Earnings Call: Q1 2018

May 14, 2018

Good morning, and welcome to our First Quarter Earnings Results Call. It's only the 3rd time that we have an earnings call since IPO ing the company in November 2017, but we have a much longer history of reporting our numbers. So given that we only recently IPO ed the company but have been reporting our numbers for every quarter since the beginning of 2015. It definitely seems like a much longer track record that we've been able to build up. If I can turn your attention to Page 3, that's the page that shows our competitive positioning across all our markets that we operate in internationally. We have 2 segments, our U. S. Segment and our international segment. And in both those segments, we now command the number one position. In Q1, we commanded for the very first time the market leadership position also in our U. S. Segment. We've been doing that for much longer time in our international segment, but it's definitely been a very strong signal for us internally to see that less than 5 years after entering the U. S. Market, we've now taken over the number one position by every immeasurable metric in the U. S. Market by customers, by meals served expanded our market leadership position and generated about 40% of our growth revenues with fairly limited Q1, we served around 48,000,000 meals to our customers worldwide, which constituted about 60% year over year revenue growth in constant currency to about €1,200,000,000 or €1,500,000,000 in annualized revenue run rate. In euro denominated currency, that yielded still 44% of revenue growth. Compared to 1 year ago, we suffered from the strong dollar. And just to remind you, given that we operate in 10 countries with very different currency environments, we believe that the fundamental performance of our business, the fundamental performance from operations is best judged by looking at constant currency numbers. If you turn over to Page 4, we broke down some of the key trends that we observed in the Q1. Our active customers massively increased from 1.4 1,000,000 in the Q4 of 2017 to 1,900,000 in the Q1 of 2018, which constituted about a 30% quarter on quarter, so not year over year, but quarter on quarter excess customer growth. Q1 for us is always seasonally the best time to acquire customers. And in the Q1 of 2018, we definitely took advantage of that advantageous seasonality. Revenue growth is quoted exclusive of Green Chef, given that we only closed the transaction towards the end of Q1 and integration of the business only started in April. So it will only show up in our Q2 numbers, and we only have limited knowledge of how that integration will eventually turn out but very positive 30 times. If you look at the 2 segments, then across the 2 segments, we saw an equally strong performance. Our U. S. Segment grew 73% in constant currency year over year, And our international segment also had the strongest quarter in terms of growth over the last 18 months with 42% year over year growth. The picture on margins is equally positive. Our contribution margin expanded by about 6 points year on year to over 26%, the highest contribution margin that we've ever shown. And also on our EBITDA margin, we saw a 7 point improvement year over year to now minus 7%. On that metric, in the Q1, our marketing spend is seasonally elevated. You'll see the counter effect of that elevated spend in the massive increase in active customers that we saw in the Q1, and that's exactly in line with our plans. So our plan has always been and will probably continue to be for the next for the coming years that in the Q1, we forked out most for marketing as we acquire customers that then deliver revenue and deliver contribution margin over the entire year. The Q1 2018 was also the Q1 in which we delivered positive cash flow from operations. So we generated €6,600,000 and it marks the Q1 in history for HelloFresh where we've seen positive cash flow from operations. That leaves us with a very strong cash position. Cash position as of the end of Q1 was €331,000,000 plus an undrawn revolver facility of €30,000,000 and as I just indicated, positive cash flow from operations brought us to that very strong balance sheet position. Taken altogether, we're very happy with the performance that we saw in the Q1, and we see ourselves well equipped to deliver on the remainder of the year. If you turn over to Page 5, you'll see that we had a big jump in active customers in Q1. And if you compare that to previous years, you see that this is more or less in line with what we've seen in 2017 and also in 2016. The shape of active customers is also expected to turn out pretty much the same as in previous years with a big increase in the first quarter and then softer increase over the course of the year given that seasonality is not as advantageous in the other quarters as it is in the Q1. Q1 in our business tends to set the pace for the year. Hence, we're quite happy with what we have delivered with 30% quarter on quarter active customer growth. If you turn over to Page 6, you'll see once again that both segments grew very strongly, which yielded about 60% revenue growth in constant currency. Constant currency is fundamentally how we did in our operations, hence the best metric to judge us. But also in euro denominated currency, a 44% increase is something that we're quite proud of and which we believe will set us up well for the remainder of the year. Next question here. With that, I would like to discuss in a little bit more detail the development