Earnings Call: Q3 2018

Nov 13, 2018

Dear, ladies and gentlemen, welcome to the HelloFresh SE Q3 2018 Results. At our customers' request, this conference will be recorded. As a reminder, all participants will be in a listen only mode. After the presentation, there will be an opportunity to ask questions. May I now hand you over to CEO, Mr. Dominik Richter, who will lead you through this conference. Please go ahead, sir. Good morning, everyone, and a warm welcome to our Q3 earnings release call. I'm joined by my colleague Christian Gertner, CFO, Head of Fresh, who will give an update on our Q3 financials and the outlook for the rest of the year at the end of the call. Before that, I wanted to share a few highlights around Q3 and around how our strategic initiatives are faring. In general, the COIL will be a little shorter in duration than the last two COILs that we did, given that we're also be hosting our Capital Markets Day today in our London offices, where I know that we'll be joined by some of you. And in those sessions later today in our offices, we'll have a lot more deep dive in content and knowledge sessions. It's going to be our 1st Capital Markets Day and it pretty much marks the anniversary of HelloFresh being a public company. And it's been quite an incredible year for us. So as we start, we wanted to reflect a little bit how we have fared against the goals that we have communicated at IPO and really kind of like give you a heads up how we're trading against those. So if you turn to Page 2, you see that there were 5 goals that we outlined at the time of IPO. I want to go through them 1 by 1. First of all, on revenue growth, we expected and projected revenue growth of about 30% year on year on the back of our strong 2017 results. That's what kind of like we guided you towards and that's also what broker consensus saw us at. If you look at how we have performed over the course of the 1st 3 quarters and how we are projecting Q4 to turn out, then we will be at more than 10% higher than expected by broker consensus at the time of IPO. Secondly, not only did we already show segment profitability in Q4 2017, we even had our 1st breakeven quarter for the whole company in Q2 2018, if you exclude the GreenShaft acquisition that we just did a few weeks earlier than that. That's a whole 6 months earlier than what we had anticipated and was mainly due to the really strong underlying margin performance and margin improvements that we saw in both international and our U. S. Business. Thirdly, at the time of IPO, there were a lot of questions around the performance of our international segment. We had just gone through a transition where we transitioned quite a lot of our manufacturing sites and fulfillment centers to new 50% year on year revenue growth and are actually headed for full year EBITDA profitability in our international segment, quite an incredible achievement that only few people would have thought we would be able to make happen. Fourthly, at the time of IPO, we communicated that we will be assuming market leadership in every market we operate. We did that much earlier than anticipated in the Q1 of 2018 already in the U. S. Market. And then just recently, with the acquisition of Chef's Play, we're now also very clearly the market leader in Canada, the only other market where we hadn't assumed the number one position so far. So as of now, 12 months after the IPO, we're really sort of like number one player in each and every market that we operate in. And finally, what we also articulated is that we would opportunistically invest in long term growth drivers if we saw a clear strategic rationale and high ROI. And we have actually identified a few of those over the last couple of quarters. So among others, we launched a new geography. We did 2 add on M and A deals at pretty attractive valuations. And we started to massively increase the total addressable market for our meal kit business. So if you look at this at those five goals, then I think 1 year later, we're fundamentally very happy how we have done over the course of that year. And we have really set out and over delivered on all those five goals that we had communicated at the time of IPO. Now let's focus on Q3. And I wanted to share a few highlights before we deep dive into the financials. Q3 was probably the most exciting quarter from a strategic angle, because after many, many positive trials, we finally broadly launched into a 3 brand strategy in the U. S, thereby massively increasing our total addressable market. First results are really encouraging and we think it's very much the right thing to do. It's something especially around the price testing that we've been doing for a long, long time where we also had a lot of initial data and a lot of experimentation data from other international markets where we had either hiked or dropped prices before. And so far it has really turned out exactly a very attractive consumer market with fairly high price points and it's the 11th country that we're active in. And finally, we assume market leadership in Canada by actually acquiring one of the early competitors on the Canadian market, Chef's Plate. And with Chef's Plate, we're actually following a similar strategy to the U. S, having 2 very attractive brands attacking different segments of the market. That's what we think will be the winning strategy both in the U. S. As well as in Canada. Q3 also marked yet another quarter of strong revenue growth. In total, we came out at €302,000,000 in revenues. That actually translates into a year on year top line growth of over 40% to be exact 41% on constant currency. And finally, but most importantly, we also made big strides towards improving our underlying EBITDA margin. International segment is firmly on track for a positive full year 2018 adjusted EBITDA. And our group EBITDA margin is broadly