Marley Spoon SE (MMM) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Marley Spoon Q2 2021 Quarterly Results Preliminary H1 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. Thanks for joining our investor call. My name is Fabian Siegel, Founder and CEO of Marley Spoon, and I have with me today Jennifer Bernstein, our CFO. Now earlier today, we released our second quarter and preliminary first half results of our financial and calendar year 2021. We also have a slide deck provided on our Investor Relations website, which we'll refer to as we present to you today our results and provide you with an update on the business. At the end, as usual, we'll open the call to your questions. Now the second quarter of 2021 was the first quarter compared to a fully COVID-impacted PCP. Even though last year's second quarter experienced explosive growth, we continue to grow compared against that basis again this quarter, keeping our long-term growth dynamics intact. If you turn to Slide 6, you can see that year-on-year growth dynamic. Active subscribers grew actually 37%. And if you control for last year's pandemic-driven impact on base customer behavior, you can see that revenue grew by 40% year-over-year, in line with subscriber growth. Reported revenue grew 12% year-over-year at constant currencies. Now if you look at user behavior across the regions we operate in, we observed normalization to pre-COVID level with the 2021 holiday season in the Northern Hemisphere as being even a bit more pronounced than in 2019 and other pre-COVID peers. Nevertheless, our growth path is intact, enabling us to reaffirm our 2021 net revenue guidance to come in at 30% to 35% growth year-on-year. While the business continued to grow dynamically in Q2, we also continued to face a challenging operating environment, especially in the U.S. The team was able to mitigate some of those headwinds keeping operating CM, which is defined as CM excluding the impacts of marketing vouchers and fixed costs such as expenses related to site lease, more or less flat. However, contribution margin decreased year-over-year. This decrease in CM was caused by the aforementioned operational challenges paired with input cost inflation as well as the normalization of marketing vouchers compared to the PCP. All in all, we missed our initial margin targets for the half year as we had planned to increase contribution margin in H1 compared to the PCP. As a consequence, we now think it's realistic to assume that this year's margin will be in line with last year's margin. And we've revised our guidance accordingly, expecting around 29% contribution margin for full year 2021. Overall, the investment into growth marketing as well as our G&A investments to strengthen our operational bench paired with the margin led to operating EBITDA loss of EUR 9.1 million for the quarter and EUR 14.8 million for the half year, resulting in an operating EBITDA margin of minus 9%. Cash from operations for the half year was only slightly negative at minus EUR 2.2 million. Now let's review the segments in more detail. We'll start with our U.S. segment on Slide 7, which shows strong post-COVID growth. Even though the PCP last year grew 171%, we grew an additional 7% in constant currency. And more indicative of the true growth, our subscriber base grew 27%. As mentioned before, we have seen quite some operational challenges that started in Q1, where we had to shut down our Texas FC due to extreme weather condition. Operational challenges continued into last quarter, and they are still ongoing. Nationwide labor shortages impacted staffing levels and labor rates, not only for us but also our inbound food supply chain and logistics partners. This had a ripple effect on customer service quality. Due to those labor shortages and overall macro environments, we are also experiencing input cost inflation during the quarter. All of these impacts created strong headwinds to our margin. Instead of an increase in our operating CM, as originally planned, we were just able to hold it steady. This led to an overall CM decline due to the additional impact of the year-over-year normalization of the marketing voucher environment. While most of the operational challenges were external factors, we also have exposed operational weaknesses within our organization, and we have implemented countermeasures to strengthen our operations to be more resilient to external shocks. In addition, we implemented a price increase for our Dinnerly brand in the beginning of Q3 to mitigate input cost inflation. Despite our team being engaged with many operational challenges during the quarter, we nevertheless continued the expansion of our customer value proposition by launching our ready-to-heat offering for our Martha Stewart and Marley Spoon brand as well as expanded our breakfast offerings during the second quarter. Moving to Australia on Slide 8, where we also experienced post-COVID growth with our subscriber base growing 31% year-over-year and our revenue growing 7% on a constant currency basis compared to the PCP. Operating CM was impacted primarily by the shift in sales mix between Dinnerly and Marley Spoon. CM was impacted by the year-on-year normalization of the marketing environment in regards to vouchers as well as some fixed cost increases due to our new Sydney FC and our Perth FC. Let's finish off our sector overview with Europe on Slide 9. Now Europe saw strong growth year-over-year with 33% active subscriber growth and 43% revenue growth compared to the inflated PCP. We launched our newest manufacturing technology at the end of Q1, which temporarily impacted CM together with the normalization of the marketing environment year-over-year. Europe is growing to scale with approaching profitability on a stand-alone basis. Taking a step back, the business we've built over the past years is about solving a big and meaningful consumer problem that could be materialized. By solving this recurring consumer problem, we have built over the past years a back book of recurring revenue business. The growth of that back book of business continued also this past half year. As you can see on Slide 11, now more than 70% of our revenue in H1 is now driven by customers who have ordered 6 times or more, which is up 5 points year-over-year. This recurring revenue dynamic is what excites us as we build our business in this measured market. But our business is not only attractive because of its built-in recurring revenue dynamics. Also, its margin profile is more attractive compared to traditional supermarkets, as Slides 12 and 13 reiterate. Our integrated supply chain creates attractive growth profit and contribution margins, which we are reinvesting for organic growth. This puts us well on our path to grow our business into a EUR 1 billion revenue business by 2025. And from a personal perspective, the first half of this year, especially Q2, has an important proof points of our ability to deliver growth while executing in a challenging environment. With that, I would like to hand it to Jennifer, who will go into more details on our financials.

