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

Welcome to the LMK Group Q4 2022 Presentation. [Operator Instructions] Now I will hand the conference over to the speakers. CEO, Walker Kinman; and CFO, Erik Bergman, please go ahead.

All right. Thank you, and good morning to those of you joining us for this presentation of the fourth quarter 2022 results for the LMK Group. As mentioned, my name is Walker Kinman. I'm the CEO of 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 fourth quarter development and financials before opening up for questions. So first, a little bit about the LMK Group and our business. As a pioneer in the meal kit space, we've been changing the way people eat for 15 years, which is why we see our purpose is innovating the mealtime experience. Our 4 strong brands in Norway with Godtlevert and Adams Matkasse, Sweden with Linas Matkasse and Denmark with RetNemt have a long heritage of innovation, entrepreneurship and simplifying everyday life for our customers. We make it easy for them to enjoy delicious, well-composed and inspiring dishes. Our services reduce the stress of planning and shopping while forming good eating habits and stimulating joyful cooking, not to mention saving valuable time for quality family moments at the dinner table. 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 dietitians, meaning that we also incorporate a significant portion of local taste preferences while offering the widest selection of recipes in the markets where we operate. We supply a highly personalized customer experience across our brands that is based on our own technology platform that we have developed ourselves. The customer experience we deliver capitalizes on AI technology, driving, for example, meal selection options and our recommendation engine. This level of personalization is supported by the capability to produce each order individually using pick-to-light and automated production solutions. Our well-established strong and scalable supply chain enables efficient purchasing and distribution processes in each country. We also are continuing to integrate our supply chain, which further allows us to take advantage of Nordic-wide sourcing opportunities. So turning to Slide 5. Let's talk about some of the highlights for the quarter. As we signaled in our last report, net sales contracted again during the fourth quarter and landed SEK 255.5 million, which was down 22% versus 2021. The last major wave of COVID infections in the Nordics that restricted travel and public events occurred midway through the fourth quarter of 2021 and continued into the first quarter of 2022. This factor, combined with the current macroeconomic environment for e-commerce, explains much of the contraction on the top line. We generally expect to be profitable in the fourth quarter due to lower seasonal marketing spend. We were especially pleased, though, to deliver a contribution margin of almost 30% for the quarter, which exceeded last year by 300 basis points. Because of this margin improvement, adjusted EBITDA also came in at SEK 24.3 million, which was only SEK 3.7 million less than last year despite a net sales reduction of almost SEK 72 million. Order frequency was also steady despite price increases that we introduced, which helped to boost our average order value by over 14%. On the balance sheet, rising cost of capital and risk premiums, combined with new financial targets set by the Board of Directors also influenced our annual impairment testing and led to the booking of an impairment reserve against goodwill carrying values amounting to SEK 120 million. So let's talk a bit about how we're developing our offerings. While it had no material impact on the fourth quarter, the launch of the Weight Watchers partnership has exceeded expectations, and we are very pleased with this continued development during January and February. This type of partnership shows the benefits of 2 strong brands joining forces, LMK Group providing production and distribution expertise combined with Weight Watchers' proven method for weight reduction and network of over 100,000 Swedish members. We see positive initial purchasing patterns for these customers, including a higher average order value. We have spent an effort during 2022, investing in our front-end technology infrastructure and are starting to see some positive direct effects on the customer experience when navigating our sites while improving our effectiveness of performance marketing and search engine optimization efforts. We have also increased the investments in social marketing, which are driving growth on social media platforms and the more recent expansion into TikTok. In the third quarter, we talked about increased delivery options in Sweden. And in the fourth quarter, we further worked at expanding delivery slots in Denmark. This has led to more options for our customers and more flexibility in how they receive their delivery. And finally, the fourth quarter also includes Christmas, which gives us the opportunity to sell our