Earnings Call: Q1 2019

Jan 14, 2019

Thank you for standing by. Welcome to the Good Food Q1 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 Call. Please note that questions will be taken from financial analysts only. Would like to remind everyone that this conference call is being recorded today, January 14, 2019, at 5 o'clock p. M. Eastern Daylight Time. 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 afternoon, everyone, and welcome to this call for Good Food Market Corp, in which we'll present the financial results for the Q1 of fiscal 2019 that ended on November 30, 2018. I'm Jonathan Ferreri, the Chief Executive Officer of Good Food, and I'm pleased to be joined on the call today by Philippe Adam, our Chief Financial Officer and by Neil Cugge, Good Food's President and Chief Operating Officer. Prior to moving on, I'd 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, I would like to ask participants to take a moment to read the disclaimer on forward looking statements on the first slide of the presentation before we begin. Slide 2 outlines our corporate highlights for the Q1 of fiscal 2019. Q1 2019 was an excellent quarter, during which we achieved record results on a number of key metrics. Growth is extremely robust, not only for Good Food, but for the industry as a whole. We are still in the very early days of building out direct to consumer meal solutions in Canada, an industry which we believe could soon reach over $9,000,000,000 As you can see, growth has accelerated in the last quarter, and we achieved record quarterly subscriber growth. Gross merchandise sales also increased significantly by 44%. As a result of the strong growth, our gross merchandise sales run rate reached $168,000,000 at the end of the quarter, an all time high for Good Food. Our gross margin and adjusted gross margin also improved significantly, with our adjusted gross margin improving by almost 7 percentage points year over year to 37.7%, another record largely due to our increasing scale and investments in operational efficiencies. While continuing to deliver exceptional growth, Good Food also generated positive cash flow from operating activities in the 3rd for the 3rd consecutive quarter. This reflects our continued strong growth in revenue, our additional gains in operational efficiencies and our ability to generate economies of scale. Being cash flow positive allows us to pursue our aggressive growth targets. Our results in Western Canada have been above expectations since we launched our operations in May 2018. Subscriber growth is robust, and we are seeing strong order rates from our members. We are also continuing to build out our team and have established close relationships with key local suppliers. The next slide shows Good Food's strong and consistent growth quarter over quarter for the past 6 quarters. By the close of the Q1 of 2019, our active subscriber base grew to 126,000. The growth accelerated during the quarter with the addition of 37,000 new subscribers, more than doubling our previous quarterly record of 16,000 net additions. Quarterly revenue has also grown sharply since Q4 2017. Revenue increased to almost $30,000,000 for the quarter, representing more than 40% of the $70,000,000 in revenue recorded in fiscal 2018 as a whole. Our strategy is to continue to invest in our growth. While this delays profitability in the short term, we believe it maximizes shareholder value in the long term as we have a tremendous opportunity ahead of us to build our market position and benefit from economies of scale. Our customer base now represents approximately 1% of the 15,000,000 Canadian households. And with the direct to consumer home meal solutions industry still in its infancy, there is an opportunity not only to gain market share but also to build a strong moat around our business. Our gross merchandise sales increased 44% to a record $37,100,000 for the Q1 compared to Q4 2018 and on a last 12 months basis, surpassing the $100,000,000 mark for the very first time. The GMS run rate reached an all time high of $168,000,000 at the end of the Q1, doubling the gross merchandise sales achieved for fiscal 2018 as a whole. As a reminder, gross merchandise sales reflects the total retail value of merchandise sold by the company. We are continuing to focus on growth and on improving member experience. We are now offering the choice of 27 recipes per week to our members in order to cater to an increasing variety of taste preferences and have recently added the Clean 15 plan. The Clean15 plan is a low carb, high protein plan ready in 15 minutes. The idea behind the new Clean15 plan is that we believe achieving and maintaining your fitness goals can be easy and delicious. We've designed the recipes to be higher in protein, lower in carbs and contain a balance of healthy fats to keep you full longer. It is part of our premium segment and comes at a slightly higher price point than our classic recipes. With only a soft launch, we have already seen tremendous interest in this plan. The new plan is a perfect complement to our existing portfolio and is part of our mission to solve mealtime stress for all Canadians coast to coast, regardless of dietary preferences and levels of engagement in the kitchen. We started with the classic plan, which made good food famous and is a great way to get out of your cooking routine with exciting new flavors and ingredients. We then added the family plan with recipes tailored to kids and parents alike. Then followed the vegetarian plan, where eating a plant based diet has never been easier or more delicious. And last but not least, the Easy Prep plan, which contains pre chopped and precooked ingredients to get dinner on the table in 15 to 20 minutes. As mentioned in our last earnings call, one of our objectives for fiscal 2019 is to expand our product categories to capture further growth opportunities. Since the beginning of the year, we have been actively working towards adding additional meal options as well as meals with different levels of engagement from ready to cook to ready to eat. And finally, we started construction on our Montreal expansion and expect the new facility to be fully operational in fiscal 2019. We're doubling the production and sales capacity of our Montreal operations, which will allow us to better serve the needs of our fast growing member base as we continue to add new meal options and expand our product offering. On that note, I'll turn the presentation over to Philippe. Thanks, Jonathan. Good afternoon, everyone. I will now present the key financial highlights for Q1 2019. Good Food continues to turn out strong triple digit growth in active subscribers, revenue and gross profit on a year over year basis. We grew our active subscriber base to 120 6,000 at the end of November 2018, an increase of 180% from November 2017. Revenue growth was up almost $30,000,000 at the close of Q1 2019, an increase of 164% from the corresponding period in 2018, while gross profit increased 2 16 percent to $6,500,000 Slide 7 compares our gross margin adjusted gross margin. As you can see, our gross margin continues to improve and increase 3.6 percentage points compared to Q1 2018. Our adjusted gross margin reached a record 37.7 percent, an increase of almost 7 percentage points over 2018. These improvements reflect continued efficiency generated in our Eastern Canada operations as well as the progress we've made on labor costs, shipping and packaging costs. Our objective is to continue investing in our operations to be the most efficient and lowest cost oatmeal solutions provider. This will enable us to offer our members the absolute best value while generating exceptional returns on invested capital. We believe this can be achieved through continuous improvements in our processes and greater automation from a level of 25% a year ago to 50% today to 75% automation in the medium term. With that, I'd like to move on to Slide 8 and focus on Good Food's quarter over quarter results. During Q1 2019, Good Food added 37,000 net new subscriber, an increase of 42% from August 31, 2018. Our revenue grew sharply by 39% in the last quarter to 29 point $6,000,000 from the $21,400,000 of revenue in Q4 2018. We generated gross merchandise sales of $37,100,000 in the Q1, an increase of nearly 44% from the $25,800,000 in GMS recorded in Q4 2018. The Q1 is historically a strong quarter with the critical back to school period. Furthermore, we're opportunistic and launched targeted marketing campaigns based on credit and incentives, which yield very good results by adding 37,000 new subscribers while building density in the major urban centers across Canada. As a result of this opportunistic strategy, credit and incentives increased to 20% of GMS for the quarter. These trends continue to point to a strong fiscal year in 2019, given that January February for starters are traditionally strong demand months for the business despite a significant seasonal slowdown in December in terms of order rate and additional new subscribers. The next slide shows our adjusted EBITDA margin, which decreased to negative 13.2% from negative 12 point 4% in Q4 2018. Net loss for the Q1 of fiscal 2019 was 4 $900,000 compared to $3,000,000 in Q4 2018. The decrease in adjusted EBITDA margin and the increase in net loss were a result of an increased marketing budget and higher wage costs due to the addition of administrative personnel to support the company's growth. As Jonathan mentioned previously, we are successfully executing on our strategy, which delays short term earnings in order to invest in market share, scale and density. We believe that these investments will maximize longer term shareholder value by allowing us to deliver greater value to our members than anyone else while attaining high returns on invested capital. Q1 2019 was Q1 2019 was our 3rd consecutive quarter of positive cash flow from operations, resulting in more than $4,500,000 of cash flow from operations generated in the last 9 months. This is quite an achievement as we are continuing to register significant growth in both subscribers and