Marley Spoon SE (MMM) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Marley Spoon Q1 2023 Quarterly Results Investor Conference Call. [Operator Instructions]. I would now like to hand the conference over to Mr. Fabian Siegel, CEO. Please go ahead.

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, whose contract, I'm pleased to say, has been renewed for an additional 3-year term. Earlier today, we released our first quarter results of the calendar year -- of Q1 calendar year 2023, and we're looking forward to presenting you those today, as well as providing you with an update on the business. We also will comment on the multi-power transaction with amongst others, 468 SPAC II, that was announced earlier this week. At the end, as usual, we'll open the line to your questions. Now we started 2023 with improved margin and operating EBITDA. However, in terms of revenue, the start was a slow one. While we showed sequential growth compared to Q4, net revenue contracted 11% compared to the prior year's period. We had expected a year-over-year decline in revenue for the quarter, but in the end, it came in softer at EUR 91 million. Lower marketing spend in the second half of 2022 resulted in a lower customer base at the start of the year as planned. However, in January, we were unable to find the scale of new customer acquisitions at the target costs that we had expected. This did improve throughout the quarter as we ended the period at the expected level of acquisitions while maintaining our customer acquisition costs and unit economics target throughout the whole period. The [indiscernible] scale in our marketing resulted in a year-on-year reduction of marketing investments for the quarter by 12% or EUR 3 million, which contributed to the lower-than-expected revenue. The bigger miss to planned net revenue, however, was caused by a decrease in customer frequency compared to the PCP, which was driven especially by Europe as well as by the U.S., and it was more pronounced for our budget offering Dinnerly. Our data suggests that the decrease in frequency was primarily caused by an increase in budget concerns as household incomes were impacted by high inflation and lower consumer confidence. This decrease in order frequency alone and translated to lost revenue of EUR 7 million for the quarter. In order to improve order frequency, we have begun initiatives to more actively influence our customer behavior by launching active merchandising and customer loyalty programs across our brands. I expect that those initiatives will start to take effect in the second half of this year. The adverse effect of order frequency was partially offset by our continued focus on growing average order value which increased by 14% year-on-year this quarter. This improvement was driven by several revenue-enhancing activities in addition to price increases in 2022. For example, we continue to increase the number of recipes we offer for which we continue to be market leading, contributing to a higher average amount of meals per order compared to the PCP. We continue to see strong adoption of our premium recipes, which provides special ingredients or faster cooking opportunities for an additional charge. We are realizing incremental sales from our market initiative, which offers our customers more than 100 additional add-on grocery items. And finally, we saw benefits to our average order value from our newly launched recipe variants, which allow our customer to customize selected recipes by switching or upgrading proteins, as well as switching other ingredients. Operationally, the year started strong. Contribution margin in Q1 reached 31%, an expansion of 3.7 points versus the PCP. Operating CM, defined as contribution margin excluding the impact of marketing vouchers and fixed costs such as expenses related to site leases, was up by 6.1 points to 43.7%. The strong contribution margin performance was driven by significant operational improvements and resulting margin gains in the U.S. which reached a record contribution margin of 35.7% in Q1, up 7.5 points year-over-year. Also, European contribution margin improved significantly in Q1 expanding 5.9 points year-over-year. The strong contribution margin performance in the U.S. and Europe offset Australia's lagging margin, which was down by 2.1 points compared to the PCP. In order to react to the softer revenue experience, we initiated a cost reduction program at the beginning of the quarter, which is expected to result in EUR 10 million in annualized cost savings. We expect those savings to start meaningfully contributing to our financial performance as of Q2 2023. Despite the lower-than-expected revenue in Q1, due to the strong margin performance and cost control, we were able to improve our operating EBITDA performance by EUR 3.3 million, landing at an operating EBITDA loss for Q1 at EUR 6.4 million, which was in line with our plans for the quarter. Now I'd like to hand over to Jennifer who will walk us through the key operating metrics, regional snapshots, as well as the Q1 cash flow. .

Thanks, Fabian. On account of the acquisition challenges Fabian mentioned already, active subscribers were down 15% in the quarter to 250,000, but this was up versus Q4 2022 by 1%. Orders per subscriber were also down in the U.S. and EU, while Australia had modest gains. Average order value in meals per order on the other hand, both grew in Q1, signaling that customers, while ordering less frequently, are putting more in their box. Average order value grew 14% in the quarter versus the PCP. And while a little more than half of that is driven by the annualization of price increases implemented last year, premium recipes, market and Chefgood product mix also contributed to the increase. Further, meals per order grew 8% this quarter versus the PCP, in part due to more family plans in the mix in Australia. Turning now to the segment review, starting with the U.S. Net revenue in the U.S. was down 11% in Q1 versus the PCP and minus 14% in constant currency, driven by cycling a tough lap of 36% growth in last year's Q1. That, combined with the reduction in half 2 2022 marketing investment and the slow start to this quarter's marketing activity led to a lower level of acquisitions than planned. The more material driver of the net revenue decline, however, was to reduce order frequency, particularly on our budget offering, Dinnerly, which has been impacted more heavily by consumers' budget concerns. While the top line was soft, contribution margin performed extremely well with the U.S. team delivering a solid operational performance. Margin in the quarter was 35.7%, up 7.5 points versus the PCP, while operating contribution margin was 47.8%, 9 points improvement versus last year. The margin performance was a significant driver of the U.S. being able to continue delivering positive operating EBITDA and has been now for the fourth consecutive quarter. Looking now at Australia, net revenue also declined, though at a lower rate as compared to the U.S. Revenue was down 4.4% versus Q1 2022 or 1.5% in constant currency, while lapping 53% growth last year. Order frequency was relatively stable year-over-year with the sales decline more a function of the half 2 2022 marketing reduction and slow acquisition start to the year. We also saw higher level of marketing voucher usage in Australia coming from a higher number of reactivated customers versus the PCP. While these customers tend to have a strong payback profile on the order of weeks versus months, the level of voucher spend in the region contributed to contribution margin landing at 26.3% for the quarter, a contraction of 2 percentage points versus the PCP. Operating contribution margin on the other hand, showed improvement versus last year, landing at 40.3%, up 2 points versus the PCP. This was largely driven by supply chain improvements as the weather-related substitution events last year were less of a factor in Q1 2023. The region's operating EBITDA also showed improvement landing at negative EUR 1.2 million, which is up EUR 0.6 million versus the PCP. Finally, turning to Europe. We saw tougher conditions and more pronounced net revenue declines in the quarter as compared to the other regions, with net revenue down 27.6% versus the PCP. A lot of focus has been placed on Europe and its performance. To understand the drivers, it's important to understand our marketing investment strategy as well. Unit economics and the expected customer LTV play a critical role in resource allocation. The LTV is a function of contribution margin, which contracted significantly in Europe last year due to operational challenges. This means that the half 2 2022 marketing spend reductions we previously mentioned were higher in Europe than in the other regions, stemming from the margin performance. Part of the Europe turnaround plan was to improve margin, which I'll address in a minute, but equally, the plan included getting more forensic on LTV calculations by country. We now have a strategy that invests where the greatest returns can be realized, which explains why we ceased operations in Sweden, which was an underperforming market. In addition to these LTV and investment dynamics, we have also seen a particularly price-sensitive consumer in Europe such that order frequency has decreased versus the PCP. We have also observed an increased level of travel among European consumers, underscoring the somewhat unpredictable consumer behavior we are facing this year. Coming back to margin, we saw great strides made in Europe this quarter with contribution margin reaching 27.2%, up nearly 6 points versus the PCP. Operating contribution margin landed at 37.7%, up 4.5 points versus last year. The margin improvement and significant cost reductions which saw G&A decline 14% year-over-year helped the region deliver nearly breakeven operating EBITDA in the quarter, excluding headquarter costs. Turning now to cash. We ended the quarter with EUR 14.7 million, implying a cash burn of approximately EUR 4 million since year-end 2022. Cash from operations was a positive $4 million driven by positive working capital and net income losses that improved month-over-month in the quarter, driven by the margin improvements and our cost discipline and prudent cash management. Cash from investing activities landed at a negative EUR 3.5 million. We continue to invest in our digital assets, spending approximately EUR 2 million in the quarter. In addition, we paid EUR 1.6 million to settle the remainder of the Q4 2022 payment to Chefgood. There were no expenditures against fixed assets in Q1. Financing cash flows were negative EUR 4.8 million in the quarter. The repayment of the EUR 5 million money market loan with Berliner Volksbank in February was offset by the drawdown of the same amount of a new loan with BVB, which carries the same terms as before, namely 6.5% plus Euribor per year. Other financing cash flows included EUR 4.5 million of combined IFRS 16 lease payments and interest payments, including the payment to runway of our monthly interest obligations. As shared in the release announcing the 468 SPAC II transaction, those interest obligations will be deferred for 6 months beginning from April. With this, I would like to turn it back over to Fabian.

Yes. Thank you, Jennifer. To summarize the first quarter, our reduced marketing profile in the second half of last year, which emphasized EBITDA profitability over growth, led to a smaller subscriber base at the start of the year. In addition, we experienced stronger than planned softness in consumer demand, which led to a more pronounced year-on-year decline in sales. Despite that, we achieved our margin and profit goals for Q1 with expanded margin and material improvement in operating EBITDA year-on-year. However, because of the lower than initially planned order frequency in Europe and the U.S., we are revising our revenue outlook for 2023 as we currently expect order frequency to remain at the current level throughout the balance of 2023. We now expect a single-digit percentage revenue decline year-over-year for full year 2023, while at the same time, we expect to return to revenue growth in Q4 this year. Furthermore, we affirm our guidance around contribution margin and operating EBITDA. We continue to expect expanded contribution margin to between 30% and 32% and full year positive operating EBITDA. I also want to comment on the recently announced transaction in regards to additional financing and intended relisting to the Frankfurt Stock Exchange. The proposed investment by existing and new investors of EUR 32 million at AUD 0.17 per CDI, a 19% premium to the last close before the announcement, is an important step to support the company's growth plan, and provides the required working capital needs to continue our path towards free cash flow breakeven. The amendment of the terms of our run rate debt facility provides additional support. In a separate step, shareholders currently representing around 70% of the share capital agreed to sell the shares for new shares in the Frankfurt listed purpose acquisition company 468 SPAC II subject amongst others, 468 SPAC II shareholder approval at an implied value of AUD 0.21 cents per CDI, a 45% premium to the last close prior to the announcement. 468 SPAC II has committed to offer all CDI holders under a subsequent offer the opportunity to sell Marley Spoon CDIs for new issued shares in 468 SPAC II under the same commercial terms, allowing for long-term participation and the future upside of Marley Spoon's equity value. After having explored various strategic options over the past months, we believe the agreed transaction offers the best alternative for shareholders to realize value. Thank you for taking time this afternoon, and with that, I would now like to open the call to questions.

[Operator Instructions] There are no questions at this time. I'll now hand back to Mr. Siegel for closing remarks.

Yes. Thank you for dialing in today. We will have some broker calls scheduled for next week starting Tuesday. So if there are additional questions coming up, we will be happy to answer them there, or if you can always reach out to our investor e-mail address and Michael Brown. Thanks so much.

Thank you. That does conclude our conference for today. Thank you for participating. You may now disconnect.