HelloFresh SE (OTCPK:HLFFF) Q4 2023 Results Conference Call March 15, 2024 3:30 AM ET
Company Participants
Dominik Richter – Chief Executive Officer
Christian Gartner – Chief Financial Officer
Conference Call Participants
Luke Holbrook – Morgan Stanley
Emily Johnson – Barclays
Sven Sauer – Kepler Cheuvreux
Kiranjot Grewal – Bank of America
Nizla Naizer – Deutsche Bank
Andrew Gwynn – BNP Paribas Exane
William Woods – Bernstein
Dominik Richter
Good morning, and thank you for joining our full year results call this morning. After the prerelease last week, we will focus today on providing more detail on our full year and Q4 2023 results and also reiterate some of the trends we have been describing last week.
2023 marked the fifth year of consecutive adjusted EBITDA profitability and self-funded growth, in which we delivered over 1 billion meals to our customers, up about 4x since early 2019. Over this period, we delivered a net revenue CAGR of 33%. And while we eventually did not meet our ambition level in 2023 and are more cautious on the outlook for 2024, growth is unfortunately not always linear.
We did pull forward a lot of consumer demand in meal kits during the pandemic and have entered a stabilization and consolidation phase since H2 2022. During this time, our existing base has continued to strong — to show strong key customer KPIs and retention, as seen in higher AOVs, higher frequencies and about a 30% increase in customer lifetime revenues over the last 3 years.
We have entered this consolidation phase earlier in our International markets than in North America and have thus also seen the International segment recover faster throughout 2023, narrowing the year-over-year gap versus 2022 in every quarter throughout the year. Our North America meal kit segment will go through the same journey but on a delayed time scale.
While we appreciate that a more linear growth path is not only more desirable for our shareholders but also, for ourselves, much easier to digest, we need to live with the fact that we grew incredibly strong during the pandemic and we were wrong in our initial assumptions how quickly we can go back to sustainable growth for meal kits specifically.
Still, we expect growth at the midpoint of our guidance to accelerate versus full year 2023. At the same time, from 2019 to 2023, we delivered an adjusted EBITDA CAGR of 57% higher than the growth CAGR of 33%. With the benefit of hindsight, it’s clear that especially in 2020 and 2021, we were overearning in some of our most advanced meal kit markets when we saw a very sudden demand spike at very low marketing intensity and met artificially high operating leverage in fulfillment and on the G&A side.
Capturing a lot of this extra demand in the short term led to a temporary level of adjusted EBITDA margins higher than what is sustainable in the long run. Still, we’re maintaining adjusted EBITDA margins in many of our mature markets significantly higher than 10% today but off of the pandemic highs that we saw before.
We see a clear path to growing all of our individual business units for both of our scaled business lines, meal kits and RTE to a greater than 10% adjusted EBITDA margin. But to achieve this in a more normalized demand and supply environment is much harder than during the peak pandemic period. And given the significantly elevated inflation we have been seeing over the past 2 years, this will longer — this will take longer than what we originally communicated.
While we appreciate and very much share the disappointment of our shareholders about the last 6 months, it’s also important to take a step back and look at the broader company development over longer-time horizons. Since 2019, we have scaled faster than literally any other consumer company, with revenues up over 4x over that time frame. During the same time, other scaled e-commerce companies saw revenues increase about 2x from their prepandemic levels. Most of our peers have shown comparable growth rates to us for 2023 and anticipate a growth rate broadly in line with our expectation of 2% to 8% growth for 2024. The same broadly applies to adjusted EBITDA and free cash flow, where for both metrics, we have generated a very strong cumulative increase since 2019 compared to other scaled e-commerce peers.
If we turn our attention to the more recent past, we see a mixed picture for full year ’23 and Q4 ’23 along our key KPIs. Orders were down 4.7% year-over-year across the group, with an improving profile over the course of the year and the narrowing of the year-over-year gap in H2. For Q4, orders were down 2.8%, with both operating segments slightly negative.
International, which is largely meal kits only, has almost closed the year-over-year gap in Q4. Performance in North America was driven mostly by RTE, which helped to offset the drop in North America meal kit orders but suffered from slower-than-anticipated growth due to a delayed ramp-up of our new cooking facility in Q4.
The slight decline in orders after the massive increase during the pandemic was more than offset by the continued expansion of AOV throughout the year. On a full year basis, we expanded AOV by 7.8% in constant currency for the full year and by 6.4% in Q4. Both operating segments saw similar dynamics, with customers increasing their basket sizes and choosing to take more meals per order as well as the benefit from the continued rollout of our HelloFresh Market and selected price adjustments contributing to AOV growth as well.
For North America specifically, we also benefited from the mix shift to Factor over the course of the year, which is a higher-AOV product, positively influencing the AOV number for North America. In fact, North America AOV for Q4 expanded by 7% year-over-year while the AOV expansion in International without the mix shift to RTE amounted to 4% AOV growth.
The increase in AOV and the narrowing of the year-over-year gap in orders helped us to accelerate revenue growth throughout the year. Full year revenue came in at 2.8% in constant currency, with Q4 slightly accelerating to 3.4% year-over-year, driven by 4.4% growth in North America and 1.6% growth in International for Q4. North America revenue was helped by the strong growth of Factor, which achieved €1.4 billion in net revenue for 2024 while showing adjusted EBITDA profitability at the same time, making more than up for the slower demand environment we have seen for North America meal kits at the same time.
Christian Gartner
Thanks, Dominik. Let me now turn to the development of our procurement expenses.
Now there are a couple of drivers within our procurement expenses: firstly, a higher share of Ready-to-Eat in our revenue mix, especially in North America. Ready-to-eat, as some of you know, has a comparative higher procurement — share of procurement expenses because in addition to ingredients, we allocate all costs, including labor associated with the actual cooking to this line item. Secondly, with extra costs in the U.S. in Q4, as previously elaborated on, a fair share of these extra costs landed in procurement. This means on a group basis, relative procurement expenses are up by 0.8 percentage points for the year and 1.8 percentage points in Q4.
In North America, relative meal kit procurement expenses are broadly stable, i.e., the increase primarily comes from the mix shift just mentioned. In International, where Ready-to-Eat is still small, we were not affected by the Q4 extra costs. Procurement expenses improved year-on-year by 1.7 percentage points in Q4.
Let me now turn to the development of our fulfillment expenses. Here, you will see a continuation of the trends discussed in the past, and therefore, I’ll be brief on this page. You see improvement year-on-year by 2 percentage points, including in Q4, despite the extra costs we had to absorb in the U.S. We’ve seen a solid year-on-year trend in both segments, North America in Q4, primarily driven by a mix shift to Ready-to-Eat; and in International, steady improvement throughout the year, including in Q4. This is despite the fact that during Q4, we started to also realize initial ramp-up costs of our new German fulfillment center in Magdeburg, something that we will continue during 2024.
And with that, let’s have a look at our contribution margin. We have overdelivered on the contribution margin expansion promised for this year. Initially, we were targeting 100 basis points expansion. We actually delivered 130 basis points despite the extra costs experienced in the U.S. in Q4.
In North America, we achieved an expansion of 1.6 percentage points for the year. And in International, we improved by 1.1 percentage points for the year, with an acceleration during Q4. We’ve seen a positive trend across most markets and expense line items included in fulfillment in International.
Now before we turn to EBITDA, let’s discuss the development of our marketing expenses. Our relative marketing spend has increased in 2023 to 18.8%. This is driven by a couple of factors. Marketing spend on the meal kits side is broadly stable year-on-year in absolute terms. However, absolute revenue is down somewhat for meal kits in 2023.
Within Ready-to-Eat, marketing spend has been mostly growing in line with revenue growth, i.e., around about 60% in ’23. In Q4, given the stop-and-go ramp-up of our U.S. RTE business and based on the production ramp-up, our marketing spend, as we discussed before, was somewhat less efficient in Q4 for that vertical.
Let’s now turn to our adjusted EBITDA development for 2023. We achieved an adjusted EBITDA of €448 million in 2023. If you add back circa €20 million impact from weaker U.S. dollar, Aussie dollar and other currencies versus 2023, we were circa €10 million lower than in 2022. This performance is driven by — on the positive side, by meaningful expansion of contribution margin of around about 130 basis points, driven by underlying decent efficiency improvements, as just discussed, on the meal kits side.
This contribution margin expansion will unfortunately take a pause in 2024 due to the factors I’m going to elaborate on shortly. On the negative side, we saw somewhat higher relative marketing expenses, as just discussed.
Our EBITDA was impacted in the U.S. by an extra €50 million extra costs in Q4, which we have discussed on other occasions. By the way, just one more technical topic, the Q4 EBITDA number that you see on this page is excluding an impairment that we’ve done in 2023 of around about €6.7 million. So if you were to add that back, Q4 EBITDA is around about €120 million.
Next, I would like to discuss the development of our cash flows. Key message here on this page is that we are back to generating positive free cash flow. This is a combination of us achieving higher operating cash flow than the previous year despite the slightly lower EBITDA and, at the same time, delivering a step-down in CapEx as previously flagged, from €418 million in 2022 to €306 million in 2023. As a result, we have generated €78 million of free cash flow in 2023, which corresponds to €0.44 per diluted share, i.e., at the current share price that represents a yield of around about 6.5%.
I would like to briefly double-click on CapEx. By now, we are well advanced in our multiyear CapEx program. We are already meaningfully beyond the peak that we had in 2022. The most significant projects have either been completed by now or close to completion.
The key components for 2024 entail, most importantly, further RTE production capacity expansion in the U.S., in Canada and in EU. Secondly, the completion of automated meal kit fulfillment centers. The biggest ones here are the one in Germany that I just had referred to and the similar one in the U.K. These fulfillment centers were initiated in 2021 and are important to accommodate product improvements, many site expansion, HelloFresh Market in an efficient production setup. Thirdly, investments into automation of existing sites.
And then lastly, our capitalized own-developed software. From 2025 onwards, we expect CapEx to further step down to around about €200 million or below. RTE will represent the biggest investment in those periods.
Before we move on to our overall outlook, one word on production capacity utilization on the meal kits side. Even in the current somewhat softer demand environment, we still sit in most markets at a capacity utilization in Q1 of broadly between 60 and high 80 percentage points, i.e., in the zone that we still regard as our sweet spots as discussed in the past.
There is a meaningful degree of flexibility. We have to manage capacity up and down short term through shift planning, how much overflow we give to 3PLs and similar measures. So while there is some short-term negative fixed cost leverage when volumes decline, this is not a massive shift in economics. In addition, the production footprint can be further aligned to volume expectation over a slightly longer period of time.
Before we turn to our outlook, I would like to spend also a short moment on the strength of our balance sheet, as this seems to have gotten lost to some over the last couple of days. We have one of the strongest balance sheets in the e-commerce space. On the left-hand side, you see that at the end of last year, we had €433 million of cash on our balance sheet.
In addition, we have a €400 million revolving credit facility, of which €366 million are untapped and freely available to us, i.e., as of the 31st of December, we have circa €800 million of freely available liquidity resources. These compare to the only funded debt we have outstanding, which is our convertible bond of €172 million, which matures in May 2025.
Our available liquidity resources cover outstanding debt, therefore, by a factor of almost 5x.
Separately, if you quickly glance over to the right-hand side, you see our financial leverage. Even if you include capitalized leases, our net debt-to-EBITDA is at a very modest 0.8x. Excluding leases, we actually have a net cash position, as you see on the left-hand side, so €433 million of cash and €170 million of convertible bonds.
Let me now turn to our outlook for 2024. We are planning for the financial year 2024 with a single-digit percentage top line growth. This is driven by a number of factors within RTE, which is currently delivering circa 50% year-on-year growth rate. We expect to continue capitalizing on strong demand for our brands as we continue to ramp up production capacity.
For meal kits, which currently experience negative revenue growth in the high single percentage digits, we expect to increasingly close the negative volume gap versus the comparative period as we progress throughout the year. We expect our ongoing investment into our physical and digital products to contribute to the strength as well as increasingly easier comps.
Based on these trends, we are targeting for 2024 a constant currency revenue growth of 2% to 8%. The lower end of this range would be consistent with us not improving the meal kit volume gap to the prior year throughout the whole year and a slightly lower RTE growth.
From a segment perspective, we expect our North America segment revenue to grow at a higher rate than our International segment, driven by the higher share of Ready-to-Eat of total North America revenues.
From a profitability perspective, we are facing a temporary EBITDA margin compression in 2024. This is primarily driven by on the RTE side, the continued ramp-up of our production capacity and elevated marketing expenses, which go hand in hand with a strong growth in customers. After 2024, once we are beyond this initial very fast ramp-up phase, we are confident that we can optimize efficiency in our production processes further, which should deliver several points of additional contribution margin and, therefore, also EBITDA margin.
Also marketing expenses as a percentage of revenue will come down once our base of existing RTE customers is further built up.
On the meal kits side, firstly, we currently see some deleveraging impact due to lower volume, as discussed earlier. Secondly, we ramped up 2 key new fulfillment centers in our 2 largest markets within International, U.K. and Germany, Austria. During the time of this ramp-up, we effectively incur extra costs as we paid double overhead and fixed costs for a period of time on top of lower productivity during the initial ramp-up phase. From 2025 onwards, though, these facilities are expected to deliver attractive efficiencies, therefore, net savings in these markets.
And then thirdly, as discussed before, we are also planning for the product investments on the meal kits side.
So taking all of that together, this means that we expect absolute EBITDA in 2024 to be lower than in 2023 and land in the range of €350 million to €400 million. We expect the adjusted EBITDA margin in our North America segment to be higher than in our International segment, as it was the case in 2023.
For Q1, we expect constant currency revenue growth at the lower end of our full year guidance and a breakeven to slightly negative EBITDA margin given, one, the seasonally high marketing expenses in Q1; and secondly, the rapid Ready-to-Eat ramp-up.
As stated previously, we would also like to pull our 2025 targets for — of €10 billion revenue and €1 billion EBITDA. Our operating environment is clearly different to the time when we had set these targets. We are still confident given the leading global market share we have across our 2 main verticals that we can break through the €10 billion revenue and achieve an EBITDA margin of 10% or more in our segments. This is not realistic anymore to get there by 2025.
I would now pass it back to Dominik.
Dominik Richter
Next, let me reiterate a number of the points on future business strategy we shared during our prerelease last week.
First of all, I’d like to talk about meal kits with some of the points also relevant for the future RTE outlook. Our existing customer base is highly attractive, and the improvements that we have delivered to the customer proposition resonates well and have led to a number of our key customer KPIs showing strong improvements over the last few years. While we cannot fully control the number of new customers every quarter and have seen a decline in new customers for meal kits since the pandemic peak times, we have very high visibility and predictability on the future revenue potential of our existing customer base.
Broadening our assortment in the menu and in our HelloFresh marketplace, delivering an increasing number of orders at better service levels through our own fleet and increasing new customization options have all proven to be powerful levers to drive larger basket sizes and higher frequencies, as you can see on this slide. This has led to a strong 30% projected increase in customer lifetime revenue. This is powerful since it affects all existing and incoming cohorts of customers.
Hence, for 2024, we aim to stabilize revenues at the high rates we have reached during the pandemic as we build out the muscles required for the next leg of growth. Specifically, we will focus on 3 areas that have shown promising results in early testing and will be rolled out to the whole customer base over the next 12 months.
First of all, we will continue to increase the size of our assortment, which is now possible given the move to new and partially automated fulfillment centers. This is a strategy that has proven successful whenever and wherever we deployed it, and we tend to see higher order rates and increased basket sizes as a result. With our modernized fulfillment footprint, we’re in a position to continue to innovate and excite our customers more than ever.
Secondly, we’re actively working to launch our HelloFresh loyalty program in select markets over the course of 2024. We aim to increase order rates by providing outstanding value to our customers here.
Thirdly, we plan to evolve our pricing and incentive strategy by moving from financial to product incentives. As we roll out, this should result in a decrease of our marketing spend in the midterm while helping to build a really healthy customer base.
It is disappointing that we will not be able to grow adjusted EBITDA for our meal kit business in 2024 given the dynamics that Christian outlined before. However, it’s also important to note that our midterm ambition to reach greater than 10% EBITDA margins in our meal kit vertical is very much intact. We will see some operating deleverage from lower volumes in 2024 alongside extra costs associated with migrating our 2 largest International markets to new and automated fulfillment centers. During that transition period in ’24, we will have to run different centers in parallel, adding some extra costs, which will lead to EBITDA margins in meal kits to temporarily contract a little from the 9% EBITDA margin we clipped in 2023.
In order to sustainably grow EBITDA margins again by 2025, we will focus on 4 main dimensions to drive improvements. While we have been disciplined around G&A and headcount in 2023, with the new volume outlook and a slower return to growth, we see opportunities to rightsize our overall cost base and optimize our production footprint. Those benefits should become visible from 2025 onwards and are a key driver for overall meal kit EBITDA expansion.
Within our fulfillment footprint, there are additional opportunities to enhance productivity as we exit all the sites and benefit from better productivity and automation in newer site. This is something that has already played out over the course of last year as you have seen in our fulfillment expense line. And as more and more new sites reach better maturity stage, we expect to continue to see these trends materialize.
We will also continue to deploy technology to automate workflows and benefit from a higher degree of automation in the business. Especially, our efforts to deploy generative AI in customer service around photography and content creation should start to show cost benefits.
Finally, our drive to move toward product incentives should allow us to lower marketing costs materially in the midterm. The combination of these drivers gives us good confidence that there is a clear path to move to greater 10% EBITDA margins for meal kits as a whole in the midterm. This is the level where many of our mature meal kit markets are already today.
With that, I’d like to turn to our RTE vertical and our expectations for that vertical for 2024. In ’23, we scaled our RTE business unit by about 60% and around 10x since acquiring the business 3 years ago, making it one of the fastest-growing businesses at scale globally. We target around 50% growth for this vertical in 2024, given a good start to the year and continued low TAM penetration. Growth will come both from scaling up our production capacity in the U.S. and penetrate that market at a higher rate, scaling up recently launched RTE geographies in Benelux and Canada as well as launching our Factor RTE brand into additional International markets.
We overall continue to be very excited about the growth prospects of this business unit and can deploy a lot of the playbook we have successfully executed for meal kits before.
Our RTE vertical reached an adjusted EBITDA margin of 4% in 2023 already while growing 60% year-over-year. Given the costs associated with ramping up a more complex production network in ’24 and the costs associated with launching and scaling new RTE markets, additional underlying like-for-like improvements in 2024 will be offset by these initiatives, and we expect EBITDA margins to remain broadly stable.
In terms of margin profile, RTE should converge to a similar adjusted EBITDA margin at scale to what we see for our mature meal kit markets today, i.e., grow to north of 10% EBITDA margin over time. The path to getting there includes AOV improvements through broadening our assortments and Factor marketplace offerings, strong productivity improvements in our cooking operations as we mature our new fulfillment footprint and, most importantly, a strong decrease of our marketing expenses as a percentage of revenue over time as our customer base matures and more orders come from our existing customer base. This very same dynamic has played out in every single meal kits geography over time.
Moving through the scale-up phase for RTE in International markets and eventually starting to produce positive EBITDA in those markets will be another driver to get the overall RTE segment to see both absolute and relative EBITDA increase. With these initiatives in full play, we see a clear path to grow the RTE vertical also to north of 10% EBITDA margin in the midterm.
So to sum up. First of all, we were too optimistic in our base case on how quickly meal kits can return to sustainable growth and have entered a consolidation phase in our meal kit vertical that will continue into 2024. Overall growth for the group should still accelerate in ’24 versus ’23, driven in large part by our attractive and fast-scaling RTE vertical.
Group EBITDA will be down in 2024, but we have taken measures to return to sustainable EBITDA expansion again in 2025, such as rightsizing our cost base and optimizing our production network for meal kits. Both meal kits, RTE and any new business unit should eventually converge to EBITDA margins north of 10%. At the moment, mix shifts in our revenue and profit composition tend to temporarily hide the strong like-for-like improvement we have been driving in many parts of the business.
We also expect the trend of changing revenue and profit composition to continue as we identify and scale the next billion-dollar business lines, taking advantage of all the assets, technology, people and competencies we’ve built up within the group over the last couple of years.
That’s it so far from our side. We would like to open the floor for questions. Thank you.
Question-and-Answer Session
Dominik Richter
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