Goodfood Market Corp

TSX:FOOD

Earnings Call Transcript 2018-Q3

[Operator]

Thanks for standing by. Welcome to the Goodfood Q3 2018 Financial Results Conference Call. [Operator Instructions] I would like to remind everyone this conference call is being recorded today, July 11, 2018, at 4:30 p.m. Eastern time. I would now like to turn the meeting over to your host for today's call, Jonathan Ferrari, Chief Executive Officer of Goodfood. Mr. Ferrari, you may proceed.

[Jonathan Ferrari, Chief Executive Officer & Chairman]

Thank you so much. [Foreign Language] Good afternoon to all, and welcome to this call in which Goodfood Market Corp. will present its financial results for the third quarter of fiscal year 2018 that ended on May 31, 2018. I'm Jonathan Ferrari, the Chief Executive Officer at Goodfood. I'm pleased to be joined today on the call by Philippe Adam, our CFO; and by Neil Cuggy, Goodfood's President and Chief Operating Officer. Prior to moving on, 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 developments. As such, I would ask the participants to take a moment to read the disclaimer on forward-looking statements on the first slide of the presentation before we begin. Turning to our financial and operational highlights for the quarter. The quarter-over-quarter growth in subscribers and revenue remains strong as more and more Canadians are turning to Goodfood for their meal solutions. On an annualized basis, our gross merchandise sales have reached $110 million at the end of the quarter, quite an achievement for a company that is only 4 years old. We were able to achieve significant gains in productivity and efficiency as we continued to grow our subscriber base and launch our activities in Western Canada. Gross margin improved 5.3 points compared to Q2 2018 as a result of better labor efficiency, lower packaging and shipping costs, as well as increased purchasing power. As a result, we have achieved positive cash flow from operations of $1.8 million for the first time as a public company. During the quarter, we also became a truly national company, launching our operation in Western Canada, where the results so far are significantly ahead of our expectations. Finally, we raised $10 million in gross proceeds from a public offering of 4 million common shares. The money was raised from existing institutional investors, who continue to believe in the Goodfood story and also from a number of new institutional and retail investors. We will use the proceed to accelerate our growth to invest in automation in order to generate efficiency and to launch new meal solutions and products. The next slide demonstrates the cumulative growth in active subscribers and revenue that Goodfood has experienced over the past 2 years. At the close of the third quarter, our active subscribers increased to 76,000, more than double the number of subscribers we had at the beginning of the fiscal year. What's more impressive is the fact that our revenue is growing faster than our subscriber base. Quarter-over-quarter, subscribers increased by 25%, while revenue increased by over 40%. The number of orders per customer increased during the quarter compared to Q2, which is always a slower period because of the holidays. We were also successful in introducing new meal solutions with higher price points in Q3. Finally, we have a loyal customer base that is growing quarter-after-quarter. Slide 4 demonstrates Goodfood's steadily increasing gross merchandise sales, which reflect the total value of merchandise sold by the company before taking into account all incentives and credits for the last 4 quarters. Quarterly growth in fiscal year 2018 has been particularly strong with a 39% increase to $26.2 million at the end of Q3, 2018, from $18.8 million in Q2 of this year. This translates into almost $70 million in the last 12 months, and as previously mentioned, a run rate of $110 million at the end of the quarter. As you know, we officially launched our national platform with the opening of our new production and distribution facility in Calgary on May 7 following the prelaunch phase. Our meal solutions are now being delivered from coast-to-coast. We're very pleased with the results, as they have been above our expectations, both in terms of subscribers and deliveries, particularly in Alberta and British Columbia. We can sense great enthusiasm for the Goodfood experience, similar to what we saw in Eastern Canada, when we first launched. Following key hires, we have been busy building out the team and now have over 50 employees in Calgary. Our team in Western Canada will continue to grow as our customer base in the region increases. We have also continued to establish relationships with local farms and purveyors as well as supply chain and delivery partners across a number of provinces in Western Canada, generating synergies with a number of preferred suppliers. It is important to note that, as we grow and scale our business in Western Canada, we expect a continued drag on our gross margin. As we said in the past, customer feedback is a core part of who we are. We're always happy to hear from our members because we want to continue to build better dinner solutions for all customer segments. This allows Goodfood to tailor its product offerings to focus on making the ordering and preparation process simpler for consumers. We now offer over 20 different recipes, each week, varying in prep time from less than 20 minutes to 45 minutes, catering to a variety of taste preferences. We have recently launched our artisan collection, which features higher-end cuts of protein. Members were telling us they wanted a more upscale meal experience once or twice a week. For example, l'Artisan recipes might feature New York strip steak, lamb chops or tiger shrimp. These recipes have flexible price points, depending on the food cost, and are offered at a higher price point than our classic meal collection. On our last call, we talked about our Easy-Prep plan. This plan includes set recipes with our usual high-quality ingredients that are already partially prepared, for example, prechopped and washed, and which can be prepared in less than 20 minutes and have proven to be very popular. On that note, I now turn the presentation over to Philippe.

[Philippe St-Cyr Adam]

Thanks, Jonathan. Good morning, everyone. I will start with key year-over-year financial highlights for Q3 2018. As you can see, growth for all key metrics remain strong with triple-digit growth in active subscribers, revenue and gross profit. Again, both revenue and gross profit grew faster than subscribers on a year-over-year basis. We grew our active subscriber base to 76,000 at the end of May 2018, an increase of 230% from May 2017. Revenue growth was up to $22.2 million at the close of Q3 2018, an increase of 246% from the corresponding period in 2017, while gross profit increased 280% to $5.2 million. For the first 9 months, revenue increased 299% to $49.1 million, while gross profit grew 289% to $10.1 million. The growth that Goodfood experienced last quarter continues the strong trends witnessed over previous quarter for our business. With that, I'd like to move on to Slide 8 and focus on Goodfood's quarter-over-quarter results. Given our pace of growth, we believe that quarter-over-quarter results are a better indicator of the progress we are making compared to year-over-year results. During Q3 2018, Goodfood added 15,000 net new subscribers, an increase of 25% from February 28, 2018. Our revenue also grew by 42% in the last quarter to $22.2 million from the $15.7 million of revenue registered in Q2 2018. As mentioned earlier, the strong increase is the result of our ability to introduce new meal solutions, adding choice and improving customer curation at various price points, a higher number of order per customer and an ever-growing base of loyal customers. If we look to Q4, it is important to keep in mind that the meal-kit industry is seasonal. Business is slower in the summer months as people are on vacation and eating out more often. That translates to a decrease in activity among existing subscribers, which results in a lower order rate. We have chosen to limit our marketing activities during this period when customers are less receptive as we see other quarters have much higher unit economics. As a result, we can expect potentially little-to-no growth in active subscribers for this and following summers, especially when compared to previous Q4 quarter-over-quarter growth. It is also worth noting that, during the summer months, we need to adjust packaging to keep our ingredients fresh, which has an effect on our gross margin. As a result, cash flow from operations will also be impacted as will our cash position. Business usually picks up quite briskly in early September with back-to-school being one of the busiest period of the year. Slide 9 compares our gross merchandise sales and adjusted gross margin results for Q3 2018 with those of the second quarter this year. We generated gross merchandise sales of $26.2 million in the third quarter, which is up 39% from Q2 2018. Gross merchandise sales for the first 9-month period of 2018 were $58.3 million. Our adjusted gross margin was 34.9%, up from 31.8% in the previous quarter, which reflects the continued efficiencies that we are generating in our Eastern Canada operations and the continued drag from Western Canada, despite the progress we made on food, labor, shipping and packaging costs. Moving on to Slide 10. Goodfood's gross profit almost doubled to $5.2 million in the third quarter of 2018 as compared to $2.8 million in the second quarter of this fiscal year. Most noteworthy is the significant improvement of 5.3 points in gross margin in the quarter from 18% to 23.3%. The increase in gross margin primarily resulted from lower unit cost for packaging and shipping due to increased efficiencies in purchasing power as well as lower labor costs for process improvement and automation. The increased efficiency and purchasing power has been achieved in both facilities. However, the significant start-up costs for Western Canada continue to have a negative impact on the overall gross margin. As Jonathan mentioned previously, we generated cash flow -- positive cash flow from operations for the first time this quarter, while launching a Western Canada facility and continuing to [indiscernible] significant growth in both subscribers and revenue. As a result of the positive cash flow and common share issue, our cash position increased to $24 million at the end of the quarter, the highest it has ever been. This puts us in an extremely solid financial position to continue to execute on our business plan. The next slide shows our adjusted EBITDA margin, which improved to negative 5.8% from negative 14.4% in Q2 2018. This was due to the significant increase in gross profit and a decrease in selling, general and administrative expenses as a percentage of revenue from 32.9% in Q2 to 29.8% in Q3. The adjusted net loss for Q3 2018 decreased to $1.6 million from $2.4 million when compared to the second quarter primarily as a result of the strong increase in gross profit during the quarter. The adjusted net loss was primarily due to planned investment in our Western Canadian facility as well as in administrative expenses to support continued active subscriber growth and an increased marketing budget. Finally, I'd like to mention our capital expenditures. You will have noted capital addition of $3.9 million over the last 9 months in Note 5 of the interim financial statements. Of that $3.9 million, approximately $1.5 million relates to our new distribution facility in Western Canada. However, included in the lease agreement is a tenant allowance that funds up to $1 million of capital expenditures. As a result, we have an amount receivable of $1 million that we'll be receiving from our landlord, resulting in effective capital expenditures for our Western Canada facility of $500,000. That wraps up our financial highlights for the third quarter of 2018 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 we may take questions from financial analysts.

[Operator]

[Operator Instructions] Your first line comes from Andrew Partheniou from GMP Securities.

[Andrew Partheniou, Associate]

Congrats on the good results and especially the positive cash flow this quarter. I'd like to talk a little bit about the margins. There has been considerable improvement on gross margin and also EBITDA, and this is especially during your ramp-up in the Western Canada operation. Can we talk a little bit about -- can you talk a little bit about what's next in terms of ramp-up and how much less there is to do as well as, in your operating expenses, how can you leverage them going forward?

[Neil Cuggy, President, COO & Director]

Yes, Andrew, it's Neil here. Thanks for the questions. Yes, for sure, we're extremely happy with the progress that the team has made in gross margins and EBITDA margins for the quarter. I think as we've alluded to in some of our investor conversations, investor presentations in the past, I think we definitely see a path to 45%-plus adjusted gross margin so definitely still a lot of work to do from the 35% that we're at today. Part of that comes from efficiencies, part of it comes from automations, and part of it comes from some of the product mix that we're working on. So I think that on the gross margin, we still have a pretty good path to 45%. And then on the SG&A, on the operating margin, I think the business has shown, obviously, that as we scale, we do get pretty tremendous operating leverage. We were able, over the last, call it, 6 to 9 months, move into 2 new facilities, continuously build the team and almost double our revenue run rate. So I think we should continue to see -- we start to build out the team but still continue to see some operating leverage going forward.

[Andrew Partheniou, Associate]

Great. And maybe we can talk a little bit about the commercial environment that you see. Noticed here there's been a sequential tick downwards in terms of credits incentives as a percent of gross sales. How do you see them going forward?

[Jonathan Ferrari, Chief Executive Officer & Chairman]

Yes, I would say -- we are, in terms of the promotional environment, I would say there's 2 primary things that affect the amount of credit and incentives per quarter. One ends up being the percentage of signups that are coming from referrals because referrals tend to have the highest promotional incentive. And then 2 is the gross new adds during the quarter, so the larger the gross new ad, the faster the company is growing, the larger the credits and incentives. What we see -- I would say, during the summer months is a pullback as we talked about in our planned marketing spend, and then in the back-to-school season, you should see a heavier allocation of our annual marketing spend happen there. And so I would say that trend in the credit and incentives should follow throughout those quarters.

[Andrew Partheniou, Associate]

And if I can just ask one more question. In the past, you've talked about your marketing costs being a majority of your operational expenses. Is it still the case this quarter? And do you see that continuing to be the case, if so, next quarter and beyond?

[Neil Cuggy, President, COO & Director]

Yes. I think what we've said in the past is we didn't want to disclose specific numbers, but it was in and around 50% or higher. This quarter, you can see, as Jon alluded to, marketing spend as a percentage of sales came down a little bit. So that was one of the parts of the operating leverage that we saw, an increase in EBITDA. But then the other parts over SG&A also came down. So I'm not going to comment exactly on the number but slightly little lower than previous quarters, for sure.

[Operator]

[Operator Instructions] We have no further questions at this time, I will now turn the call back over to the presenters.

[Jonathan Ferrari, Chief Executive Officer & Chairman]

Thanks very much for joining us today on Goodfood's Q3 2018 Financial Results Conference Call. [Foreign Language]

[Operator]

This concludes today's conference call. You may now disconnect.