Cheffelo AB

Good morning, and welcome to today's webcast, where we have Sheffello presenting the Q3 report. With us presenting, we have the CEO, Walker Kinman, and CFO, Erik Bergman. If you have any questions, please use the form located to the right. And with that said, please go ahead with your presentation.

Thank you, and good morning to everyone joining us, and welcome to this presentation of Sheffello's third quarter results for 2024. My name is Walker Kinman. I'm the CEO of Sheffello. I'm here today with Erik Bergman, our CFO. I will 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 third quarter development and financials. And then we'll take your questions that you can post in the questioners' dialogue or by emailing us directly on ir.sheflo.com. So let's start with a little about Sheflo 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 brands Gotlevert and Adams Motkasse, in Sweden, Linas, and in Denmark, Ratnemt. These well-known local brands have a rich history of innovation and entrepreneurship, 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. 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. 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 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 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. Q3 was a busy period for us, marked by continued growth and stronger customer loyalty, along with some key organizational changes and our own efforts to help consolidate the meal kit market in Sweden. With five consecutive quarters of year-over-year growth now behind us, we expect further acceleration in Q4, even as growth remains a bit uneven. It's encouraging to see double-digit growth in Sweden this quarter, especially since this market accounts for nearly 40% of Shefflo's total net sales. Active customers were flat year-over-year, and growth came from an increase in customer loyalty, as we see continued improvement in order frequency and reductions in our subscriber churn. At a profitability level, EBIT was a negative 17.2 million kronor on higher sales and marketing expenses. In short, we expected an improvement in market conditions based on reduced interest rates, increasing consumer demand. We chose to lean into that and concentrated more of the year's marketing spend into Q3. That tactic seems to have worked well in Sweden, but may actually have been a little premature in Norway and Denmark. The Meat Dogs Freed marketing partnership announced our last report was kicked off in Q3 and is on track to contribute well in Q4. We also announced changes to our organizational structure, helping lay the foundation for more effective organization and future growth while also recruiting a chief growth officer. For the nine months ending in September, we have grown net sales by 5.9% on a local currency basis and generated 12.3 million kroner in EBIT profit. Let's take a closer look at the overall market developments on the next slide. As noted, we expected a better market dynamic for meal kits in the second half based on the expectation of interest rate reductions triggering more consumer demand. Unfortunately, signals from central banks became very unsteady prior to and during the summer months due to enduring concerns about inflation. Sweden and Denmark started reducing rates in May and June, but chose to pause reductions at their nest next respective decision meetings in June and July, before continuing again in August and September. The Swedish central bank signalled in September faster reductions before year-end, which has also helped lift consumer sentiment now. Norway's central bank has chosen another direction and communicated in late September that no changes would occur until 2025, which is very unwelcome news for Norwegian consumers burdened by high variable mortgage interest rates. Swedes are now the most optimistic, as seen from a consumer confidence perspective, with that index showing a sharp recovery this year to a neutral level. The good recovery seen in Denmark in 2023 has slowed down, and while confidence is slowly improving, it remains at a lower level than has been seen for most of the past decade. Norway is up from the lowest seen in 2022, but progress slowed in Q3, and it remains at a very low level, not seen since the early 90s. Although we believe consumer outlooks will gradually improve, we're somewhat cautious about how quickly market changes will significantly boost our own growth rate. Let's continue to the next page about how this is translating into our own development in each market. So we hit double digit growth in Sweden at 11.9% for the quarter, driven largely by solid gains in order frequency. This exceeds the Q3 development in the online grocery index in Sweden, which was 7.5%. While delivery volumes grew by 11.3% in Denmark, net sales only grew by 8.6% in local currency, which was slightly under our expectations. The difference in growth rates is related to the introduction of our loyalty club with perks such as free delivery and discounts redeemed with loyalty points. These discounts are booked away from net sales, but help to drive order frequency and reduce churn. We remain pleased to see continued outperformance versus the Danske Statistik online grocery market index, which grew by 5.3% for the year-to-date period ending in August. These two indices give us a sign that customers are coming back to meal kits faster than the broader online food arena, and our own results may well indicate that we are also capturing market share. In Norway, net sales in local currency were flat, which is slightly better than the decline experienced in Q3 of last year. Given the macro view and the competitive dynamics in Norway, we remain encouraged to see our business holding ground while anticipating steady recovery in the trading environment through 2025. Let's take a look at how market consolidation is affecting our business on the next slide. In August, we announced the marketing partnership with Meadogs Frid in conjunction with Axfood's exit from the meal space. If we look back to the transaction in Denmark with the acquisition of customer relationships from Kokens Vardogsmål, we find that this cohort has exhibited a much more loyal behavior towards Rathnemt than customers acquired in the normal course of business. Orders generated as a result of this agreement up until the end of the third quarter exceeded 25,000, which is over 21 deliveries on average from a little over 1,200 customers. This is a unique cohort and opportunities to engage in this