Tattooed Chef, Inc. (NASDAQ:TTCF) Q1 2023 Earnings Call Transcript May 16, 2023

Operator: 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. [Operator Instructions] Please 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.

Devin Sullivan: Thank you, Diego. Good afternoon everyone and welcome to Tattooed Chef’s first quarter 2023 financial results 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 Financial Officer. By now, everyone should have accessed to the earnings release, which went out yesterday afternoon and is available at the company’s website, www.tattooedchef.com. Before we begin, I’d like to remind everyone that the prepared remarks being given today contain 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 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 that could cause or contribute to such differences are detailed in the company’s filings with the Securities and Exchange Commission. Except 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 is referenced.

It is important to note that this is a non-GAAP financial measure, which 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 Chef’s President and CEO, Sam Galletti. Sam, please go ahead.

Sam Galletti: Thank you, Devin and thanks to 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 in progressing towards our goal of switching from growth to profitability. I feel I need to go off-script here. I want all of you to know we are determined to make this the plant-based company of the future. I want to thank everyone for their continued support of Tattooed Chef. I am encouraged by our results for the first quarter and by the factors that we believe separate Tattooed Chef from our competitors. Our products are plant-based. We address a variety of tastes 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 or 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 the 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 per SPINS data for 12 weeks ending 4/23/2023 of the top 20 brands, Tattooed Chef is one of seven brands that continues to show unit sales growth. The health and wellness category is down 10.6% of units, while Tattooed Chef is delivering 12% more units than this time last year and experiencing 4% growth in total MULO. In addition, we have reduced the amount of time that our product stands on promotion in the store by 4.3%, 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. Thank you for your attention, and I’ll now turn things over to Sarah.

Sarah Galletti: Good afternoon, everyone. Tattooed Chef is a branded food product of the future for vegetarians, flexitarians, in fact, all the tarians. There’s something very special about Tattooed Chef products. There nostalgic comfort foods made from blends of plant-based ingredients that create the delicious taste and texture that lets to eat vegetarian without compromising flavor. Our manufacturing base assures that we work with sustainable growing practices, which results in high nutrient fruits and vegetables. Tattooed Chef has a big future and 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 Tattooed Chef. Thanks for your continued support. I’ll now turn the conversation over to Stephanie for a discussion of our results. Stephanie?

Stephanie Dieckmann: 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 filer. Our 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 Tattooed Chef branded products with Walmart. As previously mentioned, during Q3 last year, and higher trade promotion spend that reflects our support of a seasonally higher focus by our customers on healthy eating products during Q1 2023, as compared to the same period in Q1 2022. As Sam mentioned, we are well diversified between club, retail and private label. Branded sales were $31.7 million, driven by the 2 promotions that we participate in during Q1 historically with a club retailer.

Private label and other revenues decreased 4.4% to $27.4 million quarter-over-quarter, due to a decision made to discontinue certain food service items that 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 Asia [ph], third-party services and open capacity at the 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 pressures on raw materials and packaging and 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, driven by decreases of $6.9 million in marketing and advertising, $0.7 million in outside service expenses and $0.4 million in stock-based compensation.

We also expect to generate savings via enterprise-wide efficiency gains. We are building more efficient distribution networks and product lines through automation, along with the integration of an ERP system throughout all of our facilities. Net loss narrowed to $19 million or negative $0.23 per share from a net loss of $20.2 million or negative $0.25 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 cash used in operating activities for the first quarter of 2023 was $5.7 million, a substantial 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 was approximately $500,000 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 gearing towards leaner operations.

Gross margin is expected to improve on a consecutive quarterly basis throughout 2023. We expect to generate annual cost savings of approximately $40 million and had a good start towards this goal in the first quarter. Further details can be found in our press release from yesterday. As we have also noted in our press release, we continue to pursue debt per 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.

Sam Galletti: Thanks, Stephanie. Let’s open the call for questions from our analysts.

Q&A Session

Operator: Thank you. And ladies and gentlemen, at this time, we’ll be conducting our question-and-answer session. [Operator Instructions] Our first question comes from Cody Ross with UBS. Please state your question.

A – Stephanie Dieckmann: We use a cold storage facility that is 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 that they will be back up and running this week. And everyone across the country who does business with this vendor is being affected. They are a well-known cold storage facility, and we are 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.

A – Stephanie Dieckmann: It’s been about 2.5 weeks and it doesn’t affect all of our customers, but it does affect Walmart, it does affect the West Coast Kroger. It does affect all the — and Whole Foods as well.

Operator: [Operator Instructions] Our next question comes from JP Wollam with Roth MKM Capital Partners. Please state your question.

Operator: Thank you. There are no further questions at this time. I’ll hand the floor back to Sam Galletti for closing remarks.

Sam Galletti: Thanks so much, everybody, for joining us today. We really appreciate it. We appreciate all the support for Tattooed Chef, and we look forward to hearing from you in the future. Have a great day.

Operator: Thank you. This concludes today’s call. All parties may disconnect.