Earnings Call: Q2 2021

Aug 24, 2021

Quarterly report

Thank you, Richard, and thank you to all of you listening and joining the call. If you can turn to Page 2, give you a short presentation of who we are and the agenda. My name is Walker Kinman. I am the CEO of the LMK Group, and I'm joined by Erik Pereman, who is our CFO. We're going to give you a quick rundown today looking at what the LMK Group is shortly. We'll give our highlights for the Q2 2021. Eric will walk us through some of the more detailed financials. We'll conclude and then we'll have time for Q and A. Q and A can the questions can be left to the operator or they can be sent to our Investor Relations e mail account. So as we if you turn to Page 3, LMK Group in brief. We've been operating for more than a decade and today are the largest meal kit service provider in the Nordic region and a leader in Scandinavian FoodTech. We operate 4 brands in Sweden, Norway and Denmark. Those brands are Lina's Modkaste in Sweden, Gottleveld and Adam's Modkaste in Norway and the Retnemt brand in Denmark. Our business model is demand driven, which gives us a lot of visibility and on orders, it also allows us to have almost 0 in inventory and have minimal food waste, both for our customers as well as our own operations. If you look at 2020, we did we delivered 20,000,000 around 20,000,000 portions or meals for the year. Today, we have roughly 120,000 active customers and our service and product reaches 80% of the households in the Scandic region. So if you turn to Slide 4, some highlights looking at the Q2. First of all, we've continued to grow the business in a tough comparative environment. We did organic growth of 18% compared to the Q2 of 2020, and as you remember, with COVID-nineteen reaching the 1st wave in the 2nd quarter, we saw some tough comparable figures and did, like I said, 18% organic growth. Number of active customers increasing by 16%, deliveries increasing by 13%. And one very important metric for us on unit economics contribution margin hitting 30%, which is actually an increase of 0.4 percentage points on a year over year basis. 10, adjusted EBIT margin for the quarter was 9.3%, that's GBP 47,000,000 despite increasing our sales and marketing compared to the same quarter in 2020 by SEK25 1,000,000 and increasing that investment level. We during the quarter, we've continued the integration of our flexible offering. If you look at our order production lines, we're now on track to be packing customer unique fully by the end of the year. If you look at what we've talked about in terms of retnempt, the integration is on track. We are on track to achieve a single ERP system for the group and the technical platform by the end of Q4. And finally, on the sustainability side, we also initiated reporting and transparency on the food waste that we generate in our own production, and I'll come back to that. So if you turn to Slide 5, demand is strong for the flexible meal kit offering that we have. The number of active customers increasing by 16% compared to Q2, where again we had a clear positive impact due to COVID restrictions last year in the same quarter. However, we're also seeing that seasonal patterns even this year are beginning to reflect a pre COVID environment. Despite that, purchase frequency only declined by 2.2% in the quarter. When we look at production on unique production lines, we did 60% of all deliveries were produced on unique customer unique production lines in the quarter, this compares to 30% for the Q2 last year and it's also up from 49% in the Q1. We will phase out batch processing completely in the second half for all brands. 2, there is a higher unit production cost related to customer unique production. However, in this quarter, they were offset by scale economies and purchasing productivity. We do expect solid growth to continue in the second half, and this has a lot to do with the changes that we've made in our product model as well as the increase in the customer base. If you turn to Slide 16, we have been working diligently on the integration of Retnempt. And this is, as I said, on track to be completed during the Q4. The investments related to integrating Red NEMT are expected to be in the range of SEK10 1,000,000 to SEK15 1,000,000 over the next 12 months. And when we're completed with the integration, we will have this group common ERP system as well as technical platform. This provides us to continue to realize improvements in unit economics as well as launch new product offerings to help grow the Danish business even more in the Danish market. If you turn to Slide 7, we continue to move forward on sustainability. And it's important to understand, our company has been working with sustainability as a core value for more than a decade. One of the key important topics related to sustainability is food waste. It is both important from a value perspective, but it's also an intrinsic part of our business. Food waste is something that is generated in homes and we make our biggest contribution to the homes. But to increase even our transparency and underscore commitment, we have begun to provide accounting and different impact areas where we set targets for ourselves. So the first of this is food waste. And here, when we look at to what we reported in the middle of the summer, we actually have calculated 1.74 grams of food waste in our own productions per meal delivered in 2020. This is about if you were to break it down on a revenue basis, this is 3.08 grams per SEK 100 in revenue. When it comes to other initiatives that we've looked at, we launched during the quarter a pilot project in Sweden aimed at providing information on climate calculated recipes. So we will continue to provide more transparency and really underscore our commitment when it comes to sustainability topics by releasing more information as well as setting clear targets that all external stakeholders can see and be more visible on. So with that, I'd like to turn it over to Erik Bergeman to talk us through the financials. Thank you, Oker. And we could move on to Slide 9. I'm very glad and proud to present the report for the first half of twenty twenty one. The second quarter were an important quarter for us to evaluate to custom behavior post COVID. And as Walker mentioned, during the quarter, we have seen less impact from COVID restriction. We have seen the purchase behavior come back to pre COVID levels, meaning we have more pronounced seasonal slowdown towards summer And more cost customer is passing deliveries during demand in Nordic holidays that they had during the Q2. We are having a bit of tough comparison figure as the Q2 last year had a great push from an accelerated COVID situation. Despite that, we have continued to grow. Net sales is up 17.6 percentage during the quarter, adjusted to currency. Our deliveries have increased by almost 13 percentage versus same period last year. Another thing I would like to highlight, as what we also mentioned, it's the good contribution margin at 30 percentage. This feels extra good to say as we have worked really hard to last year throughout the company in all functions to really be on top of the unit economics. We have managed to improve the contribution margin at the same time as we have taken new fleet into our journey, it's an even more flexible offering. Due to the increased flexibility, We do see an increased production costs, although in this quarter that is offset by a higher sourcing of productivity. So So to conclude on the slide, we do see that the profitable growth continues even though the COVID influence recedes. Please move on to Page 10. So what is behind the continued growth? We have 2 important growth factors that I would like to highlight and those are the growth in active customers and growth in average order value. With our strong financial position, we have executed on our growth strategy and continue to accelerate investment into sales and marketing, amounted to 11.3 percentage of net sales. Despite the tough comparison phase in Q2 2020 numbers of new customers we're up 12 percentage this year compared to same period last year. The new customer inflow and increased retention rates is what drove the increase in active customers up by 16 percentage versus same period last year. Our flexible offering has also enabled a good trend when it comes to basket side and to add on sales, success grocers, this in combination with the price increase is what drove The growth in average order value increased by almost 4 percentage adjusted for currency. All in all, our stronger financial position and good control over unit economics has enabled us to invest more in customer acquisition, which is driving growth. Please move on to profitability on Page 11. We continue to see what we consider a good level when it comes to profitability, which is driven by increased top line and good control of unit economics. Marketing investment is driving the top line, but it also has an impact on the EBITDA. This is a strategy that we believe in. That we're spending 11.3 percentage of net sales in sales and marketing versus 5.7 percentage last year during the quarter, it's something that I certainly believe would drive growth also in the coming periods. As mentioned earlier, active customers up 16 percentage and of June. Increased spending in sales and marketing is enabled by the good control of June's economics, which is driven by to the conclusion margin or which is shown in the Q3 at 30 percentage mentioned in the earlier slide. Adjusted EBIT at 9.3% 2nd quarter at 8.1 percentage in 1st. Please turn to the balance sheet on Page 12. A lot has happened during the quarter as the company being listed in 29th March. Many of the transaction and handling of the proceeds occurred during the Q2. We are looking at the stronger balance sheet with non current liabilities at the low level. End of the quarter, it consists mainly of leasing and tax liabilities as the corporate bond was repaid in full during the quarter. But let's move on to the cash flow on Page 13. With the subscription model, we do have a strong cash flow conversion and we're working with the negative working capital. End of the quarter, cash position were at SEK138 1,000,000 compared to SEK60 1,000,000 last year. The increased cash position is driven by profit and to some extent it proceeds from the listing. The listing was done on the 29th March, so There's a lot of movement in cash flow between the quarters. Therefore, I would say that the first top, which gives a better understanding of the movements in the cash flow. Investment activities include acquisition of the remaining shares of Ratnam of approximately SEK 4,900,000, which is half paid by Equin shares in L&K Group, which is then included in financial activities. During the quarter, we also repaid the corporate bonds, including accrued interest and fees, which amounted to about SEK169,800,000. The net cash contributed from the IPO during 2021, it's about SEK20 1,000,000. That includes the proceeds, less costs related to acquisition of remaining shares and investment, to repayment of the corporate bond and the transaction costs. Also during the quarter, we are increasing the CapEx at SEK 7,200,000 6 in Q2 and we continue to invest in increased flexibility and in the ResMed integration. So we do have a good cash generating business, which enable us to invest in growth. With that, I would like to hand over to Wachter for the final to questions. Thank you, Erik. And on Slide 15, we have our 2nd quarter takeaways. 