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Edited Transcript of HFGG.DE earnings conference call or presentation 13-Aug-19 6:45am GMT

Half Year 2019 Hellofresh SE Earnings Call

Aug 20, 2019 (Thomson StreetEvents) -- Edited Transcript of Hellofresh SE earnings conference call or presentation Tuesday, August 13, 2019 at 6:45:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Christian Gartner

HelloFresh SE - CFO & Member of Management Board

* Dominik S. Richter

HelloFresh SE - CEO & Member of Management Board

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Conference Call Participants

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* Alvira Hamid Rao

Barclays Bank PLC, Research Division - Research Analyst

* Andrew Philip Gwynn

Exane BNP Paribas, Research Division - Senior Food Researcher & Analyst of Food Retail

* Christoph Bast

Bankhaus Lampe KG, Research Division - Analyst

* David J. Gardner

Morgan Stanley, Research Division - Equity Analyst

* Fathima-Nizla Naizer

Deutsche Bank AG, Research Division - Research Analyst

* Robert Berg

Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst

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Presentation

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Operator [1]

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Dear ladies and gentlemen, welcome to the Q2 2019 results of HelloFresh SE. At our customer's request, this conference will be recorded. (Operator Instructions)

May I now hand you over to Dominik Richter, CEO of HelloFresh, who will lead you through this conference. Please go ahead, sir.

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Dominik S. Richter, HelloFresh SE - CEO & Member of Management Board [2]

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Good morning, everyone. We're very excited to present our Q2 numbers in the next couple of minutes, and I want to briefly share the outline that we're going to go through.

I'll start with giving you some color on the Q2 highlights and on sharing an update on our mission. That will be followed by the financials, deep dive by Christian as well as an update on our guidance. Before we have our Q&A session, I'm going to have some closing remarks.

Let's start with the highlights. At HelloFresh, we're focusing on the largest segments of the food markets, the market for home-cooked meals, which is about twice the size of, for example, the total addressable market of food delivery. In this usually attractive space, we're making big progress to fundamentally change the way people eat, and I'll share an update on the impact we're having on millions of households around the globe. Secondly, in Q2, we saw continued great momentum on top line. We delivered revenue growth of 31.5% on constant currency, which is above the upper end of the previously guided range for the whole year. Thirdly, our contribution margin -- so that's the margin we make after all directly attributable costs on each delivery, was maintained at a high level of 29%. Moreover, as you know, we're operating in 12 different geographies.

So all blended numbers that we report are some of the parts observation. For each single geography, the most important point for its underlying profitability is how long we've actually been active in that market. It takes us, on average, about 5 years to start producing positive adjusted AEBITDA. Now that we have more and more markets beyond that 5-year threshold, our group profitability has also massively improved. In Q2 alone, we saw a profitable 4.2% adjusted AEBITDA margin on a group level. That's made up of a margin of 11.5% in our international segment and an AEBITDA margin of 2.9% in our U.S. business. As a consequence of our strong first half performance, we'll narrow the full year guidance towards the upper half of our previous guidance. Christian will provide more details on this towards the end of the call.

Let's come to our mission and the impact we're having on the lives of millions of households across the world. Our mission statement goes far beyond the mere financials. When we started HelloFresh almost 8 years ago now, we set out to create something that has a positive influence for a lot of people. Our mission has remained the same throughout the years. We change the way people eat forever. What has changed for us is that we now have the scale to really influence and impact the lives of millions of people for the better. We're on track to deliver more than 250 million meals to our customers around the world, that's 250 million times per year that we can make a difference. We make that difference by helping consumers to save real money with every order we fulfill and every meal we deliver.

We're democratizing access to better and healthier food at the scale of 250 million times per year. We're also providing families with better-tasting meals and allowing them to enjoy a varied and tasty diet at a very affordable price. And last but definitely not least, with each and every of the 250 million meals we serve, we help to support a better food ecosystem, and we deliver our meals at an equal footprint that is way better than you'll find at all the different alternatives.

All of that combined makes us really proud and allows us to change lives for the better. We hear that directly from our customers, who claim to save up to over $300 per month compared to shopping at a supermarket. We also hear that from third-party studies that testify to the positive environmental impact we have, such as a 33% lower greenhouse gas emissions that are basically coming to light when eating or consuming meal kits compared to supermarket food or food delivery. And with the billions of data points around meal preferences and food consumption we have, we're best positioned to serve our customers meals they actually like and that are food [prove] to make. That's reflected both in rate reviews across all different comparison sites out there as well as winning literally every single comparison on meal kits that's out there.

So in short, as of today, at the scale of 250 million meals per year and growing vastly, we're really fundamentally changing the way people eat all around the world.

With that update, I'd like to hand over to Christian for an update on our financials with a focus on our Q2 numbers.

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Christian Gartner, HelloFresh SE - CFO & Member of Management Board [3]

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Good morning. It's Christian here, and I'd like to first comment on the development of our revenues.

We have delivered another quarter of very strong revenue growth, 31.5% on a constant currency basis, i.e., again, above the guided range for the full year. And both of our segments have contributed nicely to that trend. Our U.S. business has shown a like-for-like reacceleration versus the first quarter through constant currency growth rate of 22.3%, and our international business has maintained a very strong growth profile of 45% in the quarter. Both our average order rate as well as our average order value have been up sequentially versus the first quarter of 2019.

Now next, let me discuss the development of our contribution margin. Our contribution margin has expanded by 1.2 percentage points year-over-year to 29.1 percentage points. And the core driver for this, again, similar to the first quarter of this year, was our U.S. business, where we realized meaningful efficiencies in our menu planning as well as on the procurement side.

Let me next show how that is flowing through to our AEBITDA. Now one of the most frequent questions that we got over the last couple of quarters was when we, as a group, would be profitable on the AEBITDA level. Now this time was now in the second quarter, and we were not just breakeven, but we delivered an AEBITDA margin of 4.2%. When you look at our segment, you see that, that picture becomes even prettier. Both of our segments have been profitable. Our U.S. business delivered a margin of 2.9 percentage points, and that includes our more recent businesses, Green Chef as well as EveryPlate. Our international business delivered a very strong double-digit 11.5% AEBITDA margin already. In all 3 [group], the U.S. segment as well as the international segments are profitable on the adjusted AEBITDA level; are profitable on the reported AEBITDA level, i.e., after deducting noncash accounting expenses for our share-based compensation plan; and are also profitable on the EBIT level, i.e., after deducting G&A.

With that, let me drill down now in a bit more detail in the -- into the profitability development of our international business. As you know, our international business contains, among other geographies, most of our day-1 markets, i.e., our Benelux business, our German business, our U.K. and Australian business. And Dominik has alluded to that earlier on in his presentation already what we typically see in our markets. The more mature these markets get, the more they build up economies of scale, i.e., contribution margin expense and the more we build up a basis of existing customers, and we see marketing expenses coming down over time. Why? Because the more mature these markets get, the more orders come from existing customers compared to the previous year.

And that's what you see coming through more and more in our international business. That's why our marketing expenses in the second quarter were only around about 15% of revenues. So the international business, profitable for each of the last 5 quarters and delivering an AEBITDA margin of 11.5% now in the second quarter. So when you take a step back and look at our business, you've got a business that's a global leader in its very substantial category, which is comprising -- and comprised of an international business, which has a run rate of EUR 750 million already. And that business is capable of delivering double-digit AEBITDA margins. On top of that, you've got a U.S. business, which is at the run rate of around about EUR 1 billion, and that is turning profitable already. And the whole group, overall, is growing at 30%.

So let me summarize now on the next page, again, the core drivers of our margin expansion. Firstly, our contribution margin expanded by 1.2 percentage points primarily driven by U.S. procurement. Our marketing saw a leverage of 2 percentage points of revenues primarily driven by our more mature markets within our international segment. G&A leverage of 0.9% comes on top because our overall -- our general -- overhead expenses are growing less fast by now versus our revenues. And there's another 1.3 points from D&A, partly through the first-time application of IFRS 16, partly from the recent -- from the D&A of our recent investments. So based on that very robust development that we've seen so far, we feel comfortable to narrow our guidance towards the upper end of the previously provided guidance. On Page 12. So previously, on a constant currency revenue growth for the full year, we guided 25% to 30%. We want to narrow that to 28% to 30%. On the contribution margin, we guided previously better than 27%. We want to narrow that to 28% to 29%. And on the AEBITDA margin, we previously guided negative 2% to positive 1%. We want to narrow that to negative 1% to positive 1%.

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Dominik S. Richter, HelloFresh SE - CEO & Member of Management Board [4]

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Thanks, Christian. Before we dive into the Q&A, I wanted to share a few closing remarks with you.

