to, will very soon, allow us to track full cost, standard cost associated with any movement across any customer geographic area, and really look at making better decisions around profitability, pricing, obviously what is or what is not profitable to invest further funds in and resources in the development of the brands. And so it's a very comprehensive platform. And we also are doing a lot of things on just even ICFR and controls on period and close and quarter and close software that's really going to help us make things more efficient. So, you know, it reduces labor and workarounds. So you can do a lot more with fewer folks having to spend time on it. So it's a very, very comprehensive project. And most of it's gone live. It just went live literally, you know, four weeks ago.

Okay, understood. Last one, and then I'll pass the line here. One of the tailwinds for gross margin that you had during the quarter was lower relative trade spend. I'm curious if that was a deliberate choice, if that was a reflection of something that you saw in the market, or if that was just simply comping against the period where there was simply higher trade spend, or just give me some idea of what's going on there. And also maybe what was the magnitude of that tailwind to your gross margin?

Yeah, again, it is actually very much a strategic initiative of ours, and it was very purposeful. Our sales team has been doing a tremendous job at controlling our trade spend. And look, you know how it goes. As you develop your brand and consumers are making it a destination shop, going into retail locations, looking to buy flow rather than it being more trial or treasure hunt, You know, retailers, we're getting more and more retailers who are picking up our brand without the need for us to overinvest. And while we still have a large bucket of trade spend, it has come down significantly, you know, multiple percentage points over last year. And so we're starting to get leverage out of a lot of the trade spend that we suspend on. It's still going to be an important part going forward, like program, listing, merchandising support, whether it's loyalty program support, flyer support, whatever it might be, and, of course, in-store marketing. It's all going to be an important part of developing the flow brand, and it's not a place we're going to shy away from investing in because it's a big component of Velocity. But for us, we don't see it ever getting sort of back to where it was two years ago and one year ago. We think we're doing a much better job, and consumer demand is helping that.

Yeah, and I think I'll add to that to answer your first question, Luke, part two. is the food service channel is a very strategic channel and growth strategy for flow because it is a little bit of a lower margin business, but it does not require the same trade spend or TPR, temporary price reduction strategy that you're going to see at a local grocery store or drug channel or even masks. And for that, it also has another very strategic effort, which is it is a brand building exercise as well as the trial exercise. So you're achieving a lower trade spend with this channel, but you're also getting the benefits of the marketing power of brands and partnerships like Starbucks. and NCL and Live Nation to really start to build brand marketing at the same time as having that margin and sale accompanied by a lower trade spend. So that's why we feel in the future, and we've mentioned numerous times that food service will be expanded, and we are really at the start of a very large journey with food service. I wouldn't even call it single digits penetration, even Canada or the U.S., on how much volume can be achieved and how many great partnerships we can add on to the existing partnerships we have. So we feel like this is a growth area for the company for the years to come, not months.

Understood. Thank you very much. Thanks, Lou.

Your next question comes from Chip Moore at EF Hutton. Please go ahead.

Good morning. Hey, Nicholas and Trent. How are you doing? Great.

