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Edited Transcript of FOOD.TO earnings conference call or presentation 11-Jul-19 12:00pm GMT

Q3 2019 Goodfood Market Corp Earnings Call

Jul 15, 2019 (Thomson StreetEvents) -- Edited Transcript of Goodfood Market Corp earnings conference call or presentation Thursday, July 11, 2019 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Jonathan Ferrari

Goodfood Market Corp. - CEO & Chairman

* Neil Cuggy

Goodfood Market Corp. - President, COO & Director

* Philippe St-Cyr Adam

Goodfood Market Corp. - CFO

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Conference Call Participants

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* Alain Hazzi

GMP Securities L.P., Research Division - Equity Research Associate

* Frederic Tremblay

Desjardins Securities Inc., Research Division - Analyst

* Raveel Afzaal

Canaccord Genuity Corp., Research Division - Analyst

* Ryan Li

National Bank Financial, Inc., Research Division - Associate

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Presentation

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Operator [1]

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Thank you for standing by. Welcome to the Goodfood Third Quarter 2019 Financial Results Conference Call. (Operator Instructions) I would like to remind everyone that this conference call is being recorded today, July 11, 2019, at 8:00 a.m. Eastern Daylight 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 conference call, Jonathan Ferrari, Goodfood's Chief Executive Officer. Mr. Ferrari, you may proceed.

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Jonathan Ferrari, Goodfood Market Corp. - CEO & Chairman [2]

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Thank you. (foreign language) Good morning, everyone, and welcome to this call for Goodfood Market Corp., in which we'll present the financial results for the third quarter of fiscal 2019 ended on May 31, 2019. I'm pleased to be joined on the call today by Philippe Adam, Goodfood's Chief Financial Officer; and by Neil Cuggy, President and Chief Operating Officer.

Our press release reporting third quarter results was published earlier this morning. It can be found on our website at www.makegoodfood.ca and on SEDAR. Please be aware that we will refer to certain metrics and non-IFRS measures. Where possible, these measures are defined and reconciled to the most comparable IFRS measures in our MD&A. Finally, let me remind you that all figures expressed on the call today are in Canadian dollars unless stated otherwise.

I'd like to start off with a few comments on the typical seasonality of our business, which should help provide a better understanding of both the market we are serving and our performance within it.

Our first quarter is the strongest on several key metrics, with the critical back-to-school period. The second quarter is typically strong with January and February being traditionally high demand months. However, December is slower due to the holiday season.

Margins are also usually impacted by higher shipping- and logistics-related costs due to weather conditions. Our third quarter is usually the start of a slower period impacted by spring breaks in March across Canada and by the start of the nicer weather in May. Finally, our fourth quarter is slow, given vacation time and nicer weather, which changes and influences the behavior of our members and our potential customers. As such, the fourth quarter is characterized by lower order rates, lower marketing expenses and fewer new active subscriber additions. Margins are also significantly affected by higher packaging costs due to the warmer weather.

I'll now turn to a review for our most recent results. I'm pleased to report that the third quarter was excellent. We achieved record results on a number of key metrics, including the number of subscribers, gross merchandise sales, revenue, gross margin and adjusted gross margin. We also generated an all-time high positive cash flow provided by operations on a year-to-date basis and our strongest cash position ever of $50 million at the end of the quarter.

We continued to build strong and accelerating growth this quarter generating triple-digit growth in active subscribers and revenue on a year-over-year basis. Considering that the third quarter is typically the start of a slower period, we are very pleased to have sustained the strong momentum achieved in the first half of the year.

At the end of the third quarter, Goodfood subscriber base reached 189,000 with the addition of 30,000 net new active subscribers during the quarter. This represents an increase of 100,000 subscribers since the beginning of fiscal year 2019, more than doubling our subscriber base in only 9 months.

Quarterly revenue has also grown sharply. Revenue increased to a record $49.9 million for the quarter, more than doubling the revenue for the corresponding period in 2018 and 36% higher than the second quarter. This increase resulted in revenue exceeding $137 million on the last 12-month basis. This progress was propelled by continuous growth across Canada, the success of new meal plans and our market-leading brand recognition. Western Canada results continue to be above expectation, as we are maintaining our position as the #1 home meal solutions player in Alberta and British Columbia.

