Q1 2020 Earnings Call

My remarks today will primarily focus on three areas one and overview of the heightened demand. We have been experiencing since late March as a result of the changes to Consumer behavior in response to covid-19 to a review of our first quarter performance, which includes indications of continued progress towards our previously announced growth strategy prior to the effects of covid-19. M3a more detailed. Look at changes. We implemented as a result of covid-19 as well as some of the most recent Trends we're seeing in our business and what we believe that means for the second quarter.

We operated in two very distinct environments. So far this year a pre and post pandemic world and I'm proud of our team's ability to execute on our changing business needs in both situations off first. Let's talk a bit about the recent heightened demand for a meal kit with regard to Consumers response to the covid-19 pandemic the initial sharp increase in demand among new and existing Blue Apron a customer came in late March as the country started to adapt to stay at home and restaurant restriction orders that took effect around much the country.

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These government actions contributed to more people looking for options to have their food delivered directly to their door.

Well, we had to make some temporary adjustments to our offerings and operation system and started to shift the sequential quarter-over-quarter efficiencies. We've driven in our business have helped us provide the necessary infrastructure to adapt this Anderson demand. This position does to be able to immediately begin ramping up our capacity in our lives in New Jersey and Richmond, California fulfillment centers primarily focusing on increasing headcount to enable us to fulfill million orders.

We recognize that we create a product that helps people during this challenging time and have been Relentless in our Focus to serve as many households as possible.

We expected our Q2 results will begin to reflect this increase demand and in a moment, we will speak about what we expect that to look like.

In addition based on recent indications of the expected longer-term impacts that we believe covid-19 may have on consumer Behavior relating to cooking at home. We believe there will be an ongoing positive impact on our business office at least the near an immediate term. There has been a significant increase in the number of households cooking at home is a result to stay at home and restaurant restriction orders around the country even as restrictions on consumer Behavior began to ease we expect that there will be a shift to a new economic and social norms reflecting the changes and cooking and eating habits developed during the weeks or months consumers spend at home and these will persist sometimes

We also believe that even as restrictions begin to live. There may be a long-term negative impact on the ability of some restaurants to operate a double prior to the pandemic is at all.

These this is the operator. We are currently speaking privately. May I have your name, please?

Can you check if your light is on mute, please?

You are now rejoining the main conference these times of uncertainty.

Before we get into additional detail on some of the effects of covid-19. We have been seeing we will quickly summarize our q1 results those net revenue and new customers increased sequentially quarter-over-quarter as she continued to make progress with our growth strategy in addition average revenue per customer saw another quarterly sequential increase to $271 are variable margin improved a hundred fifty basis points from the fourth quarter of 2019 to over 40% in q1 and net loss is favorable compared to the range that we provided when we reported fourth-quarter results.

Then we'll review each of these metrics and more details shortly.

We believe our first quarter performance demonstrates. The progress. Our team is taking towards this strategy that we announced last August to engage more customers that have our best customer characteristics increased choice and flexibility to better integrating our customers lives and scale our marketing spend efficiently.

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For a quarterly sequential and a year-over-year rise in orders for customer. If we believe in turn reflects the effectiveness of the new products and new customer engagement that we are creating while we've had to scale down some new products to meet the current heightened demand. We believe our growth strategy combined with a solid fiscal discipline that we've consistently demonstrated over the last six quarters provides us with a foundation for future profitable Revenue. God beyond the current business environment.

The first quarter was a significant. For new product launches. In fact, we launched more new products in q1 than any other quarter before specifically we added five new major products in the first quarter appeared to just five new major products in the prior quarter combined these product launches included meal prep, which I didn't 8 serving plan that can be prepped in as little as ninety minutes per week as well as our premium offering the delivers an elevated cooking experience with Advanced cooking techniques, the specialty protein combinations. We've been pleased with the performance of both since launch.

in addition to introducing new products, we continued our culinary Partnerships with the six-week collaboration with Chef Seamus Mullen that focused on recipes for healthy lifestyle and we plan to soon launch a partnership with award-winning chef and restauranteur Tim Hollingsworth, but the focused on the Comfort foods of Summer

these examples of how we continue to add more choice and variety to our menu demonstrate the progress. We were already beginning to achieve towards our growth strategy prior to the covid-19 demek.

