Goodfood Market Corp.

Good morning, ladies and gentlemen, and welcome to the Good Food Q4 and fiscal 2024 earnings call and webcast. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question and answer session, and 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 the 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 27 at 8 a.m. Eastern Time. Furthermore, I would like to remind you that today's presentation may contain forward-looking statements about Good Foods' current and future plans, expectations and intentions, results, level of activity, performance, goals or achievements, or other future events or developments. As such, please take a moment to read the disclaimer on forward-looking statements on slide 2 of the presentation. 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 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 begin.

Thank you. Bonjour à tous et bienvenue à l'appel conférence de marché Good Food pour présenter nos résultats financiers du quatrième trimestre de l'exercice 2024, clos le 7 septembre. Good morning, everyone, and welcome to this call for Good Food Market Corp. to present our financial results for the fourth quarter of fiscal 2024, ended September 7th. I'm joined on the call today by Neil, Good Foods President and Chief Operating Officer, and Ross, Chief Financial Officer. This morning, we announced our Q4 and fiscal 24 results. You can find our press release and presentation on our website and CDAR. All figures in today's call are expressed in Canadian dollars unless otherwise noted. Let's start with slide three. Fiscal 2024, marking Goodfood's 10-year anniversary, has been transformative for our company with significant advancements in profitability and cash flow generation, starting with adjusted EBITDA, which nearly doubled year over year. For fiscal 2024, adjusted EBITDA reached $9.1 million, representing a margin of 6% compared to 4.7 million, or a 3% margin in fiscal 2023. This 93% growth in adjusted EBITDA reflects the structural efficiencies we've implemented, strong cost discipline, and optimized pricing strategies that are now firmly embedded in our operations. Free cash flow generation has been equally strong. For fiscal 2024, we achieved $7.6 million in adjusted free cash flow, marking a pivotal moment for Good Food, as this is our first full year of free cash flow generation. This has allowed us to reduce leverage by nearly two full turns, bringing our net leverage ratio down from 4.4 turns in fiscal 2023 to just 2.5 turns today. This not only strengthens our financial flexibility, but also positions us to invest confidently in future growth opportunities. On top of the financial accomplishments, we've continued to enrich our customer value proposition. Over the past year, we've added a record number of new recipes to our offering, giving more variety and choice than ever before. We've also expanded our value plan, which delivers delicious recipes at just $9.99 per serving, making high-quality home cooking accessible to more Canadians. This focus on affordability has been key in addressing evolving consumer preferences and broadening the customer base we have access to. Finally, I'm excited to highlight that we've begun executing on our acquisition strategy, which was discussed in previous quarters. Our acquisition of Genuine Tea, a leading Canadian third-wave craft tea company, marks the first step in building a platform of next-generation brands. This acquisition is accretive to adjusted EBITDA and aligns perfectly with our vision of building a portfolio of founder-led, high-growth and profitable businesses. With a strong foundation of financial discipline, innovative customer offerings, and a roadmap for growth, we're entering fiscal 2025 with momentum.

On that note, Ross will now go over our financial performance in greater detail. Thank you, John, and good morning, everyone.

Let's move to slide four to discuss our net sales and active customer base. On slide four, you will see that net sales for the quarter were $34.1 million, compared to $37.2 million in Q4 of 23, representing a 9% decline. Beyond usual seasonality we see in the summer months, as customers travel and spend time eating out rather than at home, this also reflects a challenging consumer spending environment, as well as our focus on more profitable customers. As such, active customers ended the quarter at 101,000 compared to 116,000 in Q4 last year, though relatively stable compared to the Q3 number when factoring seasonality. As mentioned, we continue to focus on engaging with our most loyal existing and most profitable new customers. We have seen as a result our highest net sales per active customer for our fourth quarter, standing at $337 per active customer this year, up 5% from last year. Our focus on enhancing basket size and order frequency has driven that increase, even in a difficult macroeconomic climate. Turning to slide five to review our profitability levels, we are pleased to have brought consistency to our profitability and have now delivered seven consecutive quarters of positive adjusted EBITDA. Gross profit for the quarter was $13 million, representing a gross margin of 38%, consistent with last year's gross margin. This level reflects stable profitability supported by operational efficiencies and by pricing optimizations. On the back of the consistent gross margin, we continue to work to take costs out of the system and reduce SG&A and have delivered adjusted EBITDA this quarter of just over half a million dollars for a margin of 1.5%. Seven consecutive quarters of positive adjusted EBITDA has required strong cost discipline from every employee in our team. Everyone has and continues to drive efficiencies in our operations and optimization of our cost structure. Our employees persistently work to build and implement a culture of continuous improvement and lean operations, which has enabled this consistent level of EBITDA generation. Moving to slide six, cash flow generation remains a key highlight for fiscal 2024. Cash flows used by operating activities were $0.9 million this quarter, a $1.1 million improvement compared to the same quarter last year. This profitability gain consistency, or CFO, has improved compared to last year, and with capital expenditures remaining low given the good condition of our relatively new and well-maintained assets, our adjusted free cash flow has remained stable for the quarter. As outlined throughout the year, this free cash flow improvement is enabling a reduction in debt, which combined with growing profitability, have brought our net leverage from 4.4 turns in the fourth quarter last year to 2.5 turns this quarter. Turning to slide 7, which summarizes our key financial metrics this year. We are proud of the profitability metrics we delivered this year. Gross margin improved by 2.4 percentage points and adjusted EBITDA margin improved by 3.1 percentage points. on route to delivering record-adjusted EBITDA of $9.1 million. Going from this improved profitability is also record-adjusted free cash flow, which reached full-year positive territory for the first time in Goodfood's 10-year history at $7.6 million for the year. This level of cash flow and cash balance provides meaningful financial flexibility to continue enhancing our financial position and the ability to invest in various strategic initiatives, such as the recently announced acquisition of Genuine Tea. Overall, the results this year highlight our continued focus on providing more to customers with strong unit economics and building operating efficiencies. While our active customer base has shown some stability and lower contractions, It has also shown its highest net sales per active customer every quarter this year, which have in turn driven increased profitability. Combined with further use of technology tools, outsourcing initiatives, disciplined cost management, and improvement in operational metrics, such as labor cost proportion or shipping cost per order, which have both shown double-digit percentage improvement year over year, our profitability has reached levels never seen before. On balance, our profitability metrics for the year came ahead of our expectations, and we are pleased with the sustained strength of our financial performance and satisfied with growing profitability. While the majority of our financial KPIs, unit economics, and customer feedback metrics continue to show improvement, we continue to strive for growth in both the top line and the bottom line. As we look to generate growth in a difficult environment, we are energized by this performance, energized and hungry for more.

John will now provide an update on our recent customer-centric initiatives and the acquisition of Genuantique. Thank you, Ross.

Turning to slide 8, our outlook for fiscal 2025 centers on delighting our customers and expanding our platform. We recently introduced the Value Plan, built on the value recipes made available to members earlier this year. It's a cornerstone of our strategy. This plan offers delicious classic recipes for under $10 per serving, making high-quality affordable meals accessible to more Canadian households. It is not just an add-on, but a growing segment of our Ready to Cook portfolio, and its uptake has doubled since launch in the summer. Members are increasingly signing up to the plan and still have access to the rest of our recipes, upsells, and grocery add-ons. We are also excited about our chef partnerships, which include collaborations with industry legends like Chuck Hughes or Susser Lee, up-and-coming stars like chef Laurent Dagenais and Michelin-starred chefs like Lee Cooper of L'Abattoir in Vancouver. These partnerships bring unique culinary experiences directly to our customers' homes, creating a sense of joy and discovery that sets good food apart. Moving to slide nine, we are thrilled to welcome Genuine Tea into the Good Food family. Genuine Tea, a leading Canadian third wave craft tea company, embodies the values we look for in an acquisition. Passionate founders, a strong growth history, meaningful profitability, and a commitment to quality. In addition, Genuine Tea has been recognized as one of Canada's fastest growing companies by the Globe and Mail, and has won Best Tea in Toronto multiple years in a row. We are excited to be working with Sarah and David, the founders of Genuine Tea, who will continue to lead the business for years to come, maintaining the brand's unique identity, known for product innovations in high quality, organic, and transparently sourced teas. We believe Genuine Tea is well-positioned to continue to grow through its successful omnichannel strategy, selling into Canada's most discerning cafes, specialty grocery stores, and their e-commerce website. This acquisition is a critical first step in our long-term strategy to build a global portfolio of next-generation consumer brands. We aim to partner with founder-led businesses that share our values, have demonstrated consistent growth and profitability, and can operate within a decentralized model. We will also support the acquired businesses and drive value creation through, for example, combining logistics networks, offering fulfillment as a service, and cross-selling initiatives among many value-creating options. Our investment approach is designed for the long term. We plan to invest in businesses that align with our ethical and sustainability values and provide autonomy to founders while leveraging our platform for growth. This approach will be central to achieving our audacious goal of becoming a leading portfolio of next-generation brands globally. On the 10-year anniversary of Good Food, we are pleased with our financial performance and excited by the future of the company. This year has demonstrated the consistent cash flow generation ability of good food, as well as its ability to attract and invest in next-generation businesses and build a platform that is lean and well-positioned to generate meaningful shareholder value.

On that note, I will turn it over to the operator for the Q&A portion of this call.

Thank you. And ladies and gentlemen, we will now begin the question and answer session. To ask a question, you may press the star followed by the number one on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press the star followed by the number two. Once again, please press the star one on your telephone keypad to ask a question. Your first question comes from the line of Martin Laundrie with Stifel. Please go ahead.

Hi, good morning, guys. Morning, Martin.

My first question is on, you know, on the trend that you're seeing in Q1. Q1's almost done. So I was wondering if you could talk a little bit about how your customer count has evolved, how your... average revenue per user has evolved and your customer acquisition costs in Q1, just to give us a little bit of a sense on how things are going post the year end.

Thanks for the question, Martin.

I think one of the things we mentioned in the script is Q4 was continuing to see consumer challenges and softness across Canada. And, you know, within Q1, we're seeing some of the same trends in terms of consumer softness. I think one of the things that we're looking at is the subscriber count stability. So I would say since Q3 of 2024, we've seen relative stability in our customer counts. which I think is a good leading indicator. Being able to maintain that over several quarters is what leads to year-over-year revenue growth ultimately. So we're encouraged by the stability in that customer count. It's been driven, I would say, through really focusing in on the ROI of our marketing spend, as we've talked about in the past. I think we saw... about a 15% improvement in customer acquisition costs throughout the summer, and we're continuing to maintain that trend in Q1. And what else can I add? I think the value plan is helping us both attract customers who are signing up to the value plan for the $10 meals, but we're also seeing existing customers interact with the value menu So they can stay on their existing plans and add value menu recipes within their selection. And so it's creating a lot of options and ways in which customers can save money while continuing to shop at good food. So we're seeing some positive things across those trends. But as I'm sure you're seeing across all consumer businesses in Canada, we're working really hard to meet customers' needs and the environment remains challenging.

Yeah.

So if your customer count is stable and you're seeing that you're seeing consumer softness, does that imply that your ARPU is down a little bit?

I think, as you know, revenue is based on the basket size and the frequency of the orders. I think we're seeing subscribers being relatively stable. I think on an activity level, there's probably not as much activity or there's softness in the activity from the customers.

I think the basket size is held quite nicely though. Okay.

And one thing we're seeing is our Canadian dollar losing ground versus the U.S. dollar. And if I recall, I know you've got some purchases in U.S. dollars. Can you talk a little bit about how the weakening Canadian dollars is impacting your business right now?

Yeah, there's some impact, especially as we start sourcing more with the wintry season from the U.S. There's some impact on our food cost. I wouldn't say it's... it's very, very significant. It is pressuring gross margin a little bit at this point. We still try to have as many of our purchases as possible in CAD. Of course, some of the products coming from the U.S., even if they're quoted in CAD, the exchange rate has an impact, and then there's some USD purchases. It is still a minority of our cost structure.

Okay. Okay. That's it for me. Thank you. Good luck. And your next question.

Your next question comes from the line of Frederick Tremblay with Day Jordan. Please go ahead.

Thank you. Good morning. And congrats on the first acquisition. Just on that, I wanted to maybe dig a bit deeper on the acquisition strategy here and specifically if you view it as being more brand related or category related. And I guess I mean by that, are you screening targets by brands that are resonating with customers first, or are there specific product categories that you're looking at? Just want to better understand what the sort of the filters are initially on the acquisition strategy.