Subscriber growth remains robust. While churn is slowly decreasing, we are seeing strong order rates from our members. Gross merchandise sales also increased significantly to $61.2 million, up 32% over the second quarter and a 134% year-over-year. On the last 12-month basis, gross merchandise sales reached $171 million, quickly approaching the $200 million mark.

The strong growth momentum of the third quarter, driven by net subscriber additions, new meal plans and meal solutions, allowed us to surpass the $250 million mark in gross merchandise sales run rate, finishing the third quarter at $257 million. It is also important to highlight that incentives and credits as a percentage of gross merchandise sales dropped from over 20% in the first half of the year to 18.6% in the third quarter, reflecting our seasonal marketing strategy with lower incentives starting in Q3 and in addition, incremental costs associated with harsh winter conditions in the second quarter.

In a moment, Philippe will discuss the financial performance of the company in greater detail. We are continuing to focus on growth and on improving member experience. Our objective is to expand our product categories to capture further opportunities. Since the beginning of the year, we have been expanding our offerings and actively working towards adding additional meal options with different levels of engagement from ready-to-cook to ready-to-eat meals.

A few months ago, we launched our first breakfast meal solution, ready-to-blend smoothies nationwide. To date, we have internally developed 16 original flavors of smoothies and surpassed the gross merchandise sales run rate of $10 million despite limited marketing investments. In order to continue the development of our breakfast product line, we recently leased a new 20,000-square foot production facility in Montréal, exclusively for our breakfast meal solutions and allowed approximately $100 million of production capacity by the end of fiscal year 2019.

In addition to our ready-to-blend smoothies, we are also working on other products in the segment, which we expect to launch in the coming months. Considering the size of the Canadian breakfast segment, we have plenty of runway for future growth.

During the third quarter, we also launched Yumm.ca, a value meal-kit targeting cost-conscious Canadians. Yumm is the lowest price ready-to-cook meal option in Canada, starting at $6.99 per serving and offers a choice of 6 meal options per week. This new initiative effectively expands our total addressable market as it unlocks untapped demographics, including students and busy families. Our young business model will provide a similar gross margin profile, enhance customer retention and lower acquisition costs by leveraging our scale and platform, which will lead to a superior customer experience with high-quality ingredients. We believe it will also improve unit economics for the overall business by pairing the right meal solution to the right customer, thereby increasing the engagement and loyalty among our members.

Our other meal options continue to do well with the Clean 15 and Easy-Prep meal-kit experiencing a rising adoption in order rates. We are also continuing the pilot testing of our ready-to-eat meal solutions in the province of Québec and will add testing to the other Canadian provinces in the near future. At this stage, the results are very promising with increasing members' ratings and positive feedback. We anticipate to fully enter this new segment and large opportunity estimated at more than $2 billion in fiscal 2020.

On that note, I will now turn the call over to Philippe.

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Philippe St-Cyr Adam, Goodfood Market Corp. - CFO [3]

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Thank you, Jonathan. Good morning, everyone. I will now turn to capacity expansion and production efficiency. I'm happy to report that the Eastern Canada facility expansion is on track to be completed under budget and ahead of schedule. When the expansion will be fully operational, it will double the production and sales capacity of Eastern Canada from $200 million to $400 million, which will allow us to better serve the needs of our fast-growing member base as we add new meal solutions and expand our product offerings.

In Calgary, the enlargement of our refrigerated section is progressing well. We expect it to be completed by the end of our fourth quarter. As we indicated in the past, the sales capacity will double to approximately $200 million annually.

Furthermore, we recently signed a lease for a new 84,000-square feet production facility located in the Greater Vancouver area. Being closer to Vancouver members will allow us to unlock operational and logistic savings, while increasing the quality of our services.

At first, this new facility will add approximately $50 million annually in sales capacity and we expect it to be EBITDA accretive in the short term. Our planned move-in date is scheduled for the beginning of calendar year 2020.

Finally, we're making good progress on our plan to automate over 75% of our operations. Currently, our Eastern Canada facility is more than 50% automated and we're quickly ramping up our Western Canada facility. These additional automation investments will allow us to continue to improve our efficiencies and should drive higher margins over time. There is a great deal underway at Goodfood to continue to build Canada's largest perishable direct-to-consumer grocery network, and we're confident that these initiatives will bring the desired results to drive shareholder value.

