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spk03: 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.
spk02: Thank you and welcome to Freshie's second quarter 2021 earnings conference call. Joining me today is Matt Hugh Corrin, our founder, chairman, and chief executive officer, and Daniel Horan, 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 second quarter 2021 earnings release, The related financial statements and the management discussion and analysis are available on CDAR, as well as the investor relations section of Freshie's website at freshie.inc. All figures discussed on this conference call are in Canadian dollars, unless otherwise noted. 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 the second quarter of 2021, Brushy Restaurants saw strong sales recovery with 46% same-store sales growth year-over-year. Our consumer packaged goods and direct-to-consumer divisions made solid progress as we grow our omnichannel platform And at the parent level, we maintained our healthy balance sheet with a cash position of $38.1 million and zero debt as of June 27th of this year. In the second quarter, we repurchased $1.2 million in Class A shares through our NCIB and began deployment of a $1 million investment fund directly into our franchise restaurant division, which we plan to put directly into the system through the end of the year to aid in the acceleration of our recovery and growth coming out of the pandemic. I'd like to share some specific trends for our restaurant division. In Q2, digital sales continued to make up more than 40% of all North American traditional restaurant sales. Adoption of our upgraded Freshie app, which includes white-labeled delivery that is both frictionless for guests and more profitable for our franchise partners, also continued to be strong. For the second quarter running, our app sales have more than doubled year over year, with Q2's app sales up 105% as compared to Q2 2020. As we continue to encourage guests to make the Freshie app their preferred ordering option, we recently launched Freshie's first-ever app-only limited-time offer menu item. Freshie app users now have the exclusive access to our Energy Bite smoothie, featuring the great taste of our popular energy bites in a perfect for summer smoothie format. As our app continues to be the focus area for us, you can expect to continue to see exclusive app-only promos like these in future periods. In Q2 2021, particularly in May and June, as pandemic restrictions began to ease in key markets, sales levels accelerated for the system in general. We closed the quarter with a same-store sales growth of 46%, and we are pleased to be moving closer to pre-pandemic sales levels. Our North American suburban locations, for example, which are the largest segment of our system and are less affected by challenged office and mall traffic, have recovered to over 90% of 2019 sales levels, as the four-week period ended July 25, 2021. Over the same period, Freshie's broader North American traditional locations have recovered more than 80% of their 2019 sales levels. In terms of operating locations, Freshie restaurants that have been temporarily closed as a result of the pandemic also continue to reopen. As of the end of Q2 2021, Freshie had 364 restaurant locations open and operating, an increase of six locations over the end of Q1, and an additional 20 locations still classified as temporarily closed, but with an upcoming planned reopening date. Despite the challenges of recent periods, we also continue to see franchise partners open new markets, with four new freshie locations opening their doors in Q2. With pandemic restrictions receding in key markets recently, our franchise development team is seeing strong interest in the brand, and we continue to believe we are positioned in the company for a strong development pipeline in the medium term. In Q2 2021, the dinner day part made up over 25% of the sales mix in restaurants open during dinner hours. This strong performance was supported by Freshie's Better For You Tacos limited time offer, which proved popular with guests during both lunch and dinner day parts. Our take on tacos featured cauliflower-based soft-shell tortillas, three protein options, and a host of Mexican-inspired sauces and flavors like chipotle chicken, salsa verde, Mexican street corn, and jalapenos. The tacos LTO also featured a chips and hot queso add-on that has had an impressive attachment rate with our guests. It's a really delicious product. We look forward to finding ways of bringing the popular tacos back to our menu in the future, given the success of this specific limited-time offer. Following our initial fresh-eat dinner plates test in Q4 of 2020, we are now excited to bring an evolved version of that platform to our menu later this calendar year. In Q4, we plan to launch three evolved plates, each featuring a protein in two sides. During the test we did, we saw plates drive a higher mix of sales at dinner and an increase in average check, and we expect the launch of updated plates modified to reflect the customer feedback received during the test to further support dinner time sales lift. Dinner growth remains a strategic pillar for Freshie, and we are excited about continuing to grow dinner as a second core day part. As I