Tattooed Chef, Inc.
Q4 2020 Earnings Call Transcript

Published: 10 Mar 2021

[Operator:]

Thank you for standing by. This is the conference operator. Welcome to the Tattooed Chef Fourth quarter 2020 Earnings Call. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there'll be an opportunity for you 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 fourth quarter and full year 2020 earnings conference call. On the call today are Sam Galletti, President and Chief Executive Officer; Sarah Galletti, Chief Creative Officer at the Tattooed Chef; and Chuck Cargile, our Chief Financial Officer; Stephanie Dieckmann, Chief Operating Officer; and Matt Williams, Chief Growth Officer, will also be available for questions.

[Sam Galletti:]

Thank you, Rachel, and good afternoon. We appreciate everyone taking the time to join us on today's call. I'll begin today's discussion with key business highlights, including an update on our new distribution wins, Sarah will discuss our marketing and innovation, and then Chuck will provide greater detail on the financials. First, our fourth quarter revenue highlights. We are pleased to report revenue increased 48% to a $39.6 million compared to the fourth quarter last year, driven by our Tattooed Chef branded products. Our branded products sales for the quarter were a record $23.9 million, an increase of 172%, compared to $8.8 million in the fourth quarter last year. Branded sales accounted for 60% of the total revenue in the fourth quarter of 2020. For the full year, revenue was $148.5 million, a 75% increase year-over-year. Branded sales increased 363% to $84.6 million, or 57% of the total revenue for 2020, compared to 22% in 2019. This is the first year in the company's history that branded exceeded private label sales, and we expect that split to reach as high as 75% to 80% branded within the next two to three years.

[Sarah Galletti:]

Thank you, and good afternoon, everyone. I’m excited to be here to provide a little more insight on our innovation and marketing initiatives. We are disrupting the frozen aisle and retailers nationwide with our plant-based foods. Our ability to spot trends quickly and constantly innovate is what resonates with consumers and retailers alike. We were the first to go to the mass market was cauliflower crust pizza, and acai bowl have a pipeline of over 150 additional plant-based ideas. We need food that we want to eat and make it easy for consumers to enjoy with little to no prep. 2020 was a big innovation year for Tattooed Chef. We released 17 new branded skews during the year bringing our tools to 38 skews as of December 31, 2020. We’ve been happy with the performance of these new items and it has prompted more discussion with retailers around future innovation. We have 24 new skews planned for 2021, 13 of which we’ll be launching in the first half of 2021 at club and conventional retailers nationally. We are especially excited about the launch of our 100% certified plant-based pizzas. We have five skews, two-cheese, vegetable, meat lovers, pepperoni, and a white pizza. Meat lovers and pepperoni have alternatives using the clean ingredient deck. And we believe our Vegan cheese a superior to any others in the market today. These new pizzas are one of the – only to have a plant-based certified stamp, which was important for us to have on our packaging. The meat alternative space continues to be attractive to enhance our value-added meals. We are developing more products, not only in the meat alternative space, but also things alternative whether that be rice, pasta, and desserts. We continue to push the limits of what is possible and creating new food concept and are making a stamp and multiple spaces and doors. We are continually bringing new ideas to the marketplace. Given what Sam spoke about earlier with new retail distribution, there is excitement bringing Tattooed Chef into the food isles. Our food resonates with consumers and we’re encouraged to see the retailer reception to our product portfolio has been so positive. We provide delicious, approachable and innovative products not only to the growing group of consumers who seek a plant-based lifestyle, but also to the mainstream market. Our broad portfolio of products can satisfy all occasions, whether that be a meal, snack or side dish making us a go-to supplier for retailers seeking to offer a complete plant-based portfolio.

[Chuck Cargile:]

