Welcome to the Goodfood Second Quarter of Fiscal Year 2022 Financial Results Conference Call. [Operator Instructions] Please note that questions will be taken from financial analysts only. [Operator Instructions] I would like to remind everyone that this conference call is being recorded today, April 14, 2022 at 8:00 a.m. Eastern Time. Furthermore, I would like to remind you that today's presentation may contain forward-looking statements about Goodfood's current and future plans, expectations and intentions, results, level of activity, performance, goals or achievements or other future events or developments. As such, please take a moment to read the disclaimer on 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. Please go ahead.

Thank you. [Foreign Language] Good morning, everyone, and welcome to this call for Goodfood Market Corp. to present our financial results for the second quarter of fiscal '22, which ended this March 5. I'm pleased to be joined on the call today by Neil Cuggy, Goodfood's President and Chief Operating Officer; and Jonathan Roiter, Chief Financial Officer. Our press release reporting our second quarter results was published earlier this morning. It could be found on our website at makegoodfood.ca and on SEDAR. Please be aware that we will refer to certain metrics and non-IFRS measures. Where possible, these measures are identified and reconciled with the most comparable IFRS measures in our MD&A. Finally, let me remind you that all figures expressed on today's call are in Canadian dollars unless otherwise stated. I'll now turn to Slide 3, which outlines the progress and developments relative to the three key value-creating drivers of Goodfood. During our last call, we outlined the three key strategic initiatives. Our execution is focused on and that will drive long-term shareholder value. One, we are growing our on-demand active customers; two, we are expanding our on-demand coverage by launching high return on invested capital microfulfillment centers; and three, we are improving our profitability and cash flows. Expanding on these priorities, firstly, we continue to spin our flywheel through the growth of our on-demand active customers. On-demand active customers more than doubled, reaching 27,000 this quarter from 13,000 in the first quarter. As we continue to roll out our marketing initiatives and build coverage, we aim to increase both the penetration of Goodfood's on-demand offering and the frequency of orders placed by our shoppers. Our customers are absolutely loving the flexibility of our 30-minute on-demand offering. And with a cult-like following of our exclusive Goodfood products, we have found the recipe to capture a significant share of wallet. Secondly, to grow the number of on-demand active customers, we will expand our footprint of on-demand microfulfillment centers or MFCs. Our hub-and-spoke fulfillment model is well advanced, particularly at the hub level. The spokes are low CapEx, high return, local MFCs have grown in count as we now have six operational facilities and we will continue to grow that number. With the new facilities in Ottawa, Toronto and Montreal now open, we are both increasing the availability of our on-demand delivery service to more Canadians, as well as increasing the density of our deliveries to further enhance their unit economics. Thirdly, we will continue to focus on improving our cash flow and profitability levels and look to achieve progressive improvements in margins and cash flow from operations. Despite difficult operating conditions, we were able to preserve our gross margin by offsetting input cost inflation and oil price impacts through operational improvements. In addition, we reduced our adjusted EBITDA loss through SG&A efficiencies and had a $5 million improvement in cash flow from operating activities this quarter compared to the first quarter or a $10 million improvement in cash flow from operating activities compared to the first - to the fourth quarter of fiscal 2021 As we will detail later on this call, more improvements to adjusted EBITDA are planned and being implemented as our return to profitability is a key strategic value driver. Overall, given the challenging operating environment, we are pleased with the progress made against our core strategic initiatives this quarter. The exciting growth and developments in our on-demand offering demonstrate that delivery time and exclusive assortment will be key catalysts to online grocery adoption and Goodfood is uniquely positioned. On that note, over to Jonathan Roiter to review our financial performance in detail.

