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Edited Transcript of FRII.TO earnings conference call or presentation 14-Nov-19 1:30pm GMT

Q3 2019 Freshii Inc Earnings Call

TORONTO Dec 6, 2019 (Thomson StreetEvents) -- Edited Transcript of Freshii Inc earnings conference call or presentation Thursday, November 14, 2019 at 1:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Daniel Haroun

Freshii Inc. - CFO

* Matthew Corrin

Freshii Inc. - Founder, Chairman & CEO

* Paul Robert Hughes

Freshii Inc. - Chief Business Development Officer, General Counsel & Corporate Secretary

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Conference Call Participants

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* Derek Dley

Canaccord Genuity Corp., Research Division - MD & Consumer Products Analyst

* Elizabeth Johnston

Laurentian Bank Securities, Inc., Research Division - Former Analyst of Research

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Presentation

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Operator [1]

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Greetings. And welcome to Freshii Inc. Third Quarter 2019 Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Paul Hughes, General Counsel.

Thank you. You may begin.

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Paul Robert Hughes, Freshii Inc. - Chief Business Development Officer, General Counsel & Corporate Secretary [2]

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Thank you, operator. And welcome to Freshii's Third Quarter 2019 Earnings Conference Call. Joining me today is Matthew Corrin, our Founder, Chairman and Chief Executive Officer; and Daniel Haroun, Chief Financial Officer.

Please note that remarks in this conference call may provide certain information regarding our expectations, future plans and intentions that may constitute forward-looking statements. I would refer you to our most recently filed management discussion and analysis, which includes a summary of the significant assumptions underlying such forward-looking statements and certain risks and factors that could affect our future performance and our ability to deliver on these forward-looking statements.

The third quarter 2019 earnings release, the related financial statements and the management discussion and analysis are available on SEDAR as well as the Investor Relations section of Freshii's website at freshii.inc.

All figures discussed on this conference call are in U.S. dollars unless otherwise noted. Following our prepared remarks, we will open the line for questions. As we will not be conducting any follow-up calls this morning, we encourage you to use this question period to ask us any questions you might have about this quarter's results or our business in general.

At this time, I would like to turn the call over to our CEO, Matthew Corrin.

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Matthew Corrin, Freshii Inc. - Founder, Chairman & CEO [3]

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Thanks, Paul. Good morning, everyone. Since we opened our first location in 2005, Freshii has grown into a leading omnichannel healthy food brand with more than 700 points of distribution between our growing restaurant network and our ever-expanding retail partnerships. We currently do business in 16 countries and over 200 cities and growing. From our current footprint, I believe we are uniquely positioned amongst the competition to continue to evolve our menu offerings and remain on the cutting edge of global health and wellness trends with a focus on making food even more convenient and affordable for citizens of the world.

In restaurant business, and specifically the healthy food arena, has changed significantly since I opened that first location in 2005. And while we enjoy the first-mover advantage for many, many years, what got us here is different than what is going to get us to the next level of growth.

I've said this on every quarterly call this year, but I'm going to say it one more time, and then you won't hear from me again on the topic, 2019 has been very much a reset year for our brand. And while we continue to grow system-wide sales, having grown this metric for 12 conservative quarters as the public company, we've also been working closely as a team and with our Board and advisers to plan a next phase of growth for Freshii that will play out over the next several years focused on repositioning the brand in order to become more compelling to an even broader set of consumers. Striking the balance of being at once cutting edge and also promoting mass appeal is really tricky, but I believe that once we do and once we get it right, it will unlock our next several years of growth, including accelerated same-store sales growth, a reduction in store closures and an increase in restaurant-level profitability for our franchise partners.

Last quarter, we told you about a number of recent senior leadership appointments here at HQ, additions to the management team that will help shape the next phase of our growth. Dan Haroun, who you'll hear from shortly, joined us as CFO after a decade of financial leadership at Restaurant Brands International and most recently with Walmart Canada. In terms of restaurant operations, Oliver Rodbard joined Freshii as our Head of Restaurant Operations after more than 20 years of retail and restaurant experience in Europe and North America, most of which at Yum! Brands. At the Board level, Bill Schultz joined the strategic team with a wide variety of senior management experience in the food industry at Mars, Georgia-Pacific and most recently, at Coca-Cola, where Bill was the President of Coca-Cola Refreshments, Canada. These new leaders, together with the key members of the Freshii team that built us into what we are today, have been hard at work at determining our priorities as an organization heading into 2020 and beyond.

