Q3 2022 Tattooed Chef Inc Earnings Call
Greetings and welcome to the tattooed chef third quarter 2022 financial results Conference call.
At this time all participants are in a listen only mode.
<unk> and answer session will follow our formal presentation. If anyone should require operator assistance. During this conference. Please press star zero on your telephone keypad.
Please note this conference is being recorded.
I will now turn the conference over to our host Devin Sullivan Investor Relations for tattooed chef. Thank you you may begin.
Thank you Diego and thank you everyone. Good afternoon, and welcome to tattooed chefs 2022 third quarter financial results conference call on the call today are <unk>, President and Chief Executive Officer, Sarah Galletti, Chief Creative Officer, and the tattooed Jeff.
And Stephanie Dykeman, the company's Chief Financial Officer, 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 Www Dot tattooed Jeff Dotcom.
Before we begin I'd like to remind everyone that these prepared remarks contain forward looking statements such statements involved and 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 that 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.
Sept 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 and that the company believes it 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 again has been posted to the company's website.
With that said it is my pleasure to turn the call over to tattooed chefs President and Chief Executive Officer, Sam The Lettie Sam. Please go ahead.
Thank you Devin.
And thanks to everyone for joining us today.
When we became a publicly traded company in 2020, our mission was clear drive growth and introduced the <unk> brand to more customers through diversifying our channel mix and we did as evidenced by a three year revenue CAGR of 29, 7% as of Q3 and two.
'twenty two.
Our presence in more than 18000 locations as of September 30th and more than tripling of our branded SKU count.
Through the first nine months of 2020% to 100% of our growth was unit driven that is without the benefit of any price increases.
We also invested in expanding our manufacturing capacity four times to approximately 400000 square feet since 2020 with the closing of our new manufacturing facility in New Mexico.
We are also expanding outside the frozen aisle by introducing products to gain entry into the refrigerated and ambient food spaces.
We know consumers are still looking to introduce more better for you food options into their diets and plant based foods are an important movement to support this.
We know most importantly, they are looking to experience plant based foods and a more convenient economical and creative way and patchy chef is in a strong position to support consumers decision to make an impact on the world through what they eat by offering products and a variety of categories.
Such as Pizza entrees handheld breakfast and more.
We love, what we do and we know we are making a difference.
We will not run from the challenges we face.
<unk> been in the food industry for 40 years and have seen economic recessions bubbles and historically low and high rates of inflation. We recognize the world has changed and we are excited to lay out our plan to address this new reality and generate long term value for our shareholders a confluence.
Economic factors.
Inflationary pressures have driven our freight and logistics expenses to historic highs, while broader category headwinds and shifting consumer sentiment have caused us to expand how we operate our business.
We will reduce our cash burn by zeroing out inefficient spending while emphasizing the allocation of resources to areas that elevate the inherent advantages of our vertically integrated operating model and deliver the most impactful and sustainable return on investment.
As we have noted in our recent public announcements, we believe that the steps we are announcing today in combination with ongoing expansion and efficiency initiatives will serve to stabilize the business and redefine the operating characteristics.
By year end 2022, excuse me by year end 2023, we believe that we can capture approximately $30 million of cost savings primarily through a combination of the following.
A $15 million reduction in marketing related expenses in order to support our retail expansion over the last two years, we've focused on building brand awareness through targeted advertising campaigns, which allowed us to increase our household awareness to 23% in less than two years during.
This period, we have learned about our consumer where they shop.
What they value and where they learn about tattooed chef Brad.
Our strategy moving forward, we will focus on more economical marketing tactics that are closer to the point of purchase to include retail to specifics trade marketing programs targeted social campaigns and retailer specific influencer campaigns in 2023 every market.
Dollar all dedicated to driving trial and repeat purchases of the tattooed chef brands.
Automation drives savings approximately $6 million compared to no savings such realized in 2022, primarily driven by a reduction in direct labor manufacturing yield efficiencies and increased productivity in our existing footprint.
First production line is delivering to our pandemic, California.
The facility. This week and we are excited to see our planning began to be implemented on a production floor.
The first line that we are automating as one of the bull lines that will double the capacity in the same footprint utilizing less labor. Meanwhile, phase two is estimated to be completed by the end of May 2023, We believe we can implement these automation projects without slowing production output and we will see incremental.
Patiency gains throughout the coming quarters until the project is completed.
Savings of approximately $2 million associated with our dedicated in house cold storage facilities, our year to date contracted cough cold storage spend in 2022 has been $6 7 million.
A reduction in promotional programs Contra revenue that are estimated to produce approximately 7 million in cost savings as a new brand hitting the shelves over the last two years, we implemented retailer specific pricing promotional plans to support our launch with our retail partners. We created specific plans did one sure.
Our success at the shelf well being in line on our frequency and depth of discount with the competing brands in our space.
Over this period, we have learned a lot about the effectiveness of our promotional spend and required level of discounts to drive category leading velocities.
Insight, we are getting and will allow us to continue to support our retailers commitment to detach each brand while driving efficiency in our trade spend.
We are convinced that the opportunity for long term sustainable growth is well within our reach we are committed to the annual cost savings of approximately $30 million in 2023 and positive EBITDA and cash flow from operations by mid year 2024. These are aggressive goals and we will be accountable.
To ourselves and to our shell holders for achieving that.
Thank you for your attention.
And I'll now turn things over to Sarah to discuss our innovation and our marketing initiatives Sara.
I am excited about the future of tattooed shack healthy eating is no longer a fact, it's a way of life on any given night millions of plant based and tender the hundred and 13 million Americans, who are looking to get more plant based foods in their diet are cooking with readymade ingredients favoring patchy chat option.
But if those food attach each have brand was to create delicious Seljuk ready to eat plant based is that deliberate great nutrition without sacrificing flavor.
We set a new study we know that tastes delicious is the most important attributes consumers are looking for when purchasing a better for you frozen product and the study showed patchy check delivers on this claim more than many other competitive brands in our space in fact, 86% attach of check either break the grant Keith and satisfaction.
In the top 20 boxes, compared with 59% for the broader better for you category.
Further supported by our 57% best in class brand loyalty and customer retention. According to our mine site study performed on September nine of this year.
Our products are treated to satisfy every consumer is plant beside and carry no judgment.
With respect to who you are a vegan vegetarian or flexitarian, a person who just wants to incorporate <unk> into their regular diet.
Now I'll turn the conversation over to Stephanie for a discussion of our results Stephanie.
Good afternoon, everyone revenue decreased six 7% to $54 1 million in the third quarter of 2022 from 58 million in the same period last year branded sales declined $10 3 million year over year, partially offset by private label.
And other revenue increases of 27, 4% or $6 4 million year over year, driven by revenue contribution from our acquisition of Belmont confection, and various new Mexico entities.
Decline in branded sales was driven by $15 million decline in a tier one club and retail accounts and a $6 2 million increase in trade or Contra revenue related expenses, which consisted of a $1 2 million increase in slotting fees as we focus on brand expansion of tattooed chef.
Into additional retail stores across the country.
Excluding the impacts from this tier one accounts and stuff, but then slotting fees.
<unk> product sales in the third quarter up 2022 increased 17, 1% or $5 9 million from the prior year quarter.
Private label and other revenue increases were driven by revenue contribution from our acquisition of Belmont infection, and various new Mexico entity.
Tattooed chef owns or leases approximately 400000 square feet.
Manufacturing capacity and we will continue to leverage this differentiated operating asset to grow revenue and fill plant capacity.
Hi.
As Sam referenced earlier inflation has had a significant impact on our operating results in 2022, even more evident in the third quarter result.
Cost increases were broad based spanning labor.
<unk> facility related charges energy cost equipment and supply related expenses with that said in the third quarter of 2022 cost of goods sold rose nine 4% to 58 million up from $53 million in the third quarter of 2021.
As a reminder.
Great and shipping costs are above the line on our P&L and directly impact our gross margin.
We are focused and aware of these cost increases and controlling costs where possible.
In addition, our first price increase of 10% on patchy chef branded products in place at the end of September .
Rosemont with $3 9 million in third quarter up 2022.
Her to a gross profit of 5 million in the third quarter 2021.
Decline in profitability was driven by the above referenced broad base inflationary pressures on cost of goods sold and inflated trade or contra revenue spend.
As retail distribution points continue to grow, causing a near term headwind to profitability.
Great Labor expenses increased to 34, 1% of net revenue as compared to 24, 9% in the prior year period.
With the ongoing vertical integration initiatives and continued brand growth. These costs are expected to decline as a percentage of sales, which should lead to improved gross margin.
Operating expenses Rose 146, 8% to $31 6 million for the third quarter 2022 from $12 8 million in third quarter 2021.
Reflecting ongoing investments in the patchy, Jeff brand sales.
Sales channel expansion and higher public company costs.
The year over year increases were due primarily to a $7 million increase in stock based compensation expense.
$4 6 million increase in marketing and promotional expenses, a $2 5 million increase in outside services.
A $2 million increase in payroll expenses, and a 0.7 million increase in facility expenses.
Net loss in the third quarter of 2022, with $38 5 million or negative <unk> 46 cents per diluted share as compared to a net loss of $8 2 million or negative 10 cents per diluted share in third quarter 2021.
Adjusted EBITDA loss was $25 5 million in the third quarter. Once you 22 compared to adjusted EBITDA loss of $5 1 million in third quarter 2021.
With respect to our balance sheet at September 32022, cash was $14 2 million debt on our line of credit was approximately $20 million.
Net cash used in operating activities for the three months ended September 32022 was $17 2 million in the third quarter of 2022 noncash expense add backs were $12 9 million, while cash generated from working capital was $8 4 million as accounts payable.
Accrued expenses and other current liabilities generated $14 7 million accounts.
Accounts receivable generated $7 9 million.
Prepaid expenses and other assets generated 0.9 billion, which was partially offset by cash consumed from inventory of $15 million.
Capital expenditures during third quarter, 2022 were $14 5 million and primarily reflected the purchase of new manufacturing and storage equipment and a new.
80000 square foot manufacturing facility in new Mexico, and additional automation equipment related to our Paramount, California location.
I just covered above the company accessed approximately $20 million on the $40 million you wouldn't be asset based lending line to fund the outset purchase in new Mexico and other capital expenditures.
As a reminder, the <unk>.
M B line matures in September 2025.
I just covered above and in our press release last week, we have revised our 2022 outlook for revenue and gross margin. We expect sales for the year to be 235 to 245 million and gross margins to be zero to 3%.
The modifications and consumer buying behavior in response to historically high inflation levels.
The headwind from a tier one club and retail accounts higher trade or contra revenue from the change in technical accounting treatment related to the multi vendor mailer at our tier one club retailer and a near term step up in slotting fees as retail distribution growth was stronger than originally anticipated at the start of 2022.
All negatively impacted our revenue guidance and gross margin.
As Sam noted, we are shifting our focus to profitability and lowering Casper, we will continue to invest in the business.
Strategic growth opportunity as well as cost saving initiatives with that in mind marketing expenses are still expected to total $27 million to $32 million for the year and next year this will be reduced to $12 million to $17 million.
Our capex outlook remains at approximately $20 million for 2022.
With the new Q3 acquisition of the New Mexico manufacturing facility accounting for approximately $11 million.
Excluding the asset purchase capital expenditures through the first nine months of 2022 totaled $19 1 million.
As noted in our press release, the company intends to raise additional debt or equity capital in the near future.
Thank you for your attention and I'll turn the conversation back to Sam.
Yeah.
Thanks, Stephanie let's open the call up for questions from our analysts.
Thank you.
At this time well conduct a question and answer session if you'd like to ask a question press star one on your telephone keypad, a confirmation tone will indicate that your line is in the corner.
You May press Star two if you would like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up perhaps that before pressing the star.
Our first question comes from Cody Ross with UBS. Please state your question.
Good evening, Thank you for taking our questions.
First question.
Headwinds in your tier one account can you just provide a little more color on what was the nature of the weakness do you think this is onetime in nature or is this something that should persist.
During the fourth quarter and into next year.
We think that it's going to punch through partially into the fourth quarter. We expect some of those things to be removed in Q1 2023, we will release, you're at our 2023 guidance.
When we do our year end earnings call, but we are we are optimistic.
Okay and then.
As far as your decision to pivot to.
So our focus on profit and cash flow generation certainly appreciate that that's rising interest rate environment.
Talk about your sales strategy and ability to grow sales at the rate that you historically have.
We'll be pulling back on marketing expenses going forward.
Hi, Cody this is Matt Williams.
Obviously, it was not part of the initial remarks, so our strategy.
<unk> is really focused on winning with the customers that we are doing business with today.
We're obviously now a national brand we.
We have achieved.
Bearing levels of distribution with those with those retailers across the country like Walmart.
Target Kroger for that matter.
So what we're really focused on is now that we know where the customers learning about our products and how they engage with the brand which is really at store level, we think that the investments we've made in marketing.
You know really kind of allow that.
The connection to the brand to continue and so what we're very focused on is really optimizing our existing portfolio with our core customers. So as an example.
We're in a 800 stores with target on two of our core Skus, which is cauliflower, Mac and cheese Bowl and Burrito Bowl, but we're only in 200 stores with our third ranked skew in our fourth rank SKU. So we believe there's an opportunity for growth by really kind of focus.
Being on optimizing our core portfolio and in leveraging the the.
The consumer connection and how we connect to the brand.
In that space by really optimizing our existing portfolio.
Okay and then one last question if I can sneak it in you mentioned raising capital in the near future.
Can you just talk about your preferences, whether the debt or equity potential dilution and how we should think about that going forward and I'll pass along thank you.
So I want to remind everyone that Sam is the largest shareholder.
In existence at the moment, we will always better the potential dilution against the return that we expect to achieve what they need in capital. We're gonna give ourselves as much of a runway as we can through cost saving initiatives efficiency gains and price increases.
