Q3 2021 Tattooed Chef Inc Earnings Call
[music].
Good day and welcome to the tattooed shaft, Inc.
Third quarter 2021 earnings conference call.
All participants will be in listen only mode.
Should you need assistance. Please signal a conference specialist by person with Darcie followed by email.
After today's presentation there'll be an opportunity to ask questions.
Please note this event is being recorded.
I would now like to turn the conference over to you.
Rachel Perkins.
Buster relation. Please go ahead.
Thank you good afternoon, and welcome to attach Hff's third quarter 2021 earnings conference call on the call today are <unk>, President and Chief Executive Officer, There's a Lady Chief Creative Officer, and the Apache Chow and Stephanie Dykeman, Chief Financial Officer, and Chief Operating Officer, Matt Williams, Patrushev Chief growth Officer.
There will also be available for questions.
By now everyone should have access to the earnings release, which went out at approximately four O. Five P. M. Eastern time today, if you've not had a chance to review the release, it's available on the investors portion of our website at Www Dot tattooed Chaco com before we begin I'd like to remind everyone that the prepared remarks contain forward looking statements such statements involve a number of.
Known and unknown uncertainties, many of which are outside the company's control and can cause future results performance or achievements to differ significantly from the results performance or achievements expressed or implied by such forward looking statements.
Important factors and risks that could cause or contribute to such differences are detailed in the company's filings with the securities and exchange Commission, except as required by law. The company undertakes no obligation to update any forward looking or other statements herein, whether as a result of new information future events or otherwise.
In addition, within our earnings release and in today's prepared remarks, adjusted EBITDA as reference is important to note that this is a non-GAAP financial measures that we believe is a useful metric that better reflects the performance of our business on an ongoing basis. A reconciliation of this non-GAAP financial measure to its most directly comparable GAAP financial measure.
It is included in today's press release, which has also been posted on our website.
With that it's my pleasure to turn the call over to catchy just president and CEO Tim Gluttony.
Thank you Rachel and good afternoon.
On today's call I'll briefly review the key business highlights for the third quarter.
And discuss our recent announcement on the acquisition of Belmont Confections denser.
And Sarah will discuss our marketing and innovation.
Stefanie will provide further detail on the financials.
Our third quarter results demonstrate strong momentum.
With record quarterly revenue of $58.8 million or 44% increase year over year. This growth was primarily driven by 56% growth of our tattooed shell branded products with revenue of $35.3 million in the third quarter representing 60.
Percent of our total revenue.
At the end of last year, our branded products. We're in 4300 stores and we set a goal to more than double our distribution to 10000 stores.
I am proud to say that thanks to all the hard work. The team has done a product can now be found in over 13000 stores more than tripling our store count while also diversifying our channel and customer mix.
While we had national distribution before we are now much broader and deeper with the addition of mass and grocery store.
We are firing on all cylinders broadening our sales mix diversifying our sales channels innovating our product portfolio.
Gaining market share and have some of the highest velocities in frozen food.
That being said, we are lowering our revenue guidance for the year as a high growth business. It is difficult to forecast new distribution wins and timing of retail rollout.
I own that.
For fiscal 2021, we now expect revenue between 210, and $215 million, which implies year over year growth of 41% to 45% and I am very proud of that.
This is still only the beginning.
We believe package up its position to be the leading plant based food company for years to come with all vertically integrated production diversified product line and the ability to win in multiple areas of grocery stores.
Sure its position for long term success.
In May we announced the acquisition of foods in new Mexico to expand our production capacity and diversify our capabilities outside of frozen food.
We are in the process of selling our new branded products to retailers, starting with frozen Mexican products in the first half of next year.
The Carson facility is set to open at the end of the first quarter 2022, and we expect to start spelling ambient product.
Our October 26, we announced our agreement to acquire Belmont Confections, a private label co manufacturer of nutrition bars, and snacks for approximately $18 million in cash and stock.
The transaction to close by the end of the year.
Similar to the new Mexico. This acquisition opens up more capacity and capabilities and will transform our co packing business into a branded manufacturer with higher margin.
47000 square foot production facility in Youngstown, Ohio contains equipment to produce a variety of bars snack.
We're really excited to enter the $10 billion global plant based sport category with patchy check branded items.
This also aligns with our growth strategy to develop more ambient and refrigerated product unlocking more shelf space and expand our channel penetration you on retail and club, allowing consumers to enjoy patrushev product at home and on the go.
