Earnings Call: Q4 2020

Nov 11, 2020

Welcome to the Good Food Fourth Quarter 2020 Financial Results Conference Call. At this time, all participants are in a listen only mode. Following the presentation, we will conduct a question and answer session. As a courtesy to others, we ask that you each participant limit yourself to one question I would like to remind everyone that this conference call is being recorded today, November 11, 2020, at 8 am Eastern Daylight Time. Furthermore, I would like to remind you that today's presentation may contain forward looking statements about Good Food'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 like to turn the meeting over to your host for today's call, Jonathan Ferrari, Good Food's Chief Executive Officer. Mr. Ferrari, you may proceed. Thank you. Good morning, everyone, and welcome to this call for Good Food Market Corp, in which we'll present our financial results for the Q4 fiscal year ended August 31, 2020. I am pleased to be joined on the call today by Neil Caghi, Good Food's President and Chief Operating Officer and by Philip Adam, Chief Financial Officer. Our press release reporting 4th 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 and A. Finally, let me remind you that all figures expressed on today's call are in Canadian dollars unless otherwise stated. And now turning to Slide 3, which outlines our key financial highlights for the Q4 fiscal year. Our exceptional results this quarter year validate Good Food's long term business strategy and leading position in the e commerce grocery and meal solutions markets. During this year and this quarter, we experienced tremendous growth accomplishments, but also significant business and human challenges. While the second half of fiscal twenty twenty has been amongst the most difficult periods in our history, it was also the most rewarding. In addition to managing personal and family considerations, our employees worked tremendously hard to keep up with the essential needs of Canadians coast to coast while implementing enhanced safety protocols to keep our workforce and customers safe. To all Good Food employees, I want to say thank you. Our results this year quarter surpassed our expectations. For the Q2 in a row, we are pleased to report net income and positive EBITDA in addition to record levels on several key metrics. We are also very proud to report positive EBITDA for the full year, a first in our history and a clear demonstration of our business model strength. First, our annual growth in revenue outpaced our growth in subscribers by a factor of 2 as our strategy to expand our product offering and provide larger share of our customers' grocery basket combined with the new customer behavior trends translated into larger basket sizes and more frequent orders. As such, our revenue for the year reached $285,000,000 a 77% increase. 2nd, our gross margin has continued to increase substantially, hitting 32.8% this quarter, a 6.1 percentage point year over year improvement and 30.3% for the fiscal year, a 5.3 percentage point jump compared to last year. A decrease in incentives and credits, improvement in shipping costs driven by our Good Courier initiative and increased density and automation investments contributed to the gross margin increase. 3rd, we are very pleased to report our 2nd consecutive quarter of net income and positive EBITDA. This reflects not only growth in revenue and gross margin improvement, but also an efficient operating leverage driven by our scale and higher order rates. We are also immensely proud of having achieved profitability for the full fiscal year on an EBITDA basis with adjusted EBITDA reaching $4,700,000 for the year, a margin of 1.6%. This margin represents an improvement of 11.7 percentage points compared to last year. Overall, our financial performance this quarter has been exceptional, driven by accelerated penetration of online grocery shopping. I will now turn to Slide 4 to provide an e commerce grocery market update. This year has been marked by a pre pandemic and a pandemic period. Before the pandemic, the online grocery market was already set to take off and its penetration amongst Canadian households was forecasted to grow significantly. Online grocery in Canada was expected to surpass the $3,000,000,000 mark by 2023 on the back of a 21% compound growth rate. Turning to Slide 5, you can see that years of growth were turned into months and that inflection point of the online grocery industry came much sooner. The online grocery market is now estimated to already be in the $6,000,000,000 to $8,000,000,000 range currently and expected to reach approximately the $25,000,000,000 mark by 2025, growing at a 56% compound growth rate. This acceleration of growth is driven by a sharp rise in first time users as 55% of polled Canadians had purchased groceries online by March of this year. We are excited by these growth prospects and our outstanding customer experience and operating footprint positions us uniquely to capitalize on these tailwinds and build leadership in the online grocery industry. Moving to slide 6. Here you can see the strategy we are executing to build this leadership on the back of robust unit economics. Our strategy is simple. We want to build a large subscriber base and gain market share, and we do that through ensuring a world class experience for our members by increasing selection and flexibility as well as investing in automation and density. That allows us to maximize our profitability per subscriber, which in turn allows us to add more subscribers and so the wheel keeps rolling. This strategy is enabled and supported by very strong unit economics. Our average order value continues to grow sharply this year with