Goodfood Market Corp.

Good morning, ladies and gentlemen, and welcome to the Good Food second quarter FY20-24 earnings and webcast conference call. At this time, all participants are in 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 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 the operator assistance at any time. I would like to remind everyone that this conference call is being recorded today, April 16th at 8 a.m. Eastern Time. Furthermore, I would like to remind you that today's presentation may contain forward-looking statements about Good Foods' current and future plans, expectations and intentions, results, level of activity, performance, goals or achievements, or other future events or developments. As such, please take a moment to read the disclaimer on forward looking statements on slide two of the presentation. Please be aware that during 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 call are in Canadian dollars and less 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.

Hello everyone and welcome to the Good Food Market Conference to present our financial results for the second quarter of the 2024 exercise. Good morning, everyone, and welcome to this call for Good Food Market Corp. to present our financial results for the second quarter of fiscal 2024, ended March 2nd. I'm joined on the call today by Neil Kagi, Good Foods President and Chief Operating Officer, and Ross Aouameur, 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. The second quarter marked our fifth consecutive quarter of positive adjusted EBITDA. Our teams have worked extremely hard to implement and maintain the necessary cost discipline that has enabled adjusted EBITDA to reach a margin of 9% this quarter for $3.5 million in total. In the last 12 months, adjusted EBITDA has reached $9 million for a margin surpassing 5%. Comparing this figure to the $12 million adjusted EBITDA loss for the same LTM period a year ago shows the tremendous progress we have made in the past year in achieving and growing profitability. This strong level of profitability has enabled value creation to our shareholders through two key drivers, cash flow generation and leverage reduction. First, we have generated positive cash flows again this quarter with adjusted free cash flow reaching $4.3 million in the first half of fiscal 2024. This improvement of over $11 million compared to the first half of fiscal 23 cements our commitment to not only generating cash flows, but growing the cash generation ability of our business. Supported by operating and business efficiencies, that have driven gross margin consistently around the 40% mark, and SG&A expense reduction that surpassed $9 million compared to the first half of fiscal 23, our cash flow generation is poised to continue to grow and help provide further flexibility over capital allocation. Second, with this established and growing profitability, cash flow generation and capital flexibility we have reduced net leverage measured as net debt divided by LTM adjusted EBITDA by 70% from over eight turns nine months ago to just over two turns today. Both by repaying bank debt and increasing profitability, we have significantly de-risked our capital structure. Again, our capital position provides flexibility to allocate capital across multiple growth avenues in the coming quarters and years. We are pleased with our financial performance, profitability, and cash flow generation in the first half of this year and are also encouraged by the improvement in the growth trajectory of our core meal kit business. This new delicious meal option, the new delicious meal option we have given our members and the improved user experience we have delivered have driven the largest ever average basket size our customers have ordered in our 10 years of existence. Our year-over-year net sales progression is also improving with a 5% year-over-year decline in sales this quarter, showing we are closing the gap to generating top-line growth while continuing to grow profitability and cash flows by focusing on profitable sales. With our profitability consistently growing, we firmly believe that relentlessly enhancing customer value will drive top-line growth that, with our current cost structure, will in turn generate operating leverage and continue to grow cash flows. On that note, Russ 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 second quarter were 117,000, compared to 124,000 in the same quarter of fiscal 23 and 124,000 in the previous quarter, Q1 of fiscal 24. The sequential quarterly decline stems from holiday seasonality and slower customer activity at the beginning of the calendar year. As such, net sales were $39.8 million for the quarter, a 2.2 million or 5% year-over-year decline, and a 700,000 or 1.7% sequential decline compared to the first quarter. This was the result of lower customer count and orders, driven by consumer spending softness and GDP per capita reduction. Offsetting customer activity was larger basket sizes from ordering customers, as our net sales per active customer hit a high of $340 on the back of record average order value. With the current market circumstances, we expect to return to year-over-year organic growth when the macro headwinds abate. Our focus remains on growing cash flow generation and disciplined unit economic spending. We will now turn to slide five to review our profitability levels. We are pleased to have now delivered five consecutive quarters of positive adjusted EBITDA. On the back of continuous operating improvement, gross margin reached a record 43% in the second quarter, a 230 basis points improvement compared to the same quarter last year. Highlighting our focus on profitable customers, is the fact that our gross profit remained flat year over year at $17.1 million while net sales declined 5% in the same time period. With the improved gross margin and consistently improving SG&A efficiency, we achieved $3.5 million of adjusted EBITDA at its quarter for a margin of nearly 9% and 1.7% improvement year over year. This growing level of margin is the result of our team's relentless work to enhance the efficiency of our operations and to sustain a lean and lean cost structure. In recent months, we have improved our key operational and production metrics and increasingly implemented tools, whether it's artificial intelligence or technology tools, that have streamlined our production process and led to substantial improvements in the productivity of our leaner team. Combined with pricing optimizations and a focus on our most profitable products and customers, these structural improvements have driven an LTM-adjusted EBITDA of $9 million, We mentioned last quarter that we believe to clearly have a solid platform to sustain growing profitability. We can now add that everyone at Goodfood is relentlessly enhancing that platform to continue giving our customers more without requiring more resources. I will now move to slide six for review of cash flows. Capital expenditures and leverage. Cash flows generated by operating activities were approximately $100,000 this quarter. a $4.5 million improvement compared to the same quarter last year. As mentioned last quarter, one of the key reasons for the $3.8 million first quarter CFO was the timing of large payments and invoices. That timing reversed this quarter as expected. Still, as profitability continues to grow and capital expenditures remain low given the relative newness of our assets, our adjusted free cash flows remain positive as they have been for three of our past four quarters. reaching $4.3 million year-to-date and $7.4 million in the past 12 months. As John outlined, this free cash flow generation has enabled a reduction in debt, which, combined with our growing profitability, have brought net leverage from 8.2 turns in the third quarter last year to a manageable 2.4 turns this quarter. The deleveraging and cash flow generated highlight our disciplined approach to cost management and capital allocation in our commitment to delivering long-term shareholder value. Turning to slide seven, you will find a summary of our performance this quarter. We are pleased with the sustained strength of our financial performance, with growing profitability on display again this quarter. The majority of our financial KPIs, unit economics, and customer feedback metrics continue to show sustained improvements. The positive free cash flow we have generated in three of the past four quarters and positive adjusted EBITDA in five consecutive quarters demonstrate the remarkable turnaround our team's work has helped achieve. It also provides capital flexibility as we move from operating with limited financial flexibility to generating cash and paying down debt. As we look to continue on the positive momentum our stable sales display and generate growth, we are energized by this flexibility, which opens up multiple avenues for growth. Overall, we remain disciplined and keep our focus on profitable growth, which puts us in a strong position to enhance our customer value proposition every day and to continue delivering growth, growing cash flows. And we look forward to accelerating that growth in profitability.

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

Moving to slide eight. We have shared in recent quarters our customers' feedback and the delicious meals our chefs are cooking up to incorporate our raving fans' feedback. In the current challenging economic climate, our members, whether young families or busy professionals, increasingly want to prepare and eat healthy and delicious meals at home, discover new and varied ingredients, and do so at a great value. We have taken that feedback in stride and broadened our assortment of healthy recipes with an expanded array of better for you protein options. Our cleaner, more intuitive digital product now also allows members to more easily browse and select from our wider variety of nutritious and delicious recipes. What's more, Our enhanced platform now allows members to customize their recipes by selecting from a variety of farm fresh proteins with a simple click of a button on a drop-down menu. As you may have seen, we have continued adding Canadian flavor to our menu through partnerships with leading Canadian chefs. Most recently, we created unique mouthwatering recipes with Halifax-based restaurant Bicycle Thief. Chef Michael Tocchetto and our very own Chef Jordana combined to create meals our loyal fans absolutely loved. In addition to answering our members' call for more health-focused options and bringing Canadian deliciousness from coast to coast, we are also adding more value options to our lineup to give our members the ability to order with good food on any budget. We will be expanding our rotation of delicious value meals at $10.99 per serving that combine our leading culinary creativity with our farm fresh ingredients. And clearly, focusing on our customers' needs is beginning to yield results. Good Food members are ordering the biggest baskets we have ever sold, containing more portions of our recipes than ever. These results are also shown in the momentum our sales have demonstrated. bringing us closer to closing the gap to year over year growth, with this quarter representing the best year over year net sales evolution since 2021. Overall, we are pleased to continue consistently growing our profitability and cash generation, We have enhanced and will continue to enhance our customer value proposition, and with consistent 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.

Ladies and gentlemen, we'll now begin the question and answer session. Should you have a question, please press the star followed by the number one on your touch phone. You will hear a prompt that your hand has been raised. Should you wish to decline from the polling process, please press the star followed by the number two. If you are using a speakerphone, please lift the handset before pressing any keys. One moment, please, for your first question. Your first question comes from the line of Martin Landry from Stifel. Please ask your question.

Hi, good morning, guys, and congrats on your results. In your opening remarks, you've talked a lot about your cash generation potentially opening up new growth opportunities. I was wondering if you can give us some example or colors or any ideas or more details about what do you mean by new growth opportunities?

Good morning, Mathieu.

So yeah, our key focus right now is to continue growing the cash flow generation and paying down some of the debt that we have on our balance sheet. I think that remains the key short-term focus, and we're quite pleased with where our leverage ratio is ending up this quarter at two times LTM EBITDA. I think we're also being presented with some opportunistic acquisition opportunities. Certainly in the small business space, the high rates and the difficult consumer environment have created opportunities a situation where there's a lot of motivated business owners that are looking to do deals. So we're taking a look at some of those opportunities and seeing if any of them could be a good fit. The focus is on certainly being able to leverage Goodfood's assets, customer base, footprint, and of course making sure that they're cash flow positive and creative to our overall cash generation.

Okay. That's helpful. Uh, it's refreshing as well.

Um, you know, uh, you know, during the, during the quarter, um, you know, one of your competitors filed for, for bankruptcy protection and, uh, and you know, they're in, they've been in transition and I think have been sold as a result. So I would assume they they've, they've incurred a lot of disruption. Um, and I was wondering, if this quarter is representative of normal operating conditions, was that competitor much less active on the marketing front? Did that allow you to maybe reduce a little bit your spending, get better return on your ad spend or on your marketing spend?

Can you comment a little bit on the competitive dynamic that occurred during the quarter?

Hey, Martin. Yeah, thanks for the question. I think the past, call it six months, nine months, haven't exactly been normal operating conditions overall. I think from a macro perspective, everyone in the DTC consumer landscape has seen softness. I don't think the specific situation you're referring to has had a big impact on our ability to acquire customers, retain customers. I think there's still a sizable gap in size and in investment. So I'm not sure it had a significant impact. I think what I can say is that both the previous company and the acquiring company are good operators and we continue to believe that they will be a good player in the market. I don't think at this stage and at levels of scale, it affects our investments and our return on investments very, very significantly.

Okay. And my last question is more of a longer-term outlook. You know, you've generated your EBITDA margin, I think, around 8.9%. It's the highest in a long time. You know, is this... peak profitability in terms of margin for you guys? I know you've reduced your costs a lot. You've pushed your gross margins high. Is there still more juice in the system or are we going to need to see revenue growth now to improve fixed cost absorption and result in margin expansion? Just a little bit of a discussion as to where do we go from here from an EBITDA margin of 8.9%?

Obviously, knowing that there's huge seasonality in your business. Thanks for the question, Martin.

I think, yeah, it's something we're constantly thinking about. And, you know, for as long as we've been a public company, we've been forecasting double-digit margin potential. And I think we see that closer than ever. the operating leverage that we see now with the cost base that we have in place and further improvements driven by efficiency or AI investments or things like that will just kind of make that dream even more of a reality in the not so distant future. So a lot of leverage going forward and some of the acquisitions and growth opportunities that John mentioned I think could help on that front as well. Yes, I hope that gives you a good direction of where we're heading.

Okay.

And one thing I'll add as well, Matt, is we continue to be focused on automating and implementing technology within our processes. And so I think the EBITDA margin improvement from here is it's unlikely to come from a growth in the gross margin, but more from efficiencies on the GNA side. And that's primarily coming from implementing technology, automation, and AI providers that can help us reduce our cost basis. It also helps improve the consistency of our execution and really the simplicity of our operations. So we're excited to continue implementing that going forward.

Okay, that's helpful. Thank you, guys.

Our next question comes from the line of Frederick Tremblay from Disjardins. Please ask your question.

Thanks. Maybe we can start with a quick follow-up on the previous answer. Just on the tech and automation that you mentioned, does that change the CapEx outlook for the company? CapEx has been pretty modest in recent quarters. Any changes there given the tech and automation investments or initiatives that you just mentioned?

Yeah, I think the automation mentioned is more an automation in terms of processes and work within the corporate function, less on the operating side. So meaning tools that help automate some of our workflows for processing or for certain investments, whether it's in marketing, whether it's in other tools that we have, it's less about machineries. I think it doesn't really change your CapEx outlook very much, so I think we're always on the lookout for really high ROI, quick payback, capital investments that fit within our budgets and what we're looking to achieve operationally. But the automation reference was more on the corporate side.

Okay, thanks for that. And then maybe just thinking about potential ways to further increase the basket size here, maybe specifically on the add-on products. How many add-on products do you have right now? And what percentage of an average basket do add-ons represent roughly? And then I guess the follow-up to that is where do you think those metrics could potentially grow? Are add-on products, I guess, a key component of growing the baskets in the future? Or is it more about adding more selection on the actual milk kit side?

Yeah, thanks for the question, Fred. I think right now we're in about 150 different add-on products available on the site. What we've been focusing on recently is trying to provide more value through bundling and different meal occasions and different bundles that help customers see value in the add-on selection above and beyond just that grocery selection that we were trying to build out a couple of years ago. I think you can continue to see us focus on kind of meal occasion products bundles and meal occasion grocery items that help add value to our customers' lives. We'll continue to invest in digital product enhancements that help customers get exposed to the add-on products and increase AOV. I think the majority of AOV, I think, will come from different meal kit additions as well. So we'll continue to add, you know, we talked about value plan additions enhancements, different standalone products, bundling on the meal kit side. So there's a lot more opportunity, I think, that we can grow AOV on that side of the business. And today, it's a small percentage of revenue, but it's a high NPS driver for a lot of our loyal customers that order with us on a regular basis.

Okay, great. Thanks for that. Last question for me, just on the SG&A. So the decrease in SG&A in Q2 was primarily attributed to lower marketing spend as well as lower wages, utilities, and insurance expenses. I imagine that savings and salaries, utilities, and insurance are pretty sticky. But I mean, what about marketing spend? When should we expect the company or should we expect the company to be eventually more aggressive on the marketing front?

I think it comes always with discipline on unit economics. I think our marketing spend and our marketing budgets are clear. They're clearly defined. I think if you think of our unit economics, it's basically how much lifetime net sales and gross profit we make out of a customer that we acquire. And acquiring that customer is sort of the first denominator in that return. So we've got to make sure that we're very disciplined on that denominator to keep our return targets on track. So I think we are able to spend more on marketing when that denominator is at a level that's logical. And so I wouldn't say that we're necessarily going to increase marketing spend significantly, but I think it'll definitely be driven by the ability to generate the unit economics that we target.

Great, that's helpful. Thanks for taking the questions. All right, that's it for the questions today.

Thanks for joining everyone, and we look forward to speaking with you again at our next call.

Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for participation. You may now disconnect.