Hellofresh Se Ord

Good morning. Welcome all to our Q3 earnings presentation. Today I'd like to share the financial results for the most recent quarter, provide some details of some of the underlying drivers we observed, and present also an outlook for the rest of the year. To start with, this month also marks the 12th birthday of HelloFresh, and I'd like to briefly reflect on where we are today and how we think about the long-term future of the business. Our mission is to change the way people eat forever. That's a mission that we have articulated in 2011 and which has stayed the same since. To achieve that mission, we focus on pioneering innovative solutions across a range of business lines, from meal kits for home cooking to ready meals and a number of projects in incubation stages, such as pet foods. That's closely aligned to our vision to build the world's leading food solutions group. If we look at home cooking, it's a category that has been around for hundreds of years and will most likely continue to be the most popular way to eat dinner for the next hundred years. More than 50% of dinners in our target markets are cooked and consumed at home, a figure that's incredibly sticky throughout economic cycles. It took us about seven years from idea to scaling meal kits to over 1 billion annual revenue run rate by 2018, and another year to turn meal kits profitable globally. Since then, we have more than five Xs our top line, and grown profitability even more than that. Going forward, we see a lot of potential to grow meal kits further through continued product innovation in our most mature markets and bringing currently under-penetrated markets closer to the levels we see in those mature markets. At the moment, only about 1% of home-cooked meals are actually cooked with meal kits in our target audiences, and we see no reason why it should stay at that 1% level. We have more recently disrupted another food category successfully in the US, the direct to consumer ready meals. It took us seven years to grow meal kits into a billion dollar business line, and only about three years to scale factor from 100 million revenue run rate to over a billion annual revenue run rate. We also achieved profitability over that time period. With international expansion to Europe starting now, strong penetration upside left in the US, and the full innovation pipeline for 2024, we are bullish that we can repeat a similar growth curve like the one we saw in meal kits, over the subsequent years post-2018, the time it took us to a similar level that we see today in ready meals. Twelve years after starting from a blank sheet of paper and an idea, we have now established two highly profitable billion-dollar business lines, both of which offer strong potential for many years of growth. Over the same period, we have also invested significant resources in building the full backbone for one of the largest direct-to-consumer groups in the world. We've made material investments into technology, into our fulfillment networks, into AI, into our own last-mile logistics, and into our marketing growth engine. And those have created strong moats for our two scale business lines, and give us an unfair advantage for entering new business lines compared to standalone players. In summary, we feel this provides us with a well-balanced and diversified portfolio of growth opportunities and sets us up for sustained long-term growth momentum. To take the long-term view, if we continue to execute well, 10 years from now, we expect both Meerkits and RTE to be much larger business lines than they are today. And we intend to successfully have executed on expansion into other billion-dollar business lines alongside them inside the HelloFresh group. That's why we're building relentlessly today on some of those capabilities and make investments into people, technology, and infrastructure to deliver on that long-term vision. Let's turn the attention back to our most recent quarter and share some of the highlights that we saw. First of all, we grew constant currency net revenue by 3.5% year-over-year to €1.8 billion, which marks a sequential re-acceleration compared to Q2 for both Group, the US or North America, and our international business. Q2 2023 will have been the trough of net revenue growth. Inside Q3, we saw stronger performance in September, with exit rates trending positively for both orders and revenue compared to August and July. Our constant currency revenue growth was primarily driven by a strong average order performance where we reached 64.2 euro per order. That's a 7.5 increase year over year, and the highest ever average order value we recorded. This resulted in an adjusted EBITDA of over 69 million euro, equivalent to a margin of about 3.8%. in line with last year's margin, but please note that absolute EBITDA saw a material drag from FX effects in the year-over-year view, something that's purely technical and does not have any operational impact. Like for like, we improved our EBITDA. We also continued to deliver free cash flow for both Q3 as well as the nine-month year-to-date figure. despite most recent investments to launch our RTE facility. Speaking of that, on the operational side, we successfully launched that facility in Arizona, essentially doubling our theoretical capacity. And now between September and the end of the year, we will continue to onboard labor, train them on our systems and mechanisms, and gradually, every week, increase the throughput in that facility. We aim to move past any volume constraints in RTE for a strong peak season in January at the latest and are working hard to bring as many ready meals as possible to North America. In addition, yesterday night, we announced a €150 million buyback program that we'll use to buy both shares and portions of our outstanding convertible bond back through the end of 2024. Let's have a look at the development of the number of meals we shipped in Q3. We delivered 237 million meals in the most recent quarter. That's down about 2.7% compared to the prior year period, but a sequential acceleration in year-over-year trend versus Q2. In Q2, meals were down about 6% year-over-year, which should have marked the low point in year-over-year meals growth or year-over-year meals shipped. We expect to see further improvement and the gradual closing of the year-over-year gap until the end of Q4. The improvement was driven by strong engagement and order patterns from existing customers, where customers added more meals to each order on average, given the expansion of our selection by about 25%. and a better customer experience as a result thereof. On a positive note, we saw continued strong development on average order value in Q3. AOV amounted to 64.2 Euro. That's a 7.5% increase in constant currency compared to Q3 2022. On the per segment level, we increased AOV in North America by 8.2% and by about 5.9% in international. The driver behind that were a number of factors, such as the rollover of incremental price increases we did in 2022 and the higher share of RT emails in the mix for North America. More importantly, though, we've benefited from advancing our customer proposition and from rolling out strategies such expanding our menu choice for consumers and scaling the assortment in our HelloFresh market, which led to higher uptake and higher AOV in return. Put together, the small decline in meals shipped was more than outweighed by the increase in AOV, and has allowed us to grow net revenue by about 3.5% in constant currency in Q3. This marks a re-acceleration of revenue growth for the group from the trough we have seen in Q2 and is on track to see a further year-over-year acceleration for every month in Q4. Both segments saw a similar trend in Q3 with U.S. re-accelerating to 4.3 year-over-year revenue growth and international continuing to return to positive year-over-year growth of about 2%. Please be aware that in Euro-reported currency, you see a broadly six percentage point gap to constant currency revenue, given the adverse development of FX rates compared to our Euro-reporting currency. Looking more closely, at the monthly year-over-year trends, we have seen a successful execution of our back-to-school period globally, allowing us to narrow the year-over-year gap even more in September compared to August, July, and June. With the ramp-up of our faster facility proceeding according to plan and adding more volume gradually every week, we expect to see active customers, orders, meals shipped, and revenue numbers gradually improve on the year-over-year gap between now and year-end further. To sum up, the tailwind from unlocked RTE capacity and most meal kit markets trending higher already or expecting to close the year-over-year gap until year-end will provide a good base to show good top-line momentum into 2024. On top of this, some of our current subscale business units will also start to contribute a little more meaningfully to NET's revenue development over the course of 2024. With that, I'll hand over to Christian to comment on the cost side of the business.

All right, let me start with the discussion of our procurement expenses. We again delivered a quarter of strong performance in our procurement expenses, which amounted to circa 35% of revenue. As you've seen from us consistently in the past, our AI-driven menu planning helps us to achieve consistently high customer satisfaction scores and recipe ratings while also hitting our target margins. From a geographic perspective, you see from us in Q3 an improvement in relative procurement expenses in our international segment, while our North America segment somewhat increased its procurement expenses. The latter is driven by a relative increase in our RTE volume, as reflected already during our last earnings call. Relative procurement expenses in our new kit brands in North America actually improved year-on-year, similar to what you've seen in our international segment. For Q4, you should expect a similar trend, i.e. somewhat higher procurement expenses in our North America segment, as we gradually ramp up our new Factor RTE production facility in Arizona. In addition, we have a strong pipeline of new products and experiments starting to come through in both segments, adding some basis points to our overall procurement expenses. Next, I would like to discuss the development of our fulfillment expenses. In line with the trend we have delivered over the last five quarters, we have again meaningfully decreased our fulfillment expenses year-on-year by 1.6 percentage points. Especially our North America segment continues to contribute significantly to this positive trend. We continue to reduce our relative fulfillment expenses by one, optimizing our fulfillment center footprint, Secondly, by driving our process standardization, and thirdly, by ramping up the use of technology and automation. In addition, we realized savings in other fulfillment areas, such as primarily shipping. This strong operational performance translates into a continued yearly expansion of our contribution margin by 1.1 percentage points to 25.6% in the third quarter. As you know, Q3 for us is always the most challenging quarter from a contribution margin perspective. due to low fixed cost leverage during the summer months, given peak holiday season, and high temperatures require more cooling and insulation of our boxes. Against this backdrop, we are satisfied with having delivered a fifth quarter in a row of meaningful year-on-year contribution margin expansion. I'm also happy to report that we are ahead of our contribution margin expansion target communicated at the beginning of the year. We had promised at our capital markets day that we would expand contribution margin for the full year by around about 100 basis points. In the first nine months, we have delivered a contribution margin expansion of 170 basis points and expecting for the full year to achieve a contribution margin of at least 27% versus 25.5% in 2022. Next, I would like to discuss the development of our marketing expenses in Q3. Q3 was a largely normal quarter for us from a seasonality perspective, i.e. seasonally lower revenue due to the summer holiday period, combined with an increase in marketing spend in September for the back-to-school period. This resulted in our marketing spend representing circa 19.5% of revenue in Q3, approximately 1.6 percentage points higher than last year. We continue to realize an attractive ROI on our marketing spend, which is at least in line with what we achieved last year. This is supported by increased AOV on our orders and higher margin compared to last year. With that, let's have a look at our EBITDA in Q3. We realized an EBITDA of 69 million in Q3, broadly in line with last year's level in absolute terms as well as from a margin perspective. We achieved this through normal seasonality in customer orders and marketing spend, combined with a solid contribution margin and a healthy retention and ordering behavior from existing customers. It's also worthwhile, and Dominic had alluded to that earlier already, to highlight that there is an 8 million drag from FX on our Q3 EBITDA compared to the same period last year. Primarily the US dollar and the Australian dollar have softened versus the Euro, which causes lower Euro reported amounts of profits realized in these regions during the period. Next, I would like to discuss our free cash flow development. As promised, 2023 marks the return to positive free cash flow. In the first nine months of this year, we have already generated a positive 45 million of free cash flow, circa 90 million more than over the same period last year. The long-term growth of our free cash flow per diluted share is from our perspective one of the most important drivers of value creation for our shareholders. Therefore, we will continue to be focused to drive the denominator of this ratio, i.e. free cash flow growth, but also we will continue to be disciplined to avoid the growth of the denominator, i.e. share count. And in this context, We have yesterday night announced the share buyback of up to 150 million, running until the end of 150 million euros, running until the end of 2024, of which we may also use smaller parts to buy back some of our extant convertible bond. Let me now conclude by reiterating our full year outlook for 2023, and this is unchanged to what we said in our earnings call the last time. We target a constant currency revenue growth of 2% to 8% for the full year. For the first nine months of this year, constant currency revenue growth stood at 2.5% and in Q3 at 3.5%. We expect a certain further reacceleration of top-line growth to the higher single digits throughout Q4. From EBITDA perspective, we continue to target a range of 470 to 540 million euros of EBITDA for the full year. And with that, we look forward to your questions.

Ladies and gentlemen, we will now begin the Q&A session. We kindly ask all participants to limit their questions to one per person. To raise a question, please press the nine and star on your telephone keypad. In case you wish to withdraw your question, press 9 and start a second time. One moment please for the first question. And the first question comes from . Please go ahead with your question.

Thanks. I hope you could hear me. I just wanted to get a bit more color on the September exit rate that you mentioned. Was that because of the back-to-school marketing and how would that then be sustained into Q4? Could you remind us again what the seasonality is like for meal kits in Q4 and how incremental would factor be to drive sort of high single-digit constant currency growth in Q4? Some color there would be great. Thank you.

Good morning, Nisla. Great question. September was driven by the two effects that you said. Factor actually unlocking more capacity. That is something that gradually between beginning of September and the end of December should every week sort of like help us grow the factor business. And then in September, primarily, we have also been able to scale our back-to-school season. Now, when you think about the year-over-year, then obviously the pattern of marketing spend, sort of like for meal kits, for example, is largely unchanged to what we have seen last year. So also last year, we had back-to-school. Then you basically take back a little bit in October and beginning of November before Black Friday season. And then sort of like from mid-December on, sort of like it slightly dies down a little bit. But that seasonality is unchanged. And we see both in meal kits as well as in factor positive development on the year-over-year trends. And hence, expect that October will be better than September. November will be better again. And December should close the gap on most of the metrics.

And the next question comes from Marcus Diebel, JP Morgan.

Please go ahead with your question. Yeah, hi. I guess I have several questions, but I'll keep it up with you to one. Dominic, on the active customers, from your previous comments, it's not entirely clear to me. As of Q2, you were saying that you target at the end of the financial year with a positive year on your growth in active customers. Is that still the case or not? And maybe in this context, does it also mean active customer growth from what you can see in specifically U.S. meal kits? That would be interesting. Thank you.

So largely unchanged or completely unchanged to what we said before. That's our target. As I indicated with regard to Nisla's question, September was already better August, July, and June. October should improve versus September. So should November and December. So we target that by the end of the year, even also on the active customer number, we see some positive year-over-year development. Just want to caution, it's not sort of like the primary focus. We're solving for meals shipped. We're solving for orders. We're solving for overall profitability. Active customers, nonetheless, sort of like the message is unchanged to what we have communicated before. We project to be slightly up by the end of the year.

And just to ask, this is not only coming from customers. increased factor capacity. This is also coming from an underlying U.S. mu kits growth in active customers. Is that fair?

So on the international side, international has already started to trend positively on active customers year over year. On U.S. meal kits, by the end of the year, we should still be slightly shy of the number that we have seen last year, together with factor the slightly up year over year, and then expect in 2024 to fully close the gap also for U.S. meal kits.

Fantastic. Thank you for being so clear. Thank you.

The next question comes from Luke Holbrook, Morgan Stanley. Please go ahead with your question.

Yeah, good morning, everyone. Thanks for the opportunity to ask a question. I just wanted to ask what you're seeing in the scaling factor at the moment in terms of the active dynamics, in terms of retention and churn compared to the core mill kit business in the U.S. I appreciate it's scaling quickly, but any commentary on that would be very helpful. Thank you.

very similar dynamics to our highly attractive meal kit business. So for every dollar that we invest, we generate a strong return, not only over the first couple of months until we reach break even, but then also in outer years. So those customers which make not only our meal kits, but also our RTE business line, the fourth part of their shopping and of their week, we see very strong return profiles. Given those sort of like customer economics and return profiles, we expect in the long run RTE to reach similar EBITDA margins than what we already see in our meal kit business today.

Okay, thanks. So the churn is similar to the retention curve that you showed at your CMD to the group factor.

Similarly strong retention leading for e-commerce companies.

And the next question comes from Andrew Gwynne, BNP Paraguay exam. Please go ahead with the question.

Hi there, Gwynne. Good morning. Firstly, could you just reiterate all the kind of key points of guidance you give for Q4? So I think I've got most of them, but just help us on those. I think you mentioned contribution margin of 27%, for instance. So a quick roundup there. But my actual question is just on the 2025 targets. I mean, obviously the 10 billion revenue figure Now, it looks like a bit of a push. Should we be thinking that's more, you know, a couple of years later or any further kind of helpful? Thank you.

Andrew, it's Christian here. Let me take that. So on the contribution margin, the 27% or touch better is a figure for the full year that – I wanted to guide to that means for Q4, we should do even a bit better than that 27%. And then just to repeat the rest of the formal guidance that I reiterated before, 2% to 8% constant currency growth and 470%. to 540 EBITDA for the full year. I hope that's clear. And then with respect to our 2025 targets, there's no change to those.

If the next question comes from Emily Johnson-Barclays, please go ahead with your question.

Good morning. Can I ask about the wide Q4 implied range for your EBITDA guidance. What is the swing factor there? So if you're pointing to revenue growth of high single digits in Q4, what gets you, and you've given us contribution margin, how high or low do you expect marketing to go? Is that the real swing factor to get you within that range? Thanks.

Hey, Emily, it's Christian again. So I would say two things to this. One, if you think about the midpoint of our guidance, and this is from what we can see also ballpark where consensus sits, which is just a touch below that, that's a sensible zone as an overall and then whether we are a little bit left or right of that is partly going to be driven by exactly what you articulated. So what opportunities we see on the growth marketing side towards the very back end of the year, also how we want to position us for going into 2024 already. These are tactical decisions we take at that point in time, and that will drive a little bit whether we sit left or right of that.

And the next question comes from Felix . Please go ahead.

Good morning. Thanks very much for taking my question. It's on the competitive environment. Amid higher levels of inflation, what we've observed is that consumers and not only low-income groups have developed a preference for everyday low prices with demand for discounters and private labels also soaring. So how do you compete against these three trends? with your offering. Thanks very much.

We are indirectly competing obviously with offline supermarkets of all colors and in all segments. If you think about our customer group, we tend to serve customers more of the top two quartiles in the market. I think those are generally a lot more immune to short-term pressures on disposable income. If you then think about what we offer, the variety, the convenience, and also the affordability, that is something that customers in both in our internal as well as in external service have over and over stated that those are the reasons why they join HelloFresh, why they cook with a meal kit. And in my view, obviously, as a customer myself for the last 12 years, I don't think there is any way to do home cooking in any more efficient or more tastier or healthier way than with a meal kit. And I think a lot of these qualities of the product that we have insulate us to some degree for customers to switching where they can get the same product 5% or 10% cheaper. I think a lot of what you see with discounters and potentially the move from higher end supermarkets to lower end supermarkets is that very often customers are still filling their baskets in the same way. And obviously, if you can have exactly the same product, for a couple of percentage points cheaper, then why not make the switch? I would very much argue and claim that the type of milk product that we're offering is very hard to get, either by procuring the ingredients yourself or by going to one of our competitors. And that's why I don't feel that we are seeing the same trends that you have been reporting back on. certainly overall macro is weaker than it was three years or five years ago at the moment. But I think that is also temporary and we're building and continue to build the things that will make us successful in the long run.

Thanks very much.

The next question comes from the city. Please go ahead with your question.

Hi, good morning. Thank you for taking my question. Can I ask on your your constant currency AOV or price per mil year-over-year increase in the quarter and in the U.S., and how you see that versus the grocery disinflation, which is now very prevalent in the U.S. market, I guess, is lower down than the increases that you seem to be pushing through. I guess there will be a big chunk of mix, And clearly, Factor will be a consideration. But if you could give a sense of the underlying mill kit pricing that you're pushing through in the US and the elements that support that, that would be great, please. Thank you.

it gets it's christian here so um a couple of points that of this um increase that you've seen from us on the aov side um only part of that is driven really by by like for like price increases um and um the piece that's price increases really just um annualization effect to a large extent to um um to measures that we've taken during during the course of um of last year so We have not meaningfully in any substantive market, including the U.S., increased prices further in this year. For the group, when you think about that AUV uplift that we've seen of 7.5%, Roughly two-thirds of that is effectively price measures from the prior year, plus mixed effects from higher RTE feeding through, and roughly a third of that is basically from some of the incremental drivers that Dominic had laid out in his part, so more meals per order, higher take-up of our HelloFresh market offering, and a higher take-up of surcharge offerings.

Okay, great. So sequentially, you're not moving prices on the underlying rate?

Nothing planned. And also, again, also this year, we haven't done anything very substantial. It's mostly feeding through just brown rate effects from last year.

Super. That's very helpful. Thank you.

And we have a follow-up question from Marcus Diebel, JP Morgan. Please go ahead.

It's okay to ask another question if there's no other. Dominik, could you tell us how the ramp-up of factor capacity is going? You mentioned, obviously, that every week, really, you increase capacity, but how should we think about it? Maybe in Q4, do you expect by the end of Q4 you're at 100% capacity, or is that something you only achieve next year? Thank you.

It's a very big lift to open such a new facility that is into cooking. So at the moment, we're onboarding dozens, sometimes hundreds of people every week. We need to train them. We need to get them comfortable on the technology that we have, on the cooking techniques, on a lot of the systems that we employ. So similar to, let's say, an automotive plant being ramped up, the ramp up for automotive plants usually takes... It takes two, three years until they reach peak capacity. For us, that's hopefully like a lot faster than that. But in the end, we go through the same things, which is we need to train people. We need to make sure they're very comfortable in using the equipment, in using the technology, in using the systems. And by the end of the year, we should be in a situation that we don't need to throttle any demand coming to the brands. At the moment, that's still the case. We've released some of the throttles that we've put in, especially in Q2 and the earlier parts of Q3. So we're gradually sort of like ramping up volume every single week. But it's really important that it follows like a linear gradual ramp up and we don't have like massive volume spikes as you get people kind of like working on those lines and making sure that you always hit your quality scores and quality targets. I think the big thing for us is really the long-term here, right? From now to 2025, RTE will certainly be the biggest contributor. So it's much more important for us that we get the processes right, that the technology works, that the automation and the hardware works in the right way, so that in 2024 and 2025, we can show a similar growth curve from the levels where we are today. to what we did in Meerkats when we hit similar revenue thresholds. And that's really what we're focused on. It will increase week over week from now till year end. But if we're off by 1% or 3%, 5% on the volumes that we actually want to do in that facility every week, I think that's much less important than making sure that 24 and 25, we can scale as fast as possible our RTE business.

Okay, thank you.

And we have time for two more questions. So the next question is from Nicola City. Please go ahead.

Hi. Thank you for taking a follow-up. Can I come back to clarify a comment that you made? I think on core meal kit sales being a lower negative in Q4, is it possible just to, expand on that commentary and talk about, and I guess this is the US, talk about when sales would inflect positively, and I guess more personally, when you expect meal volumes or customer numbers to turn positive for the core brand in the US, please. Thank you.

So very briefly, international up in Q4 year over year on meal kits. US will probably be slightly down year over year in Q4, but better than in Q3, better than in Q2. Better than in Q1. So on all of the year-over-year numbers and all of the underlying metrics, you should see an improvement. Overall revenues, overall customers, overall orders for U.S. milk kits alone, still slightly negative in Q4, but better than Q3, Q2, Q1.

And you would expect them to go positive early next year for volumes in U.S. milk kits or... Would that be the progression?

As a general trend, yes. If you think back to what I said about the vision and where we want to take the company next 10 years, I think meal kits, whether that's in North America or international, will be much, much bigger than what it is today. We're just starting with a lot of the innovation and the innovation pipeline that we have carried out from the start of 2023. Just some of the first things are hitting sort of like the P&L now. And I think that will meaningfully increase the attractiveness. granular guidance on 2024. I think we're going to release that with our general guidance, but of course North America meal kits will continue to grow and will be much bigger than what it is today.

No, honestly, I think everyone's looking for the proof point on positive customers in the core for obviously what is an attractive longer term story. So everyone's looking for that inflection. That's helpful. Thank you so much.

And the last question is from Emily Johnson Barclays. Please go ahead.

Hi. My follow-up question was on the factor business. So you spoke about that being EBITDA break-even at the start of this year. Could you talk about how that profitability has trended throughout the first half and whether it's still break-even now that the factor facility has gone live? Any kind of quantifying that drag or kind of whether it's still positive to break even is helpful I think.

Hey, Emily, it's Christian. So we've further expanded margins at Factor, both on a contribution margin level as well as on EBITDA level. So Factor is profitable. Also on the EBITDA level, as you know, we don't break out additional disclosure on single brands and continue to do that. So if we change that, we'll make sure you're aware of it, but we're not more grounded on that. In terms of, let's say, specific more one-off ramp-up costs, there are obviously some, but that's baked into basically the contribution margin guidance that I've provided before.

Okay, and this concludes today's Q&A session, and I'll hand back to the company for closing remarks.

Thanks for all the questions. I hope we can shed some light on what I guess seem to be more a focus on short-term trends. Nonetheless, I think the long-term vision is unbroken. 12 years to establish two highly profitable business lines, billion-dollar-plus business lines, more to come. And definitely on the two business lines, RTE as the biggest growth driver for the next two years, and Meerkit, I think, with lots and lots of potential to be much bigger than what it is today. That's what we are making the investments on today. That's what we're relentlessly working on today to really make sure that across all business lines, we can show growth and delight more and more customers. Thanks a lot. Looking forward to seeing you back for our Q4 results. Bye-bye.