Marley Spoon SE (MMM) Earnings Call Transcript & Summary

Yes, thank you, and good morning to everybody. Thanks for joining our investor call. My name is Fabian Siegel, Founder and CEO of Marley Spoon, and I have with me here today, Jennifer Bernstein, our CFO. Now yesterday afternoon, we released our annual report for our financial and calendar year 2020 as well as investor deck. Obviously, we released a slightly amended version prior to this call, and we're looking forward to presenting to you today the highlights of these results as well as providing you with an update on the business. We will be referring to selective slides in the deck throughout the presentation. And at the end, as usual, we will open the call to your questions. Now 2020 was a significant year for us here at Marley Spoon. It was full of challenges. And during all those challenges, Marley Spoon and Dinnerly customers could rely on some form of normalcy, at least as the weekly boxes kept arriving, and we're proud that we could help here and that our customers could provide a home cooked meal for their families during this time of pandemic. As you can see on Slide 2, we doubled revenue in a challenging operating environment. It's also important to point out that before the start of the pandemic, our business has been already growing quite strongly over the past years with a CAGR of 59%. But 2020 was not only about growth. Let's go to Slide 4, we also expanded margin by more than 4 points despite numerous operational headwinds, and we are proud to have delivered our first year of positive operating cash flow at EUR 4.4 million. Now at the same time, we significantly improved our balance sheet. In 2020, various convertible debt facilities converted into equity. We raised additional equity through 2 placements, and we retired our senior secured debt, all in all, leading to a positive equity ratio at the end of the year. As shown on Slide 5, our business is about solving everyday problems in personalized, easy and delightful ways. When it comes to a weekend cooking, our subscribers enjoy what -- that we simplify their weekly routines. What are we cooking tonight becomes an easy selection among 16 to 30 weekly changing menu options. So instead of lengthy planning and supermarket shopping, Marley Spoon and Dinnerly box arrives conveniently at your doorstep. This way, you can cook something healthy, save money and avoid all the food waste that supermarkets incur. Therefore, making your weeknight cooking also more environmentally friendly. Now over the past years, as you can see on Slide 6, we've expanded our menu options and offerings, which led to a continued growth in net revenue per subscriber. At the same time, we grew a subscriber base for each half year period over the past 3 years. So we're not only growing fast, but for every new subscriber signs up, we're able to sell them more, meaning we're solving more of the everyday problems. While this has led to strong growth over the past years, we are just getting started. Now Slide 7 presents that the switch from offline to online shopping is really just getting under the way and while the COVID-19 pandemic led to strong growth in online grocery shopping, still only 3% to 4% of groceries are purchased online as of today. And grocery is by far the largest vertical of consumer spending. Globally, a $7 trillion category. With our current manufacturing platform, we're just able to reach and serve 190 million households across Europe, Australia and United States, we think we are well positioned to benefit from the continued growth in online shopping for this massive category. In order to serve this expected growth and in order to keep delighting our customers, we have and continue to invest into our capacity. As you can see on Slide 8, over the past years, we have scaled up our manufacturing footprint more than 10x. After moving into a larger site in Texas as well as expanding our footprint in Sydney in 2019, throughout the past year, we incrementally added further capacity in Sydney and New Jersey as well as opened our new facility in Perth. For 2021, we expect a further capacity expansion as we move into new manufacturing centers in Sydney and California. As we continue to scale our business, we are now starting to see our flywheel as shown on Slide 9, come to action. Now as we scale, we continue to experience better marketing leverage, and we're starting to experience economies of scale in our supply chain and manufacturing. The result in increase in margin allowed us to invest back into our digital capabilities, but also more importantly, directly back into the product, increasing the value we deliver on a weekly basis to our subscribers. This improved customer experience leads to strong subscriber growth and in turn more scale. So this flywheel continue to accelerate it by the capabilities we have been building over the past years. Our market-leading ability to create and officially grow our direct-to-consumer brands drive growth. Our efficient source to order manufacturing capabilities plus margin, and we have seen our margin exceed those of other larger peers. Our data science platform allows us to predict what our customers would like to eat and what menu they would choose allowing us to deliver a better customer experience. Our digital platform stack supports the efficient acquisition of new subscribers and support overall value delivered to our subscribers as they interact with us on a weekly basis. All these capabilities are supported by a conscious investment in company culture and our team, which speaks to continuously improve talent density. Now we think 2020 brought us to a scale that allows us to accelerate the Marley Spoon flywheel. This is a very special point in time of the development of our company, and we are excited to see how this virtuous circle will support our future growth. With that, I would like to hand over to Jennifer, who will walk us through some of the 2020 operational and financial metrics.

Thank you, Fabian. As Fabian mentioned, our capabilities create the foundation for business improvement and growth, but so too does our operating model shown on Slide 10. We have a sophisticated data set and analytics capability that lets us tailor our offerings to customer case and profiles. It also means that we are regularly rotating menu options, which is why we are sourcing our ingredients to order. This enables us to deliver high quality, fresh goods, customer specifications while also limiting waste and excess inventory. We're continuously working to optimize our logistics with both our line haul and last mile carriers, and leverage a shared service center in Portugal for our global customer communications activity. The benefits of this operating model is contribution margin that's improved over time with significant gains in recent years, including 4 points of improvement in the last year. The margin expansion was driven by the U.S., which gained 6 percentage points versus the previous corresponding period. Food cost improvements, renegotiating logistics contracts and the sheer scale improvements in our business there have helped step change the margin. Australia also contributed to the margin expansion, growing 3 percentage points versus the prior year, thanks to strong operational performance even amidst opening a new fulfillment center, the country's third in the fourth quarter of last year. Finally, Europe also showed significant year-on-year improvement expanding margins by 5 percentage points with the gains being driven in part by the continuation of the region's move to a one Europe way of operating. Shifting gears to a focus on our customers, we're showing another half year of strong retention among our customers with 90% of our revenue coming from repeat orders, as illustrated on Page 11 of our investor deck. Equally important, these customers are demonstrating strong long-term revenue retention. The graph on the right side of the page shows the revenue retained from quarterly cohorts for the years 2018 through 2020. The trajectory for the curve suggest that customers' rate of retention has improved over time. Customer loyalty and improvement in base behavior are factors that are contributing to very favorable unit economics, as seen on Slide 12. In 2020, we have observed a rapid payback of our customer acquisition investment in just 4 months. This is partly owing to lower CAC versus previous years as seen by the improvement in our year-over-year media spend. Over the 36-month lifetime, we see a 3x ROI, which we believe is very favorable and which encourages us to continue investing in our business. Revisiting the Marley Spoon flywheel concept again and bringing your attention to Slide 13. It's our continued investment in marketing and attractive unit economics that is delivering the scale leverage for our marketing and G&A to become more efficient with time. We see sequential improvement in marketing as a percent of net revenue. We see the same in G&A with a slight uptick in the back half of 2020 as we reinvest in the business to build new digital platforms in order to provide a better customer experience and grow our talent and leadership to keep pace with fast growth. The improved efficiency in big spend areas contributed to Marley Spoon's ability to become operating EBITDA positive for the first time in Q2 2020 earlier than planned. In fact, we delivered 3 quarters of consecutive positive operating EBITDA, enabling us to break even for the full year. We're proud of the profit path that we've been on, turning around a significantly negative margin in just 2 years. And while Australia certainly has more runway for growth and improvement, the region's EBITDA margins provided benchmarks for the rest of the organization. Briefly touching on our full year financials, as you turn to Slide 14, more details of which you can find in the audited financial statements in our annual report released yesterday, we delivered solid growth across all key metrics. We doubled our full year net revenue in 2020 on a constant currency basis, expanded contribution margin 4 percentage points after having improved by the same amount in 2019. And we delivered positive cash flow from operations for the first time in the company's history. As you can see on Slide 15, every region has helped us achieve the group performance and every region plays a key role in our portfolio. The U.S. now represents approximately 50% of our business and is a growth engine, as seen by the 89% 3-year CAGR. The U.S. also became profitable for the first time in 2020. Australia, which also enjoys significant growth as a clear profit center for Marley Spoon, having delivered EUR 10 million in operating EBITDA for the year. Finally, Europe, which is a complex region of 6 different countries, also enjoyed healthy growth and is approaching breakeven, excluding the company's headquarter costs, an indication of the region representing an important scale up opportunity. With that, I would like to hand it back to Fabian.

