Q2 2022 Tattooed Chef Inc Earnings Call
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Greetings and welcome to the tattooed Chef, Inc. Second quarter 2022 financial results 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 zero on your telephone keypad. Please note. This conference is being recorded I will now turn the conference over to your host Devin Sullivan you may begin.
Thank you good afternoon, everyone and welcome to tattooed ships 2022 second quarter financial results Conference call.
On the call today are <unk>, President and Chief Executive Officer.
Ara go Leddy, Chief Creative officer, and the tattooed chef and Stephanie Dykeman, Chief Financial Officer.
Gaslog core ROTC, Chief operating Chief operating Officer, and Matt Williams, Chief growth Officer will also be available for questions.
Earlier. This afternoon the company issued a press release, a copy of which is available in the investors section of our website at www Dot tattooed chef dotcom.
Before we begin I'd like to remind everyone that these 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.
Slide 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 the earnings release and in today's prepared remarks, adjusted EBITDA as referenced it is important to note that this is a non-GAAP financial measure that the company believes is a useful metric that better reflects the performance of its business on an ongoing basis.
A reconciliation of this non-GAAP financial measure to its most directly comparable GAAP financial measure is included in today's press release, which has also been posted to the company's website.
With that said it is my pleasure to turn the call over to tattooed chefs President and CEO Sam Galletti Sam. Please go ahead.
Thank you, Kevin and thanks, everyone for joining us today.
We reported another strong period of growth with second quarter revenue, increasing 15, 6% and six months revenues rising by nearly 27%.
We believe that this reflects our success in expanding our retail presence elevating our profile and investing in all aspects of the tattooed chef Brad.
We are uniquely positioned as a fully integrated value added plant based food company.
We grow what we sell we offer options that said every phase of a consumer's pump inside and we make food that tastes great.
As a result, we believe that we are well positioned to achieve scale drive revenue growth and capital.
And capture additional market share.
But we are continuing to attract consumers to the frozen aisle, we've taken important steps to broaden our presence by introducing products will gain us entry into the refrigerated and ambient food spaces with the recent soft launches of our own butter bars, and grain and dairy free tortilla chips I'll, let Sarah discusses new products in more detail.
But suffice to say, but the initial reception has been very encouraging.
We continue to execute our strategy of diversifying our channel mix broadening the breadth of distribution of our existing portfolio and expanding patch itself into new categories that are ripe for plant based innovation.
We've made progress in Q2 and all three of these key areas. We continue to add new distribution, we added more than 35000, new points of distribution during the second quarter. We continue to add new stores, we have expanded our retail presence to approximately 17200 <unk>.
All locations across the country. This is a 240% increase in store count since the start of 2021.
<unk> brand consumption as measured by spin IRA in Q2 was $23 3 million and grew 140% versus the prior year quarter.
Further our diversification momentum in the grocery and mass channels continued with patchy chip consumption sales more than tripling in total dollars versus the prior year quarter.
In Q2 are catchy Chuck consumption sales in new categories, such as plant based burritos KCB is breakfast begin to gain traction and market share.
Year to date, our HCV is 52 point.
4% in U S mobile, which has grown 45, 9% versus prior year.
<unk> total distribution points or TTP sold at retail for the 13 week period, ending June <unk> 2022 has grown 131, 2%, making package at the fastest cogent brand to gain distribution in the first half of 2022.
Recently, we were recognized by spin as being the fastest growing brand in the conventional food channel year to date in the grocery frozen and refrigerated categories.
This demonstrates our ability to execute our strategy strategy of channel and category diversification.
Consumption data for the second quarter as measured by scoring to IRI reflects our continual growth channel diversifications on category expansion.
And our core category plant based entrees remains the number two health and wellness brand behind Amy's now selling brands such as healthy choice sweeter an evolved.
This remains extremely encouraging considering capsid shoppers available in fewer total stores than the other top five selling brands.
In this key category our dollar velocity remains strong outperforming all of the previously mentioned brands and another core category protected shelf health and wellness Pizza. Our Q2 performance was also strong on a percentage basis. We are the fastest growing plant based pizza brand in total dollars with growth of 100.
Five 4%. Additionally.
Additionally, compared to the other leading plant based pizza brands colleague Colin Dyer tattooed chef is a high unit velocity dollar velocity and average retail price per store selling.
This two remains extremely encouraging considering package.
<unk> is less than half of the two comparative brands, we are continuing to gain new distribution and frozen appetizers snacks and greater categories and are encouraged by retailers willingness to add a cloud based product to their healthy offering.
Units per store selling and dollar velocities are in line with many of the top selling better for you brands, while while being premium priced in the category.
We achieved a significant milestone as the brand at the end of the second quarter less than 20% of the health and wellness brands generate more than $109 annual consumption sales. The latest 52 week shows the taxes you have generated over $100 million in consumption sales in categories in which we compete placing us in an exclusive class in <unk>.
Brands, considering our timing in the market.
We're all very proud of this accomplishment and the support we received from our partners.
We continue to fortify the vertically integrated nature of our operating model, which we believe provides us with a strong and sustainable competitive advantage, while enhancing margins improving efficiencies and driving profit to.
To that end the pursuit of growth opportunities in plant. The plant based space has created some operational inefficiencies and higher cash burn.
To address this problem head on we have put initiatives in motion such as automation and robotics streamlining of our facilities and leasing a dedicated cold storage space. These.
These initiatives are expected to be completed by the end of the second quarter in 2023.
As noted as noted earlier, we completed the initial production run.
But it was reiterated OPE butter bars at our facility in Ohio, We expect that these bars will begin to hit shelves in Q4 2022 on early 2023.
As a reminder, these bars will mark our entry into the refrigerated space was broadened product availability.
Additionally, our goal is to hit shelves in Q1, 2023, with our dairy and grain free chips, which will be our initial entry into the ambient space. We are excited to be expanding into these new grocery outlets and expect that these new products will generate a higher gross margin than our frozen offerings.
We certainly experienced some challenges during the first half of the year across the board and inflationary pressures impacted our operations, especially our gross profit, which includes domestic and international freight costs that have risen dramatically.
Though it is difficult for us to predict the trajectory of these inflationary trends the initiatives that we are undertaking with respect to driving revenue growth building SKU counts integrating automation and in sourcing ingredients that had previously been outsource should mitigate the effect of these trends.
I also wanted to note that 100% of our growth to date has been unit driven that is we have not implemented any pricing increases we do expect to implement our pricing strategy in the later part of 2022 with along with our productivity efforts should help to counter inflationary cost pressures.
And advances toward our goal of positive adjusted EBITDA by late 2023.
We remain confident in our ability to continue to grow sales and capture additional market share the fundamentals of our business are strong and getting stronger as we continue to deploy our portfolio of productivity and sales growth initiatives to come back near term inflationary and margin pressures, we will continue to invest in our brands our people.
And our processes and are committed to delivering long term value to our shareholders.
Thank you for your attention and I'll now turn things over to Sarah to discuss our innovation and our marketing initiatives.
Yes.
In Q2, we continued to execute our 2022 marketing plan for both brand awareness and support our slate of new product introductions designed to satisfy everybody's Clinton site.
As Sam mentioned, we are now taking a prudent approach include refrigerated and ambient good spaces with butter bars, and grain and dairy free tortilla chip and.
We just returned from sampling them at scale with consumers at this year's Lollapalooza Music Festival in Chicago.
<unk> positive feedback from thousands of festival attendees, who told US they were thrilled but now there is an alternative chip it doesn't see a second alternative only further validate our new innovation and we can't wait for them to be on retail shelves.
The functional ingredients and flavor profiles and all our products keeps us ahead of trend and answering the consumer demand for convenience and better for you food options that take the Russia attaches chef is raising the bar for the entire better for you category encased linking nearly 50% higher than the industry average on teeth and satisfaction based on a national.
And shopper study conducted in June of 2022.
In Q2, we maintained our significant media by delivering more than 295 million impressions in TV and video both cable and training services, including Bravo grew network USA Peacock on Hulu.
In addition, this quarter, we launched our first ever digital advertising campaigns to reach consumers, where they took flight search and shop with ads on Youtube Spotify Twitch.
<unk> Instagram and quick talk among others, reaching an additional 34 million U S consumers for May and June .
June .
We continued to deliver against our strategy of meeting consumers, where they are by leaning into cultural moments and conducting additional experiential activations at the Coachella Music Festival and National Apache Day.
Also launched a Doctor series campaign Shining a light on artists on the causes they give a crop about putting our brand values. Okay action from giving consumers even more reason to become loyal patrushev virus beyond our great tasting unacceptable quite a bit.
Our marketing programs continued to prove for delivering sustained brand growth with an increase in household awareness growing from 11% at the end of 2021% to 20% as of June 2022 based on a survey conducted by you guys in June 2022.
In addition to increasing household awareness our branch to close introduce new consumers into the plant based world are in a subject innovation combined with what the Catholic Health brand stands for is bringing new consumers into retail freezer aisle for our partners and we are confident we will continue to see this trend continue as our refrigerated bars and grain and dairy free tortilla chips hit retail shelves.
They did this year and in Q1 2023, I will now turn the conversation over to Stephanie for a discussion of our results Stephanie.
Good afternoon, everyone.
Revenue increased 15, 6% to $58 1 million in the second quarter of 2022 from $50 3 million in the same period last year.
Branded sales growth was partially offset by a $6 million year over year decline in club sales due to the timing of promotions in 2021 versus 2022.
Excluding this impact branded product sales in the second quarter of 2022 increased 21, 4% from the prior year quarter.
Jim referenced the inflationary headwinds we felt this quarter and they are reflected in our cost of goods sold for the second quarter of 2022 cost of goods sold rose 36, 7% to $57 4 million up from $42 million in second quarter of 2002.
<unk> one <unk>.
These costs rose more than sales due primarily to an unprecedented rise in domestic and international freight costs.
Along with increases in food costs.
In addition, we have been purposely building inventory to avoid supply chain issues and in preparation of product launches that are scheduled for later this year.
Gross profit was 740000 in second quarter of 2022, or one 3% of revenue compared to $8 3 million or 16, 5% of revenue in the second quarter 2021.
These declines were due to the above referenced increase in cost of goods sold primarily driven by increased production overhead expense.
Inflationary impacts on food packaging freight and logistics services.
Freight on finished goods was roughly $6 7 million in the 2022 second quarter.
Weighted to roughly 11, 4% of total revenue this quarter gives.
Given the expected revenue growth in the second half of 2022 and ongoing vertical integration initiatives. These costs are expected to decline as a percentage of sales, which should lead to improved gross profit margin.
Operating expenses Rose 48, 3% to $24 3 million for the second quarter 2022 from $16 4 million in the second quarter 2021, reflecting ongoing investments in attaching chef brand sales channel expansion and higher public company.
The quarter over quarter increases were due primarily to a $2 $5 million increase in marketing and promotional expenses.
$2 2 million.
Increase in operating expenses for entities that were newly acquired in 2021.
One 5 million increase in payroll and recruiting expenses.
$1 1 million increase in stock compensation expense and a $1 million increase in post manufacturer cold storage expenses.
Net by a $1 8 million decrease in professional expenses.
Net loss in the second quarter of 2022 was $26 4 million or negative <unk> 32 cents per diluted share as compared to a net loss of $57 5 million.
Or negative 70 cents per diluted share in second quarter 2021.
<unk> EBITDA loss was $20 5 million in the second quarter 2022, compared to adjusted EBITDA loss of $6 1 million in second quarter 2021.
With respect to our balance sheet at June 32022, cash was $27 7 million long term debt was approximately $1 4 million and our current ratio was two seven.
Net cash used in operating activities for the three months ended June 32022 was $23 7 million, which represented a sequential decline in cash consumed from operating activities in the first quarter of 2022.
In the 2022 second quarter point $8 million in cash was consumed by working capital activities as accounts receivable generated $14 4 million, which was offset by cash consumed by inventory.
Prepaid expenses in current liabilities.
Prepaid marketing activities totaled $15 8 million with total cash outlay of $22 9 million related to marketing expenses through the end of the second quarter of 2022.
Capital expenditures during second quarter, 2022 were $6 8 million and primarily reflected the purchase of new automated manufacturing equipment.
The installation of the chip line at our new Mexico operation equipment for our new dedicated cold storage facility and the construction of an in house laboratory in Paramount.
This leaves less than 5 million in additional cash outlays related to property plant and equipment for fiscal year 2022.
Subsequent to quarter end, we expanded the U M B asset based lending line from 25 million to $40 million and extended its maturity to September 2025. This credit line remains unused.
This new untapped line of credit has provided us with additional flexibility to fund our growth.
At the same time, we are making investments designed to improve efficiencies.
And create economies of scale to support expected sales volume ramp through the second half of 2022 and 2023.
We have revised our 2022 outlook slightly we expect sales in the second half of the year to be stronger than first half 2022 sales and thus we are maintaining our full year 2022 revenue outlook of $280 million to $285 million.
We expect our top line growth to be driven by several factors, including expanded distribution points in retail location new.
New pricing measures and exciting new product verticals.
As Sam noted growth remains our top priority and we will continue to invest in the business to support growth opportunities.
With that in mind marketing expenses are still expected to total $27 million to $32 million with $17 5 million of that figure spent year to date.
Our capex outlook remains at approximately $20 million with a focus on automation and robotics at our manufacturing facilities.
Capital expenditures through the first six months of 2022 totaled $15 6 million.
Did reduce our gross margin expectations for the year to 8% to 10% from 10% to 12% given the impact of previously mentioned inflationary cost pressures in the second quarter of 2022.
I. Thank you for your attention and I'll turn the conversation back to Sam.
Thanks, Stephanie let's open the call for questions from our analysts.
At this time, we will 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 two if you'd like to remove your question from the Q4 participants using speaker equipment. It may be necessary to pick up your <unk>.
Handset before pressing the star keys, one moment, please while we poll for questions.
Our first question is from Rob Dickerson with Jefferies. Please proceed with your question.
Great. Thanks, so much.
So you know look there's just a couple of questions first question just on the top line I know you said, though and it's also with some part as you.
Revenue should be stepping up a little bit more in the back half.
Relative to the first half.
And it sounds like maybe there's some new distribution opportunities forthcoming maybe if you could just kind of broadly just provide some color as to like if anything has really changed relative to let's say three months ago did you actually get new business wins or new products are going to be deployed a little bit more quickly than you thought just trying to.
Kind of what drives.
Back half revenue is a little bit better than previously expected.
Hi, Rob its Matt.
I'll take that question.
Are you doing.
Alright.
Good good yes, so we do.
The way, we're getting there in the second half is really three main things. The first is we are continuing to see a lot of the commitments that we have gotten from customers on some of the new categories that we've launched such as the Mexican entrees in the burritos taking half.
In our taking hold in the second half resets that we were pitching obviously in Q1 and Q2. So that's that's built into the into the model. The second is our price increase so we did announce a price increase that will be going into effect.
In all of Q4, so that is the second component.
And then we have built in.
Very significant new distribution agreement with the largest retailer in the U S from a.
Retail perspective so.
We haven't announced that yet kind of to the market, but it is taking our distribution too.
More than national distribution. So we will be nationally distributed at this retailer and so that is built into our forecast for the second half of the year on those three things or whether theyre going to be driving the.
The step up in revenue.
Okay got it that's helpful.
And then I guess just in terms of the gross margin.
It's implied for the back half of the year.
It does seem like Youre still.
Somewhat let's say of a wide ish range.
In Q3 and Q4, so just maybe if you could help me out.
Understand like what would need to happen to hit the higher end of what I guess what could.
Could happen if you had to lower it.
Hi, Robert.
It's Stephanie.
So on the topic of gross margin our revenues are down quarter over quarter, whereas you did see significant increases year over year.
Fixed costs that we started running the business at as far as operations is concerned didn't really change a lot and so what youre seeing is with decreased revenue.
Margin shrink and so in Q3 and Q4 when the revenue numbers go back up the margin comes back in.
And so it's more about that than it is any outside factor or anything else. Obviously, we all know that inflationary costs are still an issue within the industry, but it's a very simple answer for Q2 as far as the margin differential.
Okay got it.
And then just one last one for me I'll pass it all it's just on the cash side.
Yeah that'll be the cash balance is obviously, a little bit lower than it was last quarter.
Which is lower than the previous quarter. So the cash balance has been kind of trickling down.
I know you announced a new credit facility.
That gives you a little bit more flex, but at the same time directionally right. The cash there's still been a little bit of cash burn and you're up they've been operating at a loss. So.
As you think through kind of the back half of the year as we maybe get into the end of the calendar fiscal year.
Is the hope and the expectation is the cash balance actually starts to revert does kind of starts to go back up and we actually could maybe get to some positive balance because it.
It seems like that's it.
It would be somewhat challenging if you still think kind of positive EBITDA is not forthcoming until later in 'twenty three and that's it I appreciate it.
Hey, Rob Stephanie again, so one of the things that you highlighted in the press release and in this phone call as well.
We have invested a lot of money into capex and into marketing for this year and each of those has roughly $5 million in cash.
Left to go so we've got about $10 million in cash outlay for that so the cash outflow for the company does become significantly lower than it had in Q1 and Q2 for the back half of the year. As you mentioned, we also expanded our asset based lending lines and currently we have no balance on it so we're pretty confident that between those.
We have pathway to get to that profitability number and.
And so we're focused on that as well as everybody else.
Yes.
Alright Super Thank you so I appreciate it.
Thanks, Rob.
As a reminder, 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.
Our next question is from George Kelly with Roth Capital. Please proceed with your question.
