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Thank you for standing by. Welcome to the Goodfood Q2 2018 Financial Results Conference Call.[Operator Instructions] I would like to remind everyone that this conference call is being recorded today, April 12, 2018, at 10 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.
[Foreign Language] Good morning to all, and welcome to this call in which Goodfood Market Corp. will present its financial results for the second quarter of fiscal year 2018 that ended on February 28, 2018.I'm Jonathan Ferrari, the Chief Executive Officer at Goodfood. I am pleased to be joined on the call today by a colleague that you all know well, Neil Cuggy, Goodfood's President and Chief Operating Officer. Our new Chief Financial Officer, Philippe Adam, is also with us today. Philippe joined Goodfood on March 23; and brings over 15 years of experience in corporate finance, accounting and operations to the team. [Foreign Language], Philippe.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 the first slide of the presentation before we begin.Slide 2 outlines our corporate highlights from the second quarter of 2018. It is clear that the last quarter continued the strong growth trends that we have seen over previous quarters. Goodfood considerably increased its active subscriber base and revenue in Q2. Once again, our revenue grew faster than our subscribers. On an annualized basis, our gross merchandise sales run rate is approaching the $100 million mark and reached $90.6 million at the end of the second quarter. These strong results were largely due to the increased operating capacity and operational efficiencies generated from Goodfood's September 2017 move to a new Montreal production facility. Our company also achieved EBITDA profitability in several core markets in Q2 2018.We've been busy with the launch of our national platform and the opening of our new production facility, which will serve the Western Canadian market. The move into this region will expand Goodfood's addressable market by 45% or 11 million potential customers. We're pleased to note that our Western Canada facility will open on budget and ahead of schedule and that we have witnessed better-than-expected traction in the Western Canadian market at this early stage.The next slide shows Goodfood's strong and consistent growth quarter-over-quarter dating back to Q4 2016.By the close of the second quarter of 2018, our active subscriber base grew to 61,000. Quarterly growth in subscribers from Q2 2017 to Q2 2018 has been robust, ranging between 8,000 and 16,000 net new subscribers per quarter. During the last quarter, Goodfood added 16,000 net new subscribers to its base, which represented an increase of 36% from November 30, 2017.Quarterly revenue has also grown sharply since Q4 2016. Revenue increased by 39% to $15.7 million during the second quarter of 2018 from $11.2 million registered in Q1 2018. On a year-over-year basis, revenue increased 325%, as compared to the corresponding quarter of 2017. I also want to remind you that total revenue for fiscal 2017 was $19.8 million, only 26% higher than our quarterly revenue in Q2 and 26% lower than our revenue in the first half of 2018.Slide 4 demonstrates Goodfood's steadily increasing gross merchandise sales, which reflect the value of merchandise sold by the company before taking into account incentives and credits for the last 4 quarters. Quarterly growth in fiscal year 2018 has been particularly strong, with a 42% increase to $18.8 million at the end of Q2 2018 from $13.3 million in Q1 of this year. This translates into $32.1 million in gross merchandise sales in the year-to-date and $48.4 million or almost $50 million in the last 12 months. As previously mentioned, our gross merchandise sales run rate is now fast approaching the $100 million mark.The next slide summarizes our commitment and approach to consistently improving the customer experience at Goodfood. Two key pillars form the framework of our strategy in this regard.We focus considerable effort and resources in engaging with our customers to evaluate their experience with our service. This allows Goodfood to tailor its product offering to focus on making the ordering and preparation process more simple for consumers. For example, we have recently launched our easy-prep plan. This plan includes set recipes with our usual high-quality ingredients that are already partially prepared, for example, pre chopped and washed, and which can be prepared in less than 20 minutes. Our goal is to simplify meal preparation even further for the time-strapped segment of our customers.We also look to continuously adapt the meal choices offered to our customers based on their dietary and taste preferences. Our expert culinary team, along with rich data, is at the forefront of discovery of new and interesting meal options for addition to our existing list of fresh, top-quality dishes. This also helps Goodfood to better target its marketing efforts towards both existing and potential new customer segments.I would like to briefly present the launch of our national platform before turning the presentation over to Neil for a summary of Goodfood's financial highlights from the last quarter.Goodfood is proud to be launching its national platform and open our new Western Canadian production and distribution facility on budget and ahead of schedule. As mentioned previously, launching in Western Canada increases our addressable market by 11 million potential customers. What's more, we finalized key hires in the region and have assembled a team of over 30 employees. We expect to grow our Western Canadian operations significantly over time to meet the higher-than-anticipated demand that materialized from Goodfood's initial market testing in the region. Our preparation efforts to date have secured important supply chain and delivery partners across a number of provinces in Western Canada. Initial interest in Goodfood's meal kits has been strong, with over 2,000 active subscribers already signed up to our service during prelaunch. It's worth noting that this initial demand is based on an excellent reputation of our core product amongst Western Canadian consumers.Though Neil will go into further detail on this in a moment, it's worth noting that, as expected, the startup costs associated with our Western Canadian operations had a negative impact on our gross margin for Q2 2018. We expect a continued drag on our gross margin as we build up our subscriber base in Western Canada. On that note, I now turn the presentation over to Neil.
Thanks, Jonathan. Good morning, everyone.I will now present the key financial highlights for Q2 2018.Goodfood 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 61,000 at the end of February 2018, an increase of 370% from February 2017. Revenue growth was up to $15.7 million at the close of Q2 2018, an increase of 325% from the corresponding period in 2017, while gross profit increased 216% to $2.8 million. The growth that Goodfood experienced last quarter continued the strong trends witnessed over previous quarters for our business.With that, I would like to move on to Slide 8 and focus on Goodfood's quarter-over-quarter results. During Q2 2018, Goodfood added 16,000 net new subscribers, an increase of 36% from November 30, 2017. Our revenue also grew in the last quarter by 39% to $15.7 million from the $11.2 million of revenue registered in Q1 2018. These strong increases point towards continued growth, which we expect to expand even further with the launch of operations in Western Canada in the third quarter of 2018 and its addressable market of 11 million new potential customers.Slide 9 compares our gross merchandise sales and adjusted gross margin results for Q2 2018 with those of the first quarter this year. We registered gross merchandise sales of $18.8 million in the second quarter, which is up 42% from Q1 2018. Gross merchandise sales for the first half of 2018 were $32.1 million. Our adjusted gross margin was up slightly to 31.8% from 30.9% quarter-over-quarter, which reflects the continued efficiencies that we are generating in our Eastern Canada operations despite the significant startup costs from Western Canada.Moving on to Slide 10. Goodfood's gross profit increased to $2.8 million in the second quarter of 2018, as compared to $2 million for the first quarter of this fiscal year. Our gross margin in Q2 2018, which includes the startup costs related to Western Canada, decreased slightly from 18.3% to 18%, as compared to Q1 2018.The next slide shows our adjusted EBITDA margin, which improved to negative 14.4% from negative 20.6% in Q1 2018. This was due to improvements in labor costs as a result of greater automation in our Eastern Canadian facility and lower shipping costs in our larger markets. As Jonathan already pointed out, Goodfood achieved EBITDA profitability in several of our core markets in the second quarter, demonstrating that Goodfood's business model is profitable when established in a market.Moving on to Slide 12. The adjusted net loss for Q2 was flat in absolute dollars at $2.4 million when compared to the first quarter. The adjusted net loss was primarily due to planned investments in our Western Canadian facility as well as administrative expenses to support continued active subscriber growth and an increased marketing budget. As we continue to scale -- as we continue to increase the scale of Goodfood's operations, owing to the launch of our national platform, we are confident that our company's growth and our rigorous approach to operational efficiency will translate into increased profitability.That wraps up our financial highlights for the second quarter of 2018 and concludes our prepared remarks for today. We thank you all for joining us on the call.Before turning the call back to the operator so that we may take any questions from the financial analysts, I would like to come back to Slide 2, which was previously presented by Jonathan and which will help guide the discussion about our Q2 2018 results.We will now take questions from participants on the call.
[Operator Instructions] Your first question comes from Martin Landry from GMP Securities.
In your quarter, you clearly had a bit of a mismatch between your revenues and expenses. You had startup costs for your Western Canadian facility. And I presume little revenues were related to these expenses, so wondering if you can quantify a little bit sort of the impact that these startup costs had on your gross margin this quarter.
Yes, absolutely. So as you said, like we're building the business out in Western Canada. At this point, it's going better than expected even. And what we saw is a between 2% to 3% drag on our gross margin and then additional on SG&A expenses on top of that for that quarter.
Okay. And I recall Jonathan's comment that you do expect a drag again in Q3. Can you give us a bit of a visibility on when that drag could abate?
Yes. I can't give you -- we're not going to give forward-looking -- too much forward-looking guidance on it. I would say, with scale and with the team getting better, that number should come down as we get up to speed in the operations out there.
And I would add, Martin, that we're seeing obviously the implication of the Western Canada drag is that we're seeing significant improvement in the Eastern Canada gross margin. So we're seeing the benefits of those process improvements, some of the automation that we've talked about that had made a big impact in that regard as well.
Okay, that's helpful. And looking at your incentives and credits, when I look at them as a percentage of gross sales, it looks like they've increased to around 17% of gross sales, which that looks to be one of the highest levels so far. Wondering, is it getting a little bit more competitive out there? Do you have to increase discounts to win new customers?
I would say the primary explanation in that fluctuation is the increase in sign-ups that's coming from our referrals. So we do give larger incentive credits for referrals. And an increase in referrals in our marketing mix would represent a higher level of discounts.
Yes. And that's how we're able to increase our sales by almost 50%, while SG&A only goes up about 17% in the quarter, so it is kind of where the marketing dollars show up on the income statement.
And I would add to that as well that almost all of the 2,000 subscribers that we've acquired in Western Canada to date, that's been primarily driven through referrals either from Eastern Canadian subscribers that are referring Western Canadian subscribers or even kind of within the market. So we're actually very pleased to see a higher level of referral within our member base, and that puts us in a really great competitive situation.
Okay, all right. So I mean, if I understand you guys, it's just a shift between OpEx and incentives, which -- or...
Yes.
Okay. So that's fine. And then if you can talk a little bit about the trend for the metric of revenues per customer. It looks like -- and obviously our calculation is not accurate here, but it looks like your revenue per customer has gone down a little bit year-over-year in Q2. Wondering, is this in line with your expectations, and can you talk to it a little bit?
Yes. I think, as we've chatted about in the past, Martin, I think the way that we're thinking about the business is more on a quarter-over-quarter basis, which the number has increased, if I'm not mistaken. And that's how we measure the progress. Obviously, we're launching additional recipes as well to expand target market and address, as Jon mentioned, through our data analysis what our clients are anticipating and what they want to be cooking at home.
So you're saying that your revenues per customer has gone up this quarter versus -- or on a year-over-year or sequential basis. Is that what you said?
I think on a -- I don't have the number in front of me. I think on a quarter-over-quarter basis, it's flat to up, but we -- like I said, we don't particularly measure the performance of the business at this point because things change so quickly on a year-over-year basis. I think it's better to look at quarter-over-quarter numbers for the evolution of the client base.
Okay. And that's despite the fact that there's pretty significant seasonality in your business.
Despite that fact, yes. I mean, in the summer, we know it's a little bit of a different time, but for the other 3 quarters of the year, it should be relatively in line.
The other thing I would also add in this quarter is the seasonality component of this quarter was the holiday period, so the December...
Yes. Despite a low order rate around the holidays, we're still up quarter-over-quarter.
Yes. So I would say the month of December is a seasonally slow period, for sure, for meal kits. So taking that into account as well, we're happy to see where our average number of orders per customer stands, as well as the average revenue per customer as well came in above our expectations.
[Operator Instructions] Your next question comes from Leon Aghazarian from National Bank Financial.
My -- just on the subscriber number in terms of the growth. I'm -- I just overheard -- Jon, you just mentioned that the subscriber number out West is around 2,000. Is that correct?
Yes, that's correct. We have about 2,000 subscribers and...
As of the end of the quarter.
At the end of the quarter.
Okay, yes, that was -- okay, that's kind of where I was getting with my question is. So of the subscriber growth number that we see, the -- I guess, the 16,000-plus subscribers, so 2,000 of which was West, right?
Approximately, yes.
Yes, okay. So that's already started there. And I guess you can't give us an update as to what that is today, but I guess we'll see that when the quarter is done. But is that -- so you were saying that that's above your expectation for out West in terms of what you had seen in terms of the pre registration, if I can call that. Or is that more or less in line with what your expectation was?
Yes, absolutely. I would say it's ahead of our expectations. And we also follow very closely the economics in the market that we're seeing. When we were thinking about the pre-launch phase in Western Canada, there were 3 things that we wanted to test out. We wanted to test out our supply chain, so in terms of being able to make sure that the ingredients that we're sourcing are the right quality, the right quantity and basically up to spec; test out our delivery partners. There are some that are overlapping from Eastern Canada, but there are some local partners as well that we needed to really stress test, essentially, because we're expecting to grow this market so quickly. It's important for us to stress test those suppliers. And then finally, the economics that -- of the users out there, right, so the cost of acquisition, the purchasing patterns, the churn levels. Those were all part of our tests. And we're very pleased with the results of those 3 major components that we needed to test out before really ramping up this new market. And we're there now, so we're really excited to be leaning in. And it's going to be an excellent market for Goodfood.
Okay. So just on the subscriber number growth, so if you exclude the West, but can you give us a bit of more color as to where the subscribers came from? I mean, was it Ontario, Québec? Or any type of kind of mix, if you can give us some more color on that.
In Eastern Canada we're seeing increase in penetration in all of our major markets, and the subscriber increases continue to follow kind of the population as well. So, our biggest market still remain urban centers, but we are also seeing interesting growth outside of those urban centers. And I would say, as I mentioned, it's really positive for us to see an increase in the referral levels both in Eastern Canada and Western Canada. I think it really demonstrates the quality of our product and the satisfaction that our members have with what we're putting out there. I think it also reflects some of the major product improvements that we've made. So increasing the number of recipes on certain plans to be able to segment our clientele and to really be able to offer a product that's even more tailored to their needs, as well as certain new plans that we're testing out right now for different segments of our customer base. So our metrics, like our NPS scores and our referral levels, are really important to us at this stage of the business, so we're pleased with that.
Okay, great. And with respect to an earlier question regarding the startup costs, what can we be expecting in Q3? I mean I'm just trying to figure out, like, do you need to add any more fixed costs, which you've already added in your Western facility? Or are you kind of happy with that and the additional costs that will come would be more from an SG&A perspective? I'm just trying to get -- I'm trying to...
When you say fixed costs, Leon, you're talking about capital expenditures?
Yes, exactly. So because I followed the CapEx number, and the quarter wasn't that elevated. I thought it would be higher than that, so I'm trying to see if there's going to be more so in Q3 given the fact that there's a new facility up and running.
So there's definitely still some in Q3. We'll -- the number that we'll share is between $1 million and $2 million. And a portion of that, we get back from our landlord, which is probably why the number isn't as high as expected. The -- that's from a fixed costs perspective. And then from a SG&A perspective, there are some additions. And as we grow the subscriber base and the earnings power of the business out in Western Canada, there are SG&A costs that we have to add. We've chosen to keep an operational team in Western Canada and not have an IT team or some of the other overhead that we do have in our Eastern Canadian operations, so that will definitely limit the SG&A for that side of the business.
Okay, that's helpful. And one final one from me, just to kind of follow up on your CapEx. So what is your expectation for the year, let's say, overall for CapEx? And then ultimately, I mean, are there -- I guess maybe it's more forward looking, but any other type of major capital expenditures expected for 2019? I'm just trying to get a sense of your cash flow needs, I suppose, on the CapEx front for this year and next.
Yes, for sure. From an operating perspective, what we want to do is be as close to cash flow breakeven as possible, which we've mentioned in the past, while growing aggressively. So I think we've been able to show that we can do that at a $90-plus million run rate and around a $1 million cash flow from operations burn in the quarter. From a capital expenditure perspective, by the end of Q3, we will have built out all of the infrastructure that we have been looking to build out, so the $200 million of revenue capacity plus in Eastern Canada and about $100 million of revenue capacity in Western Canada. So that'll be very, very close to all finished, if not all finished, by the end of Q3. And then in the summer, our Q4, any CapEx that we would have would be on additional automation which would have a very, very short payback; and some maintenance CapEx, which we're going to look at on a case-by-case basis but shouldn't -- should be significantly lower than what we've seen for the rest of the year.
There are no further questions at this time. Mr. Ferrari, I turn the call back over to you.
Thank you very much.Goodfood is really pleased with the results that we've been able to report today: the increase in revenue almost 40% quarter-over-quarter, closing in on $100 million in gross merchandise sales. We've been able to record EBITDA profitability in several of our core markets. We've launched and acquired -- we've launched Western Canada and acquired 2,000 subscribers already in the space and seeing great traction. And we've been able to significantly improve the gross margins in Eastern Canada.Thanks so much for being here today for Goodfood's Q2 2018 Financial Results Conference Call. [Foreign Language]