Marley Spoon SE (MMM) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Marley Spoon Q1 2022 Quarterly Results Investor Conference Call. [Operator Instructions] I would now like to hand the conference over to Mr. Fabian Siegel, Founder and CEO. Please go ahead.

Yes. Thank you, and good morning. Thanks for joining our investor call. My name is Fabian Siegel, Founder and CEO of Marley Spoon and I have with me here today, Jennifer Bernstein, our CFO. Now yesterday, we released our first quarter results of calendar year 2022. We're looking forward to presenting you those results today as we -- as well as providing you with an update on the business. And at the end, as usual, we'll open the call to your questions. Now we're pleased to announce that we had a good start into the year with solid continued growth. As always, the first quarter each year is an important quarter for us to invest into marketing and to set us up for reaching our full year goals. In Q1, the media environment is normally attractive and customer behavior at the start of the year tends to be favorable for our business model. Customers are open to inviting a subscription service into their lives with people returning from holidays and making new year's resolutions. Consequently, we planned with large media budget for this quarter, which have to be efficiently deployed at attractive acquisition costs in order to not just achieve scale but scale at good unit economics. After finishing the quarter, we can say that our teams have fulfilled our plans, and we are satisfied with both the scale of acquisitions as well as the achieved acquisition costs. Overall, marketing as a percentage of net sales reached 23%, which will be the high mark for this calendar year. The successful acquisition environment paired with good base behavior of our large back book of business led to a new record. When we IPO-ed Marley Spoon in 2018, we generated EUR 92 million net revenue for the year. In the first quarter this year, we exceeded EUR 100 million in net revenue in a single quarter for the first time. We generated EUR 103 million net revenue, a growth rate of 32% year-over-year and a great affirmation of the continued growth story for Marley Spoon. As mentioned in our fourth quarter results call at the beginning of the year, this year's growth strategy is driven by acquiring new subscribers and, at the same time, launching additional revenue lines to drive ARPU. In March, we launched our Marley Spoon and Dinnerly Market offering in select graphic areas across all our regions, which subsequently will be rolled out to most areas we cover globally by the end of the second quarter. Our Market offering currently features up to 50 SKUs across categories such as breakfast, desserts, pantry items or ready-to-heat convenient items. We expect the market offering to support our growth strategy this year with meaningful sales contribution to materialize in the second half of the year. Q1 was also the first quarter of operational integration and collaboration between the Chefgood team and the rest of Marley Spoon. And both teams connected well, and we have started to learn from each other while aligning our best practices. One outcome of this collaboration is the launch of Chefgood meals in our market offering for Dinnerly and Marley Spoon in Australia. Operationally, we were quite exposed to some challenges. We experienced supply chain disruptions that impacted the availability or quality of individual ingredients in all regions, which the teams needed to replace on short notice to minimize customer impact. In Australia, we faced unprecedented floodings, which directly impacted customers' deliveries and our food supply chains. And finally, across all regions, we experienced significant input cost inflation, a trend that continues. At the same time, the first quarter saw a lot of improvements and execution success stories. For example, we experienced a strong U.S. winter storm season, impacting logistics and our manufacturing facilities, which the teams were able to mitigate by flexibly reallocating production volume across our 3 sites in the U.S., minimizing customer and margin impact. All in all, our contribution margin was down 70 basis points compared to the prior year, landing at 27.3% and operating CM, defined as CM excluding the impacts of marketing vouchers and fixed costs such as expenses related to site leases, was 37.6% globally in Q1, down 40 basis points year-over-year. In fact, year-on-year operating CM in Europe was up by 190 basis points, the U.S. was flat and only Australia took a significant hit down almost 4 points, primarily driven by the temporary impact of the floodings. Going forward, we are expecting continued inflationary headwinds throughout the rest of the year and consequently, have raised prices in April for all brands in all regions. Last year, we invested into people and processes to build the foundation for ongoing continued future growth after doubling our business in 2020. This upweighting of G&A has been primarily achieved and we saw in Q1 the G&A percentage of net sales declined versus the prior quarter. While we expect continued increase in absolute G&A cost as we selectively invest into new capabilities and increased salaries in line with inflation, we also continue to refine our cost structure and continuously look for more efficient ways to operate so we can deliver more operating leverage. Overall, the planned increased investment into marketing led to an operating EBITDA loss of EUR 9.7 million which is in line with our expectations and our plan for the year. With this, I would like to hand over to Jennifer who will walk us through some key metrics, the regional snapshots as well as the Q1 cash flow.

Thanks, Fabian. We delivered a strong quarter of active subscriber growth, up 15% versus the PCP, driven especially by Australia, which grew subscribers 37% and the U.S., which grew 9%. We also saw average order value increase, up 13% in constant currency, driven by expanding our menu to give customers more choice as well as the annualization of last year's price increase. Though orders per subscriber were slightly down versus the PCP, our overall revenue in the quarter, as Fabian mentioned, topped EUR 100 million and grew 32% year-over-year. Looking by region. We witnessed continued growth in Australia, thanks to a strong acquisition environment, which, combined with the first-time inclusion of revenue from the Chefgood acquisition, led to a 53% increase in net revenue versus the PCP. The growth was countered, however, by a very challenging operational environment, which saw supply chain issues leading to high levels of substitution or outright ingredient shortages, compounded by the unprecedented flooding that occurred in March. Two factors together have led to a contribution margin that was well below normal levels for the region, landing at 28.4%, a 4-point drop versus the PCP. The margin contraction as well as the upweighted investment in marketing that was planned for the quarter led to an operating EBITDA loss of the region of EUR 2 million for the quarter. The region also began its first phase of the Chefgood integration, which included the business moving into its new fulfillment center in Keysborough at the end of March and the inclusion of Chefgood's ready-to-heat meals and Marley Spoon meal-kit boxes from this month. Turning to the U.S. We also saw a strong growth in the quarter, with net revenue increasing 36% versus the PCP or 27% in constant currency, thanks to an increase in subscriber base and order value. We were also able to offset inflationary headwinds to deliver a contribution margin that was in line with the PCP at 28.4%. Operational improvements in the region also played a key role in holding margins steady. Notably, this time last year, we spoke of the impact of the unusual heavy ice storm that occurred in Texas in February 2021 that led to the cancellation of approximately 20,000 orders. This year, almost to the day, the region experienced a similar storm but with minimal customer impact, a testament to the planning and process improvements in the region. The operating efficiency is also evident in the region's operating EBITDA performance, landing at breakeven despite the seasonally upweighted marketing spend. Finally, in the EU, we saw active subscriber growth of 3%, though a decline in orders per subscriber, ultimately leading to a decline in revenue of 8% versus the PCP. The EU, in particular, was lapping a very strong Q1 2021, which saw a resurgence of COVID at the time and therefore, particularly low skip behavior and strong acquisition dynamics. Operationally, however, we see solid improvements in this region with contribution margin of 21.3%, up 1.4 points versus the PCP. Operating EBITDA was negative EUR 2 million for the quarter, excluding headquarter costs. As Fabian mentioned, we continued to see significant cost inflation across multiple categories of input costs. As a consequence, we have announced pricing actions of around 5% to 6% in all regions across both brands. This price increase is now live in the U.S. and expected to be in the market in Australia and Europe in May. Turning now to cash. We ended the quarter with a cash balance of EUR 20 million. The movements in cash include outlays of EUR 7.5 million for the first payment tranche of Chefgood in January, negative EUR 4 million in cash from operations, less than half our operating EBITDA landing given our negative working capital dynamics, approximately EUR 3 million in investments in PP&E and product development and a net outflow of EUR 4 million in cash from financing activities. This includes costs associated with lease and interest payments offset by the EUR 5 million equity capital raise executed in January 2022. Our financing activity also includes the settlement of a EUR 5 million short-term loan balance with Berliner Volksbank through the drawing of a EUR 5 million account overdraft facility with the bank. We expect to renew this loan during the second quarter. Given our performance in the quarter and achievement of the targets we set in place, we have an amount of capital sufficient to fund our balance of year plan. With this, I would like to turn it back over to Fabian.

Yes. Thank you, Jennifer. Well, as mentioned earlier, we're satisfied with the start to the year. We said in the past that the priorities for this year are to: firstly, grow our business by increasing our subscriber base at attractive acquisition cost and to increase choice and personalization for our customers to further drive ARPU; secondly, maintain our contribution margin and manage costs; and thirdly, to integrate Chefgood. In Q1, we have done important work and achieved significant milestones that will aid us in fulfilling those priorities. Arguably, Q1 is one of the hardest quarters to get right. It requires efficient deployment of the biggest marketing budget of the year while operating during difficult winter weather in the northern hemisphere. And this year, we also experienced significant flooding in Australia. Having nevertheless achieved our target for the quarter increased our confidence and we, therefore, affirm our guidance for the year. I would like to thank everyone at Marley Spoon for the great teamwork that delivered this good start into the year. Thank you for taking the time this morning. And with that, I would like now to open the call to questions.

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

Well done on the quarter. It looks like it's on plan. Just a couple of questions. One, the price rises you guys are going through in April and May 6% across the group, is that only recouping the cost inflation? Or is there some margin benefit to come through from those price rises?

Yes. So look, we've given guidance that we expect this year margins to be in line with last year margin, which we affirm. And we always said there's 2 elements that we have to manage to margin. On the one hand side, continuously improve our operational performance and get efficiencies and savings. At the same time, we do believe we have pricing power and if consumers see prices to increase in supermarkets and of course, the whole grocery space, we do feel that the consumers understand and follow if we go that direction. So therefore, in that line, expectations should be according to guidance, which is contribution margin should stay steady. Does that answer the question?

Yes, yes. Okay. And just on -- looking at the guidance of negative EUR 15 million versus negative EUR 10 million for the quarter. So you're kind of looking at around that EUR 1.5 million now run rate for the next 9 months. I know there's a bit of seasonality in there. So exactly EUR 1.5 million, EUR 1.5 million, EUR 1.5 million. Can you just maybe, Fabian or Jen, paint a picture for us and we're all looking to companies as they pass the promised land is a breakeven. But can you maybe just talk through your expectations of how that will land from an EBITDA perspective into the second half?

Yes, absolutely. I mean if you look at past years, it gives you maybe some understanding on the seasonality of the business. We are always taking advantage of the first quarter to acquire a lot of customers to grow the business. And therefore, you see most marketing spends or the biggest budget in the first quarter. And so if you basically take that cue, you'll see how operating EBITDA might develop over the rest of the year on a quarterly basis. But there's also another element. I mean, we said when we started the year, the priority this year is not to maximize top line at good unit economics, it's to manage to the bottom line and growing at the same time as much as we can. Given that we've had a really good start to the year, think about the revenue that we are at, at this point in time, you could argue -- you could actually -- if you would just manage to bottom line and not the top line, we're kind of already on that runway that we need from a top line perspective. So therefore, in terms of future investment to marketing, you would expect continuously declining marketing spends in the following quarters, which again then gives you that bottom line benefit. So I wouldn't expect the EUR 1.5 million linear, but you probably expect continued improvement throughout the next year on the bottom line as we manage to our bottom line targets throughout the year.

Good one. And maybe a last question for me. So you started this quarter, an important quarter of you, as you say, subscribers up 9%. Your price rises coming through this quarter, of course, 6%. And the other aspect here is focus on ARPU improvements with this -- the new initiatives around value-added products that say you got 50 on the platform now. I think some regions a bit higher. But can you talk through if you fast forward 12 months, what's the expectation for ARPU increases from that initiative?

Yes. We haven't -- I wouldn't put any guidance out there as this is new for us. We are experiencing and learning and trying to understand what are the right items and categories that customers love to see. And so therefore, I wouldn't want to give specific amount of growth contribution from this part. But I would argue, it's definitely the ability to aid us in meeting our growth target is another lever that gives us the confidence to affirm guidance at this point in time. So in fact, we have multiple paths to get to where we want to get this year and having market launched quickly and in time, it gives us another lever to pull to make sure we hit our target this year. And that's why we said we -- after this quarter, we have an increased confidence of achieving the goals for the year.

Your next question comes from [ Lashan Perera ] from Mongolia Capital.