Our focus for the year ahead, consistent with our theme of doing fewer things better, is built across 3 pillars: one, driving sales through marketing and menu initiatives; two, strengthening the trust and confidence our partners have in our brand; and three, delivering a world-class customer experience.

In terms of menu initiatives, we just rolled out our latest limited-time offer across our network, which consists of Beyond CHILii, a plant-based protein chili, using Beyond Meat crumbles. We introduced a Spicy Golden Broth infused with lemongrass and anti-inflammatory turmeric, especially popular in the cooler months and great for a snacking occasion, served in a sippable coffee-style cup. And we also introduced an innovation of our popular Energii Bites platform, which is the peanut-free cocoa Energii Bites, full of healthy whole ingredients like sunflower butter, coconut, dates, cocoa and dark chocolate chips. This limited-time offer has been supported by a digital marketing strategy designed to reach our guests where they are and let them know about these great new products.

The second pillar of our plan is anchored on continuing to build the relationship between Freshii HQ and our franchise partners. We have redoubled our focus on making decisions with the partner success at the forefront of our thought process. We will work shoulder to shoulder with our franchise partners, both through our franchisee council as well as our operations and regional marketing teams. We are prepared to invest alongside our franchise partners where appropriate in growing the Freshii brand for the long term. As I've said before, our franchise partners are the core of our business and setting each of them up for success is a key component of our own success.

Thirdly, we will increase our focus on providing the best-in-class guest experience, both in-store and online, as this is a key component of driving repeat traffic to our restaurants. To that end, we are currently working on an improved customer experience feedback and measurement program that will allow us to narrow in on what's most important to our guests as well as the areas where we have the opportunities to improve. This will allow us to stay closer to our guests and help us deliver on more of the things that keep people coming back to visit Freshii again and again.

So that's where we are today for the restaurant division. Our evolved leadership team is working hard against these 3 pillars as we head into 2020, and I'm excited about the focus and direction we've aligned on as a group. Our consumer packaged goods division continues to grow as well in revenue, in retail partners and in product offerings.

In addition to continuing to deepen our relationships with our existing retail partners, in the third quarter, we also added 2 new retail customers to our CPG business: Hudson News, which specifically is operating with Freshii at the Billy Bishop Airport in Downtown Toronto; and with Compass Group's micro-market division where we offer our healthy Grab & Go products at large industrial locations that typically have few healthy lunch options. We're excited about these 2 new partners and the new customer moments they will allow us to touch. We'll continue to report on the progress of our CPG business and growing omnichannel footprint in the quarters to come.

It is now my pleasure to introduce Dan Haroun, Freshii's Chief Financial Officer, to provide some additional color on the quarter.

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Daniel Haroun, Freshii Inc. - CFO [4]

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Thanks, Matthew, and good morning, everyone. I'll start off with our Q3 results with all comparisons being versus Q3 of 2018.

In Q3, system-wide sales increased $3.4 million or 7% to over $49 million driven by 10 net-new openings in the quarter. This growth from net-new openings was partially offset by our same-store sales decline of 3.7% as we continue to see traffic declines that are partly offset by higher check. Growth in system-wide sales led to revenue growth of 5% as higher royalties and coordination fees were partly offset by lower franchise fee revenue and lower corporate store revenue as we operated 3 corporate stores at the end of the quarter versus 5 in the prior year.

Moving down the P&L, adjusted EBITDA grew $0.4 million driven by higher revenue as noted and solid SG&A cost control as SG&A grew more slowly than revenue for the quarter.

Moving to our cash position. As at September 29, 2019, we had just over USD 29 million on the balance sheet, maintaining flexibility to drive improvement against the 3 pillars Matthew laid out as we head into 2020.

Stepping back more broadly, over the past 2 months, I've had the opportunity to meet with many of our largest franchisee partners across North America as well as spend time in our restaurants and work alongside our dedicated team at Freshii HQ. I've witnessed firsthand the passion our franchise partners, restaurant team members and HQ team have for our brand. While this passion has been a constant for the brand as it's grown, one recent update to the way we work has been bringing to bear an increasingly disciplined and data-led approach to decision-making. As a result of this, we've decided to build out a larger, stronger business intelligence team to enable increasingly data-driven decision-making.

