Earnings Call: Q2 2018

Aug 13, 2018

Good morning, everyone. I'm Dominik. I'm here with my colleague, Christian, our CFO, HelloFresh. And Christian and I will today briefly discuss our H1 results with a focus on the Q2 results and then give you a strategic update on the business and the business outlook for the second half of the year before we then open up to Q and A. If you turn over to Slide 2, you'll see the highlights of our Q2 performance. And there are three things that I'd like you to take away. Number 1, Q2 marked another quarter of outstanding revenue growth for our group. We grew 41% on a constant currency basis, excluding Green Chef and 48% on a constant currency basis, including Green Chef. Secondly, we reached our adjusted EBITDA breakeven for the first time for the group, and we did so 2 quarters earlier than what we previously announced. Our group EBITDA margin, excluding Green Chef, came in at 0%, so breakeven. And both segments showed adjusted EBITDA positive. Thirdly, we've had a very strong outperformance on our contribution margin. The group contribution margin, including Green Chef and all transaction costs, etcetera, was at 28%. And that was significantly ahead of our plan, also ahead of internal plans. Regarding Green Chef, as a reminder, we closed that transaction towards the very end of Q1 and spent Q2 starting to integrate the Green Chef business. So in the following presentation, whenever we quote numbers from here on, those are numbers excluding Greenshaft, unless we say otherwise. And with that, I'll take over to Christian, is going to lead you through our Q2 results in more detail. Yes. Good morning, everyone. It's Christian here. I would like to start with a discussion of our ramp development on Page 3 in the document. So Q2 was another quarter of very strong growth on the group level with 41% constant currency organic growth in that quarter. Our international business certainly has been the star performer in that quarter with a 65% growth rate in the quarter, but also the U. S. Delivered good growth of roundabout33% in Q2. Next, I would like to take you through the development of our contribution margin. In Q2, we've seen very a very strong expansion of our contribution margin year on year of 5.8 percentage points. But also sequentially versus Q1, we've expanded our contribution margin by 1.8 percentage points to close to 28%. We did this by further realizing procurement efficiencies within our ops within our COGS operations, both in our international as well as in our U. S. Segments. Same on the fulfillment side, we realized further efficiencies across both operating segments and especially in our international business. The strong volume growth that we've seen in revenue certainly helps on the fixed cost leverage. Now looking ahead a little bit into Q3. Most of you remember, our business is somewhat seasonal. So in Q3, we see a number of our existing customers pause during the summer holidays. And we ourselves also dive back a little bit on our marketing expenses given that July, August are not high ROI marketing month for us. That translates into lower volumes during the quarter from a seasonal perspective, therefore, less fixed cost leverage. We've also experienced now in Q3 are very high temperatures in most of our markets that has a certain impact on cooking behavior, but also on what we need to spend on packaging, on insulation materials and cooling materials. And all of that together with some of the initiatives that Dominik is going to outline in a minute means that for Q3, you should seasonally see contribution margin dip somewhat before going up again in Q4. So next, I would like to take you through the development of our marketing expenses. And what you see here on Page 5 is that we managed to decrease our relative marketing spend during H1 by around about 2.5 percentage points. Now how did we do this? 1st, year on year, we managed to lower our CAGs. And this is really a function of refining our ad tech tools, our investments over the last 12 months on the data analytics side, on our data science infrastructure and our data science teams. What you see there in the margin in the decrease of the relative marketing spend and the decrease of our CAGS is really a function of that. On top of that, we've been more disciplined, even more disciplined this year by spending investment during periods where we achieved the best ROI. And that together, you see reflected in the development of our marketing expenses. On top of that, we have a structural development where as we mature, our basis of customers of existing customers grows. And again, that helps our relative marketing investments. So when you put all of that together, very strong expansion on the contribution margin side and progress on our marketing spend. You see on Page 6 what that does to our EBITDA. And from EBITDA perspective, our second quarter certainly is a new milestone for HelloFresh. It's the Q1 where we've been EBITDA breakeven as a group with a margin of 0%. That corresponds to a massive expansion of our EBITDA margin year on year of 7.4 percentage points. On top of being breakeven on the group level, we also showed positive EBITDA in both of our segments, in the U. S. Segment and the International segment. I would like to spend the next two slides to discuss their development individually. Starting first