Goodfood Market Corp.

Good morning, ladies and gentlemen. Welcome to the Good Food first quarter of fiscal year 2023 financial results conference call. At this time, all participants are in the listen-only mode. Following the presentation, we will conduct a question and answer session. Instructions will be provided at that time for you to queue up. Please note that questions will be taken from financial analysts only. If anyone has any difficulties hearing the conference, please press star zero for assistance at any time. I would like to remind everyone that this conference call is being recorded today, Tuesday, January 17, 2023, at 8 a.m. Eastern Standard 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 for today, Jonathan Ferrari, Good Food Chief Executive Officer. Mr. Ferrari, you may go ahead, sir.

Thank you. Good morning everyone and welcome to this call for Good Food Market Corp. to present our financial results for the first quarter of fiscal 2023, ended December 3rd, 2022. I'm happy to be joined on the call today by Neil Cuggie, Goodfood's President and Chief Operating Officer, and Jonathan Reuter, Chief Financial Officer. Our press release reporting our first 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. I will now turn to slide three, which reviews Goodfood's recent strategic developments. During the first quarter and in recent weeks, we have taken multiple key steps in our march towards profitability and growing positive cash flows. Through key strategic initiatives, we have made big strides towards achieving that goal. With the improvement in cost structure well underway, our attention will begin to turn towards generating top-line growth underpinned by our improved profitability. We are very pleased with the progress made on our two key pillars of cost structure improvement, which are one, consistent gross margin enhancement, and two, SG&A and footprint streamlining. Together, they have combined a substantial gross margin and adjusted EBITDA improvements this quarter. Zooming in on the two pillars, first, we have reached record gross margin this quarter, standing at 35.5% or 36.9% when adjusted for inventory write-offs related to the discontinuation of on-demand. Gross margin has benefited from the substantial simplification of our operations, and our price adjustments to match recent inflationary pressures. With our most recent price increase having been passed through in early January, we are confident that we have reached a level of pricing and operational labor and sourcing efficiency that will help drive profitability in the coming quarters. The second pillar is our continued SG&A and asset streamlining. This quarter, we have rigorously and consistently cut costs to improve profitability and cash flows. With additional headcount reductions and contract renegotiations, combined with lease exits this quarter and in recent weeks, we reduced our SG&A from $35 million in the first quarter last year to $22 million in the first quarter of this year. While our teams continue to work tremendously hard to reduce our SG&A further and implement efficiencies, we are nearing the cost structure that provides the springboard for adjusted EBITDA profitability as demonstrated by our 14% adjusted EBITDA margin improvement year over year. Looking forward to the remaining quarters of fiscal 2023, having now mostly completed the consolidation of all of our operations into two facilities located in Montreal and Calgary, we expect strength in our gross margin as well as reduced labor and other SG&A expenses and improved cash conversion to materialize throughout 2023. As a result, we are glad to reaffirm expected positive adjusted EBITDA in the second quarter of fiscal 2023. The improvement in profitability can be further amplified by new marketing initiatives we are implementing to spur growth. We have recently launched a series of delicious meals in collaboration with Alouette, a Toronto-based restaurant that was one of the first restaurants in Canada to receive a Michelin star last fall. In the coming weeks, we will also be launching a new VIP customer program, cementing our focus on acquiring and retaining customers with strong order profiles and a partnership with a Montreal-based Canadian athlete as an ambassador of our brand. Together, these initiatives will focus on taking our customer experience to the next level and increasing customer lifetime values while conveying our core purpose through a differentiated meal experience. Overall, we are excited with the consistent progress we have made to return to profitability and the marketing plans we have put in place to take our customer excitement about our core purpose and our meal kit offerings to the next level. 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 on our top line performance. Quarterly active customers in the first quarter were 148,000 compared to 254,000 in the same quarter of fiscal 2022 and 157,000 in the previous quarter. with the majority of the sequential quarterly decline stemming from the exit of good food on-demand offerings. Net sales were $47 million for the quarter, a 6% decline compared to last quarter. This quarter, as we continue on executing Project Blue Ocean, our focus on achieving profitable growth in the near term led us to continue focusing on our most profitable customer segments and product lines. As such, during the first quarter, we discontinued our on-demand offerings impacting our active customer count and net sales. We also streamlined our grocery and meal solution product offering, which also had an impact on net sales. Despite that, we are pleased to have kept net sales per active customer stable despite the smaller product offering. With our team's focus now solely on weekly subscription delivery method, returning to top-line growth is a key component of the next steps of our strategy and our initial focus will continue to be on our highest value existing customers. Please now turn to slide five, which looks at our profitability levels. We are pleased to report record gross margins this quarter, reaching 35.5% or 36.9% when adjusted for non-recurring inventory write-offs related to the discontinuation of products sold through our on-demand channel. The 1,160 basis point improvement compared to the same quarter last year underscores the momental effort made by our operations team to simplify our operations and enhance sourcing and fulfillment. Combined with price adjustments and reduced credit incentives, we believe these improvements are structural in nature and provide a strong platform to reach profitability and positive cash flows. The improvement in gross margin was also driven in part by discontinuing our on-demand footprint during the quarter, which also allowed for further reductions in SG&A. These improvements and cost reductions resulted in a $13 million adjusted EBITDA improvement year-over-year, or a 1,380 basis points adjusted EBITDA margin enhancement versus the same quarter last year, demonstrating our commitment to profitability. It is based on this progress that we continue to feel confident that we can achieve positive adjusted EBITDA in the second quarter of fiscal 2023. I will now move to slide six for a view of cash flows and capital expenditures. Cash flows used in operating activities after considering the $2 million spent on reorg and related costs came in at $4 million, a $15 million improvement compared to the same quarter last year. A lower net loss was the main driver of the cash flow improvement. Capital expenditures came in at less than $1 million, relating mainly to payments of completed projects and tech investments. This continues our consistent reduction of capital intensity when compared to last year's first quarter capex of $12 million. We will continue to improve our cash flows from our operations and look to reduce capital expenditures in the coming quarters to drive further cash flow improvements and are now expecting our full-year fiscal 2023 CapEx to be in the $4 to $6 million range versus the previously communicated $5 to $8 million range mentioned last quarter. As outlined on the bottom of the slide, our cash use defined here as the addition of cash flows from operating activities, cash flows from investing activities, and lease payments has decreased from $32 million in the fourth quarter of fiscal 21 to $6 million this quarter, an improvement of $26 million. This positive performance has been the result of growing profitability as well as lower capital investment. As we look forward through fiscal 23, we are expecting continued reduction in our cash use, and based on realized first quarter results and our expected positive adjusted EBITDA in the second quarters, we are approaching positive quarterly cash flows. In addition, in recent weeks, we've continued working with landlords of buildings that are no longer in use and are pleased with the progress we've made in finding mutual satisfactory solutions that are allowing us to terminate our long-term liabilities. These terminations sometimes carry relatively small termination costs well below the value of our lease liabilities, with these costs appearing in cash flow from operations and are viewed as reorganization-related costs. With these efforts, we have reduced annual lease payments by over $6 million. Lastly, we ended the quarter with cash to cash equivalent of $29 million, which we believe provides balance sheet flexibility to execute our cost reduction strategy and return profitable growth and positive cash flows. Turning to slide seven, you'll find a summary of our performance this quarter. Overall, we are encouraged with the progress made on our key focus this quarter, Improving profitability metrics. All profitability indicators have shown marked improvement in the first quarter, demonstrating our unrelenting work to return to positive adjusted EBITDA and cash flows. The record gross margin with the further streamlined S&A have positioned us very well to achieve positive adjusted EBITDA in the second quarter. And so we turn our focus to growing our top line to achieving proper growth in the coming quarters. So on that note, I'll turn it back to Jonathan to write

