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Edited Transcript of FRII.TO earnings conference call or presentation 14-Aug-19 12:30pm GMT

Q2 2019 Freshii Inc Earnings Call

TORONTO Aug 24, 2019 (Thomson StreetEvents) -- Edited Transcript of Freshii Inc earnings conference call or presentation Wednesday, August 14, 2019 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* 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 - Analyst

* John Zamparo

CIBC Capital Markets, Research Division - Associate

* Kyle McPhee

Cormark Securities Inc., Research Division - Analyst of Institutional Equity Research

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Presentation

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Operator [1]

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Greetings. Welcome to Freshii's Second Quarter 2019 Earnings Conference Call. (Operator Instructions) Please note, this conference is being recorded. I will now turn the conference over to Paul Hughes, General Counsel for Freshii. 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 second quarter 2019 earnings conference call. Joining me today is Matthew Corrin, our Founder, Chairman and Chief Executive 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 the summary of the significant assumptions underlying such forward-looking statements and certain risks and factors that could affect your future performance and our ability to deliver on these forward-looking statements.

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

All figures discussed on this conference call are in US dollars unless otherwise noted.

Following our prepared remarks, we will open our 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 Matthew Corrin, Founder and Chief Executive Officer of Freshii.

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

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Thanks, Paul. Good morning, everyone. I want to start by updating you on the steps Freshii has taken this quarter in growing our omni-channel brand as well as some key new leadership appointments we've made since we last communicated.

First, our consumer packaged goods business line continues to grow. In addition to our 454 restaurant locations, which grew 8% year-over-year, we now operate in an additional 278 retail outlets, where we are selling a wide range of Freshii meals, snacks and juices. We now have almost 750 points of distribution, not including the hundreds of Air Canada flights Freshii is boarded on each day, up 30% since last quarter.

We have added shoppers drug mart and Gateway Newstands to our existing CPG partner network. And also saw additional product and site growth among Air Canada, Shell and Walmart. This retail partner and product growth further strengthens this new line of Freshii business and our omni-channel presence. We will continue to update you on the growth of our CPG business going forward.

In terms of our newly appointed leaders, Dan Haroun has joined us as our new CFO after nearly a decade of strategic financial and operational leadership in various roles at restaurant brands international and most recently, Walmart Canada. Oliver Rodbard has joined Freshii as our VP Operations and will be in charge of all things restaurant. Oliver has over 20 years of retail and restaurant experience in Europe and North America with the last 12 years spent at Yum Brands in a number of operations-focused roles.

At the Board level, we have welcomed Bill Schultz as a Director and Audit Committee member. Bill joins Freshii 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. Adding this caliber of restaurant and retail experience and leadership to our senior team and at the Board Level, will serve us well as you map out and execute on our next stages of growth.

In the same quarter that we strengthened our leadership team and substantially grown our CPG business line. We've also reported strong net income, with quarterly net income coming in at $0.4 million or 33% improvement year-over-year.

Free cash flow regeneration this quarter was also strong. We will continue to focus on growing our revenue and free cash flow going forward, even as we strengthen our team at HQ to execute on our long-term mission.

Moving to our restaurant division results for the quarter. In Q2, we experienced negative same-store sales, reporting a minus 4% for the quarter or minus 3% when normalized for the Easter calendar shift.

In order to shift our same-store sales back into positive territory, we are focused on menu innovation, marketing and streamlined in-store restaurant operations. Specifically, we continue to roll out our new streamlined menu, removing our lowest selling menu items and highest-waste ingredients, in order to improve both food costs and the in-store operations.

As I mentioned our last call, step 2 of this menu-driven process is the upgrade of our proteins. We have now begun the testing of our full oven-roasted chicken breasts, turkey meatballs and vegetarian proteins in 30 locations. The early feedback on the upgraded protein options has been positive, and we're hearing from our guests that they taste great. We believe these elevated proteins will help us both with new guests and grow average check, helping us drive same-store sales and average unit volumes into the future.

