Earnings Call: Q3 2019

Nov 5, 2019

Dear, ladies and gentlemen, welcome to the Q3 2019 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. After the presentation, there was an opportunity to ask questions. I now hand you over to Dominik Krister, CEO of HelloFresh, who will lead you through this conference. Please go ahead, sir. Good morning, everyone, and a warm welcome to our Q3 earnings call. We'll be hosting our Capital Markets Day later today in our London offices, and we hope to see as many of you as possible. During this Capital Markets Day, we'll do a deep dive on our business model and the financial drivers as well as covering our sustainability efforts and giving all of you an update on current performance of our 2 segments and their growth outlook for 2020. Hence, we'll keep our earnings call rather short this time to not steal all thunder from the Capital Markets Day that we're going to be hosting later today. Now I'd like to start off and walk you through the highlights of the Q3. For a start, in September, we launched Sweden as our 13th geography that we're active in. As with previous launches, we're executing a proven playbook of country launches, aiming to increase our total addressable market, more specifically the number of households to which we can deliver our meals. This launch has been prepared for the past 9 months and we're happy to announce that it has gone very well so far with quite positive early indications on the attractiveness of the market. Secondly, in the Q3, we showed very good growth momentum with active customers, orders and net revenue all growing north of 40%. This is evidence of the successful implementation of the strategy of additional investments that we announced last summer and which has been a major driving force of our recent outperformance. In fact, the Q3 accounted for the highest revenue quarter ever in HelloFresh history, a remarkable result given that this is typically the slowest season of the year. We did achieve these results on the back of strong revenue retention and really good performance in marketing, where we've seen some good leverage that helped us drive down our marketing as a percentage of revenue to 20%, which is a historical low as well. Taken together, this resulted in us achieving meaningfully positive adjusted EBITDA for the group, for our U. S. Segments and for our international segment for the 2nd consecutive quarter this year. As a consequence, we've upgraded our full year 2019 guidance for revenue growth and profitability in mid October when we pre released the Q3 earnings. Before we dive into the financial KPIs, I would like to use this forum to announce 2 important management changes. Effective January 1, Ed Boyce, our current U. S. CEO, will take on a wider global role as Chief Commercial Officer and become the 4th member of our Global Management Board. Ed's been with us right from the start, having successfully scaled our businesses in the U. K. And the U. S. And I'm really happy to fill this exciting new role from our internal ranks. Succeeding Ed as CEO U. S. Will be Uwe Vos, who joined us about 3 years ago as U. S. COO from McKinsey and who has been really instrumental to build out our vertically integrated direct to consumer supply chain and platform in the U. S. Uwe has proven to be an extremely successful leader and great strategic thinker and we're really excited to trust him with this larger role and running our whole U. S. Segment in this new role. That being said, I'd like to walk you through the revenue build in the Q3. International continued on its impressive year on year growth track, delivering $194,000,000 in net revenue, a 47% year on year growth rate. Equally impressive is the reacceleration in our U. S. Segment, where we benefited from the strategic investments in price and our multi brand strategy to deliver €247,000,000 in net revenue, up 38% year on year. Both combined therefore account for the highest revenue quarter ever at HelloFresh. With €441,000,000 in revenue and a 42% growth rate in constant currency for the combined group, we've set the stage for a very successful 4th quarter. Good morning, everyone. It's Christian here. I would like to comment on the development of our expanded by 1.6 percentage points to 27.5 percent in the 3rd quarter. We are also meaningfully up in both of our operating segments, meaningfully above 1% expansion both in international as well as in the U. S. Now on a sequential basis, you see that our contribution margin is somewhat down from the roundabout 29% that you've seen in Q1, Q2 this year. The core driver for this is seasonality. As most of you know, during the summer months, we are coping with higher temperatures in most of our markets. That means more inflation material, more cooling materials, therefore higher packaging costs. On top of that, the capacity utilization in the summer in our fulfillment centers is more uneven than for the rest of the year, typically lower activity in July, August and then quite a big step in September. And that again triggers somewhat increased production as well as shipping costs for us. That's what you see here in the Q3 contribution margin reflective. Now let's have a look at our marketing expenses. This Q3 is really the Q1 where you see