provide additional details on our near-term outlook. Thank you.

I will now turn to slide eight to review our outlook. Our near-term outlook continues to be dictated by four key drivers. First, the turbulence we experienced last year has led us to recenter ourselves around Good Food's core purpose. Our mission is to spark joy, by making cooking and eating a fun, exciting, and enjoyable experience to help Canadians live longer by achieving a balanced and healthy diet and to enable our community to enjoy a healthier planet by offering planet-conscious products that are sourced, packaged, and delivered sustainably. With our recent collaboration with a top restaurant in Toronto, as well as the onboarding of ambassadors that align closely with our core values and purpose, We are proud to be translating our purpose into a concrete message and actions. We are bringing our customer experience to the next level and look forward to generating growth from these initiatives. Moreover, with our cost structure and gross margin now significantly improved, we believe we have achieved and will continue to achieve the improvement in unit economics, enabling us to scale up our growth initiatives further. The initiatives we have completed and continue to execute on are expected to generate EBITDA profitability in the near term and drive positive cash flows. As we discussed, we have already seen great improvements in gross margin, reaching record levels, and have improved our adjusted EBITDA margin by nearly 14% year over year. We continue to face operating and market challenges, where our progress in reaching profitability and positive cash flows continues. Third, our balance sheet has been our key focus this past quarter. Following the previously announced tolerance entered into with our lenders, we are pleased to have reached an updated credit facility that is adapted to our current needs. We appreciate the support our banking partners have shown as we continue to right-size our cost structure to our current business model and scale. Beyond our credit facilities, we announced last quarter that our plan is to operate our business out of two main facilities in Montreal and Calgary. As such, we have exited the majority of our leased facilities and are actively looking to exit remaining leases and renegotiate commitments that would help simplify our balance sheet and further improve cash flows. These negotiations are crucial to enable good food to thrive in the coming quarters and years, and I am very pleased with the progress our teams have made. Finally, we expect all our team's hard work and these initiatives to lead to continued improvements in financial performance in the upcoming quarter of fiscal 2023. We are pleased to confirm our expectation of positive adjusted EBITDA in the second quarter And with these results, we are confident that we can expect to generate profitable growth and positive cash flows in the very near term. On that note, I will turn it over to the operator for the Q&A portion of this call.

