Earnings Call: Q3 2020

Jul 8, 2020

Thank you for standing by. Welcome to the Good Food Third 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 each participant limit themselves to one question and if necessary, one follow-up question. Call. Please note that the questions will be taken from financial analysts I would like to remind everyone that this conference call is being recorded today, July 8, 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 now 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. Results for the Q3 of fiscal 2020 ended on May 31, 2020. I'm 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 3rd quarter results was published earlier this morning. It can also be found on our website at makegoodcu. 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. It outlines our key financial highlights for the Q3. Our exceptional quarterly results validate Good Food's long term business strategy and leading position in the e commerce grocery and meal solutions market. The month of March, April May have seen the online grocery market take off and its penetration among Canadian households accelerate significantly with years of forecasted growth turning into months. During this quarter, we experienced tremendous growth, but also significant business and human challenges. While this made Q3 among the most difficult quarters in our history, it was also the most rewarding for us. In addition to managing their personal and family considerations, our employees work 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 our Good Food employees, I want to say thank you. Our 3rd quarter results significantly surpassed our growth and profitability expectations. For the first time in our history, we are pleased to report net income and positive EBITDA in addition to record levels on other key metrics. There are a few items I'd like to highlight on this slide. First, our growth in revenue outpaced our growth in subscribers and GMS as our strategy to expand our product offering and provide a larger share of our customers grocery basket combined with the pandemic's impact translated into larger basket sizes and more frequent orders. We were able to achieve these levels of revenue using less incentives as we curb delivery days and matched our marketing spend to our supply chain capabilities. 2nd, gross merchandise sales for the quarter were just shy of $100,000,000 which is a significant milestone for us. This increase was primarily driven by the growth in our active subscriber base, higher order rates and basket sizes. The contribution of the latter two factors is another clear indication of the success of our strategy to fulfill an even larger part of our subscribers' meal planning needs with a growing number of exclusive private label grocery products and delicious meal solutions. 3rd, we are very pleased to report our 1st net income and positive EBITDA in Good Food's history. This reflects not only growth in revenue, but also a clear demonstration of operating leverage driven by higher order rates. Overall, our financial performance this quarter has been exceptional driven by the accelerated penetration of online grocery shopping. I will now turn to Slide 4 to present a few highlights. As indicated, 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. Our run rate GMS now stands at $418,000,000 approaching the $500,000,000 mark ahead of schedule. From an operational perspective, we continue to expand our footprint and roll out key initiatives. 1st, we have taken major steps to reinforce our presence in the Greater Toronto Area. At the end of April, we announced the launch of our first fulfillment center in the GTA with a 42,000 square foot facility. This new facility helped grow capacity quickly and allowed us to get closer to our customers in Canada's largest market. Our first deliveries were completed at the end of May and the operations are gradually ramping up as planned. At the end of May, we also announced a second fulfillment center in the GTA, which was planned earlier this year and will be financed with part of the proceeds raised in the convertible debenture issued in late February. This new flagship 200,000 square foot purpose built facility will be state of the art and is intended to support Good Food's next phase of growth as it will be highly automated to fulfill online grocery products more efficiently. This facility is currently under construction and should be operational by demand in Western Canada further accentuated by COVID-nineteen. During this quarter, we also completed the construction of our prepared meals commissary at our Montreal facility and ramped up our last mile delivery initiative Good Courier, which delivered almost a third of our members' orders this quarter. Taking control of the last mile delivery in certain high density areas has helped our members' overall experience. It has reduced and we continue to execute on our strategy to grow our product selection in order to provide Good Food with the ability to fulfill an even larger part of its subscriber meal planning needs. On the private label side, we now have 300 exclusive private label grocery products, doubling the offering in the last 3 months. During this quarter, we have observed significant traction for our private label products with sales nearly quadrupling quarter over