significant marketing leverage showing through on all levels, I. E. On the group level as well as for each of our operating segments. Our international segment has been operating with marketing expenses meaningfully below of 20% for last couple of quarters already, but this time you also see a meaningful improvement on the U. S. Side. So compared to the same period last year, 9.5 percentage points relative savings versus 2018. We've achieved this by attractive CAGs across most of our geographies and markets. And on top of that, we saw strength in our reactivation and referral channels, which both have relatively little marketing expenses attached. So in Q3, we really achieved both, very strong customer growth, driving very strong revenue growth and at the same time, saved meaningfully on the marketing side. Now when you put that together, so an expanding contribution margin and meaningful savings on the marketing side, That means another quarter of very healthy EBITDA, a positive 15.5 $1,000,000 EBITDA in the 3rd quarter and EBITDA positive in each of our operating segments, international with a margin north of 10%, but also the U. S. With an EBITDA margin of positive 2.6%. And with that strong performance in Q3, that also means that for the full 9 months of this year, we are already EBITDA positive with $7,700,000 Let me now spend a minute and discuss our cash flow situation and liquidity situation. What you see on Page 9 is that not just did we increase our EBITDA meaningfully year on year, but also from operating cash flow perspective, we made great progress. We delivered for the full 1st 9 months operating cash flow of $33,000,000 versus a negative run about $24,000,000 in the same period last year. So this is meaningfully ahead of the same period last year, but our operating cash flow is also meaningfully ahead of our EBITDA. And the core driver for that are the beneficial working capital dynamics we have in our business and which most of you are familiar with. So I'd like to conclude our earnings update call by repeating the updated outlook for the year that we've given on the 14th of October. Given the strong performance in Q3, we have lifted our constant currency full year revenue guidance from previously 28% to 30% to now 31% to 33% for the full year. This compares to 35% for the 1st 9 months. What you should expect for the Q4 is that our U. S. Segment will again deliver a growth rate on the revenue side, which is above what you've seen in the first half of the year. For international, as flagged a few times before, after a number of quarters of exceptionally high growth rate in that segment, should expect that growth rate to somewhat normalize somewhere in the 20s in Q4, primarily driven by the benchmark becoming quite ambitious by now. Now on the contribution margin side, effectively no change to where we guided to before, 28% to 29% contribution margin. And after the 1st 9 months, we sit right in the middle of that at 28.5%. And then on the EBITDA line, given the strong performance of our Q3, we have decided to shift that upwards from previously negative 1% to positive 1% to now at the bottom end, a positive 0.5 percent to at the top end, a positive 1.75%. And after the 1st 9 months, we are already sitting at 0.6% positive for the group. So with that, we would conclude our presentation and would open it up for Q and A. Our first question comes from the line of The first question is from Andrew Gwynn of Exane. Your line is now open. Hi there, good morning. Two quick questions if I can. So the first one just on the marketing expense. I'm just wondering if you could elaborate a little bit more. It's obviously a pretty significant reduction we've seen. So just talk a little bit more around some of those initiatives that have brought that down so much, so quickly almost. And second question, just on the revenue guidance. Obviously, for the 9 month run rate, we're at 41% of revenue, constant currency 35%. It does feel a little bit like the guidance is a bit cautious? Or is it genuinely you think that, that is a very, very fair range of where we should be coming out? Okay. Hey, Andrew, it's Christian. So maybe let's talk about that revenue guidance first. Just to recall, we're giving our revenue guidance on a constant currency basis, right? And on a constant currency basis, for the 1st 9 months, our growth is at 35%, not 41%. So the range that we gave sits reasonably close to that. Why it is a touch below that is really driven by 2 factors. 