Thank you, sir. Ladies and gentlemen, we will now begin the question and answer session. If you would like to ask a question, please press star followed by the number one on your telephone keypad. If your question has been answered and you would like to withdraw from the queue, please press star, followed by the number two. And if you are using a handset, please lift the handset before entering any keys. Your first question is going to come from Luke Hannon of Canaccord Genuity. Please go ahead.

Yeah, thanks. And good morning, everyone. I wanted to dig a little bit deeper, if we can, into the VIB program. Can you give any color on what exactly that entails? What potentially that could mean in terms of growth to your overall business as well?

Hey, good morning. Thanks for the question.

So as we've been discussing over the past few quarters, the intent is to focus on engaging, retaining, and growing our highest value customer segments. Our VIP program is specifically targeting customers that are spending somewhere between $5,000 and $10,000 per year with good food. And the intent is, it's still early days in terms of iterating on the program and really understanding what generates the most value for our customers. But so far what we've seen success with is dedicated customer service lines for those VIP customers. We've tested out and created some live events for these customers where they can cook with our head chef, Jordana, and build a community around the customer experience and the products. So those are a few examples of what we've tested out so far and what's resonated well with those customers. But again, it's still early days and the program will evolve over the coming year.

Got it. That's helpful. And then the second question I have is now with this slimmed-down footprint, I'm trying to sort of ascertain what would be a realistic revenue capacity that this newer slimmed-down footprint could support going forward.

Yeah, thanks, Phuc.

If you rewind to 2019 and 2020 pre-COVID, The footprint will look pretty much the same as that as we described. So our Alberta facility plus our Montreal facility. And with that, we were approaching the 500 to 600Million dollars of revenue in peak COVID. So that kind of revenue is well within the capacity of the system. And with the other growth initiatives that we have, we can grow pretty substantially from where we're at today without any new CapEx in major facilities.

Okay, thanks. Last one for me, and then I'll pass the line, is there was commentary in the press release how there was more SG&A rationalization done towards the end of the first quarter. And I imagine that's probably what gives you confidence that you're still on track to achieve positive adjusted EBITDA in Q2. But I'm curious to know if you can provide any sort of direction on the overall magnitude of what those cost cuts are. A dollar amount would be great, but otherwise any color there would be helpful. And then if I can also for the balance of the year, I know you'll be largely done Project Blue Ocean in short order here, but curious to think about how you're scoping in future cost rationalization moving forward.

Hey, Luke. Thanks. It's John Reuter.

Good question. Look, in the first quarter, there were ongoing SG&A reductions. It comes really from two big levers. One, as we exited Good Food On Demand, it allowed us to continue to modify our workforce. And those elements took place late in the quarter. In addition, as we're exiting leases, there's all the answerly costs associated with leases that also disappear. And those, as we described, we were exiting progressively through the quarter and into Q2. So when you look into the second quarter, what we could expect is, you know, for our gross margin, we said we're going to be even thought positive, adjusted even thought positive. And so if we had an adjusted gross margin of close to 37%, it would ultimately mean that our SG&A in the second quarter would have to be below that 37%, you know, percent to 36% of the percentage net sales. So it's continuing elements coming out. So that's from a percentage perspective. And another way of looking at it is, again, Our SG&A for calculations of adjusted EBITDA went from around $16 million in Q4 to $19 million in Q1. And what we said in Q4 is that we had one-time benefits as we cleaned up at the end of the year. And so we were expecting an increase in SG&A in Q1. But ultimately, that bump is temporary in nature. So the numbers that you saw towards the end of Q4 would be a number that we would try to strive for as we head into Q2 and Q3.

Okay, thank you very much.

Your next question comes from Martin Landry of Stifel.

Please go ahead.

Hi, good morning. I would like to touch on your customer base, and I understand trying to understand at what point do you think the erosion of your customer base abate and that your customer count stabilizes?

Good morning, Martin.

So most of the decline in the quarterly active users in Q1 was related to the discontinuation of good food on demand. And so if we look at our weekly meal subscription customer base, that was fairly stable in the first quarter. And we expect to see growth in the coming quarters in terms of that quarterly active customer base. And the most important piece for us is to make sure that we're focused on growing profitably, both in terms of EBITDA and cash flow. And so really the key focus has been to ensure that the business can be EBITDA positive and cash flow positive at the current size. And as we look into the back half of the year, the new initiatives, including our VIP program, some of the restaurant partnerships that we've launched and we have in the works, and some of our brand ambassadors are going to help us grow profitably from there.

Okay. And I was wondering if you could touch on the promotional environment right now. I've received a voucher on the mail with a rebate of all the way up to $200 from Good Food, which I thought was pretty high. Can you talk a little bit about the promotional environment right now, how it is, and how's your customer acquisition strategy going?

Sure. So in terms of...

Promotions, what we've been testing out over the past few months is declining value of the coupon per basket. So rather than either offering the whole discount up front on the first basket or offering the same discount across two or three baskets, We're starting the offer higher on the first basket to optimize for our conversion rate and then declining the value of the offer on subsequent baskets that the customer orders in order to help build the habit of ordering from good food while reducing the incentives on the baskets going forward and improving the ultimate lifetime value of our customer base. We've been quite successful in seeing improvements in our unit economics through that strategy. If we look at the competitive environment, December tends to be a slow month in the meal kit industry. And so we did experience normal seasonality during the month of December, particularly in the second half of December. And so acquisition and offers and order rates typically slow at that point. And then we've seen a rebound in January, both in terms of order rate and new customers being acquired. And I would say if you look at the Unit economics on a year-over-year basis, I would say they compare favorably to last year. Customer acquisition costs are a little bit higher on a year-over-year basis, but we've also made improvements on lifetime value retention and gross margin. And so I would say the economics are healthy versus historical comparables.

Okay. And my last question is, You know, you've had a sizable margin, gross margin expansion this quarter. I was wondering if it'd be possible to bridge and quantify some of the drivers of that increase.

Yeah, look, in terms of detailed numbers, we can obviously circle back with you. But there's three big pieces. associated with the increase. The first one is by exiting the Good Food On Demand. That provided the largest benefit because there was a difference in margins between our weekly subscription and Good Food On Demand. The second piece has been, now that we're focusing solely on our weekly subscription, The office team has done a tremendous amount of work around simplifying the operation, simplifying the amount of ingredients that we're using, the amount of suppliers that we're working with. And ultimately, that drives a lot of efficiencies inside our facilities, whether it be around labor efficiency, but then also around waste and products that we're not using on a weekly basis. And the last is, you know, we have benefited as we took price earlier in the year. And that price was aligned with, you know, bringing our products to where our competitors stood. So those would be the three big buckets. And I guess lastly, as John has laid out, C&I, our credit and incentives has declined as well. From a credit perspective, we can tie that back to improved execution within our facilities. Again, greater focus, less issues, and therefore less credit. And then from an incentive perspective, John laid out, John Furrier laid out how we're very focused on acquiring the right customers as opposed to just acquiring customers. And so we're being very thoughtful in terms of our incentive programs as we go forward, as looking back in Q1 and going forward throughout the 2023.

Okay. And is it possible to get the contribution from the price increase on your gross margin?

Yeah, sure. Sorry about that.

Yeah, so that was not a Q1 event, right? So that was back in Q4. And I think the contribution probably was around 3%, maybe, 2% to 3%. It's about 300 basis points improvement in the growth margin based on the price increase.

Okay. Perfect. Thank you.

Ladies and gentlemen, once again, if you are a financial analyst and you would like to ask a question, please press star 1 at this time. Your next question will come from Frederic Tremblay of Desjardins. Please go ahead.

Thanks. Good morning. I just wanted to ask on the path to being cash flow positive with CapEx already being reduced significantly, is the cash flow positive goal highly dependent on not only being EBITDA positive but meaningfully going da-da-da-da. So if you could maybe comment just on the levers to getting you to cash flow positive. And I'm guessing it also includes working caps. So any thoughts on those elements would be helpful.

