Q3 2019 Earnings Call
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I would like to Jerry for Blue Upper on holdings.
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First name David.
The last name Brown.
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Okay.
We have created a slide presentation to accompany our remarks today.
And Jason can be accessed via the webcast link on our our Investor Relations website at Investor Day stop deliberate in Dot com.
Various remarks that we make during that call about the company's future expectations plans and prospects constitute forward looking statement.
The purpose of the Safe Harbor provisions under the private Securities Litigation Reform Act of 1995.
Actual results may differ materially from those indicated by those forward looking statements as a result, a very important risks and other factors, including those described in our earnings release going in the company's FTC filings.
In addition, any forward looking statements represent our views only as of today it should not be relied upon as representing our views as of any subsequent date, we specifically disclaim any obligation to update these statements.
During this call, we'll be referring to non-GAAP measures, which are not prepared in accordance with generally accepted accounting principles.
You are encouraged to refer to the earnings release and as you see filings, where we have described these measures in more detail. Andrew you. The reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures.
In addition, reconciliations of certain forward looking non-GAAP measures referred to during this call or on our Investor Relations website located at investors Dr. Lee from Dot com under events and presentations.
With that I would now like to turn the call over to Linda Finley Kubacki wafer CEO Linda.
Thank you release and good morning, everyone.
Our third quarter results came in came within our guidance range provided on the last earnings call. The results also reflect what we've consistently said about 2019.
The year focused on building a healthy a sustainable business to put us on a path for future profitable growth.
As anticipated we saw declines in revenue and customer account in the third quarter consistent with what we expected in this with this approach.
However, we continue to see year over year improvement in the metrics that we believe are key indicators the strengthening customer base as we pursue our growth strategy.
Average revenue per customer and orders per customer.
In fact in the third quarter. These improvements were significant but average revenue per customer up 11% year over year and orders per customer up 10% year over year.
We believed that the strengthening of our customer base validates our more deliberate marketing approach and is foundational as we continue to execute on our brand strategy.
As we've refocused our marketing over the past year, we've become more efficient and how we attract and engage consumers.
And we're encouraged by the results.
Heading into 2020, we plan to build on this approach to lean back into marketing investment as we make improvements to the product and customer experience.
We'll continue to avoid initiatives that will generate short term revenue at the expensive inefficient returns on our marketing spend and take the time to build the right product and marketing mix for sustainable growth.
We're also pleased to have recently completed the refinancing of our revolving debt credit facility with our existing lenders syndicate.
We believe the amended facility gives us an additional access to our liquidity as we drive towards growth in 2020.
We continue to believe that with the execution of our strategy will achieve our previously articulated goals of quarter over quarter net revenue in customer growth in our seasonally high period of Q1, 2020 and year over year quarterly net revenue in customer growth in the back half of 2020.
In a few minutes, Tim will provide a more detailed look at our third quarter financial performance and outlook.
Now I'll provide an update on work we're doing to build.
Future, including how we progress against our new growth strategy to date.
As you know in August we launched a new strategy that we believe will enable our core business to reach as potential and returned we labor and the growth in 2020.
Our strategy centers on three initiatives, one focus expansion to new customer segments.
To better integration to our customers' lives through more menu choices and flexibility and three efficient scaling of marketing through stronger customer relationships and new partnership.
As we progressed through the strategy, we're deliberately prioritizing better serving our customers the choice and flexibility in our products.
We believe that the sequencing here as important as improving our product and customer experience lays the groundwork for us to successfully execute the other two parts of our strategy, attracting engaging and retaining new customer segments and efficient scaling of marketing alongside the partnership.
As we pursue these improvements we remain committed to the strengthening of our foundation through ongoing optimization of our operation.
It will discipline in our meaningful blunt brand differentiation.
We believe that this foundation, which our team has worked very hard to create will put us at a competitive advantage as we pursue growth.
Now I'll walk through a few highlights from the third quarter as well as preview some initiatives ahead.
We know that our customers want more recipes to choose from weakening week out they want health conscious choices and they want the ability to select the mix of health conscious and signature options in any given week.
In mid September we launched the first phase of our new menu expansion, which gives customers full flexibility to combine our two person signature and health conscious offerings, including WWF.
This expansion increases the amount of available to person recipes each week from eight to 11.
As menu expansion currently available to all customer service out of our Richmond, California facility is phase one of our rollout which is designed to ensure that we can deliver the new flexibility to customers, while meeting our margin and product quality goals.
We plan to apply learnings from this first phase as we seek to scale this actually.
This menu expansion also encapsulates, how we view health here, if we wake up a view, which we intend to inform all future health conscious initiatives.
At Blue apron, we believed at a healthy lifestyle isn't a rigid diet that a clear set of choices based on personal needs and preferences.
We believe that when you're cooking from scratch, you're already making a better choice both physically and mentally for you and the people you Cook with and for.
Our goal is to offer delicious diverse and delicious menus that can suit a wide variety of range of pipe lifestyles and health preferences without sacrificing flavor.
These are health conscious options you truly want to eat.
The changes, we're making will build on that ball equipping our customers with the flexibility and ease to make those menus that their lifestyle.
Also in the third quarter, we re committed that quality and evoking incentive discovery in every recipe will always be central that we wait for an experience starting with the ingredients resource.
As part of this re commitment we brought more interesting ingredients into our customer kitchen, such as our beyond meet recipes, which began shipping in mid August .
When comparing the customers who ordered recipes featuring beyond me to look like control group, we saw improved retention and an increase in order rate for those who ordered the beyond meet recipes.
As interest from our customers and plant forward eating is showing staying power. We will continue to offer beyond me as well as routinely integrate interesting produce onto our menus.
In early 2020 will also be keeping in line with our commitment to ingredient variety by introducing new items into our pantry for regular recipe rotation late tofu 60 pop the and data.
Unlike a traditional subscription service, our customers choose whether or not the order from us on a week by week basis, So keeping our offerings fresh and exciting is key to our ability to keep them engaged.
To that in this Thanksgiving will be offering dessert kits for the first time as a way to stay connected to our customers during the week when many of them opt out of a sold at our with Blue apron in favor of establish Calleri tradition.
In addition to driving consumer interest with the regular rotation of new and interesting offerings.
I wondered partnerships provide opportunity to engage customers the compelling stories and personality behind our recipe.
Earlier. This month, we were excited to launch a partnership with award winning chef and television personality Christians attorney to bring four weeks of Italian American Homestyle recipes to our two serving and for serving menu.
Another lever for us to improve key customer metrics like order rate an average revenue per customer.
By leveraging our brand and culinary authority to offer more products to help our customer Cook and entertain at home with E.
The Blue label market, our ecommerce marketplace continues to be an important direct to consumer platform for us to launch and showcase these offerings, including labor line, a proprietary spaceland collaborations with partners like Murray's cheese, and a variety of coronary tools personally recommended by our test kitchen of professional Jeff.
As we outlined on our last call. The other work stream within our initiatives to better integrate into our customers' lives is providing a more flexible service experience, making it easier for consumer to engage with us in a way that best fits their lifestyle.
As we plan for how to better meet customers on their trends going forward will be applying learnings from the on demand pilot, we conducted on the west coast.
This five month pilot ended in September and we plan to integrate learnings from this into our long term product planning around subscription and non subscription models.
In the third quarter, we also realized parts of the business and added new resources to equip our organization with the REIT structure and muscle to move ahead aggressively with execution of our strategy.
This included adding new engineering resources, a new head of brand and new head of consumer digital products and more fully integrating our product marketing and culinary team under a central leadership to work holistically across each stage of the customer journey.
Finally, we gain new expertise and perspectives on our management team with the addition of our general Counsel Meritas storage and Chief Human resources officer to leave that occur.
It's been great to see our team fully engaged in and taking ownership of our growth strategy.
We believe the potential for the business remains significant and that we are well positioned to capture the opportunities ahead helped by undeniable consumer trends that we believe will work a tailwind.
Our commitment to sustainable profitable growth has not wavered.
I want to reiterate that we are pursuing what we believed to be an incredibly worthy missions. The holiday season approaching as a reminder of the power of home cooking and providing health comfort connection and community.
Our team is extremely proud to be positively influencing individuals and households across America week after week by empowering them to create incredible meals at home.
I'll now turn it over to tend to talk through our financials in more detail and after that we'll take your questions.
Thank you Linda good morning, everyone.
On this morning's call a walk through our third quarter financial results discuss recent refinancing of our debt facility and review our financial outlook.
As Linda stated.
We delivered third quarter results within our guidance range provided on our last earnings call. The third and fourth quarters reflect our priority to build for the future by continuing to pursue our growth strategy and strengthening our customer base to position the company for quarterly customer and revenue growth in 2020.
Turning more specifically to the TNL net revenue in the third quarter was $99.5 million compared to $150.6 million in the prior year in $119.2 million in the second quarter of this year, reflecting our continued focus on efficiency in our marketing investments as well as the typical seasonal impacts.
Of our summer months.
While we previously discussed at length that this transition will result in lower revenue throughout 2019, we continue to believe that strengthening our customer base is a foundational step for executing our growth strategy and building a healthy long term sustainable business.
As Linda mentioned, we're pleased that we continue to make progress on this front evidenced by significant year over year improvements in our key customer metrics of average revenue per customer and orders per customer in the third quarter.
Marketing spend as a percentage of net revenue was 12.2% down 320 basis points year over year from 15.4%, while remain focused on efficiency and increase quarter over quarter from 8.2% in the second quarter, reflecting our seasonal trends.
On the cost side margins improve slightly on a year over year basis, as Cogs, excluding depreciation and amortization improved 30 basis points from the prior year to 67.7%.
This improvement in Cogs was largely driven by efficiencies in food costs through our improved processes, but partially offset by name priest cost associated with testing more sustainable environmentally friendly packaging and our work in the third quarter to build and invest for the future which included the first phase launch of our menu expansion.
While these investments within the quarter resulted in increased cost they helped to address customer pain points as evidenced by reduced refunds in credits during the quarter.
On a quarter over quarter basis, Cogs as a percentage of net revenue increased by 780 basis points from expected seasonal increases in costs and the investments in packaging.
Product technology, Mdna or PDGF, a was 27% lower year over year, a $35.3 million, reflecting our teams ongoing commitment to streamlining costs.
On the bottom line net loss for the third quarter improved 23% on a year over year basis coming in within our guidance range a $26.2 million.
Adjusted EBITDA was also within our guidance range with loss of $13.2 million, representing a 30% improvement year over year compared to a loss of $18.8 million in the same period last year driven by continued focus on cost optimization and the slight improvement in variable margin.
From a liquidity standpoint, we're pleased to have recently completed the refinancing of our revolving credit facility, where their existing lenders syndicate.
In connection with the refinancing we extended the maturity date to August 2021, and pay down approximately $30 million the remaining balance reducing the aggregate lender commitments to $55 million.
This refinancing also aligns our financial covenants to our growth strategy, providing additional access to our liquidity, which we believe will provide increased flexibility for us to invest as we drive towards growth in 2020.
Now turning to our financial outlook as we previously noted in order to realize the benefits of our growth strategy, we plan to invest behind some of his key initiatives in the coming quarters to continue moving the business forward.
We continue to expect that these investments along with the execution of our growth strategy will lead to healthy quarter over quarter, net revenue and customer growth and our seasonally high period of Q1, 2020 and will lead to year over year quarterly net revenue and customer growth in the back half of 2020.
In the shorter term as we progressed through our strategy and specifically for the fourth quarter of this year, we expect similar year over year quarterly net revenue performance as we saw in the first three quarters of 2019, while we continue to strengthen our customer base to set us up for meaningful execution in 2020.
On the bottom line, we expect net loss in the fourth quarter of 2019 of $21 million to $24 million and adjusted EBITDA loss of $7 million the $10 million continue to reflect the impact of our deliberate pullback in marketing and the increased investments as we execute on our growth strategy.
For full year 2019, we expect net loss of $60 million, the $63 million and adjusted EBITDA loss of $7 million to $10 million.
Our outlook reflects the deliberate prioritization of the phases of our strategy that Linda just discussed.
We are focusing first and foremost on investing in our product and customer experience as we believe these improvements will lay the groundwork for successful execution of the rest of our strategy and ultimately paved the way for future growth.
Sequencing is also important as we expected a better product and customer experience will lead to more effective marketing to that end headed into 2020, we believed to bina physicians lean further into our marketing spend with expected increases in marketing on a year over year basis, both in absolute dollars and as a percentage of net revenue.
As Linda noted the work we're doing now to reset the business is a critical step as we build for the future.
Our commitment to sustainable profitable growth has not wavered and we're pleased to have the increased flexibility provided by our recently completed debt refinancing as we pursue our 2020 growth targets. We look forward to updating you on our progress for easy reference we have posted a reconciliation chart from our net loss, we adjusted EBITDA outlook on Bluebrint.
Besser relations website Linden I will now take your questions.
Thank you.
We will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad, if you're using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then to.
At this time, we will pause for a moment to assemble our roster. Additionally to allow every one of the opportunity to ask questions. We ask that you have one question Tim one follow up is needed.
The first question today will come from show weather.
The jury <unk> with RBC capital markets. Please go ahead.
Great. Thanks, two questions. Please first on the year over year rules in the back half of 2020 <unk>.
Could you talk a little bit about of the initiatives that.
You are investing in product through partnerships, which ones do you think it.
Keith do driving this growth in the back half of 2020, which gives you most conviction to drive this growth at that don't drive. This group and then the second on on product front could you. Please talk about how the same day.
Good day.
Delivering California that you launched earlier I'm in the year, how that is trending and also the default rollout that you talked about and and the menu menu expansion. How that has been trending I know, it's only for that product, but it'll be good to hear how to.
Customers are reacting responding to that thank you.
Sure so.
Touching on on a couple of the initiatives that we think about for 2020 I'm, particularly in the second half, it's actually going to be accommodation of things and part of the reason we've looked at this for the second half is it's really about the compounding effect of both more efficient marketing on top of the product initiatives that we're putting into place right now so as we've discussed.
We really want to enhance the choice and flexibility of what we're offering our customers and continue to expand that into healthy options that they can choose alongside our signature menu as well as being able to think about how we can make the model itself a bit more flexible. So we think that will also not only attract new.
Customers to the products, but an increase retention for our existing customer and then compounding that with some of our on more efficient marketing initiatives Shouldnt continue to accelerate throughout the year. As you know we are a physical product business that we are working our way into.
Process, a building out, but we need in order to deliver this more flexibility and choice and continue to roll it out in a way that will ensure that we don't lose any quality in the process from our fulfillment centers and and be very systematic about making sure that we're staying with sustainable growth in our marketing initiatives.
On as far as things around same day and the menu expansion. So as we outlined in August or whatever works things related to better integrating into customers lies in thinking about the service experience itself. In addition to the product and in doing that we're actually testing different ways that we can think about subscription.
Non subscription services, so that we learned a lot from that initiatives and enough that we launched and and just recently ended and that we're actually going to be integrating into some of those initiatives going into the second half year to think about what's possible.
As for the menu that we're launching in California that is still very early it's only been in the market or a few weeks. So we can't say definitively how that's performing at at this point, it's too early but we are very positive things from our customers.
Okay. Thank you Linda.
Mhm.
The next question comes from Youssef Squali with Suntrust. Please go ahead.
Hi, this is solder on for USIS.
First with this refinancing can you please quantify and help me better understand how much financial flexibility. This has unlocked and a second the last couple of years of cost cut it with the last couple of years cost cutting and making your operations more efficient as you look to get back into growth next year. What gives you confidence given the competitive landscape has also been shifting in that time.
Yes. This is Tim let me take that first part and start the second part of the answer then lending and can weigh in on the second part.
Lowered the over all.
So as the facility to 55 million and we have a minimum liquidity covenant of 20 million. So we think that that spread gives us along with the.
Realignment of the other financial covenants with our.
Growth strategy gives us.
Adequate liquidity and flexibility to go execute that growth.
Our growth strategy.
On the second question on the cost side, you know, we obviously made tremendous improvements in our variable margin. This year than we've done a pretty much across the board and all the components of variable margin, but it really was the first year of improvements as we go into next year, we still see room for improvement in those areas.
I'm not sure that the competitive situation at the big impact on our ability to do that our own strategy. Obviously has an impact on what we'll do with cost, but we're we're still.
Moving towards continued improvements in our overall cost structure was move into next year I think just I guess.
All right.
Sorry, just because it's more about at least what gives you the confidence as you're looking to invest start investing in growth.
Right No, yes, absolutely yeah, I think on that front you know when they think about the competitive space first of all we do believe that this is not a winner take all market. We think there's actually a lot of rents are still very early in a in the market in general and so there's room for multiple layers in the market. We are very confident with what we see in our customer metric, we talked about a revenue per customer being up.
Year over year, we know that we have a strong and engage space that really appreciate the commentary authority discovery differentiation that relates on provides and so that's part of what gives us confidence that leaning into this will actually be will actually be very productive in 2020, I will also add to what Tim was saying about the.
During the strategies that resulted in declining revenue so as we get into next year or start to stabilize revenue and then grow it I'm not even puts us in a better positioned to to get our you've got our cost to our cost efficiencies to continue to increase and actually gives us the room to be able to invest.
Your next question comes from Heath, Terry with Goldman Sachs. Please go ahead.
Wondering if you could just give us a little bit more behind the the strategy to door to return to growth in 2020.
Stabilizing customer retention or acquisition strategy I know you talked about sort of marketing being up on a on a year over year over year basis, how much of that is gonna be driving it and sort of what.
Marketing efficiencies you.
Do you expect to see or implied by that that returned to growth.
Well I'll just start on that and then have Tim.
And Jonathan but ER and thank you he.
Related to feedback that we've heard from customers research that we've done as our customers research that we've done with prospects and understanding what they want to see from a blue apron product. So I think the primary driver that you'll see any early stages will be around product innovation, which were able to do with a lot of the existing infrastructure that we built in our facility.
From a marketing.
Efficiency standpoint, but then also layered on top of this product initiatives as well as some digital product initiatives that helped make for a better customer experience in both converting as a new customer and choosing their meals on an ongoing basis.
That really has two parts to it one and continuing to see more efficiencies in the paid marketing that were already putting forward and the second one is really about introducing new partnerships that give us access to similar customers that we haven't reached yet to our best customers that will also help increased both retention.
And and conversion into engagement.
And I think underlying all of that there's always a focus on how do we continue to make the cost of the business more efficient how do we continue to sort of not lose sight of the sustainable growth that we want to put into play and not necessarily fall into the trap of outgrowth at all costs and that's something that very critical to us as they think about the cost control.
For you and I think the way lender just explained that also demonstrates that the plan for next year really is fairly balanced. If you look at the two sided equation you are pointing out either customer acquisition in the marketing spend behind that or customer engagement.
We have I think what I would describe as a relatively balanced plan across both the acquisition.
Metrics in the business.
Ladies and gentlemen, this will conclude our question and answer session. As we approach the conclusion of recall I will now turn the call back over to Mr. Kozloski for closing remarks.
Thank you very much in closing today I want to thank all of you for your interest in Blue apron I also want to thank our employees across the country, who are working so hard to progress through our strategy and don't for our future sustainable growth. Thanks, So much and have a great day.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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