As -- another recent uptake we've made to the way we work has been the implementation of a stage-gate approach to our menu innovation and operational initiatives process. Through this process, we will be assessing a number of exciting initiatives in 2022 through a test and learn approach, which we expect to help us iterate and improve offerings to scale initiatives that drive benefits for our customers, franchise partners and shareholders. We don't expect every test to be successful, but we expect to learn from the test we put in place to give us more confidence that when we do scale an initiative across our system, it will be well received by our guests and drive financial benefits for our system.

Turning around our same-store sales will not happen overnight, but we are optimistic about the opportunity to grow the Freshii brand long term. I'm personally excited to be a part of the Freshii team and look forward to updating you on our progress as we move forward.

At this time, we'd like to open up the call to any questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Derek Dley with Canaccord Genuity.

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Derek Dley, Canaccord Genuity Corp., Research Division - MD & Consumer Products Analyst [2]

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I just want to drill down a little bit more on the same-store sales number. You mentioned that you had some traffic declines offset by pricing. Can you give us more color on that, just break out the magnitude of the declines and the pricing increases?

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Daniel Haroun, Freshii Inc. - CFO [3]

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Derek, it's Dan. We won't get into the specifics of the magnitude, but we saw very similar performance in traffic and check in Q3 versus Q2.

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Derek Dley, Canaccord Genuity Corp., Research Division - MD & Consumer Products Analyst [4]

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Okay. And I guess you mentioned that you don't expect same-store sales to turn around, I think it was immediately or right away, but can you just talk about some of the initiatives that you are implementing? I think recently you introduced elevated proteins. You've got a streamlined menu test, which last I checked was in 30 stores. Can you give us an update on where you stand with those 2 initiatives today?

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Matthew Corrin, Freshii Inc. - Founder, Chairman & CEO [5]

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Sure. Derek, it's Matt. What we're seeing generally with our limited-time offer window is that guests are liking the innovation, but what it's not doing is driving new incidents, so -- which is to say, our existing guests are coming in and ordering these new menu items and simply trading out of something they would previously get. The current program is not bringing in net-new traffic. And so really what we are looking to unlock now through our digital marketing campaigns and a number of other initiatives that we'll roll out into 2020 is efforts to drive incidents. But generally, like we're proud of the food, we're proud of the marketing -- four-wall marketing. And I think as we get better at unlocking the nonfour-wall marketing initiatives, that will drive incidents, and ultimately that is the start of kicking off same-store sales growth again.

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Derek Dley, Canaccord Genuity Corp., Research Division - MD & Consumer Products Analyst [6]

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And then how about as it relates to day part performance? I think on your last call we talked more about pushing the dinner offering. Can you give us an update there?

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Daniel Haroun, Freshii Inc. - CFO [7]

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Derek, it's Dan. We're excited about dinner long term. I think that when we test something like plates, which we talked about on the last call, the first test is can we make it work from an operational perspective. And we're at a point where we feel good about that, and now it's making sure that we can plan for the right pilot in a test market as we talk a little bit about in our prepared remarks about the importance of a stage-gate approach where we're using data to help guide our decision-making. And so we're excited about dinner in the long term, and we feel confident that we could execute plates from an operational perspective first. The next step is for us to plan for a test market to get customer feedback.

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Derek Dley, Canaccord Genuity Corp., Research Division - MD & Consumer Products Analyst [8]

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And when you think about these test markets or pilot programs, what is -- and I gather it varies, but what is a typical time frame for a pilot before you make a decision on whether you can scale this across the network?

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Daniel Haroun, Freshii Inc. - CFO [9]

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Yes. I'm not going to give a specific answer because it really depends on the amount of complexity and change, both for our operations, our franchise partners and for the customer. So I can't give a specific answer. It really does depend on the initiative.

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Operator [10]

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(Operator Instructions) Our next question comes from Elizabeth Johnston with Laurentian Bank Securities.

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Elizabeth Johnston, Laurentian Bank Securities, Inc., Research Division - Former Analyst of Research [11]

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I just want to go back to the previous question there about upgraded proteins. As of the last call, they were being tested. Can you provide an update as to whether that's still in test phase and when you plan to roll that out?

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Daniel Haroun, Freshii Inc. - CFO [12]

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Elizabeth, it's Dan. So it is still in test phase, but we're excited about the opportunity from a protein perspective and thinking about taking some of the initiatives forward in 2020 as we work closely with our franchisee advisory council and our franchise partners. So we're excited about the new proteins and continuing to tweak, but we think that there is good potential with the work that we've done so far.

