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Edited Transcript of FOOD.TO earnings conference call or presentation 8-Apr-20 12:00pm GMT

Apr 10, 2020 (Thomson StreetEvents) — Edited Transcript of Goodfood Market Corp earnings conference call or presentation Wednesday, April 8, 2020 at 12:00:00pm GMT

Goodfood Market Corp. – Co-Founder, Chairman & CEO

Goodfood Market Corp. – Co-Founder, President, COO & Director

Goodfood Market Corp. – CFO

* Michael W. Glen

Thank you for standing by and welcome to the Goodfood Second Quarter 2020 Financial Results Conference Call. (Operator Instructions)

I would like to remind everyone that this conference call is being recorded today, April 8, 2020, and at 8:00 a.m. Eastern daylight 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. 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.

Jonathan Ferrari, Goodfood Market Corp. – Co-Founder, Chairman & CEO [2]

Thank you. (foreign language)

Good morning, everyone, and welcome to this call for Goodfood Market Corp., in which we’ll present the financial results for the second quarter of fiscal 2020 ended on February 29.

I am pleased to be joined on the call today by Philippe Adam, Goodfood’s Chief Financial Officer; and by Neil Cuggy, President and Chief Operating Officer.

Our press release, reporting second quarter results, was published earlier this morning. It can be found on our website at makegoodfood.ca and on SEDAR. Please be aware that we will refer to certain metrics and non-IFRS measures. Where possible, these measures are identified and reconciled to the most comparable IFRS measures in our MD&A.

Moreover, note that financial results presented today have no impact from the current COVID-19 pandemic, which will impact Goodfood in the financial results to be presented for the third quarter of fiscal 2020.

Finally, let me remind you that all figures expressed on today’s call are in Canadian dollars unless otherwise stated.

Turning to Slide 3, which outlines our key financial highlights for the second quarter. We reported strong second quarter results, continuing our robust growth and margin improvement momentum. We achieved record levels on key metrics, including subscribers, gross merchandise sales, revenue, gross margin, and EBITDA margin. We also ended the quarter in a very healthy financial position with close to $70 million in cash, cash equivalents and restricted cash, supported by our recent completed $30 million financing. There are a few items I wanted to highlight on this slide.

Again, this quarter, our growth in revenue outpaced our growth in gross merchandise sales as a result of lower credits and incentives as a percentage of GMS. Most of this decrease was driven by lower incentives, highlighting our ability to execute highly targeted marketing campaigns with strong results as demonstrated by the addition of 16,000 net new subscribers this quarter.

Moreover, the growth in revenue and gross merchandise sales was, in part, driven by an increase in average order value year-over-year, underscoring Goodfood’s ability to provide a more complete offering and to deliver a fuller grocery basket to Canadians.

Finally, our margin improvement continues to build momentum, with adjusted EBITDA margin improving 10 percentage points. This improvement is the result of strong execution at multiple levels of the operation and a further demonstration of our ability to generate operating leverage. Moreover, we have seen a solid profit margin progression in our meal-kit business, in which we are now observing positive EBITDA across Canada this quarter, reinforcing our strong profitability momentum.

I will now turn to Slide 4 to present key recent business highlights. During the second quarter, we continued to expand our operating footprint and ramp-up of our product offering to enhance member experience and expand our market reach. Let me provide you with an update on some of our key initiatives. First, in the beginning of March, we opened our new 84,000 square-foot production facility located in the Greater Vancouver area. We made our first deliveries of meal-kits and private label products during the first week of March. Volume is increasing every week, and our hiring process is progressing faster than expected. We will continue to ramp up production in the coming weeks and shift our focus on enhancing equipment and automation. We expect the facility to be servicing all our British Columbian orders by the end of our fiscal year. As needed over time, we plan on expanding the capacity of the Vancouver fulfillment center with the space already available by installing more assembly and production capacity within the 84,000 square feet. As previously indicated, being closer to our British Columbia members will translate into a higher quality experience for our subscribers, while also unlocking operational and logistics efficiencies. As of today, we are very pleased with the ramp-up process in Vancouver. And considering the current circumstances, the launch of this new facility is very timely as it’s helping us to meet the high demand in Western Canada. Combined with our existing footprint and our upcoming build-out of a Toronto facility, we firmly believe we are well positioned to enter our next phase of growth.

Second, we continue to make progress in building our new meal solutions offering. We launched several new private label grocery products in the quarter with an always-growing offering of everyday grocery essentials available to our members, all under the Goodfood brand name. We are progressing according to plan. And at quarter end, we had more than doubled our run rate sales compared to the first quarter of 2020. While in the early stages of development and still a relatively small portion of our business, we see tremendous potential for growth in the future.

Going forward, we will exponentially grow the variety of grocery products available nationwide in order to work towards fulfilling our members’ complete grocery basket. As we significantly ramp up private label grocery essentials, we will continue to optimize our product count by gathering member feedback and monitoring sales and product reviews. Overall, in addition to addressing our members’ needs and enhancing the total value of customer orders, these products will be a key driver in taking a larger share of Canadian’s food grocery basket.

Third, we completed a $30 million financing through the issuance of convertible debentures. This well-timed transaction will help us execute our growth strategy in the coming months with funds earmarked for the build-out of a GTA fulfillment center and additional capital expenditures, including increased investment in automation. We are currently in negotiation for a site to build out a production and distribution facility in Toronto, which remains on track to be operational within the next 24 months. Finding the right site requires time and creativity, but the current context, which is impacting commercial real estate demand levels, may work in our favor.

Finally, in recent months, we launched Goodcourier, an initiative to better ensure the quality of members experience by taking control of the last-mile delivery in certain key markets. We are pleased with the initial success of this initiative and the improved cost structure of our shipping logistics. As we deliver larger grocery baskets to our members, we believe that managing the delivery experience and improving logistics costs will become increasingly important. In summary, our expanded footprint and product offering, supported by our strong financial position and continued initiatives improving our margin profile have put us in a strong position to continue on our path to growth and to become the Canadian leader in online grocery.

On to Slide 5, I would like to say a few words regarding COVID-19 before turning the call over to Philippe. As COVID-19 continues to take hold across Canada and globally, we are all facing challenges in our daily lives of a magnitude never seen before. The current circumstances have accelerated the use and adoption of grocery delivery, a trend beneficial to Goodfood so far. Certain studies have even brought forward their estimates of online grocery penetration, estimating that within 5 years, we can now see 20% of groceries done online in Canada. While the pandemic may be positive for subscriber growth, increased order rates and average order values, we are also experiencing pressure on food cost and labor shortages, which are challenging our operations and supply chain.

With that said, our top priority remains the health and safety of our employees and our members. We have taken a series of important steps early on in this crisis. We’ve heightened already-strict hygiene by enforcing work-from-home and social distancing policies, purchasing and consistently using noncontact thermometers as well as procuring hand sanitizer, protective masks and installing additional handwashing stations. We’ve hired more than 500 new employees to face demand, while increasing the compensation of our production workers. We’ve increased inventory on more complex SKUs and took several measures to alleviate pressure on our operations to make sure we can continue to face the increasing demand. We’ve established a weekly update to our customers, ensuring transparent communication on how Goodfood is handling this quickly evolving crisis.

Finally, we have expanded our financial commitment to the Breakfast Club of Canada in this period where schools are closed, and we are providing meal to our frontline health care workers.

Rest assured, Goodfood is committed to helping feed Canadians across the country as best we can through our quality products and our recent initiatives. On that note, I will now turn the call over to Philippe to go through our financial performance.

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Philippe St-Cyr Adam, Goodfood Market Corp. – CFO [3]

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Thank you, Jonathan. Good morning, everyone. You can now turn to Slide 6. Slide 6 provides details on subscribers and revenue. We continue to demonstrate strong growth this quarter, driven by highly successful marketing and reactivation campaigns in the strong demand months of January and February. At the end of the second quarter, Goodfood subscriber base reached 246,000 with the addition of 16,000 net new active subscribers during the quarter. Revenue has also grown increasingly to a record $58.8 million, up $22.2 million or 61% compared to the corresponding period in 2019. This growth was driven by a combination of factors, including penetration from coast-to-coast with a higher number of members from Western Canada and Ontario, a price increase effective of November 7 and a broader offering of private label grocery products and meal solutions, leading to an increase of average order value year-over-year. This exponential growth, combined with our solid execution allowed us to proudly surpass the $200 million mark in LTM revenue.

