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spk00: Greetings and welcome to Freshie, Inc. Third Quarter 2021 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 then 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, Paul Hughes, General Counsel. Please go ahead.
spk02: Thank you and welcome to Freshie's third quarter 2021 earnings conference call. Joining me today is Matthew Koren, our founder, chairman, and chief executive officer, and Daniel Haroon, 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 third 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.
spk04: Thanks, Paul. Good morning, everyone, and thanks for joining us today. In the third quarter of 2021, Freshie Restaurants saw a strong sales recovery with 10% same-store sales growth year over year. Our consumer packaged goods and direct-to-consumer divisions took significant strides forward as well as we continue our omni-channel platform. At the parent level, we maintained our healthy balance sheet with a cash position of $37.1 million Canadian dollars and zero debt as of September 26th of this year. The company repurchased $1.1 million in Class A shares through our NCIB in the quarter and continued deployment of the $1 million investment fund directly into our franchise restaurant division, which we plan to deploy to support the system through the end of the year to help 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 first. Restaurant sales continued to recover with a 10% year-over-year increase in same-store sales. In addition to the sales recovery, the third quarter included continued strong performance of the Freshie mobile app, which posted a 79% increase in sales versus Q3 2020. While certain challenges remain for our set of downtown core locations in markets like Toronto, Chicago, and Calgary as examples, We are very pleased with our sales recovery more broadly, particularly in our suburban locations, which make up approximately 55% of our North American traditional restaurant network. These locations have recovered more than 90% of pre-pandemic levels on average as of Q3. We believe that a driver of these sales improvements continues to be Freshy's strong menu innovation. In Q3, the company had one of its best quarters in terms of menu innovation in years. Our delicious tacos limited-time offer was popular with our guests, and its premium price point and significant chips and hot queso add-on attachment drove both check and profitability. Our restaurant guests will be pleased to learn that we are making plans to integrate tacos back into the freshy menu in the near term. Along with the strong performance of tacos, Freshie's updated smoothie platform, making them available in two sizes and in a variety of new flavors, drove incremental smoothie mix in the quarter as well. In Q4, our most notable menu addition has been the recent relaunch of our evolved dinner plates platform. The dinner day part made up approximately 25% of sales in the third quarter, and we intend to continue to focus on making sure our menu has great tasting options for our guests at all times of the day. Our menu team continues their great work in the test kitchen, and we look forward to bringing more exciting menu innovation to our restaurants in the coming quarters. Next, freshie restaurants that have been temporarily closed as a result of the pandemic also continue to reopen in the third quarter. we finished Q3 with eight more stores open and operating than at the end of Q2 with a total of 372 active locations operating as at the end of the quarter. 12 locations remain temporarily closed with reopening dates expected in the coming periods. In addition to the reopenings, we also opened brand new locations in Q3 as Freshie continues to be an attractive brand for operators. As we discussed in our press release yesterday, Freshie has just signed the brand's largest ever multi-unit franchise deal. We're partnering with Level Hospitality, a group that operates a portfolio of hotels and restaurants in the U.S. to accelerate Freshie's growth in Texas through a planned 20 location expansion over the next six years. We already have a number of Freshie locations in the state and believe there is significant opportunity to become the health and wellness leader in Texas especially as migration to the state continues. Building our restaurant and development pipeline, particularly in Canada and the U.S., continues to be an area that we're focused on. In the coming months, we are scheduled to open flagship locations in the newly renovated LaGuardia Airport in New York and a prime location in the heart of Whistler Village in B.C. We believe that flagship locations like these are a great way to build brand awareness for both freshie guests and new franchise partners from around the world. Across our network, we continue to work with our franchise partners to navigate the ongoing COVID recovery period and make investments in the system from the million dollar franchise support fund we announced in the second quarter. In Q3, we targeted these funds primarily towards sales driving and profitability focused store level initiatives, particularly through marketing investment and operating cost offsets. In addition to ongoing focus on supporting our core restaurant business, Freshie's additional business line teams continue to dedicate significant effort to the growth of our omni-channel health and wellness divisions. We 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 touch points with the Freshie brand. I will now share some specifics on our consumer packaged goods division. In the third quarter, Freshie's CPG division continued to expand its points of distribution and grow its retailer partner list. Notably, our two largest retail partners, carrying our broadest assortment of products in dedicated Freshie branded coolers, have reported revenue growth of more than 75% in Q3 of 