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

Welcome to the LMK Group Audiocast for Teleconference Q3 2022. [Operator Instructions] Today, I am pleased to present Walker Kinman, CEO; and Erik Bergman, CFO.

Thank you, Mark, and thank you for those of you joining us this morning for the presentation of the third quarter results for the LMK Group. Let's get started on Slide 2. So my name is Walker Kinman. I'm the CEO of the LMK Group. I'm joined by Erik Bergman, our CFO. We'll give you a short intro on the company and then take you through some prepared remarks on the third quarter development and financials before we open up for questions. So first, a little about the LMK Group and our business on Slide 3. So as pioneers in the meal kit space, we've been changing the way people eat for over 14 years, which is why we see our purpose as innovating the mealtime experience. Our 4 strong local brands in Norway with Godtlevert and Adams Matkasse, in Sweden with the Linas and in Denmark with RetNemt, have a long heritage of innovation and entrepreneurship and simplifying everyday life for our customers. We make it easy for them to enjoy delicious, well-composed and inspiring dishes. Our service rent reduces the stress of planning and shopping, while also performing good eating habits and stimulating joyful cooking, not to mention saving valuable time for quality family moments at the dinner table. Let's turn then to Slide 4. Our meal kit business model is demand-driven and this means that we carry very low inventories and minimize food waste generated in our own operations. Our recipes are prepared by local chefs and dieticians meaning that we incorporate a significant portion of local taste preferences while also offering a widest selection of recipes in the markets we operate. We use our own proprietary tech solution made up of a single technology platform across our business. This enables a highly personalized customer experience, using, for instance, AI technology in the form of recommendation engines while being able to produce each order unique to the customers on taste preferences using pick-to-light and automated production solutions. Our well-established, strong and scalable supply chain enables efficient purchasing and distribution processes and we integrate supply chain operations in the business. As we do this, we're taking advantage of Nordic-wide sourcing opportunities. So let's turn to Slide 5 and mention some of the highlights for the quarter. The third quarter is unique during the year as it contains a large part of the Nordic summer holiday in July and early August, which lowers volumes while households are on vacation. An important aspect of the quarter is the reactivation of customers. And here, we saw a slight increase in the number of orders from reactivated customers compared to the previous year. However, most players in e-commerce in Nordics are experiencing a very tough business climate, which has both impacted us through lower new customer acquisitions and loyal customer churn. As we noted in our trading update that we published on October 7, net sales reached SEK 205.5 million for the second quarter, which was down 21% versus the third quarter of last year. This is a smaller contraction than what we experienced in the second quarter. The third quarter is seasonably low from a profitability perspective and our adjusted EBIT landed at SEK 25.9 million loss and a negative operating cash flow of SEK 28.5 million. So on a positive note, order frequency reversed course again from the slight contraction in Q2 and was up 2.5%, while average order value continued to increase and was up by 11% on a year-over-year basis helped by currency tailwinds. Let's move on to Slide 6. We continue to see challenges emerging in the market that will be with us for some time going forward. During the third quarter, central banks raised interest rates across our markets in the Nordics and this has driven substantial increases in homeowner mortgage expenses. This low income combined with inflation or -- and economic uncertainties is weighing on the purchasing power and sentiments of consumers. Public indexes we track in Sweden and Denmark have shown continued contraction in the online grocery market in these 2 countries with likely a similar development in Norway. Online groceries were down 9% in Sweden during Q3 and over 10% in Denmark through August, where data has a bit more of a lag. In Denmark specifically, we are also noting that the change in the commercial offering at the beginning of the year is also having some short-term impacts with increased churn among older loyal customers due to the offering change, while newer customer cohorts acquired during 2022 are actually among the best in the group. For our business, this meant that sales by market showed a decline in Norway of 20.5%, in Sweden by 23.6% and in Denmark of 41% during the quarter. Let's turn the page to Slide 7. So we are taking measures to address the current challenges in the operating environment. Inflation remains a distinct factor and as everyone is aware, has continued to increase in our markets. At this point, we're seeing the effects mostly in energy, fuel, food and packaging costs. We noted in our second quarter report the introduction of price increases at the beginning of August of approximately 6%, which has helped to offset some of the effects of inflation. We have recently introduced a logistics fee in Denmark and Norway to help further offset the higher costs we're seeing in distribution and packaging materials and we'll continue to evaluate price change necessities related to offsetting the impact of inflation in our business. As we have said before, the lower volume has also demanded that we look closely at our own cost structure and adapt to market realities. In the third quarter, our personnel expenses were reduced by 8% on a year-over-year basis. We will continue to manage FTE head count lower predominantly through normal employee turnover as we continue to adjust our cost structure to the current volume levels. We're not anticipating any rapid short-term changes in the current macro environment and we have, therefore, taken measures to identify must-win battles for driving growth with a longer perspective as a result of our normal strategic planning cycle. Through these battles are to increase marketing excellence as well as to cultivate superior customer experiences. We're working hard to drive more efficient customer acquisition, retention efforts that embrace tools, talent and best practices. We're also continuing to build on our customer-centric culture and reshape our organization to focus on delivering fantastic customer experience with our products every time. So moving on to Slide 8. As an organization, we are committed to delivering these fantastic or superior customer experiences and to get there requires continued development of our offering and changes to our business fundamentals. During Q3, we expanded the number of delivery options that are available to Swedish customers with most customers in metropolitan areas now able to choose between delivery days. We will continue to increase flexibility on commercially sustainable delivery options in all markets in line with our strategy. In early August, we launched several new concepts around convenience, including recipes requiring minimal active cooking time. We also launched a weekly selection of vegan recipes currently available in Sweden, adding to the wide assortment of vegetarian options supporting more plant-based diets. Finally, as we announced -- as announced, we signed a collaboration agreement with Weight Watchers in Sweden that will kick off in January. This partnership combines our production and distribution capabilities with the Weight Watchers unique method of weight reduction. And as you see this collaboration is modeled on a similar successful Norwegian collaboration that we have had for many years between Roede and our Godtlevert brand with Roedekassen. So with that, let me turn -- now turn it over to Erik and he'll take us through the financials.

Thank you, Walker, and good morning, everyone. We could move on to Slide 10 for the financial updates. As Walker talked about, it is a difficult e-commerce environment and we are seeing inflation levels that we haven't seen in decades. This is also reflected in our numbers. The third quarter is a seasonally lower quarter due to the summer holiday patterns in the Nordic countries with many families being on vacation until mid or late August. Our net sales amounted to SEK 105.5 million, which is 20.9% lower than last year. Active customers, defined as customers taking at least one delivery in the last 90 days, were 30.5% lower than last year. Part of the reason for the lower active customer number is related to our elimination of external telephone marketing sales due to [ core ] performance issues. This sales channel contributed to 24,000 new customer acquisitions during the first 3 quarters last year. A higher concentration of loyal customers and improvements in the new customer mix has contributed to the improvement of customer metrics, such as order frequency, which is up 2.5% and average order value that is up 6.6% on a common currency. To offset inflation, price adjustments were introduced in August of approximately 6% in average throughout all our brands. The price increase did not contribute any material change in churn rates, showing that customers appreciate our products. We will continue to evaluate price adjustments as needed to offset the effect of inflation also going forward. Let's move on to profitability on Slide 11. As mentioned, the third quarter is characterized by lower summer volumes, but also relative higher sales and marketing spend during the quarter, which is related to the reactivation and new customer acquisition after the summer. This is reflected in financial results where the third quarter is normally the quarter during the year with lowest profitability. As you can see in the chart, only 2020 have we achieved a positive EBITDA during the third quarter, which was also driven by COVID restrictions that were partly offsetting the seasonality. During the quarter, we achieved a contribution margin of 21.5%, which is also affected by seasonality with fixed and semi-fixed costs, for example, in production line haul being spread over lower volumes. Inflation in our markets was driven by higher fuel, food, electricity and packing costs. We estimate that the inflationary effects on packing materials, the production facilities operation costs, which includes electricity and logistics that those have increased cost by approximately SEK 4.7 million in the third quarter versus same period last year. We continue to actively work with our Pan-Nordic purchasing initiatives, which have helped mitigate inflation in the current environment, but are not producing direct incremental price productivity as was already planned. We are driving marketing efficiency measures and we are managing sales and marketing to focus the spend of when it's most efficient and profitable to gain and retain our customers. This means that we will focus more spending during the year in the first and third quarters, reduce sales and marketing spend from 19.2% of net sales to 16.8% during the quarter. In the third quarter, last year, both Adams Matkassem and Linas brands had one-off costs related to the rebranding activities and costs were also lower with the elimination of underperformer external telemarketing channels. The adjusted EBITDA loss for the quarter amounted to SEK 14.6 million, which equals a negative adjusted EBITDA margin of 7.1%. The 3.6% point reduction from last year is explained by the lower delivery volumes as well as the lower contribution margin. Adjusted EBITDA year-to-date amounted SEK 1.1 million, which equals a margin of 0.1%. Adjusted EBIT loss for the quarter amounted to SEK 25.9 million, equaling a negative adjusted average margin of 12.6% for the quarter. And with that, let's move on to the cash flow on Page 12. At the end of the quarter, the cash position amounted to SEK 70.8 million and our cash flow from operating activities amounted to negative SEK 25.8 million. Cash flow was driven by losses for the quarter and working capital changes. The graph on the page illustrates cash movement during the last 12 months, this to show the large one-off investment in integrating our Danish operation and we converted 100% customer production in Sweden and Norway. Both initiatives have now been finalized. Acquisition of tangible assets during the quarter amounted to only SEK 0.3 million compared with SEK 6 million in the same period last year. And we feel that we have a good cash position to navigate the current business climate helped by the fact that we have no structural debt on the balance sheet, except for IFRS 16 lease accounting. With that, let's move on to Page 13. The turbulence in over on a macro environment gives a high degree of uncertainty to any top line forecasting. We expect that the top line contraction will continue also in the beginning of 2023. We will continue to drive marketing efficiency measures and we are managing sales and marketing below 13% of net sales on a full year basis with emphasis on the first and third quarter. Given the rapid escalation of inflation, we see our target of contribution margin approaching 30% to require more time than our original plan. We expect that continued price adjustment, combined with efficiency improvements, social initiatives and the cost reduction will help offset the sector inflation and contribute to sequential improvements in the contribution margin. We remain committed to a contribution margin approaching 30% on a long-term basis. With that, I would like to hand back to Walker for a quick summary.