stable year on year. This sees some near term drag from profitability through the initiatives that we launched over the course of Q3. But if you look at the core businesses, international core business and our U. S. Core business, then you will see that we have materially improved our underlying margins and are very well on track for 2019 profitability. Now after the strong operational performance in the 1st year of a public company, Where do we go from here? And how are we actually going to continue our growth strategy long term? It's really sort of like growth strategy 101 that we're pursuing across 4 different vectors. The first factor is TAM penetration. If you look at how much upside we still have in terms of how many consumers have tried meal kits and how many consumers are long term meal kit users, then this is definitely continue or will continue to be a very, very big growth factor for HelloFresh in the existing markets where we're in. So acquiring new customers, reactivating lapsed customers, that's going to be a pretty big growth lever for the next years to come. Secondly, TAM expansion. And TAM expansion comes in 2 different ways. It comes through product and price differentiation. Think Green Chef for product differentiation and EveryPlate for price differentiation. So mainly what we've been doing in the U. S. And it also comes through geographic expansion. That's the avenue that we've been pursuing mainly in our international segment. So using the playbook that we have created over the last couple of years in launching 11 markets and selectively going after other attractive geographies. That all falls under total addressable market. 2nd vector. Thirdly, it's about better monetization of our customers. So we have a large number of customers that compared to their overall food budget still only spend a small portion of that with us. So actually creating solutions, how they spend more of their food budget with HelloFresh, how we can provide more value to them is something that we have started doing and something that will become increasingly important over the next couple of years. And finally, we do believe that we have created a lot of capabilities within HelloFresh and using those capabilities to starting up new verticals in some of our existing markets where we already have large consumer bases is another growth vector that we will be pursuing selectively. So in the past year, we have mainly done that across 3 projects. One was the retail launch in the U. S. Another one was the HelloFresh Go launch, our B2B offering on the German market. And finally, on the U. S. Market as well, we've been launching Go Ready Made, a ready made business that also is direct to consumer and offered in a subscription only setting. So to sum up, kind of like growth in 2019 beyond will really kind of like be derived from those 4 growth factors. It's increasing TAM penetration, expanding the TAM that we can be serving, better monetizing our customers and then using the capabilities and the qualities we have within HelloFresh to actually launch adjacent verticals. All of that by whilst balancing growth and profitability. And as Christian will kind of like tell you later in the Capital Markets Day, there is actually like a very clear correlation between the growth momentum we see in markets and the maturity of markets and the underlying EBITDA profitability that we're achieving. So turning over to our financial results. First of all, let's have a look at revenue. If we look at revenue on a group basis, we increased revenue in constant currency basis by over 40% year on year, and that was driven by both the international segment and the U. S. Segment. U. S. In 2017 saw very strong quarters in Q3 and Q4 last year. We have continued to actually sequentially do very well in our U. S. Business and that came out at 30% year over year Q3 growth in terms of revenues. In our international business, we did even better. So coming from a Q3 2017 that was compared to the U. S. Q3 probably not as strong, but still doing pretty well in 2017 after year and increased revenues by over 50%, 54% to be exact to €132,300,000 in revenue. Good morning, everyone. It's Christian here, and I would like to take you through the our margin development in Q3 first and then start with the development of our contribution margin on Slide 7 of the deck. In Q3, we managed to expand our contribution margin year on year by 2.7 percentage points. That expansion was primarily driven by savings that we've realized on the COGS side. So further procurement efficiencies and better menu planning with the key underlying drivers of this. So Q3 is another quarter for the year where we've managed to maintain our contribution margin well above the guidance we gave out for this year, which was above 25%. Next, I would like to discuss the development of our EBITDA margin in Q3 on Slide 8. We managed in Q3 to maintain effectively our EBITDA margin stable to the same period last year, with roundabout8.6% negative for that quarter. That's despite strategic initiatives that we've launched or ramped up during the Q3 of this year. So on one side, the contribution margin expansion that we just looked at of 2.7 percentage points has helped our EBITDA margin. On the other side, we invested somewhat more pronouncedly seasonally in September in our back to school campaigns in marketing, as well as that we had the incremental spend from these new strategic initiatives coming through now as of Q3 this year. In G and A, sequentially, G and A is broadly flat to what you've seen in Q2 this year. However, year on year is up and core driver for that is what we have discussed in the past, I. E. Our investments in our tech teams, in our tech infrastructure. Having said that, you should expect that right now is probably peak in terms of growth of that in those areas. So for