Yes. Thank you, Jennifer. Now as our business continues to scale, we continue to grow and improve our teams. And so we have started the new year with an expanded and strengthened executive team bringing in a lot of experience and diverse perspectives from other CPG companies, and we'll continue to grow and upscale our teams as we have high ambitions and, therefore, continue to increase the talent density across Marley Spoon. Being ambitious to us also means that we aspire to have a positive impact on the environment and the communities we operate in. As you can see on Slide 17, our source-to-order supply chain model that our business is built upon inherently leads to a supply chain that has very low amount of food waste, on average, below 1% of sales. Reducing food waste is a big contributor to fighting global warming as around 25% of global CO2 emissions are generated by our food production systems. A 2019 study from the University of Michigan concluded that cooking with a new kit reduces the carbon footprint by 30% and compared to cooking with the supermarket, a reduction primarily achieved by our minimal waste supply chain. In addition to that, most of our food that's left over at the end of our production base is donated to local charities. Next to the carbon footprint of our meal kits, we are also conscious about the carbon footprint that we contribute as a company. Since 2019, we have been measuring our corporate carbon footprint. And as of 2020, we have been operating as a carbon-neutral company and we are proud about this achievement, but we see this only as one milestone on the path of our continued ambition to build a more sustainable company. Team diversity has been another priority for us as we aspire to build a sustainable business since we started in 2014, and we are proud to announce that, for example, in terms of gender diversity, Marley Spoon is not only a gender-balanced company overall, but especially in senior leadership positions, we have built a diverse team of female leadership, constituting the majority of our Supervisory Board and executive team. 2021 is already well underway, and we have experienced strong growth across all of our regions. As you can see on Slide 18, we are reconfirming our guidance. We expect to grow 25% to 30% this year and expect to expand our contribution margin further to 30% to 31%. Our investment priorities for 2021 will be to utilize the favorable customer acquisition environment that we continue to see. We will continue to invest in our fulfillment capabilities and extend the service offering to our subscribers via extended range and increased personalization and customization. At the same time, we will continue to invest in and strengthen the team to support the expected growth over the coming years. In order to fulfill this expected growth, you will see us investing more into our global fulfillment centers and software platforms. The platforms we have built to date provide us with the ability to create personalized direct-to-consumer service brands such as Marley Spoon, Martha & Marley Spoon and Dinnerly. Our manufactured order supply chain allowed us to personalize our service offering to a degree that's hard for traditional retailers to replicate. This puts us in a very good position to continue to gain market share as customers continue to switch from offline retailers to online shopping. Today, Marley Spoon is a global fast-growing operating cash flow positive business with a strong balance sheet. At the same time, we're just getting started. We expect to continue to grow rapidly at very attractive unit economics over the coming years. Thank you for taking time this morning. And with that, I would now like to open the call to questions.

[Operator Instructions] Your first question comes from James Ferrier with Wilsons.

First question is on Slide 12 and the lower customer acquisition costs you saw in calendar '20. Is that continuing into calendar '21?

I mean we -- as we mentioned this on the past call and for the Q4 results. We have seen a really good start into the year. We're seeing good acquisition traction. And we've seen acquisition costs lower than what we have seen in prior periods or other Q1s. So overall, we see really good traction, and we see good measured CACs. On the other hand, of course, 2020 was very special, especially in the second quarter. We saw for a brief period, very, very low acquisition costs. So I think, overall, I would expect this year to be continuously having attractive acquisition costs. I'm not sure we'll see the same average that we saw in 2020. I think there might have been some -- the Q2 was really exceptional. So I'm not sure we're going to get there. But overall, we continue to see good acquisition environment and therefore, resulting also good unit economics.

A second question, back on Slide 11 and the chart on the right-hand side, can you just explain a little bit more color perhaps in sort of how those trend lines influence the return on investment or the lifetime value of the customer?

