Earnings Call: Q1 2021

May 19, 2021

Quarterly report

Thank you, Sabrina, and good morning and welcome to everyone who's joined us on this first quarterly earnings call of the LMK Group. My name is Walker Kinman. I'm the CEO of the LMK Group. I'm joined today by Eric Berryman, who's the CFO. Today, we're going to talk briefly about what we do at the LMK Group. We'll go through some highlights of our Q1 reporting. Eric will lead us through some of the financials. We'll conclude and then we'll have some time for Q and A. So just before we get started, As I said, my name is Walker Kim, and I've been with L&K Group now since 2018. I've been working about 24 years in different industries, heavy industrials, e commerce, online access, software development, optoelectronics in a number of different countries. I spent about 17 years as a CFO. And I joined in 2018 as the CFO of the LMK Group. The Board asked me to assume the role of the CEO in 2019. I've been doing that ever since. I'm going to leave a few seconds here to Erik just to give a short presentation of himself as well. Thank you, Wacher. My name is Erik Bergmann. I've been with LMK Group since 2019. I joined as Head of Business Controller. And as of 1st January, I was promoted to the CFO of LMK Group. I'm very glad that I've been a part of this journey for the past 2 years, and I We believe that we'll have a really interesting time going forward as well in coming years. So thanks, Eric. And operator, if you can change to Slide 3. So what is the LNK Group? We're an organization that was founded in 2018. And today, We are the largest supplier of meal kits in the Nordic region and a leader in what would be Scandinavian FoodTech, our specialty being organizing and delivering tens of thousands of recipes and meal kits every single week to many households in where we operate. We operate in Sweden, Norway and Denmark. And really, when you look at the meal kit and our meal kit model. This is a demand driven business and that's something that allows us to have very minimal food waste. We have high order visibility, which gives us a lot of insight in terms of exactly what we're going to need. It also means that we operate a business which has basically 0 inventory, which means that we can give very good insight upstream to our suppliers in terms of what we need delivered as well as when we deliver, we deliver perfect portions to customers so that the food waste in the home is quite low. Last year, we delivered a little over 1,700,000 meal kits. We had 135,000 active customers in 2020, and we reach about 80% of households in Norway, Sweden and Denmark with our distribution. So if we can turn the slide to Slide 4, we'll look at the Q1 2021 highlights. So as we stated in our report, we have good continued positive momentum. And we saw growth in the Q1 of 34% on an organic basis as compared to the Q1 in 2020. The number of active out customers increased by 21% and the number of deliveries also increased by 28%. And if you look at it from a profitability perspective, our adjusted EBIT margin increased to 7.0 percent, that up from 6.5% last year. It's about a 40% growth in absolute terms on the profitability line. What we adjust away for is transaction expenses in the Q1. If you think briefly about what we have been able to accomplish in the Q1 operationally, we launched flexible meal kits in the Adams Mopkasa brand in Norway. We launched our mini grocery offering for the Linus Malte Casse brand in Sweden. We acquired the remaining shares in Red NAND, which means that we fully own all of our subsidiaries in the group at this point. And we, of course, also launched the listing and did an IPO on the Nuancek First North Premier Growth Market at the end of the quarter. So if we can turn to Slide 5, I want to talk briefly about personalization as a growth driver. And this is really something when we talk about personalization, we see it as a differentiating factor and something that gives us a competitive advantage. Part of shifting over to personalization is increasing the flexibility of our operations. And in this case, I'll just highlight the fact that We did 49% of our deliveries in the Q1 were produced in our operations. On what would you could think of as a customary unique production line versus batch processing, which is very difficult to identify. It's impossible to identify who will be receiving the box until it's actually in the delivery route. So that 49% is up from 32% in the first part in the Q1 last year. We launched this flexible meal kit offering for Adam's mom cafe. And That's not to say that we've never offered flexibility in the brand, but this is really the commitment to flexibility in terms of all new customers and even migrating substantially all old customers over to a subscription model, which allows for meal flexibility. We've seen great success with this. And even by the end of the quarter, we see that over a third of customers are already actively selecting the recipes. And for us, Interaction is highly correlated with loyalty. So the fact that we encourage and get people to interact with the service, choose their recipes, any type of interaction with the service drives loyalty in the business. And so this is something that we're very positive to. Also in the Q1 in January, we launched what has been the mini grocery offering. And this is actually taking the capability that we've had in the Norwegian business and been working with since 2018 and copying that into the Swedish market. Is basically giving customers the opportunity to choose from 130 different items. Most of this is focused on breakfast and snack type of items that typically a household will visit the store maybe a couple of times a week to buy, including milk, cheese, eggs and