Tattooed Chef, Inc.
Q1 2021 Earnings Call Transcript

Published: 12 May 2021

[Operator:]

Thank you for standing by. This is the conference operator. Welcome to Tattooed Chef's First Quarter 2021 Earnings Conference Call. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. I would now like to turn the conference over to Rachel Perkins, Investor Relations. Please go ahead.

[Rachel Perkins:]

Thank you. Good afternoon and welcome to Tattooed Chef's first quarter 2021 earnings conference call. On the call today are Sam Galletti, President and Chief Executive Officer; Sarah Galletti, Chief Creative Officer and the Tattooed Chef; and Stephanie Dieckmann, Chief Operating Officer and Chief Financial Officer. Matt Williams, Tattooed Chef's Chief Growth Officer, will also be available for questions.

[Salvatore Galletti:]

Thank you, Rachel, and good afternoon. We appreciate everyone taking the time to join us on today's call. It's an exciting time at Tattooed Chef. I'll begin today's discussion with key business highlights, new distribution wins, and our recent acquisition of Foods of New Mexico. Then Sarah will discuss our marketing and innovation, and Stephanie will provide further detail on the financials. We are off to a great start to 2021. First quarter revenue increased 59% to $53 million compared to the first quarter last year driving by our Tattooed Chef branded products. Our branded products sales for the first quarter of 2021 were a record $36 million or 69% of total revenue. That is an increase of 105% compared to $18 million in the first quarter last year. We had originally anticipated it would take two to three years to reach 75% to 80% branded sales and we are proud that we are nearing that goal within six months of being public.

[Sarah Galletti:]

Thank you, and good afternoon everyone. Tattooed Chef is a brand committed to creating high-quality, delicious plant-based meals that connect with the next generation of consumers. Innovation is woven into the culture of our company and we are passionate about every product we make. We create food we want to eat and as consumers' preferences change, so do ours. Plant-based food does not have to be boring and with Tattooed Chef it's not. Our food is exciting no longer for the 1% and it's Chef created. At the end of Q1, we had a total of 42 Tattooed Chef branded SKUs and by the end of Q2, we will have 54. This includes five new 20 ounce plant-based multi-serve meals, Cauliflower spaghetti with plant based Bolognese, Sweet Potato Gnocchi with plant based butter and sage, Cauliflower Gnocchi Quattro Formagi, Chickpea pasta with plant based Sausage Ragu and Riced Cauliflower Burrito blend that are now available for purchase at Target stores nationwide. These skillet mills feature variety of our innovative plant based alternatives with plant based beef and sausage, plant based butter and alternative rice and pasta. These multi-serve meals are different yet familiar to consumers. They are truly nostalgic innovation.

[Stephanie Dieckmann:]

Thank you, Sarah and good afternoon everyone. In the first quarter of 2021, we continued on our growth trajectory. Revenue increased 58.8% to $52.7 million compared to $33.2 million for the prior year period. As Sam mentioned, the revenue increase was driven by an $18.4 million increase in revenue of Tattooed Chef branded products. This now accounts for 69% of our total revenue. Growth profit in the first quarter was $13.7 million or 26% of revenues compared to $9.2 million or 27.9% for the prior year. While gross margin declined year-over-year in the first quarter, we anticipate quarterly growth margin expansion throughout the rest of 2021 as we increase our volume. On a sequential basis, first quarter gross margin increased 860 basis points compared to 17.4% in the fourth quarter of 2020 due to operational efficiencies.

[Operator:]

Thank you. We will now begin the question-and-answer session. The first question comes from George Kelly of Roth Capital Partners. Please go ahead.

[George Kelly:]

Hi everyone. Thanks for taking my questions. So I have a few for you. I'll start with the New Mexico acquisitions that you just made. So can you just if you could help us understand the progression and you gave the two to three-year targets of I forget exactly couple of hundred million. And so, I was just curious if you could help us understand that progression and when you are going to start introducing your own branded items to that facility? And then the second part of the question is just about sizing the opportunity in tortillas, how big is that market? What's the penetration with alternative kind of plant-based products, et cetera?