Please turn to Slide 9, which compares our gross profit and adjusted gross profit. We're able to show a significant increase in profitability for the third quarter, with our gross profit increasing to $14.1 million, almost double the previous quarter and our gross margin reaching a record 28.3%, an increase of 740 basis points compared to the second quarter of 2019.

Our adjusted gross profit reached $25.4 million, up 44% over the second quarter, and our adjusted gross profit -- gross margin reached an all-time high of 41.6%, an increase of 375 basis points over the previous quarter. This marked improvement reflects our recent investments in our automation ecosystem as well as continued efficiency generated in our Eastern and Western Canada operations, the progress we've made on labor, shipping and packaging from economies of scale and increased buying power.

As previously mentioned, most of the automation equipment we purchased during the second quarter were only installed and operational during the third quarter, which explains in part the greater margin improvement between Q3 and Q2 than Q2 and Q1. It is also worth noting that we expect our fourth quarter margins to be lower due to the warm weather of summer months, where we need to adjust packaging to keep our ingredients fresh. We expect to see further gross margin improvements in fiscal 2020.

The next slide shows our adjusted EBITDA and net loss. Our adjusted EBITDA loss in the third quarter decreased significantly from the previous quarter to $2.4 million or 4.8%, which represents an improvement of more than 1,000 basis points, mainly due to a higher gross profit margin but also to lower SG&A as a percentage of revenue.

Net loss for the third quarter was $3.6 million, which is an improvement of $3 million over Q2 2019. Recall that we are successfully executing our strategy, which currently delays short-term earnings in order to invest in market share leadership, scale and density. We believe that these investments will maximize longer-term shareholder value by allowing us to deliver greater value to our members compared to our competitors, while attaining high returns on invested capital.

Turning to Slide 11 for cash flow and capital expenditures. In the third quarter, we generated a record $2.4 million in cash flow from operating activities due to a favorable change in working capital and lower net income losses, which bring the total for the first 9 months of the year to $3.9 million. It is important to note that we expect cash flow from operations to turn negative in the fourth quarter due to the seasonal impacts on our negative working capital structure.

Business usually picks up quite briskly in early September with back-to-school and cash flow from operations should then revert to positive territory. We also invested $1.5 million in capital expenditures in the third quarter or $4.9 million for the first 9 months of the year, primarily to fund the investment in automation and expansion of the production facilities in Montréal and Calgary. The majority of our capital expenditures to date in fiscal 2019 were financed by the bank facility.

Turning to Slide 12 for our financial position. We ended the quarter with a solid financial position with cash of $50 million. As at May 31, 2019, our total debt was $10 million with a $2.5 million revolver undrawn. After adjusting for a cash position, we have a negative net debt position of $39.7 million, which places us in a very solid financial position to continue growing at a very fast pace and execute on our business plan.

This concludes our financial highlights for the third quarter and our prepared remarks for today. Jonathan, Neil and I will now be pleased to answer any questions you may have.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from the line of Alain Hazzi from GMP Securities.

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Alain Hazzi, GMP Securities L.P., Research Division - Equity Research Associate [2]

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Congratulations on the good numbers.

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Jonathan Ferrari, Goodfood Market Corp. - CEO & Chairman [3]

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Thanks.

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Alain Hazzi, GMP Securities L.P., Research Division - Equity Research Associate [4]

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I just had a question on the BC facility. So is that only going to serve Western Canada? And will you guys do breakfast there? Or breakfast are still expected to be done on the East Coast?

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Neil Cuggy, Goodfood Market Corp. - President, COO & Director [5]

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This is Neil here, I'll take that one. Yes, so the idea for launching a Vancouver facility is a couple fold. We recently became the #1 meal solutions brand in BC and thought that the scale required to continue that merit of having a facility that was closer to our members. So we were lucky to find a production facility that fit our criteria and time lines that we're looking at. The purpose of the facility will be a couple folds. It will be the manufacturing and fulfillment center for the province of BC for meal-kits. Our breakfast manufacturing will be centralized in Eastern Canada for now, and we ship our products across the country and then distribute them from the relevant facilities. So no breakfast manufacturing in Vancouver in the short term, but we anticipate rolling out multiple product lines in this facility over the next kind of 12 to 24 months or could include a prepared commissary as well.

