Marley Spoon SE (MMM) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Marley Spoon 2019 Full Year Financial Results Investor Conference Call. [Operator Instructions] I would now like to turn the conference over to Mr. Fabian Siegel, CEO. Please go ahead.

Yes. Thank you and good morning. Thanks for joining our investor call. Apologies for the slight delay. The ASX processing time this morning were a bit slower than usual. So I'm Fabian Siegel, Founder and CEO of Marley Spoon. And I have with me here today Julian Lange, our CFO. This morning, we released our Appendices 4G, 4E and annual report for our financial and calendar year 2019. And we are looking forward to use the opportunity to provide you with an update on the business performance. At the end, as usual, we will open the call to your questions. Next to our annual report, we have also published an investor slide deck, which we would like to walk you through during this call. Now in 2019, Marley Spoon has made great progress in building a sustainable recurring revenue business with global operations and scalable manufacturing technology. We feel we are well positioned to take advantage of the ongoing transition of grocery shopping from off-line to online, which is likely to continue for the years ahead. And as you know, we are in the early stages of a 5-year strategic partnership with Woolworths Group, and the growth opportunities and operational synergies from this collaboration has only just begun. Now let's start with a brief summary of the year on Slide 3. So 2019 was a year of strong growth where we continued to benefit from the underlying consumer switch to online shopping for groceries. We grew our business to EUR 130 million in net revenue which is up 41% over the last year and which exceeded our previous guidance. That means we delivered more than 22 million meals in 2019. And important to mention is that most of that revenue continues to come from repeat purchases. In fact, 92% of revenue came from these returning customers. Now we did not only witness strong growth in 2019. We also saw an increased contribution margin, which increased 4 points to 25%, which was within the prior guidance given. Q4 contribution margin was 28.6% with all regions ending the year higher than the 2019 average. As we increase revenue and margin while controlling costs, we were able to improve profitability significantly. In the second half of 2019, we reduced our loss to EUR 12 million, down from EUR 20 million in the prior period. Our loss in Q4 2019 was down to EUR 2.4 million. In fact, the second half of 2019 was a turning point from which onwards each half year going forward will see reduced losses compared to the prior period until reaching profitability. An important achievement in 2019 was reaching positive operating EBITDA in our Australian segment. We did so for the first time in Q2 and also reached a positive operating EBITDA in the second half of the year. We expect our U.S. segment to follow a similar trajectory as this segment continues to grow. In the U.S., operating EBITDA as a percentage of revenue increased 23 points year-over-year for calendar year 2019, and we exited the year with only negative 11% in the fourth quarter. Now on Slide 4, you can see that all regions contributed to that strong revenue growth in 2019. More importantly, however, is to note that the amount of active customers was not the key driver here. In fact, while customers grew only 6% year-over-year, total orders grew 38% and revenue grew even stronger with 41% year-over-year. So we generated more orders per customer and more revenue per order. Now this dynamic stresses the nature of our business, which is driven by a very high repeat order rate compared to other e-commerce businesses, as you can see on the following Slide #5. As you see on this slide, 92% of our revenues came from returning customers, which is even slightly up year-over-year. More impressive, however, is that of the roughly 3 million orders in 2019, more than 64% were customer order #6 or higher, which is up 6 points compared to the prior year. More than 24% of our orders were customer order #30 or higher. Now this demonstrates that we continue to grow our quality back book of loyal customers with consistent repeat orders. This back book of business is the basis for the long-term value creation in our business. We have built this back book now over the past 5 years, and we will continue to add to it as we go into 2020. So let's drill in a bit further into those order dynamics on Slide 6, which provides you a detailed view across our segments. You can see that, as I stated before, we saw year-on-year order growth across all regions, primarily driven by Australia and the U.S. Important to note again that a strong part of this growth was driven by increased orders per customer and higher average order value despite Dinnerly, which has a lower price point, accounting for more and more of our revenue. Now we have mentioned in the past our strategy of continuously expanding our menu choice for both of our brands, Marley Spoon and Dinnerly. In fact, we believe, today, we offer the biggest recipe variety and flexibility in the market. Now this investment into increased choice is starting to pay off. On the one hand, it drives order frequency because our customers skip less often. And on the other hand, it drives order value as customers find more recipes they like, enticing them to cook with us more in any given week. So it's very encouraging to see this development, and we will continue to provide increased and more personalized recipe choice in 2020. As mentioned in our last call, in 2019, we faced operational challenges in Europe, which lead us to pare back marketing spend, generating only 5% order and 8% revenue growth in 2019. If we overcome these challenges in the second half, we expect stronger growth again for 2020, and Julian will go into more detail on this on the regional page in a little bit. Now growing our business, increasing our margins and keeping costs under control is the recipe of bringing our global business to profitability following what we have demonstrated already in Australia. So Slide 7 gives you a good depiction of this dynamic. As we continue to grow our business, our marketing spend as a percentage of revenue is coming down from 33% of revenue in H2 of 2018 to 24% in the second half of last year. Now important to note is that our cost per acquisition dropped to EUR 62 for calendar year 2019 from EUR 66 in the prior period. And to support investors' modeling of our future growth, we're providing today an additional data point, our brand maintenance rate as a percentage of sales. So investors have asked us in the past how much we would have to invest in marketing to keep our revenue steady. Traditional offline consumer brand companies have to invest into brand maintenance campaigns using brand building media as traditionally retailers are standing between them and their customers. Now you can observe that some customers pay roughly 50% of sales or more on brand marketing. Due to our more efficient direct-to-consumer channels, we can more efficiently communicate to our customers and maintain our brand. So we've simulated and estimated that by investing 10% to 11% of our net revenue in brand maintenance, it will allow us to hold revenue stable. This will allow investors to separate our marketing investment into growth investment and brand maintenance and get a better sense of what profitability can look like in the future. Now as we continue to grow our revenues, our G&A as a percentage of revenue also continues to drop. Over the time frame depicted in the chart here, our G&A as a percentage of revenue came down by 10 points. So overall, because of the base cost leverage effect, combined with increased marketing efficiency and increased contribution margin, we were able to improve our operating EBITDA margin in each of the last 3 half years, from minus 39% to minus 28% to minus 18% for the second half of 2019. And we exited Q4 2019 with minus 7% operating EBITDA margin. And we expect that this trend will continue in 2020 with the usual seasonal patterns that we have observed in the past. Now let's review our 3 regions in more detail, for which I would like to hand over to Julian.

Yes. Thanks, Fabian. If you turn to Page 8. On the left side, we'll start with Australia. Revenues in the second half of 2019 grew 60% year-on-year, which was strongest among our 3 regions. Contribution margins remained stable at 33%, also highest among the segments. As Fabian mentioned earlier, the Australian team managed to end the half with a positive operating EBITDA again after reaching this milestone for the first time in Q2 of 2019 already. A really great achievement. Another significant news, we raised our prices in Australia for both product lines in October, which you may have seen, that helped our contribution margin in Q4 to 36%, actually. And we continue to expand menu choice for our customers. Recently, we went to 27 recipes for Marley Spoon in Australia, for example. If you go to the middle of the page, the U.S. business. Growth in the second half was a bit lower year-on-year, which is mainly due to -- you may remember this from last year's strong Dinnerly growth that we had experienced in the second half of 2018. We still ended the half with 24% growth and actually saw a good start to 2020 in the region. So yes, the main story probably is more of the contribution margin. We improved 8 points, which was driven by higher labor productivity and scale benefits that we saw in purchasing. Europe, Fabian alluded to it, on the right side of the page. It's more of a mixed story. You can see on the page, we ended the second half of 2019 slightly below prior year in terms of revenue. As we have discussed in our 4C call a month ago, this temporary decline was due to changes in our manufacturing footprint in the first half. So we pared back on customer acquisitions for a while. The good news is here that we resolved these challenges in the second half and finalized the consolidation of our production activities. So we went from 3 manufacturing sites to 1 in the region. So this has already led to an increase in contribution margin. We're up 4 points for the half to 23%. And for fourth quarter, we've reached 26% already. On the growth front, we recently expanded our geographical reach with deliveries to Denmark and Sweden. So this is also out of the Netherlands, out of our one production site. So yes, we will expect our European segment to show stronger growth again in 2020. Turning to the next slide, 9. We thought we'd give you a bit more context on our historical contribution margin performance by segment, both on an as reported CM basis on the left side of the page as well as on an operating basis. The new measure recently introduced is on the right side. We believe operating CM gives you a better understanding of how contribution margin may trend as the business continues to scale. So we hope you find it useful. You can see the positive trend in each of our segments from the page, and then we ended the year 2019 on record levels everywhere. What's more, you can also observe that our U.S. and European business has started to catch up to Australia as they grow. On Slide 10, provides some key P&L metrics for the group. We covered most of these, I think, already. But you can see in both the second half, so the first set of columns, and the full year 2019, the general trend of strong top line growth, higher contribution margin and increased marketing and G&A efficiency and this leading to significant operating EBITDA improvement at the bottom of the page. So we have 14 points improvement for the year to negative 23% and then 21 points for the second half to negative 18%. As we'll cover in our guidance later, we expect the trend to also continue. Turning to cash flow page on Page 11. You can see that next to our EBITDA improvements, we again generated cash from working capital, about EUR 1 million for calendar year 2019. All in all, we ended the year flat in CFOA, minus EUR 30 million. Again, this is mainly driven by investments into growth via marketing expenditure. CapEx was slightly up versus 2018, EUR 6 million outflow for the year. We invested -- you heard this before from us. We invested more into our manufacturing sites within all regions. These outflows were largely offset by a number of fundings we had in 2019 through convertible bonds, loans and also equity financing, mainly from Woolworths Group, Union Square Ventures, Acacia and Western Tech. We had a net inflow of EUR 33 million, which even includes the EUR 7 million we repaid to our previous senior lender Moneda. As you can imagine, we are more than happy to attract such a large and repeatable investor base already in 2020. We had a follow-on investment from Union Square, which we reported in late January. This is not included in the 2019 ending cash balance you see on the page of EUR 5.4 million. And the second tranche from WTI, which is another USD 7.5 million, is coming up in mid-2020. Next, we wanted to provide a bit more clarity on the potential dilution in the outstanding debt from the various 2019 financings. If you turn to Slide 12. You can see the currently outstanding EUR 158 million CDIs at the top of the page with management controlling roughly EUR 30 million of it. In the following section, CDIs to be issued, it's called. We lifted those shares and we currently have clear line of sight to, meaning shares related to options we granted to employees, the fixed price convertibles of USV and Acacia as well as the warrants that were part of the WTI loan agreement. So these 3 items you see on the page, they come to roughly EUR 79 million CDIs. Based on current exchange rates, that is. So they would account -- mostly fully diluted, they would account for 1/3 of the [ cap ] table. Now further below, we added kind of main outstanding debt at the bottom of the table. So please note that the debt financing we list here for Woolworths Group has the right to convert in lieu of repayment, which could to additional dilution, of course. Such dilution, you remember that from previous releases, would be subject to our Australian segment revenue growth and the CDI price at the time of the conversion, and there's a floor price of $0.30. So at the bottom of the page, in the notes, we provided an example, actually, that would yield 13% dilution. The word of caution here is that this is one of many potential outcomes, of course, given the structure. So purely exemplary in nature and by no means any kind of guidance or estimate of what will happen. So we thought it's helpful for you to see. And for the full details on the structure, I refer to our annual report with the previous ASX releases on the topic. Finally, on Page 13, let me talk about guidance for 2020. Again, after the successful fourth quarter, I'm happy to reaffirm and further specify our previous guidance from last year. So we continue -- we expect continued robust revenue growth of around 30% year-on-year. Contribution margin in 2020 should improve similarly as we've seen in 2018 and 2019. And Fabian mentioned this before, second half of '19 should mark the point at which operating EBITDA losses in each half year period are lower than the prior corresponding period. And we continue to work towards turning operating EBITDA positive by the end of the calendar year. So with this, I will hand it back to Fabian.

Yes. Thank you, Julian. So let's go to Slide 14, please. Over the past year, we've proven our business model in our profitable Australian segment, and we are now seeing improvements towards profitability and attractive unit economics and high operating margins on a global level. As consumer behavior in grocery switches to online shopping, we see significant opportunities for growth and have invested in our manufacturing capabilities globally in order to ensure that we have the right foundation to support continued expansion and customization. Now our performance in 2019 was marked by strong revenue growth, which exceeded prior guidance and is driven by loyal customer behavior. This loyal customer behavior is represented by our historically built back book of business, where 64% of our orders in 2019 were generated by so-called "steady state" customers who are at an order #6 or higher. Now this backbone of business grew year-over-year, and we believe that this high-frequency purchase behavior compares favorably to other e-commerce businesses and should continue to be attractive going forward. Also in 2019, we introduced new manufacturing technology, built efficiencies throughout consolidation and product optimization as well as benefited from increased scale. And all of these led to an expansion in margin. Now by disclosing a new metric, operating CM, which reached 36% in Q4, we further demonstrate the margin potential of our business model. Now these high margins, combined with the high frequency of loyal customers, lead to attractive lifetime values. And these attractive lifetime values paired with stable or even lower acquisition costs, as we observed in 2019, lead to attractive unit economics. Now our 2019 revenue growth and growing margins, combined with the culture of frugality and cost control, led to strong improvement in operating EBITDA margin, a trend we have now seen for the last 3 half year periods, exiting Q4 at an operating EBITDA margin of negative 7% for the group. And we expect to continue our growth and margin expansion throughout 2020 and are, as Julian mentioned, reaffirming our guidance of turning operating EBITDA positive by the end of calendar year 2020. Now we are still in the early days of a vast market that's forming for online meal kit services. We are well positioned with the right product offering, the right technology, operational efficiency and an established presence in large markets. As more and more consumers switch to online shopping for groceries, we therefore see us well positioned for continued strong growth as we're building direct-to-consumer brands that provide an easier, more convenient, more sustainable and eventually cheaper way to provide a home-cooked meal to the people our customers care about. Now thank you for taking the time and dialing in. And with that, I would like now to open the call to questions.

[Operator Instructions] Your first question comes from Owen Humphries with Canaccord Genuity.

Just going through what -- just looking at your revenue growth of 30% in the next 12 months, kind of take a step back, below the line, what's your expectations around marketing cost growth during this period? Obviously, it slowed in that period. And you're still -- you're growing. But just maybe flag to me where you see marketing growth going.

I mean we said in the past and -- when we went from '18 to '19 that we'll keep marketing kind of stable as we have a more measured growth and go towards profitability. And if you compare '19 to '18, you'll see while there is a slight increase, more or less it's stable. But more importantly, as a percentage of sales, it came down. So I think that dynamic that you observed in '19 is probably a similar dynamic that you would expect for 2020.

Got you. Okay. So if you go through that, it sounds like you're at that EUR 34 million, EUR 35 million mark, which is stable-ish. And if you go to the guidance, the EUR 130-odd million revenue in calendar year '19 got 30%. Looking at EUR 170-odd million, I know you said the incremental margin there is about 4 percentage points, going to kind of 29, gives you kind of gross profit around 50. Just a couple of questions. So if you take off the sales and marketing, it's 35. And can you just go through -- is the G&A expense cash, is that all cash? At EUR 33 million from last year, annualizing at EUR 32 million, EUR 33 million, is that a cash cost to the business? Or is there some one-offs in there? Or is that a cash cost to the business basically?