[Salvatore Galletti:]

Thank you, George. This is Sam. So the first part is the way that we're looking at this is that the immediate opportunity obviously is with plant-based burritos in July as case it is, the facility is live, it is running and tortillas are being manufactured today within the facility also. So the immediate opportunity, and if we're fortunate and we can get some distribution quickly we will be third, most likely fourth quarter I could see frozen food products being the first items that we hit the market with our Tattooed Chef brands and it could be, make it and that would be, you know Sarah is looking at a full line of entrées also to be able to increase the retail area that our entrée bowls are going in. So there's tons of opportunity that is pretty immediate. It is a function of just really getting all the pieces of the items and packaging and production in place. But I think that within four or five months we definitely could be hopefully getting some distribution out there. The next part of it would be the tortilla opportunity which is actually, just as quickly, it would be the same as the frozen items because there is equipment already that have very large capacity that we could be entrée-ing that opportunity of plant-based tortillas into the market pretty quickly. And then the third part of it is, this mad concept that we're looking more towards the fourth quarter or actually even first quarter next year. And that is an additional whole another potential revenue stream of sales for Tattooed Chef products. So there are three different areas of potential revenue growth within this and that's why we're so excited about this opportunity because of the diversification not only in extending our frozen categories, but also now getting into ambient and into snacks. As far as the second part of your question on the tortillas, so immediately we want to be utilized, we want to be utilizing our grain-free concepts of pant-based tortillas right out of the gate with our frozen line. So it would be very unique to the market. And so besides us selling a plant-based alternative tortilla as a commodity which per se is a commodity although there's very limited of that product in the market today, we would take advantage of that same opportunity for those tortillas to be able to utilize it in the existing products that have created out there, but how Sarah always calls it you know nostalgic innovation. So it just lines up perfect for what Tattooed Chef is and the opportunity.

[George Kelly:]

Okay, that's really helpful. And then a different topic for the next question. So the branded sales in the quarter jumps quite a bit from where you ended last year. And I was hoping you could sort of help bridge, I think it was a $13 million improvement in this year's first quarter. So if you could sort of break it down between your biggest club customers, between new growth, between mass, could you help us understand where that jump came from?

[Salvatore Galletti:]

So it is still driven by our club successes. It has been very minimal still the opportunity of conventional retail except Target we started to pick up some of the sales in the first quarter, but it was minimal and that's why everybody always says about the question will come up about what's up with guidance, why aren’t you increasing guidance? It is because, is that you have to, by the time that you get things approved and again on shelf, and they get distributed to Target, 1800 stores or whatever store count that you're dealing with. So before you get a full year's worth of those sales, it takes time to really start hitting that number. So this first quarter, except for maybe a little bit of a conventional the Target business that was really so exciting has really been still driven by our basic accounts of club and some Walmart business.

[George Kelly:]

Okay, okay, helpful. And then last question from me is just about gross margin. So maybe this is for Stephanie, but it's been, it's still such as volatile margin just jumps around quarter-to-quarter. Is it going to, is your gross margin going to be more consistent this year or can you help it all there?

[Stephanie Dieckmann:]

Yes, gross margin will start to start to stabilize. It is a little high for a few months, but as we start going into Q3, Q3, Q4 it will be within guidance of 20% to 25% even with the acquisition of Food of New Mexico. We will continue to see that profitable. There are some changes within Foods of New Mexico that we will make within their product lines since they are really co-packer. And as we sell Tattooed Chef out of there we expect everything to fall in line with our guidance.

[George Kelly:]

Okay, thank you.

[Salvatore Galletti:]

Thank you.

[Stephanie Dieckmann:]

Thank you, George.

[Matthew Williams:]

Thank you, George.

[Operator:]

The next question comes from Rob Dickerson of Jefferies. Please go ahead.

[Robert Dickerson:]

Great, thank you so much. A couple of questions. So, I guess just for the team, you know, you kind of went through a number of the retailers, sounds like you may be getter some distribution Q2 into Q3, based on the current portfolio, as I was just trying to write it down, I kind of missed it. Could you maybe just kind of grow through how that works? I know may be in Q4 and Q1 there were some products you said you had like a lot of retail or lot of groceries for trial, so what are you seeing today it sounds like maybe you are past some of that trial phase and then it sounds like maybe you are getting some distribution and it sounds like part of that, some of that starts Q2 and then close into Q3. So maybe you just spend like a couple of minutes just kind of walk us through those retailers again, obviously just because it is such a big piece to your plan? Thanks.

[Matthew Williams:]

