Q1 2023 Tattooed Chef Inc Earnings Call
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Greetings and welcome to the tattooed chef first quarter 2023 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.
If anyone should require operator assistance during the conference Press Star Zero on your telephone keypad.
Note that this conference is being recorded I will now turn the conference over to our host Devin Sullivan of the equity group. Thank you you may begin.
Thank you Diego good afternoon, everyone and welcome to tattooed chef first quarter 2023 financial results conference call.
On the call today are Sam Dillon, President and Chief Executive Officer, Sarah Galletti, Chief Creative Officer, and the tattooed chef and Stephanie Dykeman Chief Financial Officer.
By now everyone should have access to the earnings release, which went out yesterday afternoon, and it's available at the company's web site Www Dot tattooed chef dot com.
Before we begin I'd like to remind everyone that the prepared remarks.
Being given today.
Forward looking statements within the meaning of the safe Harbor provisions of the United States Private Securities Litigation Reform Act of 1995.
Such statements involve a number of known and unknown uncertainties, many of which are outside the company's control and can.
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.
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 our 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.
The company believes is a useful metric that better reflects the performance of our business and on an ongoing basis.
A reconciliation of this non-GAAP financial measure to its most directly comparable GAAP financial measure is included in the company's press release, which is also available on its website.
With all that said it is now my pleasure to turn the call over to tattooed chefs President and CEO Sam Galletti Sam. Please go ahead.
Okay.
Thank you Devin.
And thanks, everyone for joining us today.
It's great to be speaking with you all with all of you with our filings up to date and with a little bit of tailwind and progressing towards our goal of switching from growth to profitability.
I feel I need to go off script here.
All of you to know we are determined to make this the class based company of the future I want to thank everyone for their continued support of captain chef.
I am encouraged by our results for the first quarter.
By the factors that we believe separate tattooed share from our competitors or products or plant based we address a variety of taste and our options are expanding we have invested in our brand and our manufacturing capabilities provide us with control and opportunity.
As promised we are reducing the costs necessary to operate our business without compromising our quality our commitment to our clients.
We reduced total operating expenses in Q1 2023 compared to the first quarter of 2022 and narrowed our net losses and adjusted EBITDA losses, We also reduced our cash burn quarter over quarter.
We now have greater confidence that we can meet our 40 million expense reduction target by year end 2023.
Our progress is more pronounced when comparing Q1 2023 to the fourth quarter ended December 31, 2022 with a reduction in total operating expenses and a continued narrowing of our losses.
Sarah and I have met with our customers and we appreciate their support we are continuing to introduce new products and break into new higher margin categories. We expanded our distribution with Albertsons, Walmart and Cvs and are reviewing all of our products for profitability and sell through.
We are also taking actions to drive efficiencies in our operations and fine tune our trade spend.
We compete in the health and wellness category and first Dennis data for 12 weeks ending for 'twenty three 2023 of the top 20 brands tattooed chef as one of seven brands that continues to show unit sales growth.
The health and wellness categories down 10, 6% in units.
<unk> is delivering 12% more units than this time last year and experiencing 4% growth in total Mueller.
In addition, we have reduced the amount of time that our products spans on promotion in the store by four 3%, which shows growth in both our base business and continuing brand loyalty.
The dynamics of our markets have changed and so too has our approach.
Make no mistake the market has changed and I know how to pivot our direction to profitability.
You for your attention and I'll now turn things over to Sarah.
Good afternoon, everyone Patrushev, it's a branded food products of the future for vegetarian and Flexitarian in fact, all the Permian, there's something very special about Patrushev products, there to still get comfort foods made from plant to plant based ingredients that create the delicious taste and texture that lets you eat vegetarian without <unk>.
Compromising flavor, our manufacturing base assures that we work with sustainable growing practices, which results in high nutrient fruits and vegetables, Patrushev has a big future in the better for you food and the better for the planet space. This message will be driven home on social media, where we are targeting our core consumers.
