Goodfood Market Corp

TSX:FOOD

Earnings Call Transcript 2018-Q4

[Operator]

Thank you for standing by. Welcome to Goodfood Q4 2018's Financial Results Conference Call. [Operator Instructions] I would like to remind everyone that this conference call is being recorded today, November 22, 2018, at 5 p.m. Eastern Daylight Time.I now 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. [Foreign Language] Good afternoon, everyone, and welcome to this call for Goodfood Market Corp., in which we will present its financial results for the quarter and for the 2018 fiscal year that ended on August 31, 2018. I'm Jonathan Ferrari, the Chief Executive Officer at 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 ask 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. Fiscal 2018 was another landmark year for Goodfood. Not only did we deliver solid financial performance and strong growth in active subscribers, we also established a presence in Western Canada, with the launch of our new national platform. We are now serving Canadians from coast to coast, reaching 95% of the population, and results continue to exceed our expectations. Our active subscriber base has almost tripled while our gross merchandise sales have more than tripled with an increase of 264% to $84 million. The gross merchandise sales run rate exceeded the $100 million mark and finished the year at $107.3 million. While delivering exceptional growth, Goodfood also generated positive cash flow from operating activities during the last 2 quarters of the year and for the year as a whole. 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 while being less dependent on capital markets. The enthusiasm for the Goodfood experience was felt throughout the year and as a result, we are now delivering more than 1 million delicious, ready-to-cook meals every month, confirming our clear leadership position as Canada's best-selling home meal solutions brand.The next slide demonstrates the cumulative growth in active subscribers and revenue that Goodfood has experienced over the past 2 years. By the close of the fourth quarter, our active subscribers increased to 89,000, almost triple 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. Subscribers increased by 107% during the year, while revenue increased by over 256%. The fact that revenue is growing faster than our number of subscribers demonstrates that our loyal subscriber base continues to grow and order more meals per month. The increase in revenue is also a result of our successful introduction of new meal solutions at higher price points and additional weekly options for our members. Slide 4 demonstrates Goodfood's steadily increasing gross merchandise sales, which reflect the value of merchandise sold by the company before taking into account all incentives and credits. Gross merchandise sales increased significantly to $84 million, an increase of $61 million or 264% over fiscal 2017. Like revenue, and for the same reasons, gross merchandise sales is growing faster than our number of subscribers. Our gross merchandise sales run rate totaled $107 million at the end of the fiscal 2018 period, up from $36 million at the end of the same period last year. While growing at a very fast pace, we also successfully launched our national platform with the opening of our production facility in Calgary, increasing our addressable market by over 1 -- 11 million consumers. Our new Calgary facility has a production capacity of approximately $100 million in annual revenue.We are very pleased with the results as they have been above our expectations, both in terms of subscribers and deliveries, particularly in the major urban centers of Alberta and British Columbia. More recently, we expanded our state-of-the-art production and distribution facility in Montreal and announced an expansion that will increase our national delivery capacity to $500 million. We have also made significant investments in automation, while continuing to focus on improving operational efficiencies, leading to a significant reduction in labor costs as a percentage of revenue and improvements on our gross margin. Our adjusted gross margin at 33.6% for the year and 35% for the fourth quarter reached its highest level since the company's founding.Moving on to Slide 6. Our focus on the consumer experience is at the heart of what we do. We are always looking at how we can tailor our product offerings and make ordering as well as preparation simpler for our members while maintaining the same high standards that our clientele appreciates. During the year, our chefs created over 750 new kit recipes and added an additional 10 weekly options for our members to choose from, bringing the total to over 23 recipes per week that cater to a wide variety of taste preferences. We also introduced the Easy-Prep plan that consists of 15- to 20-minute recipes that are quick, stress-free options for the preparation of wholesome meals. This plan includes set recipes with our usual high-quality ingredients that have been pre-chopped and, in some cases, even precooked for our members' convenience. Further, we've also launched our L'artisan recipe collection, featuring higher-end cuts of protein, responding to subscriber demands for a more upscale meal experience that can be enjoyed once a week. L'artisan recipe options include proteins like New York strip steak, lamb chops and tiger shrimp. These recipes have flexible price points contingent on food costs and are offered at a higher price point than our classic meal collection.Fiscal 2018 ended on a high note with strong momentum. For fiscal 2019, we will remain focused on 3 key objectives: maintaining our market leadership and growing our subscriber base across the country; continuing to improve the consumer experience by adding more recipes and meal options; and continuing to invest in automation to improve our gross margin.We also see a compelling opportunity and long runway for growth in the direct-to-consumer home meal solutions industry, a Canadian market whose value we expect will grow to over $9 billion in the near future. Goodfood is uniquely positioned to gain significant market share in key segments of the industry by leveraging our ability to deliver perishable goods across the country and capitalize on consumer tastes and preferences. As we continue to expand our product offering, we intend to roll out solutions for all 3 meals of the day with options that address all levels of engagements, from ready-to-cook to ready-to-eat dinner during fiscal 2019.On that note, I'll now turn to over the presentation to Philippe.