the coming years, you should expect that growth is going to somewhat slow here on the growth of our tech investments. So to summarize Q3 from EBITDA perspective, certainly somewhat of a transition quarter for us. Nevertheless, ahead of consensus expectations as well as for Q4, you should expect already markedly better EBITDA, so better than negative 5% in the coming quarter. With that, let me talk on the next slide on Page 9, a little bit about the financial impact of those strategic initiatives that we are implementing this year. Later today, by the way, at our Capital Markets Day, I also want to take you through in a bit more detail about payback periods and ROI that we see in some of these core initiatives. But coming to the near term EBITDA drag of these initiatives, we've plotted them on Slide 9 of the presentation. And we've grouped them into 3 buckets. So Green Chef alone creates a drag of somewhat north of negative €10,000,000 on our EBITDA for the full year this year. Same when you take the price reduction in our U. S. Business and the ramp up for our value plan in the U. S, EveryPlate together, they together also generate a negative EBITDA this year of north of €10,000,000 And then lastly, our new verticals as well as our new markets, New Zealand, namely create a drag as well of north of €10,000,000 So when you take all of that together, we expect for the full year a negative EBITDA impact of these strategic initiatives of somewhat north of €35,000,000 for the year. Having said that, nevertheless, we should not forget quite encouraging profitability development that's underlying our business and that's well illustrated in our international segment. I'd like to touch upon that on the next slide, on Slide 10. See mark the 1st year where we are EBITDA positive, This year will mark the 1st year where we are EBITDA positive in international in all of the international segment for the full year. With that, let me drill a little bit further into the performance of our segments and then coming back to our U. S. Segment on the next slide on Slide 11. So active customer growth year on year quite robust of 33% to around about 1 point 1,000,000 active customers in the 3rd quarter. And just to remind everyone, the 3rd quarter typically is the softest quarter for us from a customer growth perspective. So you should see robust growth also in Q4. Average order rates, stable to slightly down in the Q3 of this year. And average order value in constant currency, slightly down year on year and somewhat more pronounced down sequentially versus Q2 this year and policy coming through here are effectively the results of some of the strategic measures I. E. The price cut in the U. S. That we had implemented in September as well as the ramp up of every plate. Revenue growth following growth in active customers, so up around about 30% year on year in the quarter. Contribution margin up by 1.8 percentage points to 25.8 percent And EBITDA margin somewhat below the level that we had in the same quarter last year. So in Q3 this year, a negative 10.7%, primarily due to our strategic investments. However, for Q4, you should expect that EBITDA margin also in our U. S. Segment is already going to be markedly better than what you have here in Q3 this year. Now coming to our international segment, on Slide 12, active customer growth very strong of 1 about 60% year on year to around about 780,000 customers in that quarter average order rates somewhat down, so primarily driven by the meaningfully higher growth that we're experiencing now this year. And average order value in constant currency up quite a bit year on year. Drivers for that are twofold. Number 1, we effectively successfully rolled out a number of these upsell options that we launched previously in the U. S. And we brought those now to our international markets as well. On top of that, there's some mix effects in between the countries which make up this international segment. Revenue growth following growth in active customers, so also up by close to 60% in constant currency, contribution margin up quite significantly to 26.5 percent and EBITDA margin positive for the quarter of 1.2% and for the 1st 9 months as we look at on the previous slide of 1.4 percentage points. So with that, I would like to conclude with our outlook for the full year. And then I would like to reconfirm the outlook that we had given you previously. So revenue growth for the full year on a constant currency basis, excluding Green Chef of 32% to 37%. And from a contribution margin perspective, continue to feel very comfortable with the guidance that we've given before. So to deliver contribution margin but in excess of the 25%. So that's it to our presentation and I would open up to questions. We have received the first question from Ms. Lana Neide, Deutsche Bank. Your line is now open. Hi, everyone. Thanks for taking my questions. I just have 3, if I may. The current revenue run rate year to date is around 41% organically, as you mentioned, but you've maintained your revenue guidance for the full year. Do you think that the guidance is a bit conservative given the year to date performance that you've seen thus far? That's my first question. And secondly, in terms of industry developments in the industry, you've seen your peer in the U. S. Talk a lot about on demand delivery and their retail tie up. Could you give us some color on how you view the market progressing and whether you think this would be the future of meal kits going forward? And lastly, in terms of the EBITDA losses for the quarter, could you help us isolate if you hadn't spent on the strategic initiatives in Q3, what the underlying EBITDA losses may have been for the group in terms of what the underlying margin may have been in a steady state without those strategic initiatives? Thanks. Great. Good morning, you guys. It's Christian here. So let me take maybe question number 1 and 3, and then Dominic is going to talk about your second question. So on the revenue guidance, you have to recall that he basically gives that guidance initially excluding Green Chef and stick to that to basically be consistent. So slightly north of 40% growth you've seen in that quarter is including Green Chef, excluding Green Chef growth for the group is somewhere mid-30s and therefore the guidance for the full year still makes sense. However, with the little caveat that we're obviously less than half through the Q4, you should expect that we're well on track to be towards the upper end of that guidance. On the EBITDA impact of those new initiatives for Q3 alone, so that's roughly €12,000,000 to €13,000,000 EBITDA drag for the jet in Q3. That's caused by these new initiatives, I. E, if you were to exclude that from our €26,000,000 negative EBITDA that we have recorded, you would be somewhere around 13,000,000 negative or so for the quarter. Let me chime in here for your question regarding on demand offerings and where the industry is going. So I think what I tried to lay out before is that for us, it's mainly 4 growth levers that we want to pursue on a macro level, TAM penetration, TAM extension, better monetization and adjacent verticals. So I'd say, we look at that space interested. There are some of those things where we also want to keep optionality and kind of like see how things are going and make our own sort of like have our own impressions of how the space is faring. But I think it's fair to say that it's not core of our growth strategy going forward. Core of our growth strategy going forward is really what I lined what I laid out before. And on demand offerings, we do think that in terms of their scope, there's just not an opportunity that is as exciting as some of the other opportunities that we have. Great. Thank you very much. Thank you. There are currently no more questions. We have received another question from Mr. Georgios Tsien. Please go ahead. Your line is now open. Hi, good morning everyone. Just a quick one on kind of any early signs you've seen from some of that strategic investments you've made, particularly with regards to kind of the back to school campaign? And as you mentioned, you've kind of seen 6 weeks of the 4th quarter. If there's kind of any kind of encouraging increase sheets that you have seen from that? So July August, so Q3 kind of like was a little bit sort of like in twofold, right? So July August historically for us month in which we don't spend a lot on marketing and also where we see very low active rates among our customers as they're on summer holidays and as they're kind of like spending more time outside. September has been off to a or had been off to a really great start for us. So we've been going with the good momentum into the 4th quarter. Part of that momentum was certainly driven by the fact that we have decreased prices. And the good thing about prices or the complex thing about prices is that it moves a lot of different levers. So reduced prices always help us to acquire more customers at very attractive prices. On the other hand, as you all know, the obvious thing is that there is also a short term margin drag, But that has been kind of like very much in line with what we had expected and what we had seen from actually exposing customers already for the first half of the year to some of those low prices before and tracking their behavior. So overall, I think it's very much in line with what we thought it would be. And that is mainly due to the fact that we didn't do that sort of like that we didn't do that without testing it before. Quite the opposite, we had tested it and we are constantly testing what the ideal price level is for our products in all markets with RaxFFIN. Okay. That's great. And just a quick comment in terms of kind of the margin delivery for the Q3. I guess with some of the kind of the strategic investments, I was expecting a bit more deleverage on contribution margins and leverage on the SG and A side. I don't know whether this comes down to kind of the timing of the office call and every play being back end loaded. Do you expect the shape of Q4 to be a bit stronger on the marketing leverage and a bit more deleverage on the contribution side? Partly, yes. So what you should expect for Q4 is certainly some leverage on the G and A side. I agree with you on that Partly offset basically, but still some of the growth in primarily tech that I had mentioned before. From a contribution margin and EBITDA margin perspective, you should see an expansion or should expect an expansion on both levels sequentially versus what you've seen in Q3. That's partly driven that a number of those customers we then acquired in September. They are now nicely ordering our boxes and we see that coming through on the margin side as well. On top of that, you basically have a more balanced quarter with Q4 overall, where we don't have these tricky July and August in there, where there is overall less fixed cost leverage, which typically weighs on our contribution margin there for EBITDA margin as well. Has this answered your question, sir? Yes, great. Thank you ever so much. Thank you. There are no more questions. I hand back to the speakers. Thanks a lot for attending our Q3 earnings release call. We hope to welcome a lot of you for our Capital Markets today. If you're in London, we'll be hosting a number of deep dive sessions, both on the U. S. And the international segment, the strategy updates and some deep dives on our marketing and sustainability campaigns. So I think it's going to be a lot of exciting content that we will be providing and we hope that some of you make us happy with their attendance. Thanks a lot. Bye bye. Bye bye. Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect.