Marley Spoon AG (MMM) Q1 2023 Earnings Call Transcript

Marley Spoon AG (NYSE:MMM) Q1 2023 Earnings Call  dated Apr. 27, 2023

Corporate Participants:

Fabian Siegel — CEO, Founder, Management Board

Jennifer Bernstein — Chief Financial Officer, Management Board

Presentation:

Operator

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.

Fabian Siegel — CEO, Founder, Management Board

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 three-year term.

Earlier today, our first quarter results of the calendar year ’20 — of Q1 calendar year 2023, and we’re looking forward to presenting in euros today, as well as providing you with an update on the business. We also will comment on the multipart [Phonetic] transaction with amongst others 468 SPAC II that was announced earlier this week. At the end, as usual we will open the line for 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 period. We had expected a year-over-year decline in revenue for the quarter. But in the end, it came in after at EUR91 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 cost that we had expected. This did improve throughout the quarter and we ended the period at the expected level of acquisitions, while maintaining our customer acquisition cost and unit economics targets throughout the whole period.

The lack of scale in our marketing resulted in a year-on-year reduction of marketing investments for the quarter by 12% or EUR3 million, which contributed to the lower-than-expected revenue. The bigger missed plan 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 US, and it was more pronounced for our budget offering internally. 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 translated to lost revenue of EUR7 million for the quarter.

In order to improve order frequency, we have began 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 cook for an additional charge. We’re 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 variance, which allow our customers 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 US, which reached a record contribution margin of 35.7% in Q1, up to 7.5 points year-over-year. While the European contribution margin improved significantly in Q1, expanding 5.9 points year-over-year.

The strong contribution margin performance in the US 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 experienced, we initiated a cost-reduction program at the beginning of the quarter, which is expected to result in EUR10 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 controls, we were able to improve our operating EBITDA performance by EUR3.3 million, landing as an operating EBITDA loss for Q1 at EUR6.4 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 snapshot as well as the Q1 cash flow.

Jennifer Bernstein — Chief Financial Officer, Management Board

Thanks, Fabian. On account of the acquisition challenges Fabian mentioned already, active subscribers were down 15% in the quarter to 250,000. So this was up versus Q4 2022 by 1%. Orders per subscriber were also down in the US 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 US. Net revenue in the US 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-two 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 the reduced order frequency, particularly on our budget offering Dinnerly, which is being impacted more heavily by consumers budget concerns.

While the topline was soft, contribution margin performed extremely well with the US 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 point improvement versus last year. The margin performance was a significant driver of the US being able to continue delivering positive operating EBITDA as it has done now for the fourth consecutive quarter.

Looking now at Australia, net revenue also declined, though at a lower rate as compared to the US. Revenue was down 4.4% versus Q1 2022, a 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 over the half-two 2022 marketing reduction and slow acquisitions start to the year. We also saw higher level of marketing vouchers 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 [Technical Issues] 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 regions operating EBITDA also showed improvement, landing at negative EUR1.2 million, which is up EUR0.6 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 as a function of contribution margin, which contracted significantly in Europe last year due to operational challenges. This means that the half-two 2022 marketing spend reductions we previously mentioned were higher in Europe than in the other regions, stemming from the margin performance. Part of the year 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 invest 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’re 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 EUR14.7 million, implying a cash burn of approximately EUR4 million since year end 2022. Cash from operations was a positive EUR4 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 EUR3.5 million. We continue to invest in our digital assets, spending approximately EUR2 million in the quarter. In addition, we paid EUR1.6 million to settle the remainder of Q4 2022 payment to Chefgood. There were no expenditures against fixed assets in Q1.

Defined cash flows were negative EUR4.8 million in the quarter. The repayment of the EUR5 million money market loan with Berliner Volksbank in February was offset by the drawdown of the same amount of a new loan with BBB, which carries the same terms as before, namely 6.5% plus Euribor per year. Other financing cash flows included EUR4.5 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 six months beginning from April.

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

Fabian Siegel — CEO, Founder, Management Board

Yes. Thank you, Jennifer. To summarize the first quarter. Reduced marketing profile in the second half of last year which emphasized EBITDA profitability over growth, led to 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 improvements in operating EBITDA year-on year.

However, because of the lower than initially planned order frequency in Europe and the US, 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 [Technical Issues] 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 the recently announced transaction in regards to additional financing and intended to be listening to the Frankfurt Stock Exchange. The proposed investment by existing and new investors of EUR32 million at EUR0.17 per CDI and 90%[Phonetic] 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 their shares for new shares in the Frankfurt listed special-purpose acquisition company 468 SPAC II, subject amongst others for 468 SPAC II shareholder approval at an implied value of EUR0.21 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 in 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.

Questions and Answers:

Operator

Thank you. [Operator Instructions] Thank you. There are no questions at this time.

I’ll now hand back to Mr. Siegel for closing remarks.

Fabian Siegel — CEO, Founder, Management Board

Yeah, thank you for dialing-in today. We will have some broker call scheduled for next week, starting Tuesday. So, if there are additional questions coming up, we’ll will be happy to answer them there or you can always reach out to our Investor email address and Michael Brown. Thanks so much.

Operator

[Operator Closing Remarks]