I remain incredibly excited about the future of package Jess. Thanks for your continued support I'll now turn the conversation over to Stephanie for a discussion of our result was all Stephanie.
Good afternoon, everyone. We filed our 10-K for the year ended December 31, 2022, and 10-Q for the three months ended March 31, 2023 yesterday, we are once again a timely filing.
Q1, 2023, net revenue declined by $8 6 million or 12, 7% to $59 1 million from $67 7 million in last year's first quarter due primarily to a $7 3 million decrease in.
Catchy chef branded products with Walmart as previously mentioned during Q3 last year and higher trade promotion spend that reflects our support that'd be seasonally higher focus by our customers on healthy eating products. During Q1 2023 as compared to the same period in <unk>.
Q1 2022.
As Sam mentioned, we are well diversified between Cogs.
Retail and private label branded sales were $31 7 million driven by the two promotions that we participate in during Q1, historically with a club retailer.
Labor and other revenues decreased four 4% to $27 4 million quarter over quarter due to a decision made to discontinue certain service item. It were inherited with the new Mexico food distributor acquisition in 2021.
Cost of goods sold declined to $63 2 million from $63 6 million in Q1, 2022, due primarily to inflationary pressure on raw materials and packaging costs that impacted some of our best selling products, specifically I'll say evil third party services and open capacity.
Manufacturing sites.
Gross loss was $4 1 million as compared to gross profit of $4 1 million in Q1, 2022, which was primarily due to inflationary pressure on raw materials and packaging.
The increase in trade spend.
Operating expenses declined by $8 6 million or 37% to $14 7 million from $23 3 million in Q1 2022, reflecting the initial impact of our cost reduction initiatives.
And by decreases of $6 9 million in marketing and advertising.
The $1 7 million and outside service expenses and 0.4 million in stock based compensation.
We also expect to generate savings be it enterprise wide efficiency gains we are building more efficient distribution networks and product lines through automation, along with the integration of the ERP system throughout all of our facilities.
Net loss narrowed to $19 million or negative <unk> 23 per share from a net loss of $20 2 million or negative <unk> 25 per share in Q1 2022.
Adjusted EBITDA loss narrowed to $15 3 million from adjusted EBITDA loss of $16 million in Q1 2022.
Moving to our financial position at December 31, 2022, cash was $3 5 million and the net amount drawn against our line of credit was approximately 4 million net.
Net cash used in operating activities for the first quarter of 2023 was $5 7 million.
Cancel decline from net cash used in operating activities of $26 4 million at March 31, 2022. The decline was due to several factors, including a reduction in inventory of $18 6 million.
Capital expenditures during the first quarter with approximately $500000 and primarily reflected maintenance expenditures, we made considerable investments last year to complete our automation initiatives for 2023, we have revised our 2023 outlook and our longer term outlook to achieving breakeven adjusted EBITDA.
And cash flow neutrality, we expect sales for the year to be $200 million to $205 million compared to net revenue of 231 million. In 2022. This is expected to be the result of several factors, including our shift from growth to profitability, which will include the rationalization of certain.
Underperforming skus realignment of operational efficiencies and hearing toward leaner operation.
Gross margin is expected to improve on consecutive quarterly basis throughout 2023, we expect to generate annual cost savings of approximately $40 million and had a good start towards the school in the first quarter.
Further details can be found in our press release from yesterday as we've also noted in our press release, we continue to pursue debt for equity capital and have provided disclosures in our filings regarding this subject 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.
Thank you and ladies and gentlemen at this time, we'll be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad.
A confirmation tone will indicate that your line is in the question queue.
You May press Star two if you would like to remove yourself from the queue.
All participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
We'll pause for a moment to pull for questions.
Okay.
Our first question comes from Cody Ross with UBS. Please state your question.
Okay.
Good morning, or good afternoon, I should say, thank you for taking our questions first.
First question I saw a note in your press release, just about a vendor disruption and that's going to impact. Your Q2 results can you just expand here on possibly the magnitude and exactly what is the nature of the vendor disruption.
We use a cold storage facility that has nationwide and we are in several locations and they have experienced an outage in their system.
And basically we have been unable to ship products now for a couple of weeks, we are waiting to hear back from that supplier I guess, you could call them as to when their system will be back up and running but we do expect it to affect Q2, we don't have the exact dollar amount yet.
Our hope is is that they will be back up and running this week and everyone across the country, who does business with this vendor is being affected.
Well known cold storage facility.
And we're hanging in there with them and I believe that they will have solutions for us in the next week or two and once we can quantify that difference we would be happy to remark on that.
Thank you I appreciate that and I understand the sensitive nature. So I just have one last question on this topic and then I have another question.
Just can you share with us the timeline of the disruption has this been going on for two weeks three weeks four weeks just so we can try to help frame it for ourselves.
It's been about two and a half weeks.
Okay, and it doesn't affect all of our customers, but it does affect Walmart does effect.
The West Coast Kroger, it does affect all the and whole foods as well.
Uh huh.
That is super helpful. Thank you for that.
Then just pivoting here you're on a journey towards profit and positive cash flow youre still investing in new products and retail expansion do you think you could achieve your financial goals. If you hit the pause button on innovation and retail expansion.
Absolutely.
We.
So the way that our products are we've already have them all already vetted out and our margins on these other items are all the new innovation that we have laid out is two five times what our typical frozen margins are so we are able to be a little bit more.
Aggressive and flexible with our innovation.
As you know frozen has just the lowest margins in the hole and our host and the stores that we sell so yes.
Yes, we believe that we feel good that we're going to be able to to meet our guidance that we're showing and hopefully beat it.
In addition, I'd like to add that because where manufacturers the Cogs research and development on the new items has not been a costly item for us our research and development costs are not a large item on our profit and loss statements.
That was actually really helpful. That's where I was going with Beth and Sam It sounds like these new products will actually enhance your ability to get to profit and positive cash flow and the idea of stopping this would actually hinder your ability to hit it is that fair eggs is so it is smaller it is exactly.
One of the ways that we're going to be increasing our gross margins and being able to so it'll hit that pivot point that point to where we're reducing our expenses and we're increasing in all of our new innovation or has all these ambient items come in at such a higher margin. So with both of these things.
<unk> at the same time.
We're very optimistic that we'll be able to hit profitability and we're just we're trying to be conservative because it's been very interesting how our whole market.
Our competitors or peers in the same market they've just continuously hit misguided. So badly for two years now and so I just think that we needed to take a step back and be a lot more realistic and really just now start building from a base to where we're very confident and comfortable.
With what we're doing.
Got you that's helpful. And then one last question for me and I'll pass it on so I don't target here.
You mentioned the potential for raising additional capital you have about three and a half million dollars of cash on hand, you're still burning cash and will likely for the remainder of the year can you just remind us how much borrowing flexibility you currently have and the potential avenues you would go to raise capital because I imagine the cost would be fairly high given the.
Current interest rate environment. Thank you.
So what we're looking at right now is we we still have a good relationship with U M. B that remains unchanged as far as the status of our relationship we have some things in the works that were not quite ready to talk about yet.
We we've looked at every type of transaction. There is out there as you are aware at Cody as I'm sure. The market is where it gets a much different world than it was a year ago or two years ago, and so it's taken us a little bit longer than we originally planned but as soon as we're ready to announce as soon as we make sure that we've got everything lined up.
You know press release will be first and then the analysts phone calls will be second.
Okay.
Yeah.
Thank you I'll pass it on.
Thank you and just a reminder to the audience to ask a question at this time press star one on your telephone keypad to remove yourself from Q Press Star two.
Our next question comes from J P Waltham with Roth Capital Partners. Please state your question.
Hi, everyone. Good afternoon, and thanks for taking my questions.
If we could maybe just start on kind of the revenue line and sort of.
Thinking about guidance for the year.
