Cheffelo AB (publ)

Hello and welcome to today's webcast with Shefalo, where CEO Walker Kinman and CFO Ekbergman will present a report for the second quarter of 2024. After the presentation, there will be a Q&A, so if you have any questions for Shefalo, please send them in via the form to the right. And with that said, I hand over the word to you guys.

Thank you and good morning to everyone joining us. Welcome back for this presentation of Shefalo's second quarter results for 2024. My name is Walker Kinman. I'm the CEO of Sheffalo. I'm here today with Eric Berryman, our CFO. I'll take a few minutes to give you a short intro on the company for those joining us for the first time and then take you through some prepared remarks on the second quarter development and financials. And then we will take your questions. You can post those in the questions dialogue or by emailing us directly on ir.sheffalo.com. So let's start with a little about Sheffalo and our business. For over 16 years, we've been changing the way people eat dinner by innovating the mealtime experience. In Norway, we operate under the brand Skotelverden Adams Maltkasse. In Sweden, Linas. And in Denmark, Ratnemt. These well-known local brands have a rich history of innovation and entrepreneurship. They're all geared towards making our customers' lives easier. Our goal is to make life less complicated with inspiring and tasty, well-balanced meals that are easy to prepare. So by taking the stress out of meal planning, shopping and cooking, we help more people eat better and bring families together around the dinner table. Our meal kit business model is demand driven. And because of this, we can 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 meal kit recipes that are available in the markets where we operate. We provide a highly personalized customer experience across all 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 Pictolite 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 Nordic supply chain, enabling us to take advantage of sourcing opportunities across markets. Turning to slide six, let's talk about some of the key figures for the quarter. We achieved double-digit growth in the second quarter, marking the fourth consecutive quarter of growth for Sheffalo. Net sales in local currency increased by almost 12%, slightly surpassing the high single-digit growth we expected, with a boost from the reversal of the Easter timing that negatively impacted the first quarter. When making a year-over-year comparison of the second quarter, including the last week of the first quarter in both periods, to remove the Easter timing issue, we achieved a net sales growth of 7.6%. We grew in all countries in local currency during Q2. However, the rates were due very significantly. So growth in Denmark remained very strong, just shy of 40% on net sales in local currency for the quarter. We are seeing this growth rate come down as we compare to the period last year following the acquisition of customer relationships in Denmark. But our current trend suggests that we will continue to see double digit growth in Denmark during the foreseeable future. We were also pleased to see that the number of active customers is again moving in a positive direction with nominal growth at the end of June. We placed much more focus on order frequency, however, and that was up 12.6% in the quarter, also aided by the Easter timing. This and other internal metrics that measure customer loyalty help us assess the success of our marketing efficiency and customer experience initiatives. We are pleased that many of these metrics are showing good trajectories. Contribution margin landed at 31.1%, in line with our plan and on track for over 30% for the full year 2024. EBIT was 19.5 million kroner for the second quarter, higher than last year, but also helped by the Easter timing. For the first half, which removes the Easter timing comparability issue, net sales were up 6.1% in local currency and EBIT was up 7.6%, highlighting the economies of scale that we can achieve with volume growth. If you saw the Sheffield News Feed just prior to the call, you may have noticed that we successfully concluded an interesting marketing agreement this morning. So let's take a quick look at that on the next slide. So this morning we announced a cooperation agreement with Meadogs Frid, who together with Axfood have chosen to exit the meal kit market in Sweden, resulting in Meadogs Frid winding down their operations. Meadogs Frid was founded in 2007 as one of the earliest pioneers in the meal kit space. It was later acquired by Axfood in 2017. So under our agreement, Meadogs Frid will refer their 14,000 customers to the leanest brand. Of these 14,000 customers, approximately 4,000 are active. So for the collaboration, Sheffalo will pay a maximum consideration of up to 3 million SEC to Mid-Dux Freed, of which an initial amount is being paid up front, and the remaining compensation is to be paid based on the number of deliveries generated. The agreement is financed with existing funds from the balance sheet and will not have a material effect on our cash position, giving the time and nature of the cooperation we expect a contribution to earnings in the fourth quarter. With this transaction, we can also highlight that food-based e-commerce is evolving a little differently in Sweden and Denmark compared to Norway. And there we see development has been slower due to varying market conditions. While Sweden and Denmark are seeing consolidation and a shift towards prioritizing profitability over growth, in Norway, new dark stores are being established and significant private equity funding rounds for online grocery delivery continue. A broader focus on consolidation and profitability is favorable for our business and emphasizes the importance of having a cash-generating business model when the macro environment is less favorable. Let me mention a few other things about what else we're seeing in the market and how we think that will affect our business. We are very pleased to see consumer confidence improving across all markets. While the confidence measure in Denmark had already recovered significantly by the end of last year, Sweden has shown a similar recovery in the first half of this year. The improvement in Sweden is likely supported by expectations of continued interest rate reductions and inflation now once again below the central bank's targets. In Norway, we observed a good improvement in consumer confidence during the second quarter, although it still lags behind Denmark and Sweden. We anticipate that this ongoing recovery of consumer confidence will benefit our meal kit business more than the broader market for food. Let's look at our net sales growth in local currency by market during the first half on the next page. So these figures are presented for the first half to remove the timing effects of Easter between the two quarters. In Denmark, we're clearly outpacing the market, not only increasing market share, but also helping diversify Schefflo's revenue mix. Around 15% of our net sales in the first half came from Denmark, up from 11% last year. As expected, increased volumes in our Danish business have also helped move that market from generating losses in the first half of last year to contributing to profitability this year. Danske Statistik published in their survey through May a growth in online food sales of 6.3% compared to our 40% growth in the same period. The online grocery index we track in Sweden showed 5% growth in the second quarter, and we're happy to see market conditions continue to improve. It's particularly interesting to observe traditional retailers refocusing their e-commerce efforts on click and collect and adjusting home delivery fees to better reflect the actual service costs. We're growing in line with the broader online food market and given the withdrawals from the meal kit space in Sweden over the last 12 months, it's likely that we're defending our market share well while continuing to improve profitability. The exit of Meadogs Fried further consolidates the market. We're happy to be the preferred partner for helping those customers continue their meal kit service. In Norway, we can see that the meal kit market grew in 2023 by just under 6%, with loss making expansion by our main direct competitor, while our own revenue declined by 10%. We're happy to see that our own revenue is stable in local currencies so far this year. and we are generating good profitability. It is less obvious, however, how the broad market is developing other than the competitive pressure remains high. Let's shift on slide 10 for a quick follow-up to a topic discussed in the first quarter. And this was during the first quarter promotional cycle, the fact that we launched the first campaign based on a unified customer value proposition focusing on clarifying the brand messaging. This approach allows for significant media production synergies. It enables us to expand the overall messaging and content by reusing creative elements across the Linus Gottlieb and Retnempt brands. And it's also one of the dimensions in our efforts of driving marketing excellence. The initial results of this campaign were promising, driving better message comprehension and higher purchase intent than our benchmarks. As we continue to measure the effectiveness of this effort, we've seen a notable increase in brand liking and other key brand characteristics, such as, is the brand named at me? Is it modern or trustworthy? And does it deliver value for money? Adam's Motte Kasse is not part of this common value proposition, and we're working on increasing the differentiation of the brand in Norway from Got Le Vert. This brand targets a narrower market, focusing more on the food and cooking experience. To support this strategy, we raised prices by approximately 7% in August and are reinvesting in the types of recipes and ingredients used in the meal kit. We will also introduce beverage pairings, including wine and non-alcoholic options. Consumers in the Norwegian market have recently seen a new TV commercial for Adams that also highlights the longstanding relationship that Scheffalo and the Adams brand have with Norwegian farmers and local food producers. And lastly, just a quick reminder of where our overall focus lies on the next slide. In 2024, we remain dedicated to strengthening our core business with two main priorities, excellence in marketing and delivering epic customer experiences. For marketing excellence, we're focusing on advanced performance marketing and social selling, along with the unified Nordic value proposition. We'll also continue to seek new partnerships that leverage both our strengths and those of our other brands. On the Epic customer experiences side, our goal is to enhance personalization and improve the customer experience. We're also expanding our add-ons and grocery offering. All of this is done within a framework of operational excellence, where we continuously strive to improve efficiency and quality. Our long-term financial targets aim for a net sales CAGR of 6% to 8% and EBIT margins of 4% to 6%. It's important to note that achieving these margins depends on economies of scale. We don't expect to reach them during 2024. Looking ahead to 2026, however, this translates into roughly a 20% increase or 1.2 billion SEC, which is the revenue level where we expect EBIT margins to reach the 50 to 70 million range. With this, let me now turn it over to Eric to take us through the financials.

Thank you, Walker. Good morning, everyone. I'm very pleased to present the financial update for the second quarter of 2024. This marks our fourth consecutive quarter of growth. From an accounting perspective, we grew by 11.4%. However, the quarter was posted affected by Easter, so including the Easter week in comparison, we actually grew by 7.6%. And to elaborate on what we refer to as an Easter effect. So in 2024, a week of Easter fell in the first quarter, which is different from last year when all Easter weeks fell entirely in the second quarter. As many customers tend to pause their subscriptions during holidays as their normal day-to-day pattern is interrupted. And then they will return to their normal subscription once they're back to their normal routines. So moving a week of relatively lower volumes away from the second quarter to the first quarter affects the comparability of many of our metrics. I would also like to touch upon currency. Although the P&L impact from exchange rate was relatively lower in the second quarter of this year compared to the last year, we have continued to experience volatility in exchange rates between SEC and both NOC and the Danish krona. We expect this volatility to persist also going forward. And then I would like to point out that given that much of our purchases and revenue are in local currencies, we are benefiting from strong natural hedges. Our average order value for the period declined by 0.9%, adjusting for currency compared to last year. This reflected a country mix shift towards Denmark, which has a relatively lower average order value compared to Norway and Sweden. The second quarter is general quarter with lower customer acquisition. With improvements in cohort for existing customers, we are glad to report that we see an increase in active customers for the quarter. The improved performance around customers was also visible in the increased order frequency, which improved by 12.6%, although helped by the timing of Easter. Let's move on to take a closer look at the contribution margin on the next slide. I'm very proud to say that we have a good control of our unit economics. The result in the second quarter shows that we are on track to achieve our annual targets, which is a key to our profitability. Being in control of our unit economics has allowed us to utilize the improvements in fulfillment costs and invest them in items included in input goods. thereby enhancing the kitchen experience while keeping our overall contribution margin at the same level as last year. As you could see in the graph, our fulfillment cost measured as a percentage of net sales decreased by 1.5 percentage points, while the input goods increased by 1.8 percentage points, keeping the overall contribution margin in line with last year's Examples of efforts that drives cost in input goods includes adding more ingredients to the meal kits, more ingredients that are faster to prepare, such as pre-blended spices and sauces. This means providing our customers with even more value for money, which enhances our competitiveness. So let's keep on looking at the profitability on the next slide. Also, when it comes to EBIT, we are delivering according to plan. Our EBIT bar increased by 0.9 percentage points, which resulted in a 4.2 million second higher EBIT than last year. This is the highest Q2 EBIT since 2021, where we saw positive benefits from the pandemic. We continue to drive 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 customer, meaning that we are focusing a higher spend in first and third quarter. As such, the control sales and marketing expenses for the quarter was relatively lower than those quarters. It was 1.2 million SEK higher than last year in absolute terms, But 0.5 percentage point lower measured as percentage of net sales. Compared to last year, we have increased our tech cost, mainly related to staffing, to strengthen both our capabilities and our tech capacity. The increased tech cost was behind the cost for central function increased by 1.1 million SEK. However, measuring percentage of net sales, it was 0.9 percentage points lower than last year. Our OPEX is at the level where we can see the potential for leveraging increased volumes to gain scale advantage. This position us for continued profitable growth. In summary, we are continuing to deliver on our targets of annual contribution margin about 30%. We are at an OPEX level where we see that we will benefit from economics of scale. We will continue to have a strict approach to cost and technically approach to sales and marketing spend. With this, we are confident we have a strong foundation for future growth and profitability. So let's move on to the next slide to have a look at what this means for the cash flow. I want to emphasize that strong unit economics, not only for the foundation for profitable growth, but also plays a large role in our cash conversion. Our focus on efficient operations and cost management contributes significantly to our strong cash conversion. We continue to generate a solid cash flow with a free cash flow of 6.4 million SEK for the quarter. This was 60 million SEK higher than for the same period last year. The increase is mainly driven by two factors. One is increased profitability and one is change in working capital related to the timing in the end of the first quarter. The profitability part could be expressed in operating activities, excluding changes in networking capital that generated a positive cash flow of 28.5 million SEK, which was 6.6 million SEK higher than last year. As our sales follows a seasonal... This is also reflected in our net working capital. We receive payment from most of our customers shortly after delivery, while paying our suppliers at a later stage. This means that we normally expect to see a decrease in working capital in the second quarter, which drives a negative change in the cash flow statement. This year was affected by that last week of the first quarter was dominated by easier bank holidays, which postponed much of the week's cash collection into the second quarter, thus driving a smaller negative change in networking capital in Q2 this year compared to last year. Changes in networking capital generated negative cash flow of 11.1 million Q2 this year, which was 11.1 million higher than last year. During the quarter, we paid our largest dividend in the history of the company. Although, thanks to the strong cash generation that I just mentioned, our cash position was at 104 million SEK end of the quarter, which was 29 million SEK higher than the same period last year. Let's move on to the next slide. We remain focused on profitable growth and expect to see single-digit growth in the third quarter and the full second half. Our current growth trend is what we refer to as bumping, which can be further complicated given exchange rate variation, calendar timing effects and even normal seasonal impacts to customer acquisition rates. We anticipate higher growth in Denmark, where we expect double-digit growth. We are performing according to plan and new material changes are expected in our current yield economics or cost structure. Our ambition is to maintain a contribution margin of about 30% on an annual basis. We will continue to target a marketing spend of 13% on a full year basis. However, this will continue to follow the seasonal pattern observed in the previous year with a relatively higher spend in the third quarter. One thing that I would like to highlight for those of you that are not familiarized with our yearly seasonal cycles, we do not expect to be a bit profitable in the third quarter. This is in line with our normal seasonal pattern and relates to the lower volumes during the vacation period in the first half of the quarter and the relatively higher sales and marketing spend related to after-summer market activities in August and September. We do expect to continue to be profitable in the first quarter. With that, I would like to hand back to Walker for a quick summary.

All right. Thanks, Erik. And let's just turn to slide 19 to summarize, and then we'll open it up again for questions. So we're very happy to have achieved double-digit growth in the quarter. This was slightly better than expected and also assisted by the Easter timing issue. This marks the fourth consecutive quarter of continued growth for Sheffalot. We grew in all markets in Q2, which was particularly strong growth in our Danish business, which also solidly contributed to profitability in the first half. Active customers returned to growth and we saw excellent improvements in order frequency and general cohort behavior. Profitability increased in the first half with higher volumes generating economies of scale. Additionally, cash generation was healthy for the quarter and our cash position improved even after paying out our largest dividend yet. So in conclusion, we start the second half of the year with good momentum and we're on track to meet our long-term financial targets. It's great to see how focus on the customer experience is also leading to higher loyalty. The team remains committed to bringing people together on the dinner table for great food and they deserve a big thank you for their hard work in this regard. So we'll now turn to questions that we've received. Remember, you can send in your written questions to our investor relations email as well, which is ircheflot.com if you haven't already done so. So let's start with the first question that we received. And the statement we received is, congratulations on an exciting acquisition of Medox Freed. When you made a similar acquisition in Denmark, what conversion rate did you achieve with existing customers at that time? This isn't information that we have previously disclosed, but what we can say with regards to the acquisition in Denmark is that once we had gone through these similar steps to what we have agreed to with Mendox Freed, we were able to achieve a very good ratio of customer acquisition costs to customer lifetime values, what we could see is that the customers that were acquired under that relationship were by far greater than cohorts that we would have received by acquiring customers in the general market. So the effect is basically acquiring a customer database or having preferred access to a database with the assistance of Meadogs Freed exiting the market to shift those customers over to what we actually feel is a great and improved platform service for meal kits compared to what those loyal customers at Meat Oaks Freed would have been receiving at Meat Oaks Freed. The next question is how much of net sales growth comes from Denmark A quick back of the envelope calculation you can see in the notes section of our report would indicate that roughly 40% of the growth in absolute terms as measured in SEC comes from Denmark. So that 40% of the growth, but it's also growing by 40%. And the next question is, What are the major factors for achieving growth during the coming year? And a second part of that question, what type of business development can we expect from Shefflo that would contribute to growth? So I think, you know, there's... there's quite a few dimensions to that, but to try to keep it short and sweet, I think if you looked back to what we say in terms of where our focus is, there's two areas that we are investing a lot in, and that is improving marketing and excellence to drive both new customer acquisition volumes, but also in an efficient manner and make sure that those customers that come in are in fact good customers. So what we can see with things like order frequency growth, um the order frequency growth paid in much more um interesting than looking at the general active customer base because this is showing that our efforts are paying off when it comes to really investing in how we acquire customers and then the other part of that equation is really delivering great customer experiences so that has to do with the physical product experience The type of recipes that a customer can expect, the speed of those recipes, the simplicity of the recipes, while at the same time being able to eat great nutritious food that makes everybody happy around the dinner table. When it comes to the business development side, we are not specifically talking about anything. I think you can see from the last two years, or the last year at least, with both the transaction in Denmark and the transaction here now with Middagsfrid, that we're very much open and exploring different types of growth vectors. But beyond that, we're not going to go into detail at this point, beyond talking about focusing on the core business, which is the most important part to grow the business. We have a question that is saying, you say that Chef Love is driving a scalable business. What types of costs are relatively stable when revenues grow? So there's quite a few different areas that are in fact fixed costs in this business. If you look at it from a sort of a production standpoint, we have leases on production space, we have depreciation on on equipment and inventories, overhead costs. We don't need to expand administration personnel to run administrative functions. We have invested over the last couple of years in expanding our technology team. That's at a point today where we can do, and we have done a heck of a lot with the team in place. I think there's quite a few different areas in the business that simply put, because of the nature of our business, don't need to grow. The things that do will grow is, of course, all of our direct material input costs, as well as the labor component of actually producing and packing meal kits when it comes to our staff in production. With more volume comes more hours. And that requires more effort. But there are even a certain number of hours in production that are sort of a baseline that are needed to set up things for production every week. And it doesn't really matter if the production is higher or lower. And we have another question. We have several questions here. So thank you, Tobias. Can you speak a bit about the customer group at Meadogs Fried? And what is their order value and order frequency? So we can't disclose significant detail about this, but as we've looked at the customer base, I think in many contexts of brands which have been in the market a long time, um there is is a an extremely loyal customer base within me dogs freed i think as we look at that type of customer base i think it it is the type of customer that would resonate very well and and appreciate the the lena service in sweden so i think this really comes down to at this point in time they no longer have the option of receiving any dogs free and we will be very close to them in terms of referral and making it easy for them to migrate to Linas. The next question, can you elaborate on the TV campaign you have started in Norway? The elaboration is not so much. It's very specific to the Adams Maltgasa brand. If you have a chance, I think you can find that probably on YouTube. The campaign itself is somewhat whimsical, but also very lighthearted, talking about the relationship between the brand and local suppliers. And it's very much about delivering very fresh ingredients directly from the farm itself. And there's a take on it with regards to how our customers can be quite flexible and how Norwegian farmers can deliver very well to this market. So a good campaign spot. Well received so far. Speak a bit more about price increases in August. Were these across all meal kits? So the second part of that answer is no. The brands Linas, Rath & Nemt and Côte d'Ivoire did not have any price increases. We've not increased prices in those since the end of 2022. The price increase is only specific to atoms and it's roughly 7%. And as we stated, the purpose of the price increase is to help drive options for the ingredients and recipes in the ADAMS meal kit boxes. And the last question then is, what impact do you think these price increases potentially might have on the percent in marketing spend? At this point in time, as we do look at the 13% as a watermark, we can say that it will potentially rise proportionally with the 7% increase in the Atoms revenue. I would say the most important thing is to actually create a strong differentiation in the brand and make sure that the experience for the customer is really reflecting the qualities behind the brand and the focus on the food and the cooking experience. And our last question that we have so far, hands up for another great quarter. When you compare the cost of marketing today, looking back three and five years, is it more expensive and what changes have you seen? So looking backwards, the... I think we found a balance in 2020, but was also at the beginning of the pandemic, where it became clear that to make the business model work, we needed to manage sales and marketing at a level that was around 13%. So if we do the math, what is that? That's four years ago. You can see some fluctuations before that where we underspent um in 2019 to make sure that we balanced liquidity needs of the business at that time um and and that was too low um i think we've had at points in time where we've seen sales and marketing expenses increase somewhat with an effort to accelerate uh growth and with less success so it is really a balance it's a balancing act and i think we've We seem to have found a sweet spot around 13%. Obviously, there's another piece of the puzzle, which we don't disclose, it happens above net sales, and that's discounting rates. Discounting rates have changed over time with HelloFresh's entrance to the Nordic markets. I would say the most extensive change has happened in Denmark, as that market had very little discounts before HelloFresh arrived. Whereas in Sweden and Norway, it's increased somewhat, but not to the same extent. Hopefully that's a little flavor on the question. We don't see that we have any other questions coming in. So without further questions at this time, I'd just like to thank you again for joining us for the second quarter call of Sheffalo. We look forward to seeing you again in November. And that's when we report our results for the third quarter. So have a great day, everyone.