on Page 7 with our U. S. Business. So in the U. S, we've increased the number of our active customers year on year to 1,100,000 customers. Average order rate has remained roughly stable, and average order value is up slightly on a constant currency basis. All of that translates into good revenue growth of 33 percentage points despite us seeing some softening in that market towards the end of the quarter. Now from a contribution margin perspective, you see that our U. S. Business has massively expanded its contribution margin by north of 8 points in that quarter to a level of 30.2 percentage points in the 2nd quarter. Most of you will remember that is in line now with what we have given out on the group level as midterm contribution margin targets. So something that we have put out for 2021. That's where our U. S. Business is at the moment already, and that gives us the confidence to now in the second half reinvest some of that margin back into the business. And Dominic is going to take you through in more detail in a second on that. And adjusted EBITDA, a positive margin of 2% or EUR 3,500,000 in absolute terms. Now let's have a look at the development of our international business. Our international business has achieved very strong growth in active customers around about $720,000 in line with the development you see on a net revenue basis. Average order rate is down somewhat, driven by that strong growth and average order value in constant currency is up quite a bit. Why is that? That's really a function of 3 things. Number 1, there's a certain mix effect in this. Secondly, we successfully rolled out things such as 3 person boxes, which increases overall average order value. And on top of that, we've continued to roll out successfully in a number of international markets features such as premium, which again benefits our average order value. So all of that translates then into very strong revenue growth of 55 percent in the quarter. Also from a margin perspective, very strong development in our International segment, both on a contribution margin level and on the EBITDA level with a margin on EBITDA level of 4.1% in that quarter. Now in the next few minutes, I'd like to go over a brief strategy update and explain in detail our rationale behind that update. Given accelerate parts of our medium term strategy. As you see, it's a strategy that leverages our position as the global market leader by size, growth and margin profile and really capitalizes on the weakness we see in the competitive set. It's a strategy that rests on 3 pillars. 1st of all, we want to implement a multi brand strategy on the U. S. Market to really drive and expand the total addressable market that we're focusing on. Secondly, for our core HelloFresh U. S. Business, we want to invest in clear price and selection leadership. And thirdly, we're going to launch a new geography in our international segment to again further increase TAM and help us grow volume in our overall system. Let's come to the 1st pillar. In terms of our portfolio strategy, as of recently, we are able to serve U. S. Customers at many different price tiers, starting at under $5 per meal, which is less than 50% of what a meal kit has traditionally cost over the last couple of years. We have 3 distinct brands: Green Chef, HelloFresh and EveryPlate. Green Chef is priced per meal at $11 to $13 and it really focuses on organic premium ingredients and we're catering to a very much the long tail of specific dietary niches. We're leveraging the scale from our core business to really make sure we can achieve very good profitability and a very good margin profile in that business. HelloFresh was so far priced between $9.50 $10 per meal. Going forward, we'll be offering our core HelloFresh brand at a price point between $8 $10 depending on the plan that you choose and the size and the number of meals that you choose. In that business, we very clearly want to invest in selection, choice and personalization and also increase our price leadership over competition. With EveryPlate, we have seen a very successful pilot in the last of months, and our goal is to establish the leading value meal kit brand in the U. S, really targeting a previously untapped demographic. And that is possible because we can leverage the scale from our ops platform and really make sure that the costs we have in the system are distributed across those three brands. So what that really allows us is to price differentiate and capture the demand of many different customer groups, once again, vastly expanding the TAM that we're facing. Now taking a closer look on Green Chef, you'll see that we have worked very hard in the last quarter on bringing them onto our platform. We have streamlined our teams and processes. We have sharply improved the customer experience, namely by introducing Meal Choice, by bringing down prices after we have increased margin quite a bit and by introducing more delivery days. We're very well on track to realize the savings that we have outlined in our last earnings call, and integration is progressing very well. And what that means is that we've really kind of like are in a position where we have brought them onto our contracts in a number of avenues and where they we have introduced our proven tools and systems, which will allow us to grow GreenShaft towards the end of Q3 and in Q4, a lot