approximately 94% of revenue coming from subscribers with 3 or more orders. The increases in average order value and gross margin, combined with stable order rates and lower customer acquisition costs since March, equate with an industry leading marketing payback period of just north of 5 months. Switching to slide 7 for key business highlights. First, we delivered record financial results by responding to Canadian strong and sustained demand as they embraced online grocery shopping in a way that marks a pivotal and permanent shift in consumer shopping habits. As such, we generated record revenues and positive EBITDA for fiscal year and ended the year with a strong $107,000,000 cash balance. Our strong performance throughout the year has been recognized by the Capital Markets as we have been included in the S and PTSX Small Cap Index and were selected to TSX 30 as a top 30 performing stock on the TSX. 2nd, in 2020, we have also taken the steps to support our growth trajectory with the leasing or construction of 4 facilities during the year. This footprint of purpose built manufacturing and fulfillment centers, along with our new cloud kitchens for prepared meals, now reaches 590,000 square feet from coast to coast. 3rd, we further improved our members' experience through multiple customer centric initiatives, including the ramp of Good Courier, which now delivers over half of our orders and the launch of our mix and match platform, Good Food Flex and our same day delivery subscription, Good Food Wow. We also increased our product offering from approximately 40 SKUs a year ago to approximately 400 SKUs currently. New product launches this quarter include staples such as 2% milk, butter, an increased variety of breads, proteins, snacks and desserts such as olive oil, candy, delicious pies. Finally, we deepened our bond with our community. We have taken steps throughout the year to communicate with our ecosystem transparently. We made PP and E available and mandatory to our employees everywhere and provided meals to frontline healthcare workers among others. On that note, I'll now turn the call over to Philippe to go over our financial performance. Thank you, Jonathan. Good morning, everyone. Slide 8 provides details in subscribers and revenue. Our Q4 is usually our slowest period in the year impacted by the nicer weather, vacation time and time spent outside the home. However, the acceleration of online grocery adoption alleviated these seasonality trends as demand for our products maintained itself to a large extent. Unit economics remained strong throughout Q4 and revenue showed a significantly lower quarter over quarter of sequential decline, decreasing only by 3% compared to 9% for the same period last year. At the end of the Q4, Good Food subscriber base reached 280,000 with the addition of 8,000 net new active subscribers in the last few months. Revenue has also grown to $83,700,000 up $38,400,000 or 85% compared to the corresponding period in 2019. The increase in revenue was primarily driven by sustained order rates and bigger basket sizes from our current subscribers, which are fueled by the continued expansion of our product offering. As previously mentioned, 94% of our fiscal year 2020 revenue came from customers who have placed 3 orders or more, a clear testimony of our subscriber base loyalty. Please now turn to slide 9, which looks at our profitability levels. Our gross profit increased to $27,500,000 a record order margin of 32.8 percent, an increase of 6.1 percentage points year over year. The increase in gross margin resulted mainly from lower credits and incentives as a percentage of revenue, improved unit economics for packaging and shipping, which are explained by a higher density among the delivery zones with good carrier now representing more than 60% of our orders and increased purchasing power with key suppliers. This was slightly offset by higher food costs and by $1,100,000 of COVID-nineteen related costs such as temporary wage increase, personal protection equipment and additional production employees. We are extremely proud to report a second consecutive quarterly positive adjusted EBITDA in our short history at $5,300,000 or a margin of 6.3%. Adjusted EBITDA was also positive for the fiscal year hitting $4,700,000 or 1.6 percent. This strong performance resulted primarily from higher revenues and gross profits, the efficiency of our marketing strategy as well as the operating leverage effect as SG and A expenses as a percentage of revenues decreased year over year despite continuing to invest significantly in our people with several key addition in our IT and online grocery departments. Similarly, we reported a 2nd consecutive quarter of 1st net income. It reached $1,600,000 compared to a net loss of $3,600,000 for the same period last year. The 1st year of profitability is a great accomplishment and solidifies our business model and strategy as we continue to develop and launch new online grocery and meal solution products on a weekly basis. Turning to slide 10 for cash flow and capital expenditures. We generated record cash flow from operating activities of $2,400,000 $8,600,000 respectively for the Q4 and the fiscal year. This was enabled by a positive net income, but also by a favorable variance in non cash operating working capital as a result of our balance sheet structure and growing scale. The capital expenditures for Q4 and fiscal 2020 were respectively $2,900,000 $10,200,000 They were mainly related to the build out of our 3rd facility in Montreal, the construction of the flagship facility in the GTA and the continued investment in automation equipment and technology. Note that our CapEx plans have been delayed by the COVID-nineteen pandemic to