These elevated proteins are also a key card of our broader pursuit of the dinner daypart. We've recently begun testing, what we are calling Freshii plates. Our plates, which are also available at lunch but targeted towards the dinner guest, includes a choice of one of our upgraded protein options, a base of quinoa or greens and a selection of 2 of our 10 newly designed sides. They're both hot and cold, such as Moroccan carrot salad, Southwest Succotash, broccoli crunch or the stuffed avocado, to name a few.

Our view is that opening up the dinner daypart through Freshii plates is a key sales opportunity for our restaurants, especially as we market these offerings on our digital platforms, which tend to over-index traffic at the dinner daypart, particularly. We look forward to continuing to test and refine Freshii plates and will update you as they progress to rollout.

Please visit our test chicken at a Freshii in the Rosedale neighborhood of Toronto, to try them up for yourself or order Freshii plates on UberEATS in Toronto. In addition to these improvements to our everyday restaurant menu, the marketing and menu teams are working hard on more frequent menu innovation through our limited-time offers. A recent example is our Roma Salad featuring a gourmet pesto dressing, kale, quinoa and shaved parmesan cheese, which is currently in market across our system.

Additionally, our new Energii Bites smoothie, featuring coconut milk, banana and the flavors of our popular Energii Bite is presently available across our system in fueling guests looking for a healthy way to cool off in the summer months.

A marketing and menu team now has a calendar full of upcoming LTOs for the balance of 2019 and 2020, and we'll discuss them with you as they roll out. One limited time offer item in development that we are particularly excited about, includes a plant-based protein option that will roll out this fall when we reintroduce our seasonal vegetarian chili offering during the colder months. Stay tuned for that.

In terms of our restaurant openings, this quarter, we opened 13 new stores around the world, with 5 closures, which we think represents a more stabilized closure rate. Our net new openings for the quarter was 8 units. Our new store pipeline does remain strong, and we expect our unit systemwide sales and royalty revenue to grow year-over-year through 2019. That's the update on both the restaurant and consumer packaged goods division of Freshii's growing omni-channel brand.

As each division grows, it lends support to the other, whether you first experience Freshii at 30,000 feet, or by purchasing at one of our retail partners or in one of our hundreds of franchise partner-led restaurants for the full menu dining experience. In the end, we continue to find more ways to help our guest live better by making healthy food even more convenient and more affordable. I believe we've made some really important strides in our business over the last few months, in growing our CPG division, in adding a number of experienced leaders to the senior management team and in getting our menu innovation pipeline built out for the next several quarters at the restaurant level. We'll update you again on our progress in the coming quarters.

Before moving to Q&A, I'd like to take this opportunity to thank my fellow HQ team members, our franchise and retail partners around the world for their ongoing commitment to the brand as we move towards a future state. I'm grateful to be able to make this journey with such a talented and committed group.

At this time, I would like to open up the call to any questions. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question is 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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Matt, just wanted to talk a little bit about the omni-channel platform. Can you comment on both the shoppers pilot, what specific regions it is in? And then as well with Gateway Newstands, appreciated in Toronto and focused on the TTC. But can you give us any idea of how many locations you expect to have with gateway as well?

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

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Derek, thanks for your question. Most of our retail partner or pilots start in, call it, the 10 units or less. So without giving specifics, both shoppers and gateway are Toronto-based. Testing in locations that we think could be a bellwether for a Phase 2 a Phase 3 rollout. So we try to do it in locations that we can learn a lot about how it might scale into further locations. And that's similar to how we started with Walmart, similar to how we started with Shell. So I think it will be on their websites where it will be available, but we don't give specifics on exactly how many rollout in the pilot stages.

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

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Okay. Now that number is helpful. I guess just looking at your roll out with Shell when you implemented or added your Grab & Go products into these Shell locations, did you see any customer conversion from trying your products at a Shell location and then moving into a full standard store? Are you seeing that type of conversion when you open up these locations?