noted earlier in my remarks, Freshie made an additional approximately $1 million support and investment fund available to our franchise network to help the system through the challenges presented by COVID-19 from Q2 through the end of this year. These funds, which we intend to split fairly evenly between sales driving and marketing initiatives on one side and operational cost offsets and profitability driving programs on the other, are designed to help allow our franchise partners to focus on the most important task of delivering exceptional food and service to our guests by relieving a portion of the financial strain imposed by the pandemic. As usual, we've been impressed by our franchise partners' resilience in the face of the current challenges and are so glad to be able to provide corporate-level support to our restaurant division. In addition to our focus on supporting our core restaurant business, Fresh Eat's additional business lines and their teams leading them continue to dedicate significant effort to the growth of our omni-channel health and wellness channels, which complement the Freshie Restaurant Network. We strongly believe that each business line will benefit from the heightened awareness and relevance of the brand as a trusted source of all things health and wellness as we expand the consumer touchpoints within the Freshie brand. I'll share some specifics on our CPG division now. In Q2, our CPG division continued to work on expanding its points of distribution and refining its product offerings. We saw some positive trends in the quarter, including at a number of our key retail partners, including on-route service centers and Walmart. In addition to our fresh lineup of salads and wraps, we're also seeing customers and retailers alike continue adopting our beverage and snacking platforms with our juices, our energy bites, and other more shelf-stable products, making up a larger percentage of the overall sales mix. These snacking and beverage products, which benefit from a longer shelf life, enhance the breadth of our CPG offering and encourage multi-product purchases. One example of this is the recent expansion of both the flavors and the pack size of Fresh's Energy Bites, with multi-pack selling well and attracting interest from new retailers. Energy Bites also continue to be an area in which the company is focusing on flavor innovation, and we anticipate launching seasonal flavor bites in the coming periods, including a fall launch of Pumpkin Spiced Energy Bites, a favorite flavor profile of the season. Our consumer packaged goods business development team continues to generate interest with retailers, and we expect our points of distribution to continue to grow in coming periods. I'll now share some specifics on our direct-to-consumer division. Following Freshie's restaurant network launch of its apple cider vinegar gummies in Q1 of this year, in Q2, the company introduced an additional sales channel for our nutritional gummies as we launched a direct-to-consumer website for these products with both individual and subscription ordering options. Now, customers are able to access Freshie's gummies either when they come to our restaurants or they can choose to receive them by delivery direct to their doorstep. We continue to work on product innovation for our exciting new nutritional supplement business and have plans to bring additional products to market this year. Finally, before passing the call to Dan, I'd like to thank all of our dedicated franchise partners, our retail partners, and our team members at HQ for their hard work and commitment over the last quarter. As we continue to see COVID-level related restrictions in key markets abate, and as our sales trends respond accordingly, my confidence that FreshU will come out of this pandemic stronger than ever continues to grow. I'm so proud to work alongside all of our great partners in our network and our impressive HQ team every day. I'll now turn the call over to our CFO, Dan Harim. Thanks, Matthew, and good morning, everyone. As you will notice, in Q2 we made a change in our accounting policy and will now be reporting in Canadian dollars. This change was made to make our financial statements and related disclosures easy to understand and to reduce complexity given the majority of our system-wide sales, revenue and assets are in Canadian dollars. We have included in the financial statements and the MD&A the exchange rates used to make these changes and have restated our comparable periods as well. Our objective in making this change was to continue to make our financial materials easier for you to understand, and we will continue to enhance our disclosures in the upcoming quarters as our omnichannel strategy unfolds. In the second quarter and through early August, we completed the most significant review of our store portfolio to date. As a result of this review, we exited 21 locations in the second quarter and approximately five locations in the Q3 quarters to date period. A significant majority of these locations were temporarily closed at the end of Q1 and were not open and recording revenue during the second quarter. We were pleased to still increase the amount of locations open and operating in the second quarter compared to the first quarter as our franchisees reopened