HelloFresh SE (HFG) Earnings Call Transcript & Summary

Hello, ladies and gentlemen, and welcome to the HelloFresh Q1 2025 Results Call. [Operator Instructions] Let me now turn the floor over to your host, Dominik Richter.

Good morning, ladies and gentlemen. I'm here today with Christian, our CFO, to present the Q1 earnings and provide some context on our recent financials. After deep diving on our strategy for 2025 and 2026 on our recent Capital Markets Day in late March, we'll try to keep the strategic updates brief today and focus on the financial performance in Q1 as well as our outlook for the remainder of the year. What is worth reemphasizing, though, are the 2 objectives that we're laser-focused on right now as a company: firstly, deliver on our efficiency program; and secondly, create a step change in our customer offerings so we can expand the total addressable market that we go after and eventually return to a multiyear growth trajectory. This includes both meal kits and RTE. Even though they are at very different stages of growth, we strongly believe that a much improved customer offering will pave the road to predictable and sustainable mid-term growth and a continuously larger TAM to go after for our 2 strong consumer brands. Executing on our efficiency program is critical for both short-term and long-term success. It's our deliberate strategy to emphasize profits and cash flow generation over volume growth this year. We had seen the painful decline of our AEBITDA but also of our free cash flow for 3 years in a row. And it's important to turn this around in 2025 by rightsizing our fixed costs, improving our unit economics and returning to a best-in-class financial profile. This will free up the funds and investments required to self-finance the massive improvements we plan for our customer offerings and to diverse into additional product groups more forcefully. The success of our efficiency program is crucial to eventually return to growth at the right unit economics and with superior margins and a strong cash flow profile. It will provide us with the right foundation to build toward our long-term vision to create a leading global, digital-first CPG group with diversified revenue streams and strong underlying profit pools. Let's turn to the highlights for Q1 now. Q1 has been the extension of us delivering strongly on our efficiency program that we also did in Q3 and Q4 last year to fundamentally change our cost profile for the better. We've made great progress on many dimensions. Net revenue amounted to EUR 1.9 billion in Q1, a decline of 8.3% year-over-year primarily driven by a decline of meal kit marketing expenses and materially lower new customer additions in line with our strategy to optimize for higher ROI thresholds and a focus on profit over revenue growth. The flip side of this has been a strong increase in adjusted AEBITDA and adjusted AEBIT generation. AEBITDA is up 245% to EUR 58.1 million while AEBIT increased by EUR 46 million year-over-year in Q1 alone. Free cash flow increased even more forcefully by about EUR 100 million year-over-year from minus EUR 6 million in Q1 2024 to over EUR 94 million in Q1 2025. A major contributor to the improvements in all bottom line profitability metrics has been the expansion of our contribution margin by 1.3 points to 27%. In addition, we managed to decrease marketing spend by about 1 point year-over-year. This has been achieved as a result of higher marketing ROI thresholds, much reduced marketing investments in the meal kits product group and in spite of our biggest brand campaign to date for RTE in Q1. Based on the better-than-expected Q1 results, we feel on track with regard to our previously issued full year guidance despite the heightened macro uncertainty. This includes the potential impact of tariffs, major FX headwinds in our euro reporting currency, and an unclear consumer confidence outlook, particularly around the U.S. consumer, which are all hard to fully control for. We therefore think it's prudent to stick with our previously communicated full year guidance for now. Finally, we have seen encouraging results from product investments in Q1 and have a full pipeline to roll out successful pilots in many of our mature markets, mostly in the second half of the year. In line with our strategy, we saw orders for the group decline by about 12% year-over-year in Q1, mostly driven by the meaningful reduction in U.S. meal kit marketing expense. As a result, Q1 North America meal kit orders declined by about 18%. International meal kit orders, on the other hand, saw also a reduction -- which also saw a reduction of meal kit marketing spend but not to the same degree. We saw orders consequently decline by about 3.6%. Important to note that our existing customer base show overall a stable to improving order behavior, i.e., a decline in orders is fully due to fewer new customer additions. Group AOV once again increased in Q1 year-over-year to over EUR 68 per order, a 3.8% increase in constant currency. North America increased by 5.9%, International by 4.5%. Both regional segments benefited from lower monetary incentives, pushing up AOVs. In addition, in North America specifically, we saw a mix shift toward a higher share of RTE orders, which come at a somewhat higher AOV compared to meal kit orders. Put together, the deliberate strategy to emphasize profits over growth has led to a substantial temporary order decline fully attributable to lower new customer additions. This has been somewhat offset by higher AOV, most notably by lowering monetary incentives. All in all, this has led to a net revenue decline of 8.3% in constant currency. Q1 net revenue reached EUR 1.9 billion, in line with previously issued revenue guidance. From a regional perspective, North America net revenue declined about 13% in Q1, whereas International net revenue increased by about 1% year-over-year. From a product group perspective, meal kits declined by about 14% year-over-year whereas RTE net revenue grew about 8%, both in line with previously issued revenue guidance. I'll hand over to Christian now to walk us through our cost line items and the outlook for the remainder of 2025.

Thank you, Dominik. So as you will clearly see on the following pages, we have built significant momentum in our efficiency program across all costs and cash flow items. Starting with our contribution margin, we see a significant leap forward. In Q1 2025, we have increased our contribution margin year-on-year by a substantial 130 basis points to 27%. This expansion is a direct result of the efficiency levers I outlined at our Capital Markets Day: firstly, a meaningful year-on-year increase in our direct labor productivity for both meal kits and ready-to-eat; secondly, the decisive steps we are taking to decrease our production footprint in meal kits; and lastly, efficiencies gained from reducing our overhead personnel and ancillary costs. Looking at our geographic segments. North America has delivered a remarkable increase in contribution margin, up by 290 basis points. In International, we see a temporarily reduced contribution margin by 80 basis points, driven by the continued ramp-up of our automated sites in Germany and the U.K. as I flagged earlier. Importantly, we expect this to reverse by the end of the year, setting the stage for year-on-year contribution margin expansion in Q4 in International as well. So in summary, we are well on track to expand our contribution margin for the full year 2025 by circa 100 basis points, as declared earlier, even while reinvesting in our products to fuel future growth. Separately, in Q1 2025, we've taken an additional EUR 90 million noncash exceptional impairment charge driven by executing planned reductions in our production footprint. Whilst there may still be some smaller impairments throughout the year, we currently do not plan significant further impairments of similar size going forward. Let me now turn to our marketing expenses. You'll recall our detailed discussion at the Capital Markets Day regarding our disciplined ROI-focused approach. Now this strategy is clearly reflected in our results. This is particularly evident in our meal kit business, where our focus on ROI has led to a significant decrease in spending, with the year-on-year reduction in Q1 being even more pronounced than in the second half of 2024. This is primarily impacting new customer acquisition, while crucially, orders from our tenured existing customer base have remained robust. The result is a meaningful reduction of total group marketing expenses, down by 90 basis points on a relative basis and a substantial EUR 51 million in absolute terms. This achievement comes despite our strategic investments in brand marketing for ready-to-eat in Q1 as we had outlined at the Capital Markets Day. In fact, we increased our ready-to-eat brand spend by over EUR 30 million, representing approximately 6 percentage points of AEBIT margin in Q1. This demonstrates our commitment to building long-term brand equity for Factor. The disciplined execution of our efficiency program has allowed us to increase AEBITDA year-on-year by more than EUR 40 million, which given that Q1 typically is a low-profitability quarter means that we have more than tripled adjusted AEBITDA year-on-year. Both of our geographic segments have contributed to the positive trend. North America increased its AEBITDA from EUR 26 million to EUR 61 million. International increased its AEBITDA from EUR 29 million to EUR 41 million. From a product group perspective, the AEBITDA margin of meal kits stands out with 11.4%. This represents the highest Q1 adjusted AEBITDA margin we have ever achieved in meal kits in Q1, i.e., even higher than during peak COVID in Q1 2021. And importantly, we are not stopping here. We have a comprehensive pipeline of efficiency measures still to fully materialize, giving us strong confidence in further AEBITDA margin expansion in meal kits over the coming quarters and in 2026. This is a powerful engine for us to self-fund reinvestments into our products to reignite growth, as discussed at our Capital Markets Day, and to fund share buybacks while maintaining a strong balance sheet. In ready-to-eat, we meaningfully expanded the contribution margin by several percentage points year-on-year. At the same time, we stepped up investments into marketing and especially brands, where we spent in Q1 over EUR 30 million more than in Q1 2024, corresponding, as I've mentioned, to more than 6 margin points. This, in addition to building our customer base and further internationalization of the footprint of ready-to-eat, has resulted in a temporary decrease in our ready-to-eat AEBITDA margin by approximately 4 percentage points year-over-year to negative 8.4% in Q1. We expect, however, ready-to-eat AEBITDA margin to be positive each quarter and higher than last year for the remainder of the year. Our strong AEBITDA uplift in Q1 has also translated to a strong adjusted AEBIT increase in the same quarter. We have increased our adjusted AEBIT in Q1 year-on-year by EUR 46 million. This is driven by the adjusted AEBITDA uplift which we had just discussed and a slight reduction in D&A, where our lower CapEx and overall more asset-light approach start to take effect. Both of our geographic segments have contributed to this adjusted AEBIT improvement, North America with a year-on-year increase of EUR 40 million and International with an increase of EUR 12 million. From a product group perspective, you see a similar trend as just discussed for adjusted AEBITDA so meal kits very meaningfully up, ready-to-eat temporarily down due to a step-up primarily in brand investments in that quarter. Now let's turn to our free cash flow. We've delivered a significant step change in free cash flow generation, reaching EUR 94 million in Q1 2025. To put this into perspective, this represents a year-on-year expansion of EUR 100 million and resulting to a free cash flow for Q1 higher than our entire free cash flow for the full year 2024. The number of drivers for this significant improvement: firstly and most importantly, the very meaningful adjusted AEBIT and adjusted AEBITDA expansion that we just discussed; secondly, seasonal cash inflow from working capital which, in this Q1, was slightly more pronounced than last year; and then thirdly, EUR 7 million lower CapEx than the same period last year, which is mostly due to timing. For the full year, my previous guidance still holds, i.e., we're still targeting a similar amount of CapEx as last year before bringing it further down to below EUR 150 million in 2026. Our strong free cash flow generation has -- also funds our ongoing share buyback. In Q1, we've bought back 2.7 million shares for a total of approximately EUR 20 million. Based on our buyback program, we buy more shares at lower share prices. And at the current rate, we'd be done with our EUR 75 million program already around the time of publication of our H1 financials, i.e., somewhere mid-August. I would now like to conclude with our outlook for the full year. As you know, we remain entirely focused on executing well on our ongoing efficiency program whilst investing meaningfully into our product. I've discussed the key components of our efficiency program at length at our Capital Markets Day. The program's implication is that we are accepting a temporary period of negative top line growth to reset our margin and free cash flow profile, paving the way for return to top line growth with a then significantly enhanced profitability and cash generation capability. Our strong Q1 performance on adjusted AEBIT and adjusted AEBITDA and free cash flow enables us to maintain our full year guidance despite some of the emerging macro headwinds and uncertainties such as soft U.S. consumer confidence, a meaningfully weaker U.S. dollar and ongoing tariff uncertainty. This means concretely for the full year 2025. We are targeting a decrease in constant currency revenue, by negative 3% to 8%, for the full year. In Q1, as you have seen, we were at the wide end of this range. And we expect a similar picture in Q2 before steadily reaccelerating year-on-year revenue growth in H2, driven by meaningful product reinvestments. From a product group perspective, based on the first 3 weeks of Q2, meal kits is trending mildly better on revenue growth compared to Q1 and RTE somewhat softer. Driven by the implementation of our efficiency measures, we continue to target for the full year to expand contribution margin by circa 100 basis points and reduce relative marketing spend by indicatively, 50 to 100 basis points. Our contribution margin and marketing cost improvements, combined with the benefits of our overhead efficiency initiatives, allow us to target an adjusted AEBIT of EUR 200 million to EUR 250 million for 2025, an increase of 65% versus 2024 at the midpoint. This also implies a meaningful increase of our adjusted AEBITDA outlook to EUR 450 million to EUR 500 million in 2025 versus 2024. Based on the levers within our control, we remain on track with respect to our profitability targets despite heightened macro uncertainty, continued U.S. tariff risk and FX headwinds. Now on FX, please keep in mind that we had initially provided our 2025 adjusted AEBIT and AEBITDA outlook based on a euro-U.S. dollar exchange rate of 1.04. In the meantime, the U.S. dollar has softened materially, as you all know, to a level of currently approximately $1.14. Maintaining our outlook at the -- in the current FX environment effectively means absorbing an FX headwind to adjusted AEBIT for the remainder of the year of EUR 28 million through additional measures. Finally, on free cash flow, we continue to target more than doubling our free cash flow in 2025. Our strong Q1 performance represents a significant step in that direction. Coupled with our ongoing share buyback program, we anticipate that our free cash flow per diluted share growth will be even slightly higher than our total free cash flow growth, further enhancing shareholder value. We are firmly convinced that delivering long-term AEBIT growth and strong free cash flow per diluted share is the key to drive long-term value for our shareholders. These are the core targets that our entire HelloFresh organization is dedicated to achieving. Now with that, we look forward to your questions.

[Operator Instructions] And the first question comes from Luke Holbrook, Morgan Stanley.

You usually provide a more specific outlook into the outer quarter. Is there any reason for Q2 being more specific on adjusted AEBITDA absolute figure that you're guiding to? And just within that context, could you just be a little bit more specific on how trends are faring into the second quarter regarding your kind of core loyal customer base that you'd outlined at your CMD as 2/3 of the overall orders of the group, by a function of them having placed 21 orders on your platform historically versus those that are less loyal, that remaining 1/3 of the customer base? Just want to get an understanding of some of those dynamics from your cohort.

Luke, it's Christian. So from a profitability outlook, effectively what I told you not too long ago at the Capital Markets Day and also at the -- with the full year results still holds. So we're targeting every quarter to roughly be EUR 10 million to EUR 20 million better than the prior quarter from a profitability perspective and that still holds. That's why I didn't repeat it again, but no change to that. And with respect to the behavior of our loyal customer base, no change to what you've seen from us and what we discussed in detail at the Capital Markets Day 5 weeks ago.

The next question comes from Sven Sauer, Kepler Cheuvreux.

It's on the RTE segment and just looking at the sales growth and the profitability last year and now comparing it with this year. And you also mentioned that you invested EUR 30 million into the brand but also said that Q2 might be a little bit softer for RTE. I'm just wondering. Is -- I mean, is the marketing efficiency going down for this segment or am I seeing something wrong?

So for RTE specifically, it's really important to understand that we don't want to chase the last customer but really aiming to build a multi-leg growth strategy as we've outlined at the Capital Markets Day. And so the focus in H1 is to really build long-term demand and brand equity through some of the brand advertising and invest significantly into the product offering and our service levels before accelerating revenue growth again in the second half of the year on the back of this and versus somewhat easier comps. I think it's important to note that obviously, U.S. consumer is sort of like very uncertain where the U.S. consumer stands. And hence, we really want to see both our brand investments and our product investment plans land before we kind of like dig more forcefully into some of the demand-harvesting phase again. And so Q2 is more of a trend continuation of what you've seen in Q1. We should be seeing reacceleration in H2 on the back of those investments that we're taking in H1 now.

The next question comes from Marcus Diebel, JPM.

If I can follow up on the revenue momentum in ready-to-eat to what you just said. So in H2, you're telling us the revenue growth is accelerating because of, yes, your investments into the customer proposition. Or is that also a function of new markets opening up, which basically then come -- which are then incremental? If you can just spend a bit more time explaining to us why you should see this revenue acceleration in the second half in RTE.

So second -- so in the second half, it's mostly down to what we'll do in the U.S. In Europe, I think we've grown our Factor business to a good size. We've seen sort of like strong customer metrics and strong customer demand, but a big focus in our international Factor business this year is moving into our own facility so it's not a huge source of overall RTE growth for the year. And it's also not what will accelerate H2 revenue acceleration in RTE. It's really building up the overall brand demand in the first half of the year and most notably the product investments and then really focus on marketing those in our back-to-school season, which as you know is outside of the January period, the most important season for us, the biggest sort of like marketing moment in the year. And that's where we focus -- and that's where we will focus a lot on bringing those product investments across and expect that to also come through in overall revenue growth numbers.

The next question comes from Jo Barnet-Lamb, UBS.

I guess just a follow-up with regards to higher brand marketing in RTE. It's obviously very substantial. Is there anything that you can point us to with regards lead indicators that you're looking at to give you confidence that you're going to get a good payback on that expenditure? It obviously feels like quite a big step change. And then a second one if I can just sneak it in. It's a clarification from the CMD that I just wanted to ask. With regard to your cost savings that you guided to at the CMD, it's not clear to me from the buckets given. Does it include savings from reduced discounts or not?

Let me tackle the first question on RTE and brand advertising. So there's 2 data points that I can point to. Number one, we started brand advertising at very small scale last year for Factor, which we did over a 15 months period where we targeted certain geographies called DMAs in the U.S., and compared the long-term demand generation in those DMAs versus other representative DMAs where we didn't engage in doing that. And what we saw was that over the course of 12 to 15 months, we could really build up a lot more search traffic. We could build up better NPS. We could build up overall, so like a very good effect, gross effect, on other channels that we engaged in. And that has been, I think, a very robust long-term test. And based on that test, we felt comfortable deploying a much larger brand spend to a lot more DMAs over the United States in Q1 this year, and we would expect it to play out in a similar fashion. Now what are some of the sort of like more short-term metrics that we look at to see if we're on the right track? Those are metrics like brand awareness and like consideration, organic traffic to our page. And for example, unaided brand awareness for Factor jumped from about 8% to 12% over the course of Q1, so clearly sort of like some of the leading indicators that should tell you whether this is playing out in the long term. I think they look fine. They look like we would have expected that. And if the results that we've done in our large-scale experiment last year holds true, then this should play out over the next quarters. That will allow us to harvest demand more efficiently than in those DMAs where we haven't engaged in doing that. So I think a long answer, but I think the bottom line is that short-term metrics point in the right direction. And usually those type of investments play out over multiple quarters rather than the very first time that you launch it.

And Jo, it's Christian here. On your second question, whether reduced price incentives also are included in our efficiency saving targets, the answer is yes, yes. So these bake into the marketing ROI improvements that we are materializing and continue to target throughout the rest of the year and for 2026. And they are also baked into the EUR 300 million gross savings number that we had discussed at the Capital Markets Day and the EUR 200 million net number. So that's all included.

So thank you, everyone, for the questions. I'd now like to hand it back to Dominik Richter and Christian Gaertner for some closing remarks.

Thank you all for attending our Q1 earnings call. We think, I think we have a very, very clear strategy of what we want to do. We'll see over the coming quarters how that plays out, but we have big confidence that a lot of the things that we're doing right now will meaningfully increase the value to our customer base and open up to potential new audiences. So same -- in the same line as I started the call, we are really laser-focused on 2 major objectives: the cost efficiency program, which I think you've seen come through already in Q1, and we expect that trend to continue for the remainder of the year, and then also on a number of really material product investments, which I think will really help us to reinvigorate growth and eventually return to growth for the group in the long run. We look forward to reporting back on the results of that strategy in our next call when we'll discuss the H1 and Q2 results specifically. Thank you for attending the call today.