Earnings Call: Q4 2020

Mar 2, 2021

Dear, ladies and gentlemen, welcome to the conference call 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 May I now hand you over to Dominik Richter, who will lead you through this conference. Please go ahead. Good morning, everyone. I'm excited to share HelloFresh 4th quarter earnings as well as our full year 2020 results with you today. Both Q4 as As well as our full year 2020, we're impacted quite a bit by the ongoing COVID-nineteen pandemic, but it's really important to note that We faced very different circumstances across the many markets in which we operate. Specifically, in the Q4, markets Australia, New Zealand and to a lesser degree, the U. S. Have actually been opening up, while most of our core European markets bent into consumer trends in Australia and parts of the U. S. That we're opening up to understand what the new normal looks like and how consumers behave. We will continue to watch closely and derive the right conclusions, but I think it's safe to say that Consumers have continued to cook meals at home with HelloFresh and that we've also seen robust growth in these markets in As we go into our 10th year of HelloFresh, our mission remains As relevant as on the 1st day. We changed the way people eat forever. And what we mean by that is that we offer consumers And specifically those who have been home chefs before, an affordable, convenient and delicious way to cook the best And better over time. With more meals on the menu, better service levels and more competitive pricing, that's the formula Capital Markets Day, we've also outlined our vision for the group, which is to evolve from the leading market company globally to A fully integrated food group. With our purchase of Factor, a U. S.-based fast growing revenue in Q4 and the launch of our HelloFresh market in Benelux also in Q4, we've made the first important steps towards this After this short introduction, let me start with our 2020 highlights and revenue builds before I hand Secondly, we grew the number of active customers to 5,300,000 in Q4. So a Thirdly, we significantly increased our full year revenue to €3,750,000,000 in 20 And then finally, I referred to that before. I believe we're very much on track to become a leading So let's look at the strong growth in customer base In Q4, we've been up 300,000 in a single quarter and Hence, our entering the Q1 2021 on a really high run rate. That's remarkable in that way because in prior periods and in prior You've usually seen us about holding steady the customer number from Q3 to Q4. The The reason that we've been able to increase that customer number is that as we have unlocked more capacity, specifically in the United States, we've been able to also Bring in a lot more active customers and fill that additional capacity quite easily. Secondly, we've also increased our order rates further in Q4. Compared to Q4 2019 order rates have been up 18%. So double digit year on year growth with further Half of that order rate was due to a lot of incremental improvements that we've actually done to our service offering, to the number of meals that have on the menu and to our pricing structure over the course of the last year. Looking at Average order value, we've also see a very positive trend in both operating segments. Number 1, That's more than for the full year, which has been up about 6.5%. The reason that Q4 was Up even more than our full year numbers is number 1, that the U. S. Continued to grow quite significantly in AOV in Q4 A very clear focus on some of our seasonal offerings and seasonal bundles around Christmas and the holidays, which were further Customers in order rates as well as in AOV. And if you take all of those 3 levers together, you'll end up With the first time of that we actually arrived or achieved revenue at over €1,000,000,000 in a single quarter in Q4. So results that makes us really proud after the challenging year and something that actually marks a 126 percent increase in constant currency from €512,000,000 last year to over €1,100,000,000 €5,000,000,000 Please bear in mind that despite these remarkable results, especially with regards to full year numbers, we've been for large parts of the year capacity constraints. And given the sort of like customer numbers that we've now put forward in Q4, we also Enter Q1 on a really high note and continue with a very robust growth momentum. With that, I want to hand Over to Christian for the remainder of the presentation. Thanks, Dominik. So Q4 For 2020, it was not just the quarter where we achieved the highest revenue growth of the year, but also Also the quarter where we achieved the highest contribution margin with 30.7%. This is actually not just the highest contribution margin Margin was only 26% in Q2 2020, primarily due to some of the effects we have discussed on our previous earnings calls, I. E, Temporarily higher COVID induced operating expenses will be very meaningful here. We expanded that margin by around about 4 Over the last quarters, we produced a contribution margin that's meaningfully higher than it was out 4 quarters ago in 2019. What has driven that improvement? Number 1, less price incentives. Dominik spoke about that right now. So, in a somewhat capacity constrained environment there, we get best discounts for Secondly, and this is really a consummation of the trends that we We've discussed over a number of quarters now further strong performance of our procurement operations, where you see a further expansion of And then thirdly and also importantly, a greater normalization of our fulfillment