Thank you, Sarah, and good afternoon, everyone. In the fourth quarter of 2020, we continued on our growth trajectory. Revenue increased by almost 50% to $39.6 million compared to $26.8 million for the prior year fourth quarter. As Sam mentioned, the revenue increase was driven by a $15.1 million increase in revenue of Tattooed Chef branded products, which now account for almost 60% of our total revenue. Our gross profit was $6.9 million or 17.4% of revenue compared to $3.9 million or 14.4% for the comparable quarter of 2019. The improvement in gross profit and gross margin was primarily due to production efficiencies and to cost of goods sold being spread over greater revenue. We anticipate continued gross margin expansion as we increased our volume. Operating expenses increased to $7.9 million for the three months ended December 31, 2020 compared to $1.9 million for the three months ended December 31, 2019. The increase in operating expenses was primarily due to $3.4 million of stock compensation, resulting from equity grants made subsequent to the merger with FMCI in October of 2020, also increases in spending to support the growth of the Tattooed Chef branded products and to support the costs of being a public company since October 15, 2020. We expect operating expenses to increase in 2021 to accommodate the growth, invest in the brand and incur a full year of public company costs. Net income was $41.5 million in the three months ended December 31, 2020 compared to $2.2 million in the prior year period. We reported a tax benefit of $41.9 million in the fourth quarter compared to a benefit of $0.2 million in the prior year period. In October 2020, the restructuring in anticipation of the merger with FMCI caused a step-up in the tax basis of intangible assets of approximately $140.5 million, and the tax status of the Company to change from an S-corp to a C-corp. The tax effect of these changes created a deferred tax asset and income tax benefit of $39.3 million. For the full year, revenue increased by $63.6 million, or 74.9% to $148.5 million. The increase was driven by the exceptional growth of Tattooed Chef branded products. In 2020, our branded product growth resulted from expansion in the number of U.S. distribution points as well as increased volume and existing club channel customers of our current portfolio of products, and new product introductions, including smoothie bowls, vegetable blends, buffalo cauliflower, and other value-added riced cauliflower meals. Gross profit increased $10 million to $23.7 million for the year ended December 31, 2020 compared to $13.7 million for the year ended December 31, 2019. Gross margin for the full year 2020 was 15.9% slightly lower than 16.1% in the year ended December 31, 2019. The gross profit increase was primarily due to the higher revenue levels for the current year. The gross margin declined slightly due to higher costs for raw materials and other variable manufacturing costs in the current year. Operating expenses increased $12 million to $19.5 million for 2020 compared to $7.5 million for 2019, primarily due to increases in costs resulting from higher headcount and wages to manage the increase in revenue and public company costs, which did not exist in the prior year. We also had $3.4 million of stock compensation expense, and a $0.6 million in non-recurring bonus payments for the merger with FMCI. Net income was $45.4 million in the full year of 2020 compared to $5.6 million in the prior year. The net income for the year ended December 31, includes the same $39.3 million income tax benefit I described a minute ago. Adjusted EBITDA was $9.6 million, or 6.4% of revenue for the year ended December 31, 2020 compared to $6.9 million, or 8.1% of revenue for 2019. The improvement in adjusted EBITDA was primarily the result of the increase in revenues and gross profit compared to the prior year period. Our quarterly split of adjusted EBITDA was impacted by transaction costs, which were expensed prior to the merger closing in the fourth quarter. Once the transaction closed in accordance with the accounting rules, these costs were credited to income in the fourth quarter and no longer an add back for adjusted EBITDA. I recognize there’s a lot of unusual activity in our fourth quarter financial statements due to the complex accounting for the reverse merger, the non-recurring transaction costs and the large tax benefit. But irrespective of the one-time activities, we’re pleased to post strong profit while managing through significant growth and dramatic organization changes during 2020. As of December 31, we had cash and cash equivalents of $131.6 million as previously announced, including the cash proceeds from the exercising of public warrants as of February 22, the company's total cash balance was approximately $200 million. Lastly, I'll mention that we've been fortunate that the COVID-19 pandemic had a minimal impact to our business in 2020. As a food manufacturer, our operations are deemed essential and all of our facilities are currently open and operating both in the U.S. and Italy. Since the start of the year we've had – we have experienced some shipping delays, particularly in ports that are continuing to closely monitor the situation. At this time, we don't expect the delays to materially impact our first quarter results. Now turning to our outlook, we are reaffirming our 2021 annual guidance provided at our Analyst Day in December, which includes continued growth in revenue. We anticipate following up on this year’s 75% revenue growth with an addition of 50% growth in 2021 or approximately $222 million of revenue. The growth will yet again come from Tattooed Chef products. We expect expansion of our gross margin into the range of 20% to 25% of revenue. And we expect adjusted EBITDA for the year to be in the range of $8 million to $10 million as we continue to invest in driving the growth, invest in our brand and add the cost required to be a public company. And we expect net income to be in the range of $2.5 million to $5 million. With that we're now available to take your questions. Operator?

[Operator:]

The first question comes from George Kelly with Roth Capital Partners. Please go ahead.

[George Kelly:]

Hey everybody. Thanks for taking my question.

