HelloFresh SE (HFG) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to the HelloFresh SE Q3 2026 Results Call. The conference will be recorded. [Operator Instructions] Let me now turn the floor over to your host, Dominik Richter.

Good morning, everyone, and thank you for joining our Q3 2026 earnings call. I'm joined today by our CFO, Fabien Simon, and I'll spend my time on the strategic picture first, why we're making the choices we're making and why we remain convinced that they're right for this business over the long run. Our CFO, will then walk you through the numbers in detail, and we'll open the floor for questions after that. Earnings call and in our H1 shareholder letter, we talked about the phased rebuilds that we're in at the moment. With a clear focus on coming out of this self-funded transformational period as a sustainably profitable company with strong customer satisfaction and beloved products. Phase 1 was significantly reducing our cost base, especially fixed costs and our network. The program we set for ourselves for 2025 and 2026 has largely been completed, though run rate savings and other pockets of efficiency will continue to come through to the P&L next year. Phase 2 is about partially rein those savings into a genuinely better product that serves a much larger TAM than what we previously had. Phase 3 is turning that better product into growth. Once the numbers tells us it's the right thing to lean in, with strong unit economics and high customer satisfaction in place. Since last year, we've driven an ambitious innovation agenda for our customers, which included large menu expansion, upgrading existing and introducing new and exciting SKUs. At the same time, we have completely overhauled the digital customer experience, making it easier for our customers to find the right meals and add-ons in a much larger menu and driving higher engagement. Innovation at this speed doesn't arrive at full efficiency on day 1. In our last call, we spoke about temporary operational inefficiencies that come with driving so much change through the organization and our supply chains. New SKUs cost more to source before you scale volume behind them. New cuisines take a few cycles to hit customer expectations. Going from about 50 to now about 100 recipes per week over the course of the year in our average menu and even to 500 recipes per week in a pilot in the U.S. has resulted in more initial forecasting and manufacturing volatility than predicted. We've gone through a steep learning curve and ramp-up curve in H1 alongside of macro headwinds that had an adverse impact on unit economics. Now going into Q3, remained steadily high in the first few weeks of the quarter. When presented with the choice to prioritize fixing the root causes of those inefficiencies or spent behind unit economics that were not in line with our plan, we chose to considerably reduce our marketing budgets in order to protect our bottom line and free cash flow. Given the strong underlying customer metrics and marketing fundamentals, it has been disappointing. But we really wanted to avoid scaling marketing prematurely on unit economics that were not in line with where we wanted them to be. We've also successfully completed another step in our network rationalization strategy and exited buildings in New Jersey and the U.K., driving down future lease liabilities and reducing fixed costs. Our RTE profitability recovery also took a major step forward with RTE achieving adjusted EBITDA breakeven despite significant ramp-up costs for our new European site. Finally, we continued to pursue our strategy of diversifying our RTE revenue line and posted strong revenue growth in European sector markets and the Canadian sector market, and also launched our retail ready meal line across hundreds of stores in the U.S. in September. Going into Q4, we're focused on 4 things: First, we're recalibrating our menu expansion and product investment strategy. For example, we've somewhat reduced our menu size in meal kits North America from 500 miles in our pilot to now about over 150 meals back in August, still the largest menu on the market in the U.S. Second, we will continue to drive contribution margin improvements. The exit rate for Q3 was already better than Q3 average, and we're expecting to see a further step-up in Q4. Third, we will achieve greater coverage of the many personalization features that's tested successfully in a range of markets over Q2 and Q3 and get those to fuller coverage. I'll speak about those on the next slide. And fourth, we're shifting our focus to our marketing engine and how to best prepare for the upcoming January peak season and early 2027. While Q4 is generally a low quarter for growth investments, we'd like to use the time to be best equipped for a successful peak period. As a result of these choices in Q3 and our focus areas in Q4, we continue to be on track to maintain strong double-digit EBITDA margins for meal kits and a return to EBITDA profitability in our RTE segment for full year 2026, but somewhat weaker on top line than what the original guidance implied. We have strong conviction that future growth will be driven by providing customers with more value per place. And that's exactly what has been our primary focus since the start of the year. Our offering today is more competitive than it was at the start of 2026, and the customer metrics prove that this resonates. As mentioned earlier, alongside the transformation of our physical product experience, we've been making material changes to the digital experience as well. Over the course of Q3, we continued to roll out various features that make our personalization engines smarter. This is really important to allow customers to navigate a much broader menu effectively. Onboarding cuisines now have close to 100% coverage. New customers tell us what they like during checkout and every future menu weeks adjusts to their preferences, with each future menu presorted according to their preferences. We've also launched our multidimensional food profile to existing customers. Together with their order history, their menu engagement and what we can infer from their browsing behavior, it now informs what we recommend to them. As a result, customers menu feeds now dynamically take into account a customer's personal preferences and create personalized collections to such as GLP-1 friendly meals, Italian meals, meals under 20 minutes, family and so on. The categorization of meals follows an individual logic and no customer sees exactly the same menu feed. The objective is that the right meals are serviced at the right time, allowing customers to navigate a much broader menu seamlessly. Merchandising widgets that highlight seasonal specials or limited time offers has started to roll out across the personalized menu feeds for meal kit customers. They allow for storytelling, shining a light on cuisine specials or exciting new ingredients and come with video capabilities. Experiment results have shown that they drive a lot of engagement and leads to better uptake of our premium meals and seasonal specials, which can be observed in AOV gains. We've also introduced personalized add-on care results in the app experience, which features items from our add-on store that we believe customers are most likely to enjoy. Those complement their meals based on what they have in their basket and their past ordering history. This has also shown to drive upside to basket size and AOV. Over the course of Q4, we will roll out these features more progressively to all entities worldwide to capture the proven benefits to engagement, basket size and premium meal uptake. To recap, before I hand over, the first 9 months of 2026 has seen us continue to execute the multiyear strategy we've been deliberately pursuing. Strong innovation on the customer's behalf, disciplined ROI thresholds and progress towards a return to positive full year RTE bottom line. These trends are compounding in the right direction. The product is improving strongly and the customer reception proves it every single week. Growth, when we lean back into it will be a choice we make with conviction when all the ingredients are present, not a target we want to chase prematurely when unit economics have not reached the levels we aspire to. With that, let me hand it over to our CFO, who will take you through the quarter's financials.

