Cheffelo AB (publ) (CHEF) Earnings Call Transcript & Summary

Welcome to the LMK Group Audiocast Teleconference Q4 2021. [Operator Instructions] And afterwards, there will be a question-and-answer session. Today, I am pleased to present Walker Kinman, CEO; and Erik Bergman, CFO. Please begin your meeting.

Thank you, Mark, and welcome, everybody, to this call. We'll be talking about the fourth quarter results of the LMK Group. My name is Walker Kinman. I'm the CEO of the LMK Group. I'm joined by Erik Bergman, our CFO. Quickly on Slide 2, you'll see that what we'll talk about today is we'll give you a brief update on the LMK Group, talk about highlights in the fourth quarter. Erik will take us through some of the financials. We'll conclude and then open up for questions and answers. So let's turn to Slide 3. The LMK Group has been innovating in the mealtime experience since 2008. We operate in 3 countries: Norway, Sweden and Denmark under 4 different brands, Godtlevert, Adams Matkasse, Linas Matkasse and RetNemt. We're the largest supplier of meal kits in the Nordics. We're a leader in Scandinavian food tech. We have a strong local heritage and innovation and entrepreneurship. We operate a subscription home delivery model for meal kits, which is a demand-driven business model with near 0 inventory and minimal food waste. If you look at some of the quick numbers, we did around SEK 1.4 billion in revenue for 2021, delivering 23.2 million meals over the year. We ended the year around 102,000 active customers. We reached about 80% of Scandinavian households with our products, and we do this in an organization of 400 -- around 470 employees. So let's turn now to Slide 4 and the highlights for the quarter. In Q4, we continued to deliver on profitability with a strong cash flow. For the quarter, we recorded an adjusted EBIT of just under SEK 17 million and generated an operating cash flow of almost SEK 45 million on net sales of SEK 327 million. The key metric and focus for us is on cohort behavior. We saw an increase in order frequency of 6% and an increase in average order value of 5.4% despite a return to pre-pandemic customer behavior that relates to seasonal purchasing patterns. During the quarter, we finalized the implementation of 100% customer unique production across all 3 production facilities that we have, really opened up the door for continued innovation and further personalization of the customer experience. And finally, we completed the integration of RetNemt in Denmark, which places all of our operations on a common technical platform, where we use the same process in all countries. The direct benefit of this, with the integration, was the launch of a new offering in January, that -- in Denmark allowing customers to choose from 30 recipes every week. So now let's take a look at how our market is developing on Slide 5. Norway is our largest market, and here we have a dominant position in the market -- in the meal kit segment and operate the 2 leading brands, Godtlevert, Adams Matkasse. So for the full year, we grew by 21% in Norway. We did 52% of our revenue for the quarter in Norway, and net sales were up 7 percentage points during the period. The Norwegian market is continuing to show promising growth when adjusting for pandemic-related seasonality changes. And we're seeing those seasonality changes both in the fourth quarter and the first quarter. In Sweden, we operate the brand Linas Matkasse and that accounted for 36% of revenue in the quarter. For the full year, net revenue in Sweden was up by 7%. And -- but for the fourth quarter, however, revenue declined by 10%. So this decline is partly due to comparability, where we see tailwinds of the pandemic receding, but also partly related to reducing external telemarketing sales due to cohort performance in that channel. So growth across the food e-commerce market in Sweden has remained elusive during the quarter. If we look at the Swedish online grocery index, it contracted by 17% versus growth in last year in the same period, about 136%. And we also see that trend continuing into January. In the Danish market, we operate the brand RetNemt, which grew by 11% during the year. For the fourth quarter, we did 12% of our revenue in Denmark. However, net sales declined by 5% in the market compared to Q4 last year, which was also boosted by pandemic-related restrictions. We believe the Danish market is developing more or less in a manner similar to what we can see in Sweden. So let's turn to Slide 6. In 2021, was a year of operational transformation. We set out to implement 100% customer unique production capabilities across our business during the year and achieved that goal when we installed final pick-to-light capacity during the fourth quarter. This capability is something that paves the way for further personalization of our product and service offering. We also finalized the integration of Denmark, which moves that operation to a common technical platform. And then with the launch of the new offering in Denmark in January, we now offer the widest selection of meal kit recipes in all the markets where we operate. Our distribution setup in Sweden has also been a focus for us during the year. For many years, the Swedish business was based on every other week recipe and delivery model. And at the beginning of 2020, we still had about 16% of delivery areas with every other week delivery capability, and that's despite having improved the basic subscription model to a weekly recipe model. So just a little over a month ago, we actually converted the final delivery areas to every week delivery. And actually, now most new customers in Sweden are starting with every week subscription. So this change plus a later order cutoff day each week has allowed us to reduce the maximum order to delivery lead time in Sweden to 7 days. So during 2021, we also introduced delivery date choice in certain metro areas in Sweden, which we already have had in Norway and Denmark. And we'll continue to expand this delivery choice in Sweden during 2022. So let's go over to Slide 7. So with the intent of strengthening our commercial focus and ensuring faster coordination and closer coordination, we went out this morning with an announcement regarding the reorganization of our commercial activities. So Klaus Toft Norgaard has been appointed as Chief Commercial Officer, which is a new role which combines our business development, customer experience, marketing and sales functions under the same leadership. So Klaus Toft Norgaard comes with 30 years of experience from commercial management in the food industry. He is the founder of RetNemt, which was acquired in 2016 by the LMK Group, and he's been active in our group management since then. With this reorganization, Ulrika Wallin, who is our current Chief Marketing Officer, has decided to leave the LMK Group. And I just want to extend thanks to Ulrika for her contributions to the LMK Group and also the achievements that she and her team have reached over the last couple of years. The organization change is effective from the 1st of March, coming up soon. So let's now move over to Slide 8. And we'll take just a minute to look at what has been accomplished on the sustainability side. So late last year, we adopted a new group-wide sustainability policy. During the year, we moved forward on a number of fronts, initiating, for example, reporting food waste from our operations and introducing climate-calculated recipes. We were able to see strong employee engagement on our employee survey, and we had a net Employer Employee Promoter Score that ranked higher than industry benchmarks. And that's despite running complicated business integration projects and making significant operational changes in how we worked during the year. And we did it with people working from home and with the ongoing pandemic. So we're very happy to see that level of engagement. Part of the engagement, we had very broad engagement by all parts of the organization when we developed and implemented our purpose and culture statements. These take the form of something that we call The Compass. You can think of it as helping us to orient on what makes the LMK Group great and is important for our success. Finally, we also undertake the plastics promise. This was with a goal of a 20% reduction of plastics in our meal kits by 2025. So we're looking forward to providing further updates on our sustainability progress during the course of 2022. So we can now move on to Slide 9. As you can probably understand, we are exploring different strategic growth options. One of these projects is the expansion of ready-to-heat. These are products we already sell in Denmark today, but on a -- it's on a limited scale and it has a different commercial model than what we envision for the future. We know that new remote working habits are here to stay. And we also know the faster ready-to-heat meals. It gives us the opportunity to open up a new segment and increase what is our total addressable market in the current geographic footprint where we operate. So based on the current planning, we expect expansion of this activity to happen during the second half, and it will use capabilities that we already have in place in our packing facilities. So with that, I'm going to turn it over to Erik, who will walk us through the financials.

