Marley Spoon SE (MMM) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Marley Spoon Q4 FY '21 Results Investor Conference Call. [Operator Instructions] I'd now like to hand the conference over to Mr. Fabian Siegel, CEO. Please go ahead.

Yes. Thank you. Good afternoon, and 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. Now earlier today, we released our fourth quarter results as well as our unaudited financial results for our financial and calendar year 2021, and we are looking forward to presenting those results to you today as well as providing you with an update on the business. We also published a Q4 results presentation, which I will be referring to on this call. And at the end, as usual, we will be -- open the call to your questions. Now if you turn to Page 3 in the investor presentation, you will be able to review some of the operational highlights achieved during the fourth quarter in 2021. We finished the year with a quarter of accelerating growth. Net revenue in the quarter grew 24% year-over-year, and overall full year 2021 revenue grew 27% to EUR 322 million. In addition to this expansion of our top line, we also expanded our contribution margin to 31% at the end of the year, which is the highest margin recorded globally for Marley Spoon. Now this margin was achieved in an operating environment of volatile supply chains and inflation. Next to improvements in our execution function, our margin performance was also aided by successful price increases, which demonstrates the pricing power our brands enjoy. Overall, the full year revenue growth and contribution margin landed within guidance. During the fourth quarter, we continued our disciplined investment into marketing to grow our subscriber base at attractive unit economics. As you will hear later on the call, we are pleased with our ability to acquire customers at attractive acquisition costs in line with prior years despite an inflationary CPM environment and while operating at much larger scale. Now moving on to Page 4 in the results deck. I would like to share our rationale for the acquisition of Chefgood, which closed in early January and will be consolidated into our 2022 financial results going forward. So Marley Spoon's strategy is to resolve recurring everyday problems by offering personalized and sustainable direct-to-consumer solutions. All the brands we operate need to meet our internal unit economic thresholds, and our strategy to grow is, on the one hand, via attracting new subscribers and, on the other hand, by increasing the share of wallet and hence, increasing ARPU for our existing subscriber base. We have been offering ready-to-heat meals to our Marley Spoon customers in Australia and United States for some time now, which taught us that meal subscribers value such an offering. We have observed customers selecting ready-to-heat meals to replace a meal they otherwise would have cooked, but more importantly, we see many customers adding an incremental meal to their weekly Marley Spoon box, leading to an increase in ARPU across our subscriber base. We have also learned over the past years that some consumer groups prefer an even more convenient and healthy way to eat which does not require any cooking at all. In the past, we're not able to offer those customers a comprehensive solution, but we did gather those potential customer touch points over the years as part of our general marketing activities. Now Chefgood is an Australian direct-to-consumer ready meal business that provides a weekly rotating menu of 30 mains, 8 breakfasts and 7 snacks. Their meals are highly rated by a growing customer base, and they operate out of their own manufacturing facility. The business has been growing rapidly to a AUD 26 million net revenue run rate while generating positive EBITDA and net cash flow. The combination with Chefgood will allow us to increase customer choice, which we believe will lead to an increased engagement and support our strategy of increasing ARPU for our meal kit brands. Furthermore, we see an opportunity to cross-sell to our lead pools and hence, increase our marketing efficiency across all brands as we now can offer the right solution meal kit or ready-to-heat subscription to our target audience. Finally, by moving our ready-to-heat meal options that we are currently sourcing externally in-house and by combining our sourcing activities, we have identified synergies which we expect to benefit from. The upfront purchase price of up to AUD 21 million, which is being paid in 2 tranches in 2022, implies a revenue multiple of up to 0.8x on the revenue run rate. Furthermore, performance-based earn-outs are payable in tranches throughout 2024 of up to AUD 5.6 million. The transaction was funded by a combination of debt and equity placement of, in total, AUD 19 million. Now I'm excited about welcoming founder Michelle and her team to join the Marley Spoon team as we see great strategic fit while also having agreed on an attractive financial deal structure. Moving on to Page 5 in the deck, which provides a summary of the overall financial performance for the fourth quarter and the full year 2021. The earlier mentioned contribution margin expansion and the disciplined investment in marketing led to an improvement in operating EBITDA compared to the prior quarters, landing at negative EUR 4.8 million. Full year 2021 EBITDA landed at negative EUR 32 million. This loss was driven by growth investments into marketing and infrastructure in order to prepare the company for increased scale going forward. Operating cash was approximately negative EUR 15 million, which is roughly half of our operating EBITDA loss. This demonstrates the attractive cash cycle of our subscription business. With a year-end cash balance of around EUR 39 million, we are sufficiently funded to execute our future growth strategy. Now I would like to thank our teams for going the extra mile in a challenging year that was impacted by historic weather disruptions, supply chain challenges, labor shortages, inflationary pressure as well as the continued COVID-19 pandemic. Despite these headwinds, we ended the year with accelerated growth in our highest contribution margin globally. With this, I would like to hand over to Jennifer.

Thanks, Fabian. As you can see on Page 7 of the presentation, active subscribers in the fourth quarter grew 18% versus the prior corresponding period and also accelerated quarter-over-quarter. The quarterly subscriber growth was led by Australia with a 45% increase versus the PCP. On a 2-year CAGR basis, however, all regions grew subscribers materially and at similar levels. In addition to increasing our subscriber base, we also expanded average revenue per user during the quarter by 5% versus the PCP. Initiatives like ready-to-heat and festive items during the holiday season in the U.S. contributed to the ARPU expansion and helped offset a seasonal reduction in orders per subscriber. Combined, our subscriber and ARPU growth led to the net revenue result in the fourth quarter, a 24% increase versus the PCP and a continued acceleration versus the 2 previous quarters. This delivery was also achieved with an improved level of marketing efficiency that was realized in 2021, as you can see on Page 8. For the full year, we spent approximately EUR 66 per acquisition, a level that is consistent with the 2 previous pre-pandemic years, with the key difference being that we are acquiring at much greater scale and in a highly inflationary CPM environment. This helps translate to greater marketing leverage, with marketing as a percent of sales coming down to 22% in 2021 versus 26% in 2019 pre-pandemic. On a quarterly basis, our marketing as a percent of net revenue also came down significantly relative to Q3, more in line with the first half of the year. On Page 9, you see that we also realized greater leverage through our expanding margins, both in contribution margin, which is net of marketing vouchers, and operating contribution margin, which excludes the impact of marketing vouchers and fixed costs such as expenses relating to site leases. In both instances, we saw successive improvement across the last 3 quarters of the year and finished 2021 with a Q4 contribution margin of 31%, which is 2 points better than the prior corresponding period. All regions contributed to the improving trend over the course of the year, overcoming the various external operating headwinds that we experienced throughout 2021. Looking more specifically by region, starting on Page 9 (sic) [ 10 ]. The U.S. realized 3% growth in active subscribers versus a heavily COVID-impacted PCP during which consumers did not travel. Conversely, in Q4 2021, consumers were exhibiting significant holiday and vacation behavior. Looking over a 2-year horizon, however, the U.S. subscriber base increased at a CAGR of 46%. The region delivered 15% net revenue growth in Q4 versus the PCP, aided by ARPU increases and the impact of pricing actions taken during Q3. Margins expanded nearly 4 points in the quarter, demonstrating the region's greater ability to offset labor and inflationary challenges. Looking at Australia on Page 10 (sic) [ 11 ]. You can see an increase in the active subscriber base of 45% in the quarter versus the PCP, aided by the launch of Marley Spoon in Western Australia. Revenue also grew significantly at approximately 53% for the quarter. Margins held steady versus the PCP in the face of supply chain disruptions and additional costs incurred related to COVID. Australia returned to profitability this quarter, delivering EUR 2.5 million of operating EBITDA. In addition, as Fabian mentioned, we closed the Chefgood transaction and are looking forward to adding their ready-to-heat offerings to our portfolio. Finally, on Page 11 (sic) [ 12 ], Europe continued to grow active subscribers, delivering 18% growth in Q4 versus the PCP and 42% on a 2-year CAGR basis. Net revenue growth did remain flat for the period, driven by both a higher tendency of customers to skip and vacation in the quarter as well as Dinnerly representing a higher part of the sales mix than in previous quarters. Our Q4 2021 financial position is summarized on Page 13. We delivered strong net revenue in the quarter, accelerating versus Q3 and growing 24% versus the PCP. Thanks to pricing actions and operational improvements, we were able to also accelerate contribution margin, hitting 31% in Q4. G&A stayed relatively stable over the course of the year, landing at 21% of net revenue in the quarter and just below 20% for the full year. This is owing to increased investments in our operations and infrastructure during the year. We improved operating EBITDA in Q4 relative to the year's previous quarters, delivering negative EUR 4.8 million stemming from our marketing and fixed cost investments. Finally, you can see our full year 2021 cash landing and current liquidity position on Page 14. We ended the year with approximately EUR 39 million in cash, which includes a EUR 7 million extension of our Runway debt facility to partially fund the Chefgood transaction. Our full year 2021 cash from operations was negative EUR 15 million, better than half our full year operating EBITDA losses, driven largely by our working capital dynamics. Our overall liquidity is currently EUR 55 million. This considers the January payout of tranche 1 of the Chefgood purchase price, this month's EUR 5 million equity raise available to us for future Chefgood purchase price payouts and tranche 2 of our debt facility with Runway Growth Capital available to us starting from April 2022. We believe this overall liquidity is sufficient for our current growth plans. With this, I would like to turn it back over to Fabian.

Yes. Thank you, Jennifer. Now let's move on to Page 16. So as we summarize, 2021 was a year of growth, operational improvements, expanded product offerings, and we're ending the year with a simplified balance sheet. And we surpassed EUR 300 million in sales and delivered nearly 60 million meals to our subscribers. We've improved our systems and strengthened our teams, which allowed us to achieve an attractive and stable contribution margin in a volatile operating environment. We increased our offering to our subscribers, which led to an increase in order value and ARPU. With the conversion of all outstanding convertible bonds in 2021, we also finished the year with a simpler balance sheet and adequate funding and liquidity to support our growth strategy. This leads me to our 2022 priorities, which we shared on Page 17 of the results deck. Now our 2022 strategy is guided by our continued focus on improving the experience of our customers by continuing to build a strong Marley Spoon culture by continued growth within our balance sheet capacity as well as by maintaining our attractive contribution margins and focusing on cost discipline. Our priorities will be, first, to continue to grow our business. We aim to achieve this by increasing our subscriber base at attractive acquisition costs. The related investment to marketing will be weighted towards the first half of the year. Furthermore, we plan to increase choice and personalization for our customers to further drive ARPU. Finally, we will continue to invest into our end-to-end customer experience, which already in 2021 was recognized as industry-leading as we won customer service industry awards in Germany and the United States. As we continue to grow, our second priority will be to maintain our contribution margin and manage costs by continuously assessing the way we operate and aspiring to find new and more agile and efficient ways to get things done. Furthermore, we will continue to invest in automation while, at the same time, decreasing our overall CapEx level compared to 2021. The third priority will be to integrate Chefgood. Now we expect to benefit from initial synergies such as purchasing and marketing to be realized first, while integration of operations will yield additional synergies in the longer term. With regards to the outlook of 2022, we expect continued volatile customer behavior, supply chain disruptions and inflation. We provided guidance on Page 18 of the results deck, which does not yet factor in the impact of our Chefgood acquisition. This year, we expect organic revenue growth of mid- to high teens plus the full year contribution from Chefgood. We expect contribution margin in 2022 to be in line with 2021, and we expect operating EBITDA to improve year-over-year to better than negative EUR 15 million. Thank you for taking the time this afternoon. And with that, I would now like to open the call to questions.

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

I may just -- maybe just touch on the outlook statement there. Just wondering, just with the marketing spend being weighted to the first half, are you expecting -- just talk me through the CAC or the marketing environment that you're seeing today and what you're expecting for FY '22.

