Freshii Inc.

Greetings and welcome to the Freshie, Inc. fourth quarter 2020 earnings 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. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Paul Hughes, General Counsel for Freshie. Thank you. You may begin.

Thank you and welcome to Freshie's fourth quarter of fiscal 2020 earnings conference call. Joining me today is Matthew Koren, our founder, chairman, and chief executive officer, and Daniel O'Rourke, 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 includes a 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 fourth quarter and fiscal 2020 earnings release, the related financial statements, and the management discussion and analysis are available on CDAR, as well as the investor relations sections of Freshy's website at freshy.inc. All figures discussed on this conference call are in U.S. dollars and must otherwise not be. 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 or our business in general. At this time, I would like to turn the call over to our CEO, Matthew Korn. Thanks, Paul. Good morning, everyone, and thanks for joining us today. In 2020, Freshy made considerable strides in its growth as an integrated omni-channel health and wellness brand. The current economic environment is certainly challenged by the pandemic impacts, but it also reminds me of Freshy circa 2007, 2008, when we were a small eight-unit restaurant chain grinding hard to survive the financial crisis. Coming out of that grind and as a result of our work to position the brand for success when things were covered, Our business expanded and over the next several years brought a period of incredible growth for Freshie. I believe that the hard work we've been doing over the past year across our expanding set of business lines will see us exit the pandemic, hopefully in the back half of 2021, poised for similar momentum. First, I'd like to update you on our core restaurant division, the centerpiece of our diversifying business lines. In 2020, our restaurants performed with resilience in the face of unprecedented headwinds. Even as we were forced to play defense, offensive strategies were not ignored and we were able to make some sustainable upgrades to the strength of our restaurant system as we went, particularly when it comes to promoting partner profitability. Through the hard work and the quick action of our franchise partners around the world, as well as the ongoing support provided by HQ, we've maintained the vast majority of our fresh locations through 2020 and to date. A number of HQ-led programs, including our streamlined menu initiative, landlord rent renegotiation support, and inventory management program upgrades, helped support franchise partner profitability at the unit level. In addition, the self-funded direct investments made by HQ in marketing initiatives, direct rent support, and operating expense offsets also contributed meaningfully to the durability of our network. It's important to note that HG was able to make these significant financial investments in the system, even as we maintained the strength of our balance sheet. As Dan will tell you, we maintained our 2019 year-end cash balance through the entire year-end 2020. In effectively reinvesting the cost savings generated in 2020, back into the restaurant division. We have both helped to maintain its scale and set it up for spring coming out of the pandemic as traffic returns, which we hope will be as early at the back half of this year. Beyond our traditional restaurant core business, there are a number of other parts of the Freshie omnichannel story I'd like to touch on this morning. First, I'd like to update you on our digital journey. One impact of the pandemic on the restaurant industry has been the acceleration of the trend towards digital sales. As the trend has accelerated, so has Freshies focused on the digital capability of our business. In Q3, we launched version one of the new Freshie app, which featured many user experience upgrades, including a more intuitive ordering process and basket building additional item suggestions at checkout, as well as enhanced loyalty. During the new app's first full quarter in market in Q4 2020, we saw our mobile app sales grow 65% over q4 of the prior year levels and our app store rating improved from the mid twos to 4.6 where it sits today we've also recently begun to roll out in-app delivery functionality allowing our guests to order their feshy favorite items direct to their door from within the freshy app this strengthens the connections we have with our off-premise customers and makes the freshy app the one-stop shop for all of our guests you can expect to see expanding availability of in-app delivery as well as increasing focus on the stickiness through our loyalty program in the coming periods. In the medium term, our vision is that the Freshie app becomes the central touchpoint with the company for Freshie fans across all lines of our expanding omnichannel health and wellness business. On omnichannel extension, We're excited to share today that Freshie has taken its first step beyond the world of food and into the adjacent business line of vitamins and supplements. We've just launched our first supplement product, bringing apple cider vinegar gummies to the shelves at our locations across Canada with planned expansion through the rest of our network in the coming quarters. We believe the sale of on-trend natural health products like apple cider vinegar gummies and other items represent a natural expansion of the health and wellness credentials we have built up with our freshie guests over the years and we hope to continue to expand our presence in this existing and exciting space the last area i'd like to touch on this morning also from an omni channel point of view is the strong interest we continue to see from both customers and retailers in our consumer packaged goods division In the last few months, we've expanded our relationship with Walmart Canada, adding our immunity-boosting elixir shots in multi-packs to store shelves with strong early sales performance. We are also in the process of rolling out three flavors of our popular energy bites across a number of Sobeys locations. We continue to test and pilot with other major grocery retailers and see this channel as an attractive space in which to grow our CPG points of distribution. As we continue to get closer to the end of the pandemic period, we're excited to watch the progression of our partnership with on-route service stations as road travel picks back up during our second summer on-site with them. Select on-route locations now include an impressive Freshie in-store branding footprint, which we think will be effective in letting drivers know that Freshie is available while they're on the go. Additionally, we are pleased with our growing relationship with Compass, and have plans to partner with them to bring Freshie's consumer packaged goods lineup to office building food halls as employees begin to return to work. Finally, it's important to highlight that our Freshie restaurants continue to serve as both additional distribution points for these new products, as well as a showroom for new innovation in our ongoing on-the-go healthy food CPG lineup. The cooperation between the restaurant and CPG divisions is a central advantage of our multi-channel strategy as it drives sales, revenue, and proof of concept for both business lines. What I've shared so far this morning boils down to a freshy brand that we see coming out of the pandemic for the strong and intact restaurant core, a digital platform with the capacity to meet and exceed the needs of today's guests, and an expanding set of restaurant-in-basin complementary health and wellness business lines. Many of our guests can now order a Freshie salad, a sparkling kombucha, and re-up their apple cider vinegar gummy supply all through the Freshie app delivered to their door in under an hour. This provides a satisfying early glimpse into the synergistic benefits of the integrated omni-channel freshie that we are so excited to continue to build in the quarters ahead. I'll now turn the call over to our CFO, Dan Halim. Thanks, Matthew, and good morning, everyone. I'll provide a brief overview of some of the highlights of our fourth quarter and full year results. For the fourth quarter, system-wide sales were 23.6 million, which represents a decrease of 18.8 million versus Q4 of 2019. Despite many of the jurisdictions that we operate in imposing additional government restrictions during Q4, the decline in same-store sales was proportionately in line with the decrease we experienced in Q3. We had net closures of nine locations in the quarter, with nine new openings and 18 closures. Similar to recent quarters, these closures were primarily made up of sites that have been underperforming versus system-wide AUVs prior to the pandemic. The majority of these closures were locations that we had identified as being challenged as part of our real estate review, which we've discussed on prior earnings calls. The pandemic has clearly accelerated the closures in our portfolio and also provided us an opportunity to make critical progress in our restaurant transfer program. As we outlined in our Q3 earnings call, where a transfer of ownership is necessary for a site with strong real estate potential, 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 impact our industry faces. Over the course of fiscal 2020, we've completed 19 transfers in North America and have more transfers planned for 2021. which should position our overall portfolio on stronger footing to emerge and capitalize on the opportunities we expect to see on the other side of the pandemic. In terms of same-store sales, we continue to see the flattening of the same-store sales recovery we experienced in the second half of Q3 hold into Q4, with same-store sales remaining at minus 28.4% in the fourth quarter. We did begin to see our sales recovery soften further in December as many key markets that we operate in entered into further rounds of restrictions, and that softening trend has continued into Q1 so far. Despite the drastic challenges our industry faces, as Matt mentioned, we are encouraged by the early growth we have seen in our new app's performance in its first full quarter of implementation, and are excited about the upcoming in-app delivery launch. I'll now touch on some of the key highlights from our income statement in the quarter. Our Q4 revenues were $3 million, down $2.5 million versus the prior year, driven by lower system-wide sales. SG&A for the quarter was $2.4 million, which after removing certain one-time costs, represents an increase sequentially of $0.3 million versus Q3, as we've accelerated our previously announced franchisee investment programs. We continue to make possible our approach of self-funding critical system investments by being very disciplined about cost control, even as we reinvest back into marketing and other initiatives to support our small business franchise partners as we continue to do throughout the pandemic. Even having made these investments, our Q4 2020 SG&A remains 33% lower than Q4 2019. In terms of profitability, despite reporting negative adjusted EBITDA in Q4 2020 of 0.4 million, we were pleased to end 2020 with positive adjusted EBITDA for the full year, even as we made critical investments back into the system that accelerated in Q4. With signs becoming clearer that we may begin to see a traffic and sales recovery in the second half of 2021 in our major markets, we have doubled down our focus on the long-term health of our business and focused on positioning our company and our franchise partners to emerge from this period on a stronger footing than we entered it. As a result, our focus is not on maximizing short-term profitability, but rather centers on making sound investments to accelerate our recovery and be in the strongest possible position to meet our guests' needs as traffic recovers. We will, of course, continue to actively monitor our strong cash position as we make these ongoing investments, and we're pleased that we maintain our 2019 year-end cash position of approximately US$31 million at the end of the fourth quarter, largely in line with where we were when the pandemic began to impact our industry early in 2020. We are proud of the way our HQ team rallied behind our franchise partners and remained focused on what we can control, emerging from the pandemic with a stronger business model, and that is what we will continue to focus on into 2021. At this time, we'd like to open up the call to any questions.

Thank you. At this time, we'll be conducting a question and answer session. If you'd like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question comes from the line of Derek DeLay with Canaccord Genuity. Please proceed with your question.