Marley Spoon SE (MMM) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Marley Spoon Q2 2020 Results Conference Call. [Operator Instructions] I would now like to hand the conference over to Mr. Fabian Siegel, CEO. Please go ahead.

Yes. Thank you for the introduction, and good afternoon. Thanks for joining our investor call. My name is Fabian Siegel, Founder and CEO of Marley Spoon. And I have with me here today our Chairman, Deena Shiff; and Julian Lange, our CFO. Now this afternoon, we released our Appendix 4C for the second quarter of our financial and calendar year 2020, and later today as well, we will host our Annual Shareholders Meeting. And therefore, we took the opportunity to have Deena join us today during this investor call to address you and comment on the past calendar year as well as provide a strategy outlook. Afterwards, we are pleased to use the opportunity to provide you with an update on the business performance in the second quarter. And at the end, as usual, we will open the call to your questions. With this, I would like to hand over to Deena, our Chair.

Thanks, Fabian. I'm really pleased to address you in advance of the AGM this evening. Due to the unusual circumstances of COVID-19, our AGM is taking place towards the end of the ASIC extended period, and my fellow Board member, Christoph Schuh, the Vice Chairman, who's based in Germany, will deputize as Chairman for the AGM. The AGM is now taking place at the same time as the release of our Q2 4C. As Fabian said, we've taken this opportunity not only to look back at 2019 but also to reflect on the extraordinary momentum of the first and second quarter of 2020. Consistent with the German law, the AGM is not being held as a virtual interactive AGM, as we've recent experience of in Australia, but it's a face-to-face meeting in Berlin where shareholders pre-register votes and questions. To overcome those formalities, the Supervisory Board wanted to provide investors with an opportunity to ask questions interactively, especially at this important point in the company's growth trajectory. The full version of my address will be lodged on our investor site, so I'll drill the highlights. Clearly, COVID is having a deep impact on many businesses in our sector, but its impact on Marley Spoon has been mainly positive and galvanizing. Looking beyond the second quarter results which we released today, the acceleration of demand has not only brought forward our point of operating EBITDA profitability, but we also believe represents a structural change in the markets in which we operate. We predict a sustained step-up in off-line to online purchasing of home necessities, likely more white-collar workers working from home on an ongoing basis and greater unprompted awareness of our brands and meal kits in general. Our CEO, Fabian Siegel, will provide further update on the current business performance shortly. I should note, however, that we entered 2020 with continuing improvements in contribution margin, operational effectiveness and the ability to expand menu choice without unduly impacting productivity. This provided an excellent foundation to handle the rapid increase in volumes, which started in mid-March, as the pandemic created unprecedented household demand for home deliveries of cooking ingredients and, indeed, food in general. Now quickly turning to the review of 2019. Our financial results for 2019, together with the relative change from 2018, saw revenue growing to EUR 130 million, an increase of 41%; underlying operating EBITDA of negative EUR 30 million versus negative EUR 34 million in 2018. Our ability to fund our growth coming into 2020 was supported by a series of fundraisings from existing and new investors, including Woolworths Group, with whom we struck a strategic alliance in Australia, Union Square Ventures, Acacia and Western Tech, making a total of EUR 40 million in 2019. Finally, the green shoots of profitability first emerged here in Australia, with the local business reaching positive operating EBITDA from Q2 2019 while implementing new manufacturing technology. Now in this current year, it is pleasing that the accelerated expansion of the business, especially in the U.S., means that our U.S. business reached a positive operating EBITDA for the first time, making Marley Spoon overall operating EBITDA positive in Q2 2020 ahead of our earlier forecasts. In this last quarter, staff in all geographies, many collaborating remotely, have shown great adaptability to meet the changing needs of our customers in these difficult times. We look forward to continuing down that path. Marley Spoon also has a significant untapped opportunity to drive penetration of its premium Martha & Marley Spoon brand in the U.S. as well as to drive take-up of the value for money Dinnerly brand in all its territories, including Europe where it was just launched. I wanted to talk quickly about our people. A very rapid scale-up of the business in the last few months has tested the business' ability to manage supply chains, to engage and train staff and to continue to improve manufacturing effectiveness. Managing the health and safety of staff, particularly in manufacturing centers, has been and clearly remains a top priority. Our management team under Fabian Siegel's leadership continues to meet these challenges daily. Our workforce operates in 3 regions. They underpin our success. At no time is this more evident than in this difficult COVID-19 pandemic. On behalf of the Supervisory Board, I especially thank our Management Board and all our staff for their significant contribution and dedication at this time. The Supervisory Board is engaged in many aspects of the business. I also take this opportunity to thank my fellow directors, Kim Anderson, Robin Low and Christoph Schuh, for their valuable contribution, support and commitment. And of course, we thank you, our investors and shareholders, for your loyalty and support. The Supervisory Board values this greatly and assures you that we will continue to work to support Marley Spoon as it realizes its potential. With this, I'd like to hand back to Fabian.

Yes. Thank you, Deena. As Deena mentioned, 2019 was an important year for Marley Spoon in which we were laying foundations that are supporting the growth of our business today. For example, in 2019, we invested into new manufacturing technology, allowing for increasing menu choices and personalization. And this patent-pending technology has been fully rolled out now in Europe and Australia, with the U.S. following this year. We invested into a single global ERP platform, which also has been fully rolled out in Europe and Australia, with the U.S. rollout currently in progress. Furthermore, 2019 saw significant investments into big data and machine learning, which supports the development of consumer taste profiles and improves our supply chain via prediction technologies. We also increased our manufacturing footprint in the U.S. while consolidating our European manufacturing operations. Finally, we continue to invest into and grow our team by promoting high potentials within our organization as well as attracting new talent from the outside, like Julie Marchant-Houle, who joined us as our Managing Director in the U.S. this January. Now all these aforementioned investments allowed us to scale up and meet the surging demand due to the acceleration of online shopping adoption, which we have experienced in recent months due to the COVID-19 pandemic. Now the pandemic changed all our lives. During the second quarter, we had to learn how to grow our business quickly in order to reliably fulfill the increased demand of our customers as our service was acknowledged to be essential across the globe. At the same time, we had to react to disruption in our supply chains. We adapted working conditions in our manufacturing centers to heightened safety standards. And many of us had to learn how to work remotely from home while providing for families and children who stayed with us as school closed. As a team, we jointly rose to the occasion. Each of us had to accommodate a new situation, and everybody worked extremely hard. Now the efforts and tenacity of each team member allowed us to successfully navigate all the uncertainties while, at the same time, we reached our first positive operating EBITDA quarter in our history. As mentioned in one of our past market updates, the outbreak of COVID-19 and government countermeasures caused a surge in demand for Marley Spoon's home-delivered meal kits in all markets and an acceleration in the adoption of online grocery shopping. We experienced that existing customers increased their order frequency while -- with larger average order sizes starting already at the end of Q1. Now this behavior began to normalize during the second half of the quarter. New customer acquisition has remained strong throughout the second quarter at attractive cost per acquisition. Now important to notice that new customers acquired during the second quarter show equally strong or better retention as we normally experience for new customer additions. This has allowed us to continue to build up our back book of recurring revenue in Q2, which continues to account for the vast majority of our revenue. Now to date, we have been able to manage the significant scale-up, upholding high levels of food safety and fulfillment rates as well as safeguarding the health of our team. Now in order to meet this increased demand, we created additional capacity throughout the quarter, mostly by staffing up and increasing the number of shifts in our manufacturing centers. We ended the second quarter with extra capacity, which will support future growth, while we also continue to expand further our capacity. Now to that regard, you might have heard, for example, that we entered into a lease for a custom-built brand-new fulfillment center in Sydney, which we expect to move into during the first half of next year. Now coming to financials of the past quarter. Overall, we achieved record revenue of EUR 73.3 million for the second quarter, which is an increase of 129% on the prior corresponding period. This tremendous growth was achieved with improved marketing efficiency. Marketing expenses as a percentage of revenue represented 13% of revenue in the quarter compared to 18% in the prior corresponding period. Now globally, our contribution margin reached a record of 30.5%, and operating contribution margin or operating CM, which is defined as contribution margin excluding the impact of marketing vouchers and fixed costs such as lease expenses related to our production sites, ended at 37%, close to the last quarter's all-time high. Both numbers highlight the strong operating performance as well as the resilience and flexibility of our operating model. Now the strong growth compared with a solid operational performance allowed us to post our first global operating EBITDA profit of EUR 4.5 million for the quarter compared to a loss of EUR 5.1 million in the PCP. Overall, second quarter was a great success by all Marley Spooners around the world, which I would like to thank again for their hard work and commitment to serve our customers in most difficult circumstances. With this, I like to hand over to Julian, who will walk us through the individual segments next.

Thank you, Fabian. Yes. For the quarter, it was -- in terms of gross margins and profitability, so really, all regions showed a remarkable performance, growing more than 40% versus Q1, at least 80% year-over-year and increasing contribution margins significantly versus prior year. Both the Australia and U.S. segment achieved a positive operating EBITDA in Q2. But let me go one by one. In Australia, where we're now operating with a positive operating EBITDA since Q2 of 2019, we more than doubled revenues with strong contributions from both the Marley Spoon and Dinnerly brands. For the quarter, we reached EUR 24 million, up 103% versus prior year and 62% higher than Q1. Contribution margin climbed 4 points to 37%, which, all in all, resulted in an operating EBITDA margin of 15%. In the U.S., we reached a positive operating EBITDA for the first time in our history, as you heard earlier. Revenue reached EUR 38 million, up 171% compared to Q2 last year and 88% versus Q1. As you can imagine, this extraordinary growth put a lot of stress in our supply chain in the manufacturing center where we hired and trained hundreds of new staff members, even more than in the other 2 regions really. And we still managed to increase our contribution margin in the U.S. to 28%, which is up 8 points year-on-year. European revenue was up to EUR 11 million in Q2. This is not only 83% higher than the prior corresponding period, but it's also good to see marks the third quarter in a row with strong sequential growth quarter-over-quarter. So we had 20% in Q4, 19% in Q1 and now in Q2 was 44% over Q1. And this, by the way, doesn't yet include any sales from our Dinnerly brand, which was only launched in Germany last week. So safe to say that Europe is back on a strong growth path. And finally, contribution margin saw the strongest year-on-year and quarter-on-quarter improvements among the regions, with 10 points and 4 points, respectively, reaching 25% for the quarter. As a final comment maybe on the segments, so I thought it's also important to point out that we currently have available capacity in each of our manufacturing centers despite the massive growth we've already experienced. Moving on to cash. Next topic, thanks to the positive operating EBITDA, you just heard about in another strong quarter on working capital. Our cash balance increased EUR 12 million to over EUR 18 million. In Q2, we generated over EUR 7 million in operating cash, second quarter in a row that we finished with a positive number here. The overall cash increase includes -- and that's EUR 9 million from our main equity rates as well as negative EUR 2.5 million in capital expenditures. So thanks to the strong profitability and cash performance, we decided to forgo the options -- the option to pull the second tranche of WTI, USD 7.5 million, which, contractually, we are able to obtain until the end of July. The strong grocery experience also means we're upgrading our guidance for top line growth for calendar year 2020 versus the 30% we previously forecasted. We're now expecting to grow revenue at least 70% as compared to calendar 2019. On contribution margin, we've again exceeded our previous guidance for the year, with 30.5% in Q2 after 29.5% in Q1. Here, we're not updating our guidance at this point given the continued uncertainty and dynamic situation around the global COVID-19 pandemic, especially in our largest markets, U.S. and Australia, as you would have heard in the news. And with this, I'll hand it back to Fabian.