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Alain Hazzi, GMP Securities L.P., Research Division - Equity Research Associate [6]

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Okay. And you said that it will be ready by fiscal year '20 -- 2020?

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Philippe St-Cyr Adam, Goodfood Market Corp. - CFO [7]

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No. We said it will be ready at the beginning of calendar year 2020. So you can think that -- the first quarter of the calendar year, something like that.

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Neil Cuggy, Goodfood Market Corp. - President, COO & Director [8]

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Yes. I think the other thing that I wanted to mention on the rationale was you -- shipping over the Rockies cost quite a bit of money and can affect the freshness. So there'll be a good gross margin accretion from that facility and EBITDA accretion as well.

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Operator [9]

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Your next question comes from the line of Ryan Li from National Bank Financial.

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Ryan Li, National Bank Financial, Inc., Research Division - Associate [10]

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Congrats on good quarter. Just wanted to follow up on the Vancouver facility. It's 84,000 square feet, but it's only $50 million in capacity. Is it right to assume that it won't be fully utilized in the beginning and there's additional room for expansion? And also, what are the capital investments you guys anticipate for this particular facility?

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Neil Cuggy, Goodfood Market Corp. - President, COO & Director [11]

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Ryan, I'll take that one again. So the CapEx -- maybe I'll start off with the CapEx part of it. CapEx should be between $2 million and $3 million to realize that $50 million of sales, and the idea behind that is that amount of CapEx can hit those -- that revenue capacity or that subscriber capacity that we're talking about. This facility being 84,000 square feet can support much more than that. We just don't want to build out too much CapEx in the facility. And just given the length of the leases, we wanted to make sure we had a facility that we could grow into. So 84,000 can support more, but the CapEx supports that number.

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Operator [12]

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

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Frederic Tremblay, Desjardins Securities Inc., Research Division - Analyst [13]

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Congrats on the strong quarter. First question would be on the future gross margin trajectory. Obviously, we saw nice improvement in Q3. You did mention that Q4 would be lower given seasonality. Just looking at fiscal '20, do you expect further improvements in gross margin? And what would be the main drivers behind that?

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Philippe St-Cyr Adam, Goodfood Market Corp. - CFO [14]

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Fred, it's Phil. Yes, so like we said, Q4 gross margin will be affected by the summer months and the warmer weather, but we should continue to see an increase in the gross margin in 2020. I mean there's still a drag coming in from Western Canada and the new segments like breakfast. The drag is very low, closer to 50 bps. So that drag should disappear over time. On top of that, the main driver will definitely be the additional automation. So like we said, we are above the 50% mark nationwide, and the goal is to be 75% automated across our several facilities and additional automation will increase definitely the margin, and we're still seeing very good economies of scale and the effect of the buying power on our margin as well. So 41.6% gross margin for our Q3. You should see an improvement in the next quarters of fiscal 2020.

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Frederic Tremblay, Desjardins Securities Inc., Research Division - Analyst [15]

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Okay. And is the -- the 75% goal for automation, is that a goal that you intend to achieve during fiscal '20?

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Philippe St-Cyr Adam, Goodfood Market Corp. - CFO [16]

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I mean in facility like Montréal, definitely. And in the other facility, they are mostly new, so we're going to ramp up the facility like we did at Calgary. Calgary, we're not at the 50% mark but getting there closely. So it's going to be over time, but it's going to -- I mean, we're still investing significantly so we're going to see that mark in the next coming years or quarters.

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Frederic Tremblay, Desjardins Securities Inc., Research Division - Analyst [17]

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Okay. And last question for me on Yumm. I know it's early, but so far, have you -- assuming when the -- I guess the source of the subscriber would be in terms of -- is it mostly people migrating for your -- from your regular service instead of canceling, let's say, migrating to Yumm? Or is it mainly brand-new customers that are coming to that service?

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Jonathan Ferrari, Goodfood Market Corp. - CEO & Chairman [18]

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As we were launching Yumm, our focus was first on using Yumm as a retention tool to transition Goodfood subscribers that might have been canceling from Goodfood for price reason to give them the right meal solution at the right price. As we think about bringing the Yumm business to the next level in the fall and in the winter, we will be going out to acquire first-time subscribers as well. We're quite pleased with the development that we're seeing with Yumm today. We -- you might have noticed we increased the number of recipes that we're offering each week from 4 to 6 recipes. The ratings are very strong, and our customer feedback is excellent.

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Operator [19]

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(Operator Instructions) Your next question comes from the line of Raveel Afzaal from Canaccord.

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Raveel Afzaal, Canaccord Genuity Corp., Research Division - Analyst [20]

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Just with respect to automation, you said Calgary is not at 50%, can you guys just give us some indication of where the Western Canadian facility is compared to the Eastern Canadian facility, which is already at 50%?

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Neil Cuggy, Goodfood Market Corp. - President, COO & Director [21]

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Yes, of course. So the Western Canadian facility, for the automation investments to start to make sense, there's a certain amount of scale required. So the western operations globally had hit that scale, and we've started to make those investments over the last 6 months. But as Phil mentioned in his prepared marks, it takes a little bit time for these investments to kick in, people to get trained on them and then to kind of really ramp up. So we should see that in the first half of our 2020 fiscal year. Percentage-wise, it's tough to put an exact number on it but much lower than the 50%, probably in the 20% to 25% range, something like that. But the real kicker will be on the next phase that's going to come into account, like I said, in the first half of 2020.

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Raveel Afzaal, Canaccord Genuity Corp., Research Division - Analyst [22]

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Got it. And is there some sort of a linear relationship that you can point to that historically you guys increased automation by XX percentage and that resulted in gross margin improvement of XX. Is there some sort of a linear relationship just with respect to automation that you can point to so we can project how much margin improvement we can see in fiscal 2020?

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Neil Cuggy, Goodfood Market Corp. - President, COO & Director [23]

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I wish it were that easy for sure. I think there's a couple of different things that factor into it, like we -- as we mentioned in our public documents and our investor presentations, we think long-term adjusted gross margins are at 45% or above, and that kind of includes all of the product lines, breakfast, ready-to-eat, ready-to-cook, west, east, all different parts of the country.

So we want to -- we are consistently targeting that, and we hope to be able to significantly beat that. But the other thing is, with the automation investments, we don't keep all of the gross margin savings. We want to make sure that we're continuously adding value back into the product, back into experience, back into the members. So if we go up by 5%, it doesn't mean that there's a 1% increase in gross margin because we may keep some of that or share some of that with the member base and improve the value proposition even further and kind of keep our scale running through the flywheel.

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Raveel Afzaal, Canaccord Genuity Corp., Research Division - Analyst [24]

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Perfect. And just sticking with the automation theme. Is it possible to speak about the Vancouver facility? Now can this facility be automated from the get-go? Or is there some -- are there some practical reasons why the facilities are not initially automated and then automated over time?

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Neil Cuggy, Goodfood Market Corp. - President, COO & Director [25]

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Yes. Good question. So given that there is a good amount of scale that's going to be able to go through that facility, virtually, day 1, we're going to look to automate it even quicker than we did with Calgary. So we take what we've learned in Montréal, we take what we've learned in the Calgary facility, and we're going to apply that to Vancouver. Just in terms of bandwidth of the team and capital allocation, we want to make sure we're doing it in the right phases. So when we open it up in calendar -- first quarter of calendar one, that's first quarter of calendar 2020, we want to make sure that we have some of the low-hanging fruit. And then over the next kind of 6 months, we'll bring that up to what we've seen in the Calgary facility. But the good thing is the volume justify some of the investments already, so we'll start to make them earlier than we have in the past. It won't be up and running day 1.

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Raveel Afzaal, Canaccord Genuity Corp., Research Division - Analyst [26]

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Got it. And I'm wondering if there's a way to quantify what your penetration is now in Eastern Canada versus Western Canada, can be in terms of revenues, can be in terms of just market penetration, whichever way, if possible.

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Philippe St-Cyr Adam, Goodfood Market Corp. - CFO [27]

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I mean we still think we have a good 40% share of the market and our run rate at $250 million. I mean we think maybe penetration rate's around the 2%, 3% mark in Canada. But it's always hard to I guess quantify it precisely as we're the only public company reporting in Canada. But yes, I mean, just us alone, we have a penetration rate of more than 1% across Canada. Obviously, Eastern Canada is a market that is more mature for Goodfood and in general. But there's not much difference between the Western and Eastern Canada markets in terms of penetration rate. The difference is not that big.

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Raveel Afzaal, Canaccord Genuity Corp., Research Division - Analyst [28]

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Got it. And the type of -- and just to dwell a bit deeper on this point, the type of growth that you're seeing in Eastern Canada right now, is it similar to the growth that you're seeing now in Western Canada in terms of new customer adds? Or is there a significant difference in the pace at which you are growing in Western Canada, your customer base compared to Eastern Canada at this time?

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Jonathan Ferrari, Goodfood Market Corp. - CEO & Chairman [29]

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We definitely see that our Eastern Canadian market is a little bit more mature. So the growth continues to be a bit faster in Western Canada.

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Raveel Afzaal, Canaccord Genuity Corp., Research Division - Analyst [30]

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Perfect. And just my final question with respect to your marketing spend. My understanding was historically that your marketing spend is going to be front-end loaded to the fiscal year. This year, we're seeing it slightly more even. And I'm wondering if that's a change in strategy or this is how we should expect fiscal 2020 to play out as well.

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Jonathan Ferrari, Goodfood Market Corp. - CEO & Chairman [31]

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Generally speaking, we do try to spend more in terms of absolute marketing dollars during the back-to-school season and during the January, February, March period. They continue to be the periods of the year where we see the best conversion rates, the best customer acquisition cost, the best lifetime value, and so we should expect that trend to maintain during fiscal 2020. And I would say, we do maintain some flexibility within that framework if we see certain opportunities either in certain geographies where we're seeing that competition is more or less active to kind of shift that marketing spend around.

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Operator [32]

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Your next question comes from the line of Ryan Li from National Bank Financial.

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Ryan Li, National Bank Financial, Inc., Research Division - Associate [33]

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Just I want to -- food store CPI has been elevated over the last couple months, first half of the year, and typically, for grocery stores, that represents passing of higher merchandise cost for them. Are you guys noticing any pressure from that? And have you yet to make adjustments to your recipes?

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Neil Cuggy, Goodfood Market Corp. - President, COO & Director [34]

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Good question, Ryan. We see food CPI in a couple different ways for sure, and we were -- obviously we get affected by the same overall trends that the greater market would see. We're able to build the menus according to what we're seeing better pricing on, and the fact that we're still growing very, very rapidly and moving through the food supply chain has usually more than offset any of the upward pressure in pricing.

So we're still able to produce our internal CPI or increase our internal buying power for whatever food ingredients that we've put in the recipe. So we haven't felt that we're handicapped in any way or building recipe just because we continue to grow and renegotiate terms and bring on new suppliers that have better scale themselves, better automation themselves and otherwise, just to share some of the pricing.

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Operator [35]

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Your next question comes from the line of Raveel Afzaal from Canaccord.

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Raveel Afzaal, Canaccord Genuity Corp., Research Division - Analyst [36]

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Just I wanted to see some of the Canadian grocery stores are also launching their meal-kits still relatively early stage. I'm trying to understand if you're seeing any impact of that in terms of the competitive dynamics of the Canadian meal-kit marketplace at the moment? Or any -- how you see the competitive environment changing as these guys ramp up further? Any intel you can give us on that will be helpful.

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Jonathan Ferrari, Goodfood Market Corp. - CEO & Chairman [37]

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Sure. Currently, we're -- we have noticed a few of the Canadian grocers are testing out and developing some meal-kit offerings. We see this as a really favorable sign for the industry. It helps create more awareness of the category. It improves the interest in the space, and we view kind of this trend quite favorably. At this stage, we consider the initiatives to be still quite small in the context of the overall market, so we're definitely following it closely, but it has not affected our business currently.

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Operator [38]

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There are no further questions at this time. I will turn the call back over to the presenters.

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Jonathan Ferrari, Goodfood Market Corp. - CEO & Chairman [39]

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Thanks very much for joining us on the call today. We look forward to speaking with you again in our next quarterly call.

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Operator [40]

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