Hey Rob, this is Matt. So, obviously the build is taking place as we're following the category which has cycle and so, what we like to share, because there is still a lot of moving parts on the retailer side as they are coming out of COVID-19 in terms of actually when they are actually getting back into this process of doing full category reviews. And so what we like to show is kind of where we're seeing traction and where we're getting commitments quarter-by-quarter. So clearly the first big win that we had in Q1 was Target. Right? And so we came out of the gate with six new SKUs of entrée bowls with Target. We actually did an emergency revision and that was because there was another supplier that they were doing business with that had some, kind of some hang on of COVID related issues in terms of production. And so we actually accelerated our launch with them that was initially going to take place in May, in March. So that's pulled forward that launch. And so, that was really the first big hit that we had, which is upon one of the other regional grocers, Stop & Shop in the Northeast with a couple of SKUs. And so we're really doing two things, we're obviously gaining new customers and so we had a list of those that we kind of shared and I'll walk you through more of those. But then it is not only once we gain a customer, once we're gaining the customers, we're able to go back and resell or selling the other categories that, maybe that were not being reviewed when we started. And so as an example with Target, they saw the success of the brands with the entrée bowls, that now is leading into kind of them launching this line of family in your products as well. And so not only is this an ECB kind of game for us, but it also becomes a strategy around building distribution points through added SKUs. And so what you're seeing in our build is not just new retailers coming on. It is existing retailers adding more SKUs because of the success of the brand and how the brand is performing. And so that's kind of what you're starting to see as we shared with what we have in Q2, we're seeing retailers coming on like Jewel. We mentioned obviously Myer. We've got Smart & Final coming on. Whole Foods we communicated this obviously hitting. And so, we're seeing that flow through and then as the reset cycles take place, what we're sharing with you is significant new gains that we're getting in specific categories, but we know that that's going to lead to future gains as well in other categories additionally too. So that's how it plays out.

[Salvatore Galletti:]

I would just like to add Rob, that there has been no product that was launched in the first quarter that has been discontinued. The product isn’t even getting started yet on these shelves. So it is and what little information that we have already as Matt mentioned, there is a real buzz and excitement that's happening with the brand and obviously we have real numbers and data with Target that really just blew everybody out of the water. So we're very excited about the success of what's happening with our products in conventional retail as quick as it is.

[Robert Dickerson:]

Okay, cool, good enough. And then I guess turn like to your comment earlier Sam, you know when people ask like what's in the guide that's not in the guide? I mean I guess, what's kind of being communicated is, if there is reiteration of the guide this year right on the base, the 222 and then I guess like we should be thinking that there will be potential upside to that guide depending on may be when some of these new business wins occur. I'm just trying to cut it, yes think through the timing of ? That's all.

[Salvatore Galletti:]

I do understand and again we had, it was really a function of that, you know when we came out with our guidance, it was really based on our assumption that because of the momentum and success that we had and these preliminary confirmations that we were verbally getting. But still by the line these item get distributed nationally and they get the momentum behind them, it really, it is really would take, you really will take some. So may be later on this year we'll have a better snapshot at how the distribution is going to where we could revisit it, but again we'd like to stick with the guidance that we have.

[Robert Dickerson:]

Okay, yes I think that clarifies it, because people have asked, probably it's just a matter of…Right, really then my question here getting new business why is the revenue still the same, but it is essentially like you have your own internal projections, you are comfortable with those relative to the guide and then had a gap, like other stuff and this got hit in Q4 that hits in Q4 but it got bumped to Q1 and okay I get it.

[Salvatore Galletti:]

Yes.

[Robert Dickerson:]

And then I had, the other question is just kind of on the EBITDA line more mechanical is yes there is a loss in Q1 really driven by those SG&A expenses. It sounds like gross margin, but not be as high, but still high on a year-over-year basis, because of year EBITDA especially improved sequentially of a Q1, so I guess kind of the core question is though like, did that SG&A expenses kind of essentially stayed the same, so maybe part of just that sequential improvement, EBITDA is really being driven by revenue, it that make sense?

[Stephanie Dieckmann:]

Yes, so let answer that one. So when we look at the EBITDA and the adjusted EBITDA more importantly and the operating expenses, I think it is important for us to note that there were some items in that adjusted EBITDA that are not recurring and what's happened every quarter, but we did accelerate some things over the timeline into first quarter to take advantage of some promotional opportunities that we felt were important to help the Tattooed Chef brand with new and existing customers and those won't exist every quarter, they will pan throughout the year. Some of those expenses just hit in the first quarter, so you will not see operational costs grow with revenue. Operational costs kind of are where they are at right now, as you will see some consistency within those as we digest Foods of New Mexico, we know where exactly EBITDA is going land for the end of the year, but remember that we still need to get in there and we certainly to look at cost segregation studies and thinks like that. So there is some depreciation, amortization and those type of things, but those won't affect adjusted EBITDA.

[Robert Dickerson:]

Okay, cool, makes sense. And then I guess lastly, I guess somebody asked me I thought a good question, this is my last question. Sam, I think you said on the call, quickly you said kind of gives us even more conviction and comfort in reaching at least $300 million in revenue in 2022. I know, I'm pretty sure you threw out a $300 million revenue number previously, but then you know you made an acquisition which obviously helps that revenue number. I feel like I kind of have to ask, I had two people actually ask me about that, but I feel like it kind of circles back to your prior comment around 2021. Right? Like you had your own internal projects for 2021, obviously then also had your internal projections for 2022, and as guided maybe some of the business close through when you were speaking with the grocers, yes, actually just kind of feel better about those internal projections. Is that kind of sense there?