Thank you, Jonathan, and good morning, everyone. I will now turn to Slide 4, which provides details of our top line performance. Quarterly active customers during the second quarter were stable at 249,000, a 3% decline compared to the fourth quarter of fiscal 2022. Net sales were $73 million for the quarter, a 6% decline compared to last year. The active customer count and net sales were the result of two key factors. First, the second quarter has four less days compared to the first quarter; and second, the seasonality of the holiday period returning this year compared to last year, with the two weeks around Christmas and New Year's seeing lower order rates and active customer additions. As our evolution into an on-demand online grocery and meal solution provider continues, we expect on-demand active customers to be driven by the adoption of our quick commerce delivery of grocery and meal solutions and ultimately driving net sales growth. This quarter, we reached 27,000 on-demand active customers and $34 million run rate sales before credits and incentives from our on-demand offering. As current microfulfillment centers ramp up over the coming quarters and new ones continue to be launched, we expect our on-demand strategy to progressively drive our top line growth over the coming quarters and years. Please now turn to Slide 5, which looks at our profitability levels. Our profitability levels were stable this quarter with improvements achieved on adjusted EBITDA, cementing our commitment to progressively profitably - to progressive profitable improvement. Gross margins were stable at 24%, with operational efficiencies achieved by the team and labor costs offsetting increased input costs driven by global inflation and increased delivery costs driven in part by rising oil prices. While overall gross margins were stable, our meal kit gross margins improved nearly 120 basis points since the first quarter. Turning to adjusted EBITDA, our loss position improved by $1 million as we reduced our SG&A costs by $2 million this quarter versus the previous quarter and $4 million since the fourth quarter of fiscal 2021 or $60 million on an annualized basis compared to that quarter. Including this number is $12 million annualized headcount-related savings hitting our previously announced multi-quarter headcount reduction effort expected to generate at the time an incremental $11 million to $13 million of annualized savings. I'll now turn to Slide 6 for a review of our cash flow and capital expenditures. Cash flows used in operating activities totaled $14 million this quarter, a significant improvement compared to $19 million use of cash from operating activities in the first quarter of fiscal 2022 and $24 million used in the fourth quarter of 2021. It's important to note that improve - improving our cash flows can be achieved both through improvement in profitability and improvement in our management of the balance sheet. As you can see here, through better working capital management, as well as improved gross margin and lower SG&A costs, we have reduced our cash outflows from operating activities by $10 million since the fourth quarter of 2021. While we are pleased with the progress made to-date, we will aim to continue improving our cash flow position in the coming quarters to ensure we have the financial flexibility to execute on our on-demand growth strategy. We also invested $15 million in capital expenditure this quarter. The capital invested was mainly related to equipment deposits, leasehold improvements to new and existing facilities and the build-out of part of our technological platform. A significant portion of these investments relate to footprint initiatives made in previous quarters with payments only going up this quarter. These investments are acting as a cornerstone to build the physical and technological infrastructure to support the scaling of our on-demand delivery network in Toronto, Montreal, as well as the recent launch of our on-demand deliveries in Ottawa. In addition, investments to open our digital platform to non-subscribers are also part of our CapEx spend. We are pleased to say that our platform is now open to non-subscribers and the customers in Toronto, Montreal can come to our website and place an order with Goodfood without having to subscribe. This initiative unlocks a significant new potential revenue stream for the business. Lastly, we ended the quarter with cash and cash equivalents of $106 million in addition to revolver availability which continues to provide significant balance sheet flexibility to execute our growth strategy. I will now turn to Slide 7 to review our path to profitability. Our path to profitability goes through our three key value drivers: one, growing on-demand active customers; two, growing our footprint of MFCs; and three, improving cash flow and profitability. First, profitability will be driven by building scale within our on-demand grocery and meal solution network. Beginning with our quarterly active on-demand customer base with less than six months of launch, we have already reached over 27,000 quarterly active on-demand customers and believe that once we reach between 50,000 and 75,000 on-demand active customers, we'll see the scale in orders that will generate net sales required to breakeven at an adjusted EBITDA level. Second, to reach those levels of active customers and provide a high level of quality and execution, we expect to acquire 10 to 20 micro-fulfillment centers. The lower end of the range would support gaining significant coverage in order to track the on-demand active customers targeted, particularly in the key cities of Toronto, Montreal. The higher end of the range would enable edging towards a higher number of deliveries per hour that would in turn support bolstering on-demand unit economics. Third and most importantly, our road to profitability currently requires approximately $45 million of annualized adjusted EBITDA improvements, which we aim to capture through a series of initiatives that we are calling Project Blue Ocean. The key drivers of our improved financial position, in addition to the revenue growth provided by active - by growing our active on-demand customer base will be, one, simplifying our business by optimizing our footprint, outsourcing the manufacturing of certain products and rationalizing our product offering in certain areas. Two, optimizing our pricing across all products, meal kits, ready - ready-to-eat meals and grocery products. And finally, three, clean sheeting our selling, general and administrative admin spend from the ground up to ensure alignment with our key strategic goals and our net sales base. Today, halfway through the third quarter, I'm optimistic with the progress we're making on the journey back to profitability. In April, we implemented an additional SG&A cost reductions totaling $12 million of annualized adjusted EBITDA improvements over and above the previously disclosed and completed $12 million headcount reduction performed in the second quarter. In addition, we have also begun to take measures to further optimize our manufacturing footprint, leverage lower cost manufacturers for some of our ready-to-eat meals and optimize our pricing positioning with the aim of improving our cost structure and make further important inroads towards the $45 million of annualized adjusted EBITDA improvements required to bring the company back to positive adjusted EBITDA. On that note, I will turn it back to Jon Ferrari to provide an update on our on-demand strategy and our outlook.