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

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It's -- I think the whole purpose -- and it's a really great point you make, and the whole purpose of trying to build this omni-channel is each division feeds the other. And we haven't started going deep on cross-marketing, but it's certainly our relatively near-term intention, to start to use our retail partnerships to market traffic back into a restaurants. And these are restaurants to drive traffic back into our retail partners. In the future state, once our new mobile platform gets to a place where we feel good about it, you'll also be able to use that mobile platform for a wide variety of omni-channel purchases, whether in the restaurants our within retail partners for pickup or delivery.

So I think the long-term plan, Derek, is absolutely they need to be feeding each other. And we're not doing that yet strategically. I'd say the other thing on the other side of it, we also don't believe there's any cannibalization. And we watch that very closely because obviously, we don't want the CPG division to take away from the good business our franchise partners are operating every day. That's why as we rollout our CPG partnerships, we really are thoughtful about minimal overlap of products. Where you'd see potential overlap is simply around the juices and some of the Energii Bites. But around the fresh, ready-to-eat, we try to keep them unique and different, both in terms of portion size, offering and price point.

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

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Okay, great. That's helpful. And I guess you kind of led me into my next questions in terms of the mobile ordering platform. I think it's been about a year since you guys -- or a little bit more than a year since you rolled out your sort of more improved digital strategy. Can you just talk about some of the penetration that you're seeing in terms of ordering online versus in-stores?

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Matthew Corrin, Freshii Inc. - Founder, Chairman & CEO [7]

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So I think there's good news and bad news to the mobile story. The bad news is, we still haven't got it right. The good news is, we still haven't got it right. We have a -- because when we get it right, we do think it will unlock a same-store sale driver that we're currently not benefiting from. We talked on previous calls about our new leadership team. And our mobile tech team is about 10 members strong and working very hard at building the next generation of our mobile and digital platforms, not just how our guest use it to order but how we then ultimately speak to them through marketing channels. I think that is in the works and we're not benefiting from it yet. Current state, Derek, as we continue to be on strategic third-party delivery partners in certain markets. We are on billboards with (inaudible) dishes or in TV commercials, on door dash, so we're leveraging those third-party partnerships, and have guests using our own mobile platform. But it's certainly not where it should be and where it will be in the future state.

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

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Okay. And then last one for me, just in terms of the new products. We've seen a lot of new products rolled out in your stores recently. I have seen a lot in the last couple of months. Can you just talk about some of the ones that are having more success? And what you've seen in terms of consumer response to the new product offering?

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Matthew Corrin, Freshii Inc. - Founder, Chairman & CEO [9]

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Yes. I mean, I think some of the things that we're get excited about is -- and we've sort of -- I do feel like we got back to our menu cycle that looks more like that ZARA of healthier fast food that we're used to. And that sets us up for thoughtful testing, understanding of how that testing drives results, and then once we are able to prove that out, ultimately scale through the system. Some of the menu item that I'm particularly excited about are -- is the Roma bowl. I think it's a flavor that we've historically had around pesto that was very popular, and it's currently live in all of our stores. And I also love Energii Bites have been a hero product for us, as an add-on. And so I thought it was really innovative when the marketing and menu team proposed taking those Energii Bites and blending them up in a dairy-free smoothie. And so that, once marketed thoughtfully through a smoothie happy hour, has also proved to be a pretty compelling offering. I think that's the type of future state that you should expect both around the menu innovation and how we think about marketing it.

Notably, we've sort of -- while we have breakfast on many of our stores' menus, we also accept the fact that our target guest IV and maybe a broader population is increasingly jumping on the intermittent fasting train and some ways I feel like it's becoming the new way of eating. And so as we face the headwind of more and more intermittent fasting for our target guests, we look to where we think we can continue to drive their loyalty and business. And that's why we touched on some early tests around our dinner daypart. And we believe that our future state, over the 1 and 3-year plan, looks more like continue to smart menu innovation at lunch and continue to build a very thoughtful dinner daypart.

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Operator [10]

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Our next question is from John Zamparo with CIBC World Markets.

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John Zamparo, CIBC Capital Markets, Research Division - Associate [11]

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I wanted to ask about the menu test or a few different tests. And maybe we could start with same-store sales. Matt, can you provide a bit more color on this in terms of regional strengths or weaknesses or commentary on daypart levels or the competition you're seeing in the market?