[Rachel Perkins:]

Thank you.

[George Kelly:]

I will just have a couple – and then I'll have a couple, and then I'll hop back in the queue. Maybe if you could start Sam, you listed a lot of new partners that you're launching with new groceries in the first quarter, I think first half of the year. So I guess the question is, are you surprised how quickly you're bringing on additional distribution points? And is there one or two things that as you're sort of pitching these folks, are there one or two things that they're most focused on and attracted to your brand? Like how is it happening so quickly?

[A – Sam Galletti:]

Thanks, George. I don't think that is – we've been on such an aggressive path, the past few years. It's just when we started offering products to Sam's and Costco, the brand is connected right away with them. And so we'd been on just this great momentum. And so I really did feel that when our team started going to retail, that we were going to continue this momentum that we had and it is happening and it's very exciting. And so, am I surprised at it, I'm not surprised, I'm very pleasantly pleased though, because I know that there was a lot of people questioning about the conversion from club to retail, and I was never concerned with it and obviously it's proving out that the retail consumer is just as hungry for plant-based Tattooed Chef brand and product. So I'm really excited about what I see happening right now.

[George Kelly:]

Okay, great. And then there was a discussion in the prepared remarks. I may have missed part of it. But I think you talked about the advertising strategy. And I was wondering if you turn that on much so far in 2021. And what has been the response? What are the learnings with what you've seen thus far?

[A – Sam Galletti:]

I'm going to turn that over to Sarah.

[Sarah Galletti:]

Hello. So with Tattooed Chef, we've had no marketing until 2021 of January. And in our first phase, we are really focusing on banner ads and just gathering the data that we need to pivot and be strategic with where we allocate our dollars for marketing. We're going to be pitching and launching in March our commercials, which we'll be going digitally and connected, to Connected TV, but right now we're just still gathering data because we want to really be specific and strategic in where we allocate our dollars.

[George Kelly:]

Okay. Got it. And then maybe last couple of questions just related to guidance, 2021 guidance. Can you – I guess first, just Chuck, you mentioned that there were some shipping delays and some port issues, what will growth – can you help at all with kind of the sequential growth just throughout the year? Will we see the fastest growth towards the back half and anything we should think about quarterly?

[Stephanie Dieckmann:]

I'm actually going to take that one, George. This is Stephanie. When we start to look at what the growth in revenue is going to do throughout the year, we brought up the port delays and things like that. So that the information is out there. We have not experienced any delays in our shipments and our product at this time, but we want to be completely transparent. As far as revenue goes, we have some great promotions for first quarter, as you guys heard Sam's in which we have the Costco MBM. We have some great promotions next quarter. We have some great product rotations and we're building up the retail chain. And so we expect Tattooed Chef to continue to grow. But have not released the guidance for each quarter, but Tattooed Chef is where it's going. And we are going to continue to open up distribution points and new retailers across the country.

[George Kelly:]

Okay, great. Thank you all. I'll hop back into queue. Congrats in a nice quarter.

[Stephanie Dieckmann:]

Thank you.

[Operator:]

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

[Rob Dickerson:]

Okay, great. Thank you so much. Excuse me. So I guess just to go back to the guidance for a minute. There is a decent part of the call, right, is highlighting the tremendous amount of positives, right. I mean, it sounds like things, frankly, are going great or even ahead of plan or maybe expected right in the conversion into grocery. You call it out, success in Costco, doing very well in Sam's. I know there's a press release this morning about the six SKUs nationally and target, and then you call out like what Starfish, Admire, and then there are others maybe getting to thrive? So kind of put all that together, right. And then I see that the guidance was reiterated kind of my knee jerk reaction is to think, well, there's got to be upside to that guidance if this is all coming through, because I thought the guide originally was based upon visibility, right, maybe from some of the prior increased distribution gains at Walmart, but maybe not including some the new business. So I'm just trying to right size, essentially the held guidance for the year, kind of in relation to what seems to be new business wins, if that makes sense. That's it. That's my first question,

[Matt Williams:]

So Rob, this is Matt. Good afternoon. So, obviously, the new distribution is we're super excited about it. Again, we are building traction and we have a great story. But again, as you know, we're distributing our product across a lot of different categories. We've got 38 SKUs that we're selling. We sell different categories, obviously that are under different reset timing throughout the year. And so because of that, when the customers actually come on and when we start realizing revenue this year, you're going to see that, some of that revenue growth is obviously going to be factored into Q2. And then obviously mid Q3 and Q4, but the real impact is obviously on our 2022 guidance, which we're obviously enforcing. And that's where we see the full year benefit come in. So it just staggers in, it comes in a staggered way. And we're super encouraged by it. And we think it's – obviously a great demonstration that the health of the brand. Is that makes sense?

[Rob Dickerson:]

Yes. I mean, I hate to push on it. It kind of makes sense. Because I do feel like if you get the new business wins, so what you're coming in Q1, maybe in Q2, like that, or is that more trial basis or it doesn't sound like you're able to, you're not booking that revenue or maybe you are right. You're just kind of leaving yourself some leeway because obviously you're still in early innings and high growth mode. Just again, I'm just trying to figure out like if their new business wins, that's awesome. I'm just trying to figure out how are supposed to be modeling that in terms of revenue, right? The new doors, new distribution points, new SKUs, et cetera.

[Sam Galletti:]

Hey, Rob. This is Sam. How are you doing? I think that, hey when we came out with the 222 budget for 2021, we were building in 10% to 15% of business that we projected just based on conversations. We have to wait so long, before these customers will allow us to say to communicate that we win this business. So it's like, we did put, we do project 10% to 15% of that 2021 budget was on assumptions that we make based on the conversations of that we already had with these retailers. So I'm pretty again, to have a 49%, 50%, growth organically year-over-year with our frozen product line is we're just super excited about it.

[Rob Dickerson:]

Yes, no, that's, I really appreciate the clarification. That makes complete sense. Right. So that's just trying to always figure it out, but great answer. And then I guess just in terms of the vertical integration being a benefit, we've heard from almost every food company, not always kind of produce related areas on frozen. But yes, we've heard a lot about cost inflation. Is that cost inflation impacting you or potentially could impact you or because of kind of the contracts you have with the farmers and some sourcing coming from Italy, maybe it doesn't impact you as much. Maybe it that could actually be a benefit. Just trying to figure out again, kind of costs – the cost environment overall relative to the price?

[Sarah Galletti:]

As we strategically source our raw materials, and you're correct with a lot of our produce coming from Italy, we're not as concerned about some of that pricing and costs that are coming into play for other manufacturers, but also being vertically integrated helps us reduce that additional costs that other companies can't see and experience. But we also work hard to source from around the world to ensure that we are protected from some of these cost increases that come through added with the vertical integration and the ability to manufacture more products and take up some of those things within our own manufacturing. It allows us to be better protected.

[Rob Dickerson:]

Okay. That's good to know. And then I guess just lastly, just a question on the warrants sometimes you're confiscated, it sounds like you said cash balance at the end of the year around $200 million, which is partially driven, I guess by some of the cash coming in from the warrants. So I just kind of – just to clarify again, it sounds like that cash comes in, you can actually keep that cash and redeploy into other strategic value creating opportunities versus necessarily having to go back out into the market and buy back stock, right. It's almost – it's a nice kind of cash generating vehicle kind of as long as they exist. So I just kind of wanted to understand that cash comes in on the warrants, is that something you then can redeploy and kind of whether it's CapEx supply chain, what have you maybe acquisitions versus having to buy back stock? That's all I have. Thank you.

[Sam Galletti:]

You're welcome. Yes, I think two points, Rob, to answer your question. One is just a clarification. We had $131 million on the books at the end of the year, that's what you'll see in the published financial statements. Subsequent to that, there was another $70 million that came in from the warrants, that's what got us to $200 million. And there's no restrictions on that, that $200 million is in our offers, it's ours to spend strategically. And the other important point is that the $20 million warrants are now fully exercised. So there's no more dilution coming from those warrants. So we have the cash, we can use the cash and there's no more pending dilution.

[Rob Dickerson:]

Okay, great. Thank you so much. Great job. Appreciate it.

[Sam Galletti:]

Thank you, Rob.

[Chuck Cargile:]

Thank you.

[Sarah Galletti:]

Thank you.

[Operator:]

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

[Sam Galletti:]

Thank you for join us today from Italy to California. I'd like to thank my dedicated team that has worked so hard to be able to make these strong results possible. We believe there is a significant growth opportunity for the Tattooed Chef brand with new and existing customers in food retail, as well as other areas like food service. We are off to a strong start in 2021, increasing distribution, launching exciting innovative products and increasing our brand awareness. We look forward to speaking to you again at upcoming investor conferences on our first quarter earnings call in early May. 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.