Blue Apron Holdings, Inc.
Q4 2017 Earnings Call Transcript

Published: 13 Feb 2018

[Operator:]

Ladies and gentlemen, good morning, and welcome to the Blue Apron Holdings Fourth Quarter and Fiscal 2017 Earnings Conference Call and Webcast. This call is being recorded. Following the conclusion of today's remarks, the Blue Apron team will be taking your questions. [Operator Instructions] With that, I'd now like to turn the call over to Felise Kissell, Vice President of Investor Relations. Ms. Kissell, please go ahead.

[Felise Kissell:]

Good morning, everyone, and thank you for us. On this morning's call, we have Brad Dickerson, Chief Executive Officer of Blue Apron; and Ilia Papas, Co-founder and Chief Technology Officer. Various remarks that we make during this call about the company's future expectations, plans and prospects constitute forward-looking statements for the purpose of the safe harbor provision under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important risks and other factors, including those described in our earnings release and the company's SEC filings. In addition, any forward-looking statements represent our views only as of today and should not be relied upon as representing our views as of any subsequent date. We specifically disclaim any obligation to update these statements. During this call, we will be referencing non-GAAP financial 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 we have described these measures in more detail and to review the reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures. In addition, reconciliations of certain forward-looking non-GAAP measures referred to during this call are on our Investor Relations website located at investors.blueapron.com, under Events & Presentations. I would now like to turn the call over to Brad Dickerson, Blue Apron's CEO. Brad?

[Bradley Dickerson:]

Thank you, Felise. And good morning, everyone. Thank you for joining us. Since transitioning to my new role in November, I have spent extensive time with our board, our executive leadership team and the exceptional talent across our organization as we continue to work together to strengthen our business, to make progress toward our top strategic priorities and to continue to build our brand. What has become even more evident to me over the past few weeks are the extensive future opportunities for the business. Blue Apron is leading an incredibly dynamic and high-profile category. We appreciate that consumers in general are increasingly gravitating to impactful brand experiences, and we believe that we are well positioned to capitalize on this behavioral shift in a more meaningful way. In 2018, we plan to build upon the progress we began to recognize at the end of last year, with a particular focus on building capabilities, improving margins and instituting agility into the organization so that we can become a stronger, more nimble, multi-faceted business. We are actively pursuing strategies that leverage our brand strengths and core competencies to diversify and evolve Blue Apron. While continuing to drive operational improvements remains our top priority today, our team is also sharpening its focus on opportunities ahead to utilize the platform we have built to conceivably extend beyond our traditional business. We view 2018 as a year of transition and building for sustainable growth. I will speak about our 2018 financial guidance in more detail in a moment. While we continue strengthening and transitioning our business as we work through 2018, we are mobilizing our organization to reach a 2019 goal of achieving double-digit revenue growth combined with break-even adjusted EBITDA. On today's call specifically, I will review our 3 primary areas of strategic focus as an organization

[Ilia Papas:]

Thank you, Brad. And good morning, everyone. As Co-founder and CTO, I want to provide you with insight on how our technology capabilities are advancing what Brad discussed

[Bradley Dickerson:]

Thanks, Ilia. Now let me provide a deeper dive into our fourth quarter results and as well as our financial performance expectations for 2018. I previously spoke about our fourth quarter 2017 net revenue, marketing and adjusted EBITDA results. Another important part of our fourth quarter results was the sequential 800 basis point improvement from the third quarter in cost of goods sold, excluding depreciation and amortization, as a percentage of net revenue. A portion of this improvement was expected in food packaging and shipping costs as we moved from the more costly summer season to colder temperatures. More importantly, we saw great progress in stabilizing and strengthening our operational results in Linden, where our cost of goods sold efficiency meaningfully improved from the third quarter. Although our margin in Linden is still below our other 2 facilities, this gap significantly narrowed in the fourth quarter. These results are a big step forward in our transition into 2018, which I will speak about shortly. Product, technology and G&A or PTG&A decreased 2% year-over-year to $53 million and decreased 19% from the third quarter of 2017. In general, we remain focused on prudently managing costs. In other operating expenses we reported a $3.7 million non-cash impairment charge in the fourth quarter primarily related to our leased property in Fairfield, California as well as a $3.1 million charge from our personal -- personnel realignment that occurred in October. Net loss was $30 million (sic) [$39.1 million] compared to net loss of $26 million in the prior year period, with a 55% net loss improvement from the third quarter. As we begin 2018, we expect this year to be one of transition while building Blue Apron for consistent, sustainable and efficient growth. We plan to demonstrate ongoing progress in the business throughout 2018 that we expect will result in net loss improvement of approximately 33% and adjusted EBITDA loss improvement of 50% for the full year. This performance milestone will be driven primarily by cost of goods sold efficiency, with cost of goods sold as a percentage of revenue expected to be approximately 67% to 68%, a 300 to 400 basis point improvement from 2017. In addition, we expect PTG&A savings of approximately $20 million to $25 million from 2017 levels. Depending on our progress toward our 2019 goals largely driven by the initiatives that we were -- that we are outlining today, we may be able to achieve break-even adjusted EBITDA as early as the fourth quarter of this year. We project capital spend for 2018 to be approximately $20 million to $25 million, as we plan to strategically invest in additional automation to further drive operational efficiencies. Building upon the significant improvement in adjusted EBITDA from 2017 to 2018 of roughly $70 million as well as significant year-over-year reductions in capital expenditures, we expect a meaningful improvement in our cash flows as compared to 2017. Regarding net revenue, we believe that it will take time to build momentum this year, particularly given our significant pullback in marketing in the second half of last year. With that, we currently expect net revenue to be moderately down year-over-year in 2018, with the most significant portion of this decrease occurring in the first quarter following strong net revenue growth in the year-ago period of 42%. Sequentially, from the fourth quarter, we do expect that our net revenue performance will slightly improve to approximately $190 million to $200 million in the first quarter. Additionally, for the first quarter, we expect slight cost of goods sold efficiencies to be recognized both sequentially and year-over-year through further labor improvement as well as continuing to implement planning and process-driven strategies. The benefits of many of these initiatives will be increasingly realized as the year progresses. The most significant marketing spend in 2018 is projected to occur in the first quarter as a percentage of revenue and on an absolute basis. Given this significant investment, in the first quarter we'll reflect the largest portion of our adjusted EBITDA loss in 2018 at approximately $30 million to $32 million, which represents year-over-year improvement of approximately 33%. [Similarly], we expect our first quarter net loss to slightly improve year-over-year to approximately $47 million to $49 million. In closing. We remain focused on execution, working cross-functionally across the organization to drive performance. While recognizing the immediate work ahead of us, we remain confident that our original intent to build this business for the future, particularly operationally, provides us a unique platform to improve, scale and even transform Blue Apron, a business that was originally created with a disruptor mindset that is a permanent part of our DNA. I am fortunate to be surrounded by a team who live and breathe our brand, who are determined to make our business more than what it is today and who are committed to do what is needed to win. I am confident that it is with this organization-wide mindset we will build this company for sustainable long-term performance. Thank you. And now - Ilia and I will now take your questions.

[Operator:]

Thank you. [Operator Instructions] Our first question comes from Michael Graham of Canaccord. Please go ahead.

[Michael Graham:]

Hi, good morning. And thanks. Brad, any high-level thoughts on the customer outlook for 2018 relative to the other guidance points that you gave? And then just thinking about the cash situation

[Bradley Dickerson:]

Yes, thanks, Michael. So on the customer side, I think what we see there really is kind of in line with what are -- we're talking about with revenue. So to go back to -- our big focus in the back half of 2017 was on the operational challenges we had and getting Linden to the point where it is today. And if you were to tell me, back in August and September, that we'd be in this position now where we can start to turn the dial on marketing a little bit more and start to stabilize our top line, I would have thought that to be aggressive back in August and September. So I think the good thing here is that the team is really, really focused on getting to a great place. Everything, from our culinary team to our procurement teams and the upstream planning, some of the stuff that Ilia talked about, to our 3 GMs and their staff and their teams and our fulfillment centers, have just done a tremendous job on focusing and getting our operational challenges back in line and turning the corner on that. And that does give us the ability now to -- it's kind of turned the dial a little bit on marketing in Q1, but the reality is that, that negative momentum we had in the back half of '17 is a real issue obviously coming into the front half of '18. So turning the dial and the ability for us to stabilize our revenue base is a really important first step here in 2018. And it also gives us the ability now to start focusing on other things going forward around additional product offerings down the road, more deeper brand engagement with our customers and so forth as we start to look towards getting to that, to the goal of 2019 of growing in revenue and continuing to improve EBITDA performance. So with that, I think what you're going to see in the front half of this year and we're going to work our way through the year is revenue and customers -- a kind of stabilization of revenue and customers to some degree in the front half of the year sequentially from Q4. And obviously, as we work our way through the year, if you're looking at year-over-year comparisons, it's that the year-over-year comparisons will get a little bit easier every quarter as we work our way through the year, but what you should see basically is the customer and revenue numbers should be relatively in-line, as far as the year-over-year comparison and sequential comparison from quarter to quarter. As far as cash goes, yes, I think you're right. We have a lot of focus. We talked about this in the back half of 2017, to a lot of focus on cash and liquidity of our business. So the fact of the matter is we got to spend a lot of money on -- in the front half of 2017 to get Linden up and running. Now that Linden's up and running and we have some extra capacity there because of putting Linden in place, that gives us the ability to look forward now and say let's really hone in on CapEx that's really needed to continue to drive additional consumer experiences and products going forward. But the reality is, with the investments we've made in '17 both in Linden and across our other facilities with automation, the incremental need in the near future is much less. And obviously our decision in the back half of '17 on Fairfield, California is a big part of our 2018 CapEx guidance too and just basically saying that from a capacity perspective, with Linden up and running now more efficiently and our other 2 centers, we have enough capacity to get ourselves through the near term. And we don't need to spend any kind of additional significant CapEx on capacity as much as, just as I stated, some automation, additional automation opportunities we have going forward. So long-term perspective, a significant improvement in EBITDA this year, much less CapEx spend, which just turns into a much better cash flow position than we had in 2017. And obviously, if our teams are able to rally around our goal in 2019 of being EBITDA breakeven, when you look at '18 and '19 from a cash perspective, we get a -- get to a much, much better position.