some extent, but we are still confident we'll be able to complete our investments and achieve our plan with minimal delays. For fiscal 2021, we plan on investing between $20,000,000 $30,000,000 in capital expenditures to build out our flagship facility in Toronto, build the infrastructure for same day delivery across the country and further increase our automation. We ended the quarter in a solid financial position with cash, cash equivalents and restricted cash of $107,000,000 We have good flexibility to grow from current levels, withstand headwinds and execute on our strategy. Finally, we'd like to turn to Slide 11 to provide some color on our outlook. The current pandemic has changed habits across consumer markets. We have seen a sustained shift to grocery shopping completed online and we expect this shift to accelerate over the coming years as consumers realize how easy, convenient and affordable it is to receive grocery items purchased online, delivered directly at their door. Our online platform and delivered to home fulfillment model has supported the significant growth in demand which we expect to continue to be strong. With that said, some financial consequences of the pandemic will most likely reverse over time. We have incurred roughly 3 point $5,000,000 of pandemic related expenses that are non recurring. While a portion of these costs have subsided already, some are still being incurred for the time being and we anticipate they may stick for a few quarters. The pandemic has brought about business challenges and opportunities and evaluating the full range of medium and long term impacts today is still a challenge. We anticipate that a significant portion of grocery shopping done in stores has shifted and will continue to shift online. We also foresee that a large portion of food consumption done at restaurants and other hospitality businesses has and may very well continue to shift to e commerce on meal solutions. With our developed footprint of purpose built fulfillment centers, best in class last mile logistics and well established brand, Good Food is in an ideal position to capitalize on these industry shifts. This concludes our financial highlights for the Q4 and our prepared remarks for today. We will now be pleased to answer any questions you may have. Thank you. Our first question comes from Martin Landry of Stifel. Your line is open. Hi, good morning. It looks like you're seeing increased loyalty amongst your customer, which is great to hear. And I'd like to dig deeper into your revenue per customer. Your ARPU, when I look at it on a gross sale, has increased significantly year over year. And by my calculation, it stands around $3.40 And that looks like it's higher than Q1. And then despite unfavorable seasonality as you mentioned with the summer. So that increase of $50 year over year, I'd love to hear if you could discuss a little bit more the main drivers of that growth. Thanks, Ma'am, good morning. So definitely during these summer months that were that are seasonally slower usually, we did experience a year over year improvement in order rates and order frequency, which helped drive that increase in ARPU. I think part of that is pandemic related and part of it is also related to our long term strategy. So in building out ways for us to increase the speed of delivery and the flexibility in which customers can engage with us, The intent is to build out longer term higher order rates and frequencies. And the second piece on the basket size increases is really driven primarily by the increase in our selection. So the more products that we have available to our customers, whether it be ready to cook products, ready to eat meals, our expanding selection of grocery products. As the selection grows, we're seeing our customers opt in to all sorts of new products. And so that's the other main driver in increasing the ARPU year over year. Okay. If I can follow-up on that, you're saying that some of the growth has been related to pandemic and some of the growth has been related to your strategy. But it looks to me it's still very early days in your grocery offering. You mentioned you have 400 SKUs, you want to go to in excess of 2,000 SKUs. Your basket size is moving up already with a limited offering like you're talking about. Where could your ARPU go in the coming years? I mean, it seems to me that there's a lot of torque in there. I would love to hear your views on that. Absolutely. I think, as you mentioned, it's early days as we launch Good Food Wow, our same day delivery offering. The number one piece of feedback from our customer base is we'd love more selection. So it's pretty magical to get everything we love from good food delivered on a same day basis just like magic. So our customers are loving it and they're really demanding for more selection. And so as that selection increases and as our penetration of same day delivery grows, which today is only currently available in Montreal. As those key components move, I think we'll start converging the economics closer to industry average basket sizes and order frequencies for groceries and online groceries. And if you just look at where we are today versus those averages, there's probably a 30% plus upside in the longer term as we build out that selection and as we roll out same day delivery across the country. Okay. That's helpful. And maybe just one last one as a follow-up as well is any chance you can give us some details on your rollout of that grocery offering or same day delivery across the country timing wise? What I can say at this stage is progress in Montreal is going very well. So the rollout in and around the Montreal Island was really our key ground to test out all of our processes, work through