Thank you, Walker, and good morning, everyone. We could move on to Slide 11 for the financial update. All in all, we grew by 14% during the full year. 2021 was a turbulent year. We still had restrictions in the first quarter that grew customer inflow and a good tailwind from a good performance in the fourth quarter 2020. Starting in the second quarter and during the second half of 2021, we have seen the Covid restriction having less effect on customer behavior. The seasonality trends are coming back to a pre-Covid level. To understand our business, it's important to understand how the seasonality impacts. Historically, we are used to seeing a seasonal slow down in the fourth quarter towards Christmas. This was something that we did not have in 2020. But for 2021, the weaker trend mirrored the trend in 2019 and previous years. With the lower tailwind effect from Covid, the fourth quarter declined by 1.1% compared to 2020. And adjusting for currency, it is a decline by 2.6%. If you compare to a pre-Covid fourth quarter 2019, we do have a compound average growth rate of 13%. We constantly evaluate our sales and marketing efficiency. As a result, during the quarter, we decided to scale back our external telemarketing partner channel. While the channel drives a high inflow of new customers, it has not produced satisfaction of cohorts with fewer orders generated per customer than other channels. Not having as high customer inflow during the quarter had an impact on active customers, which were down 11.5%. Focus on cohort quality is providing us with a good baseline of customers. We do see the effect from that during the fourth quarter, order frequency was up 6% and average order value was up 5.4% versus the same period last year. To conclude, we are facing tough comparison figures short term as effects of the pandemic are receding, but growth compared to pre-Covid periods remains. We will continue to focus on improvement in cohort quality in combination with the reorganization of our commercial activities. With that, let's move on to profitability on Slide 12. Looking at the full year, we achieved 28.1% in contribution margin despite moving to a 100% customer unique production. I really would like to highlight all the great work that has been done throughout the organization and thank the team for successful achieving this transformation. Looking at where we were in 2019, contribution margin has improved 3.3% and is up from 24.8% during that year. For the full year, we reached an adjusted EBIT of SEK 61 million. This equals a margin of 4.4%. The 4 percentage point lower volume than last year is explained by both a slightly lower contribution margin as well as the increased sales and marketing spend. Sales and marketing was 12.8% of net sales in 2021 compared to 10.7% million in 2020. If you take a closer look at the fourth quarter, we finalized a total rebuilding of the Danish production facilities as well as we implemented a final pick-to-light line in both our other sites in Norway and Sweden, which also completed our commitment to 100% customer unique production by the end of 2021. As anticipated, the production efficiency has fallen temporarily as the new lines are getting up to speed. Lower efficiency was unfortunately amplified by high sick leaves rates as seasonal and Covid-related illness among our production workers in combination with our strict approach to protecting our product environment, impacting us more than we had already planned. With the increased production costs, contribution margin for the fourth quarter was 26.7%. We have seen limited effects of inflation during the quarter. We see that it's likely to increase as 2022 progress. We are monitoring the inflation closely to evaluate if any measures need to be taken. But we are confident that we have a tool set that allows us to efficiently manage inflation. We also have ongoing projects expected to realize untapped synergies, for example, when it comes to procurement. Adjusted EBIT for the quarter amounted to SEK 16.9 million. That is SEK 18.8 million lower than last year and explained by the lower contribution. Sales and marketing spend for the quarter was reduced compared to last year and for full year landed at 12.8% of net sales. And finally, we had one adjustment item for the quarter related to the write-down of the old tech platform previously used in RetNemt amounted to SEK 1.2 million. Let's move on to the balance sheet on Page 13. We finished the year with a healthy balance sheet. Our current ratio improved to 1.16 during the year. The proceeds from the IPO in 2021 were used to repay the bond, leaving the company without any structured debt. Long-term liabilities mostly consist of IFRS lease liabilities. And this is leaving our net debt at a negative SEK 63.4 million. With that, let's move on to the cash flow on Page 14. With our subscription model and profitability, we have good cash flow conversion, and we are working with negative working capital. End of the quarter, cash position were at SEK 160.7 million. That is twice as much as we had last year. Our cash flow from operating activities amounted to SEK 44.9 million for the quarter and SEK 78.7 million for the full year. Cash flow from investment activities amounted to SEK 11.6 million. That includes acquisition of intangible assets that amounts to SEK 9.5 million, an increase of SEK 7 million versus the fourth quarter -- the previous year. This due to investment in RetNemt's integration and investments made in customer unique production equipment in both Norway and Sweden. We are in a period where we have invested heavily in customer unique production and the business integration. As such, the CapEx, as a percentage of the net sales, amounts to 2.2% for the year, which could be compared to 0.8% during 2020. Let's move on to Page 15. We are a profitable company, and we will remain focused on maintaining profitability. We are continuously working with our sourcing model, and we expect to see improvements in contribution margins during the coming year, approaching 30%. This will be done by improving product efficiency and implementing changes in supply chain management. Our core business will continue to be subject to tough comparison figures as the meal kit market in the Nordics normalize with the pandemic tailwinds that we have felt recede. As such, we expect further top line contraction during the first half of 2022 as we continue to deliver on our commitment to profitability. Finally, we anticipate sales and marketing expenses at the level below 13% of net sales for the full year. With that, I would like to hand it back to Walker for a quick summary.