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Elizabeth Johnston, Laurentian Bank Securities, Inc., Research Division - Former Analyst of Research [13]

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Okay. And are you able to give us any more insight as to where those test locations are, like even if it's all U.S. versus Canada or any kind of comment there?

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Daniel Haroun, Freshii Inc. - CFO [14]

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Yes. So the proteins are being tested currently for the most part in the GTA.

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Elizabeth Johnston, Laurentian Bank Securities, Inc., Research Division - Former Analyst of Research [15]

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Okay. And just going back very briefly to same-store sales again, are there any other comments you can make with respect to the trends in the period or something that changed in Q2 -- in Q3 versus Q2 whether it's regional or something else, just any other color you can provide as it pertains to that?

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Daniel Haroun, Freshii Inc. - CFO [16]

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Yes. We continue to see fairly consistent trends in Q3 versus Q2. We've got markets where every -- pretty much every market has got stores that are performing at or better than the market and stores that are not performing where we would like them to. And so I think there is an element of consistency and four-wall execution that we need to continue to drive as well as the menu and marketing initiatives that Matthew touched on in his prepared remarks.

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Elizabeth Johnston, Laurentian Bank Securities, Inc., Research Division - Former Analyst of Research [17]

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Okay. Great. And just to -- turning on to a different topic going on to -- in terms of revenue, I noticed that the other revenue as a percentage of system sales, which I believe contains -- would contain vendor rebates potentially among other things, has moved higher as a percentage of system sales this quarter. Should we expect a higher level going forward? Is there any change in that outlook? Or is it just a question of timing?

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Daniel Haroun, Freshii Inc. - CFO [18]

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Yes. I think there is always going to be timing on that line and others within our business. I think the way we think about that line and the royalty stream over time, we expect to drive growth in line with system-wide sales growth.

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Elizabeth Johnston, Laurentian Bank Securities, Inc., Research Division - Former Analyst of Research [19]

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So previously there's been -- some of the guidance had indicated it was 2.5 -- roughly 2.5% of system sales. Is that still the case long term?

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Daniel Haroun, Freshii Inc. - CFO [20]

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Yes. We won't give guidance on a specific number at this point in time, but we continue to aim at growing that line in line with system-wide sales growth.

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Elizabeth Johnston, Laurentian Bank Securities, Inc., Research Division - Former Analyst of Research [21]

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And in terms of corporate cost, I heard your comments about having a -- there is a location that was closed or relocated in the period. When I look down at the specific company-owned store SG&A, that number ticked higher this quarter compared to other previous quarters. So I was wondering if you can comment on that.

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Daniel Haroun, Freshii Inc. - CFO [22]

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We did have some very minor costs with respect to the closing of one of our locations from a corporate store perspective. And we did have some corporate stores that were renovated and opened earlier on in the year, and so you don't necessarily have the right mix of SG&A and revenue on those lines that you would have on a traditional go-forward basis.

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Elizabeth Johnston, Laurentian Bank Securities, Inc., Research Division - Former Analyst of Research [23]

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And is it your intention to reopen that corporate store?

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Daniel Haroun, Freshii Inc. - CFO [24]

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No, it's not.

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Elizabeth Johnston, Laurentian Bank Securities, Inc., Research Division - Former Analyst of Research [25]

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And so when I take it -- when I look long term then, do you think 3 corporate stores is the right number? I know, obviously, it's never been a point of -- that you focused on growing, but how do you feel about having 3 overall?

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Daniel Haroun, Freshii Inc. - CFO [26]

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I think long term, we have to make sure that we have the right ability to support testing and learning, both from a corporate and an operational perspective, but also thinking about the way we might be able to leverage our franchise partners' locations from a training perspective as well. I'm not going to give a specific number, but we continue to be a capital-light, asset-light franchisee-focused organization with a handful of corporate stores to ensure that we have a good feel for what the guests are telling us and operational improvements over time.

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Elizabeth Johnston, Laurentian Bank Securities, Inc., Research Division - Former Analyst of Research [27]

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Okay. Understood. And I want to go back to another point that you made earlier about planning the proper pilot testing before rolling things out. Maybe you could just contrast that to how things might have been done previously. I'm just trying to understand how the test-and-learn approach will be different from before.

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Matthew Corrin, Freshii Inc. - Founder, Chairman & CEO [28]

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Do you want to -- Dan, do you want to maybe start with how it's going to be going forward, and I'll try to articulate how we've done it historically.

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Daniel Haroun, Freshii Inc. - CFO [29]

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Sounds good. So going forward, as we have innovation, whether that's innovation that is customer-facing or operational focused, we want to make sure that we can test something before we scale. When we do scale something for our franchise partners, we want to have the highest degree of confidence that it's going to work for our guests and drive financial benefits for our system. So the approach on a go-forward basis will be often a 1- to 3-store pilot to really just figure things out from an operational perspective and then expanding to a test market to get guest and customer feedback before we decide how to scale an initiative in the right way. So that's really the way we're thinking about how we're moving forward from a, call it test and learn, really stage-gate approach that we've got good alignment on as a leadership team.

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Matthew Corrin, Freshii Inc. - Founder, Chairman & CEO [30]

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I think to contrast that, we probably had less stages historically. And as we've grown the system, we now have more data that in some way makes the scale different and the opportunities and some of the risks different. So I think naturally, as we built out our unit count in more cities and more countries, it does require incremental stage gates than historically how we've moved things through the funnel. And I think when we think about the stage-gate approach and getting more planes in the air, so that we have a number of initiatives going on at once in different phases of tests, that does give us, hopefully, a better opportunity to have more predictable same-store sale initiatives in the future because we'll understand how things are performing, and then we can choose the sequencing of what we choose to bring out of a test and into a system-wide rollout. I think those are the things we're looking -- very much looking forward to as we start to roll through 2020.

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Elizabeth Johnston, Laurentian Bank Securities, Inc., Research Division - Former Analyst of Research [31]

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That's very helpful. And going over to talk about the CPG, that sales channel. Are you willing to share anymore qualitative -- quantitative details in terms of how much that's currently contributing, either in dollars or percentage? Just trying to gauge how much of it is coming from that channel and where it's going to be growing going forward.

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Matthew Corrin, Freshii Inc. - Founder, Chairman & CEO [32]

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We are still not breaking out CPG as a channel at this point. It's obviously a topic we continue to talk about. It is very much part of our omnichannel business model and omnichannel aspirations. And when we talk about omnichannel, it very much continues to be our intention to be able to grow a very meaningful line of revenue through our consumer package division and our retail partners. I think today, it's still a very small part of our total revenue, and that's an indication of why we don't think it's meaningful to break it out. But we are still very focused on building out the consumer package team, our retail partners and our product innovation. We have some very exciting new products rolling out as soon as late this year that I suspect many of our guests will see as they make their way around the country for the holidays.

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Elizabeth Johnston, Laurentian Bank Securities, Inc., Research Division - Former Analyst of Research [33]

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And my final question regarding the mobile app. And maybe you can provide us an update of where you are with the development and improvements on them? Are you where you want to be?

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Matthew Corrin, Freshii Inc. - Founder, Chairman & CEO [34]

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We finally -- I think we are under the adage that fourth time's a charm as it relates to our own mobile app. Our tech team has been working with a group that are building out a new app that will roll out in midway through 2020, and we're very pleased with the progress they're making. So from an internal time line, we're absolutely on track. The mobile, I think most importantly, is going to come with loyalty. And really loyalty, we think, is a very significant contributor to the same-store sale line that we, I think, have not done as well as we could be doing. So with the updated mobile platform coming out in mid-2020 attached to that will be a very robust loyalty program. I think in the interim, we continue to do a meaningful amount of business as many restaurants groups are also doing on the third-party aggregators. And perhaps, Dan might provide a little bit of additional color for you, Elizabeth.

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Daniel Haroun, Freshii Inc. - CFO [35]

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Sure. So I've had the opportunity in my first 2 months to meet with the -- our partners on the third-party delivery side just to really understand their performance to date from a Freshii perspective and also to begin thinking about building blocks for future growth. But we're really going to focus that growth on profitable growth for our franchisee partners. And obviously, when we are going to drive growth, we have to be where the customer is. So we recognize that convenience is changing, and we're going to continue to partner with these organizations, but we want to make sure that we're doing so in a way that is profitable for our partners.

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Operator [36]

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At this time, I would like to turn the call back over to management for closing comments.

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Matthew Corrin, Freshii Inc. - Founder, Chairman & CEO [37]

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Thanks so much, Latonya. And thanks, everybody, for your time this morning. We look forward to providing an update next quarter.

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Operator [38]

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Thank you. This does conclude today's call conference. You may disconnect your lines at this time. And have a great day.