any kinks and same day delivery and really get a good grasp on it. And the next market to launch will be in Toronto. So we'll have same day delivery in the GTA, I would say, beginning of 2021. Okay. Perfect. Thank you and congratulations on a good quarter. Not going to be calendar year 2021. Our next question comes from Ryan Lee of National Bank Financial. Your line is open. Hey, thanks for taking my questions and congrats on another good quarter. Just had a couple of questions. The first, with regards to the SKUs for the private label grocery, can you talk about at this point like what's the plans in terms of how fast that's going to grow over the next year in terms of next year's trends? Yes, could you talk on that? And secondly, the second question is there's been some concern about shift back into discount. So through the pandemic in the grocery channel, there's been a shift into conventional and one stop shopping that's kind of slowed over the last couple of months. What's your view on the shift back in the discount? And does Good Food have any levers that it can pull to kind of mitigate some of the impacts there? Yes, sure. I'll take the this is Neil. I'll take the first one and John you can pile on for the second half of the question there. In terms of SKU adoption, as John just alluded to in the last question, it's the number one ask from our clients, which is really exciting. So we've been focusing quite a bit over the last year on building the team, building the capabilities, kind of ironing out the machine to launch SKUs every week. And if you go on the website and look at our kind of new arrival section for groceries, you'll have an idea of what's coming online every week. And then we also have SKUs that we're launching across ready to cook and ready to eat on a new categories, new recipes. So it's pretty exciting the pace of change. We think we can still hit a 3000 to 4000 SKUs in the next 24 to 36 months. And we're in a good place to start hitting a pretty high run rate of additional items getting on the website on a weekly basis. Right now, I think in the last couple of weeks, we've been in the 15% to 20% range. And as we said, we started the year around 40% and ended the year over 400%. So really good progress on that from the team. John, I want you to take the discount versus conventional. Yes, sure. So our view around why the shift was happening from seeing that growth in discount into conventional was driven really by 2 things. So the first one was the kind of wider aisles and safer feel of the shopping environment in conventional banners was driving foot traffic there during some peak moments of the pandemic. And the second piece is really the shift from share of stomach or restaurants kind of restaurant meals, right? So share of stomachs from restaurant was shifting more towards conventional banners and conventional shopping because of the demographics of the customers. And so the way that we think about it in the Good Food context, our we don't need to worry about the size of our aisles or the safety of the experience from a customer perspective. It's really clear to customers why good food offers a safe shopping experience. And the second piece around shift of the share of stomach from restaurants into conventional banners or discount banners, we're still benefiting from that shift in the share of stomach. And as we build out some really great meal solutions on the prepared meal side that are offering our intent there is to offer a selection of delicious restaurant quality meals at grocery store prices. We're still able to hit that value component, while benefiting from the shift in the share of stomach from the restaurant industry into grocery. And these habits are being reinforced, right, over the months years that the pandemic is lasting. These shifts and purchasing trends and change in behaviors are really being reinforced And we expect this to have positive tailwinds in the years to come. Okay. Thanks again, guys. Our next question comes from Frederic Tremblay of Desjardins. Your line is open. Thank you. Good morning. I was just wondering if you could comment on how things are trending in Q1 so far in terms of the order frequency and order size. Have you seen a change since the recent uptick in COVID cases and some additional stay at home measures? Fred, it's Phil. Thanks for your question. So first of all, like Q4 was between wave 1 and wave 2 of the pandemic, and we saw that the new trends were very sticky and average order value and order rates were impacted very favorably. Like our basket size, I think John alluded to it, like grew strong double digit year over year. So what we're seeing so far in Q1 is the same trends. I mean, it's still strong order rates. Obviously, is always better in Q1 than Q4, which is our summer. And average basket size is growing with the number of SKUs that we're adding as well in our product offering. So, so far the trends I mean, the trends, I mean, sticky especially as we are in a second wave right now in Canada. Great. And then just wondering on your thoughts on the post COVID world or once the vaccine is available. I appreciate the comments earlier about potential upside to the basket size. When you're thinking about your number of subscribers, what are some of your assumptions there in terms of customer retention once we move past the COVID crisis? So the I think the most important shift in our strategy in the past 12 months has been from saying our growth in subscriber base is going to be the primary driver of our flywheel or the primary growth vector for Good Food. And that made a lot of sense in the 1st few years of the business because we were working on building out a national brand, building out national