It looks like if we think sequentially. We saw some strength in Q1, maybe that was a function of some of the club promotion, but I'm just kind of curious to get your perspective on really what gives you confidence in AR in that guidance figure and sort of the.
It sounds like Q2 might be affected a little bit, but sort of on that on that run rate sales number going forward.
What what really gives you confidence that that we've found the right level.
Yeah.
Sure J P. So.
The confidence we get that from our numbers is that.
First of all as we stated in our earnings. This company is really kind of divide it into three categories. There are some private label piece of it Theres a theres a branded with club piece of it and then there and then there is our conventional retail business, which is a piece of it so it's like.
If somebody asked me. The question, we were 100% in conventional retail I would not be as sure, but because we have the confidence from this company is really a very older. It's a 20 year old company and we have great relations and history with our club business and our private label business that gives us that.
Secured debt the confidence that then when we take these guidance numbers of like we said, 2% to 205. This year, we're not depending on such.
The growth that.
Because we're still.
When it comes to the.
The products that we're just we're still just launching products into the market. So this is so fresh bill. So we wanted to do is we wanted to be conservative, but we wanted to be realistic because as we know the market in general in our categories are declining.
I believe that you know.
Our numbers this year are spot on and then going forward are upside could be.
Very more aggressive than we are but we want to take it a step at a time I hope I answered your question Stephanie.
So what I wanted to take the time to remind everyone. J P is when we do these promotions with Costco and we've talked about it openly before in which we participate in two N. P. M Square one is for the organic rice cauliflower stir Fry and the other is for our organic off label.
Have a large contra revenue item that comes with this and when we restated our financials for 2022, we stated that it was over $5 million. So, whereas it does help us drive some revenue and it does help us with products that.
Historically, our profitable and good selling product for us it's more about the marketing experience that we have by having tattooed shack in all eight regions of Costco at the same time for a two months period, but there is a whole $5 million contra revenue that affects profitability just because it reduces revenue so it's <unk>.
Not quite the spike or the addition into the margin not to mention that there was still a drop in opex, which has nothing to do with that and that's what gives us confidence in being able to further expand upon our pathway to profitability.
Yeah.
Okay understood.
And then maybe just maybe just thinking about gross margin can you kind of.
Just help us think about.
What you are expecting to see each quarter that should drive that incremental margin expansion.
Through the remainder of the year.
Concrete you can kind of point to.
Okay.
Okay.
So the first places is we've reduced our staff, we've turned around and looked at leaner operations, meaning taking out some of the middle management and things of that nature within the plant and manufacturing itself along with the automation the SKU rationalization gearing towards higher margin products.
Some outside of the frozen section and going through and really taking a product byproduct stab as to how to move tattooed chef in the right direction, while focused on having quality product that tastes. Good but also generating revenue and where we can cut that whether it be overhead.
In the plant itself or if it's actually looking at the product line and looking at how it's manufactured in what we can do to increase the margin on a per SKU basis, Jamie I agree what Stephanie is spot on.
You have to remember that I've been in this industry for 40 years and it always used to just be about.
Every product stands on its own it needs to be that product needs to be profitable.
And Thats, how <unk> always built my business is sold by businesses. When we went public and we had this this complete new <unk>.
Venture of building a brand as quickly as you can and just trying to gain as much market share at any cost.
It's a completely different it's a completely different game and obviously when the market changed from a from a liquidity standpoint, we had to change and so but if anybody knows how to get to that profitability. It's been my life's history. So I know how to do it it's in the works.
In the process, it's hard to flip a 100 million bucks overnight, but its going to happen.
Okay.
Okay, Yeah, that's great very helpful and Oh I'll pass it along thank you guys for the time I appreciate it.
Thank you.
Yeah.
Thank you there are no further questions at this time I'll hand, the floor back to Sam Galletti for closing remarks.
Thanks, so much everybody for joining us today, we really appreciate it we appreciate all the support for tattooed shaft and we look forward to hearing from you in the future have a great day.
Thank you. This concludes today's call all parties may disconnect.