Okay. Thanks, Erik. And let's move then to Slide 17. I'll just summarize here shortly before we open up for questions. So first off is that we have continued to deliver profit and strong cash flow despite receding Covid tailwinds. This is something that we're proud of. It's something that not many in the online food space can even talk about. We were able to further improve order frequency and average order value in a flat sales environment driven partly by the reduction that we had in external telemarketing new sales activities. We completed the integration of RetNemt as well as the transformation to 100% customer unique production in all markets, and this paves the way for continued product and service innovation. While it was expectedly lower during the period, we anticipate the production efficiency will continue to improve after being infected by transformation to new production processes, combined with the elevated sick leave. And this will ultimately lead to higher contribution margins going forward. We note that the pandemic has been ongoing at the beginning has continued to affect sick leave quite a bit at the beginning of the first quarter 2022. We do not have -- we do have a top line lower expectations in the short term. We're going to be facing tough comparable figures during the first half, and this is especially as you compare to the first half of 2021, which was affected by pandemic-related restrictions and those ultimately benefited our business. We do expect to see continued improvement in cohort development for new customers, and we're looking forward as well to further benefits from the reorganization of our commercial functions. We're also looking forward to the expansion of ready-to-heat offerings and the subsequent increase in what will be a total addressable market that comes with this segment. So finally, before opening up for questions, I just want to extend a big thank you to all of our employees, our partners, our suppliers that are contributing to a world-class meal kit experience for our customers every day. I'm personally very proud to be part of this LMK Group team. So let's turn it back over to our operator, Mark, so we can take any questions. Thank you.

