Good morning, ladies and gentlemen, and welcome to the Goodfood Q2 2023 Earnings Conference Call and Webcast. At this time, all participants are in 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 one follow-up. Instructions will be provided at that time for how to queue up for a question. Please note that questions will be taken from financial analysts only. If anyone has 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, Wednesday, April the 12th at 8:00 A.M. Eastern 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. 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, Jonathan Ferrari, Goodfood's Chief Executive Officer. Mr. Ferrari, you may begin.
Thank you. Bonjour à tous et bienvenue à l'appel conférence de marché Goodfood pour présenter nos résultats financiers du second trimestre de l'exercice 2023, clos le quatre mars. Good morning, everyone, and welcome to this call for Goodfood Market Corp to present our financial results for the second quarter of fiscal 2023 ended March fourth. I'm joined on the call today by Neil Cuggy, Goodfood's President and Chief Operating Officer, and Roslane Aouameur, Chief Financial Officer. Our press release reporting this quarter's 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&A.
Let me remind you that all figures expressed on today's call are in Canadian dollars, unless otherwise stated. I will now turn to slide three, which reviews Goodfood's progress on the three key drivers of our turnaround execution. Over the past 12 months, we have worked diligently to turn around Goodfood. This commitment had three pillars of execution. One, a simpler balance sheet. Two, reaching profitability and improving cash flows. Three, generating profitable growth. We are encouraged by the progress made in the turnaround, and our team is excited about the path forward. Looking more closely at the three drivers. One, our balance sheet is now cleaner and more solid. We have refinanced our credit facilities, providing meaningful financial flexibility. We have also exited 13 operating facilities, removing nearly CAD 47 million in lease liabilities since last year and reducing outflows related to these leases.
We also strengthened our balance sheet by completing a financing transaction with partner Investissement Québec, insiders, and existing shareholders, further demonstrating the belief in our successful turnaround execution. Second, we delivered this quarter on our commitment to reaching profitability. Through operational efficiencies and price adjustments, we built structural strength in our gross margin, which surpassed 40% for the first time. Combined with our relentless cost-cutting, driving CAD 45 million of annual SG&A reductions, excluding marketing since last year, we delivered Adjusted EBITDA of CAD 3 million this quarter for a margin of 7%. Our profitability and low capital expenditures have driven a free cash flow use of CAD 2 million this quarter, a CAD 25 million year-over-year improvement, gaining momentum towards positive free cash flow. Three, our focus began to shift towards growth during the quarter.
We re-engaged in key brand ambassador partnerships and introduced product lines to broaden our audience with new paleo and keto meals, supported by an exciting marketing campaign with Montreal Canadiens captain Nick Suzuki. We also rolled out our first VIP customer loyalty program and continued to establish restaurant collaborations to provide a further differentiated offering to our customers. Lastly, we are implementing significant enhancements to our tech platform with an eye towards improving conversions and stickiness. We are pleased with the progress made on our turnaround drivers and the momentum we have to fully reach our goals of continued profitability, positive cash flows, and growth in the coming quarters. On that note, Roslane Aouameur, our newly promoted CFO, will now provide additional details on our financial performance. Over to you, Ros.
Thank you, John. Good morning, everyone. I will now turn to slide four, which provides details on our top-line performance. Quarterly active customers during the second quarter were 124,000 compared to 246,000 in the same quarter of fiscal 2022 and 148,000 in the previous quarter of fiscal 2023, with the majority of the sequential quarterly decline stemming from the exit of our Goodfood On-Demand offering. Net sales were CAD 42 million for the quarter, a CAD 5 million sequential decline compared to the first quarter, in part again driven by our exit of On-Demand. This quarter, we continued to focus on achieving profitability in the near term by acquiring more profitable customers and focusing on profitable products.
As such, in addition to discontinuing our On-Demand offering, impacting our active customer account net sales, we also discontinued grocery products with profitability levels below a threshold. Despite that, we are pleased to have seen net sales for active customers increasing 6% as the customers acquired showed better order metrics and required less incentives. With our team's focus now solely on our weekly subscription service, returning to top line growth is a key component of the next steps of our strategy, and our focus will continue to be on our highest value existing and prospective customers and products. We will now turn to slide five, which looks at our profitability levels. We are pleased to have delivered on our commitments to reach profitability this quarter.