of our margin profile. And first, let's have a look at the development of our contribution margin on Page 7. So the contribution margin level, we expanded our margin year on year by 5.8 percentage points versus Q1 2017. Those 5.8 percentage points expansion have been derived by expanding or further saving procurement efficiencies of 3.1 percentage points and on top of that, saving 2.7 percentage points in fulfillment. The key contributors to that were production, so our picking and packing operations as well as packaging. For Q2 this year, you should expect that we will be able to at least maintain the very healthy margin level to slightly expand from that 26.1 percentage point level. With that, let's have a look now how our EBITDA margin has developed. Our EBITDA margin year on year has expanded by a full 7.1 percentage points to 7.3% negative in the Q1 of this year. And this 7.1 percentage point expansion comes number 1 from the expansion of the contribution margin that I've just taken you through. And on top of that, we saved around about 3 points on marketing on a relative perspective. As Dominik had taken us through at the beginning of this call, Q1 is for us the best and most healthy quarter to bring in a lot of new good customers to our service and product. And therefore, we spent quite robustly on marketing. And that's something that then somewhat normalizes during the course of the remainder of that year. So what you should expect from us in Q2 is basically a further meaningful expansion of our adjusted EBITDA margin as we see marketing as a percentage of revenues to basically go back further and basically contribution margin to stay where it is to slightly expand further from that level. But that trend that we see in our business continues to make us comfortable that we will reach EBITDA breakeven in Q4 this year. And that again is before the impact of our recent acquisition of Green Chef. So to summarize from a margin perspective, very robust trend and very robust development that we've seen in our business. I'd like to spend now a minute to discuss our cash flow and liquidity position on Slide 9. From a cash flow perspective, Q1 2018 certainly marked a milestone in our business because it's the Q1 where we've generated positive operating cash flow of $6,600,000 So why was that the case? Effectively, we experienced, as some of you know, very beneficial net working capital trends, especially during periods where we grow strongly as we've done in the Q1. And therefore, that cash inflow from net working capital has more than offset our negative EBITDA in that first quarter and therefore helped us to generate a $6,600,000 positive operating cash flow. Separately, when we look at our cash position on balance sheet, we ended the quarter with a very robust cash position of €331,000,000 And that's already after having paid for the acquisition of Green Chef, which closed towards the end of March this year. On top of that, we have found about €30,000,000 of undrawn undrawn revolving credit facility available to us if we wanted to use that. Let me now come to an update on our guidance. Based on the robust development that we've seen in our business in the Q1, we feel comfortable to increase our revenue guidance from previously 25% to 30 percent revenue growth for the full year on a constant currency basis to now 30 points to 30 5 percentage points, again on a constant currency basis and before taking into account green share. So we've shifted our revenue guidance effectively by 5 points upwards on both ends. Greenshaft is expected to contribute from this quarter, so from Q2 onwards from about $16,000,000 $1,500,000 each quarter for the remainder of the year. And then our guidance from a margin perspective stays unchanged to what we communicated before. So on a contribution margin level, 25 above 25% contribution margin. And on adjusted EBITDA basis, we want to reach breakeven in Q4 this year, again, before the impact of Green Chef. With that, I would suggest that we pause here and look forward to take your questions. The first question is from Robert Berg. A couple of questions from me. The first question is on the guidance very quickly. Obviously, 60% constant FX growth in the year. I remember Q1 as a full year, you mentioned you like to be prudent with the guidance. Is that the same now? I'm just wondering why de acceleration through the year. And the second one would be on the guidance. If you're growing faster and keeping your EBITDA the same? Are you investing the money back into marketing? Would that be a fair assumption? And the third question on Green Chef. Dominic, you mentioned positive start to integration. Could you give any more details? I appreciate it's super early. We'd love to hear whether there's anything you've seen in the business that it's maybe a better asset than you thought, how you're thinking about the integration and if that's running ahead or in line with your expectations so far? Thank you. Robert, it's Christian here. Maybe I can take your first questions regarding guidance. So that 30% to 35% revenue growth on a constant currency basis is really our best perspective on how we think the year will shape up for us. It is a meaningful upwards lift versus to what we had communicated before. And it's the right guidance at this point of the year. You're absolutely right. In Q1, our revenue growth was above that range. And for Q2, you should expect that we're at least towards the upper end of that range. But as we had outlined before, the dynamics of our business are that the bulk of our growth in customers and therefore also revenues we basically realize in that Q1 and hence the guidance is in line with that. And on Green Shaft. So certainly, you're right, Robert. It's early days. I think so far, we've seen a number of very positive signs. So we identified a lot of savings potential and growth potential during our due diligence phase. And I think now that we have started with our integration plan round about beginning of Q2, We've seen that a lot of those assumptions and findings in due diligence were actually true. And we do believe that especially across metrics such as shipping rates, packaging, procurement, we have not only identified but can introduce savings to the Green Chef business quite meaningfully. We can also support them by integrating them onto our growth marketing platform, which I think is certainly at a fairly different level than to what they've been working with so far. And so while we will be focusing on improving the underlying margin profile and that in the upcoming months, we will certainly kind of like start investing into growth in the Green Chefs business once we do feel that a lot of the saving initiatives that we're driving right now will have materialized so that we can drive growth at a much better margin profile than what we have found before taking over the Green Chef business. Generally speaking, I think what we have definitely realized from this due diligence but also from communicating with other businesses in the market is that we do believe that over the last couple of years, we've built up huge expertise in many different areas of the business, an expertise that is not only driven by scale, but certainly also driven by scale. And that will allow us to, yes, meaningfully drive forward a business such as GreenShack. And given where we are today, we do think that everything that we had assumed during the due diligence, we do not see any reason why that should turn out different to what we had expected. Brilliant. Thanks, guys. The next question is from Markus Dever of Morgan Stanley excuse me, JPMorgan. Your line is now open. Hi, it's Markus here. Just two questions. Dominik, could you talk a bit more about also the international operations? Clearly, very strong set of results in both U. S. And international. But is there a bit of more clarity what markets performed particularly well in international as well? So that will be quite helpful. And secondly, on the cohort developments, I mean, clearly, in the IPO and also after that, we see a lot of information that payback actually reduced as of the time period of payback reduced significantly now to 12 months. Is that still the case? Have you seen any further improvement in that area that will be quite interesting as well? Thank you. On the international segment, we don't detail out in more granular detail all the respective markets that we have. I think a fair assumption is that across the board in all our major markets, we saw very good development. If you remember last year, same time, Q1 and Q2, we had a set of weaker results in our international business that was mostly driven by the fact that we ramped up our fulfillment facilities. And I think a direct consequence of ramping up those fulfillment facilities has been that we broadened our product portfolio, and that is that has really been what has been driving the growth in the Q1 already, but also now in the Q1. So a much better infrastructure that allows us to really innovate on the product portfolio has allowed us to reinvigorate growth in the international market. That has really happened across the board. And it's something that we're quite happy with because obviously, all those major sort of like transitions from one fulfillment center to the next always brings a certain level of risk with it. But overall, looking back over the past year, we think we've done the right decisions, and we've also ramped them up at the right pace to end up in the situation where we are right now. On cohorts and particularly on payback periods, What we have experienced is that over the last couple of years, we have significantly improved our margins. We've also brought down our customer acquisition costs and across all markets, cat retention broadly stable. That has resulted in much faster payback periods than what we had 2 years ago. So right now, we're actually operating significantly under 1 year of payback periods. If you look at the most recent cohorts of the last 12 months or 18 months, that time period is significantly under 1 year. It's somewhere between 6 12 months depending on market and depending on margin profile. But we do believe that going forward, we will keep that at the level where it is right now or even increases to really go up to levels that are not only market leading but sort of industry leading or category leading. Perfect. That's clear. Thank you. The next question is from Andrea Slav from Morgan Stanley. Your line is now open. Hi, good morning. This is Andreas for us. So I have two questions, please. The first one is in the U. S, I mean, great performance and now you're sort of the leading player over there. Are you seeing now sort of any change in the number of customers that might be migrating from Graeme to yourself? Is that stable? Do you actually have any visibility or not? And then the second question is just following up on the guidance question because I mean clearly you point out that 1.6 1,000,000 active customers is a great number. It implies 60% growth year on year in Q1. It would imply 30% year on year growth over the Q4. So unless your revenue per active is about to go down, you would think that your guidance indeed looks very conservative. So I was wondering if there's just anything else that we might be missing. Thanks. So on the U. S. Competitive positioning, I think for us, the opportunity is much, much broader than going after the same set of customers that has been customers or consumers of other meal kit services. I think what we still see is that in terms of category awareness and brand awareness, there is a lot of ground to gain for us. And so we're not so much focused on competitive advertising or positioning ourselves against any other market service. We're much more focused on really and service, we're much more focused on really expanding the category overall. I think if you look at market research stats and just sort of like overall market numbers, then never in the company's life or never in history have more consumers eaten milkers than now in the Q1. That is largely driven by our growth but also of the growth of other meal kit services. So I think overall, the meal kit industry has really over the last 3 years grown so dramatically and has proven to be sort of like the go to source or default service for many, many customers that we believe our focus should be much more on expanding the overall market and making sure to double down on all the trends that are shaping that development of the market than by engaging in overly competitive positioning in advertising or anything like that. You won't see that from us, and that's also not what we feel is the biggest opportunity. Hence, we're very much focused on communicating the benefits of eating with meal kits overall and of making sure that people see that we are, by awareness, the number one player in each market because we do believe that the number one player always takes on more share proportionally to the overall category development. And that's the focus of all our marketing and advertising activities. And Andrea, on your other point, is there anything else mentioning regarding around the guidance, not really other than seasonality, which you're nowhere as you know, we we are approaching not a summer period. That's when a lot of our customers are then taking their 2 week summer holidays and pause during that period. So it's less efficient than around this that holiday period to bring in a lot of new customers. And that's but that's the same, let's say, development in seasonality as we've discussed in the past. So there's nothing special to that. But you wouldn't expect actives to go down for whatever reason in the next couple of quarters, right? Our active customers, no. But to stay broadly at that level where that you've seen from us, at around the €1,900,000 that we had in the Q1. All right. Thanks. The next question is from Nesla Naizer of Deutsche Bank. Your line is now open. Great. Thank you very much. Just following up on the competition question as well, Dominik. Could you just give us an idea of how you look at the larger U. S. Retailers venturing into the meal kit space and whether that could prove to be something to be wary of going forward? Just to get an understanding on how you look at that news because that's taken up a lot of our discussion time as well in the past. And secondly, on the automation plans, could you just remind us where you'll stand in terms of investing that amount you said you would in terms of automating your fulfillment centers? And what the CapEx outlook is like for the year? Does it stay unchanged? And thirdly, on the customer acquisition costs, since we've heard your competitor in the U. S. Talk about stepping up their marketing activity a bit, just wanted to get an understanding if things have changed in terms of how you need spend on customer acquisition following on those remarks. Thank you. Sure. So on the advances into retail by some of our competitors or more broadly retail activities by U. S. Retailers, I think that that's nothing new really. I think we've been seeing retailers both in the U. S. But also in international pondering with the thoughts of either launching a product or having launched a product for the past 2 or 3 years. So we actually do have that experience, which might be quite new for U. S. Players, quite a bit from our international markets. So no matter in international markets, whether you talk about Germany, whether you talk about the Netherlands, whether you talk about Belgium, the U. K. Or Australia, we have seen those advances by retailers in almost each and every single market. Some of those partnered up with another service. Some of those launched their own nail kits. Overall, we do think that the qualities and the skill sets that you need to launch a very, very good and highly competitive service. It's quite different from the skill set that's usually insurance to large retailers. When it comes to procurement, when it comes to the manufacturing parts, but especially when it comes to the part of product development, we do believe that this is something where we are very good at, where we have built up a lot of qualities and skills over the last couple of years, and that's something that is not easy to replicate. So looking at what's how it's turned out in our international segment it's that I do not think that in any of our markets, any retail activity has really eaten into our market share or has really kept people from buying or purchasing HelloFresh meal kits. To be honest, we haven't