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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
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Good morning, ladies and gentlemen, and welcome to the Goodfood Second Quarter FY 2024 Earnings and Webcast Conference Call. [Operator Instructions] I would like to remind everyone that this conference call is being recorded today April 16 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. As such, please take a moment to read the disclaimer on forward-looking statements on Slide 2 of the presentation. Please be aware that during the call, presenters 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 on today's call are in Canadian dollars unless otherwise stated. I would now like to turn the meeting over to your host for today's call, Jonathan Ferrari, Goodfood Chief Executive Officer; Mr. Ferrari, you may proceed.
Thank you. [Foreign Language]
Good morning, everyone, and welcome to this call for Goodfood Market Corp. to present our financial results for the second quarter of fiscal 2024 ended March 2. I'm joined on the call today by Neil Cuggy, Goodfood's President and Chief Operating Officer; and Ros Aouameur, Chief Financial Officer. Our press release reporting this quarter's results was published earlier this morning. It can be found on our website and on SEDAR. I will now turn to Slide 3 to review the highlights of this quarter. The second quarter marked our fifth consecutive quarter of positive adjusted EBITDA. Our teams have worked extremely hard to implement and maintain the necessary cost discipline that has enabled adjusted EBITDA to reach a margin of 9% this quarter for $3.5 million in total. In the last 12 months, adjusted EBITDA has reached $9 million for a margin surpassing 5%. Comparing this figure to the 12 month -- to the $12 million adjusted EBITDA loss for the same LTM period a year ago shows the tremendous progress we have made in the past year in achieving and growing profitability. The strong level of profitability has enabled value creation to our shareholders through 2 key drivers: cash flow generation and leverage reduction. First, we have generated positive cash flows again this quarter with adjusted free cash flow reaching $4.3 million in the first half of fiscal 2024. This improvement of over $11 million compared to the first half of fiscal '23 cements our commitment to not only generate -- to not only generating cash flows, but growing the cash generation ability of our business. Supported by operating and business efficiencies that have driven gross margin consistently around the 40% mark and SG&A expense reduction that surpassed $9 million compared to the first half of fiscal '23. Our cash flow generation is poised to continue to grow and help provide further flexibility over capital allocation. Second, with this established and growing profitability, cash flow generation and capital flexibility, we have reduced net leverage, measured as net debt divided by LTM adjusted EBITDA by 70% from over 8 turns 9 months ago to just over 2 turns today. Both by repaying bank debt and increasing profitability, we have significantly derisked our capital structure. Again, our capital position provides flexibility to allocate capital across multiple growth avenues in the coming quarters and years. We are pleased with our financial performance, profitability and cash flow generation in the first half of this year and are also encouraged by the improvement in the growth trajectory of our core meal-kit business. This new delicious meal option -- the new delicious meal option we have given our members and the improved user experience we have delivered -- have driven the largest ever average basket size our customers have ordered in our 10 years of existence. Our year-over-year net sales progression is also improving with a 5% year-over-year decline in sales this quarter showing we are closing the gap to generating top line growth while continuing to grow profitability and cash flows by focusing on profitable sales. With our profitability consistently growing, we firmly believe that relentlessly enhancing customer value will drive top line growth that with our current cost structure will in turn generate operating leverage and continue to grow cash flows. On that note, Ross will now go over our financial performance in greater detail.
Thank you, Jon, and good morning, everyone. I will now turn to Slide 4, which provides details on our top line performance. Quarterly active customers during the second quarter were 117,000 compared to 124,000 in the same quarter of fiscal '23 and 124,000 in the previous quarter, Q1 of fiscal '24. The sequential quarterly decline stems from holiday seasonality and slower customer activity at the beginning of the calendar year. As such, net sales were $39.8 million for the quarter, a $2.2 million or 5% year-over-year decline and a $700,000 or 1.7% sequential decline compared to the first quarter. This was the result of lower customer count and orders, driven by consumer spending softness in GDP per capital reduction, offsetting customer activity with larger basket segments from ordering customers as our net sales per active customer hit a high of $340 on the back of record average order value. With the current market circumstances, we expect to return to year-over-year growth -- organic growth when the macro headwinds to date. Our focus remains on growing cash flow generation and disciplined unit economic spending. We will now turn to Slide 5 to review our profitability level. We are pleased to have now delivered 5 consecutive quarters of positive adjusted EBITDA. On the back of continuous operating improvements, gross margin reached a record 43% in the second quarter, a 230 basis points improvement compared to the same quarter last year. Highlighting our focus on profitable customers is the fact that our gross profit remained flat year-over-year at $17.1 million while net sales declined 5% in the same time period. With the improved gross margin and consistently improving SG&A efficiency, we achieved $3.5 million of adjusted EBITDA this quarter for a margin of nearly 9% and and 1.7% improvement year-over-year. This growing level of margin is the result of our team's relentless work to enhance the efficiency of our operations and to sustain a lean and mean cost structure. In recent months, we have improved our key operational and production metrics and increasingly implemented tools, whether artificial intelligence or technology tools that have streamlined our production process and led to substantial improvement in the productivity of our leader team. Combined with pricing optimization and a focus on our most profitable products and customers, the structural improvements have driven an LTM adjusted EBITDA of $9 million. We mentioned in the last quarter that we believe to clearly have a solid platform to sustain growing profitability. We can now add that everyone at Goodfood is relentlessly enhancing that platform to continue giving our customers more without requiring more resources. I will now move to Slide 6 for a review of cash flows, capital expenditures and leverage. Cash flows generated by operating activities were approximately $100,000 this quarter, a $4.5 million improvement compared to the same quarter last year. As mentioned last quarter, one of the key reasons for the $3.8 million first quarter CFO was the timing of large payments and [ invoices ]. That timing reversed this quarter as expected. Still as profitability its continues to grow and capital expenditures remain low given the relative newness of our assets. Our adjusted free cash flows remain positive as they have been for 3 of our past 4 quarters, reaching $4.3 million year-to-date and $7.4 million in the past 12 months. As Jon outlined, this free cash flow generation has enabled a reduction in debt, which combined with our growing profitability, have brought up net leverage from 8.2 turns in the third quarter last year to a manageable 2.4 turns this quarter. The deleveraging and cash flow generated highlight our disciplined approach to cost management and capital allocation and our commitment to delivering long-term shareholder value. Turning to Slide 7. You will find our performance -- summary of our performance this quarter. We are pleased with the sustained strength of our financial performance with growing profitability on display again this quarter. The majority of our financial KPI unit economics and customer feedback metrics continue to show sustained improvements. The positive free cash flow we have generated in 3 of the past 4 quarters and positive adjusted EBITDA in 5 consecutive quarters demonstrate the remarkable turnaround or teams work has helped to achieve. It also provides capital flexibility as we move from operating with limited financial flexibility to generating cash and paying down debt. As we look to continue on the positive momentum, our stable sales displayed and generate growth, we are energized by this flexibility and which opens up multiple avenues for growth. Overall, we remain disciplined and keep our focus on profitable growth, which puts us in a strong position to enhance our customer value proposition every day and to continue delivering growth -- growing cash flows and we look forward to accelerating that growth and profitability. Jon will now provide an update on our outlook.
Thank you, Ros. Moving to Slide 8. We have shared in recent quarters, our customers' feedback and the delicious meals our chefs are cooking up to incorporate our ratings and feedback. In the current challenging economic climate, our members, whether young families or busy professionals, increasingly want to prepare and eat healthy and delicious meals at home, discover new and varied ingredients and do so at a great value. We have taken that feedback in stride and broadened our assortment of healthy recipes with an expanded array of better-for-you protein options. Our cleaner, more intuitive digital product now also allows members to more easily browse and select from our wider variety of nutritious and delicious recipes. What's more, our enhanced platform now allows members to customize their recipes by selecting from a variety of farm fresh proteins with a simple click of a button on a drop-down menu. As you may have seen, we have continued adding Canadian flavor to our menu through partnerships with leading Canadian chefs. Most recently, we created unique mouthwatering recipes with Halifax-based restaurant Bicycle Thief. Chef Michael Tocchetto and our very own Jordana, combined to create meals, our loyal fans absolutely loved. In addition to answering our members call for more health-focused options, and bringing Canadian deliciousness from coast to coast. We are also adding more value options to our lineup to give our members the ability to order with good food on any budget. We will be expanding our rotation of delicious value meals at $10.99 per serving that combine our leading culinary creativity with our farm fresh ingredients. And clearly, focusing on our customers' needs is beginning to yield results. Goodfood members are ordering the biggest baskets we have ever sold containing more portions of our recipes than ever. These results are also shown in the momentum our sales have demonstrated bringing us closer to closing the gap to year-over-year growth with this quarter representing the best year-over-year net sales evolution since 2021. Overall, we are pleased to continue consistently growing our profitability and cash generation. We have enhanced and will continue to enhance our customer value proposition and with consistent SG&A and operational discipline, we are in a strong position to continue growing our free cash flow at an attractive pace in fiscal 2024 and beyond. On that note, I will turn it over to the operator for the Q&A portion of this call.
[Operator Instructions] Your first question comes from the line of Martin Landry from Stifel.
Congrats on your results. In your opening remarks, you've talked a lot about your cash generation potentially opening up new growth opportunities. I was wondering if you could give us some example or colors or any ideas or more details about what do you mean by new growth opportunities?
Good morning, Martin. So yes, our key focus right now is to continue growing the cash flow generation and paying down some of the debt that we have on our balance sheet. I think that remains the key short-term focus, and we're quite pleased with where our leverage ratio is ending up this quarter at 2x LTM EBITDA. I think we're also being presented with some opportunistic acquisition opportunities. Certainly, in the small business space, the high rates and the difficult consumer environment have created a situation where there's a lot of motivated business owners that are looking to do deals. So we're taking a look at some of those opportunities and seeing if any of them could be a good fit. The focus is on certainly being able to leverage Goodfood's assets, customer base footprint and of course, making sure that they're cash flow positive and accretive to our overall cash generation.
Okay. That's helpful. It's refreshing as well. During the quarter, one of your competitors filed for bankruptcy protection. And they've been in transition, and I think have been sold as a result. So I would assume they've incurred a lot of disruption. And I was wondering if this quarter is representative of normal operating conditions, was that competitor much less active on the marketing front? Did that allow you to maybe reduce a little bit your spending, get better return on your ad spend or on your marketing spend. Can you comment a little bit on the competitive dynamic that occurred during the quarter.
Hey Martin, yes, thanks for the question. So I think the past, call it, 6 months, 9 months haven't exactly been normal operating conditions overall. I think from a macro perspective, everyone in the D2C consumer landscape has seen softness. I don't think the specific situation you're referring to has had a big impact on our ability to acquire customers, retain customers. I think there's still a sizable gap in size and in investment. So I'm not sure it had a significant impact. I think what I can say is that both the previous company and the acquiring company are good operators and we continue to believe that there will be a good player in the market. I don't think at this stage and that levels of scale, it affects our investments and our return on investment is very, very significantly.
Okay. And my last question is more of a longer-term outlook. You've generated your EBITDA margin, I think, around 8.9%. It's the highest in a long time. Is this peak profitability in terms of margin for you guys? I know you've reduced your cost a lot. You pushed your gross margins high. Is there still more juice in the system? Or are we going to need to see revenue growth now to improve fixed cost absorption and result in margin expansion. Just a little bit of a discussion as to where do we go from here from an EBITDA margin of 8.9%. Obviously, knowing that there's huge seasonality in your business.
I think we're constantly thinking about. And for as long as we've been a public company, we've been forecasting double-digit margin potential. And I think we see that closer than ever. The operating leverage that we see now with the cost base that we have in place and further improvements driven by efficiency or AI investments or things like that. We'll just kind of make that dream even more of a reality in the not so distant future. So a lot of leverage going forward and some of the acquisitions and growth opportunities that Jon mentioned, I think, could help on that front as well. Yes, I hope that gives you a good direction of where we're heading.
One thing I'll add as well, Martin is we continue to be focused on automating and implementing technology within our processes. And so I think the EBITDA margin improvement from here is unlikely to come from a growth in the gross margin, but more from efficiencies on the G&A side, and that's primarily coming from implementing technology, automation and AI providers that can help us reduce our cost basis. It also helps improve the consistency of our execution and really the simplicity of our operations. So we're excited to continue implementing that going forward.
Our next question comes from the line of Frederic Tremblay from Desjardins.
Maybe we can start with a quick follow-up on previous answer just on the undertaken automation that you mentioned. So does that change the CapEx outlook for the company? CapEx has been pretty modest in recent quarters. Any changes there given the second automation investments or initiatives that you just mentioned?
Yes. I think the automation mentioned is more an automation in terms of processes and work within the corporate function, less on the operating side. So meaning tools that help automate some of our workflows for order processing or for certain investments in whether it's in marketing, whether it's in other tools that we have, it's less about machinery. I think it doesn't really change your CapEx outlook very much. So I think we're always going to look out for really high ROI, quick payback capital investments that fit within our budget and what we're looking to achieve operationally, but the automation reference was more on the corporate side.
And then maybe just thinking about potential ways to further increase the basket size here, maybe specifically on the add-on products. How many add-on products do you have right now? And what percentage of an average basket to add on represent roughly? And then I guess the follow-up to that is where do you think those metrics could potentially grow? Are add-on products, I guess, a key component of growing the baskets in the future? Or is it more about adding more selection on the actual meal-kit side?
Yes. Thanks for the question, Fred. I think right now, we're in about the 150 different add-on products available on the site. What we've been focusing on recently is try to provide more value through bundling and different meal occasions and different bundles that help customers see value in the add-on selection above and beyond just that grocery selection that we are trying to build out a couple of years ago. I think you continue to see us focus on kind of meal occasion, bundles and meal occasion grocery items that help add value to our customers' lives. We'll continue to invest in digital product enhancements that help customers get exposed to the add-on products and increase AOV. I think the majority of AOV, I think, will come from different meal-kit additions as well. So we'll continue to add -- we talked about value fund enhancements, different standalone products, bundling on the meal-kit side. So there's a lot more opportunity, I think, that we can grow AOV on that side of the business. And today, it's a small percentage of revenue, but it's a high NPS driver for a lot of our loyal customers that order with us on a regular basis.
Okay. Great. Last question for me. Just on the SG&A. So the decrease in SG&A in Q2 was primarily attributed to lower marketing spend as well as lower wages, utility and insurance expenses. I imagine that saving on salaries, utilities and insurance are pretty sticky. But I mean, what about marketing spend? When should we expect the company? Or should we expect the company to be eventually more aggressive on the marketing front?
I think it means it comes always with discipline on unit economics. I think we -- our marketing spend and our marketing budgets are clear. They're clearly defined. I think if you think of our unit economics, it's basically how much lifetime net sales and gross profit we make out of a customer that we acquire and acquiring that customer is sort of the first denominator in that return. So we got to make sure that we're very disciplined on the high denominator to keep our return targets on track. So I think we are able to spend more on marketing when that denominator is at a level that's logical. And so I wouldn't say that we're necessarily going to increase marketing spend significantly. But I think it will definitely be driven by the ability to generate the unit economics that we target.
All right. That's it for the questions today. Thanks for joining, everyone, and we look forward to speaking with you again at our next call.
Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.