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Welcome to the Goodfood's Fourth Quarter and Fiscal Year 2022 Financial Results Conference Call. [Operator Instructions] I would like to remind everyone that this conference call is being recorded today, Friday, December 2, 2022 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 the forward-looking statements on Slide 2 of the presentation.
I would now like to turn the meeting over to your host for today's call, Jonathan Ferrari, Goodfood's Chief Executive Officer. Please go ahead.
Thank you. [Foreign Language] Good morning, everyone, and welcome to this call for Goodfood Market Corp. to present our financial results for the fourth quarter and fiscal year 2022 ended September 3. I'm happy to be joined on the call today by Neil Cuggy, Goodfood's President and COO; and Jonathan Roiter, Chief Financial Officer.
Our press release reporting our third (sic) [fourth] quarter results was published earlier this morning. It could 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. Finally, 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 3, which reviews Goodfood's recent strategic developments. During the fourth quarter and in recent weeks, we have taken multiple key steps in our relentless march towards profitability and growing positive cash flows. Through the execution of Project Blue Ocean and other initiatives, we have made big strides towards achieving that goal. The 2 key pillars driving our progressive return to profitability are: one, a renewed focus on inspiring joy with our weekly meal kit offering, helping our customers live longer on a healthier planet; and 2, a continued improvement in our cost structure, driven by a higher gross margin, reduced selling, general and administrative expenses and asset footprint streamlining. Together, they have combined the substantial gross margin and adjusted EBITDA improvements over the year and during the quarter. Zooming in on the 2 pillars, we have first returned to our roots, focusing on our weekly meal kit offering with a twist. Thinking back to our purpose and to the problem Goodfood is looking to solve. We are looking to provide customers with joyful meal experiences and solutions to help them live longer on a healthier planet. To achieve that, our cornerstone product, our delicious chef designed meal-kits and differentiated ready-to-eat and grocery add-ons combined to provide customers with a unique experience that simplifies their meal planning with great culinary experiences. As such, we announced the decision to discontinue our on-demand delivery and refocus our efforts on the differentiated weekly subscription offering that has always been the cornerstone of our customer value proposition. Our on-demand delivery had strong consumer fit and has allowed Goodfood customers to experience an instant grocery solution. Due in large part to the high attachment rates of our meal-kits, the on-demand proposition at attractive ad-scale economics. However, on-demand's margin profile was yet to be at scale and hence, we made the difficult but financially disciplined decision to discontinue Goodfood on-demand to best position the company to return to profitable growth. This decision does have a silver lining in that on-demand introduced the Goodfood brand to thousands of Canadians, many of which are now enjoying the excitement and simplicity of our weekly meal-kit experience. The second pillar is our continued cost structure streamlining. This quarter and throughout fiscal 2022, we have rigorously and consistently cut costs to improve profitability and cash flows. During this fiscal year, we've implemented the majority of Project Blue Ocean and other initiatives that have had a material impact on our gross margin and SG&A spend. In the fourth quarter, we are pleased to see our gross margin when adjusted for a onetime charge related to discontinuing on-demand, surpassing 30%. On the SG&A front, headcount reductions, facility exits and contract renegotiations have allowed us to reduce SG&A, excluding marketing, by over $22 million annualized since the third quarter. Looking forward into fiscal 2023, having now almost completed the consolidation of all of our operations into 2 facilities located in Montreal and Calgary, we expect further improvements to our gross margin as well as reduce labor and other SG&A expenses and improve cash conversion to materialize throughout 2023. As a result, we are glad to reaffirm expected positive quarterly adjusted EBITDA in the first half of fiscal 2023, with gross margin now expected to be in the 32% to 34% range in the first quarter. On that note, I'll pass it over to Jonathan Roiter to review our financial performance in detail.
Thank you, Jonathan, and Good morning, everyone. I will now turn to Slide 4, which provides details on our top-line performance. Quarterly active customers during the fourth quarter were 157,000 compared to 250,000 in the same quarter of fiscal 2021 and 211,000 in the third quarter this year. Net sales were $50 million for the quarter, of which nearly $5 million down from Goodfood on-demand, a 25% decline compared to last quarter.