Hey, good morning, Fred. Very good question. I mean, you've answered the question for me, but you've hit on the elements. Look, if we take ultimate cash use in our business, why don't we distill it to kind of of four big levers, right? So obviously, the first lever, and to be sustainable from a cash flow position, you need to have a positive, you know, adjusted EBITDA, right? So we are, I think we're very clear our perspective on when that's happening. And, you know, we're in that period right now. The second piece that we have is working capital, you know, the business traditionally benefits from negative working capital. As we collect from our customers earlier than we have to pay our suppliers with regard to our meal kits, raw ingredients. And so as we transition back to our weekly subscription business, there's no reason why that will not eventually return to the business to have negative working capital. The third piece in use of cash is investment. And you saw from our CapEx in Q1, you know, the marked decrease of the historical business. Look, when you're down to ultimately two facilities that have, you know, least costs in the $200,000 range per month, there's not a significant amount of CapEx in these people in the business. And that's why we brought down our thoughts for the year. And I think we'll work to be on the low end of that range and possibly even provide an updated view when we speak next in April. So CapEx has fallen very materially, and we're working to be on that low end of the range and maybe even update that number as we go through a few more periods. And then the last big use of cash for our business historically was leases, lease payments that you saw in cash flow from financing. And as we laid out in our prepared remarks, we've exited a significant amount of our leases. We're in the process of talking to a handful of landlords currently where we feel confident that we'll be in a position where we'll be down to, as Neil laid out in one of the answers, two facilities. We are only operating in two facilities, but we think we could be only making rent payments on two facilities in short order. And that means, I gave you what that number would be. So we have that very clear path on those four levers to get back to a positive cash-generating business. It begins with EBITDA, which we said is this quarter. Working capital, structurally, we should benefit from. Investing, there really isn't a significant amount of capex. And leases, the team has done a very strong job of working with our landlords and finding mutually acceptable solutions to bring down the amount of monthly cash that goes out. So those are the four big pieces.

That's helpful. Thank you. Just maybe a follow-up on that last point. Any way for you to maybe quantify sort of the cost of the leases that are remaining right now? Like how incrementally positive would it be for you guys to successfully exit those leases as we think about future cash flow generation?

Sure.

Look, we're still in discussions with some critical landlords. I think It's important to be thoughtful on there. But ultimately, we're very pleased with what I'll say, like the payback of the cost to exit. And so you're seeing that in those costs, you'll start seeing there's a little bit of cost in CFO in Q1. I think it's about $150,000 of cost in CFO in Q1. you will see an increase of those costs in Q2, right? And those are, like, temporary in nature, so we'll obviously let you know what those costs are in the second quarter. But our goal would be to have essentially all of those costs out of the way in Q2, and we'll be able to walk you through what those costs are when we do a bridge of our cash use in the second quarter.

Okay, great. Last question for me. Just curious how, you know, generally how you think about price points in the current challenging economic environment. I know in the past you had a, called it discount brand for meal kits. Is that something that, maybe not in the same form, but is that something that you're thinking about in terms of lower price point items? I know maybe it sounds contrary to what you're trying to do with maybe the VIP program, but just maybe your thoughts on

potentially having different price points?

Yeah, so currently the focus is on maintaining all of our products under the Good Food brand. So we did have the Yum discount brand in the past. I think where the decision is today, we want to stay laser focused on operational excellence, cost structure reduction, and profitable growth. And so launching a new brand is not something that we want to be doing right now in terms of focus and discipline. Our key focus really has been in demonstrating the value of our meal kits and meal solutions versus restaurant and takeout options. And so as the cost of restaurant delivery, restaurant meals, takeouts has skyrocketed in the past 12 to 18 months, I think the customer segment that we're targeting sees a lot of value in our meal solutions at our current price points. So the key focus is on... increasing value to the customer rather than trying to reduce our prices to the customer segment. And I think we've been successful in demonstrating that value to our customers, finding new ways to make some of our products more convenient, like our easy prep products that have pre-cut ingredients. We also launched at the beginning of January keto and paleo recipes on our Clean15 plan, so making it easy for customers to eat healthy, follow certain dietary preferences, whether they're full-time keto and paleo or part-time diners on those plans. And so what we've seen is... despite the inflationary pressures, customers are seeing value in some of the new products that we're launching. And even our restaurant partnerships, like with Aloe, certainly the value that you can get from cooking a Michelin star restaurant at home is a very high value perception for those customers. So that's been our approach so far. And we really want to maintain focus and discipline around our profitable growth and cost structure.

Great. Thanks for taking the questions.

There are no more questions at this time. I would like to turn the conference back to Mr. Ferrari for any closing remarks.

thank you for joining us on this call we look forward to speaking with you again next quarter you soon thank you ladies and gentlemen this does conclude your conference call for this morning we would like to thank everyone for participating and ask you to kindly disconnect your