eight locations in the quarter. At the end of Q2, we had 95% of our locations open and operating, and our franchise partners have communicated they intend to reopen the majority of the 20 temporarily closed locations before the end of 2021. Now turning to our quarterly financial results, in the second quarter, system-wide sales were $38.5 million, an increase of 74% versus Q2 of 2020, which marked the onset of the COVID-19 pandemic across our major markets. On a sequential basis, Q2 system-wide sales were up approximately $10 million, or 30% versus Q1 of 2021, as government restrictions were reduced and mobility started to increase in the later stages of the second quarter. As Matthew shared, we have continued to see this sales recovery continue in the early weeks of the third quarter, including notably our suburban locations that have recovered more than 90% of pre-pandemic 2019 levels in the four-week period ending July 25th. Our sales recovery is being driven both by macro factors, such as reduced restrictions and increased mobility, as well as our digital marketing and innovation initiatives, including the successful launches of our tacos and smoothies innovation in the later part of the quarter. Our Q2 revenues were $5.6 million, an increase of $2 million versus Q2 of 2020, improvements in system-wide sales as noted, and a non-cash gain resulting from a change in accounting estimates of future performance obligations. In terms of profitability, we continue to be focused on the long-term health of our business, and supporting our franchise partners in accelerating our sales recovery. As Matthew mentioned, we have committed $1 million Canadian between Q2 and the end of 2021 in investments back into the system across marketing, digital, customer experience and profitability initiatives. We will also continue to invest in our omnichannel initiatives and we're pleased that even including the beginning of these investments in the second quarter, we still delivered positive adjusted EBITDA of 0.1 million, an improvement of half a million dollars versus the first quarter of this year. We have also continued to exercise our NCIB program and excluding the Q2 share repurchases Matthew outlined, we've maintained our cash position in Canadian dollars versus Q1 of this year at approximately 38.1 million Canadian. The asset-like nature of our business and the strong cash position gives us important flexibility in reinvesting back into our growth initiatives and continuing to execute our share repurchase program. As we hopefully progress into subsequent quarters where the impact of the pandemic begins to subside, we are encouraged by the sequential improvement in our sales recovery and our profitability and remain optimistic our omnichannel business is well-positioned for future growth. At this time, we'd now like to pass the call back to our operator to take any questions you have.
spk03: Thank you. At this time, we're conducting a question and answer session. If you'd like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in 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 Luke Hanan with Canaccord Genuity. Please proceed with your question.
spk01: Yeah, thanks. Good morning, guys. You guys gave some good color in your prepared remarks there as well as in the press release just on the sort of customer trends, the trends that you're seeing in your business sort of coming out of the pandemic. depth of the pandemic here, but I'm curious if you can give any more specificity on customer trends, sort of what you're seeing to date, specifically as far as, you know, check composition, average check, maybe for those customers that may have engaged with you before pre-COVID and maybe during COVID hadn't engaged with you. Maybe now those customers are coming back. Any sort of any more insight or specificity on what customer trends you're seeing coming out of COVID would be helpful.
spk02: Hey, Lou, thanks for the question. We've been obviously tracking our customer data and performance and loyalty quite closely in terms of the trends. The biggest thing that continues to stand out is increased in average check versus pre-pandemic levels, and that's held pretty constant throughout 2020. you know the past year and then notably with some of the innovation that we've done specifically with the taco innovation we found that that has grown average check and is often more likely to bring more than one person to that transaction which is obviously exactly what we're trying to do so We've seen check grow both from a broader customer trend, but also some of the innovation we've done, as well as the digital push that we've made, really makes it really easy for that customer to customize and add things to their entrees, but also bring a family member or a friend because of the convenience and the innovation. So we've been pleased so far with the growth in average check that we've seen to date.
spk01: Okay, excellent. And then just on the topic of LTOs and sort of your plans for this moving forward, I'm just curious how successful was the Energy Byte Smoothie LTO in driving engagement or downloads? And sort of what learnings could you use from that to sort of inform what decisions you're going to be making for the LTOs as sort of a method of acquiring customers going forward?