2021 versus the year prior. This increase was partly attributed to strong performance of our snacking and beverage products. We've also continued to add our offering to the shelves of new retailers, such as Healthy Planet in Ontario and Whole Foods in British Columbia. In terms of CPG product innovation, Freshie was also active in the third quarter. we rolled out pumpkin spiced energy bites as a consumer package good limited time offer, tapping into the annual fall themed pumpkin spice trend. The pumpkin spice bites were made available in both Freshie restaurants as well as on our CPG retail partner shelves. In terms of our growing supplement gummy lineup, to go along with our apple cider vinegar gummies launched earlier in the year, Freshie CPG added buy-buy stress and a super mushroom gummy to the product set, with all gummies now available both in restaurant and online. We plan to make our expanded gummy lineup available through additional sales channels in the coming months. I will now share some specifics on our direct-to-consumer e-commerce division, where we have taken some significant steps recently. As announced last week, Freshie has completed the acquisition of the majority control of Natura Market. Natura Market is a rapidly growing online retailer that makes on-trend healthy products available at scale across Canada. The business, which had over $19 million in sales in the 12 months ended September 30th, 2021, and has no debt, has a strong logistics and supply chain system, and has developed impressive consumer loyalty during the company's five years of operation to date. Natura will make an immediate positive impact on our overall business revenue and significantly expands Freshie's presence and capability in the delivery and digital commerce spaces. The way people across The way people access health and wellness is evolving and the acquisition of Natura Market ensures that Freshie is well positioned to meet the next generation of our customers where they are at. We look forward to sharing additional details around our integration plans in the coming months and want to welcome Natura Market to the Freshie team. We have taken some significant strides forward as an omni-channel health and wellness brand. In the quarter, our restaurant division has seen ongoing sales and reopening recovery and a growing development pipeline. We've also completed the Natura market transaction and grown our better-for-you consumer packaged goods sales, product lineup, and reach. This is all made possible through the dedication of our franchise partners, retail partners, as well as our HQ and now Natura market team members, who I'd like to personally thank. As I always say, I'm so proud to work alongside all of the great partners in our network and our impressive HQ team every day. I'll now turn the call over to our CFO, Dan Haroun.
spk05: Thanks, Matthew, and good morning, everyone. I will be reviewing our Q3 results as well as providing some additional color on our development efforts and our upcoming reporting segment review in order to continue to provide additional insight into how we are thinking about the business and the growth layers across each division. Starting with Q3, Freshie's overall revenue grew by approximately $1 million, or 23%, as compared to Q3 of 2020, driven by increased CPG revenue, higher same-store sales, a change in our CPG selling model, where we are moving more of our CPG business to a traditional buy-sell model with our retail partners, versus the legacy royalty-on-sales model we have primarily operated with to date. and partly offset by lower franchise fee revenue due to a lower store count versus Q3 of 2020. We are encouraged by seeing growth in same-store sales versus Q3 of 2020, but continue to see locations that are heavily relying on office traffic be impacted by many employers delaying their return to office plans, as evidenced by published data showing significant reductions in transit use versus pre-COVID levels across major North American markets. We continue to see our suburban locations recover faster than the rest of our network as these locations, which represent 55% of our North American store network, recovered more than 90% of pre-pandemic third quarter 2019 sales in Q3. We'll also continue to be pleased with the momentum we are seeing in our CPG business as our largest customers that have dedicated branding and a broader product assortment saw more than 75% increase in their freshie products that went through point of sale in the quarter versus Q3 of 2020. We will continue to work with our retail partners to expand points of distribution, expand our assortment, and look for strong dedicated branding opportunities as we have seen the positive impact these have We will continue to work with our retail partners to expand points of distribution, expand our assortment, and look for strong dedicated branding opportunities as we have seen the positive impact these items have on sales volumes. Our cost of sales increased by 0.9 million versus Q3 of 2020, driven by increased CPG revenue and the change in the CPG selling model previously noted. SG&A for the quarter came in at $4.3 million, an increase of $0.4 million versus the previous year, half of which is attributable to one-time costs related to the Natura acquisition and the remaining $0.2 million driven by net increase in payroll costs, largely tied to a reduction in wage subsidies. On a sequential basis, after excluding the impact of the one-time Natura transaction costs, SG&A in Q3 was roughly flat to Q2. In terms of profitability, we continue to be focused on the long-term health of our business and supporting our franchise partners and investing in growth initiatives to accelerate our sales recovery. We will also continue to invest in our omnichannel initiatives, and we're pleased that we still delivered positive adjusted EBITDA of $0.4 