Thank you, Jon. I will now turn to Slide 8. We are excited with the developments that highlighting the progress we've made in our strategy to build Canada's first integrated on-demand online grocery network. The metrics we have observed since the launch of our on-demand grocery delivery, reaching customers in as little as 30 minutes remain ahead of our expectations across adoption, retention rates, as well as unit economics, and we look forward to building on that momentum. We have now reached 27,000 quarterly active customers in our on-demand offering, translating into $34 million in run rate sales before credits and incentives. Beyond that strong growth, the metrics driving unit economics continue to perform very well. Our average order value before credits and incentives since launch has remained in the $60 to $70 range initially disclosed with a significant portion of the order value distribution in the three digits. A strong customer basket is key in ensuring we can drive expected profitability levels from our on-demand initiative and our Goodfood on-demand customers have been placing sizable orders since launch, a testament to the quality of our offering and assortment. Order retention rates have also continued to perform well with our cohorts ordering at an 80% plus rate of their initial order month. The strong retention levels speak to the addictive nature of the on-demand experience. Similarly, the order rate of the cohorts at our initial MFCs in Montreal and Toronto increased to 8x to 9x per quarter from 7x to 8x last quarter as customers developed a habit of receiving a large assortment of groceries and meal solutions delivered to their door in as little as 30 minutes. We are very pleased with the on-demand developments this quarter that highlight the progress we've made in our strategy to build Canada's first integrated on-demand online grocery and meal solutions network. The key unit economic metrics we have observed since launch demonstrate the appeal of on-demand delivery to Canadians, and we look forward to building on that early momentum. On that note, I will turn it over to the operator for the Q&A portion of this call.

[Operator Instructions] Your first question comes from George Doumet with Scotiabank. Please go ahead.

On the last quarterly call, you mentioned that you expect consolidated revenue growth in the summer or fall this year. Is that still the target? And maybe just give us your overall sense on when you expect that to happen?

Good morning, George. So I think the - in terms of consolidated revenue growth, the expectation in - is that in the fall of this year is when we'll see that growth coming back. We're seeing certainly a continued strength in the on-demand orders and growth as we talked about in the script. On the weekly meal kit subscription side, we - as we mentioned last quarter, we continue to see limited growth in the market for weekly deliveries of meal kit subscriptions. And so we'll be continuing to focus on growing the on-demand piece of the business. Within our on-demand deliveries, there continues to be about half of the basket that's meal solutions and roughly half of the basket that is grocery products. So we'll continue to see growth in absolute number of portions and meals that we're selling over the coming quarters and years, but it's unlikely to be through the subscription distribution channel and more likely to be through our on-demand offering.

Okay. Thanks for that. And just one more, if I may. Can you talk a little bit about pricing? I know you guys put in some price on the meal kit side. Does that put us in line with where we need to be in terms of food costs? And maybe how a large competitor is tackling that or are they passing through price? Are we - what level of price are you contemplating vis-a-vis that?

Yes, definitely. So as part of Project Blue Ocean that Jon Roiter mentioned in the scripted remarks, there's - the first phase of Project Blue Ocean has three key pillars. The first one is on simplifying the business, ensuring that our manufacturing footprint is optimized to the needs of the business. The second piece is optimizing our pricing. So we did take some price increases on the ready-to-cook meals over the past quarter. And we see the potential there to continue increasing prices and taking pricing on our ready-to-cook products, meal solutions, as well as grocery products going forward. And then the last piece is, based on our strategic objectives, clean sheeting the entire SG&A and ensuring that the organization from an SG&A perspective is built up to support our strategic objectives. We - following the end of the quarter, as Jon mentioned, we executed an additional $12 million of annualized G&A improvements, and we'll be continuing on that path over the coming quarters.

Your next question comes from Ryan Li with National Bank Financial. Please go ahead.

Maybe just - with regards to the meal kit business, can you talk about the thought process? Is it just a matter of not marketing as heavily in that area? What are kind of the long term gives and takes on the meal kit and where that's going to evolve to in the longer term versus on-demand? Yes, just anything on that would be great.

Good morning, Ryan. Thanks for the question. So on the weekly meal kit subscription side, we continue to see heavy promotions in the market definitely. And so our take strategically is to be focusing in on our on-demand offering. Ryan, I don't know if we can go on this way, I get a little bit of background noise.

