Goodfood Market Corp.

Good morning and welcome to the Goodford Q1 FY 2024 earnings conference call and webcast. 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. Instructions will be provided at that time for you to queue up for questions. Please note the questions will be taken from financial analysts only. If anyone has any difficulties here in 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, January 16th at 8 a.m. Eastern Time. Furthermore, I would like to remind you that today's presentation may contain forward-looking statements about Goodfood'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. Please be aware that during the call, the call presenters 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 calls are in Canadian dollars, unless otherwise stated. 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.

Bonjour à tous et bienvenue à l'appel conférence de marché Goodfood pour présenter nos résultats financiers du premier trimestre de l'exercice 2024 clos le 2 décembre 2023. Good morning everyone and welcome to this call for Goodfood Market Corp to present our financial results for the first quarter of fiscal 2024, ended December 2nd, 2024. I'm joined on the call today by Neil Kagi, Good Foods President and Chief Operating Officer, and Ross Awamur, Chief Financial Officer. Our press release reporting this quarter's results was published earlier this morning. It can be found on our website and on CDAR. I will now turn to slide three to review the highlights of this quarter. To start, fiscal 2024 marks our 10th anniversary as a company. Throughout the year, we will be celebrating this great milestone by delighting our customers and employees with great surprises and continuing to change how Canadians eat. Our first quarter has kicked off this anniversary year with great momentum. Our team built the product, process, and efficiency that have helped deliver growing profitability and cash flows, along with answering our customers' call for diversity and ease of use. we're pleased to report a fourth consecutive quarter of positive EBITDA. In the first quarter, our adjusted EBITDA reached $1.5 million for a margin of 3.6%, representing an 8.5 percentage point year-over-year margin growth. With gross margin maintained at the high 30% level and G&A having been reduced a further $5 million annually compared to Q1 last year, This consistent performance demonstrates our commitment to generate growing profitability and cash flows. This is evidenced by our LTM adjusted EBITDA now standing at $8.5 million compared to an LTM adjusted EBITDA loss of $28.5 million the same period last year. We have also hit strong cash flow generation this quarter with cash flows from operating activities hitting $3.8 million, and adjusted free cash flows reaching $4 million. We are pleased with our financial performance this quarter, and we are equally pleased with the new delicious meals and improved intuitive user experience our teams have worked very hard to deliver. With our profitability consistently growing, we firmly believe that relentlessly enhancing customer value will drive substantial top-line growth that, With our current cost structure, we'll in turn generate operating leverage and growing cash flows. To enhance our customer value proposition, we expanded our recipe customization options to provide the ability to swap or double our delicious, high-quality proteins. We also launched smart bundles to provide mouth-watering options for various meal occasions, like when our members are hosting friends or cooking brunch on a sunny Sunday morning. From a digital experience perspective, we have made our customer experience more intuitive by adding recipe tags such as ready in 15 minutes, family friendly, or carb wise to make recipe selection smoother and created simple categories to provide better browsing within our growing selection of meals. we're making weekly meal planning in minutes even more simple and delicious. Overall, we remain disciplined and keep our focus on profitable growth, which puts us in a strong position to enhance our customers' value proposition every day and to continue delivering growing cash flows and look forward to accelerating that growth in profitability.

