Thank you for standing by. Welcome to the Goodfood 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. If anyone has any difficulties hearing the conference, please press star followed by zero for operator assistance at any time. I would like to remind everyone that this conference call is being recorded today, November 14, 2019, at 8:00 A.M. Eastern Daylight Time.
Furthermore, I would like to remind you that today's presentation may contain forward-looking statements about Goodfood's current and future plans, expectations and intentions, results, level of activity, performance, goals or achievements, or other future events or developments. As such, please take a moment to read the disclaimer on forward-looking statements on slide two of the presentation. I would now like to turn the meeting over to your host for today's call, Jonathan Ferrari, Goodfood's Chief Executive Officer. Mr. Ferrari, you may proceed.
Thank you. [Non-English content]. Good morning, everyone, and welcome to this conference call for Goodfood Market Corp., in which we'll present the financial results for the fourth quarter and year-ended August 31st, 2019. I'm pleased to be joined on the call today by Philippe Adam, Goodfood's Chief Financial Officer, and Neil Cuggy, President and Chief Operating Officer. Our press release reporting fourth quarter and year-end results was published earlier this morning. It can be found on our website at mygoodfood.ca and on SEDAR. Please be aware that we will refer to certain metrics and non-IFRS measures. Where possible, these measures are identified and reconciled to the most comparable IFRS measures in our MD&A. Finally, let me remind you that all figures expressed today on the call are in Canadian dollars unless otherwise stated.
Turning to slide three, 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 fourth quarter, 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 fourth quarter 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 first quarter of the fiscal year, tends to show a rebound in several key metrics driven by demand from the back-to-school period. Now for a review of our most recent results. Slide four outlines our key financial highlights for the fourth quarter and the fiscal year.
Results for the fourth quarter 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 four percentage points compared to last year, while adjusted EBITDA margins also improved substantially by more than two 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 CAD 48 million. Overall, fiscal 2019 demonstrated our ability to generate consistently strong growth while still executing on our long-term margin strategy. I will now turn to slide five 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 fourth quarter, 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 Clean 15, a meal plan low in carbs and high in protein, available at a premium pricing and ready in 15 minutes. We also launched Yumm.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. On to slide six for additional information on our exciting new product offerings. 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 six 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 Goodfood 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. Far, we've seen strong traction across all new private label grocery products. As you may recall, a few months ago, we launched our first 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 omelets. 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 four minutes and inspired by our highest-rated original ready-to-cook recipes, as well as fresh salads and hearty soups. We currently have 14 options, including eight full meals, three soups, and three 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 CAD 4 billion 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 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 seven effectively expand our total addressable market and benefit from positive secular trends, driving strong growth. Overall, Goodfood now operates in markets representing more than CAD 165 billion 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 Goodfood 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 eight to review our operational highlights for the year. In fiscal 2019, through several core initiatives, we significantly increased our fulfillment capacity to CAD 750 million 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 fourth quarter and is now fully operational. It gives us access to a space of 155,000 sq ft, occupied in large part by the automated equipment in which we have invested. With the additional space or sales capacity from the main Montreal facility is now of approximately CAD 400 million. In Calgary, we've also completed an expansion in Q4 of fiscal 2019, which now provide us with CAD 200 million of sales capacity and an increased level of automation in the operation.
We've also leased a new facility in Vancouver. The 84,000 sq ft 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 logistic savings while increasing the quality of our services. At first, this new facility will add approximately CAD 50 million 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 separate facility in Montreal to focus on the production of breakfast products only. The 20,000 sq ft facility has a sale capacity of CAD 100 million, and we're currently ramping up the automation level as the breakfast operation is somewhat easier to automate.
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 CAD 10 million-CAD 12 million 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 Goodfood, 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 Goodfood as we continue to build Canada's largest perishable direct-to-consumer online grocery network. We are confident that these initiatives will bring the desired result to drive shareholder value. Slide nine shows the evolution of our active subscribers over the past five quarters. In fiscal 2019, we continued to generate triple-digit growth in active subscribers on a year-over-year basis. Goodfood 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 fourth 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.
Fourth quarter and fiscal 2019 revenue reached CAD 45 million and CAD 161 million 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 merchandise sales also increased significantly to CAD 56 million, up 117% year-over-year. For fiscal 2019, we are very proud to see our gross merchandise sales surpass the CAD 200 million mark, up from CAD 84 million last year. We finish the year with gross merchandise sales run rate of CAD 226 million, up from last year, but as expected, slightly lower than the CAD 257 million run rate reported in the third quarter due to the seasonality patterns of our business.
We observed a similar reduction in GMS run rate last year between the third and fourth quarters. For the first quarter of fiscal 2020, we expect our gross merchandise sales run rate to return to a level above the one reported in the third quarter of 2019. Please turn to slide 12, which compares our gross profit. As expected, as mentioned earlier, our margins for the fourth quarter 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 fourth quarter increased to CAD 12.1 million, almost triple the previous year, while our gross profit margin reached 26.7%, an increase of 5.2 percentage points compared to the fourth quarter last year.
