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

Welcome to the LMK Group Q1 2023 presentation. [Operator Instructions] Now I will hand the conference over to the speakers, CEO, Walker Kinman; and CFO, Erik Bergman. Please go ahead.

Good morning to those of you joining us for this presentation of the first quarter results for the LMK Group. My name is Walker Kinman. I'm CEO of the LMK Group. I'm joined by Erik Bergman, our CFO. We're going to give you a short intro on the company and then take you through some prepared remarks on the first quarter development and financials before I open it up for questions. So first, a little bit about the LMK Group and our business. For the past 15 years, we have been transforming people's eating habits and thereby define our purpose of innovating the meal-time experience. Our local brands in Norway with Godtlevert and Adams Matkasse, in Sweden with Linas Matkasse and in Denmark with RetNemt, all have a rich history of entrepreneurship and innovation, all geared towards making our customers' lives easier. Our focus is on delivering delicious, well balanced and inspiring meals that make cooking a joy while also promoting good eating habits and freeing up valuable time for quality family moments at the dinner table. We take the stress out of meal planning and shopping, so our customers can focus on enjoying their meals. Our meal kit business model is demand-driven. That allows us to maintain very low inventories and minimize food waste generated in our operations. Our local chefs and dietitians create recipes that reflect local taste preferences while offering the broadest selection of recipes available in the markets where we operate. We provide a highly personalized customer experience across all our brands, powered by our in-house technology platform. 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 supply chain is well established, strong and scalable, enabling us to efficiently purchase and distribute our products in each country where we operate. Furthermore, we are constantly integrating our supply chain, enabling us to take advantage of sourcing opportunities across the Nordic region. Turning to Slide 5, let's talk about some of the highlights for the quarter. So as we reported in our trading update, net sales for the first quarter landed at SEK 287.8 million, which was down 17.4% on a common currency basis for the same period last year, but a reduction from contraction rates we have seen in previous quarters. We noted last quarter that Q1 would mark the final comparative quarter that was affected by COVID infections in the Nordics, restricting travel and public events. Much of the year-over-year contraction is due to this factor, combined with the general macroeconomic weakness that has affected e-commerce and online food retail. Our contribution margin climbed to 31.6%, which was up 7.2 percentage points from last year, which is a fantastic number in this industry and puts us well on track to hit close to 30% on an annualized basis. Because of the solid contribution margin, reductions in G&A structural costs and a more efficient marketing spend, we delivered an adjusted EBITDA result of SEK 24 million compared to a loss of SEK 4.1 million in Q1 of last year, an improvement of SEK 28 million despite lower volumes. Average order value on a common currency basis increased by 13.6% in the quarter, largely due to price increases and delivery fees introduced last year. Order frequency saw a decline of a bit over 13% in the first quarter, an increase in the total number of new customers and the weight of new customer sales during the quarter, combined with a return to normal winter school holiday routines as well as the general macro economic situation, explain the change in order frequency. All else being equal, a mix shift towards more new customers with lower order frequency due to high early cohort churn rates. Let's focus briefly on the overall question of profitability. In the new financial targets that the Board released together with the last report, we noted that our immediate priorities were to be self-financing and to stabilize and then profitably grow volumes. Our return to meaningful profitability in Q1, combined with a contribution level that stands out in our industry should help alleviate any concerns about our commitment to be self-financing. We have not taken any shortcuts and it has taken time to readjust our cost structure to lower volumes, but we are there. And this, in turn, gives us further confidence to continue issuing dividends and focus on the stabilization and return to growth on the top line. Let's turn to this question by looking first at market developments. The recent interest rate hikes by central banks in the Nordic markets have resulted in significant increases in homeowner variable rate mortgage expenses, coupled with inflation and economic uncertainties, these macroeconomic issues are expected to continue affecting consumer purchasing power for some time. Public indexes we track in Sweden and Denmark have shown a continued contraction in the online grocery market in these 2 countries, and we expect that to be similar in Norway. Online groceries were down a little over 14% in Sweden during Q1. The data in Denmark lags a bit more, but we can see it was down 13% in January and 5% in February. During Q4 last year, it was down 11% in Denmark. So for the first quarter, this meant that sales by market showed a local currency decline in Norway of about 19% in Sweden of around 10% and in Denmark, just over 30% during the quarter. We have identified 3 must-win battles to stable and profitably grow volumes that we shared in our last report. The first of these is to increase marketing excellence with the ambition to drive efficiency and lower cost for customer acquisition and retention, which I'll discuss briefly on the next slide. Due to our focus here, during the first quarter, we saw a 14% increase in new subscriptions versus the same period last year despite a reduction in sales and marketing costs of SEK 14.6 million. The Weight Watchers partnership announced last year has exceeded expectations and accounted for a significant portion of the increase in new subscribers. This highlights our partnerships and closer work with third parties, such as Weight Watchers in Sweden, Roede and EVO Fitness in Norway around the health and wellness space can be an important way to drive new subscribers and traffic to our websites. We are changing our ways of working. And one example of this is different theme to menus that we are now enrolling out across multiple brands with common marketing creative content as well as go-to-market activities that lower the cost profile of these efforts. Since first announcing our focus to increase marketing excellence, we finalized the rewrite of our websites technical platform, which was completed in Q1. This common structure as well as code libraries allows for a much faster development cycle across all 4 brands simultaneously and has helped solve some of the basic tracking issues that have hindered us from being more effective in the placement of performance marketing as well as enhancing our search engine optimization efforts. Last week, we took the first step of menu in upgrading our tele program, making it easier to send invitations across social media, SMS and other links. We further have closed the feedback loop by allowing customers to track when their friends have taken their first order, also triggering their own benefit. This is an example where new functionality using a common code library are rolled out across all brands at the same time, enabled by changes to the technical platform. Let's take a closer look at our second must-win battle, our effort to cultivate epic customer experiences. Operational excellence is central to the customer experience has been a recurring theme for us since I joined LMK Group. It remains a decisive factor in minimizing areas that affect the customer, driving higher operational efficiency and lowering costs related to food waste inside and outside the meal kit. The cost savings benefit of operational excellence further allows us to reinvest in a better customer experience and is the foundation of a sustainable business model with sound financials. During Q1, we continue to see further improvement in efficiency with a sequential improvement of 6% from Q4, but more importantly, demonstrating a 31% increase in deliveries per hour of production labor compared to Q1 last year despite lower volumes. The [ hugest ] largely a result of systemic work by our hard work and production teams to improve efficiency. And this is after the recent implementation of 100% customer [ gaining ] production as well as an introduction of in-line menu printing technology at the start of last year. Steps to improve efficiency often resolve issues that also cause problems for the customer. And we have also been pleased to see the complaints across our brands as measured by percent of deliveries with a recorded incident were down by 1.5 percentage points in Q1 versus the previous year. Credits to customers due to complaints are less than 1% of net revenue, but we also saw a relative improvement of roughly 30% decrease versus last year here. Finally, to help minimize the lead time for the customers, the weekly order cutoff date for [ times ] in Sweden was changed in Q1 from Monday to Tuesday, making it more competitive for new customer acquisition and customer planning. The third must-win battle we have identified is to increase delivery volumes in Denmark. 1.5 weeks ago, we announced the acquisition of customer relationships from a competitor in Denmark. This transaction allows us direct exclusive access to just over 3,000 active customers of Kokkens Hverdagsmad as they have chosen to exit the meal kit space and will discontinue deliveries in mid-May. We have already seen a solid increase in new account registrations since the effort began to migrate those customers to our RetNemt brand and remain optimistic that this will help drive higher volumes. The technical platform changes discussed earlier directly affects our efforts to increase volume with improved conversion, better tracking tools, improvements in search engine optimization and better affiliate performance. Increasing delivery volumes in Denmark has a clear intent in the near term to return to profitability in this market. With that in mind, we have also been working diligently to improve unit economics and optimize the cost structure of our operations in Denmark, and we saw operating profit before depreciation reduced to a SEK 1.6 million loss in Q1 compared to SEK 9.3 million in the same period last year. With this, let me now turn it over to Erik to take us through the financials.

Great. Thank you, Walker, and good morning, everyone. We're going to move on to the next slide. I'm pleased to present the financial update for the first quarter of 2023. As you will see from the report, we have achieved some positive results. Net sales for the first quarter amounted to SEK 287.7 million, which was 17.4% lower than last year, adjusting for exchange rate differences. The macro environment remains challenging as external macroeconomic trends and declining consumer sentiment continued to affect demand. Active customers were 16.1% lower than last year. Acknowledging the tough market environment, we are glad to see a more efficient marketing during the period where we saw new customer acquisition being 14% higher than the first quarter last year. Order frequency was down 13.4%, driven by the mechanics of having a lower active customer base than last year at the same time as we see a higher new customer inflow as new customer [ courts ] tend to take fewer deliveries. Order frequency was also affected by winter school holidays in the Nordics where we saw a more clear return to historical subscription passing patterns. We had an increased average order value by 12.2% or 13.6% adjusting for currency. This was, to a large extent, driven by price increases. During the last 12 months, we have increased prices of 11% to 16%. This is below the annualized food inflation that we see in our markets. But let's move on to the next slide to see some trends for our active customers. So yes, so we are excited to share with you some insights from our report, where we noted the positive trend in our active customer growth. We mentioned in the report that we saw sequential growth in active customers. So I want to spend a minute to explain what we mean with that and why we talk about it. In the year-over-year comparison, we saw a decline of 16.1% in active customers. However, Q1 shows a trend change, where we achieved a sequential growth of 18.4% from the fourth quarter. This is something that we haven't done since the first quarter in 2021, as you can see in the graph. The reason for us to highlight this KPI is that it is an indication that we are on our path to revenue stabilization. Let's move on to the next slide with the contribution margin. We are very proud in delivering contribution margin of 31.6% for the quarter. This was an improvement of 7.2 percentage points versus the first quarter last year. This was a great effort throughout the organization being in control of our economics. The margin was helped by the price increases, but that is not the only factor. As I mentioned in the previous slide, price increases during the last 12 months did not call to meet the annual food inflation. Several initiatives have been successful to contribute an improved contribution margin. These initiatives includes Nordic sourcing agreements, menu control measures, increased logistics efficiency and continued production efficiency gains. As an example, production efficiency, as measured in deliveries per hour increased by 6% from the fourth quarter and was up 31% compared to the first quarter in 2022 despite lower volumes. Another example is that due to the more efficient logistics with route optimization, we have managed the limit increase in our average logistic cost per delivery to only 2% despite the high fuel inflation seen across all our markets. Let's continue to the next slide, looking at the profitability. As we announced in the fourth quarter release, we achieved EBITDA profitability in the first quarter with an adjusted EBITDA of SEK 24 million. We are focused on being on top of our unit economics, and we maintain a disciplined cost structure. Although net sales was SEK 65.1 million lower than last year, the improvement in contribution margin in combination with lower spend in sales and marketing and central function gave adjusted EBITDA improvement of SEK 29.5 million. EBIT amounted to SEK 12.1 million, which equals to 4.2% of net sales. Last year, we were at minus 4.9%. We have adjusted our operating expenses to reflect the lower volumes. Personnel costs for the quarter amounted to SEK 53.5 million, which was 21% lower than the same period last year, mainly via normal employee turnover with limited rehiring. Lower employee costs and less use of consultants are the main explanation why our cost for central functions were SEK 11 million lower than last year. In summary, we have delivered a solid performance in a challenging quarter, and we are confident we have a strong foundation for future growth and profitability. And with that, let's move to cash flow. At the end of the quarter, cash and cash equivalents amounted to SEK 87.3 million, which was an increase of SEK 31.3 million from the fourth quarter 2022. Cash flow from operating activities, excluding changes in net working capital contributed with a positive cash flow of SEK 16.8 million, which was an increase of SEK 32.4 million versus same period last year. Cash flow follow a seasonal pattern where we do have a good cash position in the end of the first quarter. It will follow the seasonal pattern with a lower position during summer months. Our cash flow is, to a large extent, affected by changes in net working capital. We have a negative working capital model. Most of our customers pay shortly after the delivery, whereas we pay our supply higher later. They had a negative effect in Q4 due to timing. We can now see the opposite effect of -- in the first quarter. Our cash flow will continue to be affected by the movements in the net working capital. Cash flow from investment activities during the quarter were mainly related to capitalized development costs of the tech platform. We expect a lower CapEx in 2023 as during 2021 and first half of 2022, have been investing in the integration of our Danish operation and the conversion to 100% customer production. Both investment programs were finalized during the first half of 2022. We are confident that we will make self-financing and continue to generate cash from our operations. In line with that assessment, the dividend of SEK 0.3 per share were approved at the Annual Shareholder Meeting held last week on April 27. This equals a total dividend of SEK 3.8 million. In general, we believe 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 the IFRS 16 lease accounting. Let's move on to the next slide. Our target is profitable growth. On a short-term perspective, that means to stabilize revenue development, which means to discontinue the contracting trend. Turbulence in the overall macro environment gives a degree of uncertainty in the top line forecasting. We see a continued contraction during the first half of 2023. And we will continue our efforts toward the contribution margin approaching 30% on an annual basis, balancing profitability and customer experience. The contribution margin is expected to follow our seasonal patterns. And with that, I would like to hand it over to Walker for a quick summary.

