Earnings Call: Q1 2020

May 5, 2020

Dear, ladies and gentlemen, welcome to the Q1 2020 Results of HelloFresh SE. At our customer's request, this conference will be recorded. As a reminder, all participants will be in a listen only mode. And after the presentation, there will be an opportunity to ask questions. May I now hand you over to Dominik Wisske, CEO of HelloFresh, who will lead you through this conference. Please go ahead. Good morning, everyone, and welcome to our Q1 2020 results. Today, we'll be covering in detail the drivers of our Q1 performance, where we already pre announced the highlights towards the end of March. We'll also be giving an update to our guidance for the remainder of 2020 and outline some of the underlying developments that we've seen and taken in times of COVID-nineteen. We were already on track for a really outstanding first quarter in January February pre COVID-nineteen, but then experienced extraordinary demand in the latter half of March throughout all our markets in a very short span of time that required an incredible amount of work for the team across all the different functions that we have. We've been fortunate that through the hard work and the many night shifts of the team, we could support millions of families around the world in those crazy times with healthy, affordable and most of all, safe meals in the safe environment of their home. A lot of the supplier relations, the technology, the brands and the operational excellence that we've put in place over the last couple of years has helped us to cope quite well with the additional demand we've been seeing since mid March. And I'm quite proud that we've played such an instrumental part in these times for many, many families. So let me quickly review some of the highlights of the Q1 with you and then hand over to Christian for the financials and the guidance. First of all, we've seen active customers reach about 4,200,000 in the Q1, up from about 3,000,000 in the 4th quarter and up from about 2,500,000 in the Q1 of 2019. So very high increase in the number of active customers. We've been delivering more than 100 and 11,000,000 meals to our customers throughout that period, which again is a steep increase from the year before and that we did despite quite challenging conditions across our supply chains in the different markets. We've also seen very strong revenue growth as a result of the many active customers. And through the whole quarter, saw a very good performance with an additional surge in demand towards the end of March. So revenue has been up by 64.5% compared to the same period last year on a constant currency basis. That's also reflected the strong performance in terms of the adjusted group EBITDA, which came in at $63,100,000 and which was driven by an adjusted EBITDA margin in both of our operating segments, the U. S. And international, of more than 10% in each of those segments. That's something that we've reached for the first time and something that is definitely testament to the very good performance and to the quick adaption to the new realities in our supply chains throughout the markets. We've also been able to generate quite a high number in terms of free cash flow. So we've generated over €111,000,000 of free cash flow in the Q1 alone, which results now towards the end of Q1 in a cash position, cash on balance sheet of almost €300,000,000 for HelloFresh Group. And then finally, the COVID situation only really influenced the last 2 to 3 weeks in March. Since then, obviously, a lot of the imposed government shelter in place. Basically, recommendations have been in place throughout our markets. And so throughout April and now the beginning of May, we've seen continued strong trading to date with revenue growth and adjusted EBITDA margins higher than what we've seen in the Q1. And please bear in mind that the Q1 has already been an excellent performance. And hence, as a result of that, we have been raising our guidance again for the full year and for the remainder of 2020. Now let me come to active customers. We've added 1,000,000 additional active customers in a single quarter compared to Q4 2019, so from roundabout 3,000,000 to over 4,000,000 active customers. That's been a trend that has been very strong in both of our operating segments and both in terms of new customer acquisition, a little front loaded to January February, but also reactivations and very strong retention rates from our existing customer base has actually contributed to that fantastic result. We had then to basically limit new customer acquisition throughout the latter half of March as capacity has been tight in some of our manufacturing centers around the world, but we've since also basically opened up new capacity, and that will be a main driver for the performance in Q2. Orders have also been up by about 66% compared to the same period last year to roundabout 15,000,000 orders in the Q1 alone. That was driven by the strong growth in active customers that we've seen and increased order rates, not only throughout the quarter, but especially focused on the latter part when some of the imposed government measures really hit our markets within a span of days throughout the world. Coming to revenue. Revenue is pretty much in line with the growth in orders that we've seen. And it's a significant step up both compared to the Q4, but even more so compared to the Q1 of last year. So revenue has been up by 65% in constant currency from €420,000,000 last year to about €700,000,000 for the Q1 in 2020. January February have already been higher than the 40% growth that we've been guiding towards. But then really in the last couple of weeks of the quarter and spilling over now into the Q2, we've been operating at very high utilization and we've been dealing with the demand quite well, But we've seen a lot of additional demand coming to our services as customers spend more time at home, cook more at home, and we've been the go to source