Thanks, Fabian. As you see on Slide 16, we delivered a strong revenue performance for the first half of this year, growing 36% versus the PCP. This contributed to an overall 2-year compound annual growth rate of 59%, but it's the recurring revenue underpinned by our continued active subscriber growth that makes for an attractive ROI business. As you saw earlier, 93% of our revenue in the first half comes from customers ordering more than one box. This led to profit growth from repeat customers of nearly 40% at our current operating contribution margin, more than enough to fund our voucher and media spend for new customer acquisition, as you can see on this slide. On Slide 17, though we are still early in our scale development, we are already delivering nearly 50% gross profit margin. I'm sorry there's some background noise. Just give me one moment. I apologize. On Slide 17, though we're still early in our scale development, we're already delivering nearly 50% gross profit margin. This is helping provide leverage to fund our fulfillment costs, which despite increased fuel costs and challenges across logistics that are affecting multiple industries we're holding flat at 18% of net revenue. Marketing and G&A show increases, but this is owing to investments in our business. On marketing, we continue to see favorable unit economics in Half 1. However, we're seeing an increase in terms of percent of net revenue given that we are lapping a period during which we benefited from low levels of required spend driven by the pandemic, particularly in Q2 last year. On G&A, we continue to invest in key areas like digital and marketing while strengthening our operating bench with new leadership hires. We're often asked by investors what rate of marketing is required to sustain with this. On Slide 18, we've answered that question, showing that on average, the rate of maintenance marketing is approximately 10%. That differed year-by-year depending on customer behavioral factors like skip rates and basket size. But on average, we need to spend 10% of revenue to maintain our sales. If we were satisfied with that, we would be a profitable company on an ongoing basis, as you can see in the middle of the chart. But as Fabian has previously shared, we have ambitions to be a EUR 5 billion company by 2030, so we invest for growth. Though we acknowledge our operational problems as well, it's largely due to our deliberate choice to invest in growing our top line that we show negative operating EBITDA. But as we saw last year, not all investment years are equal. On Slide 19, you can see how exceptional 2020 was, particularly the second half. This was an unusually low level of spend on a percent of net revenue basis driven by the pandemic. With a return to normalization of customer behavior, we similarly have a return to normalization of marketing spend. However, in that context, we are still delivering operating leverage by improving 9 percentage points versus the first half of 2019, a more comparable period. On G&A, we are seeing a step-up as we invest to meet the scale challenges we have and to strengthen our bench, but this, too, is an improvement versus historical trends. What this leads to, as you can see on the next slide, is overall positive and balanced financial picture. We have a solid, consistent trajectory of net revenue growth. Our contribution margin continues to show steady growth versus pre-COVID periods despite some headwinds. Operating EBITDA margins are negative in this half, driven by the combination of operational issues and marketing growth investments. However, we always work to maintain financial discipline across the business, which is why you see cash from operations at very close to breakeven. In addition to marketing, we are also investing in infrastructure, as seen on Slide 21. This year in particular is a big investment year for us with 2 expanded fulfillment centers and our new manufacturing technology already rolled out in the EU and in progress in the U.S. 2022 is shaping up to be another, though less sizable investment year, particularly in the EU with a second fulfillment center and on our technology platforms. It is for this reason, among others, that we entered into a debt financing agreement with Runway Growth Capital. On Slide 22, you can see that the first tranche to which we have access is in line with our 2-year capital requirements. On top, we were able to secure cost-effective funding that didn't dilute our shareholders and gives us optionality. With this funding in place and with our disciplined approach to cash management, we have an attractive cash position at the end of Half 1 of EUR 46 million. As seen on Slide 23, this cash position is aided by our negative working capital business model. Free cash flow, our net cash from operating activities less maintenance CapEx and the standstill marketing is positive. Put another way, we are generating cash to sustain the business and invest for growth. With that, I would like to hand it back to Fabian.

Yes. Thank you, Jennifer. As mentioned earlier, Q2 2021 was an important post-COVID growth quarter. As you can see on Slide 25, the market we're growing in is fast and at the same time, switching to online shopping from a very low base quite rapidly. At our current size, we're just starting to scratch the surface of that market, as Slide 26 illustrates well, with 272,000 active subscribers. We're operating in a market with 190 million households, giving us a very low penetration to date and setting the stage for future growth conditions. However, our vertical is not the only vertical that is switching from off-line to online shopping. In fact, it seems that 2020 was a catalyst for increased online adoption in many consumer verticals. That increased investment of online brands and platforms is impacting online media costs, and we see CPMs increasing. At the same time, we feel well positioned to grow at attractive unit economics in such an environment. As we've laid out on Slide 27, we have a 3-tier strategy for continued growth at attractive unit economics. First, we will continue our practice of highly controlled user acquisitions at the right unit economics, which we have now demonstrated for the past few years. Secondly, we are increasing the lifetime value of our customer relationships by providing additional food solutions to our customers, such as ready-to-heat, breakfast, baking and also additional snack and pantry items in the future. Thirdly, we believe we can leverage our strong technology and operations platforms to further monetize our customer relationships and extend lifetime value by offering additional nonfood solutions. For example, we've soft launched a direct-to-consumer per food subscription named Bezzie this year in Australia and the U.S. at minimal cost and effort. Overall, we continue to believe that there is a unique opportunity to build a large direct-to-consumer brand business over the next few years, and our growth ambition of generating EUR 1 billion in revenue by 2025 and EUR 5 billion by 2030 remains intact. If you turn to Slide 29 for a recap, Q2 was our first quarter to compare to COVID-impacted quarters and was an important step in validating post-COVID growth. We kept investing, and attractive unit economics and net revenue grew at 12% year-over-year at constant currencies. More importantly, active subscribers grew 37%, which is a lead indicator for the underlying growth, which came in at 41 percentage controlling for COVID-based behavior impacts on the PCP. However, Q1 and Q2 were also operationally challenging. Maintenance missed around 300 basis points in margin compared to what we had planned for initially, which relates to around about EUR 5 million in cost headwinds. Those cost headwinds paired with our investment into growth, both in terms of marketing and operational capabilities, led to an operating EBITDA loss of EUR 50 million for the first half. However, our cash from operations, which is the key financial metric for managing the business, came in at negative EUR 2 million for the half. We will continue to make considered growth investments from our strong cash balance of EUR 46 million, and we are well funded to support our growth plans going forward. 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 with Canaccord.

So just on the U.S. contribution margin. It's down. So I understand that price rises have come through repeatedly. Has it gone [ through any price rises from Martha & Marley? And I guess the question here is given your guidance of 29% for the full year, it does look like it's run rating it between that previous guidance range of 30% to 31% for the second half. Is that price rise sufficient enough to compensate the margin decline for external factors? And does that mean -- well, either that, yes, so just...

