Earnings Call: Q2 2021

Aug 19, 2021

Earnings release

Good morning, everyone. Welcome to the Very Good Food Company's Second Quarter 2021 Earnings Call for the period ended June 30, 2021. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. As a reminder, this call is being recorded. It is now my pleasure to introduce your host, Sabina Shabriskie, Director of Investor Relations of The Very Good Food Company. Please go ahead. Thank you, operator. Good morning, everyone, and thank you for joining us today for The Very Good Food Company's Q2 2021 financial results conference call. My name is Sabina Strubisky, Director of Investor Relations. Year. Joining me today on the call is Mitchell Scott, Co Founder and Chief Executive Officer of The Very Good Food Company in Kamini Hikari, the company's Chief Financial Officer. After prepared management's remarks, we will hold a question and answer session. A replay of this call will be archived on the Investor Relations section of VeryGood's website at www at verygoodfood.com/investors. Listeners are reminded that certain matters discussed in today's conference call or answers that may be given to questions asked constitute forward looking statements within the meaning of applicable securities laws that are subject to the risks and uncertainties relating to The Very Good Food Company's future financial or business performance. These statements are based on management's current expectations and involve risks and uncertainties that could cause actual results to differ materially from those described in these forward looking statements. These risks and uncertainties are detailed in Very Good's annual information form for the fiscal year ended December 31, 2021, and other periodic filings with Canadian Securities Regulatory Authorities available on Very Good's SEDAR profile at www.sedar.com. Forward looking statements made on this call are made only as of today and will not be updated as events unfold other than as required by applicable securities laws. Please also note that on today's call, management will refer to adjusted EBITDA, adjusted general and administrative expenses in adjusted gross profit, which are non GAAP financial measures. While Verigood believes that these non GAAP financial measures provide useful information for investors, Presentation of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with IFRS. For definitions and reconciliations of the non GAAP measures discussed to the relevant reported measures, quarter. Please consult our Q2 2021 MD and A as filed on SEDAR. I would now like to introduce Mitchell Scott, Co Founder and Chief Executive Officer of The Very Good Food Company. Please go ahead, Mitchell. Thank you, Sabina, and good morning, everyone. Welcome to Verygood's Q2 2021 earnings call. We've had another exciting quarter highlighted by a triple digit increase in revenue across our e commerce and wholesale from the same period last year. Vericut is growing in every direction. Our top key priorities in 2021 are to commission our Vancouver based Rupert facility to increase our production capacity to meet demand, to strengthen our North American e commerce sales through digital marketing initiatives and the use of social media influencers, To deepen our wholesale distribution in Canada and to expand our retail reach into the U. S. And to introduce our new Butcher Select gluten free and soy free range of plant based meat will compete with the likes of Beyond Meat and Impossible this fall. While we focus on our North American growth strategy, we have also made inroads into new markets with a recent UK e commerce launch. Our success is driven by our ability to execute on our growth strategy and the continued demand for plant based food products. Since we last spoke to you in May, increasing our production capabilities remains one of our key focuses for 2021 and beyond. Line 1 of the Rupert facility is now producing 4 times the daily production volume of our Victoria facility. We commissioned Line 1 in April 2021 and began producing limited salable products in May 2021, while testing 7 SKUs of the popular The Very Good Butcher's product lineup, which will initially be produced on Line 1. Currently operating 5 days a week with 3 ships per day, Line 1 will be producing an average of £13,000 per day starting in late August. Production volume is increasing week over week from continuous operational and process improvement in conjunction with increased production hours. We expect the ramp up of capacity of Line 1 to continue into the fall as we target £40,000 per day on average in Q4 2021, gradually increasing to an average of £60,000 per day in early Q1 2022. The 2nd production line of the Rupert facility is planned to be commissioned in late Q4 2021 with testing and food production starting in early Q1 2022. Line 2 is expected to initially produce 6 plus SKUs of our newly announced gluten and soy free Butcher Select line of plant based meat alternative. Line 2 will also allow for expansion into the North American foodservice channel, an exciting new market that I will touch upon in a few minutes. With both Line 12 fully operational, the Rupert facility will be able to produce £37,000,000 of product on an annualized basis. We recently announced that food production will begin at our Patterson facility in California starting in September 2021 on commercial Graded in order to fast track the production of Taco Stucker, one of Very Good's most in demand SKUs. While the installation of facility's 1st major production line is underway and targeted for completion before Q2 2022. Once commissioned, Patterson Line 1 will produce the Berkey Butchers various unique products, which have not yet been scaled, including our popular holiday roast, the stuffed beast and our jackfruit based ribs. We will also have the capability to make the brand's original suite of products. The production of Taco Suffer will also be transitioned to Line 1 once commissioned, which is expected to produce an average of £27,000,000 of product per year when fully operational. The Patterson facility can accommodate up to 4 production lines allowing for potential capacity of up to £98,500,000 of product per year. The commissioning of production lines at both the Rupert and Patterson facilities are experiencing some challenges due to the pandemic. We're experiencing delays with receipt of production equipment from Europe for manufacturer and shipping setbacks. In both Vancouver and California, we are experiencing delays in hiring due to labor shortages as COVID restrictions lighten and businesses open up once again. We anticipate that these challenges will continue in the near term and potentially slow the target ramp plan to meet the fast growing demand for our products in North America. We continue to see strong growth in e commerce sales year over year as we work with new marketing firms to find creative ways to attract new customers to our platforms, increase conversion rate and reduce customer acquisition costs, including partnering with social media influencers. So far, we have partnered with over 40 social media influencers who have 55,000,000 followers combined across various platforms, including YouTube, Facebook, Instagram and TikTok. To date, we have fulfilled 47,206 e commerce orders, which is more than what we shipped in all of fiscal 2020. Since the privacy updates implemented by Apple in April and the changes Facebook made to their advertising tools shortly after, The data collection features used by advertisers have become less effective. As a result, Very Good along with other direct to consumer businesses have been limited in the ways we can target consumers and measure the success of specific ad campaigns. Even with these rapidly shifting policies, We continue to steadily grow the e commerce channel quarter over quarter in 2021. During the quarter, we announced the launch of 2 exciting e commerce platforms, an Amazon U. S. Storefront and a UK e commerce website. Consumer demand for plant based foods is growing at a rapid pace across the pond and Google Trends listed the UK as the number one growing country searching for veganism. And a recent survey conducted by Finder shows that the number of vegans increased by 40% in 2020. Very good expansion into North American retail continues to be a key focus in our growth strategy. During the Q2, we entered into new partnerships that deepen our wholesale distribution within Canada and accelerate our retail reach into the U. S. In Canada, we entered into a distribution agreement with Horizon Grocery and Wellness, where the company signed on with Save On Foods, Canada's largest Western based grocery retailer carry the Very Good Butcher suite of products in 184 of its retail stores across Canada earlier this month. In addition to our new broker arrangement with Greenfield sales, we entered into 2 new distribution agreements during the quarter with United Natural Foods, the largest publicly traded wholesale distributor of health and specialty food in North America and KA distributors, the top pure play U. S. Whole food distributor of natural, organic, specialty and fresh food brands across North America. Together these two distribution partners represent over 15,000 food suppliers and distribute to more than 60,000 natural food stores, chain of independent grocery stores throughout North America. During the quarter, we increased our points of distribution by 147% to $18.69 at the end of the quarter compared to the same period in the prior year. And we just announced last week that Very Good is now 754 retail outlets across North America with more than 100 stores in the U. S. Set to carry a very good suite of products under its core brand, The Very Good Butchers. During the Q2, we also hit a major milestone in our growth strategy with our debut into the foodservice meal kit industry. In June, we announced 2 collaborations, 1, with Vancouver based homegrown meal kit company FreshFrap. We're adding Very Good's innovative plant based food products to its extensive menu of recipes and meal kits. The second arrangement is with Copper Branch, the world's largest plant based restaurant franchise with over 40 locations across North America. Corporate Branch will make Very Good Butcher's delicious and nutritious plant based products available to its customers to purchase from branded in store freezers in 8 of Corporate locations across Canada this summer. We also launched our new brand, The Very Good Cheese Co. And its lineup of 5 newly reintroduced plant based cheese products during the quarter. This exciting new brand came to us from our acquisition of the Cultured Nut in February. These very good cheese coke products were made available in the U. S. And Canada in June through our e commerce platforms and will be available in retail stores in Q4, 2021. Very Good also recently announced the launch of our gluten free and soy free Butcher Select product line of plant based meats in the Q3 of 2021. The Butcher Select product range is a premium line of extra meaty artisanal meats made with real, minimally processed ingredients offering up more than just taste. The new product line will diversify Very Good's portfolio of plant based meat and position the Very Good Butcher's brand in the alternative meat substitute category, which has been largely dominated by Beyond Meat and Impossible Foods. Products pack an extra meaty taste and texture and will initially be available through limited release on Very Good's e commerce platform with the retail rollout across North America to follow. With more consumers interested in plant based products due to a focus on health and sustainable habits, more than half of U. S. Households are now purchasing plant based foods. According to SPINS data released by the Good Food Institute and the Plant Based Foods Association in April, plant based meat sales have outpaced conventional animal product sales for the 3rd consecutive year. The Butcher Select line will not only appeal to households interested in a more plant based diet, but also extends the company's consumer base to the estimated 30% of Americans who avoid gluten. With that, I would like to turn the call over to our CFO, Kamini Hikari to review our financial results in more detail. Kamini, please go ahead. Thank you, Mitchell, and good morning, everyone. In the Q2 of 2021, we achieved revenue of $2,800,000 representing 100 and 6% increase from revenue of $1,100,000 in the same period in fiscal 2020. The increase in revenue was driven by higher e commerce and wholesale sales resulting from the company's scaling of production and distribution to meet demand in both sales channels. Compared to the previous quarter end, revenue increased 5% or $138,000 for the 3 months ended June 30, 2021, mostly due to higher wholesale revenue resulting from an increased number of points of distribution achieved during the quarter. Year to date revenue grew to $5,400,000 for the period ended June 30, 2021, an increase of 2 80 percent or 4,000,000 compared to $1,400,000 for the period ended June 30, 2020. E commerce revenue increased 161 percent $2,200,000 in the Q2 of 2021 compared to $846,000 in the same period of fiscal 2020 and remained relatively flat compared to the Q1 of 2021. E commerce sales comprised 79% of total revenue, resulting from 24,000 orders in the Q2 of 2021, an increase of 114% or 13,000 orders from the same period in fiscal 2020. Year to date e commerce orders fulfilled were 47,000 for the period ended June 30, 2021, exceeding the 40,000 orders fulfilled in all of fiscal 2020. The increase in e commerce orders was driven by the scaling of production and distribution to meet demand and an increase in key marketing initiatives to drive higher sales volume in both Canada and the U. S. Even with the changes previously highlighted to both Apple and Facebook's privacy settings, we expect e commerce sales to continue to be a significant component the company's revenue during the year. Full sale revenue increased 168 percent to $455,000 in the Q2 of 2021 compared to $170,000 in the same period of fiscal 2020, and increased 32% from the Q1 of 2021. Wholesale distribution points increased 147% to $18.69 at the end of the Q2 of 2021 compared to 757 distribution points in the same period of fiscal 2020 and increased 32% from the Q1 of 2021. We expect to be on the shelves of many more stores by the end of the year, but more so in the Q1 of 2022 after major retailers fall 2021 product category review period. Q2 of 2021, we sold 307,000 units of product, an increase of 132% when compared to the same period of fiscal 2020. Quarter over quarter, we sold 40 2,000 more units, resulting in a 15% increase. Adjusted gross profit was 1,100,000 or 39% of revenue in the Q2 of 2021 compared to adjusted gross profit of 469,000 or 43% of revenue in the Q2 of 2020. The decrease in adjusted gross margin was primarily driven by the timing of certain procurement expenses recorded in the prior year. Adjusted gross profit was 39% of revenue in the Q2 of 2021 compared to 37% in the Q1 of 2021. The improvement in adjusted gross margin was mainly due to increased sales volume achieved through maximizing the production footprint at the Victoria facility as average weekly production output increased 20% from £20,000 per week to £24,000 in May 2021. Adjusted general and administrative expense was $2,200,000 in the Q2 of 2021 compared to $498,000 in the same period in fiscal 2020 and relatively unchanged from the Q1 of 2021. The increase in adjusted general and administrative expense was due to the company becoming public in June 2020 and the related expenses, as well as building up the team and functions to meet very good strategic growth objectives. Adjusted EBITDA was a loss of $5,700,000 in the Q2 of 2021 compared to a loss of $1,200,000 in the same period of fiscal 2020 and a loss of $5,400,000 in the Q1 of 2021. Adjusted EBITDA was impacted by an increase in fulfillment The increase in development expense directly correlates with the increase in revenue this quarter as we continue to scale manufacturing and distribution to meet demand. The increase in marketing and investor relations expense is a result of our brand awareness efforts increase e commerce traffic to our website and conversion through digital marketing initiatives. The cost of effective digital marketing initiative continues to increase with the lightning of COVID restrictions as more businesses come back online. With respect to cash flow for the 6 months ended June 30, 2021, net cash used in operating activities was $14,100,000 and investing activities $8,300,000 offset by cash received from financing activities of $3,200,000 The net cash used in investing activities was primarily used for capital expenditures and leasehold improvements for the commissioning of Line 1 at the Rupert facility. In addition to cash paid for the acquisitions of the Kult Chugnak and Lloyd James of $1,250,000 cash received from financing activities was from the exercise of foreign stock options during the quarter. As we continue to strengthen our operational distribution capabilities to meet the strong demand for our product, both in North America and globally, we do anticipate this having a positive impact on our continued financial growth. During the quarter, we also achieved a key milestone by entering into a $70,000,000 credit facility with WayGuard Capital in Nine Point Partners. This facility provides financial flexibility to support our growth and expansion initiatives and is a testament of our ability to access favorable financing while diversifying our capital structure. The credit facility consists of a $20,000,000 revolving line of credit and $50,000,000 senior secured asset backed term loan. All amounts drawn under the credit facility are subject to specific foreign requirements and will pay an interest rate of 9.95 percent per annum and will be repaid in full upon maturity. The credit facility has a term of 24 months with an option to renew upon mutual consent for another 12 months. We also added strength to the balance sheet and closed an oversubscribed $20,700,000 bought deal public offering in early July. Proceeds from this will be used to start operations at the Patterson facility to support wholesale expansion in the U. S. As well as international e commerce launches. I'd like to turn the call back to Sabina for the Q and A section of this call. Thank you. Thank you, Kamini. The first question we have today is, Very Good significantly increasing its production over the next 2 years. Are you seeing the demand to meet this production? Good question. Since James and I founded Vericut a few years ago, one of our biggest issues has always been meeting the demand for our products. I still remember when we had to close the Victoria shop for a week after a grand opening in order to restock. Plant based diets are no longer a trend and they're now part of many consumers mainstream diets. A study by meticulous research indicated that the plant based food industry will grow to $74,200,000,000 globally by 2027. Our production expansion decisions were made as a result of research into the growth of the industry, in addition to feedback through discussions with major retailers. The significant increases in our production capacity and distribution ensure that we can meet this future demand. Thanks Mitchell. Our next question is, can you touch on the Line 1 commissioning process at Rupert? Did you learn any lessons that will help make for smoother process going forward? Thank you for the question. We were very happy with the Line 1 commissioning process and it ramped up as we planned. One thing that I wanted to touch on is the testing phase of our commissioning process. This is a crucial part as we need to make sure that we are always producing the high quality products our consumers have come to expect from us. And during this testing phase, saleable product is sometimes manufactured in limited quantities as it was in Q2, 2021. It is important to note that as we commission additional lines, we will continue to adhere to our testing process in order to iron out any issues and make sure we can manufacture high quality salable products. We'll be using the experience gained through the commission of the Rupert facility as a blueprint for the commissioning of the Patterson facility. Thanks Mitchell. Our next question is regarding revenue. Kamini, it's for you. When do you expect to see revenue increase on a quarter to quarter basis. Thank you for the question. We are certainly moving in the right direction as we continue to build out our production capacity in order to meet the strong demand for our products. However, like many other businesses, we are subject to the evolving impacts of the COVID-nineteen pandemic. And in this quarter, we experienced delays and the delivery of production equipment as well as a tightening of local labor markets, which made it more challenging to secure the production staff needed to ramp up operations. All of this has at times had a decelerating effect on our overall expedited ramp up and slowed our ability to get product to the market. We expect revenue to continue to increase each quarter as we find ourselves on shelves with many more stores throughout North in the Q1 of 2022, fitting in with major retailers product category review periods. Thank you. The next question we have is regarding very good e commerce and retail channels. Where do you see the most room for growth? And what do you see as the optimal split between these two revenue streams? That is a great question. E commerce will always be an important platform for us as it is a strategic tool that not only allows us to launch our new innovative products quickly into the market, that allows us to move into new geographical markets and enter into new retail partnerships as we're able to raise brand awareness and showcase the demand for our products before we hit their shelves. Two excellent examples of this are the upcoming limited launch of our new Butcher Select gluten free and soy free product line of plant based meat on our North American e commerce platforms before we roll it out into retail locations and our recent introduction of our products to U. K. Consumers through our new U. K. E commerce platform. At the same time, we clearly see room for growth in the retail segment, specifically in the U. S, given the sheer size of its grocery market, which is estimated to be USD 875,000,000,000 of which only 6% to 7% represents online grocery shopping. It makes perfect sense that we are pursuing as much growth in this channel as possible. As we move forward, we see e commerce revenue comprising roughly 80% of total revenue to an estimated 15% in the next 3 years. Thank you. Thank you, Kamini. I'd like to turn the call back over to Mitchell for concluding remarks. Very Good has had a great year so far our incredible progress is made possible by our amazing team. I want to thank our employees for their hard work and dedication to making Verigood a leading plant based food technology company. I would also like to thank our investors and consumers for their continued support. We are committed to continuing to bring you innovative, high quality, nutritious and delicious plant based products. Thank you for attending today, and we look forward to having you on our Q3 financial results call in November. Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your line.