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BLUE APRON HOLDINGS, INC Fourth Quarter and Full Year 2017 Earnings Call Transcript

February 13, 2018 FELISE KISSELL (VP, Investor Relations): Good morning, everyone. Thank you for joining us. On this morning’s call we have Brad Dickerson, Chief Executive Officer of Blue Apron, and Ilia Papas, Co-Founder & 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 provisions 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? BRAD DICKERSON (Chief Executive Officer): Thank you, Felise. 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 infusing agility into the organization so that we can become a stronger, more nimble, multifaceted business. We are

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actively pursuing strategies that leverage our brand strength 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 breakeven adjusted EBITDA. On today’s call specifically, I will review our three primary areas of strategic focus as an organization: One, driving operational improvement throughout our supply chain; two, evolving our product offerings to serve more consumer segments in addition to deepening our relationship with existing customers; and three, building a consumer lifestyle brand that symbolizes the emotional human connections created through cooking experiences. I will then turn the call over to Ilia Papas, Blue Apron’s Co-Founder and Chief Technology Officer, who will provide additional insight in our progress in the fourth quarter toward our priorities, including where we have more work to do. I will also speak to our results in more depth before sharing our performance outlook for 2018 that includes the actions we are taking to significantly improve bottom line performance this year. At a high level, our fourth quarter results were in line with guidance cited in our last earnings call with an added focus on heightened expense management. That revenue decreased 13% year over year to $188 million following an 85% increase in year-over-year revenue in the fourth quarter last year versus the prior year. Top line, again, was impacted by our intentional pullback in marketing spend, which was reflected by an usually low level of marketing spend of 13% at the percentage of net revenue. Our marketing efforts reaccelerated the final week of December with a launch of our new brand campaign as the business continued to stabilize, which I will review in more detail shortly. Adjusted EBITDA loss improved 10% to $20 million from the prior year, and we cut our adjusted EBITDA losses by 59% quarter over quarter. Our team worked relentlessly to improve the efficiency of our new Linden, New Jersey fulfillment center and was able to achieve a notable a progress in margin that contributed to our bottom line performance as well as improvements in our on-time, in-full, or OTIF rates. With that, we appreciate the work we still have ahead of us in order to gain additional efficiencies and to operate the business at the level we expect of ourselves. Our top priority remains to focus on on-going operational improvement and efficiency that is built for differentiation and agility, a

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competitive moat. Throughout the fourth quarter, our OTIF rates in Linden stabilized and are now relatively in line with our fulfillment centers in California and Texas. An example of our ongoing work to drive further operational improvement includes establishing additional rigor around production planning. Ilia will discuss the technology and operations solutions that influenced our operational improvement and our initiatives underway to build upon our capabilities. While the progress we are making in Linden is encouraging, we are still working hard to advance efficiency, bring OTIF rates to a level that consistently exceed our customer experience expectations, and create a nimble infrastructure that can easily adapt to product innovation. This will not be immediate, but we are encouraged by the progress we are methodically implementing to drive the business. Now, I would like to share an update related to our latest Blue Apron product offerings. At its core, every Blue Apron product, whether it’s a hassle free holiday meal, or a grass-fed steak dinner paired with a glass of our wine, is carefully and intentionally designed to help our customers create an incredible experience. This concept of empowering our customers to have meaningful experiences remains central to everything we do. It is our North Star. Increasingly important to the core of our vision is creating additional value for our existing customers and the ability to meet the needs and preferences of new, diverse consumer segments. Our Consumer Products team continues to focus on unlocking growth opportunities to achieve these goals, for example, by creating products that are customized to different tastes and lifestyles, launching brand partnerships, and exploring different plans and channels that we expect will enable us to reach more consumers across the country. When combined with strategic investments in marketing, we believe these growth opportunities will favorably impact customer metrics. We continue to be encouraged about our new flexible and expanded product offering which became available to all customers last fall. Given the dramatic pullback in marketing spend in the fourth quarter, some consumers may not be fully aware of our additional meal solutions, and we believe we have yet to unlock the complete potential of this expanded offering. In the fourth quarter, we advanced our merchandising capabilities by focusing on driving customer engagement. We have been working to optimize our weekly portfolio of recipes based on our ongoing collection of customer insights and feedback. In addition to offering our simpler 30-Minute Meals, we’ve recently introduced the ability for customers to select recipes that, for example, require less active work in the kitchen and/or easier clean-up. Another area that is guiding our business is our focus on building a strong consumer lifestyle brand that reinforces our identity to not simply be a transactional e-commerce business but play a more meaningful role in our customers’ lives.

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We just launched our newest brand campaign. The campaign features five different stories, one for each day of the week, that demonstrates how cooking with Blue Apron can transform an ordinary night into an experience that is much more meaningful. We are proud of this campaign because it was inspired by the thousands of real stories we have heard directly from our customers about how Blue Apron has made a positive impact on their lives. This brand building effort has been showcased on national online and offline platforms. For those of you in New York, you may have seen the extension of this campaign with digital ads we launched throughout the city, tailored for each day of the week, in major transit hubs and screens across the metro-area. Brand partnerships are a meaningful opportunity for us to leverage the platform we are building to add value for our existing customers and showcase our brand to new consumer segments. In early January, we launched an eight-week partnership with Whole30, a popular lifestyle program that encourages consuming wholesome, nutritious foods. Since we began promoting our Whole30 meals, we have seen promising early results related to new customer registrants. We plan to pursue additional partnership opportunities that align with our brand ethos and enable us to engage and expand our customer base by accommodating more lifestyle preferences and needs. I will now turn the call over to Ilia to share his perspective before putting on my CFO hat to discuss our financials for the fourth quarter and outlook for 2018. ILIA PAPAS (Co-Founder and Chief Technology Officer): Thank you, Brad, and good morning, everyone. As Co-Founder and CTO, I wanted to provide you with insight on how our technology capabilities are advancing what Brad discussed; ongoing operational improvement throughout our supply chain, evolving our product experience, and building a strong consumer lifestyle brand. As Brad stated, we made progress this quarter in Linden, achieving sequential margin and OTIF improvement. In December, we noted that OTIF rates in Linden had increased to be more in line with our other fulfillment centers. With the business stabilizing, we are now in a position to reinvest in marketing and move Blue Apron forward. Our focus in 2018 remains in gaining greater efficiencies across all of our fulfillment centers. I will now take a moment to provide some context on how we recently tackled challenges in Linden and our ongoing work to drive additional progress. We improved our operational performance by continuing to automate steps of the production process. On our last earnings call, we reviewed unexpected downtime we were experiencing from some of our new automated equipment and growing pains we were working through to gain more uptime and efficiency. We have since deployed additional automation capabilities,

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and we’ve also identified more ways to realize increased productivity from our existing technology. As we work toward automating more steps of the production process, we believe we’ll see steady end-to-end improvements across the business, from further driving down cost and complexity in operations, to further enhancing our ability to launch new products to our customers. We believe that these increased automation capabilities will unlock additional opportunities for us, and we are deliberately taking a measured approach in implementing these solutions to ensure equipment is integrated into our production process as seamlessly as possible. Overall, we’ve been more proficient about our planning processes across the organization. This involves looking at our supply chain from end-to-end and anticipating potential issues upstream to increase stability and efficiency in our fulfillment centers. For example, we are using customer feedback and behavioral data to reduce unnecessary operational complexity while simultaneously keeping the bar high for our diverse, culinary-driven recipe portfolio. This work is informed by a deep understanding of our customers’ preferences, and which ingredients can most seamlessly flow through our production process while keeping cost and waste to a minimum. More intelligent recipe planning through strategies like these leads to smarter purchasing decisions which provide opportunities to manage food costs and better allocate labor in our fulfillment centers. As we continue to evolve our product experience, we believe there are meaningful opportunities to leverage our extensive data and analytics competencies to further engage our customers. For example, we can more effectively tap into what we know about each Blue Apron customer to enhance the customization of their product experience. Our algorithms consider customer preferences around ingredients, cuisine, flavor, and other elements of our recipes to proactively suggest meals customers will enjoy while also balancing cost. Finally, as Brad discussed, we’re operating in an incredibly dynamic environment, which we believe requires a business model that can easily pivot and adapt. We are energized by the progress we are making in building a platform to strengthen our agility so that we can be better positioned to capitalize on the opportunities ahead. Our partnership with Whole30 is one recent example of how we can leverage this platform to create additional value for existing Blue Apron customers and make inroads to new segments of customers. As a founder of this company, I’m incredibly proud of the Blue Apron brand that we’ve worked so hard to create, and I’ve personally been inspired by the renewed vigor and spirit of agility that I’m now witnessing throughout the organization. Now, I’ll turn the call back to Brad.

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Brad Dickerson Thanks, Ilia. Now, let me provide a deeper dive into our fourth quarter results 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 in the third quarter. Although our margin in Linden is still below our other two 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 recorded 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 personnel realignment that occurred in October. Net loss was $39 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 are outlining today, we may be able to achieve breakeven adjusted EBITDA as early as the fourth quarter of this year.

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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 a 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 pull back 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 will 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. Now, Ilia and I will now take your questions.

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QUESTIONS AND ANSWERS OPERATOR Thank you. We will now begin the question and answer session. To ask a question, you may press star then one on your touchtone phone. If you are using a speakerphone, please pickup your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. Also, to allow everyone the opportunity to ask questions, we ask that you have one question and one follow-up as needed. 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? Then, just thinking about the cash situation, you have some good PTG&A savings, and it looks like the capex guidance for 2018 is pretty far below what you were talking about at the time of the IPO so, it feels like the cash outlook is pretty decent. But how are you thinking about the long-term cash picture relative to your improving profitability? Brad Dickerson Thanks, Michael. On the customer side, I think what we see there really is kind of in line with what we’re talking about with revenue. To go back to our big focus in the back-half of 2017 was on the operational challenges we had in getting Linden to the point where it is today. If you would have told me back in August and September that we’d be in this position now where we can start to turn the dial in 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 three 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. That does give us the ability now to turn the dial a little bit on marketing in Q1, but the reality is 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 the goal of 2019 of growing in revenue and continuing to improve EBITDA performance. So you know with that, I think what you’re going to see in the front-half of this year and as we work our way through the year is revenue and customers, a kind of a stabilization of revenue and customers to some degree in the front half of the year sequentially from Q4. Obviously as we

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work our way through the year, if you’re looking at year-over-year comparisons, 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 had a lot of focus, we talked about this in the back-half of 2017 too, a lot of focus on cash and liquidity of our business. The fact of the matter is we had to spend a lot of money 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, is with the investments we made in ’17, both in Linden and across our other facilities with automation, the incremental need in the near future is much less. Obviously our decision in the back-half of ’17 on Fairfield, California, the 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 two centers, we have enough capacity to get ourselves through the near term. We don’t need to spend any additional significant capex on capacity as much as just, as I stated, some additional automation opportunities we have going forward. So, the long-term perspective, 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. 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 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 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. 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. Brad 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. So we pulled a lot back in marketing in the back-half of 2017, especially in Q4. So coming into Q1 of ’18, we’re trying to reverse that negative momentum of marketing spend in the back half of ’17.

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So I think a couple things, turning the dial on marketing a little bit more here in Q1 as we’ve gained more comfort in what our operational capabilities are, and giving us confidence to be able to turn that 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 partnership with Whole30 I think are all things that contribute to the stabilization of revenue here in Q1. 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 a key part of where our 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 continue on with the marketing dialogue, you hit a pretty low mark in sales and marketing as a percentage of revenue in Q4. As you mentioned turning up the dial in Q1, does this go back, are there any kind of similarities that we would see at the beginning of 2017 or is that 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 either television or digital that you can then highlight. Then the second question is just on 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. Brad Dickerson Thanks, Kerry. So on the marketing piece, as far as cadence goes, 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 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 half of last year. I don’t anticipate, by any means, that we would spend at the levels we spent in Q1 in last year by any means. As I stated in my prepared remarks, it will be the highest spend of the year in Q1,

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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. As far as how we’re spending our money, I think there’s 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 on 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 too, which would probably be outside of what you’ve seen from us probably in 2017 to some degree. Then on the PTG&A side, relining the cost, I think our cost structure is in a good place today based on where our run rate revenue is. We don’t really see the need to do any more drastic cost-cutting at these 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 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 efficiencies in costs and so forth, but I don’t really see any drastic changes there going forward. I think really the story here in 2018, at least on the bottom line side is, the run rate of PTG&A coming into 2018 and obviously the improvement margin are what’s giving us confidence that we can have 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 US, 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 worked through all these warehouse issues and step in and spend 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?

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Then the second question is you got it to 400 basis points of COGS leverage in ’18. Is that a function of lapping the inefficiencies from the automation build-out in Linden, or is that those automations is that the driving stronger unit economics and that it’s a trend that we should see beyond ’18 into ’19 and ’20? Thank you. Brad Dickerson Thanks, Ross. First on the bigger picture and the competitive landscape and, listen, you know, 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 looking inward and not really focusing on competition in 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. 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. For us, we’re really looking at sequentially stabilization of the revenue base and starting to 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 businesses 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. I think again, that to my earlier comments, that’s a big part of the stabilization of our revenue base as we move forward. But the reality is some of these are kind of table stakes to some degree from a product offering perspective of, our consumers are going to incrementally expect us to continue to offer up things in the marketplace. Our teams now as we focus in ’18 it’s going to be a big focus of ours in ’18 is to continue to evolve our product offerings to our customers and not just do it on a one-off type basis but more on a 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 is 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 that as we work our way through ’18 to start to get market share again. Obviously that will be our goal as we work our way through ’18, 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 behind where our old facility in Jersey City was in the front-half of ’18. So there’s a

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little bit of a comp there that although improving, we’re working 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 to 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. Just to put things in context with margin, if the gap between Linden and our other facilities from Q3 to Q4, kind of operational efficiency or margin, basically Linden cut the gap in half from Q3 to Q4. We also see it cutting that gap in half again from Q4 to Q1. All the meanwhile, our other two facilities are improving also along the way. So this is again a testament to the teams in all three of our facilities, especially in Linden, in really showing great major improvements. But the fact of the matter is, I don’t want to understate the fact that the teams are still very, very much focused on the challenge at hand, continuing to improve margins, and continuing to drive our margins to a healthier place as we look longer term. As we get to the back-half of this year and start approaching 2019 with the other two facilities in California and Texas continuing to improve, Linden making the most improvement as we work our way through the year, we think we’re in a great position in 2019 from an operational efficiency perspective. Obviously, that would be a very, very important part of us being EBITDA breakeven in 2019 is hitting those goals along the way and putting ourselves in that position. 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 question. So, Brad, you’ve mentioned a couple of times your opportunities to diversify and evolve the business. Can you elaborate on what those might look like and what the time horizon is to when we might expect to see them? Then, just a follow-up on everything you are doing on products, can you provide some context on recent customer retention trend you’re seeing and what your expectations are as we work through 2018. Thank you. Brad Dickerson Thanks, Matt. First on the product side of things, and I’m going to 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.

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What I will tell you as far as 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. 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 partner with other great brands to drive customer engagement going forward. I don’t want to get into too much detail 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 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 timeframe 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. 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’ve seen the same thing on a retention basis. So although we’re not really growing customers, obviously 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 at the back-half of ’17. From a retention perspective, we’ve seen some more stabilization there in our existing customer base. Again, a big part of that I think is our incremental products we put out in the back-half of ’17 along with the partnerships like Whole30. OPERATOR Our next question comes from Youssef Squali of SunTrust. Please go ahead. Youssef Squali Thank you very much. I guess going back to Ross’ question on the market inside, I’d just like to get some better maybe clarification. So, you’ve increased spend in marketing starting the last week of December. What are you seeing in terms of just the market inefficiency of that spend, maybe either in terms of across 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 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. Then, on the new products 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? Thank you.

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Brad Dickerson Great. So on the marketing side, again I think that, I’ve said this a couple 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 it much improved, still to a better place in Q4. So, from an efficiency perspective, I think it’s really early to tell right now. We’re five weeks into the year. 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 five 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 three quarters, of pulling back the last two quarters to now spending in Q1. 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 just started turning this dial. 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 spending, that should, along with incremental products in the future, that should help us in the efficiency side. I might be hesitant right now to say that we have a clear picture of that so early in the front-half of this year, only five weeks into the year. As far as new products go, and on the retail side, I think you mentioned off line and retail, listen, I think this is a long-term game for us. The way we look at this is partnering across the spectrum is something from a long-term perspective that makes sense for us. So our goal is to be a consumer lifestyle brand and that means meeting customer’s 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 in our goal of being a consumer lifestyle brand is give a customer products they want, and where they want it, and how they want it. 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.

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But, again, nothing right now that’s significant to talk about there. Obviously down the road we’d 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. Ed Yruma Hi. This is Noah on for Ed. Thanks for taking our question. Can you talk about the mix of the 800 bps sequential COGS improvement? I guess how much of that was a benefit from seasonal packaging versus operational efficiencies and favorable supplier pricing? And I guess on the supplier pricing, should we expect those benefits going forward? 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? Thanks. Ilia Papas Thanks, Ed. 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 fulfilment packaging costs, and also some improved labor costs. Seasonally in our business we see a pickup in efficiencies as we go into the core months as we a reduction in packaging and improvement in food costs. That was also compounded by the improvements we saw through the enhanced planning processes and end-to-end seasons operations planning that I mentioned earlier in the call. I do think we always continue to be focused on finding further efficiencies as far as our cost structure goes, so we do expect to see more. Brad Dickerson Yes. And on the marketing side, it’s tough to gain a lot of learnings from Q4, because we did pullback 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 a pretty low amount for us, you also have 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 2017 was more of a 2018 preparation spend, the reality is that 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.

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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 more normal spend period, like Q1 and Q2, then something like Q4. Ed Yruma 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 you called out in the press release was lower key 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. Then, as you look at sort of where you stand with Linden and with your broader sort of fulfilment footprint, can you give us a sense of where capacity utilization is and 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. Brad 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. In fact, just the opposite, we’re looking at things that never get into the box as far as our ability to drive savings and food. Although historically we’ve been very efficient relative to 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 and waste that never gets into the box to 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 up stream planning mechanisms. Our Culinary team is really focusing on the right ingredients to put into the offerings. Not taking out ingredients, but making sure there’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 of 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 and there is some natural improvement. The seasonal produce in the summer is our highest produce cost of the year. So as we get out of the summer months, there is some natural improvement in food cost just because of the type of produce we

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have, but again, that’s part of it along with a great focus on reducing food waste overall. Then on the Linden side as far as capacity goes, listen you know, 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, more capacity for us going forward. We’ve 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. That’s what we’ll keep driving, and that automation and the utilization of automation obviously increases throughput in 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 would we have to have any type of spend like the spend we put into Linden as far as building out Linden itself. 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, compliment, capacity there in a simple flexible fashion, if need be, down the road to give more product offerings to our customers. 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, 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 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. Then, the percent of revenue that came from repeat orders in the quarter and how you see that trending going forward into the first half of the year. Thanks. Brad Dickerson Sure. Mark, so as far as guidance for ’18 and cash burn, if you look at my prepared marks, I think what you’ll see is guidance that will reduce our EBITDA loss from 2017 to 2018, basically cut the EBITDA loss in half. If you look at our capex guidance, it’s somewhere in the $20 million to $25 million range.

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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 to $20 million to $25 million this year. So from a cash burn 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 too coming into 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 had 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 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 talked about a series of product improvements like meal choice flexibility, some delivery improvements to 30-Minute Meals, more beef in the offerings, etc. Can you figure out which of those in the cohorts where you’ve seen improved retention, improved satisfaction, which of those product improvements over the last three to six months have had the most impact? What are people most positively responding to? Thank you. Brad Dickerson Mark, I think the reality is I think all of them to some degree have had an impact on customer experience in helping 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 rotations 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 just looking at the balance of recipes, the ability for us to increase the number of recipes that we’ve offered has a lot of help in the ability for us to put things out there that the customer desires. More recipes equal the ability for us to give them more of what they want from a dietary preference and taste preference. So

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that’s probably been one of the biggest improvements we’ve seen. I do think the quicker prep time meals have also been very, very positively received from our customers. There’s certain times customers just want to be able to get something on the table faster. So we’ve seen a lot of positive response from those. I’d say those two probably are the ones that have been the 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 questions. I have a couple. The first one is kind of a high level. The meal-kit category’s been growing in awareness quite a bit over the last couple of years, but it’s already become more competitive. 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 stickier customer profile, you’re competing against HelloFresh, Amazon, Plated, grocers, etc. Secondly, do you have to reduce price to actually drive faster growth? Then, the third one you have, Brad, is your kind of the CFO and CEO. You’re in kind of a unique position to have the strategy and the numbers. As you think about getting to breakeven, what do you have to assume for a customer account or a revenue profile to get there? Thanks. Brad Dickerson Sure. Thanks, Brian. So, on the meal-kit side, 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 mindshare perspective. So it’s really important for us to keep focusing on the future, keep focusing on what we want to drive going forward. 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 get 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 kind of a weekly subscription meal-kit business to some degree. 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.

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Now, not all of that is going to happen in 2018, but I think 2018 is going to be a big foundation building year for us to change our mindset around what for us has historically been a focus on scale and not as much focus on product offering. That’s the dynamic that’s changing for us now is to get more flexible on product offering. We think that helps create more stickiness to our customers. Obviously, it’s about putting product out there that our customers want to buy is going to be kind of our focus going forward. Reducing price to grow, 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 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. 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 are very competitively priced today. The last thing is just kind of the breakeven profile for 2019. In order for us to, I think the two big drivers, for us to hit a breakeven in 2019 would be one to continue to improve our operational efficiency so that we continue to see improvements in margin beyond the margin that we’re driving and people are driving in 2018. That breakeven EBITDA in ’19 assumes that we would continue to improve margins going forward. 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 those are the two kind of big drivers to get to a breakeven 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 talked a lot about adding new products and a big focus for ’18. Any sense I guess on the second-half of 2017 on 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? As you think about ’18, can you 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.

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Then, any change in the promotional marketing opportunity or promotional spend in ’18 versus what we saw, I guess in the back-half of ’17. Thanks. Brad Dickerson Sure. Thanks, Ralph. On new products, and relative to the back-half of ’17, what I would say is that 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 on these earnings calls, the focus on OTIF was a big driver of our focus and the need for improvement. We were actually seeing to some degree that OTIF was a cause of some retention issues in our business, specifically in the Eastern part of the US 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. The ability for us to get Linden’s OTIF in line with our other two facilities is a big part of turning the corner 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 loves our brand but maybe we didn’t have the offerings to them, we really didn’t want to focus a lot on 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 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 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 than 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’re 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 overdue promotions. There’s not really any kind of big change in how we’re approaching that year over year, especially from a dollar perspective for any means. Ralph Schackart Great. Thank you.

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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 one, maybe on the promotional deals, it looks like you’ve changed kind of the level of promotions over the last few quarters, less promotions 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? Thank you. Brad Dickerson Yes. I think that’s really more a reflection of what we think is kind of normal state for us going forward in promotional. We had, as we’ve discussed, historically, we got a little bit more promotional in the back-half of ’16. We did see with that was obviously beyond impacting bottom line and revenue, there’s 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 then buy product from you. 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 in marketing and growing new customers, that’s when you’re going to see the promotional activity pick up. In quarters where you’re pulling back on new acquisition and you’re selling to kind of a more existing customer base, there’s a lot less promotion, because all those promotions are really more tied to the entry point for customers. What you’re probably seeing in that perspective is just less promotional environment, because we’re driving less new volume in general. 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 is 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. CONCLUSION Brad Dickerson Great. Thank you, everybody. We look forward to keeping you updated on our progress throughout the year and in future earnings calls. Thank you.

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OPERATOR The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect. Note: The original recording was modified at the request of Blue Apron to correct an inadvertent speaking error. The following was modified: “Net loss was $39 million compared to net loss of $26 million in the prior year period with the 55% net loss improvement in the third quarter.”