[Operator Instructions] First is from the line of Clement Genelot of Bryan Garnier & Co.

At least 3 questions on my side. The first one is on the ready-to-heat. Can you elaborate on that? Will you do it on your own with dedicated facilities or whether any in partnership with third parties, specialists and in which country? Is it both Sweden and Norway or maybe only one for this year? My second question is on the price increases. I know you did implemented some price increases in August of last year. Did you do any new wave of price increase since that time? And my further question is rather on the contribution margin. To what extent the remodeling of the production picked up in Denmark in Q4 affected the contribution on the margin in Q4 because, I guess, it had a temporary negative effect. And when we look at '22, you target contribution margin approaching this [indiscernible] threshold? Does it mean that you intend to improve the contribution margin year-on-year versus with 28.1% [indiscernible] seen in '21?

Okay. So thanks for the questions there. And let's go through them and try to answer them. So let's start with the first question on ready-to-heat. So when we see the ready-to-heat market, this is -- has a lot to do with the opening up new segments for us. So we are not currently developing capabilities to actually set up industrial kitchens and prepare those ourselves. We -- in our current model, we work with partners, and we'll be continuing to expand through partnerships to provide products that work well in the home environment when households just need very fast meals. And that's either working from home or having soccer practice and needing to get out the door in 15 minutes. So when we look at it from a geographic perspective, it's both expanding on what we already have in Denmark. We will be expecting to roll this out in all markets during 2022. I think I'll let Erik talk a little bit about price increases here.

And so regarding price increases, if it's towards -- we're looking at the inflation, we do feel that we have the right toolset to use to adapt us to the increased inflation. One measure might be price increases, but that is one of the things that we could do. We do also have several other things that we could do to approach the increased inflation. Looking on the fourth quarter, the inflation, we were, to some extent, impacted from inflation, but that is something that we were being able to manage in a good way.