more solid and decent than what we did in the past. Taking a closer look at EveryPlate, you'll see that this is really a business that targets a previously untapped demographic. What we're doing here is we're democratizing meal kits further. It's the price of a meal is about 50% cheaper than what was before a very long time, the price of a meal kit. And what that means is that we're really opening up to a new demographic, which is possible right now because we have a very scalable ops and tech setup in place, and we can run it on the same platform that we also run our HelloFresh and Green Chef brands. We've soft launched the business in May 2018. And to date, we've seen very positive customer responses with high recipe ratings, with high net promoter scores. And given the experiences and indications that we have so far, we're very much convinced that our target margins and our target LTV to CAC will be in line with our core business once we have achieved sufficient scale. So the platform for growth is created, and we're ready to kind of like further start scaling that up after summer and over the course of Q4 and then very much focusing also on the next year. Now the second avenue that we will be pursuing is very clear price and selection leadership for our core HelloFresh U. S. Brand. Why will we do this? Why do we want to lower prices in our core business? It's because given our strong underlying margin improvements over the last couple of quarters, this is the dominant strategy for long term value creation in the HelloFresh business. We did the same in the U. S. 18 months ago in January 2017 when we lowered our prices, and that really helped us to accelerate a lot the development in that segment. And we are very much convinced that where margin is trading right now, this is the right decision. If you look at price, then price has an impact on 4 different levers. It has an impact on retention, on customer acquisition costs, on our short term margin and also on volume. And perhaps, it is negative for our short term margin to decrease prices, it's actually a very positive development on the other three levers. So given the experimentation we have done with our price team over the last couple of months, we have a very good idea what it does to retention, what it does to customer acquisition costs and also about the benefits to have more volume in the system. And we are very much convinced that this increases our customer lifetime values over time and long term also increases our dollar EBITDA. So the expected benefits in marketing, lifetime and volume really outweigh the short term margin loss that we'll be facing as we scale up the business at a lower price point going forward. The volume growth that we expect, on the other hand, will in turn help us increase margin and better utilize our fixed costs in the medium to long run. So for Q3 and parts of Q4, you'll see that the effect of a short term margin loss will be the stronger effect, but starting kind of like in Q4 and then into 2019, lower CACs, higher average order rates, higher volume and our ability to focus on a much greater TAM will easily outweigh those short term headwinds that we see. It's something that we have proven in our experiments in a very convincing way, and we are very much of the belief that this is what allows us to create the most value long term. The 3rd investment that we're going to do is an investment in new business opportunities. And there are 2 that I'd like to point your attention towards. Number 1, behind the scenes, we have worked hard in the last 3 to 6 months to launch a new geography in our international segment in the second half of the year. Now in Q3, we have some investments in the setup of our initial product, our initial supply chain, investments into the tech platform, hiring people and our systems landscape. And given our experience with operating and launching new markets, we know that as we launch new markets in the beginning, we will face fairly low margins and high marketing costs as we don't have a current sticky customer base. And so this is something that we'll be making those investments. Once again, I think we have shown in the past that we know the playbook of launching new markets, and this is something that we want to do once again by launching that new geography towards the end of Q3, beginning of Q4. Secondly, another vertical that we've been focusing on is our B2B2C food terminals. We've seen very positive trial results in Germany, and that gives us the confidence to scale up investments in that new vertical as well. It's something where we see a lot of leverage from our core business and ramping up that B2B sales pipeline, really making sure that we have a very solid and sound base for scaling that up and scaling that up in a very capital efficient manner is something that we're focusing on right now and where you will see investments in the second half of the year, so that we're ready to show some results in 2019 for that vertical as well. With that, I'll hand back to Christian to give you the outlook the business outlook for our second half of the year. I'd like to conclude with an update of our outlook. Based on the strong development we've seen in the first half and these measures that Dominic has just taken you through, we feel comfortable to further increase our revenue growth target for the full year from previously 30% to 35%. So now 32% to 37% on an organic basis and on a constant currency basis. Our contribution margin target for the year of north of 25%, we are reconfirming despite all these investments that Dominic had just taken you through. From the adjusted EBITDA perspective, given those investments, we are now not targeting EBITDA breakeven in Q4 this year, but expect it to be reached later during the course of 2019. With that, we would conclude our presentation and would invite you for Q and A. The first question is from Robert Berg, Berenberg. Your line is now open. Hi, there. Yes, thanks. Three questions from me. The first on the investments, clearly, you said there's going to be some positive impact almost immediately on the second half of the year. Would you expect there to be a material positive impact on 2019? Or is it going to be kind of a gradual benefit over the foreseeable future? Second question, international segment up really strongly sequentially in terms of active customers. U. S. Slightly softer and down sequentially. Was this just a function of the very strong Q1 performance? Or was it a softer kind of quarter in terms of adding new customers? I know your peers said for them they found it harder to add customers in the quarter than they had anticipated. Some color there, maybe your comments on weather and seasonality, should we maybe expect another drop in Q3 before maybe picking up towards the end of the year? And the third question on the low end offering. I've noticed you've launched or maybe soft launch My CookBox in the U. K. I would be interested to know how it's going. Is this similar to Every plate in the U. S. And also how many other segments you've maybe tried to sell in the offering and how it's going there? Thanks. Thanks for your questions, Robert. Let me start by answering the from last to first question. So given the kind of like launch of our low cost vertical, we actually feel quite confident right now that we're covering a lot of different price points. So everything from $5 to $13 and that's already like a really widespread on the U. S. Market, where we believe that we can really target like a very, very big part of the overall market, much bigger part than what we could previously target with the TAM that we had back then. My cookbook is in similar fashion as in EveryPlates, earlier stage was sort of like piloted later than that. We think we there's a lot of learnings that we can take from every plate and then see how those play out on the U. K. Market. It's very, very early for My CookBox, much earlier than this for EveryPlates. On EveryPlates, we're quite confident that scaling up is the right decision right now. My cookbooks, we need to verify some of the assumptions and some of the experiences that we have made on the U. S. Market so far and then implement them. And that's kind of like the strength of being a global business. In terms of seasonality, so I'm pretty sure you've all experienced the very hot European summer and U. S. Is not much different at the moment. So this is certainly something that impacts our Q3. And it impacts Q3 on a number of different levers. So first of all, I think Christian indicated that during the call. It's something that when you look at our margin profiles, we need to kind of like spend a little more on packaging. We need to kind of like really have more controls in place to make sure that everything is fresh. And that is something that have a slight negative seasonal effect. On the marketing end, you should see that traffic numbers are much lower than what you would typically expect. So given how we invest in marketing and that we always want to spend when we see the highest ROI, we have held back a little bit so far in July August. I think for us, it's all about kind of like how is September going to play out, how's the weather in September, but also how is back to school season. We're quite confident. So there are kind of like large budgets that we want to deploy. But it's a little early to say exactly how it turns out. But you're certainly correct that Q3 will be a weaker quarter if you look over the course of the year. With international and U. S, Christian, do you want to take that question? So I would say there are 2 things. Number 1, the benchmark is obviously somewhat different. If you back on the international side, Q2 last year, revenue growth was in the low teens. So it was easier for us with a lower benchmark to show their strong outperformance, but we're happy that, that has come through. The second thing is from how we allocated marketing spend among the 2 segments. We, for the U. S, front loaded that a bit more because we thought that gave us higher ROI, but that's also that we see now reflected in the development of growth towards the end of the second quarter. To your first question, impact of these measures on H2 2019. So depending on various scenarios, obviously, but ballpark, these investments that we're doing effectively correspond to around about €25,000,000 to €30,000,000 now in the second half. And then in 2019, somewhat less than that, and you will see basically the benefits of those coming through along the lines of what Dominik has mentioned in his presentation. Okay. Thank you. The next question is from David Gordon, Morgan Stanley. Your line is now open. Thank you. Two questions from me. On the new geographies, are there any sort of synergies from the new geography rollout? How long will it take to ramp up? And could you comment on your criteria that you use for looking at new geographies? And then secondly, on the various brands, could you just comment really on the rationale for the 3 brands given sort of marketing inefficiencies you may have for running 3 brands and how do the margins compare across the 3? So first, on the new geographies. So the way that we evaluate and assess whether we should launch a new geography is always kind of like among the same catalog of criteria. I think if you look at our markets that we're currently in, then you'll see that they're all sort of Western Hemisphere markets. That is something that I can confirm for the new market that is about to be launched as well. So culturally, I think close to other markets that we're already in. If you look at the 2 segments, then the U. S. Obviously as a very big stand alone market is one where we can drive huge efficiencies of scale with the different brands, but also just by the sheer volume that we drive through the system. In international, given that it's a lot more fragmented, we have centralized teams and those centralized teams which operate from Berlin, from London, from Sydney, Those centralized teams very often benefit if we can also drive more volume through the system. So it's certainly something where, first of all, we leverage the playbook of having launched another 10 countries before. But secondly, we do think that over the medium term that will help us sustain our growth momentum in the international markets at very high double digit rates. And secondly, also help us having more of that volume to better absorb the sort of like fixed costs we have in the system and the fixed costs for our centralized teams. On the U. S. Market specifically, why 3 brands? So those brands, they share the same operational backbone. So they're very much integrated when it comes to procurement, it comes to logistics, when it comes to the fulfillment center network. So on that operational backbone, and that backbone also includes all the sort of like tech and IT systems and landscape that we have. We have 3 distinct brands, where kind of like we look at the customer groups that we have and expose them to those brands where we think they will kind of like most likely fit in and have the highest lifetime value. So for us, it's really something that allows us to tap in dormant customers that so far maybe for some reason have not kind of ordered at HelloFresh very actively and kind of like reactivate those rates and at very good costs. And secondly, just to reiterate once again, to kind of like drive more volume and scale through the system, which once again helps us to absorb all the fixed costs that we have in the system. And we do actually believe that with those three brands, we're only able to offer, let's say, our low cost vertical, since we do have kind of like the other two brands that can help absorb some of those fixed costs. Thank you. Are your questions answered, Mr. Gordon? Yes. Thank you. The next question is from Nisa Neyser, Deutsche Bank. Your line is now open. Great. Thank you. I just have a few from my end. Firstly, on the new brands that you're launching, could you tell us how confident are you that there won't be a lot of cannibalization from your core brand to Evrycade, for example, in the low end? And secondly, you speak about breakeven I mean, you achieved breakeven, I guess, on a group level in Q2, but now the target of Q4 has been pushed back. When could we expect that over the course of 2019? Would it be early year towards 2019 or towards the latter half? Some color there would be appreciated. And thirdly, could you confirm that your 2021 margin targets of 12% to 15% still stand going of news flow with retailers stepping up their operations in the meal kit space by acquiring or starting their own. What is your view on how competition is progressing? Is it becoming harder to get consumers because they now have various options to choose from and the category is a bit more it has higher mind share. Some color there would be great. Thank you. Thanks. Very good questions. So let me start with the first one. In terms of cannibalization by the lower price vertical that we have launched, we have obviously soft launched that and not only talked a lot to consumers in those different demographics, what they really value and what drives them to become a purchaser of Mill Kits, But we've also run a lot of sort of like life experiments on our platform, where we grouped customers in different demographic and sort of like income groups and where we really looked at what's the impact of potential cannibalization, etcetera. And what we have found is that someone ordering a meal kit for $5 is certainly very different from someone ordering a meal kit at $11 or $13 at the Green Chef price. Same applies to HelloFresh as opposed to Green Chef or EveryPlate. So it's actually quite striking that there is a very large number of consumers that given their propensity to spend are then willing to kind of like either go to Every Plate, HelloFresh or Green Chef. The good thing for us is no matter where we win the customer, whether we win them for every plate for HelloFresh or for Green Chef, we have that customer in our database, in our system, and we then have the opportunity to actually market those different services and price points to the customer to really make sure we find the one that where the customer is stickiest and where we can extract the most value. And a slight question here. On your other two questions, so when in 2019 do we target the EBITDA breakeven? I would suggest we give you further guidance on that when we're a bit further ahead with having launched in us with these investments. On the question whether our midterm margin target of north of 10 points from EBITDA perspective still stands, the answer is yes. So across these segments, targeting a similar margin. And therefore, the midterm margin target has not changed. Just commenting on your last question around competition. So far, what we have seen is that there has definitely been a change in the perception of the market space. So I'd say 1 or 2 or especially 3 years ago, a lot of it was very, very new by now to sort of like aided and unaided awareness of the category has risen quite a bit. And so it's not only about winning over new customers where we think we're already like leading the pack and very, very good at, which you can see at our decreasing customer acquisition costs and the fact that we have increased our number of active customers year on year very strongly. But going forward, we do believe as the category matures that first of all, you need to expand TAM. That's what the 3 brand strategy is all about. And secondly, in the sort of like, let's say, existing category set and existing competitive set, we want to make sure that we also stand out and lead the pack when it comes to price and selection. And that's why we would invest in decreasing prices versus the competitive set, which we think is a very strong move, a move that only we can allow because we have improved our margins second point to really drive home the point against competition. Great. Thank you very much. The next question is from Markus Thiebe, JPMorgan. Your line is now open. Yes. Hi, everyone. Dominik, could you give us maybe some qualitative comments a bit more on the core developments? I know it's an ongoing question mark, but if you can just tell us a little bit, if anything has changed in the last quarter, maybe ideally the difference between the U. S. And international, that will be quite helpful. 2nd question is on supermarkets. Is there a chance that we see a bit more activity of HelloFresh Box going into the supermarkets? I know you have some smaller partnerships, but do you expect this to continue? And then thirdly, on pricing, I mean, you elaborated on this that it seems that you're pretty more the price leader than the taker, which is good. But could you help us that we don't get don't need to get too worried about pricing going forward that this will be an ongoing theme in the milk heat space? That would be quite helpful. Thank you. Thanks, Markus. So on cohort development, I think in the past, we haven't publicly commented on retention rates just simply based on the fact that there is no IFRS or U. S. GAAP measure for it. And that's something that we intend to keep the same way. But as a heads up, it is something that we are kind of like not worried about or don't like think this is kind of like a big subject to any drastic changes in the underlying business model. When it comes to supermarkets, so if you look at the U. S. Market, we are currently according to kind of like best knowledge that we have, the one who is the one player who is present in most stores in the U. S. Through our partnership with Ahold Delhaize. We have a number of other retail partners lined up, and we think this is a very nice business line for us going forward. But as you can see, kind of like from the strategic updates that we have given, where we believe it's a nice business line, we think the other updates that we have given you will drive home more growth going forward and will be more important for the sort of like medium- and long term development of the business. When it comes to pricing, I'll really encourage you to kind of like once again digest the 2 slides that we have provided around the impact of a price decrease on the 4 distinct levers, which are volume, retention, customer acquisition costs and margin. And price has a strong impact on all four of those levers. And it's only sort of like short term negative on 1 on margin and sort of like all the experiments that we have run. And once again, according to all the knowledge that we have from those experiments, we are very much convinced that a move on price is the right move. And it's also not the first time that we do any such thing In different geographies at different points throughout our journey, we have kind of like played around with price and moved prices either up or down, always kind of like in light with what we have deemed the dominant strategy for long term value creation. Okay. Thank you. At the moment, there are no further questions. As there are no further questions, I would like to hand back to you gentlemen. Thank you all for attending our Q2 earnings call. We very much enjoyed taking you through that strategic update and our very decent first half twenty eighteen numbers. And we do look forward to meeting again either on the road or at the latest in our next earnings call in mid November. Thanks a lot. Bye bye. Bye bye.