Earnings Call: Q4 2018

Mar 6, 2019

Morning and a very warm welcome to our full year 2018 results. Today, we'd like to update you on some of our recent highlights from the year 2018. We'd like to review our Q4 2018 financial results, and we want to provide guidance on the year 2019. I'd like to start off, however, by reviewing our company vision first, which is at HelloFresh, we changed the way people eat forever. We've pioneered the meal kit category about 7.5 years ago. And since inception, we've really been laser focused on one of the biggest segments in the food market, which is the market for home cooked dinners. If you think about how much of consumers' food budget goes towards home cooked dinners, then that's the majority and that's the one year where consumers spend most of their overall food budget on. At the same time, it's the one occasion where there hasn't been a lot of innovation in the last 50 years. So we've been really proud that we have achieved something that hasn't been done in a very, very long time to make a real difference in how consumers think about consuming and home cooking meals. The value proposition that we have is that we want to provide households with better solutions for their home cooking needs, And we do so at a very, very economical price point. Now if you look at the market, the market has really taken off over the last couple of years, and we've established a wholly new category where we are the clear number one player in all markets that we're active in. Last year alone, our customers have cooked 100 and 98,000,000 meals. We've delivered 27,000,000 boxes over the course of 2018 to our 2,000,000 active customers. I think it's fair to say that we're on a really good trajectory to achieving the vision that we've outlined 7.5 years ago when we started off the company. At the same time, we further built out and significantly strengthened our capabilities over the course of the last 12 months. As of today, we have 15 custom built fulfillment centers all around the world, which operates at about 50% capacity utilization and which have been built out specifically for the meats of the meal kit business. We're live in 12 geographies. Again, in each of those geographies, the clear number one player and market leader. And according to all estimates we have, it significantly expanded our market share in those countries over the last year. As of the end of 2018, we employed over 4,000 people, half of them in our fulfillment centers, the other half in corporate functions across our offices all around the world. Also very interesting, I think we've built out a unique supplier universe, and we're now working directly with over 7 50 suppliers worldwide, which we have onboarded to our proprietary supplier portal and which allows us to interact with them in a way that is really needed for the meal kit business and which really helps us to extract great margins, while at the same time offering a great value proposition to our customers. Before we dive into the numbers, I want to spend 1 minute on reminding you about our growth strategy. It's a growth strategy that we've been pursuing for some time now and that we have started to communicate more broadly last year. The growth strategy really rests on 3 main pillars. The first pillar is all about can penetration. Can penetration in our case means if you look at the penetration levels in terms of households that are consuming meal kits that are customers of meal kits in the 12 markets that we're active in, then we do see a lot of upside potential in each and every single market. The second pillar is around TAM expansion. And TAM expansion, in our case, goes on the one hand through products and price differentiation and on the other hand through geographic expansion. Again, that's something that's been very consistent that you can could see us do in 2018. The 3rd pillar is around monetization of our customers. Historically, we started out with having one flat planned price for all the different offerings we have. And what we've been started to do is to better monetize our customers by branching out and tailoring the different meals that we sell much better to their needs, at the same time really allowing us to extract more value from the large customer base that we've accumulated. Now looking at some of the highlights of 2018, how do these tie into the growth strategy that we have communicated? First of all, we acquired 2 businesses. We acquired Green Chef in the U. S, and we acquired Chef's Plate in Canada. In terms of Green Chef, that's really something that ties into the TAM expansion. Together with the other business that we started up in the U. S, Every Plate on the low end and Green Chef on the high end, we now have a 3 tier brand strategy in the U. S, which allows us to reach out to a lot more customers than we previously did with only our HelloFresh brand and allows us to offer our plans and our services at very different price points, thereby really expanding our TAM. The second one of 2018 was expanded Meal Choice. We've worked really hard in putting the capabilities in place and putting the fulfillment centers in place that now allow us to offer our customers a much, much greater degree of choice week in, week out. And if you look how that ties into the growth strategy, then that's very clearly, on the one hand side, a strategy that helps us to penetrate the different geographies where we're active in much better. And on the other hand, with more meals on the menu, we have started