Okay.
Hey, everybody. Thanks for taking my questions. So.
So first one just to follow up on that.
The prior questions how much pricing are you taking in in fourth quarter.
George Hi, its Matt so.
Obviously this is Ben.
Challenging for all suppliers through the last couple of years as we were talking to retailers. When we were indicating this a lot of retailers were.
Sharing that brands and manufacturers it was a little bit of like death by a thousand pinpricks like.
With a low single digit price increase that was kind of what they went out with and then they re evaluated their business and then they had to come back six months later and take another mid mid mid single digit price increase so what we did is we did it in one fell swoop, where obviously catching up to the market.
And so we.
We're kind of in that low double digit range in terms of what we took to the market and what we're encouraged by is that with that price increase. It obviously is going to help to offset some of the expenses that we're facing in our business today.
While at the same time still keeping us in line in terms of our pricing at shelf based off of what our competitive brands and the brands that we look at the consumers who are trying to reach have done and where we're at today from a pricing perspective.
George This is Sam how are you doing hey, Tim.
Tim I'm. Good. Thanks, how are you good.
I just wanted to add also that.
All of our business all of our distribution. We've won like all of these new businesses just continuously being one in the last year and as every month, we are launching new skus with new markets and so for us to have been taken in.
Price increase when we're just getting distribution within a week or two or something would really hurt the potential of the item. So we really wanted to give as much as it hurt from a profitability standpoint, we really needed to give some time for those items to hit the shelf and to get some credibility and earn some awareness.
Before we were able to feel comfortable about taking that price increase so we really hung in there as long as we could and now we feel comfortable to do it and so we feel that we will continue to be successful with the growth on how we address this pricing issue.
Okay. Okay. That's helpful.
Next question for me.
The guidance for positive EBITDA by sometime I think in the back half of next year.
Can you just help bridge, how youre going to do that.
If demand kind of buckets that I was thinking of it.
It seems like maybe you are considering stepping back on some of your marketing investments just curious if thats the case.
And then this automation and pricing.
Using those three things like what's the biggest element too.
Of all the expansion here the margin expansion you're expecting.
Absolutely George so.
It's it's just tackling and blocking here, we talked about the price increases we've talked a lot about being vertical and being vertical gives us such an advantage for much from relying on a co packer and that additional price increase that they would be passing on to us.
As we dispose of a little bit in our script. We've discussed that we are making more of the products that we've been buying so we our vertical but we still buy a certain amount of ingredients and we will continue to streamline our purchases of our products and then our production the efficiency.
We talk about these robotics and buy and when we talk about like.
The efficiencies of robotics, we're not just talking about packing and extra.
100 units a minute of a ball, we're talking about continuously trying to make more and more of the ingredients to reduce our cost is very we're very unique.
Why our model. We feel is is so important to what most of the other companies are so we're vertical we have our price increases we have a robotics going on and then we have our revenue growth. That's coming so you add all of these things that together and we really feel confident by the end of.
23, we're going to be profitable so.
Absolutely.
Doing all of these things are labor numbers by bringing in these robotics are going to come down significantly too so.
Again, we have so many levers to be able to pull from to increase our profitability revenue price increases being vertical labor and it's like because where this new company that we're just introducing all of these products, we have inefficiencies as the as the more product we make.
The more we streamline our operations the more that we're going to be able to be profitable. So I mean, it's it's.
You could see it I can see exactly how we're going to get there. We just we just need to execute but.
But the pieces are in place the puzzle is there the pieces of the puzzle are all there.
And then the last element I didn't hear you.
Speaking about was just marketing what is your plan just broadly I'm not asking for specific guidance next year, I think but like how do you think generally.
It'll go forward after this year.
Great.
I want to keep my foot on the pedal I mean, obviously, we need to be responsible.
But.
Yeah.
It's like Sarah pointed out in a year, we went from.
In two years, we really went from like 4% to a year ago of 11%. This year, 20% brand awareness in the United States and I mean for a company. They just launched a brand within a couple of years to have 20%.
<unk> awareness across the U S is incredible and we are I hate to take my foot off the gas.
But we will be responsible with the cash requirements that we have.
Okay. Thank you.
We have reached the end of the question and answer session and I will now turn the call over to CEO of <unk> for closing remarks.
Thank you everyone for your participation today, and we look forward to speaking with you. All soon have a great day and enjoy the rest of your summer.
This concludes today's conference and you may disconnect. Your lines at this time. Thank you for your participation.
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Great.
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<unk>.
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Yes.
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