revenue and are still in ramp up mode in Western Canada. The positive cash flow from operations for the quarter is primarily due to a favorable change in working capital. As we mentioned previously, we operate with a negative working capital structure that can partially support the growth of the business. As a result of the positive cash flow, our cash position increased to $25,300,000 at the end of the Q1. We also secured a $13,500,000 non dilutive debt financing toward the end of the Q1, of which $10,000,000 is still undrawn. And in Q3 2018, we raised $10,000,000 in gross proceeds from a public offering of 4,000,000 common shares. As such, we are in a very solid financial position to continue to execute on our business plan. That wraps up our financial highlights for the Q1 of 2019 and concludes our prepared remarks for today. We thank you all for joining us on the call. I will now turn the call back to the operator so that we may take questions from financial analysts. Thank you. Your first question comes from the line of Martin Landry from JMP Securities. Your line is open. The first question that I have, your credit and incentives have gone up as a percentage of gross sales. And I understand that you've added 37,000 new sub this quarter. So it's normal to see that number go up. But as a percentage of gross sales, I would have thought that it could have gone down a little bit. Could you talk to your customer acquisition costs? Are they stable? Are they trending up? Are they trading down? Any color would be appreciated. Absolutely. So we I think the general comments that we can share on the customer acquisition cost is we the business grew more quickly than we were planning during the Q1. And primarily, the reason why we were leaning in to growing the business a little bit more quickly was because the unit economics were more favorable than we were expecting. So I would say we've seen some declines in the customer acquisition cost. And I think that exactly like you mentioned, Martin, I think the explanation of the increase in the gap between adjusted gross margin and the IFRS gross margin is really a function of adding more subscribers during the quarter. But the like incentives per subscriber remain in line or better than we've seen in previous quarters. Okay, great. And I heard in the prepared remarks that you're talking about expanding your food offering, your product categories and you're talking about everything from ready to eat. Could you share with us what would a ready to eat product look like in terms of price point and margin versus a ready to cook offering? Absolutely. So we're currently in the process now of testing a couple of different formats for our ready to eat meals. The different formats that we're testing are coming in at different price points. So you could probably expect price some price points to be in line with our current ready to cook offerings, and some of them could be at a premium to that. In terms of margin profile, given that it's a new business line for us, in the short term, we would expect the margin profile to be at or below the ready to cook segment in terms of adjusted gross margin. But as we invest in building out the business line, we can expect that the gross margin profile will significantly improve. In terms of the other important levers of ready to eat meals in our business, we would really see them as a way to increase the lifetime value of the customers. So we're able to think about growing the box size by increasing the number of meals that consumers might order, as well as increasing the order rate that we can see from our members. So having, for example, a consumer or a member that might have skipped a week because they were only available to cook, let's say, one night during the week, might decide not to skip the week and order one meal that's ready to cook and complete the rest of their box with ready to eat meals. Okay. So just to clarify to make sure I understand correctly, your ready to cook your ready to eat product would not be at a premium to a ready to cook? I would say we're currently testing out the price points and we're testing out price points that are equivalent or higher. Okay. Okay, that's it for me. Thank you. Thank you very much, Matt. Your next question comes from the line of Frederic Tramdi from Desjardins. Staying with the new products, I want to talk about the breakfast smoothies a little bit. In the past, Jonathan, you mentioned that you saw in your testing that the opt in rates were quite high. I believe you said double digits for the smoothies. Curious if you had any updates on that or further observations on the opt in and order rates for Smoothies and sort of where you're at in terms of your of rolling out that initiative? Absolutely. We are we continue to be very pleased with the results that we're seeing on our breakfast product line. I would say the we've currently been still beta testing the offering. So it's not available across all Good Food subscribers yet. But the opt in rate within our pilot group is in line with what