such. So this has been successful in Norway. We have a target to get around about 10% of customers in every week choosing groceries and doing so alongside of a meal kit. You can only select this if you actually order a meal kit as well. So another way to drive engagement, to drive interaction with the service, but also improve and make life even easier for our customers out there. So let's turn to Slide 6. And here, just again, a reflection on the IPO and the successful listing of the company at the end of March. We listed on the NASDAQ First North Premier Growth Market. We raised in a primary offering SEK250 1,000,000. The largest portion of that has gone to the repayment of the bond. And this was initiated in Q1 at the end of the quarter after the listing and was completed in at Q2. And so in April, we see the recall of the bond having a cash a net cash impact of about SEK170 1,000,000. The remaining share of the proceeds used also to acquire the shares of Retnemt that the group did not own triggered by the listing of the company. And this is leading to what would now be an organizational integration. So ResMed will be integrated operationally with the group. And this also means that our technical platform integration is already underway. This is the ERP system, if you will, that is used in both Norway and Sweden across the 3 brands in Norway and Sweden today. So We'll keep you updated on the progress of that integration that has and that is well underway. So if we turn to Slide 7, I'll leave you with some thoughts before Eric talks a little bit more about financials with regards to sustainability. And This is really something that's at the core of what we do, both in terms of how we think about how people eat, the nutritional factors, the balancing of diets, but even more so about how to reduce food waste. And this is one of the things that It really gives this business model a competitive advantage given the fact that portion sizes are perfect, leaving customers with what they need, but only what they need to prepare meals for the week, cutting down on food waste in homes substantially, but also giving us immense visibility, as I mentioned, in terms of forecasting. We use machine learning and AI to forecast demand and we share that information upstream to our suppliers, which allows them to not over produce and produce to what we will be needing to deliver successfully to our customers. We released our 1st group wide sustainable luedine port here in the Q1. We're proud of that. A first step towards articulating and giving a lot more transparency to all of the things that we do within the group related to sustainability. I can give you one example of an activity that happened in the Q1, where an initiative in discussion and dialogue with the supplier was able to reduce the plastic packaging in something as simple as grated cheese. By doing so and actively working with that supplier, we were able to eliminate 2 tonnes of plastic in our operations. And this is something that we work with continually. And that's just one example. Another thing that we have we work with and we have been working with since the beginning is animal welfare. We took a step forward here in the Q1, and we have decided to be working for the European Chicken Commitment. This is something that we're working on implementing with regards to our suppliers and to be able to give customers more choice about the type of foods that they're eating. Then that's something that's ongoing forward to 2026. And lastly, just a highlight into one of the programs that's been with us since 2014. We have a plate for plate program where customers are making donations and contributions, which has allowed for us to deliver over 7,000,000 lunches to Canyon school children since 2014. It's about 10,000 School children every single day, which receive lunch when they're in school, obviously helping keep young children in school, but also even maybe more importantly, helping keep young girls in school as they typically are the first ones to suffer when food shortages happen. So Very proud of those efforts and actions. As you can see here, we have some impact areas that we have highlighted with food waste, food products, resource consumption, health and social responsibility. We look forward to articulating more of our targets and goals going forward in respect to these sustainability elements, and we'll do so in the future. So with that, I'm going to turn it over to Erik, who will lead us through some of the financials. Thank you, Oker. We could move on to Slide 9. I'm very glad and actually proud to present our 1st quarterly report. As Walker mentioned, the net sale is up 31 percentage for the same period last year. That is almost 34 percentage if excluding change rate differences. This is a solid growth driven by the increased customer base being 21.4% higher than last year with all brands contributing to the growth. Our deliveries has increased by almost 29% for the same period last year. And our flexible offering has also enabled a good trend in when it comes to But offering has also enabled a good trend in when it comes to site and the add on sales such as our mini grocery. This translates into the average order value that has increased by 4.1 percentage adjusted for currency. And another dimension to this is the good contribution margin we have at 29 percentage. And this feels extra good to say as we have worked really hard the last year throughout the company in all function to really be on top of the unit economics. We have managed to improve the margins at the same time as we have taken huge leaps in Travel Journey to an even more flexible offering. As Walker mentioned, almost half of our production is customer unique. Due to the increased productivity, we