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Edited Transcript of MMM.AX earnings conference call or presentation 30-Jul-19 11:00pm GMT

Q2 2019 Marley Spoon AG Earnings Call

Aug 29, 2019 (Thomson StreetEvents) -- Edited Transcript of Marley Spoon AG earnings conference call or presentation Tuesday, July 30, 2019 at 11:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Julian Lange

Marley Spoon AG - CFO & Member of Management Board

* Rolf Weber

Marley Spoon AG - MD of Australia

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Conference Call Participants

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* Owen Humphries

Canaccord Genuity Corp., Research Division - Senior Industrials Analyst

* Shaun Weick

Macquarie Research - Analyst

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Presentation

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Operator [1]

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Thank you for standing by and welcome to the Marley Spoon Q2 4C Conference Call. (Operator Instructions) I would now like to hand the conference over to Mr. Julian Lange, CFO. Please go ahead.

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Julian Lange, Marley Spoon AG - CFO & Member of Management Board [2]

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Thank you. Good morning, everyone, and thank you for joining our investor update call. I'm Julian Lange. I'm the CFO of Marley Spoon. I'm actually filling in today for our CEO, Fabian Siegel, who's currently enjoying summer vacations with his family. I have with me today the Managing Director and Co-Founder of Marley Spoon Australia, Rolf Weber, who most of you will actually be familiar with from previous investor events we did in Australia.

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Rolf Weber, Marley Spoon AG - MD of Australia [3]

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Good morning, everyone.

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Julian Lange, Marley Spoon AG - CFO & Member of Management Board [4]

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This morning, we released our Appendix 4C, quarterly cash flow reports for the quarter ending June 30, 2019, the second quarter of our 2019 financial year. And we're pleased to use the opportunity here to provide you with an update on the business performance and the highlights of the past quarter. And at the end, as usual, we'll open the line to your questions. So let's jump right into it.

Overall, we're really pleased with our operating performance in the last quarter and the first half of 2019. We delivered on several key milestones for the business and they're confirming our guidance around CM and profitability. We generated high top line growth and improved contribution margin on the back of a strong performance in our U.S. business. This has led to significantly lower losses on an operating EBITDA basis in Q2. And

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In addition, as you will have heard, we entered into a 5-year strategic partnership with Woolworths in the quarter, which strengthened our balance sheet and makes us an -- I think an even more formidable competitor in the Australian market. So Rolf will give you more update on this a little bit later.

To go into the numbers, our revenue growth was 55% in the first half of the year compared to the same period in 2018 with the U.S. leading the way once again, growing 98% year-on-year. 2Q numbers are very similar, actually, 54% growth on a global basis versus Q2 2018, again U.S. driving mainly this development with 91%. Quarter-over-quarter, global growth accelerated as expected. Our business generated EUR 32 million in revenue over the course of Q2 2019 after EUR 29 million in Q1. That's an increase of 9%. The strong 2Q growth is particularly notable, I think, as we significantly decreased marketing spend in the quarter. This is following our usual seasonal pattern with Q1 and Q3 being the quarters with high investment into new customer acquisition. I think this really speaks to the strength and importance of our orders from repeat customers, which really dominate our revenue as we previously communicated to you.

Our margins, we're happy with the development. Our contribution margin, globally, we reached 24% in the second quarter after 20% in Q2 of last year and 21% for the calendar year 2018. This improvement was also driven mainly by the U.S., whereas CM reached 21% for the entire first half of 2019 after 13% in the same period last year. In the U.S., we profited in specific from purchasing-related savings helped by our volume growth, of course, as well as higher labor productivity after we moved our 2 largest manufacturing centers in New Jersey and Texas last year and in Q1 this year, respectively. All in all, on the margins, we're on track to reach our previously communicated guidance. We've set the global CM percentage in the mid to high 20s for 2019.

Given the strong top line growth and margin development, also helped by seasonally lower marketing spend, our operating EBITDA loss was down to around EUR 5 million in the second quarter compared to a loss of around EUR 12 million in the first quarter and a loss of around EUR 8 million in Q2 of last year. This actually marked the lowest quarterly operating EBITDA loss in over 2 years for the company, which is also why we feel confident to reaffirm our guidance that we've given previously to reach profitability on an operating EBITDA basis by 2020.

Particular to note is our Australian business had, I think, an exceptional quarter, really. I'm glad to turn it over to Rolf, who runs the business over there.

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Rolf Weber, Marley Spoon AG - MD of Australia [5]

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Thanks, Julian. Happy to go into more details. Australian operations were profitable on an operating EBITDA basis for the first time in the second quarter, and this is on the back of strong top line growth. And we've continued with our high contribution margin. The Q2 revenues in Australia were 47% above Q2 2018, and the contribution margin remained state of best in class of 33%.

We also rolled out our company's new manufacturing technology in both the Melbourne and the Sydney manufacturing centers throughout the quarter, which will help us with quality and productivity going forward. Also see this technology as important step in continuing to increase our menu choices and the personalization for our customers in the future. These 2 things have led to better customer retention in the past, and we see this going forward. The rollout of the new technology now in Europe and also in Australia means that we produce around half of our global volume on this new technology.

And finally, you've heard it, we entered into the long-term strategic partnership with our Australian -- or the Australian grocery chain Woolworths here in Q2, and we started to kick off our alliance initiatives here in Q3. With the alliance, strategic partnership, there are 2 main work streams here. One is dealing with growth or driving growth mainly about marketing Marley Spoon and Dinnerly meal kits to the existing Woolworths customer base in the country. And the other workstream is for synergies and cost savings, where we're looking into several opportunities to optimize our cost base, for example, through purchasing or logistics. I'm really excited about the potential here and look forward to presenting more concrete activities and outcomes when we're a bit further ahead in our partnership.

That's all for me in Australia. Julian, now for you to talk about cash.

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Julian Lange, Marley Spoon AG - CFO & Member of Management Board [6]

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Yes. Thanks. Thanks, Rolf. In terms of results reported in our 4C, the cash balance as of June 30 was around EUR 11 million, up from EUR 9 million at the end of first quarter. This reflects the roughly EUR 18 million in funding we received from Woolworths as part of the partnership you just heard about. This was partially offset by the repayment of the Moneda senior secured loan for around EUR 5.5 million. The funding and repaying Moneda loan significantly strengthened our balance sheet. We continue to actively work on new debt funding options in order to support our path to profitability.

The operating cash outflow in Q2 2019 was EUR 10.7 million, up from EUR 6.8 million in Q1 despite the significant improvement in loss for the quarter. The main driver for this was a EUR 4.5 million decrease in payables and accruals, which was a function of -- reflects the change in marketing spend quarter-over-quarter.

Our cash used in investing activities actually was just over EUR 1 million in Q2, so significantly down versus Q1, we had EUR 3 million there, due to the completion of our U.S. site build-out we talked about earlier as well as lower payments related to the manufacturing equipment that Rolf just talked about also.

So to summarize, to wrap up here and opening it up to your questions, I think we had a very good quarter. Operating losses are lowering on the back of higher sales, improving margins and what we had also guided towards more measured investment into marketing. I think that's the trend we generally expect to continue to see on our path to profitability. Our U.S. business grew strongest again and was able to increase contribution margins the most while our Australian business turn to profit for the first time.

On the back of the -- these 2 positive developments in our largest segments, we reaffirm our guidance, again, of reaching a global contribution margin percent in the mid to high 20s after the 24% in the first half. And we're on track to reach overall operating EBITDA profitability by 2020 as previously communicated.

So I know as Rolf mentioned also, we look forward to sharing the progress of the recently started Woolworths partnership with you in the future. I think the really

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feeling here with us is the collaboration truly has the potential to transform our Australian business, and the funding obviously we received as part of the deal really strengthened our balance sheet.

So with that, thanks for taking the time this morning, and I would like to open the call up to questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from Owen Humphries from Canaccord Genuity.

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Owen Humphries, Canaccord Genuity Corp., Research Division - Senior Industrials Analyst [2]

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Just I noticed you guys didn't talk about active customers in this release. Can you maybe just provide an update on how that active customer trend has gone through the quarter?

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Julian Lange, Marley Spoon AG - CFO & Member of Management Board [3]

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Sure. So we ended on June 30 with 172,000 active customers. That's up almost 40% from 125,000 a year ago.

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Owen Humphries, Canaccord Genuity Corp., Research Division - Senior Industrials Analyst [4]

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Was at 172,000, was it?

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Julian Lange, Marley Spoon AG - CFO & Member of Management Board [5]

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Yes.

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Owen Humphries, Canaccord Genuity Corp., Research Division - Senior Industrials Analyst [6]

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Did you -- just trying to look at my notes here. Did you finish the first quarter at kind of 194,000?

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Julian Lange, Marley Spoon AG - CFO & Member of Management Board [7]

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190,000, yes. So it's -- no, seasonally, it's down a bit. I think the -- what I was referring to earlier in terms of the marketing spend, so that's the reflection of this, so as we spend significantly less, really only half of the marketing budget in Q2. This is the seasonal pattern I think we talked to you about earlier as well. So that has a reflection in this active customer metric.

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Owen Humphries, Canaccord Genuity Corp., Research Division - Senior Industrials Analyst [8]

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Okay. And then so I'm trying to just marry up the cash flow statement (inaudible) or just marketing spend. So I notice it doesn't really quite marry up with the anecdotes. Can you maybe just touch on what -- is that a prepayment that you've made? I know you said reduction in account payables. So is that just -- so that money is being spent in the past that you're paying this quarter. So I was of the [impression] marketing spend would reduce.

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Julian Lange, Marley Spoon AG - CFO & Member of Management Board [9]

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Yes. Correct. Correct. So yes, since we had such a big difference in marketing spend from Q1 to Q2, but we have quite good terms on marketing spend with kind of our main marketing partners. So really a lot of the cash outflow of the Q1 spend was in Q2. So that's what we were trying to say with that -- with the statements around that.

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Owen Humphries, Canaccord Genuity Corp., Research Division - Senior Industrials Analyst [10]

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Right. And maybe -- can you maybe just touch on what the first half -- first quarter, second quarter split was in terms of marketing dollars? If we get away from the...

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Julian Lange, Marley Spoon AG - CFO & Member of Management Board [11]

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Sure. So I'll give you euros, if that's okay. The first quarter was -- so in the first half, we spent EUR 18 million in total, and the first quarter was EUR 12 million and the second quarter, EUR 6 million.

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Owen Humphries, Canaccord Genuity Corp., Research Division - Senior Industrials Analyst [12]

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Okay. Got you. Good one. Okay. And just on the anecdote there around you're looking for additional debt funding options to support long-term growth. Obviously, you've just taken the funding round from Woolworths. So how advanced are you on that discussions around -- and are we looking at another convertible? Or are we looking at straight debt at attractive rates? And just how advanced are we?

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Julian Lange, Marley Spoon AG - CFO & Member of Management Board [13]

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Yes. So we're looking to do debt. So as you know, the last couple of investments here with Union Square and Woolworths were convertibles. I think that was testament to the specific investors that we -- or partners that we brought onboard. No, as we just explained also, we repaid our main senior lender, Moneda, with some of the Woolworths proceed. So I think that puts us in a really good position to now basically mostly repaid all of our outstanding long-term debt. So I think that puts us in the -- in a great position to obviously raising debt.

So I think that's the focus right now. We're really active on that front. As you know, we've been talking on -- since -- basically, since the IPO, we've talked to you about refinancing the debt. So we've now repaid most of it. So I think these are very advanced conversations, and they've been going on for a while here with banks or debt funds. So I can't tell you though exactly when we'll announce something around this.

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Owen Humphries, Canaccord Genuity Corp., Research Division - Senior Industrials Analyst [14]

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But is that required to get the breakeven now? Or is it -- my understanding was that post-Woolworths deal, you guys were funded to breakeven.

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Julian Lange, Marley Spoon AG - CFO & Member of Management Board [15]

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I mean to me, I think it's the prudent thing to do. Now as I think most companies don't run with close to no debt on their balance sheet. I think we're in the position now after having done these 2 convertibles to raise new debt at attractive terms. So I think that's what we should be doing.

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Operator [16]

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Your next question comes from Shaun Weick, Macquarie.

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Shaun Weick, Macquarie Research - Analyst [17]

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Yes. Just wanted to follow-up on a couple of things that aren't obviously touched on. Just obviously, you've had a bit of a reduction there in active customers, and I understand that marketing spend is effectively halved. But can you just talk -- so I suppose what you're seeing from an underlying unit economics perspective around, I guess, trends in CAC and retention and if you've seen any kind of change there in the period.

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Julian Lange, Marley Spoon AG - CFO & Member of Management Board [18]

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Yes. Not really. So I mean it's -- usually, we don't go into the details at the 4C. You know that the half year results coming up in a month. I -- but yes, I mean don't expect any material changes, be it on unit economics or CAC, so I think in line with what we've reported in the past. This has been stable. But yes, we will have the exact details in about a month's time.

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Shaun Weick, Macquarie Research - Analyst [19]

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Okay. And then just on Australia, I mean obviously, you've reached profitability for the first time. I mean is the expectation there that you'd get back below profitability in Q3 as you invest more in marketing? Or do you think that, that business is now on a trajectory to maintain profitability going forward?

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Julian Lange, Marley Spoon AG - CFO & Member of Management Board [20]

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Yes, Rolf, you want to take this?

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Rolf Weber, Marley Spoon AG - MD of Australia [21]

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Yes. Yes. Shaun, Rolf here. The -- yes, yes. The Australian business can be sustainably profitable. But as you say, the marketing spend quarter-on-quarter, they do different -- they are different as we capitalize on the opportunities that present itself, for example, in quarter 2, where we traditionally grow -- can grow quite fast. So overall, quarter-on-quarter, there may be fluctuations. But the trajectory is that we're sustainably profitable.

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Shaun Weick, Macquarie Research - Analyst [22]

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Okay. And maybe just on Europe, there's not much mentioned there in terms of what's happening. Maybe you could just talk a bit about Europe. And I guess within that, to what extent Europe's been a driver in that, I suppose, decline in active customers? And what markets, in particular, you've seen a bit of active customer weakness Q-over-Q?

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Julian Lange, Marley Spoon AG - CFO & Member of Management Board [23]

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Sure. Yes. Again, so we'll have a lot more detail in a month's time. The -- no, this kind of, let's say, temporary dip in active customers, I think is really mostly in the countries where we also acquired a lot in the first quarter, right. I mean you know these dynamics from us, that so -- no, you acquire a lot. There is some early churn in that customer pool. So I think that's kind of, no, what we're seeing right now. There's no specific trend, I would say, that Europe contributed to this, in specific. I think also in terms of the business development, it wasn't a main driver, either on top line and contribution margin. So that's why we didn't comment on it. But you have all the details in the half year results in a month's time.

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Shaun Weick, Macquarie Research - Analyst [24]

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Okay. Cool. And maybe just one more, just in terms of like the initial stages of the Woolworths strategic partnership. If you could just provide any further color as to how that's initially progressive -- progressing and perhaps what we can expect to see there over the next kind of couple of quarters?

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Rolf Weber, Marley Spoon AG - MD of Australia [25]

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Yes. I'll take that. So Shaun, this is a -- the very early stages, the beginning of a long-term strategic partnership with Woolworths. And as you know, we've made earlier how excited I am about this. So it's a bit too early to go into specific potential impacts. But what we're seeing is very -- a lot of excitement on the Woolworths end, a very good engagement on both sides to drive the initiatives in growth as well as in synergy. And we're currently working through a pile of opportunities on those -- both workstreams, and we'll update you in the future on more specifics on what we're doing here.

And the other point to note is that none of these effects are actually currently reflected in any of our numbers or business forecast, so.

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Operator [26]

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(Operator Instructions) There are no further questions at this time, that does conclude our conference for today. Thank you for participating. You may now disconnect.

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Julian Lange, Marley Spoon AG - CFO & Member of Management Board [27]

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Thank you.