Marley Spoon SE (MMM) Earnings Call Transcript & Summary

Thank you, and good afternoon, everybody. Thanks for joining our investor call. So my name is Fabian Siegel, Founder and CEO of Marley Spoon. And I have with me here today, Jennifer Bernstein, our CFO. Earlier today, we released our third quarter results for our financial and calendar year 2021, and we are looking forward to presenting to you today these results as well as providing you with an update on the business. And at the end, as usual, we will open the call to your questions. Now reflecting on 2021 so far, I can say that we are experiencing an environment with very volatile customer behavior. When it comes to skip rates or holiday behavior, it turns out that neither 2020 nor 2019 are good reference years. The volatility in customer behavior has a particularly big impact on our sales forecast because the vast majority of our revenues made up by repeat customer purchases. Whereas, in the time before COVID, our models allowed us to predict customer behavior and therefore, sales quite accurately and also far out. It turns out that in 2021, revenue prediction is much harder, both when it comes to modeling the development of our sales to existing customers over the modeling of our customer acquisition activities. Now we started the year with guiding revenue growth to be between 25% and 30% after doubling our sales in 2020. After the first quarter, our models predicted an acceleration of growth, which made us adjust guidance upwards. Now after the summer in the Northern Hemisphere, the outlook has come back to where we started the year. Specifically in Q3, we have seen higher-than-normal skip rates and a higher cost acquisition environment in the Northern Hemisphere due to the stronger than usual holiday impact that we observed this year. In order to maintain attractive unit economics, which trust mean 6 to 8 months payback and 3x return over the lifetime, we reduced customer acquisition investments, and this will impact Q4 revenue. The reason why Q3 revenue was broadly in line with our expectations is due to the incremental revenue caused by the return to lockdowns in Australia, which somewhat offsets the higher than normal holiday related revenue impact in the Northern hemisphere. Nevertheless, the decision to reduce acquisition volumes in order to maintain our target unit economics will have an impact on Q4 and therefore, requires us to revise our 2021 net revenue growth to be between 26% and 28%. We have seen a recovery in base behavior and improved customer acquisition costs, and Q4 net revenue growth is currently trending higher than Q3 at the PCP. 2021 has also been volatile on the operating side, where we have been facing supply chain disruptions, labor challenges and input cost inflation. Given that we operate in such an environment, I think we made very good progress in Q3, improving our operating margins by about 150 basis points quarter-on-quarter as well as year-over-year. These improvements were led by improvement in our U.S. segment by about 200 basis points quarter-on-quarter. Now we expect further margin improvement in Q4 as our investments into our operations teams processes and technology are expected to yield additional benefits for our business. And at this point, I would already like to thank our teams that are working very hard in this volatile operating environment every day to build manufacturing excellence at scale in order to delight our customers globally. Now overall, 2021 has been a year of investments to people, processes and infrastructure that we require to operate at the scale achieved by doubling our business last year and that prepares us for the continued growth towards our midterm ambition to build a EUR 1 billion revenue business. Those investments consequently continued in Q3 and combined with a disciplined investment in marketing led to a negative operating EBITDA of EUR 13 million for the quarter. In the fourth quarter of this year, we expect continued revenue growth and expanded margins to lead to a significantly lower level of losses compared to Q3. And with this overview, I would like to hand it over to Jennifer, who will walk us through our key metrics and our individual segments.

Thanks, Fabian. We saw active subscribers grow again in the third quarter, 20% versus the prior corresponding period, led by Australia, which grew 35% and accelerated versus Q2, hitting nearly 100,000 active subscribers. However, as mentioned, customer behavior was very volatile during the summer months, such that we saw a more challenging acquisition environment in the U.S. and Europe. As a consequence, active subscribers in these regions slowed slightly versus the previous quarter, even as they grew versus the previous year. Basket size increased by 5%. This increase was influenced partly by price increases implemented globally, but principally, in the U.S., where we raised prices by approximately 9% at the end of the quarter. Looking at our performance on a regional basis, we saw mixed outcomes across the segments. Australia went back into COVID lockdown, which provided tailwinds to the business, such that the region grew 30% versus the prior corresponding period, a strong acceleration over the previous quarter. Australia's growth was delivered amidst operational challenges, which saw the team needing to incorporate costly COVID measures to protect the teams and enable the continuation of business operations. Despite these incremental costs, Australia delivered an operating contribution margin of 43.5% in line with the prior corresponding period. Contribution margin declined versus the prior corresponding period due to a higher share of voucher spend incurred to take advantage of a strong acquisition environment. We would also like to share that we have just launched our Marley Spoon brand in Western Australia, joining our Dinnerly brand there, which launched in December 2020. Early sales are strong, and this launch means we are now offering both of our meal kit brands nationally. In the U.S., we faced a very volatile market, characterized by higher skip rates. This was a result of more pronounced holiday behavior than expected during the summer months, with consumers more frequently away and ordering less, behavior which we have seen abate at the end of Q3. The result was slower growth than expected, 3% versus the prior corresponding period, while active subscribers grew 5%. We also saw costlier acquisitions in the third quarter, which we opted not to pursue in line with our disciplined approach to maintaining attractive unit economics. This is having a subsequent impact on Q4 net revenue, which is what partially led to our revised full year net revenue guidance. Operationally, the U.S. is showing encouraging signs of improvement and an ability to better navigate external cost pressures, which persist. Operating contribution margin reached 34% and nearly 2 percentage point improvement versus the PCP. This is despite continued challenges related to staffing our fulfillment centers labor rate challenges and food cost inflation, all of which we managed to offset in the quarter with the pricing actions on both brands. Contribution margin, which landed at 23% was just slightly up versus the prior corresponding period, a lower rate of expansion versus operating CM due to an increase in marketing voucher spend compared to an unusually low voucher share in the PCP. Finally, in September, we moved into our new California fulfillment center, significantly expanding our footprint and creating capacity for future growth. We also rolled out a new manufacturing process in all 3 U.S. fulfillment centers, which is simplifying our operations, improving the customer experience and enabling further order personalization. Lastly, in Europe, we grew net revenue 15%, while growing active subscribers 34% versus the prior corresponding period. We were similarly challenged as we were in the U.S. with consumers vacationing at high rates, thereby impacting base sales and acquisitions. We also faced a similar operating environment as that experienced in the U.S. with the labor shortages, wage rate and food cost inflation hitting us in Europe. Nevertheless, contribution margin and operating contribution margin both held in line with the previous year while expanding versus the previous quarter. Turning to cash. The company ended Q3 2021 with a cash balance of EUR 33 million, an improvement of approximately EUR 17 million versus the prior corresponding period. Cash from operating activities landed at negative EUR 7.7 million, ahead of our global operating EBITDA lending, thanks to favorable net working capital. This puts our year-to-date cash from operations at negative EUR 10 million. We continue to invest in our fulfillment centers and digital platforms, which contributed to an outflow of cash from investing activities of negative EUR 5.5 million in the quarter. These investments were funded in part with new financing activity, including an asset financing facility with National Australia Bank Limited in the amount of EUR 3.7 million at an attractive 3.5% interest rate. This week, we also drew the remainder of tranche 1, a total of USD 15 million, of our debt facility from runway growth capital. The second tranche of USD 20 million remains undrawn. The company expects to finish 2021 with adequate cash and existing funding facilities to continue to fund its growth strategy in 2022. Finally, the third quarter saw W23 investments, an affiliate of Woolworths Group, convert its last 2 outstanding convertible bonds, which combined totaled [ EUR 17 million. ] With this conversion, our balance sheet has significantly improved. As we have previously mentioned, the volatile consumer environment that we witnessed in Q3 will have a carryover effect on our Q4 net revenue such that we have revised our net revenue guidance back to a range in line with our guidance at the start of this year between 26% and 28%. Our expectations for contribution margin remain unchanged. With that, I would like to hand it back to Fabian.

Yes. Thanks, Jennifer. Now despite all the volatility and supply chain challenges, Q3 was another quarter in which we continued to build our team's capabilities, processes and increase capacity. The operating margin performance this quarter reflects a positive impact from those investments flowing through, and we expect further improvements materializing until the end of the year. While revenue this year has been harder to predict, the underlying growth trends stemming from the overall channel switch from offline to online shopping for groceries continues to be intact. Consequently, our midterm growth ambition to build a EUR 1 billion business over the coming years remains intact as well. Our growth strategy continues to be driven on the one hand by continued growth of active subscribers, and on the other hand, by offering additional services and grocery add-on items next year, leading to higher revenue potential from each of our customers. After doubling our business in 2020, we will significantly grow again this year, and we expect ongoing significant growth at attractive unit economics and disciplined cash management for the coming years. As we scale, we will see additional operational gearing to come through, improving our operating EBITDA margins. Despite us having delivered 1 million meals each week this past quarter, we believe we are still at the very beginning of our ambition when it comes to building this company. Over the coming years, we aspire to build Marley Spoon into a much bigger business that it is solving our customers' everyday problems in personalized and sustainable ways. And I'm grateful for the support of each of our customers, each of our team members and all of our shareholders as we continue on the journey. 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 James Ferrier from Wilsons.

First question is about the contribution margin guidance. Quick back of the envelope, it looks like you'd need something in the order of 32% margin at a group level to hit the full year guidance. Does that sound right?