We're currently working actively on multiple financing tracks, we will provide more clarity when we have more to share but we are we are open to options at this moment in time and we're gathering information.
Yeah.
Thank you.
And just a reminder to ask a question press Star One. Our next question comes from George Kelly with with Roth Capital. Please state your question.
Yeah.
Hey, everybody thanks for taking my questions.
So first one and I'm going back to.
Just try to ask a similar question that was just asked from the previous questioner.
But I'm still a little unclear. So just wanted to ask you again, the seals outlook change was about 40 million Bucks for for this year.
And I am still just kind of unclear on.
Exactly sort of the breakdown of what that's coming from so if you could maybe say it one more time just as far as this tier one customer are they pulling your products or is it really just about you know really consumer behavior has changed rapidly unexpectedly.
Or anything else you can provide just to give you.
Some clarity on exactly what's going on.
And you briefly mentioned it during the Q2 earnings call Sams club.
Does not have as many types of Jeff items, or one time promotion as they did in prior years and we were aware of that that's part of the loss that occurs within the revenue.
Passing chef brands did well inside even with that happening, but it was $15 million in revenue that occurred in 2021 that we did not see in 2022 and that was a planned thing at Sam's club with planning on one of the items with private label.
A couple of the everyday items honestly just ran their course they'd been on shelf for multiple years and it's what happened, but it's one of those things in which we have reestablished our relationship with them and we're hopeful in the future. We will continue to do business with them.
And move forward from that but we are continuing to expand into retail chain.
And really diversify our customer portfolio.
So that we are not overly reliant on any one customer.
And George this is Matt if I could add I mean, we really also did reset our business with Walmart so with Walmart.
We had skus in there that were not the most productive skus in our portfolio.
Categories that we're not kind of our core categories and so we went to them with a proposal.
To actually kind of reset the business in terms of going after kind of the core categories that were that are performing best for us which is really primarily.
The offering is now entre bowls, and so there was a little bit of a timing.
Impact in terms of the lost sales of.
One reset that took place in one category, which would fetch and then the new reset that just took place which is in the frozen new lifestyle set and so net net we gained stores net that we gain skus.
We know that the Skus that we now have on shelf, we're gonna be significantly more productive.
But there was a slight.
Timing or there was a timing issue that led to this kind of gap in revenue that we will see.
Cycle itself out as we move into 2023.
Okay. Okay. That's helpful. Thank you and then second question on.
On your liquidity, so could you walk through I understand theres $14 million of cash.
Is the remaining amount that 20 million Bucks on your credit facility is that fully available and then.
And then the third part of the question is outside of that cash in that facility.
And I understand you just mentioned the debt and equity raised but I'm not talking about that.
Or are there any other sources of liquidity, maybe its inventory you think you could draw down on inventory or Theres other asset sales, you're considering just could you walk through through that kind of near term liquidity.
We have a great relationship with U N V I want to make that abundantly clear we have a great relationship with them are they.
They formally invested in the company a few years ago and became an owner and they have since brought down some of their ownership due to FCA rules and things of that nature, but they remain a great partner with us as far as other places that we can generate cash from inventory is absolutely high on our list. It's one of those things in which we are highly folk.
Based on our inventory values, we do expect to pull down in the coming quarters and be able to utilize that as part of our cash basis that adds to our liquidity.
We are evaluating other means like going through as we do automation and looking at equipment that is no longer functional for us.
And whether that would go to another facility or if we would actually go out and sell pieces of equipment that are no longer functional to the operation. Those are things that we look at Theres a lot of places that we have that we can pull from and we're evaluating those every day.
Okay, and then last one for me is just about if we go to early 2023 and some of these initiatives are more fully.
Put in place I guess I'm thinking of the automation.
And you've taken pricing.
And so thats fully played through well what is the kind of go forward gross margin as you see it now I know theres a lot of moving parts, but if you could just high level provide kind of a.
Our go forward that we should.
Hidden kind of really mid 2023 that would be helpful.
The only answer I can give you right now George is positive.
Positive gross margin.
It's going to be the simplest answer we'll provide guidance for 2023 with a year end earnings report and possibly before then right now we're busy running and making sure that all of our processes and our initiatives are running smoothly and we really want to make sure that before we go out to the market and tell you in the world did everything is lining up.
The way that we want it to you before we quote exact numbers.
Okay. Thank you.
Thank you there are no further questions at this time I'll hand, the floor back to management for closing remarks.
Thank you everyone for your participation today, we look forward to speaking with you all soon and keeping you apprised of our progress have a great day.
Thank you. This concludes today's conference all parties may disconnect.
Have a great day.
Yeah.
Okay.
Okay.