Marley Spoon SE (MMM) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Marley Spoon Q1 FY '20 Quarterly Results Investor Conference Call. [Operator Instructions] I would now like to hand the conference over to Mr. Fabian Siegel, CEO. Please go ahead.

Yes. Thank you and good morning for joining our investor call. I'm Fabian Siegel, Founder and CEO of Marley Spoon. And I have with me here today Julian Lange, our CFO, as well. So this morning, we released our appendix for -- see, actually not this morning. We already released it yesterday evening Australian time for the first quarter of our financial and calendar year 2020. And so we're pleased to use the opportunity to provide you with an update on the business performance. And as usual, again, we'll open the call to your questions. Now overall, Q1 really was a record quarter for Marley Spoon, and this was achieved regardless of the tailwinds of the current crisis that hit on our business since the end of the quarter, on which I'll comment further in a bit. Now in the first quarter, we successfully built our business, and I'm pleased to say that we actually exceeded our expectations even before the COVID-19 situation hit us. In Q1, we continued our mission to serve our customers by offering a sustainable, safe and reliable way to cook for their families, offering up to 30 weekly changing recipes to choose from. And unlike supermarkets that are challenged with high amounts of food waste that eat into margins, Marley Spoon has built a more efficient source-to-order supply chain that allows us to supply fresh products to be delivered to our customers' doors at high margins while avoiding food waste. Now in the first quarter of 2020, our Marley Spoon Dinnerly and Martha & Marley Spoon brands generated record revenue of EUR 42.8 million, which is an increase of 46% on the prior period, or 48%, excluding FX impacts. Now this is an acceleration of growth compared to 2019. And again, the impact of the current situation on our business was fairly limited in the first quarter. So growth momentum was already building up. More importantly, Q1 was the first quarter since the IPO in which we generated positive operating cash flow. Now reaching this milestone was not only driven by an increase in revenue, but also by reaching a record contribution margin of 29.5%. Operating contribution margin, which is defined as contribution margin, excluding the impact of marketing vouchers and fixed costs, such as site leases, reached 38%. Now all regions improved their margins, and especially our Australian segment performed strongly despite the challenges of the bushfires, which you might remember. Now this demonstrates the resilience and flexibility of our supply chain and operating model. The strong growth and contribution margin contributed to a significant improvement in operating EBITDA, with the loss almost halving to EUR 6.4 million compared to the previous year. Now given the current situation around the COVID-19 pandemic, we decided to disclose additional information on April trading and provide additional context on what we have observed over the past 6 weeks. So the outbreak of COVID-19 and government countermeasures has been causing a surge in demand for our meal kits in all of our markets since the middle of March. And while the environment we operate in remains highly dynamic and uncertain, to date, we have been able to manage a significant scale up, upholding high levels of food safety and fulfillment rates as well as safeguarding the health of our team members. So the expansion of our workforce and overall production capacity has allowed us to fulfill customer orders, with a revenue of EUR 22 million in the 4-week period from calendar week 14 to 17 of 2020, which is more than double compared to the same period in the previous year. Some context, now this number equates to an annualized revenue run rate of EUR 286 million or AUD 480 million. Now enabling such revenue growth has been an amazing achievement by our team. In all our markets, our team members have been operating in new work environments while facing unforeseen supply chain challenges. And we've been especially impressed by our frontline team members in our manufacturing centers that have been operating for long hours during these past weeks, showing up, stepping up. Now many of them are still in the process of learning and becoming part of the Marley Spoon team. Now the current operating environment is uncertain with global supply chains reorienting to a new reality. To date, our food supply chain has proven resilient, and we have mostly been able to adapt many choices in order to respond to individual items being not available or becoming more expensive. Also, customer acquisition cost has dropped significantly since mid-March. And we expect to continue to benefit from a favorable advertising environment for the foreseeable future. And we currently plan to continue to invest into marketing and this -- [ to be able ] to capitalize on both their unit economics. But maybe let's take a more detailed look at our regions, the 4C and cash flow, for which I will hand over to Julian.

Thanks, Fabian. So starting with our Australian segment, where the growth was the strongest, we were up 70% versus Q1 of 2019 on a constant currency basis and 56% in euros. Contribution margin also improved 6 points year-on-year to a record 38%. Operating CM, even 7% to 45%. This is particularly impressive by the local team, as Fabian mentioned, given the impact of the bushfires earlier in the quarter. All in all, this meant another profitable quarter on an operating EBITDA basis for Australia, a milestone we thereby also achieved over the last 12 months. Now the U.S. grew 56% year-on-year as well to over EUR 20 million in revenue for Q1 or 51% on a constant currency basis. CM was a similarly strong story like in Australia, with an improvement of 5 points to 26% in the quarter. Operating CM, even 7 points to 36%. Now this improvement was mainly driven by better productivity and quality in our manufacturing centers, which is a really continuing positive trend from the fourth quarter 2019. In the U.S., we also signed a 1-year extension to our licensing deal with Martha Stewart until now 2023. And this actually includes the restructuring of past and future royalty payments that you will see will lead to an exceptional gain in Q2 of around EUR 1 million. Now European segment, let's see, growth picked back up 11% year-on-year, also driven by the new markets in Northern Europe that we entered, Denmark and Sweden. CM there was up 1 point to 21%; operating CM up 2 points to 30%. We move on to cash flows. As Fabian mentioned, we had a positive operating cash flow of EUR 0.5 million in Q1 for the first time. And next to the improved profitability, as Fabian mentioned, this was helped by seasonal and volume-related working capital improvements. Now we did increase inventory levels towards the end of the quarter in anticipation of COVID-related supply chain disruptions, but other working capital categories more than made up for this. So overall, the cash balance increased from EUR 5.4 million to EUR 5.9 million in Q1, which doesn't yet, by the way, include the second USD 7.5 million tranche of our WTI loan entered into at the end of last year. As you all remember, this is still available to us to draw at the end of Q2 or early Q3, upon reaching certain revenue and G&A expense milestones which, yes, we remain confident we can achieve. Turning to our 2020 guidance. So given the Q1 performance and recent developments, we're now expecting a stronger revenue growth than the previously guided 30% year-over-year for calendar year 2020. However, Fabian was touching on it, given the uncertain environment, there really being no precedent for what we're currently experiencing, we're really unable to quantify the exact expected growth above this level beyond the next several weeks. On contribution margin, you will have noticed that we already reached the previously guided level for the year, with 29% in Q1. And with regard to reaching positive operating EBITDA on a group level, we now expect it to happen earlier in Q2 already versus late 2020, as guided before. So with this, I'll hand it back to Fabian.

Yes. Thank you, Julian. Now as a summary, the first quarter was really a record quarter on many levels. Our business accelerated growth. We reached record revenue while the team delivered record margin. And this led to the first quarter of being operating cash flow-positive in the company's history, mostly achieved before the current environment started to impact our business. Now this strong Q1 performance, paired with the recent tailwinds due to the current surge in demand for our meal kits [ to ] upgrade guidance. We now guide for the overall company to be profitable in the second quarter, which is 6 months earlier than we had guided before. Also, as you know, due to our working capital dynamic, operating cash flow tends to be ahead of profits, especially when the business is growing strongly. So when I take a step back and reflect on the past weeks, I have to say, to me, it seems that the process of online adoption for groceries, which we have been experiencing over the past years, seems to have made a dramatic step forward. Now I believe that the new customers to our brands that are now experiencing the convenience of home-delivered meal kits, and that applies also in general for online order groceries, they will want to continue to benefit from this convenience once life turns a bit more to normal. Now we are still in day 1 or maybe now on day 2 of this massive category switching from off-line to online. Therefore, we expect continued growth at attractive margins for the coming years. We are just at the beginning of what our ambition will lead us to build over the coming years, focusing on providing an essential and personal service to the community of our customers, which is bringing delightful, market fresh and easy cooking back to the people. Thank you so much for joining me this morning. And with that, I would like to open the call to questions.

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

Well done on scaling the business to where it is today, through profitability, it looks like. So can you guys just touch on how you've been able to cope with demand in terms of scaling up your facilities or how many people you hired? And also touch on what your -- what the current capacity of your factories could hold, changing shifts, schedules and the likes? Just what is the upper limit to your revenue given your current facilities?

Yes, absolutely. I mean in the past, what we experienced is that customers used to prefer to have their meal kits delivered at the beginning of the week, normally on Mondays, Sundays, Tuesdays. These are the main delivery days, which made us operate in our facilities quite similarly across the globe, which is we have these big peak production days at the end of the week, maybe we run 2 peak production days, and then we have 3 off-peak days for the other less popular delivery slots. And that's kind of the footprint that we had prior to this new environment. Now what we did over the past weeks quite successfully, we ramped out our teams, so we could actually -- could run longer shifts. So instead of just operating 2 days for peak production, we went into 5 days, sometimes 6 days peak production. And that was possible because the customer, today, they're actually quite open getting their box at another point during the week, as long as they're getting a box. I mean what we see really is consumers are grateful to have a reliable service that brings food to their home so they don't have to go into supermarkets, and they have one less that they have to worry about. So we see customers being quite open to being moved into an available delivery slot and production slot, and that has allowed us to scale up our capacity. Now we currently operate in all our regions at this mode where we have 5 to 6 production days, and each of them are quite busy. But we're just starting to experimenting that out yet, which is putting in a second shift, as most or all of these sites so far operated in one shift fashion. And now we try to put in a second shift. So in theory, we could argue April was quite impressive with more than 100% growth year-over-year, and we're now trying to see, well, what is the next step that we can go in terms of capacity. So that's the thinking. The theory now, in practicality, you have to be careful when you bring onboard people, you have to train them, there's a learning curve. And these days, you have to keep them safe, meaning we have to also sometimes roll things a bit slower to make sure that we have social distancing in place, that we have stepped up hygiene processes in place. And that is, in a way, also then a counterbalance to the theoretical expansion of capacity. But at this point in time, we're feeling quite comfortable that we are on a really good growth trajectory, and we are able to meet the demand that's surging with the facility footprint that we have.

A double shift means double capacity? Is that the way I should think about it?

I think that it's, in theory, yes, but you have to, of course, think about changing [ shift ] times. You have a shift -- the shift that gears up, the shift that gears down. So there are certain overlaps. So it's technically not maybe quite double, but you can, in theory, put in maybe another 80% in capacity if you start to put in additional shifts.

Good one. And then shifting gears to Europe. That was a laggard in that quarter. Just obviously, April, surging 100-plus percent. Is it across all regions broadly about 100%, including Europe? Or is your -- still a slight laggard to the group?

I think the Q1 growth year-over-year, first of all, is an exploration. And as you might remember, the reason why Europe was lagging last year is that we pilot our new manufacturing technology, our third-generation manufacturing technology in Europe, which, as we brought it to market, made a switch of marketing, and therefore, we saw in the first half last year Europe going side -- slightly down and then catching up again. And so what we see is now, we see Europe in the first quarter, coming back to growth, double digit, slower than the other regions. That's true. But you'll see that catching up as we go throughout the year. Now we've always have said, the difference between Europe and U.S. and Australia is that due to the lower margin profile, it would probably always take a step back in growth. But at this point in time, we see very strong material growth across all regions, including Europe. But we would still continue our position that probably U.S. and Australia have a tick more in terms of growth. And then Europe is also growing quite rapidly and solidly, but maybe it had slower than we will expect to see in Australia and in the U.S.

Okay. Good one. And just obviously, you passing through free cash flow break -- the promised land of free cash flow at breakeven. And just understanding your offensive game here as you start building cash. You're talking about ramping up sales and marketing, obviously, that will come at some stage, you're talking about new markets, new product initiatives. What's the thinking about various growth initiatives coming through this period?

Well, I think at this point in time, we are really experiencing the current situation, which is highly dynamic. We see a lot of growth and continued growth potential, and that doesn't require us to enter new regions, to enter new countries to continue to grow the business. And when you think about overall, the adoption of online groceries, even though that I think we are seeing a gap up now in adoption, it's still very early, and it's a massive category. So I think what remains true is that, first of all, we have to now navigate this very exciting but also challenging environment. And when things settle down, we will see whether what are the next. But I have no doubt that there's multiple avenues for rapid growth over the next years ahead of us. And we have to choose what's the right one at the right point in time for us. Given that we have now achieved a very important milestone earlier, we always said that reaching cash flow breakeven and reaching profitability was the first step. I think as things settle down over the coming months, or 2, 3 quarters, where -- however it will take, nobody knows, then we'll be able to better assess what are the next steps for the company.

Your next question comes from Neil Carter with IFM Investors.

Fabian, can you tell us a bit more about your marketing spend? Potentially a bit higher than we had anticipated, but I guess that's good opportunity. Could you just talk about where you've been spending and what your thoughts are and what you think the ad spend looks like for the rest of the year?

Sure. I mean -- so in Q1, our marketing as a percentage of sales came down year-over-year. And you remember, Q1 and Q3 always tend to be the high growth quarters, they are back-to-school and New Year resolution. And these are normally great environments for us to grow the business. And therefore, to us, it's not a surprise that in Q1, we spent more on marketing as a percentage of sales compared, for example, to Q4. However, and that's also true year-on-year, this was actually down dramatically from 41% to 27% in that quarter. And so I think overall, it's within line, and it was a very favorable environment in Q1. And while we don't disclose CPAs on a quarterly basis, we really saw a good environment. That's also why the business grew and was kind of ahead of plan in terms of top line and reaccelerated growth in Q1. Now of course, we are today in a very different environment. We saw when the surge started and demand increased, we saw that we could dramatically pay back our marketing spends, and that was a very unique environment in terms of resulting positive unit economics. Now nobody knows how this will now develop over the coming weeks and months. And if it normalizes, I mean, you'll see then more traditional marketing environment. At the same time, we see in many regions, maybe less so in Australia but in the other 2 regions, that media costs have come down dramatically, which even if things go back to normal, it would make our unit economics, of course, would support them as our expected acquisition costs would drop just because of media cost coming down. So we are in a very favorable environment right now in terms of marketing, but it's very early to say and to guide where will this land. For sure, it will be better than what we had thought just 8 weeks ago. That we are pretty certain. And now we have to balance what's the right balance of capturing market share, growing and building cash buffer as the business is running cash flow positive. And that has to be the call, and Julian and I and our CMO joined us, we are very closely monitoring this actively on a weekly basis to find the right balance here. And we'll be able to say more at the end of the second quarter where we would have landed in the second quarter. I hope that kind of answers the question.

And Neil, just to support on -- Fabian. So this year, we had EUR 11.7 million marketing spend in the quarter, last year at EUR 12.1 million. So it's actually, even in absolute dollars, down a little bit, where your top line grew 46%. So I think as planned, and I think that's a good dynamic if you look at those 2 kind of in a relationship.

Your next question comes from Matthew Chen with Foster Stockbroking.

Well done on the results. Just wanted to touch on contribution margin. So that was encouragingly up as a record and as well as operating contribution margin. It's probably already pushed through what you'd guided for at 29.5%. I think that operating contribution margin that you disclosed last year, does that represent sort of a target that you might want to get to in the next couple of quarters? Is there room for that to keep coming? And where is that margin expansion in terms of the actual contribution to that growth? Was that in fulfillment or COGS? Can you just provide a little bit more color on that?

Yes, absolutely. So -- and maybe I can give a high-level perspective, and Julian can run us a little bit more through the details. But in general, we saw that -- we guided last year that our margin will be increasing in 2020 on the same kind of level as in the past years, plus 3 to 4 points. And we were 25% last year, which now in Q1, we were at 29%, and Q4, we were at 28.6%. And so there is, of course, great improvements that we've done earlier in the year, and they were not part of the scale benefits that we might see now as this is not kind of prior to the surge that we are seeing. So we kind of -- the team delivered, I think, a strong performance. We see more potential in the future. But at the same time, there's quite a lot of uncertainty going forward. So therefore, I don't think it's really the right point to guide about it. But I think -- Julian, if you want to -- through the regions a little bit, I think you see that all regions kind of benefit -- performed in Q1 on that front already.

Yes.

No, I think it's particularly strong, wasn't it?

Yes, and there was a lot -- I mean, going into this in fourth quarter and Q1 that had to do with the performance of the manufacturing centers. As Fabian mentioned, we're now really focused on building the capacity where you will appreciate it, especially in the short-term, that may also put some pressure on it. But I think that's kind of the -- a high level situation here that we think we're a bit ahead of the plan here. But you need to kind of see how the situation evolves. And your question on operating CM, I think this is really -- I mean, you're not going to get there in a couple of quarters because it's really done at scale. We're adjusting for some kind of fixed cost factors, and so that you will always have in your CM. But I think it shows you directionally where it can go to. And obviously, it's a bit of an impact on marketing. As Fabian mentioned, there's a great environment right now to keep growing. So as long as we grow strongly, we'll also have always a bit of a -- call it a gap to your operating CM. So we don't look for the gap to be completely closed here soon, but I think it directionally tells you also really, incrementally, all the additional volume that's -- at what kind of margin that comes in. So that's more representative, I think, for that. It's not necessarily like a short-term guidance, where it will be in a couple of quarters, yes.

And just wanted to clarify on the capacity. So I mean, April, essentially, you doubled capacity from last year on the, I guess, not normalized, actually, relaxation of peak demand days or peak shift days. And there's the potential for 80% on that double from double shifting? Is that -- that's what I wanted to clarify.

I mean April already saw some of the second shifts now in place. And we had some places and capacities -- sorry, in some places and sites and days where we already were operating on 2 shifts. So I wouldn't do the straight math nor 80% on top. But I think Fabian's point was more illustrating that we're going more and more in that direction. So every day, every shift that you add has significant amount of capacity. I would note a supportive statement also to say that there's short-term and then also over the medium term, we can -- we still have capacity. You may remember also from last year that we moved into much larger sites in the U.S., for example, right? So space wise, we think also there's room to grow for us over the midterm.

Because I think this year's plans for a couple of core improvements are also on the cards aren't they? And I think they're sort of the increased side...