Marley Spoon SE (MMM) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Marley Spoon AG Q3 2022 Quarterly 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 to everybody. 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. Earlier today, we released our third quarter results of calendar year 2022, and we're looking forward to presenting you those results today 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 during the third quarter, the business continued to operate according to plan. Our strategy for this year was to focus on improving operating EBITDA while growing the business in a measured and controlled way. As planned, in Q3, we delivered an improved operating EBITDA result in line with our expectations and good year-over-year growth. Achieving our growth and operating EBITDA goals, while we -- which we said at the beginning of the year, underscores the reliability of our business model in this current market environment. Our growth was achieved through continued execution of this year's three pillar growth strategy. First, we continued to invest with discipline into marketing to acquire new subscribers at unit economics in line with our internal target of 6 months payback and 3x return over the lifetime of the customer, leading to a 4% growth in active subscribers year-over-year. Overall marketing as a percentage of net revenue was at 14.6% roughly half compared to the PCP. Second, our initiatives to drive average order value continues to yield solid results. Amongst others, average order value was driven by newly launched Premium recipes that provide special ingredients or recipes as an additional charge, our market initiative that offers up to 200 additional grocery items to our customers as well as price increases. Our market-leading recipe choices also contributed to the increase in average order value by leading to a higher average amount of meals per order compared to the PCP. Overall, basket size grew 28% or 14% in constant currency. Finally, our Chefgood business acquired at the beginning of the year continued to drive growth for our Australian segment. Overall, the successful execution of our growth strategy led to Q3 net revenue growing 26% year-over-year to EUR 100 million, in line with our plan that has factored in the reduction of marketing investments in the second half of 2022 to deliver our operating EBITDA target. Contribution margin also developed according to plan and expanded year-over-year. Global contribution margin reached 28.8% for the quarter, an expansion of 70 basis points over the prior year. Operating contribution, defined as CM excluding the impact of marketing vouchers and fixed costs such as expenses related to site leases was down 110 basis points to 37% compared to the PCP. Now the margin and performance was driven by strong operational improvements in margin gains in the U.S. segment, which again operated profitably this quarter and by an overall lower marketing voucher spend compared to the prior year. The Australian margin, while improving quarter-on-quarter continued to be impacted by ongoing external food supply chain issues, particularly substitutions due to lack of availability or poor quality. Those [ hedgements ], however, eased throughout the quarter and the business continued to operate profitably in the quarter. European margin performance was poor impacted by energy, logistics and food cost inflation as well as last mile costs driven by labor shortages. We are conducting an operational review and have launched turnaround initiatives to improve our European performance to turn the business to profitability as well. As part of this turnaround plan, we have made some leadership changes to strengthen the European operations team. In addition, Ebony Simone has stepped down as CEO of the EU region, which will now be led by myself directly, while I am performing the operational review and supporting to region and its turnaround. The continued measured growth at reduced marketing spend, combined with the contribution margin expansion compared to last year led to an operating EBITDA result that was significantly improved versus the prior year and also sequentially versus the prior quarter, lending at negative EUR 1 million, excluding onetime charges from severance payments and historical sales tax correction in the U.S. With this, I would like to hand over to Jennifer, who will walk us through some key metrics of the regional snapshots as well as the Q3 cash flow.

Thanks, Fabian. We delivered another quarter of active subscriber growth, achieving 275,000 active subscribers globally, an increase of 4% year-over-year. This growth was led by Australia at 5%, followed by the U.S. at 4% and Europe, which delivered 2% active subscriber growth. We saw the orders per subscriber decreased by 5% versus the PCP, but the number of meals per order increased by nearly the same amount, at growth of 4.5% versus the PCP. In addition, average order value increased 28% in the quarter versus the PCP or 14% in constant currency. Price increases in all three regions contributed to this growth as did the introduction of premium recipes, which offer customers higher quality proteins and a more elevated culinary experience at an increased cost as well as improved attachment rates for market. Turning to the performance by region. We were very pleased with the results delivered by the U.S., which saw strong growth and another profitable quarter. The U.S. delivered year-over-year net revenue growth of 37% on a reported basis or 16% in constant currency despite a pullback in marketing spend versus the previous year and the second quarter of this year. Increased portion sizes, additional menu offerings and pricing taken to offset inflation led to the net revenue growth as to the growth of the region subscriber base. Contribution margin also performed well in the quarter, landing at 28.5%, an expansion versus the previous quarter and an improvement of more than 5 percentage points year-over-year. The margin expansion partly resulted from reduced marketing vouchers in the quarter, but also points to the successful implementation of the region's operational turnaround, specifically in terms of picking line productivity and improved service levels and logistics. This can be seen in the operating contribution margin, which also expanded versus the prior year, landing at 36.3%, a 230 basis point improvement. The net revenue growth and margin expansion led to another profitable quarter for the region with delivery of EUR 3 million in operating EBITDA, an improvement of EUR 8.5 million versus the previous year. Turning to Australia. We saw the resilience of that region in terms of what it was able to deliver despite facing many external headwinds. Net revenue grew 24.4% year-over-year or 14% in constant currency in Q3 2022 driven by growth in active subscribers and additional menu offerings, further integration of the acquired Chefgood business, particularly into our global marketing playbook, also contributed to the year-over-year growth. Both contribution margin and operating contribution margin were lower versus the previous year. This was due to inflation, particularly in produce costs, the ongoing weather-driven supply chain challenges and the subsequent ingredient availability and quality issues. However, the contribution margin and operating contribution margin of 32.2% and 40.3%, respectively, for an improvement over the last quarter by approximately 2 percentage points each as we finally witnessed an easing of the headwinds toward the end of the quarter. Strong cost management to overcome the margin contraction helped deliver another quarter of operating EBITDA profitability with Australia delivering nearly EUR 4 million, an improvement of approximately EUR 5 million year-over-year. Finally, in Europe, we continue to see softness of consumer confidence weakens and inflationary pressures persist. Net revenue was down nearly 3% versus the PCP and while this was a slower rate of decline versus the previous quarter, order frequency was down year-over-year. Contribution and operating contribution margin were also not at satisfactory levels, trending far below Q3 2021. Contribution margin was 17%, flat versus the second quarter of this year, though operating contribution margin at 28% contracted 2 percentage points versus Q2. Fuel inflation and logistics costs and service levels were largely responsible. Nevertheless, despite the margin deterioration, the region held operating EBITDA losses flat to the PCP at minus EUR 2 million. Questions have been raised about the European business in light of this performance. As Fabian mentioned, we are undertaking an operational review of the business that includes advancing our turnaround plan. Progress against those plans include the management changes that Fabian spoke of and a more targeted country level view of marketing allocation and effectiveness. While it is too soon to call victory, we are encouraged by margin improvements we already saw at the end of Q3 and with preliminary October performance. Looking at cash flow, we ended the quarter with EUR 21.6 million in cash, due in part to the timing of payments. Positive cash from operations helped offset outlays in investing and financing. Taking each individually, cash from operations was significantly improved versus the previous quarter, landing at a positive EUR 3 million, which includes currency tailwinds. Our improved operating EBITDA performance, negative working capital as well as the impacts of foreign currency exchange contributed to the operating cash balance. Cash from investing activities was nearly negative EUR 3 million with some minor fixed asset additions in the U.S. and Australia and investment in our digital capabilities, not reflected yet in investing cash is the EUR 1.6 million paid out to the former owners of Chefgood this month as part of the acquisition of the ready-to-heat business in January of this year. Finally, cash from financing activities was approximately negative EUR 4 million for the quarter, driven by our IFRS lease payments as well as interest expense, which increased quarter-over-quarter by EUR 800,000 due to rising interest rates and the impact of a weaker euro. This quarter, we also obtained funding for our insurance premiums associated with the renewal of our global insurance policies in the amount of EUR 1.4 million. With this addition as well as the change in cash quarter-over-quarter and the currency impact on the USD denominated debt, we ended the quarter with a net debt position of EUR 63.5 million. Looking ahead to the last quarter of the year and our full year lending, we are pleased to be able to reaffirm our guidance for full year 2022, namely delivering organic net revenue growth versus the PCP in the mid- to high teens before the full year contribution from Chefgood, delivering contribution margin in line with 2021 and delivering operating EBITDA better than negative EUR 15 million. Having delivered three consecutive quarters in line with the plans we developed at the start of the year, while facing many unexpected or worse-than-anticipated headwinds gives us confidence going into the fourth quarter to end the full year as communicated in January. Specifically, we expect Q4 operating EBITDA to be profitable between EUR 2 million and EUR 4 million. This outcome is the result of financial discipline through measured investments and growth and a focus on cost control to balance the top and bottom line, an approach we expect to continue into 2023. With this, I would like to turn it back over to Fabian.

Yes. Thank you, Jennifer. Overall, we are pleased with the performance of our business to date. We do not experience at this point in time, a material impact from reduced customer confidence in regards to existing customer order behavior, allowing us to reach our growth targets at the planned level of marketing investments. At the same time, our initiatives to increase our average order value by providing more many choices and additional menu items have been successful to date. We have been able to expect our margin in inflationary and volatile operating environment, be on track to achieve our margin goals as we continue to improve our operational efficiency while also successfully taking pricing to offset inflation. The continued controlled growth and margin performance underline the reliability of our business model in the current environment and led to a sequential and a strong year-on-year improvement on our quarterly operating EBITDA and operating cash flow performance. Furthermore, as mentioned by Jennifer, we expect another sequential improvement for Q4 this year as we expect to be profitable as operating EBITDA on a total company level. I would like to point out that the current operating EBITDA trajectory, unlike 2020, where the business benefited from strong tailwinds is materializing despite the headwinds that the current operating environment is presenting. The sequential improvements throughout this year and achieving our guidance to date provide us confidence that our business is expected to continue on this development path throughout the following year, which -- with continued growth and improved profitability. I would like to thank everybody at Marley Spoon for the great teamwork that delivered good performance throughout the year-to-date. And with that, I'd like to thank you for taking the time this afternoon. And I would now like to open the call to questions.

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

I guess just a focus on Europe was down in the quarter, was that on the profitability outside of Europe and also the guidance into the fourth quarter. Maybe just touch on in your views, your view of what Europe is worth, the timing for the turnaround? Is it kind of the next 6 months? Is it a 12-month project? How much could it be -- how much is the cost to shut down if you had to make that decision? Just kind of early views if that's possible?