Yes. And I think if you look a little bit if the overall contribution margin, you asked a little bit to what extent was this impacted by production and what we experienced in production. A significant portion was related to production-related efficiency. And I think, again, we reiterate we have rebuilt 3 facilities, which impacted general production during the construction phase. And then we have implemented 3 new pick-to-light lines in each production facility, which both has a learning curve for our staff as they learn the new production process and it needs to be tuned in. So even as we've had production lines already operating, employees in Norway and Sweden, for instance, have been operating other types of production lines with batch production. So as those employees move over to pick-to-light production, they need to learn that. And I think the biggest unknown event that really impacted us in November and December has to do with sick leave absences. So sick leave in general, we always have to deal with sick leave, but because of Covid and seasonal sicknesses and also saying that we need to protect our production facilities, which also means to limit the amount of illness that can spread in the facility, we have a 0 tolerance policy to sickness in the facility. That amplifies bringing in a lot more temporary staffing and using agency staffing, which also means that we don't always have the same employees on the line every week, which further slows down, bringing up the new lines into production. So we -- sick leave, unfortunately, hasn't gone away. And we see that at the start of the year, where sick leave has continued to impact because of the very high rate of Covid infections and combined with just also seasonal illness. And I think if we look at the general productivity, it continues to increase -- so we see this as a temporary thing, but impacting us much more than anticipated in the fourth quarter and impacting contribution margin. So as we look for 2022 and approaching the 30%, it's really -- I think the direct answer to your question is yes, we do expect improvements year-over-year. We believe we can control inflation. We have a plan for that, but we also have significant synergies that go above and beyond just managing inflation to be able to take further cost out of our supply chain.

The next person in the queue who is to ask currently [ Tovin Aten ].

I had a few questions. The first is, you're guiding for a strong contribution margin this year. But I guess do you also have a lot of sick leave and a little bit reduced efficiency in the beginning of the year, so you should kind of see a bit higher costs now in the Q1 and then improving and gradually? Or how do you foresee that?

Yes, that's definitely a fair statement. We -- I think January and February months have seen very high sick leaves across our business. So the sick leave continues to be a factor, which means that it will take longer for the teams to be able to learn in the new processes because of the disruption with people. And the challenge with sick leave is that it hasn't been steady, too. It's 1 week, we can have quite a number of people out and in planning for the next week, we have too many people because the sick leave fluctuates. So that type of volatility lowers production efficiency, and we will see some of that through the first quarter as well.

Okay. So -- and then I was cut off just for one second here, but you said that the ready-to-heat offering, it will be -- you will not attempt to kind of have a full set up there, you will basically cooperate with somebody else? And then is that the way to understand it?

Yes. I think we could see this as a partnership approach. And I think with the collaboration versus actually setting up kitchens is our approach to the ready-to-heat market here initially.

And then finally, I had some technical or kind of question regarding the adjusted EBIT margin. So you reported adjusted EBIT margin of 4.4% for the full year. However, you also have some nonoperational items regarding or connected to past acquisition, I believe. So -- just to understand, it looks to me that that is depressing the margin by maybe 0.9% or something for 2021. And looking at the balance sheet, it's -- this item is -- you only have SEK 11 million, I believe, to amortize left on this, I think it's customer contracts in the balance sheet. Can you just -- do you have the number for how much of the D&A is operational? And how much is nonoperational, meaning that it's related to the past acquisition. I believe that was from maybe 2017? And also how much will this reduce the margin also in 2022? Because if you adjust for this, I believe your operating margin was really 5.3% in 2021. And I was wondering how will this -- the rest of this be amortized? Will it be fully amortized by the end of 2022? And how will it be quarter-by-quarter, going forward?

Yes. So we do have depreciation and amortization amounting to SEK 45.9 million during the year, and that includes amortization of customer contracts that you mentioned of SEK 11.2 million, and those will be fully amortized during the -- until the end of 2022 and it will be done in sequence. So most of them during the first half, but there are still some -- end of 2022, it will be amortized.

Because it looks to me that it's about SEK 3 million per quarter. Is that correct? And then -- but...

It's a bit more in the first half, but the SEK 11.2 million on the full year.

This is for 2022?

Yes, exactly. So for 2022.

And how much was the amortization in 2021 that was nonoperational. Do you have that number as well?

In 2021, it's regarding the customer contracts, I think that you are referring to them it was as well, SEK 11.2 million.

It was also 11.2%. Okay. So it will be -- okay. So okay, so it will be fully amortized by 2022. And then -- yes okay. All right. And it seems also like you are quite committed to delivering on a profitable -- you are committed to delivering on profitability, which I think is great because we see a lot of other meal kit companies are basically just driving growth and losing money. So you have this -- when you listed, you had a objective of reaching 6% to 8% EBIT margin. I guess maybe that is the operational EBIT margin. So you have this special amortization nonoperational that drags down the margin by 1%. But are you committed to on an operational basis, do you think you can reach this 6% to 8% for 2022?

I think if you look at the financial targets, or that we talked about the time line for these financial targets is 3 to 5 years. And we also expressed, we have a lot of turbulence here short term when it comes to knowing exactly how the pandemic environment plays out. So we -- for us, it is an operational EBIT target. So you're absolutely right there. I would say that we have a period here coming through the environment that we're in right now, where we will be -- we will have an environment, where we have the contribution margins that we will be driving back up towards 30%. And then we will also -- a lot depends as well in terms of volatility and in terms of top line and cost structure. But over time, we do definitely expect 6% to 8%.

And that was the last question from the phone. So I'll hand the floor back to our speakers.

Yes. And it looks like we have -- we're just checking the questions on our Investor Relations channel here, and it looks like we've received some questions there. And we'll see if we -- let's see how we can address those questions. I think...

Yes, I can start, we had one -- another question regarding the depreciations during 2022, and how much the depreciations will decrease. We have done a lot of the investments during the year. So obviously, that is something that will impact the profit and loss. As well, we do have the depreciation of the customer contracts, and that is then, as we mentioned in the previous question, something that will be last year this year for 2022.

So the next question that we have on the Investor Relations e-mail is the telemarketing that was ongoing, especially in Sweden, was it cold calls? Or were you trying to reactivate sleeping customers? We actually have what we call internal telemarketing and external telemarketing. Internal telemarketing is an activity that's both ongoing and very productive for reactivating these sleeping customers. And we continue to believe in that and continue to drive that channel. What we have slowed down and essentially has stopped. It has to do with cold calls as well as leads calls. So -- and these are performed by external telemarketing companies. You ask -- we have another question here, which is -- will the ready-to-heat include large investments? We don't anticipate large investments for rolling out ready-to-heat in our markets. There's another question here with regards to how are we thinking about using the SEK 160 million in cash. And for the time being and what we've said and what we've written in the report is we are exploring different strategic growth avenues. We also are very clear that when it comes to the cash flow of the business, we do believe there's room for both looking at dividends as well as investing in strategic growth. When we think about the question is, it would be interesting to hear how we see the competition from HelloFresh. Yes, the share -- the equity market seems to believe that they're going to take over all of the Nordics and the knockout all of the competition, including the LMK Group. I think, yes, HelloFresh is obviously a new large international competitor in the Nordic market. They know how to do meal-kit business as do we. I think what it comes down to is, we don't see this as a winner-take-all market. We have a very good offering. It's very local. It's very -- we work with both local taste as well as local suppliers. We don't use private label in our products. And customers are very familiar with our strong brands. We don't believe that HelloFresh will be able to knock us out of the market. But they will obviously have -- they obviously have a foothold, and they have indicated that they will continue to make the investments, and they have made significant investments and generated significant losses in the Nordics over the last couple of years to find their positions. But we do believe that they're rational as well. And at some point in time, they will also need to make money to be able to justify the business activity. The last question, and we had a few here. So the last question was, are you going to do any large investments during the year that will burden the profitability for 2022? We have increased the investment level because of the integration of RetNemt and also the rollout of pick-to-light production. We will be making investments at a CapEx level to further increase production efficiency and automation. But we expect that to be at a lower level than what we invested in 2021. We don't see any other significant projects having a material impact on profit and loss in terms of affecting profit for 2022 to the same degree that we had in 2021 with both pick-to-light and production efficiency, lower efficiency in production as well as extra costs related to integration with RetNemt. So with that, it looks like we don't have any...

We have one more question regarding dividend. Yes, we got that question regarding dividends. If you might pay a dividend? And the management team and the Board are exploring different strategic growth options and evaluating how to efficiently deploy cash resources. And the group's cash flow is sufficient, strong to offer the potential for both dividends and investments in growth.

That's the statement that we have as of today. Okay. I don't see any further questions from our other written channels. And if there's no other further questions on the phone then I'd like to just thank everybody for the participation on this call today. I look forward to speaking to you again in the future. Thank you very much for your time.