Yes, I think if you can make this mass. Of course, the fourth quarter is a bit bigger than the other quarters. And therefore, will have big impact on the fourth quarter, but yes, I think it has to be north of 30%.

Okay. And sort of, I guess, building on that then, Fabian, is that sort of number north of 30% indicative of where you would see calendar '22 at a starting point? I appreciate there is historically, at least some seasonality from quarter-to-quarter, but is that north of 30% an indicative starting point for calendar '22?

You have indeed the seasonalities were in the summer when we have normally higher packaging costs wise that somehow is a negative impact on margin and then in the winter, it's diverse effect. So you have these seasonalities, how margin goes up and down. And so therefore, the first quarter margin of -- is then a higher margin first and fourth quarter margins. So I think the -- what we see at the end of the first quarter we saw within the third quarter continues improvement of margin with every month, which gives us a good outlook into Q4, where we are expect to be in the range that you mentioned above 30%, and that's what we're seeing exiting the quarter. And therefore, you expect the Q4 margin profile to be somewhat where the year will start. And -- but I don't want to give guidance for 2022 on margin. I think we commented on the volatile operating environment these days. So therefore, the margin guidance these days are much harder than it used to be -- levels. I don't want to speak to 2022 in general, but you expect to start 2022 where you end 2021.

Okay. That's helpful. On marketing costs, so it was EUR 22 million in the quarter against EUR 16 million -- I'm sorry, EUR 17 million in the second quarter. So it's quite a big step up, and as a percentage of revenue, it increased to 28% of revenue. I'm trying to reconcile that quite significant step-up in marketing spend. I reconcile that with your comments that you sort of dialed back the customer acquisition activity given the less favorable environment for that. Can you just explain those 2 somewhat conflicting points?

Absolutely. They're not contradicting. Q3 always is a strong -- historically, it's been a quarter where customer acquisition has been quite successful for us, and we tend to invest more in the third quarter. And then in the fourth quarter, it goes then down significantly. And then the fourth quarter, again, it's an environment where we see we can acquire customers at very attractive unit economics and at scale. So you have the seasonality of marketing as percentage of sales fluctuating quarter-over-quarter. Again, Q3 and Q1 are those quarters we expect those to be higher. Q2 and Q4, you expect this to be lower. And so the -- actually, we had planned to acquire even more customers because normally, it is a very attractive environment where you can acquire good unit economics. And compared to our plan, we actually spent less marketing. So we had expected to spend more than what we have spent, but we saw that over the summer months where the vacationing was quite extensive, that doesn't not only need to your existing customers skipping more often, but there's also less eyeballs available and so your marketing efficiency declines. And so we were not able to acquire the level of customer growth that we wanted, and at least not at the prices we thought makes sense and that's why we dialed it back. And that, of course, had an impact on our plans for the fourth quarter. So it was definitely a stronger quarter of investment in customer acquisitions that we acquired to our customers, but our ambitions were higher. We wanted to acquire more customers, but the environment was not there, not at the unit economics that we deem to be healthy for the business. And that's why we spent less than we had planned, and that has an impact on Q4 revenue.

Okay. So at a 28% of sales, that sounds like that was sort of what you were targeting, albeit the dollar spend -- that the euro spend ended up less and the sales ended up less, but as a percentage of sales, that 28% sounds like a sort of what you had been anticipating. And therefore, if we look forward into calendar '22, that level spend sort of 28%, which we haven't seen since sort of the 2018. Is that 28% of revenue a reasonable level of investment that you're looking to make on the marketing line?

Not for the full year, no. For sure not. I mean again, Q3, these are strong marketing -- these are normally strong marketing quarters. Q1 and Q3, so you expect this to be higher. But on a full year basis, of course, it looks differently. So that 28% is not a good predictor for next year. I think what you would rather would do is, you would look at the full year marketing as a percentage of sales for 2021. And I think you take this as a starting point, and we are now actually deciding what's the profile for next year, and we'll talk about this next time we talk to the market whether what's the amount of growth investments we seem to be the wide profile. I can already tell you, and we mentioned this in the past, our ambition is to grow within the means that we have and that will guide our decision, how much we're going to invest into growth next year. And that also will then drive the decision, how much marketing as a percentage of sales we're willing to invest, but it's a choice that we can make. And so we'll have to find the right profile here. Maybe one more comment again to Q3. So yes, we spent less on what we wanted to spend. We want to spend a little bit more and get a little bit more customers, but also within the quarter, as I mentioned, we saw acquisition cost rise to the area where we didn't feel it to be attractive. It also means within the quarter in certain weeks, we had just higher acquisition costs. So the way the euro didn't give you the same amount of customers that you would have expected, and then you manage your CPAs down again to where you want them to be. So it's in a way it's like when you see the market not being able to provide you the efficiency, your acquisition costs go up. And then you manage the acquisition costs down again where you want it to be, but then you lose normally volume. So I think it's a mixture of -- in Q3, we wanted to acquire more customers for the money that we have spent. So acquisition efficiency wasn't where it needs to be, and therefore, we dialed it down towards the end of the quarter, leading to in the end even slightly lower spend than we had planned, but also more importantly, missing some of the acquisitions that we had planned for coming in towards the end of the quarter and then impacting Q4.

