Earnings Call: Q3 2017

Nov 21, 2017

Good morning, and welcome, everyone. I'm dialed in here from New York, whereas my colleague, is actually in Berlin. So hopefully, you can all hear us well. And please do let us know if there is some problems occurring here. Having said that, I'd like to straight dig into our numbers and into our Q3 results and get started. So the last couple of months have been pretty phenomenal for us because when we took the company public on November 2, it was actually less than 6 years after HelloFresh was a mere blank sheet of paper and a mere idea. And it has obviously not only been a great success for us to took the company public after such a short period, but also I think the Q3 results that we can present to you guys today are also really outstanding. On a high level, there are 3 things, which I think so far has not been knowledge in the public domain, which I'd really like you to remember from the presentation, which is: number 1, we've seen accelerating growth throughout the year. Q3 has been the fastest like for like quarter in the year. Secondly, we've been operating in a very cash efficient way this year. Our cash flow has consistently been better than our EBITDA results. And then thirdly, we've seen great market share gains, both in international but especially in the U. S. And continue to see very favorable trading environment. We've put together a couple of slides, and I'd actually like to dig into that right now. So if you can turn your attention to Slide number 3, and I'll walk you quickly through that, followed by Christian walking you through the detailed financials that we have, then myself giving an outlook to Q4 before we then come to your questions. So if you direct your attention to Slide 3, we have seen continued strong revenue growth on group level. We've been growing by 48% in our reported currency, in euro currency. If you look at it on constant currency basis, it's actually been 53% and as such marks the highest growth quarter year to date so far. In the U. S, we've been growing by 76% year on year in euro reported revenue, which is actually 86% in constant currency growth. So in Q3, we have really seen a devaluation of the euro against the dollar. Hence, our euro denominated revenues are less than what we can show in constant currency growth. International has also been developing very nicely again in Q3 After we had successfully completed our buildup of manufacturing sites, we actually could grow again by 18% in euro reported currency and 20% growth in constant currency. The same picture shows actually on our contribution margin and our adjusted EBITDA margin. We expanded our contribution margin to 23%, so a 6% gain versus Q3 2016 and a 1% gain versus Q2 2017 despite the fact that Q3 has historically always been our softest quarter and is also the quarter in which we absorb less of our fixed costs just given that our customers take more holidays and have a slightly lower order rate than in other quarters of the year. Adjusted EBITDA margin came in at minus 8%. Again, it's a 6 percentage point improvement year on year, and it's compared to the 2nd quarter, which is seasonally quite a strong quarter, only 0.6 percentage points below, which is a clear improvement compared to 2016 and if you look at our development from Q3 2016 to Q2 2016. Very importantly, our cash consumption has consistently been below adjusted EBITDA levels due to the very favorable working capital dynamics that we have. So in the entire Q3, we only consumed $3,000,000 of cash flow from operations. And that is something that you can also see year to date where we have also been consistently below the levels that you see in adjusted EBITDA spend. After Christian leads you through the rest of our financials, I'm going to come back to our outlook for the remainder of the year. What I can already tell you right now is that we see a very good trading environment and that so far Q4 has been off to a really good start. So we can reconfirm the outlook that we've given you during our IPO process and are very confident that we can hit the numbers that we have outlined. If you turn to Page 4, I want to quickly lead you through our manufacturing build out, which we have successfully completed towards the end of Q2 and then ramped up over the course of Q3. If you look at the picture, we now have 7 sites online. That's basically 7 sites more than we had 2 years ago in online. So we basically managed within 2 years to build out our entire distribution center, manufacturing center network all across the world, spanning 3 continents. The last site was onboarded in Australia towards the end of Q2 and then fully ramped up during the course of Q3. And what is really important and what I'd like to basically direct your attention towards is the fact that we completed that entire build out on time and on budget. It's been all done by the same team that has been flying around the world and at some point building up 3 or 4 of those sites at the very same time. So we're really glad and confident that we have managed this fulfillment center built out in the way that we did because we now can really focus on product expansion. We really now have the space and the outline, the shop floor design in those manufacturing sites that will allow us to innovate around our products. And what you could already see over the course of 2017 is that we have added a lot of features to our product line, which we had been planning for a long time. But given we were in different manufacturing setups previously, we could not innovate as fast as we wanted to have. The next step with regard to our manufacturing site build out is now that we want to engage in a modular and a step by step automation of our production processes. And what that means is that over the course of 2018 2019, we want to invest roughly €50,000,000 in the automation of those 7 fulfillment centers. This will, on the one hand side, help us slightly to improve our margins our fulfillment margins, but more importantly, will help us to continue to innovate on the product. That means introducing more meals, introducing more dietary profiles and coming up with new food products, which is really what we're very excited about and look forward to. Right now, that's the last number I'd like to point your attention to. It's the capacity utilization of only 30%. That means as we continue to scale and as we continue to grow our volumes, we can actually absorb more of the fixed costs, and this will also help improve our margins going forward. Merely by improving volumes, we can basically spread our fixed costs over a higher amount of deliveries, which will in turn drive down our fulfillment costs as we continue to scale volumes. Okay. Good morning, everyone. It's Christian here. So I would like to spend the next few minutes to walk you through the key line items on our P and L. And firstly, I would like to start with some slightly old news. Given that you have seen our revenues for Q3 in the prospectus during the IPO process already. But nevertheless, they're worthwhile to review. So let's have a look at them on Page 5. Dominik had alluded to them before. So what you see from us for Q3 is effectively on a constant currency basis, the fastest growing quarter so far this year. So 53 percent revenue growth on constant currency in Q3. And also in reported currency, a very healthy growth, slightly below that, given primarily the softer U. S. Dollar that we've seen in that quarter, but also reported currency close to 50%. And that's very strong growth trend is really broad based across our 2 segments with our U. S. Segment continuing the very high growth rate of 86% in Q3 in constant currency, 76% in reported currency and our international segments reaccelerating to on a constant currency basis, to run about 20% and on a reported currency basis to roundabout 18%. The 20% constant currency growth for international, that's roundabout what you should expect from that segment going forward over the next couple of quarters. Also one last point here on revenues. These EUR 217,000,000 revenues that we delivered in Q3, that's roughly EUR 8,000,000 dollars ahead of what you've seen in broker consensus during the course of the pre DIE research that has been published. So with that, let's turn now to our margin profile. And there, you also see a very robust trends. Firstly, let's have a look at our contribution margin on Page 6. So what you see here from a contribution margin perspective, a very meaningful expansion of our contribution margin versus the same period last year, a full six points that our contribution margin has expanded to a level of 23.2% now as of the Q3. So the distance that you've seen from us that we've put between 2016 2017 over the previous quarters shows around about 5 points during the 1st two quarters of this year, has further expanded in Q3 to 6 points in Q3. And also sequentially, even though Q3 is typically a softer quarter for us, we have managed to expand that contribution margin by a full point in Q3. So that puts us on a very solid footing to achieve these margin savings that we have targeted until Q4 2018 and that we have discussed with you in the past. So next, I would like to review with you the development of our marketing expenses on Slide 7. And there you see on absolute basis, our marketing expenses have increased as we need to bring in more and more new customers into our business. On a relative basis, as a percentage of revenues, you see our marketing expenses have come down slightly by around about 1 point. And that's something that you should expect to see from us going forward, I. E, on a relative basis, our marketing expenses to trend for the full year of next year to below the 25% level. Our CAGs have remained very stable at around the level that you've seen from us in the previous quarter. So when you put all of that together, let's have a look now what that means for our adjusted EBITDA margin on Slide 8. And there you see that our adjusted EBITDA margin also has improved by a full 6 points year on year in the Q3 of 2017. So from a negative 14% to a negative 8% and that again puts us on the right track to achieve our EBITDA breakeven by Q4 2018 as we had communicated in the past. So that's it really on our P and L. I'd like