quarter. Moving on to Slide 5, we want to share some details on the impact of COVID-nineteen on our business. The past few months have represented a pivotal point in time for Good Food as the pandemic ignited the growth of online grocery shopping in Canada. COVID-nineteen has proven to be a significant catalyst as the adoption rate of online grocery has effectively outpaced growth projections of several years in a matter of months as Canadians fully embraced a new way of shopping that we believe will continue to grow in popularity in the coming years. Consequently, we observed increased demand for all of our products and private label grocery items in particular. Furthermore, the order frequency from existing clients increased and the average basket size was also higher as customers further adopted our grocery and ready to eat products. The crisis also created operational challenges and additional costs that impacted our gross margin. On the labor front, we needed to bring a significant number of new employees on board during the quarter and established an essential Canadian pay program leading to temporarily higher labor direct and indirect costs. In addition, supplemental pressure on the supply chain, which drove increases in food costs and enhanced hygiene procedures, personal protective equipment and social distancing measures negatively impacted our gross margin. These additional costs were offset in part by our decision to match our marketing spend to our supply chain capabilities as well as amortizing our fixed costs over a larger revenue base. I'd like to end by saying that I am extremely proud of our team for stepping up our role as a Canadian corporate citizen. Among other things, we launched a fundraising campaign to support The Breakfast Club of Canada's COVID-nineteen emergency fund and we also provided weekly meals to teams working at the Chum Hospital's first line patient call center and volunteers at the on-site daycare center. Giving back is a core part of our business and it has never been more pressing to support Canadians across the country who are facing unprecedented challenges. In summary, our customers are embracing good food as an alternative to traditional supermarkets throughout our growing selection of exclusive private label grocery products and delicious meal solutions. COVID-nineteen has accelerated the timeline of our business plan and provides us with a unique opportunity to grow and reinforce our position as the Canadian leader in online grocery and meal solutions. Our team is excited by the strong tailwinds behind us, which we expect will drive us to new heights throughout much of the decade. Our operations have come through the 1st stress test of the pandemic and we are currently focused on preparing our operations and supply chain to be ready for a second wave of COVID-nineteen in the event that it were to occur in the fall and or winter months. On that note, I will now turn the call over to Philippe to go over our financial performance. Thank you, Jonathan. Good morning, everyone. Slide 6 provides details on subscribers and revenue. Interestingly, our Q3 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. However, the acceleration of online grocery adoption changed these seasonality trends as demand naturally grew for our products. At the end of the Q3, Good Food subscriber base reached 272,000 with the addition of 26,000 net new active subscribers during the quarter. Revenue has also grown to a record 86.20 was primarily driven by higher order rates and basket sizes from our current subscribers. The continued expansion of the company's product offering and decrease in incentives and credits as a percentage of revenue also contributed to the increase in quarterly revenue. This exponential growth combined with our solid execution allowed us to reach just shy of the $250,000,000 mark in LTM revenue. Turning to slide 7. Gross merchandise sales also increased significantly to $99,800,000 up 63% year over year. The solid growth momentum of the 3rd quarter allowed us to surpass the $400,000,000 mark in gross mission by sales run rate for the first time. After only 5 years in business, we believe this is quite an achievement as it demonstrates not only our ability to execute, but also a fast and reliable adoption rate. It is important to highlight that revenues grew more than GMS as we achieved a level of credits and incentives of 13% of gross Vision Dice sales, well below the 20% average for fiscal 2019. Despite the surge in demand for our products, we're able to keep a tight control on quality issues and the credits given accordingly as keeping our high quality standards for our members with a priority. Incentives usually given to new customers were reduced as part of our plan to limit marketing spend to match supply chain capabilities. Please now turn to slide 8, which compares our gross profit and adjusted gross profit. Our gross profit increased to $24,900,000 a record or a margin of 28.8 percent, an increase of 0.5% in packaging and shipping due to operational efficiencies, increased density among delivery zones and purchasing power with key suppliers. This was offset by higher costs incurred for additional production employees and temporary wage increases, higher food costs and other related costs such as personal protection equipment