Marley Spoon SE

ASX:MMM

Earnings Call Transcript

[Gilbert Siegel, executive]

Yes. Good morning, everybody, and thank you 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.

Yesterday, we released our second quarter results of calendar year 2022, and we are looking forward to presenting you those results today, as well as providing you with update on the business. We also have published an investor presentation which we refer to during our call. And at the end, as usual, we will open the call to your questions.

Now while the second quarter provided challenges on many levels in each of our regions, overall, we are satisfied with the results that we have achieved. As summarized on Slide 4 of the investor presentation, we continue to execute our 3-tier growth strategy. In Q2, this led to a 35% growth achieving EUR 109 million net revenue, which was driven by growth in subscribers, basket sizes, the consolidation of our newly acquired ready-to-heat Chefgood business and price increases, which we rolled out at the beginning of the quarter in all regions.

During this time of continued growth, we also were able to operate with stable margins despite a highly inflationary and volatile operating environment. And this was achieved, thanks to our fully engaged teams that worked with creativity and grid to offset adverse impact to the business.

Bigger scale in the quarter, combined with stable margins and coupled with continued cost discipline, led to an improved operating EBITDA result, reducing our operating EBITDA loss for the quarter to EUR 3 million, which corresponds to an operating EBITDA margin of negative 2.8%.

Now based on our performance in the first half of 2022, we expect to meet our full year targets and therefore reaffirming guidance. That implies that we expect for year to be operating EBITDA breakeven amidst slower growth at lower marketing spend.

Skipping Slide 5, as Jennifer will drill into some of those financial results in a bit. I would like to draw your attention to the foundation of the ongoing growth we are able to generate and which we also expect for the future.

As you can see on Slide 6, Marley Spoon is a relatively young company that has been growing rapidly with 120% CAGR over the past 7 years. During these years of growing the business, we also improved our operating EBITDA margin sequentially, which -- with 1 outlier in 2020, which saw strong profitability tailwinds.

Consistent with our reaffirmed guidance, we expect this year to be another important step stone that will bring increased scale, but also operating EBITDA breakeven in the second half, in line with the development of our company over the past years. Our ongoing growth is driven by our recurring revenue model, which leads to an ever-growing back book of business, as you can see on Slide 7.

Now in the first half of 2022, around 75% of all orders, where order number 6 or higher, which is up 5 points compared to the prior corresponding period. First-time orders only represent 50% of all orders in H1. This effect is driven by long-term customer loyalty as can be seen in the revenue retention curves displaying 4 years of actual data for our 2018 customer cohorts. As you can see, those long tails are very stable. And hence, you would expect long-term customers to stay much longer even beyond the 4 years that we are showing here.

Now this long-term customer loyalty has been the overall growth driver of the meal kit category in general, as you can see on the following slide, Slide 8. The meal kit category has been dramatically outgrowing supermarkets over the past years as customers switch to meal kits for the weeknight cooking needs. And within the category over the past years, we have been able to outgrow our direct peers.

We expect to continue this growth performance by executing our 3-tier growth strategy summarized on Slide 9. In the second quarter, we continued to grow our active subscriber base by 13% at attractive unit economics. This growth has been primarily driven by the U.S. and Australia, while Europe was slightly down, letting a high-growth PCP. Average order value increased by 23% as we continue to increase our menu choice, launched incremental offerings in our new market section and executed price increases.

Finally, the integration of our newly acquired ready-to-heat Chefgood business provides incremental growth for our Australian segment. Overall, we believe that our 3-tier growth strategy provides us optionality and control over how to continue to grow the business with discipline and attractive unit economics in the current operating environment.

With this, I would like to hand over to Jennifer, who will walk us through some of the key metrics, the regional snapshots as well as the Q2 cash flow.

[Jennifer Bernstein, executive]

Thank you, Fabian. As we just discussed, our growth rests on 3 distinct pillars, and we can see the impact they have in the makeup of our net revenue growth on Slide 11. Order increases played almost as big role as the increase in average order value, which again is a function of pricing, but also add-ons on the impact of Chefgood.

Fabian also spoke of the good unit economics that are the foundation for our investment in new customers and that led to our active subscriber growth. We are continuously updating our unit economic analysis to ensure our key guardrails remains. In this case, we looked again at a trailing 52 weeks of customer behavior to determine that based on our net revenue and contribution margin forecast, our 6-month payback and 3x return remain. Payback and LTV assumptions rely on contribution margin.

On Slide 12, you can see that for the first half of 2022, we landed contribution margin at 27.2%, stable versus the prior corresponding period. In fact, since the end of 2019, we have been operating within a band between 27% and 30%, never falling back to 2019 levels. Our contribution margin does have seasonality, which helps explain the variation by half year, but the stable CM landing for the first half was within the context of a very challenging external operating environment.

The stable margin performance was a function of the increased basket size and operational efficiencies we leveraged to offset the very sizable inflation we experienced and continue to see in our business.

Turning to performance by region. You can see on Slide 13 that the U.S. had a strong quarter, delivering solid growth of 43% versus the PCP or 26% on a constant currency basis, expanding both contribution margin and operating contribution margin by 3 points versus the prior year and returning to profitability. The growth was a function of increased portions, thanks to more family plan sizes in our volume mix.

A 9% increase in active subscribers also contributed to our growth. Productivity in our fulfillment centers kept picking costs low and contributed to the margin expansion. The 2 together resulted in positive operating EBITDA of EUR 2 million for the quarter, which, combined with the breakeven Q1, led to a EUR 2 million profit for the first half.

On Slide 14, you see that Australia also benefited from strong active subscriber growth, improving 36% versus the previous year. Chefgood contributed to the increase in subscribers, but our Marley Spoon and Dinnerly meal kit business on a stand-alone basis also contributed double-digit active subscriber growth. This, combined with greater menu choice and a focus on improving recipe quality led to net revenue growth of 53% in the second quarter or 46% in constant currency.

Margins contracted in Australia in the quarter with the level of external supply chain issues and inflation too challenging to overcome. Lack of availability or poor ingredient quality, combined with high prices for substituted items, led to a decline in margins versus the previous year. Nevertheless, with the revenue growth and focus on cost discipline, the region also managed to deliver EUR 2 million in operating EBITDA.

Turning to Slide 15. You see that the EU region had a more challenging quarter, both active subscribers and net revenue were down versus the PCP, but with different dynamics at play. Active subscribers, which declined 5% versus the prior year, overlapping a 73% increase in active subscribers in Q2 2021. We also see that active subscribers declined at a lower rate than orders per subscriber, which decreased 13% year-over-year. This tells us that our customers are currently buying less owing to a decrease in consumer confidence in a region where e-commerce in general is delivering weak results.

We expect to return to top line growth, but equally, we need to expand margins. We were disappointed with the region's CM and operating CM delivery, both of which declined versus the PCP due to challenges with ingredient freshness and substitutions. Europe has demonstrated before that it can expand margin and deliver CM close to the mid-30s range. We have turnaround plans in place to return to improved margins with an aim to bringing the region to breakeven profitability.

Turning to fixed costs on Slide 16. Half 1, 2022 saw lower levels of marketing and G&A as a percent of net revenue than both the previous half year and the PCP. On marketing, we landed Q2 at 16% of net revenue, 7 points below the prior quarter in keeping with our plans to taper down marketing spend as we progress through the year. On G&A, cost discipline across all areas of the organization contributed to greater operating leverage on this line item. We continue to focus on G&A as just one of several levers in the business to help deliver our operating EBITDA plan.

In fact, on Slide 17, you can see our operating EBITDA trajectory. Excluding 2020, which was an unprecedented and therefore, poor reference year, we delivered our second best operating EBITDA quarter in absolute terms, landing at minus EUR 3 million, a significant improvement versus the first quarter. This is consistent with our plans to show sequentially improved operating EBITDA as we progress through the year. Note that this figure excludes the impact of EUR 900,000 in onetime charges associated with severance costs and a historical sales tax catch-up in the U.S.

In operating EBITDA margin terms, we delivered our best margin quarter to date, excluding 2020. We are pleased with this result, which is consistent with the internal plans we set out at the start of the year.

Finally, turning to cash. You can see on Slide 11 that we forecast a significantly lower level of CapEx spend for the full year 2022 versus 2021. We are tracking to our CapEx plan, which focuses less on large-scale expenditures, such as those we made last year and more on efficiency generating items and infrastructure for our FCs.

This quarter, as you can see on Slide 19, we drew the remaining tranche of our debt facility with Runway Growth Capital in the amount of USD 20 million. We also renewed our EUR 5 million money market loan with Berliner Volksbank, offsetting the overdraft facility with the bank of the same amount, which we repaid in Q1 2022. This leaves us with net debt of EUR 50 million and nearly EUR 30 million in cash on our balance sheet.

As Fabian previously stated, we are focused on delivering our plans, which call for significantly lower losses versus 2021. We are managing within our balance sheet capacity, and we remain focused on maintaining financial discipline.

With this, I would like to turn it back over to Fabian.

[Gilbert Siegel, executive]

Yes. Thank you, Jennifer. As mentioned earlier, we are on track to deliver our plan for the year. However, despite being at more than EUR 400 million in run rate revenue, we are still at the very beginning of our growth path.

As you can see on Slide 21, the category we operate in, groceries for cooking is vast and online penetration is still very low compared to other consumer spending verticals. And we, therefore, expect for the category to continue to grow rapidly as more consumers discover online shopping for groceries in general and meal kits in particular. Such growth, however, might be impacted as we face potential recessions in the markets we operate in.

However, as shown on Slide 22, we believe that the category we operate in groceries, tends to be less prone to recessionary slowdowns. In fact, looking at the 2008 recession during the great financial crisis, we can see continued growth for food or groceries, while most other categories contracted. Term of operating a 2-brand strategy, we feel well positioned to adapt to our customers' budgetary preferences during a potential recession.

We also believe that we are reasonably well positioned to maintain our margins in an inflationary environment, as you can see on Slide 23. Over the past 12 months, we have implemented price increases in all of our regions. And we were able to observe customer behavior to only to be briefly impacted by such price increases. We therefore believe that we have multiple levers, operational improvements as well as pricing power to mitigate the impact of inflation. Our ability to grow our business by 34% at stable margins year-over-year during the first half of this year is a testament to this.

In summary, as you can follow on Slide 25, we started the year with a plan and corresponding guidance. We set out to continue to grow the business at stable margins while significantly improving our operating EBITDA results year-over-year.

Now with the first half of the year under our belt. And despite all the developments since the beginning of the year, we can say that we are on track to deliver on our plan, and we thereby reaffirm our guidance for the year. That means that for the second half, we expect slower growth at lower marketing spend and operating EBITDA breakeven for the second half of the year.

Going forward, we aim to continue growing our business following our 3-tier growth strategy. We will remain disciplined in hitting our unit economic targets as we invest into growth while closely monitoring overall cost to generate more operating leverage, which we expect to yield continued improvements on our bottom line performance.

I would like to thank everyone at Marley Spoon for the great teamwork that delivered good performance during the first half in a difficult environment. Thank you for taking the time this morning. And with that, I would now like to open the call to questions.

[Operator]

[Operator Instructions] Your first question comes from Emma Wyndham-Smith from Wilsons.

[Emma Wyndham-Smith, analyst]

I just have a couple of questions, but I might kick off with the expectations for the outlook for EBITDA. What can we -- how should we think about third quarter relative to the second quarter? I know you typically spend a bit more in the third quarter given it's an attractive customer acquisition environment. Do you think this is something we can expect to see in 2022?

[Gilbert Siegel, executive]

Yes. So I think we said we expect sequential improvements in operating EBITDA throughout the year. So our expectations would be that third quarter is better than second quarter and fourth quarter better than third quarter. And that's also related to our spend profile. We mentioned that marketing spend, we expect to taper down through the remainder of the year. .

So unless in some prior third quarters where we accelerated, I think to hit our goals and plans for this year, that is not necessarily the case. So we wouldn't expect higher marketing spends in Q3, but rather going on a slower growth path to hit our guidance, both top line and bottom line.

[Emma Wyndham-Smith, analyst]

Perfect. That makes sense. Second question, in regards to Australia, so we talked about during the second quarter, we saw sort of poor ingredient quality as a result of the flood than you were sort of stuck with higher-priced substitution. How has this trended into the third quarter? Like are you seeing improvements here? Or is it sort of staying the same?

[Gilbert Siegel, executive]

I mean, unfortunately, I would say, at this point in time, it's still the same. The -- it always takes some time for the crop to be planted and the supply chains to be restocked. And so while we all hope for this to subside. At this point in time, we just don't see it in the market yet. Our current estimate is that throughout the third quarter, by the end of the third quarter, unless we have new floods coming, we should be back in a more normalized environment. .

[Emma Wyndham-Smith, analyst]

Yes. That makes sense. And then final question for me. Just on Chefgood, could you provide a bit more color on the marketing synergies? And what you expect to materialize out of the marketing integration? And what that could look like?

[Gilbert Siegel, executive]

Yes, absolutely. I mean we are quite excited about this potential synergy. We've been acquiring customers in Australia for both Dinnerly and Marley Spoon over many years. And we have shown earlier in the presentation, not every customer stays. In fact, many customers that trial do not today. So while you find a core audience that then uses Marley Spoon and Dinnerly for years, there's also a group of customers, which like this idea of subscription or ordering food online, but somehow a meal kit is not quite what they're looking for.

And so we have all this data. And so the question when we looked into the Chefgood acquisition, is there an opportunity to leverage this data and combine not just our we believe, best-in-class marketing practices together with leveraging this data to more effectively find customers for the Chefgood brand. Since the beginning of the third quarter, we have operationalized integration. So we basically generated both synergies, integrated with teams and seeing the first campaigns in the market.

So it's too early to tell whether the strategy in general is working, but early results are quite hopeful or make us quite hopeful that this indeed could be working out. And I think we can a more detailed comment on this probably in the next quarter update. But we executed the structural changes and the marketing integration is done. And now it's about looking at the results for a while, but early indications point into the direction that this could, in fact, be working as planned.

[Emma Wyndham-Smith, analyst]

Perfect. Well done on the results. .

[Operator]

Your next question comes from [ Bastian Brock ], Private Investor.

[Unknown Attendee]

I have 3 questions. The first 2 for Jennifer. Just for a clarification, if the revenue growth guidance in constant currency? Or is this in euro?

[Jennifer Bernstein, executive]

Our guidance is in euros.

[Unknown Attendee]

Okay. Perfect. Then the second question, after breaking even in H2, are you planning to be permanently profitable? So in '23, '24 and going onwards. And what is the most important margin drivers? Is it marketing? Is it contribution margin or G&A leverage?

[Jennifer Bernstein, executive]

Sure. So we're not guiding to the outer years just now, but we are working on our plans, in fact, we're in the midst of the now for 2023. I think what you'll see is a very similar messaging to what we've delivered this year and what we continue to deliver, which is cost discipline, a focus on growth but not at the expense of the bottom line really kind of measured growth.

To your question about what are the most important drivers and -- they're all important. And I think what we've shown this year is that we have levers across the whole P&L to try to expand margin and deliver more operating EBITDA. But I would also say it's in the future years, in the outer years, what you'll see is not even so much a focus on operating EBITDA, but really on net income. We really need to work towards free cash flow breakeven, delivering net income breakeven because operating EBITDA is really just kind of part of the puzzle.

But in terms of the levers, we know that margin expansion is meaningful for us. We have the lever to pull on marketing if we want to go to slower growth. G&A is something we feel good about what we've delivered in the first half in terms of reductions and getting more operating leverage, but we think we still have room to go there. So I would say it really cuts across all levers.

[Unknown Attendee]

Okay. And then maybe a follow-up, your operating cash flow was, I think, for the first time lower than adjusted EBITDA. Is this something that we should expect going forward as well? Or will it turn around when growth is accelerating?

[Jennifer Bernstein, executive]

Yes. I wouldn't say that this is a new pattern. I mean we do see some seasonality and that sometimes will be actually trend operating cash a little bit worse than operating EBITDA is coming from some working capital dynamics, timing of deferred revenue, but it's not something that I would take as a strong trend. .

[Unknown Attendee]

Okay. And then my last question for Fabian. Could you elaborate on the turnaround plan for Europe, any measures you have already taken or you are planning to take in the future?

[Gilbert Siegel, executive]

Yes, absolutely. It's -- I think what we will -- when we look -- take a step back and look at the 3 regions, Australia was the first region to become profitable. U.S. now is at that scale and performance where we expect all the future profit contributions from the U.S. Europe always had lower margins. And that is primarily because of the supermarket competition is stronger in Europe, and therefore, the relevant price points that we price our products towards is also lower.

That always -- as we always said in the past, we expect, therefore, to we have something like a 500 basis point difference in margin. And that's been given that we have to achieve the same unit economics, has been impacting the budget that we can spend on to customer acquisition in Europe, which led Europe on a slower growth part. So that's why Europe has been growing slower over the past years.

And so therefore, for Europe to turn profitable, it's not a surprise that it's the last region and will follow the U.S. So from that perspective, we are still in the -- on the path or within the plan of having Europe follow what the other 3 regions have achieved. Now how do we get there? I think it's 3 levers. It's, on the 1 hand side, continued growth, and we do expect continued growth in Europe. So that gives you more scale.

Contribution margin, we do believe the performance currently is not to the full potential and so increasing contribution margin and then managing costs. So we ensure that we also start contributing to the group level bottom line. So the way it's driving growth, managing margin, managing costs, and then you will see Europe follow the part of the other 2 regions and also start contributing benefits to the overall bottom line.

[Unknown Attendee]

Yes. Okay. Then maybe one last follow-up. I heard that your competitor, LMK Group in the Nordics is scaling back marketing since Q1. Do you see any positive effects on that, that prices for marketing go down or you can acquire customers more easily? Or isn't that something you have seen yet?

[Gilbert Siegel, executive]

I mean, in general, when it comes to D2C brand building, it's demand-creation marketing play. That means Google -- the Google share of overall spend and acquisition is much lower than demand fulfillment play. And that means the direct competitors have not such a big impact on your marketing cost because it's not primarily the Google auction that then gets less busy. And therefore, actions of your competitors, LMK or others do not directly, again, impact strongly new marketing efficiencies, the CPM levels. That's more the big macro trends that we see impacting CPM level.

So therefore, LMK to pay out our marketing, it doesn't yield immediate benefits for us, and that's more a function of how our category works, which is primarily demand generation, not demand fulfillment. And again, therefore, less search, but more social media top-of-the-line awareness building. So it's a more fragmented channel mix that you have to operate in this business. That is less prone to direct competitors actions. And so we don't benefit from that generally.

But having said that, overall, we continue to also achieve our unit economics in Europe, but it is at a lower growth level because you have to be much more disciplined on the per user acquisition cost compared to the other regions because of the margin profile in Europe.

[Unknown Attendee]

Okay. And yes, good luck with the quarter.

[Operator]

Your next question comes from Adam Upton from AOP Capital.

[Adam Upton, analyst]

Well done on another good set of numbers. A couple of quick ones for me. Just on the unit economics, is there a reason -- so in the prospectus, the 3x payback was over 36 months, and it's now sort of been stretched out to 48 months. Is that -- has there been a change in the -- I guess, in the economics or the view of the economics of the business?

[Gilbert Siegel, executive]

Yes. The 2018 prospectus numbers we've seen in 2019, we looked -- we adopted a 48-month view from 2019 onwards and basically looked at paybacks over the period. And you would argue this arbitrary what's the point that you decide because now that we have 4 years to data we showed in this presentation today, you could even argue 4 years since arbitrator short now because assuming everybody falls drops that after 4 years, it's unrealistic and you expect customer must to stay longer. And so the payback assumption or the payback calculation we are applying, in effect, stops after 4 years, doesn't apply a terminal value after 4 years.

And you could argue the payback probably is higher than 3x that is currently showing. It's just that the square methodology makes us stop at 48 months which given the data that we have now, it's probably too conservative. And so that's probably the next step that you would have, if you gather more data, you would probably want to form an opinion what incremental value generation you generate after those 4 years for every customer core that you acquire.

[Adam Upton, analyst]

Okay. Then in Q1, in Australia, you had -- I'm not sure what you actually call it, but the cost of make goods due to supply chain issues and food quality issues. I think that number was sort of 3% to 4%, which came directly off the contribution margin in Australia in Q1. Can you talk to -- I'm not sure exactly what you call that expense. But can you talk to the trends of that expense in each of the regions in Q2?

[Gilbert Siegel, executive]

Jennifer, do you want to take the one?

[Jennifer Bernstein, executive]

Sure. Maybe I just referring to inflation in general. I mean the substitution issue is pretty unique to Australia right now. Coming from the weather events, even Omicron, I know we don't talk much about that anymore, but it really was a factor early on in the half.

I mean, overall, in inflation terms, I mean, we're seeing inflation across food, principally produce and proteins. In some instances, those rates are double digit. We're also -- we also have some labor inflation in certain regions where we needed to stay competitive. I don't have the numbers to share by region, but it was part of the reason why we introduced pricing in Q1 on average 5% to 6% across the regions.

And yes, so I think we're still seeing that inflation. As Fabian said earlier, with respect to the substitutions, we expect that to -- we're hoping that, that diminishes as we get through Q3 because we do think a lot of those were weather-related, but we'll have to see inflation. It's still something we factored into our outlook.

[Adam Upton, analyst]

Yes, as less inflation and more cases where, I guess, people got the wrong box or the box was damaged or whatever and you either replace it or made good for that -- for those...?

[Jennifer Bernstein, executive]

I'm not -- Rates of right, sorry, perhaps I misunderstood. I mean I don't think we talk about rates of customer constraint rates, but we try to manage that to a low single-digit level. We do see, particularly in Australia, where we've always had very stellar kind of very low customer -- rates of customer credits. We saw that increase a bit on account of the substitution issue, but we still -- we've seen improvements as we're getting more agile in dealing with the substitution. So we're starting to see those levels come down.

With respect to -- we have customer credits that expand different categories, whether it's for a logistics issue or an ingredient issue. And we're seeing those credits coming down as we're just getting more agile in the business planning, whether it's shifting to a different logistics provider or better menu planning to factor the substitutions.

[Adam Upton, analyst]

Again, but on that issue, Australia was a standout in Q1, and it's less of an issue in Q2, but...

[Jennifer Bernstein, executive]

Substitutions are still an issue. I don't want to downplay that, but I would say the way we're dealing with them, has probably improved. So at the customer credit level, we've seen in the last couple of months, we saw some sequential improvement in our customer care credit rates. So I think we're just -- unfortunately, it's kind of stuck with us the substitutions issue, so we are getting more familiar with and better at managing it.

[Adam Upton, analyst]

Sure. And final one for me. At what point do you -- or what milestones are you looking for or will be required for you to replace the Runway facility like with something that's more better priced?

[Gilbert Siegel, executive]

As we improve our bottom line performance, you probably are in a better position to have access to other opportunities on debt funding. We do have currently an interest-only period with our lender that gives us some optionality if you wanted to refinance at some point in time in the future. So I think there is options on the table. At the same time, we have a very good working relationship with our current financing partner. It's a good partnership. So I think that also take into consideration.

In the end, we have to find the right source of capital to support the business. But over time, as the company matures in its profitability level, you could argue you could also mature on the kind of debt providers that are the right ones for the business that probably have lower costs as the business risk reduces over time.

So I think there is an opportunity over the next few years to improve that side of the business as well.

[Adam Upton, analyst]

But is it EBITDA breakeven? Or is it net income breakeven or?

[Gilbert Siegel, executive]

I mean there's no milestones or performance milestones, there are no covenants to that -- in that regard in our credit terms. So there is no direct correlation to specific performance.

[Operator]

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

[Gilbert Siegel, executive]

Yes. Thanks, everybody, for joining this morning. We -- as I said in earlier remarks, we started the year with the plan and communicated the plan in our guidance now with half a year down the road, we can say we are on track to deliver. And so we're looking forward to communicate more with many of you on our road show that's starting today and until the middle of next week and looking forward to this time, personal interaction as we are, finally after 2 years of no COVID traveling, are able to be down under here in-person, again, so looking forward to many of these conversations. And then as usual, in a few months' time will then share the next quarterly results. Thanks, everybody.