Turning to Slide 7. Gross merchandise sales also increased significantly to $68.9 million, up 48% year-over-year. The solid growth momentum of the second quarter allowed us to reach the $300 million mark in gross merchandise sales run rate for the first time. After only 5 years in business, we believe this is quite an achievement as it demonstrates not only our ability to execute but also a fast and sticky adoption rate. When looking at the relationship between GMS and revenue, it is important to highlight that revenues grew more than GMS as we achieved a level of incentive and credits of 14.7% of gross merchandise sales, well below the 20% average for fiscal 2019. Incentives are still an effective customer acquisition strategy. And as we continue to build brand recognition, increase our loyal subscriber base and offer high-quality service, they will likely represent a lower figure as a percentage of sales. It is important to note the reversal of $1.2 million of unused credit and canceled accounts had a positive impact of 1.8% on credit and incentives as a percentage of sales and positive impact on profit margins. While the reversal of unused credits by canceled accounts has always been a part of our regular business, we have historically only applied it once a year in the second quarter.

Please now turn to Slide 8, which compares our gross profit and adjusted gross profit. Our solid execution and operational strength has translated into continued margin improvement despite second quarter margins being typically impacted by higher shipping and logistic costs due to winter weather conditions. Our gross profit increased to $17.8 million on a record gross margin, surpassing the 30% mark for the first time, standing at 30.3%, an increase of 9.4 percentage points year-over-year. Our adjusted gross profit reached $28 million, and our adjusted gross margin reached 40.6%, increasing 2.8 percentage points year-over-year, on track to reach our long-term goal of 45%.

The increase in gross margin and adjusted gross margin resulted primarily from lower production costs as a percentage of revenue and lower unit costs for food, packaging and shipping due to increased operational efficiencies, automation, increased density among the delivery zones, purchasing power with key suppliers and lower incentive and credits as a percentage of revenue. This was partially offset by investment related to new product offerings.

The next slide shows our adjusted EBITDA and net loss. Our adjusted EBITDA loss in the second quarter decreased from the previous quarter to $2.9 million or a margin of minus 5%, which represents a robust improvement of 10 percentage points year-over-year. The increase in adjusted EBITDA margin resulted primarily from higher revenues and gross margin as well as the operating leverage effect as SG&A expenses as a percentage of revenue decreased compared to last year. It was offset in part by additional expenses coming from the launch of new products.

In addition, we’ve seen a solid profit margin progression in our meal-kit business, in which we are now proud to observe positive EBITDA across Canada this quarter, reinforcing our strategy and our strong profitability momentum. Similarly, net loss improved from $6.5 million in the second quarter last year to $3.4 million this year. From this improvement, $1.3 million is due to a deferred income tax recovery related to the convertible debenture.

Turning to Slide 10 for cash flow and capital expenditures. In the second quarter, we used cash flow from operating activities of $3.9 million, primarily due to an unfavorable variance in noncash operating working capital. This is explained, in large part, by variances of deferred revenue and payables as our new product offering has currently less favorable payment terms as we are onboarding several new suppliers per quarter. As we increase volume and build relationships with these suppliers, we expect to be able to get more favorable terms over time.

In February 2020, Goodfood announced and completed a $30 million financing through the issuance of convertible debentures. We intend to use the net proceeds from the offering to fund the build-out of a new Toronto production and distribution facility, to further investments in capital projects at our existing production facilities in Montreal, Calgary, and Vancouver as well as Toronto and for general corporate purpose.

In the quarter, the capital expenditures of $2.2 million were mainly related to the build-out of the Vancouver fulfillment center. The construction related to the partial in-housing ready-to-eat production at our Hickmore facility and the purchase of new automation equipment. For the first half of the fiscal year, we invested $3.9 million in capital expenditures. We still expect to spend between $10 million and $12 million in capital expenditures in fiscal 2020. With our new financing, we ended the quarter in a very strong financial position with cash, cash equivalent and restricted cash of close to $70 million. We thus have ample flexibility to grow to current levels and withstand any potential negative impact from the current crisis if required.

Before we conclude, I would just like to make a few comments on our next quarter. As a reminder, our third quarter is usually the start of a slower period, impacted by spring breaks in March across Canada and by the start of the nicer weather in May. However, as we discussed earlier in our call, given the current COVID-19 crisis, our next quarter will probably not follow this typical seasonality pattern. While we see top line trends and negative gross margin impacts emerge from the current pandemic and the measure taken as a result, it remains too early to draw definitive conclusions on the upcoming quarter.

This concludes our financial highlights for the second quarter and our prepared remarks for today. Jonathan, Neil and I will now be pleased to answer any questions you may have.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question is from Michael Glen with Raymond James.

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Michael W. Glen, Raymond James Ltd., Research Division – Equity Research Analyst [2]

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Okay. So just wanted to dig in. You’re talking about positive EBITDA quarter to date. So can you just maybe provide a little bit of insight into what we should expect to see from you guys from a marketing spend in the coming periods. Have you been able to scale back the marketing to a large degree, just given the surge in demand that you’re seeing?

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Jonathan Ferrari, Goodfood Market Corp. – Co-Founder, Chairman & CEO [3]

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Just to clarify the EBITDA comment. We were talking about our meal-kit segment within Q2, so not, kind of, talking about Q3 to date. So within Q2, our — we’re seeing profitability within our meal-kit segment. Phil, is there anything else that you’d like to add to that?

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Philippe St-Cyr Adam, Goodfood Market Corp. – CFO [4]

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It’s based on our internal calculation. And yes, we’re already seeing profitability in Q2 for the meal-kit business and a very strong progression year-over-year from that business as well.

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Michael W. Glen, Raymond James Ltd., Research Division – Equity Research Analyst [5]

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Is it fair to…

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Jonathan Ferrari, Goodfood Market Corp. – Co-Founder, Chairman & CEO [6]

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Yes, go ahead.

I can answer the second part of your question as well in terms of Q3. So what we mentioned so far is we’re seeing an increase in demand from both existing subscribers as well as new subscribers to our platform. It’s also leading to some increased average order values as some of our members are trying products that they haven’t tried in the past and building up the size of their order value. In terms of marketing, we’re building out a plan that’s flexible to adapt based on how we’re building out capacity as well as the trends that we’re seeing. It’s certainly favorable for our unit economics so far in terms of customer acquisition costs and the average credit and incentive per sign-up. But we just want to be careful in terms of the type of forward-looking statement we gave. We’re only a few weeks into the pandemic, so we need to be flexible in terms of our strategy. I think what’s more exciting to us is the longer-term view. So thinking a little bit less week-to-week and month-to-month, but more thinking about how this crisis can have a major impact on online grocery adoption in a very permanent way. So there’s a lot of reports and research that are coming out right now. When we were talking about 10% online grocery penetration within the next 5 years, that was a $13 billion market in Canada. And I would say the reports that we’re seeing now have shifted to 20% online grocery adoption within the next 5 years. So we’re talking about a potential market size that might be twice as big as what we originally thought.

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Michael W. Glen, Raymond James Ltd., Research Division – Equity Research Analyst [7]

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Okay. And then just in terms of — can you provide some insight into how you saw the subscriber adds, sort of the cadence of that through the quarter? Did it start off just sort of normal and then you saw a rapid escalation? Has that tapered off at all? Or has it leveled off at this point in time?

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Jonathan Ferrari, Goodfood Market Corp. – Co-Founder, Chairman & CEO [8]

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Are you talking about Q2 or Q3?

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Michael W. Glen, Raymond James Ltd., Research Division – Equity Research Analyst [9]

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Q3. Like what you’ve seen quarter-to-date?

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Jonathan Ferrari, Goodfood Market Corp. – Co-Founder, Chairman & CEO [10]

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Yes. So what we’ve seen is continued demand, I would say, what we saw was the increase in demand started approximately March 13 when the Québec government closed schools in Québec, and then that was followed by additional closures and nonessential businesses closing. And so we saw the impact continue into the beginning of the month of April. We’ve been careful in managing supply and demand. So making sure that we’re staffing up and that the additional safety protocols that are — that we’re putting in place can be put in place to continue to keep everybody safe. So we want to be careful in terms of the guidance that we give for Q3. In fact, we don’t want to give any guidance in Q3, and we prefer to talk about some of the positive trends that we’re seeing. And Neil will be able to comment as well on some of the pressure that we’re seeing on some of our cost structure as well due to the crisis.

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Neil Cuggy, Goodfood Market Corp. – Co-Founder, President, COO & Director [11]

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Maybe just to add to that, too, Michael, subscriber adds in one part of revenue and profitability generation. So you have, obviously, the order rate and the average order value as well. And if you look at the last 2 years, call it, we’ve been able to increase average order value, and order rate has kind of stayed flat. So it’s — those 3 things coming together creates revenue or demand generation. So it’s not only subscriber adds that go very, very quick. It can be — you can see a large jump in revenue just from our existing order — our existing client base starting to order at a higher level or higher basket value.

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Operator [12]

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Your next question is from Ryan Li with National Bank Financial.

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Ryan Li, National Bank Financial, Inc., Research Division – Associate [13]

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Just the first one, in terms of when you guys announced the 500 new hires sometime in March, was that primarily to staff Vancouver? Or is that more of a response to, kind of, the increase in demand related to COVID-19? And are you able to share what the net increase in employees is?

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Neil Cuggy, Goodfood Market Corp. – Co-Founder, President, COO & Director [14]

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Yes. Ryan, it’s Neil. I’ll take a stab at that one. So I think we’ve been able to hire actually more than the 500 people right now across the country. Vancouver specifically has added a small number to that. I would say is, it is more or less independent of that number. Like, we had a ramp planned for Vancouver that would hit the full BC volume, as Jon mentioned on the call by, kind of, end of fiscal year. That’s still the case, even with the increased demand from COVID-19. So it’s been a small percentage of that 500 that shifted to specifically Vancouver. Obviously, our Calgary facility is also experiencing a lot of demand and hiring quite aggressively as well. But the majority, I would say, has been in our 2 Montreal facilities, both for breakfast for meal-kits.

As far as the net additions, we can’t share any numbers around that or we don’t want to share any numbers around it. I think we’re facing the same pressures as all essential businesses that are continuing to operate on the ground. So attendance rates have definitely come down, pay has gone up. Safety procedures are a lot more cumbersome and — to the operation. So I think net, we don’t have the actual number to share on the call, or we don’t feel comfortable sharing on the call. But we would anticipate continuing to hire well above that 500 to continue to meet demand and then be able to backfill anybody that has been asked to stay home or decides not to come in?

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Ryan Li, National Bank Financial, Inc., Research Division – Associate [15]

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Okay. And then in terms of — I guess, some of the challenges that were sent out in the letter that Jon sent to subscribers last week. In terms of — is that an impact on the supply chain that you expect to kind of continue throughout the quarter? Or are you making some progress of kind of mitigating some of the impacts there? Is it like just because it was too much, too early? Or is it something you can deal with throughout the quarter and, kind of, mitigate and get through that as you progress through the quarter? Or are you seeing something get more structural?

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Neil Cuggy, Goodfood Market Corp. – Co-Founder, President, COO & Director [16]

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No, I think it’s a combination for sure. Like, if we talk about supply chain, just being ingredients and food costs, there’s positive and negatives on that side as well. So as you transition to spring season, summer season around the world or around our growing — our main growing regions in California and Mexico and Canada, we can definitely start to see increased produce availability. So that’s always a positive thing on pricing and supply chain. Obviously, when everything started to go into lockdown 2 or 3 weeks ago, all the panic buying sent everyone’s supply chains into a frenzy. So there was some pressure on the cost and availability. We were still able to meet all the demand that our clients were asking of us. So I think there’s pockets. Overall, grocery volumes have kind of stabilized from our understanding now. It’s not the big spike that we saw 3 or 4 weeks ago. And definitely, I think with this stability, there’s still challenges, but they’re much more isolated rather than just pulled across the whole supply chain. And the other thing I would add is we’ve been able to diversify the supply chain quite a bit recently to help make sure that we’re not overly affected by pricing or availability, and we can also change the menu, right? So we haven’t had to put — you don’t have to put all the items that are at spiked pricing on the menu. And then the last thing I would say just on the positive side is commodity pricing coming down helps everything quite a bit. Like oil being at $20 a barrel, definitely, logistics costs can come down from that, but there’s challenges everywhere.

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Ryan Li, National Bank Financial, Inc., Research Division – Associate [17]

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Okay. That makes sense. And then lastly, in terms of your strategy of rolling out the grocery private label SKUs, has that changed because of COVID-19? Are you accelerating that, making changes on what kind of products and the number of SKUs that you’re putting on, just to be able to better address kind of a more complete basket from some of your subscribers?

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Neil Cuggy, Goodfood Market Corp. – Co-Founder, President, COO & Director [18]

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Yes, I can take a stab at that one as well. So definitely, as Jon mentioned, like we want to be in a position to take advantage of the this massive adoption or increased adoption and the market size of online grocery. So we’ve been able to actually accelerate the launch of some of the SKUs that we thought would be most impactful in their grocery — in our clients’ grocery essential basket. At the same time, with the challenges from an employee base and supply chain, we don’t want to go too quickly. So I would say we’re probably going to stabilize for a little bit here and make sure that we’re adding intelligently, the right number of SKUs and the ones that matter to most of our clients. I think short term, that’s kind of what we’re aiming to do. And longer term, I think it just helps across the board solidifying the minds of Canadians that we’re really the #1 online grocery brand, not just a meal-kit company or meal solution business.

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Operator [19]

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Your next question is from Frederic Tremblay with Desjardins.

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Frederic Tremblay, Desjardins Securities Inc., Research Division – Analyst [20]

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With the new shelter at home measures in place for a few weeks now, I was just wondering if you’re, sort of, starting to see some repeat orders from the new customers that may have ordered a box in, let’s say, week 1 or week 2 of this COVID-19 situation? Or do you feel like some of the demand was more onetime pantry loading in nature?

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Jonathan Ferrari, Goodfood Market Corp. – Co-Founder, Chairman & CEO [21]

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So we are seeing continued orders from the new subscribers that were added on. So I would say there is an impact in demand from both new subscribers and existing subscribers. But the effect from the order rate on existing subscribers currently is larger than the effect from new subscribers.

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Frederic Tremblay, Desjardins Securities Inc., Research Division – Analyst [22]

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Okay. And I know in the past, you’ve stated that your meal-kit business is about 90% of the overall business. Just curious to me, to get a bit of color on what the average basket looks like in recent weeks with COVID-19 as it shifted in a significant way more towards the private label items. If you had to provide a bit of an update on the split by category there, what could you say?

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Jonathan Ferrari, Goodfood Market Corp. – Co-Founder, Chairman & CEO [23]

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Yes. So we — in recent weeks, what I would say is the meal-kit business continues to be the largest revenue driver. So the biggest part of the orders and the biggest part of the business by far is still meal-kits. I would say where we’ve seen the largest percentage increase in growth is indeed in the private label groceries. So we’re seeing a larger percentage of orders include at least 1 grocery essential item, and we’re seeing the average number of grocery essentials that are included in each box increase as well, so that’s been a real bright spot for us.

It’s created an opportunity for customers to try out our private label essentials with no specific marketing initiative or credits attached to it. And so that’s been really positive. I think in this current environment, the focus is around: One, making sure that our employees and customers, they save; two, managing the supply chain and the labor shortages that Neil was talking about; and then three, making sure that we’re creating habits within our customer base that are going to last longer than just a few weeks or a couple of months. We really want to make sure that we use this opportunity to create lasting habits within our customer base.

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Philippe St-Cyr Adam, Goodfood Market Corp. – CFO [24]

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And if I can add to that, Jon. Fred, in the past, we said that the new businesses represents approximately 10% of our sales, even though we’re seeing very good growth in private label and ready-to-eat solution right now. Relatively speaking, like Jon mentioned, meal-kit is still the biggest driver, and the 90% to 10% split is still relatively accurate.

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Operator [25]

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(Operator Instructions) Your next question is from Jenny Wang with Eight Capital.

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Jenny Wang, Eight Capital, Research Division – Analyst [26]

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Just first one on the supply chain disruptions that you’re experiencing. Is it mostly labor shortages? You mentioned food costs, sourcing ingredients, kind of, I guess, could you elaborate a little bit on what the main drivers of supply chain disruptions are? And also, are you experiencing any of that in sourcing your grocery items as well?

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Neil Cuggy, Goodfood Market Corp. – Co-Founder, President, COO & Director [27]

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Yes, thanks for the question. So the main — I would say, the main challenge as we were kind of alluding to on the previous question, started off as supply chain and then has shifted towards labor as the crisis and lockdowns become prolonged. As you guys are well aware, people stay home, whether they’re healthy or sick or scared. So definitely trying to make sure that we have the right labor that’s coming in, that’s well trained and staying safe within the facility. Supply chain would be the most — the second most challenging part, just to put into context, like we have supply chain challenges, pre-COVID crisis as well on a week-to-week basis to be able, to source the right ingredients with the right quality and the right price for our clients. So I think pricing has definitely come up, availability has come up. Suppliers are facing the same types of labor shortages and challenges that we have. Some of our suppliers have had a 60%, 70% of their labor force not show up, which obviously impact the amount of output that they can do. So I think if I were to rank it, it would definitely be employees being the most challenging and then supply chain. And like I said, there are bright spots as well. Obviously, logistics has been a — there’s nobody on the road, so you can get more delivery done. Fuel cost comes down, density goes up. The average order value increase helps us amortize some of the fixed costs of getting a basket out to clients as well. So there’s a lot of positives and a lot of negatives at the same time.

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Jenny Wang, Eight Capital, Research Division – Analyst [28]

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Okay. Got it. And in terms of gross margins, you’ve mentioned in the press release, expectation that fixed cost as a percentage of revenue will continue to decrease with the company has continued growth, which should benefit gross margins. Is this what we’re expecting to see in Q3 accounting for the current COVID crisis? Or is this more of a longer-term expectation?

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Philippe St-Cyr Adam, Goodfood Market Corp. – CFO [29]

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I can take this one. It’s longer term. So if you look at our Q2 in 2020, we’re able to show operating leverage from Q2 2019. So the G&A were smaller as a percentage of sales in this quarter, which is always great to see and to be able to demonstrate. And for us, it’s a longer view in a sense that we are aiming at 45% gross margin target and EBITDA at 15%, so this — we can see the operating leverage has a big effect on this. We might be able to demonstrate progress every quarter. But definitely, the operating leverage is a longer-term view for us.

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Jenny Wang, Eight Capital, Research Division – Analyst [30]

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Okay. And 1 question on deposit EBITDA across Canada for your meal-kit business. Is this including overall corporate expenses, or is this more of a, kind of, meal-kit segment positive EBITDA?

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Philippe St-Cyr Adam, Goodfood Market Corp. – CFO [31]

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So we look at our business internally, and we were definitely at different stages. Like we started the meal kit business 5 years ago. And when we look at online grocery and private label, it’s fairly new. So for us, it’s not at the same stage. Therefore, we have 2 different profitability profiles for now, even though we’re looking at having the same margin over time. So for us, for us, the meal-kit profitability is how we look at our business, and it’s definitely proved that when you have a more stable, more established business, you are able to show profit. So it demonstrates the profitability of our business model. And it also speaks of the fact that the other business are not at the same stage and dragging our gross margin and EBITDA margin.

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Jenny Wang, Eight Capital, Research Division – Analyst [32]

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Got it. And just one last one for me. In terms of just the new hires, they are already training. Are they — are you finding that, that’s alleviating a lot of the kind of the supply chain or, I guess, the labor strain? Or are you still kind of expecting to experience more strain on labor going forward?

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Neil Cuggy, Goodfood Market Corp. – Co-Founder, President, COO & Director [33]

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Very tough to answer the question. Obviously, it depends a lot on public perception, fear, have we flattened the curve from a COVID perspective? It’s a lot of external factors that will contribute to that, and we’re going to focus on what we can control in the — in our facilities and with our clients. So what I can say is we’re going to continue to hire aggressively. And the only way that we start to build some significant capacity across the country, again, is through hiring and training. So it’s just keeping our foot down, hiring people, training them as quickly as possible, separating tasks to be as kind of single focused — singularly focused as possible in terms of what the associates are doing and looking for extra space to continue to grow.

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Operator [34]

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Your next question is from Raveel Afzaal with Canaccord.

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Raveel Afzaal, Canaccord Genuity Corp., Research Division – Analyst [35]

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My first question is with regard to customers. Do you have to waitlist any customers at this point? Or are you accepting all new customers that want to utilize Goodfood services?

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Jonathan Ferrari, Goodfood Market Corp. – Co-Founder, Chairman & CEO [36]

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We are currently restricting certain delivery days for new customers. So that has limited some of the demand on our peak days in order to prioritize our existing customers. And we’ve also, I would say, shifted some of our marketing focus into Western Canada, where we have more excess capacity due to the launch of the new facility. So we’ve been able to make those adjustments without starting a waitlist so far.

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Raveel Afzaal, Canaccord Genuity Corp., Research Division – Analyst [37]

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Got it. And then based on your sensitivity analysis, when you factor in your manufacturing capacity, supply chain, what do you think your — you can get your revenues to or your total customer base to, at this point in time, what you can handle?

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Jonathan Ferrari, Goodfood Market Corp. – Co-Founder, Chairman & CEO [38]

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I think given the situation is evolving every single day, it’s a — it’s an answer that we would not feel comfortable giving a specific number on this call. The reasons for that is based on the supply challenges that we see as well as labor issues that we talked about. I think it’s important for us to continue building the capacity to service the needs of Canadians across the country. And the largest challenge in this situation is really creating predictability in the business on a weekly cadence for our operations and production staff. So we’re continuing to work on that internally, but we’re still early on in this crisis.

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Raveel Afzaal, Canaccord Genuity Corp., Research Division – Analyst [39]

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Completely understand. And then just moving on to internalizing the last-mile delivery partner. Can you speak about how we should be thinking about your delivery cost now versus in the past? How widespread is this internalization? Any color on that or quantification will be helpful.

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Neil Cuggy, Goodfood Market Corp. – Co-Founder, President, COO & Director [40]

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Yes, Raveel. So we have launched pilots of our Goodcourier platform in the past and saw very positive results. So far, we’ve tended to focus exclusively on urban centers, where we have a facility. We’ve, I think, pre — just pre crisis, we also launched a little bit in the GTA So it would be available in most of our 4 major markets right now. We’ve seen cost reductions and experienced benefits from it. These are not apps we own or drivers that we employ, but through partnerships, we’ve been able to develop this business model. I think from a strategic standpoint, this has always been what we’ve trended towards, starting off with larger carriers. And as we build density in certain regions, we want to go towards lower cost or different types of pay models, where we can take advantage of having 1 driver do 100 or 150 Goodfood deliveries on a single route.

I think the other thing that it allows us to do is in an online grocery world, everyone talks about the challenge of last-mile delivery. And obviously, we have solved the last-mile delivery profitability question that all the online grocers, kind of, scratch our head about. So we have the infrastructure in place to be able to react to increase the basket size, refrigerated transportation, all kinds of different flexibility now that we can build into the system that allows our members to have a better experience than anything else that’s offered in the market.

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Raveel Afzaal, Canaccord Genuity Corp., Research Division – Analyst [41]

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Very helpful. Can you say what your average credit incentives are now versus Q2 of fiscal ’20 complete? I have 2 questions but I’m not sure if you’re comfortable answering. One is that. And then secondly, if you can share what your net customer base is at the end of last month?

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Jonathan Ferrari, Goodfood Market Corp. – Co-Founder, Chairman & CEO [42]

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At this stage, I think we should refrain from making those comments. We’ve never given any kind of forward-looking guidance in the past. So I think it would be pretty much the worst time in history for us to start giving forward-looking guidance. So we want to continue being transparent as we learn new things about the business and have new factors that we incorporate within our models. So we’ll continue to stay transparent with investors and the research community as well as making sure that our customers understand the steps we’re taking. So far, I would say we’ve had a significant amount of customers just pouring in and writing into us. Even if they’re their delivery might have been delayed 1 day, the quality of the products that they received were excellent. There’s a lot of deliveries that are, of course, happening on time in full. And we’ve — the outpour that we’ve received from our customer base in terms of the essential service that we’re offering to them is exceptional. We share it with our team every single day. And what I would add as well is, this is — it’s an opportunity for us to build a lasting bond with our customer base that goes way years into future, we hope that the emotional relationship that we develop with our customers and the way that we communicated with them throughout this crisis and the way that we played an important role in their household, we hope that, that bond is one that’s going to last for years to come.

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Operator [43]

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And there are no further questions at this time.

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Jonathan Ferrari, Goodfood Market Corp. – Co-Founder, Chairman & CEO [44]

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Great. If there’s no further questions, I just want to thank everyone for taking the time to be on the call. We’re living, really incredible times. We’re privileged to be continuing to serve our customer base as an essential service, and we look forward to updating you on our Q3 results this summer.

Thanks very much. Have a great day.

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Operator [45]

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Thank you for joining today’s conference call. You may now disconnect.

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