popular Christmas meal kits and other seasonal add-on products that are supported by our production capabilities. So let's take a closer look at the market development. Central Banks further raised interest rates across our markets in the Nordics, and that has driven substantial increases in homeowner mortgage expenses. This, when combined with inflation, war and economic uncertainties, continues to weigh on the purchasing power and sentiments of consumers. We expect it will do so for some time. Public indexes we track in Sweden and Denmark have showed a continued contraction in the online grocery market in these 2 countries with likely a similar development in Norway. Online groceries were down a little over 7% in Sweden during Q4. This type of data has a bit of a lag in Denmark, but there we see it being down 12% in November and 12% for the full third quarter. During the fourth quarter, we introduced delivery fees across all brands and added a further price increase in Sweden, which addressed the higher local food inflation there. While the delivery fees had no noticeable effect on churn in Norway and Denmark, the higher prices and delivery fee in Sweden had a short-term impact on increased churn. For our business, this meant that sales by market showed a decline in Norway about 18%. In Sweden, it was around 22%, and in Denmark, it was just under 40% during the quarter. Inflation and other macroeconomic factors have affected our business throughout 2022, but we are very mindful that a focus on profitability has been a key element of our success and especially so in this environment. While price increases have certainly helped us offset some of the effects of inflation and expand margins, we are also immensely proud of the efforts that have gone into continuing to drive operational excellence and improved efficiency across the business. For instance, we have seen a 27% increase in deliveries per production hour compared to Q4 last year, which was marked by the final implementation of 100% customer unique production. Successful efforts to improve efficiency often mean simplification and solving root cause issues, which have also then resulted in a 1.3 percentage point decline in the percent of orders that have registered some form of complaint. Happier customers leads to fewer reimbursements, and the 0.5 percentage point drop in reimbursement is equal to almost SEK 1.3 million in higher profit compared to what it would have been if no improvement in complaints had occurred. Further contributing to margin expansion has been a 24% reduction in year-end full-time equivalent head count as well as a reduction in central function expenses. As I noted in the written report, we are faced with several realities as we examine our operating environment that encompass inflation, recession, competition and rising cost of capital. In light of these realities, we have adjusted our financial targets and set out several clear must-win battles that are high on our strategic agenda. On the financial target side, we are focused on being profitable and self-financing in the short term. This means focus on stabilizing and then profitably growing the top line. We have adjusted our long-term expectation on growth to 6% to 8% CAGR once revenues have stabilized. Given the higher degree of uncertainty surrounding inflation and competition, we expect to see EBIT margins of approximately 4% to 6%. Our must-win battles can be summarized with 3 headlines. Increasing marketing excellence is about lowering the cost for customer acquisition and retention through more effective marketing efforts. We are defining a single value proposition across markets while increasing investments in performance marketing and social selling capabilities. We have further more examined in our commercial setup to simplify cost, to simplify structure, sharpen focus and improve digital execution. Under the headline of cultivating epic customer experience, we place special emphasis on continuing to improve the customer journey. We have reorganized assigning committed customer experience teams with the aim of developing steps in the customer journey with focus on onboarding, delivery, retention and our physical products. We are focused both on the quality of the experiences we are delivering as well as doing it in the most cost-efficient manner. Finally, we are also keen on taking advantage of the large market opportunity that exists in the online food market in Denmark. We're fully established with excellent operational capabilities, but volumes have been affected by many significant changes to the commercial offering and the general economic environment. We, therefore, also place special emphasis on increasing volumes in Denmark to amplify economies of scale and increase critical mass. Our immediate focus is on accelerated search engine optimization, boosting conversion rates, increasing traffic and expanding our marketing partnership network effectiveness. So with this, let me now turn it over to Erik to take us through the financials.