million in the third quarter, which, along with Q2, is typically a stronger quarter in terms of system-wide sales compared to Q4 and Q1, which are typically smaller quarters from a revenue perspective. In terms of liquidity, we ended the quarter with a strong cash position, roughly flat to the previous quarter, after accounting for share repurchases, and continue to expect that even after the recently completed Natura acquisition, we will continue to retain a significant financial flexibility to allow us to continue to reinvest back in our franchise restaurant division, investor growth in our omni-channel strategies, and continue our previously approved NCIB share repurchase program. Now, in addition to covering the financial highlights for the quarter, I want to provide an update on our franchise development and real estate initiatives, our recent Natura market acquisition, and our upcoming financial segment reviews. First, starting with development. Over the past 12 months, we have prioritized strengthening operations, digital acceleration and menu innovation initiatives, and completed a thorough review of our North American traditional store network and franchise partners. We have also defined and assessed our priority development markets across North America and see significant runway to grow units across North America, including room to more than double our store base in Canada alone. With the impacts of the pandemic expected to further reduce in 2022 with increasing vaccination rates and the relaxing of government restrictions, we intend to make considerable investments in our franchise development and real estate teams to grow our franchise development pipeline and accelerate unit growth in 2023 and beyond we expect fewer store openings in 2022 than in previous years as many of our franchise development and real estate efforts were intentionally paused during the most acute pandemic periods in order to prioritize supporting our franchisees with landlord negotiation efforts and ensure our go-forward real estate strategy is well positioned for the post-pandemic environment. Yesterday's announcement of our new exciting multi-unit 20-site deal in Texas is a strong example of our renewed focus on building our post-pandemic development pipeline for the years to come. Another exciting growth story for our business is the recent acquisition of Natura Market, a rapidly growing health and wellness e-commerce retailer. Natura Market operates their own warehouse in the GTA and services Canadian customers nationwide. Despite lapping very challenging comps in the prior year, as e-commerce accelerated after the onset of the pandemic, Natura Market has continued to grow revenue in September and October 2021 versus the same periods in the prior year. To date, Natura Market has been focused on driving growth while maintaining strong cost discipline, allowing it to scale without needing external financing. We welcome this approach and expect to continue to operate Natura Market in the same manner going forward, as we expect to continue to drive top-line growth without meaningful cash burn. Natura has become a trusted place for customers with dietary needs and preferences to access innovative, better-for-you food and snacking items, often being one of the first retailers to bring emerging US brands into Canada. We see significant growth opportunities in driving increased brand awareness, expanding assortment in existing categories, expansion into adjacent categories, and benefiting from overall e-commerce growth. From an accounting perspective, we plan to account for the transaction as a business combination, and the results of operations after November 1st are expected to be consolidated in Freshie's fourth quarter earnings. Finally, as a result of the Natura market acquisition and growing momentum in our CPG division, we will be reviewing our operating segments in Q4 of this year as well as continuing to shift our CPG business model to a more traditional buy-sell arrangement with existing customers. These changes will allow us to give better visibility into the growth initiatives and levers our omnichannel business has to drive strong performance in the coming years while maintaining strong liquidity. We look forward to sharing more details on this in the upcoming quarter. At this time, we'd like to now pass the call back to our operator to take any questions you have.
spk00: At this time, we will be conducting a question and answer session. If you would like to answer a question, please press star then 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. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. Once again, that was star, then one, if you would like to ask a question. And one moment, please, while we poll for questions. And our first question comes from Derek Dealey of Canaccord Genuity. Please go ahead.
spk03: Hi, guys. Congrats on showing some good sequential improvement here. One of the things I wanted to ask, just in terms of you mentioned suburban stores are back to 90% of pre-pandemic levels, which is great to hear, but can you give us some color on where the urban stores are at?
spk05: Derek, thanks very much for the question. At this point, across most of our North American markets, we continue to see employers either delay or change the return to work plans. And we see that in many of our mobility data that we track through transit, with most markets down, you know, 60 to 70%. I would say our performance in our urban stores is better than those transit mobility metrics, but definitely will be slowest to recover versus our suburban locations.
spk03: Okay. And I'd imagine in those urban stores, I would assume by far the biggest day part there would be lunch, right? So the key is just really getting people back in the office, back to work, back into their routines before you start to see a material improvement there.