Between these two acquisitions, we believe they can contribute up to an additional $300 million in annual revenue in the next two to three years.
Focus going forward will be to continue growing detach each have branded plant based product portfolio.
We look for similar acquisitions that we are able to add assets and manufacturing in order to develop new products and other categories and create shareholder value.
We continue to broaden our growth as measured by spin in the last 52 weeks ended October three 2021.
Our T D piece have increased by over 315% and our measured consumption has increased 239% due to strong growth in club mass and grocery.
Ali.
We have seen very strong consumption increases versus prior quarter, highlighting the continued traction we are having in measured channel.
In the third quarter, we saw consumption sales increased by 49% versus Q2.
Additionally, when comparing our total U S. New construction sales for the latest 12 week ended October 3rd 2021 versus our health and wellness branded peers as defined by spin out your chest is now the fourth largest brand in total in the categories in which we compete.
More specifically in our core category frozen vegetable entrees to check as the number two ranked health and wellness brand as measured by spin.
Consider this is a tremendous testament to the strength of the brand and our team's ability to execute.
Our innovation is working in the last 52 weeks ended October three 2021, we had four of the top 10 best performing single serve new innovation Skus in the frozen vegetable entre category in total dollars and five of the top 10, performing skus when comparing velocity.
There's also not translate into the pizza category in the latest 52 weeks attitude shelf is the third best performing new pizza skew large in the health and wellness category as measured by spin and it is the number one you in terms of velocity in club, we had three limited time offers including our web.
Those French arrows Breakfast Bowl Cheeseburger Bowl and peptide fried right.
According to spins in the club channel for the latest 12 weeks ended October three 2021 attitude shift is up over 64% what.
It was at 52 weeks ended October three 2021 tattoo check was up nearly 26%. It remains one of the fastest growing brands in the frozen category.
In the mass channel latest 12 weeks ended October three 2021, according to Neil we have grown 2163% and we continue to see tremendous momentum in October at target. We also increased the number of categories offering tattooed shop, adding the assortments in the pizza.
Breakfast vegetable categories, increasing our SKU count the 25 total.
In the grocery channel, we continue to win distribution with both national and regional retailers in the U S. Because of our innovative product portfolio and case studies and existing retailers as.
As a reminder, we launched our food channel programs that start of 2021, and we are very encouraged by the results.
In our core categories frozen entrees for the latest 12 weeks ended October three 2021, we are now a top 10, selling health and wellness brand and by far the fastest growing in the category in the third quarter, we began distribution at Kroger sprouts farmers market multiple Albertsons division, including.
Both with Socal Norcal, Intermark Inter mountain Seattle.
Also H E B and price Chopper as we previously announced in the fourth quarter, we launched six skus in public as well as one new distribution in giant y and Heidi.
We also expanded our total average SKU count per store from 5.8 to the end of Q2 to 6.5 today. Our internal goal is to get to 30 frozen skus per store across retail and we are well on our way to achieve this with many retailers. We also believe we have even more upside when we launch into.
<unk> ambient product.
We have multiple avenues of growth with expanding product offerings in existing retailers, gaining more distribution with new retailers, including grocery and convenience stores developing our food service business as well as licensing and international opportunities.
From an operational standpoint, we're on track to increase our production capacity and nearly four fold in 2021 with the addition of Belmont, We will have over 315000 square feet of manufacturing space to make everything from pizza to bolt bars snack and more to control our own destiny.
Tattooed ship has the ability to be a generational brand and resonates with Gen Z and millennial consumers, who are looking to connect with brands and food.
What we are most focused on now with building brand awareness to drive more sales because we know our products are far more superior to others in the market today and now I'd like to turn over the call to Sarah to discuss our innovation and our marketing efforts.
Thank you and good afternoon, everyone. We have a lot of exciting plans in the work that had to check well, we're not ready to divulge everything just yet I can tell you we have a strong pipeline of over 250 ideas that we believe are unique and will resonate with consumers.
We have decided that new innovation out of the food the new Mexico facility for the tattoo chip brand will be 100 per cent, who then we think there is a significant gap within the Hispanic southwest food category for begin items and believe the tattoos Shack brand has the ability to lead in that category given the success, we've had to date with us.
Offerings like our plant these breathable.
We are in talks with retailers and expect to launch these new products in the first half of next year.
