HelloFresh SE

Good morning, everyone and welcome to our first quarter 2020 results. Today, we will be covering in detail the drivers of our first quarter performance, where we already pre-announced the highlights towards the end of March.

We will also be giving an update to our guidance and for the remainder of 2020 and outline some of the underlying developments that we’ve seen and taken in times of COVID-19. We were already on track for a really outstanding first quarter in January and February pre-COVID-19, but then experienced extraordinary demand in the latter half of March throughout all our markets in a very short span of time that required an incredible amount of work for the team across all the different functions that we have.

We have been fortunate that through the hard work and the many night shifts of the team, we could support millions of families around the world in those crazy times with healthy, affordable, and most of all, safe meals in the safe environment of their home. A lot of the supplier relations, the technology, the brands and the operational excellence that we’ve put in place over the last couple of years has helped us to cope quite well with the additional demand we’ve been seeing since mid-March, and I am quite proud that we’ve played such an instrumental part in these times for many, many families.

So let me quickly review some of the highlights of the first quarter with you and then hand over to Christian for the financials and the guidance. First of all, we have seen active customers reach about 4.2 million in the first quarter, up from about 3 million in the fourth quarter, and up from about 2.5 million in the first quarter of 2019, so very high increase in the number of active customers.

We’ve been delivering more than 111 million meals to our customers throughout that period, which, again, is a steep increase from the year before and that we did despite quite challenging conditions across our supply chains in the different markets. We have also seen very strong revenue growth as a result of the many active customers.

And through the whole quarter, saw a very good performance with an additional surge in demand towards the end of March, so revenue has been up by 64.5% compared to the same period last year on a constant currency basis. That’s also reflected, the strong performance, in terms of the adjusted group AEBITDA, which came in at €63.1 million and which was driven by an adjusted AEBITDA margin in both of our operating segments, the U.S.

and International, of more than 10% in each of those segments. That’s something that we’ve reached for the first time and something that is definitely testament to the very good performance and to the quick adoption to the new realities in our supply chains throughout the market.

We’ve also been able to generate quite a high number in terms of free cash flow. So we’ve generated over €111 million of free cash flow in the first quarter alone, which results now towards the end of Q1, in a cash position, cash on balance sheet, of almost €300 million for HelloFresh Group.

And then finally, the COVID situation only really influenced the last 2, 3 weeks in March. Since then, obviously, a lot of the imposed government shelter-in-place, basically recommendations, have been in place throughout our markets.

And so throughout April and now the beginning of May, we’ve seen continued strong trading to date, with revenue growth and adjusted AEBITDA margins higher than what we’ve seen in the first quarter. And please, bear in mind that the first quarter has already been an excellent performance.

And hence, as a result of that, we have been raising our guidance again for the full year and for the remainder of 2020. Now, let me come to active customers.

We have added 1 million additional active customers in a single quarter compared to Q4 2019, so from around about 3 million to over 4 million active customers. That’s been a trend that has been very strong in both of our operating segments and both in terms of new customer acquisition.

A little front-loaded to January and February, but also reactivations and very strong retention rates from our existing customer base have actually contributed to that fantastic result. We had then to basically limit new customer acquisition throughout the latter half of March as capacity has been tight in some of our manufacturing centers around the world.

But we’ve since also basically opened up new capacity, and that will be a main driver for the performance in Q2. Orders have also been up by about 66% compared to the same period last year to around about 50 million orders in the first quarter alone.

That was driven by the strong growth in active customers that we’ve seen and increased order rates, not only kind of like throughout the quarter, but especially focused on the latter part when some of the kind of like imposed government measures really hit our markets within the span of days throughout the world. Coming to revenue, revenue is pretty much in line with the growth in orders that we’ve seen.

And it’s a significant step-up, both compared to the fourth quarter, but even more so compared to the first quarter of last year. So, revenue has been up by 65% in constant currency from €420 million last year to about €700 million for the first quarter in 2020.

January and February have already been higher than the 40% growth that we’ve been guiding towards but then really, in the last couple of weeks of the quarter and spilling over now into the second quarter, we’ve been operating at very high utilization and we’ve been dealing with the demand quite well. But we’ve seen a lot of additional demand coming to our services as customers spend more time at home, cook more at home, and we have been the go-to source for a lot of families around the world.

With that, I want to hand over to Christian who is going to lead you through contribution margin and then our financial results.

Yes, thank you. Maybe just briefly on our segmental growth profile, you see that both of our segments grew very robustly in the U.S., even somewhat faster than our International business and this is really a continuation of the trends that you have seen – that you have observed already in Q4 last year.

Now, already looking a little bit ahead into Q2, you should assume that both segments roughly are growing in Q2 at a similar growth rate. With that, let me turn to our contribution margin.

In Q1, we maintained a contribution margin at a relatively attractive level of close to 29%. And this is really the function of a number of offsetting parameters.

On one side, we have seen a higher impact of price incentives, driven by the very strong new customer acquisition that we have generated throughout that quarter. On top of that, we have seen somewhat higher fulfillment expenses.

This is mainly driven due to the implementation of further employee safety measures and some extra pay in production, all effectively driven by the COVID-19 situation. And all of that is largely offset by further efficiencies that we have seen in our procurement operations.

Let me now comment on the development of our marketing expenses. What you see here is effectively a continuation of the trends you have now observed already over the last three quarters for us, i.e., despite having added 1.2 million new active customers in this quarter, we have meaningfully reduced our marketing expenses on a relative, but even on an absolute basis, year-on-year, in this quarter.

Our marketing expenses as a percentage of revenue are down by more than 14 percentage points. And through that, our U.S.

segment has been the biggest contributor to this trend. What’s important is this is not just because of COVID this is a trend we have observed in every single month of the quarter, i.e., every single month, we have seen, year-on-year, a reduction of our relative marketing expenses in the mid-teens.

These marketing expense relative, reduction flow through 1:1 to our bottom line and you see this on this page. This effectively has helped us to generate, in a single quarter, an AEBITDA of €63 million.

This represents a margin of 9%, i.e., a 15 percentage point expansion versus the same period last year, i.e., we have operated very closely already to our mid-term target margin and this in a quarter, which typically shows compressed margins because of our robust marketing activities that we undertake at the beginning of the year. Let’s quickly have a look how this profitability breaks down across our segments.

And Dominik has alluded to that upfront already we have generated a very strong AEBITDA margin in both of our segments, 10% plus in each segment. For the U.S., for the first time, in double-digit territory with a margin of 11.3%, but also our International business has generated a strong AEBITDA margin of 10% in that quarter.

So to summarize, in Q1, we’ve produced both very strong revenue growth and a very healthy profitability profile across our entire business. But not just that, we’ve also generated a strong cash flow.

We’ve generated a cash flow from operations of €132.5 million in the first quarter and we’ve generated a free cash flow of €111 million in a single quarter. So after our CapEx spend, taxes, interest and so forth, meaningfully more than €100 million free cash flow in a single quarter.

We ended last year with a cash on balance sheet provision of €193 million. Now through the strong free cash flow generation, we have added to that and increased that cash position to €300 million at the end of the first quarter.

On top of that, we have an un-drawn revolving credit facility of €80 million available to us. This brings me to our last slide, to our updated guidance.

Despite the heightened economic uncertainty, we are increasing our guidance for the full year, meaningfully. We increased our expected group constant currency growth from previously 22% to 27% to now 40% to 55%.

We increased our AEBITDA margin guidance from previously 4% to 5.5%, to now 6% to 10%. And let’s also quickly recap some of the underlying assumptions.

So for Q2, and Dominik had alluded to that before already, we assume somewhat higher growth and a somewhat higher margin versus an already very strong Q1. We also assume a greater lifting during the course of Q2 of some of the lockdown restrictions and a normalization of demand patterns, including order rates during Q2.

We also assume that HelloFresh, compared to most other companies, will cope comparatively well with the recessionary environment that is already a reality in most of our major markets. It goes without saying that in the current environment, this outlook is subject to heightened uncertainty and therefore, we’ve also decided to go with relatively broad ranges compared to what we provide you normally in terms of our guidance.

With that, we would open up for questions.

Hi. Thanks, guys.

I will keep it to three questions. My first question on capacity, I would love to dig a little deeper into Dominik’s comments made earlier in the presentation, could you run through how you managed to add capacity so quickly and whether this is something which could continue in the near-term, if necessary and are you planning to bring forward any other CapEx projects?

The second question also on capacity and how to think about your maximum potential revenue growth now, but maybe a good way to do this is in terms of looking at the revenues that you saw in March or April, if in Q2, we say €250 million average revenue per month, are we seeing revenues of over €300 million in March or April? Maybe some color on that.

And you mentioned about economic uncertainty in the report and just now in the guidance. How should we think about how recession-proof your business is?

Does this speed up your thoughts at all on launching EveryPlate in the other international markets? Thanks.

Thanks, Rob. So in terms of capacity management, I think there is a number of different dimensions that you need to look at.

Number one is just like how big are the centers that we actually have. Another dimension is actually what’s the availability of labor and how fast can we train up labor?

So I think those are probably the two biggest contributing factors. What we have seen is that at some point, in March, we definitely had to limit and restrict kind of like new customers coming to the service because we first had to source and train up new labor to then be able to really kind of like manufacture on as many days and then as many shifts as we can.

I think since the beginning of April, we have then been able to slowly build out capacity in the centers that we already have and we now have more capacity than when we entered the COVID-19 phase. But certainly, there is another offsetting trend going on, which is imposed social distancing measures and sort of like increased safety and sanitation protocols, which caused some element of time.

And hence, I think it really depends in terms of how much capacity we will have available in terms of how much of those measures will remain in place. And so I can’t give you an answer that applies to all of our different manufacturing centers.

But high level, we’ve been able to further expand our capacity through smartly building out some additional spaces surrounding our manufacturing centers and through ramping up the number of delivery days and production days that we actually have. So that’s been positive for us.

But it always comes with a certain lag as you need to train up a lot of labors, a lot of supervisor, which can’t be done from one day to the next.

In terms of – so your question, what the theoretical revenue on – would be at current capacity, so max revenue, that’s around about the €3 billion mark. Obviously, with variation to the left and to the right, depending a little bit to how equally distributed growth is.

On top of that, please keep in mind that we have got our ongoing CapEx program ongoing. As you remember from our last call, 3 months ago, we are planning to invest €70 million in terms of CapEx.

A lot of this goes into capacity expansion during the course of this year. And in the first quarter, we spent already pretty much one-fourth of that amount, €18 million.

And then finally, in terms of the economic uncertainty, I think a lot of the preparations that we’ve done over the last years by structurally driving down our cost base in terms of ingredients, in terms of logistics, in terms of manufacturing, I think a lot of those developments now are in our favor and we actually do operate on a very good cost basis. I think what we’ve seen from customer research and what we’ve seen in terms of development in the last couple of weeks was that customers generally consider our meals very affordable.

We also have the numbers to back that up, that compared to supermarket spend, etcetera, we actually come out very well when you benchmark our meals. And what you typically see in recessionary environments is that food-at-home spend is not contracting a lot, it’s actually rather stable.

And food out-of-home is usually the sort of the type of discretionary spend that customers do away with. And hence, we do think that generally, we’re in a very good position, and we obviously still have the opportunity of a very successful value brand that we have in the U.S., which we are definitely thinking about launching in other markets as well.

Again, this is also a little bit a capacity situation and a priority situation, what do we want to do first? But it’s certainly something that we are evaluating and assessing as we go along.

Amazing. That’s pretty clear.

Thank you.

Yes hi everyone. Congratulations, both, for these results.

Very impressive numbers. Two questions, maybe a question on how you continue to drive marketing spend?

In the U.S., we seen a slight decline in traffic, which I guess is just a function of you optimizing the marketing spend. Now with the comments on capacity, is it fair to assume that marketing spend will slightly increase to basically allow for even more customers coming back to the site?

And then more conceptually, the second question on marketing, longer term. We have an overall margin target of about 10%, which we now reached.

Given that a lot of customers remain sticky, where do we think can this go? I mean, I appreciate that you can’t or you don’t maybe feel at this point in time to comment on long-term margin potential, but more conceptually, is there really a reason to believe that the marketing spend, as a percentage of revenues, should meaningfully increase, again?

Yes, on my numbers, the margin guidance of 10%, even mid-term, looks quite conservative. So any help on kind of like driving – how you drive marketing spend going forward would be quite helpful?

Yes. Thanks, Marcus.

Let me comment on that. So talk about short and the longer term.

In the short-term, for Q2, you should assume marketing expenses as percentage of revenues will be down further compared to Q1. And Q1 was around about 17%.

And then during H2, you should see a normalization, i.e., an increase again of that relative marketing spend. In the longer term, what we have guided to in the past is that, let’s say, what we call midterm, yes, which is effectively 2022, we would see our marketing spend as a percentage of revenue in the 15% to 17% area, and that still holds.

Yes, so there’s no change to that.

Okay.

Good morning team. Just one clarification and two quick questions if that’s okay.

So just on the clarification, you mentioned that revenue growth in Q2 was similar. It wasn’t entirely clear between the two regions, right?

It wasn’t entirely clear if that meant similar between the two regions or similar versus Q1. So that’s just the clarification.

The second question just on supply constraints again. Maybe just talk a little bit about the sourcing of products?

I imagine there’s some help because of the pressure on the broader foodservice market, but just a little bit of clarity there. And then the final point, it’s quite hard to pick up in maybe some of the data, given the sort of averages are skewed by the second half effect – second half of March effect.

But could you just clarify or just talk a little bit more about customer behavior? So how much are we seeing a significant step-up in frequency and so forth?

Okay, super. Andrew, let me clarify the first one, and sorry if I have confused you there.

So in terms of group revenue for Q2, we see that above Q1, and Q1 was at 64.5%, so for Q2, we expect to be higher in terms of year-on-year group revenue growth. And we assume that in the second quarter, that growth will be more similar or more equal between our two segments.

So our U.S. segment and our International segment, for both of them, we expect to grow at a similar rate in Q2.

With regards to what we see on the sourcing side and potential pressure on food supply chains, I think generally, we’re very well diversified. So in each of the markets, we draw on a fairly large pool of suppliers.

There have been smaller scale disruptions, but I think we could mitigate all of those pretty well and navigate the environment quite well. So that it didn’t have a big impact at consumer-facing.

And generally, we do think that there was obviously quite a bit of turbulence in the market. So if you look at food prices, if you look at supplier relationships, if you look at services that had been supplying restaurants before, there was definitely quite a turbulent time in the first couple of weeks and prices were all over the place for some of the ingredients.

But if you look at the numbers and if you look at how we’ve dealt with that, then I think a big complement to the team who navigated that environment pretty well. And we could navigate that with very, very little obvious impacts on customers.

We had to exchange some ingredients here and there. But given that we are on top of the menu and that we can fairly easily also exchange ingredients if shortages occur, that usually comes with very little impact to consumers.

And we do not foresee that there will be any more severe impacts going forward. And now in the second quarter, we’ve also seen less than in the first weeks.

In terms of customer behavior, I would say that consumer adoption has definitely been compressed and what we feel is that it’s been very good for habit forming, if customers sort of like do home cooking for a number of days in a row. And if a normal customer typically gets his first couple of meals over the span of a month or two and now you get those same number of meals over two weeks, then that obviously helps like forming habits.

And that actually, we think, will lead to a structural improvement and what we see from customers. And that’s definitely what research and – so both research and data actually shows.

Okay thank you very much.

Three questions from my side. The first one, you’re saying that in Q2, you expect more growth from the international market because you say the growth in International and U.S.

will be the same, so we have a massive step up. Could you give us some colors of which markets do you think is driving this the most?

And what does it implies for the margin for the full year, if we compare International and the U.S.A.? And the second question would be, do you expect a different consumer behavior retention rate for what’s so-called the COVID customers, customers that moved to HelloFresh because of the lockdown?

And the last question would be, we saw food retailers, they talk about already about trading down, so they see their customers are paying more attention, buying more private label within food retail. I was wondering if in your business, you see kind of similar trends, maybe customers buying less add-ons or customers are doing a bit less or if you haven’t seen anything so far?

Thank you.

Fabienne, it’s Christian. On your first two questions on International growth, yes, we would see a step-up of that in Q2.

This is reasonably broad-based, yes? So there’s not 1 or two single geographies who would stand out there.

We see a similar further acceleration of the growth pretty much across our 12 markets in International. From a margin perspective, so to your second part of the question, for the full year, EBITDA margin between the two segments, we expect a reasonably similar margin profile from a full year perspective for both of them.

Retention of new customers, it’s obviously still early days, but our – what we see so far and that also our base case assumption is that the customers we have added over the last couple of weeks show a similar retention profile as, let’s say, our normal cohorts.

And in terms of price sensitivity, which I think your third question was mostly directed to, I guess the meals that we have, we have actually been seeing that customers perceive them as a very affordable alternative, especially now if you’ve actually seen with a lot of the retailers imposing very high shipping fees and delivery fees and that generally, like online supermarkets are more expensive than off-line supermarkets. We’ve actually seen a lot of consumers commenting quite positively on the value for money that we actually offer and so we haven’t seen anything like increased price sensitivity from consumers.

But I think that it’s also understandable, if you look at the price at which we sell our meals, which is actually in line or cheaper with supermarkets at much better service levels and much more convenience levels.

Okay, thanks a lot.

Thank you. Thanks for taking my questions.

Three for me. So just following up on the International segment, EBITDA margin came at 10% in the quarter.

But can you maybe give us a sense of what the margin was in the more developed markets? That would be helpful.

The second is on the marketing, marketing strategy more so. So you also experienced strong growth before COVID in January and February.

So I was wondering what was that mainly driven by? Has there been further optimization on the customer acquisition side even before the outbreak?

And lastly, on the competitive environment, how has COVID changed the competitive landscape at all? Do you think some competitors have become stronger maybe given the unexpected tailwind?

Thank you.

On your first point on the margin of our more developed international markets, so this has been quite healthy, similar to what you’ve seen in the past, so north of 15%.

With regards to marketing strategy, pre-COVID, we’ve seen some of the lowest customer acquisition costs that we’ve ever had in January and February already. I think that was, to a small degree, down to the competitive landscape.

To a much larger degree, due to the fact that we’ve been building up our brand and that our brand awareness is now at the highest level that it’s ever been in all the different markets. And we do think that through some of the forced adoption that we’ve now seen over the last couple of weeks, and that adoption that has been compressed onto a very short time line, that is actually something that will benefit us also going forward when it comes to basically marketing our products and our services to consumers.

In that – basically, with regards to that, with regards to the competitive landscape changing, I think, certainly, also for some of the smaller direct competitors we had, the rising tide has been lifting all boats. But we’ve also seen that a lot of the indirect competitors have obviously like struggled with less demand.

So whether that’s some of the some of the takeout guys, whether that’s restaurants, whether that’s quick-service restaurants, etcetera, I think there’s a very large additional demand opening up. And that’s where we feel we are in a good position to capture the vast majority of that, just given that in terms of the product that we have and also in terms of the price point at which we work, we do think we have a much superior offering to a lot of the competitors that we’re actually facing.

So certainly, in the short term, I think some of the direct competitors have also seen some strong tailwinds. But I think more long term, given our brand awareness and given that there is a lot of additional demand that should flock to meal kit services and at-home solutions, we do think that we’re actually better positioned than before.

Very helpful. Thank you.

Hi, three for me. So first, wanted to ask about newer markets within International, how they’re progressing in terms of both revenues and profitability.

Were France, Sweden or any other markets loss-making in Q1? Second, just wanted to ask again about the margin of EveryPlate compared to the core HelloFresh offering in the U.S., I know we have been asked about it before, but I wanted to see if there’s any update there, especially as we think about potentially EveryPlate becoming an offering in International?

And third, just on M&A, any changes towards – in your attitude towards M&A, we know one of your peers in the U.S. is doing a strategic review, including a potential sale.

Would this ever be something that you would consider?

Okay, great. Alvira, on the – on your first point, so were our more recent market loss-making in Q1?

Answer is yes, so Sweden, France and the likes, definitely still in the investment phase. If you remember from some of the data we’ve shown you at our last Capital Markets Day, typically, it takes us at least 3 years, more normal case, closer to 5 years for a market to breakeven.

And those markets are definitely still pre that breakeven phase. In terms of contribution margin for EveryPlate further expanding, yes, so on that – continues to be on that great trajectory that we’ve discussed in the past.

But not quite there yet where the – let’s say, where the core brand is in terms of absolute margin, but well on track to get there over time. On M&A, Dominik?

Yes. And for EveryPlate, just to add, where we have slightly lower contribution margin than in our core business, EveryPlate is fully integrated into our platform.

So it benefits a lot from basically splitting the overhead costs that we have to move brands to more segments, etcetera. And so we do think that with EveryPlate and HelloFresh, together on one platform, we can actually benefit for both of the brands.

So HelloFresh can have a higher brand by also running EveryPlate. And hence, I think the two together will actually be in a very good – already in a very good position and have further potential to advance.

With regard to M&A, not much has changed. I think we’re generally more comfortable with building organically.

And I think building organically is more in the DNA that we have. We still see a lot of growth runway in the markets that we have and also in potential new geographies.

So that’s definitely like higher on our agenda. Very opportunistically, we might look at M&A.

But it’s definitely not top of the agenda, and you should expect us to be builders and to build out the business organically.

Thank you.

Okay. Thanks a lot for your attention and for your attendance to our first quarter results.

Rest assured the team and ourselves, we are working very hard to provide as many meals as possible to families all across the world. And we are looking forward to seeing you back here for our second quarter earnings call.

Thank you and have a great day.