[Philippe St-Cyr Adam]

Thank you, Jonathan. Good evening, everyone. I will start with the key year-over-year financial highlights for Q4 2018. Goodfood recorded strong financial results in Q4. As you can see, we achieved triple-digit growth in active subscribers and revenue. We grew our active subscriber base to 89,000 at the end of August 2018, an increase of 187% from August 2017. Revenue followed suit and reached $21.4 million at the close of Q4 2018, an increase of 185% from the corresponding period in 2017, while gross profit increased 357% to $4.6 million. For fiscal 2018, revenue increased 256% to $70.5 million, while gross profit grew 308% to $14.7 million. Again, both revenue and gross profit grew faster than our subscriber base did for the year, with an increase in the number of orders per customer and the introduction of new meals options at higher price points.Slide 10 compares our gross merchandise sales and adjusted gross margin results for Q4 2018 and for the year. Gross merchandise sales almost tripled compared to Q4 2017, growing to $25.8 million in the fourth quarter compared to $8.7 million recorded in Q4 2017. Gross merchandise sales for fiscal 2018 were up $61 million or 264% to $84.1 million for the year compared to $23.1 million in 2017. Our adjusted gross margin increased almost 10 percentage points to 35% compared to 25.5% in Q4 2017. Adjusted gross margin was the highest in the company's history and reflects continued efficiencies generated in our Eastern Canada operations as well as the progress we have made on labor, shipping and packaging costs. This is despite the 1% to 2% drag from the commencement of Western Canada operation in Q4 2018 and the additional packaging required during the summer months. Adjusted gross margin for the year was 33.6%, up almost 4 percentage points compared to fiscal year 2017.Moving on to Slide 11. Goodfood gross profit more than quadrupled to $4.6 million in the fourth quarter of 2018 compared to $1 million in the fourth quarter of fiscal 2017. The strong increase was primarily due to the continued growth in the number of active subscribers. Gross margin increased 8.1 percentage points when compared to Q4 2017 and 2.7 percentage points when compared to fiscal year 2017. The increase in our gross margin was mainly due to the lower production labor cost as a percentage of revenue, resulting from investments in automation as well as lower unit costs for packaging, food and shipping as a result of increased efficiencies and purchasing power. The adjusted EBITDA margin improved to negative 12.4% and negative 12.1% of revenue for the quarter and fiscal year, respectively. This represents an improvement of 16.6 percentage points and 5.8 percentage points over the corresponding period of 2017. This improvement is mainly due to the strong increase in our gross margin for both periods and to our higher operating leverage, which resulted in a decrease of our selling, general and administrative expenses as a percentage of revenue. As we continue to increase our scale, we are confident that this growth as well as an increased operational focus will translate into profitability. Slide 13 wraps up our year-over-year highlights. Our net loss for fiscal year 2018 was $9.4 million, a small decrease from the $9.9 million in fiscal year 2017. The decrease in net loss is mainly due to higher gross profit and lower finance expenses substantially offset by higher SG&A expenses. The adjusted net loss for Q4 2018 increased to $2.9 million for the quarter, primarily as a result of a higher net loss caused by a planned increase in selling, general and administrative expenses. The adjusted net loss for the year increased to $9.3 million when compared to the 2017 period. The adjusted net loss for fiscal year 2017 excludes the loss on the reimbursement of convertible notes of $4.3 million. The increase in adjusted net loss was primarily due to planned investments in our Western Canada facility as well as administrative expenses incurred to support continued active subscriber growth and increased marketing budget. With that, I'd like to move on to Slide 14 and focus on Goodfood's quarter-over-quarter results. During Q4 2018, Goodfood added 13,000 net new subscribers, an increase of 17% from May 31, 2018. Our revenue decreased slightly in the last quarter to $21.4 million from the $22.2 million of revenue in Q3 2018. As we mentioned on our previous earnings call, the fourth quarter is always slower because of the summer vacation period. Customers are eating out