expenses and especially of This contribution margin performance is even more impressive. If you keep in mind that we were In the process of ramping up 3 new fulfillment centers during the Q4, in the U. S. And then towards the end of the 4th quarter Also second site in our UK operation. Okay. Next, let's have a look at Marketing expenses. Q4 was still in environment. There were somewhat capacity constrained. The hard lockdown has contributed that situation. This meant that we were somewhat less forward leaning terms of our marketing activities than we otherwise could have been in October November. And then as all of you know, December is then typically a time of the A seasonally dial back on our marketing activities anyhow. When you put that together, it means that despite our very strong 8% for the 4th quarter, so broadly at a similar level where we came up for the full year And 5 points below where we were in the same period last year. Let's I have a brief look at G and A. This is really a continuation of what we discussed over the last 9 months, I. E. Our G and A expenses were meaningfully slower than our revenue. And therefore, we see meaningful fixed cost leverage On the G and A line. If we see very significant reduction of G and A expenses as a percentage of revenues by 4 point All of this add meaningfully to our EBITDA margin. Our EBITDA margin in Q4 increased to 15.7%. Therefore, our full year EBITDA margin ended up at 13 0.5%, the very top end of the upward device range that we put out in December last year. Since We generated more than €500,000,000 of EBITDA in 2020, while we grew the business by That contributes roundabout EUR 283,000,000 net EBITDA and our international business EUR €76,000,000 of EBITDA and also if you put a contribution of both of our operating segments where quasi equivalent. For the year, As you know, the delta when you add those two numbers up, you get into the €505,000,000 EBITDA for which generated negative EBITDA of 53,000,000. Let me switch gears now a little bit and go This is a key aspect of our business, which I am Already tried to highlight to you at our Capital Markets Day last December. Other and most other We are strongly free cash flow positive. We reached free cash flow breakeven In 2019 and then in 2020, we generated around about €500,000,000 of Such as the acquisition of HECTOR that we closed at the end of 2020, we were able to finance cash on our balance sheet. Now looking into 2021, also means we can fund internally all of our growth These include new fulfillment centers, further investment in automation, a ramp up in the U. S. Of sector, The launch of at least 2 new geographies and the expansion of our HelloFresh market and add The all critical investments will get to our midterm goal of €10,000,000,000 revenue at a 10% to 15% EBITDA margin and we will be able to fund these investments this year out of our own cash flow. Let me now conclude For the full year 2021, we are targeting a constant currency revenue of 20%, 25% and an EBITDA margin of 9% to 12 With the 1st couple of weeks of 2021 already under our belt, I can say that we had a strong For the year 2021, which means that for Q1, very indicative we obviously, we are Expecting a year on year constant currency revenue growth in excess of 70%. Okay. With that, we very much look forward to your questions. Thank you. We will now begin our question and answer session. Thanks. Guys, a couple of questions from me. And you mentioned it first question, you mentioned a few times on the call So a couple of questions on this. As we head into 2021, where are we now running in terms of capacity across the U. S. Capacity In terms of fuel rates and the rest of the world, please. And if you can comment on how much, if possible, The constraints impacted any customer acquisition in the quarter, which you kind of alluded to for the U. S, that would be great. And the second I'd like to hear your thoughts on that statement first, and then I'd be interested to hear about the mix of gross adds, what proportion of gross adds are totally new to It's Christian here. Let me grab the first question on capacity constraints. This is you may remember Our discussion at our Capital Markets Day. So this is something that we readily lift. Yes, so we have We've added further capacity in the U. S. With our Georgia site, which is being ramped up and where further capacity becomes In Q1, we also added a second site in New Jersey, which is being ramped up as we speak and then our Additional large New Texas site will come on stream sometimes during Q2 this year. Yes, so with respect to the U. S, I would say this is all going completely in line And we plan and is in full flight. And also internationally, we are executing on our plan. The U. K. Our second site It's being ramped up and has alleviated some of the capacity constraints we had there in Q4 by now already. And they are Basically, further sites as we go throughout the year that come on stream, an additional one in Australia, expansion in Canada, Further expansion in Germany and in our Nordics business. So all of these are effectively in flight and will basically help Effectively doubling capacity versus where we stood in Q3 last year Impact overall customer acquisition, largely we have debottleneck that, but we still need to do a lot of We tried to be able to take advantage of January February because those are usually the month where number 1, media prices capacity to be available in January February that we can then fill at very attractive rates with new customers. And so that's something I think the team has