Goodfood Market Corp. (FOOD) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to the Goodfood Q2 2023 Earnings Conference Call and Webcast. [Operator Instructions] 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 2 of the presentation. I would now like to turn the meeting over to your host for today, Jonathan Ferrari, Goodfood's Chief Executive Officer. Mr. Ferrari, you may begin.

Thank you. [Foreign Language] Good morning, everyone, and welcome to this call for Goodfood Market Corp. to present our financial results for the second quarter of fiscal 2023 ended March 4. I'm joined on the call today by Neil Cuggy, Goodfood's 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 at makegoodfood.ca and on SEDAR. Please be aware that we will refer to certain metrics and non-IFRS measures. Where possible, these measures are identified and reconciled to the most comparable IFRS measures in our MD&A. Finally, let me remind you that all figures expressed on today's call are in Canadian dollars, unless otherwise stated. I will now turn to Slide 3, which reviews Goodfood's progress on the 3 key drivers of our turnaround execution. Over the past 12 months, we have worked diligently to turn around Goodfood. This commitment had 3 pillars of execution: one, a simpler balance sheet; two, reaching profitability and improving cash flows; and three, generating profitable growth. We are encouraged by the progress made in the turnaround, and our team is excited about the path forward. Looking more closely at the 3 drivers. One, our balance sheet is now cleaner and more solid. We have refinanced our credit facilities, providing meaningful financial flexibility. We have also exited 13 operating facilities, removing nearly $47 million in lease liabilities since last year and reducing outflows related to these leases. We also strengthened our balance sheet by completing a financing transaction with partner Investissement Quebec, insiders and existing shareholders, further demonstrating the belief in our successful turnaround execution. Second, we delivered this quarter on our commitment to reaching profitability. Through operational efficiencies and price adjustments, we built structural strength in our gross margin, which surpassed 40% for the first time. Combined with our relentless cost cutting, driving $45 million of annual SG&A reductions, excluding marketing since last year, we delivered adjusted EBITDA of $3 million this quarter for a margin of 7%. Our profitability and low capital expenditures have driven a free cash flow use of $2 million this quarter, a $25 million year-over-year improvement, gaining momentum towards positive free cash flow. Three, our focus began to shift towards growth during the quarter. We are reengaged in key brand ambassador partnerships and introduced product lines to broaden our audience with new Paleo and Keto meals supported by an exciting marketing campaign with Montreal Canadiens Captain, Nick Suzuki. We also rolled out our first VIP customer loyalty program and continue to establish restaurant collaborations to provide a further differentiated offering to our customers. Lastly, we are implementing significant enhancements to our tech platform with an eye towards improving conversions and stickiness. We are pleased with the progress made on our turnaround drivers and the momentum we have to fully reach our goals of continued profitability, positive cash flows and growth in the coming quarters. On that note, Ross Aouameur, our newly promoted CFO, will now provide additional details on our financial performance. Over to you, Ross.

Thank you, Jon, and good morning, everyone. I will now turn to Slide 4, which provides details on our top line performance. Quarterly active customers during the second quarter were 124,000 compared to 246,000 in the same quarter of fiscal '22 and 148,000 in the previous quarter of [ fiscal '23 ] with the majority of the sequential quarterly decline stemming from the exit of our Goodfood on-demand offering. Net sales were $42 million for the quarter, a $5 million sequential decline compared to the first quarter, in part, again, driven by our exit of on-demand. This quarter, we continued to focus on achieving profitability in the near term by acquiring more profitable customers and focusing on profitable products. As such, in addition to discontinuing our on-demand offering, impacting our active customer count net sales. We also discontinued grocery products with profitability levels below our threshold. Despite that, we are pleased to have seen net sales per active customers increasing 6% as the customers required better order metrics and required price incentives. With our team's focus now solely on our weekly subscription service, returning to top line growth is a key component of the next steps of our strategy. And our focus will continue to be on our highest value existing and prospective customers and products. We will now turn to Slide 5, which looks at our profitability levels. We are pleased to have delivered on our commitments to reach profitability this quarter. Gross margin again hit record levels in Q2, reaching 40.7% or 42.2% when adjusted for nonrecurring inventory write-offs related to discontinuation of products through our on-demand channel. The 1,820 basis points improvement compared to the same quarter last year underscores the efforts made by our teams to simplify operations. Combined with price adjustments, reduced credits and incentives and product streamlining, we believe these improvements are structural in nature and provide a solid platform to sustain profitability and drive positive cash flows in the near term. This level of gross margin has also contributed to keeping our gross profit in total dollars stable on a lower net sales basis, further supporting our profitability and improved cash flow this quarter. SG&A expense reduction measures were also implemented this quarter and resulted in an additional $5 million of annual savings. In total, we reduced our SG&A, excluding marketing by over $45 million annually in the past 12 months. These savings, combined with the structural strength of our gross margin, resulted in a positive adjusted EBITDA of $3 million, a $17 million improvement year-over-year for a margin of 7%. While we are pleased to have delivered positive EBITDA, we are fully focused on the next steps of our plan and we'll now focus on consistent annual growth of EBITDA and free cash flow. I will now move to Slide 6 for a review of cash flows and capital expenditures. Cash flows used in operating activities came in at $4 million, a $10 million improvement compared to the same quarter last year. Generating net income as opposed to a net loss last year was the main driver of the cash flow improvement. Capital expenditures came in at less than $0.5 million, relating mainly to capitalized labor of tech investments and payments of maintenance work. This continues our consistent reduction of capital intensity and compared to last year's second quarter CapEx of [ $15 million ]. As a measure of our use of cash, we have introduced a metric that will combine our cash flow from operations and capital expenditures. This metric is free cash flow. As you can see here, when adjusting for restructuring-related cash flows, our free cash flow outflow this quarter totaled $2 million, continuing to gain momentum towards free cash flow breakeven. This positive performance has been the result of growing profitability as well as lower capital investment. Turning to Slide 7, you will find a summary of our performance this quarter. Overall, we're encouraged with the progress made on our turnaround drivers this quarter, simplify our balance sheet, improve our profitability and cash flow metrics and set the table for growth. All profitability indicators have shown marked improvements, demonstrating our unwavering commitment to return to positive adjusted EBITDA and cash flows. The record gross margin and to further streamline SG&A, has positioned our cost structure to consistently achieve positive adjusted EBITDA as we now turn our focus to growing our top line and to achieving profitable growth in the coming quarters. On that note, I will turn it back to Jon to provide additional details on our near-term outlook.

Thank you, Ross. I'll now turn to Slide 8 to review our outlook. First, we have substantially completed our turnaround execution. With our simpler balance sheet and operations, we have achieved EBITDA profitability on the back of structurally sound gross margin and SG&A cost structure. The target is now to maintain and grow positive EBITDA. Second, we are working hard to complete the last step in the balance sheet and cost structure portions of our turnaround. Exiting remaining leases and renegotiating additional contracts to drive further improvements in cash flows will be a key part of our near-term strategic goals. Third, we are stepping up our sustainability efforts to elevate our customer value proposition. In our open letter to customers and to all who eat, we have outlined key sustainability priorities, we have been executing on whether sourcing even more from local suppliers, reducing plastic in our deliveries equivalent to 2.4 million plastic bags per year or offsetting the carbon footprint of our deliveries. We plan on being gooder and continue to make our customers clear priorities our own. We are also stepping up our growth efforts. The Canadian online meal solutions market is currently estimated to stand at $1 billion and a projected 20% household penetration could bring the market size to $3 billion in a matter of a few years. To capture an outsized share of the meal solutions market, Goodfood has launched exciting initiatives that are aimed at attracting a broader set of customers, generating more orders per customer and increasing basket sizes. A few examples include investments made in our digital product, our mobile application and web platform in order to drive improved conversion and retention. With an updated customer platform, we also aim for our product innovation to play a key role in our growth trajectory. We are collaborating with Canada's top restaurants and chefs to create unique recipes, our customers can only find on Goodfood. To further grow our household penetration, we are also exploring the broadening of our product offering and distribution channels, including the potential addition of a wider range of meal solutions to address our customers' needs within underpenetrated dayparts. Our focus has now shifted to growing our business and doing so profitably. And to achieve that, our teams are executing on the highest return opportunities. Overall, after delivering on our profitability promise in the first half of the year, our focus shifts to cash flow improvements in the second half and setting up the platform for growth in early fiscal 2024. On that note, I will turn it over to the operator for the Q&A portion of this call.

[Operator Instructions] Your first question will come from Frederic Tremblay at Desjardins Securities.

Jon, I just want to come back maybe on one of your last points there on the potentially expanding the distribution channels. That's probably early on or maybe early on some of the discussions and strategies, but any additional details that you can provide in terms of what you're thinking out in terms of other ways to distribute the product? And maybe initial thoughts on how doing that would impact positively or negatively your margin profile given the significant improvements that we've seen on excellent in recent quarters.

Thanks for the question. As we made the decision to move away from on-demand deliveries, one of the key areas of focus was moving from being a retailer towards being a brand, right? And so for Goodfood to really focus on building our brand and to have a unique place in our customers' heads and hearts. So as we were thinking about the future of the business, we're thinking about how to be where our customers want us to be, how to enable customers to interact with Goodfood on a flexible basis on their terms. And so in addition to improving some of our direct-to-consumer channels, we are exploring other partnerships. And we'll keep you posted as we get closer to some announcement news on that front.

Okay. Perfect. In terms of pricing, I believe you said last quarter that there was an increase in January. Any plans to make further pricing adjustments? Or are you comfortable with where that's at versus what you're seeing on increasing costs and sort of the other key cost metrics as well?

Thanks for the question. I think we're always going to monitor literally the market, but our cost structure to make sure that our targets from a margin perspective are there. I think at this very moment, there are no designs or plans to change pricing within our [ market plan ]. With that said, our goals and margin targets will drive that decision. I think for the time being, we have found a nice balance of customer value proposition and pricing, and that's the plan we're executing on now.

Maybe one more thing, Fred, if I could just add to that. It's Neil here. You all noticed, I know you're a customer. We've also introduced higher value options such as organic chicken breast. And that comes at a $2, $3 or $4 premium depending on which plan you're purchasing from. So that's helped us increase AOV, increase effective pricing without actually passing through a subscription-based price increase.

Great. That's helpful. And maybe if I could squeeze in one last one on CapEx, pretty modest at $0.5 million in the quarter. Is that a level that you feel is sustainable moving forward, especially as you think about returning to a more significant top-line growth?

Yes, absolutely, Fred. I think as we said, we've been focused on free cash flow and we'll be continuing to focus on that for the coming decades. We think we're well positioned from an infrastructure standpoint to kind of grow back into what we've invested in over the last couple of years. So we don't think there's any substantial CapEx going forward. We'll be opportunistic on stuff that has very short paybacks to improve efficiency, quality, kind of launch new ideas, but really being disciplined on that side. As we know, we did more than twice the volume in the same network over the pandemic. So we don't think there's much that we need to do to grow into a pretty profitable business.

Your next question comes from Martin Landry at Stifel.

Just a follow-up to the last question, the last discussion you guys had. You closed -- I think you said 13 and 2 more to exit. So just trying to understand a little bit what's your capacity right now in terms of the support revenues? Did I hear correctly that you said that with the existing infrastructure, you can do double the size of the revenue base that you're generating right now. Is that correct?

It's Neil. Thanks for the question. Pretty quick to assume double, yes. I think we can squeeze it even more than that. But we've effectively gone back to a meal kit only infrastructure with our Goodcourier kind of last mile network. And that's where we were running pre on-demand launch back in 2020. So with that, we were able to do more than double the revenue base.

Okay. And then on your gross margin, very nice expansion on a year-over-year basis. I was wondering if you could do a bridge for us to -- from last year so that we can quantify a little bit the impact of the main drivers that boosted margin.

Yes. Of course, Martin. So I think the 2 top drivers is -- are the improvements in credit and incentives, which basically fell more to net sales and improve the gross margin. The second driver is price adjustment. I think we were a little reactionary in adjusting our prices to the inflation we were seeing in the market. I think operational drivers were also important at food cost per portion as we look at it, has had some nice improvements in large part due to ingredient simplification but also to some sourcing and supply chain efficiency. Production labor has also incurring some gain in efficiencies, large part because of on-demand being discontinued, but also because of a little bit of a redesign of how we fulfill, how we put together [ about it ]. And I think lastly shipping per order has also seen some nice efficiencies that is largely driven by on-demand. And we -- in the meal kit side of things have a nice plan of which orders are going out win and allows us to bring some efficiencies there and planer out in an optimized way.

Okay. So is it possible to quantify these each of them in terms of the contribution to your 1,800 bps expansion?

I think you can see the top 2 as being the majority, probably over 50% and the other factors being close to the other half.

Okay. And then just last question. Just trying to understand a little bit the environment right now. When your customers are disconnecting from your platform, what are the reasons why they're disconnecting? Are they price sensitive given the overall inflation in the slowing -- economic slowing down? Are they going to a competitor's offering? Or are they just changing their needs? Just trying to understand a little bit, and I'm sure you do follow up when your customers disconnect just to get some feedback. So if you can share some of the reasons why your customers are disconnecting that'd be great.

Yes. So we're seeing certainly some price sensitivity around customers experiencing inflation around all of their weekly spend. One interesting factor is the price sensitivity was stronger when we first passed our price increase in January, and customers have kind of stabilized in their perception of our pricing since then, which tells us that there's always a short adjustment period in customers' price perception after a price increase. But ultimately, customers are seeing value in our offering. As we've talked about in the past, our key focus is really in thinking about how to add more value to our customers, bringing Michelin star chefs and partnerships of that nature to our customers' homes turns Goodfood into an option that can compete with a high-end restaurant quality experience. I think when we think about our growth potential in the future, we certainly have lost ground in the past 12 to 18 months as we were building out our on-demand offering and other companies were focusing on their weekly meal subscriptions. And so I would say as our folks [ freshness ] any delivery issues, and so that's helped the stickiness of our customer base. And we do see the potential for us to continue growing household penetration from here. I would say there's interest in understanding how to better serve the more price-conscious consumers. But our first step from here is really making sure that we're servicing the higher-end customer with the better-for-you type offering that they're excited about. So Neil alluded to it before, we introduced some organic proteins on our menu in the past quarter. We also launched our Keto and Paleo meals in partnership with Nick Suzuki. And so we're really thinking about how to segment the market better and make sure that we have the right offering tailored to the right customers that see the value perception in our product.

Your next question will come from Luke Hannan at Canaccord Genuity.

I wanted to delve into this topic of broadening your product offerings and your distribution channels here. One of the things that you alluded to in the filings is potentially introducing both a wider range of ready products and a discount offering. I want to focus on the ready-to-eat products for a second. One of your competitors has had so far a great success in rolling out their U.S. ready-to-eat brand here in Canada so far. So I'm curious to know how can you defend share against that particular brand? And do you see any potential for cannibalization of a meal kit customer going exclusively over to ready-to-eat meals?

Thanks for the question. So we've been -- specifically on the ready-to-eat side, experimenting different approaches to the ready-to-eat market for a couple of years. I would say we see segmentation in that market as well. So there's some more functional type food offerings that are more dietary focused. And then there's some more kind of what we would consider classic ready-to-eat options that are closer to a meal kit, like a classic meal kit recipe. So we've experimented with a few different types of ready-to-eat offerings in the past few years. There certainly is, I would say, an expansion in the direct-to-consumer meal markets that's available through this ready-to-eat offering. So for example, single-person households will tend to be more likely to order from a ready-to-eat meal subscription this as an example. So there are certain segments of customers that ready-to-cook meals and the ready-to-cook model isn't the right offering for them. So it could be an expansion. We've also seen over the past few years that some of our ready-to-eat meals have helped us expand our basket size as well. The ready-to-cook customer that is ordering a few ready-to-cook meals per week for dinner might also opt in for ready-to-eat lunches that they can order for the week. So there's a few different configurations in which basket sizes and the addressable market can grow through the ready-to-eat meal segment. And so to date, it's been a small penetration of our basket sizes, but we've been experimenting with it and really understanding the economics of that business.

Okay. And to be clear, the $1 billion market size, the term that you see in the market today. Does that include ready-to-eat or is that just meal kits?

That's ready-to-cook.

Okay. And then my follow-up here on the discount offering. If we go back to last quarter, I think we had talked about this a little bit where it felt like the timing wasn't necessarily right. You were more focused on operational excellence rather than driving growth through other initiatives. Now there's been a bit of a shift on that front. So it sounds like you are exploring this. So what's going to be different, I guess, by this offering this time around versus what you have with Yumm.ca? And then can you remind us what was the margin profile for Yumm.ca you had previously?

I think the -- from our perspective, the key focus is how do we ensure we're maximizing free cash flow generation. And so in order for us to maximize free cash flow, we need to make sure that we're leveraging the existing infrastructure that we have, the existing G&A that we have as much as possible and minimizing any direct marketing related to different product lines. So that's the approach we're taking, both on the lower price meal side but also on the ready-to-eat side. I think the other key point is how do we make sure that we're not adding complexity into our business. So that was certainly a key learning over the past 18 months as we focus on on-demand as we were growing the SKU count and the number of products, the complexity of the business and the operations increased dramatically during that time. So we're getting really smart in terms of how to manage that complexity, how to minimize the number of unique ingredients, unique recipe items, making sure that there's no extra infrastructure required or additional facilities required to service these product lines. So those are really the key learnings that we're incorporating into our path forward.

Okay. And a very quick follow-up. Are you envisioning a price gap with that offering that's similar to what you would have had with Yumm.ca apart from price gap relative to what would be the mainstream or the core offering?

So I think the best way to think about it right now is our product pricing is quite dynamic. And so -- and Neil alluded to this a little bit earlier in the call, but we are like charging premiums for certain items, right, in terms of the organic, certain types of premium proteins, and there's the opportunity for us to deliver some more value to customers on the lower end of the price spectrum as well. And so I would see the pricing as being dynamic. And as we execute on that and over the coming quarters, we'll bring back some of the key findings and the P&L impact as well.

At this time, we have no other questions. So I will turn the conference back to your host, Jonathan Ferrari, for any closing remarks.

Thank you for joining us on this call today. We look forward to speaking with you again at our next quarterly call.

Ladies and gentlemen, this does conclude your conference call for this morning. We would like to thank everyone for participating and ask you to please disconnect your lines.