more often and tend to order less frequently. Although results in Q4 2018 were particularly strong, we expect that future summer months will see more significant quarter-over-quarter declines in sales and gross margin in addition to negative cash flow from operations and flat to negative subscriber growth.Slide 15 compares our gross merchandise sales and adjusted gross margin results for Q4 2018 with those of the third quarter this year. We generated gross merchandise sales of $25.8 million in the fourth quarter, relatively stable when compared to the $26.2 million in GMS recorded in Q3 2018. As I just mentioned, the summer vacation period affects GMS in the same manner it affects revenue. Our gross merchandise sales for fiscal 2018 were up $61 million or 264% to $81.1 million for the year compared to $23.1 million in 2017. Our adjusted gross margin was stable at 35% compared to the 34.9% in the previous quarter. Adjusted gross margin was the highest in the company's history and reflect continued efficiencies generated in our Eastern Canada operations as well as the progress we've made on labor, shipping and packaging costs. This is despite a 1% to 2% drag from the commencement of Western Canada operations in Q4 2018 and the additional packaging required during the summer months. Moving on to Slide 16. Goodfood's gross profit decreased to $4.6 million in the fourth quarter of 2018 as compared to $5.2 million in the third quarter of this fiscal year. The decrease in gross profit can be explained by the lower revenue generated during Q4 and the fact that we need to adjust packaging during the summer months to keep our ingredients fresh. For the same reasons, gross margin decreased slightly for the quarter from 23.3% to 21.5%. As Jonathan mentioned previously, we generated positive cash flow from operations for the second consecutive quarter and for the year. The positive cash from operations for the quarter is primarily due to a favorable change in working capital and to the lease inducement of $1 million for the Western Canada facility, which was reimbursed by the landlord during the quarter. Without this reimbursement, we would still be in a breakeven position on a cash flow basis for the quarter. This is quite an achievement as we are continuing to adjust for significant growth in both subscribers and revenue and are still in ramp-up mode in Western Canada. Cash flow from operations for the year was $300,000. As a result of the positive cash flow, our cash position increased to $24.5 million at the end of the fourth quarter, the highest it has ever been at the end of a quarter. Combined with the $13.5 million financing announced last week, this puts us in an extremely solid financial position to continue to execute on our business plan. This new debt financing consists of a secured 3-year term loan of $10 million, a $2.5 million revolving credit facility and $1 million in other short-term financing. The interest rate is attractive and is a significant improvement from what we're paying on our previous long-term debt. Furthermore, the repayments will only start in 2 years, giving us additional flexibility to keep growing and increase profitability. The next slide shows our adjusted EBITDA margin, which decreased to negative 12.4% from negative 5.8% in Q3 2018. This was due to the decrease in gross margin and to a planned increase in selling, general and administrative expenses as a percentage of revenue. We also saw an opportunity to further increase marketing expenditures toward the end of the quarter in preparation for the important back-to-school period. As a result, we have had very good momentum going to Q1 2019. The adjusted net loss for Q4 2018 increased to $3 million from $1.6 million when compared to the third quarter, primarily as a result of the decrease in gross profit during the quarter. The decrease in adjusted net loss was primarily due to planned investments in our Western Canada facility as well as administrative expenses to support continued active subscriber growth and an increased marketing budget. That wraps up our financial highlights for the fourth quarter and fiscal year 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 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 -- my first question is, you're talking about expanding our product offering, you're talking about providing solutions for 3 meals of the day. I'm wondering what would -- what could be the impact on your average revenue per user? It would obviously trend up based on a wider offering, right?

[Jonathan Ferrari, Chief Executive Officer & Chairman]

Martin, yes. So the impact that we would expect from our additional offering would be twofold. One would be to increase the lifetime value of the subscribers and, secondly, to increase the average order value. At this point, I think it's too soon to talk about a specific number in terms of a target, but the idea that we would be able to increase the average order value is absolutely right on. We believe that it's the same member, the same Goodfood subscriber in a week that might be looking for breakfast solutions for some days of the week, a couple lunches, some dinners that they might want to cook on their own at home and a couple dinners that they might want to heat and serve. And this would also have a positive effect on gross margin, given that the fixed cost of a delivery and the packaging would be amortized on a higher average order value.

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

Okay. And what kind of penetration could we see from your existing subscribers using more than one meal offering? Over time, at maturity, could we see something like 20% of your subscribers using more than one meal offering?

[Jonathan Ferrari, Chief Executive Officer & Chairman]

I didn't catch the last part of your sentence. Could we expect that...

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

Over time, is it -- would it be fair to expect something like 20% of your subscribers using more than one meal offering?

[Jonathan Ferrari, Chief Executive Officer & Chairman]

Absolutely. I would say in our early testing, we were surprised to see, definitely, double-digit opt-in rates. So again, it would be too soon to kind of expand that over the entire base to get some numbers, but what we've seen in our breakfast testing is that the opt-in is quite high, absolutely.

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

Okay, okay. And, Philippe, you've talked about gross margin improving a lot this quarter. It's the highest on an adjusted basis it's been in the history of the company, and you mentioned that labor was one of the reasons. But I'm wondering as well, you're probably achieving as well better sourcing costs, right, due to your increased scale? And how has that impacted your gross margins?

[Philippe St-Cyr Adam]

Yes, definitely. The -- I mean, we're getting better terms with our supplier, and that translates into higher gross margins in terms of, like, shipping costs and packaging costs, for instance. But food costs as well, we're getting better terms, so we're trying to give it back to our customers to increase the value proposition. So that part doesn't translate into gross margin improvement but into customer improvement instead. But definitely, the better term and the scale help and will continue to help the gross margin.

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

Okay. And last question for me, we're almost finished Q1 now. I'm wondering if you're seeing any shift in trends that could impair your growth or your profitability objectives for '19.

[Jonathan Ferrari, Chief Executive Officer & Chairman]

We entered our first fiscal quarter, as we kind of discussed, with a lot of momentum, I would say, from the month of August, which led to higher-than-expected growth in subscribers in the Q4 of 2018. And that momentum continued with the good start into Q1 2019. So we see very favorable trend in terms of competitive dynamics and the continued growth of the business.

[Operator]

[Operator Instructions] Your next question comes from the line of Frederic Tremblay from Desjardins Capital Markets.

[Frederic Tremblay, Analyst]

Just on the rollout of new meal solutions, can you provide a bit more detail on timing of that? I know you said during fiscal '19, but maybe a bit more precise if you can. And as well, your thoughts on developing those solutions internally versus potentially partnering with someone or acquiring an established player.