Gross margin again hit record levels in Q2, reaching 40.7% or 42.2% when adjusted for non-recurring inventory write-offs related to discontinuation of products sold through our on-demand channel. The 1,820 basis points improvements compared to the same quarter last year underscored the efforts made by our teams to simplify operations. Combined with price adjustments, reduced credits and incentives, and product streamlining, we believe these improvements are structural in nature and provide a solid platform to sustain profitability and drive positive cash flow in the near term. This level of gross margin has also contributed to keeping our gross profit in total dollars stable on a lower net sales basis, further supporting our profitability and improved cash flow this quarter. SG&A expense reduction measures were also implemented this quarter and resulted in additional CAD 5 million of annual savings.
In total, we reduced our SG&A excluding marketing by over CAD 45 million annually in the past 12 months. These savings, combined with the structural strength of our gross margin, resulted in a positive Adjusted EBITDA of CAD 3 million, a CAD 17 million improvement year-over-year, for a margin of 7%. While we are pleased to have delivered positive EBITDA, we are fully focused on the next steps of our plan and will now focus on consistent annual growth of EBITDA and free cash flow. I will now move to slide six for a review of cash flows and capital expenditures. Cash flows used in operating activities came in at CAD 4 million, a CAD 10 million improvement compared to the same quarter last year. Generating net income as opposed to a net loss last year was the main driver of the cash flow improvements.
Capital expenditures came in at less than $500,000, relating mainly to capitalized labor of tech investments and payments of main or maintenance work. This continues our consistent reduction of capital intensity and compared to last year's second quarter CapEx of CAD 15 million. As a measure of our use of cash, we have introduced a metric that will combine our cash flow from operations and capital expenditure. This metric is free cash flow. As you can see here, when adjusting for restructuring related cash flows, our free cash flow outflow this quarter totaled CAD 2 million, continuing to gain momentum towards free cash flow breakeven. This positive performance has been the result of growing profitability as well as lower capital investments. Turning to slide seven, you will find a summary of our performance this quarter.
Overall, we are encouraged with the progress made on our turnaround drivers this quarter. Simplify our balance sheets, improve our profitability and cash flow metrics, and set the table for growth. All profitability indicators have shown marked improvements, demonstrating our unwavering commitment to return to positive Adjusted EBITDA and cash flows. The record gross margin with a further streamlined SG&A has positioned our cost structure to consistently achieve positive Adjusted EBITDA as we now turn our focus to growing our top line and to achieving profitable growth in the coming quarters. I will turn it back to John to provide additional details on our near-term outlook.
Thank you, Ros. I'll now turn to slide eight to review our outlook. First, we have substantially completed our turnaround execution. With our simpler balance sheet and operations, we have achieved EBITDA profitability on the back of structurally sound gross margin and SG&A cost structure. The target is now to maintain and grow positive EBITDA. Second, we are working hard to complete the last step in the balance sheet and cost structure portions of our turnaround. Exiting remaining leases and renegotiating additional contracts to drive further improvements in cash flows will be a key part of our near-term strategic goals. Third, we are stepping up our sustainability efforts to elevate our customer value proposition. In our open letter to customers and to all who eat, we have outlined key sustainability priorities we have been executing on.
Whether sourcing even more from local suppliers, reducing plastic in our deliveries equivalent to 2.4 million plastic bags per year, or offsetting the carbon footprint of our deliveries, we plan on being gooder and continue to make our customers' clear priorities our own. We are also stepping up our growth efforts. The Canadian online meal solutions market is currently estimated to stand at CAD 1 billion and a projected 20% household penetration could bring the market size to CAD 3 billion in a matter of a few years. To capture an outsized share of the meal solutions market, Goodfood has launched exciting initiatives that are aimed at attracting a broader set of customers, generating more orders per customer, and increasing basket sizes. A few examples include investments made in our digital product, our mobile application, and web platform in order to drive improved conversions and retention.
With an updated customer platform, we also aim for our product innovation to play a key role in our growth trajectory. We are collaborating with Canada's top restaurants and chefs to create unique recipes our customers can only find on Goodfood. To further grow our household penetration, we are also exploring the broadening of our product offering and distribution channels, including the potential addition of a wider range of meal solutions to address our customers' needs within under-penetrated day parts. Our focus has now shifted to growing our business and doing so profitably. To achieve that, our teams are executing on the highest return opportunities. Overall, after delivering on our profitability promise in the first half of the year, our focus shifts to cash flow improvements in the second half and setting up the platform for growth in early fiscal 2024.
On that note, I will turn it over to the operator for the Q&A portion of this call.
Thank you, sir. Ladies and gentlemen, we will now begin the question-and-answer session for financial analysts. If you would like to ask a question, please press star followed by one on your telephone keypad. If your question has been answered and you would like to withdraw from the queue, please press star followed by one. If you are using a speakerphone, please lift your handset before pressing any keys. One moment please, for your first question. Your first question will come from Frédéric Tremblay at Desjardins Securities. Please go ahead.
Thank you. Good morning. John, I just wanna come back maybe on one of your last points there on the potentially expanding the distribution channels. It's probably early on or maybe early on some of the discussions and strategies, but any additional details that you can provide in terms of what you're thinking of in terms of other ways to distribute the product? Maybe initial thoughts on how doing that would impact positively or negatively your margin profile given the, you know, significant improvements that we've seen on that front in recent quarters.
Yeah. Good morning, Fréd. Thanks for the question. As we made the decision to move away from on-demand deliveries, one of the key areas of focus was moving from being a retailer towards being a brand, right? For Goodfood to really focus on building our brand and to have a unique place in our customers' heads and hearts. As we were thinking about the future of the business, we're thinking about how to be where our customers want us to be, how to enable customers to interact with Goodfood on a flexible basis on their terms.
In addition to improving some of our direct-to-consumer channels, we are exploring other partnerships, and we'll keep you posted as we get closer to some announcement news on that front.
Okay, perfect. In terms of pricing, I believe you said last quarter that there was an increase in January. Any plans to make further pricing adjustments, or are you comfortable with where that's at versus, you know, what you're seeing on increasing costs and some of your other key cost metrics as well?
Yes. Hi, Fréd. Thanks for the question. I think we're always gonna monitor not only the market but our cost structure to make sure that our targets from a margin perspective are there. I think at this very moment, there are no designs or plans to change pricing within our meal kit plan. With that said, our goals and margin targets will drive through that decision. I think for the time being, we have found a nice balance of customer value proposition and pricing. That's the plan we're executing on now.
Okay. Perfect.
Maybe one more thing, Fréd, if I could just add to that. It's Neil here. You'll notice, as I know you're a customer, we've also introduced higher value options such as organic chicken breast, and that comes at a, you know, a CAD 2, CAD 3, or CAD 4 premium depending on which plan you're purchasing from. That's helped us increase AOV, increase effective pricing without actually passing through a subscription-based price increase.
Great. That's helpful. Thanks. Maybe if I could squeeze in one last one on CapEx. Pretty modest at, you know, CAD 0.5 million a quarter. Is that a level that you feel is sustainable moving forward, especially as you think about, you know, returning to, more significant top-line growth?
Yeah, absolutely, Fréd. I think, you know, as we said, we've been focused on free cash flow, and we'll be continuing to focus on that for the coming decades. We think we're well positioned from an infrastructure standpoint to kind of grow back into what we've invested in over the last couple of years. We don't think there's any substantial CapEx going forward. We'll be opportunistic on stuff that has very short paybacks to improve efficiency, quality, kind of launch new ideas. Really being disciplined on that side. As we know, you know, we did more than twice the volume in the same network over the pandemic.
We don't think there's much that we need to do to grow into a pretty, profitable business.
Great. Thank you. Congrats on the strong quarter.