done like a really good job. But certainly, it's not that we're totally unconstrained. It's rather that I think We're spending at quite good levels, but there's an element of demand steering across all markets in order to make On lifestyle, as I would probably frame it, I think one thing not to forget is that supermarkets, which is what We're predominantly taking share from and where our consumers usually spend food dollars when they're not shopping or furniture or others. I think in our case, supermarkets have never been closed. So no one was Forced to order at HelloFresh. I think what happened and what we've also heard from consumers is that They've obviously had more time at their hand to try out new things and to do something that they haven't Done before, and that's certainly something that has benefited us a lot. But I don't think, at any point in time during 2020 customers came to us because they felt kind of like they can't get food anywhere else. And so I think That's important to keep in mind. With regards to new customers and I think reactivations Since it's something that was the last part of your question, as we've now sort of like gone to try something new when they stay home a lot, etcetera. And so our reactivations have definitely been At a very healthy level. And but at the same time, we've also had to keep in mind that we had to steer demand and hence we haven't been as unconstrained as we ideally would have liked to be, but reactivations continue to make up like a good Share of our conversions. And so basically at around the level that we've communicated At the Capital Markets Day, high 20s is what we've been seeing in Q1 Perfect. And if I could just ask a very quick follow-up. So Dominic, you mentioned Q1 more push For customer acquisition, so far, have you seen the benefits of that? So a nice step up in customer numbers in Q1 in both So I think it's too sorry, I was on mute. Excuse me. So we I think it's a bit too early to talk about final Q1 numbers. But generally, what you see from us is a step up in customer numbers in Q1. And I think the way The quarter is going. You should certainly expect that from the 5,300,000 customers that we had in Q4 that There will be a step up in Q1. Okay. Thank you very much. Our next comes from Markus Steber, JPMorgan. Please go ahead. Your line is now open. Yes. Hi, everyone. Also, like three questions from my side. Christian, could you help us a bit more to understand the full year 2021 guidance in regards to your comments on Q1? I mean, on the First thing, you said Q1 likes to be up 70% in revenues. You guide 20% to 25% for the year. Coming from AUVs. Anything you can comment on would be quite helpful. Then on Dominik, It seems you're going to launch in a few more countries. It seems you're hiring in Japan, in Italy. So could you maybe update us a bit more how this is going and when we expect or when we should expect launch And then maybe the last question again maybe for Christian. At least a high level comment On the question, how many of the active customers are actually paying the full price, Thank you. Okay. Sure. Let me start. So on the Full year guidance, you remember that the guidance we put out, the 20% to 25% constant currency growth rate in Early December, yes, where I think most of you thought that was reasonably bullish. And you're right, the first half Q1 at least, we've started on a strong footing, but overall, it's obviously still early days. So Is there some potential upside to the guidance we've got out there where we stand right now? Yes. But it's probably a bit premature to We visit that. The earliest we would do that is concurrent to our Q1 results publication, so Early May or thereabouts. Now on your second question in terms of Fully paying versus people on discounts, we haven't changed Let's say our overall approach is towards price incentives at all since we spoke last time. So Effectively, when you become a customer of us, typically you get a price incentive on your first delivery or you spread over your first We think given the capacity constraints we had in a number of our markets in Q4, we The overall, we're probably a little bit more modest in terms of discounts that we gave you overall as a new customer, Can I maybe just follow ups here? On the first one, on the full year guidance, yes, it's very conservative. I just try to understand what the kind of like drivers are. Is it really active customer In that range, or is it really coming from average order values? Maybe in this regard, it would be interesting. And then secondly, also, Reactivations also come at discounts. So that's why I asked, okay, is that basically kind of Kind of quite just aware what's the share of customers that are on discounts and those who are not. Yes. So on the left No change for basically the previous quarters. On your first one, Dominic had alluded to that earlier. Customer growth is very robust so far going into Q1, and you will see that when we Our full Q1 and we published the data, but continued customer growth It's definitely the dominant driver of our revenue growth. Then looking further out into 20 All that we discussed at the Capital Markets Day in terms of how we're seeing our key revenue I was shape up over during the course of this year is still unchanged. So effectively, what we assume is that There will be a return to normal seasonality in most of our markets throughout this year. And we also expect a certain Normalization in terms of average order rate in the second half of this year. So but there are to all of these underlying revenue drive, No change to effectively