to better monetize the customers that we've acquired over the last couple of years. We've also launched HelloFresh in New Zealand, in Western Australia and in the French speaking part of Canada. Again, that very clearly ties into the pillar around TAM expansion, and that is around TAM expansion through geographic expansion. And then finally, I already mentioned it in the beginning, with the acquisition of Chef's Plate, we've been targeting one of the most attractive markets in the meal kits category, which is Canada. And in Canada, we now also command the number one position. And with Chef's Plate, which we have priced very economically, we've now been able to reach out to different customer segments, thereby once again really enlarging the TAM that we can penetrate in our Canadian market. If we turn to our numbers, then for 2018, we saw continued strong progress on top line and profitability. From just over €900,000,000 in revenue in 2017, we managed to grow to €1,280,000,000 in revenue, which constitutes a 41% year on year growth rate. Equally impressive was our progress on the contribution margin, where we expanded our contribution margin from 23% to 27.4%, a 4.4 percentage point increase in the short span of only 1 year. That translates to a 3.5 percentage point expansion in our EBITDA margin from minus 7.7 percent to minus 4.3%. So I think really looking at those 3 most important KPIs and numbers in our business, 2018, we've been really, really successful, and 2018 provides us with a great base for a very successful 2019. If you look at how that growth shaped up over the course of the year, then you can really see that we have maintained a very high growth momentum over the course of the year. In constant currency, we've grown 60% in the Q1 of 2018, 48% in the Q2 of 2018 and then maintained a 41% year over year constant currency growth rate of 41% for the Q3 and the Q4 of 2018. So all in all, I think very, very strong growth, which is also supported by very positive development on the contribution margin and adjusted EBITDA side. It's Christian here. Let me continue with providing you a bit more detail on the quarterly development of our contribution margin on Page 10 in our presentation. So in 2018, we managed to meaningfully expand our contribution margin each quarter of the year. And we finished the year with a very strong contribution margin in Q4 of 29 0.2%. This is even more remarkable if you remember that we ramped up a number of key strategic growth initiatives in the quarter. And despite the initial margin dilutive impact of these initiatives, we effectively realized our best contribution margin ever in the quarter. With that, let's have a look a bit further down in the P and L and look at the trend in our EBITDA margin development on the next slide on Slide 11. And what you see here is effectively the same trend that you've also seen on the contribution margin level. We expanded our EBITDA margin substantially each quarter and finished the year with our best ever EBITA margin of negative 0.8% in the 4th quarter. Now what I'd like to do over the next couple of slides to drill down a little bit further into the development of our EBITDA profile, both on a segment basis and also give you a bit more color on the impact of those new strategic growth initiatives on our Q4 numbers. So starting on the next slide on Page 12 with our International segment. Our international business, as most of you will know, represents around 43% of group at the moment and comprises really our most developed markets as well as a number of recent launches. Now in 2018, we have been EBITDA profitable for the full segment. So not just for single market within international but for the full segment. We've been EBITDA profitable for the last three quarters and therefore also for the full year and realized an EBITDA for the full year of €14,900,000 Of that €9,500,000 alone we achieved in the Q4 of last year corresponding to a margin of 5.7%. And we've achieved all that while still growing the business substantially north of 50%. Now let's have a look at our U. S. Segment on the next slide on Page 13. And a couple of points here on that slide. So number 1, our core U. S. HelloFresh brand has been EBITDA profitable in Q4 already. It was around €4,800,000 And then when you look at those new strategic growth initiatives that we launched or ramped up during the latter half of last year, namely Green Chef, the organic business that we bought in March last year, Every Plate, our value plan that we ramped up in Q4 last year and then selected price around prepared food. Those together have created a drag in Q4 last year on our EBITDA of approximately €5,800,000 So when you include that, the total segment EBITDA has been mildly negative of roundabout €1,000,000 But again, the HelloFresh brand itself in the U. S. Has been EBITDA positive in the Q4 of last year. Now with that, let's revisit the development of our group EBITDA margin in Q4 on the next slide, on Slide 14. On this slide, when you put the 2 segments together, so the €9,500,000 for the International segment, we just looked at the negative €1,000,000 for the U. S. Segment and also deduct our holding of €11,900,000 negative EBITDA. But then add back, 4,000,000 negative EBITDA. But then add back the impact of those strategic initiatives, which comprise basically the ones that we just looked at, the €5,800,000 in the U. S. Plus on top of that, another round about €2,000,000 for strategic initiatives within our international