Goodfood Market Corp.

Welcome to the Good Food second quarter of fiscal year 2022 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 and one follow-up. Instruction will be provided at that time 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 zero for operator assistance at any time. I would like to remind everyone that this conference call is being recorded today, April 14, 2022, 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 2 of the presentation. I would now like to turn the meeting over to your host for today's call, Jonathan Ferrari, Good Food Chief Executive Officer. Please go ahead.

Thank you. Bonjour à tous et bienvenue à la telle conférence de marché Good Food. to present our financial results for the second quarter of the 2022 exercise, closing on March 5th. Good morning, everyone, and welcome to this call for Goodfood Market Corp. to present our financial results for the second quarter of fiscal 22, which ended this March 5th. I'm pleased to be joined on the call today by Neil Kagi, Goodfood's President and Chief Operating Officer, and Jonathan Reuter, Chief Financial Officer. Our press release reporting our second 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 with 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. I will now turn to slide three, which outlines the progress and developments relative to the three key value-creating drivers of good food. During our last call, we outlined the three key strategic initiatives our execution is focused on and that will drive long-term shareholder value. One, we are growing our on-demand active customers. Two, we are expanding our on-demand coverage by launching high return on invested capital micro-fulfillment centers, and three, we are improving our profitability and cash flows. Expanding on these priorities, firstly, we continue to spin our flywheel through the growth of our on-demand active customers. On-demand active customers more than doubled, reaching 27,000 this quarter from 13,000 in the first quarter. As we continue to roll out our marketing initiatives and build coverage, we aim to increase both the penetration of Goodfood's on-demand offering and the frequency of orders placed by our shoppers. Our customers are absolutely loving the flexibility of our 30-minute on-demand offering, and with a cult-like following of our exclusive good food products, we have found the recipe to capture a significant share of wallet. Secondly, to grow the number of on-demand active customers, we will expand our footprint of on-demand micro-fulfillment centers, or MFCs. Our hub-and-spoke fulfillment model is well-advanced, particularly at the hub level. The spokes, our low-cap ex, high-return local MFCs, have grown in count as we now have six operational facilities and we will continue to grow that number. With the new facilities in Ottawa, Toronto and Montreal now open, we are both increasing the availability of our on-demand delivery service to more Canadians, as well as increasing the density of our deliveries to further enhance their unit economics. Thirdly, we will continue to focus on improving our cash flow and profitability levels and look to achieve progressive improvements in margins and cash flow from operations. Despite difficult operating conditions, we were able to preserve our gross margin by offsetting input cost inflation and oil price impacts through operational improvements. In addition, we reduced our adjusted EBITDA loss through SG&A efficiencies, and had a $5 million improvement in cash flow from operating activities this quarter compared to the first quarter, or a $10 million improvement in cash flow from operating activities compared to the fourth quarter of fiscal 2021. As we will detail later on this call, more improvements to adjusted EBITDA are planned and being implemented as our return to profitability is a key strategic value driver. Overall, Given the challenging operating environment, we are pleased with the progress made against our core strategic initiatives this quarter. The exciting growth and developments in our on-demand offering demonstrate that delivery time and exclusive assortment will be key catalysts to online grocery adoption and Goodfood is uniquely positioned. On that note, over to Jonathan Reuter to review our financial performance in detail. Thank you, Jonathan, and good morning, everyone. I will now turn to slide four, which provides details of our top-line performance. Quarterly active customers during the second quarter were stable at 249,000, a 3% decline compared to the fourth quarter of fiscal 2022. Net sales were $73 million for the quarter, a 6% decline compared to last year. The active customer counts and net sales were the result of two key factors. First, The second quarter has four less days compared to the first quarter. And second, the seasonality of the holiday period returned this year compared to last year, with the two weeks around Christmas and New Year's seeing lower order rates and active customer additions. As our evolution into an on-demand online grocer and meal solution provider continues, we expect on-demand active customers to be driven by the adoption of our quick commerce delivery of grocery and meal solutions. and ultimately driving net sales growth. This quarter, we reached 27,000 on-demand active customers and $34 million run rate sales before credits incentives from our on-demand offering. As current micro-fulfillment centers ramp up over the coming quarters and new ones continue to be launched, we expect our on-demand strategy to progressively drive our top-line growth over the coming quarters and years. Please now turn to slide five, which looks at our profitability levels. Our profitability levels were stable this quarter with improvements achieved on adjusted EBITDA, cementing our commitment to progressive profitable improvements. Gross margins were stable at 24% with operational efficiencies achieved by the team and labor costs offsetting increased input costs driven by global inflation and increased delivery costs, driven in part by rising oil prices. While overall gross margins were stable, our meal kit gross margins improved nearly 120 basis points since the first quarter. Turning to adjusted EBITDA, our lost position improved by $1 million as we reduced our SG&A costs by $2 million this quarter versus the previous quarter, and $4 million since the fourth quarter of fiscal 2021. or $60 million on an annualized basis compared to that quarter. Included in this number is $12 million annualized headcount-related savings hitting our previously announced multi-quarter headcount reduction effort expected to generate, at the time, an incremental $11 to $13 million of annualized savings. I will now turn to slide 6 for a review of our cash flow and capital expenditures. Cash flows used in operating activities totaled $14 million this quarter. a significant improvement compared to $19 million use of cash from operating activities in the first quarter of fiscal 2022, and $24 million used in the fourth quarter of 2021. It's important to note that improving our cash flows can be achieved