Yes. I think we provided visibility for 2021, and this, you saw CAC was actually in line with prior years despite the much larger scale that we operate in and also an environment where indeed CPMs are inflated. But we are doing -- as you can see in the results, we were able to offset this by just operating better, smarter, having better acquisition channel control, applying more technology into certain ways to predict LTVs, for example, that allows us to bid better and then, in the end, get the same efficiency. Our expectation is that we should be able to continue to do that. So the year started well. And so far, we do not expect our marketing efficiency to decline year-over-year. Quite the opposite, we think that we can continue to offset potential environmental CPM inflation by this better way and higher efficiencies that we have in our marketing activities. Did that answer the question?

Yes, it does. Yes. And maybe just a question, have you changed your CapEx plan in the last quarter? Obviously, you're saying the CapEx to reduce versus FY '21. Is the expectation -- have you deferred any CapEx plans this year into FY '23? And maybe a question for Jen. Given the plan around the guidance, where do you expect liquidity to end in FY '22?

Jen, do you want to take both of those?

Yes, yes, I got it. So yes, so we did -- we had a CapEx of about EUR 20 million in full year 2021. As you know, we opened the 2 new fulfillment centers in Sydney and California. And so with those now both fully operational, we do see a reduction in our CapEx plans for '22. I wouldn't call it a postponement per se versus we did the big investments already in the capacity expansion as well as introducing the new technology that we have in each of the fulfillment centers in the U.S. So the focus in 2022 is going to be more about automation, warehouse management systems, those kinds of things, selected investments as opposed to the big expansion projects that we saw last year. With respect to liquidity for the full year, we're not guiding to that. We guide to operating EBITDA, as we've just done. I think -- and you see the slide in the investor presentation, we feel that at least in terms of how you want to think about modeling it, we've got the second Runway tranche available to us after the first quarter. We've guided to lower CapEx. We're guiding to improved operating EBITDA versus 2021. So we'll leave it at that for now. Just to add -- sorry, just to add also one other thing to point out, I mean I think there is a historical -- historically, we have delivered cash from operating activities that is better than operating EBITDA. So I think that's just another way you can think about your modeling.

Your next question comes from Elijah Mayr from CLSA.

Just a couple from me. Maybe just firstly touching on, I guess, the changes or the impacts onto labor and what you're seeing in food inflation, I guess, during the quarter and how that sort of transitioned into January and, I guess, how that sort of goes into your guidance and expectations for 2022.

Jennifer, do you want to take that, margin?

Yes. Yes, I can take that. So I mean the -- I would actually say the inflation, as you're all probably reading about it, it's actually not even isolated to food. In fact, we're seeing fuel inflation, of course, food, some packaging materials. We've got hit already at the end of last year, so that was probably why we took the price increases. And principally the U.S., although we had price increases as well in Australia and EU at the end of Q3, that helped to offset the food inflation that we were seeing. We are still definitely seeing it in 2022, which is why our current margin guidance is essentially to be in line with 2021. That's really driven by 2 things. It's not only the inflation that we're seeing across the board, again, global in addition to the supply chain challenges, not necessarily getting the products that we want, needing to make substitutions, the challenges our carriers are having in terms of finding labor, our own labor challenges. All of these things are -- they're factored into our plans. So we've definitely considered them. There's also a degree of wanting to invest back into the customer despite the inflation that we're experiencing, so hence the margin guidance. But I would say the food inflation is uniform around the globe. And so we're just doing what we can to be more agile in terms of negotiating with our vendors, joining buying groups in the U.S., for example, where it makes sense to try to get more efficient pricing. If that answers your question?

Yes, that's good. And I guess, I mean, if you continue to see inflation going into 2022, how much scope is there for you guys to increase prices? Or will you guys hold off on that, given you've recently, I guess, increased them, particularly in the U.S.?

We have pricing in all regions...

Yes. I mean, I think -- sorry, go ahead.

