Hellofresh Se Ord

The conference is now being recorded. Good morning, ladies and gentlemen, and welcome to the HelloFresh SEQ1 2024 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 Dominik Richter.

Good morning and welcome, everybody. Thank you for joining us today for our first quarter earnings call. We will be discussing our financial and operational performance for the first quarter of the year. But after a more thorough deep dive on strategic priority during our full year results a few weeks back, we will focus primarily on our financial results today before we will open the floor for a question and answer session. Please also note that starting with this release, we provide more visibility on the trajectory of our RTE and meal kit product lines respectively. and we will split out net revenue and adjusted EBITDA for meal kits and RTE separately. Overall, our Q1 results came in very closely to what we expected and communicated during our last interaction in early March. Let me briefly share some of the highlights of Q1 24 with you now before we discuss them in more detail in the remainder of the presentation. First of all, we saw continued group AOV expansion by 6.5% on a constant currency basis, driven by higher AOV in both geographical segments. Group orders are down by 2.6% year over year, in line with the trend experienced the previous quarter. Our group revenue amounted to 2.1 billion which is actually representing the highest ever quarterly revenue we generated as a company, and marks a 3.8% constant currency growth rate. RTE continued to grow at a high pace. It amounted to 56% growth on a constant currency basis, whereas Meerkats saw continued negative constant currency revenue growth of about 7% in the first quarter of 2024. Our contribution margin came in at 25.2%, about a point down from the 26.3% in Q1 2023. And this has mostly been influenced by the initial ramp up costs of selected new fulfillment centers and even more so by the rapid ramp up of our US RTE business. All in all, we generated a positive adjusted EBITDA of 17 million, which is a margin of just shy of 1%. A number of our strategic priorities for the remainder of the year are right now in the early implementation and execution phase and will progress over the remainder of the year. We plan to report back on them as we collect the data on progress made and execute on the roadmap for the envisioned changes. Just as a reminder, our 2024 strategic priorities revolve around three main vectors. First of all, a strong focus on driving cost efficiencies so we can start to show a clear path to eventually 10% adjusted EBITDA margins for both meal kits and RTE in the midterm, as well as significant improvements to our ability to generate free cash flow. A range of projects here has been identified and will be executed according to plan. The success of this strategy will be reflected in higher PC2 margins and the lower share of G&A as a percentage of revenues over time. The second priority is to continuously improve the customer lifetime values of our customer base by strengthening the product proposition and shifting investment from acquisition into our product and toward existing customers. This includes a number of initiatives such as menu enhancements with a higher share of customizable meals, a broader assortment in HelloFresh market, and the launch of our HelloFresh loyalty program in Q4. All of these initiatives and this strategy is aimed at further positively impacting both the average order rates and AOV of our customers and hence to increase customer lifetime values. The third strategic priority is a laser focus on the scale up of our RTE operations in the U.S., and the internationalization of that business lane. And this will remain the single biggest growth driver for the group for the remainder of 24 and also in 25. On this third big strategic priority, we would like to give you an update already today and also on an ongoing basis in future releases, given its growing importance for the group. RTE has progressed well and is on track to reach the goals we have for it in 2024. It's already at a 2 billion Euro run rate revenue in Q1, and we have scaled revenues by 20X over the last five years since we acquired the business in 2020. Our RTE playbooks follow the tried and tested playbook that we have perfected with 18 country launches over the last 10 years in the meal kit space. We now have built a strong nucleus and brands in the US and we'll capitalize on this while moving forward with steady internationalization to provide long-term growth runway for the brand. Specifically, For international RTE, we come out of our product market fit phases in Australia and Canada, which is part of North America. We have strong feedback from customers and start to have solid unit economics for those business units. These markets will receive more investment over the year to scale operations while remaining disciplined on overall cash outflow. Benelux, which we launched mid last year, and newly launched Denmark and Sweden, marked the first geographies in Europe, paving the way for more launches in the future. These entities are currently still loss-making and subscale. Hence, our focus is on building toward good unit economics first and creating early consumer demand. before they reach the milestone of receiving additional investment to scale operations. I also want to comment on a few notable developments for Factor US to give more color on our near-term plans and strategy here. Our Arizona site was launched in Q4, delayed versus our original launch date by about six to eight weeks. and has since been receiving an increasing share of volume since launch. It starts to be at good critical volume now, so our focus shifts very strictly to driving efficiencies here. We're focusing on improving unit economics as we train, associate, and push productivity over the remainder of the year. which should lead to better PC2 margins and ultimately better adjusted EVTA margins than what you see in the RTE segment for the first quarter and where we are today. We also expanded the coverage of our delivery days to additional regions, moving from one to at least three days of coverage. This gives customers a longer shelf life of the product when they receive it at home and obviously also more flexibility for customers to receive the product at the most convenient day of the week. We have also added a significant number of new healthy recipes to our recipe database and as a result feature now a weekly rotating menu of 35 meals per week which is up about 10 recipes per week or 30% year over year compared with the same time last year. It's a proven lever to increase order rates of existing customers and make our product long-term more attractive, both in satisfying existing customers and attracting new customers. And finally, we have also expanded our factor marketplace where we follow a similar strategy to what worked well in meal kits. This means adding additional customer value drivers to the overall assortment. Recent factor private label launches include a range of healthy juices, smoothies, healthy snacks, and our very own protein powder. This assortment expansion should have positive impacts on AOV for the RTE vertical. It's a good opportunity to also use these products as we move towards offering more product incentive and shift our marketing mix away from purely financial incentive. After this short update on our RTE vertical, let me turn back to our most recent quarter and comment in more detail on the financial results we generated. In Q124, we delivered 32 million orders, a mild decrease compared to Q123 by about 2.6%. The order decline observed in meal kits, whereas our RTE segment grew very materially year over year in orders, largely offsetting the adverse development in meal kits. This is particularly visible in North America. The decline in orders is driven exclusively by the lower share of new customers, given the strategic shift to settle for fewer but more high-quality new customers, which we started to execute mid-quarter and flagged a few weeks ago. Our existing customers continue to show strong, predictable order behavior, and as a result, strong customer lifetime values in line with our communicated strategy. Average order value for the group improved by 6.5% in constant currency year over year. It's mostly a continuation of the AOV drivers that we saw in some of the more recent quarters as well, with many different drivers contributing. For both geographic segments, North America and international, We sell a higher share of premium meals. We have introduced more customizable options, and we now feature a broader assortment and HelloFresh markets. All of these being responsible for driving up AOV. Specifically in North America, we also have the positive contribution of a faster growing RTE business line, which comes at a higher AOV. And for international specifically, we have the run rate effect of some selected price increases. Notably, to a certain degree, you already start to see now the impact of fewer financial incentives on AOV, which we have executed as part of the strategy shift in mid Q1. Let me turn to revenue. In Q1, we actually generated the highest net revenue quarter in HelloFresh Group's history. The quarter certainly did not feel like a highlight in the company's history, but it's a good reminder that HelloFresh has been growing very consistently and steadily and profitably for many years in a row, with Q1 24 up another 4% versus the same quarter last year. Starting with this quarterly update, we will also start providing more visibility on the top line and bottom line, not only by region, but also by product category. Looking at regions, like we did in our past reports exclusively, you see that North America grew by 4.6% and international grew by 2.3% versus the comparable period a year ago. Looking at net revenue development per product category, you'll see RTE growing strongly year over year at 56% to over 500 million Euro per quarter, which accounts for a run rate of over 2 billion Euro in net revenue. This was made possible by the fast ramp up of our new facility, which, as you may remember, came online delayed by a few weeks in Q4, but started now to receive more and more volume over the course of Q1. The meal kit segment, on the other hand, contracted by 7% year over year, a result of both a soft consumer environment and a strategic shift to aim for higher quality customers and the prioritization of building out our customer proposition while protecting our adjusted EBITDA margins over chasing more new customers in the short term. With that, let me hand over to Christian to comment on our cost line items and provide you guidance for the remainder of the year.

Thank you, Dominic. Let me continue with the development of our procurement and cooking expenses. One point up front, as you have just heard, we changed actually the labeling of this cost line to make it more transparent. But this also includes all the cooking related expenses in our RTE product group. i.e., we booked for this line item, firstly, all expenses related to procurement, so ingredient expenses, inbound shipping, personal expenses of our procurement function, and so forth, for both of our product verticals, but also costs related to the actual cooking of our ready-to-eat meals, including the associated direct labor and equipment costs. So with that, let's have a look at the underlying trend. We've seen relative procurement and cooking expenses increase by two percentage points. In North America, we've seen an expansion of almost four percentage points, which is driven, number one, by a higher share of ready-to-eat in the overall mix, and then secondly, by the fact that cogs within ready-to-eat in the U.S. are temporarily elevated because of the significant ramp-up of recently added production capacity namely our Goodyear, Arizona site. In international, we actually reduced relative procurement and cooking expenses by 1.5 percentage points as we realized efficiencies in a somewhat more normal inflationary environment. Let's now turn to our fulfillment expenses. The trend of our fulfillment cost line is to a certain extent the flip side of what we just had discussed regarding procurement and cooking. Given the higher share of RTE, which has less associated pick and pack expenses, overall relative fulfillment expenses are down by circa one percentage point. Our North America segment is the key driver for this. Fulfillment as percentage of revenue has decreased by 1.7 percentage points compared to Q1 last year. Within international, relative fulfillment expenses are mildly up year-on-year by circa 50 basis points. To a large extent, driven by the factors that we have discussed previously, i.e., namely the ramp up of new fulfillment centers, Now, biggest international markets, Germany and UK, which will also be visible for most of the year, as we discussed before. And then on top of that, some modest volume deleveraging. These trends in our operational cost line items result in a contribution margin of 25.2%. This means that our North America segment has seen a net reduction of its contribution margin of circa two percentage points to 26.5%. And our international segment has seen a net expansion of its contribution by roughly one percentage points. All based on the trends that we just discussed here. So with that, I'd like to talk about our marketing expenses. There are a couple of points I would like to highlight on this page. Firstly, as you know, Q1 typically marks the highest level of our marketing activity for us during the year, as we meaningfully step up sequential new customer acquisitions versus Q4. Secondly, this trend is further amplified by the rapid and successful scaling of our ready-to-eat business, where we have been delivering with 56% a higher revenue growth rate than what we are targeting for the full year. The year-on-year absolute marketing spend increase you've seen from us in Q1 is entirely down to this rapid RTE expansion. And then thirdly, as flagged just now by Dominic, we have also modestly recalibrated how we split our economic marketing budgets between price incentives and pay channels. i.e., we weighted more to the letter with an overall beneficial impact on customer quality and retention, but therefore also somewhat increased relative marketing expenses. Okay, when you aggregate all of that, let's have a look at our EBITDA. As you know, we initially targeted EBITDA of circa break-even in Q1. We actually outperformed this target by delivering 17 million of positive EBITDA. When you look at our two reporting segments, North America delivered an EBITDA of 26 million, a margin of 1.9 percentage points. Now, this compares to a margin of 5.7% in Q1 2023. The key driver of the difference is the effect of our ready-to-eat scale-up, both in relative marketing expenses, but also temporarily on contribution margin. During H2, you should expect to see this combined drag to somewhat reduce. International delivered an EBITDA of 29 million euros, effectively maintaining its EBITDA margin at 4.1%, despite the impact of some volume delivered. Negative EBITDA contribution from holding expenses stayed broadly flat versus last year, which illustrates overall good cost discipline, which we enforce on our central functions. Before we turn now to our outlook, let me quickly summarize the top and bottom line trends on the next page. We focus first on the top left-hand side on this page. Our North America segment delivered a decent 4.6% revenue growth in Q1. The key driver for this growth was the successful rapid expansion of our ready-to-eat product group, which grew a whopping 56%, as you see on the bottom left of this page. The bulk of this business represents our U.S. factor business. Now, this rapid growth does not come for free. It also means higher marketing expenses and during that rapid initial ramp-up phase, also temporarily higher production costs. Therefore, our RTE EBITDA margin was negative in Q1, as you see on the bottom right of this page, and also had an impact on our North America EBITDA margin to be somewhat lower than in the prior year at 1.9%, as just discussed, and as you also see on the top right-hand side of this page. Our international segment has actually maintained its EBITDA margin well in Q1 at 4.1%. Despite some modeling, the leverage and the ramp-up of two new fulfillment centers as discussed. If the same applies to our MiKit product group overall, which preserved its EBITDA margin at around about 5%, the split Q1 being the highest seasonal marketing quarter. Let me now conclude. by reiterating the full year 2024 outlook that we provided about a month ago on our full year earnings call of 2% to 8% constant currency revenue growth in an EBITDA range of 350 to 400 million. Let me also touch upon current trading and therefore an indicative outlook for Q2. As you've seen from us, from our Q1 numbers, so far everything is shaping up very much in line with our previously communicated expectations. For Q2, and keeping in mind that it's early in the quarter, we specifically expect a slightly softer year in the order and revenue growth compared to what you've seen from us now in Q1. That's primarily driven by how we've allocated our marketing budget between the first two quarters of 2024. As a consequence, we should also expect meaningfully lower relative marketing spend in Q2 versus Q1. Expect sequentially somewhat higher contribution margins than in Q1, but down year-on-year, driven by the same factors that we had discussed previously, i.e. temporarily higher production costs within RTE during the ongoing ramp-up phase and the temporary impact of the ramp-up of new MiKit fulfillment centers in Germany and increasingly the U.K. That would result for Q2 in indicative EBITDA margin of somewhere 5.5% to 7%. So with that, we will open the floor to your questions.