Earnings Call: Q1 2019

May 7, 2019

Dear, ladies and gentlemen, welcome to the Q1 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 will be an opportunity to ask questions. May I now hand you over to Dominic Rister, CEO, who will lead you through this conference. Please go ahead, sir. Yes. Good morning, and a warm welcome from myself and our CFO, Christian Guertner. To our Q1 earnings call 2019. We would like to keep this call rather short and concise since we've articulated both our growth strategy as well as how we want to balance growth and profitability for the rest of the year in great detail before. And I think our Q1 numbers, the Q1 numbers, also show that this strategy is working out very well. So if we turn to the Q1 highlights on Page 3 of the presentation. Budget in seasonally advantageous quarters, and that's also something that's reflected in our Q1 numbers. If you kind of like think about market share, then I think in terms of market share, we've made great progress In the U. S, according to our own estimates, we're trading between 40% 45% market share, which is twice the size of our nearest competitor in the U. S. Alone. In international, kind of like we're even better according to kind of like all the estimates that we can see. On a blended basis, we have about 70% market share, in some markets even higher than that. Looking just at the Q1, I think we had a very strong Q1. We grew with over 30% year on year, both in terms of active customers as well as in terms of constant currency revenues. And if you look at it not year on year but quarter on quarter, then you can see that especially in the U. S, we had a very strong first quarter with sequential growth of over 25%. Looking at our contribution margin. We expanded contribution margin to 29%, which is at about the same level where we were just 3 quarters ago before we actually did the price adjustment and started our value brand. So great work of the team in our operations functions, which within 2 quarters has actually kind of like made back all that margin that we had foregone in terms of better retention and lower customer acquisition costs when we made our price adjustments in the U. S. Market. 4th of all, our adjusted EBITDA margin came in at about minus 6%, which was 1 percentage point better than the same quarter last year. And then finally, I also like to point your attention to the strong liquidity position that we have. So we have access to cash of about €265,000,000 which consists of cash on balance sheet of about €119,000,000 and we have additional undrawn credit revolver of about €76,000,000 So I think all in all, a very comfortable cash position on the balance sheet, which allows us to operate the business in the way that we do. So moving on. Kind of like as I have already pointed out, we're very clearly the number one player globally, twice the size of the next biggest competitors on the U. S. Market alone. I think about 4 times the size 3 to 4 times the size of the next biggest competitor globally, and we continue to expand market share. Moreover, I think we've also shown in terms of customer satisfaction that given that we are leading competition in terms of variety, price and service levels that we've been voted over and over again as best near delivery service. Most recently, I think we just chose pretty significant price in the U. S, which is crowdsourced price and which just shows that I think a lot of the investments that we have done along the number of mills that we have, price that we have and service levels, it's very hard to basically beat us on any of those dimensions. Same applies to the operations side, to our supply chain side, where we have also won a number of prizes, most recently number 1 in features price, which is kind of like directed at the whole manufacturing industry and which I think you can see that sort of like a lot of the work that we do is actually reflected not only in the numbers, but also if you talk to industry experts or if you talk to customers directly. Coming back to the numbers. If you look at our customer growth, then you can see that in Q1, as a result of focusing our marketing investments on the seasonally advantageous quarters, we grew customers year on year from 1,900,000 to about 2,500,000. And as you can see on the graph, the pattern is kind of familiar. So you can always see us stepping up our customer base in the Q1, which then acts as kind of the baseline for the rest of the quarters of the year. And that's something that's, I think, a very recognizable pattern by now and which is something that you should also expect for the next quarters in 2019. Constant currency revenue. We've grown constant currency revenue at about 35% year on year from just under €300,000,000 to €420,000,000 That consists of both clusters, so U. S. And international, showing a very good performance. U. S. Grew 23% year on year against a very tough comp. So last year, Q1 2018 was by far the highest growth momentum that we've seen in a long period. We basically managed to grow another 23% year on year, again, the strongest comp of the year. International saw 53% year on year growth. Again, easier comps, but nonetheless, I think it's great to see that our international business has been growing at a better rate. And that growth really comes from a variety and from a large number of countries that are within our international cluster. The other thing that I wanted to mention is the sequential drop in the U. S. Like from Q4 2018 to Q1 2019, we've been growing sequentially by over 20% quarter on quarter, which I think is also really reassuring. So really kind of like taking advantage of the market opportunity that we see in the U. S. And I think it's also great to see that the strategy that we