spk05: I would say that's definitely the plan for our urban locations. What we found is with our suburban locations that have a mix of of residential and retail related traffic, we do continue to benefit both from the lunch day part, but also afternoon and dinner day parts as well. And so we're optimistic that on the other side of the pandemic, we can continue to build out day parts beyond lunch as well.
spk03: And in those suburban stores, can you give us an update on just the split of day parts?
spk05: It's slightly higher than the overall dinner day part of 25%, as those suburban locations often have longer operating hours and are more accessible for the dinner day part.
spk03: Great. That's helpful. Also in the store, this is the first time in a little while where we saw net, in North America anyway, net restaurant growth and flat overall, which is still good. Should we make the assumption, and I appreciate your comments that you made just now that 2022 is going to be a little bit slower on the new store openings, but should we assume you're now at the point where you're going to have net growth on a quarterly basis?
spk05: At this point, we're much more focused on the long term than necessarily managing quarter to quarter, especially in the front half of 2022. As the pandemic has taught us, we can have desolate plans, but pivots are absolutely required. um and so really you know the the activity you've seen you would have noticed yesterday with the the texas deal that was announced as well as significant investments that will be made in the the development teams um you know in the course of the front half of 2022 um you know we're really focused on growing that unit count again back in 2023 and beyond okay great um just on on the natura acquisition
spk03: I get you're planning to run these as sort of two separate entities, but can you just provide some context in terms of, like, are there plans to cross-sell Fresh E CPG products on the market? You know, what are some of the potential cross-learnings that you'd expect to gain from this acquisition?
spk05: Absolutely. We definitely intend to partner with the Natura team to accelerate growth, but absolutely want to let them continue doing what they've been doing well. Over the long term, we do expect to see growth, profitability, and capability synergies. Both Freshie and Natura really are focused on a customer that's looking for the better-for-you space, strong digital relationships with both sets of customers, and really both brands bring innovation and you know, an on-trend things to market. And I really focused on loyalty and customer experience at the heart. So I think with the backdrop of those four things that both brands share, we do see the opportunity for cross-sell, cross-promotion, but also informing innovation and potentially even assortment into both the restaurant and Natura market spaces, you know, gradually as we work through, you know, integration in the next few months.
spk03: Okay, great. Look forward to seeing that develop. Thank you very much.
spk00: The next question comes from Kyle McPhee of Homework Securities. Please go ahead.
spk05: Hi, guys. First on Natra, I'm wondering if you can give any color on their profitability. Basically, I'm just wondering if there's a cash burn and if it's going to require capital injections from Freshie and into your cash bonds, or is that not the case? Yeah, I think we've said in our prepared remarks to date, we've been really impressed by the way they've been able to drive significant growth while being extremely disciplined with cost and capital. You know, we admire that about the Natura team, and we expect to continue in that way as we integrate and accelerate for growth. So we're not expecting any meaningful cash burn from that business. Got it. Okay, thanks. I just wanted to check something I think you said on the call. Did you say you ultimately want to double your store count in Canada? Is that what you said in your prepared remark? Yeah, we see runway for significant unit growth in the long term, and in Canada alone we see runway to more than double our store count in the Canadian base after an exhaustive real estate market analysis that's been conducted in 2021. Got it. Okay. So, I mean, can you give us any info on – You know, you used to have kind of store opening pipeline. Is there anything you can tell us about what exists in that pipeline today? Or is this really about building a pipeline over the next year and for opening in 2023? Yeah, it's really a mix of both. It's primarily going to be building a pipeline in the next year, and obviously yesterday was a strong start in the Texas market, but we really see the opportunity to grow both with existing and new franchisees, whether that's infilling strong markets such as BC and Ontario, but there's also significant white space in the Canadian market as well. Got it, okay. And so thanks for disclosing your suburban mix of stores at 55% of North America. Can you tell us what North America is as a percentage of all your stores now? North America would be a significant – yeah, North America would represent more than 90% of our system-wide sales across the globe. Got it. Okay, thanks for the info. That's it for me.
spk00: This concludes our question and answer session. I would like to turn the call back to Matthew Koren for any closing remarks.
spk01: Thanks, Andrea, and thanks to Kyle and Derek for your questions, and thanks to everybody else joining us this morning. We look forward to updating you again on the freshie progress next quarter. Thank you.
spk00: This concludes today's conference. You may disconnect your line at this time, and thank you for your participation.
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