Thank you, Walker, and good morning, everyone. We could move on to the financial updates. We were faced by a difficult e-commerce environment, and we saw inflation levels that haven't seen in decades. The sales environment remained depressed during the fourth quarter due to the ongoing macroeconomic factors that impacted demand. The fourth quarter was characterized by seasonal slowdown towards Christmas vacation, and as such, the fourth quarter is normally not the quarter where we go out to acquire new customers. Our net sales amounted to SEK 255.5 million, which was 21.9% lower than last year. Our active customers were 30.5% lower than last year. During the quarter, we increased prices with the introduction of delivery fees across all brands. We also added a price increase in Sweden addressing a higher localized food inflation. The price adjustments were needed to maintain our high product quality. The higher prices were also the main factor behind the increased average order value increased by 14.3% versus the fourth quarter in 2021. Let's move on to look at the contribution margins. We are very pleased in delivering a contribution margin of 29.7% for the quarter. This was an improvement of 3 percentage points versus the fourth quarter last year. The margin was helped by the price increases, but that is not the only explanation. In total, LMK Group has increased customer prices between 11% to 16% on meal kits versus last year, including the delivery fee. This is higher than we have done before, but it's lower than the reported food inflation, which were 18.2% in Sweden, 11.5% in Norway and 14.9% in Denmark year-over-year in December. The inflation was not only limited to food but also estimate inflation effects on packing material, production fixed costs and logistics to have increased costs by SEK 3.9 million in the fourth quarter 2022 versus same period last year. Several initiatives have been successfully not only reducing the impact from inflation but also contributing to an improved contribution margin. These initiatives include Nordic sourcing agreements, menu control measures and continued production efficiency gains. Let's continue on profitability on the next slide. We ended the year with a strong quarter from a profitability perspective. The adjusted EBITDA for the quarter amounted to SEK 24.3 million, which equals an adjusted EBITDA margin of 9.5%. This is 0.9 percentage points higher than same period last year. The good contribution margin in combination with disciplined operating expenses were behind the relative improvement of adjusted EBITDA despite lower volumes. The adjusted EBITDA for the full year amounted to SEK 25.4 million, which equals an adjusted EBITDA margin of 2.3%. We are driving marketing efficiency measures, and we are managing sales and marketing to focus the spend on when it's most efficient and profitable to gain and retain our customers. Our efforts in marketing excellence have reduced marketing spend by 9.7% versus last year. On a full year basis, sales and marketing expenses amounted to 12.8% of net sales, which is in line with what we previously communicated. To offset delivery volumes and reduce our cost structure, we have been reducing head count, mainly the employee turnover and limited rehiring. Personnel costs for the quarter amounted to SEK 53.1 million, which was 6.3% lower than same period last year. During the quarter, an impairment charge of SEK 120 million was recognized. This was related to goodwill values for Sweden and Denmark. The decision to reduce the carrying values were due to increased cost of capital in combination with updated financial plans with revised financial targets. The impairment is based on a discounted cash flow valuation where the weighted average cost of capital used in the calculation has increased from 12.9% to 17.9% in Sweden and from 12.4% to 17.6% in Denmark. This is driven by higher risk-free interest rates and increased market risk premiums. The financial targets reflect the new reality and our focus on profitable growth. And as such, we have done changes in our financial estimates. The impairment charges itself does not affect the company's cash position and does not have any impact on our operations. And with that, let's move on to the cash flow. At the end of the fourth quarter, the cash position amounted to SEK 56 million. Most of our customers pay shortly after the delivery, whereas we pay our suppliers later. Due to this negative working capital model, the position in end of December is seasonally low due to seasonal pause during Christmas holiday. This is to be increased once customer payments begin in January. Cash flow from operating activities during the fourth quarter amounted to minus SEK 5.6 million, with changes in net working capital of minus SEK 29.6 million. The negative changes are, to a large extent, explained by changes in trade payable balances. This is due to calendar effects, adjusted payment terms imposed by new European legislation and lower volumes. This change in net working capital for the full year amounted to minus SEK 44.6 million, also explained to large extent by the changes in trade payable balances. We don't expect the same negative change in working capital for 2023. During 2021 and first half of 2022, we have been investing in the integration of our Danish operation and the conversion to 100% customer unique production. Both investment programs were finalized during the first half of 2022. This was reflected in our CapEx as acquisition of tangible assets amounted to SEK 2.6 million compared to SEK 9.5 million previous year and on a full year basis to SEK 13.2 million compared to SEK 22.4 million the previous year. Investment in 2022 also include investment in our offices as we reallocated our Stockholm office during the fourth quarter and our Oslo office during the first quarter. In general, we believe that we have a good cash position to navigate the current business climate, helped with the fact that we have no structural debt on the balance sheet, except for the IFRS 16 Lease accounting. So dividends. There is a balance between providing a good direct return to shareholders as well as investing in growth opportunities. Given the market development in 2022 and the uncertainty in the volume development, the Board had adopted a new dividend policy shifting the focus from a fixed amount per share to a relative number based on generated cash flow. The dividend policy states that the target dividend over time should amount at least 50% of cash flow from operating activities less CapEx and lease amortization. The policy focused on the minimum level that we intend to pay out. For 2022, the Board proposed a total dividend of SEK 3.8 million, which equals to a dividend of SEK 0.36 per share. Let's move on to looking forward. Our target is profitable growth. On a short-term perspective, that means to stabilize revenue development, which means to discontinue the contracting trend, although turbulence in the overall macro environment gives a high degree of uncertainty in top line forecasting. That's mentioned on the page, we do see a continued contraction during the first half of 2023, although at lower levels. We will continue our efforts toward the contribution margin approaching 30% on an annual basis. We will also 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 in the first and third quarter. And finally, we are expecting to be EBITDA profitable in the first quarter of 2023. With that, I would like to hand back to Walker for a quick summary.

All right. Thanks, Erik. Let's go to Slide 18 to summarize, and then we'll open it up for questions. So as we conclude, we'd also like to leave you with some of the takeaways for the quarter. Our disciplined approach to profitability, a new partnership with Weight Watchers in Sweden and clear must-win battles, guiding our strategic direction are what lead us into the new year. Volumes are down. That trend will continue through the first half of the year, but this is partially offset by double-digit gains in average order values. We have raised prices to counteract inflation and make sure that we maintain product quality. We have increased our production efficiency and quality in production and continued developing the customer experience. We've delivered a big improvement in contribution margins during the quarter, which is helping set the stage for increased profitability going forward. And finally, the Board has set a new dividend policy and is proposing a dividend of SEK 0.3 per share. So to conclude, I'm very proud of the efforts of my colleagues this past year. I want to thank them for their efforts in navigating what was a very challenging operating environment. 2023 will continue to demand a lot of all of us, but we have a strong team in place that's capable of delivering. So with that, we're going to turn the call back to an operator to handle questions.

[Operator Instructions] The next question comes from Clement Genelot from Bryan Garnier.

Three questions on my side, if I may. The first one is on the partnership with Weight Watchers. Could you give us any more color regarding the performance of this partnership? My second question is rather on the prices. Post price increases in Sweden and the implementation of the delivery fees, how do you compare with HelloFresh [indiscernible] market, so being Sweden, Norway and Denmark? And my third question is rather on the customers, how is the customer recruitment going so far in Q1?

Thanks for your questions. We can start out with the Weight Watcher partnership. And just to give you an idea, we have -- as we mentioned, the partnership and the sales acquisition has exceeded expectations. That relationship, we do some of the marketing on our own channels, but we also have the benefit of the customers and the members of the Weight Watcher network. So they are approaching their own customers with the offer of meal kit which is specifically tuned to the Weight Watcher model. I can't talk about specific details. But when we look at it from the perspective of assisting in terms of customer acquisition, in terms of improving marketing efficiency, we see this as benefiting relationship. We can significantly lower our acquisition costs with Weight Watcher customers, and at the same time, that provides us with room to give them a benefit for also making sure that they are actively engaged in promoting in their own channels. When it comes to the prices, you asked about the delivery fees and how those relate to HelloFresh in all the markets. We have gone out with a delivery fee, which increased our average order value with roughly 4% to 5%. This is in line with what the market has been starting to collect on orders. So we're not exceeding HelloFresh by any significant means. I can't comment right now on specifically market for market where those delivery fees are landing, but they are in line with market. And I think it also gives us the opportunity to engage customers in loyalty actions as well, where we can introduce free delivery due to loyalty now that we have delivery fees in place. Finally, I think you asked about customer recruiting and how that's gone in the first quarter. I can say that through the end of February, we are recruiting at a rate in excess of what we recruited for new customers in 2021, and we're doing it at a lower cost overall in terms of marketing, sales spend and vouchers for discounts. Did that cover your question, Clement?

Yes.

[Operator Instructions] There are no more questions at this time. So I hand the conference back to the speakers for any closing comments.

Yes. So there are -- we have some more questions that have come in, in terms of written questions. So we'll read those questions out, and then we'll address them. So we have one question, which was, can we speak about our market share in meal kits in your different markets, Norway, Sweden and Denmark; how it has been developing over time, especially in relation to HelloFresh, who are very aggressive on marketing, that question coming from [ Robert ]. Judging market share is more of an art than a science because there's imperfect data. So if we look at it this way, if we take the Norwegian market, we -- up until the entrance of HelloFresh pretty much had what we would have judged to be about 95% of the market with very few competitors and those competitors being very local and very niche. So obviously, with HelloFresh coming in, the market share dynamic has changed in Norway. It's fairly clear that they're willing to spend a lot to acquire customers at this point in time. And that means that our market share would be lower in Norway today than what it was before the entrance of HelloFresh. In the Swedish market, for quite some time, we have been a market leader in the meal kit space with maybe 1/3 of the market. With the entrance of HelloFresh, again, that changes the overall market dynamic. What we have seen from the data from Dagligvaruindex, which is the Swedish grocers association in Sweden, is that our market share when it comes to those reporting in the market, which excludes HelloFresh and Marley Spoon, indicates that we've been capturing market share from other competitors for the last 2 years. However, that market is also affected by HelloFresh's marketing activities in the market. So we expect at this point in time that HelloFresh has probably passed us in terms of market share. We maintain a significant portion of market share in the market, and we have a very competitive offering in the market. When it comes to Denmark, we have been a follower in that market and chasing the market leader, which was -- which has been -- sorry, I dropped the name, Aarstiderne, who has been a market leader for some time. So we've been a challenger in that market with probably closer to 15% market share. I think HelloFresh's entrance has also changed that market dynamic. And where we're at today is lower than 15%. It's very difficult to judge what that would be, but it would be sub-15% in the Danish market. So hopefully, that answers that question. The next question we have comes from [ Pieter ] and the question is, cash is down significantly during Q4, which was the opposite during the second quarter -- was the opposite during 2021. Can you please elaborate about the cash change?

Yes. So looking at cash change, one of the main -- so comparing last year versus this year, the main difference is the decline or a decrease in net working capital. That is explained and also came up in the presentation, both by timing and about the European legislation and as well as lower volumes. The timing aspect of it is approximately -- impacting us by around SEK 20 million, and that is when we do pay our suppliers. Also to elaborate on the European legislation, so the European legislation is about that -- the maximum amount of payment days that we can provide our suppliers is 30 days. Previously, we have had suppliers with more than 30 days, and that is also then making us -- that is impacting our trade balances. And we are estimating that -- although it is hard to estimate, but we estimate that to around SEK 4 million to SEK 5 million of an impact. During the year, we have also had the dividend we paid out in the first half as well as we have been investing more heavily in our CapEx, which I also mentioned in the presentation. We don't foresee that we will continue with the same investment levels that have been doing during 2021 and the first half of 2022.

Okay. Let's move on to the next question. The question was from [ Marcus ] , and it says, how do we see the competition in Denmark? Who are the largest players? You've been active in Denmark here for many years. What steps will you be taking and why will this give success in the future? So when it comes to the Danish market, HelloFresh has taken a large position also with aggressive marketing in Denmark. The other large players would be Aarstiderne. Nemlig is also an online player doing both free pick -- pure-play free pick but also providing meal kit experiences. There's a number of other players in the market that reflects our size and position as well. But when it comes to Denmark, what's been clear for us is during the -- both the exit of the pandemic as well as the timing at the same time with the integration to a different technology platform, we changed certain elements of the commercial model. What we're seeing is that we have good -- when it comes to the cohorts coming since the change in the commercial model, we are seeing good cohorts. We're seeing cohorts that are as strong as we have in Norway, for instance, and better than Sweden. The challenges is that we have lost customers along the way who were used to a different offering. So what we are focusing on, as I mentioned in my remarks, are things that will drive the volume in Denmark but very much focused on the things that we need to do to be much more effective digitally in the market. And this includes accelerating search engine optimization, working with conversion rates and optimizing conversion, increasing the flow of traffic and also working with the marketing partnership that we have and expanding that. Ultimately, this is a tough market to be in, but we see a very interesting opportunity in Denmark. We continue to see that opportunity, and we're well established to be able to capitalize on it. Let's move to the next question. And this one is from -- an anonymous question. From your new dividend policy, the dividend makes sense. But do you believe the proposed dividend is well aligned with your very negative macro outlook? I think that this is a question really from a shareholder perspective as well is how do we balance what would be a business that's been able to generate cash flow with looking at the market and the development end market. I think in our case, we see that the market has definitely entered recession. It will be in recessionary during the year. When we talk about a dividend of SEK 0.3, it's a significant reduction from the dividend that we gave last year. And the cash when it comes to the cash outlays for the dividend, it reduces to roughly SEK 3.8 million, down from SEK 22 million. So there is a significant reduction in that dividend. I think from our perspective, it's well within the capital requirements of the business and our expectations as well in cash generation for 2023. We have another question with regards to -- let's take the goodwill question first. The goodwill is not impaired in Norway. Why is this? Wouldn't that be affected by the same increased cost of capital as Sweden and Denmark?

Yes, it's true that the capital has increased as well -- the cost of capital has increased in Norway as well, although that is also back to what we had previously in -- on the books for what carrying value was before. So we do see that the change is larger in Sweden and Denmark for cash units.

It's also relative to the carrying value sizes. So in the case of Sweden and Denmark, these relative carrying values versus cash flows were much higher and required impairment. We have another question with regards to HelloFresh from [ Marcus ]. Question, I'm translating this from Swedish, so bear with me. Has HelloFresh acted differently with regards to marketing during the second half? Can we see if they've been more cautious or more aggressive? Is it the same type of activity in all 3 countries or something more cautious in Norway where you have a strong position? I think in general, what we can see with the market, I think you can look at Google Trends to understand how activity in the market is trending. I don't have really any specific comments with what HelloFresh is doing. One thing that we do see is that there has been reduced search patterns for keywords within meal kits, like meal kits and the meal kit space across the Nordics. I think in line with that, we are happy with our position in terms of increasing our competitiveness vis-a-vis the marketing efforts of HelloFresh. I think the last question, at least I can see for now, is back to looking forward. We have -- and this is also from [ Marcus ]. We've gone 2/3 of the way through the first quarter. Can you give a guide on how the year has started? So as I said in my remarks, I think one of the key indicators for us is the fact that we have -- in response to Clement's question, we have increased the number of customer acquisitions so far through the year. We've done it at a lower cost and level of marketing. So that is definitely, from our perspective, a positive start to the year. As we said in the guidance going forward, we see our EBITDA for the first quarter being positive. We're not going to guide on a specific figure for that. But obviously, looking back at last year, we expect an improvement from where we finished the first quarter in 2022. In other measures, I think if you look at our must-win battles, we have a clear focus here on what would be marketing excellence. So the continued drive to increase marketing efficiency, very much focused on how our front-end and digital platforms are interacting with search engine optimization with performance marketing tools and just improving the customer experience. As I mentioned, we've increased conversion rates due to changes in our checkout and our landing pages. So we're continuing to work. Obviously, we've got a tough market environment all around. Inflation hasn't disappeared, but we're definitely in a situation where we have control to the extent that we can control our business, and we expect to continue to deliver profitability. So I think that -- I don't see that we've had any other questions coming in from our Investor Relations e-mail account as well. Thank you for your questions. Thank you for your participation. We look forward to checking back in after the first quarter results and speaking further about the LMK Group business. Thank you. Have a good day.