articulated that we focus a lot of the marketing activities on the Q1 is really showing results. With that, I'd like to take over to our CFO, Christian, who will lead you through margin and results as well as guidance. Okay. Thank you. So I'd like to first discuss the development of our contribution margin with you on Slide 7 of the presentation. And what you see here is that we delivered a very strong contribution margin of 29% in the Q1 of this year. This is 2.9 percentage points higher than in the same period last year and roughly on an equal level as where we ended up last year. How did we achieve that 2.9% year on year improvement? This really comes from COGS and there are 2 core drivers. One, we further refined our many planning data models that we've got in place. And secondly, we also further realized incremental efficiencies in our procurement organization. When you look at fulfillment expenses, those are roughly stable as percentage of revenues, and this is despite us having ramped up meaningfully new businesses over the last 12 months, both in the U. S. And in international. In the U. S, Every Plate and Cream Chef and in international, our new heating business. Now next, let's have a look at our EBITDA margin development. For the group, we delivered an EBITDA margin of negative 6.2 percent in the Q1. This is 1.1 percentage point better than in the same quarter the previous year. This is driven primarily by a new full expansion on the contribution margin side, which we just looked at on the previous slide, And to a small extent, by the first time application of IFRS 16 as well. Both of these effects are partly offset by higher marketing spend in the U. S. In the Q1, and you see that reflected here the bottom left hand side on the slide as well. And revenue growth in the U. S. That Dominic had also just taken us through for the whole segment of the U. S. And then secondly, also a ramp up of our 2 newer businesses within the U. S, EveryPlate and Green Chef, both are bringing in a lot of new, very attractive customers with high ROI to us, but they're more early stage than the group overall, and therefore, the share of marketing as a percentage of revenues somewhat higher than for the group overall. Now when you look at the international segments, on the bottom right hand side of the page, you see that we realized a positive EBITDA margin of 4.4% in international segments. That's an expansion of 5.4% versus the same period in the previous year. I'd like to spend a moment to comment on the development of our EBITDA margin in the International segment in a bit more detail, and you see that on the next slide on Slide 9. So the Q1 this year is now the 4th consecutive quarter where we delivered a positive EBITDA margin in that international segment. And in Q1, Q1 being typically the quarter where we spent the most on marketing, so that we take full advantage of those growth opportunities in the quarter. So despite that, €8,000,000 absolute EBITDA in that segment alone and a 4.4% margin. Now if we were to look at just the more developed businesses, I. E, the businesses where we're active since 2015 or earlier within that international segment, The margin for that developed international part of that segment in the Q1 has been already north of 8%. So great profitability in our international business, and this is something that we see to continue in the rest of the year. With that, let me now spend a moment on our liquidity position on Page 10. Our liquidity position remains very strong and effectively unchanged to where we ended the year last year. So cash on balance sheet of €189,000,000 Our €18,000,000 credit facility that we have in place remains substantially undrawn. We just used a little bit for a and we produced a positive operating cash flow in the Q1 of the year despite EBITDA losses. If you recall, the underlying driver of this are basically our beneficial working capital dynamics in quarters where we show meaningful sequential growth. We have an inflow from working capital and that's something and that's what you see coming through here in our operating cash flow. So let me conclude now by reconfirming our guidance for the full year on Page 11. This guidance is unchanged to what we have communicated earlier in the year, I. E, we're targeting revenue growth of 25% to 30% year on year on a constant currency basis. We target a contribution margin of better than 27%, And we're targeting an EBITDA margin for the full year within the range of negative 2% to positive 1%. So we will pause here and open the call up The first question we received is from Robert Berg from Berenberg. Three questions from me. The first on the U. S, it would be great to hear if you have any insight for us on the U. S. Growth, which of the 3, if any, of your segments over there performed better or worse? That will be the first question. The second staying on the U. S, you've just been through a call to now Q1 when your main U. S. Peer has a fastest marketing budget. Did you see any noticeable benefit from the new strategy at this stage? And the third one is a really obvious question, but I guess needs to be asked. Is there any specific reason that you're not updating your top line guidance at this stage after the very strong Q1 performance? Thanks, Robert. When we look at the U. S, growth has really been driven by all three brands. I think if you look at the 2 newer brands, EveryPlate and Green Chef, then they're starting off of a much lower base, obviously. And kind of like the operating model that we have is that we're really dynamically shifting our budgets across the 3 brands. So I think each one of those brands, I think, we've been quite happy with. And like I said, the operating model is really that we have one team, which is dynamically shifting both in terms of creative assets as well as in terms of budget between the three brands. And where we see the best ROI, that's basically where for the week or for the next 2 weeks, we're doubling down. And so if you take a high level view on it, then I think the message is pretty clear. We're happy with the development of all three brands, and I think it was exactly the right decision for us to launch 2 new brands last year. That's really helping us now to see leverage on the marketing budget. With regard to your second question, I think kind of like already answered that in parts. So sort of like always as you have also seen in the last couple of years, Q1, we kind of like our marketing spend. That's why kind of like we're making sure that we can kind of like front load some of the customer acquisition activities. And like I said, in the U. S, kind of like between the three brands, we try to dynamically shift that what we see in terms of customer acquisition costs, what we see in terms of trends. And the same thing we actually do in international, where on a weekly basis, actually on a daily basis, kind of like the team that leads customer acquisition and leads our marketing activities is looking at where do we see the highest ROI and which campaigns are performing particularly well and then doubling down on those. I think let me comment on top line guidance. What you saw in the first quarter is that we've taken full advantage of a great opportunity that we saw in the market and brought in a lot of new customers. And as you know, typically, the customers we bring in, in that Q1 are the highest ROI customers. So it's great that we had that opportunity, and we realized that. And that's what you see expressed in the 35% constant currency growth in the Q1. And we said that growth going forward for the remainder of the year will then be a bit more gradual so that it is still appropriate from our perspective to maintain our current guidance for revenues for the full year. Okay. Thank you. The next question we received is from Andrew Glynn from Exane. Your line is now open, sir. Hi, good morning, everybody. Yes, two questions, if I can. So the first, just again on the U. S. Could you just elaborate a little bit more? So you got that big difference between contribution margin improvement and then the EBITDA. So marketing, as you mentioned, but just wondering if you could just color in a little bit more. And then on the French business, obviously relatively new, how is it ramping up? Just some sort of early insight on that market. Thank you. Thanks, Andrew. So if you think about the U. S, then kind of like on the contribution margin side, you can see that, first of all, we're sort of like benefiting from the addition of scale that we have added that comes in parts through basically having more than one brand, but also comes in part because we've just been growing kind of like for a number of years, now very strongly. But as you face in the improvement, it always takes some time. I think you've talked very confidently about contribution margin expansion and what we see as potential avenues for contribution margin expansion. That's because there's also time delay between locking in new prices, locking in new fulfillment centers and kind of like scaling them up and seeing productivity improvement. So from the moment that we continue to see those things coming through, 3, 4 quarters. And that's kind of like what you can see in the Q1 results and what was also kind of like partly one of the drivers why we did some pricing adjustments in the U. S. Because we have been seeing that we've actually been expanding margin very strongly so that in our view, the optimal strategy was to lower prices a little bit. Same thing, if you think about the higher contribution margin and then if you think about so we're benefiting from having more volume and more scale across different brands on the contribution margin side. On the other hand, Green Chef and EveryPlates start with basically very few customers and hence kind of like marketing at new customer as a percentage of overall revenues for those 2 kind of like new brands. Obviously, it's very different to HealthTrust. And I think you must not forget that both in international as well as now in the U. S, it's always sort of some of the parts equation that we're looking at. So it's always sort of like what you see us publishing is always kind of like a lot more nuanced if you actually look at the details. And so on the marketing side, you saw very strong sequential growth from the Q4, and that was basically driving the higher marketing budget in the Q1. And then going forward, I think you should see that normalize more. And just on the core underlying HelloFresh proposition in the U. S, presumably no real change to the sort of look and feel of the P and L. You're obviously seeing that improvement in contribution margin, but the EBITDA margin showing a similar sort of pattern? That's right. And so for the HelloFresh brand, in the U. S, EBITDA margin is obviously quite a bit better than what you see for the full segment. And then France, sorry, any sort of early indications? Yes. France, as you said, early stage, yes, so far so good. We're happy with how it's going. It's completely done with plan, but I would say it's still early days. Okay. Thanks so much. Next question we received is from Nizla Naizer from Deutsche Bank. Your line is now open, madam. Great. Thank you very much. I just had a question on the breakeven target for the full year. I think last year, you mentioned that sometime over 2019, you intend to reach breakeven levels for the group. So just wanted to see if you can give us some visibility on when that could be. Could that be a Q2 development