[Neil Cuggy, President, COO & Director]

Fred, it's Neil. I'll try and answer those for you. So for impact in fiscal '19, as Jon mentioned, we've been beta testing the breakfast program, and it's been going very well but on a very small scale, so we don't anticipate any kind of major contribution from that for the first quarter for sure and throughout the early half of the year as we kind of get the product dialed in. And then the new solutions that we're talking about as well, I wouldn't anticipate any major contribution in the first half of the year. And depending on how quickly we can get the product market dialed -- it dialed in, not much relative to the base business throughout fiscal '19, but hopefully, quite a bit of contribution for fiscal '20. And your second part of your question was what again, sorry? M&A versus the organic?

[Frederic Tremblay, Analyst]

Just the -- well, your thoughts about developing those solutions internally versus partnering or acquiring someone that's already established in those categories.

[Neil Cuggy, President, COO & Director]

Absolutely. Yes, so given the management team's expertise and background in capital markets and M&A, I think we feel comfortable looking at opportunities to buy into the industry. Unfortunately, we haven't come across any attractive deals that would move the needle or significantly jump start our development in any of the new products that we're thinking about getting into but remain optimistic and open-minded. So right now, we've been choosing to build it organically.

[Frederic Tremblay, Analyst]

Okay. Next question was on the promotional environment in Eastern and Western Canada, maybe if you can compare those and if you expect the environment to change, given the pending combination of your 2 main competitors.

[Jonathan Ferrari, Chief Executive Officer & Chairman]

Yes. So for the first part of the question, we don't see currently very much difference between the promotional environment in Eastern and Western Canada. We do have less brand awareness and a lower market position in some parts of Western Canada relative to Eastern Canada, given that the launch was in our recent past. But that, I would say, disadvantage is changing very quickly and we're quite happy with the unit economics that we're seeing in Western Canada, and they're progressing favorably faster than expected. The second part of your question was about the, I guess, combination of Chefs Plate and HelloFresh in the Canadian market. I think the -- from our perspective, what matters from a competitive dynamic perspective and what we attribute value to is in being the #1 best-selling brand because what matters to the consumer is, when I think of a whole meal solution, what is the first brand that comes to mind, what's the first brand that I think about. And also, what we've seen in the home delivery space in Canada is there's definitely a network effect that we've talked about in the past where a significant part of our new sign-ups come from referrals. And so we do think that there's value in being the best-selling brand in Canada, which we continue to be following the acquisition and which we project to continue to be in the future. And we don't necessarily anticipate that there will be much advantage to having -- to kind of owning the #2 and the #3 brands in Canada. So we feel quite comfortable with the competitive position in Canada.

[Frederic Tremblay, Analyst]

Okay, that's helpful. And I'm just curious on your, I guess, general retention of customers lately as you increase the number of recipes, Easy-Prep plan, just in terms of -- in recent months, have you seen a change in the retention rate of your recent week records or too early to draw a conclusion from that?

[Jonathan Ferrari, Chief Executive Officer & Chairman]

What I would point you to is the better-than-expected subscriber growth in Q4. So I would say generally speaking, we would -- we were not anticipating subscriber growth of this nature in Q4. And the reason why it happened was because we were seeing better-than-expected economics. So we were seeing positive seasonal -- kind of positive fluctuations in the seasonal lifetime value of the customers and better-than-expected customer acquisition costs. And so that's what led us to push a little bit more on the marketing dial and spend a bit more in marketing during the quarter, and that has continued into Q1 of our fiscal '19. So we're seeing positive developments there. In terms of the new products like L'artisan and the Easy-Prep plan, there's 2 things that we were -- well, I guess the levers that we were playing with there is one of the average order rate. So on the Easy-Prep plan, making the product a little bit easier to use and more convenient, we were expecting that to lead to a higher order rate on that plan, which is proving to be the case. And what we were thinking with L'artisan is enabling a more premium experience for some of our members for one night of the week has led to a higher average order value for those customers. And so those are all trending very positively for the overall lifetime value of the customers at Goodfood.

[Operator]

[Operator Instructions] 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 Q4 2018 Financial Results Conference Call. [Foreign Language]

[Operator]

This concludes today's conference call. You may now disconnect. Thank you for joining. [Foreign Language]