directly related to COVID-nineteen. Our adjusted gross profit reached $38,100,000 or a margin of 38.2 percent, down 3.4 percentage points year over year due primarily to pressure on food and labor costs resulting from the COVID-nineteen pandemic. A significant part of these costs is the non recurring. The next slide shows our net income and adjusted EBITDA. We are extremely proud to report our 1st quarterly positive adjusted EBITDA in our short history at $6,000,000 or a margin of 6.9%. Note that adjusted EBITDA is also at near breakeven for the 1st 9 months of the fiscal year. Percentage of revenues decreased, offset by additional expenses resulting from the launch of new product offerings as well as the additional cost incurred due to COVID-nineteen. Similarly, we reported our 1st net income. It reached $2,800,000 or $0.05 per share compared to a net loss of $3,600,000 or negative $0.06 per share for the same period last year. The Q1 of profitability is strengthening 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. In the Q3, we provided record cash flow from operating activities of $8,600,000 primarily due to a positive net income and a favorable variance in non cash operating working capital as a result of our balance sheet structure. The capital expenditures of $1,900,000 were mainly related to the build out of the Vancouver fulfillment facility, the construction of the in house ready to eat area at our Montreal facility and the continued investment in automation equipment. Overall, we've generated over $6,000,000 of free cash flow net of capital expenditure this quarter. For the 1st 9 months of this fiscal year, we invested $5,800,000 in capital expenditures. We still expect to spend around $10,000,000 in capital expenditures in fiscal 2020. The investments in the build out of the new flagship fulfillment center in the GTA will only start in fiscal 2021. We ended the quarter in a very strong financial position with cash, cash equivalents and restricted cash of $80,500,000 We thus have ample flexibility to grow from current levels and with an exchange EBIT across consumer markets. We've seen a sustained shift to grocery shopping completed online and we expect the shift to accelerate over the coming years as consumers realize how easy and affordable it is to receive grocery items purchased online, delivered directly at home. With that said, some financial consequences of the pandemic will most likely reverse over time. We've incurred roughly $2,400,000 of pandemic related expenses that are non recurring and are already reduced like the essential Canadian Pay program which we recently discontinued. The COVID-nineteen related costs consist of $2,000,000 in production labor costs as well as $400,000 in other production costs and SG and A expenses for instance personal protection equipment and sanitizer and additional health and safety measures. The pandemic has brought about business challenges and opportunities and evaluating the full range of medium and long term consequences today is very difficult. What we know is the acceleration of online. We also anticipate that a large portion of food consumption done at restaurant and other affinity businesses as and may very well continue to shift to e commerce home meal solutions. With our developed footprint of purpose built fulfillment centers, best in class last mile logistics and well established brand, Good Food is an ideal position to capitalize on this industry shift. Before we conclude, I'd like to make a few comments on our next quarter. As a reminder, our 4th quarter is typically slow given vacation time and nicer weather, which changes and influences the behavior of our members and of potential customers. As such, the 4th quarter is characterized by lower order rates, lower marketing expenses and fewer new active subscriber additions. Margins are also affected by higher packaging costs due to warmer weather. The current COVID-nineteen pandemic has accelerated penetration of online grocery and on meal solution, but may not significantly change the seasonal dynamics affecting our next quarter. It is difficult to predict exactly our consumer will behave and we'll monitor the situation closely and we'll be ready to adjust our operations accordingly. This concludes our financial highlights for the Q3 and our prepared remarks for today. We'll now be pleased to answer any questions you may have. Thank you. Thank you. Your first question this morning comes from Martin Landry from Stifel. Please go ahead. Hi, good morning and congratulations on the solid results. And I understand that you don't have full visibility on your Q4. But I was wondering if you can share a bit of color. I mean you've seen the higher basket size and higher order rates due to the COVID crisis. I'm wondering how these metrics have evolved post quarter end? Good morning, Matti. So we're about a month into Q4 right now. In terms of order COVID, we have seen them come down a little bit since the peak of the crisis and the peak of the lockdown. As Phil mentioned, part of our thinking there is there's an impact from loosening of some of the social distancing guidelines that are in place. I think there's also an effect from our typical Q4 seasonality pattern, although less exacerbated perhaps than in the past. We know that during the summer months, people