or Q3? Just some color there would be great. My second question is on your international expansion plans for 2019. Are you planning to add any more markets on top of the tests that you're doing in France and what you've obviously done in New Zealand? My last question is on the competitive landscape in the U. S. I know we heard that your largest competitor who's listed is pulling back on marketing, but has the dynamic changed from any of the other players that are in the market? Are they doing better, worse than your previous largest competitor? Anything there that you need to be concerned about or see as an opportunity? Just some color there on the competitive landscape would also be great. Thank you. Okay, great. Let me start with your question on breakeven timing and quarterly profitability. So for Q2, you should assume that both the group and the U. S. Will already go towards that break in line with slightly to a left or exactly there, they will come out a little bit too early, but it certainly will you will see a step up in the right direction from a margin perspective. International will continue to be positive in the Q2. Q3 then, as you know, is fast and seasonally always the slowest quarter, which then is also reflected in margin in terms of lack of fixed cost leverage when a lot of our customers spend some time on the beach and importantly during that period. And in Q4, it's typically very robust from a margin perspective. So that's probably what you should expect as the development over the next 9 months. We just launched France as Andrew had also asked about. So I think in general, kind of like looking at expansion always under the lens of TAM expansion. And given that we just added France as a new market, I think that's where the focus is on right now. And then I think we're definitely looking towards what could be additional markets. But if you think about overall growth strategy, then a lot of the growth in international will be driven in Canada, in France that we had kicked off in the previous 2 years rather than adding any new ones. So since ramping up new markets always takes time, I think it's something definitely to be excited about in the long run, but not so much in the short or medium run, if you define that as the next 2 years. And I'm sorry, there was a question. Just remind me. This is on the competitive environment in the U. S? Yes, sure. So I think competitive environment is actually an interesting question. I think overall, if you benchmark our industry since inception to where most of the players are right now in terms of growth momentum, in terms of profitability levels, etcetera, then I think the industry as a whole is actually doing quite well. So if we look at there have been a couple of prominent sales in the U. S. Kind of like to retailers, There have been other companies that kind of like have done pretty well in their niches. And if you look at us, I think also very strong development. So I think overall, if you look at the U. S. And if you look at the top 5 players, then I think the industry is actually quite healthy. Now what does that mean in terms of competitiveness? I think that given that what you can also see at the customer awards that we have won over and over again, that the strategy that we have, which is really making sure it can be better than competition on every dimension that is really relevant to customers, so price, variety, number of meals on the menu, service levels, that's something that we have clearly articulated and that we believe in. And I think that's something that is paying off. And according to all the estimates that we have, we're growing faster than the market and growing faster than competition and are actually expanding market share. Great. Thank you. The next question we received is from David Gardner from Morgan Stanley. Your line is now open, sir. Hi, thanks. Two questions from me. If we look at the contribution margin trajectory on Slide 7, it's hard to sort of see why that sort of guide for the full year hasn't been increased. Can you just talk through how the trends therefore in 2019 might differ from previous years and where there may be contribution margin pressure through the end of the year that is sort of driving not increasing the contribution margin guidance? And then the second question, could you also quantify the impact of IFRS 16 on this quarter's EBITDA? Thanks. Sure. David, it's Christian here. So firstly, on your contribution margin and specifically when you look at the senior set, that I would say 2 things. 1 is you have to consider also, let's say, the seasonal softness in Q3, where there's less fixed cost leverage that we have in the system. And then if you remember, in 2018, we guided for contribution margin of better than 25%, then came out at 27%. For this year, we guided at better than 27%. There's probably a bit of room of upside to that as well. So I would say we there is probably some upside. And on top of that, we also have to provide for Becky a softer margin quarter, seasonal margin quarter in Q3 typically, and we are ramping up a number of new businesses further as well, which we have to provide for. Now on your second point, IFRS 16 impact, the impact in Q1, and it's going to be similar in the subsequent quarters this year, is round about 1 point so 1 margin point on the EBITDA level. On the EBIT level, there's hardly any impact. Yes. Great. Thank you very much. As far as there are no further questions, I hand back to the speakers. Thanks, everyone, for attending the call. We look forward to catching up with you over the next couple of weeks and then to welcome you back when we have our Q2 results. Have a nice day, everyone. Bye bye. Bye bye. Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect.