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

Hello, and welcome to the LMK Group audiocast teleconference Q1 2022. [Operator Instructions] Today, I am pleased to present Walker Kinman, CEO. Please begin your meeting.

Thank you, very much. And welcome, everybody, to this quarterly call for the first quarter financial results of the LMK Group. My name is Walker Kinman. I'm the CEO of the LMK Group. I'm joined today by Erik Bergman, who is our CFO. We're going to talk a little bit about our business, go through the first quarter and Erik will take us through some of the financial numbers. We'll wrap it up and then we'll open up for some question and answers. So let's turn to Slide 3. The LMK Group has been innovating the mealtime experience since 2008. And we're today a leading supplier of meal kits in Nordics, a leader Scandinavian food tech. We have with us a very strong local heritage and innovation and entrepreneurship in subscription based meal kits and ready-to-cook delivered to the home. Our business model is a very much demand driven and then we have near 0 inventory and minimal food waste in our operations. If you look at the 2021 numbers and the size of the business, we did SEK 1.4 billion in revenue and we delivered a little bit over 23 million meals to over 100,000 active customers. We reached 80% of the Scandinavian market, our Scandinavian households with our distribution network, and we have approximately 470 part-time and full-time employees working with us today. So let's turn to Slide 4 and go through some of the highlights for the quarter. Now our first quarter can only be characterized as reflecting what is the broader slowdown in e-commerce that we've seen across the Nordics for categories that are unrelated to travel and leisure. So meal kits in the more general online food categories have shown broad declines during the first quarter when faced with what's basically a very tough comparable environment from the first quarter of last year. We're also seeing things such as concepts like Revenge Tourism that are working their way into mainstream localities. Then this is really speaking on wanting to break free of what became the new normal during the pandemic. So this catch-up spending outside the home, and it's combined with the impact assorting inflation is really leading us to a short-term shrinking on the consumer wallet for at-home spending and what would be everyday services. So while our long-term prospects for growth remain strong, we're adjusting as needed to what is basically current market realities. Meal kits help consumers save time. They give inspiration, their great tasting food. They reduce food waste. These are factors that are directly related to relevant trends in our markets. And you can think of these as convenience, awareness, good health relationships and even being climate conscious. So there's still headroom for us to grow the category and the uptake of meal kits. And as we look at what we've been doing with our technology and production, this gives us a lot of confidence that we have the capability to offer what would be the most attractive meal kit solution on the Scandinavian market. For the first quarter, we delivered SEK 353 million in net sales. This was down 15.9% year-on-year. Q1 remains a period where we seasonally invest heavily in sales and marketing. So this factor, combined with inflation, high sick leave in production and even the onboarding of new production processes that were put in place and that we are putting in place, impacting efficiency during the quarter. And this leads to an adjusted EBIT result of minus SEK 17.4 million. Our operating cash flow for the period was minus SEK 24.6 million. So despite the slowdown and specifically the reduction of new customer inflows as we emerge from the pandemic, and also due to our significant reduction of external telemarketing challenge during Q4, we have continued to see improvements in 2 of our key metrics, underscoring the attractiveness of the offering. So order frequency increased by 7.6% year-on-year, while average order value increased by just under 7%, both of which are really key factors in improving our customer lifetime values. So continue on a positive note, we can turn to Slide 5. Now during the quarter, we launched new initial identities. You can see here for the Linas and Adams Matkasse brands. This identity makeover helps reinforce the significant changes that have happened in these brands with the transformation to fully flexible meal kit offerings over the last year. During the quarter, we also announced changes in management and organization that drive focus on our commercial efforts with the aim to increase organizational efficiency. We also are continuing to make significant investments in technology through active recruitment on the tech side and also production automation. And this would be things like the introduction of in-line personalized recipe printing during the quarter, which will help drive production efficiency over the long term. As we looked a little closer at our capital situation, we also concluded a change to the dividend policy was warranted and shareholders approved a dividend of SEK 1.75 per share at our first annual shareholder meeting held last week as a public company. At that same meeting, Johan Kleberg was elected as a new member of the Board of Directors. He replaces Fredrik Kongsli from the Hercules team who did not stand for reelection. Johan brings with him a solid background in media, e-commerce and logistics operations. We're happy to add his talents to the Board. We can now turn to Page 6, with some brief comments on product innovation. So as previously announced, we are on track to increase our total addressable market by expanding our ready-to-heat meal offerings. We expect this to launch commercially in Q3 at the latest. We are treated in the ready-to-heat offering as a complement to the meal kit subscription. Don't you think of it as an add-on product? We're also, however, working with general convenience concepts in the core offering, and this includes meals with easier preparation as well as fast cook times that would be part of the offering from August. I mentioned investments in technology. And in this respect, we include in-line recipe printing. This is a capability that helps efficiently reinforce our dominance in the Nordic market when it comes to the broadest selection of delicious recipes with over 80 a week now offered in Sweden. The broader selection now includes even more great tasting vegetarian options as well as the introduction of baking dishes all of this orchestrated with our AI engine in the selection process. So the great food is just a few clicks away. So let's take a closer look at how the different markets developed over the quarter on Page 7. So as I mentioned, we're seeing a downturn in e-commerce and online groceries across all markets. In Sweden, we can see from the Swedish online grocery index a fall of 19% in the first quarter. This category includes click-and-collect, free pick as well as meal kits delivered to the home. Our own new sales contracted by 25%, our own net sales contracted by 25% in Sweden year-over-year, which is partly due to the current overall trend in the market, but also the reduction of external telemarketing spend that was not providing satisfactory cohort quality. So in Denmark, we have seen figures reported for the market showing a decline of 27% in online into a food during the first month of the quarter. And our own net sales declined in the period of 29%, which is basically reflecting the broader market trend. Norway remains relatively strong despite increased competition and the current macro environment with only a 5.2% decline in net sales during the quarter. So let's take a quick look at our sustainability efforts on Slide 8. We recently published our sustainability report for 2021 as part of our annual report that we delivered to shareholders. The report is available on our website and is a great resource for us to communicate what we're doing around the impact areas that we have identified. We took home awards in Norway for our efforts around sustainability for more effective use of plastics and meal kits to reduce both the overall usage while also reducing food waste. And finally, as part of our consideration of the impact we have in the communities where we operate and also to generate employee engagement, we've introduced a new policy offering 2 volunteer days per year for full-time employees. All right. With that, now I'd like to turn it over to Erik to take us through the financials.

Thank you, Walker, and Good morning, everyone. We could move on to Slide 10 for the financial update. Despite tough environment, we continue to deliver improvements in average order value and order frequency. Walker talked about emerging from the pandemic environment and that consumer spending are being affected by higher household costs driven by inflation and the pent-up desire for traveling and visiting investments as we emerge from the pandemic restrictions. That in combination with our core business continues to be subject to tough comparison figures when put against the pandemic close to 2021. Those are the main reasons for net sales in the first quarter are 15.9% lower than the same period last year. Although, I want to highlight that net sales were 10% higher than Q1 2020, which was to a large extent unimpacted by COVID as the restriction began ramping up in March 2020. The scale back of our external telemarketing partner channel have also had impact on the size of our active customer base. While the channel drove a high inflow of new customers, it has not produced satisfactory cohort with fewer orders generated for customers and other channels. That in combination with not having a high customer inflow during the quarter are the main explanations of our active customers being 26.8% lower than last year. The scale down of our telemarketing and escalation of biweekly delivery areas are 2 examples of many initiatives that has been done to increase our cohort quality. The improved quality could be seen in both order frequency that was up 7.6% and average order value that was up 6.9% versus same period last year. To conclude, we are facing tough comparison figures short term as the effects of the pandemics are receding, but improvements compared to pre-COVID periods remains. We will continue to focus on the improvement in new cohort quality and marketing efficiency. We'll answer stability on Slide 11. We achieved a contribution margin of 24.4%. That is lower than last year. Although this year, we are producing with a 100% customer unique capability, where each delivery could be tailored for each customer in all our countries where we operate. The last pick-to-light line were [indiscernible] in end of Q4. As anticipated, there were some learning curves related to that also in the first quarter this year. Delivery efficiency was unfortunately amplified by high sick leave also during the first quarter. This is a seasonal and COVID related illness among our production workers in combination with our strict approach to protecting our producting our environment impacted us more than originally planned. We have further been challenged in the demand forecasting in the current marketing environment and have not been able to adjust staffing levels to reflect demand as quickly as we would have liked. Therefore, production efficiency improvements have been delayed until the second quarter. We have seen effects of inflation during the quarter. One example is in the fuel prices that's impacting our logistics chain. We are monitoring the inflating closely to evaluate what measures that need to be taken. We are confident that we have a tool set that allows us to efficiently manage inflation. Adjusted EBIT for the quarter amounted to a negative SEK 17.4 million. That is lower than last year and are explained by both the lower volumes as well as the lower contribution margin. The first quarter is a quarter where we invest more heavily in sales and marketing as the customers to seasonality remains with us for a longer period until the summer vacation and are in general less frequency parts. As such, sales and marketing as a percent of net sales amounted to be 16.1%, which during the full year are in line with the target of below 13%. With that, we can move on to the balance sheet on Page 12. When it comes to both balance sheet and cash flow, the comparison versus last year are impacted by last year's IPO with the proceeds acquired in the first quarter, but the acquisition of both the RetNemt and the repayment of the corporate bond occurred in the second quarter. With the repayment of the bond, it's left the company without any structured debt. Long-term liability mostly consist of IFRS lease liabilities. Excluding them, gives us a net debt of a negative SEK 109.9 million. The proposed dividend of SEK 1.75 per share for 2022 was approved at the Annual General Meeting. This is offering a good direct return while still allowing the company to invest in strategic growth opportunities. The Board of Directors have also stated a new dividend policy. The policy is targeting dividends over the next 3 years to 5 years, should amount to at least SEK 1.75 per share on an annual basis. This is very important, we expect to remain a cash-generating company. And with that, let's move on to cash flow on Page 13. As mentioned in the last slide, previous year's comparison was impacted by the IPO. As such, many of the items in the cash flow are also not comparable between the years. And in the first quarter, the cash position amounted to SEK 109.9 million and our cash from operating activities amounted to minus SEK 24.6 million. The cash flow from investment activities amounted SEK 7.2 million. The increase versus last year are related to investments in production equipment in both Norway and Sweden. The CapEx amounted to 2% of net sales during the quarter and we have been in a period where we have invested heavily in custom unique production. They have a CapEx like model, and we estimate the CapEx to 1.5% of net sales. Let's move on to Page 14. So looking forward, the external environment where we operate are turbulent and we expect it to continue to be turbulent. We are well equipped to face such markets as our company retains a healthy balance sheet and is unencumbered but with structural debt. The turbulence in the overall market environment gives a high degree of uncertainty to any top line forecasting this year, but we expect net sales in our core business to continue contracting first half versus last year, while we expected to trend to flatten out in the second half. Given the rapid escalation of inflation, we see our target of contribution margin approaching 30% as more challenging for the full year 2022. The reality of high inflationary environment for food and energy complicates our progress in the area. And as such, we expect it to take a couple of more quarters to approach that level. We expect it to be achieved through continued improvement in the production efficiency and supply chain management. And we remain confident that we have a tool set that allows us to fix manage inflation over time including input cost control and pricing power. And we continue working relentlessly with realizing the benefits of our investments in our production capabilities. We will continue to drive marketing efficiency measures, and we are managing sales and marketing expenses to a level below 13% of net sales for the full year. With that, I would like to hand back to Walker for a quick summary.