tend to find ways to leave their homes even during these periods where road trips or staycations can still be an option. And as we look longer term into the, let's say, the next coming years, we can see definitely that the industry as a whole can be bolstered by this shift that's really accelerating in terms of the dollars moving from offline grocery stores and restaurants into the online world. And we think that will continue to show improvement in those metrics. And the last thing I would say is, I'd just like to remind everyone in this situation that our business strategy pre COVID was also built around increasing order rates and average order values through growing our selection, whether it's our meal solutions or our private label grocery products to fulfill a larger part of our customers' basket. And some of that was accelerated during this crisis, but long term that was always our strategy and intent and we're happy to see that that's been accelerated and well on track. Okay. Thank you. And maybe just a follow-up. There's a lot of discussion on online grocery in your press release. And I was wondering if you could share some of the attachment rates you're seeing for grocery items into your meal kit boxes currently? And what would be your near term and long term goals for attachment rates? So today we're seeing more than 25% of orders are containing a non ready to cook item. I think there will be a couple of different inflection points for that part of the business. So right now, we're in a stage where with 300 SKUs on the website, they those SKUs are primarily add ons to the order, right? Like the main driving force continues to be the attraction of our ready to cook meals. And so we're able to see add ons, which is positive for average order value, as well as overall gross margin. And as we hit different milestones in growing the selection on the website, so going from 300 to 1000 to 2000 plus SKUs, we believe there's going to be a point where we'll continue to lead with our ready to cook meals and our differentiated meal solutions that are high margin products, but we'll become more of a destination for other items outside of only the ready to cook products, which we believe will be positive for all of the economics across the board. Your next question comes from Ryan Lee from National Bank Financial. Please go ahead. Hey, guys. I just kind of want to touch on the lower SG and A rates. Can you just like break it down more specifically, which kind of buckets you benefited from in this quarter? And then how sticky do you think those are going forward notwithstanding seasonality? Hi, Ryan, it's Philip. I think in the past, we said that our SG and A bucket was split between mostly marketing expenses and wages and salaries and that wages and salaries represented 35% to 45% of that bucket in the past. I mean, in this quarter, we've definitely continued to build out our teams. As John mentioned, like we're ramping up our grocery offerings. We're building up that team very much opening new facilities across the country. So you can imagine that we've invested as well in wages and salaries. And that's wages and salaries is at the higher part of that range for the SG and A bucket. And like we mentioned on our call, like the goal of this quarter was to limit our marketing spend to match our supply chain capabilities to alleviate pressure in operation. So, definitely, we saw a big operating leverage there and we benefit from being able to amortize our fixed costs over a larger revenue base. Okay. Thank you. And then in terms of the new website, is that fully launched? I see it in my account or is it just rolled out partially to some members? And have you noticed any benefits? It's definitely set up a lot better than the prior website. I'm glad you noticed it, Brian. We've been working on that behind the scenes. So we have been working on a new user experience for a few reasons. I think it was primarily the thinking behind it was to make it easier to discover some of our new products and to make selection process faster and more seamless. We're rolling out that new selection page user experience in a phased way across the country in order to continue gathering feedback from customers and continuously improve on the experience. There's about 70 percent of our member base today that has access to that new selection page user experience. Our hope was that it would help continue to drive an increase in average order value and order rates, which is coming true. And the other exciting part of this user experience is that we're able to offer more flexibility to our customers. So, our customers can choose from different recipes, from different ready to cook plans, for example, which was a big pain point, as well as select as many servings of an individual recipe as they'd like. And so it's exciting for flexibility. It's a real differentiator in the market in terms of experience. And over the next few months, we'll have rolled it out to 100% of Good Food members. Okay. Thanks for that. Thank you and congrats on a great quarter. Just wondering on private label grocery, with it being so successful currently, do you plan on accelerating the pace at which you will introduce additional SKUs in that category? Maybe if you could take us through some of the timeline of going from 300 to several 