Q1 2021 Blue Apron Holdings Inc Earnings Call

Uh huh.

[music].

Yeah.

Good morning, and welcome to the Blue Apron Holdings first quarter 2021 earnings conference call and webcast.

At this time all participants are in a listen only mode and as a reminder, this call is being recorded today Thursday made a sixth 2021 for replay purposes.

Slide presentation has been created to accompany today's remarks and can be accessed on the blue apron Investor Relations website.

As of today and should not be relied upon as a representing its views as a very subsequent date the company specifically disclaims any obligation to update these statements.

During this call the company will 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, an S. A C filings, where it has to find these measures and to review the reconciliation a these non-GAAP financial measures to them.

Most directly comparable GAAP measures and.

In addition, reconciliations a certain forward looking non-GAAP measures referred to during this call are included in our earnings release, which is available on the company is a investor relations website located at investors dark blue apron dot com under events and presentations.

And with that I would now like to turn the call over to Linda Fendley cause Lawsky Blue apron C E O Linda.

Thank you Ken good morning, everyone and thank you for joining us today.

Our first quarter, a adults demonstrated another quarter of gross that our business with approximately 27 per cent ear over a year revenue growth and another quarter a meaningful improvement in many of a key customer a matrix.

The improvement in a business continues to be driven by our growth initiatives, which includes a new product innovation that further a differentiates blue apron from our peers debt.

We continue to make progress with the implementation a return focused marketing initiatives.

We also seen a positive impact from the changes in a certain operating practices that are a fulfillment centers that it helps make our operations more efficient.

Overall first quarter net revenue adjusted EBITDA and net loss for a well we're in line with guidance. We provided at a time, we reported a fourthquarter results call in February.

Turning now to some a first quarter a highlights.

Customers rose both year over a year and on a quarterly sequential basis, reflecting the benefit from a marketing investments and a quarter as well as our ability to efficiently attract high quality customers based on our product innovation.

While we continue to see some benefit to demand from the pandemic. We're also seeing sustained levels of heightened customer value even as more people are being vaccinated and tried to levels increased.

Improvements that led to this achievement also helped drive consistent top line growth over the last year, a while establishing a foundation for us to meet our goal of achieving consistent annual positive adjusted EBITDA.

And looking at Blue apron today compared to April 2019, many things about our business and our operational practices have evolved.

We continue to leverage our strong brand equity and a unique ingredients and flavors, we offer to retain and attract high quality customers.

Affinity for the Blue apron brand as a foundation on which we are building and launching our new products and operating efficiency initiatives, resulting in this runway a consistent improvement.

I'll highlight some of the changes we've made over the last few years and start with product innovation, which we have discussed before is a key driver of our business growth.

Compared to two years ago, we now offer significantly more choices for our customers. This includes additional flexibility with customizable recipes and their ability to order more blue apron each week.

Customers can now add more recipes to their box and order a second box meals, each week and wines each month.

We also offer a more variety across our menu, which now features a 35 weekly options compared to 17 weekly options a January of 2019.

We've also introduced meal prep.

A single prep and streamline cooking session for for a different recipes and its a little guidance 90 minutes.

It's a operations.

With a improved planning on forecasting processes now in place we've been able to further reduce our food waste, even as we enhance a variety and quality of our ingredients.

Compared to 2019, and taking a way to different challenges of operating during a pandemic. We've also lowered our package a cough.

We were able to do so through more strategic sourcing efforts, including a now streamlined process of identifying and onboarding suppliers as long as optimizing or a package that configurations to adapt to seasonal by those shots.

We implemented those cost savings, while making a boxes more sustainable and we know you 16 per cent more of a recyclable content.

In that regard, we continue to optimize a fulfillment centers by a better leveraging labor hacking and equipment.

We now include more free package ingredients in our boxes, allowing us to optimize additional labor resources.

Since we first started focusing on these efficiencies in the second half of last year, we've applied our practices across both fulfillment center. It's M. C. A continued decrease in labor required per pack line and labor minutes per box.

As a result of the progress we've made and it's labor constraints a decline from the highest levels. A 2020, we believe or a generally capable of addressing the current forecast a demand by utilizing our fulfillment centers image and Linden enrichment.

As such we recently closed Arlington facility, which we had temporarily reopen and operated for the first quarter a 2021.

We expect this will benefit or a variable margin going for it.

We are proud of the world class facilities B, a built in we feel they're a key advantage on our ability to scale and we aren't the only ones to be impressed blue apron was recently featured on the history channel is modern marvels for the innovative process by which resource fulfill and deliver a high quality ingredients to our customers.

The last thing I want to spend a little time highlighting is that over the last two years, we've been rebuilding our full marketing function and still have a significant opportunity ahead.

In addition, as he continued to assess our marketing mix, we're expanding into new channels with new efficiencies.

We plan to continue to lean into partnerships to help attract new customers entertained current on.

This quarter, we're collaborating with Walt Disney Studios for a second time to create a menu in celebration of the release, a dizzy and fix <unk> original feature film Luka, which will be straining on Disney plus beginning June 18th.

In addition, as part of our Wellness 360 campaign, we've partnered with calm the number one app for a sleep meditation and relaxation.

We're also expanding our W. W. A partnership and now feature a W. W approved option on a weekly meal prep menu.

Thank you and good morning, everyone as highlighted in this morning's release, our first quarter results were inline with a guidance. We provided in February with net revenue of $129 $7 million coming in about $700000 above the high end of our guidance range.

Net revenue rose, 27% year over year and represented our fourth consecutive quarter of double digit year over year growth.

First quarter meal kit demand continued to be driven by a more expansive menu offerings. The continuation of our successful partnerships and rollout of new products such as customization.

As Linda highlighted product innovation, which includes add on the newest introduction to our menu is one of the key pillars of our growth initiatives and we expect to continue to launch new products over the balance of this year.

As previously stated we plan to support these expansion with higher marketing spend compared to last year.

As we were.

As we reviewed on a fourth protocol, we have increased our marketing investment over last year with first quarter spend of $19 9 million or $15 four per cent, a net revenue compared to $15 million.

Eight per cent of net revenue in the first quarter a 2020.

Turning now to a review of our key customer metrics, which continue to reflect the benefit from our focus on customer engagement and retention.

We had 391000 customers in the first quarter of 2021 up from 376000 in last year's first quarter and also up on a quarterly sequential basis.

Orders per customer a 5.4 remains at improved levels.

Okay.

Around price levels reported.

Average order value was a record $62 a compared to $58 in the first quarter a 2020.

Average revenue per customer was more than $300 for the fourth consecutive quarter rising 22% year over year to a record $331.

Reflecting our operating momentum the last four quarters have been the only time Blue apron has recorded average revenue per customer of more than $300 since prior to 2015.

On the cost side cost of goods sold excluding depreciation and amortization as a percentage of net revenue increased year over year by 340 basis points.

Understood.

The increase was primarily due to an increase in food and labor costs due to investments made to increase fulfillment center capacity.

A majority of it used to be nonrecurring they are directly related to the impact that the pandemic has had on our operations.

These costs were partially offset by a decline in our external patch packaging costs.

I think improvements on.

Our variable margin was 37, 1% in the first quarter of 2021 compared to 45% in the first quarter of 2020, we expect margins to normalize going forward.

On PT G&A, we continue to demonstrate cost control and a product technology and G&A costs in Q1 T. G&A as a percentage of net revenue was 28, 2% declining 540 basis points compared to a year ago period.

I also want to highlight one other thing on the cost side to provide additional context around some of the headwinds from Linda highlighted as we operating throughout the pandemic.

Since last March we've increased our sanitation and safety protocols.

To keep our team members a possible.

These measures include additional cleaning.

Masks to all employees implementing health and wellness screenings.

A physical barriers, we've also had higher costs for temporary labor and employee attendance on a constraining this time.

Over the last four quarters.

From Q2, a 2020 through Q1, a 2021, we estimate the higher level a cost directly associated with enhanced COVID-19 related protocols and for temporary labor and attendance bonuses totaled approximately $4 million.

This includes $2 million on the first quarter to support new mandated weekly testing of our employees.

While these costs are expected to remain elevated for some time, we do expect they will begin to decline this quarter.

On the bottom line, we reported a net loss of $15 7 million and an adjusted EBITDA loss of $6 $1 million, both of which were in line with our guidance.

We recorded a negative operating cash flow and free cash flow of $12 million $13 $7 million, respectively. Both of which are improvements compared to last year's first quarter.

We expect our cash burn rate to decline through the rest of 2021 as we leverage investments made in the first quarter related to the pre positioning inventory and other assets that we plan to use drive our business through the balance of a year. In addition to the normalization of working capital timing.

At March 31, 2021 we had cash and cash equivalents, a $29 $6 million a $3 3 million in total outstanding borrowings under the senior secured term loan of which $29 8 million was classified as long term debt and $3 $5 million was classified as the current portion of long term debt.

We have also amended our term loans to provide us with more flexibility around our accessible liquidity you can reference our form 8-K that was filed with the SEC. This morning for more details.

Turning to our financial outlook for a second quarter, let me first share some assumptions are.

Our guidance assumes about a consistent benefit to our business from the execution of our strategic strategic growth initiatives and ongoing operational improvements.

It also assumes planned investments and marketing initiatives as well as our ability to manage liquidity and compliance with our debt covenants.

Further our guidance assumes a return of seasonal fluctuations to the historical we experienced a pre pandemic, reflecting that there may be a decrease from the impact that's had on consumer behaviors relating to cooking at home as restrictions continue to be lifted and more people are vaccinated.

Lastly, the guidance assumes that we will not experience any unforeseen significant disruption in our call center operations or supply chain.

Before sharing the 2021 second quarter guidance. It is important to note that 'twenty 'twenty 'twenty second quarter reflected the largest benefit from stay at home orders related to the pandemic.

Yeah, since we're bringing fluid into their homes, including blue apron.

That's more of the country has reopened as more people get vaccinated and begin to travel we do not believe that last year's second quarter as the best benchmark to gauge our continued progress.

Reflecting these factors and assumptions, we expect second quarter net revenue of approximately $122 million to $126 million.

Compared to the 2019 second quarter, the revenue guidance reflect from approximately 2% to 6% increase.

While this guidance reflects a sequential decline from Q1, which has historically been our seasonally highest quarter I note that it is a smaller sequential decline than we had seen previously when factoring out Q2 2020 non by normal seasonality as a result of the onset of the pandemic in the United States.

It's also worth.

The gross over the second quarter reflect a significant better key customers.

Even though a customer count is down 13% from a second quarter. A 2019, we are deriving materially more value per customer, but a higher average per value orders per customer and average revenue per customer.

As a result of our focus on attracting and retaining high quality customers with deep brand affinity through more efficient marketing as well as a product innovation and operating efficiency.

Yes.

Yeah.

Other guidance metrics.

Lots of no more than $17 million on the second quarter and an adjusted EBITDA loss of no more than $7 million.

A full year 2021, we expect to achieve a.

Single digit.

Net.

With the expectation that the second half of 2021 will return to growth after the narrow declines we're forecasting for Q2.

Before taking your questions I'd now like to turn our attention towards the longer term.

As we look to 2022 and as the business is expected to return to its pre pandemic seasonality and a variable margin. We expect net sales leverage together with additional operational efficiency improvements continued marketing efficiencies cost containment and PT G&A will contribute towards a blue apron generating its first full year of positive.

<unk> EBITDA.

For easy reference a reconciliation table from net loss to adjusted EBITDA is included in our earnings release, which has been posted on Blue Aprons Investor Relations website.

Linda and I will now take your questions.

Randy Thank you and to our listening audience. If you would like to ask a question simply press star and one on your telephone keypad pressing star on one more place you went to a queue and we will open your lines. One at a time also a friendly reminder, that if you're joining us today on a speaker phone. Please return to your handset prior to pressing star one.

To be certain that you're a signal does reach our equipment and once again, ladies and gentlemen that its star and one we will hear first from Maria reps at Canaccord. Please go ahead.

Good morning, and thank you for taking my questions I just wanted to ask you about your full year revenue outlook.

A big stand a little on what youre seeing either in customer behavior or sort of a competitive landscape.

Now try it a little bit low expectations for the year.

Okay.

Sure I can start on that and then Randy can.

Jump in with any thank you Murray on for that question. So we're still I think very very strong behavior from our customer base as we said last year and on and sort of earlier. This year. We were very focused on building product innovation that will drive sustainable growth.

So we are focused on creating value and that's where you're seeing some of the continued record numbers around value coming from them as far as rapidly for a customer et cetera.

So we feel really good about what we're seeing with that kind of tail on behavior coming through the pandemic because of the work that we've done around higher quality customer attraction and retention as well as on initiating some of these product initiatives that will continue to sustain and post pandemic times. So we're seeing very very good strength of those customer numbers.

On but we do see a little bit of a lap in Q2 as expected, but what we are seeing through the rest of the year is just focusing on how we continue to scale, our marketing programs build out new technologies, new channels et cetera on top of that value that we've actually already created so really it's just about on.

Looking at the rest of the year and thinking about all of a different puts and takes throughout the year and how we can continue to expand into new marketing channels.

As we build on the rest of the year.

[noise] opportunities.

I'd add to that that our focus continues to be on driving a strong key customer metrics that we've been talking about.

Look at the forecast for the balance of a year. We expect these two customer metrics to continue to expand a week.

Continued deliberate to deliver on a product initiatives and give customers a more opportunity to derive more value from blue apron products, we're seeing those trends continue to expand on this.

Thank you that's very helpful and maybe one follow up if a good. So we know that Q2. This isn't a list had a slower quarter for you a unable to share with us any color in terms of what's implied in your outlook for a customer additions for the second half a year or maybe just talk more broadly about how should we think about it.

If a customer trends for the balance of a year.

Sure.

Customer.

No go ahead, Randy you start.

Well I'll take the second happened then maybe took a back to Linda for the first that was a question go a little bit out a quarter as it relates to key customer trends.

Thank you should expect is a seasonal curve to look more like they did pre pandemic with continued customer growth.

We'll say that we are more focused on driving maximum value per customer than pure customer growth in terms of.

Total numbers that being said customer growth is a key component of our growth strategy, albeit making sure that we're bringing in the highest quality customers possible Linda anything to add.

Yeah, sure and I'll, just say that we are being consistent with what we've said before that we don't want a go for growth at all costs and we continue to focus our efforts on driving customer growth as they talked about sequencing our strategy earlier when he talked about first really deriving a significant customer value by adding flexibility a variety of choice that is low.

Youre, saying pay off and those key customer metrics and then layering marketing on top of that so that we can take advantage of the efficiencies that we see and a product and increased values and each customer on that we bring in and also retain.

And so we are planning on continuing to lean into that marketing through the rest of the year to build on top of those product initiatives.

We look at driving customer growth going forward.

Got it that's very helpful. Thank you both.

Mhm.

And once again, ladies and gentlemen that is star and one and we remind you to a return to your handset prior to pressing star and wanted to be certain that youre a signal does reach our equipment, we'll pause for just a moment to give everyone a chance to a signal.

We do have a signal coming in from aerial coal with our excuse me area Cole with Cole capital. Please go ahead.

Thank you very much.

And.

Good morning to everyone on a call quick question about the recent customers were added in the first quarter. Linda have you what sort of a feedback have you gotten so far in terms of a behavior.

Of the new customers in terms of their a frequency of order on average order size relative to the older.

Based on customers you have on I'm really trying to understand is how effective have you been when you bring a new customers and bringing in the high value customers you seek vs customers maybe later on.

On ordering and generating less revenue than the more tenured customers.

Thanks, So much for the question area on actually this is a one of the things that we're particularly happy about them as they look towards.

The sustainable trends towards growth one of the things that we stated in this morning's discussion.

That's a wellness 360 program that we launched in Q1 is bringing in some of our highest value customers debt that we've seen since I've joined the company a.

On the interesting thing about that wellness program is it isn't totally a new customer acquisition program, but we have existing customers that of course, we're taking advantage of that program as well.

So we're actually able to see it's a little bit less about new versus old customers.

I think the more interesting aspect is are we creating offerings that both more deeply engage and create more value in our older customers are loyal customers on.

As well as bringing in higher quality customers. So again as reflected in a key customer metrics. We are actually seeing a strong value in both the new customers that we brought in in Q1 as well as the existing customers that have been with us for a long time that a more deeply engaging with our products and it's a combination of those changes that are actually driving.

Driving that customer value that we've been talking about so we think a that is a very positive aspect on top of that of course, we watch very carefully as as pandemic behavior shift look at some of the recent travel trends et cetera, and we're able to look at how they are our customer base behaves.

During that time, and we are seeing a lot of them a lot a positive sustained behavior on in the value of those customers throughout those fluctuations as vaccinations a rolled out in travel continues and that's a we think a big part of of the manifestation of what we've been trying to do which is really focused on driving that customer.

Value.

Got it. Thank you and then one last question for Randy.

In terms of goals for the future can you give us a sense maybe.

Uh huh.

How many customers are what sort of a revenue levels or other metrics a company would need to be at in the future to be new situation or a free cash flow turns positive and blue apron, a self sustaining a a growing entity and does not need to raise additional cash to help fund future.

Growth.

Sure it's less about it's less about the absolute number of customers and more about the the composition of those customers in terms of customers that are driving high order value.

Orders without a more frequently.

If you think about the quarter that we just posted Q1 on an adjusted EBITDA basis, if I'm, if our margin architecture have booked more normal without some of these one offs that we had around capacity constraints.

Other things that we had to do a.

On a pro forma basis, we would have expected positive adjusted EBITDA a key.

One alone.

A cash burn.

Is it through the balance of a year and I do expect that we will be in position to begin generating positive cash flow.

Round the corner into next year.

Right.

Yes.

[music].