Goodfood Market Corp.

Good morning, ladies and gentlemen, and welcome to the Good Food Q2 of Fiscal 2025 Earnings Call on Webcast. At this time, all participants are in a 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 the 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, April 22nd 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, goal search events, or other future events or developments. As such, please take a moment to read the disclaimer and 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 We 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 proceed.

Thank you. Bonjour à tous et bienvenue à l'appel conférence de marché Good Food pour présenter nos résultats financiers du second trimestre de l'exercice 2025, clos le 8 mars. Good morning, everyone, and welcome to this call for Good Food Market Corp. to present our financial results for the second quarter of fiscal 2025, ended March 8th. 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 Q2 results. You can find our press release and presentation on our website and CDAR+. All figures in today's call are in Canadian dollars, unless otherwise noted. Let's start with slide three. In Q2, we're encouraged to have delivered positive adjusted EBITDA for the ninth consecutive quarter, showcasing the durability of our business and financial model, despite significant economic headwinds. Adjusted EBITDA for the quarter was $1 million, representing a 4.5% margin. Within a softer top line and consumer spending environment, this continued margin performance reflects the adaptability of our operations, the soundness of our strategic priorities, and the nimbleness of our cost structure. Our gross margin also remained strong at 43%, even with macro pressures impacting volumes. This was supported by cost efficiencies and process optimization, which helped mitigate seasonal declines in customer orders. In Q2, our customers' baskets reached an all-time high, driven in large part by enhanced digital experience features like protein customization and more intuitive add-on flows, which made it easy for customers to build larger baskets. Good Food members can more easily browse our full selection of delicious meals, sides, desserts, appetizers, and more, driving more portions and products being added in each basket. In recent weeks, we launched our new Heat and Eat line, a ready-to-eat offering available in select geographies. Early reviews have been strong, and the Heat and Eat meals that can be ready in two minutes are helping meet the growing demand for high-quality, healthy, and ultra-convenient meals. We're also proud to share that we officially achieved B Corp certification, a powerful recognition of our ongoing commitment to ethical business practices and environmental stewardship. The certification, a culmination of years of our team's hard work, is a customer-facing testament to our commitment to continuously enhance our social and environmental performance, accountability and transparency, all of which are important for our customers, our employees and the communities we service. With all of this in play, we believe the business is firmly positioned to continue executing on both our core organic and inorganic growth pillars.

Ross will now walk you through our financial performance. Thank you, John. Let's begin on slide four with our sales and customer metrics.

Net sales for the quarter totaled $30.5 million, a 23% decline year over year. This drop primarily reflects a lower active customer count, resulting from a more pronounced holiday seasonality, cautious post-holiday consumer spending, and general macro headwinds. While the headwinds were strong, we continued our focus on higher-value customers requiring less incentives and displaying stronger unit economics, which helped us achieve record net sales per active customers of $363, a substantial increase from the $327 in Q1. Active customers ended the quarter at $84,000, down from Q1, driven by the aforementioned lower consumer spending and aligned with our focus on customers with better unit economics. Overall, these figures underscore the challenging holiday seasonality we experienced and the muted post-holiday spending environment and very low consumer confidence. While we recognize the challenges brought about by a lower net sales basis, the results also underscore our ability to drive more value per user with fewer promotional incentives leading to healthy margins, as we will see on the next slide.

I will now turn to slide five to review our profitability levels.

This quarter, gross profit reached $13 million with a 42.6% gross margin, relatively flat compared to last year, despite the fixed costs being amortized on lower order and sales basis. This was achieved through lean operations and supply chain diversification, lowering food costs in an inflationary environment. Strategic efficiencies in our fulfillment process also drove lower labor unit costs, and reductions in packaging unit costs, which contributed meaningfully to this result. Adjusted EBITDA came in at $1.4 million, reflecting the enduring strength of our cost management framework. While this is lower than the figure posted in Q2 last year, we are encouraged by the operational agility and financial discipline built, which helped us effectively navigate the substantial seasonal and macroeconomic challenges that occurred this quarter. Our teams relentlessly embed continuous improvement principles across the business, driving sustainable efficiency gains and providing an increasingly resilient level of profitability, ready to face a wide array of economic scenarios.

Now moving to slide six to review cash flows.

Cash flow used in operations was $1.2 million, primarily driven by lower net income and timing differences in SG&A payables. Capital expenditures remained modest at $0.4 million, with spend concentrated on compliance upgrades at our Montreal facility, which are now more than half completed. Adjusted free cash flow was negative $1.5 million, compared to a positive $0.3 million in the prior period. Despite the quarter's challenges, our liquidity remained solid, with $19 million in cash and marketable securities. Also noteworthy from a balance sheet perspective was the repayment in shares of our 2025 convertible debentures shortly after the quarter ended. This further deleverages our balance sheet and reduces risk while supporting strategic capital flexibility moving forward.

Turning to slide 7, which summarizes our key financial highlights for the quarter.

Overall, we maintained a gross margin of nearly 43% and delivered our ninth consecutive quarter of positive adjusted EBITDA. reinforcing the strength of our cost structure and unit economics and underscoring the efficiency of our operating model. While our adjusted EBITDA margin declined over a year to 4.5% as net sales declined, it remained stable relative to Q1. We attribute this resilience to a balanced approach, investing in physical and digital product enhancements and customer experiences that deliver solid returns while remaining very disciplined on costs. Our total net debt to adjust the EBITDA ratio is now at a manageable three turns after the repayment in shares of our 2025 debentures. Our capital structure is healthier and we retain the flexibility to support growth when the current headwinds subside.

With that, I'll turn it back to John for outlook. Thanks, Ross.

Let's now look ahead on slide eight. As we chart our path forward, Our organic value drivers are squarely focused on enhancing the customer experience and growing responsibly. A standout initiative in recent weeks has been the launch of our Heat and Eat Meals, a major expansion in our product mix and addressable market that caters to time-sensitive consumers without compromising quality. These delicious meals have seen strong early adoption as we are selling nearly 1,000 meals a week only in Quebec and without any advertising. The quality and convenience of the meals has also translated into strong satisfaction rates. Members have shared glowing feedback with ratings averaging 4.6 out of 5, an early validation of our decision to invest in this segment. We are actively working to expand the lineup of recipes and delivery zones making these nutritious and convenient options available to more households across Canada. Turning to the ready-to-cook side, Good Food's head chef, Jordana, and her team have traveled the world to bring back authentic global flavors, ingredients, and cuisines to our customers' homes. This has led to the creation of the limited-edition Good Food Travels kits, allowing home chefs to experience firsthand the cuisine of Oaxaca in Mexico or Thailand and Vietnam in Southeast Asia. As we continue to explore the world and bring it back to Canadians coast to coast, we look forward to continuing to bring flair and global discovery to our menu. In parallel, we also continue to grow our value plan, which remains an attractive point of entry for new customers and a useful tool to drive upsell into our broader recipe portfolio. On the Genuine Tea front, the organic craft tea brand that we acquired in November We continue to be impressed with the performance of the business as it exceeds our expectations. Since its acquisition, the brand has achieved top-line growth, nearing 30% to 40% year-over-year, while sustaining EBITDA margins in the teens. Genuine Tea has had important wins this quarter, onboarding multi-location café brands like Pure Bread Bakery in British Columbia and growing matcha sales 100% year-over-year at Whole Foods. Genuine Tea also reported benefiting from the Buy Canadian movement as it is increasingly serving as an alternative to US-based tea brands. We are enthusiastic about the overall performance of our first acquisition and now have the blueprint for our acquisition strategy. Growing founder-led, profitable, and value-aligned businesses with omnichannel potential. As we think of the future of our company, we envision a structure in which Good Food, Genuine Tea, and future acquisitions operate under the umbrella of a parent company, benefiting from the networks and expertise we have developed over the past 10 years. In fact, this model is already unlocking strategic synergies from shared logistics to fulfillment capabilities. We're excited by the runway Genuine Tea presents and our deepening integration to maximize its impact. This acquisition is not just about a great product. It represents our first step towards building a curated portfolio of next-generation brands that deliver delight and profitability. We will continue to be disciplined in this effort, seeking scalable and sustainable assets that enhance our ecosystem. As part of our ongoing mission to create value responsibly, we are incredibly proud to have achieved B Corp certification a recognition that places good food among a global community of businesses committed to high standards of social and environmental performance. This milestone reinforces our dedication to sourcing locally. 100% of our ingredients come from Canadian suppliers, with 70% directly from local farms, and to reducing our environmental footprint through initiatives like carbon reduced supply chains and resource efficient operations. B Corp status validates the steps we have taken across all aspects of our business, from governance to sustainability, and serves as a public commitment to improving the future of our planet while delivering fresh, high-quality meals Canadians can feel good about. On the Treasury side, we now hold the equivalent of 22.3 Bitcoin through the ETF as part of our Bitcoin Treasury Reserve strategy. This strategy aims to preserve long-term value, hedge against inflation, and diversify capital deployment. While the majority of our liquidity remains in conventional instruments, we believe this is a prudent and value-creating strategy given the current macro environment. In closing, as we enter our 11th year in business, we are energized by the quality of our offerings, the passion of our team, and the clarity of our strategy. Whether it's through meal kits, heat and eat meals, or strategic acquisitions, Good Food is laying the groundwork for long-term differentiated success. Thank you for joining us. I'll now pass it to the operator for questions.

Thank you. 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, you may press the star followed by the number two. Once again, please press the star 1 to join the queue.

One moment, please, for your first question. And your first question comes from the line of Martin Landry with Stipple.

Please go ahead.

Hi. Good morning, guys. I would like to get more details on your customer count. the decline of 22,000 active customers during the quarter is a bit concerning. I'm sure that you're conducting exit surveys with your customer and I wondered, what are the reasons that are cited by your customers when leaving? Are they going to competitors? Are they disconnecting because they don't see the value in your offering? Can you just elaborate a little bit as to why there's so much customer erosion right now?

Good morning, Mathé. The main factor behind the decline in the active customer count is actually order rate related. We've actually seen an improvement in customer churn rate like cancellations or cancelled customers That has improved like year over year, and we've continued to see the improvement into Q3. But the lower seasonal order rates in December and then lower order rates that continued in January was the driver of the reduced active customer count in the past 90 days. So it's less about the cancellations and more about less activity within the customer base or reduced order rates.

Okay.

And sorry, what, what is the okay. And then have you been able to onboard some customers during the, during the quarter?

So, yes, we've continued to like acquire new customers.

And then from a churn perspective we have we've made some improvements, both quarter over quarter and year over year. From a customer acquisition cost perspective, we've seen a small reduction year over year in customer acquisition cost. If we look at the full matrix of our unit economics, I would say CAC is relatively stable, a little bit down. Churn is improved fairly significantly through the initiatives we were talking about of Like the product portfolio improvement, digital experience improvement, reducing friction from the customer experience and ease of subscription management. But the order rate is really what's been driving both the decline in sales year over year, as well as the reduction in the active customer counts. That's the key driver right now.

Okay. And maybe to dig a little bit more, so why is it that customers are not ordering as much as they used to?

So I would say, as we were seeing the numbers come in in December, we were assuming more pronounced seasonality in December. The way in which the holiday period fell this year, it impacted more Monday deliveries than it did last year. which has a more pronounced impact on the reduction in order rates seasonally because kind of Sundays and Mondays are the biggest delivery days for good food. And then in January and February, we saw like continued customer acquisition and the impacts on CAC that I mentioned. but the order rates didn't pick up as much as they have in prior years seasonally. And we're attributing that partially to the consumer spending environment and the tariff situation that was, I guess, started to pick up in February. Our supply chain is not directly impacted by the tariffs, really, given the fact that most of what we're sourcing at Good Food is is Canadian, and our sales are primarily in Canada. Genuine Tea has maybe 10% of sales into the US, so it's quite small. But the general uncertainty in the market that was building up from a macro perspective late in 2024 and then exacerbated by the tariff situation in early calendar Q1 The combination of those items really have created a lot of uncertainty within consumer spending and our customer base. And that's where we've seen backing off on the order rates. The flip side is we talked a little bit about basket sizes. We've been working to grow the basket size. of the average customer order and making it easier for customers to add, whether it's heat and eat meals or other add-ons to their baskets. So partially it's been offset by some better basket sizes that improves both profitability and AOV, but certainly it's been a challenging environment. As we look into our fiscal Q3, We are seeing some stability in the customer count, which is good. The order rates remain lower than in this time last year, but we are seeing some stability. I guess both in the order rate quarter over quarter, but also in the customer count.

Okay.

Well, that was my next question. It was about Q3. So it sounds like things are stabilizing a little bit. Cause I mean, uh, at some point, um, with, with your sales declining, like we're seeing today, uh, your fixed cost absorption erodes a little bit, I guess it worsens and, and, and we're seeing it on your, on your, on your margin, uh, on a year over year basis on your EBITDA margin. So, so by the sound of it, um, you know, is when you're seeing stability in your customer account, Does that mean that we could expect your customer account to be stable sequentially in Q3?

Yeah. Hey, Martin. It's Ross here. I think in Q3, at least what we've seen so far, is that from an order rate perspective, there is stability, which means that If on the subscriber side there's stability, this should translate into active customers, so customers who have placed an order within the quarter to be stable. Of course, we're halfway through, so there's quite a bit to go in the quarter, but I think we can expect some stability on that front if order rates continue to be stable for the remaining weeks in the quarter. And maybe to go on, make a comment on your margin comment. I think we've worked very hard and we're able to variabilize, if you allow me the expression, a good chunk of our COGS so that we're still able to keep gross margin at a healthy level. I think on the SG&A side is where there's, when there's a net sales basis that evolves and declines is where there's, opportunities that we want to make sure we're investing in the right areas and see if there's areas where there's room for improvement. So that's something we'll continuously look into. So I think from a gross margin perspective, there should also be stability. And then on SG&A, we'll look for improvements throughout every day, every week, every month.

Okay, super. Thank you, and best of luck. Thank you.

And once again, if you would like to ask a question, simply press the star one on your telephone keypad.

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

Thank you. I just wanted to ask on the ready-to-eat offering. This is a category that you've been involved in in the past, and there's been a few iterations of it. I'm just wondering if there's anything different this time around that gives you the confidence that this will be successful and sort of how much of a focus that is versus ready to cook. A while ago in the industry, there seemed to be a bit of a shift towards ready to eat. Is that something that you're trying to pivot to in a meaningful way or is it more of a complimentary offering overall?

Good morning, Fred.

So, yes, the Ready to Eat segment is something that we've played around with in the past. We have some pretty significant learnings from those previous initiatives that we're able to apply to our current heat and eat offering. One is we've made the decision to prepare and cook the meals in-house within our facilities versus working with suppliers. In the past, what we saw is both the quality and the margin profile of the products that were prepared by third-party suppliers had trouble reaching consistency and traction within our customer base. We believe bringing that production in-house is better both economically and from a customer experience perspective. So effectively what we've done in the Montreal facility is convert a portion of our space into heat and heat production space. We are seeing strong demand in the market for these types of meal solutions. It's a product that's very convenient easy to prepare, and it's really differentiated from what you would find on Uber Eats or DoorDash because of the health profile of the product. So it's healthy, it's delicious, and it's significantly cheaper than any type of restaurant delivery. So those are some of the things we're seeing in the market. It does look like it's a growing segment, which is the reason why we feel it's important for good food to grab a piece of that growing segment. And then the other piece I would add is we're building it within the good food customer experience. Our intent is to make it easy and seamless for customers to mix and match ready to cook and heat and eat products. And some of the behavior that we're seeing is for customers to be ordering the heat and eat products in addition to their ready to cook products. which is helping grow the basket sizes. At this point, it's still a small selection, and it's a very regional focus within certain parts of Quebec. So we're early days, but we're quite pleased with the traction so far. We're delivering more than 1,000 meals per week, and the customer ratings and reorder rates are encouraging. Ross and Neil, I'll pass it to you if there's anything else you'd like to add about the heat and eat segment.

Yeah, maybe just one thing, Fred. Obviously, one of the learnings that we've had is how to amortize the GNA of the facilities and of the team. So we've been much more integrated from a supply chain perspective and an operations perspective in this recent launch, which has helped on getting the gross margin up a lot faster while maintaining that quality experience that we that John just mentioned and so far customers are really happy and the team is extremely extremely motivated.

Thanks for that. I appreciate the color.

Maybe a question of supply with everything going on in the US trade policies. I know you guys are very local focus as it relates to your sourcing, but has there been any impact whether on availability of supply or perhaps inflation from even locally from the current macro environment or is it business as usual, tough to say in the current macro environment, but has there been any sort of notable impacts on your supply approach or just the overall supply chain?

Yeah, I'll start on that one.

I would say on the ready-to-cook side, it's been fairly stable. I think there are suppliers that have seen cost increases in their supply chain, and we work with them to try to not pass those along to customers in whatever way we can. Over long periods of time, obviously, the inflation kind of catches up if it all ends up being sticky. But so far, it hasn't affected any kind of menu or other products significant value proposition drivers that we focus on. And same for the heat meet segment as well. And then I think the biggest piece right now from a supply chain perspective that we're focused on is helping genuine T-scale, as John and Ross mentioned in the prepared comments. A couple of their products are really, really doing well. Matcha is up 100% in Whole Foods and performing well across the other channels that they sell into. So working with them to secure more supply globally for a market that's growing really quickly.

I don't know, Ross, do you have anything else to add? Yeah, I think that covers most of it.

I think when obviously this flip-flopping on tariffs came about, we We looked at our supply chain and made sure that we had a secure supply, b some clarity on price. I think being mostly local, working with Canadian suppliers, even if they sourced some of the products in the US, they had alternatives. And then when the latest announcements were made that goods covered under USMCA were exempt, that covers a decent chunk, not all, but a decent chunk of produce and food related items. I think so far we've been able to see some good results, and even as mentioned in the remarks, the food cost proportion actually went down during the quarter as we worked to source this kind of pushed sourcing to go and explore and make sure that we get the best prices on everything. So it's been good so far.

I think the markets are relatively tight, but still manageable.

Thanks.

Last question for me on capital allocation, especially with the debenture repayment in shares. I'm just curious to see what your current and mid-term capital allocation priorities are. You mentioned M&A. There's obviously another debenture maturing in 2027. So just wanting a bit more clarity on what you're expecting there in terms of your capital uses moving forward, especially in the current environment where, you know, sales and potentially cash flow, there's a bit of a weight there on that. So just your thoughts on that would be helpful. Thank you.

Yeah, appreciate the question, Fred, and a good one. I think we've always been focused on prioritizing capital allocation based on return profiles, be it the internal P&L or some external opportunities. I think we'll definitely continue to do that. I think obviously it is prudent to be extra prudent on cash deployment and capital allocation over the next few months and potentially a couple of quarters to make sure that we have more clarity on the landscape in North America. So I think we'll continue to manage our cash as prudently as possible. With that said, when there's good ROI or great ROI opportunities that come about, I think definitely we maintain the flexibility to be able to act on them.

Thanks for taking the questions. 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 the call, and we look forward to speaking with you again at our next call.

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