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spk00: Thank you. Greetings. Welcome to Freshie's third quarter 2020 earnings conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to your host, Paul Hughes, General Counsel for Freshie. Thank you. You may begin.
spk02: Thank you, and welcome to Freshie's third quarter 2020 earnings conference call. Joining me today is Matthew Koren, our founder, chairman, and chief executive officer, and Daniel O'Reilly, chief financial officer. Please note that remarks in this conference call may provide certain information regarding our expectations, future plans, and intentions that may constitute forward-looking statements. I would refer you to our most recently filed management discussion and analysis, which include the summary of the significant assumptions underlying such forward-looking statements and certain risks and factors that could affect our future performance and our ability to deliver on these forward-looking statements. The third quarter 2020 earnings release, the related financial statements, and the management discussion and analysis are available on CDAR, as well as the investor relations section of Freshy's website at freshy.inc. All figures discussed on this conference call are in U.S. dollars, unless otherwise meted. Following our prepared remarks, we will open the line for questions. As we will not be conducting any follow-up calls this morning, we encourage you to use this question period to ask us any questions you might have about our results and our business in general. At this time, I would like to turn the call over to our CEO, Matthew Koren.
spk03: Thanks, Paul. Good morning, everyone, and thanks for joining us. This morning, we will report on the hard work executed by our franchise partners and HQ team members as we look to drive profitability, operational excellence, and sales initiatives in the face of the challenges the restaurant industry is facing. Through Q3 and to date, Freshie has deployed a mixture of defensive and offensive strategies that we believe will both see us through the current pandemic period and set us up for growth as things normalize. I want to reiterate the same five things we referenced on our last call that give me confidence in the strength of Freshie as a brand, a network of restaurants, and our ongoing omnichannel expansion in the health and wellness industry. These five sources of confidence continue to be, one, our attention to the importance of managing restaurant and corporate level profitability in an environment where restaurant traffic is challenged by the pandemic. Second, our sales recovery and maintenance of approximately 70% of 2019 sales through Q3 in the stores included in our same-store sales base, despite the second phase of the pandemic having hit hard in many of our key geographies. Three, the continued progress we are making in expanding beyond our lunchtime core and building our dinner business, which has grown considerably year over year as percentage of sales and which we expect to further strengthen by the recent launch of our chef-inspired dinner plates across Canada. Four, our Fresh E Foods consumer packaged goods division and the strong interest it continues to generate from both retail partners and customers. And five, the continued strength of the unity and connection between Fresh E franchise partners and the HQ team working arm in arm to address our collective challenges. These five points, plus the strength of our balance sheet, plus the commitment and grit I've seen exhibited across our entire system in the toughest times ever faced by restaurant operators, give me confidence in the longevity and strength of the Freshie brand. Before moving on to talk about our recent strategic work, I'd like to touch on Freshie's headline performance metrics. Over 90% of our North American traditional locations and 80% of our global locations are currently open and operating. Despite the impacts on the second phase of the pandemic in many key geographies, the Freshy Network saw an approximately 70% increase in system-wide sales in Q3 compared to Q2. Further, the system has retained the sales recovery it gained since the earliest days of the pandemic, with same-store sales holding generally consistent to what we reported on our last earnings call. As we mentioned last quarter, our drive stores, which make up over a third of our entire network, have generally experienced the strongest recovery trajectory, while our urban center and mall locations remain more challenged given traffic impacts in these areas. In terms of openings and closures, in Q3, we opened four new freshie restaurants. while closures slowed versus Q2 to 14 closures, giving us a net closure number of 10. I mentioned the continued strength of our cash position, which sat at approximately $31 million USD as of the end of Q3, and allows us the optionality and flexibility to invest in our system when and as needed to drive recovery and our forward-looking initiatives. Freshie has continued work on the three strategic pillars we set out for 2020 in order to accelerate short-term recovery and position the brand for long-term growth. First, we remain focused on maintaining and strengthening our core business. Following the completion of a Canada-wide rollout of our new elevated chicken in Q2, We recently began in-market testing of an all-new superfood smoothie lineup that includes brand new flavors like banana and nut crunch and the spirulina, as well as re-imaginations of freshy classics like strawberry banana and tropical mango. Early results in this test show that guests are enjoying the upgraded smoothie lineup, and we will continue to monitor the progress of this initiative. We plan to continue to innovate on our current menu and core lunch day part through customer-focused, data-driven menu initiatives in the coming quarters. Second, in terms of strengthening our digital presence, I'm pleased to let you know that we have launched phase one of the all-new Freshie mobile app. The new app has an entirely upgraded user experience, point-of-sale integration, improved suggested order add-on functionality, and personalization ordering functions. The next phase of the new app rollout will include the introduction of a revamped loyalty program, as well as in-app delivery functionality. We've seen strong user ratings and feedback on the Apple and Android app stores so far, which is a sign that our guests are appreciating the improved digital experience. As a reminder, Earlier this year, we completed the rollout of both Uber Eats and DoorDash partnerships across 90% of our serviceable locations in North America, which, as a complement to our new app rollout, further strengthens our connection with our guests in the increasingly important digital sales arena. Our third strategic pillar for 2020 is the continued development of dinner as a second day part. which is particularly important as we continue to see dinner make up a higher percentage of overall sales as compared to pre-COVID-19 levels. In late October, following a successful market test in Vancouver, British Columbia, we completed a limited-time only cross-Canada expansion of the new Dinner Plates platform, complete with family meal options and sides, and available for dine-in, take-out, or delivery. Additionally, as you may have seen, just this past Monday, we launched one of the biggest limited-time offer promotions to date as a brand and offered the entire country of Canada the chance to try Freshie Plates for free when ordering through the Skip the Dishes platform during dinner time. The feedback we received from both new and long-term guests on this promotion and on the plates themselves was excellent. We are excited about dinner as a second day part opportunity and intend to continue to invest in this area. Beyond the three pillars we are working on this year, we've also committed to working alongside our franchise partners to address the challenges of the COVID-19 pandemic. As I announced last quarter, we've created a $1 million investment pool to be applied to initiatives designed to accelerate our restaurant's sales recovery. We've now started deploying these funds in support of the Freshie Franchise Partner Network. In particular, we've invested significantly in marketing and promoting the launch of our new Freshie app, both physical and digital marketing initiatives, designed to drive check and in offsetting certain franchise partners' supply chain costs. As I said, our franchise partners have been working tirelessly to maintain momentum in this challenging environment, and we want to make sure they know that we're right there with them. In addition to continuing marketing and app-related investments, we planned to direct additional funds to further initiatives, including a new loyalty program rollout and the implementation of an enhanced customer experience program across our network. In terms of our consumer packaged goods division, in Q3, Fresh E Foods continued to build retailer relationships and generate new interest with its evolving lineup of healthy, shelf-ready options. In addition to continuing work with our current retail partners, including Walmart, Canada and Shell and others, following a successful rollout across enroute travel hubs in Ontario this summer, FreshEat and enroute will continue their partnership going forward. Motorists will continue to be able to choose FreshEat's better for you food options when they pull in to refuel at an enroute centre. The strong interest from major retailers in listing the Freshie Foods lineup is ongoing, and as I've mentioned, we look forward to reporting back on this division as our company grows. In summary, at Freshie, we continue to play both offense and defense during this evolving pandemic period. As I've described to you today, we are both actively investing and engaging in activities designed to drive sales and set the company and our partners up for long-term success. while still remaining highly diligent in focusing on the current cost-based management that must play a central role in all near-term pandemic management strategies. Before I turn the call over to Dan, I want to thank our entire team at HQ, as well as our franchise partners and their team members, for their continued commitment to the freshening mission throughout the ongoing period. Without this commitment, we would not be as resilient and strong as we have proven to be to date. Additionally, this quarter, it's important that I also acknowledge and thank many of our landlords that have come to the table and worked with our real estate team to put in place medium-term lease revisions for our franchise partners that better reflect the realities of the pandemic environment and that we believe will help see our restaurants through to better in-store traffic days. I truly appreciate their collaboration and look forward to our continuing relationships. I'll now turn the call over to Dan to provide some additional color on our financial results before opening up the call to any questions. Thank you.
spk02: Thanks Matthew and good morning everyone. I'll provide an overview of our third quarter results, reviewing our sales, how that translates to our revenue and profitability, as well as our liquidity position. For the third quarter, system-wide sales were $27.5 million, which represent a decrease of $21.7 million versus Q3 of 2019, but as Matt mentioned, represent a strong recovery from Q2 2020 levels with an increase of 70% in system-wide sales sequentially versus the second quarter. We had net closures of 10 locations in the third quarter with four new openings and 14 closures. Similar to Q2, these closures were primarily made up of sites that had been underperforming prior to the pandemic. As we said last quarter, many of these closures were of locations identified as being challenged as part of the real estate review we discussed on the second quarter conference call. I do want to briefly touch on the importance of our in-network store transfer program to our long-term success. It is not our strategy to buy back locations from franchise partners and run them corporately for any period of time as we remain committed to our asset-light operating model. Instead, where a transfer of ownership or management is necessary for a strong site, we will continue our efforts to shift these attractive locations to our most capable partners while working with our landlord partners to negotiate medium-term lease structures that reflect the temporary but material sales challenges our industry faces to keep these sites viable. In the third quarter, we completed four new transfers and since the beginning of 2020 have now transferred a total of 10 locations from challenged operators to more capable partners who also tend to be better capitalized. We believe this critical work will have a lasting impact on our business for years to come. In terms of same-store sales, we continue to see the same-store sales recovery we experienced in the second half of Q2 hold into Q3, and we're pleased with the progress we saw in the quarter, with same-store sales recovering from negative 46.5% in Q2 to negative 26.8% for Q3, almost a 20% improvement. We continue to see strong improvements in average check in Q3 2020 as compared to the prior year and it was encouraging to see traffic trends in the quarter improve versus the second quarter. We did begin to see our sales recovery soften slightly in September compared to the first two months of the quarter as many of the jurisdictions that we operate in felt the impact of a second wave of the pandemic and increased government restrictions. I'll now touch on some of the key highlights from our income statement in the quarter. Our Q3 revenues were $3.6 million, again a strong improvement versus Q2 levels, but down $2.3 million versus the prior year. SG&A for the quarter was $2.9 million, which represents an increase of $1.1 million versus Q2 when we were operating in a time of heightened uncertainty and had certain temporary cost reduction initiatives in place. We continue to make possible our approach of self-funding critical system investments by being very disciplined about cost control. even as we reinvested back into marketing and other initiatives to support our small business franchise partners, as we did in the second quarter as well. Despite these investments, our Q3 SG&A remained 17% lower than Q3 of 2019, and the company continued to benefit from the Canadian government wage subsidy initiatives in Q3, which are recorded as a reduction to SG&A. Moving to our profitability and free cash flow, we were pleased to record our third consecutive quarter of positive adjusted EBITDA, which came in at $0.3 million despite the significant revenue challenges brought on by the pandemic and our reinvestment into the system in the quarter. We also reported positive free cash flow of $0.3 million for Q3 as we remain disciplined and controlling CapEx. We continue to be focused on the long-term health of our business and positioning our company and our franchisee partners to emerge from this period on stronger footing than we entered it. As a result, our focus is not solely on maximizing short-term profitability, but rather includes making sound investments to accelerate our recovery and be in the strongest possible position to meet our guests' needs as traffic recovers. We do aim to self-fund these investments through cost savings wherever possible to maintain our strong and stable cash position. On that note, we were pleased that we maintain our cash position of approximately $31 million USD at the end of the third quarter, largely in line with where we were when the pandemic began to impact our industry in early March. Our HQ team has rallied behind the everyone is an owner mindset we approach our business with, and we continue to look for creative ways to reduce our expenses to free up further funding to accelerate our strategic initiatives as we move into 2021. At this time, we'd like to open the call up to questions.
spk00: Thank you. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. And for participants using speaker equipment, it may be necessary to pick up the handset before pressing the star keys. One moment while we poll for questions. Our first question is from Lou Cannon with Canaccord Genuity. Please proceed.
spk01: Thanks. Good morning, guys. Matt, first one's for you. I'm curious to know, and specifically on the app that you guys are rolling out, when you think about using your own proprietary app versus some third-party aggregators like like a gift edition store, et cetera, how do you think about where it is, I guess, you see your customers long-term? I mean, I would imagine you see them longer term gravitating towards your app because of the loyalty program, and that would also be a benefit to you guys because you get to use and see that data. Just if you could shed some more light on how you see that ecosystem of apps and how it works longer term for your customers.
spk03: Good morning, Luke. Yeah, I think you're seeing it exactly the right way and the way that we are as well, which is, you know, the call it medium-term journey is to bring as many of our, you know, loyal customers who see value in using us multiple times a year, shift over and see value in having our app on their phone. And if they become a member of our app, they also become a member of our loyalty program. And if they're a member of our loyalty program, there suddenly becomes a lot of incremental value for that guest to be actually interacting with the Freshie app versus ordering us on one of the third-party aggregator platforms. And so I think the world will have both. I think we'll drive a lot of revenue through a myriad of third-party partners who we have good relationships with and can reach a broad audience And then we'll be looking to bring those guests who are quite loyal to Freshie and see value on keeping our logo on their valuable home real estate to become one of our loyalty members and ultimately be able to serve them up more value in more curated ways over time. And that's basically the way we're thinking about it.
spk01: Got it. That's helpful. When you touched in your prepared remarks, the other comment you had made was that you're getting, I guess, a bit more favorable lease terms, or at least more reflective of this new environment that we're operating in. I appreciate that you probably can't share the specifics of what exactly those new leases entail, but Can you, I guess, provide any sort of insight? Is there a certain level of abatement? Is it more based off of something like a percentage of sales, something that's more variable and appropriate to now? Or just curious to know if you can shed any sort of additional light there.
spk02: Hey, Luke, it's Dan. Thanks for the question. It's an important one. From our perspective, we're really focused on supporting our our franchisees and getting through this medium term and and really you know there's the impact we're seeing right now is temporary but it's significant and with the work that we've done with our our network and we've talked about the network um over time in the last few quarters um it's really important for us to make sure that we can get back to a world where traffic is normal and then you know the economics of the restaurant p l um start to look a little bit more like what they would look like pre-pandemic and that's really how we're partnering with our our landlords to go on that journey together to see the brand through to the next stage when traffic is normal and we can get back to partnering together in the ways that we have to date.
spk01: There was also discussion in the prepared remarks about there was an offset test, G&A, associated with the wage subsidy program. Can you guys disclose exactly sort of how much that may have helped? And I'm assuming that we can assume that there probably won't be much benefit for that going forward.
spk02: Yeah, so those numbers are disclosed, and you can see them in our financials. Maybe if I step back and think about the way we're operating more broadly, our aim is to maintain our cash position but reinvest to support our small business franchise owners. And so you've seen that with the choices that we've made in managing our costs in a very disciplined way and then cleaning up investments. And Matt talked about the investments that we've been making across the system in the prepared remarks that we disclosed last quarter. And so really we're looking at it holistically in managing our cost base to free up funding, to invest back in our franchise system for the short term, but also to emerge from the pandemic in a stronger way.
spk01: Okay. Last one for me, and then I'll jump back in the queue. The partnership, the EnRoute partnership, is there an opportunity there maybe for i'm appreciating probably there's you're seeing i mean i know canadians aren't really traveling ontarians aren't really traveling as much right now as maybe they would in a normal environment but people can still you know drive to see other parts of the province if they choose is there an opportunity to maybe expand the the skew assortment that you have at those locations across ontario
spk02: I think it was our first quarter launching with OnRoot, and we're pleased with the results we've seen. Our teams are actively working together on how we can take advantage of the next spring and summer busy season as well. But it's early days in the partnership, but we're pleased with the results we've seen to date, and it's a partnership we want to continue to build and grow on that's important for us.
spk01: Got it. That's very helpful. Thanks, guys.
spk00: We have reached the end of the question and answer session. I would like to turn the conference back over to Matt for closing remarks.
spk03: Thanks, Sherry. And Luke, thanks for your question and thanks for everybody else who joined us this morning. We will look forward to updating you on our progress again next quarter. Have a great day.
spk00: Thank you. This does conclude today's conference. You may disconnect your lines at this time and thank you for your
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