I'd like to ask about some of the moving pieces the next couple quarters, more on the warehouse and distribution side. Trent, maybe just help us think about margin trajectory next couple quarters into 2024 You know, when I dovetail that with your comments on the food service side and mix, and I think the investment strength there makes sense. Just just help us think about the. The margin trajectory. Yeah, great question. And so, look, we. We know because we've gone through this pact, this engagement of really redefining our go-to-market strategy on the logistics, warehousing, distribution side. And we had thought originally going into the fiscal year when Nick and I first came in, we knew this was a large sort of, we kept calling it a black hole of cost that we had to get our arms around. We did bring in a great consulting group that have helped redefine, again, that go-to-market strategy. It's just taken a while, but now we actually are going through a very defined process of execution. We believe by late August, early September, we will have fully optimized our best go-to-market strategy. And the dollar value of the savings that are going to come from that are significantly, I mean, like for us, very, very much significantly more than what we'd anticipated. And so we think our margins, while, you know, yes, it was mixed, but there was also a lot of other things going on in margins this particular quarter as we sort of ramp up and invest. We think in Q3, you'll still have a little bit of lumpiness. And I said this at the end of the last quarter when it was 30%. I said there's going to be lumpiness in the near term. Don't expect every quarter is going to be close to 30%. But we do believe coming out of this fiscal year, sort of if you think Q4, Q3, there should definitely be some improvements from where we are right now, Q2. Q4 should get better again. And our goal is to get up well over 35 going into the next year. And to go beyond that, we think there's a path to really ramp margins and pulling on a lot of levers going forward. So we anticipate higher than we had expected earlier in what we were sort of talking about. We weren't guiding, but we were talking about where we wanted to be. We're now thinking we can be even higher. Excellent. That's great color, Trent. And maybe for my second question, just Aurora, sort of timelines and what to watch for there. I assume you've had some discussions based on your confidence, but just any more detail on that process. Yeah, look, we identified this a while back as part of the pillar, you know, the four-part pillars. It's a valuable asset, as we say. It's a profit center. It has very strong EBITDA as a standalone asset. production facility. And so, yeah, obviously there's a lot of good things about that particular facility beyond just the profit center, geographical location, two major distribution routes in the middle of a very populated area with a great labor force, expansion capabilities that can get, you know, we have three lines in there. You could probably put up to eight lines in there. Warehousing is right beside it. So a lot of great things. And, uh, so we do have, uh, you know, like we can't get into exactly what's transpiring in the background, but we do have a large number of very, very interested parties, uh, to that want to come into that facility. And so we've had several ongoing negotiations and conversations with certain parties and, you know, we're not sure which form and format it will take because there's multitude of different ways to unlock value there. a straight sale of the facility, some type of joint venture. We're not sure yet which, which it will take, but we do know there's value to unlock that are going to allow us to put, you know, funds in our bank and be able to have the wherewithal to grow this brand the way we want to and invest in that growth.

Yeah. And I think I can just add to that, that the number one consideration for, for flow is that it will continue and we'll partner with the a company uh that will continue the strategic growth of flow over the years and years to come uh thus achieving what growth that we're already achieving year to date um and our penetration and the us and and canada just growing there we are really uh going to partner with a strategic um company to be able to continue that growth of flow and the flow branded products as we move to an asset light model and streamline we want to make sure that we ensure the quality of the flow product and the partner has the capital resources and the know-how to be able to continue our growth path as we penetrate more into canada and ultimately uh invest heavily against our u.s growth

Excellent. That's great to hear. And maybe just the last one on vitamin water. Any more color or metrics you can provide on that launch? I think you had some new packaging and a lot of things going on, but curious to hear how that's ramping.

Yeah, excellent question. You know, as we stated before, we are very pleased that this innovation is being receptive by both the customers and the retailers. with our penetration up above 5,000 stores and the velocity is well above the category average because this category as a whole has not seen a lot of innovation and we're delivering a daily dose of an organic certified vitamin C and zinc along with those organic flavors of elderberry, citrus and cherry. And we are producing as much as we possibly can to keep up with it. But even as our e-commerce, we literally sold out a cherry and had to up our production to be able to get it back into circulation very fast. We believe that this franchise of vitamin-infused products is something that we can grow in the years to come to provide not only the amazing quality of Flo's water and the organic flavor combinations that we do, but the increase in functional attributes to each one of these vitamin-infused products are really satisfying our core customer's need to get hydration plus functionality. And so we'll be investing heavily against this product line in the future. And we see that this is a great category for us to grow and play in. And we know this because our consumer and our retailers are accepting the product and writing incredible reviews both on and offline about the experience they're having with the product and the flavor combination and the taste profile. So, yeah, we're very bullish with our continued growth as well as our continued expansion of that product line.

Great to hear. All right, I'll hop back in. Thanks very much. Thanks, Chip.

Your next question will come from Mathieu Gauthier at Stiefel. Please go ahead.

Morning, Mathieu. Hi, good morning. A couple of questions on my end. Maybe if we can start with the revenues for the Flow brand, which were up a strong 32% sequentially. Could you maybe expand on the main road drivers behind that strong performance? And maybe if you could also give us the proportion of those revenues that maybe came from one-time initial channel fill?