Firstly, it's important to remember that our fourth quarter is, along with the winter holidays, our seasonally weakest period in the year. In addition, as we continue to execute on Project Blue Ocean, our focus on achieving profitable growth in the near term led us to continue focusing on our most profitable customer segments and product lines. As such, during the fourth quarter, we reduced our on-demand micro fulfillment footprint before discontinuing completely in October, impacting our active customer count, which in turn impacted our net sales. This was partially offset by continued strength in net sales per active customer as basket sizes grew and further offset by higher margins per customer per quarter as you will see on the next slide. With our team's focus now solely on our weekly subscription delivery method, we're returning to top-line growth is a key component of the next steps of our strategy. And our initial focus will continue to be on our highest value of existing customers. This focus has been supported by continued decline in credits and incentives, now standing at 9% as customers require less incentivization to place an order. Operational improvements also drove lower credit despite the impact of warm weather can have on our deliveries. In recent weeks, the seasonally strong period for a weekly subscription in addition has shown good momentum in November, resulting in the highest amount of active customer addition since February 2020. Order volume is, therefore, steady and growing since it's continuing our on-demand delivery. And we expect net sales in the $46 million to $48 million range for the first quarter of fiscal 2023. Please now turn to Slide 5, which looks at our profitability levels. We are pleased with the evolution of our profitability indicators over the year, with all indicators showing marked improvement this quarter. Gross margin reached 28.3%, a 210 basis point improvement compared to the third quarter. And when adjusted for onetime inventory charges related to the discontinuation of our on-demand product line, gross margin was, in fact, 30.7%, comfortably surpassing our previously communicated 30% target, and that's why we are now comfortable forecasting a 32% to 34% gross margin in the first quarter of fiscal 2023. The improvements in gross margin, was driven in part by larger basket sizes and operational efficiencies, driving lower product and fulfillment costs. The reduction in our on-demand footprint during the quarter also led to more efficient cost of goods sold and improved credit incentives as a result of our targeted customer addition strategy. These improvements, when combined with continued reduction in SG&A as well as onetime cost saving benefits resulted in an $8 million adjusted EBITDA improvement or a 1,200 basis point adjusted EBITDA margin has been versus the previous quarter, demonstrating our commitment to profitability. It is based on this progress, though we continue to feel confident that we can expect to achieve positive adjusted EBITDA in the first half of fiscal 2023. I will now move to Slide 6 for a review of cash flows and expenditures -- capital expenditures. Cash flows used in operating activities totaled $13 million, showing a small improvement compared to the third quarter of fiscal 2022. A lower net loss, excluding charges, was offset by cash restructuring costs and lower contributions from net working capital. Capital expenditures came in at $5 million, relating mainly to payments of completed projects and technological investments. This continues our consistent reduction of capital intensity when compared to the second quarter CapEx of $15 million. We will continue to reduce our capital expenditures in the coming quarters to drive further cash flow improvement and are now expecting our full year fiscal 2023 CapEx to be within the $4 million to $8 million range and focus on technological enhancements with a payback below 12 months. As outlined on the bottom of the slide, our cash use defined here as the additional cash flows from operating activities and cash flow from investing activities has decreased from $31 million in the fourth quarter of fiscal 2021 to $18 million this quarter, an improvement of $13 million. This positive performance has been the result of growing profitability as well as lower capital investment. As we look forward through fiscal 2023, we are expecting a material reduction in our cash used in the first quarter of 2023 compared to our most recent quarter, and expect to turn to positive quarterly cash flows during fiscal 2023 as our profitability levels continue to improve. In addition, in recent weeks, we've been working with our landlords of the buildings that are no longer in use and are pleased with the progress we have made in finding mutually satisfactory solutions that are allowing us to terminate our long-term liabilities, and in some cases, raise additional capital that we are applying towards our credit facilities. Lastly, we ended the quarter with cash and cash equivalents of $37 million, which we believe continues to provide the balance sheet flexibility to execute on our cost reduction strategy and return to profitable growth and positive cash flows in the near term. On that note, I will turn it back to Jon Ferrari to provide an overview of what we've accomplished this year and additional details on our near-term outlook.
Thank you, Jonathan. Turning to Slide 7. You will find a summary of our performance this quarter and year. Overall, Goodfood has seen its fair share of challenges this year. From consumer behavior, moving away from e-commerce purchases, a behavior that we believe is temporary in nature to challenging operating and capital markets conditions on the back of macroeconomic forces not seen in over 40 years.
