Q2 2023 Blue Apron Holdings Inc Earnings Call
Good morning, and welcome to the Blue Apron Holdings second quarter 2023 earnings Conference call ended up guest at.
At this time all participants are in a listen only mode.
As a reminder, this call is being recorded today Wednesday August nine 2023 for replay purposes.
A slide presentation has been created to accompany today's remarks and can be accessed on the blue apron Investor Relations website.
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On this morning's call, we have Linda Findley, President and Chief Executive Officer of Blue Apron, and Mexico, and interim Chief Financial Officer.
Before handling the call or where did the company. We will review the safe Harbor statement various statements that the company makes during todays call about its future expectations plans and prospects constitute forward looking statements for the purpose of the safe Harbor provisions under the private Securities litigation.
From act of 1995.
Actual results may differ materially from those indicated by those forward looking statements as a result of risks and other factors, including those described in the company's earnings release issued this morning in the company's SEC filings.
In addition, any forward looking statements represent the company's views only as of today and should not be relied upon as representing its views as of any 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 and SEC filings, where it has defined these.
My shares and to review the reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures with that I would now like to turn the call over to Linda Findley Blue apron CEO Linda.
Good morning, everyone and thank you for joining us on the call with me today is Mitch Cohen Blue apron interim CFO .
We had a very busy second quarter and I'm excited to walk you through our work and more importantly, what it means for blue apron going forward.
Let me open with two important comments first profitability.
We have established a clear path to achieve adjusted EBITDA profitability, which we expect to reach starting in the second quarter of 'twenty 'twenty four.
This follows several strategic actions taken to reduce costs increased marketing efficiency and position the business for long term sustainable growth.
Second liquidity.
Our internal model reflects sufficient capital from our operations to achieve our adjusted EBITDA profitability goals and to continue to move the business forward. This is based on aggressive cost reductions and the shift to an asset light model.
Now, let me dive into our second quarter 2023 results, we delivered a strong quarter to set the stage, while the fresh realm transaction closed in the last month of the quarter the improvements I will share where before the benefits of the transaction.
Let me start with the cash burn reduction this quarter, we implemented additional efficiencies continuing the work we accomplished in the first quarter.
As of June 30th our quarterly cash burn and operating activities improved by approximately $13 $2 million compared to the second quarter of 2022, reflecting a 72% year over year improvement.
This follows the 67% year over year quarterly improvement, we recorded as of March 31st.
The time frame to reduce cash burn is exceptional and I want to recognize the team's incredible efforts to deliver these impressive results.
While we plan to continue to aggressively manage our cash burn in the second half of the year, we anticipate it will increase slightly in the third and fourth quarters inline with typical seasonality.
Even with the seasonality of the actions. We are taking are expected to get us to adjusted EBITDA profitability in Q2 of next year.
We do plan to invest slightly more marketing now that we are seeing payback periods, well below a year and at the lowest level in eight quarters.
I will touch on this more in a bit.
Staying with the balance sheet, we are now a debt free company.
With a portion of the proceeds of the transaction, we repaid our remaining senior secured notes in full.
This provides us with greater flexibility as we are no longer subject to a minimum liquidity covenant.
We now have unrestricted access to all of our cash and have eliminated all the costs associated with the debt.
Moving to our goal of adjusted EBITDA profitability. We are ahead of plan.
This quarter, we significantly reduced our adjusted EBITDA loss by 84% year over year, and 70% sequentially to a loss of $2 $6 million.
Our increases in efficiency across the business also drove strong margin improvement variable margin was 37, 9% in Q2, our strongest margin performance since 2020 and a notable increase from 35, 8% in Q1, 2023, and 34, 7% in Q2 2022.
The strong performance was driven by rigorous cost management and productivity improvements implemented prior to the transfer of our operations to threshold.
Mitch will discuss how we plan to look at margins moving forward in a bit.
In parallel with financial and operational management initiatives, we continued to see record customer engagement metrics.
Average order value hit another high at over $75 up approximately 8% versus Q1.
Average revenue per customer improved significantly to $397 another record high.
Key drivers were a price increase that we implemented in may of 2023 optimization of promotional and marketing spend and more importantly, strong engagement from our repeat and tenured customers.
The value, we provide our customers as evidenced by consistent orders per customer, which was $5 three for the quarter.
As I've shared before the longer our customers with us the more they tend to spend over their tenure.
Total customers in the 12 months ended June 30th 20, twenty-three was 679000 compared to 687000 in the equivalent prior year period.
Total customers in the second quarter was 267000 compared to 326000 in the first quarter of 2023 and 349000 in the second quarter of 2022.
We anticipated this decline and customers as we deliberately reduced our overall marketing spend.
In the second quarter marketing spend was $9 $4 million, a reduction of 36% sequentially and 57% year over year.
At the start of the year under the leadership of our new Chief revenue Officer, we implemented an improved testing program.
The goal is that every marketing dollar we invest delivers on our targeted payback period, while also attracting the right customer.
With over six months of testing under our belt, we have identified what we believe is the right formula to move to more effectively target. The next dollar.
And all of this is paying off in Q2, we saw significant improvement in payback periods at levels far less than our one year target and efficiencies better than Q1.
Cost per acquisition also improved by 30% while conversion rates improved by 25% year over year during the second quarter.
In addition, our average weekly retention is the strongest it's been in five quarters, even with the recently implemented price increase.
We were able to make consistent and repeatable improvements, while continuing to leverage our strong brand.
Given our success, so far and as we capitalize on our new asset light model, we are increasing marketing slightly in the second half of the year, we plan to stay within our targeted one year payback period, and expect our investments to come to fruition in 2024.
To summarize the second quarter, we now have a stronger balance sheet, no debt and significantly lower cash burn that positions us to meet our goal of adjusted EBITDA profitability in the second quarter of 'twenty 'twenty four.
Now I wanted to take a moment to discuss our strategic path forward.
During our 2022 Investor day, we laid out our three year. The next course strategy aimed at achieving long term sustainable growth and reaching profitability.
A key component of this strategy focuses on building an ecosystem of partners and relationships that furthers, our vision of better living through better food, which now includes fresh realm as our fulfillment partner.
Transferring our operational infrastructure to execute our asset light strategy allows for efficiency to enhance shareholder value while balancing growth.
We retained our full direct to consumer business, including all aspects of creating and marketing our delicious recipes, along with the data and technology to support that work.
Under our asset light model, we removed our direct rolled in fulfillment of our meal kits, allowing us to be more agile and focused on new product innovation the.
The benefits of the shifts are clear.
First this model has a significant impact on both fixed and variable cost to drive further efficiency.
In selling our production and fulfillment infrastructure, we unburden, our fixed cost base within P. T G N a.
Under the new partnership we are taking on a fixed P. T. G N a fee the fee is lower than our current run rate cost and will decrease further at the beginning of 2024.
As we continue to scale our business, we expect to see the structure would be more efficient, especially with the removal of a large portion of direct fulfillment overhead costs, such as personnel costs or depreciation and amortization associated with growth.
Last month, we also executed our previously announced reductions and corporate head count to streamline our business to match, our asset light model, resulting in an approximately 20% reduction of positions.
These actions will drive approximately $7 million in additional annualized savings.
In addition to the other transaction work we've done we believe that we are on track to achieve the financial and cost savings milestones due to receiving an additional $4 million in funding from fresh million fresh realm payable to us starting in the fourth quarter.
Looking at variable cost, we anticipate improvements as a result of the asset light model.
Blue apron retains control of the quality and supplier standards. We believe we can leverage thresholds scale in labor food packaging and logistics. This should drive variable cost efficiencies in the long term.
Second through this partnership we have the ability to introduce new products quickly and efficiently without compromising on quality.
Well the apron was previously limited to the capabilities of its own fulfillment centers now we were able to leverage thresholds expertise and scale to grow our own product portfolio.
Starting in the first half of 'twenty 'twenty four we're introducing even more convenient meals on the menu.
These new no prep options will enhance our current offerings, while also allowing us to target a new set of time starved health conscious consumers.
Third as we continue to focus on our products. We now have the capacity to identify new revenue enhancing opportunities. We plan to do so by leveraging the strength of our brand our culinary authority, while taking advantage of their economies of scale.
We will share more details as the work progresses.
In summary, the teams ability to realize significant cost savings improving marketing efficiency and close a complex and strategic deal to transition blue apron to an asset light business model.
Is poised for the future in my view remarkable.
As I've stated before it is my belief that the industry is fragmented and is ripe for consolidation and as an asset light business, we can be more opportunistic opportunistic.
As such we plan to continue to look at strategic opportunities that makes sense for the company and its shareholders.
I am energized and optimistic the work we have done over the past few quarters to stabilize the business, including the fresh round transaction and position. It for growth allows us to reissue guidance for the first time since the second quarter of 2022, which Mitch will touch on shortly.
We look forward to speaking with many of you at upcoming conferences. This fall with that let me turn things over to Mitch to run through our financials.
And good morning, everyone.
Let's begin with an update on our balance sheet and liquidity position before diving into the quarters performance.
Our cash balance at the end of the second quarter was approximately $30 million as compared to 31 6 million at the end of Q1 2023 and beyond.
Now a debt free company. This reflects a number of factors first.
We should all be approximate of approximately $23 6 million upfront cash net cash proceeds as part of the transaction.
Lex.
The repayment of all remaining senior secured notes due April 22, and a half million of which was paid in the second quarter. This is beneficial for two reasons one it removes the restricted covenants previously in place, which allows us to be more flexible with our cash balance moving forward into eliminates the over $2 $5 million of annual interest expense.
Yeah.
Our cash balance was not materially impacted by the at the market offering launched in February of 2023 we sold a minimal number of shares at the beginning of Q2 was almost 66 million of the 70 million still available as of June 30th.
As Linda noted.
And has this reaching adjusted EBITDA profitability in Q2 2024 without the need to access the ATM.
In addition.
In addition to the cash proceeds from the transaction and accelerated debt pay down you'll notice the following changes to our balance sheet as a part of the transaction.
First at the closing of the transaction, we sold and transferred two extra pressure on all inventory related to our meal kits.
Turning to <unk> 3 million in inventories look like.
Wine and marketplace items second we have a $3.5 million. So sellers note receivable net of discount accretion to us by Crestwood threshold.
Not reflected in our balance sheet is the up to $4 million in cash consideration payable to us by pressure on starting in the fourth quarter, if we achieve cost savings and financial milestones.
As Linda mentioned, we have made significant process progress towards meeting these financial goals to reach the milestone also not reflected in the second quarter balance sheet or the expected annualized cost savings of approximately 7 million, resulting from the July corporate workforce reduction.
Our plan reflects capital from operations to sufficient capital from operations to achieve adjusted EBITDA profitability goals that you Didnt move forward with this business. However, we also believe it's important to maintain optionality and our access to capital at all times.
In reference to Mr Sandberg and there's obligations.
Removal of dead and the closing of the pressure on transaction now behind us.
Are you able to operate the business independent of those funds to achieve our near term plans. However, Mister Sandburg remains obligated to fund $68 2 million and we are refocused on monetizing some or all of the pledged collateral and an intentional matters optimize value.
Continue to pursue pursue all options available to us to receive the amount.
Recall that these are private company shares and therefore, the timeline to monetize them might take longer than it would be similar public company shares.
Turning to the second quarter results net revenue was $106 2 million a decline of six 1% sequentially and 14, 5% year over year, the sequential and year over year decline was driven primarily by the one time $10 million of bulk sale, we fulfilled in the second quarter of 2022 as well.
Well as the deliberate reduction in marketing spend that led to reductions in customer counts in order volume.
Our customer engagement metrics continued to strengthen in average order value reached a historic high of $75 66 up seven 7% sequentially.
One 7% year over year due in part to a price increase along with the meaningful reduction and created some promotional spend.
Average revenue per customer clients to $397, while orders per customer was 543, our highest level since Q2 2021.
Turning to expenses variable margin was 37, 9% in the second quarter with 210 basis sequential increase over Q1, and the year over year increase of 320 basis points improvement. The variable margin was driven by our ongoing efforts to drive operational efficiencies through continued measured cost managing.
And with productivity improvements.
In the second quarter, PT G&A costs were $34 1 million or three 6% decrease sequentially and 12, 1% decrease over the prior period.
Part of the recent corporate workforce reduction, we recorded 400000 onetime employee related expenses, primarily consisting of severance payments in the second quarter, we expect to incur a 1.3 million similar one time expenses in the third quarter of 2023 substantially all of these expenses will result in cash expenditures.
As a result, we expect these head count reductions to result in additional annualized cost savings of approximately $7 million.
Re class flow was a negative $6 1 million an improvement of 69% year over year factoring the funds received from the transaction and the repayment of our outstanding senior secured notes our sequential net kept net balance decreased approximately $1 5 million in the second quarter.
Looking to the bottom line, we reported a net loss of 61 9 million for the second quarter compared to $23 3 million in Q2, 2022 and $17 million in Q1 of 2023.
Excluding the onetime impact of the transactions noncash loss of $48 6 million net loss for the quarter was $13 3 million.
In the second quarter adjusted EBITA was a loss of $2 6 million compared to $16 2 million loss in the second quarter of 2020 to $8 7 million loss in the first quarter of 2023.
Our continued focus on driving operational efficiencies to streamline the cost structure has helped drive three consecutive quarters of reductions in adjusted EBITDA loss.
The move to an asset light model will help decrease in clubs and improve our overall margin profile from a variety from a variable and fixed cost perspective.
Let me briefly touch on some of the changes to our P&L you will see going forward.
For variable costs with rational I'm, assuming the production with them with the majority of our products and cost of goods sold.
We'll recruit will include the following components.
Recipe ingredients costs, which would be a perennial calls drug device like restaurant based on the inputs and contents.
Superb labor.
New product initiatives product course.
The film cost, which will include fulfillment packaging and shipping costs and inclusive of fulfillment labor.
Our margin fee charged by restroom and other which will include some of the product reductions fulfillment of items, we retain such as wine market items.
We believe we will directly benefit from freshman homes economies of scale and sourcing and labor cost to drive improved variable margin going forward.
As part of the transaction will apron is eligible to receive up to 17 and a half million of volume based rebates from pressure around mid 2024, and 2025 based on future meal kit volumes.
New product initiatives and achievements of financial targets playoffs, if earn.
These rebates could contribute to reduction in Cogs and improvement in variable margin beginning in 2024.
Moving to our fixed costs, we will maintain our most of our previous line items with material changes in two specific areas one.
Recurring annual baseline P. T G N AC subject to adjustments representing the.
Operating overhead costs passed down to us compress room, starting in 2024, the fixed fee will be approximately 10 million sizable reduction to previous run rates.
By operating of our own facilities to depreciation and amortization will be minimal going forward as we will no longer own heavy assets and instead will be primarily expense to internally develop software.
Blue apron now has a lean fixed cost that that can push can support foreseeable growth and allow us to drive operating leverage our plan assumes minimal capital investments going forward.
We believe that our shift to an asset light model will yield significant benefits to our business and will continue to focus on optimizing our cost structure. The sale of our product production fulfillment center operational infrastructure to crush realm will positively impact the PT G&A line and as Linda mentioned, we executed a planned corporate workforce reduction to accommodate.
Our new model.
With the closing of the transaction together with the additional planned streamlining efforts.
Previously identified and we will continue to implement we are now in a position to provide financial guidance for the first time since the second quarter of 2022.
Our guidance and targets reflect assumptions about our business, including the anticipated benefit of the shift to an asset light model as well as expected benefits of our expense management initiatives.
Our ability to create new product initiatives the ability to generate the volume needed to earn the 17 and a half million in rebates the achievement of certain financial and cost savings milestones to earn up to 4 million of additional cash consideration restroom, realizing a benefit of the $3 $5 million seller note.
<unk> ability to cost effectively price the reduction in fulfillment of our meal kits and other products and that we will not experience any unforeseen impacts increased impact of the macroeconomic trends.
By year end 2023, we expect our net revenue and customer count to be lower year over year due to the deliberate actions, we have taken to manage marketing spend and efficiency specifically, we expect net revenue for the year to be in the range of $410 million to $415 million adjusted EBITDA loss in the range of 27 23 million.
Looking ahead as we announced in June we would expect adjusted EBITDA profitability in the second quarter of 2024, we expect at year end 2024 to be adjusted EBITDA profitable and to achieve year over year revenue growth.
We look forward to sharing more with you on our next earnings call and with that I'll turn things over to the operator to open up the call for questions.
Thank you we will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone, if you're using a speakerphone. Please pick up your handset before pressing the keys.
Anytime you have a question has been addressed and you would like to withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
Our first question comes from Dan Carnose with benchmark. Please go ahead.
Great. Thanks, good morning.
Nice to hear all the progress.
Linda can we just talk a little bit.
In the shorter term on.
Our marketing spend.
We've talked about kind of the toggle between sort of Aoc and promotional spend versus customer acquisition and I'm, assuming there's probably some noise in the second quarter, just due to all of us.
But you had going on.
The strategic changes that you're making you've talked about kind of leaning in a little bit into Q3. So I just wanted to understand.
Trying to target again sort of a smaller core base that spends more or.
At least for now.
She does get ramped or just how should we think about kind of that balance.
Kind of.
Adding new customer absolutely.
Yeah. Thanks, so much for the question.
No you're absolutely right. We are planning on continuing to focus on profitability and that means you know focusing on the customers who are going to be the.
The best customers for us going forward.
Sure that we're creating value for those customers and driving the right balance of promotion versus marketing spend we are encouraged by the fact that we continue to see those improvements in our marketing spend which is why we feel confident and a slight lean in in marketing at the end of the year to basically prepare us for 2020 for them as you know it takes them.
While for some of those to come to fruition, but we've actually evened out on a pretty reasonable promotional level. So that's been positive while still being able to drive return on the business from a customer perspective. So we are that's part of the reason we wanted to make sure that we guided going forward because as we've said all along we're going to be focused on customers I don't remember it can be.
Focus on profitability and making sure that we do that through the highest value customers not necessarily focusing on large acquisition pushes but we can lean in with with significant efficiency in our marketing based on the testing and learning that we've done over the last six months.
And just kind of it's helpful just to kind of piggyback off of them.
Let's just close.
Next year I mean, just.
Revenue growth that.
<unk> got new initiatives, how do we think about kind of the balance.
The growth trajectory from here like what's kind of the base do we bottom in 'twenty three in terms of customer counts and it grows from here does <unk> grow as a new revenue line.
Can you just kind of talk through the puts and takes as we think about the setup for 2024.
Yes, you are correct. It does bottom out in 2023 and that is that's the intent and that's what we're planning to do all along to make sure that we drive towards profitability. As we think that is the most important goal is to reach adjusted EBITDA profitability, starting in Q2 and full year adjusted EBITDA profit profitability and revenue growth.
In 2024.
So that is really our primary focus so you'll see it kind of again continue to stay muted this year as our guidance indicates while we gear up for new product launches next year that will combine with our existing product strength and and marketing efficiency that we've actually gained to be able to.
Into profitable growth in 2024.
Yeah.
And just maybe a housekeeping point on that like as you launch new product initiatives given that you can leverage thresholds capabilities like how do we think about either the margin profile or.
Your ability to kind of.
Or.
<unk>.
Product launches.
Absolutely I mean as you can tell from the comments that we've made and the progress. We've made when you look at last year compared to this year the reduction in cash burn and the significant improvement year over year and adjusted EBITDA profitability.
Can tell that we are laser focused on margin and that will include the new products that we launch making sure that there is that they meet our margin profile and continue to drive the ability to leverage the fresh from infrastructure that is significant and has the ability to produce more types of products and we were able to produce on our own.
Alright, great Super helpful. A nice progress.
<unk>.
Thanks, so much Dan.
As a reminder, if you have a question. Please press star then one to be joined into the queue.
Our next question comes from Maria <unk> with Canaccord. Please go ahead.
Hi, Good morning. This is Matt on for Maria Thanks for taking my questions. So Q2 revenue was understandably soft given the heavier quarter for travel activity lower marketing spend and the one time bulk comp, but could you maybe just provide some color on what you're seeing in terms of the macro impact on consumer demand.
For meal kits and then I just have a quick follow up.
Yeah. So I mean, we are still seeing some cautiousness in the macro environment, but it's interesting because as we look at our business and the progress we've made in our marketing efficiencies.
Efficiencies were.
We're actually seeing very strong repeat purchases so that $5 three orders per customer per quarter is quite strong, particularly for Q2, where you start to normally see a bit of a seasonal dip and especially in concert with a pricing change. So we're really actually happy with the fact that even though you are seeing overall still a little.
Bit of muted acquisition when it comes to consumer spending at least what we're seeing in our business based on some of the changes. We've made is very high average order her orders per customer per quarter, which is that $5 three great. A O V. So willingness to purchase and seeing the value within the.
And we are seeing increased retention. So those are all really positive for us and we see those as positive indicators of the future. Even though we are still seeing a little bit of a macro muting. When it comes to overall acquisition all that being said we did also comment that we are seeing.
<unk> conversions improved by 25% year over year.
So that is also quite positive for us as well.
Got it. Thanks, that's very helpful and kind of answered my second question, which was.
It was just more curious about the consumer the customer reaction to recent price increases, but it sounds like it wasn't you didn't see a major uptick in churn or every pair or anything but.
Could you maybe just also just talk about your capacity for future price increases and how you feel the offering is priced relative to the industry at this point.
So absolutely we're still priced the same or lower than our competitors in the industry with an extremely high quality products are you know we've maintained our our stance on quality food quality and also recipe quality.
So we're very happy with that what we did see with the pricing change is better than expected retention. After the pricing change and again, we are still seeing a little bit of softness in acquisition, but we did see that 25% increase and conversion year over year. So that that is a positive indicator we tend to think about future price increases.
In terms of value, we want to make sure that we're always staying priced within the correct point for value for the customer we want to make sure that they feel value from that product going forward.
And so we'll keep an eye on any sort of pricing changes that that might makes sense, either based on inflationary pressures or not but our biggest focus is making sure we drive value for customers and given the fact that we are priced in line or lower than our competitors. So we feel that we do that quite well.
That makes sense. Thanks, a lot for the color I'll jump back in the queue.
Thank you.
As we have no further questions ladies and gentlemen, this will conclude today's question and answer session I'd like to turn the conference call back over to Linda for any closing comments.
Thank you everyone for your time today, we really look forward to providing an update on all of our efforts soon and in the meantime, if you have any additional questions. Please don't hesitate to reach out to us directly.
Thank you.
The conference has now concluded. Thank you for attending today's presentation you may all now disconnect.