BASE FOOD,Inc. Q3 FY2025 earnings call

• Company Mission and Strategic Focus
  • Core mission: Innovate staple foods to make healthy diet accessible and routine, developing convenient, tasty, nutritionally complete affordable staple foods
  • This fiscal year's core priority: Build a robust operational structure scalable for growth from 10 billion yen to 100 billion yen in revenue, achieve full-year profitability, and improve cash efficiency, rather than pursuing aggressive top-line growth
  • Product Development Updates
  • Launched 3 new BASE BREAD flavors (Coffee, Milk, Strawberry) based on customer feedback, which have been well-received, contributing to the record low churn rate; new flavors will roll out to retail stores sequentially
  • Completed a major renewal of the cup noodle series: improved taste score from 4/10 to 6/10, matching the taste of standard non-nutritional cup noodles; discontinued the old version to make way for the renewed product, which is now available in minimum 4-packs to lower trial barriers, enabling cross-selling with BASE BREAD for subscription customers
  • Channel and International Operations
  • Own EC: Focused on improving customer lifetime value (LTV) rather than aggressive new customer acquisition; cut inefficient ad spending while maintaining roughly stable subscription order counts, achieved a record low churn rate of 5.6% (down from 9.0% in the year-ago quarter), an outstanding low for physical goods subscriptions
  • Wholesale: Total retail store count increased by 913 stores quarter-over-quarter, with expansion focused on drugstores and supermarkets (convenience store penetration is already complete); the temporary decline in same-store sales is driven by the pre-renewal discontinuation of the old cup noodle version, which management expects to reverse once renewed cup noodles launch
  • International: Pursues lean, profitable growth instead of ad-driven unprofitable expansion; follows a startup model of online trial first, then in-store expansion via existing retail partnerships to avoid heavy ad spend; Hong Kong 7-Eleven test sales are performing well, and additional store rollout has been approved; evaluating new market entry (South Korea, Taiwan, Singapore, mainland China) cautiously, prioritizing markets with high Japan affinity and short supply chains, planning to enter mainland China via partnerships with local manufacturers with existing production and distribution to avoid heavy upfront investment
  • Financial and Operational Efficiency Improvements
  • Price increase at the end of Q2 drove gross margin improvement to 56.6%; reduced cost of goods sold to 1.73 billion yen from 1.79 billion yen quarter-over-quarter via product formulation changes
  • Cut advertising and promotion expenses to 0.77 billion yen from 0.85 billion yen quarter-over-quarter in line with plan, reduced personnel costs slightly after pausing aggressive hiring following the post-IPO hiring surge, adjusted other fixed costs flexibly
  • Equity ratio recovered to 17.5% after full-year profitability progress and refinancing via long-term loans from Mitsubishi UFJ Bank, repaying short-term debt to improve financial health
  • Other Initiatives
  • Will launch a formal shareholder benefit program, upgrading from the prior simple discount coupon included in meeting notices
  • SBIR subsidy proceeds will be recorded as non-operating income in the next fiscal year, with first disbursement expected between May and June 2025

1. Own EC: 2.6 billion yen in revenue, 65% of total revenue, up 4.5% quarter-over-quarter. 2. Wholesale: 1.13 billion yen in revenue, 28.25% of total revenue, down 2.3% quarter-over-quarter. 3. Other EC (Amazon etc.): 0.22 billion yen in revenue, 5.5% of total revenue, up 0.5% quarter-over-quarter. 4. Overseas: 0.03 billion yen in revenue, 0.75% of total revenue, down 8.5% quarter-over-quarter. Total company revenue is 4.0 billion yen, up 2.2% quarter-over-quarter. Total operating profit is 0.23 billion yen (turning to profit from a -0.03 billion yen loss in the prior quarter), with an operating margin of 5.8%, up 6.8 percentage points quarter-over-quarter.

• Management confirms that the plan to achieve full-year profitability remains on track: August (the last month of Q2) achieved monthly profitability, Q3 achieved quarterly profitability, and Q4 will deliver full-year profitability as planned, with the probability of achieving full-year profitability having increased significantly
  • After completing this fiscal year's profitability transition, management targets sales growth of 10% to 30% year-over-year while continuing to improve profit margins
  • The Q4 advertising spend reduction is part of the pre-planned quarterly schedule, and management does not expect this to negatively impact the start of next fiscal year's growth

• There are no major explicit new risks disclosed, but management notes that it has strengthened overall risk management and quality assurance processes after the prior year voluntary product recall, to prepare for future scalable growth
  • Aggressive inflation creates pressure on consumer purchasing power, which may limit the pass-through of price increases
  • International expansion involves incremental execution uncertainty, so management is pursuing cautious, partnership-based entry to limit risk exposure
  • The current advertising spend reduction is focused on inefficient channels, but future sales growth will depend on continued product taste and variety improvement to reduce reliance on advertising spending

Q: Will current advertising cost suppression continue into future periods to keep lowering the ad ratio? / A: The sequential Q1 to Q4 ad spend reduction was pre-planned for this fiscal year, and is not a permanent ongoing trend. Management’s long-term strategy is to improve product taste and convenience to eliminate the tradeoff between nutritional benefit and consumer experience; as product quality matches standard staple foods, sales can grow without heavy advertising spend. However, while the company targets 10-30% top-line growth, it will maintain flexibility on ad spend based on market conditions, rather than committing to permanent deep cuts.

Q: What factors explain the strong performance of BASE FOOD at 7-Eleven Hong Kong, and what are the expansion plans? / A: Hong Kong has strong consumer demand for Japanese goods, even Japanese products that underperform in Japan sell well there, and Made in Japan has broad appeal across Greater China and Southeast Asia. BASE FOOD’s nutritionally complete convenient offering is a strong match for time-constrained business professionals in dense global financial centers like Hong Kong, which matches the product’s core market fit. Japanese convenience stores are perceived as leading retail players across regional markets, so the existing product success in Japanese convenience stores translates well to overseas locations. Additional store openings have already been approved in line with this strong performance.

Q: After a ~10% price increase, why did own EC average order value not increase by a full 10%? / A: Management never planned for a full 10% passthrough to average order value, as consumer purchasing power is constrained in the current inflationary environment, and it even expected potential churn increases from the price hike. The actual outcome of a moderate average order value increase and a large net reduction in churn was better than expected, which management attributes to improved product value that offsets the higher price. The company will continue working to lower production costs via innovation, similar to how consumer technology costs fall over time, and will maintain flexibility on future pricing aligned with industry trends.