All right. Thanks, Erik. So let's turn to Slide 15 to summarize and then we will open it up for questions. So in the third quarter, we increased order frequency with a steady customer reactivation flow and increased our average order value in the midst of a very challenging e-commerce environment. We introduced price increases counteracting inflation while managing towards a lower cost structure. Our work is ongoing to deliver fantastic customer experiences and we do so -- and to do so we are going to continue to invest in the development of our services, products and brands. And last but not least, the company retains a good cash position to navigate the current environment and is debt free. So to conclude, I'd just like to thank all of our employees and partners again for all of their hard work in a very challenging operating environment. Let's now turn it back over to our operator, Mark, to open up for questions.

[Operator Instructions] Ee have one question from the phone lines that's from the line of Clement Genelot of Bryan Garnier.

Maybe 2 questions on my side. The first one is on the partnership with Weight Watchers. Is there any figures you can share about Weight Watchers to really help us understand the extent of this partnership in Sweden? I mean how many members do they have in Sweden? And also, would it lower your [ CAC ] in the country? And my second question is you have on -- around the sales guidance. So your guidance of continued sales decline of the beginning of next year, is it only reflecting let's say the fact that you stopped your telemarketing campaigns only, if I'm right, in Q1 of '22? Or is it also reflecting a kind of consumer squeeze in the Nordics?

All right. Thanks for the questions, Clement. I think to answer the first question with regards to the Weight Watchers partnership, we were not able to release figures on the relationship with that partnership. I think one of the things that we appreciate about this type of collaboration though, is, first of all, a very strong brand name in a segment which can quickly align with the leanest brand in Sweden. As I mentioned, we've done a partnership with Roede between Godtlevert using subscription Roedekassen, which is basically the same type of concept with regards to weight reduction in the Norwegian market. That's been both a very successful and a very loyal group of customers in Norway. And we see that as -- that's the fundamental behind why we're doing this with Weight Watchers also in Sweden. We bring a lot to the table with capabilities in terms of manufacturing, distribution and technology menu planning and they have both a very broad customer base as well as brand strength to promote in their channels. I would say that we are not calculating business models with a increase in customer acquisition as most of the customer acquisition push will go through Weight Watchers channels. With regards to the sales decline and our indications that we expect sales to continue to contract over at least the next 6 months, I think there are the 2 aspects that you mentioned that are impacting us. One is clearly on the discontinuation of telemarketing, where initial volumes that come in with first purchases from that channel drives volume. As you correctly mentioned, we started the -- we had telemarketing last year through the month of October. And then we basically ramped that channel down based on having lead flows that were in place and just working through leads. But by January, it was completely external telemarketing activities were completely stopped. So that is definitely one factor that slows down -- from a comparability perspective, it is out of the equation. But I don't think -- we can't avoid the fact that there is consumer sentiment decline in the market and what we're seeing both with consumer activity post-pandemic, which has gone back to old [ hunts ] and old routines combined with a squeeze in terms of wallets for consumers. And that's both from inflation seen across the board, but also in terms of interest rates on mortgages that are increasing and then combined with sort of other general geopolitical uncertainty and recession uncertainty. So I think you basically get both aspects there when it comes to consumer sentiment being weaker and therefore, seeing volume decline because of consumer sentiment.

[Operator Instructions] Okay. There seems to be no further questions from the phone lines at this time.

Okay. And we've received one question through our e-mail channels. So let's address that question. We have from [ Jorge Danielson ]. The question, is it possible to reach 30% contribution margin medium term if volumes stabilize on the current levels? And in our calculations in the forecasting, we definitely keep 30% in our targets in terms of where we're building the business. I think to answer the question specifically, I think, yes, it is possible to get there, but it will take some time. We're definitely working through and driving efficiency within our production facilities after some significant changes last year. We're working with both pricing and other cost measures that will help improve our contribution margin. So as we know, we're looking for definitely sequential improvement in what would be the fourth quarter. But also year-over-year, we expect to see sequential improvement. But this is a question, can you do it at the current volumes? And I think our answer there is definitively yes. Erik, I can't see if there's any more questions. Have you gotten anything else through your channel?

No, there's -- I can't find any other question either.

Okay. So thank you very much for tuning into the call. And once again, we thank all of our employees and partners and everybody involved in our business for the hard work in the current environment. With that, we'll conclude the call. Thank you very much for joining.