Flow Beverage Corp

TSX:FLOW

Earnings Call Transcript 2023-Q2

[Operator]

Good morning, everyone. Welcome to Flow Beverage Corp.'s Fiscal Q2 of 2023 Conference Call. As a reminder, this conference call is being recorded today, June 15, 2023. [Operator Instructions]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 3 months ended April 30, 2023, which are available under the company's profile on SEDAR.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.

[Nicholas Reichenbach, executive]

Thank you, operator. Good morning, everyone, and thank you for joining us today. I'm joined by Trent MacDonald, 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 4 strategic steps to execute our goal. #1, the sale of our Virginia production facility, which was achieved last November; #2, securing strategic financing from our Aurora facility, which happened in January; 3, simplifying and optimizing our entire operation and as announced this morning in our press release, the execution of our strategic alternative to our Aurora production facility. Trent will provide more details to update on all 4 bullet points as he prepared with his remarks.Since the execution of the first 2 steps, Flow brand has delivered excellent growth. Most recently, we reported 98% Flow branded 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 operation, bolster our balance sheet and demonstrate profitable growth and we've just begun. As of April 30, Flow 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 Albertsons Safeway locations across the United States, which is one of the largest grocery chains in the U.S.Looking at Flow 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 foodservice business has led to a record quarter net revenue growth of 98%. We are also seeing in the market today that our retailers, foodservice companies and consumers are demanding sustainable products, Flow remain the highest B-Corp's 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 and similar packages. We think that this means consumers are choosing Flow because of its amazing taste, our 0-calorie flavors and of course, our innovation with our vitamin infused water.Not only is revenue growing from our foodservice partners is 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 multiyear 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, Flow's influential 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 owned 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.

[Trent MacDonald, executive]

Thank you, Nicholas. [ Well ], let me 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 foodservice 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 foodservice does have as 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 Flow.Consolidated revenue increased 56% in Q2 2023 to $14 million. Not only did the Flow brand growth come in above what we had anticipated. We also successfully transitioned co-pack agreements from our Virginia production facility and saw higher order volumes from our key partners. Gross margins improved to 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 foodservice business resulted in temporarily lower margins as over the long term, we believe foodservice will help drive revenue growth at retail locations and over our e-comm platform as we are getting thousands, thousands of customers to try Flow and then when they pick up their morning coffee or to quench their thirst while watching the [ 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 7 days a week from 5 days a week with the ramp in production costs come prior -- but this ramp in production costs 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 the potential in the very near term. There are lots of material optimization initiatives in logistics and warehousing, which we've not yet executed on that we believe will help to improve margins once completed. EBITDA loss improved to $7.1 million from $8.5 million last year due to our higher gross profit and lower stock-based compensation.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 and 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 to -- and we have been incurring some costs ahead of the anticipated benefits, which we feel are only a quarter or 2 away.Salaries and benefits also increased from the prior year as a higher volume of Flow -- based on a higher volume of Flow sales. But again, logistics and -- 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, our 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 0.6x our revenue as compared to our publicly traded beverage peers trading at a multiple of 3 to 5 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 4-point plan to achieve profitable growth. As previously disclosed, we have completed the first 2 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 nonproduction 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 are 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 in the P&L from that point forward.And the last step in our 4-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 million 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.

[Operator]

[Operator Instructions] Your first question will come from Luke Hannan at Canaccord Genuity.

[Luke Hannan, analyst]

Nicholas, you had mentioned in your script there, it sounds like that foodservice is strategically an 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 foodservice 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 foodservice. How much more runway do you have to grow there?

[Nicholas Reichenbach, executive]

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. Yes, to answer the first question, we are defining the core metrics of conversion as we roll out foodservice 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 the flavor that they carry at Starbucks. And we saw a significant double-digit growth in our e-commerce and a significant growth across all of our retailers with our core SKU, we call it OG of the high mineral [ high outline ] nonflavored water in both the 500 and 1 liter. But we also saw specific SKUs that were impacted, that were dedicated 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 Flow new customers and Flow old customers on the values and attributes in Flow, 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, flowhydration.com. This will, in the quarters to come, give us very quantifiable data associated with house foodservices 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.

[Luke Hannan, analyst]

That's good color. My second question here is just on the -- one of the components of -- 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 get from these new capabilities?

[Trent MacDonald, executive]

Sure. Let me answer that one. So look, when we come in the IT 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 are world-class platforms, but they weren't optimized and it was like getting evenly when you really need it at Toyota. And for us, because they were never optimized, they didn't speak to each other the way we -- 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 didn't have the information. And not only have they were very, very high cost again.So the new IT ecosystem, while much more simplified is actually tremendously comprehensive. So we have our -- obviously, 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've really spent 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 will allows us to -- will very soon allow us to track full cost inter costs associated with any movement across in customer geographic area and really look at better -- making better decisions around profitability, pricing. Obviously, what is not profitable to invest further funds in and resources in the development of the brand.And so it's a very comprehensive platform, and we also are doing a lot of things on just even ICM parent controls on period end close and quarter end close software that's really going to help us make things more efficient. So it reduces labor and work around 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 has gone live. It just went live literally 4 weeks ago.

[Luke Hannan, analyst]

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?

[Trent MacDonald, executive]

Yes. Again, that is -- 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, I have got, as you develop your brand and there's consumers are making it a destination shop looking -- going into retail locations looking to buy Flow rather than it being more trial or a treasure hunt. 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, multiple percentage points over last year. And so we're starting to get leverage out of a lot of the tradesmen 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 ] or 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 does allow such -- it does -- it's a big component of velocity. But for us, it is -- we don't see it ever getting sort of back to where it was 2 years ago and 1 year ago. We think we're doing a much better job and consumer demand is helping that.

[Nicholas Reichenbach, executive]

Yes. And I think I'll add to that, so I answer your first question, Luke, Part 2 is the foodservice 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 trades and/or TPR, temporary price reduction strategy that you're going to see at a local grocery store or drug channel or even [ margin ] channel. 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 foodservice will be expanded, and we are really at the start of a very large journey with foodservice. I wouldn't even call it single-digits penetration even in 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.

[Operator]

Your next question comes from Chip Moore at EF Hutton.

[Chip Moore, analyst]

Great. I'd like to ask about some of the moving pieces, the next couple of quarters more on the warehouse and distribution side. You tried to just help us think about margin trajectory next couple of quarters and into '24. And then when I dovetailed that with your comments on the foodservice side and mix and I think the investment strength there makes sense. Just help us think about the margin trajectory?

[Trent MacDonald, executive]

Yes. Great question. And so look, we know because we've gone through this pack 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 call 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. And we believe by late August, early September, we will have fully optimized our -- that's 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 yes, it was mix, but there was also a lot of other things going on in margin in 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, it's going to be close to 30%. But we do believe coming out of this fiscal year, sort of, if you think Q4, Q3 will -- there should be definitely be some improvements from where we are now in 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 in pulling on a lot of levers going forward. So we anticipate like higher than we had expected earlier and what we were sort of talking, but we weren't guiding, but we're talking about where we want to be. We're now thinking we can be even higher.

[Chip Moore, analyst]

Excellent. That's great color, Trent. And maybe for my second question, just Aurora sort of time lines 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.

[Trent MacDonald, executive]

Yes. Look, we identified this a while back as part of the pillar -- the 4-part pillars. It's a valuable asset, as we say, it's a profit center. It has very strong EBITDA as a stand-alone production facility. And so yes, there's -- obviously, there's a lot of good things about that particular is only beyond just the profit center, geographic location to major distribution routes in the middle of a very populated area with a great labor force, expansion capabilities that can get -- we have 3 lines in there, you could probably put up to 8 lines in there. Warehousing as rate decided. So a lot of great things.And so we do have -- 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 to -- that want to come into that facility. And so we've had several ongoing negotiations and conversations with certain parties, and we're not sure which form and format it will take because there's a 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 it will take, but we do know there's value to unlock that is going to allow us to put 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.

[Nicholas Reichenbach, executive]

Yes. And I think I can just add to that, that the #1 consideration for Flow is that it will continue and will partner with a company that will continue the strategic growth of Flow over the years and years to come, thus achieving growth that we're already achieving year-to-date and our penetration in the U.S. and Canada just growing there, we are really going to partner with a strategic 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 [ then now ] to be able to continue our growth path as we penetrate more into Canada and ultimately invest heavily against our U.S. growth.

[Chip Moore, analyst]

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 that's ramping.

[Nicholas Reichenbach, executive]

Yes. Excellent question. We -- 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.So 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 Flow'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 customers' 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 yes, we're very bullish with our continued growth as well as our continued expansion of that product line.

[Operator]

Your next question will come from [ Matthew Goche ] at Stifel.

[Unknown Analyst]

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 growth drivers behind that strong performance? And maybe if you could also give us the proportion of those revenues that maybe came from onetime initial channel fill?

[Trent MacDonald, executive]

Yes. Look, the -- we don't typically give disclose the breakdown of all of our sales in terms of percentages. But we [ can ] say this. The -- obviously, there are -- we launched a new channel or with a large new partners like in this case, Starbucks as an example. You always have that fill in, to your point. But I can tell you thus far, I think from what everything we can see that it has been outperforming what Starbucks thought it would. And there have been a monumental amount of preorder -- or sorry, post orders after the fill-in. So we have had repeat purchasing, repeat purchasing, repeat purchasing like crazy. And so that has been -- and 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 a couple of key partners that we took in Q2. But look, other channels, like I mentioned in my prepared remarks, Norwegian Cruise Line is doing extremely well for us as a foodservice and again, promoting more trial, and that's been around for a while, and that continues to grow and as do most of our other channel e-commerce was up over 40% -- 45% year-over-year. And we don't normally disclose that, but I just wanted to know that this is that's e-commerce. And it was up over 45% year-over-year. So we're seeing growth in a multitude of different channels and not just in foodservice and in the first initial orders.

[Nicholas Reichenbach, executive]

Yes. We're definitely going across all channels 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 the 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 onetime recurring 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.

[Unknown Analyst]

Great. That's helpful. Maybe if we move on the gross margin and maybe if we can better understand the puts and takes on a sequential basis given the sale 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 is temporary?

[Trent MacDonald, executive]

Yes. Look, 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 -- I'd say the first month of our Q2. And obviously, production and inventory buildup comes before the ultimate sale. And so we incurred a lot of cost at Aurora as an investment in COGS. And a lot of that it goes in because of the way we allocate goes into COGS. I know there's a matching principle here, but we -- there does -- 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 were up tremendously both here again in 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, then 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, cost because there's an allocation.And that we see as temporary because we're -- again, we're in the midst of a -- we're in an execution mode now. We've done all of our homework. We've looked at all different types of partners and everything else. So now we're in execution mode, and you'll see that again in the next quarter or 2. But for us, that's all fairly temporary. And then you get into foodservice 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 newer 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 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. that is certainly lower than we had anticipated, and we had some logistical issues. So there's a lot of things going on emerging this quarter that we would have liked to have not had happen, but we also see 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 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.

[Operator]

[Operator Instructions] Your next question will come from Sean McGowan at ROTH MKM.

[Sean McGowan, analyst]

Yes, Trent, we called out the $800,000 in salaries and benefits. Does that tool away in Q3? And is there anything else in salaries and benefits that you would characterize as kind of unusual or nonrecurring?

[Trent MacDonald, executive]

Yes, there's a few things that happened in Q3 in salaries and benefits that -- sorry, 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 teammates ] have been happily exited from the organization that are non-logistics nonproduction. And they go through salaries. And so you can see that, that's going to decrease salaries going forward. Also, like we're doing a lot of things around production logistics. And of course, put some -- some of that salary, a lot of that salary and logistics and to some degree, production [Technical Difficulty] salaries, and they all ramped up in the quarter. We see that coming back quite a bit in the quarters to come.And even in G&A, I know you're asking about salaries, the G&A was the same way. We took some -- a couple of provisions, and we did some things around the IT ecosystem, which all hit G&A and to a degree, salaries, some of that was salary cost. So all of that sort of goes away as we go through. There's still going to be some costs into Q3, but then in Q4, that level [ back comes out ]. And so there's a lot of things that are happening. It's a bit of a moving thing as we were really -- I said -- I guess the best way to say it was that we were investing in what we knew was going to be the optimization streamlining of our business, and you see a lot of that investment coming through in salaries and G&A in Q2, but we anticipate that's going to come -- start coming back down significantly in Q3 and then especially in Q4.

[Sean McGowan, analyst]

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

[Trent MacDonald, executive]

Interest?

[Sean McGowan, analyst]

Yes.

[Trent MacDonald, executive]

Well, look, we have our...

[Sean McGowan, analyst]

What we saw in the quarter was obviously a big increase because of the loan, but is that kind of -- is that a fully flushed out? Are we going to see that number go up as we go throughout the rest of the year?

[Trent MacDonald, executive]

Yes. It's a bit of a complex answer to be honest. Sean, the -- we have this Aurora strategic 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 open, but our goal is not to carry a lot of debt servicing in the future. So I don't anticipate, if you looked at our financials right now in Q2, and then you look at Q1 of next year, just -- which is only 2, 3 quarters away, I would not anticipate you're going to see nearly as high an interest.

[Sean McGowan, analyst]

Okay. That makes sense. And on the ERP switch over the whole system, you said that some of that is already live. These [ switch holders ] notorious for certainly causing glitches. Do you feel like you're kind of past the critical point and everything is switched over enough that you don't kind of be clear for a sudden disruption.

[Trent MacDonald, executive]

That's a great question. And the short answer is yes. But you're right. 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, whether it was with the optimizing with the people we have 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 our [ FT team, since ] the organization. But we had some time pressures 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 2 systems. And so there have been some headaches and pain from go live to up to this point. Although I can tell you, it's gotten a ton better, and we're getting -- we're pretty much there on the core system, and now we're getting into the BI and some great software on quarter end close processes and month-end close processes. So I think most of the pain is behind us for sure, but it will be another probably 4 to 6 weeks before we're really where we need to be.

[Operator]

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 lines.