Yes. So I think -- so there's 2 parts of this. On the one hand side, we are continuing to implement operational countermeasures, which we have line of sight to, and this will support margin in the second half. We also will see support from moving some of the inflationary headwinds that we have seen and passing along to price increases. And so Dinnerly has increased its prices at the beginning of Q3. We are always looking at alternatives with other brands. We do believe our brands have pricing power and so I think we have a good line of sight to countering the margin headwinds that we have seen in the U.S.

And then, I guess, the question here is just on the customer acquisition costs. Obviously [indiscernible] is getting back to normal. What are you seeing on the CAC front? Has there been a change in your economics in the last 4 months from a very favorable environment in Q1?

Yes. I think the -- and we mentioned this at the end of the Q1 call as well. So I think our goal is always to hit our unit economic paybacks and our customer NPV. And H1 was a year -- a period where we could actually execute to that plan. So we feel like we are well positioned to offset rising CPMs. I think when the CPMs rise, then the question is, on the one hand side, how can you improve conversion rates to keep your acquisition costs, so your CACs relatively flat? And what's it going to do to LTV to favorably impact the CAC to LTV equation? And both of these things worked out. So I think we're well positioned. The reason why we mentioned it is it's a common theme that we hear in the industry and we wanted to give confidence to investors that we actually have a strategy that we think positions us very well to also in the future operate at good unit economics even as CPMs continue to increase.

Okay. Good. And then just around the CapEx, Slide 21. Maybe I've missed this, but first of all, is that EUR 20 million approximately for FY '21 and '22? Obviously, the [indiscernible] half of that. Is there a mistake there? Or is this EUR 20 million [indiscernible]?

Jennifer, do you want to take that one?

Yes. Sorry, actually, I do have to acknowledge that. That is a mistake. I mean you see that CapEx is definitely still a focus area for us in the next year. As I mentioned in my remarks, we're looking at given the growth trajectory in Europe, the second fulfillment center there, we do continue to invest in our technology platform to support our growth. But it is anticipated to be at a lower level versus this current year. I apologize for that.

And '21 is EUR 20 million, is it?

It's about that range, yes. So we have -- we still have half the year ahead of us, but that's -- kind of the forecast range is about that range.

And maybe can you just remind me -- maybe you have said in the past, but just what digital platforms means?

Digital platform means a lot of things. Everything from enabling the personalization that we've talked about in the past. So the taste profiling, as an example. That means using our own customer behavior -- using customers' order history to tell us what they like as opposed to our driving that decision for them. So their order history gives us a good indication of their likes and preferences. It's digital, making us more automated in the areas of fulfillment and then kind of cuts across the whole of our operations. Fabian, I don't know if you want to add on that.

Yes. We had -- at the Capital Markets Day, we explained our digital platform strategy and our focus to keep investing into our digital platforms. And the way this works is part of that is directly going to cost and part of that is activated, and that's why you have it here in CapEx. From an accounting perspective, you would see part of those value costs showing up in CapEx.

And just the last one for me. The first part of your business is the back book of revenue that doesn't churn. Can you just talk through -- you say that the number is [indiscernible] 70% of revenues that is [indiscernible]. What's the relative churn number on that number on that 70% quarter and -- or monthly or yearly basis?

Yes. I think -- of course, the churn numbers change with every individual order as the customer builds this habit over time. But I think we, in the past, released an important data point that if you are at Box #6, the likelihood to buy another box was actually more than 94%. So at that point in time, you've created a lot of habit already. So the retention curve already starts to flatten out. And that's why we think this is a very interesting data point to look at 6 orders plus. But to give more granularity, as you can see on the slide, I think what's more important is not only that the majority of our revenue is based from our back book, but this keeps growing over time. And I think that's a very nice dynamic. We've disclosed this now over 2 years now. And it's very interesting, I think, as an investor to look how this progresses over time. And I think it speaks to the nature of the business. So I think it's a very good continued measure to look at how does the composition of our back book is evolving over time. And here we increased 5 points year-over-year with now more than 70% of revenue by customers who ordered 6 or more times. So I think it's a very important metric -- health metric of our business. And it's also good to see, especially after a year of COVID, to see that this is very consistently developing forward. And so we felt that, that was an important data point to share with the market.

Your next question comes from James Ferrier with Wilsons.

First question is on revenue retention. At times in the past, you've showed a chart around revenue retention for different customer cohorts over the past couple of years. I don't think -- I haven't seen it in this pack. But perhaps if it's not in there, could you just verbally give us an indication of how that trend line has progressed in the recent quarter?

Yes. So I think we're not reporting on this metric on a quarterly basis. The last time we showed it was at May at our Capital Markets Day. In general, cohort retentions are slow-moving indicators. So I think looking at them once a year is probably something that makes most sense because the fact -- in fact, they are actually not changing a lot. So maybe that's also the answer to the question. So we see very consistent user behavior and so there is really no major differences on cohort retention in the quarter, and you wouldn't expect it.

Yes. Okay. Second question, just with the -- on the back of the price increase that you're taking in the U.S. That's a good opportunity. If you could give us some observations around where you see pricing for Dinnerly and for Marley Spoon in the respective markets relative to your competitors.

Yes, absolutely. And I think what's important to mention is that when consumers look at our services, they are not necessarily comparing it directly to other new crops . They're also comparing it to the supermarket, which is still how we acquire the majority of our customers. Now the majority of growth comes from the continued switch from off-line to online shopping. So we identify customers that currently shop at [indiscernible] the supermarket, and we offer them an alternative. And what we've seen is that these customers have experienced quite dramatic price inflation in the U.S. in the supermarket share over the past 6 months or maybe past year. So this is not something new to them. And so we've taken very measured steps. And so far, those comments that we hear from customers is quite positive. So this is not the first price step we've taken. So we were able in the past, as we saw prices increase, to -- able to share those increases with the customers because they have experienced such increases themselves already as they go shopping. And we're also not the only company that is taking price measures in the industry. So HelloFresh. In the U.S., Sunbasket. Others are also taking price steps. So it is, in a way, important to mention that our benchmark -- our price benchmark is primarily vis-a-vis the supermarket. But of course, we also take always the direct environment into consideration when we make these decisions. But so far, we feel like we have quite some pricing power in our brand, and that gives us some level of confidence that when it comes to inflation, those cost impacts can be shared with the customer.

Okay. That's helpful. Thirdly, on the contribution margin, building on from Owen's question there as we look into the second half of the year. If I understood your comments correctly, to achieve the contribution margin guidance, you'd be expecting the operating contribution margin to expand some of the internal measures that you're taking and perhaps an abatement of some of the external pressures that you're seeing. But perhaps more importantly, are you also expecting that the voucher spend as a percentage of sales is going to ease? Or is that going to remain sort of year-on-year a burden on margins?

I wouldn't call it a burden on margins. I would say, last year, the PCP was, of course, when you really unpack it, had some tailwinds because it was quite unusual, the environment we had last year. So when you compare this year's margin versus last year's margin, it's not that this year we have a burden. I think last year, we had surprising headwinds because, to be honest, first, customers came for free. Then we switch marketing back on. But then we switched marketing back on last year, we didn't need to give any vouchers to get the conversion rates we needed. So it was a very unusual environment. I think now it's more like the normal environment that we operate in. And so I wouldn't call vouchers as burden. Quite the opposite. Vouchers are very important measure to improve conversion rates. So when we look at acquisition costs, we also get media costs and voucher costs, and we minimize the combination of the 2. Because if you would give vouchers, your conversion has to be so low that media cost would explode. So vouchers are very effective and an important way to introduce a new -- to a new customer that's currently shopping at the supermarket. And that's why the whole industry is using it because it's a measure of effective customer acquisition. So I wouldn't call it the -- that's how this business works. And it has worked, and I think it's optimized over the past years and frankly, very optimal. So this quarter was actually a very a good quarter or normal quarter -- normalized quarter when it comes to acquisition cost. But I think what's true also is there were a lot of plans when we started this year on how to continuously expand margin. A lot of operational ideas. And then as we mentioned this first half, first quarter and second quarter, there was just one thing that came up -- one hit that came after the other was the Texas site closure, and we had -- we couldn't ship boxes. Logistics issues all over the U.S. due to weather, then labor -- acute labor shortages, which then create their own local effect. So I feel like the team had many ideas what to do to expand margin, but then there was really no time because you have to contract all the time of all these things happening left and right. And I think the fact that we kept operating CM steady is a testament to the team actually doing a really good job in countering that. But we also didn't do what we wanted to do, and that's what the [indiscernible] comes from. But at the same time, we feel like this gives us very clear line of sight of what we can and will do to increase margin going forward, and the team is working on that right now. And that's why we still have to call it as it is. I think it's more realistic that margin will be in line with last year's margin. But there's many things we can and will do not just in the second half, also going forward beyond to improve operational efficiency. We still feel we are at a very early stage of automation. We are at the very early stage of operational excellence. So there's many things we want to do to increase our gross profit margin and contribution margins over the coming years.

Very helpful. Last question is just on that customer acquisition cost. You mentioned the word normalization a few times. Could you just perhaps add a bit of color to that in the sense of customer acquisition costs? Clearly, they're above where they were this time last year, but are they back to pre-COVID levels? Or are they still more favorable than that point in time?

Yes. When I look at the first half -- and we are reporting on acquisition costs normally once a year. And -- but when you look at the first half, it's probably more in line with the historic average. So for sure, the favorable impact we saw in 2020, we don't see at this point in time. But also it's important to note the continued growth dynamics. So the way when you think about it -- and that, I think, was also a good part of the Q1 story. We are able to acquire a lot of customers at good acquisition cost because historically, the acquisition costs, I think they have been quite favorable. 2020, of course, is not -- by no means the right benchmark or standard. I think the historic norms is a good standard. And to that part, I think H1 was in line with historic norms.

Your next question comes from Elijah Mayr with CLSA.

Just firstly, just following on, I guess, on the marketing side of things and the marketing spend. I mean, typically, over the years, the first quarter has been high and then dropping in the second quarter. And you have improved profitability, but you've got marketing spend, obviously, increasing in second quarter. Is that more a result of that stable environment still rolling off in the first quarter? And how should we look at that marketing spend on a quarterly basis going forward for the third and fourth quarter of the year?

Yes. I mean we continue to see a very stable environment. I think this was really -- it was a tale of 2 cities, I would like, analogy. So I think from a growth dynamic, it continues to be an environment where consumers are open to online shopping and switching from off-line to online. I think as people go back to rethink about their lives after the pandemic, they realize they spend more time from home. And so I think online shopping in general will continue to become a bigger part of people's lives, and that creates just a very good growth environment. And at the same time, we have the aforementioned operational challenges. So -- and our ambition is to grow the business at the right unit economics. We always try to find the customer at the right price point. The sooner the better because it actually helps you in generating this back book of business earlier, which then helps you with the growth of the company and fulfill our growth ambition, which we shared with the market at the Capital Markets Day. So therefore, I think Q2 was -- the reason why we were investing in marketing in Q2 was because we could find customers at the right price point, the good unit economics, and that's what we will continue to do. So I think 2021, while operationally challenging, it's also a great year for growth because we see lots of consumer openness to switch from off-line to online. And of course, we want to explore that and keep and gain market share in such an environment.

So we should expect that Q2 run rate of marketing, I guess, to increase as we go into the third quarter? Can you maybe see more favorable environment to acquire customers?

We don't guide on marketing as a percentage of sales. I would argue if we can -- if this environment of customer demand continues and we continue to scale or we can scale at the right price, we should. Because as Jennifer mentioned, the operating leverage comes through quite nicely as the business keeps scaling. There's a negative working capital impact of our business. So faster we grow, the more we generate cash flow. There's many benefits for our business when it comes to growth. And therefore, in Q3, if we can find the customer at the right price point, we will invest for growth. And so you would expect, as usual, for Q3 to be a strong growth quarter of investment. So definitely, if you can find the customer at the right unit economics, which it looks like we should be able to, then you should expect investment into growth in Q3.

Excellent. And then just on the labor shortages in the U.S. specifically. There's sort of comment in the release saying that it's starting to abate. Maybe if you could just give us an up-to-date sort of -- or look at where that is at the moment. And if you do have any expectation, it's probably something hard to get, but any expectations of how that will be resolved. And that $5 million impact that you noted before, whether that will fully revert in the third quarter or fourth quarter.