Goodfood Market Corp.

Good morning, ladies and gentlemen, and welcome to the Good Food Q4 2023 Earnings Conference Call and Webcast. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question and answer session. As courtesy to others, we ask that each participant limit themselves to one question and one follow-up. 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 zero for operator assistance at any time. I would like to remind everyone that this conference call is being recorded today, November 22nd at 8 a.m. Eastern Time. Furthermore, I would like to remind you that today's presentation may contain forward-looking statements about GoodFeed's 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's call, Jonathan Ferrari, Good Food Chief Executive Officer. Mr. Ferrari, you may proceed.

Thank you. Good morning, everyone, and welcome to this call for Good Food Market Corp. to present our financial results for the fourth quarter of fiscal 2023, ended September 2nd. I'm joined on the call today by Neil Kugge, Good Food's President and Chief Operating Officer, and Ross Aouameur, Chief Financial Officer. A press release reporting this quarter's 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 MDNA. 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 to review the highlights of this quarter and year. We are pleased to continue building on our profitability momentum by delivering a third consecutive quarter of positive EBITDA and record EBITDA for the full fiscal year. This performance demonstrates our commitment to build on our improved financial performance to generate growing profitability and cash flows. In the fourth quarter, we delivered positive adjusted EBITDA of $1 million a margin of 2% during our seasonally weakest quarter. Operational efficiencies we have worked to gain in addition to continuous pricing optimizations drove robust gross margins with gross profit stable year over year on a lower net sales basis. Combined with unwavering SG&A discipline, the improved gross margin has led to strong EBITDA performance. For fiscal 2023, We are also pleased to report our largest ever positive adjusted EBITDA performance of $5 million, or a margin of 3%, compared to an EBITDA loss of $41 million, or negative margin of 15% last year. This successful turnaround and record performance stems from the operational efficiency gains, as well as our focus on consistently improving our unit economics over time through enhancements to our customer value proposition. On the SG&A side, we have reduced annual non-marketing SG&A by $34 million this year, enabling a cost structure that can consistently drive growth in our profitability metrics. Our marketing efficiency initiatives have also begun bearing fruit as our customer acquisition cost has decreased by double-digit percentage points compared to the same period last year and to the early quarters of this fiscal year. The efficiencies our team have been laser focused on achieving are key to Goodfood's profitable growth. Both in recent months and into the future, we continue to build on the momentum we've created by consistently strengthening our customer value proposition to increase the stickiness of our customer base and unlock new TAM. We have increased and continue to increase our assortment of delicious recipes. We are investing in the user experience on our digital platforms. while doubling down on sustainability and building inspiring partnerships with good food brand ambassadors and brand partners. More on that later. Overall, we are lean, mean, and disciplined, which puts us in a strong position to continue delivering EBITDA growth and look forward to accelerating that growth in profitability. On that note, Ross will now provide additional details on our financial performance. Over to you, Ross.

Thank you, John, and good morning, everyone.

I will now turn to slide four, which provides details on our top line performance. Quarterly active customers during the fourth quarter were 116,000 compared to 157,000 in the same quarter of fiscal 22 and 119,000 in the previous quarter this year. with the majority of the sequential quarterly decline stemming from seasonality. The relatively mild decline in the context of the seasonally impacted quarter is the result of successful re-engagement campaigns that have driven a broader set of customers to place orders. Net sales were $37 million for the quarter, a $5 billion sequential decrease compared to the third quarter. This figure was the result, again, of the seasonally lower order rate and customer base, offset by larger baskets containing more recipes and add-ons. Net sales per active customer were roughly in line year over year and declined sequentially, driven by the lower order rate typical for the summer months. We will now turn to slide five, which looks at our profitability level. We are pleased to now have delivered three consecutive quarters of positive adjusted EBITDA. On the back of continuous improvement in gross margin, which reached 38% in the fourth quarter, and 990 basis points improvement compared to the same quarter last year, we achieved $1 million of adjusted EBITDA this quarter for a margin of nearly 2%, a 6% improvement year over year. This level of profitability in the fourth quarter underscores the efforts made by our teams to simplify and enhance the efficiency of our operations. Combined with pricing optimization and a focus on our most profitable products and customers, these improvements have now shown to be structural in nature and provide a solid platform to sustain growing profitability, as evidenced by the gross profit in dollars remaining again stable year over year on the overnight sales basis. The increased gross margin combined with the implemented G&A savings provide the lean cost structure enabling to maintain consistent EBITDA profitability, even in seasonal quarters like this one, or in quarters with increased marketing activity, as is the case in the current first quarter. I will now move to slide six for a review of cash flows and capital expenditures. Cash flows used by operating activities were $2 million, an $11 million improvement compared to the same quarter last year. The reversal from positive CFO in the third quarter of this year to negative CFO this quarter is driven by the nature of our working capital as we pay invoices stemming from the higher volume third quarter and the lower volume fourth quarter. Still, the substantial improvement compared to last year is mainly the result of improved profitability. Capital expenditures came in again at less than a quarter million dollars, relating mainly to capitalized labor of tech investments and payments of minor maintenance work. This continues our consistent reduction of capital intensity when compared to last year's fourth quarter capex of five million dollars. As a measure of our cash generation ability, we introduced this year a metric that combines our cash flow from operations and capital expenditures. That metric is free cash flow. As you can see here, when adjusting for restructuring related outflows, we used $1 million of free cash flow in the seasonal fourth quarter, an $11 million improvement compared to last year. This performance has been the result of growing profitability as well as lower capital investments and underscores our disciplined approach to cost management and capital allocation, and our commitment to delivering long-term shareholder value through substantial free cash flow generation. Turning to slide 7, you will find a summary of our performance this quarter and fiscal year. Overall, as John mentioned, we are energized with the results of our team's hard work, which has driven record gross margin and adjusted EBITDA this year. Both on an annual and quarterly basis, profitability indicators have displayed the material improvement and consistent strength year over year, demonstrating our unwavering commitment to profitability and cash flow. Focusing on this fiscal year, we are very pleased to report our largest ever annual adjusted EBITDA, standing at nearly $5 million and a margin of 3%. This strong performance is underpinned by a structurally strong gross margin, which also hit an annual record at 39%. These levels of profitability have translated into an $87 million improvement in adjusted free cash flows, well on our way to consistently generating and growing positive free cash flows. This year's financial performance provides the ideal launchpad for a plan to generate profitable growth for years to come and generate significant shareholder value.

On this note, I will turn it back to John to review our outlook. Thank you, Ross.

Switching to slide eight, last quarter we shared key customer insights that inform our long-term roadmap to consistently grow our customer value proposition, thereby creating an increasingly sticky customer base, as well as carefully growing our TAM to serve the needs of new customer segments. First, busy professionals and families are increasingly craving delicious and nutritious meals that can be prepared in minutes. With this in mind, we have broadened our assortment of carb-wise, calorie-smart, keto, paleo, and high-protein recipes by over 50%, many of which can be prepared within 10 or 15 minutes. We partnered with key brand ambassadors to amplify the initiative, including Montreal Canadiens Captain Nick Suzuki, and paired some of the new meals with the introduction of our better-for-you proteins, including organic beef, grass-fed bison, and steelhead trout. Second, we are seeing strong demand from customers who are looking for experiences that spark joy while providing an alternative to pricey restaurant options. To achieve that, we have curated select partnerships for our customers including exclusive meals co-created with Michelin-starred St. Lawrence restaurant in Vancouver to bring dishes like lemony chicken piccata with fresh fettuccine and garlic roasted broccolini to our customers' homes. Another exciting product innovation we introduced to our customers this fall is our new line of air fryer recipes in partnership with Ninja, Canada's number one selling air fryer brand. Our air fryer recipes take minutes to prepare, cost half the price of restaurant delivery, and provide unbeatable crispy flavors like our air fryer fried chicken sandwiches with spiced honey and crisp apple kale salad. It's been a hit with our customers. Third, Canadians are prioritizing planet-friendly options whenever possible. Our customers have long appreciated our perfectly portioned ingredients, that save them from food waste and keep more cash in their pockets, as well as the way in which we've built our supply chain to remove middlemen from farm to kitchen table. This year, we've taken it up another notch by offsetting carbon emissions on good food deliveries and by introducing packaging innovations that have helped us to remove the equivalent of 2.4 million plastic bags annually from our deliveries. We have already started seeing results from the initiatives we've covered together today, which will compound into free cash flow growth going forward. For example, in the fourth quarter, our customer's basket size increased by 3% compared to the third quarter without a price increase. Throughout the quarter, we were also able to improve customer acquisition costs by double digit percentage points as a larger share of our signups come from referrals from passionate customers and reactivations from older customers who want to discover the new good food. Overall, our lean and mean teams are happy to have achieved record profitability this year. Going forward, we are convinced that by remaining focused on consistently growing our customer value proposition with sustained discipline on our SG&A costs, We are in a strong position to continue growing our free cash flow at an attractive pace in fiscal 2024 and beyond. 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. Should you have a question, please press star followed by the number one on your touchstone phone. Again, that's star followed by the number one. You will hear a three-tone prompt acknowledging your request. Should you wish to decline from the polling process, please press star followed by the number two. If you're using a speakerphone, please lift your handset before pressing any keys. Our first question comes from the line of Martin Landry from Stevell. Please go ahead.

Hi, good morning, guys. Morning, Martin. My first question, uh, you know, we're almost done, uh, your, your Q1, um, quarter. So, um, I was wondering if you can give us some color on how the quarter has, has gone, uh, you know, perhaps, uh, you know, some color on revenues, customer account profitability, um, you know, especially given that, uh, uh, the macro outlook in Canada is difficult. So just, uh, any color would be super helpful.

Good morning. Thanks for the question. So we have continued to see certainly deterioration in the macro environment that's impacting everyone from customers to suppliers that are experiencing stress as well. So it is a difficult environment. I think the work that we've done over the past 12 months has put us in a really good place to continue growing our profitability. And we've also made a lot of the investments up front, as we were talking about, to improve and grow our customer value proposition consistently. So we continue to see year-over-year improvements on our customer acquisition costs. Customer lifetime values are also increasing based on better order rates, as well as some success that we've seen in growing the basket size through some of the partnerships that we talked about with the brands that we're working with. So I think the outlook continues to be difficult on the macro side, but I think good food is faring relatively well through it. And from a quarterly active customer account, we have seen growth from Q4 to Q1, which is a very good sign and a good base for us to be starting fiscal 24.

Okay, thank you. That's helpful.

So you're able to grow your customer account in this difficult environment. That's great. I've noticed your credits and incentives for Q4 have gone up a little bit. I think they were around 16%. How do you balance credits and incentives to attract customers versus profitability? I don't know if you can just walk us through a little bit at what point the delta and, you know, makes you look at profitability versus customer count?

That's a good question. And you've noticed, right, compared to Q4 last year and this year, I think a few things to talk about. The first one being the re-engagement campaigns. You mentioned that these were first for us and they were an initial test in the fourth quarter. It's not the perfect quarter to do that, but I think in June we saw some really good results that drove incentives a little higher. I think the other piece is if you think of ENI last year with on-demand being a quick delivery, you'd see usually less credits and more direct deliveries. I think in the hot summer and the weekly meal plan and longer deliveries, that goes up a little bit. I think from an overview where we think things are, I think there's a tight balance between making sure our gross sales float and our net sales into our gross profits and we still are able to make sure that the customer experience is good and that we incentivize folks to either be re-engaged with the platform or to join the platform. So I think if we can keep gross margin at a level where we thought in the fourth quarter, while being able to be incentivizing people to order and join the platform. I think those two combined to provide a pretty good balance to then drive profitability on an EBITDA basis and improve cash flows. So I'm not gonna say Q4 was the perfect balance of that, but it's an indication of where we can go up to where we can go on CNI while maintaining good gross margin and EBITDA profitability.

Okay, that's helpful. There's a strong interplay as well from a customer acquisition cost to our CNI percentage. The higher the CNI, up to a certain point, we see in our modeling that customer acquisition costs will actually come down and the inverse is true as well. We're constantly playing with obviously maximizing lifetime value, but is there you know, a 12% CNI target or 16% CNI target. And what does that mean for our cost of acquisition and the efficiency of our media spend as well? So it, you know, if you reduce one, it doesn't necessarily mean it's going to all go to profitability right away, but what you're trying to do over the longterm is get the most lifetime value and shortest payback on your marketing investments.

Okay. That's awful. And then maybe just last one for me, if I can squeeze in, um, You've done an impressive job at reducing your SG&E expenses. I think you said $34 million in one year. Can you just remind us a little bit, when do we lap most of the cost reduction for modeling purposes? That'd be helpful.

Yeah, so they spanned a couple of quarters last year. I think by the end of Q2 and into Q3 is where most of it will have been lapped. I think if you try to compare G&A structures, and the $34 million is G&A, including the S, so it's really G&A. I think by Q3, you'll have the more comparable year-over-year cost structure. With that said, we're pleased and energized and the team did a lot of work to get to that number. That doesn't mean we're not going to look for further improvements. It obviously won't have the same scale.

Okay. Okay. Congratulations. Thank you.

Ladies and gentlemen, just a reminder, should you have a question, please press star followed by the number one on your touchstone phone. We have our next question. It comes from the line of Frederic Tremblay from Desjardins. Please go ahead.

Thanks. Good morning. Most of my questions have been answered, but I have a couple more. One of the things I found interesting was the upcoming launch of customization in terms of being able to swap or double the proteins in the recipes. Can you maybe share a bit more color on that, where you're at with that upcoming initiative that you started testing it and If so, what would be your initial takeaways from that? And just your thoughts as well on the timing of when that may be fully rolled out to the entire customer base.

Yeah, Fred, thanks for the question.

I think as we laid out in the past couple of quarters, we want to continue investing in selection and the protein customizations. I think is a way to add selection without adding a ton of complexity. So we'll continue to explore different ways to use that to give customers more selection, more perception of selection, and hopefully grow basket size and order rates consistently over time as well. It also gives us an opportunity to introduce different variety of proteins that we wouldn't necessarily be able to include at base pricing in people's plans. We mentioned some of the organics, some of the free range, some of the grass-fed beef. So you'll see some of those types of things continue to kind of come in and out of the menu as we test different price points and protein.

Okay.

And then on potentially expanding into other channels, multi-channel partnerships, do you have an update on where you're at with those potential partnerships and what you're sort of thinking about on that one?

Yes, we've been running a pilot with Skip the dishes out in Western Canada for I want to say two quarters now. It's been going well, still small scale. It's only a couple stores and a limited number of SKUs. So It's been going well. We're continuing to iterate on that. We're chatting about if we scale up or stay at the same pace that we're at today. That's been something that's in the back of our mind, obviously. And the vast, vast majority of our sales and profitability come from the rates cook business. So we want to continue to focus the team's efforts on that, especially with the macro environment that we're seeing. Everyone is looking for different ways to reach customers, so we get lots of inbounds from different retail partners or other e-commerce players on how to expand both of our reaches, which we'll continue to entertain.

Great. Maybe one last one for me on free cash flow outlook or just general thoughts on cash flow. Obviously, CapEx has been reduced tremendously here. So in terms of growing cash flow in the future, is it? Like, are you envisioning it mainly becoming from increased top line, or is there more to do on the SG&A fund, for example, just trying to figure out what the key levers would be for future cash flow improvements?

Yeah, great question. And I think the answer is a balance of both. We definitely want to continue to be disciplined on the SG&A side and invest in the highest ROI pieces of the SG&A part of the P&L. I think from a profitability perspective, given the cost structure we have and our iterations and balancing of CNI and net sales, I think we can be in a place where additional sales will flow through at a pretty high quid. So that'll definitely be sort of the operating leverage free cash flow generation that we're looking to generate. I think on the G&A side, there's definitely room for further improvement, and we look at it on a weekly, daily basis to make sure that we're not missing any opportunities. I think it's probably more marginal than what could come from the top line. With that said, our goal will always be to be balanced, and I think from a growth perspective, the macro outlook is making us focus even more on the G&A side. and looking at how we can take advantage of opportunities on the top line.

Thanks for taking the questions.

There are no further questions at this time. I'd now like to turn the call back over to Mr. Ferrari for final closing comments.

Thank you for joining us on this call this morning. We look forward to speaking with you again at our call in January.

Thank you, sir. Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines. Have a lovely day.