Thank you, Dominik. Good morning, everyone, and thank you for joining us for our Q3 earnings presentation. As you know, we updated our outlook through an ad hoc announcement in September. We will address that. But I would invite you to read this quarter in a broader context of our strategy. In Q3, we remain disciplined on marketing return on investment. We delivered a double-digit adjusted EBITDA margin for meal kit. We reached adjusted EBITDA breakeven in ready-to-eat. We continued our efficiency reset, and we kept investing selectively in growth opportunities such as ready-to-eat in retail or paid fully in the U.S. market. We have been very deliberate in how we implement our strategy and the number you see for Q3 are a result of that. So revenue was EUR 1.4 billion, a reported decline of 9.8% for the group or 11.3% in constant currency. Meal kits declined 13.1%, ready-to-eat declined 11.1% and the other segment, which is our newer ventures, grew 36%, all in constant currency. Average order value increased 7.5% in constant currency to EUR 70.5 driven by selective price increases and a continued uptake of add-on and premium recipes from our existing customers. Contribution margin was 23.3%, down 1.3 percentage points year-on-year, including a temporary increase in procurement and cooking expenses from the rapid menu and geographic expansions. In response, we reduced marketing expenses by 24% in absolute terms or 3.2 percentage points as a share of revenue, in line with our commitment to marketing return on investment and to protect our unit economics. Adjusted EBITDA improved year-on-year at EUR 54.4 million or EUR 50.9 million in constant currency. Meal kit reached an adjusted EBITDA margin of 10.8% and ready to eat reached an adjusted EBITDA breakeven, both an improvement compared to last year. Free cash flow was negative EUR 5.7 million in the quarter, an improvement compared to last year, driven by higher adjusted EBITDA, lower lease repayment and capital expenditure and working capital phasing. Finally, we finalized a full stage refinancing we initiated about 6 months ago with an inaugural bond executed in July. And last month, with a new revolving credit facility of EUR 375 million with a maturity in 2030. In the quarter, we delivered on our commitment to the bondholders to fully repay the 2027 term loan range and started to repay in anticipation the 2029 one, sorry. And I will come back to this later during the presentation. Moving to Slide 9 on revenue. I want to be upfront about the trade behind the revenue performance. The magnitude of revenue decline was mainly the result of a conscious decision to pull back on marketing, which affected how many new customers we acquired during the back-to-school period. And how many large customers we activated. We reduced marketing to protect unique economics at a time when procurement and cooking costs were running high because of how quickly and how significantly we expand the menu. I believe this was the right choice for the long-term health of the business. Group revenue was EUR 1.4 billion in Q3, a decline of 11.3% in constant currency or 9.8% as reported. Meal kit declined 13.1% in constant currency and ready-to-eat declined 11.1%, while our other segment, which includes our new ventures, grew 36%. Average order value continue to expand, increasing 7.5% in constant currency to EUR 70.5, driven by selective price increases and the continued uptake of add-ons. The increase was more pronounced in meal kits at 7.8% in constant currency, which helped limit the negative impact on fulfillment expenses and kept the meal kit contribution margin stable despite higher procurement costs, as you will see on the next slide. Our focus on high ROI customer, which we applied in the first half as well has led to lower convergence, building up cumulatively through the first 9 months of 2026. Revenue from tenured customers, those who have stayed with us for more than 12 months as we showed during Q2 remained positive year-on-year for the group at the end of Q3 2026. The revenue decline in the quarter is again fully explained by a lower level of conversion. Looking forward, the sequence matters. The economics of each order first and then stepping up conversion and performance from a healthier base. That is a direction of travel the management set and is executing with discipline. Let me now turn to our cost base. And I would like to start with contribution margin because this is a line where the quarter fell short of our expectations, which then had an impact on how we decided to spend on marketing. Excluding share-based compensation and impairment, Q3 contribution margin came in at 23.3%, which is 1.3 percentage points below the 24.5% we reported a year ago. To understand why, it helps to recall what we have been doing. Over the past quarters, we have reinvested the selling from our efficiency reset into the product, a considerably broader menu, better ingredients and richer experience for our customers. We still believe a more desirable physical and digital product is right for the long-term health of the business. However, as Dominik explained, what turned out to be higher than anticipated is the cost of ramping up that menu expansion therapy. The increase in the cost base prove more stubborn than expected, and that is what the contribution margin reflects. The competition helps understand where the pressure points were in our contribution margin. Procurement and cooking costs represented 40.9% of revenue, an increase of 1.5 percentage points year-on-year. And this is where the effect of the menu expansion is most visible. On the other side, fulfillment costs improved by 0.5 percentage points to 36.2% of revenue. I will draw your attention to the quality of that improvement. So the efficiency reset and the AOV increase are offsetting volume-led deleverage, cost inflation and the learning curve that cost with the product innovation cycle of this scale. By segment, meal kits delivered a contribution margin of 26.6%, flat year-on-year. The higher procurement costs as a share of revenue was mitigated by the efficiencies coming through in fulfillment and by higher average order value. In other words, the meal kit model is absorbing the investment without giving granular margin. This, however, is not good enough, and we expect to see a scenario when cost overruns normalize in which AOV increases and further efficiency result in higher contribution margin. Ready to eat came in at 19.7%, a decrease of 2.3 percentage points. So 2 factors explain this: First, the same menu expansion, which has been rolled out in this category as well, resulting in higher procurement and cooking costs. And second, a mix effect from our expansion into new markets which are not yet operating at the efficiency level of our core geography. The direction of travel on our underlying construction is intact. But I do not want to suggest that this results itself. As Dominik mentioned, our focus is to recalibrate the menu expansion and product investment and to correct the operational inefficiency that came with a rapid ramp-up. And it is precisely because the contribution margin came in below our expectations that we took the decision, I will describe on the next slide, marketing. So group marketing spend was reduced by 24% year-on-year or EUR 76.6 million in absolute terms. As a share of revenue, marketing came down from 20.1% to 16.9%, which is 3.2 percentage points lower. For reference, the reduction in the first half of the year was 15.4%. So the pace stepped up in the third quarter. When contribution margin came in below our expectations, we made the decision to protect unit economics rather than to keep buying growth at a return that is subpar to what we can do when the operational cost overruns and the volatility on the cost base is not there. This is a trade we have made, space, but not at any cost. Marketing spend declined faster than both the number of orders and revenue in both segments, which is the intended dynamic of a return-driven approach. The year-over-year pace in new customer conversions did not improve in Q3, given that we reduced marketing spend more deeply than H1. Lower acquisition and reactivation volumes have built out through the years, and we should not expect that to reverse until we step up conversion again. In meal kit, marketing spend reached 14.1% of revenue, down 20.8% year-on-year. In ready-to-eat, marketing spend was 19.7% of revenue, down 32.8%. The level is structurally higher than meal kits because this is a younger category that relies more on new customer conversion. The decline was steeper than meal kits for two reasons. The more pronounced increase in procurement and cooking expenses ready to eat in the quarter versus our own expectations, which call for a stricter stance on return and the level of brand investment we made in the third quarter of last year, which you don't see to that extent. Turning to Slide 12 on the adjusted EBITDA summary for the quarter and for the first 9 months. Q3 group adjusted EBITDA was EUR 54.4 million compared to EUR 40.3 million last year, which represents a margin of 3.8%, up 1.3 percentage points. In constant currency, adjusted EBITDA was EUR 50.9 million at 3.6% margin. The quarter improvement versus last year landed within the range we expected and consistent with what I communicated during the H1 earnings call. So let me walk you through the segment. Meal kit delivered EUR 105.3 million of adjusted EBITDA in constant currency broadly in line with the EUR 105.5 million last year at a margin of 10.7% versus 9.4% in the third quarter of 2025. For the first 9 months, meal kit adjusted EBITDA was EUR 382 million in constant currency at a margin of 11.3% compared to EUR 440 million and 11.8% last year. That 9-month comparison still reflects the front-loaded product investment and the winter storm we experienced in the first quarter. And it is the reason why the margin improvement in the third quarter is a positive set. At the beginning of the year, we committed to maintaining a double-digit meal kit margin, and this is what we are delivering. Ready-to-eat reached adjusted EBITDA breakeven in the quarter compared to a negative EUR 21.6 million and negative 4.6% a year ago. This was one of the priorities we set ourselves, and I would like to recognize the ready-to-eat meals for delivering it. For the first 9 months, ready-to-it adjusted EBITDA improved by EUR 30 million in constant currency from negative EUR 47.9 million to negative EUR 17.9 million. We still expect the ready-to-eat margin to be breakeven and therefore, an improvement versus last year for the full year. Holding costs were about EUR 50 million in constant currency in the quarter compared to EUR 39.5 million last year. This reflects mainly IT services cost inflation, including related to AI and salary adjustment made as the share-based compensation program is reduced, but not one for one. I mean, indeed, share-based compensation expense, which is excluded from the adjusted EBITDA declined to EUR 8.4 million from EUR 15.3 million, a reduction of nearly 45%, and EUR 34.1 million for the first 9 months compared to EUR 53.5 million last year. All-in, group adjusted EBITDA for the first 9 months stand at EUR 98.6 million, with a margin of 4.3% or 4.1% in constant currency. Next slide on free cash flow. So your free cash flow is, as I said, during the first half of the year, a KPI to which we are giving greater weight. Year-to-date, free cash flow is positive at EUR 43.8 million, compared to EUR 75.7 million for the same period last year, a decrease of EUR 31.9 million. I mean this is mostly driven by lower adjusted EBITDA year-to-date is the reason for which we have just described. In Q3 alone, free cash flow was negative EUR 5.7 million compared to negative EUR 80.7 million in the third quarter of last year, an improvement of EUR 75 million. So 3 elements, expenses, lower capital expenditure year-on-year, lower lease liability repayments which reflects the rationalization of our fulfillment footprint and the phasing of working capital between Q2 and Q3, which we communicated during our H1 results. That brings me to the full year. It is important enough to highlight that we do still expect the full year free cash flow to trend near or at breakeven. This means that the business continues to self-fund its own transformation and the footprint rationalization is structurally lowering our lease repayment and CapEx. Turning to the slide on capital structure. Before I get into the detail, let me remind you of where we started the year. At the end of H1, our financial debt was concentrated in 2027 with EUR 473 million coming due that year, a EUR 400 million revolving credit facility and EUR 73 million of term loan. The strategy to strengthen our capital structure is developing according to the plan we set to ourselves. And there have been 3 steps. In July, we successfully placed an inaugural bond of EUR 350 million with a 5-year maturity and a coupon of 5.5%. In August, we prepaid in full the 3-year term loan range, which was EUR 72.8 million, which was due in 2027, and on the first -- on the 5-year tranche, we have begun quarterly repayments with EUR 10 million plan for this year, and we are targeting a reduction of at least 50% of the principle by the end of 2027, way earlier its maturity. And then first in October, we renewed our revolving credit facility until October 2030, with an amount of EUR 375 million, in line with our target amount. So the result, on a pro forma basis for Q4 is a profile with no financial debt maturating before 2029. So EUR 97 million of term loan in 2029 but which will be repaying -- which will be ahead of its maturity and the RCF in 2030 and the bond in 2031. So the work done was about extending our maturity profile, diversifying our sources of funding and giving the business a more durable foundation and time, while it executes the recalibration, Dominik described earlier. It is important to mention that there is no change in how we think about capital. Our capital allocation priority remains unchanged. And the commitment to reduce the term loan is part of that discipline. Let me conclude with our outlook, Slide 15. The guidance we communicated in September is reconfirmed today. For revenue, we expect a decline of 9% to 11% in constant currency against EUR 6.76 billion in 2025. For adjusted EBITDA in constant currency, we expect a range of EUR 350 million to EUR 370 million compared to EUR 423 million last year. If I think about how Q4 has started to shape up, Revenue for the full year in constant currency is trending towards the middle of that 9% to 11% range. For adjusted EBITDA, the full year outcome depends on the pace of profitability recovery and on marketing decisions. So the consensus is currently trading towards the bottom half of the range, which is reasonable from today's point of view. We want to maintain flexibility to invest more in marketing before the year-end, if returns justify. This estimate reflects what we know today. The performance of the first 9 months, the corrective actions we are taking on the cost of the expanded menu and a deliberately cautious stance on marketing until the unit economics are restored. We have chosen to protect profitability and cash even at the expense of short-term revenue. With that, we open up for questions.

[Operator Instructions] The first question is from Joe Barnet-Lamb from UBS.

I have many questions, but I will limit myself to one. So my only question was just on this, the menu. So you've been talking about proactively reinvesting in the product as a strategic focus, and that is one of the things that sort of held back margin to date. Now you're reducing the menu, which you just expanded, did you strategically target a menu that was just too big? Or was the operational execution of that expansion, the issue?

Thank you for your question. We're reducing in one geography that was the U.S., where we ran a very aggressive pilot where we wanted to stress some of our systems, but we've seen that this was probably too much. We still run, I think, a strong agenda in diversifying a lot of cuisines in offering a lot of new meals to customers. We definitely see that these larger menus resonate a lot with customers. But what I tried to explain in my remarks, is that it's usually like some type of learning curve that we're going through. So when we talk about recalibrating investments, what we're doing right now, it's mainly 2 things. So number one, we're not increasing the menu further. We're reducing in the one pilot where we just went to multiple hundreds of meals. And we're trying to focus a lot more on getting the cooking and procurement costs down. So if you look at the separation of fulfillment costs and procurement and cooking costs, the fulfillment costs were actually generally in line and actually improving year-over-year. But it's really kind of like introducing a lot more ingredients and cooking processes that took us longer to go through the learning curve than what we had all expected.

Maybe just a follow-up, if I can, and then I'll get back in the queue. How quickly do you expect the benefits of the recalibration of the menu size to flow back through into margin?

How quickly -- sorry, can you repeat the question?

Yes, you're effectively saying you sort of went too far on the menu expansion because you've learned by trial and error, effectively, right? But that's obviously come at a cost. So presumably reducing the size of the menu is then going to aid your margin, which is why you're doing it. So how quickly can we expect the benefits of the reduction in the size of the menu in the U.S. to flow through into margin?

So what I said earlier is that we exited Q3 with a better contribution margin than what was Q3 average since we've done some of those recalibrations starting in August. And we also expect to see in Q4 some progression. So it's definitely something that is all hands on deck now where we see that we're getting better -- and you should also be able to see that in the margin profile.

Next question is from Andrew Ross from Barclays.

Maybe if I can build on what Joe is asking. So it sounds as though contribution margin is gradually improving. How does that then inform your thinking as to how much marketing you can deploy in the next back-to-school period for meal kits, which I guess is in January? And as it stands today, based on what you see in cohorts you've acquired through this year and then the assumptions you're running as to how much marketing you might deploy in back to school in January, how do you kind of think about the run rate growth of revenues across the business into next year and then for all of 2027 based on what you see today?

I can answer that one, Andrew. Thanks for the question. I think our -- as Dominik said, our priority for the ready is to on 2 things. One is to ensure quality exit rate on the unit economics. And following on the question from Joe, we are expecting in Q4 already some improvement on our contribution margin. Does it mean that all we would have been offset, probably not because it's a journey, but it's definitely one of the first priority we are setting for ourselves. The second priority is to prepare the next important window, which is January peak period. I think we have to be careful. I think we have in the past too quickly to anticipate what the future will look like without having all information in hand on the unit economics and on the performance on PCs. So I think it's a bit too premature at this stage for us to give any commitment or perceptions on next year. But we will, for sure, come back to market as soon as we have all information in hand on unit economics. But I think we will as well communicate with some performance on January peak, like what we have been doing at beginning of the year and like we have been doing on the back-to-school in 3 weeks ago. So too premature, I think to share some light on 2027 as we focus on the closing well the year, having a good exit rate. But as soon as we have a better view, we will for sure communicate with the market.

Next question is from Nizla Naizer from Deutsche Bank.

My question is around factor in the retail stores and the target opportunity. Could you maybe give us some color on how the economics work for this particular part of the business? And how large do you think this opportunity could become? And are you looking at other potential retail partners in the U.S. as well to roll out factor investors? Some color there would be great.

Happy to provide some context and some color. We actually have built the muscle to sell into retail because this is a big part of our foods ready-to-eat business in Australia, where this has grown strongly over the last couple of years and where we have pretty strong presence in many different formats and retail stores in Australia. Now in the U.S., as you rightly pointed out, we ran a first pilot earlier in the year, which was very successful and then concluded that we want to scale with that partner in many hundreds of stores starting in September. That has happened. I think so far, both sides are quite happy with the performance that we're seeing. So if we're thinking about a longer time horizon, then certainly, we were similar to what we did in Australia, try to broaden the presence across formats and across different retailers and stores. But retail sell-in cycles, building up supply chains, et cetera, that takes a little time. So I think the bottom line is we're quite excited, both what we have achieved in Australia and what that implies for the retail opportunity in many other countries. We're happy with the results that we've had from the pilot and will definitely work over the course of 2027 to expand our retail presence, primarily in North America.

Maybe you had a question on the economics. So what we can say is on what we know today and in Australia, but as well in the U.S. incrementally, it's a more favorable economics than on DTC. That's why we are very excited about the opportunity and to share some light on what we have been achieving, for instance, in Australia, and we should not go ahead of ourselves here, but to give some data point. In Australia, our business in retail is already representing about of our foods business there. So it's highlights the possible opportunity in front of us in other geographies as well.