Goodfood Market Corp.

Thank you for standing by. Welcome to the Good Food Third Quarter 2021 Financial Results Conference Call. At this time, all participants are in listen-only mode. Following the presentation, we will conduct a question and answer session. As a courtesy to others, we ask that each participant limit themselves to one question. Instructions will be provided at that time for you to queue up for questions. Please note that questions will be taken from financial analysts only. If anyone has any difficulties hearing the conference, please press star followed by the zero for operator assistance at any time. I would like to remind everyone this conference call is being recorded today, July 7, 2021, at 8 a.m. Eastern Time. Furthermore, I would like to remind you that today's presentation may contain forward-looking statements about Good Foods' current and future plans, expectations, and intentions, results, level of activity, performance, goals or achievements, or other future events or developments. As such, please take a moment to read the disclaimer on forward-looking statements on slide two of the presentation. I would now like to turn the meeting over to your host today for today's call, Jonathan Ferrari, Goodfood's Chief Executive Officer. Mr. Ferrari, you may proceed.

Thank you. Bonjour à tous et bienvenue à l'appel conférence de marché Goodfood. Good morning, everyone, and welcome to this call for Good Food Market Corp.

to present our financial results for the third quarter of fiscal 2021, ended this May 31st. I'm pleased to be joined on the call today by Neil Kagi, Good Foods President and Chief Operating Officer, and Jonathan Reuter, Chief Financial Officer. Our press release reporting our third quarter results was published earlier this morning. It can be found on our website at makegoodfood.ca and on CDAR. Please be aware that we will refer to certain metrics and non-IFRS measures. Where possible, these measures are identified and reconciled to the most comparable IFRS measures in our MD&A. Finally, let me remind you that all figures expressed on today's call are in Canadian dollars unless otherwise stated. Turning to slide three, which outlines our key financial highlights for the third quarter. Our results this quarter demonstrate the continued strength of Goodfood's value proposition to our customers. The clear benefits, convenience, and differentiation of our ready-to-cook products, combined with our growing grocery selection and same-day delivery capabilities, drove strong basket sizes and order rates, translating in record revenues. Our gross profit also hit a new record as basket sizes and operational effectiveness led to fixed cost leverage and lower credits and incentives. Our last mile delivery optimization also contributed to the solid results. This strong operational performance positions us well to continue to invest in additional initiatives to attract and retain customers. Adjusted EBITDA, which was positive for the quarter, was and will continue to be impacted As we have previously communicated, by the significant strategic investments we are making in people, technology and new infrastructure to support our next stage of growth. It is important to note that our investments in footprint and new technologies impact both our capital and operating expenses. Finally, our positive cash flows from operating activities, coupled with a strong balance sheet, continues to provide us with significant financial flexibility. Overall, our financial performance this quarter has been strong, driven by our strategy, solid execution, and the accelerated penetration of online grocery and meal solutions shopping. Generating year-over-year growth of 24% and 51% in revenues and gross profit, respectively, in the context of a comparable quarter that was significantly positively impacted by the pandemic last year, is an achievement we are all very proud of. I will now turn to slide four to discuss Goodfood's evolution. Since going public in 2017, Goodfood has evolved significantly. We gained substantial scale with revenues growing from $20 million in 2017 to over $380 million today. Our product offering has and continues to evolve to better serve our customers. Goodfood has grown from a ready-to-cook meal kit company with a handful of recipes, to now building out Canada's leading on-demand grocery delivery network anchored by a 30-recipe deep ready-to-cook offering that changes weekly, a growing grocery product selection, and an expanding purpose-built footprint with currently approximately 800,000 square feet spread across nine facilities from coast to coast. This evolution has enabled us to capture a larger share of customers' food and grocery spend and penetrate larger addressable markets. Moving to slide five, as we continue our evolution, our strong execution has allowed us to make significant progress on three key pillars required to build Canada's leading on-demand online grocery network and ultimately drive our next phase of growth. First, our selection of grocery products has grown tremendously. We have added nearly 250 products in the past three months alone and are close to reaching the thousandth SKU milestone, well ahead of our initial goal to do so by the end of calendar 2021. As we continue to build the right selection for our customers, we plan on adding more produce and as well as complement our existing good food offering with select national brands for customers to complete even more grocery baskets with good food. Second, delivery speed is a key requirement of shoppers to adopt online grocery delivery. To increase delivery speed and optimize cost structure, we are in the process of building out our distributed network of centralized manufacturing and distribution infrastructure, which will feed our highly automated and tech enabled footprint of local fulfillment centers that will be close to customers. As such, In addition to expanding same-day delivery in Montreal and Toronto, during the quarter, we continued to make progress in building out this distributed network, which will provide speedier deliveries while further lowering our cost to serve. Specifically, during the quarter, in addition to our announced new automated local fulfillment center in Ottawa, we added a distribution center in Montreal that will ultimately only service Quebec and Eastern Ontario. We expect both facilities to be operational in the first half of fiscal 22. In addition, subsequent to the quarter end, we signed leases in Toronto and Montreal, the former a manufacturing site that will allow us to redistribute closer to our customer activities currently taking place at our main Hickmore facility and the latter further reducing our same day delivery window in the Montreal region. Our footprint developments will allow us to further enhance delivery speeds in the key markets of Montreal and Toronto, but also launch same-day delivery in Vancouver, Ottawa, and Quebec City in the near term. Third, we are investing significantly in our differentiated technology platform. Our internal technology team has grown from 15 people less than two years ago to 75 people today. This investment has enabled us to assemble and develop the technology infrastructure to begin automating our grocery fulfillment, develop a frictionless platform that will be open to non-subscribers in short order, develop an exciting and very well rated mobile application, and ultimately to orchestrate orders automatically. In sum, we believe that as we bring these three pillars together, Coupled with continuing to provide Canadians with their meal solutions, we are uniquely positioned to address the growing online segment of Canada's $130 billion grocery market. Before I turn the call over to Jonathan Reuter, I would like to welcome him to our executive team. Along with Greg Christopher, who joined as EVP of operations, we've added experience and depth to our executive teams and are thrilled with contributions made so far with much more to come. On that note, over to Jonathan Reuter to review our financial performance in detail.