really seen any impact of that. And if I look back over the last 2 or 3 years, and a lot of those activities which have been promoted, heavily in marketing or in the press have actually ended and a lot of them have withdrawn. So in that sense, I do think that retail can be a nice incremental add on revenue stream that has an attractive margin profile. I don't think that it can ever take up a large part of the category, and I do believe that our focus on a direct to consumer model will always drive the largest part of our activities. We have tried out our sort of like a retail offering ourselves for quite some time. We've actually been one of the first in the overall space who has tried it out. We do believe that we have a pretty good idea of what are the drivers of a successful product, and we will selectively think about rolling that out or partnering up with resellers as an additional distribution platform. But just in terms of the size of the revenue opportunity, we do believe that the major, major, major parts of our future revenue growth and revenues will always come from the on the direct to consumer route. Okay. And then on the direct to consumer route. And it's Christian. Just to follow-up, Nizla, your other question on CapEx and Automation. Just to recap what we've said in the past. We said in the past that we intend to spend over up to around about 60,000,000 euros until the end of 2019 on CapEx where the bulk of the spend goes basically into modular automation or semi automation solutions in our fulfillment centers, and that is still unchanged. What you will see from a timing perspective is that CapEx will begin you will begin to see that in our numbers probably from Q4 this year onwards and then the remainder of it basically distributed across 2019. Does that answer your question, Bostik? Yes. And my final question was whether you've seen a change in the customer acquisition cost dynamic after your competitor in the U. S. Said that they're stepping up marketing spend? So the answer is no. We achieved very robust customer acquisition costs. And if anything, the trend has been beneficial to us over the last couple of quarters, including that Q1, I. E, at the margin, those customer acquisition costs become less fast than what they've been a year ago or 2 years ago for us. Thank you very much. There are currently no further questions. And we have a follow-up question from Nesla Naizer. Yes. If I may, just if Dominik and Christian, if you can remind us, are there any new ventures or any new initiatives that you all have undertaken over the course of 2018 that are either doing well or you think could meaningfully contribute to revenue in 2018? Just give us an understanding of what's next and exciting in HelloFresh. That would be great. Thank you. So I think generally speaking, we do have a team that is fully focused on innovation, both in the core products as well as off core products, so in new verticals. I think we've made some good progress, both on the sort of like core products and broadening our proposition in the core products as well as with some tests and trials that we've been running off our core products. And will they contribute meaningfully to 2018 revenues? That's probably not. But it's still those are initiatives that we are kick starting now or have kick started over the last 6 to 9 months and where we do think that they will contribute to revenue in 2019, 2020, 2021. Just looking back at our own history, and I think starting HelloFresh and the Meal Kits vertical in late 2011 and then scaling it up, you'll see that especially in the beginning, there's a lot of focus on product market fit, on really understanding customer needs, on really understanding margin profiles, both when you start out the new vertical as well as if you scale it up where it could eventually end up. And hence, we've been much more focused on really proving out our hypotheses than on scaling up and on putting money or customer acquisition expenses behind and driving that up. So right now, it's all about finding the right products and finding the right initiatives that we will then power forward in the coming quarters. So I don't want to sort of give you a lot more detailed information on that given that it's still on sort of like a very early stage, but we're very much focused. I think that's the bottom line. We're very much focused on really making sure that we have a constant pipeline of innovation and that we start very, very early in also venturing out into new areas, into new services to make sure that we can continue our pace of revenue growth also in the outer years and that we can maintain a very high revenue growth profile beyond 2018, 2019 into 2020 and or following years and quarters. Great. Thank you. As there are currently no further questions, I would hand back to you gentlemen. Thanks, everyone, for attending our Q1 earnings call. We're looking forward to welcoming you again on the Q2 earnings call. And rest assured, we're very much focused on keeping up the performance that we've shown in the Q1. I think we do have a pipeline of a lot of exciting initiatives coming up that will show both in the core products and in other verticals in the next quarters. And that's what we're very much focused on, not so much looking left and right, but really focusing on maintaining the number one position in all the markets that we operate in and iteratively improving all the key metrics and KPIs as we have done on a very continuous basis over the last 2 or 3 years that we've been