Goodfood Market Corp

TSX:FOOD

Earnings Call Transcript 2023-Q4

[Operator]

Good morning, ladies and gentlemen, and welcome to the Goodfood Q4 2023 Earnings Conference Call and Webcast. [Operator Instructions] I would like to remind everyone that this conference call is being recorded today, November 22 at 8 a.m. Eastern Time.

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's call, Jonathan Ferrari, Goodfood's Chief Executive Officer. Mr. Ferrari, you may proceed.

[Jonathan Ferrari, executive]

Thank you. [Foreign Language] Good morning, everyone, and welcome to this call for Goodfood Market Corp. to present our financial results for the fourth quarter of fiscal 2023 ended September 2. I'm joined on the call today by Neil Cuggy, Goodfood's President and Chief Operating Officer; and Roslane 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 to review the highlights of this quarter and year. We are pleased to continue building on our profitability momentum by delivering a third consecutive quarter of positive EBITDA and record EBITDA for the full fiscal year. This performance demonstrates our commitment to build on our improved financial performance to generate growing profitability and cash flows. In the fourth quarter, we delivered positive adjusted EBITDA of $1 million, a margin of 2% during our seasonally weakest quarter.

Operational efficiencies. We have worked to gain in addition to continuous pricing optimizations, drove robust gross margins, with gross profit stable year-over-year on a lower net sales basis. Combined with unwavering SG&A discipline, the improved gross margin has led to strong EBITDA performance. For fiscal 2023, we are also pleased to report our largest ever positive adjusted EBITDA performance of $5 million or a margin of 3% compared to an EBITDA loss of $41 million or a negative margin of 15% last year.

The successful turnaround and record performance stems from the operational efficiency gains as well as our focus on consistently improving our unit economics over time through enhancements to our customer value proposition. On the SG&A side, we have reduced annual non-marketing SG&A by $34 million this year enabling a cost structure that can consistently drive growth in our profitability metrics. Our marketing efficiency initiatives have also become -- begun bearing fruit as our customer acquisition cost has decreased by double-digit percentage points compared to the same period last year and to the early quarters of this fiscal year.

The efficiencies our team have been laser-focused on achieving our key to Goodfood's profitable growth. Both in recent months and into the future, we continue to build on the momentum we've created by consistently strengthening our customer value proposition to increase the stickiness of our customer base and unlock new TAM. We have increased and continue to increase our assortment of delicious recipes. We are investing in the user experience on our digital platforms, while doubling down on sustainability and building inspiring partnerships with Goodfood brand ambassadors and brand partners. More on that later.

Overall, we are lean, mean and disciplined, which puts us in a strong position to continue delivering EBITDA growth and look forward to accelerating that growth and profitability. On that note, Ross will now provide additional details on our financial performance. Over to you, Ross.

[Roslane Aouameur, executive]

Thank you, John, and good morning, everyone. I will now turn to Slide 4, which provides details on our top line performance. Quarterly active customers during the fourth quarter were 116,000 compared to 157,000 in the same quarter of fiscal '22 and 119,000 in the previous quarter this year, with the majority of the sequential quarterly decline stemming from seasonality. The relatively mild decline in the context of a seasonally impacted quarter is the result of successful reengagement campaign that have driven a broader set of customers to place orders.

Net sales were $37 million for the quarter, a $5 million sequential decrease compared to the third quarter. This figure was the result again of the seasonal lower order rates and customer base offset by larger baskets containing more recipes and add-ons. Net sales per active customer were roughly in line year-over-year and declined sequentially, driven by the lower order rate typical for the summer months.

We will now turn to Slide 5, which looks at our profitability levels. We are pleased to now have delivered 3 consecutive quarters of positive adjusted EBITDA. On the back of continuous improvement in gross margin, which reached 38% in the fourth quarter and 990 basis points improvement compared to the same quarter last year, we achieved $1 million of adjusted EBITDA this quarter, for a margin of nearly 2%, a 6% improvement year-over-year. This level of profitability in the fourth quarter underscores the efforts made by our teams to simplify and enhance the efficiency of our operations. Combined with pricing optimization and a focus on our most profitable products and customers, these improvements have now shown to be structural in nature and provide a solid platform to sustain growing profitability as evidenced by the gross profit in [indiscernible] remaining again stable year-over-year on a lower net sales basis.