Second our recent announcement to acquire Belmont confections will allow us produce virtually any bar, whether that be refrigerated shelf stable or confection candy.
It also opens up additional areas of the store outside of frozen for the tattoo chip brand well.
While the transaction has not closed yet we have already begun testing for the new line of unique plant based bars and will be on shelf at some point next year.
Our product continued to perform well as demonstrated by tattooed shaft now being a top 10 brand across club grocery and mass in the categories in which we compete.
In Q3, we launched six new skus, including our plant based Maple sausage, and Sweet Potato Bowl and Cauliflower Meatless Lover's Pizza Bowl.
One of the greatest competitive advantages, we have is there a vertical integration and agile manufacturing capabilities to be able to pivot and capture the latest trend.
Turning to our marketing efforts, we've continued to aggressively spend behind the <unk> brand to build greater brand awareness.
We've created an ambassador program and started testing more marketing on social Facebook, Instagram and Pinterest as well as paid Youtube and Spotify adds to see where we get the best engagement.
The results have been very positive outperforming industry benchmarks by two times in terms of consumer engagement for paid social.
Our goal is to meet the consumer where they already are so they're more inclined to share and continue to build the community.
We are approaching things differently than traditional food brands and it's on purpose.
So we are seeing in our business and are winning brand positioning purchase up to take market share and bring new consumers into the categories. We serve.
Now I'll turn it over to Stephanie to walk through our financials.
Thank you Sarah and good afternoon, everyone.
To begin there were some items that came into question that resulted in what has been determined to be immaterial revisions of prior quarters.
While this was a technical accounting matter that primarily affected expenses classified between cost of goods sold and operating expenses full details will be available in our 10-Q filing.
In the third quarter of 2021 revenue increased 43, 5% to $58 $8 million compared to $41 million for the prior year period.
As Sam mentioned, the revenue increase was driven by $12.7 million or 56% increase in revenue of tattooed shaq branded products.
This now accounts for 60% of our total revenue.
A slight decrease from last quarter due to the reset foods of New Mexico acquisition, which is included in private label revenue.
Gross profit in the third quarter was $5 $9 million or 10, 1% of revenue compared to $4 $2 million or 10, 3% for the prior year period.
The slight decrease in gross margin was primarily due to the increases in raw material packaging and freight and container costs due to inflation.
As well as the two facilities in new Mexico, which were newly acquired in May 2021.
Really upset by the achievement of economies of scale from the increase of tattooed shaft sales volume and improved production capacity foods of New Mexico. Currently only manufactures private label products, which have a lower margin when compared to our tattooed shaq branded products.
The facility is expected to be fully operational and manufacturing both private label and tattooed chef branded products during 2022.
The Carson facility is not currently in operation and is expected to become active during the first quarter of 2022.
We anticipate quarterly gross margin to expand in the fourth quarter of 2021 and throughout 2022 as we increase our branded volume and our production capacity.
Operating expenses increased to $13.6 million in the third quarter of 2021 compared to $7.6 million in the prior year period. The increase in operating expenses was primarily due to an increase of three.
$4 million in marketing expenses.
$4 million in sales Commission expense.
$5 million in resolution of a dispute and related fees point $8 million in stock compensation expense.
And $1.5 million in operating expenses for foods of New Mexico, which was newly acquired in May 2021, partially offset by a decrease of $2.2 million in professional expenses.
We expect operating expenses to decrease as a percentage of revenue overtime as we benefit from economies of scale.
We're also heavily investing in the tattooed chef brand to increase distribution.
Raise brand awareness.
And drive sales in the new stores that are launching products the.
The cost that we're investing in today should produce realized benefits in the future.
Net loss was $8 $2 million in the three months ended September 30, 2021 compared to net loss of $3 $1 million in the prior year period.
Adjusted EBITDA was negative $5 million in the third quarter of 2021 compared to adjusted EBITDA of positive $1.6 million in the prior year period. The decline was primarily due to public accounting costs that were not present in the third.
Third quarter of 'twenty 'twenty and the operating expenses that were just mentioned.
As of September 31, 21, we had cash and cash equivalents of $129.5 million.
Now turning to our outlook.
The company is committed to an aggressive plan of growing the top chef brands as Sam stated earlier, we now expect total revenue in the range of 210 million to $215 million, an increase of 41% to 45% compared to 2020, we are.
Firing on all cylinders, winning new distribution diversifying our sales channel innovating gaining market share and have some of the highest velocities in frozen food.