do see an increased production costs, although that is offset by a higher sourcing productivity. So all in all, for this slide, 29 percentage Contribution margin, 34 percentage organic growth and that is something that we are proud of. Let's move over to marketing and customer acquisition on Page panel. Q1 is usually a good period. It's a quiet customer. The customer are staying home and are less frequent to pause. And due to seasonality, they also stay with us for a longer period. So in line with the company's growth strategy, we have increased the sales and marketing expenses by 45 percentage, amounting to SEK 56,000,000 in Q1, which corresponds to 13.4 percentage of net sales. Last year, the same percentage was at 12.1%. This year, with a stronger financial position, We have prolonged our marketing efforts throughout the quarter, resulting in almost 50% higher new customer inflow, which is driving the growth in active customers that is up 21% versus last year. We do continue to take good average acquisition cost on par with the same period last year. And also when it comes to the COVID pandemic impact, we see that more consumers who previously didn't know how to buy food online now have been accustomed to do so. We don't see that transformation to end yet due to less pandemic restriction, although the pandemic restriction has speeded up the transformation to online in sales. From our side, the number of loyal subscriber customers has increased to a new level and our assessment is that they will not stop consuming our meal kit just because the pandemic is over. Although we have seen a different seasonal pattern during the pandemic restrictions with fewer customers passing during holidays and celebration and instead continue to consume our beer kits. We expect that behavior to approach previous seasonal patterns as the effect of the pandemic subside. But all in all, our strong international position and good control of unit economics has enabled us to invest more in customer acquisition, which is driving growth. Let's move over to profitability on Page 11. In our business, Q1, it's a good period for top line growth. But as a matter, it's also a pair with Higher marketing expenses, which is up from 4% to 5%, which represents 1.3 percentage points of net sales increase. This year, we are also heavily impacted by the lifting cost of SEK 12,900,000. Alden, we continue to see a good trend when it comes to profitability, which is driven by the good top line and also with good control of the unit Economics. But as I said, the lifting cost has impacted us during the quarter. If exclude the lifting cost, we see an adjusted EBITDA of 9.6 percentage and our adjusted EBIT at 7 percentage, which is something that we feel very confident about. Comparing to last Q1 last year, in absolute terms, we have achieved an adjusted EBIT of SEK 29,400,000, which is an increase of almost 40 percentage from Q1 last year. I also want to mention, it's not on this slide, but In the previous legal structure, the interest expenses for the bond was not tax deductible, which should make the efficient tax higher historically than it will be going forward. But all in all, when it comes to profitability, We have the volumes, we have the good control of the unit economics and as such we are driving the EBIT to a level that we feel very comfortable with. Let's move over to the balance sheet on Page 12. When it comes to the balance sheet, a lot has happened during the end of the quarter with the company being listed the 29th March. We're looking but although we are looking at a strong balance sheet with non current liabilities at a very low level, End of the quarter, it consists mainly of leasing and tax liabilities. During the quarter, we have received the proceeds from the IPO. But the end of the March, we have called but not paid the bond. The bond was settled in April, net liquid impact of approximately the SEK 169,800,000,000 including accrued interest, waiver fee and an additional 5% call premium in accordance with the bond terms. As the bond is settled, we have reduced our financial costs and we're actually a little bit more flexible as we are no longer restricted by the bond covenants. And looking at the balance sheet, as The bond was settled in April. It and the accrued interest in wafer fee was also reclassified from non current liability to current liability, which is the explanation of this line. Equity is impacted by the issued shares in the listing process that we have also acquired and we also have acquired the remaining shares in the rest of them. The purchase price for rest of them amounted to approximately SEK 54,900,000 of which half is paid by cash and half by issuing shares in LMK Group. Along with that, we also repaid the vendor loan of the initial retnem acquisition. Moving on to the cash flow on Page 13. With LMK Group's business setup with the subscription model, but we do have a strong cash flow conversion and we are working with a negative working capital. During Q1, cash flow are heavily impacted from the listing. We have a good cash generation from the operations despite having the nonrecurring cost of SEK 12,900,000 in the P and L and we also have another SEK 5,500,000 emission cost impacting Equity and Financial Activities. There is a lot of movement within the operating receivables and liabilities in connection to the listing, For example, the settlement of the transaction with selling shareholders is paid through NOK Group's balance sheet. We have also received the proceeds from the ago, which as you could see have a big impact with financial activities. And I just want to mention again, the bond was settled in April, a net effect of SEK169,800,000 which then will have impact then in April. CapEx at SEK 3,400,000. During the period, we have continued to invest in reflective production and also in our tech platform. So with that, I would like to hand over to Walker for the final conclusion. Good. And thanks, Erik. We'll move to Slide 15 before we take your questions. So just to summarize here our takeaways and looking at Q1, very good momentum in active customer growth, in sales growth and in profitability. We're very happy with the results from Q1. We continue on our journey to innovate the Meal Time Experience. And this means for us increasing personalization so that the experience becomes much more personal, much more flexible and really passed really accustomed to the needs and the craving of the individual household and the individual consumer. We have begun the integration of Retnet and this will be an ongoing activity throughout the year and looking forward to getting the benefits of the group synergies that come both extracting best practices out of the Danish business into Norway and Sweden and vice versa. We will be continuing our investment in products and the delivery model going forward and focused a great deal on personalization as we mentioned as well in the report, working through our delivery model to give a lot more options for customers as we move forward in the second half and improve our delivery model. So with that, I'd like to conclude on our formal remarks. And now I'll turn it back to the operator, and we'll take your questions. Thank you. We have a question from the line of Timon Cenolo from Ryan Gardner. Please go ahead. Good morning, Abolke and Erik. Paul, I've got 4 questions for myself, if I may. The first one is on Tier 1 growth. Did you see any sales growth gap maybe in Sweden And also the although my country is still benefiting from Malogdan's, I. E. Norway and Denmark. My second question is on the full year growth. Your midterm guidance is 10% to 12% annual organic sales growth. Do you think It could be above that level from 2020 or anyone. Given the Q1 growth, that would only require, let's say, close to 7% growth of the remaining 9 months, so quite amazing in my view. My third question is on the customer acquisitions That grew by a steep percent in Q1, while the number of active customers grew by 21%. Is it then fair to let's assume that retention rate is improving? Or is it just because you massively recruited new New customers over Q4 and Q1 and that these customers are still in the early curve of retention rates. And my final question is on the raw materials inflation. Some big food manufacturers You guys are already highlighting inflationary pressures on food And also on some APAC hedging costs, do you share the view and do you intend to absorb it or pass it Pass it on to the investors. Thanks. Thanks, Clement. Good questions. So I think if we take the first question with regards to growth by country and do we see any major gaps, I think We're seeing good sales trends and good growth in terms of revenue in all three countries. It is somewhat higher in Denmark and Norway versus the Swedish market. If you look at the Swedish market compared to Norway, on the other hand, you can see there's significantly more competition in the market. So probably not surprising in that respect, But I think we do see some slight differences in the growth rate between the different countries. You're talking a little bit about The growth rate for the full year and I think, yes, the mid to long term targets that we outlined and have outlined are in the 10% to 12% growth range. I think a fair assessment for 2021 is that especially with the Q1 behind us and momentum coming into the Q2 with higher active subs is that it's quite possible that we're above that 10% to 12% by some margin. So I think there's a lot of uncertainty, of course, in how the market will develop and how the habits of customers will return to normal and to normal seasonality post pandemic. But one thing is pretty certain For us is that as a group and in our product and service offering, we've never been stronger, which also gives us quite an advantage both in terms of the resources that we have available to us in sales and marketing, but also the ability of the product itself to really capture and retain customers. So we're very confident about the future and certainly in terms of our growth possibilities. When you look at customer acquisition, customer acquisition was well up in the Q1 and as we noted increased by 50% over the Q1 of last year. We had already accelerated spending last year. So definitely seeing even more spending in terms of sales and marketing to attract customers. It is pretty fundamental for us. And this is a business model. It's sort of like a washing machine. Someone told me once, you got to meet a lot of customers in so that you really find the good customers because loyal customers in our business and over 50% of our customer base has been with us for over 2 years. So Loyal customers in this business really give us sorry, I think that number is not 50%. It's 50% of our customers over 6 months, but a third of our customers over 2 years. So when we talk about finding really good customers, you're going to have to get you're going to have to have good customer info to be able to tune that. So we're quite happy with what we're seeing in terms of retention rates on customers in the Q1, and certainly the acquisitions levels that we're seeing. But there is definitely the initial effect of customers that are trying out the service for the first time and will rotate out fairly quickly. And then we work on recapturing and reactivating those customers over time. With regards to inflation, packaging costs, food cost inflation, I think we actually saw very good food prices in the Q1, especially with regards to sales to fruits and vegetables. What we when we think about inflation, we're working very actively in what would be curated food, which means that in our model, a very important piece of the operational and financial control is how we work with input factors to make sure that we don't have any surprises or big swings on margin. And that includes everything from locking in certain types of volumes on proteins to making sure that we have margin for fluctuation in prices. So I think when it comes to saying, is it going to be absorbed by the company versus passed on to the customer. I think ultimately it has to be passed on to the customer in one form or another. That can take the form of price increases if necessary. If we judge that that's where we're at, it can also take the form of making sure that we plan meals according to raw ingredients that are not showing the big risk of price changes. I think all input factors when it comes to materials and especially with regards to e commerce material, You can think about cardboard boxes and whatnot. We have seen price increases coming through because of that, but they're not extreme and they are a very small portion of our input costs. So I'm not concerned at this point that we're going to see packaging cost inflation being a significant factor in our CN. Great. So I hope those answer the questions. Clement. Yes. Thanks, Henrik. Yes. Thank you. There are no further audio questions at this time. So I hand back to the speakers. Okay. Thank you. Thank you, Sabrina. And I think we did receive one question via email and web during the call. So let's answer that question. The question is, how do you adjust to the increased competition from HelloFresh in your markets, especially considering they are preparing to launch in your strongest market in Norway. Will you increase your marketing spend? And if so, how will that affect margins going forward. And that's a good question because the reality is that the market dynamic has been shifting. We've talked a lot about it in the roadshow when we were preparing for the IPO. A lot of this has to do with the fact that there's quite a difference between fixed meal kit markets and flexible meal kits. With regards to Hillopresch and specifically the markets where we're operating, we're very Proud of the changes that we've been able to accomplish very quickly with regards to personalization. And for us, We're very much a local player of the Nordics. We've been operating here for over a decade. We understand the market. We also have some very strong brands and strong and recognition to help us. And basically what it comes down to is that the experience for us is about being very personalized. And that doesn't mean just selecting recipes, but it has a lot more to do with how you interact with the service and how we're able to deliver a service that is specifically tailored to your taste, your preference, your preference, just your household size and the types of foods that you prefer and enjoy. We offer today 30 to 40 recipes in our Swedish and Norwegian markets. We think that there's always room to improve there and that's part of our journey in terms of custom manufacturing as well, which gives us even greater opportunity to integrate machine learning and AI that helps us very intelligently put things in front of customers that we know the customers like and that we know that specific customers like. We also have a very good control of local producers in the Nordic markets. We work very, very closely with local production. And so a lot of what's coming in front of our customers is and known to the extent that it's local, but also surprising to the extent that it's somewhat unknown from local players. And I think that that's also something that gives us quite an advantage when it comes to addressing an increased competitiveness from HelloFresh. I think we're well aware of the Norwegian market and their entrance or pending entrance into Norway. And I think that this is, of course, not something that we're taking standing still and we're working with regards to make sure that Customers have the best experience that is possible from a meal care provider. I think if you look at it from a marketing spend perspective, we spent a little over 15.5% of net sales in the Q1 when it comes to sales and marketing. This is up 1.3 percentage points from last year. We did so and increased profitability. So definitely one of the things that we have to our advantage is the ability to control costs and to control the quality of the delivery to such an extent that I don't think that this for us isn't going to be a head to head sales spend against HelloFresh. We have the ability to increase our marketing spend, but as we've highlighted in our communication during the roadshow is that we sort of see 13% over the year as a reasonable profitability level to assure both a growth which is taking place and we were able to achieve much more than that with 13% in the Q1. But to go out and and drive our spend up to 15%, 20% of net sales. I don't see that as being an effective strategy or even to put it bluntly the type of fight that you win. We have to be sharp in terms of personalization and making sure our customers are very, very happy customers and very satisfied with the products that they're receiving. So I hope that answers the question coming from also the web. And with that, we don't have anymore. Let me just double check, but I don't think we have any more questions that have come in. So I'd like to again thank everyone for taking the time to join us. Very happy and thank you to all of our customers, Employees and suppliers and partners who helped us to have a very successful Q1. Look forward to speaking to you again soon about the Q2. Thank you.