[Michael Graham:]

Okay. Thanks very much.

[Operator:]

Our next question comes from Matthew DiFrisco of Guggenheim Securities. Please go ahead.

[Matthew DiFrisco:]

Thank you. I picked up on you guys talking a little bit more about partnerships this -- on this call. I wondered if you could talk about that as far as early stages, what you see as far as representation of sales from those partnerships such as the Whole30 partnership. And is this also potentially somewhat of an offset to an environment where you're not spending as much maybe on marketing but getting back to a little bit more revenue growth? Are these the drivers behind it? And if you could talk more about some other partnerships perhaps.

[Bradley Dickerson:]

Yes, I think you're right to some degree. The negative momentum coming out of the last half of the year, as I said, was a real issue, right? So we pulled a lot back on marketing in the back of 2017, especially in Q4, so coming into Q1 of '18, we're trying to reverse that kind of negative momentum of marketing spend in the back half of '17. So both -- I think a couple things. Turning the dial on marketing a little bit more here in Q1 as we've gained more comfort in where our operational capabilities are and giving us confidence to be able to turn the dial is a big part of stabilization of revenue. I would also say that our product offerings that we put in place at the back half of '17, more flexibility to our consumers, more choices in recipes, "quicker prep time type" meals, along with our partnerships with Whole30, I think, are all things that contribute to the stabilization of revenue here in Q1. So I think a combination of turning the dial on marketing and better products and better brand partnerships as we move forward, I think, are all kind of a key part of where revenue is in Q1 versus Q4.

[Matthew DiFrisco:]

Excellent. Thank you.

[Operator:]

Our next question comes from Kerry Rice of Needham. Please go ahead.

[Kerry Rice:]

Thanks a lot. Maybe to - continuing on with the marketing dialogue. You hit a pretty low mark in sales and marketing as a percentage of revenue in Q4. As we -- as you mentioned, turning up the dial in Q1, does this go back, is there any kind of similarities that we would see at the beginning of 2017? Or is that kind of too high of a level and it's more like a 2016? Or any other context you can give us to think about how that marketing spend levels are in Q1; and maybe about the marketing efforts, any changes strategically to television, digital, that you can then highlight? And then the second question is just on kind of right size of the business. You did some realignment efforts in 2017. Are you kind of happy with where you are now, or do you think there's other cost-cutting efforts that you can make? Thanks.

[Bradley Dickerson:]

Yes, thanks, Kerry. So on the marketing piece, as far as cadence goes, yes, I would look at this as really, really happy with where we landed Q4 relative to our operations and where margins came in; again more confidence as we get into Q1 here with our ability to continue to improve margins going forward. So we are prudently turning the dial. I wouldn't say that we're completely turning the dial all the way by any means. We still have a lot of focus and work to do on the operational side of our business, ahead of schedule but still some work to do, so we're going to kind of turn the dial a little bit, start to spend a little bit more as a percentage of revenue than you've seen from us in the back of last year. I don't anticipate by any means that we would spend at the levels we spent in Q1 last year by any means. So as I stated in my prepared remarks, it'll be the highest spend of the year in Q1, but I don't see it at quite the levels as a percentage of revenue or obviously in absolute dollars as we had in Q1 of last year. And as far as how we're spending our money, I think there are some ways that are consistent with what we've done in the past. There's other things that we're doing differently. I will tell you, though, that there's a lot of focus in our organization on not just spending money to acquire new customers at the top of the funnel. But also other ways to invest in the consumer experience overall for our customers, so there's a lot of conversation on how do we spend money in marketing, along with balancing -- now that we're working through these operational challenges, balancing the other areas of our business that can provide deeper engagement with customers and an overall incremental experience with our customers. So we're focused on some of those things today which would probably be outside of what you've seen from us probably in 2017 to some degree. And then on the PTG&A side, realignment of costs, I think our cost structure is in a good place today based on where our kind of run rate revenue is. So we don't really sees -- the need to do any more drastic cost cutting at this current revenue levels. I will tell you, though, there's a lot of effort going on around things that we can remove from a cost perspective that are kind non-value-added costs in the organization. So there's a lot of focus on that throughout the organization, but I would say those are more things that companies would naturally be looking at, as far as the efficiencies and costs and so forth. But I don't really see any drastic changes there going forward. So I think really the story here in 2018, at least in the bottom line side, is the run rate of PTG&A coming into 2018 and obviously the improvement in margin are what's giving us confidence that we can halve that EBITDA loss from 2017.

[Kerry Rice:]

Great. Thank you.

[Operator:]

Our next question comes from Ross Sandler of Barclays. Please go ahead.

[Ross Sandler:]

Great. Two questions, Brad. So first, just stepping back from the current trend but looking at the big picture. HelloFresh is almost as large as Blue Apron in the U.S.; and over the last year seemed to have filled the void, as you guys cut back on marketing, despite them running largely manual operations, from what we gather. So is there any reason why structurally you can't retake that market share once you've kind of looked through all these warehouse issues and stepped in and spend on -- more on marketing? Is it just willingness to sustain losses in the short term that gets that market share back? Or is there anything unique about the product or your go-to-market that would potentially make recapturing that share challenging? And then the second question is you guided to 400 basis points of COGS leverage from -- in '18. Is that a function of kind of lapping the inefficiencies from the automation buildout in Linden? Or is that -- those automation is actually driving stronger unit economics in that it's a trend that we should see beyond '18, into '19 and '20?

[Bradley Dickerson:]

Yes, thanks, Ross. So first, on the bigger picture and the competitive landscape. And listen, the back half of '17, we were very, very internally focused, obviously, on getting our operations in-line. And the team rallied around that in a great manner, but the reality was -- is that, that was something that we had to do from just kind of looking inward and not really focusing on competition and the outward view of things. So as we get into '18 here, I still think we're in this position now where we're turning the dial on marketing. Some of this is transitioning from pulling back on marketing to now pressing the pedal on marketing. And there's a dynamic there that it does take a little bit of time to turn the corner on the negative momentum of the marketing spend in the back half of '17 as we get into '18. So that's going to take a little bit of time, so for us, we're really looking at sequentially stabilization of the revenue base and starting to look at -- look forward to how do we start to grow that revenue base in the future as we get further and further away from the pullback of marketing in the back half of '17. There's nothing structurally in our business that I would say is prohibiting us from starting to take market share back again. I do think, again, it's a little bit of a momentum game. And the ability for us to put some distance between the back half of '17 is part of the landscape. I will tell you, though, from a product offering perspective we're really proud of the ability for us to put new products and offerings in place in the back half of '17. And I think again that, from my earlier comments, that's a big part of the stabilization of our revenue base as we move forward, but the reality is that some of these are kind of table stakes, to some degrees, of -- from a product offering perspective of our consumers are going to incrementally expect us to continue to offer out things in the marketplace. Our teams now -- as we focus on '18, it's going to be a big focus of ours in '18. It's to continue to evolve our product offerings to our customers and not just do it on a one-off-type basis but more in consistent incremental basis going forward. So I don't think that structurally is an issue for us, but it's going to be a focus of ours going forward. It's to continue to have more product offerings out there, so as we turn the dial on marketing as we get through '18 and start to have new, different things for our customers on top of the things we put in the back half of '17, we think that puts us in a position, as we work our way through '18, to start to get market share again. Obviously it'd be our goal as we work our way through '18 and especially into '19. As far as the cost of goods sold leverage, first and foremost, Linden, although improved, as we get into '18 here, specifically in the front half of '18, although Linden has improved significantly, it's still going to be behind where our old facility in Jersey City was in the front half of '18. So there is a little bit of a comp there that, although improving, we're working kind of against that to some degree. So as we work our way through Q1 and Q2, Linden will continue to close the gap on both where our other facilities are, California and Texas; and also where we were last year in the old Jersey City center. As we work our way in the back half of the year, to your point, obviously we get some easier comps, especially in Q3, but the reality is it's partly some easy comps in Q3 and Q4 but it's also partly the fact that Linden is still kind of working through and improving in Q1 and Q2. So just to kind of put things in context with margin

[Ross Sandler:]

Great. Thank you.

[Operator:]

Our next question comes from Matt Trusz of Gabelli & Company. Please go ahead.

[Matt Trusz:]

Good morning. Thank you for taking my questions. So Brad, you've mentioned a couple of times your opportunities to diversify and evolve the business. Can you elaborate on what this might look like and what the time horizon is until when we might expect to see them? And then just to follow up on everything you are doing on products, can you provide some context on recent customer retention trends you're seeing and what your expectations are as we work through 2018?

[Bradley Dickerson:]

Yes. Thanks, Matt. So first, on the product side of things. And I'll be careful, obviously, to lay out too much of our product road map here, for obvious reasons, but what I will say is I would say the back half of '17 was the time for us to focus on operational challenges. As we get into '18 here, our focus really starts to become on, as we continue to drive operational efficiencies, to start to really focus on product and product offerings to our customers. So what I will tell you is, first, how that looks is I would expect continued focus on the ability for us to increase offerings to our customers, to add flexibility to our customers. Those are things that our customers want. And I would also look at it from the perspective of how do we leverage our brand into things like partnerships, like we talked about with Whole30 and so forth; to kind of partner with other great brands to drive customer engagement going forward. So I don't want to get into too much details of product specific, but what I would expect from us as we work our way through the year is you'll start to see a lot more consistent and a lot more incremental offerings to our customers kind of on a quarter-by-quarter basis as we start to work our way through the year, especially as we get to the back half of the year, with margins continuing to improve. From a retention perspective, what I would say there is again we're in a time frame here again where we're kind of transitioning from the first big step, which was getting operational issues behind us, to the second step of now turning the dial on marketing and starting to spend some dollars to stabilize our revenue base. The next step would be obviously to get more consumer products out to our customers. So in that, along with some -- products that we put out in the back half of '17, along with partners like Whole30, going back to my comments before around the stabilization of revenue, we're seeing the same thing kind of on a retention basis. So although we're not really growing customers, obviously, in as much as we have in the past because of our pullback on marketing, and that momentum coming into '18 obviously is an issue as far as the pullback of marketing in back half of '17, from a retention perspective we've seen some more stabilization there in our existing customer base. I think a lot -- again a big part of that, I think, is our incremental products we put out in the back half of '17 along with partnerships like Whole30.

[Operator:]

Our next question comes from Youssef Squali of SunTrust. Please go ahead.

[Youssef Squali:]

Yes. Thank you very much. I guess, going back to the -- to Ross's question on the market insight. Just get some -- I would like to get some better maybe clarification. So you've increased spend in marketing, starting in the last week of December. What are you seeing in terms of just the marketing efficiency of that spend maybe either in terms of cost of customer acquisition or ROI just considering that the competition has also taken advantage of the fact that you weren't there to dramatically increase their spend? Has the -- effectively the unit economics of the business changed structurally now that you have effectively more customers -- or more advertisers or competitors competing more aggressively for that customer? And then on the new product offering, can you just elaborate maybe philosophically on your view of maybe partnering with an offline player? We've seen what Plated has been doing, what Amazon and Whole Foods are also trying to do. Where do you sit on that topic?

[Bradley Dickerson:]

Great. So on -- yes, on the marketing side, again I think that -- I've said this a couple of times now, that the negative momentum coming out of the back half of '17 is a real factor as we work our way through the front half of '18. So obviously there's been a lot of competition out there. They've been spending money much more aggressively throughout '17, into early '18, so that will impact us, as far as our ability in the front half of '18. That is part of our challenge in the front half of '18, along with the fact that we are still obviously very, very focused on improving our operational efficiency. So when we look at Q1, we're being very prudent on how we turn the dial, understanding that we're working against some negative momentum coming into the year. And we also are still focused on getting our margins to a better place than we were in Q4, albeit much improved, still to a better place than Q4. So from a -- from an efficiency perspective, I think it's really early to tell right now. We're 5 weeks into the year. And I don't want to understate that, transitioning from really pulling back on marketing to starting to turn the dial, it's going to take some time to really get a feel for what that means from a revenue top line perspective. That's why we're being a little bit more hesitant to give specific top line full year guidance, because we're only 5 weeks into the year. And this is a pretty big change in the dynamic of how we've been focusing on marketing over the last 3 quarters, of pulling back last 2 quarters to now spending in Q1. So I would say the jury is still out on efficiency right now because it's a little bit too early to tell and we really are just starting to turn this dial. So our hope would be, as we again distance ourselves from the pullback in the back half of '17 and start to gain some positive momentum forward with marketing spend, that should -- along with incremental products in the future, that should help us in the efficiency side. I would just -- I'd be hesitant right now to say that we have a clear picture of that so early in the front half of this year, only 5 weeks into the year. As far as new products go on -- and on the retail side, I think you mentioned offline and retail. Listen, I think this is a long-term game for us. And the way we look at this is partnering across the spectrum is something from a long-term perspective that makes sense for us, so we are -- really our goal is to be a consumer lifestyle brand, and that means meeting customers' expectations on products and meeting customers where they purchase those products. Now that's a long-term view. We're very focused on our core business right now; and improving our customer experience in our core business, along with improving product offerings in our core business. We don't really have any significant near-term things to talk about there, but longer term I think obviously that would make sense for us. And our goal of being a consumer lifestyle brand is get - give the customer products they want and where they want it and how they want it. And I think that's what our focus is as we start looking at 2019 and beyond. How do we put ourselves in that position to be that consumer lifestyle brand. But again nothing right now that's significant to talk about there. And obviously, down the road, we'll talk about something if something was there, but nothing significant right now.

[Youssef Squali:]

Thanks, Brad. That was helpful.

[Operator:]

Our next question comes from Ed Yruma of KeyBanc Capital Markets. Please go ahead.

[Unidentified Analyst:]

Hi. This is Noah on for Ed. Thanks for taking the question. Can you talk about the mix of the 800 bp sequential COGS improvement? I guess, how much of that was a benefit from seasonal packaging versus operational efficiencies and then -- and favorable supplier pricing? And I guess, on supplier pricing, should we expect those benefits going forward? And then I guess, second, just on the marketing pullback, can you talk about any learnings during the fourth quarter and how that might shift where you spend your dollars as they increase going forward?

[Ilia Papas:]

Thanks, Ed (sic) [Noah]. This is Ilia. I can talk quickly about the COGS improvement. So a lot of that, as you mentioned, was broken down between our food and products packaging costs, shipping and fulfillment packaging costs and also some improved labor costs. Seasonally in our business we see a [peck of inefficiencies] as we go into the cooler months. It's that we see a reduction in packaging and an improvement in food costs. And that was also compounded by the improvements we saw through the enhanced planning processes and kind of end-to-end systems operations planning that I mentioned earlier in the call. And I do think we are -- we always continue in -- continue to be focused on finding further efficiencies, as far as our cost structure goes. So we do expect to see more.

[Bradley Dickerson:]

Yes. And on the marketing side it's tough to gain a lot of learnings from Q4 because we did pull back on so much marketing in Q4 as we focused on the operational side of things. So when you look at our spend at 13% or so of net revenue, which is historically pretty low amount for us, we also got to put in context that we did spend some money in the back half of 2017, in December, kind of in preparation for getting into 2018 and turning the dial a little bit. So even that low spend had some kind of -- even though it hit 2017, it was more of a 2018 preparation spend. So the reality is I think that we were very, very focused on really controlling our costs in Q4 and focusing on the operational side of things. It would be really hard to gain any significant lessons because it was such an abnormal period of time for us from a marketing perspective. I do think that -- in Q1 and Q2 now, as we start to turn the dial again and we look at the landscape of what has changed for Q1 and Q2 of this year versus previous years, I think we'll have a lot more lessons learned there relative to the level of our spend, how that results in revenue and also the efficiency of the different channels. I think we'll learn a lot more in kind of what I would say is a normal spend period like Q1 and Q2 than something like Q4.

[Unidentified Analyst:]

Thank you.

[Operator:]

Our next question comes from Heath Terry of Goldman Sachs. Please go ahead.

[Heath Terry:]

Great. Thanks. Brad, one of the things that you called out in the press release was lower food costs as part of that 800 basis points. Can you give us a sense of how much of that is sort of like-for-like pricing or being able to get efficiencies with suppliers versus ratcheting-down the cost of the food or the mix of the food going into the actual boxes? And then as you look at sort of where you stand with Linden and with your broader sort of fulfillment footprint, can you give us a sense of sort of where capacity utilization is and sort of how much of the return to growth will be taking advantage of those fixed expenses that are already being put in place there to get incremental leverage?

[Bradley Dickerson:]

Yes, Heath, sure. On the food cost side, the focus of the team really has not been to take value out of the offering to our customer and out of the box. That's been a big focus of the team. So a lot of what you're seeing as far as improvements in food has not been at the expense of our customer. Or in fact, just the opposite, we're looking at things that never get into the box, as far as our ability to drive savings in food. So although historically we've been very efficient relative around things like food waste, there's been a lot of focus on upstream planning and making sure we put ourselves in a position to not generate a lot of food waste that never gets into the box of the customer. So I would say that the vast majority of the food improvement outside of seasonal, which we'll talk about in a second but outside of seasonal, is really upstream planning mechanisms. Our culinary team is really focusing on the right ingredients to put into the offerings, not taking out ingredients but making sure it's a good mix of what type of ingredients we're putting in across our recipe portfolios, along with just really more diligence and discipline around purchasing a product and focusing on demand forecasting accuracy and so forth. Those things have been a big driver in our ability to reduce food waste in our fulfillment centers, which is a big part of the food cost improvement. Now again naturally there's Q3 to Q4. There is some natural improvement. The seasonal produce in the summer is our highest kind of produce cost of the year, so as we get out of the summer months, there is some natural improvement in food costs just because of the type of produce we have but again a vast part of it along with a great focus on reducing food waste overall. And then on the Linden side, as far as capacity goes, listen, obviously Jersey City was 150,000 square feet. Linden is just under 500,000 square feet, so just from a square footage perspective there's much, much more capacity for us going forward. We put a lot more automation into Linden also, and we're really just starting to get the benefits of that as we start to see our margins improve. Again, upstream planning has been a big, big part of that relative to planning to utilize the equipment on a much more disciplined basis. So that's what I'm going to go keep driving. And that automation and the utilization of automation obviously increases throughput and capacity also beyond just the square footage. So as we go forward, Linden will give us the ability to scale in the future in a more efficient manner. If we had to continue to scale and drive revenue growth, we may have to have some incremental equipment purchases, but by no means we'd really have to have any type of spend like the spend we put in Linden as far as building out Linden itself. So our job going forward is to incrementally and consistently offer new products to our customers and build an infrastructure that is agile and can flex to do that. A lot of that will be obviously the ability for Linden, with the room it has, to do that. And our other facilities, also we're focused on how do we supplement, complement capacity there in a simple, flexible fashion, if need be, down the road to give more product offerings to our customers. So that's kind of our viewpoint right now.

[Heath Terry:]

Great Thank you very much.

[Operator:]

Our next question comes from Mark May of Citi. Please go ahead.

[Mark May:]

Thanks. I think, at this point, most of mine have been covered, but it -- Brad, I know that you gave several data points in terms of guidance, outlook for the year. And I apologize if I missed this, but can you tell me what your -- what is built in, in terms of overall cash burn for the year? It sounds like you expect it to be highest in Q1, but on a full year basis can you give us a sense of that and then the percent of revenue that came from repeat orders in the quarter and kind of how you see that trending going forward into the first half of the year?

[Bradley Dickerson:]

Sure, yes, Mark. So as far as guidance for '18 in cash burn, if you look at my prepared remarks, I think what you'll see is guidance that we'll reduce our EBITDA loss from 2017 to 2018, basically cut the EBITDA loss in half. And if you look at our CapEx guidance, it's somewhere in the $20 million to $25 million range, so you're looking at roughly an EBITDA improvement of roughly $70 million versus last year. And you're looking at CapEx well below last year's CapEx which was over $100 million; somewhere the $20 million, $25 million this year, so from a cash burn's perspective a much healthier position than 2017. And obviously, as we work towards 2019, the ability for us to hit our goal in 2019 would obviously improve that pretty dramatically to -- for even 2018. As far as repeat orders, we don't really give out the specific numbers, but what I will tell you is in Q4 we had a higher percentage of repeat orders than we've had historically. Some of that is just because of the pure math of the fact that we were not spending a lot of money on marketing and not bringing a lot of new customers in during the fourth quarter. So there's a natural math at play there that just says you have more representation of existing customers coming into Q4 than you had maybe historically because we're pulling back on marketing and not getting as much customer growth. So although the metric is greater than we've seen historically, as far as repeat orders, I would caution that a lot of that is just because of the dynamic of pulling back on marketing to some degree than just improving the metric overall.

[Mark May:]

Thanks.

[Operator:]

Our next question comes from Mark Mahaney of RBC Capital Markets. Please go ahead.

[Mark Mahaney:]

Thanks. You've talked about a series of product improvements like meal choice flexibility, some delivery improvements with 30-minute meals, more beef in the offerings et cetera. Can you part -- can you figure out which of those in the cohorts where you've seen improved retention, improved satisfaction? Which of those kind of product improvements over the last 3 to 6 months have had the most impact? What are people most positively responding to?

[Bradley Dickerson:]

Yes, Mark. I think the reality is I think all of them to some degree have had an impact on customer experience and helping kind of get stabilizing retention for us as we get into Q1, the retention metrics. I would say that the team here has been focused on really the things you mentioned was -- the recipe rotation is a very important thing. If you think about the week-in and week-out basis for customers, to be able to select things they like is really, really important, so a lot of focus in the back half of '17 on the rotation of recipes, to your point, more steak on the menu, not just steak but again just kind of looking at the balance of recipes. Now the ability for us to increase the number of recipes that we've offered gives us, has a lot of help in the ability for us to put things out there that the customer desires. So more recipes equal the ability for us to give them more what they want from a dietary preference and taste preference. So that's probably been one of the biggest improvements we've seen. I do think the quicker-prep-time meals have also been very positively received, from our customers. There are certain times customers just want to be able to get something on the table faster, and so we've seen a lot of positive response from those. I'd say those two probably are the ones that have been most well received, from our customers.

[Mark Mahaney:]

Thank you, Brad.

[Operator:]

Our next question comes from Brian Nowak of Morgan Stanley. Please go ahead.

[Brian Nowak:]

Thanks for taking my question. I have a couple. The first one is kind of a high level. The milk category has been growing in awareness quite a bit over the last couple of years, but it's already become more competitive, so I guess I'd be curious to hear, Brad, about what gives you confidence now that this new marketing strategy is going to really lead to improved customer economics and higher quality, more sticker customer profile as you compete against HelloFresh, Amazon, Plated, grocers et cetera? Second one, do you have to reduce price to actually drive faster growth? And then the third one, Brad, is that you sit in the seat of kind of the CFO and the CEO. You kind of have a unique position on the strategy and the numbers. As you think about getting to breakeven, what do you have to assume for customer count or revenue profile to get there?

[Bradley Dickerson:]

Sure. Thanks, Brian. So on the meal kit side, yes, I think the reality is it's a much more competitive space. There's a lot more players in the market. There's a lot more competition from a consumer mind share perspective, so it's really important for us to keep focusing on the future, keep focusing on what we want to drive going forward. And again, the teams are really now becoming very focused as we start to work past these operational challenges on the consumer mindset, product offerings, the ability to give more products out to customers. That's going to be a really important part. So I've said this before. The way our business looks today is a kind of a weekly subscription meal kit business to some degree. And "meal kit" is a word you guys like to use, not as much as we like to use internally here, but as we go forward, the ability to evolve our offering to our customers beyond what we look like today is going to be really important. So more flexibility, more recipes to choose from, different types of products, different ways to get products to our customer is going to be really, really important. Now not all of that is going to happen in 2018, but I think 2018 is going to be a big kind of foundation-building year for us to change our mindset around what for us has historically been focused on scale and not as much focused on product offering. And that's kind of the dynamic that's changing for us now. It's to get more flexible in product offering. We think that helps create more stickiness to our customers, and obviously it's about putting products out there that our customers want to buy. It's going to be kind of our focus going forward. Reducing price to grow, I don't -- if you look at the competitive landscape of pricing, we feel like we're very competitive out there in the pricing landscape for this. I don't think pricing is the issue, but I do think, and we talked about this before, is how do we make sure that we going forward continue to match price and value to the offering. So the ability in the back half of '17 with more recipes to choose from and really focus on recipe rotations, putting a lot more value to our customers was something that was really, really important for us. So continuing to match kind of value to price in the future is something that we're going to be very, very focused on. That could mean in some cases taking prices up because the value of the product is increasing. It could mean in some cases taking product -- prices down to match the value that the consumer perceives in the type of recipes or meals they're getting. So there's a lot of work on pricing going forward. It's a very, very important component longer term for us. I don't think it's by any means a barrier for growth right now because we're very competitively priced today. And then the last thing is just to have the breakeven profile for 2019. In order for us to -- I think the 2 big drivers for us to hit a breakeven in 2019 would be, one, to continue to improve our operational efficiencies, so to continue to see improvements in margin beyond the margin that we're driving and certainly we're driving in 2018. So that break-even EBITDA in '19 assumes that we would continue to improve margins going forward. And the second thing it does assume also is that we do return to some kind of full year growth in revenue top line year-over-year. So that -- those are the 2 kind of big drivers to get to a break-even EBITDA in '19.

[Brian Nowak:]

Great, thanks.

[Operator:]

Our next question comes from Ralph Schackart of William Blair. Please go ahead.

[Ralph Schackart:]

Good morning. Brad, you've touched a lot about adding new products and a big focus for '18. Any sense, I guess, on second half of 2017 and the customer attrition? How much of that was driven by not having the right products in the market versus simply just pulling back on marketing spend? And as you think about '18, if you can maybe sort of talk about your opportunity as you add more products to go back to previous customers that were perhaps seeking those new products you're going to offer. And then any change in the promotional sort of marketing opportunity or promotional spend in '18 versus what we saw, I guess, in the back half of '17?

[Bradley Dickerson:]

Sure. Thanks, Ralph. So on new products and relative to the back half of '17, what I would say is that we didn't -- obviously, pulling back on marketing was a big impact to the back half of '17. I would probably move away from saying that the product offerings that we had in the back half of '17 were the cause of the customer attrition in the back half of '17. I would say that, if you went back to our earlier conversations in the back half of '17, in these earnings calls, the focus on OTIF was a big driver of our focus, and the need for improvement. And we were actually saying to some degree that OTIF was a cause of some retention issues in our business, specifically in the eastern part of the U.S., because of some of the challenges we had in Linden. So I would say that was -- the biggest driver in the back half of '17 of challenges in attrition of customers was driven by OTIF, so the ability for us to get Linden's OTIF in-line with our other 2 facilities is a big part of turning the quarter as we get into Q1 of '18. Obviously that, on top of pulling back on marketing, didn't help the customer numbers by any means, but the fact of the matter is we didn't want to put the pedal down on marketing until we had OTIF back in line. So I think, as we look forward, the ability for us to, now with OTIF in-line and product offerings that are incrementally better than they were a year ago, going back out and telling the story of reactivation to customers who may have been with us in the past and loved us and loved our brand but maybe we didn't have the right offerings to them. We really didn't want to focus a lot, in the back half of '17, on doing that, when we were having some OTIF challenges. So the fact of the matter is now, to your point, in the front half of '18, it is becoming a bigger focus for us now of reaching out to those customers who we've had relationships with in the past. Now that we have our customer service levels in a better place and we have some different products, product offerings out there that we didn't have before, this is a better time to be out there talking to those folks and trying to get reactivation. So that is a focus of ours right now, and that's a little bit of a change on the back half of '17. On the promotional side of things, we're really careful about promotions. It is a part of our acquisition strategy. We are not looking to significantly change promotional values and dollars. We're looking at different ways of doing promotions, but we are very, very careful from a brand perspective to overdo promotions. So we're -- there's not really any kind of big change in how we're approaching that kind of year-over-year, especially from a dollar perspective, for any means.

[Ralph Schackart:]

Great. Thank you.

[Operator:]

Our last question comes from Aaron Kessler of Raymond James. Please go ahead.

[Aaron Kessler:]

Great. Thanks, guys. Most of the questions have been asked but just one maybe on the promotional deals. It looks like you've changed kind of the level of promotions over the last few quarters. I guess less promotions kind of to new customers. Can you talk about maybe what impact that's having on both customer acquisition levels and maybe the quality of the consumer that you're acquiring?

[Bradley Dickerson:]

Yes. I think that's really more a reflection of what we think is kind of normal state for us going forward in the promotional side. We had -- as we've discussed historically, we got a little bit more promotional in the back half of '16. And we did see what that was. Obviously, beyond impacting bottom line and revenue, it is a big impact relative to the type of customer you get in the door and what's driving them to come in the door and buy product from you. So we moved away from that, as we saw some data points, in the back half of '16. So through '17 and now into '18, I think what you're starting to see is a little bit more of a normal state in promotional activity. Now obviously in quarters where we're spending more on marketing and growing new customers, that's when you're going to see those promotional -- the promotional activity pick up. In quarters where you're pulling back on new acquisition and you're selling to kind of more of an existing customer base, there's a lot less promotion because all those promotions are really more tied to kind of the entry point for customers. So what you're probably seeing in that perspective is just less-promotional environment because we're driving less new volume in general. And from an offering perspective, I think what you've seen from us is again not really necessarily changing the dollar amount of promotions but offering the promotions in some different ways around multiple boxes versus just the first box and so forth and some of the things we've been doing.

[Aaron Kessler:]

Great. Thank you.

[Operator:]

This concludes our question-and-answer session. I will now turn the call back over to Mr. Dickerson.

[Bradley Dickerson:]

Great. Thank you, everybody. And we look forward to keeping you updated on our progress throughout the year and in future earnings calls. Thank you.

[Operator:]

The conference has now included. Thank you for attending today's presentation. You may now disconnect.