type of customer acquisition do not occur often. That said, we're excited to see the Meat Dogs Free Marketing Partnership appears to be headed along similar lines. We are just at under 1,000 customers taking orders by the end of October. We have a lower order frequency in Sweden due to a market history with every other week delivery. So it is very encouraging to see almost 90% of the delivery volumes from Middagsfrid compared to the Kåkans transaction after a similar startup phase. Turning to the next slide, we zoom in a bit on our gross target and the general meal kit market. We have set a net sales growth target with a CAGR of 6% to 8% that translates into $1.2 billion SEC for 2026. Development during the 2024 period has us on track for achieving that. There are four areas that we see that will have a meaningful impact on growth for Sheffalo in the near term. Three of these, price optimization, increasing the active customer base, and improvements in order frequency are estimated at having equal weight effects at two to three percentage points of growth each. The last is the continued expansion of add-ons and groceries, which still makes up less than 2% of our net sales and is expected to contribute one to two percentage points to growth as we develop the offering. We remain strongly convinced that the meal kit market has tremendous potential. There is noise in the investment community about the future of meal kits, perhaps driven by the behavior of some of our peers, who until recently have focused on growth over profitability. Our conviction at Sheffalo is that we will only be successful if we address customer segments that have the economic means and the compelling motivation to subscribe to our service. We see several underlying factors that will continue to drive demand for meal kits and lead to growth in the customer segments we are addressing. Megatrends that place more emphasis on convenience, nutrition and sustainability, followed by demographics and general population growth in the Nordics, are two catalysts for steady growth. Recently, inflation has squeezed disposable incomes, but the long-term trend is towards increases in purchasing power, allowing for even more everyday convenience, like the service of a meal kit. Finally, we are convinced that innovation and improvement in the service will help grow the total addressable market. Turning to the next slide, I would like to highlight that this isn't just about growing the business, but also, as the market consolidates and becomes more rational, increasing our competitiveness. We set our sights on profitably increasing our market share, not buying it, but winning it. To do this, we know that we will have to increase and engage our active subscriber base, which in turn means getting even better at efficiently attracting high-value customers while also ensuring profitable subscriber loyalty. These can be summarized with business outcomes that are in focus when we make decisions about where we put our efforts. From a strategic perspective, these ideas also are a foundation for the recent organizational changes as we sharpen the focus of our talented colleagues on the task of acquiring and retaining customers. As part of this, we recently announced the appointment of Adam Bjorklund, currently the head of digital sales at SAS, to a new role as chief growth officer at Sheffalo. On the next slide, you have an overview of the management structure that is in place since October 1st. Adam will join us in early January to take over the new role as CGO. Until then, Klaus is acting in the role. Klaus Stenfeld moves into a newly defined role as Chief Customer Officer, where the focus is on the user experience. Most importantly, the physical product experience and communication with active subscribers. These changes also reopened the opportunity for Klaus to step back into a focused role of Chief Business Development Officer, where we intend to invest more time in evaluating potential growth vectors to complement our core meal kit business. I'm very happy to welcome Adam to the team and look forward to his contribution in this new organizational structure. Change is never easy, but as we look towards the future of Sheflo, I'm convinced that these changes will lay the foundation for future growth and a stronger, more competitive business. With this, let me turn it over to Eric to take us through the financials.

Thank you, Walker, and good morning, everyone. I'm pleased with our results for the third quarter. Net sales grew by 2.4% or 3.8% when adjusting for currency. Our core business remains strong, shoving positive trends, especially among our established customers. In the third quarter, we always experience lower sales due to summer holidays in the Nordics when our customers tend to pause their subscriptions. It is also a period with increased marketing activities towards the end of the quarter to reactivate and gain new customers. This year, we saw a slight delay in the ramp-up period, which could be explained by a more favorable weather throughout August compared to last year when poor weather led to an earlier ramp-up. This slight seasonal shift impacts our net sales compared to last year. Currently, our growth comes from a strong performance from our established customers, which is reflected in increasing order frequency trend, where we saw almost 3% increase in the third quarter. The increased order frequency reflects the positive shift in custom purchasing behavior, Our loyalty club, a more efficient and selective way of handling discounts and improvements in the customer experience are examples of drivers behind the improvements. We are experiencing what we refer to as a bumpy growth, where the growth was slightly slower in the third quarter than in the first half. I want to emphasize that we do have a strong underlying growth, although this bumpiness comes mainly from different levels of new customer acquisitions. Our new customer acquisition was slower this quarter. Last year, we had two major initiatives outside of our regular sales and marketing efforts that had a significant effect on our new customer acquisition. First, our partnership with Weight Watcher was new and attracted many new customers. And second, we acquired customer relationships from Kockens Vardagsmat in Denmark during the second quarter, which also contributes to a higher new customer acquisition. Our business sees the highest new customer acquisition in the first and third quarter every year. As growth are currently driven by established customers, we expect to see relatively higher growth in quarters with lower inflow of new customers and a higher when the new customers contribute less. Finally, I would also like to touch upon currency. We continue to experience volatility in exchange rates between SEK and both Norwegian and Danish kronor. We expect this volatility to persist going forward. However, I would also like to highlight that given that much of our purchase and revenue are in local currency, we do benefit from strong natural hedges on profitability, but it will have an effect on our top line. Let's move on to take a closer look at the contribution margin on the next slide. I'm proud to say that we do have a solid control over unit economics. Contribution margin reached 27.9%, which was in line with last year. Contribution margin will vary with seasonality and are relatively lower in the third quarter due to lower volumes. And to be clear, the third quarter results confirms that we are on track to maintain an annual contribution margin above 30%. By managing our unit economics efficiently, we have been able to leverage fulfillment cost savings into an enhancement in product quality. The savings are achieved through both production and logistics efficiencies. Let's move on to have a look at our marketing spend. The third quarter is characterized by relatively higher sales and marketing expenses aimed at reactivating and acquiring new customers. This year, we navigated a cautious macroeconomic environment In anticipation of an improved macroeconomic outlook, we intentionally increased sales and marketing spend to leverage on that improvement to drive an increase in customer acquisition. This led to an overall spend of 41 million SEK, or 19.1% of net sales, compared to 16.8% last year. While this approach showed positive results in Sweden, its impact was more limited in Denmark and Norway versus what we had anticipated. as we did not see the same macroeconomic recovery as expected. We have shifted costs through the third quarter. However, as previously communicated, sales and marketing expenses are expected to be around 13% for the full year, indicating a lower marketing spend in the fourth quarter. During the quarter, we also signed a marketing cooperation with Middagsfrid, focused on transferring customers to our Lina's Mothcaster brand. We have recognized one million SEK in Q3, with the reminder of the cost expected to be recognized during the fourth quarter. Let's now have a look at the profitability. As mentioned in earlier slides, due to the seasonal characteristics of the quarter, with lower volumes and a relatively higher marketing spend in the third quarter, the third quarter is typically our least profitable quarter. EBIT for the quarter was minus 17.2. This was 4.4 million SEK lower than last year. This is mostly explained by the relatively higher sales and marketing spend that I talked about in the previous slide. And to be clear, while timing of marketing expenses in 2024 creates comparability challenge, we are projecting a full year increase in EBIT and expect Q4 to show strong profitability. We are experiencing increased profitability in Sweden and Denmark. This is driven by higher volumes and economies of scale. In Sweden, we have also seen significant improvements in our logistics setup. In contrast, profitability in Norway has declined. This is mainly due to increased marketing expenses and inflationary costs that were not passed on to customers. To conclude on profitability, We have a good control of our contribution margin. We are at the OPEX level, where we see that we will benefit from economies of scale. We allowed us to make a higher investment in sales and marketing expenses in the third quarter. We will continue to have a tactical marketing spend approach. And in line with what we communicated before, sales and marketing is expected to be around 13% on a full year basis. Let's move on to the next slide to have a look at the cash flow. In the third quarter, the same factors that impact profitability typically make the third quarter the quarter with lowest cash flow from operations. However, our working capital fluctuates with seasonal patterns. The post-summer ramp-up in volumes led to a seasonal increase in trade payables, which positively impacted cash flow by 14.6 million SEK for the quarter. There was, however, a timing difference in trade payables compared to last year, which mainly explained the 19.6 million SEK lower cash flow from networking capital. That timing effect is partly due to that the last day of the quarter fell on a Monday, while last year it was a Sunday, resulting in supplier payments being pushed into the next quarter. Cash flow from investment and financial activities remained in line with last year. The free cash flow for the quarter was minus 3 million SEK, which was 32.5 million SEK lower than last year. This decline is mainly due to the differences in networking capital and also a 9 million SEK tax refund that we received last year. And to clarify, that tax refund in 2023 was a timing effect between quarters during that year and did not have an impact on the full year results. I want to emphasize that strong unit economics not only form the foundation for profitable growth, but also play a large role in our cash conversion. Our focus on efficient operations and cost management in combination with our CapEx-like model contributes significantly to achieving a strong cash conversion, where we have generated a free cash flow of 31 million SEK so far during the year. Let's move on to the next slide. Looking forward, we anticipate continued bumpy growth in the near term, with an acceleration again in the fourth quarter. We expect delivery volumes in Sweden and Denmark to grow by high single digits or even low double digits. while Norway's volumes are expected to remain steady. Our contribution margin is set to stay consistent with seasonal patterns, and we are on track to surpass 30% for the full year, supported by strong operational performance and a stable purchasing environment. Our approach to marketing and sales spending remains disciplined. We will continue to target the marketing spend of 13% on a full year basis. And again, although that the timing of marketing expenses this year complicates the direct comparison, we are expecting an increase in EBIT for the full year with Q4 expecting to deliver strong profitability and top line growth. With that, I would like to hand back to Walker for a quick summary.