Q4 2021 Goodfood Market Corp Earnings Call
[music].
Welcome to the good food fourth quarter and fiscal year 2021 financial results conference call.
At this time all participants are in a listen only mode.
Following the presentation, we will conduct a question and answer session as a courtesy to others, we ask that each participants limit themselves to one question.
Instructions will be provided at that time for you to queue up for questions.
Please note that questions will be taking from financial analyst.
Lists only instead.
If anyone has any difficulties hearing the conference. Please press star followed by zero for operator assistance at any time.
I would like to remind everyone that this conference call is being recorded today November 17th 2021 at eight a M eastern time.
Furthermore, I would like to remind you that today's presentation may contain forward looking statements about good foods current and future plans.
Technicians and intentions results levels of activity performance.
Our achievements or other future events or developments.
As such please take a moment to read the disclaimer on forward looking statements on slide two of the presentation.
I would like to turn to meeting over to your host for today's call Jonathan Fair Ari Good food Chief Executive Officer. Please go ahead Sir.
Thank you.
Those were not supposed to be that bad.
Got it off there must be a good food what goes off you know there's a recession all she gets the M. P mess it exerts its domain manteer closer to healthier.
Good morning, everyone and welcome to this call for good food market Corp to present, our financial results for the fourth quarter and fiscal year 2021.
And did this August 31.
I am pleased to be joined on the call today by Neil Keggy, Good Foods', President and Chief operating Officer.
And Jonathan Reiter, Chief Financial Officer.
Our press release reporting our fiscal year and fourth quarter results was published earlier. This morning. It can be found on our website at make good.
Good food that CA and on SEDAR.
Please be aware that we will refer to certain metrics and non <unk> measures.
Where possible. These measures are identified and reconciled to the most comparable <unk> measure in our MD&A.
Finally, let me remind you that all figures expressed on today's call are in Canadian dollars.
Unless otherwise stated.
Now turning to slide three which outlines our key highlights for the year and fourth quarter.
Our results this year demonstrate our continued strength of good foods penetration and value proposition.
The clear convenience and differentiation of our ready to Cook products combined with our growth.
Reselection and fast delivery capabilities drove strong basket sizes, and order rates translating into record revenues of $379 million for the year.
Our gross profit and gross margin also hit new records of $116 million and 36%.
Rowing growth as communicated during our last earnings call our fourth quarter.
Results have been impacted by the return of summer seasonality further amplified by the reopening of economies across the country.
The volume decline, particularly in the months of July and August impacted our topline.
With net sales, reaching $79 million and gross margin standing at 23%.
We view the 5% year over year decline in net sales as a sign of resilience in the business as fourth quarter net sales remained well ahead of pre pandemic levels, despite unprecedented pent up demand for outside.
Palm activities.
Our gross margin was impacted by the volume decline, creating operating deleverage in our cost of goods sold seasonality, leading to higher packaging costs as well as inflation, particularly in labor as a result of current labor shortage conditions.
Lastly.
Astley, our investments in Ondemand grocery and meal solution fulfillment also group, creating material startup costs in our cost of goods sold.
After a strong fiscal 2021 and a seasonally weak fourth quarter. We are now looking forward to fiscal 'twenty, two and the growth potential of our on.
Demand grocery and meal solution strategy. The key driver of our next phase of growth.
We have now surpassed the 1000 product mark providing a compelling selection of grocery and meal solutions to our customers available in under one hour and most Toronto neighborhoods and within the next few weeks in Montreal.
<unk>.
Offering an alternative to traditional grocery that takes less time to arrive at our customers' doors than it takes to go shop in a store is truly unique in terms of value proposition and it will drive online grocery penetration and position good food to be the Canadian leader in the field.
In addition, we are already seeing early signs that on demand delivery will fuel demand for our meal kits and ready to eat products as our merchandising for one hour or less delivery includes all three product lines we offer.
On that note I'll turn it over to Jonathan Reuter to review our financial performance.
Scale.
Good morning, everyone. Thank you Jonathan I will now turn to slide four which provides details of our topline performance.
The acceleration of delivered to home e-commerce grocery and meal solution adoption combined with good foods enhancement and delivery speed and product offering allowed us to achieve.
Indeed record results this year.
Net sales reached $379 million for the year, a 33% growth compared to fiscal 2020.
For the fourth quarter net sales to $79 million.
5% decline compared to the same period last year.
The result was driven by expected seasonality.
Cheap amplified by the reopening of economies across the country.
Which in turn led to lower active customer count and order rate.
These trends were particularly strong in July and August and we have sensors or a rebound in volume from the July and August chose.
Though the return to normality for comedians is likely to continue.
Allergy happiness and demand conditions in the coming months.
As our transition into an on demand online grocer and meal solution provider continues we expect the future growth of our three product lines meal kits ready to eat meals in grocery to be driven in large part by our on demand platform.
<unk> chop, please turn to slide five which looks at our profitability levels are.
Our record gross profit this year increased to $116 million <unk>.
Translating into a gross margin of 36%.
Gross profit grew 34% year over year and gross margin grew 30 basis points.