On that note, Ross will now go over our financial performance in greater detail. 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 first quarter were 124,000 compared to 148,000 in the same quarter of fiscal 23, and 116,000 in the previous quarter, Q4 of fiscal 23. The sequential quarterly growth stems from the usually more active back-to-school period. That said, we are particularly pleased with the resurgence in quarterly active customer growth, not only growing compared to the seasonal fourth quarter, but also growing against the more comparable third quarter of last year and reaching the same level as the second quarter of fiscal 23. This increase in customer activity was also driven by successful re-engagement campaigns that have driven a broader set of customers to place orders. Net sales were $40.5 million for the quarter, a $3.3 million sequential increase compared to the fourth quarter. Stronger order rates and larger baskets containing more recipes and add-ons were the main drivers of the net sales growth. This increased level of activity resulted in net sales proactive customers increasing to $326 this quarter, continuing on its upwards growth trajectory. We will now turn to slide five to review our profitability levels. We are pleased to now have delivered four consecutive quarters of positive adjusted EBITDA. On the back of continuous improvement in gross margin, which reached 39% in the first quarter, 380 basis points improvement compared to the same quarter last year, we achieved $1.5 million of adjusted EBITDA this quarter for a margin of nearly 4% and 8.5% improvement year over year. Its consistent and growing level of profitability is underpinned by efforts made and execution by our teams to enhance the efficiency of our operations and create a lean and mean cost structure. Combined with pricing optimization and a focus on our most profitable products and customers, these structural improvements have driven an LTM adjusted EBITDA of $8.5 million for a margin of 5%. We now clearly have a solid platform to sustain growing profitability. I will now move to slide six for a review of cash flows and capital expenditures. Cash flows generated by operating activities were a strong $3.8 million this quarter, a $10 million improvement compared to the same quarter last year. The reversal from negative CFO in the fourth quarter to positive this quarter is driven by the increase in profitability and also by the nature of our working capital as we pay invoices stemming from the lower volume fourth quarter and the higher volume first quarter. A portion of the CFO improvement is simply due to the timing of invoices and other payables as well. Still, the substantial improvement compared to last year demonstrates the impact of our improved profitability, and it is directly having an impact on our cash flows. Capital expenditures came in again at less than a quarter million dollars, relating mainly to capital labor of tech investments and payments of minor maintenance work. This continues our consistent reduction of capital intensity. Adjusted free cash flow, which combines CFO and CapEx spend to evaluate our ability to generate cash in normal operating circumstances was $4 million and $9 million improvement compared to last year. Its performance has been the result of the growing profitability as well as lower capital investments and further highlights 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 seven, you will find a summary of our performance this quarter. We are pleased with our financial performance this quarter. Pleased, but not content. Our profitability overall and overall financial KPIs continue to show sustained improvement, and we are especially proud of our cash flow generation. The positive free cash flow we have generated in two of the past three quarters brings us to an inflection point on our cash levels, as we have evolved from operating with limited ability to allocate capital to generating cash and paying down debt, as we did this quarter by reducing our term loan further. Overall, we are energized with the consistently strong results that have driven strong profitability and cash flow metrics quarter after quarter. Profitability indicators continue to display material improvements and consistent strengths year over year, demonstrating our unwavering commitment to profitability and cash flows.

John will now provide an update on our outlook. Thank you, Ross.

Switching to slide eight, we shared in recent quarters the feedback that is informing our roadmap and execution to enhance our customer value proposition every day. This feedback has been instrumental in creating a stickier and more engaged fan base as well as helping to carefully grow our addressable markets both within our direct-to-consumer meal kit market and within adjacent categories to increasingly serve the needs of new customer segments. Overall, home cooking remains the most popular way Canadians eat dinner. In the current challenging economic climate with the potential for a recession and discretionary income spending correction, home cooking is becoming even stickier. Our customers, families, and busy professionals are increasingly focused on preparing and eating healthy, nutritious, and tasty meals at home with high quality ingredients that can be prepared quickly. Armed with that feedback, we continue to broaden our assortment of healthy recipes that provide low-carb options, and with the expanded customization options we launched, we have given our customers the option to choose different proteins for various recipes or even customize the size of the protein they can order. We also continue to partner with key brand ambassadors to align our customers' wants and values with our meals and brands. After a successful partnership with Montreal Canadiens captain Nick Suzuki, we have also partnered with Sarah Nurse, pro hockey Olympic medalist, with more exciting partnerships to come. In addition to answering our members call for more health focused options, we've also taken in stride customers desire for experiences that spark joy while offering an alternative to pricey restaurants and takeout options. For example, We have introduced a rotation of delicious value meals at $10.99 per serving that combine our leading culinary creativity with our farm fresh ingredients and unique sourcing abilities to provide a delicious meal experience at an even more attractive price. We also started selling four serving family style recipes on our two serving plans, which can be used for entertaining or weekly meal planning and provide great value to our customers. These family-style recipes are a great way for us to continue increasing our average basket size. As Canadians increasingly eat at home to save money, we're continuing to find new ways to spark joy cooking at home, building on the momentum of our curated, unique partnerships with some of the best restaurants in Canada, bringing local flavors from aloe in Toronto and St. Lawrence in Vancouver with more exciting collaborations in the pipeline that are sure to delight our fans. Finally, Canadians are prioritizing planet-friendly options whenever possible. Our members have long enjoyed the perfectly portioned ingredients that nearly eliminate food waste and our farm-to-table supply chain that removes intermediaries and additional costs from meal planning. After building on that by offsetting carbon emissions on good food deliveries and by introducing packaging innovation that have helped us to remove the equivalent of 2.4 million plastic bags annually from our deliveries, we have many additional initiatives in the pipeline that will further highlight our ESG efforts across many areas of good food. We have already started seeing results from the initiatives we've mentioned today and in previous quarters. For example, our customers are ordering bigger baskets containing more portions of our delicious recipes, with basket sizes increasing double-digit percentage points year over year, further supported by our customers' order rate also displaying significant increases. Overall, we're lean, mean, and consistently growing our profitability. We're also remaining focused on consistently growing our customer value proposition And with continued SG&A and operational discipline, 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.

If you wish to ask a question, please dial star 1 on your telephone keypads now to enter the queue. Once your name is announced, you can ask your question. If you find your question is answered before it's your turn to speak, you can dial star two to cancel. As a reminder, this is for analysts only, and please limit yourself to one question and one follow-up. Our first question comes from the line of Martin Landry of Stiefel. Please go ahead. Your line is open.

Hi. Good morning, guys.

My first question is on... is on your gross margin. We're seeing your credits incentives going up significantly on a year-over-year basis, but yet your gross margin has also expanded nicely. So I was wondering if you can bridge your gross margin on a year-over-year basis so that we have a better idea of the buckets that are driving the improvement?

Yeah, good morning, Martin, and good question. I think if you look at the components of what flows through gross margin, obviously we have the credits and incentives and net sales that are the main component from a dollar perspective that flow through. So incentives have gone up, as you noticed. That was offset by a few components, and to bridge them, the first component is price adjustments. We were a little bit late last year in adjusting our prices to the inflationary environment. So now with the price adjustment that enables us to give discounts to re-engage customers and to keep customers ordering on the platform as well as attracting new ones. The second component is going to be on the labor side where our cost proportion, production labor cost proportion has decreased significantly. And I think the third component is on the food cost side, where we're seeing a better food cost environment, but we've also simplified the operation to have less ingredients overall and less cues overall to put our meal kits together. And that has also reduced waste significantly, also coming out of on-demand that had a significant higher waste component to it.

Okay, that's helpful. Can you quantify them for us? Ross?

In specific percentage numbers, that would be a little... Yeah, I think what I can tell you is the majority of the improvement, call it about half, comes from the pricing adjustment. About 30% comes from the labor efficiencies, and food and other small improvements justify the rest.

Okay. Okay, thank you. And then maybe the follow-up to that, maybe a little, I don't know if you have the numbers handy, but I'm trying to see what's the average price of a serving right now. You've got plenty of different options, but on average, what's the price of your serving? And how does that compare to pre-COVID levels? Just to... give us an idea of how much pricing has been taken over the last couple of years. And where are you positioned versus your competitors to understand a little bit, you know, what's your approach?

Yeah, thanks, Neil. Thanks for the question. So, Current pricing, we tried to kind of segment the customer base, as John and Ross were saying in the opening remarks, from a $10 price point or just below $10 price point that you can get today on some of the larger baskets up to kind of that weekend date night type of price point of around $30 for some of the artisan meals. So we have everything in between. Lowest plans. are starting in and around that $10 price point. And then, you know, subscription plans go up to about 18 bucks and then people will kind of mix and match about that. So we think we've covered a pretty broad base of Canadians that are looking to eat healthy, delicious meals at home through the service. How that compares to pre-COVID, obviously we've had lots of inflation and price adjustments over the past 36 months. So it's probably up around 15% to 20%, depending on the price point, and continuing to kind of pass along some of the cost increases and take some of the efficiencies that we were talking about into our margin, which allowed us to deliver the $8.5 million of LTM EBITDA. I think going forward, we have some interesting... pricing adjustments that we can look at and try to deliver more value to customers through playing with food costs, playing with upsells, offering incentives to purchase larger baskets. So the team has been working tirelessly on some really interesting things that we think will help engagement and AOV. So hopefully that gives you a good sense of where we're at.

Yeah, super helpful.

From a positioning perspective, I think we're in line with sort of the broader competitors. If you think of the HelloFreshes and locally here, the cookies, I think there's obviously lower cost, more value focused meal kits that are at a lower price point. But broadly, we're in line with sort of similar or even slightly lower level quality meal kits in terms of price.

Okay, that's helpful.

Thank you.

Thank you.

And our next question comes from the line of Frederick Tremblay of Desjardins. Please go ahead. Your line is open.

Thanks. Good morning. As you embark on this growth journey, I'm curious to hear a bit more about the latest cohort of new customers that you added in Q1. In terms of the near-term economics of these new active customers, can you share a bit of color on the near-term profitability, retention, order frequency, and basket size of these new customers. I know it's early, but just any details on those factors would be helpful.

Yeah, good morning, Fred. And the question makes sense. I think if you, as you say, as we embark on this growth journey, the economics always have been, but obviously even more importantly now, drive the decision we make on customers. So if you generally think of how we've structured our acquisition, I think the driver is how quickly we can pay back the customer acquisition costs. So that drives the decision in two ways. A, how low can that cost of acquisition be? And two, how quickly can you get enough orders and enough baskets to pay that back? So the first piece from a customer acquisition perspective, I think we've We've mentioned it and done some really good work there to drive it down from probably 50% to where it was in its highs sometime last year. So really more manageable acquisition costs that automatically lift the economics. I think from a lifetime value and order rate and basket size perspective, we've changed quite a bit how we incentivize customers. Um, the incentive used to be very focused on the first box to get people to come in and try the concept. I think the concept is a little bit better known now. So it's really to see how it fits within customer's lifestyle. So the incentives are spread over multiple boxes, which drives down the incentive per box, which increases its net gross margin and its profitability. So what that enables as well is attracting customers that really want to see if this meal planning tool is helpful within their lifestyle rather than customers that are looking for a free box and then have a little less of a reason to stick around after. So I think it expands the orders we're seeing from customers that are ordering multiple times. And what it does is it automatically increases their lifetime value and helps their payback. I think from a basket size, new customers come in at roughly the expected average basket size. I mean, our classic meal plan is our most popular, and that's where the biggest chunk of our basket size is. So it's an AOV north of $100 on a growth side. And then from an order rate perspective, I think they display definitely some better economics than what we were seeing last year and the year previous from a retention perspective and order rate perspective. So we are, you know, we are seeing basically these economics trickling down faster, payback being closer to our target of around our target of six months. And that's what really has underpinned the profitability. The marketing investments have kept quite sustainable, but just with a lot more efficiency.

Great. That's helpful. Maybe just to follow up on the customer acquisition costs. Is there anything structural, I guess, in the decline in the customer acquisition cost? Or is it, for lack of a better word, something temporary that's driving that? Just looking to better understand if that's sustainable, if it's a matter of you guys maybe picking up some of the waning fruit initially, just trying to better understand the dynamics there.

Please.

One of the key things we've been working on on the customer acquisition side is actually directly on our digital experience. So like directly on the website and the app, we've been working over the past few quarters on removing friction in the signup flow, enabling customers to refer friends more easily within our digital experiences, which of course the Customer acquisition cost of a referral is much lower than a brand new customer. And then the last piece is continuing to focus on re-engagement. So that's another low customer, or sorry, reactivation of canceled customers. It's another low cost customer acquisition cost pool. So we have our database of customers going back to 2014. And what we're seeing is that customers are, as part of their life cycle, right, they go in and out of subscribing to our weekly meal kit service. And if we can provide a great experience while they're a customer, a great off-boarding experience when they decide to pause or cancel their subscription, the propensity of customers to actually come back and become reactivated as customers is growing. And so when we think about our overall customer pool, yes, we think about our active customers that have an active subscription. But to us, our customer base includes the active customers and the canceled customers. And we're continuously thinking about ways to re-engage them. And the restaurant partnerships that we were talking about have actually served as a great tool to reactivate customers. So exciting partnerships like that have worked quite well. And our thinking is if we can continue to position our service as great value versus restaurants, right? It's a restaurant-quality meal, farm-to-table supply chain, and for as little as $10 a serving, our customers are able to prepare really delicious meals at home, take care of the meal planning, and have flavors that can suit the whole family. customers are seeing value in that offering. There's certainly some macroeconomic headwinds that we talked a little bit about in the script, right? The focus of customers on maximizing the value that they're getting is certainly something real that we're dealing with, but I think we're doing a good job our offering as a replacement to expensive restaurant options, takeout options. Our customers are thinking about the cost of good food versus an Uber Eats or a skip the dishes delivery, for example. And so in that context, I think they're seeing pretty good value.

Great. Thanks for that. And my last question is, you know, we noticed a decent share of the cash flow in the quarter was used for debt repayment. Looking ahead, can you talk about your expectations for cash flow generation and your thoughts on future debt repayments or other potential capital allocation decisions?

Yeah, that's a good question. I think we're obviously looking to generate cash flows, consistent positive cash flows. I think there's some timing for working capital that sometimes goes on our side, sometimes on the other side. I think if you look at the near future, we have a credit facility that gives us access to a little bit more cash and that we could look to either use or repay depending on where interest rates head. And I think what it gives us mostly is that ability to have some capital allocation decisions to say, well, if we're seeing these kinds of returns in our marketing, if we think we can get this kind of return from some small investments within the facility, what then drives the best near-term cash flow and new-term and new-term cash flow generation. So I think we definitely have some nice decisions to make there, and we're cognizant of our capital structure and looking to build the cash flow generation to be able to continue to sustain it.

Great. Thanks very much.

Thank you. And as there are currently no further questions on the line at this time, I'll hand the floor back to Mr. Ferrari for the closing comments.

Thanks very much for joining us on this call. And we look forward to speaking with you again at our next call. Thank you.

This now concludes the conference.

Thank you all very much for attending.

You may now disconnect your lines.