Yeah. Hey, good morning. Thanks for the question. I think, um, What we're looking for is really the concept of next generation brands. So we're looking for brands that are aligned with Good Foods values, right? So Good Foods core purpose of delivering joyful nourishment and helping our community live longer on a healthier planet. That's kind of, you know, one of the overarching themes that we're thinking about and talking about with the businesses that we're interacting with. I think having a similar end consumer is something that we're favoring. So having the ability to say the brand has potentially a similar customer base that we can cross-sell their brand into Goodfood's customer base and vice versa, I think that's a real plus. Next generation for us also means a significant amount of e-commerce sales. And that creates some interesting opportunities for us to offer fulfillment as a service to some of these smaller brands that are fulfilling their products internally themselves. And we can do so on a larger scale with many efficiencies. probably at a cost basis that's 15 to 20% below what a smaller brand would be doing on their own. And then I think for us as well, what we really like about Genuine Tea is they've carved out a unique niche for their brand and their business that's fast growing and is gaining adoption in Canada. So they're one of the leaders in the third wave tea movement. And if you've heard about the third wave movement on the coffee bean side, it's all about promoting quality, freshness and transparency of the product. So Genuine Tea is sourcing directly from international farms, getting high quality products and getting it really fresh for their customers. And it also creates a real focus around innovation, which I think is another core piece of next generation brands. So Genuine Tea was the first tea brand to offer traditional matcha in Toronto, for example. They're also a leader in adaptogenic tea blends, working with nutritionists to build out those tea blends. And so those are a few of the characteristics that we see in the next generation brands that we're interested in working with. And what we love about the Genuine Tea situation as well is the founders, Sarah and David, have this combination of a really deep understanding of their consumer base and their products. They're both tea sommeliers, but they also have business backgrounds and have MBAs. which gives them a really interesting combination of business acuity and entrepreneurial abilities and deep knowledge of their consumers and their space. And so I think for us, what we're trying to do is make sure that in addition to targeting good foods organic growth, we can build out this platform of brands that give us many ways to win and many ways to grow within the portfolio and And Genuinity has been really an impressive, fast-growing brand over the past few years, and we're excited to work with the founders.

That's great. Thanks for that. Maybe just a last clarification there. I think in your script you mentioned global brands a few times. Was that meant to say that you're looking outside of Canada as well? And if so, how would you think about some of those synergies in terms of logistics and other, I guess, Canadian-centric synergies that we could see from some of the acquisitions that are made in Canada and how you would offset that if you were to acquire outside of Canada.

So we focused our core efforts within Canada Of course, since we've made the Genuine Tea announcement, we've had some interest from businesses, I would say, across North America. And so we're keeping an open mind within the U.S. market. We're trying to find businesses that we have an edge in and we understand better than any other buyer out there. So I think that's a core piece of it. And we're also exploring opportunities to, um, to bring us brands into Canada and leverage our platform for that. So that could be one of the ways in which, um, value could be created, uh, working with, uh, a us brand.

Okay, great. That's interesting. Um, maybe switching topics here, um, more on the margin side, obviously great progress in the fiscal 24, um, and without giving any, I guess, for guidance for, for fiscal 25, um, are you seeing any sort of levers that would potentially continue to move the margin higher in the next year? Or are we sort of at a plateau and maybe we're relying more on margin accretive acquisitions? That's how you're thinking about the growth and adjusted EBITDA margin going forward.

It's a good question.

I think from a gross margin perspective, what we've mentioned in recent quarters and highlighted with the value plan is what we're looking to find ways to give more to the customer. So I think there's some investments that are being made in terms of the amount of diversity in some ingredients and up and down the pricing options. So that's on the gross margin. I think on the EBITDA margin, definitely margin accretive acquisitions will play a role in that. I think overall, we're still always going to look for you know, marginal cost improvements on the OPEX side to see what we can do better, whether it's focusing on improving some of our technology tools and how they can help increase productivity within the business or look at some of the longer-term contracts that we've had that we can work through so I think those gains are probably going to be more on the marginal side so I think if you look at the mix of adding both margin accretive acquisitions and doing some small improvements on the SG&A side and there's the path to get to margin improvement on the EBITDA side Alright thanks for taking the questions that's all I have Thanks Fred

Thank you. And I'm showing no further questions at this time. I would like to turn it back to Mr. Jonathan Ferrari for closing remarks.

Thank you for joining us on this call, and we look forward to speaking with you again in the new year.

Thank you, presenters. And ladies and gentlemen, this concludes today's conference call. Thank you all for participating. You may now disconnect.