1 is basically, as I've outlined just on the call, how we see the growth shaping out in both of our operating segments, where the international business will basically slightly come down versus what you've seen in the last couple of quarters to somewhere in the 20s. So that guidance is consistent with that. The another factor, which I don't want to bore you with too much granularity, but it's a little bit also around how delivery days and Christmas this time sits. So compared to the period before, the net effect of that is that we had a slightly higher number of, let's say, high volume delivery days in Q3 this year versus the same period last year. And also the way that Christmas hits this year, we probably, as you know, around Christmas, a lot of our customers then tend to pause during that period, how Christmas sits this time. It looks like that pausing will probably affect not just 1 week, but for some of our customers, 2 weeks, which is baked into that guidance as well. Does that make sense? Yes, indeed, indeed. Yes, thanks. Okay. Terrific. And then on your first point on marketing, I would say a couple of points. Number 1, we are very happy with the customer acquisition costs we achieved in substantially all of our markets. That from our perspective is not necessarily sudden, but it's really a continuation of a longer term trend, and we'll go through some of that detail in our Capital Markets Day later today. On top of that, the fact that both our referral program as well as our activation activities work very well, further helps in terms of containing our paid marketing expenses, those are really the core drivers that we see on the marketing line. And is I mean, obviously, churn and so forth, I think the previous comments have been relatively stable. Any significant change we've seen in this quarter? Nothing significant, but I would say, overall positive trends over shorter as well as over longer period of time. But again, we want to talk a little bit more in detail through some of these drivers this afternoon. So if you stay with us a couple of hours, then we will certainly discuss it in more detail in 2 hours. Okay. I can be patient. Thanks very much. The next question is from Robert Burke of Berenberg. Your line is now open. Yes, thanks. I'll drop my question then on marketing. Hopefully, you fill us in later. But I just have a quick one then on the customer growth in the quarter, very strong, which typically means slightly higher drop offs in the following quarter. How should we be thinking about the impact of your strong Q3 on the Q4 customer numbers maybe this year versus previous years? Just a little bit of help there. Thanks. Yeah. Yes. So it's that's a good point, Rob. So you should expect a further increase in customer numbers in Q4, but probably somewhat less pronounced than what you saw in the sequentially from Q3 to Q4 last year, given that, as you said, we made a big step already in Q3 and the way how our retention profile shapes, you typically then see in the second quarter some noise from that as well. Awesome. Thanks. The next question The next question is from Nita Nizer of Deutsche Bank. Your line is now open. Great. Thank you. I just have a couple from my end. Just on the international segment growth, could you elaborate which markets help contribute to drive to that growth in terms of customer addition as well as overall revenue expansion? And secondly, how did your developed international market margins perform? You usually give us a range as to how those markets in particular were doing versus the overall segment. Just some color there would be great. My second question is on the Q4 sort of outlook. With the expansion to Sweden, would there be a drag on the overall margins in Q4 that you can maybe guide us towards? And would we continue to see some marketing leverage going into Q4 after the very strong Q3 sort of result on the marketing side as well? Thank you. Hi, Nisler. Let me take a couple of your questions. So first of all, in terms of drag on margins due to expansion, I think over the last couple of years, we always had some young markets, which we just launched. Hence, this is something that's already baked into our numbers. And it's actually something that in Q3 where you had seen in the previous quarters some of our younger brands in the U. S. Ramping up, Now some of them have reached some more scale, which certainly has also been helpful on a number of other metrics when it comes to the U. S. Segment, such as the marketing leverage for example that we gained a little bit here. In terms of our margins for mature international markets, as you pointed out correctly, our international segment comprises both very mature markets as well as markets such as Sweden or France, which we only launched a couple of quarters or years ago. Hence, if you only look at the mature markets, all the metrics that you'll see are quite a notch higher. So whether you talk about the marketing as a percentage of revenue, the contribution margin or also our adjusted EBITDA line, you can expect that in our mature international markets, they're a couple of percentage points higher than what you see for international as a group. And then on the point on should you see further marketing leverage in Q4? The answer is yes. So also in Q4 year on year, you should see marketing as percent of revenues be lower and therefore enhance or be accretive to our bottom line. The next question is from Marianne Deese of Morgan Stanley. Your line is now open. Good morning, everyone. Three questions from me. Firstly, if you could just give us a bit more color on the performance of the 3 brands in the U. S, if there was a big difference between the growth rates, if there's anything that you would like to call out there? And then secondly, on the U. S. Again, if you could just comment on the competitive environment in the quarter and anything you may have seen since then, given the fact one of your competitors has started to ramp up marketing spend again? And then thirdly, on Sweden, if you could just comment on how the customer acquisition costs there compared to your other markets, just given the fact you have had a relatively established competitor there? Do you see any difference in customer acquisition costs? Are customers more familiar with the category, meaning that costs are lower? If you could just give us any color there as well, that would be very helpful. Thank you. So let me start commenting on the 3 brand strategy in the U. S. I think unlike in international where we have multiple different geographies, in the U. S, we've started scaling up 3 different brands and they all rest on the same supply chain platform. So the good thing is that after sort of like starting to ramp them up over the 1st couple of quarters, We've managed to get them in terms of their sort of like unit economics pretty close to our HelloFresh core brand. While we're still growing kind of like quite significantly in our core brand, given that we just ramped them up from scratch or from very low levels, EveryPlates and Green Chef, obviously, those have sort of like higher growth rates. And as we scale them up, they now also kind of like reach quite meaningful volume. And so that's definitely been part of the driving force behind our great U. S. Results. In terms of competitive landscape, the way we look at it is not so much in most of the channels that we have. We're not competing so much against the direct competitors. Our biggest competitor is customers' inertia to go for a meal kit solution and do the traditional grocery run. That's really the sort of like major competition that we're focused on. And when we actually market our services on the big ad platforms, we're kind of like going for audiences that would usually go that would typically go grocery shopping. And a lot of our communication and a lot of our marketing strategy is around establishing Meerkats as the go to solution for some of those customers. So everything that we see in terms of competitive spend is in terms of its impact on our spend levels just of very minor importance. I think that's something that we have seen over the last couple of years and that's definitely also how we strategically think about our marketing investments that it's a lot more about expanding the total addressable market rather than pure market share gains despite the fact that we've also seen quite a bunch of those. And then in terms of Sweden, it's very early days. So we only launched it in September. So I think it wouldn't be prudent to give you sort of like a lot of information and say this is how we expect it to be for the next couple of quarters. But what we like about Sweden is that it's a well established meal kit market that there is high consumer adoption and we can already see that the way that we approach marketing our services and brand in Sweden is much less explanatory than it is in some of than it has been in some of our other early markets, just given the fact that people kind of like know the concept and know the different services. So a lot of our communication is much more focused around the benefits that we have right from the start over existing competition such as our price points, the meal choice that you have as a consumer, the flexibility, the selection because the product that we launched in Sweden is superior on most of those dimensions right from the start versus the existing competition. And though that's something that in a market with high consumer adoption when we can launch a superior product that is something that we think is a formula for success. That's very helpful. Thank you. And now the last question is from Olivia Raul of Barclays. Your line is now open. Good morning. Just two for me. First on international, you've said that margins in more mature markets are a few points higher than the segment as a whole. Can you give us a sense of how fast those markets are still growing? And second, it looks like you have a high 27,000,000 finance income in Q3. Are there exceptions within this? What exactly is this? It's Christian. So to your two questions. The top line growth rate of our developed international markets is still very attractive, so meaningfully north of 20 percent for that group within our international segments. Now on that finance income that you see there in Q3, you may remember we pre reflected in our Q2 numbers. We also have a little bit in the write up of our Q3 results. This is effectively coming out of an external funding round we've done at HelloFreshGo, our smart fridges business, where we brought on board 3 very high quality external investors. Through that funding round, there is a non cash one off accounting book gain that we have realized. That business also going forward as of this Q3 is not consolidated in our group numbers anymore. So that book gain is roundabout €23,000,000 Again, it's non cash. It's also just affecting that financial result line plus net income beneath, I. E, no impact on EBITDA, adjusted EBITDA and so forth and is a noncash accounting gain. Thanks. So I hand now back to the speakers for the closing words. Thanks a lot for attending the Q3 call. Like I said in the beginning, we'd be excited to see as many of you as possible during the Capital Markets Day later today. Thanks a lot. Bye bye.