Your next question comes from Martin Landry at Stifel. Please go ahead.
Hi. Good morning, guys. Just a follow-up to the last question, the last discussion you guys had. In, you know, you closed, I think you said 13 facilities, and two more, to exit. Just trying to understand a little bit, what's your capacity right now, in terms of, just to support revenues? Did I hear correctly that you said that with the existing infrastructure, you can do double the size of, the revenue base that you're generating right now? Is that correct?
Yeah. Martin, it's Neil. Thanks for the thanks for the question. Pretty safe to assume double. Yeah. I think we can, we can squeeze it even more than than that. We've effectively gone back to a meal kit only infrastructure with our Goodfood Courier kind of last- mile network. And, you know, that's where we were running pre On-Demand launch back in 2020. With that, we were able to do more than double the revenue base.
Okay. Okay. Then, you know, on your gross margin, a very nice expansion on a year-over-year basis. I was wondering if you could do a bridge for us to, you know, from last year so that we can quantify a little bit the impact of the main drivers that boosted margin.
Yeah, of course, Martin. I think the two top drivers are the improvements in credits and incentives, which basically flow more to net sales and boost the gross margin. The second driver is price adjustments. I think we were a little reactionary in adjusting our prices to the inflation we were seeing in the market. I think operational drivers were also important. I think food costs, proportioned as we look at it, has had some nice improvements in large part due to ingredient simplification, but also to some sourcing and supply chain efficiency.
Production labor has also seen some gain in efficiencies, large part because of On-Demand being discontinued, but also because of a little bit of a redesign of how we fulfill how we put together our boxes. I think lastly, shipping per order has also seen some nice efficiencies that is largely driven by On-Demand as we in the meal kit side of things, have a nice plan of which orders are going out when, and allows us to bring some efficiencies there and plan our routes in an optimized way.
Okay. Is it possible to quantify these, each of them in terms of the contribution to your 1,800 basis points expansion?
I think you can see the top two as being the majority, probably over 50% and the other factors being, close to the other half.
Okay. Okay. Just last question, just trying to understand a little bit, you know, the, the environment right now. You know, when your customers are disconnecting from your platform, what are the reasons why they're disconnecting? Are they price sensitive given the overall inflation and the economy slowing down? Are they going to a competitor's offering or are they just changing their needs? Just trying to understand a little bit, and I'm sure you do, follow up when your customers disconnect just to get some feedback. If you can share some of the reasons why, your customers are disconnecting, it'd be great.
Yeah. We are seeing, certainly some, you know, price sensitivity around customers experiencing inflation around all of their weekly spend. You know, one interesting factor is the price sensitivity was stronger when we first passed our price increase in January. Customers have, you know, kinda stabilized in their perception of our pricing since then, which tells us that, you know, there's always a short adjustment period in customers' price perception after a price increase. Ultimately, customers are seeing value in our offering. As we've talked about in the past, our key focus is really in thinking about how to add more value to our customers.
Bringing Michelin star chefs and partnerships of that nature to our customers' homes turns Goodfood into an option that can compete with high-end restaurant quality experience. I think when we think about our growth potential in the future, we certainly have lost ground in the past 12 to 18 months as we were building out our On-Demand offering and other companies were focusing on their weekly meal subscriptions. You know, I would say as our focus has returned to our weekly meal subscription, we've been able to improve quality metrics, freshness, any delivery issues. That's helped the stickiness of our customer base. We do see the potential for us to continue growing household penetration from here.
I would say, there's interest in understanding how to better serve the more price-conscious consumers. Our first step from here is really making sure that we're servicing the higher-end customer with the better-for-you type offering that they're excited about. Neil alluded to it before we introduced some organic proteins on our menu in the past quarter. We also launched our keto and paleo meals in partnership with Nick Suzuki. We're really thinking about how to segment the market better and make sure that we have the right offering tailored to the right customers that see the value perception in our product.
Okay, that's helpful. Thank you.
Your next question will come from Luke Hannan at Canaccord Genuity. Please go ahead.