The increase in gross profit and gross margin for the year resulted mainly from fixed cost leverage in the first three quarters of the year.
Provided by higher volume and average order values.
And lower levels of credit incentives as a percentage of revenues.
For the fourth quarter, our gross profit and gross margins fell to $80 million.
23% respectively.
This level of gross margin was a result of four non structural key drivers.
Labor costs and shipping costs were impacted by operating deleverage, resulting from lower volume as fixed labor costs remained while sales were lower and lower density impacted shipping efficiencies.
And particularly in the month of July and August.
Second inflation, neither labor market driven by an unprecedented tight labor market led to a labor shortage, requiring wage increases overtime and incentive bonuses. All at the same time as volume was impacted by seasonality.
Third our.
Our packaging costs were impacted by seasonality as it as they are every year with more ice pack and liners used to protect against the warm weather, which lasted well into October this year as.
As well as the increase in the sales of grocery products requiring additional packaging.
Lastly, startup costs to support our <unk> initiative.
Had a material impact as new facilities were open and inventory was built particularly in grocery.
As we look forward past Q1 and over the next few quarters, we see progressive path to return to gross margin in line with our long term objectives as we expect revenue growth to return in the second quarter and cooler weather to help drive.
Some of these costs out while labor productivity and access to more labor will help ease the impact of inflation.
Moreover, Moreover, we have taken several initiatives to improve gross margin such as simplifying our manufacturing processes launching good courier in more markets and reducing packaging used.
Okay.
As we continue transitioning to an on demand grocery a meal solution.
Delivered within an hour.
Although startup cost will continue to have an impact on gross margin as we build out our network. We expect their importance to decline as more of our micro fulfillment centers come online and our revenue base grows.
Turning to adjusted EBITDA.
Our investment in people and technology to build our on demand delivery platform continue this year, increasing our general and admin expenses and leading to an adjusted EBITDA loss of 4% or $15 million for fiscal 2021.
Over the course of the year, we have expanded our team and technology capabilities to build a structure.
<unk> to enable the orchestration of orders delivered in about 30 minutes.
These investments are required to support a significantly larger revenue base that we expect to materialize as we rollout.
Our one hour or less meal solutions, and grocery offering to more and more Canadian.
In the fourth quarter, they translate to an adjusted EBITDA loss of 18 million.
Or 22, 4%.
Of note, an accounting methodology change regarding cloud computing computing capitalization driven.
Driven by the International financial reporting interpretations Committee agenda decision in the summer of 2021 had a negative impact of $1 $6 million on adjusted EBITDA for <unk>.
2021.
The combination of these factors led to a net loss of $32 million this year and $22 million this quarter.
Overall, although we were disappointed with our fourth quarter results. We are confident that in the near term gross margin improvements combined with reduction in SG&A as a percentage of sales in addition to growth.
And the revenue base driven in part by unlocking a $25 billion plus target addressable market through our on demand platform will improve profitability in the coming quarters and enable us to execute on our long term strategy of bringing on demand groceries and meal solutions to the majority of Canadians, while generating industry, leading profitability at scale.
Now turning to slide six for a review of cash flows and capital expenditures.
Cash flows used in operating activities totaled $16 million this fiscal year compared to a generation of cash flows from operating activities of $7 million last year.
This was the result of higher net loss, an offset for the most part by acreage depreciation and amortization.
Scale, we invested $19 million in capital expenditure for the year or 5% of our net sales the.
The capital invested was mainly related to equipment deposits leasehold improvements to new and existing facilities and the build out of parts of our technological technology platform.
These key investments have helped support with the launch of sub one hour delivery.
And Sue Montreal, as well as the launch of our on demand delivery Ottawa in the coming months.
In the coming year, we will continue to invest capital in building the on demand grocery network and infrastructure that will enable a superior customer experience and solidify <unk> position as Canada's leading vertically integrated on demand.
Toronto and meal solution provider.
Lastly, we ended the year with cash and cash equivalents of $126 million, which continues to provide significant balance sheet flexibility to execute on our growth strategy.
Finally, we would like to turn to slide seven to provide a conclusion on our financial performance.
We are pleased with our record net sales and gross profit achieved this year and doing so despite the headwinds faced in the fourth quarter.
Our profitability was impacted by rapid volume deleverage and the investments made this year to support our plan for future growth investments, we will continue to make as our cash balance provides the financial flexibility needed.
Without.
These investments are profitability would've been in the high single digit percentage adjusted EBITDA. This year as our addition to technology to management and to all the supporting admin functions that have been made to capture the online grocery meal solution market.
As we see these investments generate sizable compound annual growth in net sales for years.
We expect these costs over time to be absorbed by our new on demand growth platform.
And now on that note I will turn it back to John Ferrari to review our on demand strategy.
Thank you John.
We're also pleased with the key developments that highlight the progress we made in our evolution.
So the building candidates first integrated on demand online grocery network.
As we set our sights on fiscal 'twenty, two and beyond.
The speed footprint selection and technology developments achieved in this year have us well positioned to benefit from the value proposition. We are building to further entice Canadian.
<unk> and choosing us as their online grocer.
The Canadian grocery market continues to gain scale and it's Digitization has strong momentum but remains in its very early stages and very little of the estimated $142 billion market has shifted online.
The very large.
<unk> is there for the taking and we are positioning ourselves through our on demand offering to capture a significant portion of it.
E Commerce for grocery is quickly evolving everywhere around the globe.
The advent of third wave E Commerce called quick Commerce has changed.
Tim summers interact with online grocery and is the future of grocery logistics infrastructure.
We believe and have observed.
That providing an experience to customers that rivals in speed and selection physically going to a grocery store is key in driving the next leg of adoption post.
How cut epic.
In fact, 85% of Canadians see value and attribute importance to having online grocery delivery within two hours, while 61% of them are willing to switch to a new grocery retailer with two hours or less on demand delivery.
<unk> patent mortar grocery trips currently take over 60 minutes to complete while online grocery options in Canada provide limited same day options and can take multiple days to be delivered.
Our on demand delivery network aims to respond directly to the needs of Canadian households by providing the right merchandising to answer most.
Breakout all food grocery needs within one hour or less.
Our selection has surpassed 1000 products and we will continue to grow.
Our merchandising includes staples and unique grocery products combined with meal solutions that can provide a healthy delicious option to any meal location.
If negative prices.
Overall, we are pioneering quick commerce online grocery in Canada, as the first and only vertically integrated player with our own grocery products and value added meal solutions sent to customers through our purpose built fulfillment network and are positioned to be the.
The market leader as we rollout our network from coast to coast.
In its early stages, our on demand offering in Toronto has provided very exciting and promising results without any marketing.
First the net promoter score we have achieved is best in class.
And currently at 88.
Demonstrating customers' appreciation for a fast delivery of a wide variety of meal kits grocery products and ready to eat items.
Second.
The average order values. We have achieved are also at the high end of what fast grocery shop tends to be.
I think between 65 and $70 so far.
Third leveraging our strong brand superior merchandising and existing shipping routes.
Has allowed us to build our on demand offering on the back of a uniquely strong unit economics.
Basket sizes and on demand are significant while sourcing benefits from our existing subscription platform.
Kale to provide better procurement costs.
Finally, and most importantly.
Leveraging the delivery routes of our subscription orders known days in advance are.
Our shipping costs have been ahead of our expectations standing below $10 per order and we will continue to improve as on demand volume scale.
During our launch over the past two weeks, our average order to delivery speed has been 35.5 minutes, providing a truly amazing.
Amazing experience to customers.
Based on the current demand levels and before the benefits of our dedicated marketing efforts, we see a clear path for a single highly replicable micro fulfillment center.
To reach $20 million of annual revenue run rate.
Our unique and superior merchandising combined with a technology infrastructure brand and order volume. We have already built helped provide very attractive unit economics to go along with a truly disruptive value proposition.
Furthermore, our micro fulfillment centers.
Strategically located within minutes of our customers' homes.
Require less than $1 million of startup cost.
In order to be launched and provide a payback period of less than six months, given our ability to leverage our existing brand procurement and shipping.
We currently have a line of sight to five additional.
<unk> micro fulfillment centers, while our teams have the capacity to roll out as many as 20 per year.
Overall over the past two years, we have delayed the profitability.
Our existing ready to Cook subscription business.
Which it could have provided in order to invest.
Key pillars speed selection and technology.
To build the value proposition to capture the online grocery opportunity.
Starting this year, we are launching this value proposition to customers and are excited by their response.
As we continue our evolution to an on demand grocery.
<unk> and meal solutions provider or.
Our strong execution has allowed us to make significant progress on the three key pillars required to build Canada's leading on demand online grocery network and ultimately drive our next phase of growth.
On that note I will turn it over to the operator for the Q&A portion of this call.
Thank you at this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad.
Pause for just a moment to compile the Q&A roster.
Your first question comes from Martin Landry from Stifel. GMP. Please go ahead.
Hi, good morning.
In your opening remarks, you mentioned that.
Past Q1, you expect revenue growth to return in Q2, I am not sure if I understood correctly, but does that mean that you expect your revenues to decline on a year over year basis in Q.
Hey, good morning Martha.
I think the way to look at it is that.
The next big growth driver of the business, which is the on demand.
Quick ecommerce delivery of our grocery meal kits really launched late Q1.
And as a result.
When we.
Look sequentially, while there is definitely a significant growth that we saw from the lows of July and August.
The seasonal lows ultimately revenue.
The next revenue growth driver will really be seen in the second quarter.
Okay.
So so if I hear you you don't expect much revenue growth in Q1 so.
Whats going on is it is it.
I'll start still a softness in our pool because of <unk>.
Sweater or is it is it your subscriber counts that are not moving up.
Yeah.
Hey, that's a M. So I would say.
As we were in Q4.
The combination of the return of the summer seasonality.
In addition to the you know the reopening across the country that was really leading to volatility in both.
Rates and demand from new subscribers.
From the.
July and August lows, we've seen.
Significant growth from there.
And.
It's hard to predict exactly what's going to happen within the future quarters.
But as John mentioned, we're expecting that towards.
The end of.
Q1, we will start seeing some more.
Contribution from our on demand.
Strategy and that includes sales of meal kits grocery products as well as our.
<unk> prepared meals as we look at Q1.
<unk> of this year versus Q1 of last year, it's important to remember that in Q1 of last year, we were still in beta.
Basically a full lockdown.
The comparable.
Comparable number from last year.
Still a pandemic number versus a mostly open a number this year and we also experienced.
Some warmer weather in September and October of.
This year in Q1.
So overall the.
What we're seeing is an improvement certainly in India.
Unit economics of the meal kit subscription business, we've seen some improvements in the customer acquisition costs in Q1 as well.
L a and some improvements in the order rate as well and I think we just need to be mindful of that as we work through this reopening it'll be hard to forecast exactly what the demand is going to look like.
But looking forward past Q1 and into into the rest of the rest of fiscal 'twenty two.
We.
It's all demand strategy, which is essentially opening us up to a completely new.
New Tam right, the really being able to access the full on demand grocery market across Canada. This is a growth vector that's new to us it's a.
Believe that grocery market is evolving quickly everywhere around the world it's expected to be.
Over $25 billion just in the U S. This year.
And in Canada.
On demand grocery portion of that market is essentially inexistent and so looking at some of the global trends looking at where growth is happening.
On demand food delivery and grocery delivery as we exit this pandemic, we think we're incredibly well positioned.
With our on demand offering to be able to continue growing our sales of meal kits grocery products and prepared foods.
Okay.
And just my last question you know.
And seeing a lot of inflation in.
And labor and freight and food I know you've increased prices last spring.
But you know just wondering what's your what's your ability to increase prices given the competitive dynamic that you see and what's your view on fuel.
You're seeing increases.
Yeah, Hey, Mark Thanks Neal.
Yes, as you mentioned, we did do a small price increase and then some price adjustment its actually up and down in different markets across the country and.
Q3, and Q4 as well.
So we're constantly adjusting pricing in.
With with different markets to try to maximize value to customers and end margins.
We think we're able to pass along.
The inflation cost or at least a large part of the inflation cost to consumers in various ways pricing is one of the levers we have.
And we're continuing to kind of adjust.
Thanks, Andrew.
Lines Accordingly.
And.
As you are aware, we are investing heavily in technology and process to try to take out as much cost.
We can as well so.
A combination of factors that we think put us in good shape for the rest of the fiscal 'twenty two.
Yeah.
My name is okay.
<unk>.
Your next question comes from Graeme Kreindler from eight capital. Please go ahead.
Hi, good morning, and thank you for taking my questions here.
Discuss the customer resilience in the prepared remarks, and looking at the movement in active customer.
Customers, which is defined as someone who has but placed an order in the last three months.
That was down 10% from the prior year. So I'm curious if you could please discuss what the path for growth in the active customer count looks like moving forward is it going to be new customers, who have never engage with the platform or is there a lot of ground to gain on re engaging customers.
That had been on the platform prior with the enhanced service level, how does the company look at that.
That mix moving forward. Thank you.
Thanks very much for the question.
So and in terms of.
The growth in our active shopper base.
Looking at pre pandemic numbers, we've always seen this.
This reduction in order rates throughout the summer months, which translates into a reduction in active shoppers during Q4.
Going forward the ways in which we're growing the active customer.
Customer base. The first one is certainly re engaging existing customers to ensure.
Placing an order and so we have a customer.
Relationship management tools that we're using in strategies in order to Reengage.
<unk> customers during the fall and into winter.
The second piece is certainly continuing to.
To grow.
Grow the customer base and increase the penetration.
<unk> of our new two good food customers.
And what are the key levers there is opening up our digital store for customers, who are looking to engage with good food in a way that provides significantly more flexibility so customers will be able to order a meal.
All kids there'll be able to order a grocery products ready to eat products.
Or without subscriptions.
And as we mentioned delivered quickly to their homes. What we believe that will lead to is an increase in penetration and market share across all of those categories and that's what we're really focused.
On throughout fiscal 'twenty two.
Okay. Thank you then just as a quick follow up to that you mentioned that on demand had been launched with virtually no marketing efforts was that just in the period that was seen in Q1 or has that changed or are there plans to ramp up those efforts in the near term.
Are you referring to the marketing effort is ramping up.
Yes in relation to the on demand service.
Yeah, absolutely. So the first few weeks of our.
One hour or less on demand launch in Toronto were launched without marketing just in order to ramp up our operational.
All capabilities.
And in logistics.
Drivers in.
Our ability to do those deliveries quickly.
As we turn to the coming weeks, we are launching our marketing initiatives, we're starting and focusing on the greater Toronto area first that's where.
First on demand micro fulfillment center is.
So we expect that that will have.
A few impacts one is bringing on a new on demand customers to our platform.
And the second piece is ensuring that our existing and previously canceled customers on the meal kit.
We're all are aware of this new offering.
And really this.
Ability to offer.
Sub one hour delivery of a wide assortment of good food products provides the flexibility that's required for new types of customers to engage with good food right. So it's a much larger.
Scripps shifts of customer personas that are interested in this offering as we've seen through our current data and through our customer experiences around the world.
It's important to understand that on demand grocery delivery in less than one hour.
Is one.
Brett fastest growing e-commerce categories everywhere around the world. So we hear about.
Softness in.
Even Amazon's e-commerce numbers in Q4.
The reality is one of the one of the only and extremely quickly growing on demand.
Or sorry e-commerce offerings around the World is quick commerce grocery delivery and we're positioning ourselves to be a leader in that space. We're also uniquely positioned because we have our existing merchandising. So if you look at our basket sizes that we talked about somewhere between 65 and $70 per.
Order.
The leaders in our on demand grocery delivery.
The world has significantly smaller basket sizes, and so we're uniquely positioned in the sense that our existing merchandising allows us to have higher margins and much larger basket sizes were also uniquely positioned with the.
Team and the technology that we've been building for the past two years as well as our.
Our existing brand and the awareness that we have around it.
And so that's allowing US also to combine our.
Our meal kit subscription delivery orders with our on demand orders that are coming in.
And that allows us to have.
Significantly lower delivery costs than any of the other on demand players globally. So it's it's a it's a very large and growing untapped addressable market in Canada, we're really uniquely positioned to be able to capture an outsized share of that market and the economic.
Half of the business are extremely attractive so we're able to launch our micro fulfillment centers for less than $1 million.
For micro fulfillment center strategically located close to our customers' homes.
And we're able to get a payback as we mentioned in less than 12 months.
Those micro fulfillment centers so the echo.
I'll make were also excellent. So we're really excited about this new phase of growth post pandemic and this should provide a years of a compound annual growth in active shoppers and revenue for years to come and ultimately the.
The cost structure that we have today is.
We'll be amortize both from a gross margin perspective, and from an SG&A perspective, it'll be amortized over this growing revenue base that is led by our on demand our strategy.
Your next question comes from Michael Glen from Raymond James. Please go ahead.
Hey, good morning, So just coming back on the micro fulfillment center. So Jonathan can you maybe speak to like how many households.
One of these micro fulfillment centers do you expect it to.
Or how does it fit exactly.
With the larger facilities that you've.
You already have in the market.
Hub and spoke type models like what type of radius can can one of these facilities are ultimately sir.
Hey, Michael Thanks for thank you for the question.
The way we look at it obviously in terms of population. So I don't have the number of exact household and where.
Testing of postal codes.
As we speak to say, what what can be done in.
And time effective and.
And profitable manner.
But right now our.
Our GTA micro fulfillment center is servicing well over $1 million.
Potential shoppers and and that number is going to slowly increase over.
Where does that three or four months as we rollout a couple of them because these other stores that we have.
The backlog. So that's 10 to 20 times, what a normal grocery store is able to service.
Which is why John made in the prepared remarks comments around ramping up to.
$20 million or they are in the near future.
So we're.
We're pretty confident that.
The Tam of each location is.
Is march.
The service that we're offering is unique.
As evidenced by our NPS score.
In the mid eighties, and and ultimately we can be highly profitable in this model by launching more.
In more stores as we have.
More and more customer data.
So that was the first part of your question. If you could just repeat the second part Michael So I get that right.
How does it fit with the existing you have the larger fulfillment centers and as well so how does the fulfillment fit with the with the larger fulfillment.
Yes, exactly so you mentioned hub and spoke I think that's a good way to think about it we also have to.
Businesses that are complementary but unique right.
Customers that are outside of the metropolitan areas will continue to receive a meal kits and add ons and there are in.
And their orders, which has helped drive <unk> over the.
The past couple of years and.
Has been a big success.
And those fulfillment centers those larger footprint fulfillment centers, which we have in D. C. Calgary Vancouver, Calgary, Toronto, and Montreal will continue to service those customers.
And then future investments in fulfillment and technology will continue.
To be.
Over indexed towards the on demand strategy.
Part of those will be.
Replenished by some of these fulfillment centers and we have a distribution center that would be.
Also opened.
In Q4 and over Q1 to service those those micro fulfillment centers as well so.
Complementary.
And allow us to move much faster.
Okay, and then just for myself and listening to you describe the strategy. It does feel it it feels like a strategic shift when I when I'm listening to it. So how long has this been in the works and it is this was this decision to move in this direction viewed internally as a.
A significant strategic shift.
Yes, I would say.
We've been working on our micro fulfillment center strategy for them.
18 to 24 months now.
The the first version.
What's really testing out the the customer economics and really understanding.
Operating nuts and bolts of the business through our good food Wow same day service that we launched in Toronto and Montreal.
The intent was always to to use that as a test to understand customer.
Of that of your and also the capabilities that we needed to build in order to be quick Commerce leader and then bring down the delivery times within the cities to sub one hour.
I think the.
The overall strategy from a merchandising perspective that we've talked about for.
<unk> <unk> hundred 12 months now in terms of the 1000 plus.
<unk> skus today growing to 4000 Skus.
<unk> remains the same as well.
We're looking at.
The same strategy around opening up our platform from a technology perspective to have our customers be able to interact with good food with more flexibility.
Oh within without subscriptions, so we've been talking about that for a little while.
And so I think that's the real exciting piece today is from those 24 months of investments. We're finally at a place today, where we're starting.
To deliver.
Real on demand orders and.
And we have.
Our customers that are absolutely loving it.
And really quick Commerce is it's the direct answer to what customers everywhere around the world want and so one of the key barriers to.
Online grocery adoption has been.
Use of delivery windows that provide.
Good for them.
Later today or next day delivery, where the customer actually needs to do a lot of preplanning they need to make sure they're available during the delivery window.
Or other faster.
Faster delivery methods.
Which are not vertically integrated and which provide a poor customer experience in terms of.
Missing items.
Huge markup markups on the price of the products in a delivery and so we're really in a position here, where we're set up for our next phase of growth, there's a really Ah Ah.
A huge amount of.
Online grocery or dollars that will be coming from the brick and mortar space and transitioning into this quick commerce grocery delivery and we're extremely well positioned to capture that market.
Your next question comes from Tom Lee from.
Please go ahead.
Okay.
Thank you and good morning first.
First question for me.
I was wondering if you've noticed any major differences in the product mix between.
On demand delivery, it's a one hour or less versus.
Next day deliveries there.
More impulse buying there for on demand.
That would provide higher margins.
Hey, good morning.
So we are seeing a.
Higher proportion of our grocery products.
Good food branded grocery products within our.
On demand less than one hour delivery. It's also.
An experience that has significantly.
The less friction for the customer and so what we're expecting to see is.
Customers that are placing more than one orders.
<unk> per week.
There's something.
And we havent seen in any significant way in the past.
And so the intent is really.
To create a service offering that is just addictive to our customers.
And to have them coming back time, and time again multiple times within a week to place their orders now.
Now that still means our bask.
That is in the 65 to two or 60 to $70 range. Those basket sizes are still quite large and healthy and allow us to have great economics are on the fulfillment and delivery of those items, but we would like to end and we expect to see customers engaging much more frequently with us.
<unk>, Great and then just.
Given the.
Potential opening of further and micro fulfillment centers and investments in automation technology, what are your expectations for Capex in fiscal 'twenty two.
Hey, Brad it's Neil here and just to add onto.
What John was saying about the previous question like we were able to hit day parts a lot quicker too so.
The spike in order at 11 to 10, even before the lunch rush and on the way home from dinner. So.
Things like that.
In terms of Capex, where.
We're still working.
Working through the full fiscal.
I mean two plan.
It'll be.
Opportunistic is a real estate.
Comes available. These these micro fulfillment centers.
In terms of locations are extremely unique.
We have you know.
A team looking 27 around the clock.
20, literally driving up and down streets define well positioned locations because it can make a massive difference it here one or two streets over.
And depending on how economics continued to come in if we see what we what we expect to see and what we're currently seeing.
We'll probably continue to ramp up.
And we have some.
Our capex on projects that we've been investing in over the last.
Six to 12 months as well so RBC facility.
It's 90% complete.
The Ottawa facility, which John mentioned in the prepared remarks, as well, which is 90% complete.
And then we have fiber fiber.
Carioca other opportunities in the pipeline that we're very excited about.
Obviously with every incremental micro fulfillment center that we're launching that cost is coming down quite a bit we mentioned sub 1 million, but we think we can cut that pretty aggressively as well.
Yeah.
Your next question comes from Brian Lee from National Bank Finance.
Financial Please go ahead.
Hey, Thanks for taking my call guys.
Yes. The first question, maybe just more along the on demand launch you mentioned flat line of sight to five more locations.
Are you able to share kind of.
Where those would be more in the Toronto Montreal are or is it beyond.
Five or six.
Hey, good morning, Ryan so the our intent really.
Is to focus in on that.
Dominating specific large urban centers. So the intent is for.
The next set of.
Of micro fulfillment centers to be located.
First within the GTA and the greater Montreal area. So those are the two.
Two main markets that we're going to be building out.
Density of our both on demand deliveries and our micro fulfillment centers.
Certainly what we see is.
We're expecting that the addition of each.
New micro fulfillment center within the same city.
It's going to allow us to.
Service customers more quickly add capacity will be able to ramp up.
The utilization of each of those micro fulfillment centers.
Is much more quickly as well and then if they were in a different city and ultimately improves the economics, even further so being closer.
Closer to customers in different parts of.
The same metropolitan area allows us to reduce the cost of deliveries and really to be extremely competitive.
Centers with brick and mortar brick and mortar.
Grocery shopping.
So we'll be focusing into in those two metropolitan areas.
And then we will continue expanding across the country after that.
Okay. Okay. Thank you and then in terms of the timing of the on demand March was it more.
About reaching some sort of penetration rate within the cities.
Online grocery or was it getting a large enough SKU count can you talk a bit more about the rationale around that.
Yeah, Hey, Ryan Thanks for the question yes.
Timing is just a matter of pieces coming together.
It is.
We've been investing in technology people process and buildings over the last several several quarters. So.
Selection as you know so we think there's a minimum viable selection to be able to offer the grocery strategy.
I'm in an on demand fashion, which we believe we've we've surpassed now with over 1000 Skus and growing.
The technology platform being able to.
Efficiently and effectively fulfill capture.
And offer.
Sub one hour delivery is obviously something that needs tweaking from our traditional meal kit business, where you have visibility on demand and highly planned now.
Operations.
And routes.
And then the real estate right like I was saying in the past the past question.
Real estate market across the country is quite competitive. These locations are are uniquely position. We think there's a certain first mover advantage in the country as well around getting some of these core core locations.
<unk> demand.
Those things need to come together for the kind of a trifecta of.
Upon the bankruptcy.
Maybe I can add as well I mean.
If you look at.
As John was saying we can.
In the process of working our buildings over last 18 to 24 months.
And in our prepared remarks, we talked about that ultimately the meal kit business is high single digit EBITDA business. When you strip out the costs related to this initiative.
A significant amount of cost we have in our system I mean, the math would be around $40 million to $50 million ultimately.
That we've been building over the on an annual basis, but it's been.
Building over the last couple of years as we've been preparing for this launch that John laid out there's been part of the overall long term strategy of the company.
Your next question comes from George <unk> from Scotiabank. Please go ahead.
Good morning, guys I'm, just trying to understand a little bit the gross margin.
Of ramping up the on demand grocery.
You spoke to some mixed impacts that could be dilutive at first but.
Just wondering longer term like when would you expect this to.
It'd be accretive to gross margins from a timing standpoint or anything to talk about it we appreciate it.
Sure. Thank you.
Good question.
I mean, I think we have to start with just where are we in Q4 right in the fourth quarter.
When we look at the component parts of the of the drop in gross margin.
None of these are structural right ultimately.
The majority of these are items that we worked through whether it be seasonality whether it would be.
The decline in volume.
That we saw in July and August.
All things that we're doing all elements that we can can address and we have been addressing either through growth coming out of July and August.
Taken cost out of our system, and becoming more efficient etcetera or how Neil talk about how we're having inflation.
Overall when you when you look at our business we.
We believe kind of the historical if you will meal kit business isn't that 30% 35%.
Gross margin range and then the groceries ultimately the O&M and groceries will be in the 25 to 30 and when we look at the baskets that we're seeing that they're coming in right now.
The soft launch if you will.
All of our on demand.
<unk> delivery in Toronto, which is delivering within 35 minutes essentially.
The baskets coming in very similar to a while which is really that 50 50 mix that we've been.
That we've been alluding to in previous calls and so ultimately when you put the two margins together, we still see a 30% gross margin business that comes together.
Okay. Thanks for that but by when do you think we can get about 25% to 30% I guess the margin for us.
The online kind of on the <unk>.
One piece of that how much more scale when you get there.
Yes.
Look I mean I think.
Each of these fulfillment centers at the beginning are.
Obviously have an impact.
On our margin.
The reality is the it'll be driven by the adoption rate.
And the the number of orders that we're seeing through each of these centers and ultimately the I O V, which each on each one of those metrics I would say theyre coming in ahead of our expectation.
So when we.
Oh, the ultimate time, when we'll be able to get the economies of scale that we're saying what will really be driven by a O V and the number of orders that are that the flow through.
Okay.
Yeah.
Your next question, George maybe sorry, if I could just add to that.
George maybe the other thing to think about it's really the ramp.
<unk> like the ramp can be quite as fast.
Fast.
<unk>.
Yeah, Jonathan I was talking about a quick commerce being the fastest the only and fastest growing e-commerce sector in the world and the reason why it is is because of NPS scores, so with a with an NPS score.
We have 85.
That means youre going to refer people that means that.
People are going to love it and refer people. So in terms of growth. It's the early days since the meal kit industry, where everybody to try and it refers a tremendous amount of people. So the ramp of the stores is important for gross margin, but we think can be quite effective because.
Focus on the customer experience.
Your next question comes from Paul Cheever from RBC capital markets. Please go ahead.
Thanks, very much and good morning.
I wanted to focus on capacity so just on the existing facilities.
What's the total.
Capacity annual capacity in terms of either revenue run rate orders at the moment and then when you look out to next the end of next fiscal year with the new facilities Youre developing where do you see the annual capacity getting too.
Hey, Paul.
Al.
So I think in terms of capacity.
We we have.
We're building definitely enough capacity to see the growth that we are expecting and that ultimately what our investors are expecting as well.
I would say, it's easy for one of these stores to generate.
In the end of 'twenty.
Millions of they are a range and we can we can go above that as well.
I think the way Youll youll see it play out as.
We're not going to hit capacity before launching a store that's complimentary in terms of.
In terms of cost to that store, so bringing down the cost of servicing certain postal codes will eat into the.
Volume, but what we will have reached a critical mass.
To George's question on gross margin before doing so.
So I think.
With let's say high level $20 million and five stores six stores in the pipeline.
Could easily see a $100 million plus a value.
Our our.
Ottawa building itself is a.
Fully automated version of these micro fulfillment centers, which we've been.
Talking about for several quarters now.
Itself has a much higher capacity as well and will service.
A good portion of the Ottawa area.
So overall I would say.
Hundreds of millions in the pipeline for <unk>.
For capacity.
Okay.
Helpful very helpful to understand that the smaller stores.
Or facilities.
The larger ones can you just remind us again, how much additional capacity to the larger ones that youre.
Developing how much would that add.
At our Ottawa store is roughly.
Three X to Forex.
The capacity of this moment.
Okay. Thank you I'll pass along.
Again, if you'd like to ask a question press Star then the number one on your telephone keypad. Your next question.
<unk> comes from Luke Anand from Canaccord Genuity. Please go ahead.
Yes, thanks, good morning, guys.
I wanted to dig in a little bit on the competitive environment, specifically for on demand grocery just I guess trying to shape that clearly it's an area that's relatively new for you, but I'm curious to.
No I guess, what the size of the incumbents in the space, maybe you can share that just in terms of.
Order sizes or percentage of the market that they have currently.
And I guess, where you see yourself being in that market longer term and I guess sort of as a follow up to that as well is the assumption that the total 4000 skus.
Skus that you plan to get long term that youll be able to carry those in the smaller mfc's and as a result of national brands as well.
Hey, good morning, Luke so in terms of.
Vertically integrated on demand players.
We're the only one that's operating.
In Canada today, so it's really.
Pretty amazing headstart through our current existing brand technology infrastructure that we've built.
As well as.
The line of sight that we have on our upcoming micro fulfillment center launches if you look globally.
There is about four four.
With players that have a significant.
Can't scale, either in the U S or in Europe.
And and as we've talked about and in the U S. Its already expected to be about a 20 billion dollar market there and so as we think about the addressable.
<unk> market for our a quick commerce deliveries in Canada from the 100, and a $40 billion of our total grocery space where we're.
We're planning for a shift of 20% of that total addressable market to go into the quick commerce space and.
We are working towards having an outsized.
Share of that market.
And again the reason why customers are shifting towards quick commerce deliveries in the grocery space is because and the reason why the NPS is so high is because it's actually faster to place an.
Order with good food and have it delivered in less than an hour, it's faster to do that than to get in your car drive to the store.
Pick up what you need come back home there is no pre planning, it's a completely flexible model and we're.
We're selling our products at grocery store prices and so that's the.
A key item that gets unlocked from being a vertically integrated player.
So we're really excited about that.
Can you remind me of your second question Luke.
Well actually.
I can pivot to another question.
Right now the low Capex that you have.
The other of these facilities.
Does that include any investments as it relates to automation or like how should we be thinking about that from just the production margins or the production cost that would be involved.
With this particular.
On the Ondemand grocery line.
Is the view long term that you will invest in automation.
<unk> needs.
<unk> turned to get better margins or like how should we be thinking about that.
Yes, the answer definitely yes longer term, we think automation will be a key component.
<unk>.
Any e-commerce player.
Right now the focus of the automation in these.
Micro fulfillment centers in the GTA in GMA or on the technology side, So where can we use tech to make or.
Our employees more effective and efficient.
And our logistics more densely rabbit. So those are the two in terms of you have in terms of structural advantages.
As we said our merchandising strategy is is a big differentiator that allows us to.
Have higher average order values and also higher margin.
If you look at the Hello fresh financials.
30% to 35% of what they are selling is as food cost.
And at a grocery store.
Average.
Average product is closer to 60%, 70%. So it's a big Delta there in terms of margin that we can generate.
By including meal kits prepared meals in our basket.
And and then the structural advantage of of our weekly subscription deliveries.
Tens of thousands of deliveries a week.
Montreal and.
In Toronto allow us to piggyback and.
In March routes, even in an on demand fashion.
With those orders.
That facility in Ottawa as we mentioned when we talked about in the past is going to be fully automated off the bat.
And we will be a good comparison versus.
The more manual operations that we have.
Today, but we have a clear path to.
Taking pieces of the operation and and streamlining our automating those so it'll be a little bit less of a holistic approach and more kind of operation by operation approach, but we're excited to kind of block and tackle over the coming years this will be a longer.
<unk> journey for sure because.
This piece of technology, our technology for the size of the store and the speed.
Is that is very new.
Yeah.
And there are no further question at this time I will turn the call back over to the presenters for closing remarks.
Thanks, very much so for any of you that are living in Toronto were currently servicing 18 neighborhoods in Toronto.
With our less than one hour on demand delivery. So we encourage you guys to give it a try and see if you're within those on demand zones.
And try out.
The customer experience, let us know what you think.
And for those of you who are outside of those zones, we're expanding shortly within Toronto and as we mentioned in a few weeks Montreal and then Ottawa thereafter, so whichever markets Youre located in please give the customer experience that's right. It's a it's.
So lately.
Magical experience.
And that our customers are raving about and as we talked about we are uniquely positioned in the market to capture an outsized share.
Of this fast growing industry.
And ultimately the economics and the payback periods that we're seeing.
A really exceptional so on that note. Thanks very much for joining us on this call. We look forward to speaking with you again at our next quarterly call.
This concludes today's conference call you may now disconnect.
Okay.
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Yeah.
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The House has ended this call goodbye.
Lenny motto, how how cushy.