We have previous pricing in all regions last year, and what is interesting is we normally model the reaction of customers to those price increases. Because when you first announce them, you tend to see higher churn rates for a certain period of time. You see certain skip rates for a certain period of time. And especially in the U.S. where we took the biggest price increases, we saw actually customers very much understanding and accepting those price increases, which kind of demonstrates the pricing power that our brands enjoy. We saw lower skip and churn than what we had expected based on data we had seen in earlier price increases we've done historically. Also, we see that other brands in the space experience the same situation and consumers experience prices in supermarkets going up. And so what we've seen is that overall, we and also others have been offsetting some of those inflation that we've experienced, and customers are supporting that. We are -- when we look into our positioning, the way we position our brands, we never position our brands in the various price bands we operate in. As you know, we have Dinnerly, Marley Spoon, that focused on different audiences. We never position our brands as the cheapest player. We -- our value proposition is more around convenience and choice and experience in Marley Spoon and around simplicity and making -- enabling people's lives in the Dinnerly space. We've seen by now that other competitors also have leveled pricing, so that we are basically in a similar position before we took our first price actions last year, which puts us potentially in a situation that where necessary, we feel we can, in a measured way, take pricing as we see inflation and consumer experience inflation in the supermarket. So I think I wouldn't rule it out. I think we certainly have the capability to maintain our margins that way. However, there's many other things that we also can do to support margins in the operational side that we are confident that our margins should remain strong as we have multiple avenues to offset potential inflationary impacts, as Jennifer has mentioned earlier, that we planned them and considered them in.

The next question comes from [ Lashan Perera ] from Magnolia Capital.

Can you talk a little bit about the U.S. market and where you think it's headed for 2022, given that we would have liked to see those numbers go up a little bit comparing to some of your competitors? I think they've had about 35% or nearly 40% active cost to net growth. So can you describe on what would be the plan for the U.S. market to get that growth moving?

Yes, absolutely. I mean we are guiding to growth for next year. That growth will be supported by all the regions. We always say we are not guiding to individual region's growth as we are agnostic in terms of where we acquire our customers. We try -- we have a global lens acquiring customers at the right unit economics where we find them. And this can be different quarter-over-quarter in the various regions, especially the last 2 years, as we have had quite a different timing impact on various COVID-related customer behavior changes. This has been different in the various regions quarter-over-quarter. So it didn't happen uniformly across our regions. Now having said that, we do believe the U.S. growth probably will be led by the U.S. We see the U.S. as -- continues to be one of the large growth opportunity for our business where we can grow attractively. So again, I think growth will come from all the regions next year, and U.S. will probably be leading that as the acquisition environment remains attractive. The market is huge, and the market is very well developed, and we see good success with our brands that we've positioned there. So it's definitely part of our growth story, and growth focus will continue to be the United States.

Just one other question from me. So regarding Australia, so we've had really good numbers. And as you know, the lockdowns got ended towards the end of last year. And how do you see the growth coming in Australia after both New South Wales and Victoria ending the lockdown?

Yes. The reason why we provided subscriber growth 2-year CAGR numbers this time around because we wanted to help to see through indeed this different phasing. We saw a bigger impact on COVID-related lockdowns in Q4 in Australia and versus in the U.S., it was the other way around. Despite Omicron also being present there, customer behavior was not really impacted at all. Quite the opposite, the Christmas holiday travel season was one of the busiest in recent history despite Omicron. So we've seen the impact in different quarters in the different regions, but if you really look through and look at the overall continued growth, you see actually similar subscriber growth across all the regions. So while there might be quarter-over-quarter impacts on how countries locked down and open up again, it doesn't change. We believe that the overall growth is uniform throughout the regions as we see a customer behavior that's -- once they switched from off-line to online shopping and realize the benefits of and convenience of shopping and cooking with a meal kit compared to the supermarket, this actually persists and provides continuous growth. So there might be quarter-over-quarter changes in baseline customer behavior, which has a big impact on revenue growth. We provided in the Appendix an updated slide where we show how the order -- our subscriber base is distributed across our revenue. So the majority of our sales are from existing customers, not from new customers. So if you've got this big base of recurring revenue, it tends to be impacted a lot by change in behavior and frequency that we've seen over the past 2 years. So therefore, again, I would -- we would say, let's look through the quarter-over-quarter impact and look more at the long-term growth trends. And there, we see actually strong growth in Australia and the U.S. and Europe, quite uniform on subscriber base. So I would say, quarter-over-quarter, you might see a higher variance on frequency as customer behavior is quite fluctuating, but it doesn't -- it only masks. It doesn't change the overall growth that is quite strong uniformly across all the regions over the past 2 years. And we expect more growth also in 2022.