Marley Spoon SE (MMM) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Marley Spoon 2020 Half Year Financial 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 afternoon, everybody. Thanks for joining our investor call. So my name is Fabian, Founder and CEO of Marley Spoon, and I have with me here today Julian Lange, our CFO. And so this afternoon, we released our first half results for our financial and calendar year 2020, and I'm looking forward to presenting to you these financial results and as well providing you with an update on the business outlook. During the call, we will refer to a slide presentation, which we released together with the first half financial report earlier today. And at the end, as usual, we'll be opening the call to your questions. Now as many of you know, our business has benefited from the COVID-19 pandemic. We continue to see an acceleration of the adoption for online shopping in all of our regions. And this beneficial market environment has led to strong sales growth in the first half of the year, as you can see on Slide 9 in the presentation. Now revenue in the first half grew 89% year-on-year, and we experienced 129% growth in the second quarter. Now please note, however, that we already saw an acceleration of growth in the first quarter prior to COVID-19, which is a testament, I think, to the underlying dynamics of consumers switching to meal kits pre-pandemic. Of course, now in the second quarter, growth was historic. Now at the same time, as the overall revenue surged, our contribution margin expanded to a record of 30%, which is up by 6 points year-over-year, which is a great achievement if you consider all the supply chain challenges our teams had to navigate as kind of went into lockdown across the world. Now this massive growth not only was achieved while achieving high margin, it also came paired with increased marketing efficiency, as you can see on Slide 11. Now marketing as a percentage of sales dropped to 18% compared to 29% in the prior period, which has been an ongoing trend over the past years already. Underlying, of course, our unit economics in the past always used to be very attractive, thus, the internal rate of return of our customer acquisition or our IRR being already above 30% per year. Now these unit economics have improved significantly during COVID-19, and we continue to see very strong unit economics to date. Now the growth in top line revenue, increased contribution margin and marketing efficiency led to our first half year with positive operating cash flow of EUR 8 million. Also, we experienced our first quarter with a positive operating EBITDA of EUR 4.4 million in the second quarter. Now while we have experienced strong demand and a result in uplift in our business, our teams, at the same time, have been directly impacted over the past few months. [ Of course ] in all regions contracted the virus. Luckily to date, all of these infected team members are recovering, with mostly mild symptoms present during the time of the infection. And for that, we're grateful. Since March, we have implemented heightened health and safety standards in all of our facilities following and often exceeding guidelines from local health authorities as we continue to prioritize our team's health. Now the recent temporary closure of our Melbourne facility was such a conservative measure taken in consultation with the local health authority. Notwithstanding these challenges, the operational impact of these disruptions did not materially affect the momentum of our business, and customer impact has been limited. We have since resumed operations on Melbourne facility in case you're wondering. I want to express at this point, again, our gratitude to all of our team members and our manufacturing centers around the world, who are proudly fulfilling an essential service to our customers, basically allowing them to have their dinners prepared in the safety of their homes. Now as mentioned in prior calls, we had prepared for a sizable drop in quarter-on-quarter revenue for Q3 this year, which is reflecting the uncertainty of customer behavior during the COVID-19 pandemic. This is today not materialized, instead continuing to experience significantly reduced customer acquisition costs and strong demand for our brands in all regions. We, therefore, upgraded our guidance again and are now expected to achieve 80% to 100% revenue growth for calendar year 2020. With this, I want to hand over to Julian, who will provide some more details on our results for the first half of 2020.

Thank you, Fabian. So turning first to some top line metrics on Page 12 in the deck, if you follow along. We more than doubled active customers year-on-year to now 350,000 active customers, on average order 5% more during Q2 and with a 7% higher average basket size per order. All in all, we delivered over 20 million meals in the first half of 2020, with really all segments contributing to the strong growth story. So let's dive into the segments a little bit on the next page, Slides 13 to 15 in the deck. Australia continues to show the highest contribution margin, with now operating EBITDA positive since Q2 of last year. As Fabian mentioned, we recently had to close our Melbourne site temporarily, which put some extra strain on the Sydney team. But now having come out of this, we actually have additional capacity to continue to grow also in the longer term, as we recently signed -- you may have heard about it separately, new lease for space 3x the size of our current facility in Sydney. So we expect to be operational in that new site sometime in the first half of next year. Turning to the U.S. Again, this shows the strongest growth of all segments. Meals shipped in Q2 almost tripled compared to the prior corresponding period. We're particularly happy to see that we grew faster than our competition, at least the publicly listed ones that we know of, which I believe is a testament to our successful 2-brand strategy with Martha & Marley Spoon as well as Dinnerly. Given the contribution margin improved again throughout the first half of 2020 in the U.S. to now 28%, we were also able to reach a positive operating EBITDA for both Q2 and the first half in the U.S. for the first time, so great achievement by the team there. The European segment, if we go to the next page, showed strong sequential growth for the third quarter in a row now. So it's nice to see the region being back on a strong growth trajectory. Revenue was up 83% for Q2 year-on-year and still 45% for the first half. The new markets in Denmark and Sweden, for example, are starting to contribute to the growth here as well, and we recently -- you may have also heard we separately launched our budget brand Dinnerly in Germany in the first European market. So that should support future growth in the region. At the same time, contribution margin here also continued to improve in the first half, reaching close to record 25% in Q2. We turn to the financial results on the next page, 16, in the deck. And Fabian already covered main highlights but just to reiterate, strong top line growth, increasing contribution margins. He spoke about the greater marketing efficiency. And also, you see on the page with good cost control and G&A expenses. So this has led to the first quarter positive operating EBITDA in Q2. And for the half, the loss was really down to only EUR 2 million, which obviously is a significant improvement compared to EUR 17 million loss in the first half of 2019. Maybe one additional comment on our results. You can -- we have a detailed page in the appendix on this. We don't usually talk a lot about the net loss, but it's worth pointing out. We ended the first half with a large net loss, which has to do with the EUR 59 million fair value adjustment books on our various warrants in convertible bonds because you can imagine of the sharp appreciation on share price. So this would eventually get offset in equity upon exercise of conversion of these instruments. And yes, I guess, needless to say, it's not affecting cash. Now what you can also see on the next page, we can speak about cash flow on Page 17, also a very good story. I think the lower operating loss, which we talked about, strong performance on working capital, almost, I would say, as usual, but good to see again. We generated EUR 8 million in operating cash in the first half of 2020, 2 quarters in a row actually with positive CFOA. So we had -- and together with our equity raise in May, usually, the limited CapEx spend that you see in our business, the way we run it, then we're able to increase our overall cash balance from EUR 5 million at the start of the year to EUR 18 million by the end of the first half. So moving on from cash to guidance on the next page, Slide 18. We've updated our guidance again. Fabian mentioned it. We continue to see tailwind on top line. So we're now expecting 80% to 100% year-on-year growth for the calendar year 2020. On contribution margin, we're not changing our guidance, given there is still uncertainty around the impact of COVID-19, although we already tracked ahead of the guidance for now, but [ then we'll guide ]. So with that, I'd like to hand it back to Fabian.

Yes. Thanks so much, Julian. Now to take a step back, over the past 6 years, we've built a platform and demonstrated the ability to create personalized direct-to-consumer service brands such as Marley Spoon, Martha & Marley Spoon and Dinnerly. And our manufacturer-to-order supply chain allows us to personalize our service offerings to a degree that's impossible to provide via traditional retail supply chains. In the first half of 2020, Marley Spoon reached a transformative milestone. Now we have built AUD 500 million run rate revenue business that generated positive operating cash flow in the first half and reported our first profitable quarter globally. At the same time, we are still at the very beginning of our development, and we believe that we have built an extremely well positioned platform to benefit from what's yet to come. As you can see on Slide 19, the grocery vertical is not only the largest vertical of consumer spending, it is also just beginning to switch to online shopping compared to most other consumption verticals. Because of COVID-19, we see now an acceleration of e-commerce adoption across all verticals. Online adoption for groceries is even outpacing most other verticals with some studies expecting a doubling of the online share by the end of 2021. Now with our global platform today reaching more than 180 million households across the U.S., Europe and Australia, we are extremely well positioned to benefit from this growth opportunity at the very attractive unit economics that you've seen. In addition to the growth opportunity presenting itself due to the acceleration adoption of e-commerce, there's even further growth opportunities, such as extension of our product offering or potential regional expansion. Our strategy, therefore, will be to continue to invest into growth and customer acquisition at those attractive unit economics, yielding high 30% plus IRRs, while at the same time, improving our capital structure. 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. All in all, we are confident that over the coming years, we will build $1 billion-plus revenue business. So thanks for taking the time this afternoon. And with that, I would like now to open the call to questions.

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

Well done. It looks like business continues to gather momentum. I might just touch on the guidance statement there, upgrading between above 70% to between 80% and 100%. I noticed you've capped the growth at 100%. Maybe a question is you have -- the CAC has fallen from $66 to $62 last year. Given -- what are you forecasting in terms of customer acquisition costs for the remainder of the year to get to that guidance number?

Yes. So I think when we last guided the market after the second quarter, things were still fresh. We are wondering what would happen to user behavior in the third quarter as user behavior normalizes. And we're expecting a significant drop in third quarter revenue. And to date, this has not happened yet. So as we are now looking at the data, we have a better visibility now that we have line of sight towards the end of the year to actually properly look at various scenarios, and that allowed us to come up with a range. So that range that we -- given, we think, is a bottom-up-driven range. So we feel quite confident that this is a better guidance than what we had prior. Now we do see better unit economics currently, a much better unit economics because, as you mentioned, the acquisition costs are very favorable and continue to be very favorable. So from that perspective, I would argue the business is, in the past, always had strong unit economics with 6 months payback, [ 2 weeks ] return or this 30% plus IRR. This is much better today. That's why we want to, of course, take over -- take the opportunity to grow and leverage that. At the same time, we want to balance -- the balance -- the rebuilding of our balance sheet, so to say. Now we've got these 2 goals, growing, taking on the opportunity, but also making sure we continue to build our balance sheet. And that basically guided -- led us to guide this range between 80% and 100%.

And probably, Owen, as in actual, the total, where do we land in the range is probably a bit less dependent on the acquisition costs and more on this kind of do we see normalization, how fast, yes? So I think that's -- anyone's guess at this point. We've seen in Europe, for example, a bit more normalization than the other territories, which is, I think, understandable given the news. But to the extent, of course, this normalization was not that kind of [ normal ] and customer behavior doesn't happen, I think that's how you have to think about the range, yes? So if it happens sooner, then we're probably closer to the bottom of the range. But if it doesn't come or, I don't know, it's delayed into next year, then maybe more on top of the range. So I think that's the bigger impact here, how the base behavior turns out in the next few months versus the acquisition cost.

Okay. And just maybe just touching on you saying you're expecting a drop in the third quarter. We're 2 months through or 2 months through the quarter. Does that mean that revenue run rate is actually tracking above the last quarter to date?

We don't give specific guidance on the third quarter. There are still -- go ahead, Julian.

Go ahead. We're not tracking above. I mean we did say it's normalizing, right? And we had really a very unusual set of circumstances in April and into May. But yes, I mean, this is part of the reason Fabian explained why we kept -- why we increased guidance again. Specific number on Q3 to Fabian's point, we didn't put in, but I think on this, there's still a little bit of normalization happening in all the regions versus what we saw in Q2. I think it's probably -- that's really how to think about it.

Right. Okay. You are seeing a bit of a normalization in terms of average order per customer and retention.

Yes, exactly, and then frequency of order. I mean, as you know, right, so 90-plus percent of our orders always are recurring orders, and so it's not dependent so much on new business. So to the extent that people can leave the house more and so forth, so there's a bit of normalization happening.

And just maybe on the margin assumption going forward, obviously, higher revenue scale-up efforts, you guys not upgrading your margin assumptions. Any reason you're seeing any inflation across your COGS line in terms of food input costs or other?

Yes. Not really inflation. I would say, Owen, I think that the -- while in short term, [ no one ] really talking 2020 guidance here, right? It's really these events like what we had recently with Melbourne, for example, right? I mean, as you can imagine, it's more what I said earlier. Now we put strain when we had to close Melbourne even just for a couple of weeks, put some strain and with additional costs in Sydney, right? So I think there is these kind of things happening still across the globe, really not just -- not a onetime event. As Fabian mentioned, we had infections in all regions, and then we have to react with. So I wouldn't call it kind of inflation. I think food supply chain has generally held up pretty well. But these kind of things not only do lead to loss in productivity, sometimes higher quality [ read-across ] and so on. So I think this can always happen, that's why a bit cautious here. So nothing kind of systematically that we're seeing. But given the dynamic situation globally within all our markets, especially in our biggest ones, I think that's prudent to say. Now we cannot rule out that more of these temporary closures can happen not in fourth quarter, so hence, no upping the guidance. But there's more potential, I think, if you think like longer term. I think you're making the right point. Yes. We're much bigger now, and that should lead to some deflation over time, but that's nothing that's some -- that's, I think, in the short-term guidance for 2020.

And obviously, as you guys pass-through free cash flow of breakeven, options are plenty to the acquired customers in your current regions to -- or into new regions. Are you eyeing off any new regions in FY '21? Or is it more focused on direct customer acquisition in the current markets?

I think in the deck, we tried to frame the growth opportunity. And in the way, we have a global platform, reaching 180 million households across U.S., Europe and Australia, and we see these adoption acceleration in e-commerce in general but specifically in groceries. So we are already perfectly, I think, positioned to grow over the coming years, where we are, but -- and that we also show it in the deck, there are, of course, additional growth opportunities that are adjacent. One on the product side. You have used and experienced ready-to-heat meals in Australia, which is one example we are moving into adjacency. Our service offerings to solve more problems for our customers which also leads, of course, an additional growth. But also regional expansion is certainly an option, and we alluded to that also in the deck. So I wouldn't take it off the table for 2021, but it's certainly not necessary for showing very solid growth over the coming years.

Your next question comes from Matthew Chen with Foster Stockbroking.