1000 SKUs? SKUs? Hi, Frederic. Neal here. Thanks for the question and thanks for the comments on the quarter. We definitely have a pretty aggressive ramp plan already drawn up on paper. So COVID during the 1st couple of weeks of COVID, we decided to on the current operations and make sure supply chain can keep up with the demand that we saw coming in well above the 4 $20,000,000 run rate that we announced. So we have a good team in place here that's been built out over this quarter and past quarter that's ready to scale pretty aggressively. You should see an increasing frequency of new products on the new part of the web page that Ryan was just referring to and also around the country because we tend to focus the launches on certain regions at the beginning and then scale across the country. So we don't think it's a rush to get to any specific number of SKUs, but want to control the scaling to make sure the experience is very, very good. Perfect. And maybe as a follow-up to that, there was a mention of Good Courier in the comments, especially with online grocery. I'm wondering what your internal plans are in terms of potentially eventually offering same or next day delivery. Maybe if you can maybe comment on your intentions for that? Yes, for sure. We're really excited about what we've been able to do with Goodcourier so far. As we've said in the past many times on these calls and in other investor forums. Density is extremely important for the last mile delivery game and because of our density from our marketing strategy and high customer retention in those markets, we've been able to significantly reduce the cost and increase the experience with Good Courier. In the coming months, you can imagine an Uber Eats type experience through Good Food platform in terms of user experience. We think the current timeline definitely from order to receiving is very, very good for clients that have a very predictable schedule. But those who drop a little more often have different schedules that are much less predictable could benefit quite a bit from some sort of same day, next day delivery service. So we're not going to commit to any timeframe officially on the call, but it's something that we're working on we should have some news in the coming quarters. Okay. That's very helpful. Thank you. Your next question comes from Luke Cannon from Canaccord Genuity. Please go ahead. Yes, thanks and good morning guys. And I'd like to echo the comments on what was obviously a very strong quarter. The first question I have I guess is on that lower marketing spend. I know you briefly touched on what the trends are in Q4 to date. I'm just curious to know if the marketing spend is, I guess, at similar levels as to where it would have been in Q3 so far? As to match our marketing spend to our operational and supply chain capabilities. We have definitely stabilized the operations since Q3 and are in a good stable situation from a demand and a supply perspective. And the other thing I would mention is Q4 is always a typically seasonally light period for marketing spend and for customer acquisition. So we're trying to continue to find ways to balance the short term and the long term to ensure that we're making the right decisions for our competitive position in the coming years. Understanding that we believe that there's that our addressable market has shifted from a $10,000,000,000 market in Canada to a $23,000,000,000 market by 2023. And so during this journey, we'll be making the right decisions for shareholders in order to maximize that long term value while balancing shorter term profitability. Understood. And then my second question is on your new 2 newest fulfillment centers in Vancouver and Toronto. I'm just curious how are these sort of operating at scale right now? Or is there still some time before both of these are fully ramped up? Yes. Definitely, the Vancouver Definitely, the Vancouver facility or BC facility, we had it in our strategic plan many, many months in advance and had time to properly plan and ramp up. So that was something that is on target with our ramp plan and is not is definitely not operating at capacity because we built a facility larger than what we needed to accommodate the growth that John was just mentioning. But definitely on track and is taking almost all of the volume that it can across the network right now. So we're ramping up still and should be fully fulfilling all of the capacity it can in months in a couple of months. The GTA, the smaller facility that we announced kind of during the COVID height of the lockdown, is taking additional capacity that was coming from our Montreal facility. So we're really excited about being closer clients, enabling some of those shorter timeframes of deliveries in the future as well and is ramping up very, very nicely from the time that we thought we should act on the facility or decided that it made sense to our first delivery was about 7 weeks. And now we've been really scaling that up. So it's been really, really positive to have that in the network. And you can anticipate more volume going through there, but definitely not at capacity either. Okay, great. Appreciate the color. Your next question comes from Michael Glen from Raymond James. Please go ahead. Hey, good morning. Just on the competitive situation in Canada right now with the big uptick that we're seeing in the online grocery world, are you seeing you're obviously benefiting from that capturing your fair share or more than your fair share. Are you seeing an uptick in the competitive situation as people try to jump in and grab some market share here as well? We are in a market that is experiencing such significant increases in growth and penetration, I think it's to be expected in the coming years that I would say from a current perspective in the market today, we continue to see more of a supply side challenge than a demand side challenge. So there's more demand out there for grocery delivery and food delivery than there is supply of businesses that are able to fulfill that demand. And I think on a differentiated strategy that we'll be able to carve out a unique piece of the market. And so our unique differentiator includes our technology and fulfillment capabilities that we've invested in the past few years, which will get us, as Neil mentioned, to same day and next day deliveries in a ultra cost competitive fashion, as well as our merchandising strategy, that's poke basket with private label, really a complete selection of private label grocery products to fill out the rest of the grocery basket, which again is under Good Foods brand in order to be differentiated, to reduce the complexity of selection and to carve out larger margins than what a typical retailer might make in selling grocery items. So we would look at this competitive environment as continuing to be quite favorable for us in growing the overall market and we're quite pleased with the progress that we're making on executing on that strategy. Okay. And then last quarter, you alluded to the meal kit business being EBITDA positive. I'm assuming that that's the case this quarter as well. Are you able to indicate whether the private label offering was EBITDA positive in the period? Michael, yes, definitely, Nielkit is EBITDA positive this quarter, obviously. On the private label in the Niel Solution business, I mean, we're starting to see some profitability sign, but we're not completely there yet. Definitely, the growth that we've been seeing in Q3 is helping with operating leverage, ramping up the margin, establishing stronger relationship with our suppliers and getting better pricing for what we buy. This is all beneficial to our business and profitability is coming. But overall, it's still the new chip business that is increasing the profitability on a consolidated level. And yes, like in terms of the split, like last quarter, we said 90% of our revenues were was coming from the meal kit. It's still the case even though they're actually still the case and even though we saw a big increase in our private label sales. Okay. Thanks for taking the questions. Our next question comes from Jenny Huang from 8 Capital. Please go ahead. Congrats on the quarter guys. A lot of the questions were asked, but just one question on the subscriber adding subscribers. At the onset of the pandemic when you were kind of holding back on adding new subscribers, are you kind of back to normal now in terms of being able to absorb new additions? Yes, the operations have definitely stabilized across the country. As we mentioned, we're still seeing some cost challenges. We had the Central Canadian Pay Program that is ending officially in July, early July for all associates across the country. Supply chain price of protein as you guys have seen probably from shopping yourselves or in the news or other coverage is still quite high. So we still have definitely some gross margin pressure, but we're able to absorb more volume now that the operations are stabilized and we have the additional facilities that can ramp as well. Got it. Thanks. And maybe just one more on maybe on the cost side. Are you seeing any pressure on food costs or anything that's kind of putting pressure on gross margins or kind of what's the dynamic in terms of kind of on the cost side of things? Thanks. Yes, definitely. Like, I think, things have stabilized, as I said. So, there's we're not running around to find ingredients and bring on new suppliers every day like kind of at the top of the crisis. So we're able to have a little more strategic discussions and better negotiations and our contractual pricing is back in line. So definitely still pressure on food cost, mostly coming from protein, especially as it starts to warm up in Canada. There's usually a pretty big drop in produce prices in the summer months. So definitely some price on the protein side. And then on the labor side as well, at least through the month of June having higher expenses due to the Central Canadian Pay Program. Canada Day causes a little pressure on the gross margin side. So overall, that's what we're seeing. Some of it offset by some of the good courier gains that we've had and other logistics gains that we've had. And definitely the seasonal packaging pressure that we always have is there as well. But that's the current situation for gross margin. Got it. Thank you. This concludes the Q and A portion of our call. I will now turn the call back to our speakers for concluding remarks. Thanks very much everybody for joining us on the call today. We look forward to speaking with you next quarter. Ladies and gentlemen, this does conclude today's conference call.