for a lot of families around the world. With that, I want to hand over to Christian, who's going to lead you through contribution margin and then our financial results. Thank you. Maybe just briefly on our portfolio, you see that both of our segments grew very robustly, the U. S. Even somewhat faster than our international business. And this is really a continuation of the trends that you've seen that you've observed already in Q4. Last year, now I'm already looking a little bit ahead into Q2, you should assume that both segments roughly are growing in Q2 at a similar growth rate. With that, let me turn to our contribution margin. In Q1, we maintained a contribution margin at a relatively attractive level of close to 29%. And this is really the function of a number of offsetting parameters. On the one side, we've seen a higher impact of price incentives driven by the very strong new customer acquisition that we have generated throughout the quarter. On top of that, we have seen somewhat higher fulfillment expenses. This is mainly driven due to the implementation of further employee safety measures and some extra pay in production, all effectively driven by the COVID-nineteen situation. And all of that is largely offset by further efficiencies that we've seen in our procurement operations. Let me now comment on the development of our marketing expenses. We see here is effectively a continuation of the trend you have now observed already over the last three quarters for us, I. E. Despite having added 1,200,000 new active customers in this quarter, we have meaningfully reduced our marketing expenses on a relative, but even on absolute basis year on year in this quarter. Our marketing expenses as a percentage of revenue are down by more than 14 percentage points. And through that, our U. S. Segment has been the biggest contributor to this trend. And what's important is this is not just because of COVID. This is a trend we've observed in every single month of the quarter, I. E, every single month we have seen year on year a reduction of our relative marketing expenses in the mid teens. This marketing expense relative reduction flows through 1 for 1 to our bottom line. And you see this on this page. This effectively has helped us to generate in a single quarter an EBITDA of CHF 63,000,000 representing margin of 9%, I. E, a 15 percentage point expansion versus the same period last year, I. E, we've operated very closely already to our midterm target margin and this in a quarter, which typically shows compressed margins because of our robust marketing activities that we undertake at the beginning of the year. If you have a look how this profitability breaks down across our segments, And Bjornik has alluded to that upfront already. We have generated a very strong EBITDA margin in both of our segments, 10% plus in each segment. For the U. S, for the first time in double digit territory with a margin of 11.3%, but also our international business has generated a strong EBITDA margin of 10% in that quarter. So to summarize, in Q1, we've produced both very strong revenue growth and a very healthy profitability profile across our entire business. But not just that, we've also generated strong cash flow. We've generated a cash flow from operations of €132,500,000 dollars in the Q1. And we've generated a free cash flow of 111,000,000 in a single quarter. So after our CapEx spend, taxes, interest and so forth, meaningfully more than $100,000,000 free cash flow in a single quarter. We ended last year with a cash on balance sheet position of €193,000,000 Now through the strong free cash flow generation, we've added to that and increased that cash position to €300,000,000 at the end of the first quarter. On top of that, we have an undrawn revolving credit facility of €80,000,000 available to us. This brings me to our last slide to our updated guidance. Despite the heightened economic uncertainty, we are increasing our guidance for the full year meaningfully. We increased our expected group constant currency growth from previously 22% to 27% to now 40% to 55%. We increased our EBITDA margin guidance from previously 4% to 5.5% to now 6% to 10%. Let's also quickly recap some of the underlying assumptions. So for Q2 and Bjornik had alluded to that before already, we assume somewhat higher growth and a somewhat higher margin versus an already very strong Q1. We also assume a greater lifting during the course of Q2 of some of the lockdown restrictions and a normalization of demand patterns including order rates during Q2, We also assume that HelloFresh compared to most other companies will cope comparatively well with the recessionary environment that is already a reality in most of our major markets. Goes without saying that in the current environment, this outlook is subject to heightened uncertainty. And therefore, we've also decided to go with relatively broad ranges compared to what we provide you normally in terms of our guidance. With that, we would open up for questions. Ladies and gentlemen, we will now begin our question and answer session. And the first question is from Robert Berg, Berenberg. Your line is now open. Please go ahead. Hi. Thanks, guys. I'll give you three questions. My first question on capacity. I'd love to dig a little deeper into Dominic's comments made earlier in the presentation. Could you run through how you managed to add capacity so quickly and whether this is something which could continue in the near term if necessary? And are you planning to bring forward any other CapEx projects? The second question also on capacity and how to think about your maximum potential revenue growth now. But maybe a good way to do this is in terms of looking at the revenues that you saw in March or April. If in Q2, we say that $250,000,000 average revenue per month, Are we seeing revenues of over $300,000,000 in March or April? Maybe some color on that. And you mentioned about economic uncertainty in the reports