All right. Thanks, Erik. Let's turn to Slide 16 to summarize and then we'll open it up for questions. So most importantly, we've seen a broad slowdown in e-commerce during Q1 as the economies in the Nordics continue to emerge from the pandemic. Despite this slowdown in customer acquisition and revenue, we're continuing to drive improvements in the customer experience and have seen both order frequency and average order value metrics improve. We expect to see further top line contraction in the remainder of the first half based on current trading and in line with what we communicated in Q1. However, we're also working with other growth avenues, and we will be launching easy-prep-meals and ready-to-heat across all brands in August. As a result of our dividend policy review, we believe the capitalization situation of the company allows for a dividend, which offers a good direct return while allowing for further investment in growth. Finally, I'd like to just thank all of our employees and partners for all of their hard work in this dynamic operating environment. And now I'd like to turn it back to our operator to open up for questions.

[Operator Instructions] And we don't have any audio questions. So I hand it back to the speakers.

We'll just take a look real quick at our Investor Relations account and see if we have any questions coming through the web. Just give us a minute.

We have got a question from [ Jens Danielson ]. The EBITDA margin in Denmark are minus 25% in the quarter, what is behind the low profitability? And what are you doing in Denmark to have the turnaround?

Yes. So I think in -- when we talked about the operation in Denmark, we have looked at an integration project, and we did an integration last year doing a lot of changes in Denmark. Unfortunately, when you look at the volume development, and this comes back to what's happening in the broader online food in Denmark with a fall in the market of 27%. This also impacts even our own business in terms of planning and volume levels. So what we're experiencing right now is partly due to the fact that we have introduced new technology changes, and there's a learning curve associated with that. The teams are doing well in terms of getting very comfortable with the production technology, but there is still efficiency related to that. With combined with lower volumes, it complements both staffing and planning efforts and unit economics. I think when we also look at Denmark, we have planned for even more -- a level of marketing spend in Denmark reflecting our ambitions in the market. What's clear is that in our planning, we also did not expect that the broader market would behave in the way it did. This isn't just a Danish issue, but it also reflects in what we have done in the other markets, where most -- a lot of our spending in the quarter happens very early in the quarter with media campaigns and other things. It's difficult to throttle those costs when we see that the market did develop the way that we actually expected it to.

Yes. And we've got another question from [ Jens Danielson ] about the cost in the central function that has increased in Q1. And he is asking you what is behind that and if it will continue to increase. The thing that what is behind the increased cost is mainly back to 2 things. It's -- one thing is that we are a little company that drives higher cost now in the -- during the first quarter that we didn't have last year as well as we do invest more in the tech function. And as such, we also need a larger tech organization that we're able to work with our new customer unique production lines. And you further ask if we were writing the report that we are adapting the cost structure to the marketing environment. And if you could give some more details on how we do that.

Yes. So when it comes to cost structure, of course, there's a lot of different ways to approach it. Obviously, working with unit economic is the predominant area, and that's a function of both volumes and efficiency. So obviously for us, when we set the goal of a 30% CM2 margin and we're sticking to that goal, but we do see it taking us a little bit longer to get there. That both is about improving operational efficiency in production through both investment and through adjusted staffing levels and timing as needed in production to reflect the volumes that we have. We also have, in general, been very cautious when it comes to what types of -- as natural staff turnover occurs, the replacement of all roles in the organization. So these are very simple ways to look at it from a cost structure perspective. I think the other tool, of course, in our toolkit that we haven't used has to do with pricing and how our services are priced in the market. And we see a lot of price changes happening, and this is still not something we've yet done anything with.

Yes. And we have further questions on the e-mail. We have Fredrik Moregard from Pareto. What are you doing to offset cost inflation? Are you looking at price increases? What are the measures are there to navigate inflation?

Yes. And it was a little bit in that question as well when it comes to the inflationary environment because we do have a good tool set for controlling costs and unit cost and input factors and the cost of input factors. That happens -- in our planning cycles, we plan on a quarterly basis. So as there are very short-term rapid swings in prices, those are more difficult to carry. When it comes to the long-term planning perspective, this is quite clear. So when it -- we have -- in our planning towards CM2 of 30%, we think a lot about the opportunities that we have at a Nordic level for sourcing synergies. And we really haven't tapped into any of these opportunities over the last couple of years despite the really impressive work that's been done by the team in driving cost productivity. So that opportunity is in front of us, but it also, of course, then becomes a little bit more complicated with the very high inflation that we're seeing in food prices. And finally, that as a tool, there's always pricing and we're seeing pricing move in the market everywhere right now. We haven't done anything yet, but that's always a possibility for us as well.

We have some more questions from Fredrik. You say you expect a negative first half trend to flat out in second half. Does this mean that you don't expect to see growth in the second half?

[ Fredrik ], it comes back to our comments with regards to the challenge in forecasting in this market environment. I think we have had challenges in forecasting when it comes to COVID in general. And it's very difficult to understand exactly how consumers are going to behave. I think our opportunity here is we've got a fantastic base of customers that we can address and go back to -- that have tried the service during COVID. And also we've had an opportunity to show them how we can improve life with our products. I think what it comes down to is that we -- most people have to get through sort of this catch-up spending effect outside the homes before they're going to refocus on some of these factors. So it's difficult to predict what's going to happen in the second half. We don't expect the same type of challenge with comparability that we definitely see here in the first half of 2022.