All right. Thanks, Erik. So let's turn to the conclusions here, and then we'll open it up for questions. So a couple of takeaways from our first quarter. First of all, we delivered solid profitability and good cash generation in the first quarter. We had good unit economic development, better-than-expected performance of Weight Watchers partnership and also the recently announced acquisition of customer relationships in Denmark, all have helped get the year off to a good start in a tough environment. Volumes are down, and that trend will continue through the first half of the year, but it is less contraction than we've seen in previous quarters. We have seen a lower order frequency, but it's particularly offset by stronger gains in average order value. And we're also encouraged to see the sequential growth in active customers for Q1. We have continued to advance our progress on our must-win battles and are pleased to see better customer acquisition efficiency, improved production efficiency and quality towards the customer and tangible steps to increase volumes in Denmark. And finally, the improvement in cash generation and cash position helps support our directive to be more self-financing as well as confidently issue a dividend. In conclusion, I take great pride in the hard work and dedication that's displayed by every member of our organization in what has been navigating a difficult operating environment and getting the year off to a good start. Although the challenge of 2023 will persist, I'm confident in the ability of this team to deliver. And with that, we're going to turn back the call to the operator and start handling your questions.

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

Only 2 questions on my side. So the first one is on the, [Technical Difficulty] you mentioned the new -- you mentioned that the new subscriptions were up by 14% year-on-year in Q1, but active customers almost -- that was still down by 16%. So does it mean that churn was actually up by [ 14% ] in Q1? And my second question is whether [indiscernible] pricing, what's your view on pricing all over the U.S. of [ any free ] do you consider I think the prices even some food main foods [ harvesting ] and also to try to boost the demand.