With HelloFresh, we're serving a number of megatrends in a huge addressable market. More than 50% of dinners in the U.S., more than 70% of dinners in our international markets are home-cooked. That's the largest and most profitable segments of the food market. We're providing consumers with healthier, more affordable and more environmentally friendly options for all their home-cooking needs, and this will drive adoption and subsequently revenues in many more years to come. We are tackling that huge space with very limited competition globally. Over the last 8 years, we've put up significant barriers to entry by investing hundreds of millions into our technology and our fulfillment infrastructure. We've collected billions of data points on taste, food consumption and on optimizing our margins. It will take hundreds of millions of investments and many, many years to replicate this.

Moreover, by being vertically integrated and doing everything in-house from menu design to manufacturing to distribution, we're able to capture not only the retail margin, like other e-commerce companies out there, but we capture the brand's margin, the wholesale margin and the retail margin all at once. Even today, you can already see that our AEBITDA margins should be materially higher than that of other e-commerce players out there. In fact, we should be able to produce twice the AEBITDA margin of e-commerce peers due to the vertical integration that we have. That's nowhere near reflected in our share price at the moment, but I assure you that we're very focused to get the share price in line with what our business model and the operational performance deserves.

With that, we'd like to open up the Q&A session.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question is from Andrew Gwynn, Exane BNP Paribas.

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Andrew Philip Gwynn, Exane BNP Paribas, Research Division - Senior Food Researcher & Analyst of Food Retail [2]

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So obviously, a good performance this quarter with the profits coming through quicker than I think many of us expected. But is there a logic you think in significantly increasing marketing to accelerate the top line? Just wondering how you sort of balance profitability versus growing top line, if there's any sort of updated thoughts on that account. And then secondly, just on the U.S., obviously, those acquisitions were a small drag on profitability. Just wondering if you could update as to how that drag has gone up. You did comment, but I think I didn't quite get the gist of what you were saying as to whether or not they were just less of a drag or where actually Green Chef was now into profit.

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Dominik S. Richter, HelloFresh SE - CEO & Member of Management Board [3]

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Thanks, Andrew. On marketing, as you pointed out, we're always trying to balance growth and profitability. I think we've always been, over the last couple of years, extremely disciplined in how much we actually spend on the additional and incremental consumer that we get to HelloFresh, and that's definitely the same thing that we're following right now.

I think the biggest driving force behind us reaching profitability is, as I pointed out, the fact that now most of our mature day-1 markets are beyond that 5-, 6-year threshold and we're starting to significantly produce high AEBITDA margins there. Same thing in the U.S., as Christian pointed out, kind of like it's on a $1 billion run rate. Only 5 years after we started in that market, profitable in the core business already. And I think that's what you alluded to in your second question, the core business produces higher -- even higher, and the U.S. produces even higher AEBITDA margins than the one that we report because there is some offsets of the new brands that we launched last year, which are obviously not on a profitable level yet.

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Andrew Philip Gwynn, Exane BNP Paribas, Research Division - Senior Food Researcher & Analyst of Food Retail [4]

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Sorry, just on the marketing costs, I mean, any kind of update as to whether or not customer acquisition costs are coming down or the sort of lifetime value is changing materially versus what you'd still say, let's say, 6 months or so?

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Christian Gartner, HelloFresh SE - CFO & Member of Management Board [5]

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So on the marketing side, our customer acquisition costs have moved in a reasonably narrow band over the last couple of quarters, somewhere low 70s to low 80s in euro terms. And Q2 was, in advance, more towards the lower half of that.

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Operator [6]

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The next question is from David Gardner, Morgan Stanley.

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David J. Gardner, Morgan Stanley, Research Division - Equity Analyst [7]

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A couple of questions. In terms of international, were there any sort of standout markets within international that you'd find as being particularly strong? And then in the more mature markets, can you give us a sense of what sort of your best-in-class AEBITDA is at the moment? And then thirdly, in the mature markets, given you've got existing customers ordering more, can you comment on how your churn has been trending versus on the IPO and then more recently?

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Dominik S. Richter, HelloFresh SE - CEO & Member of Management Board [8]

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Okay. So with respect to performance across -- within our international segment, we are very happy about the performance, frankly, of most of the geographies within that segment. So all are -- pretty much all of them are at least in line with plan in terms of best-in-class margins of our most mature markets within that international segment. For the most mature ones, we basically are achieving margins which are in the high teens.

And so your last question was, David?

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David J. Gardner, Morgan Stanley, Research Division - Equity Analyst [9]

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On churn. Could you comment on where your churn is today versus at the IPO and...

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Dominik S. Richter, HelloFresh SE - CEO & Member of Management Board [10]

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Our churn is very stable. So our retention profile is substantially similar to the one that we hedged onto the market at the IPO, which gives us a high level of predictability and planability for our marketing spend and for the ROI that we use on it.

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Operator [11]

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The next question is from Robert Berg, Berenberg.

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Robert Berg, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [12]

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Just a couple from me. The first, I'd love to hear an update on how the geographic expansion is going, how the newer market is performing, any update on future markets? And the second, your main U.S. peers said it's going to boost its marketing from the really low levels we're seeing today in order to kind of kick start their growth. Are you anticipating this will impact you, too? Do you think you benefited at all from the lower levels of marketing? And how conservative are you being around any change to the competitive dynamics?

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Dominik S. Richter, HelloFresh SE - CEO & Member of Management Board [13]

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Thanks, Robert. On geographic expansion, I think what we outlined pretty much 1 year ago was that geographic expansion for us is one strategic pillar that allows us to expand our total addressable market. Very much in line with that, we're continuously looking at additional markets, and we will most likely launch about one additional market per year. That's what we have done over the last 3 years, and that's kind of like how we also see that going forward. That's kind of like the level at which we can still support very high profitability levels and then also kind of like make sure we have enough growth momentum in the outer years by basically doing that type of geographic expansion.

Geographic expansion that we did over the last 3 years was mostly in France and New Zealand and in Canada. I think all 3 markets combined has been a big contributor to the results that we have seen, also -- especially to the growth momentum that we have seen in the international segment. So I think we're very happy with how that is going, and that definitely gives us confidence that that's the right thing to do also going forward.

In terms of competition and marketing spend of competitors, I think, in the end, we're marketing to different audiences. We're marketing to different customers, and we're not only in competition with direct competitors with other meal kit companies, but we're basically in competition with all other brands that want to market to the same audiences that we actually have. So competition has a very little impact on kind of like how we think about our own marketing spend.

As I've pointed out before, we've been very disciplined in how much we actually want to spend on a new customer, and that's much more driven by how aggressive kind of like other brands way out of the meal kit space are actually marketing to that -- to those same audiences. But I do think that with the technology that we've built up and with the growth engine that we've built up, that we can very much kind of like navigate those waters. And so we don't think that either direct competition, increasing spend or other brands increasing spend massively towards the audiences that we're serving will impact us significantly.

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Operator [14]

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And the next question is from Nizla Naizer, Deutsche Bank.

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Fathima-Nizla Naizer, Deutsche Bank AG, Research Division - Research Analyst [15]

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I have a couple of questions from my end. Firstly, as a customer in London, I saw over the last month or so that you're giving me added sort of optionality where my 3-meal box, I can add a fourth meal for a cheaper rate of meal, and now I've got desserts, et cetera. So I was just curious to see how aggressively are you rolling out the sort of flexibility options among your markets? Is it available for all customers? And how confident are you to deal with this complexity? And is it affecting your margins in any way? Just some color there on your plans for, I guess, more convenience to the customer would be great.

My second question was around the order value. In the U.S. in Q2, it was still down on a constant currency basis. I know you've introduced some price reductions, which you flagged last year. So just wanted to understand how that's rolling out, and if it's being offset by more add-ons that people are taking and what that take-up rate is like.

My last question would be on marketing. How has the customer acquisition cost evolved? Is it stable at that EUR 80 sort of level that you've always flagged you maintain it at? Just some color there would be great.

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Dominik S. Richter, HelloFresh SE - CEO & Member of Management Board [16]

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Thanks, Nizla. With regards to your first question around certain add-on products or seamless upgrades to the number of meals that you actually want to have, that has been one of the major strategic initiatives. And I wanted to provide a little bit of context why that is sort of like being faced in now in the first half of the year. I think it's been something that has been on our strategic road map for quite some time. What we have to do first was basically do the investments in our fulfillment centers regarding kind of like fitting them out to handle the additional complexity, automate certain steps in our fulfillment center setup and also set up the technology to be able to very flexibly handle all the different orders and fulfill all the different orders.

Now that's something that we've done over the last 2 years. And then basically, Q4 last year but even more so now in the first half of the year, we've started rolling out a number of add-on concepts and a number of upgrade concepts across all our major markets. They're not live yet in all markets, so there's definitely kind of like more upside potential to come from these, but it's something that we've always known consumers want. Consumers always told us about that in market research, but we have to prepare our supply chain and our technology infrastructure to be able to deliver on that promise first. And now in the first half of the year, we've started to rolling that out a lot more across the U.K., across the U.S., across Germany and other of our more mature markets.

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Christian Gartner, HelloFresh SE - CFO & Member of Management Board [17]

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And on average order value year-on-year, it's slightly down, Nizla. Absolutely, as you had commented on core driver, as you mentioned, is basically [240]. The headline price reduction was done in the U.S. at around the same time as now and basically the ramping up of EveryPlate. When you look at it sequentially, so Q2 to Q1, we'll see that average order value is actually up in constant currency. And one of the key drivers for that is exactly what you and Dominik just had gone through, i.e., the introduction of these add-on and extra offerings.

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Dominik S. Richter, HelloFresh SE - CEO & Member of Management Board [18]

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And on marketing, I think Christian commented on that before. So over the last couple of quarters, basically since IPO, we've seen our customer acquisition costs trail around low EUR 70 to low EUR 80 per incremental customer. That's something that we're very comfortable because we see a very high ROI on that marketing spend, and that's something that we've also seen in the second quarter. And so I'm very happy about that.

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Operator [19]

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The next question is from Olivia Rao (sic) [Alvira Rao], Barclays.

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Alvira Hamid Rao, Barclays Bank PLC, Research Division - Research Analyst [20]

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Most of my questions are covered, but I have one more. Your U.S. growth looks quite strong in Q2 after a more tepid Q1. Just wondering what's driving those? Do you think it's category expansion or share gains?

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Dominik S. Richter, HelloFresh SE - CEO & Member of Management Board [21]

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I think it's both. So there's definitely some internal data that we have that shows us that we're gaining share over our competitors in the U.S., but we're also bringing a lot of new customers to the category. If you think back to the value proposition that we have that for a lot of customers, we're able to provide them access to healthier but also to more affordable meals that they can get in the supermarket, then I think that's a very convincing value proposition.

And hence, we actually do think that going forward in the next couple of quarters, we'll be able to kind of like continue on that momentum and bring more and more consumers to the category as well as now that we have a value proposition that is superior to what all our competitors have in terms of price, in terms of choice, in terms of speed of delivery, that's also something that will further drive gains over competitors, in our opinion.

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Operator [22]

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The next question is from Christoph Bast, Bankhaus Lampe.

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Christoph Bast, Bankhaus Lampe KG, Research Division - Analyst [23]

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There's also only one left for me. Could you share with us your idea behind the recent joint venture of HelloFreshGO with [before the end] fall back? So do you plan to internationalize this business? And should we expect this to become a meaningful earnings contributor in the near future? Or exactly what's the idea behind this?

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Dominik S. Richter, HelloFresh SE - CEO & Member of Management Board [24]

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So HelloFreshGO has been a business that we incubated about 1.5 years ago within HelloFresh, where we spotted a need, first of all, among our own employees to provide them with the fresh food and snacks in their workplace. It's been something that had then gained some traction initially in our home market in Berlin. And as we saw that this is a business that can actually kind of like grow very fast, we've kind of like made the decision to spin that out and partner with other venture capitalists to basically give us the best opportunity to grow the business as fast as possible.

It has some overlap with our core business, but then again, kind of like, I think, the majority of functions, it doesn't have a huge ton of overlap. And in that sense, we think that the business has the best opportunity to scale as fast as possible as a stand-alone business. And that's why we brought external partners on board that can also provide guidance and provide competence in areas that we might not have in-house. And so we're very happy about that setup going forward and think it's the best setup for that company to be really successful.

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Operator [25]

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This concludes our Q&A session. I would like to hand back to the [speakers].

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Dominik S. Richter, HelloFresh SE - CEO & Member of Management Board [26]

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Thanks a lot, everyone, for attending our second quarter earnings call. I think we've been very happy and excited to share some color around the numbers and around the progress we made on our mission and the scale at which we can now operate and really improve people's lives. We look forward to welcoming you back to our third quarter earnings call in November. Thank you. Bye-bye.

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Operator [27]

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Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect now.