Earnings Call: Q4 2019

Nov 14, 2019

Thank you for standing by. Welcome to the Good Food Fourth Quarter 2019 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 each participant limit themselves to one question and if necessary, one follow-up question. Instructions will be provided at that time for you to queue up for questions. Please note that questions will be taken from financial analysts only. I would like to remind everyone that this conference call is being recorded today, November 14, 2019, 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. Good morning, everyone, and welcome to this conference call for Good Food Market Corp, in which we'll present the financial results the Q4 year ended August 31, 2019. I'm pleased to be joined on the call today by Philip Adam, Good Food's Chief Financial Officer and Neil Caghi, President and Chief Operating Officer. Our press release reporting 4th quarter year end 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 today on the call are in Canadian dollars unless otherwise stated. Turning to Slide 3, I'd like to start off with a few comments on the typical seasonality of our business, which should help provide a better understanding of both the markets we serve and our performance within these markets. Our Q4, which we're reporting today, is usually slow given vacation time and nice weather, which influences our current and potential members' behavior. As such, the Q4 is characterized by lower order rates, lower marketing expenses, and fewer new subscriber additions. Margins are also significantly affected by higher packaging costs due to warmer weather. However, the next quarter we will report our Q1 of the fiscal year tends to show a rebound in several key metrics driven by demand from the back to school period. And now for a review of our most recent results. Slide 4 outlines our key financial highlights for the Q4 and the fiscal year. Results for the Q4 and fiscal year end 2019 were excellent. We continue to have strong growth momentum, while also significantly improving our margins. This year, we delivered triple digit percentage growth on several key metrics including active subscribers, revenue, GMS and adjusted gross profit. Our margin profile also continues to trend towards our longer term goal with gross and adjusted gross margins both improving over 4 percentage points compared to last year, while adjusted EBITDA margins also improved substantially by more than 2 percentage points for the same period. We also quadrupled cash flow generated from operations on a full year basis and ended the year with a solid cash position of nearly $48,000,000 Overall, fiscal 2019 demonstrated our ability to generate consistently strong growth while still executing on our long term margin strategy. I will now turn the slide I will now turn to Slide 5 for operational highlights regarding new launches. Fiscal 2019 was very active in terms of product launches. We continue to improve our member experience with new meal solutions and grocery products, which generated further growth through increases in active subscriber counts and average order value. With the objective of continuously improving member experience, we expanded our product offering to provide more choice and capitalize on opportunities in complementary markets. In the Q4, we launched our private label grocery products, initially in Quebec only and now nationwide. We also expanded our breakfast meal solutions with delicious new products and launched our ready to eat meal solutions in Quebec and Alberta, gradually expanding distribution across Canada. In our ready to cook meal solutions, we developed Clean15, a meal plan low in carbs and high in protein available at a premium pricing and ready in 15 minutes. We also launched yum. Ca, our value positioned meal kit brand. Finally, in October 2019, we launched a proprietary eco friendly reusable delivery box in Alberta and Quebec, positioning us as the leader in the industry with respect to environmental sustainability initiatives. Over the coming months, the lightweight box will also be used for deliveries in Toronto, Vancouver, Edmonton and Ottawa. We continue to work on additional green initiatives to make our operations even more eco friendly. It is our intention to reduce the use of plastic inside our delivery boxes by 50% over the next 12 months. Now on to Slide 6 for additional information on our exciting new product offerings. As we continue to evolve towards being the number one online grocery player in Canada, our leadership position is getting stronger in the ready to cook segment and it remains our largest driver of revenue and member demand. We continue to develop creative recipes and plans for this meal solution and we now offer 35 original internally developed meal kit options that change on a weekly basis across 6 meal plans. Our newly developed meal and grocery solutions are also rapidly growing. In our private label grocery operation, we are now offering 75 products of everyday grocery essentials ranging from olive oil, cold brew coffee, almond butter, premium snacks, proteins and much more. These items are all sold under the Good Food brand name and are priced at an average discount of 15% to grocery store branded equivalents. We're able to offer better pricing by eliminating the expensive overhead associated with brick and mortar stores by cutting out brands and by reducing waste substantially compared to the traditional grocery store value chain. In fiscal 2020, we will continue to grow the variety of grocery products available in order to work towards fulfilling our members' complete grocery basket. In addition to increasing the total value of customer orders, these products will be accretive on a net profit margin basis. So far, we've seen strong traction across all new private label grocery products. As you may recall, a few months ago, we launched our 1st breakfast meal solution, ready to blend smoothies. Since then, we have expanded our breakfast solutions and now have in addition to 18 original flavors of smoothies, several new internally developed products including artisanal oat bowls and savory omelettes. We are also working on new products in this segment such as pastries and high protein muffins, which we expect to launch in the coming weeks. Considering the quick adoption of our breakfast product offering and the importance of the Canadian breakfast segment, we believe we have plenty of runway for future growth in these meal solutions. In July, after several months of pilot testing, we also soft launched our ready to eat meal solutions in Quebec and Alberta. Over time, we will gradually expand our distribution across Canada. These meal solutions aim to expand our offering to existing and prospective customers in order to provide full home meal solutions across the different meals of the day. The ready to eat product offering is comprised of prepared meals ready in less than 4 minutes and inspired by our highest rated original ready to cook recipe as well as fresh salads and hearty soups. We currently have 14 options including 8 full meals, 3 soups and 3 salads that change on a monthly basis. These meal solutions have been well received by the market so far and we see a great opportunity to capitalize on this estimated $4,000,000,000 market. These new offerings have been developed as a result of our growth strategy and a reflection of the direct connection we have with our members who constantly share their preferences with us. Our meal solutions will contribute to further improve unit economics for the overall business by offering the right meal solution to the right customer, thereby increasing engagement and loyalty among members as well as spreading our fixed costs across a higher value basket. These home meal solution initiatives and the positive response our members have laid and the positive response from our members have laid a solid foundation to build our evolution towards becoming the Canadian leader in online grocery. You can see that these new meal solutions on Slide 7 effectively expand our total addressable market and benefit from positive secular trends driving strong growth. Overall, Good Food Now operates in markets representing more than $165,000,000,000 in size and with strong forecasted growth in the near term. These markets will benefit from the accelerating adoption of online grocery shopping and increased penetration across Canada. With our current and upcoming product offering, combined with our strong operational and production capabilities, we firmly believe Good Food is ideally positioned to grow in these markets and solidify its position as a leading online Canadian grocer in Canada. On that note, I'll turn the call over to Philippe. Thank you, Jonathan. I will now turn to Slide 8 to review our operational highlights for the year. In fiscal 2019, through several core initiatives, we significantly increased our fulfillment capacity to $750,000,000 of sales. We extended the capacity at our main facility in Montreal and I'm happy to report that the expansion was completed on budget and on time in the Q4 and is now fully operational. It gives us access to a space of 100 and 55,000 square feet occupied in large part by the automated equipment in which we have invested. With the additional space, our sale capacity from the main Montreal facility is now of approximately $400,000,000 In Calgary, we've also completed an extension in Q4 of fiscal 2019, which now provide us with $200,000,000 of sales capacity and an increased level of automation in the operation. We've also leased a new facility in Vancouver. The 84,000 square feet facility is scheduled to open in early calendar 2020. Being close to our Vancouver and West Coast members will allow us to unlock operational and logistics savings while increasing the quality of our services. At first, this new facility will add approximately $50,000,000 in sales capacity and we expect it to be EBITDA accretive in the short term. Given the strong adoption and growth in demand for our breakfast meal solutions, we've also leased a new facility in Montreal to focus on the production of breakfast products only. The 20,000 square feet facility has sales capacity of $100,000,000 and we're currently ramping up the automation level as the breakfast operation is somewhat easier to automate. Finally, we invested a significant amount of effort in automation during fiscal 2019 and this will continue in fiscal 2020 as we expect to invest about $10,000,000 to $12,000,000 in CapEx. These additional automation investments will allow us to continue to improve our operating efficiency and optimize our cost structure to drive higher margins