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Thank you for standing by. Welcome to the Goodfood Q1 2018 Financial Results Conference Call. [Operator Instructions] I would like to remind everyone that this conference call is being recorded today, January 11, 2018, at 8 a.m. Eastern Daylight Time. I will now turn the meeting over to your host for today's call, Jonathan Ferrari, Chief Executive Officer of Goodfood. Mr. Ferrari, please go ahead.
Thank you. [Foreign Language] Good morning to all, and welcome to this conference call, where Goodfood Market Corp. will present its financial results for the quarter of fiscal 2018 that ended on November 30, 2017. I'm Jonathan Ferrari, the Chief Executive Officer at Goodfood. I am pleased to be joined on the call today by my colleagues: Neil Cuggy, Chief Operating Officer and Chief Financial Officer; and Matthew Côté, Director of Accounting.Prior to moving on, 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, I would ask participants to take a moment to read the disclaimer on forward-looking statements on Page 1 of the presentation before we begin.As you can see on Slide 2, the 2018 fiscal year is off to a very strong start. We experienced robust year-over-year growth in the number of active subscribers and revenue. Sales were strong as evidenced by our annualized gross merchandise sales run rate, which stood at $62.8 million at the end of Q1 2018. These results were driven in part by the seamless and successful move to a new Montreal production facility, which allowed us to more than quintuple our operating capacity. The move to this new facility also allowed us to generate economies of scale, achieve gains in labor productivity and significantly increase the number of meal-kits delivered weekly to our customers. We continue to make good progress in preparing for the launch of our national platform and the opening of a new facility in Western Canada during the first half of the current calendar year. This move will expand our addressable market by 45% or 11 million potential consumers. Slide 3 offers a snapshot of Goodfood's strong and consistent growth in the last quarter. Active subscribers reached 45,000 as at the end of Q1 2018. This represents a close to fivefold increase from the 8,000 active subscribers that Goodfood registered at the end of Q1 2017. During the first quarter of fiscal 2018, Goodfood added 14,000 new subscribers to its ranks, which represents an increase of 45% from August 31, 2017. Revenue grew sharply as well, increasing by more than fivefold when comparing the figures from Q1 2018 with Q1 2017. Our quarterly revenue increased strongly to $11.2 million in the first quarter, which was up 50% from the $7.5 million recorded in the fourth quarter of the last financial year. Our new production facility in Montreal is the focus of Slide 4. After operating at or above full capacity in our previous facility from March to August 2017, we seamlessly transitioned to a new home in mid-September 2017, increasing our production and distribution capacity to 83,000 square feet from 16,000 square feet. What's more, our new facility allows us to expand to up to 155,000 square feet in the future, which would enable us to operate at 10x our initial capacity. This is critical to maintaining Goodfood's leading market position and will enable us to support our continued growth with the capacity to serve more than an estimated 200,000 subscribers from our Montreal facility and to generate more than $200 million in revenue. Following the move to our new home, Goodfood significantly increased the number of boxes delivered to customers on a weekly basis by 70% while achieving important gains in labor productivity and increasing the number of full-time equivalent production employees by only 35%. In Q2 2018, Goodfood will focus on further automating our Montreal site. The next slide summarizes a key element of Goodfood's future growth strategy and an exciting development for our company. We've been working hard in Q1 2018 to ready our launch strategy for our new national platform, which will be operational in the first half of calendar 2018. This includes construction work on our new facility in Western Canada, which has already started, as well as key hires that have already been made in the region. Our new national platform will expand our addressable market by 45% or 11 million potential new customers. Our expansion into Western Canada dovetails with our continued focus on increasing market penetration in Eastern Canada. Taken together, it's easy to see why 2018 should be another strong fiscal year. With that, I'll turn the call over to my colleague, Neil, to run us through the financial highlights of our company for the last quarter.