segment, namely HelloFresh Go! Our smart fridges as well as Chef's Plate, a business in Canada that we acquired towards the end of last year. All of that totaling around about €8,000,000 impact for these new strategic initiatives. You see that if you adjust for these strategic initiatives, we have been profitable also from a group level from EBITDA perspective in the Q4 to the tune of roundabout €5,000,000 So I want to highlight that because that shows you that we effectively promised that we delivered on what we promised at the time of the IPO. We not just meaningfully outperformed on the top line, but we also back then told you that we are targeting an EBITDA breakeven in the Q4 of 2018 on the parameter of the company as it stood the IPO. And that's effectively what you see on the page that we have delivered with a roundabout €5,000,000 EBITDA in that quarter. So two more things I wanted to discuss with you here as part of the presentation, the first one of those being our liquidity position. Let's turn to Page 15. We maintain a very strong liquidity position in the company. We finished the year with freely available cash on balance sheet of €194,000,000 On top of that, we have an undrawn 3 year syndicated bank facility available to us of another €80,000,000 So very healthy balance sheet and plenty of liquidity buffer. Now lastly, let me conclude with our guidance for 2019. On Page 16 of the presentation. For the full year 2019, we target revenue growth on a constant currency basis of 25% to 30%. We are targeting a contribution margin of better than 27%. And we're targeting an adjusted EBITDA margin for the full year within the range of negative 2% to positive 1%. And then from a quarterly perspective, you should expect from us a similar pattern as you know from us from the past. So very robust growth in Q1, both year on year as well as sequentially. With that also somewhat over indexing in terms of our marketing investments in Q1 given that this is the best period for us to bring in new customers to the service. And in Q2 and Q4 being the best quarters for us from an EBITDA margin perspective and Q3. Then from a top line perspective, the softest quarter, given this is the quarter which is peak holiday season in most of our geographies. So that's it with respect to our presentation, and we would open it up to Q and A at this point. Ladies and gentlemen, we will now begin our question and answer The first question is from Robert Berg, Berenberg. Your line is now open. Please go ahead. I believe. The first one on your guidance, first line guidance. Christian, you just mentioned the Q1, obviously, very important. We're now in March. How much comfort do you have based on the 1st couple of months on the full year guidance? Have you achieved the vast majority of that? Do you think it's a great start to the year? Or that would be the first question. The second one, the price cuts that you put through in the U. S, you highlighted the negative impact on EBITDA. Could you give some color on revenue impact so far? Are you seeing any increased customer acquisition, client retention, reorder rates, anything that you could specifically point to for the revenue impact of that initiative? The third question on new geographies. Could you give us any update on the starts there? Are you seeing similar trajectories to your existing markets? And the 4th question, probably one further question on the contribution margin guidance. Could you give us a little more color? Are you effectively saying it will improve versus 2018? Or is there any particular reason why it may hover around the 27% mark? Okay. So let me it's Christian here. Here. Let me maybe start from current trading. So far is very healthy. So obviously, still early in the year. But as regards to Q1, on all levels on plan and therefore, in line with the guidance that we have provided here from a top line perspective, you should more expect us to be probably towards the top end of the range, just talking about Q1. So far so good. On your point on contribution margin, so is there a could there be a reason why it should not expand versus 20 18. So answer is, in principle, no. So we're targeting a further expansion on that contribution margin level. There are a couple of mix effects. As you know, our the contribution margin in our International segment is slightly below the contribution margin in our U. S. Segment. So if international were to grow a bit faster than U. S, you have a little bit of a mix effect. But even with that, you should expect somewhat of a further expansion on the contribution margin level. And then maybe I take the 3rd out of your 4th points as well, an impact of the price adjustment in the U. S. That we have implemented as of September last year. So the impact of that has been very positive, which shows certain our Q4 numbers on and positive on all levels. And hence, when you think back about that bridge that I've shown you now for the U. S. Business in terms of impact of new strategic initiatives, we did not even show the impact of the price reduction in that as part of these new strategic initiatives, I. E. The payback and positive impact of those pricing measures was as such that we more treat it now as business as usual and it's within that €5,000,000 positive bucket absorbed already that our core HelloFresh brand delivered as positive EBITDA in that quarter. Okay, great. And any comment on the new geographies? So in terms of new geographies, it's obviously part of our growth strategy to expand our TAM through geographic expansion. I think overall, that's something where you basically should think about us targeting to launch about 1 new market per year in international within the international segment. And I think we always spend a lot of time identifying the right markets where we do expect a great consumer response and where a lot of and where we have a lot of evidence that our offering will meet great demand. And so we're definitely kind of like very satisfied with how the business has taken off, for example, in New Zealand or in the western part of Australia as well as kind of like other sort of like smaller geographic expansion steps that we've taken. And so that's already sort of like in line with what we had expected, rather sort of like positively surprised about the response. And I think we've really seen that every additional markets that we launch, just given that we've had accumulated so many learnings over the past couple of years, It's a very low risk move for us that's paying off in a short amount of time. Great. Thanks, Don. The next question is from David Gardner, Morgan Stanley. Your line is now open. Please go ahead. Thank you. Good morning. Two questions for me. Could you give us a sense of the growth in international? How much of it is organic and how much of it is coming from the launch of new markets? And secondly, could you give us a sense of the gross margin impact from the launch of EveryPlate in the U. S. And how we should think about that going into 2019? Thanks. Maybe I'll start with that. It's Christian here. So growth in international, the vast majority of that growth is really coming from very healthy growth in our existing territories. Obviously, the new ones are growing very fastly as well on a stand alone basis. But given we're ramping them up now, the overall impact is still more modest versus basically the growth that we see from our existing territories. Then in terms of growth split in the U. S. And every plate in particular. That's not exactly how we think about it. By now, we are in the fortunate position that we have now this 3 tiered pricing strategy and brand strategy in the U. S. That Dominic had alluded to earlier. And that puts us into a great position to really very dynamically decide which of these three formats then gives us for the incremental marketing investment the highest and most attractive ROI. And that's how we really steer that business at the moment. So you should really look at the U. S. Segments going forward as a whole. Okay. Thank you very much. The next question is from Nizhlan Isa, Deutsche Bank. Your line is now open. Please go ahead. Great. Thank you. I have three questions from my end as well. A couple on the outlook. Could you just clarify, Christian, the organic or the growth that you've guided for, for 2019, is it purely organic? Or does it also include Chefs' Plate? And secondly, on the adjusted EBITDA guidance, is there the impact of IFRS 16 already included in the range that you've given? And what would that impact be? If you could just walk us through, that would be great. And then my last question would be on the competitive environment. I mean, how has it changed for you, particularly in the U. S? And we've seen your largest competitor there going after a strategy where they've said 30% of their customers are the ones that are most retentive, and that's what they're going to go after. How do you view this strategy? Does that ease competition for you in terms of customer acquisition? Do you think it's the right way to go forward? Or does it still make sense to go after that 100% of the customer cohort, which I'm assuming you are doing? So to just get some color on that, that would be great. Thank you. Okay, super. So let me start with the first two points. So the top line growth outlook, so the 25% to 30% on constant currency, that's as of the parameter of the company as it stands as of year end, I. E. That also includes Chef's Plates business that we bought in Q4. In terms of its overall contribution, obviously relatively moderate, but that's included there. So it's not, strictly speaking, only organic, but also includes that. Now our EBITDA guidance, whether that includes IFRS 16, the answer is yes. So to the benefit of everyone on the call, and most of you will remember that from our Capital Markets Day in November last year, where we also had a slide on that. So as of this year, under IFRS, everyone's required to record leases in a certain way that they're basically recorded on balance sheet. And part of what we had previously is operating expenses. The D and A part of is basically now realized separately as D and A. So that is baked into the guidance that we've provided. Impact of that is effectively an incremental D and A depreciation and amortization charge of roundabout €20,000,000 And we had a slide on that in our Capital Markets presentation towards the end. There you have the detail on it as well. On the point of the competitive environment, I think it's fair to say that the competitive environment always has some impact on our overall growth and our overall growth strategy. That's also why we provide you with ranges on kind of like how we think about kind of like overall growth rates on a company wide level. I think specifically in the U. S, there is a number of competitors, and we are by far the largest player, but we have under 50% market share, according to our own stats, between 40% 45% market share. So there's obviously always the impact of not only just one competitor, but of different competitors and whatever strategy they pursue. And that does have some impact on kind of like how aggressively we like to spend on customer acquisition and how we see the environment evolving. Having said that, I think what we've always been laser focused on is on absolute dollar returns on our marketing investments. And what we have found is that kind of like a broad approach works very well for us because that means that we can kind of like target very different customer segments. And a lot of those customer segments or basically all of those customer segments, we have a very good return on our marketing investment. So for every marketing dollar that we spend, we return about 3x that marketing spend over the course of a customer's life. And just looking at that, that's really the kind of like metric that we're focused at, and that's really what determines our overall customer acquisition and growth strategy. And in that part, we don't foresee any changes to that because given the sort of like tools that we have developed in house and given the strategy that we have around our growth investments, we've always seen great return on that, and that's what we want to continue to do. Great. Thank you. If I could just follow-up on the customer acquisition point. You've previously mentioned that the CAC usually hovers at around €80,000,000 Was that the case for 2018? And would that be the case going into 2019? Would you optimize to be at that level? That's correct. That's been the levels that we've been seeing over the last couple of years. And it's no coincidence that it's been kind of like around that level. We've been spending towards that level and tried to basically optimize our growth whilst not spending far more than those €80 levels. And that's kind of like how we think about the growth engine that we have built up. Great. Thank you. The next question is from Nadim Simrozak, Reuters. Your line is now open. Please go ahead. Good morning, everyone. I'd like to ask about your new markets or your plans for 2019. Do you have any specific country you're looking at? And then you're mentioning that you want to improve your margin in 2019. So can you be a bit more precise how you want to reach that goal? Absolutely. So on the market, I think for our long term growth strategy and top line momentum, it's important that we invest in kind of like that we invest early in new markets at the same time kind of like penetrating our existing markets is the far bigger growth factor for us. So what that means is if you look at how many households are new kid consumers right now in our most important markets, then we think that there is a lot of upside for us in all those markets to just kind of like get a lot more customers kind of like start cooking with meal kits for their dinners. So that's definitely the kind of like most important growth factor when we look at it. If you think about new markets, then we really kind of like try to establish kind of like about one new market per year. And so we've only kind of like launched New Zealand kind of like towards the end of 2018. If you see a new market from our side, then that's going to be towards the end of 2019 or the beginning of 2020. I think overall, the impact of that in the 1st year is always going to be kind of like fairly small, but we establish our base. And that and from that base, it allows us to grow in the coming years. In terms of margin, our kind of like operating margin will really improve through the same things that we've been improving so far. So by having more scale, we get better prices on the different things that we buy from packaging to foods to all the others that we have. We will better utilize our fulfillment centers with more volume going through them. And then on the same kind of like in the same line of argument, we also kind of like work constantly towards building out better systems and better software tools in house that allows us to forecast demand better and hence kind of like extract and increase our margins from current levels. The next question is from Christoph Baast, Bankhaus Lampe. Could you remind us how the relation between your customer lifetime value and the customer acquisition costs have developed in early Q1? So if I remember correct, in the past, it took you 9 months to earn your customer acquisition cost. Is that still the case? Or has it improved further? How should we think about this metric going forward? I mean, holding your CACs constant and assuming an improving contribution margin, I think also the CIB CAC ratio should improve further. That's the first question. Secondly, could we have a quick update on your retail product for the U. S. Supermarket? I think you introduced this product 9 months ago. Can you share with us what your lessons learned are? And how has this product developed compared to your original plans? And thirdly, a very quick update on Go Ready made would be helpful. To me, it looks like you have lost some traction over the last month, at least in terms of website traffic? And that's it. Thank you. Okay, Christophe. It's Christian here. Let me start with our return on marketing invest, customer lifetime value to CAC. So effectively, in Q1, we see the same healthy at least the same healthy ratios as we've seen last year from the payback of our marketing invest of within less than a year That is intact also with respect to the customers that we have acquired so far in Q1. So no change to that. How should you think about that metric going forward? So for I would say for modeling purposes, you should assume that we will at least keep it at this very attractive level. So that should be your basis structure. I think your basis structure would also not be that we will, in the near term, massively increase that because as long as we hit that very attractive payback metric and ROI, we will definitely then maximize for growth rather than limiting growth and further increase that ROI profile. Okay. Thanks. In terms of retail, we're quite positive on the retail launch that we did last year. We are the one provider who has the biggest store footprint in the U. S. For retail meal kits. At the same time, it's a kind of like in terms of overall revenue impact, it's a fairly small line of business. So we like it because we think we're reaching out to a different segment. So really looking at the customers who buy meal kits in retail, it's a very different customer segment with much less predictability than what we see in our direct to consumer business. So we think it's really a nice add on for us, and it allows us to establish very good retail relationships. And we're positive that we can grow that business line over the next couple of years. It's really one of those long term bets that we've put in place and where we see good initial results. But overall, revenue impact is definitely kind of like still quite small. Having said that, we are the biggest we are the ones with the biggest retail footprint right now in the U. S. Market, and we are positive on its development. With respect to Go ReadyMate, I think that's a fair observation. So we've been very focused in the Q1 of acquiring customers into every place in Green Chef, where we see like really good return on our investments, I mean, our marketing investments. And so what we've been doing between the 3 brands or the 4 brands that we have, so HelloFresh, Go Ready Made, Every Plate and Green Chef in the U. S, is to really dynamically allocate our growth investments into those verticals where we see the biggest return on investment. And so in the Q1 of this year, that was definitely kind of like the other 3 brands, and we've taken the foot off the gas a little bit for Go Ready Mix because the sort of like customer profitability and the economics of that business are not yet in a place where we feel comfortable in putting a lot of money behind it. Okay, great. Thank you. We have a follow-up question from Nifsla Neisser, Deutsche Bank. Your line is now open. Please go ahead. Great. Just a couple more questions, if I may. At the Capital Markets Day, you mentioned how the developed international segment was already doing 4.5% positive margins in the 9 month period. I was wondering if you could give us an update given the strong Q4 that you had on what the overall 2018 sort of performance of those developed international markets were? And last question, if I may. The supply portal looks very interesting. Could you give us an update on what share of ingredients you source directly from suppliers in the U. S? I think the last update we had was close to 60%, if I'm not mistaken, at the time of the IPO also. So just some update there would be great. And even in the international segment, if you can tell us what share that you source directly from suppliers is, that would be great. Thank you. Okay. Nelite, it's Christian. Let me start on your first point. As you've seen, the full international segments are both the developed markets within that plus the more recent countries such as Canada, New Zealand, Switzerland and so forth, All of those together generated a 5.7% adjusted EBITDA margin in the 4th quarter. So when we look at the developed markets only, that's been in the high single digit for that quarter. In terms of our supplier relationships, both for the U. S. And international, we're at about an 80% level of ingredients that we source directly from farmers and manufacturers. And that's the level that we've been growing over the past couple of years. As you mentioned, we were at about 60% share sort of like 12, 15 months ago, and we're now at just over 80% of that share. And we do believe that this will further grow by a couple of points, but then basically teeter out at that level because given the sort of like unique set of ingredients that we need week in, week out, it makes a lot of sense to source and directly integrate with suppliers for the bulk of them. But then there are always kind of like unique things where it makes more sense to go via wholesale or others. So we're quite confident that we can further grow that by a couple of percentage points from the base level of just over 80% that we see now in the U. S. And also in international. Great. Thank you very much. And just maybe one qualifying statement. It's obviously always a journey. So if we launch a new country, then the bulk of ingredients is not sourced directly. It takes time to build up that supplier network. But it's a journey that I think we now have great experience on and where we have a very clear view on how long we need to be in a market and how long it takes to actually onboard suppliers that basically fulfill all the requirements that we have. Understood. Thank you very much. We haven't received any further questions. I hand back to the speakers. Thanks a lot for your attendance this early morning, and we very much look forward to updating you again on our Q1 results in May. Have a great day. Thanks, everyone. Bye bye. Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect.