Marley Spoon SE (MMM) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Marley Spoon Q3 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. Good afternoon, and thank you for joining our investor call today. My name is Fabian Siegel, Founder and CEO of Marley Spoon, and I have with me here today Julian Lange, our CFO. Now this afternoon, we released our third quarter results for our financial and calendar year 2020, and we are looking forward to presenting to you today these results as we are all providing you with an update on the business outlook. Also, earlier today, we launched a deal to issue 17.4 million new CDIs in a capital raise that is fully underwritten and led by Canaccord Genuity. Wilsons Advisory and Stockbroking Limited is acting as co-manager. And you will see the details of the raise in the presentation pack that we have also released to the ASX and it's in process of being published imminently. I'm very happy about the support for the raise from both existing and new shareholders, and we look forward to carefully investing the proceeds to drive the next stage of our growth and development. At the end, as usual, we will open the call to your questions. Now it has been over 6 months since the global pandemic impacted all of our lives. During this time, our business has grown a lot. We've witnessed an acceleration in adoption of online shopping, especially in groceries and for meal kits. Accordingly, our business experienced strong demand from existing and new customers. And while order frequency and average order sizes retreated from the peaks we had seen at the beginning of the pandemic, they remain above pre-COVID levels throughout the third quarter. Also during the quarter, we continued to experience a favorable acquisition environment with lower acquisition costs due to high customer demand. Now the combination of the higher order frequency and basket sizes as well as a lower acquisition cost led to unit economics that were favorable compared to pre-COVID times. We, therefore, decided to invest into customer growth in order to continue building our back book of recurring revenue, while delivering an overall profitable quarter at the strong unit economics. Now this strategy resulted in strong growth in the third quarter, with revenue again more than double compared to the previous corresponding quarter. Specifically, we generated EUR 69.3 million in net revenue, which is an increase of 109% year-over-year or 118% excluding the impact of foreign exchange. Especially noteworthy is the continued strong growth of our U.S. business, which grew 163% on a constant currency basis year-over-year. Important to note is that the strong growth in the third quarter was achieved with improved marketing efficiency. Marketing expenses as a percentage of revenue were 14% in the quarter compared to 31% in the PCP. Q3 also showed strong operational performance. Our contribution margin improved year-over-year by 5 points to 28% and operating contribution margin, or operating CM, which is defined as contribution margin excluding the impacts of marketing vouchers and fixed costs, such as expense relating to site leases, reached 37% in Q3, also up 5 points. All regions contributed to this margin expansion. While both margin metrics were up year-on-year, we saw some COVID-19-related operational challenges [ assert ] themselves in the quarter such as the temporary closure of our Melbourne site and related shift in production volume to our Sydney site. Also compared to the second quarter, CM was impacted negatively by 2 points due to increased sales discount as part of the higher investment into growth. As mentioned in the past, our strategy for the second half in 2020 was to balance the opportunity to invest into customer growth at attractive unit economics with strengthening the balance sheet. Accordingly, we took a controlled approach, and we maximized growth while keeping the overall operating EBITDA positive at EUR 0.4 million compared to a loss of EUR 10.1 million in Q3 2019. Now over the past months, we've been continuously and carefully observing the behavior of pre- and post-COVID-19 customers. And the data we have gathered makes us conclude that over the past 2 quarters, our business has attracted new customers which showed the same or higher retention as we observed pre-COVID-19. This, combined with the overall positive growth momentum of our business, allows us to narrow our guidance range to the upper end of our previous guidance Now we expect to grow 90% to 100% for the calendar year 2020. With this, I'd like to hand over to Julian, who will walk us through the top line metrics and segment updates and cash flow.

Thank you, Fabian. Yes. Good afternoon, everyone. And as usual, we include some segment metrics to further explain our top line developments in the release as well as in the presentation that Fabian mentioned. It's on Page 12 there if you're following along. What you can see there is that our growth was really broad-based with all segments growing the meals shipped by at least 90% year-on-year. U.S., almost double that. There's a healthy dynamic of active customer growth, leading to higher orders and meals growth, which means we don't only have more active customers, but the average activity level is increasing. This is also reflected in our average order size, which is up 6% versus Q3 2019 on a constant currency basis and 2% on a euro basis. Now going into a bit more detail on the segments. Next to the strong growth, we're also happy to see each region increase its contribution margin between 5 and 6 points year-on-year. In Australia with [Technical Difficulty]

Ladies and gentlemen, this is the conference operator, we have temporarily lost connection with the speaker line. Please continue to hold, the conference will begin shortly. We now have reconnection with the speaker. Please go ahead.

So we were just going into Australian details. In Australia, EUR 25 million in revenue, 36% contribution margin. We again reached a positive operating EBITDA in the double digits. So it was 13% of revenue. Overall, the temporary closure of the Melbourne site in August only had a minor financial impact here, thankfully. In the U.S. segment, we've reached a positive operating EBITDA again for the second consecutive quarter on the back of EUR 34 million in revenue and a 23% contribution margin. We were facing some operational challenges and some margin pressure there during the quarter. To note as well is the fact that we were able to complete a build-out project on the U.S. East Coast. In the manufacturing center there, we expanded the refrigerated space in the site. So this will help us with capacity for the future. [Technical Difficulty]

Pardon me, this is the conference operator. We have temporarily lost connection again with the speaker line. Please continue to hold, the conference will begin again shortly.

I can actually carry on for Julian until he gets back. Operator?

Thank you for holding. We now have reconnection with the speaker. Please go ahead.

Sorry about that. So Europe also continued its strong growth and also improved its margin in the quarter and it was EUR 10 million in revenue and 26% contribution margin. The segment actually there also is nearing breakeven on an operating EBITDA basis if we exclude the headquarter costs with around EUR 3 million in the quarter in headquarter costs that you can see in the segment results. There on the operations side, I mean, we're happy to see also Dinnerly launched in July in Germany, and we've seen good initial traction, I would say, there. On cash flow, so turning to our performance on cash. We ended the quarter with EUR 16.5 million. That's EUR 1.8 million lower than the end of Q2. This was driven by operating cash outflow of EUR 1.3 million. This is largely due to a minor shift in working capital. We had capital expenditures of EUR 2.1 million, for example, for this East Coast project I just mentioned. And this is all partially offset by EUR 2 million inflow. As you recall, we had an announcement on this, we had WTI exercise their warrants. So from that, we had an inflow on the financing side. All in all, for the year, the cash burn is up EUR 11 million. CFOA contributed EUR 7 million of this. Capital expenditures for the 9 months at EUR 6 million so far, and net financing flows a bit over EUR 10 million in 2020 so far. As you will recall, we also did a small equity raise of EUR 9 million in May. That's included in there. And turning to guidance. As Fabian mentioned, the strong Q3 top line performance enabled us to narrow our revenue guidance to the top half of the previous range. So we now expect 90% to 100% for the year now on a euro basis and before that was 80% to 100%. On CM, we're at 29% through 3 quarters, in line with our original guidance for 2020. So we feel confident that we can also achieve this for the full year. Although there have been some COVID-related impacts across regions in different categories. We mentioned the Melbourne shutdown, for example, earlier. I mean, there's a lot of things we're working on. And so we do believe that things -- we need to believe we can continue the margin, and we're working on that as always, of course. So yes, with that, I would like to hand it back to Fabian. And sorry again about the connection problem.

Yes. Thanks, Julian. So to sum it up, over the past 6 years, we've built a global platform that provides us with the ability to create personalized direct-to-consumer service brands such as Marley Spoon, Martha & Marley Spoon, Dinnerly. And our manufacture to order supply chain allows us to personalize our service offering to a degree that it's hard to replicate via traditional retail supply chain model. Now Marley Spoon today is a fast-growing AUD 500 million run rate revenue business, which has just closed on its second consecutive globally profitable quarter. At the same time, we are still at the very beginning of our development. I mean, we believe that we have built an extremely well positioned global business that's reaching more than 180 million households as we speak today. Now this position should allow us to benefit from the continued switch from offline to online shopping, providing a long-term growth opportunity at very attractive unit economics over the coming years. Now thank you for taking the time this afternoon. And with that, I'd like now to open the call to questions.

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

Well done on scaling the market demand. Just targeting that upgrade to guidance from 80% to 100% to 90% to 100%, just backsolving the numbers there, it looks like it's a pretty wide range for that fourth quarter, call it, 61 to 74. I guess we're partway through that fourth quarter, can you just maybe touch on what you'll need to see to hit the bottom end of that 90%? And given what's happening in the second wave around the world, I thought that you'll be more tracking towards that top end. Just maybe talk me through what you're seeing in that and why the wide range?