Thanks. Good morning, everyone. I wanted to delve into this topic of broadening your product offerings and your distribution channels here. One of the things that you alluded to in the filings is potentially introducing both a wider range of ready-to-eat products and a discount offering. I want to focus on the ready-to-eat products for a second. One of your competitors has had so far great success in rolling out their US ready-to-eat brand here in Canada so far. I'm curious to know how can you defend share against that particular brand? Do you see any potential for cannibalization of a meal kit customer going exclusively over to ready-to-eat meals?
Thanks for the question. We've been specifically on the ready-to-eat side and experimenting different approaches to the ready-to-eat market for a couple of years. I would say we see segmentation in that market as well. There's some more functional type food offerings that are more dietary-focused. There's some more kind of what we would consider classic ready to eat options that are closer to a meal kit, like a classic meal kit recipe. We've experimented with a few different types of ready-to-eat offerings in the past few years. There certainly is, I would say an expansion in the direct-to-consumer meal market that's available through this ready-to-eat offering.
For example, single-person households will tend to be more likely to order from a ready-to-eat meal subscription, just as an example. There are certain segments of customers that ready-to-cook meals and the ready-to-cook model isn't the right offering for them. It could be an expansion. We've also seen over the past few years that some of our ready-to-eat meals have helped us expand our basket size as well. A ready-to-cook customer that is ordering a few ready-to-cook meals per week for dinner might also opt in for ready-to-eat lunches that they can order for the week. There's a few different configurations in which basket sizes and addressable market can grow through the ready to eat meal segment.
We, y ou know, to date, it's been a small penetration of our basket sizes, but we've been experimenting with it and really understanding the economics of that business.
Okay. To be clear, the CAD 1 billion market size, the TAM that you see in the market today, does that include ready-to-eat, or is that just meal kits?
That's ready- to- cook. Yeah.
Okay. My follow-up here on the discount offering, if we go back to last quarter, I think we had talked about this a little bit where it felt like the timing wasn't necessarily right. You were more focused on operational excellence rather than driving growth through other initiatives. There's been a bit of a shift on that front. It sounds like you are exploring this. What's gonna be different, I guess, about this offering this time around versus what you have with Yumm.ca? Can you remind us what was the margin profile for Yumm.ca when you had it previously?
Sure. I think the, you know, from our perspective, the key focus is how do we ensure we're maximizing free cash flow generation. In order for us to maximize free cash flow, we need to make sure that we're leveraging the existing infrastructure that we have, the existing G&A that we have as much as possible, and minimizing any direct marketing related to different product lines. That's the approach we're taking both on the lower priced meal side, but also on the ready-to-eat side. I think the, you know, the other key point is how do we make sure that we're not adding complexity into our business?
That was certainly a key learning over the past 18 months as we focus on On-Demand, as we were growing the SKU count and the number of products, the complexity of the business and the operations increased dramatically during that time. We're getting really smart in terms of how to manage that complexity, how to minimize the number of unique ingredients, unique recipe items, making sure that there's no extra infrastructure required or additional facilities required to service these product lines. Those are really the key learnings that we're incorporating into our path forward.
Okay. A very quick follow-up. Are you envisioning a price gap with that offering that's similar to what you would have had with Yumm.ca? That's a price gap relative to what would be the mainstream or the core offering.
I think the best way to think about it right now is our product pricing is quite dynamic. Neil alluded to this a little bit earlier in the call. We are, like, charging premiums for certain items, right? In terms of the organics, certain types of premium proteins. There's the opportunity for us to deliver some more value to customers on the lower end of the price spectrum as well. I would see the pricing as being dynamic. As we execute on that and over the coming quarters, we'll bring back some of the key findings and P&L impact as well.
Okay. That's great. Thank you.
At this time, we have no other questions, so I will turn the conference back to your host, Jonathan Ferrari, for any closing remarks.
Thank you for joining us on this call today. We look forward to speaking with you again at our next quarterly call.
Ladies and gentlemen, this does conclude your conference call for this morning. We would like to thank everyone for participating and ask you to please disconnect your lines.