to spend a moment now to discuss our cash flow trends on Slide 9. And our cash flows, as many of you know, structurally benefit from advantageous working capital dynamics, I. E, in a normal period for us, where we grow, where there are no special effects, we typically consume much less cash than what you see from us as adjusted EBITDA. Concretely, for the Q3 of this year, you see that we have consumed in our operations only €3,000,000 versus a negative adjusted EBITDA of €17,400,000 in the same period. Then if you look at the full 9 months of this year, you see a similar trend. So cash consumption in operations of $32,000,000 versus an adjusted EBITDA of $64,000,000 from $32,000,000 difference from a cash flow perspective versus EBITDA perspective. With that, I would like to hand it back to Dominik to discuss our outlook. So Q3 numbers, I think, can give you a very nice glimpse of our continued strong performance year to date already. We've so far seen in the Q4 2017 also a very good trading environment and now being around midway through the Q4, we can definitely confirm the outlook that we've given all of you in the IPO process. What you can see is that U. S. Continues to grow very healthily, that the international segment is back on track after we had built out our manufacturing sites during which we had pulled back in spend a little bit. And we really see that trend continuing into Q4, so can confirm the guidance we have given you before. I think to summarize, it's quite rare to see businesses at our scale growing at the rates that we do, also to see businesses at that scale having accelerating growth quarter year on year on a quarterly basis and at the same time be so predictable. So if you really think about it, we're a newly public company, but I think we have established a track record of really expanding top line, expanding contribution margin and expanding our EBITDA margin over the last couple of years. Because in fact, given that we're only a public company for a short few weeks right now, it's pretty unique that we have consistently published our quarterly numbers for the last 10 quarters as a private company. So I really want to like to take this opportunity and remind everyone that we've already set up really a track record of proving to each and every one that we can deliver both on top line growth and on margin expansion going forward. I'd also claim that we're a much stronger company than we were 12 months or 24 months ago, not only in terms of the talent we have in the organization and the numbers we've been putting out there, but very much also when it comes to the outlook for the category and for us specifically. So over the last 12 or 24 months, fundamentally, we have expanded our market share in our international segment and now also in the U. S. If you look at a number of leading indicators such as web traffic, if you look at credit card data that tells you about new customers acquired, you can see that we're actually seeing big market share gains on the U. S. Market as well, which is driving some of those positive top line developments. So all in all, I think we've been very happy with Q3. I'd like to remind you once again on the three things that are probably news today, which is: number 1, we've seen reaccelerating growth throughout the year. We've consumed extremely little cash so far in the Q3 and also year to date have consistently seen cash consumption below adjusted EBITDA levels. And then finally, we've seen market share gains in all our markets, both international as well as in the U. S, and we are very excited for 1st year as a public company and the year of 2018, where we will actually have a lot more product launches and new products coming through so that we can execute very well against the growth strategy that we've outlined so far. With that, we'd be happy to take your questions. The first question is from Francois Helkon Reis, Morgan Stanley. Your line is now open. Hello. Can you hear me? Yes. Yes. Hello. Sorry, I was on mute. My good morning, everyone. So my first question was just a little bit on the U. S. So if you could give us some additional color on the extent to which you're benefiting from the weakness of your main competitor, Draper and sort of any sense on how many customers you would be gaining from them or any signs that your acquisition cost could be decreasing due to lower marketing activity at Braeburn? So any indication on this would be helpful. That's my first question. And the second one is on the international. So international at constant FX, as you've pointed out, has accelerated to 20% over the full Q3. And actually, that compares to plus 17%, which you had disclosed for the 1st 6 weeks, suggesting basically that there was a step up of growth in the 2nd part of the quarter. So is it fair to assume further acceleration of growth in international in Q4 to maybe sort of mid-20s? Or basically, should we expect the same sort of level of growth? So to your first question, Francois, I think what we've seen in the U. S. Is a very favorable trading environment. Now what does favorable trading environment mean? It means for us that the