HELFY - HelloFresh SE (HLFFF) Q1 2023 Earnings Call Transcript

2023-04-29 14:31:06 ET

HelloFresh SE (HLFFF)

Q1 2023 Results Conference Call

April 27, 2023 02:30 AM ET

Company Participants

Dominik Richter - Chief Executive Officer

Christian Gartner - Chief Financial Officer

Conference Call Participants

William Woods - Bernstein

Andrew Gwynn - BNP Paribas

Sebastian Patulea - Jefferies

Marcus Diebel - J.P. Morgan

Emily Johnson - Barclays

Nizla Naizer - Deutsche Bank

Nick Coulter - Citigroup

Andreas Riemann - Oddo BHF

Presentation

Dominik Richter

Good morning, everyone. We're pleased to welcome you to our Q1 2023 Earnings Call today. I think we're just off of a very solid first quarter, especially considering the world we were living in last year. First time over €2 billion per quarter profitability better than guided as we made more progress on many cost initiatives and our RTE business has been going very strongly, yet is capacity constrained since middle of January.

Over the course of last year and also the last quarter, we've dealt with a rapidly changing macroeconomic environment, in which the team overall had showed great adaptability. If you remember, last year in Q1, Omicron wave still ramp as through the world. Google recorded the higher search volumes for COVID and different governments were actually mandating stay at home orders. And all these things contributed to a really outsized first quarter in Q1 2022 and has provided a tough benchmark year-over-year for the first half of 2023.

We don't want to lemon spill too much as these macro effects, I think, impact all businesses around the world. We rather want to focus on the things that we actually can control, and that's also the message that we have given to our teams and rallied our troops around all year long. Consequently, over the course of the last 12 months, we've made very significant progress in a number of different areas. We've massively strengthened our leadership levels, we have built a state-of-the-art fresh food fulfillment center network second to none, we have enhanced our customer proposition to previously unseen levels, and we've also scaled both RTE and are prototyping a number of other promising direct-to-consumer verticals as we speak. This all makes us look fairly optimistic into the second half of the year and also provides the right ingredients for ongoing strong growth beyond 2023.

So let's take a look at the highlights of the first quarter together. We achieved a new record high net revenue quarter, growing 3.3% in constant currency to €2.02 billion, the first time we beat the €2 billion mark. We grew our average order value by about 9% year-over-year to €61.2, a result of measured price increases, more mills per basket and a positive mix shift to higher-value brands. We delivered more value to customers, and they are happy to pay a little more for that. Order rates stabilized at the same high levels that we've seen during the COVID pandemic at four orders per active customer per quarter, a significant step-up to pre-COVID times and evidence that customers are finding a lot of value in our product offering.

Importantly, our exercise to scrutinize all of our cost line items yielded good results with contribution margin expanding once again to 26.3%, that's a 1.1 point improvement compared to Q1 2022. As a result, adjusted EBITDA amounted to €66 million, which translates into a margin of 3.3% in the quarter, where we actually spent most on winning over new customers. All in all, I think this provides a decent start to the year that makes us confident we can deliver on the full year guidance that we issued just a few weeks ago.

All of 2022 and also in the first quarter of 2023, we have scrutinized all of our cost line items hard to identify additional savings and optimization potential. More often than not, we've been successful and managed to mitigate a lot of the inflation-driven cost factor increases through either by the productivity or smaller buying decisions. And while it's incredibly important to do that, in times like these, it's also when the foundations for future earnings and revenue growth are being late. And that is why we have continued to invest into the customer proposition throughout the whole cycle in order to be able to attract new audiences to HelloFresh and make our current active customers happier.

So as an example, over the course of last year, we have continued to roll out HelloFresh market to three new geographies with additional geographies launching in the second half of 2023. We have materially decreased our food waste per euro revenue significantly, thereby improving our sustainability profile and sustainability perception for consumers. And we have massively increased the number of recipe options for our customers. In the last year alone, we have increased the number of weekly recipes by 32% year-over-year and the share of customizable mills from 29% to 48% on the menu. These improvements are even more visible when looking at them on a longer time series.

Unlike FMCG companies, we have had measured price increases with providing a lot more value to customers, which has led to very high and consistent average order rates. All of these improvements have allowed us to significantly increase both AOV and average order rates compared to the pre-pandemic era and allowed us to reach out to broader customer segments in the markets that we operate in today.

Outside of our core meal kit market and our HelloFresh market proposition, we've put the whole weights of our direct-to-consumer competencies behind the rollout of factor in the U.S. This has propelled us to become the largest direct-to-consumer ready meal provider in the [States] over the course of only two years. The whole category is still very much in the state of market penetration, where meal kits were in 2016 or 2017 with incredible growth potential going forward.

What's important to notice that scaling in RTE business is way more complex than the meal kits business given investments needed to cook great meals at scale. As we complete the build-out of our Arizona facility in the next couple of months, we will unlock a lot of additional capacity for Factor U.S., allowing us to grow to a multiple of our current revenue run rate in the -- then existing facility footprint. As a matter of fact, at the moment, we're maxed out since early January and cannot fulfill a lot of the demand we're seeing in the marketplace. But this should, on the other hand, provide a nice growth tailwind for the second half of the year as we work through opening up that facility.

While Factor already meets the bar in many respects and can create a lot of demand from consumers, there's still a lot of room to grow the proposition, very much analogous to what we did in meal kits over time. We'll be investing into growing our assortment, opening more delivery days and shortening order to delivery leads times, which should open up new audiences for us.

Outside of the U.S., we've also launched Factor in Canada. We will be launching the first ready-to-eat product in Europe in the second half of the year. And for Youfoodz, our Australian ready-to-eat business, we're in the final steps of completing our facility move and also look towards scaling up production and customer acquisition in the second half of the year. So all in all, RTE provides both for 2023 and also for the midterm future, a strong growth driver for the group, and we're incredibly excited to take full advantage of that.

In the first quarter of 2023, we delivered 278 million meals. That's a sequential increase of about 13% versus Q4 2022. Year-over-year, our meals are down by 3%, driven by a 5% decline in active customers. Active customers did increase though by 14% sequentially, and we've added 1 million net new customers in the first quarter. Both our International segment and our North America segment contributed to that growth and showed good sequential active customer growth rates.

While the sequential increase was according to plan, we did not reached the levels previously seen in Q1 2022, a period that was still heavily impacted by stay at home orders and people working from home.

On a positive note, our average order rate stabilized at much higher levels than pre-COVID, averaging four orders per active customer per quarter, in line with last year's order rate. We've also seen customers adding more meals to their baskets, which has helped drive up AOV. Speaking of AOV, average order values saw a strong growth in the first quarter, up about 9% from last year. For our North America segment, we increased AOV by about 9.5% in constant currency, while our international segment showed a 6.9% AOV increase.

This positive development was driven by different factors, most notably by higher prices per meal, customers adding more meals to their basket, but also by a slight mix shift to higher average order value products and the take-up of HelloFresh market. So despite strengthening our relative affordability by increasing prices a lot less than overall food CPI inflation data suggests, AOV increases were still the primary driver of higher year-over-year net revenue in the first quarter.

So taking all of that together, a small decline in the number of meal shipped tag with a strong increase in the average order value have allowed us to show positive year-over-year net revenue growth with a 3.3% constant currency increase compared to the first quarter of 2022. We achieved over €2 billion in net revenue for the first time, making that a record quarter for HelloFresh, even higher than the -- until then record quarter in Q1 2022.

Our North America segment contributed with 5.5% constant currency growth, while our International segment remained broadly stable against a very tough comp, down 0.5% in constant currency to be precise. What we did see last year was that North America was coming out of COVID much earlier, whereas in international, especially in Europe, Q1 was still a very, very tough benchmark and most people still working from home and will be mandated to shelter at home.

With that, I'm going to hand over to Christian to walk you through our margin profile and our adjusted FDA outlook.

Christian Gartner

Okay. Super. So let me start as usual with the discussion of our procurement expenses. Our procurement expenses as a percentage of revenue have increased by 1.4 percentage points year-on-year in the first quarter. Now this is driven by a number of factors.

Firstly, year-on-year inflation. The meaningful year-on-year inflation has a certain impact on our procurement expenses, even though we continue to manage mitigating the effect well through measures that we have discussed before.

Secondly and importantly, an increased contribution of ready-to-eat to our overall business mix. Keep in mind that new production costs and associated labor are for our ready-to-eat business included in our procurement expenses or better in -- better called COGS. However, fulfillment expenses on the other hand, for ready-to-eat are typically lower. So you will see the flip side of that, when we talk about our fulfillment expenses.

Thirdly, what Dominik just discussed, so our customers ordering more meals per order, ordering more surcharge offerings and add-on offerings from HelloFresh market, especially those last two points, whilst they're impacting relative procurement expenses. We also increased AOV and have lower incremental fulfillment expenses associated with them. We are, therefore, net accretive to contribution margin, both relative and in absolute terms. For Q2, by the way, you should expect procurement expenses as a percentage of revenue to go down slightly sequentially, i.e., our gross margin in Q2 is expected to expand mildly sequentially versus Q2.

But let's have a look now at our fulfillment expenses. We have very meaningfully decreased our fulfillment expenses year-on-year by 2.4 percentage points. This is really the continuation of the strong improvement that you've seen from us since mid last year, especially our North America segment continues to contribute significantly to this positive trend. As we had discussed in detail at our Capital Markets Day last month, we see meaningful potential to further reduce our relative fulfillment expenses from here by: one, increasing the majority of our fulfillmentcenter network, through optimizing our fulfillmentcenter footprint and through process standardization; and secondly, by ramping up the use of technology and automation.

Besides the like-for-like ongoing improvement, you see here also the flip side of what I just discussed with respect to our procurement expenses, i.e. the impact of a higher share of ready-to-eat, more meals per order, more surcharge and add-on take up, which means lower relative fulfillment expenses. Now taking both together, so the trends that we discussed in procurement as well as in our fulfillment expenses means for our contribution margin -- that we have successfully expanded our contribution margin by 1 percentage points to 26.3%.

Now just to recap what we discussed in much more detail at our Capital Markets Day a month ago. We are targeting to expand our contribution margin to approximately 29% by 2025, i.e., up circa 3.5 percentage points versus where we landed in 2022. Of this improvement, we want to realize at least 1 percentage point in 2023 already. What you see here from our Q1 results that so far, we are well on track to do that.

Now let's have a look at our marketing expenses for Q1. From a marketing perspective, we are now back to our normal seasonality profile, i.e., a seasonally high growth marketing spend in Q1, which drives a substantial sequential increase in active customers. We grew active customers by 1 million from 7.1 million in Q4 2022 to 8.1 million in Q1 2023. As a percentage of revenue, marketing expenses were just above 20%, i.e. very much in line with the indicative guidance provided in our last earnings call in early March, about eight weeks ago.

Now while in Q1, marketing as percentage of revenue was still around about 3 percentage points higher than in the comparative period last year. Given Q1 2022 was still impacted by Omicron effects, we expect in Q2, marketing expenses as a percentage of revenue, still a bit higher than last year, but much closer. It's around about a 1 point delta between the two periods.

With that, we will look at the development of our EBITDA. Given the return to normal seasonality in our marketing spend based on the trends just discussed, we delivered an EBITDA in Q1 of €66 million. This is €33 million lower than last year given Q1 2022 still had some Omicron effects, but it is a touch better than what we had initially penciled in for Q1 EBITDA. The reasons for that are, one, the contribution margin was slightly better than what we originally said is target and secondly, that EBITDA in Q1, which is seasonally compressed, very much depends on how some of our marketing campaigns in the latter half of the quarter are exactly sized.

The more important point from what we showed you now is a key takeaway. We had an overall decent start. So far, things are very much in line with plan and our CACs really across our whole P&L in terms of orders, customers, revenue and EBITDA. We are therefore on track with respect to the full year guidance provided on our earnings call about eight weeks ago, where we were targeting for the full year 2% to 10% constant currency revenue growth and EBITDA of €460 million to €540 million.

Now with respect to Q2, it's obviously still relatively early in the quarter. So far, account trading mostly consists of the seasonally slower Easter weeks. So with that caveat in mind, we indicatively expect for Q2 2023 active customers of approximately €7.7 million and year-on-year constant currency revenue growth of 1% to 2% and then as we've discussed before, against easier comps in H2, reacceleration of top line thereafter.

Let me now finish our presentation with a quick review of our cash flow in Q1. Cash flow from operations amounted to €112 million, as usual, supported in that quarter by seasonal cash inflow from working capital. Our cash outflow from investing activities primarily consists of two elements: firstly, around about €95 million of CapEx as flagged a few times before of the approximately €350 million, €360 million CapEx we are planning to spend this year. We will invest a fair amount of this in the first seven to eight months of the year.

Specifically in Q1, we have made good progress on the ready-to-eat facility for Factor in the U.S. We finished the build-out of our ready-to-eat production facility for Youfoodz in Australia. We largely finalized the build-out of our French fulfillmentcenter and also made good progress on the execution of our overall CapEx plan and other geos. €95 million CapEx is the biggest piece of this. And the second one is €35 million for the acquisition earn-out of Factor.

This represents now the final payment to form a Factor shareholders, i.e., there's no more cash outflow in this regard in the future. This means we maintained our cash balance at a strong €467 million, our balance sheet remains largely unlevered, and there were no changes to our liquidity resources during the quarter.

One last housekeeping point. Just before we turn to Q&A. Just to remind you that from a segment reporting perspective, as we mentioned in our annual report already and at the Capital Markets Day, we report our Canadian business as of this quarter as part of a North America segment, so that has moved from our international segment over to our North America segment. And with that, we very much look forward to your questions.

Question-and-Answer Session

Operator

The first question comes from William Woods.

William Woods

I'm just interested to think about the pricing that you've put through in the different markets and obviously, the impact on customer numbers as well. It looks like you're able to pass on a bit more pricing in the U.S. but not internationally. Why you're not passing on more inflation internationally when most of the international markets inflation is much higher? And is it because you're seeing a greater volume elasticity?

Dominik Richter

William, let me take that question. I would say two reasons for U.S. pricing a bit higher. Number one, I think you can see that especially in the direct-to-consumer world, U.S. brands have increased pricing a lot more in North America than in Europe.

And secondly, it's also a bit of a timing effect. We did exercise price increases in the U.S. earlier than in international. So there is a little bit more coming through in International over the course of the rest of the year. So that should close the gap a little bit.

The third point, maybe just to give you the full comprehensive picture. In the U.S., we've also had higher contribution of RTE, so a mix shift to higher-value products. So it was not only price increases, but also a mix shift to higher-value products in the U.S., something that we haven't seen in international, where we haven't launched RTE yet and will also not, in the foreseeable future, be of significant size.

Operator

The next question comes from Andrew Gwynn.

Andrew Gwynn

Good quarter, obviously. Just firstly, just to clarify on repeat, sorry, the Q2 guidance, just to make sure we got it all you run it relatively quickly. And then my question, kind of very similar, actually. But in Q2, there's a little bit of drag potentially from the ready-to-eat market. Is that fair to say in the U.S.?

So obviously, sequentially, we're not getting the same growth coming through. Is it possible to just give us an idea where it was in Q1?

Christian Gartner

So on the Q2 top line guidance, we're targeting around about 7.7 million active customers. So if you compare to the trend last year. Last year you've seen Q1 to Q2, sequential decrease in active customers overall about 400,000. So what we're targeting for this year is somewhat less than that and that translates into a top line year-on-year growth of 1% to 2% ballpark for [indiscernible]. Again, we are pretty early in the quarter.

And then with respect to ready-to-eat, as Dominik has mentioned, we are now at full capacity. So at least on a sequential basis, that business is going to be stable until we basically start to have our new facility in Arizona operation and can ramp it up.

Andrew Gwynn

Just are you able to give us a little bit more color just obviously a very temporary drag in Q2, but just to get our heads around what the drag might be or...

Christian Gartner

We're not guiding on that -- on a detail. Sorry Andrew.

Operator

And the next question comes from [indiscernible]

Unidentified Analyst

You've actually got Joseph Barnet-Lamb from Credit Suisse, sorry. Yes. So just a question with regards to the marketing versus growth dynamic. You obviously pretty recently updated us on your sort of CAC versus LTV thought at the Capital Markets Day, but would love to hear sort of your most up-to-date thoughts on sort of current CAC and progression of CAC. Are there any signs that CAC is coming down?

Or is it sort of modestly trending higher? And then just also one clarification with regard to sort of the outlook commentary. I think you said that marketing will be about 1 percentage point delta in Q2. That's I assume, on a year-on-year basis. We see a similar sort of differential on year-on-year basis through the year? Or is there any phasing we should be aware of?

Christian Gartner

Yes. So let me maybe answer them the last half of your question and Dominik is going to do the first bit. So in terms of Q2 marketing as a percentage of revenue, they were around about 1 percentage point delta that is year-on-year. Yes. So marketing expenses as a percentage of revenue would be around about 1 point higher in Q2 than they were in Q2 2022.

With respect to the full year, if you remember what we discussed at our Capital Markets Day, we said for the full year marketing as a percentage of revenue, also roughly 1 point higher than what we did in 2022. So 2022, we were close to 17% for the year. So for '23, that would be -- for the full year, closer to around about 18%.

Dominik Richter

Yes. And in terms of CACs and CAC development that we're seeing. I think it's pretty much in line with what we have been seeing throughout Q2, Q3, Q4 last year. So it hasn't been going up from those levels. It's pretty much stable and we would probably forecast according to our sort of like best knowledge that it continues to stabilize at those levels.

So no movement for the last, let's say, about nine months, very much in line with that higher than what we have seen during COVID times, but at the same level, really for the last nine months really.

Operator

The next question comes from Sebastian Patulea.

Sebastian Patulea

Good morning, everyone. Thank you for the presentation. Do you see any geographies in the International segment, where maybe Factor will not work or maybe consumers are not ready for that proposition yet, please? And if that's the case, why please?

Dominik Richter

So we're obviously yet to launch in International. So everything that I'm telling you now is a crystal ball. But I do not think that the European consumer is that different to the U.S. consumer. I do think that sort of like our initial results that we have seen in Canada and also that we have seen ready-to-eat can grow to a meaningful volume in Australia points towards also consumers outside of the U.S. being really excited about that product. So as we launch it in Europe in probably towards the end of Q3, I think we can sort of like prove some of our hypotheses, but where I stand right now, I don't think that this is really -- that there's really like a vastly different behavior between U.S. consumers and international consumers.

Sebastian Patulea

And if I may follow-up, please. I know it's only been just a few short months since Factor has been launched in Canada. Do you see a similar fast adoption curve in Canada for Factor as compared to the U.S. Please?

Dominik Richter

I'm happy that you're all excited about ready-to-eat. We're also very excited about it. But really, when we launch either a new meal kit geography or also an RTE brand, the first sort of like 12 months are really all about finding product market fit. So making sure we can produce great meals at scale, making sure we understand what customers really like if we need to adapt our menus, et cetera. And we basically control the ramp-up speed.

So usually, only when we see that all these things fall in place, so great customer satisfaction, good margin profile, then we actually dedicate a lot of our advertising dollars towards a brand.

And so in the first 12 months, really our North Star that we're trying to optimize against is customer satisfaction and our manufacturing quality as well as getting sort of like our margin profile in place because that then makes scaling it up much more profitable than if we scale up prematurely. So I think there are very good indications about this working well in Canada, but I think we will only kind of like start scaling that up really sort of like towards the end of the year. We've launched it in -- I can't remember December or January. But so it's still quite early, and we're collecting customer feedback and feedback on our production processes.

Operator

[Operator Instructions] The next question comes from Marcus Diebel.

Marcus Diebel

Two questions. Dominik, if you can maybe just elaborate a bit more on the ramp up, again, on RTE will be interesting because we learn at The Capital Markets Day that RTE is about 10% of revenues. Now you're going to double effectively the capacity in the U.S. So you doubled the capacity in the U.S.

The question I have here is how should we think about this in terms of the ramp-up in the U.S. market, given there is a market that you have been into, you highlighted you're running at high utilization rates already. How quickly is that ramping up? And then also, how do we think about the marketing in the U.S.? I mean, I assume every HelloFresh customer that tried the product will get a Factor e-mail.

That seems to be the case from what we see. So it should be fairly cheap to ramp up the capacity there. Is that fair to say in the U.S. market?

And then the second question would be on -- Christian given that you gave us a lot of components for Q2 already, could you maybe give us similar to Q1, maybe an EBITDA range, what you see at the end of the day at the EBITDA? That will be great. Thank you.

Dominik Richter

Marcus, with regards to Factor U.S., I think what's different to ramping it up in international markets is that we clearly have product market fit already. So we know which meals customers really like. We know sort of like the recipe ratings, et cetera. We know how to manufacture those meals. We still need to get it right to basically train labor and get them to sort of like follow all of the production processes.

So it's not that we open up that facility. And in the week after, we're basically unconstrained in just acquiring as many customers as possible, but the ramp-up curve should be much, much quicker than if you actually have to prove product market fit first. So to give you an indication, I would say, once we open that facility, there's probably a ramp-up plan of about eight to 10 weeks. And at that point, we should be very comfortable if the indicators point to the right results to dedicate a lot of advertising spend towards Factor.

Marcus Diebel

Perfect. And maybe Dominik, since there is a [indiscernible] But the marketing, I just try to understand how efficient the marketing will be? Because it seems like it's a nice ramp-up, but you have a very large customer base already. So is it fair to say that marketing spend for these additional capacity will actually be much lower than the group average? That's basically what I'm after, sorry.

Dominik Richter

So given the penetration levels, given where we are in the sort of like life cycle of that brand and given the brand awareness that we have, I think it's -- I have mentioned that before, it reminds us of meal kits in 2016 or 2017. So I think our base case assumption is that we can acquire customers at lower customer acquisition costs for our Factor brand, and that should help us sort of like get customers as -- on an average basis, and slightly cheaper in the second half of the year as more customers go to Factor versus our meal kit brands, which operate at much higher penetration levels.

Operator

And the next question comes from Emily Johnson.

Emily Johnson

My first question is you posted 3% growth at constant FX in Q1 with the hardest comps. Can you give us a bit more color on why growth is slowing in Q2 when the year-on-year comps are 10 points easier?

The second question is on the Marketplace business. So you're now in 12 markets there. Can you give us an indication of what percentage of customers are captured within that? I think previously, it might have been this time last year, you spoke about a low-teens percentage take-up in markets where people were able to have marketplace add-ons and an average of a kind of $15 to $20 take-up per basket on that. Is there any update you can provide on those numbers?

I think they were food in U.S., but any comments more broadly would be helpful. And as well, if you have seen any impact of the cost of living crisis on that kind of extra discretionary spend with the marketplace business specifically.

And then my third question is on the fulfillment costs, given you've had some benefit in the first half of the year from both your Phoenix site on the meal kit side, opening up, which is your largest center, which you'll start to annualize in the second half of the year plus in the first half, you are at capacity for Factor, and to what extent should we expect any kind of negative drag from the Factor site coming live in the second half of the year, given there will be more end capacity available there?

Christian Gartner

Okay. That was definitely a question with a lot of [indiscernible] . So let me let me try to pick off a few of those. So on the growth profile in the second quarter, again, it's in line with what I tried to give you as parameters upfront. So the top line growth of 1% to 2%, so not too dissimilar versus what you've seen from us in the first quarter.

And then keep in mind what Dominik just said that basically at Factor we are at full capacity, that's effectively, where we right now think we make a lot and what the reasonable assumption is for the growth profile.

On your fulfillment cost question, it's true. So there is some capacity coming upstream. But still, that is all baked into what I told you before. In terms of the contribution margin expansion, not just in Q1, but also for the full year of at least 1 point, that's what we stand behind, even if there may be a little bit of volatility in a certain quarter or some months because of new capacity coming on stream and is going through that ramp-up process.

Dominik Richter

In terms of HelloFresh market. I think as we have broadened the assortment slightly in the markets that we're active, we've seen higher customer or a higher share of customers actually taking on orders. So I think last year and also what you referenced here, we talked about low teens percentage of customers adding items to their basket. We've increased that number. I think it's now mid- to high-teens that are adding an item to their basket each week at least.

And we do think that as we invest in broadening and making our assortment more attractive that we can further grow that number going forward and also grow the basket size going forward.

So I would say it's outside of the U.S. and Benelux, where we have been active with HelloFresh market for over two years now. It's still sort of like in prototype state. So meaning that the assortment is not super broad, et cetera. And as we increase that assortment, as we make that assortment more relevant, I do think that our customer uptake numbers should continue to grow and also the basket sizes should continue to grow.

So this will definitely be a material contributor to continuing to grow AOV going forward.

Operator

And the next question comes from Nizla Naizer.

Nizla Naizer

I think it's more of a follow-up to an earlier question, but I don't think we got the color just to sort of understand how margins are going to be like in Q2. Christian, you mentioned that the marketing cost would be 1 percentage point higher than Q2 last year, but gross margins could also be higher. So could the margins be flat year-over-year? Would there be some advantage due to fulfillment being better again, that could then help. Could you give us some color maybe on the new degree there?

Yes, that would be my question.

Christian Gartner

Yes. Nizla, we got a message from Marcus as well that he point out on part of his question, which went into the same direction, was not fully answered to him. For Q2, when you think about -- so down to the contribution margin level, we effectively are targeting that round about a 1-point outperformance that you've seen from us in Q1 as well, and that's effectively what we are targeting for ballpark for Q2 as well.

On the marketing side, then we give that back. So from EBITDA margin perspective would be reasonably similar, absent basically a couple of basis points basically on the G&A side, where we're probably above. If you marry that with relatively modest top line growth in constant currency and also that the dollar is on Q2, if it stays where it is right now, probably a touch weaker that means in absolute EBITDA terms in the second quarter. And again, this is against the caveat that we're still early in that quarter. But in absolute terms, it would be reasonably ballpark in the zone, where we were in Q2 last year effectively.

Does that make sense?

NizlaNaizer

Yes, it does, very helpful.

Operator

And the next question comes from Nick Coulter.

Nick Coulter

Three quick ones, if I may, please. Firstly, is it possible to get a sense of the underlying quantum of price increase to customers in the first quarter? And obviously, the balance is the impact of add-on surcharges and mix, but it would be great to get an understanding of how much you're kind of under inflating versus that the broader kind of grocery or restaurant markets?

And then secondly, is it possible to isolate or give a sense of the impact of RTE add-ons and the kind of flip-flop that you have in gross margin and fulfillment costs? Just so that we can understand the underlying trajectory in both gross margin and fulfillment excluding the kind of the RTE or add-ons impact? And then lastly, and perhaps more personally, on customer trajectory through the year, when should we expect actives growth to inflect? Is that the 3Q or 4Q?

Christian Gartner

Okay. Super, let me go through these points. So impact of pricing of that overall AOV expansion that Dominik has gone through. Pricing impact there is a bit more than half of the overall impact that you've seen from us, are not too dissimilar to what we had discussed in the past.

In terms of this, the impact of more ready-to-eat and other factors on this -- on impact how procurement versus fulfillment expenses come out. When you take the U.S. where, basically, most of that is visible when you look at North America rather when you look at our North America segment, where effectively procurement expenses have gone up year-on-year by around about 2 points, less than 1 point really comes from unmitigated underlying ingredients price inflation and all the rest of north of a point is really from these effects that I have discussed or more ready-to-eat, more [indiscernible] charge more on -- more add-on offerings. Is that helpful?

Nick Coulter

That seems helpful.

Christian Gartner

Great. And so your third point was what again?

Nick Coulter

Third was just on customer trajectory through the year, kind of when should we expect actives rate to inflation...

Christian Gartner

Would be basically mid- to latter part of the second half, yes, so effectively by Q4.

Operator

And the last question comes from Andreas Riemann.

Andreas Riemann

Two topics. One is, could you speak about the performance of your three different meal kit brands in the U.S.? Is there some down trading or anything you would like to call out here?

And the second topic is actually what are the average preparation time of meal kits? I'm asking that because I could imagine that they are getting shorter and shorter. So then the question would be whether the meal kit business is actually moving closer to the ready-to-eat business going forward. And therefore, the question is how have those average preparation times trended over the last few quarters or years, maybe?

Dominik Richter

Andreas, let me take your questions. On the U.S. brands and their relative performance, I think generally, this is very much up to us and where we actually invest our advertising dollars. Just as a reminder, unlike a lot of other D2C brands, we operate a broad portfolio of geographies and brands. And so we always funnel our advertising where we actually see the best return on investment.

In the U.S. now in the first quarter, I definitely think that we have prioritized EveryPlate in Green Chef, a little bit over HelloFresh Core. Not so much actually because we see like very bad incremental CAC efficiency at HelloFresh core. But that throughout the pandemic, we have really funded a lot of our investments into our HelloFresh brand and have underinvested in EveryPlate in Green Chef because we've had the highest profitability on every advertising dollar spent in the HelloFresh U.S. brand.

We have reversed that a little bit by mid last year. And I think if you look at Q1, Green Chef and EveryPlate have received more of the share of advertising dollars than in the past, and that has also led them to have a slightly -- a slightly sort of like a better year-over-year performance than our HelloFresh core brand. But I think the important point here is that it's not a binary decision for us, whether we invest advertising dollars or not, that we always look to allocate it to where we actually see the best return on investment.

With regards to your second question with regard to prep times. We have expanded our menu a lot. And so a lot of the meals that we have added to our menu has actually been meals with shorter prep times. And convenience is definitely something that no matter if you're a family customer or if you're a couple, if you follow specific dietary restrictions or not, I think this has been feedback that we've been getting a lot from certain groups of customers that they are looking for shorter prep times. We have heard that and have invested a lot into making sure we also have meals on the menu with shorter prep times.

It's not like they have replaced other meals that we have on the menu because there's a lot of other customer groups that actually want to spend 40 minutes, 45 minutes in the kitchen, preparing a nice meal. And so what we wanted to do is we wanted to give customers the choice.

And as we have expanded the meals on the menu by about 32% year-over-year, a lot of the extra meals that we have added come with shorter prep times. So consumers can really make a conscious choice what type of meals they actually want to get .

Andreas Riemann

Okay. And then the follow-up on the first topic would actually be -- I mean, the three brands in the U.S. give you flexibility, as you just mentioned. Would that make sense to have basically a similar setup than in European countries maybe?

Dominik Richter

We do have it in some European countries. So we have Green Chef in the Netherlands and in the U.K. We have EveryPlate also in Australia and in Canada. So we do have some of that flexibility as well as in international, not to the same degree, just given the size of the market, but we do have that flexibility also in a number of our European or other international segment markets.

Operator

Okay. So at the moment, we didn't receive any further questions. So let me hand back over Dominik Richter for some closing remarks.

Dominik Richter

Thank you all for making the time and joining our Q1 2023 earnings call. I think overall, a lot of the points were obviously flat at the Capital Markets Day already. I hope we could provide some more color about how the rest of the year should shape up. And we look forward to welcoming you back the latest at our Q2 earnings call later in the year. Thanks so much, and have a great day.

For further details see:

HelloFresh SE (HLFFF) Q1 2023 Earnings Call Transcript