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Matthew Corrin, Freshii Inc. - Founder, Chairman & CEO [12]

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Absolutely. Let me try to do-- to give you a bit more color around our same-store sales. So I mentioned just as pure mechanics there is a Easter shift, which was about 100 basis points, directly tied to calendar shift. I think the second, again, just sort of mechanical and nonmarketing related, we hardly had any price built into this year's comp. And so we strategically push pricing towards later in the year, once we get our new menu and elevated proteins rolled out through the system. That menu cycle of innovation comes with taking price, specifically, tied to our [evolved] and improved proteins. So we pushed prices, we didn't want to do it twice and we're doing that later this year. So there's no price built-in.

The markets that we are the biggest in and continue to penetrate both in our traditional stores and our retail CPG partnerships continue to remain strong with same-store sales, even as they're lapping prior year strong comps. And so in some ways what we're learning from that is, the deeper we go in markets, both in the holistic omni-channel rollout but all stores rise all tides in some ways. Our future -- more growth rises all tides.

In terms of some softness, we had experienced softness in Alberta. And notably, and we think about whether it's market conditions and we know there's been some challenges in that province, it's also a market that we've had very significant unit growth and system-wide sales growth in the prior year, 2 years and 3 years. And we've sort of gone from like one to dozens and dozens of locations in a very short period of time in that province. And I think there's been some temporary normal course of cannibalization, which does happen before all stores start growing again, but I also think there's some market conditions. And I think finally, and I mentioned -- and it ties back to some of the conversations around mobile that Derek was asking about, we're not getting the benefit that I believe other brands are currently experiencing with going deep in marketing through their mobile platform. It's a high priority for us, I believe, once, it gets rolled out in the newest version, that will be the one that works. And we're hard at work and trying to get that complete and out to our guests as soon as possible.

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John Zamparo, CIBC Capital Markets, Research Division - Associate [13]

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That's helpful. I may have a follow up on one of those points in a moment. But back to the menu test, it seems exciting. When do you plan to have that rolled across the entire network? And will it be done onetime or do you plan to phase it across different regions and different times?

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Matthew Corrin, Freshii Inc. - Founder, Chairman & CEO [14]

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So I think -- maybe when we just speak holistically around how we think about all areas of our company today, in some ways, we want -- we definitely want to go as fast as possible to get our comps growing again, to get our unit growth going again to the place that we're used to, that we've experienced in the previous years. But I think the right thing to do, at least in this calendar year, was to go slow before we went fast again. And I think, we're coming up to the completion of building an evolved leadership team that together we can start doing less things, doing them a lot better and having higher results of those things that we roll out. Even some of the internal processes we've put in place involve very specific gate review processes so that you can skip steps, it needs certain eyes. Hopefully, all those things will lead to improved operations at the store level, which ultimately gives a better guest experience, improved profitability and then gets our flywheel of same-store sales and unit growth through profitability growing again.

So that's a broad statement around how we think about all things we do, specifically around the menu, the same things apply. So our testing starts in 30 locations, so that we can really learn and understand both operationally and from a sales perspective, how innovation impacts the business, and the -- and our partner and our guest. And after a certain period of time once we feel like we're satisfied that there's been enough testing, then we start to scale it through the network. So I think the recent example is, we're live in 30 stores with our streamlined menu and our elevated proteins. And we're seeing early results. Without giving a specific time, we like to keep it in that gate for a certain amount of weeks to really feel satisfied that it's a strong enough bellwether and how it will perform once it sale -- once it scales through the network. And once it does, it moves pretty quickly. Does that help as you think about our menu innovation cycle?

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John Zamparo, CIBC Capital Markets, Research Division - Associate [15]

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Yes, yes. That's helpful. Sticking with the new menu, you mentioned the higher prices reflects the higher quality, of course. But I'm just thinking the low average entrée price had been kind of a selling point for the company. So have you seen push back on the higher prices? Or is it just that the competition has moved prices upwards pretty significantly in the past 2 to 3 years, so now you feel you're just in line with competition in terms of pricing?

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Matthew Corrin, Freshii Inc. - Founder, Chairman & CEO [16]

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Yes. I still think we're below the competition. And I think taking price is a relative statement. I think we are very thoughtful of -- and our menu cycle is both trying to give great value. So value isn't always just the price you pay, to me, it's the quality relative to the price you pay. And I think, just to use the protein example because we're talking about it, I think the value proposition of our elevated proteins relative to the price that our guest pays for it, is way stronger than it has been historically, even if the price of the chicken was lower. I think that the price-value ratio was also off. So I think on one hand there's that element, and I still think we continue to be very compelling in terms of price-quality ratio. And then in terms of net price relative to our competitors and as you know, like, we -- we're one of the few brands that have scaled in multiple countries and cities and provinces and states in the healthy fast food arena. So there's different competitors, regional local competitors in different markets that we operate, but it's definitely a lens that we wear. And we still think that we're on a price-to-value basis. We are very competitive. It's very much in our mission, and so we ask ourselves the question before we do anything is -- does this decision make a healthy eating more convenient, more affordable to citizens of the world and that is the lens we'll continue to wear.

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John Zamparo, CIBC Capital Markets, Research Division - Associate [17]

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Okay. Understood. Maybe we'd shift to omni-channel. See, these announcements are setting, it seems like there's significant growth at both new partners and existing ones. But are there any metrics you can share to give investors a sense of how material this is, either in terms of system sales growth through these channels or total system sales generated from these channels, as a percent of the total network?

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Matthew Corrin, Freshii Inc. - Founder, Chairman & CEO [18]

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So I -- here's what I'd say, we are -- it is very exciting to us. We announced, in the last 30 days, in addition of a Board member with very seasoned CPG experience, we announced our CFO with tons of experience on the retail side of CPG, which was Bill from Coke and Dan from Walmart. I do think the way we ultimately share our growing CPG division is about to change. And I would just ask you to -- so I don't speak out of turn, I want both Bill and Dan and some other team members to get their hands around the CPG opportunity and how we should think about both building it out and sharing it with our investing community. And I think you should expect in the future to see some evolution of how we help you understand that line of business. I think a broad stroke, we shared sort of unit growth and I think that continues to be exciting. Both unit growth with existing partners, who want to continue to scale with us. New partnerships that are continuing to enter pilots, and we're learning from that. New product innovation within these retail partnerships, I think they're all good signs but still early days. And so we're certainly focused on investing with (inaudible) and sharing more holistically how we think about CPG into the future.

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Operator [19]

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Our next question is from Elizabeth Johnston with Laurentian Bank Securities.

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Elizabeth Johnston, Laurentian Bank Securities, Inc., Research Division - Analyst [20]

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So just continuing on the CPG topic here. And I'm [indiscernible] That you're hesitant to give certain metrics. But just trying to understand, at least at this point right now, how much it's contributing to your overall results? So are you able to share anything with respect to maybe percentage of system sales? Or anything in that respect on an LTM-basis, try to sense -- get a sense of now what that's contributing, both to that as well as your profitability?

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Matthew Corrin, Freshii Inc. - Founder, Chairman & CEO [21]

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You're not going to love the answer, but we're not giving that level of detail right now. I think maybe what I'll share, which might be helpful is that, in its current state, if you think about the full P&L, which is the total business and the team that's running it internally, it is a profitable line of business for us. But -- and then maybe I would just refer back to some of my comments that I shared with John in the previous question. There's not much more at this point that we want to share, although you should expect, once Dan, our CFO, gets in and wraps his hands around how we should think about sharing this line of business, you should expect some evolution around that.

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Elizabeth Johnston, Laurentian Bank Securities, Inc., Research Division - Analyst [22]

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Okay. Understood. And I wanted to ask a little bit about average unit volumes. So it seems that AUV overall move lower. And I recognize that, that would be likely be different by both FX and same-store sales growth. But it seems to continue to go down. Some if maybe you could help us understand some of the impacts there, whether it's really just driven by same-store sales? And related to that, if there's been any change with respect to franchisee profitability?

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Matthew Corrin, Freshii Inc. - Founder, Chairman & CEO [23]

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It's a really fair question. And it's -- we're very focused on driving average unit volume for all of our partners. So in part, it is tied to some of our softer same-store sales, in part, it is tied to some of our FX, although if you even just segment it out to Canada and U.S., it's also down there. So that ties back to same-store sales. And part, it's tied to a slower year one ramp and where stores enter the comp base. So it's taking them longer to get to steady state and maybe we've historically experienced. I can tell you we're aware of all those things and those are high-priority focuses for our grand opening teams, our operations team and our marketing and menu innovation teams. And so it's a number that we're very focused on.

I believe that building that second daypart around dinner, I believe that continue to be thoughtful, smart menu innovation around lunch are sort of the lowest hanging fruits. And I think the mobile is also a significant opportunity to step change those AUV numbers. But our long-term goal is, we do want to get stores opening and ramping faster and then comping from there. And we're thinking about our grand opening plans, and we're thinking about our menu offering broadly to be able to achieve that. From a profitability perspective, I think it continues to be important to remember that we are building stores for some of the most competitive prices within the, call it, fast food QSR franchising arena, so we continue to build stores for less. And in fact, last year, we were able to drive cost out of our build-out. So it does not put the sales-to-investor ratio offside because our sites are smaller in nature. It also tends to come with a lower occupancy cost. So it also creates a low breakeven point on the unit economic model. But that said, we're still very cognizant that we need to get our AUVs and our same-store sales growing and continue to keep this in a very compelling choice for franchise partners.

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Elizabeth Johnston, Laurentian Bank Securities, Inc., Research Division - Analyst [24]

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That's helpful. And I wanted to go back to your comment about the slower ramp-up for stores in year one. Do you think that's a factor of the market that we're in right now? Has -- or has it been something that you've changed internally? Or is it potentially even -- you're doing the same things that have always been successful but the market's now much more competitive. Just want to know your thoughts on why that would be ramping up slower?

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Matthew Corrin, Freshii Inc. - Founder, Chairman & CEO [25]

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Yes. I -- so I would say, we don't have -- we don't know for certain, but one of the things we have experienced is, we're competing against ourself in many of these markets. So imagine a world where you opened the very first Freshii in Winnipeg and now everybody in Winnipeg will use that Freshii, whether they want to eat it every day or once a month. And then a couple of years later, there's 25 Freshii locations in and around the city and province. And now it's much, on that -- down that day one, there's way less people around the city that are going to that one but still a trade area that's using it.

And I think that is an interesting, maybe, way to think about our year one ramp. I think then the question is, what do we do to get ahead of that deliberate and self-cannibalization? And I think leering on more aggressive, pre-marketing within a trade area is one thoughtful way to ramp up our new guest. And also continue to build a daypart that gives our guests a reason to use us not just at the lunch daypart, which is currently our share of daypart.

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Elizabeth Johnston, Laurentian Bank Securities, Inc., Research Division - Analyst [26]

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Okay. Great. And speaking of dayparts, so the dinner, obviously, opens up a new one for, but I wanted to go back to breakfast a bit more. I know we've talked about that in the past as being a really strong opportunity, but I don't recall any update of late on it. And I know part of the challenge with that was that some restaurants aren't open for breakfast. So are you able to give us an update on that? And as it pertains to coffee as well, which I know launched maybe a year ago on Ontario.

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Matthew Corrin, Freshii Inc. - Founder, Chairman & CEO [27]

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So we have experienced an environment where breakfast has not grown where we thought it could've been tied to our coffee. I think what's interesting about breakfast is the place that we seem to excel most, that's a breakfast daypart is the picking up, a customer picking up a Juice Cleanse, a full day Juice Cleanse and that average check is probably more like a catering order than even a lunch or dinner price point. So from a hours of operation, if we can continue and as we continue to market our Juice Cleanse, which is a full day of eating, it continues to drive that part of the day. The average check and, in our opinion, a customer, specifically targeted -- our target customer is more and more inclined to skip breakfast because of their intermittent fasting routine. I think it's a real challenge for us to continue to invest serious energy in marketing and team hours behind building. We really do think, in the order of sequencing -- over the long term, we do think we can build a breakfast business that makes sense and works and is profitable over the near and medium term. And in the world of sequencing and trying to do less things and doing them better and having more impact, we do think lunch and dinner is -- are the right places for us to focus our energy and resources.

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Elizabeth Johnston, Laurentian Bank Securities, Inc., Research Division - Analyst [28]

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And just one more for me for, if I may, on the mobile, those investments and development. I'm just wondering why the decision's been made to build that internally, rather than partner with technology company who could either build it for you or have one already built that you could utilize?

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Matthew Corrin, Freshii Inc. - Founder, Chairman & CEO [29]

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In some ways, we're doing both. And I think, I'd say we want to keep our specific strategy on how we're building it and who we're building it with confidential because we considered to be proprietary to our brands. So we don't want to share that with the broader public. But we are actually being thoughtful about in the right places, using internal resources and in other places using external resources. And I would be more than happy to at the right time, share more detail with you and maybe even get you on a call with our tech team.

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Operator [30]

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Our next question is from Kyle McPhee with Cormark Securities.

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Kyle McPhee, Cormark Securities Inc., Research Division - Analyst of Institutional Equity Research [31]

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Just wanted to chat on the active opening pipeline here. Your MD&A says, it now fits at 105. That seems to be shrinking beyond the pipeline depletion from actually opening stores that were in the pipeline. So it seems like you're not adding anything to the pipeline and some are actually dropping out. Can you explain what's going on there? Are previous agreements actually being terminated and dropped out of the pipeline?

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

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Kyle. So the answer is, both. So we're opening stores and as stores open, they move out of the pipeline, out in the active opening pipeline. And we are being much more disciplined in the spirit of going slow before we go fast again. We've been more discipline of who we're inviting into our systems. So even though we're having a lot of continued interest in franchising, I'd say we're much more disciplined on who we're inviting in and how fast we're moving to bring them into our system. And ultimately, once they join us in, then they move into that active opening pipeline. So that's coming from both ends. And I'd say that is deliberate, and we think once we -- at the right time, we think that number could continue to grow again. Hopefully, that helps. You think about that metric.

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Kyle McPhee, Cormark Securities Inc., Research Division - Analyst of Institutional Equity Research [33]

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Yes. That helps. Okay. And then on the -- on your pace of closures and openings. In your prepared remarks, you said you expect kind of the same pace of closures near-term versus the 5 you closed in Q2. What about the opening space? Is that going to stay the same as well, or should that pickup near-term as you chew through that pipeline? And maybe you get back to the pace of openings you used to be delivering versus the 13 in Q2?

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

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Yes. So to your point, the closures we think is -- are more normalized now. And in terms of openings, you will note that Q2 openings was lighter than previous quarters. We do believe we'll continue to have unit growth through the second half of 2019. And we also believe that there is this -- little bit of this going slow to go fast again. And I think you're experiencing that in this calendar year. So I think as we feel like we start to get our key restaurant operating metrics moving in the right direction, we will then put our foot back on the gas of driving more unit growth. And ultimately, as those business metrics improve, we also expect with this more evolved team and more thoughtfulness around how we work with our partners, we expect the closures to continue to be in levels that we're used to. And I -- so I think the future holds for both those things, obviously, that's what we're very focused on. And I do think you should expect some future opening to look positive through the second half of the year, maybe higher than what you would've seen this quarter.

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Operator [35]

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(Operator Instructions) We now have a follow-up question from John Zamparo with CIBC.

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John Zamparo, CIBC Capital Markets, Research Division - Associate [36]

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I wanted to ask about the U.S. AUV, in particular. It seems to get disproportionately declines versus the rest of the network. So can you talk about net openings in the U.S. and also franchisee interests south of the border?

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

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We don't break out those specific metrics, other than to say that the AUV is not what where we want it to be in the U.S. But I do think, in some ways, the same rules apply. Like, we need to get our second -- our growing, we need to get our mobile strategy moving again. I think that one of the anecdotes I shared earlier just around same-store sales. And maybe this gives a little bit more color around the U.S. is, where we have the most market penetration, we continue to see the greatest strength on a year-over-year basis. And we have less of that in the U.S., although -- because we recognize that we are very focused on a select 5 or a half-dozen-or-so markets in the U.S. that we're trying to make look more penetrated and more similar to some of our Canadian markets, and I've shared a little bit of that on previous calls. So we think that as we go deeper in key markets in the U.S., they'll start to look more like some of our Canadian markets where we built that penetration.

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John Zamparo, CIBC Capital Markets, Research Division - Associate [38]

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Okay. Understood. And back to the mobile ordering, what is it that you feel you're missing at this point? You said you're not happy because you're not where you want to be. What elements do you feel you're missing versus competitors at this stage?

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Matthew Corrin, Freshii Inc. - Founder, Chairman & CEO [39]

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I think it is -- I think there's friction in -- so as a -- I'm just going to speak as a consumer there. I think there is friction in the app, so it's step 1 through 5, or step 1 through 8 of starting the order to completing the order. I think it could be even more frictionless, more efficient and more intuitive. So I think there is some user interface improvements that we're aware of and that we can improve. I think it lacks, although, it's slowly changing as we roll this out, but it's historically, lacked a delivery component. And we're starting to roll a delivery widget attached to our own app out. So guests now can order or ensure they will be ordering through our system, on our app with delivery built-in, which is a big part of ordering in our opinion. We also, historically, did not have, what we call, ASAP ordering. So a guest would order and they would have to pick a pick-up window but they couldn't pick up right now, and we flipped that. And now everybody -- over half of our orders are ASAP, which I think is a big statement. So people want it right now, and we were previously only giving them a 15-minute window. So I think there was some fallout from that.

And I think finally, and the whole point of the app, in my opinion, and also in getting more and more guest to use the app versus a third-party is to build a highly compelling loyalty program attached to it. And I think ours is not where it should be and can be. But I -- so I don't think there's one thing. I think, unfortunately, there is a lot of things. The good news is we're aware of them all, and we have the right team who are aggressively attacking it and we're very excited to get it out to our guests as soon as reasonable. I think the other side of it, John, is -- and I believe you're a user of our app, so I think you've even mentioned this in the past but -- the operations side, so once the order comes through and hits the store, the operations have to be as seamless as walking in and ordering. And I think a lot of our stores do it well, but I don't think enough of our stores do that well. And all of our -- he's VP Operations, which we recently announced is well aware of that friction of layering on mobile and how important it is to get that right in order to build that line of business. So I'm sort of coming at it from both sides, and it's a long answer but that's the way we think about it.

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John Zamparo, CIBC Capital Markets, Research Division - Associate [40]

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That's very helpful. And I guess the corollary of that, can you remind us where -- when it comes to POS systems, where is the network in terms of being able to take on like a next-generation app all at the same time? Are there significant investments needed to I guess prepare each store to do that or are they already set up to evolve to the next stage of the app?

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Matthew Corrin, Freshii Inc. - Founder, Chairman & CEO [41]

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Yes. It's a good question. And it's top of mind because we're eminently -- holistically when we talk about mobile, I will say it's -- and this tech team that's leading our all-things technology, that includes our point-of-sale system. And you totally hit it on the head, which is our point of sale has to speak to our mobile and digital and vice versa for so many reasons, for data analytics and just streamline operations. So you're nailing it in the way we're thinking about the evolution and the next version of mobile is directly tied to how we think about the point-of-sale system. And even other ways to potentially order, like a kiosk.

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Operator [42]

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We have reached the end of our question-and-answer session. I would like to turn the conference back over to management for closing remarks.

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Paul Robert Hughes, Freshii Inc. - Chief Business Development Officer, General Counsel & Corporate Secretary [43]

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Great. Thank you, operator. Thanks, again, for your time this morning and for your continued interest in the Freshii story. And we look forward to providing you an update next quarter. Thanks very much.

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Operator [44]

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Thank you. This concludes today's conference. You may disconnect your lines at this time, and have a great day.