Yes, absolutely. And maybe it's also good to refresh how we are calculating the ROI. So what we've seen on Slide 12, we've given you a snapshot on unit profitability, so payback and ROI. And that 2020 snapshot means we look at those cohorts that we acquired in the year 2020. And to be very specifically, given that we have observed a 4-month payback. We're actually starting a bit earlier even. So we started in calendar week 40, '19 all the way to calendar week 41, '20. So that's kind of the customer groups and cohorts that you look at. And you look at the behavior, you realize the paybacks that you have. But of course, in order to then come to the 3x return calculation, what we do is we take actually past user cohorts we have observed to then use that real data to extrapolate the 2020 user acquisition cohorts forward and therefore, come to the snapshot we provided. Now that means, coming to your question, we've seen in the past on the one hand side, you can see it on Slide 11, which is the first time we actually disclosed long time quarterly net revenue retention cohorts. You see that you have this very long stable base of customers that once they switch to Marley Spoon really get used to the product and the service and they start integrating into their lives. And they're literally stay with the products forever. And obviously, the 2018 cohorts for 11 quarters, very, very flat at the tail. But what you also see is that every year, we improved our net revenue retention. Now what that means in regards to our view on unit economies and payback, there is a certain conservatism built in, of course, as we use past data that we apply to the 2020 cohort as we look forward now. So that's the data that we have. So what you could see is in the past, we have observed the net revenue retention to improve every year. And that also then leaves room for ancillary you could have an upside on the unit economics that we're currently looking at, but you have to be somewhat conservative. We think, oh, you have to have a proper database, the databases of your decision, that's why the path data we feel is the best proxy to apply here. And so therefore, if you look at 11 and 12 in combination, you could see in the past, we have been able to improve net revenue retention. And you could argue, there's opportunity for upside, therefore, on the view on the unit profitability as we've seen here in the 2020 snapshot.

Understood. That's very helpful. Last question for me is around margins and just in the context of operating leverage as we move ahead. So with your calendar '21 guidance, the contribution margin guidance would imply about 100 to 200 basis point expansion. So the first part of the question is, is that sort of expansion also expected at the operating contribution line as well? I'm just trying to get a feel for where that operating leverage is coming through.

So I would say that the margin expansion is a combination of things. I think it's -- well, a lot of it is just kind of business as usual that's same. And so we had -- as we said in the remarks, we had 2 consecutive years of 4-point expansion, which was driven in large part by our scale. We consider that our growth is still going to give us some scale leverage, but we also are reinvesting back in the business at the same time that we're looking for different ways that we can always optimize the way that we're doing our fulfillment center manufacturing. So installing different lines to give us more picking efficiency, negotiating different food contracts. As I mentioned in my remarks, negotiating with our line haul and our last mile carriers. So it's always exploring ways that we can kind of to trim those cost items. That said, we're also investing in the business a lot. As you know, we're investing in some new fulfillment centers that's going to -- that will take some time to ramp up. There will be some staffing, some training that will be associated with that. So I'd say, overall, that's probably why we have a more balanced 1- to 2-point expansion. With respect to -- maybe you could just expand on your question, the operating contribution. I'm not sure I follow exactly that specific part of your question.

Well, the fact that you do disclose separately the operating contribution margin from...

Oh, sorry, if we're expecting expansion there, too?

Yes. Yes.

I don't know, Fabian, do you want to comment on that?

Yes. I mean the -- so the guide from a contribution margin and the difference between contribution operating CM is that the factor in or we -- the operating CM doesn't include fixed cost and marketing vouchers. So they are a better perspective on the margin improvement. You would expect as CM improves, you would also expect operating CM to improve. But in fact, what you would see over time as the business scales, you would expect that operating CM to come closer and closer to operating CM. So when you look at the performance last year, we had 29% contribution margin, but operating CM was like in the mid-30s and that is kind of the gap that you still have, which is due to the fixed cost effect and also due to the effect of the high amount of voucher shares ready to date we still acquire and are growing fast on the customer base. So these 2 things -- or these 2 margins, you expect them to move closer together that means your contribution margin probably grows faster than your operating CM, but you would also expect operating CM to improve year-over-year. Does this answer your question?

Yes. That's great. And then the second and last part of the sort of the operating leverage question is obviously, the marketing spend is a lever that you'll call more or less aggressively depending upon how attractive the unit economics are. But when we look at the G&A line, and as a percentage of net revenue, it stepped down quite considerably in calendar '20. Do you see that line as a source of operating leverage in '21? Do you think it will step down again in '21 as a percentage of net revenue?

I wouldn't expect it to drop really. I mean what you saw at the phenomenon in half 2 '20 versus half 1 is probably more in line with what we're looking at because I think the really rapid pace of growth in 2020, I think we got the fulfillment centers in a place where we can deliver that capacity, but the rest of the organization didn't perhaps move in lockstep with that expansion. So I think getting the right teams in place are continuing to get the right people in place. The digital platform is requiring a certain set of talent that we need to build out that perhaps we didn't have before data scientists, for example. We've commented before on the leadership team and the developments that we made there at the executive level, but also across different functions in the organization. So I think we're going to try, of course, for more efficiency, but at the same time, we're going to be up weighting spend a little bit just because we need to play a little bit of catch up across the organization.

So for 2021, therefore, you probably expect G&A to -- that you probably expect G&A to grow in sync with overall business. But then in the midterm, you would expect, nevertheless, the cost leverage effect come through also on the G&A basis. So I think in the midterm, you probably expect G&A to be in the high single digits. But for 2021, you'll see us probably continue to invest in capabilities of the team. And so in order to support long-term growth, you'll probably see that go more sideways. But then the trend long term is, as you saw it already in the past years, you'll see G&A to drop as a percentage of sales also in the midterm.

Our next question comes from Matthew Chen with Foster Stockbroking.

Just wanted to come back to Slide 11 and the net revenue retention curves. I just wondered if you could talk more about the well, I guess, how you improved that cohort behavior and how that improves through time because it does look like through history, you've made improvements to retention where the 2020 cohort with that data looks much better than '19.

Yes. I think there's various impacts that are helping us here. One impact, probably not -- probably the smallest one, but it's a very consistent one, and then you see it also further up on Slide 6, you see that we increase the revenue per subscriber over time as we added more choices and options. So this was probably a helper in improving revenue retention. That's one positive impact. Another positive impact, probably a bigger one, was our ability to get better on finding the right customers. As the business scales, as the platform scales, we have more data or data allows to train your algorithms better and lots of acquisition marketing is around finding the right lookalike audiences that are relevant for your products. So the more data you have, you're more efficient to get there. And so our ability to attract the right customers over time improved, which then improves your net revenue retention. And similar, slightly different is your ability then once you acquire a customer to retain your customer, we have, over the past years, heavily invested into a predictive modeling of when is a customer about to churn or what is the right time to maybe reactivate a customer. And while in 2018, we barely did any of that. We started to roll out these automatic algorithm-driven churn prevention campaigns and the reactivation campaigns, they then drive it on the based on the RFM modeling where we understand which is an attractive customer, which is a less attractive customer, then automatically provide the right offer for the right customer to either prevent them from leaving the service or getting that back into the service. And this was just starting to roll out in Q1 in 2019 and with more significantly than scale in 2020. So this is probably the third impact our reactivation and churn prevention approach significantly improved over the past 3 years. And so these 3 elements probably, collectively increased dramatically our net revenue retention. And again, when it comes to our unit economic perspective, we still use past data to predict future behavior. That means when we look at the 2020 users and expect their behavior after the first year, we're actually looking towards 2019 and '18 and using that observed behavior to then calculate our expected ROI. And you could argue there's a certain level of conservatism, therefore, built into the model.

I would just add one thing. Sorry, Matthew I was just going to add one thing, which is even as we look ahead, too, I would say there's a fourth element that's going to contribute, which is it's still grounded in the technology and the data science, but it's the taste profiling. So the longer customers stay with us, and this is why that retention is so important, we get more knowledge about what customers like. We use their own orders to help play back certain recipes to them that much what their tastes are. So it's not just the science of keeping customers from churning, but it's also the science of just continuing to delight the customers who want to stay in and do continue to order.