just now in the guidance. How should we think about how recession proof your businesses? Does this speed up your thoughts at all on launching every plate in the other international markets? Thanks. Thanks, Rob. So in terms of capacity management, I think there's a number of different dimension that you need to look at. Number 1 is just like how big are the centers that we actually have. Another dimension is actually what's the availability of labor and how fast can we train up labor. So I think those are probably the 2 biggest contributing factors. What we've seen is that at some point in March, we definitely had to limit and restrict kind of like new customers coming to the service because we first had to source and train up new labor to then be able to really kind of like manufacture on as many days and then as many shifts as we can. I think since the beginning of April, we have then been able to slowly build out capacity in the centers that we already have. And we now have more capacity than when we entered the COVID-nineteen phase. But certainly, there is another offsetting trend going on, which is imposed social distancing measures and sort of like increased safety and sanitation protocols, which cost some elements of time. And hence, I think it really depends in terms of how much capacity we will have available in terms of how much of those measures will remain in place. And so I can't give you an answer that applies to all of our different manufacturing centers. But high level, we've been able to further expand our capacity through smartly building out some additional spaces surrounding our manufacturing centers and through ramping up the number of delivery days and production days that we actually have. So that's been positive for us, but it always comes with a certain lag as you need to train up a lot of labors, a lot of supervisor, which can't be done from one day to the next. In terms of so your question, what the theoretical revenue would be at current capacity, so max revenue, that's roundabout the €3,000,000,000 mark, obviously, with variations to the left and to the right depending a little bit to how equally distributed growth is. On top of that, please keep in mind that we've got our ongoing CapEx program ongoing. As you remember from our last call 3 months ago, we are planning to invest €70,000,000 in terms of CapEx. A lot of it of this goes into capacity expansion during the course of this year. And in the Q1, we spent already pretty much 1 quarter of that amount, EUR 18,000,000. And then finally, in terms of the economic uncertainty, I think a lot of the preparations that we've done over the last years by structurally driving down our cost base in terms of ingredients, in terms of logistics, in terms of manufacturing. I think a lot of those developments now are in our favor. And we actually do operate on a very good cost basis. I think what we've seen from customer research and what we've seen in terms of development in the last couple of weeks was that customers generally consider our meals very affordable. We also have the numbers to back that up that compared to supermarket spend, etcetera. We actually come out very well when you benchmark our meals. And what you typically see in recessionary environments is that food at home spend is not contracting a lot. It's actually rather stable. And food out of home is usually the sort of the type of discretionary spend that customers do away with. And hence, we do think that generally we're in a very good position. And we obviously still have the opportunity of a very successful value brand that we have in the U. S, which we are definitely thinking about launching in other markets as well. Again, this is also a little bit a capacity situation and a priority situation, what do we want to do first, but it's certainly something that we are evaluating and assessing as we go along. Amazing. That's really clear. Thank you. The next question The next question is from Markus Buebbo, JPMorgan. Your line is now open. Please go ahead. Hi, everyone. Congratulations for these results. Very impressive numbers. Two questions. Maybe a question on how you continue to drive marketing spend. In the U. S, we've seen a slight decline in traffic, which I guess is just a function of you optimizing the marketing spend. Now with the comments on capacity, is it fair to assume that marketing spend will slightly increase to basically allow for even more customers coming back to the site? And then more conceptually, the second question on marketing longer term, we have an overall margin target of about 10%, which we now reached. Given that a lot of customers remain sticky, where do we think can this go? I mean, I appreciate that you can't or you don't maybe feel at this point in time to comment on long term margin potential. But more conceptually, is there really a reason to believe that the marketing spend as a percentage of revenues should meaningfully increase again? Or on my numbers, the margin guidance of 10% even midterm looks quite conservative. So any help on kind of like driving how you drive marketing spend going forward would be quite helpful. Thank you. Yes. And thanks, Markus. Let me comment on that. So let's talk about short and the longer term. In the short term for Q2, you should assume marketing expenses as a percentage of revenues will be down further compared to Q1 and Q1 was around about 17%. And then during H2, you should see a normalization, I. E, an increase again of that relative marketing spend. In the longer term, what we have guided from the past is that, let's say, what we call mid term, which is effectively 2022, we would see our marketing spend as a percentage of revenue in the 15% to 17% area, and that still holds. So there's no change to that. Okay. And the next question is from Andrew Guinee, Exane. Your line is now open. Please go ahead. Hi, good morning team. Just one clarification and two quick questions, if that's okay. So just on