Good morning, everyone. Thank you, Jonathan. I'm excited to have joined this dynamic team and company and look forward to bringing great convenience and quality to Canadians' homes in the coming years. I will now turn to slide six, which provides details on subscribers and revenues. The acceleration of delivered-to-home e-commerce grocery and meal solution adoption, combined with good food enhancements in delivery speed, product offering, and customer loyalty, have allowed us to achieve record results again this quarter. Subscribers grew 16% year-over-year to reach 317,000, with a small sequential decline in subscribers of 0.6%, being more than offset by continued strength of our customers' engagement with our platform. Record revenues of approximately $108 million grew year over year by $21 million, an increase of 24% compared to the same period last year. The increase in revenues was primarily driven by sustained strength of order rates, particularly at the beginning of the quarter, and basket sizes purchased by subscribers which were a result of increased product offering. In summary, more customers brought bigger baskets more often. Also, the stronger revenue growth compared to subscriber growth highlights the success of our strategy to broaden our grocery product offering to fill a larger portion of customer baskets. Please now turn to slide seven, which looks at profitability levels. A record gross profit increased to $37.7 million, translating into a gross margin of 35%. Gross profit grew 51% year over year, and gross margin grew 6.2 percentage points. The increase in gross profit and gross margin resulted mainly from fixed cost leverage provided by higher average order values, lower current levels of credits and incentives as a percentage of revenues, and also from continuing improvements in delivery unit costs, driven by the favourable cost structure of our last mile delivery initiative. We are also pleased to report another quarter of positive adjusted EBITDA, standing at $1.7 million, or a margin of 1.6%. Compared to the prior year's adjusted EBITDA of $6 million and 6.9%, the decline in adjusted EBITDA was primarily driven by the significant investment in G&A expenses which we are making to expand our technology, grocery, fulfillment, supply chain, and management teams to support the next phase of our growth. The combination of these factors led to a net loss this quarter of $2 million, the equivalent of 3 cents per share, versus the prior year's net income of $2.8 million, or net income of 5 cents per share. Turning to slide eight for review of cash flows and capital expenditures. We generate cash flows from operating activities of $1 million for the third quarter of this fiscal year. This was enabled by our attractive negative working capital structure combined with a growing scale. Compared to last year, cash flow from operating activities has come down primarily as our investments in operating expenses have led to higher net loss. Capital expenditure for the third quarter we're approximately $5 million or 4.7% of our Q3 revenue. They are mainly related to equipment deposits, leasehold improvement to new and existing facilities, and the build-up of parts of our technology platform. For fiscal 2021, we now expect to invest approximately $20 million in capital expenditures to build our fulfillment infrastructure for same-day delivery of approximately 4,000 SKUs across the country. and further increase our automation and technology platforms. We continue to expect our fiscal 2022 CapEx investments to be meaningfully higher as we roll out same-day delivery to more and more Canadians, focus on automation to reduce our cost to serve, and continue to enhance our technology platform while advancing other initiatives as detailed in the use of proceeds section of our latest MD&A. Lastly, We ended the quarter with cash and cash equivalent of $157 million, which continues to provide significant balance sheet flexibility to execute our growth strategy. Finally, we'd like to turn to slide nine to provide conclusions and discuss our outlook. We are very proud of our record revenues and gross profit generated this quarter. Along with a strong year-over-year growth in the context of a quarter, which was significantly positively impacted by the COVID-19 pandemic last year. We are even more pleased with the key developments that highlight the progress made in our evolution to building Canada's leading on-demand online grocery network. As we set our sights for fiscal 2022, the selection, speed, footprint, and technological developments achieved this quarter have us very well positioned to benefit from the value proposition we are building to further entice Canadians in adopting online grocery delivery. Turning to the near return, as you may recall, our fourth quarter is impacted by seasonality. Our last year's fourth quarter saw a mild seasonal decline in revenues as our historical seasonality impact was partly muted by the positive impact of the COVID-19 related commerce restraints We now expect, as these restraints have been lifted throughout most of the country, the normal seasonal effects of the summer months, along with the ongoing vaccination rollout, to impact fourth quarter results. With that said, looking to 2022, we expect e-commerce grocery and meal solution shopping to continue growing at a fast pace. I believe we are setting the stage with good food to continue household penetration growth. In summary, our main priorities remain building the right selection of products for our customers, coupled with a technological platform that reduces friction points and provides our customers additional flexibility, while further building out our distributed fulfillment network to increase speed of delivery. Taken together, we believe these three pillars will build Goodfood's leading on-demand online grocery network in a market still in its early days. On that note, I will turn it over to the operator for the Q&A portion of the call.

Thank you.

As a reminder, to ask a question, you'll need to press star 1 on your telephone. Our first question comes from Martin Landry with Stifel. Your line is open.

Martin, I don't know if you're speaking.

We can't hear you. Hi, good morning. Can you hear me? Loud and clear. Good morning. Good morning. Sorry about that.

Congrats on the quarter and welcome, Jonathan, to the team. My first question is on the grocery opportunity. There's lots of discussion on grocery opportunities. but it's difficult for us to measure your growth in that channel. I, uh, I was wondering if you could share any data that could give us some, you know, an order of magnitude of progress, like non meal kit revenues during the quarter or, or discuss the growth rate of your grocery revenue, anything that you're willing to share would be helpful.

Yeah. So, uh, we had previously, um, discussed our kind of non-meal solution revenue being in the 10% range of sales. Because of the great growth that we've seen in meal kits over the past 12 months, that range is still accurate today. As John mentioned during our prepared remarks, we've seen... You know, we're kind of expecting and planning to hit the 20% of sales mark for the grocery product lines in the short term. And so as we prepare to launch these local fulfillment centers that we've talked about, such as the one in Ottawa, that are going to be well equipped for fulfilling our growing selection of SKUs. as well as the launch of our new digital experience that will allow customers to engage with our grocery products without needing to sign up for a meal kit subscription. Those factors combined with the growth of our selection, which we've made great progress on this quarter with the launch of 250 products, that's setting us up to see the business get close to that 20% mark during 2021. fiscal 22.

Okay, so just to be clear, do you expect to have fiscal 22 sales, 20% of sales coming from non-meal kits or just hit that run rate inflection point at some time during the year?

Yeah, I would say on a run rate basis, I think we can expect to hit that level sometime in fiscal 22.

Okay, that's helpful. And then just my last question would be on your rolling out of same-day delivery in Ottawa, in Quebec City, in Vancouver. any tidbits you can give us on timing of the rollout of these services in these cities would be helpful.

Yeah, hey, Dr. Anthony. Morning. Timing on it, we're doing a lot of work over the last quarter and Q4 to prepare for what you know is our, you know, kind of back to school and heavy period throughout Q1, Q2, and Q3. So, you know, You should see an acceleration of the rollouts of cities over the first half of fiscal 22 and hopefully even faster during the second half of 22.

Okay, Neil, just to be clear, which cities are you going to have offering same-day delivery in the first half of 2022?

The ones you mentioned should be on track for first half.

So Ottawa, Vancouver, and Quebec City. Okay. Okay, perfect. Thank you.

Thank you. Our next question comes from Frederick Tremblay with Desjardins. Your line is open.

Thank you. Good morning. So first question for me is on, Jonathan, you touched on eventually opening up the platform to non-Milkit subscribers for the grocery business. Can you help us just understand which milestones or which steps still need to be achieved for that to be launched? And I was wondering if that's also... dependent on you guys supplementing the current offering with national brands, which is also something that you mentioned. So are those two things related or they're two completely different initiatives?

Yeah. Thanks for the question, Fred. So Our entire strategy here was built around all of the feedback and the data that we've gathered from our WOW customer base. That's kind of the closest proxy that we have to grocery first customers. So looking at that feedback, we've mentioned in previous quarters that the most important request that they have to turn good food into their weekly grocery shopping destination is to see the growth in assortment and SKU count. So that's why we're really pushing on accelerating the growth of our SKU count. In order to service that larger SKU count, we need to have our facilities set up locally in the cities that we've mentioned in order to be able to service the grocery basket. with a high pick and quality perspective and an optimized cost to serve and last mile delivery fee. So that's kind of the other piece. And then the last piece is just adapting our digital customer experience to be able to kind of guest browse on our website and check out with or without a meal kit subscription. So those are the three pieces that we'll see coming together during fiscal 22. And we'll be rolling that out in select markets across the country. I think the exciting piece there to understand is we're really opening up our customer pyramid to have different levels of engagement within our customer base. So our highest engagement customers are well-suited to the meal kit subscription, right? To receive a weekly or bi-weekly delivery of meal solutions and meal kits directly to their home. For our medium and lower engagement customers, the meal kit subscription tends to be not well adapted to their needs. It tends to create friction for that set of customers. So our intent is to make sure that we keep a very attractive meal kit subscription opportunity for our high engagement customers for whom it makes sense. and then open up our customer pyramid to be able to generate a significant amount of our revenues from our medium and lower engagement customers, which in other retail environments can create kind of 50% of sales in certain other retailers within those two sections of their pyramid.

That's really helpful. Thanks for that. Last question for me would be on the inventory front. We saw it was essentially stable sequentially at $14 million despite you guys adding 250 products. So curious to hear your thoughts on, you know, inventory management and how you've been able to repeat the, uh, the inventory where it is despite the significant growth in the product selection and sort of what we can expect going forward with, uh, with inventory management and working capital.

Sure. Thank you for the question. It's Jonathan here. Um, From an inventory perspective, well, first of all, our inventory will continue to grow as we continue to add additional products in the grocery front. That being said, the turnover continues to be in line with historical quarters. And as we add more facilities, as I mentioned, inventory will keep on growing. We have systems in place and processes in place to manage inventory. our inventory and ensure that it continues to turn at a rate that's attractive. Ultimately, this all comes back to our attractive negative working capital model. And we continue to foresee that model to keep on working. As you know, our customers pay us once we ship the product. And with our suppliers, we have obviously days to pay them. So we're really excited with that negative working capital model to continue as we go forward.

Great. Thank you.

Thank you. Our next question comes from Ryan Lee with National Bank. Your line is open.

Hi. Thanks for taking my questions. Good morning, guys. Just had a few questions at this point. Can you talk about the inflation trends that and what you're seeing from the cost perspective and which buckets are seeing the most impact. I know that's a topical item. You can go into some more details on that. Obviously, your gross margin rate is still

Yeah, hey, Ryan, it's Neil. Thanks for the question, and good morning. You know, as you said in previous quarters, we see the same inflation that the rest of the food industry or the rest of the e-commerce industry sees, so we're not immune to any of the trends that you experience and hear about from other companies. Ryan, could you go on mute? Actually, your typing, I think, is... quite loud in the background there. Thanks. So as I was saying, we're seeing the same inflation that most other players in the industry see. We do have the benefit of being able to adjust menu several weeks and months in advance when we do see outsized inflation in specific parts of input costs at least. We also passed along a price increase during the quarter to offset some of the inflation that we were seeing that we thought was more structural and going to stick around for a long time. So overall in the food front, we think we're well under control and performing well. Obviously, gross margin 35% of the quarter wouldn't be possible without good cost control on that side. The other problem, place that we see right now is the labor side. As the economy reopens and demand for lower skilled labor picks back up, it's been more and more difficult to attract and retain workforce in certain parts of the country. So we've had to adjust wages in certain facilities. Usually those adjustments stay around. We're not going to go and increase and decrease in in six months from now, so that would be the other bucket that we have a close eye on.

Okay, thanks for that, and then my last question is kind of related to CapEx spend and some of the facilities. Can you provide an update on the Toronto facility when that's looking to come up and running as well? I think Jonathan Reuter was saying that The capex was about, the plan is about 20 million this year. Is that down slightly from the prior figures that you guys were looking at, like 25 to 30 million for the year? And lastly, like on the new smaller facilities, what kind of footprint is that? What kind of level investment are you looking at for the Quebec City and Vancouver locations?

Yeah, let me try to get all those. So first off on CapEx for 21, the previous guidance I think was 20 to 30. So we'll be within that guidance probably at the lower end of the range, mostly based on CapEx, OpEx split, timing of some of the investments, and just lease signing, et cetera. So that's where we'll end up most likely for 21. For 22, it'll be significantly higher than that. As I was saying to Martin's question, we're going to significantly accelerate the rollout in a lot of different markets, which will necessitate a higher capex spend. On the Toronto facility, no major updates from the update we gave last quarter. We've shifted resources to enable same-day delivery in more cities. That's proving to be the right strategy. Construction delay is still kind of outside of our control, but like I said, in line with the last update. We've shifted a lot of the internal engineering tech and resources towards the distributed network, as Dejohn mentioned on the prepared remarks. I think that covered all your questions, Ryan. Was there one more?

Yeah, just maybe a quick update on those smaller facilities for the same-day delivery capability, like what level investment are we looking at for these locations?

Yeah, we don't want to break out the investments per facility quite yet, but we'll have some updates through the first half of fiscal 22. What I can say right now is significantly more capex spend in fiscal 22 versus 21. You know, we have $160 million almost on the balance sheet plus significant debt access. So we're excited to put that capital to work at very, very high ROIs. Okay, great. Thank you so much.

Thank you. Our next question comes from Grammy Crindler with A Capital. Your line is open.

Hi, good morning, and thank you for taking my questions here. I wanted to follow up regarding the comments about seasonality into Q4 and get some thoughts about reopening trends and how it may impact the business moving forward. I'm curious if you could talk about that with respect to you know, the potential subscriber growth heading into Q4, what you're seeing to date, as well as the average revenue per spend, you know, that's had some good growth in Q3 year over year. I'm wondering, despite some of the listed restrictions here, whether you're still seeing some durability in terms of some of those stay-at-home trends with consumers. Thank you very much.

Good morning, Graham. Thanks for the question. So we're quite pleased with the Q3 results that we reported. We started comping to the like COVID quarters 12 months ago. So seeing kind of over 20% revenue growth as the vaccination was progressing well in Canada during our Q3 of 21. and comparing to kind of a COVID bum quarter last year and seeing that nice year-over-year growth, I think puts us in a really great place. We feel quite confident that the digitization of the food and grocery industry in Canada remains at its very early days. we're still seeing over 90% of food and grocery sales being done in brick and mortar stores. And so we expect that over the coming years, that number will shift pretty dramatically online. Q4 is a, seasonally weak quarter for us. We didn't see that full seasonality last year because there was no vaccine and restaurants and the general kind of travel and economy were mostly closed last summer. So there will be a kind of a seasonal impact at Q4 and some progress on the vaccine rollout and reopening of restaurants. which contributes to customer demand certainly rising within the brick and mortar channels in Q4. We are continuing to see some really strong basket sizes. So the strategy of growing our selection, accelerating our delivery speed creates more demand. opportunities for customers to find what they're looking for at Good Food and to have bigger baskets, which is positive for both revenue and gross margin. And our churn continues to be at record low levels. And so we're really pleased to see that retention and engagement from our existing customer base as well.

Okay, understood. Thank you very much for that. And then just as a quick follow-up, with respect to the 4,000 skew, longer-term goal. Is there any specific timing that you've put in terms of reaching that goal and does the inclusion of national brands, do those national brands, are they included within that 4,000 figure? Thanks.

Yeah, so we have built our fulfillment center footprint both in terms of our centralized distribution facilities as well as our local fulfillment facilities. Both of those pieces of our network have been built for approximately a total of 4,000 SKUs. As part of those 4,000 SKUs, we do expect to have a percentage of those be third-party or national brands. Some of those third-party brands might be large national brands that have very strong market concentration. Some of them might be a way in which we can provide some local products in different cities that we service. It's important to note as well that the 4,000 SKUs that we're talking about, the total count will be the same across all of the regions that we service. but the actual SKUs will be adapted to each regional market. So it won't necessarily be the same, or in fact, it will not be the same 4,000 SKUs in each of the markets that we're servicing. And so we're quite proud with the progress we've made there. 15 months ago, we had essentially no grocery products. Today, we're hitting close to our 1,000 SKU count. well ahead of what we were projecting for calendar 2021. And we're very close to that inflection point where we'll have a critical mass of SKUs that will enable our customers to do most of their weekly shop with us. And that'll probably happen somewhere between the 1500 and 2500 SKU mark. So we don't actually need to get to the full 4000 SKU. before having that inflection point and the vast majority of what our customers need for their weekly shop. So we're really pleased with that progress there.

Okay, understood. And if I could just sneak one more in. In terms of bringing on third-party or national brands, how is that process going? Are you getting lots of inbounds from these brands who want to be on the Good Food platform? Is there a lot of active outreach from the good food side? What's that look like in terms of the mix of inbound versus outbound?

Certainly, 15 months ago, it was entirely our team that was reaching out to find suppliers and ultimately products that wanted to be part of our assortment. Today, the table has shifted, right? And we have hundreds if not thousands of products and suppliers that are reaching out to us to have their products listed. And that includes both private label products and branded products. One of the interesting things to note about the branded products is that many of these branded product companies are interested in building out a digital strategy and finding ways to reach kind of younger digital savvy consumers. And so there's some interesting potential there for brand partnerships and ultimately for monetizing some of those relationships with the branded product companies.

Got it. Appreciate the call. Thank you very much.

Thank you.

Our next question is from Luke Hanna with Canaccord Genuity. And we would like to remind everybody, to please keep your questions to one question and one follow-up. Luke, your line is open.

Great. Yeah, thank you very much. Good morning, everyone. I just wanted to, I guess, dig a little bit deeper into your marketing spend. And specifically, I'm curious if you can share anything on how specifically you've been able to become more efficient in that spend. Is it a matter of sort of selecting the right mediums where you're starting to see better conversions of your dollars into customers that are attracted to the platform? you know, anything that you can shed some light on and maybe how that's evolved and how you sort of plan on evolving that strategy, I guess, over the balance of the next 12 months.

Awesome. Good morning. So in terms of our marketing strategy, we've been really nimble during this reopening and kind of roll out of vaccination progress. And so we've been nimble in a couple of different ways. One is the composition of our marketing spend between incentives and media. That's kind of one area where we try to be flexible to generate kind of the best results on our marketing spend. And then the second piece where we're being flexible is and really nimble is Within our media spend, we're going where our customers are. And so in times where the economy is more closed, people are more at home, we're focusing on those at home marketing channels like our TV spending and our digital channels. While during the summer months and rolling out of the vaccine, we're focusing on more of those out-of-home channels like radio and billboards to be where our customers are. We're continuing to see great paybacks on our marketing spend, primarily driven by um, uh, you know, our record retention rates with our customers and a great increase in progress in our basket sizes.

Okay. That's helpful. Thanks. Um, and then my, my second question, um, I saw in my, my inbox of last night, I think it was, um, that you guys are introducing a new pricing model where there's going to be, I think, a delineation or a separation of the delivery fee component and the service fee component. outside of, I guess, what was already included in the cost of the actual meal kits before. And then as well, you're reducing the minimum orders on, I think, Good Food Wow deliveries. So I guess my question is what sort of drove the move to that? And it's very early days, obviously, so we don't know how exactly that's playing out. But what's informing your move to that? Is that something you decided internally, you know, it's within your ability to be able to do so and do so profitably that you decided to do this? Or are you sort of taking this as a response to maybe what's going on in the marketplace today?

A great question. Thanks, Luke. And I'm happy to see that you're reading our marketing material. So we are testing out within our member base, splitting out kind of the delivery portion of what the customer is paying versus the product level pricing. The reasons behind that are twofold. First, it's become somewhat of an industry norm to split out the delivery portion versus the product level pricing. And so kind of trying to align with the way that customers are becoming used to seeing that pricing structure is one piece of it. The second piece of it is We're really trying to ensure that our product level pricing is comparable or at a discount, right, to the conventional banners, or I would say at a pretty significant discount to the pricing of conventional grocery banners. And so that split is made more obvious to our customers by kind of clearly showing them what part of the pricing that they're paying is related to the product level pricing versus the delivery pricing. And then the second piece to that as well is having a delivery fee baked in, I think, makes larger baskets more attractive to customers, to be able to amortize a little bit of that delivery cost over a larger basket, which is something we'd like to incentivize. And then it also makes our WOW value proposition even more attractive to have those delivery fees be waived through our WOW monthly subscription. So these are things that we're testing out. And as you said, it's very early days, but we're looking forward to getting some customer feedback around that and ultimately trying to maximize the value perception and the price perception from our customers, as well as the economics of the business model.

Okay, thanks. Sorry, very quickly as a follow-up, is that something you're doing across your entire member base right now or just in certain geographies?

We like to roll it out on a progressive basis. And so kind of assuming the results are positive, it kind of gets rolled out on a more wider basis. Perfect.

Okay. Thank you very much.

Thank you. Our next question comes from George Dume with Scotiabank. Your line is open.

Good morning, guys, and congrats on the quarter. John, I think last conference call you had some commentary on the new customers acquired during our January promotion. So, just wondering how much of those remain active today? Do you think that's been a successful kind of promotion? Maybe on a smaller magnitude, but do you plan on doing more of those?

Hey, good morning, George. a few things from that January promo. So we continue to see, um, uh, churn at an all time low. So yes, uh, um, you know, vast majority of those customers, uh, are still with us today. That's kind of the, uh, first point. Uh, second point is, um, uh, as we grow, um, Our SKU assortment, we're seeing the attachment rates rise, kind of percentage of our meal kit customers who are also purchasing groceries. So that continues to rise. And the last piece is if you look at our grocery revenue per active customer that's buying groceries, that's also growing at a really fast rate. When we look at these three items and the data and the feedback that we have from those three items, it does lead us to believe that our January promotion was highly effective in helping push our grocery strategy and adoption forward. And if we ever were to repeat a similar strategy, the most important thing for us is to ensure that the quality of the experience that we deliver during that promotion is flawless. And so the biggest challenge that we had was really the stress that it put on our operations and our facilities. And so that's something that we would have to solve before doing a similar initiative again.

Okay, thanks. And just for my follow-up, I know you guys have a pretty ambitious plan to grow across Canada, but at what point does it maybe become more creative to deploy some capital towards a share buyback, given the valuation differential with some of our public competitors out there?

Yeah, I... you know, certainly looking at, uh, our share price and, and our trading multiple, um, you know, we're trading at a discount, a significant, uh, discount to HelloFresh, which trades at a significant discount to, uh, other, uh, e-commerce and food delivery companies. So there's, there's clearly, um, uh, value there, right. And, and kind of thinking about, uh, how we get our, our valuation and our stock price to perform better. Um, Right now we have some highly accretive investments in terms of ROI. And so we remain focused on building out our skew assortment, accelerating the delivery speed through our distributed network and all the technology investments that we've mentioned. And as that kind of scales and rolls out, we'll continue to consider other ways in which we can create value for our shareholders.

Thank you. Our next question comes from Michael Glenn with Raymond James.

Your line is open.

Hey, good morning. First question, so when you put out the press release for the facility in Ottawa, it highlighted some specifics with respect to an alignment with Microsoft. Is this a big difference versus how your other warehouses are operated? I'm just trying to understand. how the interaction with, there's a lot of references to Microsoft in that press release, just trying to understand that a little better.

Yeah. Hey, Michael, it's Neil. You know, we've been working with Microsoft for several years now. I can't tell you exactly when we started the relationship, but, you know, with the growth of online grocery and the success we've had with our customer base in Canada, Microsoft has been, you know, increasingly excited about, working with us. So, you know, just expanded scope, joint press release, and we're looking forward to doing R&D with them in the future. We've gotten the teams much, much closer and are pushing what they can do, and they're pushing what we can do. So it's a great partnership. Okay, so that wasn't a new initiative.

That was something that was already in place then?

Some new, for sure. Like I'm saying, like the pushing their systems and them pushing our team to get the most out of specifically the AI pieces of their platform are part of the recent discussions, but we've been working with Microsoft for several years. Okay.

And then, Jonathan, maybe correct me if I'm wrong, but is what you're seeing in terms of, I'm just trying to understand the overlap between the meal kit business and the good food wow. It sounds like the way you're looking at things, there's not much overlap. Maybe correct me if I'm wrong on that, but is the customer base really quite distinct?

Yeah, so we, I guess if you're thinking about overlap from a product perspective, there is a lot of overlap. It's primarily a difference in basket composition. So our weekly meal kit subscribers are ordering meal kits first, right? So that's like the bulk of their basket is meal kits. And they're engaging with our grocery assortment as add-on products, right? Like if I'm ordering my meal kit, I might order a couple items for breakfast, or I might order some good food olive oil to make the meal kits. So they're add-on items. which help us grow our basket sizes and our margins and revenue per customer. So it's an AOV play on that front. From the WOW perspective, we're seeing, I would say kind of close to 50% of the WOW basket be groceries and 50% of it be our meal solutions. So if we kind of project that forward based on our expectation of our growth of WoW subscribers, that's kind of how we get to our expectation of seeing kind of overall 20% of the business hit that revenue from grocery products sometime in fiscal 22. And so the meal kits and the meal solutions are still core to the basket within WOW. Even within our customers that are going to be grocery first, the meal kits are an incredible differentiator. It's a value-added product for our customers and it really simplifies our customers' weeknight meal routine. But the basket composition is more skewed towards groceries and it creates more reasons to engage with good food. So the intent is to have lower churn, higher order rates, and then the basket sizes, the basket composition look quite different than what it is today.

Okay. Thanks for taking the questions.

Thank you. Our last question comes from Paul Treiber with RBC Capital Markets. Your line is open.

Thanks very much. Good morning. Just want to delve into a little bit of subscriber growth and the changes you're seeing there. I mean, you mentioned a couple of times that churn is at record lows. So can you just break down the growth in subscribers between either new subscribers and churn and how you see those trending over the next couple of quarters?

Certainly, as we've been progressing through this vaccine rollout and reopening of the economy, combined with the summer seasonality that we typically see in our Q4, most of our sales and orders are indeed coming from existing customers rather than new customers. And so we've been focused on really building three pillars to our growth strategy. So the one that was primarily driving the good food business over the first few years was increased penetration and subscriber growth across the country. We have since built out those two extra pillars of growing our basket sizes. as well as growing engagement rates with our existing customers. And so during periods of kind of seasonal weakness, the focus is really on engaging our existing customers and growing basket sizes through new products and accelerated delivery speeds. And then turning to fiscal 22, the intent will be to acquire the grocery first customers in a, in a pretty significant way. And so kind of within the first half of fiscal 22, we'll be able to give you some more specific updates on that front, but that'll be a huge driver of growth in our business. You know, as we know that the meal kit business in Canada continues to have an exciting total addressable market, right? It's a few billion dollars of TAM for sure. This shift into being grocery first is going to put us in a market with $130 billion of TAM. And I think we have a really unique way to carve out a market position for good food there. So I have a really unique offering within that $130 billion TAM. And we also expect that our strategy will deliver some of the best gross margins and ultimately EBITDA in kind of the grocery delivery business in the world.

And with your new planned frictionless platform, opening that up to non-subscribers, in the longer term, do you see revenue growth decoupling from subscribers or do you think it would always be the e-grocery or meal kits, do you think it would always be a highly subscriber-driven business?

Yeah, I think to a large extent, the decoupling between subscribers and revenue growth has already happened because of that increase in kind of the basket sizes and the engagements that we've been able to demonstrate through our strategy and execution on that front. I think longer term, the best way to think about the business will be on a quarterly active customer base. And so customers will choose to engage with us in different ways, right? It could be off subscription, it could be on a meal kit subscription, and it could be on a WOW monthly subscription. And so the way that we are really thinking about it is kind of quarterly active customers as being the best way to think about our customer base.

Okay, thank you for taking my question.

Thank you. There are no other questions in the queue. I'd like to turn the call back to management for any closing remarks.

Thank you for joining us on this call. We look forward to speaking with you again at our next quarterly call.

This concludes today's conference call thank you for participating you may now disconnect.