The increased gross margin combined with the implemented G&A tables, provide the leading cost structure enabling to maintain consistent EBITDA profitability. Even in seasonal quarters of this one or in quarters with increased marketing activity as is the case in the current first quarter. I will now move to Slide 6 for a review of cash flow and capital expenditures. Cash flows used by operating activities were $2 million, an $11 million improvement compared to the same quarter last year. The reversal from positive CFO in the third quarter of this year to negative CFO this quarter is driven by the nature of our working capital as we pay invoices selling from the higher volume third quarter and the lower volume in fourth quarter. Still, the substantial improvement compared to last year is mainly the result of improved profitability.

Capital expenditures came in again at less than $0.25 million, relating mainly to capitalized the neighbor of tech investments and payments of minor maintenance work. This continues our consistent reduction of capital intensity when compared to last year's fourth quarter CapEx of $5 million. As a measure of our cash generation ability, we introduced this year a metric that combines our cash flow from operations and capital expenditure. That metric is free cash flow. As you can see here, when adjusting for restructuring related outflows, we used $1 million of free cash flow in the seasonal fourth quarter, an $11 million improvement compared to last year.

This performance has been the result of growing profitability as well as lower capital investments and underscores our disciplined approach to cost management and capital allocation and our commitment to delivering long-term shareholder value through a substantial free cash flow generation.

Turning to Slide 7. You will find a summary of our performance this quarter and fiscal year. Overall, as Jon mentioned, we are energized with the results of our team's hard work, which has driven record gross margin and adjusted EBITDA this year. Both on an annual and quarterly basis, profitability indicators have displayed the material improvement and consistent strength year-over-year, demonstrating our unwavering commitment to profitability and cash flow. Focusing on this fiscal year, we are very pleased to report our largest ever annual adjusted EBITDA standing at nearly $5 million at a margin of 3%. The strong performance is underpinned by a structurally strong gross margin which also hit an annual record of 39%.

These levels of profitability have translated into an $87 million improvement in adjusted free cash flows, well on our way to consistently generating and growing positive free cash flow. This year's financial performance provides the ideal launchpad for our plan to generate profitable growth for years to come and generate significant shareholder value. On this note, I will turn it back to Jon to review our outlook.

[Jonathan Ferrari, executive]

Thank you, Ross. Switching to Slide 8. Last quarter, we shared key customer insights that inform our long-term road map to consistently grow our customer value proposition, thereby creating an increasingly sticky customer base as well as carefully growing our TAM to serve the needs of new customer segments. First, busy professionals and families are increasingly craving delicious and nutritious meals that can be prepared in minutes. With this in mind, we have broadened our assortment of carb wise, calorie smart, keto, paleo and high-protein recipes by over 50%, many of which can be prepared within 10 or 15 minutes.

We partnered with key brand ambassadors to amplify the initiative including Montreal Canadiens Captain, Nick Suzuki and paired some of the new meals with the introduction of our better-for-you proteins, including organic beef, grass-fed bison and steelhead trout. Second, we are seeing strong demand from customers who are looking for experiences that spark joy while providing an alternative to pricy restaurant options. To achieve that, we have curated select partnerships for our customers, including exclusive meals, co-created with Michelin-starred St. Lawrence Restaurant in Vancouver to bring dishes like lemony chicken piccata with Fresh [indiscernible] and garlic roasted Broccolini to our customers' homes.

Another exciting product innovation we introduced to our customers this fall is our new line of air fryer recipes in partnership with Ninja, Canada's #1 selling air fryer brands. Our air fryer recipes take minutes to prepare, cost half the price of restaurant delivery and provide unbeatable crispy flavors like our air fryer fried chicken sandwiches with Spice Honey and Crisp Apple Kale salad. It's been a hit with our customers. Third, Canadians are prioritizing planet-friendly options whenever possible. Our customers have long appreciated our perfectly portioned ingredients that save them from food waste and keep more cash in their pockets as well as the way in which we've built our supply chain to remove middlemen from farm to kitchen table.

This year, we've taken it up another notch by offsetting carbon emissions on Goodfood deliveries and by introducing packaging innovations that have helped us to remove the equivalent of 2.4 million plastic bags annually from our deliveries. We have already started seeing results from the initiatives we've covered together today, which will compound into free cash flow growth going forward. For example, in the fourth quarter, our customers' basket size increased by 3% compared to the third quarter without a price increase. Throughout the quarter, we were also able to improve customer acquisition costs by double-digit percentage points as a larger share of our sign-ups come from referrals from passionate customers and reactivations from older customers who want to discover the new Goodfood.

Overall, our lean and mean teams are happy to have achieved record profitability this year. Going forward, we are convinced that by remaining focused on consistently growing our customer value proposition with sustained discipline on our SG&A costs. We are in a strong position to continue growing our free cash flow at an attractive pace in fiscal 2024 and beyond. On that note, I will turn it over to the operator for the Q&A portion of this call.

[Operator]

[Operator Instructions] Our first question comes from the line of Martin Landry from Stifel.

[Martin Landry, analyst]

My first question, we're almost done your Q1 quarter. So I was wondering if you could give us some color on how the quarter has gone perhaps some color on revenues, customer count, profitability, especially given that the macro outlook in Canada is difficult. So just -- any color would be super helpful.

[Jonathan Ferrari, executive]

Thanks for the question. So we have continued to see certainly a deterioration in the macro environment that's impacting everyone from customers to suppliers that are experiencing stress as well. So it is a difficult environment. I think the work that we've done over the past 12 months has put us in a really good place to continue growing our profitability. And we've also made a lot of the investments upfront as we were talking about to improve and grow our customer value proposition consistently. So we continue to see year-over-year improvements on our customer acquisition costs, customer lifetime values are also increasing based on better order rates as well as some success that we've seen in growing the basket size through some of the partnerships that we talked about with the brands that we're working with.

So I think the outlook continues to be difficult on the macro side, but I think Goodfood is faring relatively well through it. And from a quarterly active customer count, we have seen growth from Q4 to Q1, which is a very good sign and a good base for us to be starting fiscal '24.

[Martin Landry, analyst]

So you're able to grow your customer count in this difficult environment. That's great. I've noticed your credits and incentives for Q4 have gone up a little bit. I think they were around 16%. How do you balance credits and incentives to attract customers versus profitability. Just -- I don't know if you can just walk us through a little bit at what point the delta makes you look at profitability versus customer count?

[Roslane Aouameur, executive]

It's a good question, and you've noticed, right, compared to Q4 last year and this year. I think a few things to talk about, the first one being the reengagement campaign as you mentioned that these were first for us, and there were an initial test in the fourth quarter. It's not the perfect quarter to do that, but I think even we saw some really good results that drove incentives a little higher. I think the other piece is, if you think of C&I last year with on-demand being a quick delivery, you'd see usually less credit and more direct deliveries, I think, in the hot summer on a weekly meal plan and longer deliveries, that goes up a little bit.

I think from an overview of where we think things are. I think there's a tight balance between making sure our gross sales flowed at our net sales into a gross profit -- and we still are able to make sure that the customer experience is good and that we incentivize folks to either be reengaged with the platform or to join the platform. So I think if we can keep gross margin at a level where we saw it in the fourth quarter, while being able to be incentivizing people to order and join the platform, I think those 2 combined to provide a pretty good balance to then drive profitability on an EBITDA basis and improve cash flow. So I'm not going to say Q4 was the perfect balance of that, but it's an indication of what we can -- where we can go -- up to where we can grow on C&I while maintaining good gross margin and EBITDA profitability.

[Martin Landry, analyst]

Okay. That's helpful. And maybe if I can just squeeze 1.

[Neil Cuggy, executive]

On the question just on -- there's a strong interplay as well from a customer acquisition cost to our C&I percentage. So the higher the C&I up to a certain point, we see in our modeling that customer acquisition costs will actually come down and the inverse is true as well. So we're constantly playing with obviously maximizing lifetime value, but is there a 12% C&I target or 16% C&I target? And what does that mean for our cost of acquisition and the efficiency of our media spend as well. So if you reduce one, it doesn't necessarily mean it's going to all go to profitability right away. But what you're trying to do over the long-term is get the most lifetime value and shortest payback on your marketing investments.

[Martin Landry, analyst]

Okay. That's helpful. And then maybe just last one for me, if I can squeeze in. You've done an impressive job but reducing your SG&A expenses. I think you said $34 million in 1 year. Can you just remind us a little bit when do we lap most of the cost reduction for modeling purposes, that would be helpful?

[Roslane Aouameur, executive]

Yes. So they spend a couple of quarters last year. I think by the end of Q2 and into Q3 is where most of it will have been lapped. I think if you try to compare G&A structure and the $34 million in SG&A, including the [indiscernible] through G&A. I think by Q3, you'll have the more comparable year-over-year cost structure. With that said, we're pleased and energized and the team did a lot of work to get to that number. That doesn't mean we're not going to look for further improvement. It obviously won't have the same scale.

[Operator]

[Operator Instructions] We have our next question comes from the line of Frederic Tremblay from Desjardins.

[Frederic Tremblay, analyst]

Most of my questions have been answered, but I have a couple more. One of the things I found interesting was the upcoming launch of customization in terms of being able to swap or double the proteins in the recipes. Can you maybe share a bit more color on that, where you're at with that upcoming initiatives that you started testing it? And if so, what would be your initial takeaways from that? And just your thoughts as well on the timing of when that may be fully rolled out to the entire customer base.

[Neil Cuggy, executive]

Thanks for question. I think as we laid out in the past couple of quarters, we want to continue investing in selection and the protein customization, I think is a way to add selection without adding a ton of complexity. So we'll continue to explore different ways to use that to give customers more selection, more perception of selection and hopefully grow basket size and order rates consistently over time as well. It also gives us an opportunity to introduce a different variety of proteins that we wouldn't necessarily be able to include it at base pricing in people's plans. We mentioned some of the organics, some of the free range, some of the grass-fed beef. So you'll see some of those types of things continue to kind of come in and out of the menu as we test different price points in protein.

[Frederic Tremblay, analyst]

Okay. And then on potentially expanding into other channels, multi-channel partnerships. Do you have an update on where you're at with those potential partnerships and what you're sort of thinking about on that front?

[Neil Cuggy, executive]

Yes. So we've been running a pilot with SkipTheDishes out in Western Canada for I want to say 2 quarters now. It's been going well, still small scale. It's only a couple of stores and a limited number of SKUs. So -- it's been going well. We're continuing to iterate on that. We're chatting about if we scale up or stay at the same pace that we're at today. So it's been something that's in the back of our mind, obviously, and the vast, vast majority of our sales and profitability come from the ready-to-cook business. So we want to continue to focus the team's efforts on that, especially with the macro environment that we're seeing. Everyone is looking for different ways to reach customers. So we get a lot of inbounds from different retail partners or other e-commerce players on how to expand both of our reaches, which will continue [ on your ] name.

[Frederic Tremblay, analyst]

Great. And maybe one -- last one for me. On -- maybe on free cash flow outlook or just general thoughts on cash flow. Obviously, CapEx has been reduced tremendously here. So in terms of growing cash flow in the future, is it -- like are you envisioning it mainly coming from increased top line? Or is there more to do on the SG&A, for example, just trying to figure out what the key levers would be for future cash flow improvement.

[Roslane Aouameur, executive]

Yes, great question. And I think the answer is a balance of both. We definitely want to continue to be disciplined on the SG&A side and invest in the highest ROI pieces of the SG&A part of the P&L. I think from a profitability perspective, given the cost structure we have and our iterations and balancing of C&I and net sales, I think we can be in a place where additional sales will flow through at a pretty high quit. So that will definitely be sort of the operating leverage, free cash flow generation that we're looking to generate. I think on the G&A side, there's definitely room for further improvement, and you look at it on a weekly, daily basis to make sure that we're not missing any opportunities.

I think it's probably more marginal than what could come from the top line. With that said, our goal will always be to be balanced. And I think from a growth perspective, the macro outlook is given -- or making, I think, focus even more on the G&A side and looking at how we can take advantage of opportunities on the top line.

[Operator]

There are no further questions at this time. I'd now like to turn the call back over to Mr. Ferrari for final closing comments.

[Jonathan Ferrari, executive]

Thank you for joining us on this call this morning. We look forward to speaking with you again at our call in January.

[Operator]

Thank you. Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines. Have a lovely day.