Hellofresh Se Ord

The conference is now being recorded.

Good morning and a warm welcome to the HelloFresh SE Q2 2023 results. At this time, all participants have been placed on a listen-only mode. The floor will be open for questions following the presentation. Let me now turn the floor over to your host, Dominik Richter.

Hi, good morning. Welcome all to our Q2 2023 earnings presentation. Today we'd like to confirm the numbers that we've already pre-released a couple of weeks ago and use the opportunity to shed some additional light on how Q2 turned out for us, but also how we see ourselves performing against our long-term ambitions. Our mission is to change the way people eat forever. And home cooking has obviously been around for hundreds of years and will most likely continue to be the most popular way to eat dinner for the next 100 years. More than 50% of dinners in our target markets are cooked and consumed at home, a figure that's also incredibly sticky throughout economic cycles and all ways of life. In the almost 12 years since HelloFresh was started, We grew HelloFresh to a meals run rate of over 1 billion meals per year, which is on the one hand an incredible achievement. On the other hand, this also just constitutes a little over 1% of all dinners that our prime target group consumes. We've more recently disrupted another food category successfully and grown into the largest direct-to-consumer ready-to-eat player in the U.S., the plans to also bring that to Europe and other places around the world. Changing the way people eat forever, not only for people cooking at home, but also for those being a little bit shorter on time. These two scaled verticals and the number of newer verticals, which are in the early stages, and as a meaningful step closer to our vision to grow into the world's leading food solutions group. While we have achieved some amazing wins and despite being the biggest disruptors in these two huge consumer categories of home cooking and ready to eat in the last decade, we still feel very early in our trajectory and are excited about the days ahead of us. And while it's always nicer to have everything go smoothly up and to the right in an extremely consistent fashion, the reality is that it's usually a little bit more messy and we continue to be faced with many things that we cannot control. Whether that's a pandemic, which in hindsight was a big accelerator to our market penetration, an inflationary shock or warmongering, just to name a few. Others, such as capacity constraints, are to a certain degree in our own control, but we cannot always time them without any impact to our growth journey or actually in line with a financial quarter, making the numbers sometimes seem a little bit more volatile than they are if you assume where they should be headed in the mid and long term. In the long term, these are all completely negligible things if you think about the size of the opportunity that we go after. But in the short term, they often cause us a lot of hard work and long nights. What we have done in all these phases is to really focus on the long term and work backwards to actually understand what the best strategy is to deal with the shorter term opportunities and challenges of today. And so for the first half of 2023, for us, this really meant shifting our focus to exercising strong cost discipline across the board and improving our underlying unit economics significantly. but also making our customer experience better. This puts us now in a position to take the next step in our growth journey with a more profitable model and a lot more modes against current and potential future competitors. After the massive scale up over the last three years, when we more than tripled the business, these past six months have certainly felt a little bit more like a transition period. but it has been healthy and made us the strongest version of HelloFresh that we've ever been. In terms of talent, technology, but also our unit economics, I think we paved the way for strong profitable growth and predictable, sustainable free cash flow generation. In the end, it's quite simple. As a company, we strive to maximize the long-term free cash flow per share for our shareholders. by building the customer base, technology, talent, and brand to become a category-defining company in our own right. With the many moats and the strong market share gains that we have achieved, we are on a clear path to build a lasting winner in one of the largest consumer categories and also on track for very material free cash flow generation. With these opening remarks in mind, I'd like to walk you through some of the highlights specifically of Q2, bearing in mind the overall H1 development. First of all, we've grown constant currency by about 1% year over year. as a decrease in active customers is more than offset by an increase in AOV of 8% and continued strong average order rates close to record levels of 4.1 of orders per customer per quarter. We've seen very strong operational efficiencies on both procurement and fulfillment expenses. which drove a very substantial contribution margin uplift by about three points to 28.4% contribution margin. That is very reminiscent of some of the contribution margin that we've actually seen pre-COVID or in the early days of COVID. We've had a very disciplined spend approach against a relatively soft consumer environment, which translates into broadly flat relative marketing expenses. and which also gives us some additional discretionary growth budget for the second half of the year. Most notably, we achieved our highest ever quarterly adjusted EBITDA of 192 million at a margin of about 10%. Importantly, we also generated very significant free cash flow again. Our free cash flow from operation is among the highest it has ever been in Q2. And so also Q2 and Q1 combined made us to achieve not only record operational free cash flow, but also return to generating free cash flow after the investments that we've taken in fulfillment centers and the build out of our infrastructure. We've narrowed our top line guidance to 2 to 8% of constant currency growth, and we've upped the range of adjusted EBITDA. We expect to land in to 470 to 540 million, taking into account the additional discretionary growth budget that we've taken aside for H2. Why do we think, or why are we positive for the development in H2? Number 1, because we've worked hard on actually improving our unit economics and go for very profitable growth in the 2nd, half of the year. Our factor production capacity will be the bottleneck. The comparative period benchmarks become easier. And a number of product enhancements, such as the. increase from 35 to 45 meals on the menu in the US market will start to hit. It's in combination with our better contribution margin will guide us the way to continued profitable growth and then also free cash flow generation. In addition to improving our unit economics in the short run, We also continued to invest in new business verticals such as pet food for our factory Europe launch and a number of capabilities in the first half of the year to drive mid to long term growth, profitability and ultimately free cash flow per share. The last six years we've been investing into establishing artificial intelligence and machine learning as key components of our technology platforms. with many use cases live and providing real monetary benefits. Right now, we have a group of about 70 data scientists and machine learning engineers who work exclusively on training, refining, and deploying around 1,500 models per week across a multitude of different use cases all along the Hello Crush value chain. Most of our models are powered by the unique and proprietary data sets that we've accumulated over the last few years such as customer order patterns, meal preferences, menu browsing behavior, and other rich customer preference training sets. Examples of AI ML-driven applications that are used daily in our operations include, for example, menu creation algorithms, new real-term customer lifetime modeling, incentive individualization, customer service automation, or the load balancing of picks along our picking lines in near real-term. When most of these scaled use cases rest on predictive AI, we also continue to be excited about our forays into generative AI as well. For both types, the value of our own proprietary data sets is immense. For both types, The infrastructure demands to structure your own data, to store your data, compute, to make it consumable for the different application cases are very similar principles that we have gained strong experience in over the past six years. Outside of the AIML use cases, that we already have live today and that I just shared. We see lots of opportunity across all P&L line items to benefit from the advances of AI and specifically GenAI. Over the last six months, we started experimenting with some use cases and become increasingly excited for the mid-term potential. I don't want to read out each and every one here, But if you focus on some of the ones that we have in green here, those are ones that we are experimenting live with today already. And so if I pick out one example from each of the G&A line items, for example, on the revenue side, we've seen good initial results to better leverage AI to understand fraudulent customer behavior and better crack down on it, actually identify that earlier and be more efficient in turning these customers away. In procurement and fulfillment, we've started to leverage computer vision to enhance the quality of our picking processes, and we aim to introduce this more widely for quality control purposes around our fulfillment centers around the world. In marketing, for example, we've seen tremendous opportunities for creative asset generation, such as simple copywriting, image generation, or video generation. Something that is done at the moment by many, many talented people inside of HelloFresh at agencies today at varying quality levels and where generative AI can play a big role in the midterm. It's also, I think, a really interesting use case to leverage real-time weather data and forecast to dynamically adjust and configure our packaging solutions, which allow us to reduce packaging, which benefits the environment and helps us save on cost, plus provides a better user experience to customer. And then finally, with regards to employee productivity and G&A, I think especially with regard to our engineering population, for establishing code assistance tooling to make the coding process less error-prone, of higher quality, and achieve higher productivity in the process. So ultimately, in the mid to long term, a lot of these opportunities will eventually materialize and make us a better, more efficient business. It's hard to say what timeline we're exactly looking at to bring many of these opportunities into production, so into their daily usage. Versus simple test cases where we've already seen good results, but given our experiences, given our talent. And the investments that we've done over the last 6 years. Into structuring cataloging and storing our own proprietary data sets. We feel pretty well equipped to leverage the opportunities that are provided by this new technology. Let me return quickly to some of the numbers from the second quarter. So, 1st, starting with meals. We delivered around 254M meals in the 2nd quarter. Of 2023, so after the unparalleled growth over the last 3 years. That's actually been the first year where we've been down in meals about 6% versus last year as we've rolled off the final pandemic comparable quarter, but we remain well on track to deliver more than 1 billion meals to our customers in 2023. While existing customers continue to show some stickiness and actually ordered on average more meals per order than ever before, We pulled back on some of our marketing investments given a softer consumer environment, elevated travel levels and anticipated improvements of our unit economics into the second half of the year. We plan to shift a part of these budgets to H2 and we will have the bottleneck factor U.S. capacity and can drive more profitable growth as a result. In terms of average order rates, we increased that by yet another 2% year-over-year to 4.1 orders per quarter per customer. That's a new record level for HelloFresh in the second quarter and more than 14% higher than the last pre-pandemic level that we had. Major drivers for this improvement are the enhancement of our product and recipe quality, better service levels, and a significant strengthening of the relative affordability against grocery and food delivery, which have been exposing their customers to a lot more inflation than we have in the process gaining relative affordability. With that, I'd like to come to the average order value we have observed during the second quarter. AOV has been trending 8.4% higher than last year and has reached 63.6 Euro per order. This was the single biggest driver to our year-over-year positive net revenue growth. And if you look at our two segments, AOV increased actually 9.7% year-over-year in North America and about 6.5% in our international markets. Three factors contributed to that growth in average order value. Number one, a higher contribution of RTE, specifically impacting the North American number. Price increases. And then very importantly, also bigger baskets by our customers on the one hand side with a larger menu. They've taken on more meals per order on average. And with the rollout of HelloFresh market into the UK, into France, and into Germany, we've also had a lot more customers exposed to our HelloFresh market. And that contributes positively to increasing AOVs. The last two should really continue to be growth contributors going forward as we roll out HelloFresh Market and scale RTE. Even as inflation is rolling off, this will contribute to better AOVs going forward. Now, taken together, a reduction in the number of meals sent with higher average order values led to a constant currency revenue growth of about 1% for Q2. 1.92 billion euros. Please note that the euro lost against most other currencies so euro denominated figures are slightly down whereas in constant currency they're actually up. Q2 should have been the low point for growth with re-acceleration of customers and number of meals expected for H2. Outside of easier comes We see the scaling potential of Factor US into H2 as very significant. And we see a number of product enhancements hitting in the second half of the year, such as the expansion from 35 to 45 meals on our US menu, as well as the rollout of HelloFresh markets into more and more geographies. Overall, much improved unit economics and an improved customer experience. should make our growth in H2 more profitable, which is why we have shifted some of our budgets into these periods. With that, as always, I hand over to Christian to walk you through our cost line items and our free cash flow generation.