Sorry about that. Thanks.

Yes, no issues. So from a meal kit perspective, I think the best way for us to be differentiated in the market and avoid competing on purely incentives and price is to offer a differentiated offering, right? So the flexibility of focusing in on our on-demand meal kits, creating more of a one-stop shop for our customers to get a wider assortment of products than our competitors are offering on the meal kit side. And lastly, offering that flexibility of not having to plan a week ahead, being able to receive everything you need within 30 minutes. These are the key pillars on which we're looking to compete both on the meal kit side and on groceries. And the last point that I would mention is within our on-demand customers, the 27,000 customers that we talked about, there's really three sets of customers in there. So we have weekly meal kit subscribers that choose to place additional orders in a given week on the on-demand platform. We have customers who are brand-new to Goodfood, and we're reaching them just with a wider appeal of the offering through our on-demand service. So there's a much larger target market there for us to capture than simply on the weekly meal kit subscription side. And the last piece is reactivating cancelled Goodfood weekly subscribers into on-demand. So any customers that cancelled their weekly subscription because they didn't want to manage the subscription, they didn't have a predictable enough schedule for it or simply didn't have time to cook every week at home on our meal kits, this is really a rich pool of customers that we're able to reactivate within our on-demand offering.

Okay. Thanks for that. And maybe just one last one. Can you talk about the Board change? What should investors read into regarding any shift in direction or strategy at the company? Is there anything at this point that you can comment on?

Definitely. So, Hamnett through edo Capital was one of Goodfood's first outside investors. And he's been one of our largest shareholders since 2015. From Hamnett's perspective, he's really focused on investing in early-stage businesses and has added a tremendous amount of value to the business and as a partner to Goodfood. His intent is to continue being one of Goodfood's largest shareholders. We included in our press release a link to his letter, just an open letter talking about why he was stepping down from the Board. And ultimately, it came down to a personal decision. So he's stepping down all of his Boards and taking a sabbatical over the next year. So it's - he intends to continue being a great supporter of Goodfood and looks forward to continuing to cheer us on from the sidelines. So we made the decision to replace Hamnett seat with another large Goodfood investor. So, John Khabbaz is Phoenician Capital's Managing Partner and Founder, Goodfood's largest institutional investor today. And we look forward to - we have been interacting closely with John over the past several quarters. And we think based on his business acumen, experience in the capital markets, we think John is going to be able to add a lot of value to Goodfood. And so we thank Hamnett for all of his contributions and just very excited to have John joining us over - over the past Board meeting and into the future. So John is really a long-term committed investor and is really thinking in years and decades, not in quarters. And so it's really exciting to have him on the team.

Your next question comes from Frederic Tremblay with Desjardins. Please go ahead.

Just wanted to ask maybe on the product assortment. Given that meal solutions and meal kits are a differentiating factor for Goodfood in the on-demand space versus other quick commerce players and contributing to higher average order values. Would it make sense for you guys in the future to increase your offering in terms of meal solutions, if that's possible, and if there's anything else that you can add? Maybe your thoughts on future product additions in general in terms of categories, and if you think meal kits or meal solutions are part of that moving forward?

Yes, hi, Fred, thanks for the question. Hopefully, it's personally motivated, as well as investor motivated. But yes, definitely, we see an opportunity to continue to optimize selection on that side of the business. We have played with different types of offerings. We have the ability with our micro-fulfillment center to offer hot offerings as well. So there's a lot of different things that we think we can play with in the future. Right now, we felt like the selection is at least a critical mass where we're hitting that kind of half of the basket that Jon was mentioning. In the future, once we feel like the rest of the selection is built out around grocery and non-food items, we'll kind of refocus the team's efforts on meal solutions. I think there's different meal kit offerings that we can adapt to the on-demand customer, and definitely, dayparts that we'll look to take advantage of as well, as well as seasonality trends that we can take advantage of as well.

Great. That's helpful. And just maybe on productivity within the MFCs that you've opened so far. Can you maybe just provide a few comments on key KPIs that you're looking at, maybe average time to assemble an order or waste or like anything that you're looking at within the MFCs, and just give us maybe a bit of color on how those are tracking versus initial expectations and ultimate targets for that?

Yes. Just one more thought that came to mind for the first question as well, like the ALDs for all of our baskets that contain meal solutions are about 25% higher than the peer grocery basket. So it's another reason to continue to focus on that selection, as well as we see it being a basket builder someone comes for a meal kit or a meal solution product and then ends up rounding out an $80 to $90 basket. So still obviously very attractive on that side. To your KPI question, as you can imagine, we capture a ton of data, and we have multiple daily operational meetings that we're looking at. So whether it's time to fulfill, average time to order, customer ratings, all of the cohort analysis and data that Jon Roiter was talking about in the prepared remarks as well. So we're operationally very, very focused on all of the signals that we're receiving from our teams on the ground and then from the customers. What I can say around early success is, as you can see by the growth, we're happy with the volume that's coming through all of the MFCs and the feedback that we're getting from customers around Net Promoter Scores and retention rates, so that's really awesome. We have three or four major tech initiatives that will help improve the customer service levels, as well as our profitability per order, which should start to deliver in the coming weeks and quarters, which are really excited about. And then the last thing is as we've launched new facilities kind of in the overlapping concentric circles that we presented last quarter, we're starting to see our hypothesis around one of the major components around profitability of deliveries per hour come true. Within the early days, we're almost in the three to five range pretty consistently. So really excited about that.

Great. Thanks.

One thing I can add on that front as well on the topic of deliveries per hour. So we started a pilot during the quarter to get more bikers and e-bikes doing deliveries from our micro-fulfillment centers. And we were excited to see in that early pilot that we achieved above four deliveries per hour with our bikers and e-bikes. And so we talked about a longer term target of being above five deliveries per hour and seeing about three deliveries per hour in our three kilometer radius around the micro-fulfillment centers. And so to be able to see the results with our bikers and e-bikers hit such a high number of deliveries per hour at this early stage, it's pretty exciting from a unit economics perspective, in addition to being really an eco-friendly way to get deliveries without any gas, any fuel surcharges. So our customers really love to see their baskets coming from bikers and e-bikes in addition to being a really profitable way to get deliveries completed.

Your next question comes from Martin Landry with Stifel GMP. Please go ahead.

My first question, I was wondering if you can give us a bit more on the economics of your on-demand grocery initiatives? Wondering if you can discuss the customer acquisition cost to acquire an on-demand customer currently? And what was the net revenue per user during the quarter for your on-demand customers?

Definitely. Good morning, Martin. So on customer acquisition, we have three different ways, right, as I talked about in terms of how we're acquiring on-demand customers. The upsell from a weekly meal kit subscription towards getting additional orders delivered on demand. We've seen that, that's a really attractive way for us to acquire on-demand orders with limited marketing spend. On the side of reactivating old or cancelled weekly subscribers, what we've also seen is that, that's another goldmine for us in terms of low customer acquisition cost, reactivations into the on-demand platform. And then from a completely new to Goodfood customer perspective, that would be our higher customer acquisition cost channel in terms of on-demand customers. But we're happy to see from a blended perspective that our customer acquisition cost is coming in, I would say, really strong. And part of it is due also to just the reduction of friction that exists when signing up to the on-demand offering. So there isn't a long-term weekly subscription or a long-term commitment to getting a number of meals delivered per week. However, even without that commitment, what's exciting to see is that we're actually getting twice the amount or 3x the amount of orders per quarter from our on-demand customers versus our weekly meal kit customers. So we - by removing the friction, we're improving customer acquisition costs, while not trading revenue per quarter, and in fact, the revenue per quarter per customer is quite a bit higher.

Okay.

And maybe I could add to that, Martin - maybe I could add to that, Martin, you asked about the lifetime value of a customer. So we're seeing retention rates are 4x to 5x higher than our weekly subscription. And so when you extrapolate that out, we're still so much in the early stages, right? We're six months into this. But if you maintain those retention rates, the lifetime value of these customers have required are materially higher than those required on the weekly subscription side. And then I think on your second comment, if you want to kind of triangulate towards the revenue per customer per quarter, it's eight to nine orders per customer per quarter and $60 to $70 of ALD, that kind of gives you a good sense of what the revenue per customer per quarter is.

Yes. On a gross basis, okay. Maybe just last question on the on-demand as well. Wondering if you can give us a bit of an idea of how many MFC days did you have this quarter, meaning how many MFCs did you have open during the quarter? And how many days were these MFCs opened during the quarter versus last quarter? Just to get an idea of your productivity on a per day operating basis versus Q1?

Hi, Martin, it's Jon Roiter. It's definitely an interesting way of seeing the metric and we can obviously get that. The way I would think about the six that we have opened, we said on the last call that we would be six by the time we spoke to you on the journey to 20 by the end of this year. So we kind of hit that target, and we continue to move forward and plan to have additional openings over the course of the coming weeks and months. I would say in terms of the additional ones that were opened over the course of the quarter, I mean, I think you can kind of think that we spoke in mid-January that was halfway through the quarter. So you knew the number then which I think was around 3. And then ultimately, we progressively opened four, five and six up to, let's say, last week through the quarter. But it's an interesting data and we can definitely get that going forward.

Your next question comes from Luke Hannan with Canaccord Genuity. Please go ahead.

This question is probably for Jonathan Ferrari. You've mentioned multiple times now on this call and in past calls that offering a fulsome basket, that's one of the competitive advantages that you guys have over the other quick commerce players that are out there, and that's something that's a moat that you expect to be able to defend going forward. I guess my question is what underlies your conviction that that's a moat that's going to stay going forward? And why isn't that something that someone else may be one of the larger brick-and-mortar groceries, for example, why wouldn't they be able to replicate that same sort of selection and be able to eat away at that moat going forward?

Hi, good morning, Luke, thanks for the question. So I think the first comment or the one that I made earlier on this call was specifically referring to other meal kit kind of weekly meal kit subscription offerings. So what we've seen is that our customers love the convenience of being able to buy meal kits, prepared meals, and a greater assortment of grocery products within a one-stop shop, and that's a real differentiator, and we think it's going to position us to continue capturing meal kit market share in Canada. When it comes to other on-demand players, I think the - probably the biggest differentiator is around the exclusivity of our assortment. And so from a prepared meals perspective, meal kit perspective, and the strength of our private brand, which is about 80% of our grocery assortment today and what we intend to continue kind of having that ratio going forward. There's no other quick commerce player that we've seen globally or even local brick-and-mortar grocery stores, that's been - that's demonstrated an ability to provide exclusive products like this to their customers, and really having that cult-like following around some of our key products is a moat that we intend to continue maintaining. And what's pretty amazing is not only having that assortment, if we think about our competition from a brick-and-mortar perspective, we - we're really focusing on two key pillars to be differentiated and to build the moat around the business. So the first one is the exclusive assortment that we just talked about. And the second piece is, is our ability to deliver within 30 minutes in a frictionless experience. There's no other competitor in Canada that's able to - brick-and-mortar grocery competitor anyways, that's able to deliver in the time frames that we're doing. And so we believe that we're really uniquely positioned from that perspective. And there's a number of moats around that, right? Like there's the MFC network that we talked about. There's our courier, right, the Good Courier network that we're using to do our deliveries, both from an on-demand perspective and a weekly meal kit subscription perspective and ultimately, the brand that brings it all together. So we think these are exciting differentiators and exciting moats. And ultimately, we're quite happy to see the customer reaction and the NPS scores continuing to be really high, and it's creating great momentum within our customer base.

Okay, thanks. That's helpful. And then my second question, I guess it's kind of a 2-part question. You had spoken before about those three different buckets that you have your customers in the on-demand grocery business where they sort of come from. And so first part of that question is the customers that are brand-new to Goodfood, how much they make up of those 27,000? And on top of that as well, what are you finding for the brand loyalty for those customers that are brand-new to Goodfood? We've seen other competitors, quick commerce competitors in the space that are being fairly incentive-driven and promotional, I guess, not too different from what we saw from the meal kit players earlier on as well. I would imagine that the average consumer would be looking to maybe jump around and take advantage of as many incentives as possible to, I guess, get the lowest cost for whatever their basket is, just curious to know if you could share what you're seeing there?

Yes, definitely. So I would say that the new to Goodfood customers represent, call it, more than 50% of the 27,000 quarterly active customers. And the reason behind that is with limited capacity as we scale up, we were interested to really open up our target market and understand how muted Goodfood users would be performing with our on-demand offering. For those users from a retention perspective, I would say that they are key in driving the 80% plus retention rates that we've seen. So from a stickiness perspective, we love the numbers that we're seeing there. One of the key differences certainly between the new to Goodfood customers and the existing customers or past customers that are reactivating into on-demand is the basket size does take a little bit of time to build up. So first orders, new to Goodfood customers tend to be a little bit smaller. And then as they experience the Goodfood selection on orders 2, 3, 4, it starts growing larger. And we're happy to see that they're still interacting with our meal kits and our meal solutions. And so it proves out our point that we'll be able to capture more market share and continue growing the number of meal kits sold across Canada with this more flexible offering. And then from a profitability perspective, we're still seeing even the early basket sizes being large enough to hit our profitability targets. And as we've talked about, like the - Neil mentioned, there's a number of metrics, certainly from an operational perspective that we track towards. But the biggest drivers of profitability for the on-demand deliveries is the basket size that we've talked about and ultimately, the deliveries per hour that we're able to do from an MFC. And within the next five MFCs that we're going to be launching, the intent is to have most of those five help us bring more density within the existing markets and further improve the economics. And so they'll really help us to continue to drive deliveries per hour within the markets that we're serving today.

Your next question comes from Michael Glen with Raymond James. Please go ahead.

Just on the SG&A rebuild that you're describing. Can you - so your SG&A in Q2 was a little over $33 million. Are you - with everything happening, are you able to give an indication as to what like run rate annual or a run rate quarterly SG&A would look like going forward?

Hi, good morning, Michael. So Jon Roiter here. So I think from an SG&A perspective, I think just the number that I mean, that we're looking at is, I guess, the SG&A that feeds into adjusted EBITDA. So the number is closer to $31 million, and I think it was around $33 million in Q1. So you see a steady decline, a decline of $2 million since the first quarter, and it was even higher than that in Q4 of 2021. So we continue to work downwards on that number. The first series of cost reductions, if you will, we announced in December. It took - we probably executed that over the course of the first quarter evenly. And so the - that $12 million was partly reflected in Q1, and then ultimately, it gets fully reflected in the second quarter. The additional $12 million that we just announced today, half - ultimately for the most part are complete, and that was in the - we're halfway through the quarter right now. So we'll see the full benefit of that $12 million, ultimately, it will be - we need to see that into Q3 to see the full benefit. So there will be a continuous decline as we continue to execute on these - the initiatives that we laid out and we laid out the dollar value of $12 million. So that will be partly reflected in Q3 and then ultimately be fully reflected in Q4. And then in the prepared remarks, we laid out how we're looking at our manufacturing footprint, our logistical footprint, what products are we selling, how do we selling them. And so there's ultimately more cost reductions that come out, because we recognize there's a $45 million shortfall, if you will, between where we are today on profitability. And our objective is to work through the three different levers, including revenue growth and the three levers that we laid out that are part of Project Blue Ocean to ultimately close that gap of the $45 million.

And I guess the follow-on question to that is you - Goodfood is a growth company overall, you have a relatively new strategy in terms of these micro-fulfillment centers. I mean the messaging is growth, but at the same time, would it - approaching would appear to be some fairly significant cost reductions on the SG&A line. I'm just trying to balance the two together like how you're able to accomplish those?

Yes. I think the key message behind it is we did a lot of heavy lifting over the past 18 to 24 months in terms of setting up the private label brand, the new digital experience that Jon Roiter mentioned in our prepared remarks that open up the platform to be able to purchase products on or off subscription. So customers today are able to buy their on-demand orders without any future commitment with a $2.99 delivery fee. So opening up the platform, building out the hubs that we need for our grocery distribution center, building out the first set of MFCs, which are, of course, the hardest to get right as we iterate around the right format. And so as these major projects deliver, we've been thinking about how to ensure that we are taking out the costs that were associated with the heavy lifting as those projects deliver. So I think that's kind of one key piece. The other key piece is certainly on the meal kit pricing side. And so we're able to see through some of the previous price increases that we've put through and some of the future ones that customers have been receptive and understand the price inflation being passed through to them. And I would say from simplifying our organization and ensuring that our entire footprint is really designed to support our strategic initiatives, we also have some opportunities there to reduce the amount of assets that we have in certain parts of the country. So when you bring it all together, as Jon mentioned, we're executing on the first phase of our Blue Ocean initiatives. But ultimately, we do see a path to $45 million plus of EBITDA improvements, and the team is excited to be delivering on that while simultaneously growing our on-demand offering.

Okay.

And, Michael, maybe some additional context, like we're obviously coming out of COVID here like every other business around the world, and we're coming from a high of $525 million plus run rate of meal kit sales and building - we are a growth-driven organization. Our team is very growth-driven. It's - that's our primary focus in trying to provide more value to customers, but thinking about coming off that, investing for the future, construction projects take lots of time frame and a good amount of people to do them well. So we're just rightsizing the organization for a growth business of $300 million versus $500 million right now. But hope to get back to that number in the not-so-distant future.

Your next question comes from Paul Treiber from RBC Capital Markets. Please go ahead.

Just a high-level question to start. Just on the $45 million EBITDA improvement, you're calling out $12 million in further SG&A reduction. The remaining - should we think the remaining $30 million EBITDA increase, is that stemming from driving up revenue and operating leverage to get you there?

Hi, good morning. A very good question. So I think - let's just recap the levers. So the first lever is revenue growth. And ultimately, as we're transitioning the business from a purely a weekly subscription business to one where in Montreal, Toronto, we're starting to almost have and we should have in the coming quarters full coverage of the cities of on-demand offering, growing our quarterly active on-demand customers and growing that revenue base is an important lever. The second lever is, ultimately, what are the assets that we need to deliver on that promise and reviewing our footprint, as well as what products we're making in-house versus those that we can buy, and perhaps even rationalizing some underperforming product lines or products. Again, that drives probably you'll see that on the margin side, as well as some SG&A. The pricing mechanism is that we - we've entered the market and - in the on-demand with, I think some really attractive pricing. We see that there's opportunity to ensure that our pricing is aligned with what our competitors are pricing their products at, both from the meal kit side, as well as on the grocery side. So pricing is also an important lever for us. But ultimately, we think we still will be bringing greater value, both from the pure price, but then also from the service-oriented nature of our business that we're bringing the product within 30 minutes, we think that's a third lever. And then lastly, while we've done significant work on SG&A, clean sheeting the organization what we need, as the business further transition over the course of the coming quarters from a - that weekly subscription business to one where more and more postal codes and cities have an on-demand offering, we can continue to ensure that we have resources dedicated to where the growth of the business lies, which is the on-demand side of the business. And we service the weekly subscription side of the business with the right headcount and infrastructure. So ultimately, it's all four of those levers and pleased that we, in April, have already started to make inroads very concretely with the $12 million that we've announced.

Okay. And my second question, just in regards to the on-demand business, this was asked maybe one way, but I'll try it another way is how do you think about capacity utilization over the next several quarters? And as you ramp up the capacity there, the number of fulfillment centers, how should we think about the trend in capacity utilization, where we are now, where you started and where it would go?

Yes. Hi, Paul, so a couple of different things. I think you're referring to Martin's question around like days of MFC operations per quarter. So right now, what we've announced publicly is our micro-fulfillment centers on average can do about $20 million of revenue. Some facilities today are above 50% capacity. But as Jon Ferrari was saying, the - some of the incremental launches that we'll be doing over the next 90 to 180 days will be focused on incremental demand, but also improving our profitability per order by having smaller delivery radiuses. So that will help kind of balance the capacity that we're seeing in some of the early centers that we open. So ultimately, in order to hit profitability, we think a minimum of 10 facilities across the three markets that we operate in today are required, and then further from there, we can continue to grow. So obviously, the $20 million is theoretical at this point based on what we're seeing so far in some of our early centers, we think that could be exceeded, but we feel pretty good on the capacity side. And we've built a really well-functioning team that's able to launch these centers at a increasingly low cost. Since we first launched in, I guess, it was late Q1, our first facility, we probably brought the cost to launch down by 60% or 70% and continue to look at ways to continue to bring that down. So hopefully, that gives you a little more color, but that's how we're thinking about it.

Yes. That's helpful. Thanks. I'll pass the line.

Your next question comes from Ty Collin with Eight Capital. Please go ahead.

I know we're tight on time here, so I'll keep it to one question. I just wanted to follow up on a comment from earlier in the call that the SKU assortments kind of sitting at a critical mass now. Is the company still targeting 4,000 SKUs longer term? It looks like you've been lingering around 1,000 for a few quarters now, and it seems like a lot of your quick commerce peers aim for around 1,500 to 3,000. So I appreciate any update you could provide on the thinking there and maybe whether that's evolved at all since you started to roll out on-demand?

Yes, absolutely. So right now, we're actually sitting around 1,200 to 1,300 SKUs, if you include all the meal solution products as well. We're continuing to add could be anywhere from five to 50 items a week depending on what the team is able to bring to market that could be national brands, private label and even some incremental meal solution products. We think kind of the current selection allows someone to do - our core customer to do their weekly grocery shop with us and that's what we're seeing from our numbers. The long-term target still remains 4,000. We think that's the right mix to continue to expand for more and more baskets from our existing customers and then into other verticals. But that's where we think that we will end up. We're not in a rush to get there. I think we felt a good level of urgency to get to the critical mass that we're at today, but now feel like we have the right assortment that people can shop regularly with us. So we're always sunsetting products that we don't get the right margins on or don't have the right ratings on and bringing new ones to market. So you'll see quite a bit of movement heavily focused on bringing alcohol to market, which we have in Toronto, which is going really, really well, soon to be launching that in our Montreal facilities as well. So the assortment will continue to evolve, but we want to make sure we're looking at doing it in a profitable way.

That's great color. Thank you very much.

And there are no further questions at this time. I will turn the call back over to the presenters for closing remarks.

Thanks, everyone, for joining us on this call, and we look forward to speaking with you again on our next quarterly call. Have a great day.

This concludes today's conference call. You may now disconnect.