[Salvatore Galletti:]

Absolutely, you nailed it. I mean, you know, it is like we, you know to tie in what you were saying it is like, we -- it was always a function of like our facilities, because we are producing our products that we sell. And so we look at our production facilities and then we say hey, you know where are we and, but and so based on our functions we came out with 222. And then for us, but and we know that for us to continue to grow, unless we became a marketing company, we would need to do M&A. And the beautiful thing about the Foods of New Mexico facility is that we didn’t have to pay some crazy multiple because it was a branded product, because we have our brand. And so it was -- so we get this incredible facility that is an existing facility that’s operating with over 300 people that has all the food licenses and just raring to go that now, we could, we could bring our brand and we can now exactly what I was trying to accomplish is to be able to increase our revenue and the guidance that I suggested, based on M&A that is our model as a manufacturer to be able to control our destiny. So it is exactly what you just said and what I was hoping to hear in that.

[Matthew Williams:]

And Rob I’d add, I mean, if I could add, I mean one of the things that I would also share is that this space you know $1 billion in revenue for frozen food Mexican food products. We know exactly where we can fit and the thing that I think is great is that consumers are already gravitating towards this kind of nostalgic innovation comfort food that comes from the Mexican food category to the Tattooed Chef brand. I mean the Tattooed Chef brand some of our best selling SKUs as we’ve launched in the market today are some of the SKUs that our Mexican-style products. I mean the product that’s flying off of the shelves at Target is our new burrito bowl that Sarah has created, which is phenomenal and so people are now looking to us to bring great tasting, creative plant based Mexican food to the marketplace, and they’ll be looking for us to kind of lead that charge. And so it’s kind of that we’ve been testing it and I think that we’re comfortable with what’s going on with that SKU, what’s going on with the Sam’s with the burrito blend even our original enchiladas bowl that this is a place that people expect us to bring great tasting products and I think that is really exciting.

[Robert Dickerson:]

Right. And then if I could just sneak one quick one for Stephanie just on cost inflation, if you like, and stressed assets could we ask this of every food company right now. It’s just you’re in growth phase. Right. There’s obviously a lot of inflation, a lot of different commodities, freight, you name it. Is there, is there anything that’s sticking out to you that could it could actually be just inflationary on the cost side, on the COGS side? I guess one, and then two is just as you do grow so it doesn’t sound like there’s any type of sourcing issue of certain products or ingredient? That’s it, thank you so much.

[Stephanie Dieckmann:]

So of course we’re seeing inflation, everybody seeing inflation, we were, it would be residual for us to say that we’re not, and on the side, yes, the announcement for corn, retail Mexican street corn. I understand why people might think that it could be a concern, we are contracted in with the year along pricing. It has been confirmed, and so as long as the price of corn regulates at some point in time in the next 12 months, which I’m convinced that it will then we would turn around and we would see things come back in line before we were due to contract the next time and that’s some of the ways that we try to combat inflation in general, when it comes to cost of goods sold. But on top of that being vertically integrated helps us because we manage that cost within our manufacturing facility, not just for the raw materials. If we see an increase in raw materials, and we’re making strides when it comes to direct labor by the purchase of equipment and utilizing a lower cost for direct labor per cell unit, then we can absorb some of those costs. And we have a little more control than if we were utilizing a co-manufacturer or a co-packer because we would get there inflation cost within their raw materials, their labor challenges and that would just follow-up to ours. We are confident that if we continue to see inflation for cost of goods sold that if we were to approach our customers later closer to that 12-month mark and inflation were still high that we would be better received at that moment in time. If there was necessary price adjustment then we would be, if we turn around tomorrow. And so we are bracing for the impact of that, we are monitoring it closely and we’re paying attention to our raw materials. We have not had any challenges in getting raw materials at this point in time, but we make sure that we diversify our suppliers and that we’re tracking that and that we’re ahead of the game on that. So it’s very important to us as manufacturers to be able to control that ourselves. It’s part of why we’re so excited about New Mexico.

[Robert Dickerson:]

Got it, awesome. Thank you so much.

[Stephanie Dieckmann:]

Thank you.

[Salvatore Galletti:]

Thank you.

[Operator:]

This concludes the question-and-answer session. I would like to turn the conference back over to the management for closing remarks.

[Salvatore Galletti:]

Thank you for joining us today. We are off to a strong start to 2021 and have an incredible opportunity to grow the Tattooed Chef brand. We have increased capacity and sales, expanded gross margins and closed on a strategic acquisition. We have done everything we said we would and we believe we’re just getting started. I look forward to speaking to you again at several upcoming investor conferences and our second quarter earnings call in August. Have a great day.

[Operator:]

This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day