what we discussed 2.5 months ago. Let me briefly comment on your On internationalization, internationalization has always been a big driver of our growth. And We also wanted to launch in at least 2 new markets this year. I think the 2 that you mentioned, Italy Japan are probably more to the sort of like back end of the year. That's something that is very early days. But I'm quite confidence that it's always going to be part of our overall growth strategy because we by now have a really well working playbook. And I think with regards to Japan, that's obviously a little bit more exploratory and a little bit higher risk and higher Certainly, but there's still a lot of sort of like consumer trends and data that we have gathered from Japan That we think could make that a very attractive target market. But certainly, among the different internationalization strategies and the different target geographies, one of the riskier ones. Perfect. Thanks a Good morning, everyone. Three quick ones from my side. The first one for you, Dominique. I saw that you created I just wanted to make sure you're still committed to HelloFresh, would be my first question. And the second question would be for Christian, can you tell us, taking into account all the ramp up of distribution centers that you're doing, what would be your And finally, regarding the EBITDA guidance that Can you give some colors regarding the 2 segments? Do you expect the 2 segments to finish the year 2021 with the same margin? Or would you expect So let me maybe start A quick comment on my Board mandate. So I'm partnered up with a number of other people To form a stack doesn't change anything about my commitment to HelloFresh. Quite the opposite. I think 95% to 9% of my net worth is tied up in HelloFresh, and I'm fully committed to HelloFresh. And it's more to be seen in light of a board And Fabienne, on your The other two points. So firstly, on the relative EBITDA margins by segment, We expect something similar to what we've seen this year. So very healthy EBITDA margin By both of our segments with the international segment, a touch ahead in terms of margin, not necessarily in terms of absolute EBITDA, but in In terms of Our capacity, this is now theoretical capacity. And it obviously depends a little bit on How fast our individual markets run and how that capacity is distributed across all Our sites, the theoretical capacity once we are through all of that expansion Programs that I mentioned until Q1, 2022 should be north of EUR 7,000,000,000 Okay. Thank you very much. Our next comes from Andrew Quinn, Exane BNP. Your line is now open. Yes, good morning, both. Two questions, if I can. So first is a familiar question, On use of cash, just wondering what the intentions are. I mean, obviously, you mentioned the CapEx, but wondering if we should Have in mind the potential for a special cash return during 2021. Second question, you've alluded a little bit to it at the beginning, but just talking Well, the reopening sort of trading almost to Australia and parts of the U. S, I'm just wondering if you could elaborate A little bit more on the sorts of patterns that you're seeing there as people go back to work. Thank you very much. Okay, Great. On your first point on use of cash, you're absolutely right. Our most important is really to invest that into our growth. We see there very high conviction, high ROI A way to deploy the cash. And therefore, we have a quite ambitious investment program across new sites, across automation, Also across our general infrastructure, also in terms of our tech teams and support. So that's the core focus. Beyond We will maintain a very strong cash position, which There's definitely some flexibility for 2 things. Evaluating add on M and A if we have conviction that The value creating for our shareholders such as we had the case when we were able to acquire In Q4 last year, so there we would have an open eye to it. And then in case There were some capital market volatility where we would see our stock trade at unreasonable levels, then we Also consider using part of our cash flow buyback stock if we were in that situation. Now With respect to your second question in terms of what do we see in Australia as it This come out largely out of the or is in a post pandemic world right now already. There, you We see pretty much what we have expected and discussed in the past, I. E, we've seen Retention keeping up at a very busy level and above actually where it has been trending Prior to the COVID period, we see a certain normalization in terms of ordering pattern Of our customers. So all very much in line with what we thought it would do and what also is a little bit our playbook Okay. And just on the buyback, could you just confirm how much of the share capital you're permitted to buyback? Just wondering what the current So if we are in a theoretical situation where it makes sense to look at that, then we would look at We haven't currently committed a certain part of our cash to us. So It would be a theoretical use of cash, which comes way down the priority list versus what I discussed In terms of investing that cash into the growth of our business. Our next question comes from Timo Genaro, Sonangoni. Please go ahead. Your line is now Good morning. I've got 2 questions from my side, if I may. The first one is just to It is obviously the most advanced regions in terms of normalization 1st upon by mix. So in terms of retention rates and order frequency. And just The second question is on geographies. Quite recently, if I'm right, in 2019, you mentioned of countries in the manner of Europe and Europe. Of course, I have in mind So in Australia and New Zealand, some of the broad trends that we've been seeing is that as the country has Opening up, people were taking sort of like more vacations again. More vacations for HelloFresh usually means slightly lower order rates. And so this is certainly something that's during, sort of like December and also January we've seen in What we've also seen is that people on average have taken like a little less meals, so Slightly negatively impacting our AOV. And I think here the explanation is also people are eating more out, has continued to be at really, really high levels in Australia, and that has allowed us to still acquire customers that over the summer period in Australia and New Zealand had stopped some of their deliveries. So I think in broad terms, really very much in with what we have projected or forecasted. And we'll obviously continue to look closely at this to make the implications and inferences for how we should think about opening up of With regards to launching in Southern Europe, I think what has happened over the And a lot more consumers in Southern Europe have actually started to order foods via food delivery platforms, via Grocery platforms and also by a lot of different niche services. And so this is something that has not only And so COVID is not only something that has accelerated and pulled forward some demand in our mature geographies. It has also meant, in conditions in place for us to be also successful in Italy. Like I said, it's more something that will launch towards back end of the year, but we do believe that it has all the right ingredients to for us to be successful with the internationalization playbook comes from Shaked Akya, Morgan Stanley. Please go ahead. Your line is now open. Great. Thank you. I have three questions left. First of all, on the contribution margin trends, they are quite favorable in the Q4. Should we expect that to continue going forward? Or should the new capacity expansion Put some pressure on the margin for rest of the year. And can you remind us what level of utilization are you targeting long term? 2nd, A follow-up on Japan. As you said, it's a bit of a different market to the ones you're currently in. Will you be looking to grow organically or through partnerships? Can you give us any indication on how big you think this opportunity can be for you and how much the product will really have to change? And lastly, An update on HelloFresh Market. I think you said in the release you've reached 100 SKUs already. What's the take up in Benelux thus far? And how Great. Shagit, let me start With your first question on contribution margin, you may remember at the Capital Markets Day in December, I had guided for contribution margin for 2021 of between 28% to 29% and that still holds. So that's where we The range where we think we will end up for this year. Now as we approach Spring and summer, then some of our packaging expenses, cooling materials and so forth will also go up a little bit, It also impacts contribution margin plus all the fulfillment center ramp ups, which are still to come. That's all baked into Contribution margin guidance as well. So 28% to 29% that guidance for And I think we have the confidence to say that, obviously, we need to localize some of our content. We need to localize The meals, the logistics providers that we work with, some of the service levels, which always needs to be sort of like adjusted to local levels, but we have the confidence to say that we really believe in the playbook that we have developed over the last couple of years and which has Makes pretty much every single country launch successful for us. And so as I indicated Towards the earlier parts of the call, it's a little more risky than some of our other bags, but it's also a really big TAM in Japan, just given population given household incomes, there's the prevalence of a few other new players already in the market, which means to us Signals to us that there's going to be high consumer adoption for that type of offering. And so again, I think on balance, we're really I'm excited about launching there, but it will take some time. And it's certainly one of those markets where you go slow in the beginning To find product market fit, to make sure that all of the assumptions we are making are holding true and then accelerate sort of like once you have found Expect a huge contribution to our overall results, but I think that's the nature of some of the things that And then finally, your other question was around the HelloFresh market. So I think we've only introduced that to you during the Capital Markets Day, where it was very early, where we thought of sort of like important some sort of like customer uptake numbers and The AUM impact, I would basically ask you to wait for another quarter or 2 because the The data that we've seen so far is very positive and is probably slightly exceeding our internal expectations, but it's also very early days. And Before, we don't have like 2 or 3 quarters of numbers under our belt and really understand And the trends and really understand the sensitivity of customers to broadening our assortment to certain pricing, etcetera, By mid of this year to check-in with the reports on some of the overarching trends that we're seeing with HelloFresh I will hand back to the speakers. Thank you for attending the Earnings call for Q4 and at the same time our full year 2020 results. Q1 is off to a very good start for HelloFresh, and we Bye bye. Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect.