Organto Foods Inc. (OGO) Earnings Call Transcript & Summary

Good morning, everyone. I think we're about to begin. Steve, I believe you're unmuted. You could say a word.

That's great.

Okay. Perfect.

That's great. Can you hear me, Peter, though? Perfect.

Well, okay. So I guess we'll just get started. I want to thank everyone for joining the call. I know it's been some very difficult unprecedented times. The format of the call will be a short introductory by Steve, and then we'll unmute all the lines for a Q&A. So I appreciate everyone if you could hold your question until the end. You will be on mute until the end and then we'll take everyone off mute for a Q&A. So Steve, I'll turn it over to you. Thank you.

That's great, Peter. Thanks. Just confirming again that you can hear me.

Very well.

Yes. Okay. That's great. Thanks and good morning, everyone. Along with Peter and I on the call today, we have Rients van der Wal, our Chief Operating Officer and CEO of Organto Europe B.V. I'll make the prepared comments just to bring everyone up to date, and then we'll all be available for questions. So I think with all that's going on in the world, we wanted to provide you with an update on our markets and our business operations at this time. We'll try and keep our opening remarks fairly short and to the point before opening the call up to questions, which I think is most important. And as Peter said, just hold your questions until we get through our comments here, and then we'll open it up and work through everyone's questions. Before that, though, I do want to personally wish all of you and your families health, safety as we deal with this unprecedented time in our lives. But this, too, will pass, and we will get through it. And finally, before we get going, I do need to remind everyone that commentary and discussion during this call may include forward-looking statements and, therefore, is subject to important risks and uncertainties. Results could differ materially from the conclusions, forecasts and projections as certain material factors and assumptions will have been applied in drawing conclusions and in making the forecasts or projections upon which the forward-looking statements are premised. Additional information about these material factors and assumptions as well as other risks, uncertainties and/or relevant factors are set forth under Forward-looking Statements and Risk Factors in our annual report for the fiscal year ended December 28, 2018, which is available on our website on SEDAR at www.sedar.com. So with that, on our last investor call held on February 24, 2020, we focused on current market conditions, the successful repositioning of our business over the past 18 months, our record results for 2019 and our outlook for the future. In summary, we noted that the demand for healthy, sustainable foods was strong and growing, and that remains a good thing for us. We noted that we had repositioned our business model to an asset-light from asset-heavy model, which allows for more flexible and scalable business growth with lower invested capital, which was also very positive. Our record results in the back half of 2019 were a testament to the progress we have made with our new business model. And we discussed our growth plans and the opportunities we are pursuing to consolidate the fragmented European supply market. None of this has changed. And in fact, demand in the markets we are serving has grown in recent days, and we believe that our supply chains are well positioned to meet this increasing demand. So let's shift from the call on the 24th to our current operations amid the COVID-19 pandemic. First, with the health and wellness of our personnel, customers, business partners and communities top of mind, all personnel working from our commercial office located at Breda, the Netherlands plus other international locations are working remotely and are not required to attend offices. In addition, all nonessential, business-related travel has been suspended, and technology is being utilized to facilitate ongoing communications amongst personnel and with commercial partners. Our information technology and communications systems permit full operational and administrative capabilities from remote locations, and we are working as intended by the company's continuity plan. In fact, our commercial team is meeting up to 4 times per day via teleconference to ensure coordination of all activities. Our customers are located across 10 European countries, including the Netherlands, the U.K., Germany, France, Belgium, Spain, Denmark, Sweden, Russia and Switzerland. And our suppliers are located throughout Latin America, Africa and Europe. All of these have been impacted in one form or another by the coronavirus pandemic. Most countries we serve have restrictions in place up to and including full lockdowns with schools, daycare, restaurants, bars and community institutions closed and travel restrictions and social distancing mandates in place. The focus in these locations is on keeping the essential businesses and sectors operating. The key for us is that, that includes all retail foods businesses, essentially our customers. Demand for food at retail locations remain strong throughout our European markets -- our key European markets, sorry, as consumers shift from eating outside the home to eating at home during the pandemic. While foodservice demand has fallen off with the closure of restaurants, bars and institutions, the demand for foods at retail has risen dramatically as consumers shift to eating at home rather than out of the house. The majority of our customers are serving the retail space, so that is good for us. Governments are focused on keeping essential businesses operational, including retail foods businesses. And to this point, there have not been significant disruptions in our supply chain. While some European countries have closed their borders to human traffic, to this point essential commercial cargo has not been significantly impacted and continues to flow across international borders. All of our commercial partners, both customers and suppliers, our confirmed operational and supply chains remain open for the transport of essential food product, including fruits and vegetables. Our Netherlands-based warehouse and logistical partners are fully operational with additional health and safety measures, obviously, in place. Demand for our products -- our key products is very strong, and we believe our supply chain is well positioned to continue to provide nutritious organic food products as all customers, suppliers, warehousing and logistics partners continue to operate. Every effort is being taken by all stakeholders to ensure that critical food supply is maintained during these difficult times and into the future in order to meet this increased demand. This is positive for our business, we believe. So while an incredibly difficult time around the globe, demand for our products is very strong. Customers, suppliers and service partners are operating as best as possible in an effort to maintain food supply, and our team is in place and working remotely. We expect demand to remain strong for the foreseeable future in the retail markets we serve, and all governments are focused on keeping supply chains open for the flow of essential goods, especially food. In fact, even with a country of Italy being essentially locked down for the past couple of weeks, we have continued to receive supply of organic asparagus from the country, indicative of the efforts to keep supply chains open and food on the shelves. So in summary, while everyone has been impacted by this global crisis, we do find ourselves in the enviable position of serving a market that is clearly essential and where demand is growing rather than contracting and a market that is deemed essential and will remain that way. So we're very positive. So Peter, I'll turn it back to you, and we can open up the lines.