Yes. I mean, in the past, we always -- when we spoke about guidance, we explained that there is, of course, the new customer dynamic, but very important as well as how do existing customers behave. And we've seen that behavior change a lot at the beginning of the COVID-19 crisis, as you remember, and it peaked maybe in April, May, when it comes to skip rates, when it comes to order sizes and started to normalize. In Europe, it has normalized pretty much at the end of the third quarter. And in Europe -- in U.S. and Australia, we see that this normalization, maybe it's 50% back, but then it kind of stalled there and it [ stayed ] there for a while. So in the past we said, when we had the wider range, based on how normalization will continue to happen, if the business or the user behavior is normalized to pre-COVID level, we would see revenue more at the lower end of the guided range. And if the behavior doesn't normalize, we'd see it more in the upper range. Now as the year is progressing, we continue to observe the user behavior, and so that's what allowed us to narrow the range now. When you now ask, of course, what will happen to the narrowed range? So in a way it's the same question, the same answer. It really depends on what we will see. Will we see a continued normalization and going back to normal, then we'd maybe be at the lower end of the range. Will we not see any normalization, then it might be more at the higher end of the range. So it really depends on what user behavior will be when it comes to our existing customers, which are, of course, a big driver of our business. As 90% of our sales is recurring, that has a big impact. And that's anybody's guess, of course. Will we just stay where we are right now? Or will we go back to normal in the next 4 quarters? Or maybe the world is changing. Again, we see a second wave starting in Europe and maybe in the U.S. So that's anybody's guess, and we can't really foresee that, of course.

But as you stand today, it sounds like you haven't seen that normalization. Is that right?

So it looks, at this point in time, we see a very stable user behavior at the end of the third quarter. And as we said in the past, the user behavior kind of stayed where it was and didn't continue to normalize to pre-COVID level at the end of the third quarter.

Good one. And just in life, obviously, the pandemic hit hard. You guys obviously saw a surge in demand. You turned up your marketing spend for a little while to kind of cope with demand. Just as we go through a second or third wave, whatever you want to call it, are you guys able to scale with demand, particularly in Europe, but also in the U.S.? Do you guys need new facilities or new CapEx? Or are you guys ready to be able to double revenue if there is a surge?

I mean as we mentioned before, we were kind of in a good position at the beginning of 2019 -- 2020 as we had done a lot of capacity expansion in 2019. And that kind of set us up well to cope with the growth that we've seen and the business has grown dramatically. And the team has done an amazing job to create more capacity, while also working environment to keep everybody safe. So this was in a way a double stretch. And a lot of that capacity increase was due to hiring, shifts -- adding additional shifts, growing the team. The team grew dramatically this year. And that, in a way, leaves us today at a situation where we still have excess capacity, and you've seen additional capacity expansions, for example, the New Jersey cool room expansion that concluded at the end of the third quarter. So currently, we do have more capacity, and we're not running at double shifts and you never run a triple shift. So in a way, there is the ability to grow in the footprint that we have in place. Also true is that we are and we have accelerated our plans. So we -- you've seen that we announced a larger facility in Sydney that we will enter in, in the first half. That's nearly tripling the footprint that we have currently in Sydney. We talked about U.S. capacity expansion project that we would have maybe initially planned for more 2022. We're moving them forward, and we'll earlier enter into those. So we continuously build and expand capacity for the coming years because this business will continue to grow going forward also after a post-COVID world. So today, we feel comfortable that we have capacity reserves to meet existing and also increasing demand. And we are now also moving forward some long-term CapEx plans that we had more set up for 2020 and beyond and moving them into 2021 as the business has developed so rapidly this year so far.

Okay. Good one. Good to hear. And just one last one for me. So it sounds like you're raising money with the capital raising. Maybe can you talk me through your -- post this, you'll have the strongest balance sheet you've ever had, Fabian. Is the plan -- and you're also profitable. Is the plan here to go back into a cash burn scenario? Or do you think you'll keep it as a buffer as you're obviously scaling at 30% EBITDA margins, incremental EBITDA margins?

Yes. I mean, in the past, we've said we have these 2 objectives. On the one hand side, we see this unit economics pre-COVID, they were already quite attractive. Now the ability to invest into a customer to get a cash recovery of 6 months, but more importantly, getting an ROI of 3x, which is -- over the lifetime of the customer, which is corresponding to a higher than 30% IRR. This is a very attractive way to invest and deploy capital. And this has only improved and this is materially better these days. So we have really good unit economics. Given that we live in a low yield world, we believe that's a great way to deploy capital. So that's one objective. And the objective, as you mentioned, strengthening the balance sheet. As the business turns the corner and is now generating positive operating cash flows, and we have it very much on our control, that is also our goal. Now the third quarter shows you that how much control we have. Now we are able to maximize growth, but also make sure we hit a quarterly profit. And so going forward, our strategy will be to reinvest the operating cash flows that we generate into continued growth. And the raise will allow us to do that because the raise will give us the balance sheet strength that we need, given that the business is now at significant scale. Now AUD 0.5 billion in run rate revenue and growing, we just need a little bit more cash buffer to be able to then reinvest the profits into growth. So we don't expect to go into cash burn mode. We expect to overall run the business at breakeven and deploy capital as long as we see these amazing unit economics. That always has to be true for us to invest into a customer. Regardless what the brand, regardless what the region, we want to make sure that we hit at least a 6 months payback, 3x return or 30% IRR. And again, currently, we are significantly better than that due to the favorable environment. So we want to capitalize on that growth opportunity that we are being presented at these times and also beyond.

[Operator Instructions] Our next question comes from Matthew Chen from Foster Stockbroking.

Fabian, well done. Just wanted to touch on -- you had mentioned sort of product and geographic adjacencies last time around. So is that sort of where a good idea in terms of where that use of funds might go? Can you expand a little bit more on that?

Yes. We tested this year various product expansions. You've seen ready-to-heat options. You've seen other regions, breakfast, baking. And so our strategy here is to solve more problems that the customer have. As we are delivering a box to our customers every week anyway, the ability to solve more of our customers' problems in personalized ways is really key to our strategy and gives us additional growth opportunity. Now because of the COVID growth that we see in this year, this strategy, in a way, wasn't our primary objective. And we are focusing on just handling all the growth that we are presented in our core business. So what you'll see into 2021, you'll see us continued investment into these adjacent product opportunities. But this doesn't require really cash, it's more like an ongoing operating process. And instead the opposite, we think it gives us incremental sales and quite profitable sales as the infrastructure costs of delivering the box to our customers' door, they're already incurred. And so we've seen basket size increases. Also pre-COVID, if you look at our first quarter, you already saw certain positive impact of basket sizes that are related back to our adjacent product offering. Now we have to be careful that since COVID started, we have now 2 effects: we have basket size increases due to the need to cook more often with us and also these adjacent products. So these things come in together at this point in time. But overall, we do see -- if we offer more adjacent product choices, we do see basket sizes going up, and therefore, it's an attractive way for us to grow. And we will refocus on those as things normalize around us operationally, and you'll see more of that then next year.

Great. And just on the sequential contribution margin. So you touched on in the quarterly, the sales discounts as part of higher investment in growth. Is that something that's sort of going to be ongoing? Or can you give a little bit more color on that?

Yes, sure. Matthew, this is Julian here. So there's, of course, a seasonal dynamic in there. I mean I think you remember this from the past, we tend to spend more on marketing in Q1 and Q3. So this is not that unusual. I think we're -- what we're doing a bit more is we always kind of optimize this between media cost and how we incentivize customers. And I think we probably shifted a bit more towards a different discounting structure there. So I think that may be playing a part, but I think most of it will be really seasonal, right? So -- and as you remember, Q4, we usually spend a lot less on marketing. So that you should also see come back to some extent, yes.

Yes. I think that was a little bit of a surprise in the actual outflows. I think as a percentage of the top line, this is slightly more than what you sort of talked about as a long-term brand maintenance percentage. I think it was about 14-odd percent.

I mean when you think about brand maintenance, we said in the past, and it's very interesting if you benchmark us with other CPG companies. Investors often ask what is needed to invest into marketing to keep the brands steady? And in fact, for Marley Spoon, to keep the business steady on the long run on a year-over-year basis, if you invest 10% to 11% of your sales in marketing, that's what keeps the business steady. That's the brand's maintenance and everything else on top of that gives for growth. And that's still true right now. Now this hasn't changed at all. Of course, given that you have, and the things I want to remind everybody, the growth of the second quarter had 2 vectors. On the one hand side, we had the increased demand of existing customers that didn't go on holiday or business trips anymore and didn't skip boxes and also wanted to cook more often per week with us. This create -- and as the recurring revenue is the back book of our -- backbone of our business, you saw an immediate strong vector upwards just from existing customers. This doesn't really talk about new customers and customer behavior and churn behavior. It's just suddenly there's just more demand of your base. And that kind of normalized again. So you have this vector that's kind of trending downwards since. And then you had your continued customer acquisition dynamics at really good unit economics. So therefore, the brand maintenance metric that we kind of introduced at the beginning of the year, it still holds. It hasn't really changed at all. But of course, there's been quite some unusual dynamics in the second quarter, and we have to be mindful of that as well. So therefore, year-over-year, maybe it's a better way to look at this than quarter-over-quarter.