Your next question comes from Elijah Mayr from CLSA.

Maybe just firstly on, I guess, looking at if we can made it -- 2022 a couple of months away. I mean what are your thoughts around, I guess, the step-up in Australia then reverting again like we've seen in Europe and America? And how does that sort of feed into your sort of revenue expectations, I guess, post this calendar year?

Yes. So I think what we've seen in 2020 is every time we grew and we have new customers trialing our services, they realized cooking with Marley Spoon is so much more convenient than cooking with the supermarket and provides much more variety that these customers stick around. So people last year when we doubled our business, they were wondering, well, you double in 2020, 2021 is to be down because we can't keep everybody. Well, it turns out 2021 is another month -- another year of growth because we grow on top of that step-up that we make. So what we will see is -- what we expect, therefore, for Australia is now we've seen, as you could see a big step-up in growth in Australia. We expect that these customers will behave in line what we've experienced throughout 2020. So retention of customers acquired and lockdown situations tend to be as good or better than what we normally tend to see. So these customers stick around, but what also will happen and we thought on the Northern Hemisphere in Q3 is that the activity of the base can fluctuate. When lockdowns go down, people are going out more to restaurants and they want to meet their friends again, and this can have an impact on at home cooking. And so you see frequency changes, but you see this not having a negative impact on the retention. So therefore, what we expect is that this increase in new customers that we -- that tries Marley Spoon and Dinnerly during the lockdowns, we expect them to stick around. We do expect, however, also for Q4, as we modeled it that the frequency as lockdowns ease will be negatively impacted of the base customers, not just the new customers that we just acquired, but all the customers that we have in the base that are now maybe seeing their friends and going to restaurants. So again, we expect -- every time we do a growth step forward, we've seen in 2020 that these customers stick around. So we expect this to be also the case for those customers that joined us in Q3 in Australia just now, but we have planned in the lock opening up, which will have an impact on the base behavior, and that's also reflected in our revised guidance.

Yes. Understand. And then, I guess, maybe for just sort of looking more specifically at USA and sort of what's going on over there? And can you comment on whether the price increases there would have had an impact on the lower volume perhaps [ feeding ] into sales? Or is it purely down to the change in behavior?

So we model -- so when we do our modeling exercises, we take into account holiday period, special days, labor days and we see historically, they have an impact on how people behave. When it comes to price increases, we do the same. So when we see price increases, we don't see necessarily an impact on frequency, but we do see an impact on churn because, of course, nobody loves the price increase. And so when you announced the price increase, you often have customers leaving on that announcement day. And so we -- that's always been part of the analysis even going -- before going into a price increase, you try to model out and understand what's the impact -- what's the expected impact of the price increase. You have a good guy as you increase your revenue and you've improved your margins, but you also have a negative impact on your business for those customers, they don't follow you in that price increase. And so we have a historic reference point of when we have increased prices and we took these historic reference point to model this specific price increase in the U.S. in the summer. And what we saw is that the amount of people leaving us due to the price increase was lower than what we had expected. So our read of the data is that customers did follow us with the price increase because they have seen prices increase in supermarkets, and they have seen this all around them. So I think the audience that we are targeting, which for Marley Spoon customers are households with an average household income of [ $250,000 ] roughly. The Dinnerly customer household is around $70,000 to $80,000. We have seen that these households probably experienced similar price increases in the supermarket, and they were not particularly surprised or offended by the price increase. So we definitely see that our brands they provide [indiscernible] pricing power because in the end, this is a convenience promise that we make and the promise of elevating people's life, make people's life easier or elevating the people's lives by having better cooking. And customers definitely see the value and follow us, therefore, when we have the [indiscernible] prices increase throughout our supply chains. And we feel like we have the data at least so far, as we analyze it, suggests that we have the pricing power to roll over as we -- in case we continue to be in an inflationary environment also going forward. So we do believe that as input costs, food costs increase that customers will be able to follow us with these increases.

So with, I guess, in the U.S., when you've got the step down in active customers on a quarter-on-quarter basis, it's probably fair to say most of that is just from the change in behavior and increased sort of post lockdown holiday behavior? Or can you give us a sense on how much of that step down?