you mentioned. We've also been working on developing new flavors as well. So we had been testing 6 flavors of smoothies, and we've developed another 4 flavors during the quarter. And we continue to be very encouraged with the feedback that we're getting from our members in terms of the value perception of the smoothies, the usefulness of the smoothies on a daily and weekly basis and the nutrition and flavor profile that we're delivering. Okay. That's great. And then in terms of just Western Canada, in terms of the progress there, you mentioned that was above expectations. Can you talk about the subscriber additions? Are they coming more and more through referrals as your platform there gets a bit, let's call it, older, although it's quite young? Are you seeing more and more of those loyal initial customers that are putting you in contact with new potential customers to referrals? Yes. Hey, Fred, this is Neil here. We were like John mentioned on the call, we are very pleased with the progress that we've seen in Western Canada, starting to contribute more and more every quarter. Still a little bit of drag on the margin side, but on a customer's acquisition standpoint, it kind of seems like the same split as we're seeing in Eastern Canada. We recently announced that we are the official meal kit of the flames out in Calgary, which has helped acquisition out there as well. So we are using a mix of the same strategies and kind of seeing the same types of referral incentives. Okay. And Neil, you mentioned that's still a drag on margin, fully up and running and doing is fully up and running and doing very, very well, hitting some pretty aggressive targets. So, yes, it's decreasing, but still in that range. Your next question comes from the line of Leon Akasharian from National Bank. Your line is open. Hi, good afternoon guys. Just on the maybe a little bit on the cost structure side of things, you mentioned the expansion in Montreal is ongoing at the moment and you expect it to be done in fiscal 'nineteen. Can you just remind us what is the expectation in terms of CapEx for that facility, please? And if you're on target and on budget so far? Yes. Hi, Leon, it's Phil. So we said that the CapEx for the Montreal extension would be around $4,000,000 to $5,000,000 We are going to try to be on target or even lower than that. If everything is progressing well, we should be open officially by the end of the year end and everything is financed through our debt facility that is still undrawn at $10,000,000 Okay. And then in addition to that, obviously, would be the automation that is ongoing at the moment as well. So what kind of costs are we looking at for fiscal 'nineteen now that you started kind of the year? Where do you see the direction on the automation going in terms of expenses? Yes. So it's evolving on a monthly basis. Obviously, it's one of our targets to invest in automation and increase the margin. We're looking to invest approximately between $3,000,000 $5,000,000 automation during the year in addition to the expansion. So everything would be financed as well to the debt financing that we have available right now. Okay. And then what I mean, I know it's a bit early, but what percentage are you at automation? Because I know your goal is about 75% automation in the mid term is kind of what you guys were saying. So could you put a number on where you are right now? And then maybe I'm going to try to ask this question differently. How far is midterm for you guys in terms of getting to that 75% automation? Yes. I mean, couple of months ago, we're at 25% automated. Right now, we with the investment we've done in Q1, Q4 2018 and the one that we've done in Q2 2019 as well, we are about 50% automated and we are aiming to be at 75% estimated in the next coming quarters, like medium terms. It can go quickly with the investment that we're doing right now. Okay. And then one final one for me, just maybe to on the West Sea Canadian front. I mean, I appreciate the color on the subscriber growth and that's been exceeding the expectation. In terms of finding labor, how has that been? And in terms of the facility itself, will that require further CapEx in order to keep up with the expansion in subscriber growth? Yes. I will take that one Leon. So in terms of capacity availability, as we mentioned in the past, we see about $100,000,000 of sales out of the facility. Obviously, there's a lead time in construction projects. So we're starting to look at expanding that facility right now. And then that would all if we were to do anything on the CapEx side for Calgary that would fall into the budget that Phil was mentioning. And then in terms of availability, we had chosen to launch in Calgary appropriately and staff up and the team is appropriately and staff up and the team is, I would say, fully built up out there now. Okay. Thanks for your time, guys. There are no further questions at this time. Mr. Ferrari, I turn the call back over to you. Thank you all for joining us today for Good Food's Q1 2019 financial results conference call.