However, it is difficult to forecast new distribution wins and timing of retail rollout, which has let us to lowering our forecast for the year.
We now expect gross margin to be between 12% to 14% we have been focused on our supply chain and avoiding distribution delays similar to peers. We are also experiencing some inflation in freight and container costs.
We now expect adjusted EBITDA to be a loss of $18 million to $20 million. We will continue with our aggressive plan to grow the brand through extensive marketing and promotional spend that has already produced significant growth.
Lastly, we expect capital expenditures in the range of $15 million to $20 million for full year 2021 which includes both our recent acquisition of foods of New Mexico and plans for Belmont confection.
In closing, we believe the tattooed chef brand has great potential and we have a significant runway for growth in the large and growing plant based food category with increased distribution robust innovation pipeline.
Acquisition, and a strong balance sheet, we are well positioned heading into 2022.
With that we are now available to take your questions.
Operator.
Okay.
Thank you.
We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.
If you're using a speakerphone please pick up your handset before pressing the keys.
To withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
Yeah.
Our first question comes from George Kelly with Roth Capital. Please go ahead.
Hi, everybody thanks for taking my questions.
So maybe to start hoping you could.
Just any more detail just about guidance.
So I know in prior quarters you've.
Sort of broken down your full year expectation by.
The core business and then layered on our foods in new Mexico. So curious if you could do that again and are there any channels I don't know if it's club or grocery like any more specificity you can give just on on on the gap in our guidance.
So George Thanks for the question.
When we start to talk about the implied guidance of $48 million to $53 million, which I know you already did the math on for Q4 to finish out the year in that 210 to $2 15 range.
It is a lack of promotions and things like that in the club channel that we would normally see at this point in time people really focus on indulgent eating and with the holidays last year being more stay at home and not normal.
It's really hard for us to predict the consumer behavior, that's going to happen in the healthy eating space.
And so we looked at everything and this is where we feel very comfortable guiding for this year. When we started to talk about gross margin and those types of things inflation.
He is a factor it's always been a factor and remember that our freight costs are included in cost of goods sold.
For both inbound raw materials, and outbound freight costs and that means that that inflation does directly affect gross margin for tattooed chef.
Okay. Okay, and then next question for me and I'm not.
Looking for specific guidance, but just hoping you can.
Sort of help Directionally with next year and what I'm. Most curious about is.
Your approach to margins next year I know gross margin. There's all these factors that some of which are out of your control around inflation.
And all that but I kept hearing in your prepared remarks that advertising you've been pleased with the returns there and so I'm just trying to understand like how aggressive should I be or should should folks listening like her.
EBITDA.
Will you kind of.
Continuing investing a lot incrementally next year in advertising and should we kind of expect to EBITDA breakeven or even profitability to be deferred maybe into 2023.
George we are aggressively growing tattooed shaft, and we're going to continue to spend aggressively in marketing for 2022 and in promotion.
You will start to see some profitability in 'twenty two 'twenty three and we really think that the back half of 'twenty 'twenty three is when we foresee some of that turning around without getting too specific.
Okay. Okay, and then maybe last question for me just to revisit the first topics that you were going through about club. So are there any I understand that this is a difficult year over year comp in with holiday you know how people are spending their holidays and the like but any kind of big promotions that.
Brian last year that are especially challenging or like how much of a decline.
Are you expecting in the club channel in the fourth quarter.
So remember that we had talked previously in Q1 and Q2, we ran very large promotions within the club channel.
Q3, those promotions back off in the form of limited time offers.
And then in Q4.
Honestly, there's there's no giant promotion.
There.
A little bit of limited time offer left that'll still occur, but even Q3 is.
Pretty much the growth that we've seen in tattooed shaft at mass and grocery and not as reliant on club is Q1 and Q2 were this year.
Yeah.
Okay.
I think that's all I had I appreciate the time.
Thanks, so much George.
Yeah.
This concludes our question and answer session I.
I would like to turn the conference back over to Dan Gladney for any closing remarks.
Thank you for joining us today, we believe Patrik Geoff is positioned to win in plant based foods and our strong growth demonstrates that our products are resonating with consumers I look forward to speaking to you again at upcoming investor events, and our fourth quarter and full year 2021 earnings call next year.
Have a great day.
That's all it takes US now concluded. Thank you for attending today's presentation you may now disconnect.