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Edited Transcript of FOOD.TO earnings conference call or presentation 8-Jan-20 1:00pm GMT

Q1 2020 Goodfood Market Corp Earnings Call

Jan 10, 2020 (Thomson StreetEvents) -- Edited Transcript of Goodfood Market Corp earnings conference call or presentation Wednesday, January 8, 2020 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Jonathan Ferrari

Goodfood Market Corp. - Co-Founder, Chairman & CEO

* Neil Cuggy

Goodfood Market Corp. - Co-Founder, President, COO & Director

* Philippe St-Cyr Adam

Goodfood Market Corp. - CFO

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Conference Call Participants

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* Frederic Tremblay

Desjardins Securities Inc., Research Division - Analyst

* Jenny Wang

Eight Capital, Research Division - Analyst

* Michael W. Glen

Raymond James Ltd., Research Division - Equity Research 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 First Quarter 2020 Financial Results Conference Call. (Operator Instructions)

I would like to remind everyone that this conference call is being recorded today, January 8, 2020, at 8 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 call, Jonathan Ferrari, Goodfood Chief Executive Officer. Mr. Ferrari, you may proceed.

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Jonathan Ferrari, Goodfood Market Corp. - Co-Founder, Chairman & CEO [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 first quarter fiscal 2020 ended on November 30, 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 first quarter 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.

Slide 3 outlines our key financial highlights for the quarter. Overall, first quarter results have surpassed expectations in growth and margin and we're very pleased with the business performance over the first 3 months of fiscal 2020. We achieved record levels on key metrics, including subscribers, gross merchandise sales, revenue, gross margin and EBITDA margin. We also continue to generate positive cash flow from operations and ended the quarter in a very healthy financial position, with $47 million in cash, cash equivalents and restricted cash.

There are a few items I want to highlight on this slide. The growth in revenue outpaced our growth in gross merchandise sales as a result of lower credits and incentives as a percentage of GMS. Most of this decrease was driven by lower incentives, highlighting our ability to execute highly targeted marketing campaigns with strong results, as demonstrated by the addition of 30,000 net new subscribers this quarter.

Moreover, the growth in revenue and gross merchandise sales was in part driven by an increase in average order value, underscoring Goodfood's ability to provide a more complete offering and to deliver a fuller grocery basket to our Canadians.

Finally, our margin improvement continues to build momentum with adjusted EBITDA margin improving 6.7 percentage points. This improvement is the result of strong execution at multiple levels of the operation.

I will now turn to Slide 4 to present a few operational highlights. During the first quarter, we continued to ramp up our product offering to enhance member experience and expand our market reach. Let me provide you with an update on some of our initiatives.

First, we expanded our breakfast meal solution. Since launching our ready-to-blend smoothies in the spring of 2019, we've built our offering and now have 32 delicious breakfast products available to our members, including numerous internally developed proprietary items like our seasonal artisanal oat bowls, savory omelets and high-protein muffins. Our breakfast meal solutions are growing and have reached run rate gross merchandise sales in the mid-teens in recent weeks.

Second, we continue to make progress in building our private label grocery product offering. We launched several new products in the quarter and optimized our offering of existing products. We are nearing 100 items of everyday grocery Essentials offered to our members, all of which are sold under the Goodfood brand name and at a discount to the branded equivalent products available at major national chains like Loblaws, Metro and Sobeys.

Going forward, we will exponentially grow the variety of grocery products available in order to work towards fulfilling our members' complete grocery basket. As we significantly ramp up private label grocery essentials, we will continue to optimize our product count by gathering member feedback and monitoring sales.

Third, we have made important strategic decisions for our ready-to-eat meal solutions. Recall that these meals were introduced in Québec and Alberta, respectively, late during fiscal 2019 and early fiscal '20, and we are currently working to expand this offering across Canada. We now have over 20 options available to our members, including full meals, soups, chili bowls and salads. We're still in the early days, but we have seen solid traction for these meal solutions, and we see a great opportunity to capitalize on the significant market opportunity. As such, we've decided to in-source a portion of our offering at our Hickmore facility. We're starting construction by the end of January, and we should be operational in the coming quarters. This will allow us to offer better custom products to our members from coast to coast, while improving our margins. Overall, in addition to address our members' needs and enhancing the total value of customer orders, these products will be a key driver in taking a larger share of Canadian's food grocery basket.

Finally, in the coming weeks, we will be opening a new 84,000 square feet production facility located in the Greater Vancouver area. As indicated in the past, being closer to our British Columbia members will translate into operational and logistics savings, while ultimately increasing the quality of our service.

On that note, I will turn the call over to Philippe to go over our financial performance.

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

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Thank you, Jonathan. Good morning, everyone. We can now turn to Slide 5, which provides details and -- detail on subscribers and revenue. We continue to demonstrate solid growth this quarter, driven both by the important back-to-school period and better-than-expected Black Friday results.

At the end of the first quarter, Goodfood subscriber base reached 230,000, with the addition of 30,000 net new active subscribers during the quarter. Obtaining continued net growth on a much larger member base confirms our momentum in the market and among Canadian consumers.

The subscriber growth was driven by a combination of factors, including continued growth in British Columbia and Alberta and also in Ontario, where we now have as many subscribers as we do in Québec, the seasonal ramp-up of our targeted marketing campaigns and our new and extended product offering.

Revenue has also grown sharply, increasing to a record $56.3 million, almost double the revenue for the corresponding period in 2019 and 44% higher than the fourth quarter. Remember that we increased prices on November 7 in Québec and Ontario. While the pricing adjustment only impacted our revenue for 3 weeks in -- of the quarter, this was very well received by our subscribers, as it has resulted in a few cancellations, while many opted to let pricing advance.

Turning to Slide 6, gross merchandise sales also increased significantly to $68 million, up 21% over the fourth quarter and 83% year-over-year. The strong growth momentum of the first quarter allowed us to approach the $300 million mark in gross merchandise sales run rate, finishing the quarter at $276 million.

When looking at the relationship between GMS and revenue, it is important to highlight that revenues grew more than GMS as we achieved a level of incentives and credits of 17.3% of gross merchandise sales, well below the 20% average for fiscal 2019. Incentives and credits are still an effective customer acquisition strategy, but as we continue to increase our revenue base, they represent a lower figure on a percentage basis.

Please now turn to Slide 7, which compares our gross profit and adjusted gross profit. Our strong execution and operational improvements have translated in continued net margin improvement. Despite the fact of new products being launched, we have shown a significant increase in profitability in the first quarter.

Our gross profit increased to $16.2 million, and our gross margin reached a record 28.8%, an increase of 6.9 percentage points year-over-year. Our adjusted gross profit reached $28 million, and our adjusted gross margin reached 41.1%, increasing 3.4 percentage points year-over-year, on track to reach our 45% objective in the medium term.

While we remain driven and focused on rapidly growing the top line and expanding the business, our strategic initiatives to extend margin are yielding expected results, in line with our long-term profitability plan. The increase in the adjusted gross margin resulted primarily from lower production costs as a percentage of GMS, lower food, packaging and shipping unit costs due to additional automation investments, operational efficiencies, increased density among the delivery zones and purchasing powers with key suppliers, slightly offset by the launch of new product offering.

The next slide shows our adjusted EBITDA and net loss. Our adjusted EBITDA loss in the first quarter decreased from the previous quarter to $3.7 million or a margin 6.5%, which represents an improvement of 6.7 percentage points year-over-year, mainly due to higher gross profit margin and stable SG&A expenses, but also despite an EBITDA drag from the launch of new products of over 2.5 percentage points. As a reminder, we continue to successfully execute our strategy, which still focuses on growth and capturing market share in the nascent online grocery industry in Canada. We firmly believe being the leader in fulfilling Canadians' digital grocery basket is the best driver of returns to shareholders.

With that said, we nonetheless improved EBITDA margin 14.1 percentage points over the past 8 quarters and continue our strong and consistent execution in achieving long-term growth and profitability goals for Goodfood.

Turning to Slide 9 for cash flow and capital expenditures. For several quarters now, we've been able to finance our growth through cash generated by the company. In the first quarter, we are pleased to have generated positive cash flow from operating activities of $1.5 million. We've also invested $1.7 million in capital expenditures to finance equipment for the new Vancouver facility to invest in automation and in some upgrades to our current facilities.

As we continue to grow and optimize our operations, we still expect to spend between $10 million and $12 million in capital expenditures in fiscal 2020.

Before we conclude, I would just like to make a few comments on our next quarter. As a reminder, the second quarter is typically strong with January and February being traditionally high-demand months. However, demand -- however, December is usually slower as the holiday season is the lowest demand period of the year. Also note that margins in the second quarter are impacted by higher shipping and logistic-related costs due to weather conditions.

This concludes our financial highlights for the first 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) Our first question today comes from Frederic Tremblay from Desjardins.

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Frederic Tremblay, Desjardins Securities Inc., Research Division - Analyst [2]

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I wanted to ask about the increase in average order value. Can you provide some -- the magnitude of that increase and the main drivers behind it? Is it more the kind of pricing, product expansion, a bit of both? If you could provide a bit of color around that?

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

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Fred, it's Phil. Thanks for your question. So average order value increased significantly year-over-year because of the added products that we've included in our basket. I'm referring to breakfast, ready-to-eat meals and private label items. So year-over-year, it's in the range of 5%. So directionally, we're very happy with that. And it's just the beginning because we've added only, let's say, 150 new items since we started this new division and product offering. So the average order value should continue to go in that direction.

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Frederic Tremblay, Desjardins Securities Inc., Research Division - Analyst [4]

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Okay. And on the private label grocery items, there was a mention that the number of products would grow exponentially. Provide some details on the pace of that. You're close to 100 items now. Where do you expect to be a year or 2 from now?

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Jonathan Ferrari, Goodfood Market Corp. - Co-Founder, Chairman & CEO [5]

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Yes. Happy to provide a bit more visibility around that. So we -- when you look at grocery SKUs, there's about 80% of sales in the grocery industry that will come from 20% of the SKUs in a typical supermarket. So we'll be targeting those 20% of SKUs that end up being the highest movers. That will translate into, call it, 3,000 to 4,000 SKUs to hit that 20% of SKUS. And we'll be working on building that out over the next 2 to 3 years.

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Frederic Tremblay, Desjardins Securities Inc., Research Division - Analyst [6]

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Okay. That's great. Congrats on a great quarter.

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Jonathan Ferrari, Goodfood Market Corp. - Co-Founder, Chairman & CEO [7]

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Thank you.

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Operator [8]

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Our next question comes from Jenny Wang from Eight Capital.

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Jenny Wang, Eight Capital, Research Division - Analyst [9]

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My first one, in terms of the new product offerings, can you give us an idea of what portion of the customers purchasing these new products are new subscribers versus existing?

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Jonathan Ferrari, Goodfood Market Corp. - Co-Founder, Chairman & CEO [10]

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Sure. Thanks for your question. Primarily, we are selling our new products to our existing customers. So we do have a small amount of breakfast-only subscribers. But I would say, across the board, we're targeting most of our new products to our existing customers to either increase average order size or increase the frequency of the engagement, so the average order rate that we would see on a customer. And over the next few months or during this fiscal year, we'll be creating the ability to more easily mix and match products to make sure that, that experience is seamless and that we can capture an order that contains ready-to-cook products, ready-to-eat products, private label products in a combination, in a way that is easy and flexible for our customer base.

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Jenny Wang, Eight Capital, Research Division - Analyst [11]

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And are you planning on further price increases going forward? And would that be throughout all the geographies that you're currently operating in?

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Jonathan Ferrari, Goodfood Market Corp. - Co-Founder, Chairman & CEO [12]

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Sure. I think our approach is just like any other business. It's an annual general price increase strategy that we'll be looking at. So making sure that we take inflation costs into consideration and increasing pricing across the board based on inflation. So that's kind of the general price increase strategy on an annual basis. And then on a more targeted basis, we do have the ability to vary pricing of every single product in every single geography. And so based on the demand that we're seeing, based on competition, analytics, customer shopping patterns we will have an approach that prices differently in every single market. And so that'll be on a more constant basis rather than annual where we can flex that pricing to maximize demand and profitability.

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Operator [13]

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Our next question comes from Ryan Li from National Bank Financial.

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Ryan Li, National Bank Financial, Inc., Research Division - Associate [14]

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Congrats on a good quarter. Just had a follow-up. In terms of the incentives as a percentage of GMS. Are you able to give further details on that? Was that planned? Or was it just a result of the general market in taking up the incentives? And what should we look for in terms of the rest of the year? Is it a good base to work off of?

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Neil Cuggy, Goodfood Market Corp. - Co-Founder, President, COO & Director [15]

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Ryan, thank you for the question. It's Neil here. I'll take a first stab, and then I'll let Phil talk about the going forward numbers what we've always said to investors and to the public is that credit and incentives line is really a function of the speed of growth. So with very, very high growth comes a bigger gap between our GMS and our IFRS sales number and still with the pretty aggressive growth that we've had, it's smaller in percentage terms than in the past, which means that some of that will mathematically just reduce the credits and incentives. So that's just a purely mathematic explanation. And then the other aspect is we're always evaluating which markets are discounting heavier than others for that first-time incentive. And where we feel we have very, very strong market position, we're able to take that first-time credit down a little bit, and that's, kind of, what you're seeing in terms of translation to the overall business. And I'll let Phil take the second half.

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

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Yes, Ryan. So yes, we're very happy with the sequential declines from Q4. Like Neil was saying, most of it was coming from the incentive piece of the credit incentive for Q1, and it's a mathematical formula, bigger base, lower incentive on a percentage basis. However, like we said in the past, we're trying to reduce that number over time. So it will -- varies from one quarter to another with the targeted marketing campaign and the strategy that we will use. However, over time, it should continue to decrease, and we're also focusing on balancing our credits that we're giving to our current member as well. We're increasing quality on a weekly basis, therefore balancing the credit piece of the credit incentive is also a focus of ours for 2020 and the year to come.

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Ryan Li, National Bank Financial, Inc., Research Division - Associate [17]

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Okay. And then my last question is kind of related to the general market. Particularly some of the, I guess, traditional grocers have been talking about increased competition in the online space. Have you guys noticed anything over the recent weeks and months? Has that stepped up? And how does that impact you guys?

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

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Sure. In our -- in the ready-to-cook meal space, I would say, competition is stable. We definitely have a few competitors that continue to develop the market with us. We saw the consolidation of Cook It and MissFresh in Québec this quarter. So I think overall, consolidation is a healthy thing for the unit economics of the industry, reduces competition and gives a little bit more scale to the companies. I think, online groceries and meal kit businesses are industries that need scale in order to become profitable and in order to be able to compete in the long term. I don't think that move to combine MissFresh and Cook It signals a lack of interest from grocers to get into the meal solution space or into online groceries. I think it really signals that companies need to get scale, right, in order to have leading market share and get dominant market positions that can be sustainable over time. And then in the broader online grocery landscape, we see that the large grocers continue to tinker and to work on their longer-term strategy, but we have not seen any direct impact from that on our business today. We feel very comfortable with our competitive position over the next few years, and we think we've carved out a really unique strategy that's going to allow us to compete very well, even in a market where investments increase in grocery delivery and meal solutions.

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Operator [19]

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Our next question comes from Raveel Afzaal from Canaccord.

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

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Congrats on a very strong quarter. A couple of questions. First on SG&A, you had very strong customer adds in this quarter, probably, like, if I understand correctly, this will be the highest add for fiscal 2020. Correct me if I'm wrong. But if that's the case, then should we see SG&A remaining relatively flat compared to Q1 fiscal '20 levels in the subsequent quarters? Or do you see any significant step-up in the SG&A because of employee hires or new product offerings?

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Philippe St-Cyr Adam, Goodfood Market Corp. - CFO [21]

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Raveel, it's Philippe. As you know, SG&A includes multiple components including marketing, but also salaries of office employees and other items that we invest to build the new businesses and the new -- and launch new products. As we grow the business and aim to become the Canadian leader in online grocery, we've added world-class people to help us bring the business to the next level. And I don't know if you saw our new IR deck that was on our website this morning, but we're seeing that the G&A portion of the SG&A represented between 35% and 45% of SG&A total. Therefore, I think, investing in the SG&A piece will continue to be something important for us. And the S, which is the marketing, should still continue to be a big investment of ours. Q1 was a very good quarter. We've invested in marketing at a very good payback, and the next -- Q2 so far has been great in that sense as well. So I mean, G&A will continue to increase on a dollar basis and same thing for marketing. On a percentage basis, this should continue to be in the same range.

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Jonathan Ferrari, Goodfood Market Corp. - Co-Founder, Chairman & CEO [22]

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That's exactly right. And the thing that I would add as well is our ready-to-cook business continues to drive towards profitability, but it's important to note that we have a few points of EBITDA margin that's invested into our new product offerings, so ready-to-eat, breakfast products, private label products. There's a few points of EBITDA margin that are purposefully being invested into that.

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Raveel Afzaal, Canaccord Genuity Corp., Research Division - Analyst [23]

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Very helpful. And then when you look at your overall incentives and you take out the -- just the quality incentive piece out of that, do you see any opportunities to optimize that and reduce the money being spent on quality incentives?

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Neil Cuggy, Goodfood Market Corp. - Co-Founder, President, COO & Director [24]

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Yes. Here we go. You're saying on the operational quality or on the nonquality? I didn't get the...

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Raveel Afzaal, Canaccord Genuity Corp., Research Division - Analyst [25]

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Sorry, I'm talking about on the revenue side. I'm talking about the credit incentives and within the credit incentives, you have -- within the credit incentives, you also have quality incentives?

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Neil Cuggy, Goodfood Market Corp. - Co-Founder, President, COO & Director [26]

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Yes.

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Raveel Afzaal, Canaccord Genuity Corp., Research Division - Analyst [27]

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So that's what I'm talking about, product being returned back to you.

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Neil Cuggy, Goodfood Market Corp. - Co-Founder, President, COO & Director [28]

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Yes. Yes. Perfect. So we don't actually have returns because it's perishable. So whenever there actually is an issue, we'll just credit the member and let them keep it. So -- but yes, absolutely. Like we've made actually some pretty amazing progress over the last 2 quarters on just executional quality across the board. As Phil mentioned in the prepared remarks, the winter snowstorms are never easy on a logistical business like ours. So we've gotten a lot better on that as well and have a pretty solid plan for this winter season versus past winter seasons. Opening the Vancouver facility is going to help massively as well. As you know, the Rockies can get shut down for days at a time in the winter with avalanches and snowstorms. So we're not promising any massive changes in that, and I would go with Phil's guidance, but it's slow and steady progress across the board as we increase the number of SKUs, add new facilities and continue to invest in the team. We also have some great tech. We hired a new CTO, who's -- who has a lot of operational experience that can help put a lot of tech into the ops which should lead materially to some changes in the coming quarters.

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Operator [29]

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(Operator Instructions) Our next question comes from Michael Glen from Raymond James.

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Michael W. Glen, Raymond James Ltd., Research Division - Equity Research Analyst [30]

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Are you guys -- so you're highlighting the positive cash from operations this quarter. Can you provide some indications for how we should think about that for the balance of the year. It swung positive, negative through 2019. I'm just wondering if you can -- do you think it'll be consistently positive this year? Or should we think of some swings quarter-to-quarter?

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Philippe St-Cyr Adam, Goodfood Market Corp. - CFO [31]

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Michael, it's Phil. So as you know, like in 2018 and 2019, we're able to show positive cash flow for the year. There's definitely swings between quarter. Like for instance, even though we were positive cash flow almost $1 million in 2019, our cash flow in Q4 was -- from operation was negative. Because of the summer, we had a lower demand, lower subscriber adds, which impact our negative working capital structure. So Q1 was pretty good with $1.5 million. We're happy with that. We should definitely see some swings in the quarter. You should expect that, and you should definitely expect negative working capital impact in Q4, and negative cash flow from ops. Our goal is still to have cash flow from ops neutral while growing at a fast pace. So we're going to try to achieve that in 2020. And yes, so you should expect swings. But so far, very happy with the cash flow from ops in Q1.

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Michael W. Glen, Raymond James Ltd., Research Division - Equity Research Analyst [32]

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And then on the $10 million to $12 million in Capex, can you provide -- is there a bucket sort of breakdown you can provide to that? Like where that capital is getting spent?

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Neil Cuggy, Goodfood Market Corp. - Co-Founder, President, COO & Director [33]

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Yes. I'll take that. So we're not adding much capacity other than the Vancouver facility. That was one of the major CapEx plan for fiscal 2020. And then the rest has been continuing to invest in automation to increase profitability, gross margin, predictability of the business. So it's really those 2 buckets. And then as we said in the prepared remarks, we've, I guess, finalized the location inside of our facility for our ready-to-eat, in-house facility, which as you know we've been outsourcing for a while into third party production. So that will cost a little bit there. But in terms of scale, automation still remains the largest and then Vancouver and then ready-to-eat, that's probably the 3 biggest buckets.

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Michael W. Glen, Raymond James Ltd., Research Division - Equity Research Analyst [34]

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Okay. In the $10 million to $12 million because you have another line on your cash flow statement, intangible assets, does the $10 million to $12 million exclude what would be that amount in the acquisition of intangible assets because it was $200,000 this quarter?

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Philippe St-Cyr Adam, Goodfood Market Corp. - CFO [35]

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Yes. Michael, so intangible relate mostly to the ERP system that we've implemented. And that's part of the $10 million to $12 million that Neil mentioned. It's not the biggest CapEx investment we're going to do this year, but it's still significant enough to be mentioned, to be discussed. And yes, the ERP system is changing the way we're looking at our -- we're operating the business, and it's going to help us definitely launch new products faster and control a bit better the operation.

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Michael W. Glen, Raymond James Ltd., Research Division - Equity Research Analyst [36]

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Okay. No, I just wanted to clarify that, that is included in the $10 million to $12 million. Okay.

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Philippe St-Cyr Adam, Goodfood Market Corp. - CFO [37]

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Yes. It is.

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Operator [38]

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And we have no questions in queue at this time. I'll turn the call back to the presenters for closing remarks.

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

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

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Operator [40]

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This does conclude today's conference call. Thank you very much for attending. You may now disconnect.