clicks per cost that we have seen for our ads, for our advertising strategy has been in a very favorable spot. It means that we have seen less competition, both from bigger and smaller competitors when it comes to some new channels, when it comes to some media spend channels where we are directly competing. But I think it's worth pointing out that it's not so much that we are in direct competition in certain channels with some of our direct competitors or that customers are basically switching over from direct competitors. That's not so much the fact as that we see favorable trading environment in terms of just very good costs that we see that we need to spend for bringing in customers. So in short, I think we definitely benefit from the fact we have a strong balance sheet now, that we have a very sophisticated setup in our marketing and that we can basically deploy and justify high spend because we can do so very efficiently. But I cannot comment too much on bigger or smaller competitors that we have on the U. S. Market. It's quite hard given that all that information is sensitive and privy to them. Hence, I can only comment really on ourselves, but we do see a very favorable trading environment that continues now also into Q4. And Dominik, presumably this favorable trading environment is translating in slightly better retention dynamics in new cohorts in the stages? Or it's too soon to really tell? It's a little too soon to tell. Right now, when we mentioned favorable driving environment, it's really that we can see that we can scale our marketing spend very efficiently and that the cost per new customer, which Christian has disclosed earlier in the call, has been stable throughout all of Q3 compared to Q2 and Q1 this year. This is really what we're referring to when we speak about a favorable trading environment. In terms of your second question regarding our international business and our international cluster, it's correct that basically coming out of summer, we have basically redeployed some spend to our international markets. So given the sort of like numbers that we had disclosed for the 1st couple of weeks, those were more affected by seasonality. So back then, in the 1st 6 weeks of Q3, you've seen 17% year on year growth. We've now then basically slightly dialed up our efforts as people were coming back from summer holidays. But this is more an effect really of the seasonality that we do have in our business. And now for Q4, we basically want to continue the trend. We always do have some fluctuations when it comes to all the different reported currencies we have and how we actually aggregate them, but we are quite confident that you will see a similar development than what we have seen in Q3. Like I said, there's always some fluctuations just given that we have so many different currencies that we need to aggregate. Okay. Thank you. Very good. The next question is from Chris Collett, Deutsche Bank. Your line is now open. Good morning. It's Chris Collett from Deutsche. First of all, congratulations on the IPO and on the quarter. I just had two questions. One was just just looks like the gross margin improved particularly in the U. S. I'm just wondering, could you just talk a little bit about scope for further improvement sort of is there? And then second was just you mentioned about some of the product innovations, new catering to new dietary requirements and so forth that you're now looking to roll out. I know you've spoken about that in the past, but could you talk about some of the things that you are more specifically the things that you're addressing right now? It's Christian here. On the U. S. Contribution margin, that's right. We've seen a very healthy trend there our U. S. Business, where the contribution margin sequentially went up by around about 2 points versus the Q2 of 2017 and by more than 10 points year on year. Key drivers behind that is really primarily 2 drivers. 1, on the COGS side, so procurement, we are continuing to implement a number of the measures that we had discussed together a couple of weeks ago. So increasing consistently the share of direct growers, for example, increasing our purchasing terms, and it has been one good source of that margin expansion. And then secondly, on the production side within our fulfillment centers, we managed to further increase our efficiencies, which also had a beneficial impact on our contribution margin. When it comes to product development, what we have been investing in is when you as a customer are looking and on the menu that it is much more seamless to switch around the number of meals, the number of delivery days, etcetera, per week that you're actually being exposed to. We've also been pioneering a couple of special meals in the Q3 and now going into the Q4. So what that really means is that in the U. S, we have started to monetize our menu better. So after we had introduced premium meals towards the beginning of the year, we've now taken that one step further and have actually 2 of the slots on our menu been experimenting with all across the entire Q3 and Q4 and are basically tracking results both when it comes to cost, when it comes to predictability of revenues, when it comes to take up and also when it comes to margin impact very closely. And we will be rolling out on a broader basis the 2, 3 most successful of those initiatives. But for competitive reasons, I don't want to comment right now on which those initiatives are essentially. But basically, important to understand that we have taken that protocol of experimentation throughout Q3 and Q4 and basically consistently tried out new dishes, new concepts such as desserts, such as dinner to lunch, such as 20 minute meals, such as semi prepared meals with pre diced and sliced vegetables and have really kind of like looked at what's that impact is on customer retention, customer take up and our margin and cost assumptions around that, and we will be rolling out some of those initiatives on a broader basis towards the beginning of 2018. Great. Thanks very much. The next question is from Andrea Faras, Morgan Stanley. Your line is now open. Hi, good morning. Just a follow-up please. When you talk about sort of the rollout of the automation of production processes into your different warehouses, can you give us an idea of how this rollout is going to be conducted and how we should think about sort of the risk of these new technology being implemented in the warehouses as we look into next year? Thank you. Sure, absolutely. So the way to imagine or the way to visualize this is really that it's happen in a very modular way. As you know, we have 7 manufacturing sites that we're operating at the moment. The way that we go about introducing more technology and more automation equipment into our sites is that we pick out one site where we actually look at automating some of the steps of the overall production process. If we think as a framework about our production process, you can think of it as basically a process that has 35 sequential steps. Right now, there is a few number of those steps, which is automated. When we talk about a modular build out of that process, it basically means that we're looking in one side first to automate 1 or 2 other steps, followed by the introduction of those automated steps in the other facilities as we also, at the same time, then basically try to automate 1 or 2 steps more of that entire automation process. So really, why did we choose that strategy? It's, as you rightly point out, in order to mitigate risk. I think we've already automated some of the steps in our distribution centers, so we know how to go about it. It's partly the same team that is responsible for building up those fulfillment centers in the 1st place. So it's not that we basically reinvent the wheel for each and every warehouse, but we're basically following the same concepts and the same protocols in each of our sites, and we're following very much a game plan. Only once we pass the tests and once we pass and see that the steps become more efficient and we become more productive in our sites can drive down error rates and or manual errors that might be happening, then we actually go on to introduce those same processes and those same automation equipments to the other side. So very much a process that is focused on mitigating risks, while at the same time trying to really basically have a rollout that allows us to share knowledge and to share learning between sites and countries. That's great. And if I could just have one small follow-up. So of these 35 sequential sets that you think might be able to automate, can you give us an idea of your more the warehouse where you have implemented the highest level of automation? What number broadly of these steps would you reckon are already automated? So I think it's pretty clear that right now, we are a basically, we are following a manufacturing approach that is still fairly manual, but that's okay. That is something that is already baked into our numbers, and we don't assume that we basically go from 0 automated steps to 35 automated steps. I would say, broadly speaking, and this is more for illustrative reasons, so they don't take at least they do take it with a grain of salt. But right now, we've basically automated somewhere around 5 of those 35 steps just to basically to put that illustratively out there. And we're now speaking about automating the next 5 steps. And those really basically will then help us to broaden our product portfolio and allow us to handle more complexity in those sites while driving down costs at the same time. That's great. Thank you. As there are no further questions, I would like to hand back to you gentlemen. Thank you so much for attending our first earnings call as a public company. I hope we have met or exceeded the expectations that you've set out. And like I said, we couldn't be more excited for 2018 With the strong balance sheet and the strong position in the markets that we have, we're very much looking forward to putting that money to good work and investing it whilst at the same time balancing growth and profitability so that we can confirm our outlook. We want to basically grow next year north of 30% and become breakeven by Q4 2018. Thank you all for attending the call. Bye bye.