Yes. Thanks very much, Julian. Just to sum it up, the second quarter was a record quarter on many levels. Our business accelerated its growth dramatically, reaching record revenue, while the team stayed safe, served our customers and our agents. This led to the first quarter of profitability. Now the strong Q2 performance enabled us to upgrade our revenue guidance for this year, as you just heard, and we guide for the company to grow at least 70% year-over-year. The team here at Marley Spoon is proud of what we've achieved in just over 6 years. Now we have built a profitable global business with a near AUD 500 million revenue run rate. However, we believe we are actually still at the beginning of our journey. Now the switch from off-line to online commerce has barely begun over the past 20 years. As a direct-to-consumer manufacturing business, we see us extremely well positioned to benefit from the continuation of this trend. Now over the past years, we've demonstrated the ability to create and build personalized direct-to-consumer service brands, such as Marley Spoon, Martha & Marley Spoon and Dinnerly. Our manufacturer-to-order supply chain allows us to personalize our service offering to a degree that's impossible to provide via traditional retail supply chains, and we intend to continue to leverage this ability for future growth. Our strategy, therefore, will be to continue to invest in customer acquisition in a disciplined way as long as unit economic targets are being met. And that means we intend to reinvest the majority of our profits for the foreseeable future into our business as we believe we have a historic opportunity to build large and impactful service brands in some of the largest consumer markets in the world. We would like to thank you for your trust and support in this mission and are grateful for your continued support going forward. So thanks so much for taking the time this afternoon. And with that, I would now like to open the call to questions.

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

I might start by saying -- I'll ask the hard question first. The first quarter, you're growing at 46%. April, you're growing at 100%. Throughout the quarter, you grow at 130%. It sounds like May and June were 150%. You've come out and said the global behavior was better than you expect throughout the period. And yet, you're forecasting the second half weekly revenue run rate to go backwards by 30% on the weekly run rate last quarter. Can you just talk through that guidance, Fabian? Are you seeing anything in the last couple of weeks in July that goes against that trend? Or can we expect -- or what are you thinking around the next short term in terms of revenue declines?

Yes. I mean that's the million-dollar question that everybody is asking. What does it look like in this COVID situation? We indeed saw in the second quarter, on the one hand side, a normalization of our base behavior, which, of course, was one part of the surge that our existing customers wanted more Marley Spoon boxes. They skipped less often, and they had larger basket sizes. And in the second half of the quarter, so we saw that moving back towards a normalization to different degrees in the various regions. But at the same time, we continue to saw a very strong ability to acquire customers. And this behavior of those new customers, it showed us that it is at least as good or even better than what we have seen prior to the COVID pandemic. And that's kind of -- these 2 vectors, they have this counterbalancing effect. And so that's what we saw over the second quarter. Now when we look into the second half, it's very hard, of course, to predict what will happen to the demand situation overall, and that's why we decided to be cautious in our guidance, and we say at least 70%. We have a high degree of confidence, but at least means we will have to see how COVID has an impact on customer behavior. We've seen recent lockdowns in Australia that provides, again, a high incentive for customers to rely on our solutions. We see the U.S. being very unstable. So there is also the opportunity for additional growth coming out of those situations, but we feel we don't have the ability to guide against that. And as our ambition is to have reliable guidance, we felt and the Supervisory Board felt strongly about the -- giving the market something they can rely on and think at least 70% is starting point for the market to rely on. And then you all have to see and be close to our consumers over the next half year.

Okay. But your numbers then, it's -- are you not -- are you seeing anything in your actual numbers through July that makes you think -- or is July higher than June?

I mean we don't give revenue numbers on a monthly basis. What we can and have seen in the past, the big discussion was what does Q3 look like? Will Q3, like, jump back, like fall of a cliff? As in the beginning of the second quarter, I think analysts had seen that potentially happening. Now that is something we do not see happening. So we do not see revenue snapping back or cliff quite the opposite. We do see a continued strong trend of being able to acquire customers at attractive rates and also existing customers behaving in the same way of loyalty that we have seen in the past. So therefore, we do not see any form of snapback today. But also, we all have to acknowledge it is a very dynamic environment. So we have to be very careful, and we can't predict the future these days or less good as we could do it in prior years.

Sounds like you're being very conservative, Fabian. Good one. And then maybe a question around you guys, you've gone -- you passed through the promised land of breakeven. Now you're well capitalized on the balance sheet, making money. I mean you did highlight that you plan to reinvest incremental profits to take advantage of the opportunities. Can you maybe flag this, obviously, multiple opportunities? So you invest in price, new market, marketing, customer acquisition. Which of your -- have you made the strategy? What's your viewpoint about how you plan to reinvest the incremental profit?

Yes. I mean in the past, you've seen us operating our business, very much focused on return on invest when we acquire our customers. And so the CAC to LTV ratio has always been at the core of our strategy where to invest our capital. And that will remain, meaning we believe that the switch from off-line to online and groceries has just started. And through this COVID pandemic, we believe we see a gap up in adoption. But even if we just -- and some studies have suggested that online grocery adoption might have grown 100% year-over-year. That means, on a global average, you're jumping from 6% adoption. So all in all, we're still in day 1. And so we see a lot of opportunity to grow in our existing markets, in our existing brands. And over the coming years, there's lots of room to grow because growth rate is not only the largest vertical of consumer spending. We also operate in one of the largest consumer markets in the world. So there is tons of opportunity to grow. And so you would probably see us not changing our strategy, but just continuing and reinvesting into that strategy and continue to grow the business.

Okay. You talked about -- given that growth in the U.S., potential strain in the supply chain, where are you in terms of -- are you up against your capacity now? Or do you -- what percentage of capacity you're running at in the U.S.?

Yes. I mean that's a question -- maybe Julian, you're a bit closer to the regions. Maybe you can answer that question.

Yes. No, so we're not up to capacity. So we have available capacity in all regions. The exact number is always a bit tricky, given how many shifts are running and so forth. But we've talked to you about this in the past. We were largely a one-shift operation, have now moved most of the sites globally to multiple shifts per day at multiple days a week. So I think there's no more levers that we can pull on in terms of shift and just staffing in the sites. And at the same time, we are currently investing also into build-out. I mean we announced Sydney, there is a smaller project going on also in the U.S., in the East Coast. So we're making some of these investments. So I think the short answer is, right now, we have available capacity. We do not foresee good demand going forward, so we're also making select investments, I would say, into expanding this further. It's -- I don't see a constraint here in the foreseeable future.

And just lastly on me -- for me. On the customer acquisition cost is running at around EUR 52 in the past. Has it been increasing? Are you guys holding -- your unit economics ramped 3x and just acquiring customers at that rate? Or just talking through, obviously, you've seen very large cash deflation, but are you seeing in recent periods cash start to rise?

I'll take this one.

Yes, go ahead.

Yes. So I mean you've seen the numbers are significantly below. So I mean we can share maybe a bit more detail also around the half year results and give some more perspective here. But I mean significantly really means that there's a kind of double-digit percentage below what we normally see. And as Fabian alluded to, the customer behavior, we see no retention, we see it stable. So then just the math tells you so that your CAC to LTV improved sales. So I think that's something that we continue to see, these lower acquisition costs. But yes, I mean I cannot really comment on whether this solution stay for very long. But at the moment, it's sustaining and improving that equation.

All right. And well done on a phenomenal quarter and being able to scale the business across all groups in rapid pace. So well done guys.

Your next question comes from [ Saga Shiek ] from CBA.

Incredible quarter as the previous quarter suggested some great growth rates coming through. A couple of questions from my perspective. So will we -- I guess is EUR 4.3 million now the baseline in terms of going forward in terms of what you're expecting as the operating EBITDA quarter-on-quarter and potentially even growing further given the growth rate? Second question being just around expansion strategy. So are you guys looking now to grow into further regions, further markets, namely France, Spain and Europe or Canada in Northern Americas or even Asia, to some extent? Or the plan is to keep building on the current territories that you have and keep getting market share from, I guess, organic growth? And then final question, probably around -- similar to what the last caller asked around customer acquisition costs and the lifetime value. Can you just run through -- if the customer acquisition costs are sitting around EUR 52, what's the lifetime value looking like for that metric?

Yes. I mean regarding the profitability, and I mentioned it during my speech at the beginning of the call, so the EUR 4.5 million positive EBITDA, operating EBITDA is not a benchmark or is not something that you can expect to happen on a quarterly basis going forward because we do see these -- we'll talk about in a second to answer your third question, CAC to LTV, we do see the strong unit economics. And therefore, what we will do on a quarterly basis will decide what opportunities do we have to grow the business and efficiently invest into a profitable customer acquisition. And therefore, we expect to reinvest a lot of these profits into growth. So on a quarter-to-quarter basis, this number can go down as we see amazing opportunity to grow. However, and we said that also in the past, we balance our [ return ] to growth with the goal in the second half of the year to continue to build the balance sheet of Marley Spoon. So we [ have ] lots of interest to accumulate additional and sufficient cash buffer to run the business. And I think the second quarter was a great quarter to move into that direction. But this path probably is not finished, but it's a trade-off. So therefore, you will -- as we go [ 6 ] quarters, you will then hear us talk about this trade-off between, on the one hand side, continuing to build the balance sheet, at the same time, continuing to invest into growth. So that number is not a number you should keep in your mind as a benchmark going forward, especially as we have the opportunity to grow into our -- in our existing region. So you mentioned the geographic expansion. Currently, we see ample opportunity to grow in the existing 3 regions or 8 countries we're operating in to acquire customers at great unit economics. The switch from off-line to online and groceries has just begun. So geographic expansion is not necessary for significant growth in the coming years. However, I also wouldn't rule out that we will look at opportunities to expand the geographic reach of our services. For example, last year, we just expanded into Denmark and Sweden. So I don't think it's a necessary requirement to move into new territories, but it is an option we are very carefully and selectively assessing also going forward. I think your last question was really the critical one, and that's the one that has guided us how we built this business since the very beginning, which is what's our ROI expectations for every dollar we invest into a brand or into a region. So we are trying to or we're aiming to ensure that our payback time of acquiring a customer or a group of customers or cohort, we try to get a cash recovery around 6 months. So when we acquire 1,000 customers, we expect that this money -- the group collectively returns us to the margin, not revenue, but to the margin the group generates within roughly 6 months. And then the lifetime of that group of customers, our margin or profitability expectation is 3x. So for every dollar we invest, we expect $3 to be returned. And that is the threshold under which we decide where to invest, in which markets and which brand. And of course, in the second quarter, we -- and Owen alluded to this earlier, we had this unusual situation that acquisition costs have been coming down dramatically. So suddenly, the unit economics are dramatically better, and they were very good in the second quarter. But going forward, they might go back to the old normal, which I would argue were still exceptional before we entered into this pandemic. So this CAC to LTV will actually guide future growth, both geographic, but also in terms of the EBIT profile that you'll see in the future. It will all be around building the back book of business of recurring revenue over the coming quarters and years.

Excellent. Yes. That's great. And if I can just do one follow-up, which is probably more at a strategic, holistic level is, what do you both think is the next step change for this business? Is it a strategic alliance with the likes of Uber from a delivery perspective? Or is it influence the marketing where we have -- I don't want to say Kardashian, but the likes of them celebrity influencers in each market who are really driving the scale? So what do you see as the step change for this business to really accelerate that growth?

Well, I don't expect -- I mean the COVID-19 obviously is a step change. Now what we've experienced in the second quarter has been a step change in all regions happening at the same time. So we've seen a gap up in adoption, so that is a step change in consumer behavior. And we don't know what will this mean for the future, but I have the -- I feel that adoption of online shopping across all brands and all verticals is currently seeing a lot of tailwinds. And that is -- I think it's a massive behavioral change. And we haven't even seen it yet what the consequences will be on society and consumer behavior. And I would say, other than that, I don't expect step changes in marketing or step changes in the services that we're looking at. I really think we have a very profitable business with strong unit economics, where we're in day 1 on growth. And I think we execute very well compared to our peers internationally. So our goal really is to double down on that, focus on that and continue to build this profitable business. We don't -- I don't think we need other external step changes at this point in time.

Your next question comes from Matthew Chen at Foster Stockbroking.