Similarly, for fiscal 2019, gross profit reached a record CAD 40.3 million, with a margin of 25%, as compared to CAD 14.7 million, with a margin of 20.8% for the corresponding period last year. These substantial improvements stem from our investments in automation, operational efficiencies, the increased density in 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 fourth quarter reached CAD 22.8 million, more than double the previous year, while our adjusted gross profit margin reached 40.7%, an increase of 5.7 percentage points compared to the fourth quarter last year. For fiscal 2019, adjusted gross profit reached a record CAD 79.8 million with a 6.1 percentage points improvement in margin to 39.7%, as compared to CAD 28.3 million 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 cost 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 the 40% barrier over the past six 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.
Adjusted EBITDA loss for the fourth quarter and fiscal 2019 increased over the previous year, in line with our expectations, as we experienced strong member growth in 2019. Our EBITDA margins improved substantially with the fourth quarter and fiscal 2019 margin improving respectively by 2.7 and 2.1 percentage points. Higher gross margins drove the improvement, offset by higher SG&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 fourth quarter and year stood at CAD 5.9 million and CAD 20.9 million, 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 fourth quarter with a use of CAD 2.7 million. However, it is with great pride that we are able to present positive cash flow from operations for a second year in a row. We generated CAD 0.9 million for fiscal 2019, four 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 for capital expenditures.
We invested CAD 2.8 million in capital expenditures in the fourth quarter as we continue to fund investments in automation and extension of production facilities in Montreal and Calgary. We ended the year with total CapEx investments of CAD 7.6 million, 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 CAD 12 million in bank financing, most of the CAD 10 million-CAD 12 million budgeted CapEx for fiscal 2020 could also be financed via senior debt financing. The new capital investments in 2020 will continue to push the automation of our operations, improving our production facilities' efficiency and cost structure, and will allow for a faster extension of our product offering.
This concludes our prepared remarks for today. Jonathan, Neil, and I will now be pleased to answer any questions you may have.
Thank you. As a reminder, to ask a question, you will need to press star one on your telephone. To withdraw your question, press the hash key. Please stand by while we compile a Q&A roster. Our first question comes from the line of Ryan Li from National Bank Financial. Your line is open.
Good morning. Thanks for taking my call. Just a couple of questions. The first 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 the 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?
Yep. That's correct.
Okay. As you're aware, our business is a little bit different in the sense that we have, from a food 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. That puts a pretty significant advantage in terms of where the food inflation is coming from and where we can invest our gross margin dollars for maximum benefit with our members. 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 strong as well, and obviously with Black Friday coming up, that's a big spending time of year for all consumer categories. We feel pretty confident right now.
Okay, that's good to hear. I've noticed you've been reaching out to some subscribers in terms of potential pricing increases. I understand that it's not broad-based at this point. It's just a selective item. Will that make it more difficult to compete if some of your grocery peers are slashing pricing in the coming quarters?
Yeah, as you're aware, we haven't been touching pricing over the last couple of years for the majority of our member base just through increasing scale that we've been able to.
To take in the business. We thought the opportunity was good now to take advantage of that large gap in not increasing pricing. We think that the relationship with our members is strong enough that 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 have in the back of our minds, depending on the market conditions and where we're seeing the most demand, too.
Okay, great. I'll jump back in the queue.
Again, if you'd like to ask a question, that's star one on your telephone keypad. Our next question comes from the line of Louis Jutras from Desjardins. Your line is open.
Good morning. Thank you for taking my question. As you look to expand 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. Yeah, 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. We want to be very careful that we're matching that customer experience value proposition and not overstretching the operations. That's really the mix that we're balancing. It'll be a continued gradual rollout as we find the right partners to partner with on that side.
All right, thank you. 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. I'm happy to take that one. 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 a need to expand our capacity there. The Vancouver facility will also give us the opportunity to be closer to our members in Vancouver, 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. We expect to see some quality improvements in that region.
We expect to see some gross margin improvements as well from being closer to our customers. 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?
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. We're happy with the trends that we're seeing. 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. We're approaching a double-digit percentage of sales that are coming from products outside of ready-to-cook.
All right. Thank you.
Again, if you'd like to ask a question, that's star one on your telephone keypad. Our next question comes from the line of Raviel Essel from Canaccord. Your line is open.
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?
Hey, Raviel. Yeah, thanks for the question. I'll be happy to take it, and Phil can chime in as well with any other additional comments. Definitely 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 margins 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. Right now we're trying to sell that at a 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?
Yeah. Hi, Raviel, thanks for your question. I mean, the one thing I'd like to add to that is currently there's a drag of, let's say, between 1%-1.5% on our adjusted gross margin coming from combination of breakfast, ready-to-eat and private label. That drag should be halved over time, like the one we had with certain Canada meal kits so far. Currently, there's one. Over time, there should be none.
Very helpful. Thank you. Now with the Vancouver facility coming online and your other facilities, are you guys thinking about changing, adding more flexibility with respect to the delivery schedule? I'm talking about next-day delivery is probably still a little while away. Are you guys getting to that point where you can further improve your delivery schedule?
Hey, Raviel. I'll be happy to take that as well. 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. We have the advantage of the subscription model where people have some relative visibility on where they're going to be and what they want to be ordering over the next week. Anything we could do to reduce that time frame 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. You can definitely expect to see some trends towards shorter gap in delivery time frame. 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. Definitely expect to see some trends, and we think it's going to be moving in the right direction over the next 12 months, let's say.
Perfect. Thank you. Congratulations on all your initiatives. I'll get back in the queue.
Again, if you'd like to ask a question, that's star one on your telephone keypad. 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 two months. Have a great day.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.