Thanks, Jonathan. Good morning, everyone. We present here our key financial highlights for Q1 2018. As you can see in the 2 figures year-over-year at the end of November 2017, we respectively increased our active subscribers by 462% and increased our revenues by 412%. Growth has been robust and continued the strong trends witnessed over the last many quarters in the business. The figures on Slide 7 demonstrate how Goodfood has remained focused on generating profitable growth. Our gross profit was up in the first quarter of 2018 to $2.1 million, which represents a 527% increase from the $0.3 million registered in the first quarter of 2017. Our gross margin increased to 18.3% for Q1 2018 as compared to 15% for the corresponding quarter of 2017. These figures reflect positive trends in gross margin and steady growth as compared with last year.On Slide 8, you will see that our gross merchandise sales for Q1 2018, which reflects the total retail value of merchandise sold by Goodfood before taking into account all incentives and credits, totaled $13.3 million compared to $2.6 million for the corresponding period of 2017. This represents an increase of 419% from Q1 2017. Adjusted gross margin for the quarter was up to 30.9%, up from 27.1% for the corresponding period of 2017. The increase in gross margin is primarily attributable to lower unit costs for packaging. The next slide wraps up our financial highlights year-over-year. Our net loss is down to $2.5 million in the first quarter of 2018 from $3.1 million in Q1 2017. Adjusted net loss was up to $2.4 million for the last quarter from $0.4 million in Q1 2017. The increase in adjusted net loss was primarily due to the planned investments in administrative expenses to support continued active subscribers growth as well as an increased marketing budget. Adjusted net loss excludes the loss on the disposal of fixed assets of approximately $0.1 million in Q1 2018 and a loss on the remeasurement of convertible notes of $2.7 million recorded in Q1 2017. This takes us to Slide 10 and a shift in focus to our quarter-over-quarter results. I'm happy to report a 45% increase on our active subscribers in Q1 2018 vis-à-vis the fourth quarter of 2017. That translates into an increase of 14,000 net new active subscribers over a 3-month period, our strongest quarter-to-date in terms of the gain in net new active subscribers. What's more, our revenues increased by 50% in the quarter when compared with the given last quarter of 2017. These trends continue to point out to a strong fiscal year in 2018, given that January and February for starters are traditionally strong demand months for the business despite a significant seasonal slowdown in December. Slide 11 compares our gross merchandise sales and adjusted gross margin results for Q1 2018 with those of Q4 2017. Gross merchandise sales were up 52% quarter-over-quarter in Q1 2018 and our adjusted gross margin improved by 540 basis points over the same period. Our smooth transition to our new expanded production facility in Montreal allowed us to generate economies of scale and significantly increased the number of boxes delivered per week while achieving gains in labor productivity. As mentioned previously by Jonathan, Goodfood is particularly proud that our gross merchandise sales run rate, which represents the last 4 weeks of gross merchandise sales in the quarter on an annualized basis, reached $62.8 million as at November 30, 2017. As Jonathan also touched on, the launch of our new national platform and the opening of our new Western Canadian production and distribution facility will allow Goodfood to leverage its leading market position and bring the unique Goodfood customer experience to even more Canadians.Moving on to Slide 12. Gross profit more than doubled to $2.1 million in the first quarter of fiscal 2018 as compared to $1 million in the last quarter of fiscal 2017. Q1 2018 was also favorable when looking at gross margin as gross margin increased 490 basis points from the fourth quarter of 2017 to 18.3%.Slide 13 shows our adjusted EBITDA margin, which decreased to negative 20.6% in the first quarter of 2018 from negative 29% in Q4 2017. This significant improvement of 8.4 percentage points is primarily due to strong increase in gross margin over the last quarter, a realization of economies of scale and a reduction of SG&A expenses as a percentage of revenue in Q1 2018. As we continue to increase the scale of our operations, we're confident that our growth and rigorous focus on operational efficiency will translate into furthermore increased profitability. That brings us to a close of our financial highlights for the first quarter of 2018 and concludes our prepared remarks for today. We thank you all for joining the call. Before turning the call back to the operator so that we may take questions from financial analysts, I would like to come back to a slide that was previously presented by Jonathan. This slide -- this is Slide 14 that you now have in front of you. I trust that the contents of this slide will help guide the discussion about our Q1 2018 results. We will now take questions from participants on the call.
[Operator Instructions] Your first question comes from the line of Karim Meneeim from National Bank.
All right. So could you maybe talk about the trends you're seeing in your customer acquisition costs vis-à-vis the payback? So maybe comment on your payback period in number of months or number of orders?
Yes, I would say we do see some seasonal fluctuation in the cost to acquire subscribers as well as the order rate, which can be reflected in how quickly the payback period is realized. What we see in the fall season is typically a higher order rate. So we do see a faster payback period than during the summer months. And overall, the trends on customer acquisition cost and lifetime value remain in line with what we've seen in the business previously.
All right. Could you maybe quantify the payback period?
We don't disclose that publicly right now, Karim. I think you can back out some of the numbers by using number of subs over the period, gross merchandise sales and get a sense of the order rate. And with the estimates that you guys have on cost of acquisition, that will give you a pretty good idea.
All right. That's good to know. Moving on to SG&A, could you maybe break it down by fixed cost versus marketing cost in percentage?
Yes, I mean, what we can say is consistent with previous quarters, well over 50% of SG&A was media spend. And that's kind of what we can point to. That's all we can comment on for now.
Sure, okay. Maybe talk about the Montreal facility. How much more CapEx do you expect to spend on the facility?
Yes. So at the end of November, we had a good portion of the capital expenditures required. We have one final phase that we're waiting to put in place, which will come most likely online in Q2. And that would be somewhere in the order of $0.5 million to $750,000. Just a note on that, we're also spending CapEx in this quarter for our Western Canadian operations. So it will be blended between the 2, the next results.
All right. And what would the total be?
I don't have an answer for you on Western Canada right now. But total CapEx for Western Canada it's going to be $2 million to $3 million. And we're pushing to get it up and running as quickly and safely as possible. So a portion will be in Q2 and a portion will be in Q3.
Perfect. And could you maybe elaborate on the economies of scale you're seeing in Montreal?
Yes, I think the easiest way to quantify it is the stat we've quoted. So we increased the orders by over 70% while only increasing headcount by about 30%, 35%. Also important to note that the headcount increase is also investing in future growth. So to hit that 70%, we didn't actually need to get the full 30%, 35% increase in FTEs. The automation has gone very well and allowed us to increase labor productivity on certain parts of the process by 8 to 10x. And we're going to continue to bring those types of automation projects online over the next 6 to 12 months as well.
Perfect. Good to know. One last one for me. How has Goodfood's market share been trending?
Our estimate is that we're still maintaining or gaining market share in all of our key markets. We are seeing, I would say, very, very positive trends in Ontario, Québec as well as in the Maritimes. We've also -- we also continue to build our waiting list out in Western Canada. And we're seeing very strong demand in the key provinces there as well, so positive, I would say.
[Operator Instructions] You have a question from the line of Martin Landry with GMP Securities.
This is Andrew filling in for Marty. I just wanted to talk a little bit about how we look into the future. So I'm curious if you guys can give any color on how your subs are going in this quarter and correspondingly, how the credits and incentives are going this quarter considering it's a little bit of a low season over the holidays.
Yes, I think we -- having run the business for over 3 years now, we've seen several holiday periods. And we adjust the hiring and marketing spend accordingly and try and maintain cost of acquisition in line or below with what we would like, what we feel comfortable with. So I think this December was in line with what we thought. And then traditionally as we mentioned, January, if you look at our previous releases, January to May is a pretty strong period. So we would anticipate that to be repetitive this year, especially with the fact that we're trying to bring on Western Canada at the same time.
Okay. And when we go and look into Western Canada when it ramps up, would we see something similar as to what happened this quarter? I've noticed here that your credits and incentives as a percent of gross sales has gone up Q-over-Q.
Yes, the percentage has gone up simply because of the growth has also been increased. So in Western Canada, because a lot of people are going to be signing up with either referrals, free boxes or incentives from different marketing initiatives that we run, I would anticipate that to be the case as well.
Okay, fantastic. And as well congratulations on your economies of scale that you guys have been able to get, it's pretty impressive. Going forward, you mentioned automation. Is there anything else that we should be keeping in mind that you guys could be able to gain from economies of scale?
Well, one thing is we did the transition to the new Montreal facility in this quarter. So the full quarter is not representative of what we were operating at, at the kind of $63 million run rate at the end of the quarter. So we anticipate being able to further that. Obviously, December, like we said, is a challenging month, couple holidays in there. But with the automation, we probably have another 3 to 5 parts of the operation that we're looking at right now to improve the easy wins, quick wins on the automation side before really seeing full gross margin run rate.
Fantastic. And the last one for me, I'll get back in line, is how should we think about when the West Coast is up and running? How should we think about the benefits of having a national platform versus only operating in the East Coast like it is now?
So we -- on the user acquisition and the marketing side, we do see some synergies from certain national campaigns that can offer better efficiency than regional campaigns. I think we talked a little bit about this on the last call as well. But in terms of suppliers, there is overlap in our logistic suppliers in some of the food and the farms that we work with as well as the packaging, so the boxes, the liners, all the bottles. So we do see being able to generate further economies of scale by having that extra market out there. Anything else to add to that, Neil?
Yes, I would say a little bit in cost of goods sold and definitely some on the marketing side. And then just having a national brand helps awareness in general.
Are you able to comment on any kind of specific initiatives that you guys would be looking at?
In terms of?
In terms of, for example, marketing.
We're looking at essentially the same type of rollout that we did in Eastern Canada. So getting -- I think the most important part is getting our small core fan base as quickly as possible of a few thousand subscribers. Once we get our core thousand subscribers, we're able to start seeing some fairly viral referral patterns in our member base. And then we amplify that with our very targeted Facebook and direct mail campaigns, radio campaigns to start building out the density by postal code in the same way that we did in Eastern Canada in order to leverage and really start building out a network that has some density in it in Western Canada. And that will all be supported by national TV campaigns as well, where we see some efficiencies versus regional TV campaigns.
There are no further questions at this time. Mr. Ferrari, I turn the call back over to you.
Thank you very much. Thanks all for joining us today for Goodfood's Q1 2018 Financial Results Conference Call. [Foreign Language]
This concludes today's conference call. You may now disconnect.