Hellofresh Se Ord

The conference is now being recorded. Good morning, ladies and gentlemen, and welcome to the HelloFresh SEQ3 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, CEO of HelloFresh.

Good morning and welcome, ladies and gentlemen, to our Q3 earnings call. After we've pre-released our headline numbers last week already, we would like to focus today on giving some additional color on our recent marketing strategy changes and share some more details on the respective performance of our two largest product groups, Meerkits and RTE. For all direct-to-consumer companies, marketing and advertising constitute a large investment area with both near-term and long-term impact to both growth and profitability. This is because direct-to-consumer companies like us cannot rely on foot traffic to their stores nor halo third-party brands driving customers to the site. After we've talked a little bit about our drive to lower cost in our fulfillment network and through operational streamlining, In the most recent course, we would like today to spend a few minutes to share some thoughts on the fundamental shifts in our marketing strategy we have initiated over the last six months. These tend to work their way somewhat quicker through the P&L than, for example, site rationalization or operating model changes. And we did see some early signs of success in Q3 already. In the last few years, we have perfected the marketing playbook to penetrate early stage growing markets that are early in their adoption curves in a very effective manner in different industries, from meal kits to RTE to most recently PET or premium butchery. However, given that we expect no strong near-term growth in the meal kit category, we set out to build the muscles to optimize our marketing budget for long-term brand strength and a different market maturity as we want to consolidate the market around a new size and drive higher profitability and cash flow generation as a result of it. This has led to a number of fundamental changes to our approach. Whereas we had tried to maximize growth in under-penetrated markets at low ROI thresholds before, we're now focusing increasingly on maximizing the overall marketing ROI. It's important to note that our marketing budget has always been successfully spent to generate positive future ROI in aggregate. However, in a world where the future category might be somewhat smaller than initially expected, it's important to generate strong ROIs today. If adapted by prioritizing to win over high-value customers with strong customer lifetimes, over considering market share versus competitors as a primary input metric to our marketing mix. Further, rather than focusing on generating the largest pool of first-time buyers, we will increasingly focus on improving overall brand metrics and brand strength to the benefit of the whole customer base. That means focusing our marketing efforts to simultaneously drive first-time purchase of high-value customers drive usage of existing customers, and re-engage formers. One important avenue to do so is pivoting our incentive strategy from primarily using monetary incentives to relying more on product incentives, which benefit the whole customer base and are beneficial toward long-term customer tenure. We aim to bring this strategy to life in a data-driven and disciplined approach across the whole funnel, from awareness to consideration, trial, usage, and reconnecting farmers with the product. We have started to shift some of our overall budget into brand and content investments in the recent back-to-school period and saw a positive impact on brand recall and brand desirability. As we continue to drive an ambitious product innovation roadmap, we plan to talk more about new and recently launched product features. In a category where brand awareness is high, we will benefit by showcasing our product to both prospects and existing customers and make them aware of news to our product portfolio. Our direct-to-consumer platform, which has been developed and optimized over many years and constitutes one of our strongest assets, will help us to convert prospects into buyers at favorable and industry-leading customer acquisition costs. Recently, we have tweaked our ROI thresholds and started to turn away low intent audiences through cutting back on incentives and taking a much harder stance toward borderline fraudulent customers' behavior, such as multiple accounts per household. Finally, We want to have a strong focus on our tenured customer base to increase their retention and order frequency, and as a result, improve overall marketing ROI. This entails improving the service levels we provide through real-time information of where the order currently sits in our supply chain, proactively informing customers of any potential issues with an order, and providing better customer service through self-serve tooling and GenAI. In addition, we've upped the pace on product innovation and will meaningfully increase the number of meals on the menu, the cuisines featured every week, and the options to customize your order. But we have driven significant change already in 24. 25 will see acceleration on our product innovation efforts unlocked by new manufacturing solutions and increased productivity. Finally, we have started to test into our loyalty program, HelloFresh Plus, which will roll out to the majority of our Meerkat customer base globally over the course of 2025. While it's too early to share quantitative results, test user cohorts have shown high customer satisfaction with the program and we're eager to expose more of our base to HelloFresh+. The combination of all of those factors should lead to higher customer satisfaction ultimately better customer retention and a clearer understanding of the value we provide. This should result in a more loyal and more profitable customer base and will increase the returns on our marketing ROI. As it remains early days, we have grown confident that we're on the right track and will add the muscles of marketing in a mature market environment to our playbook going forward, benefiting the group and all its entities as a whole. With that, I'd like to point your attention back to our most recent quarter, where we could see some of these developments already play out. I'll start with the highlights. Q3 turned out to be a robust quarter against the lowered expectations we provided earlier in the year. We're early in our quest to meaningfully expand EBITDA, EBIT and free cash flow, but have seen some promising signs in Q3 that we're on the right track. We did generate revenues of over €1.8 billion in line with expectations and constituting a year-over-year growth rate of about 2% in constant currency. Revenue growth has been primarily driven by an increase in AOV to 66.2 euro, a 3.8% year-over-year growth rate. So good marketing efficiency following our shift in strategy that I just elaborated to focus on high value customers and brought marketing expenses down, both on a relative and absolute basis, for the group and more forcefully for our Meerkats product group. As a result, we expanded Absolute EBITDA to over 72 million for Q3 with an EBITDA margin of 8.5% for Meerkats and 1.3% for RTE. As a result, we have also generated free cash flow of about 30 million euro in the nine months here to date. and expect to increase free cash flow for the year further based on improving marketing efficiencies and lowering our capex spend for the remainder of the year. Taking a look at orders, our existing customer base has shown quite robust trends here as well, with order rates and customer retention up year over year. That was, however, not enough to offset the considerably smaller number of new customers we saw in meal kits. And as a result, total orders for the group shrank by 1.9% year over year, from 28 million orders in Q3 23 to 27.5 million orders in Q3 24. AOV, on the other hand, had continued to improve in the most recent quarter, increasing by 3.8% in constant currency. This was driven by both regional segments, North America and international. North America increased by 4.3% year-over-year, international by 3% year-over-year. The difference between the two mainly stemming from a higher contribution year-over-year from RTE to the overall mix in North America. Both segments, however, continued to see favorable trends in AOV through the uptake of larger baskets following our menu choice expansion and the introduction of new product concepts that come at an extra price tag. Putting that all together, our overall group revenues expanded by 1.9% in constant currency versus the prior period one year earlier. with our regional segment, North America, contributing 2%, and international at 1.7%. More interestingly, when looking at product groups, you notice a very different trend for meal kits and RTE, while RTE continued on its strong growth trajectory and posted growth of just shy of 40% year-over-year in Q3. The meal kit product group was down by 9% in the same period following the strategy change in meal kits marketing, a shift of our budgets more forcefully into the RTE product group, and consequently, a much lower number of new customers joining our Meerkat brands in Q3. With that, I'll hand over to Christian to walk you through our cost lines.

Thank you, Dominik. So let me turn now to our contribution margin. Our contribution margin is still down year-on-year in Q3 by 1.3 percentage points. However, the delta to last year is sequentially reducing due to, number one, a gradual improvement of productivity in ready-to-eat, which we are quite confident will continue in Q4, and secondly, continuous productivity improvements in meal kits, especially in our North America business. This positive trend is somewhat offset by the ramp-up expenses of new need kit fulfillment centers in Germany and the UK, as we had discussed on prior calls. From a seasonal perspective, we expect a normal sequential expansion in contribution margin as we go into Q4. Let me now turn to our marketing expenses. Marketing spend. It's for the first time down this year, both in relative as well in absolute terms. This is a continuation of the trend, which I described on the last two calls. We apply strong ROI discipline on our marketing spend, and Dominic had gone through the details a few minutes ago, which means that we acquire fewer, but on average, higher value customers. When you look at our underlying product groups, we continue to acquire a lot of new customers in ready-to-eat, where revenue in Q3 is up by 40%. This means for that product group, absolute and relative marketing spend is up year-on-year. In new kits, where overall new customer acquisition activity is going through a normalization phase, Absolute euros spent on marketing as well as marketing as percentage of revenue is down year-on-year and then the sum of those two means down for the group, both in absolute and relative terms. For Q4, we target to maintain our marketing efficiency and other than last year, will not spend against the seasonally weaker trend in the second half of that quarter. By EE, we are OK to accept slightly lower revenue compared to last year, but at a sustainably higher profitability level. Let's now have a look at our Q3 EBITDA. We have delivered an EBITDA of $72 million in Q3. slightly higher than last year and also higher than our initial expectations. This was effectively driven by both good ops performance and therefore a decent contribution margin and secondly, good marketing efficiency as we've just gone through. After the first nine months, adjusted EBITDA for the group stands at 235 million, which sits well from our perspective versus our EBITDA guidance. Let me now dive into our two product categories, starting with meal kits. We achieved a higher EBITDA margin and a higher absolute EBITDA in this product group. This is primarily driven by the focus on our marketing ROI. Contribution margin is a touch lower for meal kits than last year, driven by the factors discussed on prior calls, i.e. the temporary impact of volume deleveraging and the initial ramp-up costs of more automated sites in Germany and the UK. However, we are taking active steps to offset these effects. And therefore, while at the beginning of the year, we were targeting actually a one percentage point compression in EBITDA margin in mu kits this year from 9% to 8%, at the moment, we are more trending towards maintaining that 9% margin for the full year. Let's now also talk about our ready-to-eat product group. Ready-to-eat in Q3 ended up slightly better than breakeven, i.e. a touch better than what I indicatively envisaged on our last earnings call. Keep in mind that the comparative last year period does not yet include the impact of the new production capacity ramp-up, which started in Q4 last year. We therefore feel pretty confident to deliver a mid to a higher single-digit EBITDA margin in Q4 in ready-to-eat already versus a negative EBITDA margin in Q4 last year, i.e. from Q4, you should see the profitability pattern switch, i.e. this year's period, then better than last year's period. Before we talk about our cash flows, I would like to briefly also discuss adjusted EBIT. Other than adjusted EBITDA, our adjusted EBIT in Q3 is actually down year-on-year from 14 million to around about 7 million. This is driven by higher depreciation and amortization this year, which increased by roughly 10 million year-on-year, excluding the effect of impairment. Going forward, we want to actually put more emphasis on adjusted EBIT, as adjusted EBIT is a better KPI to take our capital efficiency into account. So given that adjusted EBIT and free cash flow are the KPIs we want to maximize in the long run, we will also more regularly guide and comment on these metrics from 2025 onwards. Let's now have a look at our free cash flow. Our free cash flow in Q3 was negative by around about 20 million, which results in a year-to-date free cash flow of positive 30 million. This is approximately 50 million lower than last year, driven by, on the one hand, lower EBITDA by roughly 100 million year-to-date and less favorable working capital movements, which is largely offset then by lower capex. In the first nine months of 2024, We spent $130 million on capex. For the full year, we have trimmed our capex plans further and also shifted some into 2025, which means that we're targeting now for 2024 overall somewhere in the low $200 million of capex versus the $230 million to $240 million that we had discussed before. I would now like to talk about our narrowed guidance for the full year. After the first nine months of this year, our constant currency revenue growth stands at 2%. As we discussed a number of times on this call, we want to maintain our strong focus on disciplined marketing spend also in Q4. This means that we intend to spend less on marketing than in the same quarter of last year, especially in the latter half of Q4. when customer acquisition environment is typically seasonally less attractive. As a consequence, we reduce our revenue growth outlook for 2024 on a constant currency basis from previously 2% to 8% to now 1% to 1.7%, i.e., we're indicatively planning with a slightly negative constant currency revenue growth in Q4 for the group. Also, please keep in mind that the US dollar so far has been weaker in Q4 compared to Q4 last year. Before last year, the average dollar to euro was 1.075 versus in October, we've seen the dollar fluctuating between 1.085 and 1.12. If that pattern continues, a softer FX rate that would impact your reported revenue growth for Q4 as well. Now let's talk about EBITDA. Given our strong EBITDA in the third quarter of 2024 and our continuous focus on marketing efficiency, we raised the lower end of our EBITDA outlook by 10 million. i.e., the narrowed range is now 360 to 400 million compared to an analyst consensus of 361 million before we pre-released our Q3 results. After the first nine months, we sit at an EBITDA of 235 million. This implies an indicative EBITDA range of 125 to 160 million for Q4 compared to 114 million in Q4 last year. Lastly, I would like to conclude with a qualitative midterm outlook. We will only provide quantitative outlook for 2025 together with our full year numbers on March 13. However, I would like to already give you a qualitative picture of the key levers through which we are confident to drive both profitability and cash flows into next year and beyond. From a contribution margin perspective, we're targeting an expanding contribution margin driven by Labor productivity increases across both of our product groups, MealKit and Ready2Eat, supported by further production-side rationalization within MealKit. In marketing, we are targeting to maintain strong ROI discipline. On our marketing spend, as you've seen come through in our Q3 numbers already, On top of that, we are starting to benefit from a bigger existing customer base on the ready-to-eat side. On G&A, we are targeting to achieve further overhead and G&A savings, which should bring absolute G&A expenses down further next year. And then lastly, on CapEx, we at Maximum are targeting of around 200 million for 2025 and see the opportunity to bring this down further thereafter as we are overall well prepared in both product groups to largely address future demand out of our existing infrastructure. I'm looking forward to provide you more, also more quantitative detail on that on our earnings call in March. Also, we want to dive into some of these levers here in more detail at our capital market day, which we are planning for the end of March. But for now, we look forward to your Q3 related questions.