both through improvement in profitability and improvement in our management of balance sheets. As you can see here, through better working capital management, as well as improved gross margin and lower SG&A costs. we have reduced our cash outflows from operating activities by $10 million since the fourth quarter of 2021. While we are pleased with the progress made to date, we will aim to continue improving our cash flow position in the coming quarters to ensure we have the financial flexibility to execute on our on-demand growth strategy. We also invested $15 million in capital expenditure this quarter. The capital invested was mainly related to equipment, deposits, lethal improvement to new and existing facilities, and the build-up of part of our technological platform. A significant portion of these investments relate to footprint initiatives made in previous quarters with payments only going out this quarter. These investments are acting as a cornerstone to build a physical and technological infrastructure to support the scaling of our on-demand delivery network in Toronto and Montreal, as well as the recent launch of our on-demand deliveries in Ottawa. In addition, investments to open our digital platform to non-subscribers are also part of our cap expense. We are pleased to say that our platform is now open to non-subscribers and that customers in Toronto, Montreal can come to our website and place an order with good food without having to subscribe. This initiative unlocks a significant new potential revenue stream for the business. Lastly, we ended the forwarded with cash and cash equivalents of $106 million in addition to the revolver availability, which continues to provide significant balance sheet flexibility to execute our growth strategy. I will now turn to slide seven to review our path to profitability. Our path to profitability goes through our three key value drivers. One, growing on-demand active customers. Two, growing our footprint of MFCs. And three, improving cash flow and profitability. First, Profitability will be driven by building scale within our on-demand grocery and meal solution network. Beginning with our quarterly active on-demand customer base, with less than six months of launch, we have already reached over 27,000 quarterly active on-demand customers. I believe that once we reach between 50,000 and 75,000 on-demand active customers, we'll see the scale in orders that will generate net sales required to break even at an adjusted EBITDA level. Second, To reach those levels of active customers and provide a high level of quality and execution, we expect to require 10 to 20 micro-fulfillment centers. The lower end of the range would support gaining significant coverage in order to attract the on-demand and active customers targeted, particularly in the key cities of Toronto and Montreal. The higher end of the range would enable edging towards a higher number of deliveries per hour that would in turn support bolstering on-demand unit economics. Third and most importantly, our road to profitability currently requires approximately $45 million of annualized adjusted EBITDA improvements, which we aim to capture through a series of initiatives that we are calling Project Blue Ocean. The key drivers of our improved financial position, in addition to the revenue growth provided by growing our active on-demand customer base, will be, one, simplifying our business by optimizing our footprint, outsourcing the manufacturing of certain products and rationalizing our product offering in certain areas. Two, optimizing our pricing across all products, meal kits, ready-to-eat meals, and grocery products. And finally, three, clean sheeting our selling general and admin spend from the ground up to ensure alignment with our key strategic goals and our net sales base. Today, halfway through the third quarter, I am optimistic with the progress we're making on the journey back to profitability. In April, we implemented an additional SG&A cost reduction totaling $12 million of annualized adjusted EBITDA improvements over and above the previously disclosed and completed $12 million headcount reduction performed in the second quarter. In addition, we have also begun to take measures to further optimize our manufacturing footprint, leverage lower-cost manufacturers for some of our ready-to-eat meals, and optimize our pricing positioning with the aim of improving our cost structure and make further important inroads towards a $45 million of annualized adjusted EBITDA improvements required to bring the company back to positive adjusted EBITDA. On that note, I will turn it back to John Ferrari to provide an update on our on-demand strategy and our outlook. Thank you, John. I will now turn to slide eight. We are excited with the developments highlighting the progress we've made in our strategy to build Canada's first integrated on-demand online grocery network. The metrics we have observed since the launch of our on-demand grocery delivery reaching customers in as little as 30 minutes remain ahead of our expectations across adoption retention rates as well as unit economics and we look forward to building on that momentum. We have now reached 27,000 quarterly active customers in our on-demand offering translating into $34 million in run rate sales before credits and incentives. Beyond that strong growth, the metrics driving unit economics continue to perform very well. Our average order value before credits and incentives since launch has remained in the $60 to $70 range, initially disclosed, with a significant portion of the order value distribution in the three digits. A strong customer basket is key in ensuring we can drive expected profitability levels from our on-demand initiative, and our good food on-demand customers have been placing sizable orders since launch, a testament to the quality of our offering and assortment. Order retention rates have also continued to perform well, with our cohorts ordering at an 80% plus rate of their initial order month. The strong retention levels speak to the addictive nature of the on-demand experience. Similarly, the order rate of the cohorts at our initial MFCs in Montreal and Toronto increased to eight to nine times per quarter from seven to eight times last quarter as customers developed the habit of receiving a large assortment of groceries and meal solutions delivered to their door in as little as 30 minutes. We are very pleased with the on-demand developments this quarter that highlight the progress we've made in our strategy to build Canada's first integrated on-demand online grocery and meal solutions network. The key unit economic metrics we have observed since launch demonstrate the appeal of on-demand delivery to Canadians, and we look forward to building on that early momentum. On that note, I will turn it over to the operator for the Q&A portion of this call.

Thank you. At this time, I would like to remind everyone, in order to ask a question, press star, then the number one on your telephone keypad. Your first question comes from George Dune with Scotiabank. Please go ahead.