Thank you, Steve. At this moment, I'll unmute all the lines. Please feel free to just ask a question. Please identify yourself, and we'll do our best to organize the questions and answer it. Thank you. I'm unmuting at this moment. I believe anyone can ask a question.

It's [ John Power ].

Hi, [ John ].

Hey, [ John ].

So I wanted to thank -- obviously thank you guys and the whole team for not only hosting this call but doing what you're doing in this very tricky situation that we're all in. So a couple -- So I wanted to -- a, we really appreciate it as shareholders. But I wanted to ask you, how do you use -- the capital markets are in clear upheaval. Have you thought about -- and obviously, I certainly understand the sensitivity to price gouging. But have you thought about raising prices at all just to ensure sustainability for the core business? And then I have a follow-up after that.

Peter, do you want me to take these first?

Yes. I think it's better for you to give a shot at that, Steve.

Yes. So [ John ], clearly we'll take all the margin that we can. We're dealing with suppliers who are trusted suppliers. We're dealing with retailers who are good, long-term customers of ours. We have to be honorable in the supply chain. This is a real opportunity for us to, I don't want to say, become the supplier but to entrench ourselves as a really important supplier. At the same time, here in Canada, for example, Loblaws, who are the largest retailer in Canada, have promised that they won't raise prices. And so I think everybody wants to get as much of a piece of the pie as they can, us included. We have to be careful with that and not burn bridges at a time when relationships will be deepened much greater. Rients is on the call. And Rients, you're facing stuff every day. And I know you and I have chatted about this because, [ John ], it's not lost on us in any way, shape or form. Rients, do you want to comment on that a little bit and sort of what our philosophy is there?

Yes. Thank you, Steve. Just confirming everybody can hear me. Yes?

Yes.

Yes.

Yes. Okay. Perfect. Yes. No, I think you summarized it very, very well. We -- commercially speaking, regarding the strategy, we see it as the moment to basically reinforce the relationships that we have with suppliers and customers. That being said, we are trying to be realistic because operations are quite challenging as well at the moment. But we -- well, we try to make a healthy and good margin for us as a company and making sure that, at the same time, we stand out in our performance towards our customers and suppliers.