1st and foremost, profitable growth continues in our business. We've seen increased delivery volumes even as seasonal purchasing behavior has begun to return to pre COVID levels. High customer activity and strong demand for our flexible meal kit offering, and we are on track to fully integrate RepNEMT as well as achieve 100% customer unique production before the end of the year. And with that, looking towards the second half of the year, because of the changes to our product model and customer base increases, we do expect solid growth to continue in the second half. And just before we take questions, I'd just I'd also like to thank all of our employees and partners for both a great quarter and all of their ongoing efforts in continuing to innovate the mealtime experience. So Richard, back to you for Q and A. Thank you. Our first question comes from Clement Doerma from Bryan Murray. Please go ahead. Your line is now open. Yes. Hi, Marvolka and Eric. I will have 4 questions from my side, if I may. The first one is on price increases. Do you expect some price increases to take place in H2? Either from your own initiative or whether to reflect the incoming food inflation. My other question is on the dollar contribution margin. Do you think about the continuous gross margin Improvements and the fact that our production costs on the flexible lines are lower than initially expected. Is it enough to, let's say, offset the upcoming additional fulfillment costs that are related we are modeling next to which puts a negative cut off in H2. In other words, Can the contribution margin be flat year on year in 2021 or maybe even up? And my final question is on VA marketing. Do you still stick to your guidance of marketing costs Pilof, I've seen a percent of sales in 'twenty one. Thanks. 3, thanks for the questions, Clement. And let's take that first one, really on the price increasing side, how much of this is our own initiative? How much of it it is addressing increases in food inflation. I'll let Erik take that first one. Yes. So we do see an indication of increasing food costs, although we have calculated with it and we're also doing price adjustment throughout all our brands actually during the Q3, that is to mitigate the effects of the increased cost that we're seeing. Yes. And if we're looking contribution margins, and I think you're right here. The fact of the matter is that, while our expectations when it came to flexible production was that we would experience a higher cost in the transition and transformation to flexible production, we have a higher cost related to flexible production. But as I stated in the remarks, and this is what we're seeing, that has been lower than our expectations and as we saw both in the Q1 and in the second quarter, we've been that has been fully mitigated through productivity on the purchasing side and the work that the sourcing teams are doing, as well as basic scale economies with higher volume, I think I'm fairly comfortable at this point in time to think that going forward for the rest of the year when it comes to flexible production, this isn't going to drive significantly higher unit cost on the production side. And we don't expect to give any ground either when it comes to cost productivity or even further economies of scale. When it comes to fulfillment and logistics, we are going to be making some changes and we do expect to increase the flexibility consistent with our personalization strategy to increase personalization so that the offering is more flexible and that can be choice of delivery, it can be more delivery days, it can be shorter cutoff times from order 2 delivery. So all of those elements are still ending to be implemented and we intrinsically know that there are higher costs associated with that. We're conservative in our view of that, but it's not expected to be significant cost increases due to that impact in fulfillment. I'm not ready to go so far as to say that we'll be up on contribution margin for 2021 versus 2020, but we're certainly doing everything we can to continue to improve unit economics and any significant impacts that would come from fulfillment are not you wouldn't see more than a point or 2 in the impact at Centimeters levels anyway. I think when we look at the marketing side, we do see marketing definitely below 13% for the full year. We made significant investments in the 2nd quarter. And also, we're definitely trying new things, and we're testing where we can get the most impact for the marketing money that we spend, some of those investments we will have an impact through the rest of the year as well because of the nature of the business and reactivation of customer and that cycle. But certainly, I think we intend and we have always stated that we'll be making heavier investments in sales and marketing. We've increased the rate of new customer position year over year as well, but we've had to work harder to get it in the Q2. And these are things that we'll be evaluating from a marketing efficiency standpoint in the future as well. The good news is that we continue to increase in the unit economics area and have a lot more capital to fund investments in sales and marketing. Okay. There appears to be no audio questions. I will turn the conference to the speakers for any closing remarks. Thank you, Richard, and thank you again to to everybody who took the time to join the call, any further questions can be dropped to our Investor Relations e mail account. I wish all of you a good day. Thank you.