over time by lowering labor costs. Automation will also increase our ability to deliver more rapidly and provide flexibility to our members as fulfillment becomes not only a core competency for good food, but also a competitive advantage. Combined, these expansions and investments allow us to better serve the needs of our fast growing member base as we add new meal solutions and expand our product offerings. There's a great deal underway at Good Food as we continue to build Canada's largest perishable direct to consumer online grocery network and we are confident that these initiatives will bring the desired result to drive shareholder value. Slide 9 shows the evolution of our active subscribers over the past 5 quarters. In fiscal 2019, we continued to generate triple digit growth in active subscribers on a year over year basis. Good Food subscriber base reached the 200,000 mark, more than double our subscriber base of 2018 with the addition of 11,000 net new members in the 4th quarter. This solid increase is the result of the expansion of our national platform, the strength of our ready to cook leadership position and our broadened product offering. The next slide reviews our top line growth. Revenue has also grown sharply year over year. 4th quarter and fiscal 2019 revenue reached $45,000,000 and $161,000,000 respectively, more than double the revenue reported for the corresponding periods last year. This growth was primarily driven by the continued increase in the number of active subscribers, the expansion of the national platform, reaching new geographies in Canada and now servicing 95% of the population and the increase in the product offering. Turning to Slide 11. Gross Machine Dye sales also increased significantly to $56,000,000 up 117% year over year. For fiscal 2019, we are very proud to see our gross Visionbody sales surpass the $200,000,000 mark, up from $84,000,000 last year. We finished the year with gross merchandise sales run rate of $226,000,000 up from last year, but as expected slightly lower than the $257,000,000 run rate reported in the Q3 due to the seasonality patterns of our business. We observed a similar reduction in GMS run rate last year between the 3rd and 4th quarters. For the Q1 of fiscal 2020, we expect our gross merchandise sales run rate to return to a level above the one reported in the Q3 of 2019. Please turn to Slide 12, which compares our gross profit. As expected and as mentioned earlier, our margins for the Q4 are impacted by the warm summer weather where we need to adjust packaging to keep our ingredients fresh. Our gross profit and margin increased significantly year over year. Our gross profit for the Q4 increased to $12,100,000 almost triple the previous year, while our gross profit margin reached 26.7 percent, an increase of 5.2 percentage points compared to the Q4 last year. Similarly, for fiscal 2019, gross profit reached a record $40,300,000 with a margin of 25 percent as compared to $14,700,000 with a margin of 20.8% for a corresponding period last year. These substantial improvements stem from our investments in automation, operational efficiencies, the increased density and delivery zones and the effect of scale with key large suppliers. Please turn to slide 13, which compares our adjusted gross profit. Our adjusted gross profit for the 4th quarter reached $22,800,000 more than double the previous year, while our adjusted gross profit margin reached 40.7 percent, an increase of 5.7 percentage points compared to the Q4 last year. For fiscal 2019, adjusted gross profit reached a record $79,800,000 with a 6.1 percentage points improvement in margin to 39.7 percent as compared to $28,300,000 or a margin of 33.6% for the corresponding period last year. Again, this marked improvement in profitability reflects our recent investments in automation, operational efficiencies with regard to packaging and shipping, increased density among delivery zones and purchasing power with key suppliers. We expect that fixed costs as a percentage of revenue will keep decreasing with our continued growth, which will increase gross margin. We therefore expect to see further gross margin improvements in fiscal 2020. With adjusted gross margin having broken through a 40% barrier over the past 6 months, we're on track to reach our adjusted gross margin objective of 45% in the near future. While we still keep a strong focus on top line growth, we are pleased to see that our increased focus on margins is yielding results consistent with our long term profitability plan. The next slide shows our adjusted EBITDA. Our adjusted EBITDA loss for the Q4 fiscal 2019 increased over the previous year, in line with our expectations as we experienced strong member growth in 2019. However, our EBITDA margins improved substantially with the 4th quarter and fiscal 2019 margin improving respectively by 2.7percent2.1 percentage points. Higher gross margins drove the improvement offset by higher SG and A expenses, mainly driven by strategic growth efforts, planned investments in marketing and higher wage costs to support new product launches. Turning to slide 15. As a result, net loss for the 4th quarter year stood at $5,900,000 $20,900,000 respectively. In fiscal 2019, we successfully executed on our strategy, which currently delays short term earnings by investing in market share leadership, scale and density. We believe these investments will maximize longer term shareholder value by allowing us to deliver greater value to our members compared to our competitors, while continuously attaining high returns on invested capital. Turning to slide 16 for operating cash flow. As a result of the impact of the seasonal slowdown in sales on our negative working capital, cash flow from operations turned negative in the 4th quarter with a use of $2,700,000 However, it is with great pride that are able to present positive cash flow from operations for a 2nd year in a row. We generated $900,000 for fiscal 2019, 4 times the cash generated for the corresponding period last year as we continue to increasingly fund the subscriber growth in our business with our generated cash flows. Turning to slide 17, our capital expenditures. We invested $2,800,000 in capital expenditures in the Q4 as we continue to fund investments in automation and expansion of production facilities in Montreal and Calgary. We ended the year with total CapEx investments of $7,600,000 a significant increase over last year. The majority of our CapEx for the year was financed by the senior debt facility. As we recently obtained an additional $12,000,000 in bank financing, most of the $10,000,000 to $12,000,000 budgeted CapEx for fiscal 2020 could also be financed via senior debt financing. The new Cabo investments in 2020 will continue to push the automation of our operations, improving our production facilities efficiency and cost structure and will allow us for will allow for a faster expansion of our product offering. This concludes our prepared remarks for today. Jonathan, Neil and I will now be pleased to answer any question you may have. Thank you. And our first question comes from the line of Ryan Lee from National Bank Financial. Your line is open. Good morning. Thanks for taking my call. Just a couple of questions. The first one, one of your grocery peers, one of the main grocers yesterday, they highlighted increasing promotional and competitive intensity in the market. And they said that inflation was declining through the last couple of weeks. Just wondering if you've noticed any unusual pressure from this sector in terms of acquisitions and order rates in the quarter to date so far? Hey, Ryan, it's Neil. Thanks for the question. I had a little bit of trouble hearing you there, but I think you were talking about Loblaws reporting some pricing competition. Is that accurate? Yes, that's correct. Okay. I mean, you're aware, our business is a little bit different in the sense that we have, from a inflation standpoint, the ability to control the menu that we're putting up and what mix of ingredients that we're sending to our members. So that puts a pretty significant advantage in terms of where food inflation is coming from and where we can invest our gross margin dollars for maximum benefit with our members. And then on the customer acquisition side, we haven't seen any major changes in any of the economics. The standard seasonality as Phil and John discussed on the call. The back to school season has been very, very strong as well. And obviously, with Black Friday coming up, that's a big spending time of the year for all consumer categories. So we feel pretty confident right now. Okay. That's good to hear. And then, I'd noticed you'd been reaching out to some subscribers in terms of potential pricing increases. Is that I understand that that's it's not broad based at this point. It's just a selective item. Will that kind of make it more difficult to compete if some of your grocery peers are slashing pricing in the coming quarters? Yes, I think we as you're aware, we haven't been touching pricing over the last couple of years for the majority of our member base, just to increasing scale that we've been able to take in the business. We thought the opportunity was good now to take advantage of that large gap in not increasing pricing. And we think that the relationship with our members is strong enough that there was it was the right time to do it. Overall, it's been extremely well received and we don't have any further planned price increases, but something that we can continue to kind of have in the back of our minds depending on the market conditions and where we're seeing the most demand to. Okay, great. I'll jump back in the queue. Our next question comes from the line of Louis Joutre from Desjardins. Your line is open. Good morning. So, thank you for taking my question. As you look to distribution of ready to eat products across Canada gradually, are you comfortable with production capacity for these products? Hey, this is Neil. I'll take that one again. Yes, I think definitely we realize the operational differences between our base business of ready to cook and the new business of ready to eat and are very conscious of scaling that up at the right quality. We want to make sure that as we're growing the business as we've done in any of our business lines in the past, we're delivering an outstanding experience to any member that tries it. So we want to be very, very careful that we're matching that customer experience, value proposition and not overstretching the operations. So that's really the mix that we're balancing. So it'll be a continued gradual rollout as we find the right partners to partner with on that side. All right. Thank you. So my next question would be with the recent acquisition of the Calgary facility and the upcoming opening in Vancouver, I was wondering if you could comment on subscriber trends and as well as the adoption of your breakfast and private label products in Western Canada? Absolutely. Absolutely. I'm happy to take that one. So the Calgary expansion as well as the building out of the new Vancouver facility, which will be operational in calendar 2020, were driven by really solid market share gains in those regions. We became in the past year the number one home meal solution brand in those geographies and felt the need to expand our capacity there. The Vancouver facility will also give us the opportunity to be closer to our members in Vancouver. And so avoid having going through transporting our boxes through the Rockies from Calgary during the winter months, where there's often road closures that can delay the delivery of the boxes. So we expect to see some quality improvements in that region. We expect to see some gross margin improvement as well from being closer to our customers. And we also expect that we'll be able to more easily launch certain initiatives like our reusable boxes by being closer to our member base. What was the second part of your question? It was related to just give me a second. It was related to the adoption of the private label products and the breakfast meal solutions in Western Canada. Sure. So we're happy with the trends that we're seeing. We did we do have the general strategy of launching most new products within our Montreal market, just because it's closer to our larger customer base and we're able to segment out certain types of customers that we want to test products with. I would say overall across the country, you can think that ready to cook meal solutions are still the vast majority of our sales. But we're approaching double digit percentage of sales that are coming from products outside of ready to cook. All right. Thank you. Our next question comes from the line of Raveel Afzal from Canaccord. Your line is open. Good morning, guys. Thank you for hosting the call. I wanted to know, can you speak a little bit about the margin differential, the gross margin differential between private label products and the meal kit options that you guys have? Thanks for the question. I'll be happy to take it and Phil can chime in as well with any other additional comments. So definitely the just the scale of the operations, as John was just mentioning, on the ready to cook side and our kind of fully integrated supply chain on that side allows us to have the best margin on out of all the divisions there and it is the largest part of what we do still today. As we shift more and more towards online grocery, we're going to get more intelligent about private label pricing. But right now, we're trying to sell that at slightly lower gross margin profile than what our in house fully vertically integrated products would get. Phil, is there anything you wanted to add to that? Yes. Hi, Ravi. Thanks for your question. I mean, one thing I'd like to add to that is, currently there's a drag of, let's say, between 1% to 1.5% on our adjusted gross margin coming from a combination of Brexit, ready to eat and private label. But that drag should be there over time like the one we had with Western Canada Meal Kits so far. So, currently, there's one. Over time, there should be none. Very helpful. Thank you. And now with the Vancouver facility coming online and your other facilities, are you guys thinking about changing adding more flexibility with are we are you guys getting to that point where you can further improve your delivery schedule? Yes. Hey, Raveel, I'll be happy to take that as well. Yes, definitely it's one of our strategic priorities for the year to continuously reevaluate that gap between when a member is placing their order and when they're receiving a box. Obviously, we have the advantage of the subscription model where people are have some relative visibility on where they're going to be and what they want to be ordering over the next week. But anything we could do to reduce that timeframe, we think is positive from a customer acquisition standpoint, from a competitive standpoint, and we just think it's the right thing to do as well. So you can definitely expect to see some trends towards shorter gap in delivery timeframe. I think next day delivery is definitely ideal from a consumer standpoint. We want to make sure we're balancing all of the pieces of the economics, the negative working cap, inventory holding, all of those things to make sure that we do it in a controlled manner that doesn't affect any of the balance sheet that we have right now. So definitely expect to see some trends and we think it's going to be moving in the right direction over the next 12 months, I'd say. Perfect. Thank you. Congratulations on all your initiatives. I'll get back in the queue. We have no further questions at this time. I'll turn the call back to the presenters for closing remarks. Thanks very much. Thanks everyone for joining us on this call. We look forward to speaking with you again either at our next quarterly call or at our Annual General Meeting in about 2 months. Have a great day. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.