infrastructure to support our customers, building out our logistics and supply chain networks. So it was really the most intelligent way to scale the business and to build out our strategy on that front. And over the past 12 months, even before the pandemic, you'll recall, we started developing the 2 other vectors of our flywheel. So in addition to subscriber growth, we've also been building out this strategy to increase our selection. So from 40 SKUs to 400 SKUs today to 4,000 SKUs in the future, which is a major growth vector for Good Food and is showing improvements on not only basket sizes, but retention and customer lifetime values. And the second or sorry, the third piece of that growth vector is really the acceleration of our delivery speed. So there will always be a segment of our customer base that is on a weekly subscription and it's going to be the most cost effective, really the most value oriented way to receive a good food delivery. But adding same day delivery into the mix is really if you think about it, it's really turning our potential from selling to a customer once a week. So 52 times a year to being able to service our customers 3 65 days a year if they want to. And so from that perspective, it's really another huge growth driver and growth vector for the business. And those three pillars, the subscriber growth, the growth in variety and selection, as well as offering a faster speed of delivery, They're all working together to improve our the whole economics of the business, the basket sizes, retention, customer acquisition costs and order frequency. And so, we're tracking really nice quarterly progress on all of those metrics through our strategy. And pushing forward, I think the business was on a great trajectory pre COVID. We are in a situation where a lot of these trends have been put forward and a lot of attention has been brought on to good food during this pandemic. But even beyond, I think we're still in the very early innings of digitizing one of Canada's largest industries. And so it's hard to forecast what might happen in any short term time period. But in the long term, we're still in the very early innings and that's how our team is building out our strategy and running our operations. That's very helpful. Thank you. Our next question comes from Luke Cannon of Canaccord. Your line is open. Thanks and good morning everyone. I wanted to dig a little bit further into the gross margin line. Obviously, it was up 6.1 percentage points year over year. That's a very healthy improvement. I'm curious to know, in the press release, it talks about how scale and purchasing power with suppliers sort of help drive that performance year over year. I'm curious to know if your suppliers or if you your company is impacted at all by we've all seen the headlines for supplier fees being passed by your brick and mortar peers, the incumbents on to their suppliers. Is that something that affects you or your suppliers? Did that help you sort of gain purchasing power with them in the quarter? Yes. Hi, Luke. This is Neil. It's a great question. We are not we don't participate in those supplier fee games. We negotiate pretty favorably with price with our suppliers. And as we said, we do business with over 100 farms and artisans. So it's very difficult for them to make their business work if we're layering on feed and feed and feed. So in short, no. What has driven increasing gross margin definitely has been affected by food costs and purchasing power. So that's really exciting to see as we continue to scale. We've been able to get better terms and better pricing for our customers. Yes, that's kind of what I can see on that for now. Okay. And following up on that, as far as food cost inflation, I noticed that's something that wasn't called out in the press release or the MD and A. Is that still sort of an ongoing issue for you guys to mitigate? Do you anticipate? Is it still such a pervasive issue that you're still issue that you're still maybe considering passing through price increases or any color there will be helpful? Yes, for sure. I think one thing to add to our supplier relationships as well as I think about it a little more is, as we've grown selection and through press releases and conference calls, people suppliers have been reaching out to us to do business. So they understand the traction we're getting in selling our grocery products with our customers and have been very excited to do business with us, which has been a great change over the past 12 months and we anticipate that growing even further. I think to your second question, food cost inflation has been definitely felt in parts of our portfolio of ingredients and has been offset a lot by purchasing power and going direct to farms in other parts. So we put forth a price increase in July, late Q4, late Q4. And that was well received by customers given the food cost inflation environment. And so far in Q1, we don't anticipate any major changes. We've been able to kind of close the menu and use our purchasing power to offset any changes there. Okay. Last one for me and then I'll pass the line. Just on the competitive environment, we know obviously one of your competitors in the space launched their online offering. I think it would have been early on in your fiscal Q4. I'm just curious to know if you've noticed any impact from that or maybe other competitors coming into the space. The online grocery market, we can all see it's obviously expanded quite considerably since the onset of COVID-nineteen. I'm curious to know if there's been any if you've been able to maintain your share with the onset of these new competitors, if you've been able to grow share or if you've noticed any other sort of competitive effects, we'll say, in your areas of operation? Yes, certainly. So I think the what the pandemic has made clear is that the penetration of online groceries in Canada is going to happen much more quickly than we were expecting in the past. And whereas some of the most optimistic forecasts were suggesting somewhere between 5% 10% penetration in online groceries in Canada within the next few years. Now we're seeing analysts and major competitors in the space think that 20% penetration in the online grocery space is not unreasonable. And so what that means is all of the competitors in the space are thinking about how this shift is going to affect their business and their customer offering. It certainly creates some questions around what to do with a store network in order a store network that might see 15% to 20% of their business shift in some way. It creates a lot of questions around that. And so our view is all of the different ways in which a customer is interested in interacting with online groceries, whether it be click and collect, 1 hour delivery, same day delivery and then next day and beyond, all of those different ways in which a customer can be serviced needs to be offered and available to those customers. And so we do expect that all competitors in the industry will be building out those different offerings and beefing them up in the coming years. Okay. Our next question comes from Michael Glynn of Raymond James. Your line is open. Hey, good morning. So just circling back to gross margin, can you maybe talk a little bit more about the Good Courier initiative? I guess I'm definitely surprised to see this myself when it was first described. I never thought it would sort of generate the size of upside we're seeing on the gross margin. Like where is that coming from exactly? Yes. Michael, this is Neil. It's an extension of the strategy that we've been talking about for a long time. So focusing on building density has been the number one way in which we can reduce delivery costs, whether we're working with partners or with Good Courier. And when we see a certain market hit a threshold of density, the payback for launching Good Courier in that market is multiples in the 1st year. So we've been able to build a team and a playbook that we can roll out those markets increasingly quickly over the past 12 months. So just an extension of what we've been talking about and doing for the last 5 or 6 years. And it also allows us a lot more control so we can be much more customer centric. The Goodcourier team can have Uber like tracking. We can have moving billboards on the side of wrapped vans in the cities. It allows us to do refrigerated transportation as well. So there's a huge amount of upside to owning that piece of the delivery experience. And I think you might have stated your current penetration on Good Courier is about 50%. Do you have any projections as to where that might track in coming quarters? Yes, that's right. So we're currently just above 50 Again, the way that we look at it is on a city by city basis. It doesn't even have to be a large urban center. It can be what we would consider a Tier 2 or Tier 3 center as well. So we'll continue to roll out where it makes the most sense. I can't give you a clear forecast. I don't think that's something we want to share at this point. What we can say is it will be an increasingly large number of deliveries and we'd hope that the percentage would continue to increase. But obviously, we're trying to grow the overall base at the same time. So if the overall base is growing faster, then we can get good career in the market. That's not necessarily a bad thing for the overall business either. Okay. And then just in terms of customer acquisition cost and really want to hone in on marketing spend here. In coming quarters, we're thinking about this Good Food Wow launching more broadly throughout Canada. Like how should we think about marketing spend surrounding this launch or these rolled out efforts? So Q4 is always a seasonal time of the year where we tend to reduce our marketing spend as it tends to land less well with customers that are just spending more time out of their homes and going to markets and walking around. And there are other seasonal periods of the year, such as Q1, certain parts of Q2 and then Q3 where customers tend to be more receptive to signing up to an online offering. And the other two key points I would add to that is, 1, in launching new products. So in growing the selection of our products, as well as offering this new Wow! And same day delivery offerings. There is some awareness that we need to build out both within our customer base and within the broader Canadian population. And so we'll be investing in building that awareness out, I would say, within the coming quarters. I'll leave it there. Pleasure. Thank you. Our next question comes from Brian Lee of 8 Capital. Your line is open. Good morning. Congrats on the quarter and thanks for taking my questions. The majority of my questions have been answered, but I was wondering if you could maybe touch on profitability on non meal kit businesses. Are you guys seeing some signs of profitability in private label or ready to eat meal solutions? And could you maybe speak to when you expect to see profitability across the segments? Hi, Brian, it's Phil. So first of all, every segment of our business has been growing quite a bit, meal kit too. So directionally speaking, you can think of non meal kit, which is meal solution and private label, directionally in line with what we said in the past as a percentage of sales. And in terms of profitability, yes, it's going in the right direction, not to the meal kit level side yet. It's still, let's say, diluting to our gross margin and to our EBITDA margin on a consolidated basis. But it's definitely going the right direction as we are strengthening our relation with our suppliers, automating the operations for sure and launching more SKUs, getting more scale and operating leverage in these segments. So yes, so that's what I can set up this. Got it. And second question I have is, in terms of SG and A, obviously, we've seen improvement as a percentage of revenues. Was it the reduced marketing spend? Could you maybe touch on the main drivers of the change? Good question. So yes, I mean, if you look at our Q4 year over year, it decreased. And I mean, we're very proud that we're able to show strong operating leverage in that quarter. And it's one of the main reasons why we're profitable as well. I mean, we're still like investing quite a bit in our teams. We're still hiring lots of key people in IT, online grocery and other key departments. So you have to think that G and A still represents a big portion of our SG and A. I mean, obviously, as you can see, like marketing is going very well. Marketing payback went from 7 months in 2019 to 5 months in 2020. So definitely very efficient marketing strategy out of us on that front, but a lot of investments have been made and are being made in our SG and A. Got it. Thanks for answering my questions. I'll jump in Our next question comes from George Doumet of Scotiabank. Your line is open. Hey, good morning guys and congrats on a strong quarter. I just wanted to follow-up on the gross margin questions. Just wondering if how much of that was a strong operating leverage to a seasonally weak quarter? And how much of that was more structural gains in terms of efficiencies and lower incentives? Just trying to think about that line, I guess, going into next year. Yes. Hey, George, it's Neil here. Operating I would say operating leverage was lower than in Q3 for sure. Some of the other things that we had in Q4 that were continued from Q3 were a high number of agency employees, which come at a higher cost and all of our essential Canadian pay programs that are associated with the 1st wave of the pandemic. So we're able to deliver really good results despite having quite a bit of pressure on the actual labor bucket of our gross margin. And you can take reference to my answer on cost inflation from the last participant as well. In terms of percentages coming from operating leverage credit incentives and efficiency, just to give you an exact percentage, I think credit incentives, we performed quite well in Q4, both on the incentive side and on the credit side. So the team continues to manage those metrics very, very tightly. And in terms of efficiency, I think we have a lot still a lot to go in terms of taking costs out of the equation. Our facilities today are still quite manual from an online grocery perspective, which is why we're very excited about the new facilities coming online and being able to reduce our picking cost well over 50% for any of our online groceries. So there's a lot of efficiencies still to come in the coming years and we think a lot of the labor costs can be taken out. Okay. Thanks for that. And in general, our free cash flow generation has always been pretty strong because of, I guess, the negative working capital from the meal kit business. But as we continue to focus and roll out on grocery, how should we think of that impacting the working capital requirements of the business? George, So, definitely like managing the inventory with more SKUs is something that we think about. I mean, so far, we were able to operate our business still as a just in time business. I mean, if you look at our inventory turnover, it stayed mostly flat year over year, even though we've added many facilities throughout the year and that's about 100 of SKUs. So I think we're doing a good job and we can even be better over time. What's also important for us is to control waste. Like we said in the past, we have about 1% waste across our supply chain and we were able to keep that percentage close to 1%, even lower in the last quarter. So we're striving to continue to operate the same unit economics, improving them even though we're adding them several thousand of SKUs. Okay. And just one last one if I may. I'd be happy to hear your thoughts on this one. Can you maybe talk to the differences in terms of the subscribers acquired during COVID versus prior to COVID, maybe qualitatively and maybe from a churn perspective? Happy to do so. I think the general takeaway is the customers that we were acquiring during COVID represent fairly similar purchasing patterns and economics to the customer base that we had before that. And I would say an important part of the reason was during some of the peak weeks of COVID, we were indeed turning down demand. So we were focusing on servicing our existing customers, solidifying our supply chain to actually fulfill our customer promises to our existing customers rather than taking on all of the customers that were demonstrating interest in online groceries and meal kits. And so generally speaking, I would say because of that, we didn't get a lot of customers that were just there for a few weeks and turned out and the customer base looks fairly similar to the rest of the base. And from a churn perspective as well? That's right. Okay. Those are my questions. Good luck. I'll ask the line. Thanks. Thanks very much. There are no further questions. I'd like to turn the call back over to Jonathan Ferrer for any closing remarks. All right. Thanks everyone for joining us on the call and we're looking forward to speaking with you again next quarter. Ladies and gentlemen, this does conclude the conference. You may now disconnect. Everyone have a great day.