the clarification, you mentioned that revenue growth in Q2 was similar. It wasn't entirely clear between the two regions, sorry. It wasn't entirely clear if that meant similar between the two regions or similar versus Q1. So that's just a clarification. The second question just on the supply constraints again. Maybe just talk a little bit about the sourcing of products. I imagine there's some help because of the pressure on the broader foodservice market, but just a little bit of clarity there. And then the final point, it's quite hard to pick up maybe some of the data given the sort of averages are skewed by that second half effect, second half of March effect. Could you just clarify or just talk a little bit more about customer behavior? So how much are we seeing a significant step up in frequency and so forth? Okay. Super. And let me clarify the first one. And sorry if I'm confused you there. So in terms of group revenue for Q2, we see that above Q1. And Q1 was at 64.5%. So for Q2, we expect to be higher in terms of year on year group revenue growth. And we assume that in the second quarter, that growth will be more similar or more equal between our 2 segments. So our U. S. Segment and our international segment, for both of them, we expect to grow at a similar rate in Q2. With regards to what we see on the sourcing side and potential pressure on food supply chains, I think generally, we're very well diversified. So in each of the markets, we draw on a fairly large pool of suppliers. There have been smaller scale disruptions, but I think we could mitigate all of those pretty well and navigate the environment quite well. So that didn't have a big impact to consumer facing. And generally, we do think that there was obviously quite a bit of turbulence in the market. So if you look at food prices, if you look at supplier relationships, if you look at food services that had been supplying restaurants before, there was definitely quite a turbulent time in the 1st couple of weeks. And prices were all over the place for some of the ingredients. But if you look at the numbers and if you look at how we've dealt with that, then I think big compliments to the team who navigated that environment pretty well. And we could navigate that with very, very bitter obvious impact on customers. We had to exchange some ingredients here and there. But given that we are on top of the menu and that we can fairly easily also exchange ingredients if shortages occur, that usually comes with very little impact to consumers. And we do not foresee that there will be any more severe impacts going forward. And now in the Q2, we've also seen less than in the 1st weeks. In terms of customer behavior, I would say that consumer adoption has definitely been compressed. And what we feel is that it's been very good for habit forming. If customers sort of like do home cooking for a number of days in a row. And if a normal customer typically gets his first couple of meals over the span of a month or 2 and now you get those same number of meals over 2 weeks, then that obviously helps like forming habits. And that actually, we think, will lead to a structural improvement in what we see from customers. And that's definitely what research and so both research and data actually shows. And the next question is from Fabienne Caron, Kepler. Your line is now open. Please go ahead. Yes. Good morning, everyone. Three questions from my side. The first one, you're saying that in Q2, you expect more growth from the international market because you said the growth international and U. S. Will be the same, so we'll have a massive step up. Could you give us some colors of which markets do you think is driving this the most? And what does it imply for the margin for the full year if we compare international and the U. S. A? And the second question would be, do you expect a difference in you know behavior retention rate for what so called the COVID customers, customers that move to HelloFresh because of the lockdown? And the last question would be, we saw food retailers, they talk about already about trading down. So they see their customers are paying more attention, buying more private label within food retail. I was wondering if in your business you see kind of similar trends, maybe customers buying less add ons or customers are doing a bit less or if you haven't seen anything so far? Thank you. Again, Christian, on your first two questions on international growth, yes, we would see a step up of that in Q2. This is reasonably broad based. So there's not a 1 or 2 single geographies who would stand out there. We see a similar further acceleration of the growth pretty much across our 12 markets in international. From a margin perspective, so to your second part of the question, for the full year EBITDA margin between the two segments, we expect a reasonably similar margin profile from a full year perspective for both of them. Retention of new customers, obviously still early days. But our what we see so far and that also our base case assumption is that the customers we have added over the last couple of weeks show a similar retention profile as, let's say, our normal cohort. And in terms of price sensitivity, which I think your third question was mostly directed to, Yes, the meals that we have, we have actually been seeing that customers perceive them as a very affordable alternative, especially now if you've actually seen with a lot of the retailers imposing very high shipping fees and delivery fees. And that generally like online supermarkets are more expensive than offline supermarkets. We've actually seen a lot of consumers commenting quite positively on the value for money that we actually offer. And so we haven't seen anything like increased price sensitivity from consumers. But I think that is also understandable if you look at the price at which we sell our meals, which is actually in line or cheaper with supermarkets at much better service levels and much more convenience levels. And the next question is from Ms. Latia, Morgan Stanley. Your line is now open. Please go ahead. Thank you. Thanks for taking my questions. 3 for me. So just following up on the international segment, EBITDA margin came at 10% in the quarter. But could you maybe give us a sense of what the margin was in the more developed markets? That would be helpful. The second is on the marketing strategy more so. So you also experienced strong growth before COVID in January February. So I was wondering what was that mainly driven by? Has there been further optimization on the customer acquisition side even before the outbreak? And lastly, on the competitive environment, how has COVID changed the competitive landscape at all? Do you think some competitors have become stronger and maybe given the unexpected tailwind? Thank you. On your first point on the margin of our more developed international markets. So this has been quite healthy similar to what you've seen in the past. So north of 15%. With regards to marketing strategy pre COVID, we've seen some of the lowest customer acquisition costs that we've ever had in January February already. I think that was, to a small degree, down to the competitive landscape to a much larger degree due to the fact that we've been building up our brand and that our brand awareness is now at the highest level that it's ever been in all the different markets. And we do think that through some of the forced adoption that we've now seen over the last couple of weeks and that adoption that has been compressed onto a very short time line, that is actually something that will benefit us also going forward when it comes to basically marketing our products and our services to consumers. In that, basically with regards to that, with regards to the competitive landscape changing, I think certainly also for some of the smaller direct competitors we had, the rising tide has been lifting all boats. But we've also seen that a lot of the indirect competitors have obviously like struggled with less demand. So whether that's some of the takeout guys, whether that's restaurants, whether that's quick service restaurants, etcetera, I think there's a very large additional demand opening up. And that's where we feel we are in a good position to capture the vast majority of that, just given that in terms of the product that we have and also in terms of the price point at which we work, we do think we have a much superior offering to a lot of the competitors that we're actually facing. So certainly, in the short term, I think some of the direct competitors have also seen some strong tailwinds. But I think more long term, given our brand awareness and given that there is a lot of additional demand that should flock to meal kit services and at home solutions, we do think that we're actually better positioned than before. Very helpful. Thank you. And the last question is from Ms. Raul Vakis. Your line is now open. Please go ahead. Hi. 3 for me. So first, wanted to ask about newer markets within international, how they're progressing in terms of both revenues and profitability, were France, Sweden or any other markets loss making in Q1? 2nd, just wanted to ask again about the margin of EveryPlates compared to the core HelloFresh offering in the U. S. I know we've been asked about it before, but wanted to see if there's any update there, especially as we think about potentially EveryPlates becoming an offering international? And 3rd, just on M and A, any changes towards in your attitude towards M and A? We know one of your peers in the U. S. Is doing a strategic review, including a potential sale. Would this ever be something that you would consider? Okay. Great. We are on your first point. So were our more recent market loss making in Q1? Answer is yes. So Sweden, France and the likes definitely still in the investment phase. If you remember from some of the data we've shown you at our last Capital Markets Day, typically it takes us at least 3 years, more normal case closer to 5 years for a market to breakeven, and those markets are definitely still pre that breakeven phase. In terms of contribution margin for every plate further expanding, yes, so on that continues to be on that great trajectory that we've discussed in the past. But not quite there yet where the let's say, the core brand is in terms of absolute margin, but well on track to get there over time. On M and A, Doenk? Yes. And for EveryPlates, just to add, while we have slightly lower contribution margin than in our core business, EveryPlates is EveryPlate is fully integrated into our platform. So it benefits a lot from basically splitting the overhead costs that we have to more brands, to more segments, etcetera. And so we do think that with EveryPlate and HelloFresh together on one platform, we can actually benefit for both of the brands. So HelloFresh can have a higher brand by also running EveryPlate. And hence, I think the 2 together will actually be in a very good already in a very good position and have further potential to advance. With regard to M and A, not much has changed. I think we're generally more comfortable with building organically. And I think building organically is more in the DNA that we have. We still see a lot of growth runway in the markets that we have and also in potential new geographies. So that's definitely like higher on our agenda. Very opportunistically, we might look at M and A, but it's definitely not top of the agenda, and you should expect us to be builders and to build out the business organically. Thank you. Okay. Thanks a lot for your attention and for your attendance to our Q1 results. Rest assured, the team and ourselves were working very hard to provide as many meals as possible to families all across the world. And we're looking forward to seeing you back here for our Q2 earnings call. Thank you, and have a great day. Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect.