Goodfood Market Corp

TSX:FOOD

Earnings Call Transcript 2019-Q1

[Operator]

Thank you for standing by. Welcome to the Goodfood Q1 2019 Financial Results Conference Call. [Operator Instructions] I would like to remind everyone that this conference call is being recorded today, January 14, 2019, at 5:00 p.m. Eastern Daylight Time.I would now like to turn the meeting over to your host for today's call, Jonathan Ferrari, Goodfood Chief Executive officer. Mr. Ferrari, you may proceed.

[Jonathan Ferrari, Chief Executive Officer & Chairman]

Thank you. [Foreign Language] Good afternoon, everyone, and welcome to this call for Goodfood Market Corp., in which we'll present the financial results for the first quarter of fiscal 2019 that ended on November 30, 2018.I'm Jonathan Ferrari, the Chief Executive Officer of Goodfood, and I'm pleased to be joined on the call today by Philippe Adam, our Chief Financial Officer; and by Neil Cuggy, Goodfood's President and Chief Operating Officer.Prior to moving on, I'd 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, I would like to ask participants to take a moment to read the disclaimer on forward-looking statements on the first slide of the presentation before we begin.Slide 2 outlines our corporate highlights for the first quarter of fiscal 2019. Q1 2019 was an excellent quarter, during which we achieved record results on a number of key metrics. Growth is extremely robust not only for Goodfood but for the industry as a whole. We are still in the very early days of building out direct-to-consumer meal solutions in Canada, an industry, which we believe could soon reach over $9 billion. As you can see, growth has accelerated in the last quarter, and we achieved record quarterly subscriber growth. Gross merchandise sales also increased significantly by 44%. As a result of the strong growth, our gross merchandise sales run rate reached $168 million at the end of the quarter, an all-time high for Goodfood. Our gross margin and adjusted gross margin also improved significantly. With our adjusted gross margin improving by almost 7 percentage points year-over-year to 37.7%, another record, largely due to our increasing scale and investments in operational efficiencies. While continuing to deliver exceptional growth, Goodfood also generated positive cash flow from operating activities in the third -- for the third consecutive quarter. This reflects our continued strong growth in revenue, our additional gains in operational efficiencies and our ability to generate economies of scale. Being cash flow positive allows us to pursue our aggressive growth targets. Our results in Western Canada have been above expectations since we launched our operations in May 2018. Subscriber growth is robust and we are seeing strong order rates from our members. We are also continuing to build out our team and have established close relationships with key local suppliers.The next slide shows Goodfood's strong and consistent growth quarter-over-quarter for the past 6 quarters. By the close of the first quarter of 2019, our active subscriber base grew to 126,000. The growth accelerated during the quarter with the addition of 37,000 new subscribers, more than doubling our previous quarterly record of 16,000 net additions. Quarterly revenue has also grown sharply since Q4 2017. Revenue increased to almost $30 million for the quarter representing more than 40% of the $70 million in revenue recorded in fiscal 2018 as a whole. Our strategy is to continue to invest in our growth. While this delays profitability in the short term, we believe that it maximizes shareholder value in the long term as we have a tremendous opportunity ahead of us to build our market position and benefit from economies of scale. Our customer base now represents approximately 1% of the 15 million Canadian households. And with the direct-to-consumer home meal solutions industry still in its infancy, there is an opportunity not only to gain market share but also to build a strong moat around our business. Our gross merchandise sales increased 44% to a record $37.1 million for the first quarter compared to Q4 2018, and on a last 12 months basis, surpassing the $100 million mark for the very first time. The GMS run rate reached an all-time high of $168 million at the end of the first quarter, doubling the gross merchandise sales achieved for fiscal 2018 as a whole. As a reminder, gross merchandise sales reflects the total retail value of merchandise sold by the company. We are continuing to focus on growth and on improving member experience. We are now offering the choice of 27 recipes per week to our members in order to cater to an increasing variety of taste preferences and have recently added the Clean 15 plan. The Clean 15 plan is a low-carb, high-protein plan ready in 15 minutes. The idea behind the new Clean 15 plan is that we believe achieving and maintaining your fitness goals could be easy and delicious. We've designed the recipes to be higher in protein, lower in carbs and contain a balance of healthy fats to keep you full longer. It is part of our premium segment and comes at a slightly higher price point than our classic recipes. With only a soft launch, we have already seen tremendous interest in this plan. The new plan is a perfect complement to our existing portfolio. And it's part of our mission to solve mealtime stress for all Canadians coast to coast regardless of dietary preferences and levels of engagement in the kitchen. We started with the classic plan, which made Goodfood famous and is a great way to get out of your cooking routine with exciting new flavors and ingredients. We then added the family plan with recipes tailored to kids and parents alike, then followed the vegetarian plan where eating a plant-based diet has never been easier or more delicious. And last but not least, the Easy-Prep plan, which contains pre-chopped and pre-cooked ingredients to get dinner on the table in 15 to 20 minutes.As I mentioned in our last earnings call, one of our objectives for fiscal 2019 is to expand our product categories to capture further growth opportunities. Since the beginning of the year, we have been actively working towards adding additional meal options as well as meals with different levels of engagement from ready to cook to ready to eat. And finally, we started construction on our Montréal expansion and expect the new facility to be fully operational in fiscal 2019. We are doubling the production and sales capacity of our Montreal operations, which will allow us to better serve the needs of our fast-growing member base as we continue to add new meal options and expand our product offering.On that note, I'll turn the presentation over to Philippe.

[Philippe St-Cyr Adam]

Thanks, Jonathan. Good afternoon, everyone. I will now present the key financial highlights for Q1 2019. Goodfood continues to turn out strong triple-digit growth in active subscribers, revenue and gross profit on a year-over-year basis. We grew our active subscriber base to 126,000 at the end of November 2018, an increase of 180% from November 2017. Revenue growth was up almost $30 million at the close of Q1 2019, an increase of 164% from the corresponding period in 2018, while gross profit increased 215% to $6.5 million.Slide 7 compares our gross margin and adjusted gross margin. As you can see, our gross margin continues to improve and increase 3.6 percentage points compared to Q1 2018. Our adjusted gross margin reached a record 37.7%, an increase of almost 7 percentage points over 2018. These improvements reflect continued efficiency generated in our Eastern Canada operations as well as the progress we've made on labor cost, shipping and packaging costs. Our objective is to continue investing in our operations to be the most efficient and lowest cost of meal solutions provider. This will enable us to offer our members the absolute best value while generating exceptional returns on invested capital. We believe this can be achieved through continuous improvements in our processes and greater automation from a level of 25% a year ago to 50% today, 75% automation in the medium term.With that, I'd like to move on to Slide 8 and focus on Goodfood's quarter-over-quarter results. During Q1 2019, Goodfood added 37,000 net new subscribers, an increase of 42% from August 31, 2018. Our revenue grew sharply by 39% in the last quarter to $29.6 million from the $21.4 million of revenue in Q4 2018. We generated gross merchandise sales of $37.1 million in the first quarter, an increase of nearly 44% from the $25.8 million in GMS recorded in Q4 2018. The first quarter is historically a strong quarter with the critical back-to-school period. Furthermore, we were opportunistic and launched targeted marketing campaigns, based on credit and incentives, which yielded very good results by adding 37,000 new subscribers while building density in the major urban centers across Canada. As a result of this opportunistic strategy, credits and incentives increased to 20% of GMS for the quarter. These trends continue to point to a strong fiscal year in 2019, given that January and February, for starters, are traditionally strong demand months for the business, despite the significant seasonal slowdown in December in terms of order rate and additional new subscribers.The next slide shows our adjusted EBITDA margin, which decreased to negative 13.2% from negative 12.4% in Q4 2018. Net loss for the first quarter of fiscal 2019 was $4.9 million compared to $3 million in Q4 2018.The decrease in adjusted EBITDA margin and the increase in net loss were a result of an increased marketing budget and higher wage cost due to the addition of administrative personnel to support the company's growth. As Jonathan mentioned previously, we are successfully executing on our strategy, which delays short-term earnings in order to invest in market share, scale and density. We believe that these investments will maximize longer-term shareholder value by allowing us to deliver greater value to our members than anyone else while attaining high returns on invested capital. Q1 2019 was our third consecutive quarter of positive cash flow from operations, resulting in more than $4.5 million of cash flow from operations generated in the last 9 months. This is quite an achievement as we are continuing to adjust our significant growth in both subscribers and revenue and are still in ramp-up mode in Western Canada. The positive cash flow from operations for the quarter is primarily due to a favorable change in working capital. As we mentioned previously, we operate with a negative working capital structure that can partially support the growth of the business. As a result of the positive cash flow our cash position increased to $25.3 million at the end of the first quarter. We also secured a $13.5 million non-dilutive debt financing towards the end of the first quarter of which $10 million is still undrawn. And in Q3 2018 we raised $10 million in gross proceeds from a public offering of 4 million common shares. As such, we are at a very solid financial position to continue to execute on our business plan. That wraps up our financial highlights for the first quarter of 2019 and concludes our prepared remarks for today. We thank you all for joining us on the call.I will now turn the call back to the operator, so that we may take questions from financial analysts.

[Operator]

[Operator Instructions] Your first question comes from the line of Martin Landry from GMP Securities.

[Martin Landry, MD Equity Research & Equity Research Analyst]

The first question that I have, your credit and incentives have gone up as a percentage of gross sales and I understand that you've had, had 37,000 new sub this quarter. So it's normal to see that number go up, but as a percentage of gross sales, I would've thought that it could have gone down a little bit. Could you talk to your customer acquisition cost, are they stable? Are they trending up? Are they trending down? Any color would be appreciated.

[Jonathan Ferrari, Chief Executive Officer & Chairman]

Absolutely. So we -- I think the general comments that we can share on the customer acquisition cost is, we -- the business grew more quickly than we were planning during that -- during the first quarter. And primarily the reason why we were leaning in to growing the business a little bit more quickly was because the unit economics were more favorable than we were expecting. So I would say we've seen some declines in the customer acquisition cost. And I think that -- exactly like you mentioned, Marty, I think the explanation of the increase in the gap between adjusted gross margin and the IFRS gross margin is really a function of adding more subscribers during the quarter, but the -- like incentives per subscriber remain in line or better than we've seen in previous quarters.

[Martin Landry, MD Equity Research & Equity Research Analyst]

Okay, great. And I heard in the prepared remarks that you're talking about expanding your food offering, your product categories and you're talking about everything from ready to cook to ready to eat. Could you share with us what would a ready-to-eat product look like in terms of price point and margin versus a ready-to-cook offering?

[Jonathan Ferrari, Chief Executive Officer & Chairman]

Absolutely. So we're currently in the process now of testing a couple of different formats for our ready-to-eat meals. The different formats that we're testing are coming in at different price points. So you could probably expect some price points to be in line with our current ready-to-cook offering and some of them could be at a premium to that. In terms of margin profile, given that it's a new business line for us, in the short term, we would expect the margin profile to be at or below the ready-to-cook segment in terms of adjusted gross margin. But as we invest in building out the business line, we can expect that the gross margin profile will significantly improve. In terms of the other important levers of ready-to-eat meals in our business, we would really see them as a way to increase the lifetime value of the customers. So we're able to think about growing the box size by increasing the number of meals that consumers might order as well as increasing the order rate that we can see from our members. So having -- for example, a consumer or a member that might have skipped a week because they were only available to cook, let's say, 1 night during the week, might decide not to skip the week and order 1 meal that's ready to cook, and complete the rest of their box with ready-to-eat meals.

[Martin Landry, MD Equity Research & Equity Research Analyst]

Okay. So just to clarify to make sure I understand correctly. Your ready to cook -- your ready-to-eat product would not be at a premium to a ready to cook?

[Jonathan Ferrari, Chief Executive Officer & Chairman]

I would say we're currently testing out the price points and we're testing out price points that are equivalent or higher.

[Operator]

Your next question comes from the line of Frederic Tremblay from Desjardins.

[Frederic Tremblay, Analyst]

Staying with the new products, I want to talk about the breakfast smoothies a little bit. In the past, Jonathan, you mentioned that you saw in your testing that the opt-in rates were quite high, I believe you said double digits for the smoothies. Curious if you had any updates on that or further observations on the opt-in and order rate for smoothies and sort of where you're at in terms of your -- of rolling out that initiative.

[Jonathan Ferrari, Chief Executive Officer & Chairman]

Absolutely. We are -- we continue to be very pleased with the results that we're seeing on our breakfast product line. I would say the -- we've currently been -- still beta testing the offering, so it's not available across all Goodfood subscribers yet. But the opt-in rate within our pilot group is in line with what you mentioned. We've also been working on developing new flavors as well. So we had been testing 6 flavors of smoothies and we've developed another 4 flavors during the quarter. And we continue to be very encouraged with the feedback that we're getting from our members in terms of the value perception of the smoothies, the usefulness of the smoothies on a daily and weekly basis and the nutrition and flavor profile that we're delivering.

[Frederic Tremblay, Analyst]

Okay, that's great. And then in terms of Western Canada, in terms of the progress there, you mentioned that was above expectations. Can you talk about the subscriber additions on a -- coming more and more through referrals as your platform there gets a bit, let's call it, older, although it's quite young. And are you seeing more and more of those loyal, initial customers that are putting you in contact with new potential customers through referrals?

[Neil Cuggy, President, COO & Director]

Yes, Fred, this is Neil here. We -- like Jon mentioned on the call, we're very pleased with the progress that we've seen in Western Canada, starting to contribute more and more every quarter, still a little bit of drag on the margin side. But on a customers' acquisition standpoint, it kind of seems like the same split as we're seeing in Eastern Canada. We recently announced that we're the official meal-kit of the Flames out in Calgary, which has helped acquisition out there as well. So we're using a mix of the same strategies and kind of seeing the same types of referral incentives.

[Frederic Tremblay, Analyst]

Okay. And Neil, you mentioned that's still a drag on margin, still around 1% to 2% as it was in prior quarters?

[Neil Cuggy, President, COO & Director]

Yes, I would say it's getting lower and lower as we go. The team is fully up and running, and doing very, very well, hitting some pretty aggressive targets. So yes, it's decreasing but still in that range.

[Operator]

[Operator Instructions] Your next question comes from the line of Leon Aghazarian from National Bank.

[Leon Aghazarian, Special Situation Analyst]

Just on the -- maybe a little bit on the cost structure side of things. You mentioned the expansion in Montreal is ongoing at the moment and your expect it to be done in fiscal '19. Can you just remind us what is the expectation in terms of CapEx for that facility, please? And if you are on target and on budget so far?

[Philippe St-Cyr Adam]

Yes, Leon, it's Phil. So we said that the CapEx for the Montreal expansion would be around $4 million to $5 million. We are going to try to be on target or even lower than that. Everything's progressing well. We should be open officially by the end of the -- year-end and everything will -- is financed through our debt facility that is still undrawn at $10 million.

[Leon Aghazarian, Special Situation Analyst]

Okay. And then in addition to that, obviously, would be the automation that is ongoing at the moment as well. So what kind of cost are we looking at for fiscal '19? I'd like to start at kind of the year, where do you see the direction on the automation going in terms of expenses?

[Philippe St-Cyr Adam]

Yes. So it's evolving on a monthly basis. Obviously, it's one of our target to invest in automation and increase the margin. We're looking to invest approximately between $3 million and $5 million automation during the year, in addition to the expansion. So everything would be financed as well through the debt financing that we have available right now.

[Leon Aghazarian, Special Situation Analyst]

Okay. And then what -- I mean, I know it's a bit early but what percentage are you at automation? Because I know your goal is about 75% automation in the midterm is kind of what you guys were saying. So could you put a number on where you are right now? And then -- maybe I'm going to try to ask this question differently, how far is midterm for you guys in terms of getting to that 75% automation?

[Neil Cuggy, President, COO & Director]

Yes. I mean couple of months ago, we were at 25% automated, right now, we -- with the investment we've done in Q1 -- Q4 2018 and the one that we've done in Q2 2019 as well, we are at about 50% automated, and we're aiming to be at 75% automated in the next coming quarters like medium terms, it can go quickly with the investment that we're doing right now.

[Leon Aghazarian, Special Situation Analyst]

Okay. And then one final one for me. Just maybe on the Western Canadian front, I mean, I appreciate the color on the subscriber growth and that's been exceeding the expectation. In terms of finding labor, how has that been and in terms of the facility itself, will that require further CapEx in order to keep up with the expansion in subscriber growth?

[Neil Cuggy, President, COO & Director]

Yes I'll take that one, Leon. And so in terms of capacity availability, as we mentioned in the past, we see about $100 million of sales capacity out of that facility. Obviously, there's a lead time in construction projects, so we're starting to look at expanding that facility right now. And then that would all -- if we were to do anything on the CapEx side for Calgary that would fall into the budget that Phil was mentioning. And then on -- in terms of availability, we have chosen to launch in Calgary, specifically based on availability of labor as being one of the criteria and it's been good so far. We've been able to hire appropriately and staff up, and the team is, I would say, fully built up out there now.

[Operator]

There are no further questions at this time. Mr. Ferrari, I turn the call back over to you.

[Jonathan Ferrari, Chief Executive Officer & Chairman]

Thank you all for joining us today for Goodfood's Q1 2019 Financial Results Conference Call. [Foreign Language]