We have faced headwinds that have made fiscal 2022 Goodfood's most difficult year since inception. In the face of these challenges, we have not stood still. We embarked on Project Blue Ocean to improve our cost structure and footprint and have made the difficult decisions required to achieve our #1 goal, establish profitable growth. The tough conditions faced this year led our team to step up and make significant progress to consistently improve the operating and financial performance of the company quarter after quarter. Through the series of operational and strategic initiatives implemented for the most part this year, our gross margin improved from 23% in the fourth quarter of last year to over 30% on an adjusted basis in the fourth quarter of this year, while our adjusted EBITDA loss was improved from $18 million in the Q4 of fiscal 2021 to $2 million this Q4. While we are proud of this progress, we know our work is not yet done. We look forward to the upcoming quarterly calls when we can speak to positive and growing adjusted EBITDA and cash flows. I will turn to Slide 8 to review our outlook. Our near-term outlook will be dictated by 4 key drivers: First, the turbulence we have experienced this year has led us to re-center ourselves around Goodfood's core purpose. Our mission is to spark joy by making cooking and eating a fun, exciting and enjoyable experience to help Canadians live longer by achieving a balanced and healthy diet and to enable our community to enjoy a healthier planet by offering planet conscious products that are sourced, packaged and delivered sustainably. As we complete Project Blue Ocean and continue to execute towards that ambitious purpose, we will look forward to a laser focus on our meal-kit experience and align our teams towards building Canada's most loved digital first food brand. Second, the initiatives we have completed and continue to execute on are expected to generate EBITDA profitability in the near term and drive positive cash flows. As we discussed, we have already seen great improvements in gross margin, surpassing the 30% mark when adjusted for onetime charges and have improved our adjusted EBITDA by $16 million this year. We continue to face operating and market challenges where our progress in reaching profitability and positive cash flow continues. Third, our balance sheet has been our key focus this past quarter and year. Following the previously announced tolerance entered into with our lenders, we continue to advance discussions towards an updated credit facility that is adapted to our current needs. We appreciate the support our banking partners have shown as we continue to right-size our cost structure to our current business model and scale. Beyond our credit facilities, we announced in October that our plan is to operate our business out of our 2 main facilities in Montreal and Calgary. As such, we are actively looking to exit leases and renegotiate commitments that would help simplify our balance sheet and further improve cash flows. For example, we are pleased to announce that we have now exited or agreed to exit multiple leases and have received, or will receive, payments that are being applied to our term loan balance. We want to thank our landlords who have been working with us to find fair settlements. These negotiations are crucial to enable Goodfood to thrive in the coming quarters and years and I'm very pleased with the progress we've made. Finally, we expect all our teams' hard work and these initiatives to lead to continued improvement in financial performance in the upcoming first and second quarters of fiscal 2022. We are expecting net sales to be steady and growing in the range of $46 million to $48 million in the first quarter, excluding on-demand, with gross margin reaching 32% to 34% in the same period. With these results, we are confident that we can expect a return to positive quarterly adjusted EBITDA in the first half of fiscal 2023. 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 Martin Landry of Stifel GMP.
My first question is on your footprint rationalization. You ended your opening remarks saying that you've exited several leases. And this contributed to a bit of a cash inflow. So wondering how many leases do you still have to get out of? And how much cash inflow post the fiscal year-end did this rationalization generated for you guys?
Good morning, Martin. Thank you for the question. Look, we're having multiple conversations with our landlords. And as Jon said, we're very appreciative of the constructive conversations that we're having with them. Very pleased to announce in British Columbia, for example. As you know, we consolidated our weekly meal-kit manufacturing from BC into Calgary. So that allowed us the opportunity to exit that lease. And in fact, that is an example of a facility where -- because there were assets in the building. We received a cash payment and ultimately, we're applying that to our term loan.
In Montreal, we've exited multiple, so probably around 3 micro fulfillment centers. In Toronto, I would say we're on the short strokes of being able to negotiate settlements with our landlords in the Toronto area. So incredibly pleased over the last few weeks at the receptiveness of our landlords defining fair and jet settlement that works for both parties and full confidence that over the coming weeks, we'll be able to further reduce our long-term liabilities associated to our leases. Was there a second question? I apologize.
Yes. Well, I'm just wondering if you can give us an order of magnitude as to what kind of cash you can generate through that exit process?
We'll be disclosing it like in subsequent quarters as we finalize the deals. I think the key point is in the buildings where we've made significant investments, we've seen either landlords or third parties interested in giving us some financial compensation as part of the deal, which is great news and which we can use to improve our balance sheet position and pay down our term loan. Clearly, the larger leases are industrial buildings, right, in terms of like the dollar value of rental payments and long-term liability. So the industrial buildings, we have -- kind of the biggest one is, let's say, one in Western Canada and 1 or 2 in Eastern Canada.
And so those are the larger ones. And then the MFCs are larger like aggregate number of leases, but are smaller in terms of dollar value. And I would say the other piece that is important to note is it's taken us a few months to get ready to exit some of these buildings and so some of them -- the discussions with the landlords are still quite fresh. But what we're seeing is that the landlords understand that there's a win-win opportunity to come to a fair settlement with us and those discussions are progressing well and we'll keep you updated in subsequent quarters.
Okay. And just to be clear, how many facilities are you currently operating right now? Are you down to 2?
We are like manufacturing meal-kits from 2 facilities. We're prepared to exit all of the other ones. Some of them we're still using for storage purposes, but we're prepared to exit all but 2 facilities.
And maybe I could add, once we do that, our lease payments every month fall by about 80%, so a significant reduction in our outflows that will be happening on a monthly basis.
The next question comes from Frederic Tremblay of Desjardins.
I just wanted to maybe get your views on the composition of a typical basket for weaker delivery services. I know you guys have provided some thoughts on that for on-demand baskets. But with the business moving back to weekly deliveries, can you comment on the average side and I guess composition between meal plans and add-ons?
Thanks for the question. So I would say at a high level, we're averaging somewhere between 3 and 4 recipes per order in terms of meal-kits in the $80 to $85 range. And we have about $10 to $15 of add-ons in the deliveries as well. And the add-ons are a mix of either prepared meals or Goodfood branded add-ons.
We've been able to significantly reduce the number of add-ons that are offered to customers without or while managing any material impact to sales. And so what that means is we've been able to keep our highest selling best margin add-ons available to customers through our weekly deliveries. And we've been able to maintain the vast majority of the sales from those add-ons with less add-ons. And the key message ultimately is -- we are making all of the decisions that we need to make in order to simplify our business. And with the simplicity and the focus in the business, it's leading us to deliver better customer experiences, more consistent WOW experiences for customers and enables us to generate better and better margins as we're more and more focused. So that's kind of the consistent message that you'll be hearing and that will be repeating quarter after quarter.
Okay. And then, just on maybe driving revenue growth moving forward. Just wondering what the -- in your view, what the main levers of that will be? I mean, is it increasing your active customer count or is it selling more products to your higher margin, more loyal customers?
Yes. So as we mentioned, we're looking in Q1, while stripping out on-demand, we're seeing sales and order volumes that are steady and growing. By the end of Q1, our weekly order volume on our meal-kit subscription was about 14% higher than where we started the quarter. And so we're quite pleased to see that the focus on execution is also leading to growth in revenue.
In terms of where we're focusing on the growth, we're really looking at focusing in on our very best customers and growing the ARPU from those customers and so basket sizes continue to increase in size quarter-over-quarter. Part of the increase in the basket size is related to price increase. And part of it is related to helping our customers more easily discover the products that are available to them through Goodfood and add them to their baskets. And part of it is working on order frequency with customers and engaging those customers more frequently. We've also been able to see some growth in net revenue per customer through lower incentives. And so that's another area that we've been seeing progress on. So that's really where we're focused on for the next few quarters. It's the most profitable way for us to generate growth in revenue and in the top-line. And in the future, we do see some parts of the country where we can increase our customer penetration and we'll do so carefully over time.
The next question comes from Luke Hannan of Canaccord Genuity.
Maybe to follow-up on that last line of questioning. You talked about maybe increasing awareness in areas where it's maybe a bit lower than you would like. What's your view? And how do you measure whether or not brand awareness is low in those particular markets? And what, I guess, underlies your conviction that you'll be able to gain sort of traction in those markets, like you have and maybe the Toronto's and Montreal's, for example?
Good morning. Thanks for the question. What bringing us back to the start of the pandemic, we were at about 25% brand awareness across the country. And today, in most markets, we're in the 80% plus range. And so, we're pleased to see that the brand awareness has continued to grow steadily over the past few years. From our perspective, we're really looking for that -- the most profitable growth that we can generate. And so that's why looking within our existing customer base, finding effective ways to engage, reactivate customers and have them engage with new Goodfood products and larger baskets more frequently. That's really where we're focused.
And so that brand awareness will continue to increase over time. But it's not a key concern right now for us to increase that brand awareness in any specific part of the country. And in order to achieve our EBITDA and ultimately, our cash flow positive targets. We've built our cost structure not to require any material growth on the top-line. And so we're really setting up the business to be profitable at the current revenue range. And every incremental dollar of revenue from there is going to have very high cash conversion given the work we've done on our cost structure.
Okay. And then the second question, I think you touched on in the prepared remarks that even though you guys exited on-demand grocery, you were still able to get some of those customers that, maybe that was their first experience with Goodfood, and now you've converted them into meal-kit customers. Can you share what those conversion numbers were like? And then, as a follow-up to that as well for this most recent quarter and then, in Q1, what are you seeing as far as reactivations as well?
So on the first part, I would say, I don't have a number to share in terms of conversion rate from on-demand to our weekly subscription. But what I can say is most of the customers who are ordering on-demand, we're also engaging with our meal-kit product. And so because of that fact, we've been quite successful in transferring some of those customers from on-demand into our weekly subscriptions. And what was the second part of your question?
Just the reactivations that you would have seen both in the quarter you guys just reported and then also in the quarter-to-date Q1, I guess, rather, what you're seeing there as far as reactivations, I guess, I'm trying to get a sense of maybe how successful your efforts to maybe reengage customers has been. I know you guys are focusing on the more profitable ones. But I also have to imagine it's a little bit easier to reactivate than it would be to seek out new customer as well.
You're right on, yes. So from a reactivation perspective, we -- both in terms of focus from our marketing team and thinking about effective tactics to reactivate customers but also from an execution perspective of delivering more and more value to our customers, ensuring that the experience is consistent for them across time.
Those 2 factors combined have led us to see improved reactivations, customer satisfaction rates. And ultimately, we're seeing increase in retention as well and the lifetime value of our customers. And so all of this is putting us in a position to be quite pleased with what we're seeing on the top line. As I mentioned, volume is steady and growing and up quite significantly from where we started the quarter on our weekly meal-kit subscriptions. And so like I said, I think what we need to do in this macroeconomic environment is make sure that we're blocking and tackling all of the elements that are going to lead us to grow the volume and grow the top-line. But we're not making any of our EBITDA or cash flow plans, contingent on that growth. We're really making sure that, that cost structure in place doesn't require revenue growth to hit cash flow positive. And I know we talked about being EBITDA positive in the first half of 2022 or 2023, sorry, on a fiscal basis, we could very well see positive cash flow being reached in that period at some point as well.
[Operator Instructions] The next question comes from Paul Treiber of RBC.
Just a couple of questions on cash here. What's your expectations for the amount of cash that you would need to fund the remaining Project Blue Ocean initiatives or maybe another way of asking is how much cash do you expect to consume before reaching breakeven?
Paul, look, we're -- when we look at our cash use, we walked through the fourth quarter, the amount that we used. It's important to recognize that in that fourth quarter. We're effectively paying for expenses in the third quarter. And as you know, the seasonal revenue decline that takes place in the fourth quarter, there's less cash coming in. With the rebound in revenue that Jon described in the first quarter around increase in orders and the improved profitability from an adjusted EBITDA perspective, we're making real stride in reducing that cash burn.
I think the way to kind of think about it would be that for the quarter that's effectively ending tomorrow, it will be comfortably under 50% of what the cash burn of the fourth quarter was. And then when we look into Q2, as you know, we feel very strong, that we're very committed and very strongly that we will be adjusted EBITDA in the first half of fiscal '23. So when we look into Q2, we have the benefit of 1 positive EBITDA. 2, the business historically has benefited from a negative working capital. And so there's no reason to believe that we can't continue to drive cash from a working capital position. Thirdly, we gave some guidance on our CapEx. It's negligible in terms of -- if you look at our past CapEx, so CapEx has really fallen quite strongly. And then lastly, one of the questions earlier on, we talked about the lease reduction payments at the least excellent leases and ultimately, what that does from a cash use. So when you put all that together, as Jon alluded, it's -- we're working towards our plan, obviously, is a plan where we're cash flow positive -- that we'd begin to cash flow positive in 2023. And when you look at the factors I just laid out, if those line up as we would like them to line up, it could be as early as the second quarter of this year.
And second question related to cash. Just on the balance sheet here, how much cash do you typically need during the quarter to run your operations? And where is the current cash balance trending relative to that?
Yes, Paul, thanks for the follow-up. I mean, remember, the history of this business prior to a Goodfood on-demand was a negative working capital business. So as I said, there's no reason why we can't return to that model. And then, ultimately, as our cash conversion from EBITDA to cash in the bank increases for the reasons that I laid out.
But that's ultimately what's going to drive that positive cash balance that's going to start increasing quarter-over-quarter as we go through 2023. Now again, our goal is through the year to get there. But if everything lines up, we could actually see that happen in the quarter that's starting on Monday or Sunday.
[Operator Instructions] There are no further questions at this time. Please continue.
All right. Thanks, everyone, for joining the call. We're looking forward to speaking with you again in January for our next quarterly call. And in the meantime, if I don't speak to you personally, wishing you happy holidays, Happy New Year and see you in January.
Ladies and gentlemen, this does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.