And that was also in line with the next question. So could you help us understand what will bring you back to growth beyond H1 2022? What is the main driver increasing the customer base, increasing order frequency or average order value?

Well, we still have -- I think fundamentally, we have areas of the business where we see the possibility to continue to drive much better order frequency numbers and that specifically in the Swedish market, which lags our other markets in terms of order frequency. I think when it comes to average order values, we continue to drive both the ability to deliver add-ons and to upsell. And here, we've worked a lot with technology in terms of putting AI and machine learning to use so the customers actually have opportunities to pay up for other items that are presented to them, which also align with taste preferences. But I think when we talk about expanding the total addressable market, we're actually looking a lot more at the convenience side. And this fits into both our push on ready-to-heat, which we expect to see commercially in the market in Q3 as well as simply working with more convenience options, and this really comes to convenience options that are more in line with the product -- the core product but deal with much faster preparation times, maybe a little longer cooking times or simply from start to finish, it has to be faster.

And you scale back telemarketing but could not offset a lot of customer intake commission or redirecting marketing investment and how have these new channels performed in terms of customer intake?

So I think the general statement with regards to the overall market is also a general challenging to be able to sit and assess individual channel performance. One of the areas where we have expanded during the quarter has been what is a telefriend marketing campaigns. And when we've seen the results for telefriend, we see better cohort profiles than what we've seen historically with telexternal telemarketing cohorts. So I think as we expand looking at different channels to approach, there's different options out there. We have shifted more of our spending into consideration type of media spending, and you'll see much more influencer interaction with our products and services these days that has historically been there. So it's not about pushing higher on broad media spending, but rather moving down the chain with performance marketing, performance channels as well as a consideration efforts.

Yes, we'll continue the questions. We have one from [indiscernible] and noted some competitive pressure in Norway, but what about Sweden?

So in Sweden, the general market has been quite competitive for some time. And I think we're also seeing that in the result that when it comes to other long-term meal kits players that are offering fixed meal kit solution, we're seeing that their businesses decline very, very rapidly and have been doing that over several quarters. So the competitive pressure in Sweden is more or less the same. Obviously, with HelloFresh in the market, there's – HelloFresh is very aggressive on deep discounts and also seeing sort of a different type of short-term goals in how they want to drive their business from acquisition and market share perspective. So I don't think that's changed at all in Sweden. And of course, the change in the competitive pressure in Norway is simply that it's a market that has not had significant competition on meal kits and HelloFresh entered that market also last year. So the good news in Norway is that because online food has not been as well adapted in the market, and it's not as mature, there's a lot more room for growth. So Norwegian consumers are also being educated on meal kits in this process. And I think we see that reflected in our performance in Norway in the first quarter as well.

And a question from that is -- which ingredients are seeing the highest price inflation and how are you mitigating this. And I can say that in our meals, one of the largest cost is the protein in that one, and they see a high inflation in both chicken and fish and the way we could mitigate that is to both what type of protein to include in the dish and to what to extent is included as well. So -- but there are some road to which we also see looking at what we talked about earlier with the big synergies and purchasing? And we got another question from [indiscernible] and ready-to-heat, largely in all markets in Q3?

Yes. And this is what we're planning on, and this basically means we have been running ready to heat in the Danish market for several years, but on a different scale and with a different approach, commercial approach to the market in this first phase of looking at ready-to-heat, will basically approaching the market is with partners to place existing products in the portfolio offering.

Great. And we got some questions as well from Clement Genelot in -- from Bryan Garnier. First question is, could you quantify the impact of sick leave on your Q1 EBITDA? And yes, we do have the numbers on how the sick leave is impacting, but I don't think that is something that we are talking to about externally. And the second question is, and is discrepancy between the trend in active customer base declining between Sweden, Norway and Denmark. This is it's down in all 3 geographies?

Yes. The short answer there is yes, it is. And this is on a comparison basis against what was basically a very heavily restricted first quarter of last year. When we look at those 2 markets, so they're not developing in precisely the same way. And part of this has to do with the underlying reduction in telemarketing spend, which impacts Sweden the most. So if you look at active customer decline, Sweden leads, as those what would be less well-performing cohorts are remerged from the equation. In Denmark as well, I think the overall market situation is certainly with the contraction in online groceries and 27% is actually driving also a higher level of decline in active market active customers in Denmark, but lower than Sweden. So -- and then we have Norway, which is not declining as much.

Yes. And then we have a question from [indiscernible]. Marketing spending in the second quarter, what do you expect margin to spend to be in the second quarter in percent of net sales.

And this level of detail, we're not broadcasting in terms of what we spend. I think one of the general comments that we have made is we were not satisfied last year with the performance of the marketing spend in the second quarter, ultimately due to the fact that it's too close to the summer holidays. So as we look at seasonality in the business on the sales and marketing side, we will see that both the first quarter and the third quarter will show the highest marketing spend. And I think as Erik commented, when we talk about sales and marketing over the course of the year, we still are looking at less than 13% of net sales as a target, and we will throttle sales and marketing to that level.

Yes. And we have a question from [ Marcus O’Dell ]. And how do you see the longer-term development in Denmark?

So Denmark is a very interesting market for us. I think in many ways, it's similar to the Swedish market, although a little bit smaller. So I think we have good prospects in Denmark, especially given the fact that we're -- we have been a smaller player in the market. One of the reasons that we made the integration and the investment in platform and technology is also to increase what would be the flexibility in that offering and the ability to provide every week a lot more, both recipes and flexibility to customers. So I think we're in Denmark because we like Denmark, and we see it as a very interesting case.

And another question about inflation, how big part of how big pockets to deliver, how much have the delivery costs increased? And to what extent is that of the total cost per delivery? And I would say that's a bit too detailed question for us to able to answer in this session?

We don't disclose unit economic breakdowns on distribution costs. But I think that what you can generally look at from a distribution perspective is that many of line-haul contracts with carriers carry what would be energy price variation. So fuel cost changes. There are certain surcharges that are locked into those contracts and basically kick in automatically. So with energy prices with crude prices that spiked to what was it 120, they're trading down around 105. I think what we have seen is fuel surcharges kick in on the distribution side, but that's on long-haul networks. Over time, of course, that puts a lot of pressure on last-mile delivery change. So we have ongoing dialogues with our partners on the last mile delivery, but it doesn't have the same impact that we've seen directly on line haul.

Another question from [ Marcus ] is about the 30% in marketing spend and how you derive that number?

Yes, I think when we look at our business, it's the balance between profitability and growth, and we haven't seen this -- we don't see this market as a winner take haul. We don't see it as necessary given the -- also given the size of the market, the maturities of the market, going out and spending at a much higher rate begins to deteriorate the profitability focus in the business. So based on running a business model that has CM2 margins approaching 30%. 13% gives us both the room above or would be a maintenance level to maintain in the normal market circumstances, the active customer portfolio as well as grow it. So that's why we've landed on the 13%.

And another question from Marcus is about, is there a point in focus on profitability before growth in this challenging environment?

I think we've been operating the business for many years that it has been actually prioritizing profitability before growth. So I don't think that this is a major -- we don't see this as a major change. It is probably not in any business to take very sharp dramatic moves to generate short-term profitability at the expense of long-term stability in the business and revenue development. So I think what it comes down to right now is we had a large amount of our marketing spend based on assumptions about what the market would develop like in the first quarter, which have turned to be quite different. I think from many people's expectations. So line sales and marketing, even in the first quarter is not something that could happen to the extent that would have impacted profitability significantly here for the first quarter. So -- but I think from our business perspective, we certainly are very much focused on profitability. And what that means for growth is to make sure that we're balancing the future and not taking just short-term profitability measures to boost short-term profit.

And that was the last question that we have…

Great. Thanks for all the questions. We note here in some of the questions that came in that there were some challenges reaching the operator and dialing into the telephone call. So we'll take a look at that and see if we can't figure out what the challenge was. Thank you for everybody who took the time to join us this morning and listen to both our remarks as well as ask the questions. Appreciate the interest again in the LMK Group. We look forward to reporting to you again at the end of our -- in August when it comes to the second quarter. So thank you again for today, and have a good day.