Yeah, look, we don't typically give the Flows you know, the breakdown of all of our sales, uh, in terms of percentages, but we can't say this, the, you know, obviously there are, we launch a new, a new channel, uh, or with a, with a large new partner. It's like, like in this case, Starbucks as an example, uh, you always have that fill in to your point. Uh, but I can tell you thus far, um, you know, I think From everything we can see, it has been outperforming what Starbucks thought it would. There have been a monumental amount of post-orders after the fill-in. We have had repeat purchasing, repeat purchasing, repeat purchasing like crazy. We see it coming into Q3. We're in Q3 now. and so we've seen that and so yes there is a proportion of that just on on a couple of key partners that we took into the in q2 but you know look um other channels like i mentioned in my in in my prepared remarks norwegian cruise lines is doing extremely well for us as a food service and and again promoting more trial and that's been around for a while and that continues to grow as do most of our other channels e-commerce uh you know was up um you know, over 40%, 45% year over year. And we don't normally disclose that, but I just wanted everybody to know that this is, that's e-commerce. And it was up over 45% year over year. So that, you know, we're seeing growth in a multitude of different channels and not just in food service and in, you know, the first initial orders.

Yeah, we're definitely going across all channel with that growth. And I would say, and Trent, you correct me if I'm wrong, But the majority of our sales are coming from our core repeat customers and retailers as they grow into the brand and expand the product line across their retail shelf and into their channel and cold vault bridges. And that's where we're achieving a lot of growth. Initial orders are not a substantial amount of one-time reoccurring revenue for us, never have been either. And what we're seeing is very strong repeat purchases on regular occurrences across all channels to support the growth of the flow brand.

Great. That's helpful.

Thank you. Maybe if we move on the gross margin, And maybe if we could better understand the puts and takes on a sequential basis, given the cell of Verona. So maybe if you could give us a margin bridge, I guess that would be helpful. And I guess the drivers behind the lower margin and what you see as structural and maybe as temporary.

Yeah, well, one of the big things is that we did move from a 24-5 model at Aurora to a 24-7. And that's a lot of volumes going through there. We did that in, you know, I'd say the first month of our Q2. And, you know, obviously production and inventory buildup, you know, comes before the ultimate sale. And so... We incurred a lot of COGS at Aurora as an investment in COGS. And a lot of that goes in because of the way we allocate. It goes into COGS. I know there's a matching principle here, but a lot of that does end up going into COGS. And then our logistics. Our volumes were up tremendously, as you know. You could see it. Our volumes are up tremendously, both here in Canada and the United States, and that carries a lot more cost. Unfortunately, we don't get a lot of leverage off of our current logistics structure. And so it's almost linear. And I would even go so far as to say it's actually beyond linear. It costs more per unit of production in terms of logistics than we get actual benefits of economy of scale. And so as volume goes up, and all those logistics costs, a lot of them go into both G&A and salaries, and of course, COGS, because there's an allocation. And, you know, that we see as temporary, because we're, again, we're in the midst of a, we're in execution mode now. We've done all of our homework, we've looked at all different types of partners and everything else, and now we're in execution mode. And you'll see that, again, in the next quarter or two. But for us, that's all fairly temporary. And then you get into the food service as well, which is lower margin, but that's also temporary because you're right, there are some order-ins for things like Starbucks, but then as repeat purchases come in and new SOs come in to restock and people come into the better channels after trialing, which we again are seeing in not only e-comm but conventional, as Nick just talked about, that improves margins. And then in the U.S., look, there was some problems we had this quarter, you know, as our partner down there begins to ramp up and get used to the operations. And so that caused us to have some lower margin in the U.S., certainly lower than we anticipated. And we had some logistical issues. So there's a lot of things going on emerging this quarter that, you know, we would have liked to have not had happen. But we also see a a very bright path to ensuring that that doesn't occur in the future with some of the things that we're doing. And so I think, you know, Q3, Q4, there's a reason to believe that we're going to get back to much better margins, especially coming out of the current fiscal year.

Great. That's helpful. Thank you for the caller. That's it for me.

Thank you. Ladies and gentlemen, once again, if you would like to ask a question, please press star one at this time. Your next question will come from Sean McGowan at Roth MKM. Please go ahead. Morning, Sean.

Good morning, guys. Morning. Are you able to hear me okay? Yep. Yes. Okay, good. My headset's been weird. Yeah, Trent, you called out the $800,000 in salaries and benefits. Does that go away in Q3, and is there anything else in salaries and benefits that you would characterize as kind of unusual or non-recurring?

Yeah, there's a few things that happen in Q2 that we know aren't going to happen in Q3 and specifically Q4 as well. There's a lot of things that just happened. As you know, we just announced today 30% of our corporate layoffs teammates have been exited from the organization that are non-logistics, non-production, and they go through salaries. You can see that that's going to decrease salaries going forward. Also, you know, like we're doing a lot of things around production logistics. And, of course, some of that salary, a lot of that salary in logistics and to some degree production goes to salaries. And they all ramped up in the quarter. We see that coming back quite a bit in the quarters to come. And, you know, even in G&A, I know you're asking about salaries, but G&A was the same way. We took a couple of provisions and we did some things around – the IT ecosystem, which all hit G&A and to a degree salary, some of that was salary cost. So all of that sort of goes away, you know, as we go through. There's still going to be some cost in the Q3, but then in Q4 that levels back out. And so there's a lot of things that are happening. It's a bit of a moving thing as we really, I said, I guess the best way to have said it was that we were investing in in what we knew was going to be the optimization and streamlining of our business. And you see a lot of that investment coming through in salaries in G&A in Q2, but we anticipate that's going to start coming back down significantly in Q3 and then especially Q4.

Okay, thank you. Can you give us a sense of what we should expect consistently on a quarterly basis for interest expense?

Interest? Yes.

Well, look, we have our... What we saw in the quarter was actually a big increase because of the loan, but is that fully flushed out? Are we going to see that number go up as we go throughout the rest of the year?

Yeah, it's a bit of a complex answer, to be honest. You know, Sean, we have this Aurora strategic plan review happening and we have, again, negotiations and discussions with many interested parties and a multitude of different potential structures. With that being said, coming off the backside of any kind of potential transaction, there's a question of what debt will remain. And so our goal isn't to, I can tell you this, and to be, you know, to be open about it, our goal is not to carry a lot of debt servicing, you know, in the future. So I don't anticipate if you looked at our financials right now, Q2, and then you look at Q1 of next year, just which is only, you know, two, three quarters away, I would not anticipate you're going to see nearly as high an interest. That's what I asked.

Okay, that makes sense. And on the ERP switchover or, you know, the whole system, you said that some of that is already live. You know, these switchovers are notorious for suddenly causing glitches. Do you feel like you're kind of past the critical point and everything's switched over enough that you don't, you know, kind of in the clear for a sudden disruption here?

You know, that's a great question, you know, and the short answer is yes. But you're right, you know, like we had some time pressures for certain things that we'll get into, but we had some time pressures in terms of when we made the decision we're going in a different path, which we knew we were going to, you know, whether it was with optimizing with the people we had with the software providers we had already or going with a different set of software providers. We knew we were going to go down a different path shortly after I actually came into the organization. But we had some time pressures to get it to go live once we finally made the decision of where we're going and with whom. And so we didn't have a lot of time to parallel the two systems. And so there have been some challenges. you know, some headaches and pains, uh, from go live to up to this point. Although I can tell you it's gotten a ton better and we're, we're getting, we're getting to the point where we're pretty much, we're pretty much there, uh, on the core systems. And now we're getting into the BI and some, uh, and some great software on quarter end on quarter end closed processes and month end closed processes. Uh, so I think, I think that most of the pain is behind us, uh, for sure. But it'll be another probably four to six weeks before we're really where we need to be.

Okay. All right. Thank you very much. That's it for me. Thanks, Sean.

Ladies and gentlemen, at this time, there are no further questions. So this will conclude FLOW's Q2 2023 conference call. We would like to thank everyone for participating and ask you to please disconnect your