Moving on to what has happened in our business since the covid-19 10 demek. I'm going to devote the balance of my prepared comments this morning to review expected business impact a number of the actions. We've taken to meet increased demand including a oil changes hiring an HR progress implementing safety enhancements and managing our supply chain and marketing functions.

I believe the work that we previously put into the implementation of our growth strategy has helped position us to meet this rapid urgent demand.

Based on Trends we've seen in response to covid-19 as well as certain assumptions which Tim will note in his comments. We now expect cutie Revenue to grow year-over-year by high single digits on a percentage basis and took a net loss to continue to narrow versus the previous quarter. We also expect both adjusted ebitda and operating cash flow to be positive in the quarter.

As a result of the changes in consumer Behavior, we've been seeing in response to covid-19 including both an increase in milk it orders and an increase in milk it average order values. We saw milk it demand increased by approximately 57% in the first three weeks of April compared to the first three weeks of March.

As we noted earlier this increase came quickly and we initially were not able to meet all of this heightened demand and as a result milk it net revenue increased approximately 22% from the same comfortable time. We Define milk. It demand is the number of milk. It's ordered in that time. X the average order value for that. And we Define the net revenue as orders are filled by multiple X the average order value.

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Working to build our fulfillment center back labor force to enable us to meet this new increase demand and assuming the heightened level of demand is sustained or continues to grow as we believe there is the potential for we should have we have enough labor to to meet the demand directly.

In a moment Tim will provide more details around our second-quarter expectations.

Now let's move on to the actions we take in to meet demand first on operations. As I mentioned. The initial fight came late in q1, and we quickly prioritized increasing our fulfillment capacity off while working to increase capacity. We initially prioritize fulfilling the increased demand from existing customers and we canceled or delayed a portion of our shipments to some new customers and recently reactivated customer one week.

We then built our plan to quickly increase capacity while enhancing are already comprehensive personal hygiene and sanitation standards and other government regulations designed to prevent the spread of covid-19.

As we work to continue to meet increased consumer demand, we believe that one of the challenges from Blue Apron past is now serving as well as we have additional fulfillment center capacity. We believe we have the equipment package these food safety standards and supply chain to support the higher demand for our primary need at this time has been hiring at our fulfillment operations.

As we begin the process to accelerate temporary and permanent Staffing in our Linden New Jersey and between California fulfillment center. We also created an immediate capacity serve a higher Demand by reducing variety of options to limit the need to frequently change their production lines in our fulfillment centers. This decision allowed us additional time to pack meal kits and allowed us to get more mail kids out to more customers wage. Did this by discontinuing a subset of recipes for an interim period and closing some weekly offering Cycles as early as we continue to hire.

We understand its practices in line with others in the meal kit space that are adapting to meet new demand levels.

On hiring an HR. We extended the closing date for Arlington Facility by a few more weeks for adding capacity. But we still intend to close the facility in the second quarter as planned and transfer that volume to Richmond and Los to show our support for all our teams that are fulfillment centers and to help attract new hires. We recently implemented a temporary wage increase and an attendance bonus for our dedicated hourly employees. This applies only be fulfilled in Center employees as our corporate have kitchen and customer experience employees have been working from home since mid to late March.

Inside our fulfillment center is the safety and well-being of our employees remains our top priority.

As I referenced in my earlier remarks during this time. We have also enhanced our existing comprehensive personal hygiene employee safety and sanitation standards and have instituted other measures to help prevent the spread of covid-19.

As an fda-regulated operation are employees have always been required to wear appropriate protective equipment at all times on the production floor, including nitrile gloves and smocks hair and beard Nets and safety glasses.

To hold an additional food safety certification from safe Quality Foods food safety code which is widely considered to be one of the most rigorous and comprehensive food safety standards in the world.

In addition employees are not allowed to enter the production floor without stepping through a disinfecting foot bath and washing their hands thoroughly.

In response to covid-19 starting in early March we enhanced our existing procedures with additional hand-washing requirements changed shift interactions reduced human contact increased social distancing efforts page where it is both on and off production floor and further strengthened equipment sanitation procedures.

Also, we are now providing our fulfillment center employees with masked in line with recent guidance from the CDC FDA and local regulations. All employees are now required to wear masks while in any area.

Next I would like to discuss supply chain availability and safety to date. We have not experienced any significant disruptions in our supply chain Blue Apron tightly manages it supply-chain and we seek to work with a supplier as who hold in value the same I safety and sanitation standards that we do.

Because we operate on a just-in-time sourcing model and have a strong network of suppliers. We can make adjustments as needed based on both our needs and the needs of suppliers.

Also the same tightly controlled supply chain means our food has a much more direct path producer to box with minimal human contact in between we are grateful to be able to continue to support our life is that have been affected by other closings in the slow downs in the food service industry our team continues to actively manage our supply chain to minimize impact the customers while maintaining the high standards, we're known for on and off welfare freshness and quality.

Finally, I want to provide an update on our current marketing efforts while marketing remains an essential part of our business. We have slowed and adjusted our marketing spend based on the heightened demand. We've been seeing we have temporary shifted some of our marketing dollars to ramping up production and engaging our existing customers with content social engagement and support for staying at home. We are also using this. To build our marketing strategy for the future wage based on the third pillar of our growth strategy as how we expand our reach for future growth in a scalable and sustainable way.

I'll conclude my comments this morning with review of some of the positive metrics that I believe underpin our second quarter guidance.

As mentioned the increase in demand started the last weekly cycle of March since that time we have continued to see improvements in both the number of active Blue Apron customers as well as increase in average revenue per customer the improved average revenue per customer generally reflects both increased orders for customer as well as higher average order value Blue Apron degenerated year-over-year increases in both of these metrics in the last five consecutive quarters. We have seen a further increase in those metrics over the last few weeks as our customers. Look for meal Solutions following the various stay at home and restaurant restriction orders and other restrictions on consumers that have been implemented throughout much of the country.

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Positive in recent weeks our Focus remains on continuing to build on our products and services in order to both need the immediate need of our existing and new customers and work to retain those who've developed an appreciation for cooking at home and connecting with loved ones were mealtime as we don't know what the future will with whole will hold in regard to the longer-term impacts of the pandemic on our business. We are not relying on this recent demand and continue to be focused on our three Congress strategy as we move forward in the current environment.

We believe that the strategic planning and budgeting done. The last year is helping us to adapt to meet this demand decreased. We also remain confident that our previously announced growth strategy continues to be the right strategy even now and as we stood in February, our board has undertaken a strategic Alternatives review process to support the execution of the strategy and enhance long-term shareholder value.

We are grateful to our long-standing customers and those new to Blue Apron who are inviting us into their homes. I believe these customers appreciate the many attributes of the meal experience. We deliver from Discovery to Quality to connection and we expect that many of them will continue to cook with us in the future. Our growth strategy is a critical component to retain our customers and attract new ones. We currently plan to continue to ramp up our operations team demand to get as much food as many homes as possible while maintaining our high level of customer service satisfaction and safety.

I'd also like to thank our dedicated employees for their flexibility as we've made changes to their work environment to meet elevated demand and we put in place additional personal hygiene sanitation and safety features even with Iraq evolution in our fulfillment center processes and the need for our non fulfilment Center employees who work from home to continue to provide our customers with a delicious meals. They crave at the level of quality that comes to know and expect from Blue Apron off now turn it over to Tim to talk to our financials in more detail.

Thank you and good morning. Everyone echoing Linda. I would also like to thank our entire team as they continue to navigate and quickly adapt to this ever-changing environment enabling us to deliver as many Blue Apron meals customers as we possibly can during these unprecedented times.

Now turning to Blue apron's first quarter performance. We delivered first quarter results within the guidance range. We provided on our February earnings call as Linda stated earlier. We believe that these results validate the progress with our cross-functional teams have made against our previously announced three-pronged strategy net revenue in the first quarter of 2020 was 101.9 million dollars compared to one hundred forty one point nine million in the prior year in ninety, four point three million in the fourth quarter of 2019 as indicated previously. We have spent the last year, we focusing our marketing Investments and aiming to become more efficient and how we attract engage customers while we knew this transition would likely have a negative impact on net revenue throughout 2019 strengthening our customer base as a foundation for executing our growth strategy as we work towards building a healthy long-term sustainable business.

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And prior to seeing the effects of covid-19 pandemic on our business. We leaned back into our marketing investment to leverage improvements to our product and customer experience as a result. We saw sequential court reporter growth in both net revenue and customers as well as continued Improvement in certain customer metrics marketing spend in the first quarter of 2020 increased in both absolute dollars, and as a percentage of net revenue off a quarter-over-quarter and year-over-year basis to $15 or 14.8% of net revenue driving an increase in the number of customers have 7% quarter-over-quarter to $376,000.

While maintaining our discipline customer acquisition mindset. We also saw improvements in certain key customer metrics that point to a strengthening customer base average revenue per customer and orders for customer and am 5% and 4% year-over-year and 1% and 2% quarter-over-quarter respectively finishing the first quarter of higher levels, and we've seen in the last few years on the cost side card, excluding depreciation and amortization as a percentage of net revenue improved one hundred fifty basis points quarter-over-quarter to 59.5% in the first quarter of 2025 from 61% in the fourth quarter of 2019, the quarter-over-quarter improvements in college largely reflect the expected seasonal trends of the business as well as our continued focus on cost efficiencies.

Product technology and G&A or p t g n a cost declined 13% year-over-year to 34.2 million dollars reflecting our teams ongoing commitment to optimizing our cost structure and gently managing expenses of their operating expense was three point two million in the quarter and 8.1 million with 8.1 million dollars of changes related to the plan closure of our Arlington Texas fulfillment center of partially offset by a game of four point nine million dollars from the unwinding of our build-to-suit accounting as a result of our exit from our unoccupied Fairfield California lease, we officially Xbox Fairfield California lease on March 31st. We are scheduled before we exited from our Arlington film and Center by June 1st on the bottom line net loss for the first quarter of 2020 improved a project on a quarter-over-quarter basis to 20.1 million dollars from 20.9 million dollars in the fourth quarter of 2019 adjusted ebitda finished the quarter at a loss of 5.8 million dollars.

Representing a 30% Improvement quarter-over-quarter compared to a loss of eight point three million dollars in the fourth quarter of 2019 driven primarily by efficiencies and our fulfillment center Network and our continued focus on cost optimization now turning to our financial Outlook. Let me preface by sharing some assumptions our guidance attempt to account for the continued impact of covid-19 on our business including as a result of changes in consumer behavior and grocery Alternatives and the magnitude and timing of the impact on our business when the effects of covid-19 and related research and begin to ease further. Our guidance assumes that we will not experienced any significant disruptions in our fulfillment operations or supply chain as a result of the covid-19 pandemic.

as Linda discussed

Customer comments we have seen a sharp increase in demand for our meals and Q2 as a result of the covid-19 pandemic driven primarily by a growth in customers as well as Improvement in certain customer metrics such a wage orders for customer and average revenue per customer because of this increased demand. We were expecting net revenue in Q2 to grow year-over-year in the high single digits on a percentage basis to a bath smelly 130 million dollars notwithstanding substantial investments in our Frontline fulfillment center team as volume ramps up. We expect to deliver a net loss of no more than six million dollars positive adjusted ebitda of at least five million dollars and positive operating cash flow of at least ten million dollars.

As Linda mentioned we believe that the covid-19 pandemic will continue to affect our consumer behavior for some time and will continue to benefit our business going forward Beyond Q2. We also believe that the quiddity Outlook will benefit Beyond que tu as a result of the increased demand we have seen to date we cannot however provide specific guidance on Beyond Q2 since at this stage. It is difficult to assess the duration of that magnitude of the impact of this new normal on our business for future.

As we announced in February of the company's board of directors continues to evaluate a broad range of strategic alternatives to maximize shareholder value including to support the execution of the company's growth strategy for easy reference or chart for my net loss. We just keep it is included in our earnings release, which have been posted to the Blue Apron investor relations website, and then I will now take your questions.

We will now begin the question-and-answer session. Ask a question. You may press * then 1 on your touchtone phone. If you're using a speaker phone, please pick up your handset before pressing the keys to withdraw your question, please press * then two.

To allow everyone to ask questions. We ask that you have one question and one follow-up as needed.

The first question will come from Maria ribs with canaccord.

Good morning. It's great to see customer growth and strontium am here. I just wanted to ask a couple of questions. Maybe can you spend a minute talking about how may thinking about maintaining this healthy level of demand and customer engagement when we are past sort of this wave of heightened demand due to the pandemic.

Sure, I can start with that and then 10:00 can add anything that you'd like to join in? So what we see first of all from the third-party research out there is that there is expected life changes in core customer behavior that that encourage more cooking at home. Even after some of these challenges pasts and that there's going to be quite some time off of that sort of lags behind us people are looking at them that being said we assume and understand that the only way that we retain and engage people pass. This point is to give them a great experience with the product if I were particularly happy with some of the product initiatives that we put forward into one as well as some of the work that we've been doing over the last 18 months to try to drive more variety more choice and more experienced because all of those were designed to retain and answer the questions about health about variety and about flexibility that our customers and past customers have been looking for the product.

Get that in addition to that. We are also continuing on with our existing.

Road map to add more of those. Uh, those options in that we had already planned for 2020 as we believe that that's a big indicator and how people retain with our product and a big part of what they're looking for. What hasn't changed and what we will continue to maintain and we know is important for our products going to be our our consumers coming in is that we have great recipes great flavors high-quality exam Hai Animal Welfare standards, and we intend to continue to maintain those so that we can have that differentiation of the quality of the product along with the fact that we're meeting customers needs when it comes to help variety and flexibility. In addition to that. We've also been changing and enhancing our marketing program to look at both acquisition and retention and assuming how we can actually apply that to our existing customer base as well as the new demand that's come in from this to maintain the appropriate proportion of that going forward. We have been looking carefully at the data to understand Trends and understand the transit center under Louis.

Customer base and we are seeing that strength there through some of the key customer metrics that we were talking about earlier in the call him. Do you want to add to that? You know, I think that's great, you know a couple of things kind of puts pieces together just to go back again. The the first thing is, you know, in q1, we actually were very happy that when we increased our our marketing spend a bit of a year in court reporter as well as our to see the positive results of the growth initiatives that Linda was just talking about yeah, we're pretty happy that we did see quarter-over-quarter increase in revenue and specifically increase in our customer metrics and maybe most importantly than something you called had any other question that $25,000 increase in overall customers quarter-over-quarter. We don't get 7% increase in customer. So even though we didn't see any real impact of the covid-19 pandemic on our business in q1, you know, we did see positive impact of our growth strategy in q1, so it's so that was great and that's something to Thursday.

That as we move, you know beyond Q2, of course we talked about in Q2. We're seeing this sharp increase, um, you know, it's driven by increasing customers as well as increase in customer orders in Revenue per customer, so that that's great and as as Linda talked about work, we're seeing that happen on, you know with very efficient marketing spend. So when you put those two things together as we go into the second half of the year, you know, I do believe that they'll be extended effects of that shifting Behavior related to customer consumer eating habits that Linda talked about and then that's going to end the on you know, the direct you to covid-19. But at the same time as Linda we just talked about as well. We will be continuing to lean into those growth initiatives. You know, we think that we'll have, you know be able to be quite efficient from a marketing side as we you know contingent back into Marketing in the second half of the year, you know, and we think that and we will of course as Linda just pointed out continued to lean into those growth initiatives that we've been talking about for some time. So the only think the, yep

Mission of those things. Um, you know what this interview

Position going forward and and you know, we can't specifically um guide to what should happen in the second half of the year because of all the uncertainties, you know, we do believe that they'll continue to be some positive effects as we move out of Q-tips.

Again, if you had a question, you can press * then 1 at this time.

Please hold for a moment while we assemble our roster again.

Our next question will come from our ecole with Cole capital.

Hello, I'm good morning. Thank you again for doing your call three quick questions. I recognized the fact that you've had strong demand in the April timeframe was trying to better understand how many sort of how much lost Revenue there was maybe in the month of April due to cancelled orders that you were not able to fulfill wage and then question number two. Ugh, as you know, your full menu is not available now to customers I was wondering through your hiring efforts when you would expect the full menu of options to be available. Cuz right now even when one order is from May the full full menu options are not available yet and then third question is just on Monday and may miss this further comment from you. But if you made any comment about how maturely higher Revenue per order and frequency of orders is changed here in in the April time.

Covid-19 was more evident.

Linda you want me to just step in on the first part of that and I'll let you talk a bit about sure. Yep. Okay. So yeah. So are you by the way thanks for the call. I appreciate you. I appreciate the question off the you know, what Linda went through on her in in her section is pretty much what happened in April in terms of the Demand versus what we're able to service and you know to be clear the pickup in demand, you know largely related to the impact of the covid-19 pandemic on top of of course the growth initiatives that we already had out there in the marketing Q one was pretty big. So I saw that 27% increase in total demand now without going into the individual specific metrics I can tell you that that was driven by kind of multiple things. We it was caused by an increase in the number of customers are in that time. Um an increase in the orders for custom that time. An increase in Revenue per order during that time. So all of those things were kind of positively wage

Um moving us toward that 26th.

Percent increase in demand now. It happened pretty quickly. So we had to start ramping up labor under SE is very quickly to to service that and so we were able to service about a 22% increase. So you'll know the difference between that 27% pick up and 22% that we're able to service was was um, you know, obviously represents a little bit of missed opportunity in April, but as window also said, you know, we've been continuing obviously off ramp up as we you know, look for increased demand through the rest of you too and you know believe that will be in good shape to be able to handle the demand. I'm going through the rest of the quarter. So, um, you know, hopefully that that office that handles that part of it and then Linda if you want to talk about the the menu offerings

Sure. So on the menu offerings, obviously, one of the things we never really want to sacrifice is variety of our customers at the same time recognizing The Importance of Being able to as many people as possible with food in their homes. We did make the decision to limit the choices on the menu in order to feed up our ability to deliver food safely. And so we were younger we did make that difficult decision in order to reduce some of the variety that was available and we're expecting that, you know within the quarter will be able to return to that same level of variety and we're working hard to get to that as quickly as possible. But again, we still feel like our priority is making sure as many customers both new and existing can get food that they're looking for some first and and that's not prioritizing now, but we are getting close and continuing to ramp up. So we'll we'll be able to have news for you fairly soon on going back to full variety on the menu.

Thank you and best of luck. Thanks so much.

Thanks. Are you?

If anyone has any further questions, please press star one at this time.

I'm showing no further questions. This will conclude our question-and-answer session as we approach the conclusion of our call. I will now turn it back over to miss Kozlowski for closing remarks.

Thank you very much on behalf of everyone at Blue Apron. We do want to wish you your family's colleagues and Friends well, and he's extremely unsettling time and let you know that our teams are working diligently and effectively to bring incredible home cooking into people's homes in this important and challenging time. Thank you.

The conference has now concluded thank you for attending today's presentation. You may now disconnect.