Marley Spoon SE (MMM) Earnings Call Transcript & Summary

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 here today Jennifer Bernstein, our CFO. Now earlier this week, we released our first half results for our financial and calendar year 2021, and we are looking forward to presenting those results to you as we are providing you with an update on the business. And as usual, at the end, we'll open the call to your questions. Now in the first half of 2021, we delivered 38% net revenue growth at constant currency, with net revenue lending at EUR 158 million, which was underpinned by solid active subscriber growth of 37%, while lapping the first COVID comparable period. Now our continued growth reaffirms to us that our strategy of investing in our brands, operations, manufacturing capacity, digital capabilities and people is working. Looking ahead, we will remain focused on building on that scale which have been achieved to date and continuing to invest for growth at favorable unit economics. We believe that this is positioning us well as consumer behavior continues to switch from off-line to online shopping for groceries in general, and towards meal kits specifically. Nevertheless, our rapid growth over the past 18 months led to operational challenges in the first half that were compounded by labor and supply chain challenges, especially in the United States, which affected both us and our partners. This led to reduced marketing efficiency and margin compression such that contribution margin in H1 was below our expectations coming in at 27% and operating CM staying flat year-over-year at 37%. However, we are seeing encouraging signs of a more favorable operating environment, and we have made organizational changes to strengthen our bench. And we, therefore, believe that the right initiatives have been put in place to deliver a contribution margin in the second half of around 30%. Now taking a step back, we continue to see attractive unit economics, and we operate in a large market that can support multiple meal kit operators. This market continues to grow dynamically due to the adoption of online shopping for groceries still being in its early stages. Therefore, we will continue our strategy of investing for growth at favorable unit economics, given underlying profitability of the business on a standstill basis if you factor in maintenance marketing costs before incremental growth investments. Also, we will continue our investments in CapEx to deliver increased fulfillment center capacity, manufacturing advancements and improvements in our digital platforms, so we can continue to advance the customer experience with our meal-kits. On this point, it's important to note that our CapEx program across 2021 and 2022 are fully funded by the recently secured debt facility from Runway Growth Capital. With this, I would like to hand over to Jennifer, who will review the individual segments and provide a financial outlook towards the remainder of 2021.

Thank you, Fabian. Let's start with the U.S. In half 1, the company's U.S. segment grew 39% in constant currency and active subscribers grew 27% year-on-year. The growth was driven by continued demand across both our Martha Stewart and Marley Spoon and Dinnerly brands. Half 1 was negatively impacted by weather events as well as nationwide labor shortages impacting available staffing as well as labor rates in our U.S. fulfillment centers. Our inbound food supply chain and logistics partners were also impacted leading to supply chain disruptions and impacting delivery service quality. Throughout the first half of the year, we therefore diversified our logistics partner setup to improve in this area. At the same time, we increased wage rates to remain competitive in our hiring. Labor shortages have started to ease in Q3 as pandemic-related unemployment benefits expired, and we're seeing an overall improvement in our U.S. operations, also as a result of an improved management team setup. Finally, we experienced industry-wide input cost inflation in various food categories. We've subsequently offset this cost inflation with a price increase on Dinnerly at the beginning of Q3 and Martha Stewart & Marley Spoon this month. As we adapted our marketing efforts to our operational challenges throughout the quarter, our marketing efficiency was negatively impacted. Specifically in Q2, we temporarily switched from national campaigns to more local campaigns, which tend to have lower efficiency. Our national campaigns have now resumed. In addition, due to the normalization of the acquisition environment compared to last year, the amount of acquisition vouchers increased. Consequently, contribution margin landed at 26%, down 1 point versus the PCP but missing plan by a wider margin. To offset the reduced marketing efficiency, we decided to increase our marketing spend toward the end of the first half of the year, while actively managing towards attractive unit economics. On product side, as part of our continued drive to increase basket size and lifetime value, we launched our ready-to-heat offering and expanded our breakfast offerings at the end of half 1. In Australia, we delivered 23% revenue growth on a constant currency basis. Active subscribers grew 31% year-on-year. We continue to deliver strong operational performance in Australia with operating contribution margin of 42%, 2 points down versus the previous -- prior corresponding period. contribution margin was impacted by the normalization of the acquisition environment leading to a normalized and therefore, higher acquisition voucher share compared to the PCP as well as costs related to the move into our larger Sydney fulfillment center and our new Perth fulfillment center. Furthermore, as sales mix shift towards a larger Dinnerly share reduced margins compared to the PCP. As Dinnerly grows in scale, the margin differential between Marley Spoon and Dinnerly is decreasing. In Europe, throughout the first half, we benefited from a very favorable growth environment with strong demand, allowing us to exceed our growth plans at attractive unit economics. The segment delivered 69% revenue growth compared to the PCP. Active subscribers grew 73% year-on-year. The team in Europe launched our newest manufacturing technology at the end of Q1, which temporarily impacted picking performance. In addition, the contribution margin performance was impacted by the normalization of the acquisition environment, leading to a normalized and therefore higher acquisition voucher share compared to the PCP. In Q2, we started our own last mile logistics operations in the Netherlands. Due to the initial success of the pilot, we now expect to scale up those operations across Europe in the coming quarters. As Fabian already shared, we delivered solid half 1 2021 growth of 36% or 38% on a constant currency basis. Contribution margin came in at 27%, 3 points lower than the PCP, however, operating contribution margin or CM excluding the impacts of marketing vouchers and fixed costs such as expenses relating to site leases held flat at 37% for half 1 2021. We delivered negative operating EBITDA of EUR 15 million but landed near to breakeven on operating cash flow at minus EUR 2 million. Finally, the company's overall cash position at the end of half 1 '21 is EUR 46.3 million, an increase of EUR 28 million versus the end of last year, owing in part to the signing and closing of a committed senior secured credit facility of 4 years with Runway Growth Credit Fund, Inc. funding, which is intended for our 2021, 2022 CapEx program. Facility will give Marley Spoon access of up to EUR 55 million or USD 65 million over 2 tranches. Of the EUR 38 million of tranche 1, EUR 25 million was drawn at closing. A second tranche of EUR 17 million is available to be conditionally drawn through June 30, 2022. Now turning to the overall financial outlook for the rest of 2021. Despite the decreased marketing efficiency in half 1 and the higher-than-expected skip rate behavior that was observed during the summer holiday period in the Northern Hemisphere, we anticipate further growth for the second half of the year. Therefore, we are reaffirming our full year net revenue guidance of 30% to 35% growth for 2021 versus calendar year 2020. Contribution margin is expected to increase in half 2 2021 versus the first half year leading to a full year CM expectation, in line with last year's full year margin of 29%. We'll continue to invest in growth, marketing at favorable unit economics, and we expect marketing as a percent of net revenue to be lower than in 2019. However, given the lower-than-expected contribution margin, the decrease in marketing efficiency and marketing spend increases versus last year's low levels on account of the pandemic, we expect to incur further operating EBITDA losses in the second half of 2021. This outcome is expected to translate to negative cash from operating activities for the second half of the year. Given our expected year-end cash balance, coupled with our available debt facility, we expect to have adequate resources to fund our OpEx and CapEx growth investments without raising additional capital. With that, I would like to hand it back to Fabian.

Yes. Thank you, Jennifer. Now 2021 continues to be a typical year when we're facing COVID comps, operational volatility and some exceptional investments in people in our fulfillment centers. All of these are leading to larger negative operating cash flow and operating -- negative operating EBITDA than we had anticipated at the beginning of the year. However, we continue to be excited about our long-term growth potential that our operating model has not changed. And consequently, going forward, our strategy for 2022 and beyond remains unchanged. Our plan is to invest into strong customer and revenue growth at favorable unit economics while keeping operating cash flow at all around breakeven. This growth, combined with the negative working capital dynamics of our business model implied that operating cash will be more favorable than operating EBITDA. We reaffirm our ambition to build a EUR 1 billion business over the coming years, and we believe we are adequately funded to fulfill these growth ambitions. Thank you for taking the time this afternoon. And with that, I would like now to open the call to questions.

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

Jennifer, thanks for your time. First question is just around some of those challenges you faced in the second quarter, supply chain constraints, labor shortages. You mentioned there being some encouraging signs on improvement on that front. So could you just provide some extra color around those signs of improvement?

Yes, absolutely. What we have seen at the end of the first quarter, then going into the second quarter that it was harder and harder to hire the amount of team members, we needed in our fulfillment centers for our growth. We had situations where when we, for example, ask for agencies to send us supplemental team members, we only got maybe 40% of those orders fulfilled, which then, of course, leads to this ripple effect that you are short staffed on your shifts. You start to produce the orders. That means everybody is working overtime. And then because of the over time, at some point, it's very hard to work in a cold environment for 10 hours, 11 hours, then some of these team members, especially the newer ones that just joined, maybe some of them said, look, this is not what I signed up for, or maybe I just don't have the time for these unstable overtime hours, given that there's other commitments people have. But then, of course, can they do it own attrition rate. So you have the situation where access to labor gets harder because the policies around unemployment supplements around COVID make it economically, for many, not worthwhile to actually be out to look for a job. Plus schools being closed, and therefore, the female work participation in the United States had actually dropped -- or has dropped around 80% compared to prepandemic levels. So you have this situation where it's hard to attract team members, and that has a ripple effect also on the existing workforce and the attrition rates on the existing workforce as people then suddenly have to work more hours than they actually maybe have time for on their commitments. And that is impacting, of course, your own production schedule. It also impacts partners. To give you one example, the meat packing plants saw also labor shortages, which then sometimes means certain products that you expect to arrive on time, don't arrive on time or they don't arrive at all and you have to substitute those with other products last minute, so the consumer can still have a meal that they can cook at home. And when you think about downstream logistics, you then had a similar situation where large logistics partners, on one hand side, seeing increased volume from e-commerce boom. But at the same time, having similar challenges to scale up the last mile fleet of drivers, all of these then leads to a service disruption. So you have the situation where we experienced at least challenges, not only in our size, but also with our suppliers. Now what has happened over the past couple of weeks, specifically as we started into the third quarter, many of these supplemental unemployment benefits -- COVID-related unemployment benefits have actually phased out. And it did have an immediate impact on the ability to actually attract team members to our side coupled with an increase in wage rates that we agreed in the second quarter. So the combination of higher wage rates with a different policy environment allows us now to actually get to the levels of staffing that we need, and it has an immediate impact on our scheduling and our -- we see similar things on our inbound supply chain. And we also, by now actioned on the diversification of the last-mile network that Jennifer mentioned earlier. So all these things we now start to see leading indicators going in the right direction that they are actually having now also positive impact on the operational performance of the company. So therefore, we think the second half will definitely look better than the first half in the United States when it comes to the operational execution.

Okay. That's very encouraging. Probably related to that question then, Fabian, I think on the second quarter result call several weeks ago, you mentioned that you'd eased up on customer acquisition activity in the U.S. or at least to Jennifer's point earlier, you changed tack from national to localized campaigns? Has that customer acquisition activity increased in totality to start this third quarter? Are you back to the trajectory that you would otherwise have liked to have been on barring that little not pause, but slowdown in the second quarter?

All these operational challenges that I mentioned in the second quarter had also an impact on customer satisfaction. What we see as customers in the first 6 times when they use our service, the first 6 boxes, they arrive. That helps them to build a habit, to form a habit. After customers form the habit, they become very loyal to the service. And when there are disruptions, and we treat our customers fairly and proactively, they're willing to see beyond these distractions and looking forward to the next box. But especially when it comes to the early habit building phase, disruptions tend to -- when they happen. And while the percentage number is small overall, it does, of course, have an impact on this early customers on a bigger extent. You -- it doesn't make sense when these things -- when you're facing these things, to aggressively acquire new customers and then to the point that Jennifer made, then leads to your whole marketing strategy to adapt to change and to adapt to the operational challenges. All of these counteractions, these marketing counteractions that we had taken in the second quarter, we're not doing any of them anymore. So I think all these things are back to normal to the operational marketing execution is back to the normal way of doing business, so to say, as we started in Q3. And so that's good because it sets us up for the second half to be more in line with what we -- how we normally operate when it comes to customer acquisition.

Okay. And then final question for me. You've reiterated your views that contribution margins will improve in the second half heading towards that full year number of around 29%. So can I just clarify that your expectation is that both the operating contribution margin will improve in the second half of the year. And in addition to that, the costs that sit between the contribution margin and the operating contribution margin. That delta will also narrow whether it's voucher spend, et cetera, to customers disrupted by supply chain issues. That's sort of example. That spend will also shrink a little bit in the second half as well.

Yes. I mean, you have these -- you have 2 impacts when you come from gross to net revenue. One is marketing-related vouchers, which is a normal course of doing business, but also to your point, when there is a problem and you have to credit a customer it has an impact also on -- let you give a voucher to the customer and that comes off gross revenue as well. And so as you have the spread between CM and operating CM and operational improve, that spread is expected to slim down. And so I think the dynamics you point out is absolutely correct. What remains to be seen is how voucher strategy will evolve. Voucher strategy is for us. What we always do is we tend to look at acquisition costs internally into gross acquisitions to look at media cost and voucher costs, and then we see them as a combined cost to acquire a customer. And then we compare this to a lifetime value based on a margin after the voucher cost -- what it gives you, I think, a better understanding what's the right balance is. So what you also see is these things can vary as we optimize, they can vary because we use the vouchers over multiple boxes as this supports habit forming. And so it will be interesting to see whether the impact on customer complaint vouchers, which should reduce and therefore, the data should shrink, whether this is offset partly by a different voucher strategy, which in the end is always focused on decreasing the overall amount of cost we have to acquire a customer. And I think we mentioned in some of these calls earlier, we are seeing CPM environment where the media cost is increasing. And sometimes we see it can be actually cheaper for us to reduce the media spend, but then increase the voucher spend on certain channels. So this is a very interesting and dynamic exercise that we also see. So therefore, you have this dynamic also when you continuously track operating CM. So I think while operating team is very interesting, and that's why we disclose it, it gives you an unblended view on the operating performance, net of these marketing dynamics. That's why it's interesting. But in the end, of course, we guide towards CM because that's the one that matters from a P&L perspective.

[Operator Instructions] Your next question comes from Alex Unsworth with Canaccord Genuity.

I think I may have logged in with Alex's password. can you guys hear me? It's Owen here from Canaccord. So just -- the share price has gone from [indiscernible] down to lower $2 just back up again today. The key concern coming out of the last update was just around the balance sheet and the balance sheet position. You guys have come out in the financial release and talked about operating cash flow breakeven in FY '20 of -- or calendar year '22. Can you maybe just provide some context to us listeners just around where the cash balance will land at the end of FY '22, if you hit your milestones? And then on that point, you reach that number and to reach operating cash flow breakeven. What growth rate given your unit economics, does that imply for FY '22?