I think just to wrap that up, [ John ], so we -- I would say that we have brought our margins up a few points, but we're having to be really careful. It's just -- I mean, just like I said...

Yes. No, no, I completely understand. Yes...

It's like the guy that went out and bought all the Lysol wipes. I don't know if that was in Canada.

Yes.

He bought all the Lysol wipes and now he's persona non grata. So just want think we'd be careful. Sorry, [ John ].

Yes. No, no, understood. Yes, I was just more thinking of capital markets get completely shut down. Then you got to survive, right?

Yes.

So -- and then the only other comment I would say related to the capital, and this is more commentary than a question, but I don't know like Blue Apron, for example, which was on the ropes a week ago, their stock has gone from like $2 to $13 because they're delivering food directly to homes, obviously. And obviously, you guys are delivering to supermarkets, but that's equally as critical. And so maybe, as horrible as the situation is around the world, maybe the capital markets will be open for Organto because of what you're doing and its importance to the world. So I wish you the best of luck, and we will stay tuned. So thank you.

Super. Thanks, [ John ].

Thanks, [ John ]. We -- this is Peter. I -- we clearly agree there's an opportunity for us. I mean clearly, the business opportunity is enormous and we just need to address that, and we're trying to address it every day. Anyone else?

Can you hear me? It's [ Mark Laveau ] speaking. I know time is precious for everybody at the moment. I just wanted to ask whether this disruption in capital markets is creating some additional uncertainty. I know that we're not quite cash flow positive yet, so we'll have a financial raise at some point in the future. I assume that's -- if that's still the case, then what contingency plan do you have in mind at the moment?

I'll take the intro part, Steve, and maybe you can add to it. I mean at this point, we're evaluating all options. Clearly, 2 months ago, we would look to a different opportunity set. Today, I think the opportunity set is even larger than we were evaluating. And I think at some point, we need to look at it, but it's something we evaluate every single day. Steve, do you want...

Yes, Peter I think that -- no, I think that's fair. And we're managing our working capital preciously as we continue to work through these. More working capital would probably position us to really go after some big, big opportunities. We're doing as much as we can and things are rolling. And as Peter said, we're evaluating that every day.

When you're talking about opportunities, you mean strategic acquisitions? Or just operating opportunities with orders and things like that?

Yes. First off, operating opportunities with just working with our growers. Rients and I were on a call last week with a large grower who had supply and was really interested. So we'd love to grab more of those operational opportunities as well. And I think as we noted on the last call, [ Mark ], we're really anxious to consolidate the European market. We've got discussions going with a couple of parties that are really interesting. And that's also -- that would require capital. But in the shorter term, it's just to seize upon the opportunities that are in front of us today and every day.

The lines continue to be open. Does anyone else have a question?

Hey, guys, can you hear me?

Yes, very well.

Yes, I can hear you, Tom.

Yes. Okay. Hey, can you just -- obviously, now you've got Italian supply chain. Moroccan, you're talking about obviously a more closer to the customer sort of logistic and supply chain configuration. So can you talk about how your cash cycles and what the returns on capital would be for those of us who are thinking around this financing and how that money gets put to work and how efficient it is in the way you guys are set up now?

Steve, it's better if you could take that. I don't know if you -- I'll add to it if I...

Yes. So [ Tom ], the perfect scenario is that the source of supply is as close as possible to where we're selling. Traditionally, our fundamental philosophy here, it was a change that came with our repositioned business model, is we don't finance growers. So we don't do a deal with somebody like we did in the past and advance a whole bunch of money and wait for them to grow the crop. Our strategic relationships that we have are with established growers. And basically, what will happen is we will pay for a percentage of that product when it's accepted by us and starts the shipping process. And we'll pay for the rest of it when it gets into our market and we're able to take it to market and we're satisfied with the quality, et cetera, et cetera. So the beauty of a relationship like Morocco on a product like avocado is that, that's a 3-day trip to Europe maybe for now if the borders aren't quite as quick, but it's still a trip and that trip will get done, versus an organic avocado coming out of Peru, which has to ride on a container and takes 4 weeks. So the closer we can be, the better in rolling our capital, and I'll get into that in a second. At the same time, if we're moving product by air, so an organic asparagus from Peru, again that's a 2-, 3-, 4-day trip. So by the time -- so we're putting cash out for a week, maybe 1.5 weeks. And then we sell the product. We factor the sales, so we collect 80%. And so the cash that is out of pocket on short supply, either fresh or products like avocado, which are fresh but have a longer shelf life, the more we can do of that, the quicker our cash turnaround is. And we've commented that look, growth takes between 10% and 15%. So for every $10 million of revenue that you want to grow, you need between 10% and 15%. The 15% is on the outside when you've got to pay for containers and they're on the water for an extended period of time and you're not factoring. And the 5% to 10% layers are if you're turning -- if you're bringing the product quicker. So the quicker we can bring product, the quicker we turn it around, the quicker the return on our invested capital. That's why we'd like to do business. The reality is, is you can't do it all that way because Morocco isn't in season all the time and Europe isn't in season all the time. And so for certain times of the year, you just got to go to other locations. We were -- on organic asparagus, we were bringing it from Peru. We're now sourcing out of Italy. It's a little bit quicker on Italy, but it's still a plane ride. It's not a real big deal. For things like our organic avocado, when Morocco season ends, our next source of supply is out of Peru. And unless we're flying it and sacrificing margin, it's got to go onto a boat. And so that takes longer and requires more capital. It gets us more in that 10% to 15% range. So that's a long answer, [ Tom ]. Rients is probably the best guy to answer it. Rients, what haven't I hit there? And do you want to add more?

I think very spot on, Steve. Not much to add there.

Okay. I don't know if that answers it, [ Tom ]. Is that what you were looking for?

Yes, yes. No, that's great. So in aggregate then, a $1 million to $1.5 million investment creates $10 million of revenues, and your margin on that is 10% to 15% or 10%, 12%?

Yes. What we've done is just from a conservativity point of view. So look, assume 10% margins. And that was how we got to cash flow breakeven, with increasing our revenues by that amount. Now here's the way it works, [ Tom ], and you and I have chatted about this a number of times. If we're selling product white label to distributors and folks, the margins are 8% to 12%, sometimes a little higher but in that ballpark. We have to have that distributor layer in place to roll out the brand. We've got some very interesting stuff happening with the brand. But branded sales, you get up into the 25% range. So -- but you have to have that distributed layer in place. And the reason for that is it's that distributed layer that can deal with the fluxes in supply, i.e., 1 week, we have 10,000 kgs of a product and the retailers want 5. Well, then, the distribution layer takes the other 5 if we don't lose our brains giving it away or not being able to sell it. And the next week, when it's higher, we've got -- or the retail wants 20 and we only have 15, then the distribution layer can act the flux there so long as we're keeping them notified. So what's key for us is to continue to move our margins up through our efforts to roll out the brand. We've been careful to roll out the brand because you don't have -- you don't want to burn your brand loyalty by shorting customers. So as our supply goes up and we get comfortable with our organic asparagus supply or our organic avocado supply, now we know that we're not going to be shorting retailers, and we go back to them with the branded product. And so that moves us to 15, 20 and beyond as the mix changes. It's the mix change that really drives the margin improvement that we'll see. So Rients, do you want to comment further?

Well, again, I think you're very much spot on, Steve. So I think to build the branded distribution, you really have to take it step by step. And you can only really build it constructively if you have the right volumes already going through our warehouses. And so you can also make the right preselections on what to go under the brand. So I think you're spot on, Steve. Everything -- not much more to add there.

All right. Thank you, guys. Thank you, [ Tom ]. Any other questions?

[ Tom ], did you have more questions?

I'll jump in the queue here and just see if anybody else has, and I'll throw another one thereafter.

Okay. Yes. Yes, okay.

Hey, it's [ John Power ] again. Let me -- a quick follow-up on this -- on that thought process that we were just discussing. How vulnerable are you to the airline industry and the potential disruptions that we're already seeing and potentially can get worse?

Rients, do you want to -- I assume you're dealing with that every day these days?

Yes. So I think what we see so far at the moment, our supply regions are mainly North Africa, Italy, Africa and a bit of Latin America. And it's a mixture between road transport, sea transport and air. At the moment, all of our air transport is coming from Africa. None of the cargo has been restricted in any way. So far, we haven't had any interruptions. So yes, I think so far, we don't see too much issues there. Of course, globally speaking, we all know that routes are being cut back, but they're not being stopped entirely. So to give you an example, if normally out of East African region there would be 2 flights 7 days a week plus dedicated cargo planes, maybe if they cut back, they will go to 7 flights a week instead of 14, and they will continue with the dedicated cargo planes. So, so far, what we really see as statements from governments, but we also feel in practice, that food distribution has a lot of priority, and we feel that in how smoothly still the road transport is going, handling at airports, handling at seaports but also the bookings from an air freight point of view.

Yes, [ John ], just to follow up on Rients' comments, from everything we're seeing, governments and business are really making food a critical priority. Like this is bad enough, but can you imagine -- and hopefully, everybody has got a couple of extra rolls of toilet paper because it seems to have had a massive run and -- but core to preventing panic is to make sure that there's food available. And everything we're seeing so far seems focused on that. I mean even with the closure of the Canada-U.S. border, the President has made it perfectly clear that it doesn't stop commercial trade, especially food. That was his exact comment.

Anyone else has a question? Or [ Tom ], we can come back to you if you have another question?

Yes. So if we were to step back here and just sort of analyze the opportunity here, and the supply chain -- the food supply chain that we have access to out there, if you could talk about an aspirational pipeline, if you will. What kind of numbers are we looking at? The -- if we were -- if we had all the money in the world right now to work this business model, the staff that we have, the expertise we have, the niche we have, what is that number like that's behind the Organto opportunity? And -- is it $50 million, $60 million, $100 million? With all these relationships that we've forged over the past couple of years, what kind of number would we be looking at?

Peter, I'm happy to take that. Do you want to take it Rients? You can take it. We all have the same answer. Go ahead.

I'll add to it.

Okay. Yes. [ Tom ], Rients would tell you that based on the supply that he has today, suppliers, pardon me, that he has today and that we know about, there's a $35 million business there, just look -- what we know with existing suppliers today. Our Morocco avocado supplier could provide us with more and has asked us to do more. Relationships that we have in Latin America today, we haven't even turned on at a great extent other than test it, that we made sure it worked, our whole organic green beans, snow pea and sugar, snap program out of. And we just -- we turned it on to test it and make sure that it was working and the supply and the quality was good, but we just don't have the working capital to do all of that right now. And so we're focused on sort of higher-velocity products for us. We have no qualms in saying that we see a $100 million organic fresh fruits and vegetables platform that can be built in Europe without doing acquisitions. We think it could be bigger with acquisitions and it can be quicker with acquisitions. But it needs working capital. And if you just use the $1 million to $1.5 million for every $10 million, you see that the investment is not massive to get there. Keep in mind like we're not investing in factories and farm irrigation and all of those sort of things. We're investing in our supply chain and leveraging our talents to work on certification, logistics and warehousing and go-to-market expertise to create that linkage. But with the supply we have today, with the people that we're dealing with today, we see $35 million. We can get there fairly quickly, and we see no -- we have models. And models are models, so I won't -- and I don't mean runway models. I mean our business models on how we grow to $100 million with our key product categories, organic avocado, organic asparagus, blueberries, blackberries, green peas -- green olives, pardon me, snow peas, green beans, snow peas, sugar snaps, ginger, mango in the core products that we're dealing with today. And there's more products that we can put into, and we will as demand dictates and as our ability to finance those plays out. Rients, do you want to jump in? I probably missed something there.

So I think, again, Steve, I think you say everything very correctly. I think the amount of -- even in the tough times that we are in today with the coronavirus, the amount of energy we have in the business amongst ourselves right now is incredible. And even today, yes, we see and we feel everywhere around us that the opportunity that we are working on is a massive one and that there's a very fragmentated market in Europe that we can consolidate. There's a growing demand for healthy foods, and it hasn't changed for a single moment with the virus. If you just look at the numbers of organic ginger, they're going through the roof, just to give you an example. So yes, I think it's a very, very interesting moment for us. I think -- well, we have an obligation today to do the best we can, to be the best we can to serve our markets correctly, to make sure that the supermarkets are filled with products that we continue to operate. I think also, generally speaking, if you look around us, there are plenty of businesses and segments where people are in a really, really tough position right now because of the crisis. For us, it's generating even more opportunities and everything. So yes, from that side, it's extremely exciting. And I think it's about capturing that energy every day and to solve challenges because, of course, operations do have their challenges in times like this but to translate it in the right way and to move the business forward. And for sure, there's an opportunity of organic growth that can take us to $35 million to $40 million already and with more time to develop it into a $100 million-plus business. And I do believe that it goes way beyond there. If you -- just take the fact that generally speaking, European retailers are between 6% to 8% of their assortment in organic fresh produce. They want to grow. Consumers want to grow. That's not going to change after today. And I think we're extremely well positioned to help everybody drives that need and that demand.

Great stuff. Owen, just maybe for the listeners on the call as well, if you want to see some comparable charts of what's going on out there in the last week, which is actually quite staggering, United Natural Foods, which I guess not long ago was a $5 stock, it's now trading at $12.5. Of course, [ John ] was mentioning Blue Apron, Kroger, all these -- Campbell Soup. It's -- the world has definitely changed. And obviously, this represents quite the opportunity. So good job, guys. Thank you.

Thanks, [ Tom ].

Thank you, [ Tom ]. We are -- we do echo that, [ Tom ]. We are seeing more business opportunities than we've seen in a long time. And clearly, we're excited about the opportunities. And we are evaluating out what's the best way for us to capitalize on that, and part of that is additional working capital. Anyone else?

Hey, Peter. A quick question, Peter. Have you looked at like crowd funding as a way to -- maybe not really for equity but working capital? It seems like all these portals have been created, and all of the products they were trying to push through those portals really isn't going to play well right now and where you guys have a business that's spot on. So have we looked at crowd funding as a way to try to access some working capital?

One of the issues -- the answer is I looked at it initially a few years ago. I have to revisit it because there has been some rule changes. We are a publicly traded company, and some of those rules may or may not apply to publicly traded companies versus private companies that generally use the crowdsourcing model. But it's a wonderful signal.

Okay. Yes. Yes, that sounds good. Let's visit on that this week when we have time.

Perfect. Thank you, [ John ].

Thanks, [ John ].

Well, if there are no other comments, we'll give it a few seconds, Steve, maybe we'll just close the call and thank everyone for their time. And I'll turn it over to you, Steve, for any closing remarks.

Yes. No, thanks, Peter. Listen, thanks, everyone, for joining. And I sincerely hope this update was helpful. I want to wish everyone all the best in these difficult times. And normally, I always like to say, "Well, I'll see you soon," but I don't know when we'll be all seeing each other. But we'll be chatting lots. And we're excited and thankful, quite frankly, that we're in this market -- in the food market versus other categories. And so it's exciting in a rather perverse way, but it is exciting for us. And we're thankful and we appreciate everyone joining us, and I wish you all safe health. Take care, guys. Thank you. Yes, bye. Bye. Thank you.