Freshii Inc.

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 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.

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.