spk02: Yeah, it's a really good question, and I'll answer it in two parts. First of all, with respect to the Energy Byte smoothie, that was really a way to reward our loyal app users and create excitement and also test them more. And so that is pretty recently in market. And what we can say so far is that the Energy Byte smoothie is definitely holding its own on the app in terms of mix within the smoothie platform and doing exactly what we wanted to do was reward those very loyal guests. In terms of driving activation, we had a one-day activation event with our taco launch that was an extremely successful event that drove customers to the app and really brought in a significant amount of new users. And that obviously helps introduce a new user to everything that's great about Freshie and our menu, but also the easiest way to access it, which is through our app. And so we're going to continue to think about the channel, whether that be in restaurant or digital. And obviously the Freshie app is really important as we think about innovation. you know, going forward. But, you know, those are two examples that really accomplished different things, but also bring an immense amount of valuable learnings in terms of activating new products, you know, through the own Freshie app channel.
spk01: Okay. And then just on your store network here, I noticed one of the things that you mentioned in your prepared remarks and also in the press release was the discussion on the closing of six stores that were previously open during Q4. So I would imagine Those stores would have been open for a period of three or six months, and the performance maybe wasn't up to expectations. So I guess a two-part question. One, what was the specific sort of drivers in closing those stores? And then the second part is how much visibility do you guys have for the 20 stores that are temporarily closed right now on maybe the likelihood of those stores being able to sort of reopen and stay open moving forward?
spk02: Yeah, so in terms of the two-part question, if we talk about the sites that closed in Q2 that were not temporarily closed to start the quarter, and we've talked about this in previous calls, we're really looking for, obviously, the right location, the right partner, the right unit economics with the rent structure, both today but also what we foresee looking like post-pandemic as well. And these were locations that were not in our strongest markets where we – you know, really see significant growth and opportunity going forward, which is why, you know, these weren't locations that we were looking to transfer to a multi-unit, well-capitalized partner that, you know, really drives higher AUVs. In terms of the temporary closures, the 20 locations that we've got that are temporary closed at the end of the quarter, um a handful have started to reopen and we do expect to see more reopenings um in in the fall um either with you know gradual return to to office but also reopening of universities um so the majority of these locations we expect to to reopen before the end of 2021 um for discussions with our franchise partners uh you know just if and when you know traffic recovers um you know by month gradually um is really what we expect so we we're pretty optimistic that the vast majority of these locations will open shortly.
spk01: Okay. And the last one for me, and then I'll pass the line. Just the digital mix, I think, remained relatively steady at 40% from Q1 to Q2. I'm just curious to know what your views are on what that long-term mix looks like between brick-and-mortar sales and digital sales. And then also, is there anything that you guys have in the pipeline as far as converting some of your customers who maybe would engage with you on a third-party app more towards your own proprietary app?
spk02: Absolutely. In terms of brick and mortar versus digital, we do think of it obviously from a channel perspective, but also from, you know, in terms of digital delivery versus in-store pickup, but also, you know, how that guest came to the restaurant. And, you know, in terms of your question about converting, we have activations online. both in terms of third party where we now have in-app delivery to continue to activate customers onto our app, but also in restaurant. It's a great opportunity for our team members on the front lines to help educate the customer about the benefits of our app. And we had good results with some of the activation events that we've had in the restaurant, and these are going to continue to be really important for us We obviously want to continue to drive digital mix higher. We know that those customers on our app, they come more often, they spend more, and they're more likely to bring a friend or family member. And that's something that's obviously really important to us driving that same sort of sales flywheel going forward. And so you're going to continue to see us put a lot of effort and focus on that, recognizing that there's still absolutely a role for third-party businesses. aggregators in bringing product to life. They have a large customer base. And so, you know, we're going to make sure that we're where the customer is. But, you know, ideally we can get, you know, significant new downloads and, you know, because of that average check and frequency dynamic, that really works well for our franchise partners.
spk01: Okay. I appreciate all the comments. All the best. Thanks, Luke.
spk03: Thank you. Ladies and gentlemen, as a reminder, if you'd like to join the question queue, please press star 1 on your telephone keypad. We'll pause a moment to allow for any other questions. Thank you. Ladies and gentlemen, this concludes our question and answer session. I'll turn the floor back to Mr. Coren for any final comments.
spk00: Thank you, Melissa, and thanks, everybody, for joining us this morning. I look forward to updating you again on our next quarterly call. Take care.
spk03: Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.
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