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Edited Transcript of MMM.AX earnings conference call or presentation 29-Aug-19 11:00pm GMT

Half Year 2019 Marley Spoon AG Earnings Call

Sep 19, 2019 (Thomson StreetEvents) -- Edited Transcript of Marley Spoon AG earnings conference call or presentation Thursday, August 29, 2019 at 11:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Gilbert Fabian Siegel

Marley Spoon AG - Co-Founder, Chairman of the Management Board & CEO

* Julian Lange

Marley Spoon AG - CFO & Member of Management Board

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Conference Call Participants

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* Ian Jamieson;tkdy Advisors;Partner

* Shaun Weick

Macquarie Research - Analyst

* Stuart Foster

Foster Stockbroking Pty Ltd., Research Division - Executive Chairman & CEO

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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 H1 2019 Financial Results Investor Call. (Operator Instructions)

I would now like to hand the conference over to Mr. Fabian Siegel, CEO and Co-Founder. Please go ahead.

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Gilbert Fabian Siegel, Marley Spoon AG - Co-Founder, Chairman of the Management Board & CEO [2]

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Yes, thank you, and good morning. Thank you, all, for joining our investor call. So I'm Fabian Siegel, Founder and CEO of Marley Spoon. And I have with me here today, Julian Lange, our CFO.

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

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Good morning, everyone.

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Gilbert Fabian Siegel, Marley Spoon AG - Co-Founder, Chairman of the Management Board & CEO [4]

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And yes, so this morning, we released our Appendix 4D and half year financial report for the half year ending June 30, 2019, which is the first half of our 2019 financial year. And we're pleased to use the opportunity to provide you with an update on the business performance and highlights of the past half year. At the end, as usual, we will open the call to your questions. So let's start. Maybe let me walk you through our release deck and maybe we'll slide -- we'll start with Slide 2.

So overall, we are pleased with our operating performance in the first half of 2019. We generated strong top line growth of 55% in the first half of 2019 compared to the prior corresponding period. And today, Marley Spoon is a AUD 200 million run rate revenue business, and it is based on the revenues in the second quarter of 2019. We improved our contribution margins on the back of a strong performance in our U.S. business to 24% in the first half of 2019 and confirm also our guidance of reaching mid- to high 20s in 2019.

In the first half of 2019, we rolled out our third generation manufacturing technology, which is now fully operational in Europe and Australia. And this is, for us, an important milestone for future scaling of our business and crucial as we execute our strategy to lead our category through innovation and customer choice and personalization.

Now in the second quarter, our Australian operations were profitable on an operating EBITDA level. This was achieved before any effects of our new strategic partnership with Woolworths, and first actions there by the way are underway in Q3. Our operating EBITDA margin improved from minus 36% a year ago to minus 28% in the first half of 2019, reaching minus 16% in the second quarter.

Overall, we reconfirm our guidance of reaching EBITDA profitability on an operating basis by 2020.

So maybe let's move on to Slide 3. So it has been a year since we listed Marley Spoon at the ASX. Now in this past year, we have not only grown Marley Spoon significantly, but at the same time, we've achieved many important milestones that lay the foundations for our future growth and profitability. And now considering the time we have here, I want to highlight only some of those milestones. But please review the deck and our press release for further details.

Now since the IPO, we successfully provisioned Dinnerly as the second brand to Marley Spoon in Australia and the U.S. Now we believe our 2-brand strategy is giving us a unique advantage over other companies in our space, and we see great traction and customer satisfaction across both brands.

We continue to lead our industry in choice and flexibility, and we've been talking about this in the past. Since the IPO, we have expanded our menu choice for Marley Spoon from 12 to 20 weekly changing options. And for Dinnerly, we expanded from 6 to 14. While our customer data shows that providing more choice increases customer satisfaction and lifetime value.

In the past 12 months, we also made great progress to move our business towards profitability while continuing to invest in infrastructure such as tripling our manufacturing footprint in the U.S. And it's with these investments we reached EBITDA profitability for the second quarter 2019 period on an operating base in Australia and expect to reach overall profitability on an operating EBITDA basis by 2020. An important recent achievement has been our strategic alliance we formed with Woolworths which we reported and spoke to you in the past, which not only became an investor in our business, but also provide us with growth opportunities and benefits for synergies.

Now let's look a bit closer at our financial performance in the first half of 2019. Now on Page 4, you can see that Marley Spoon revenue grew in the first half of 2019, 50% (sic) [55%] year-on-year with all regions contributing to the strong growth rate. Our U.S. business was the main revenue driver with a growth rate of plus 98%. Our active customer number grew 38% year-on-year, which actually underlines how much our revenue growth is driven by loyal customer behavior.

Now Marley Spoon is a high recurring revenue business. In fact, if you switch to the next page, Page 5, so we'll see that 91% of our revenue in the first half of 2019 came from repeat purchases which, compared to other e-commerce businesses, is very high. 64% of all orders were of order #6 or higher, and that is an important loyalty metric that actually increased year-on-year by 2 points. This dynamic of higher revenue growth than customer growth highlights the strength of our business model and marketing strategy, which I'd like to review together with you on the next slide, Page 6.

First of all, we are happy to report that while we acquired significantly more customers in the first half of 2019 compared with prior corresponding period, our cost per acquisition continues to be stable at EUR 66. Now keeping cost per acquisition stable while accelerating customer acquisitions demonstrate the experience and advanced technologies we've built over the past years in our marketing and brand teams. Now this acquisition infrastructure allowed us to grow our customer base at attractive cost acquisition, but importantly, our revenue grew even stronger year-on-year.

Now the effective execution of our marketing strategy grew our business to a $200 million business, of which more than 90% is from repeat customers. All in all, we increased marketing efficiency and reduced our marketing percentage of revenue by 3 points year-on-year to 29% for the first half of 2019.

Now moving on to the next slide. So while we grew our business at stable acquisition costs, we continue to improve our margin in the first half of 2019. Especially our U.S. business increased its contribution margin to 21% year-on-year, which is up 8 points from 13% in the first half of 2018. We believe in the midterm, our U.S. business is able to achieve similar margins to our Australian segment, which was already operating at 33% in the first half of 2019.

Despite some one-off challenges in Europe, which we'll cover during our segment overview, we improved our margin overall by 2 points to 24% during the first half of 2019. And we expect our margins to continue to improve and confirm our guidance of reaching the mid- to high 20s in 2019.

Moving on to Page 8. So our top line growth combined with margin improvement and increased marketing efficiency allowed us to improve our operating EBITDA margin year-on-year from minus 36% to minus 28%. In fact, the second quarter, the margin already reached minus 16%. Now in light of this development, we reconfirm our guidance of reaching operating EBITDA profitability for the whole group by 2020.

With this, I'd like to hand over to Julian, who will walk us through the individual segments and also the financial statements.

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

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Thank you. Thanks, Fabian.

Turning to a different region on Slide 9. Starting with Australia on the left, our local business there grew top line by 44% on a constant currency basis by keeping the contribution margin stable at current best-in-class 33%. As actually mentioned, we reached profitability on an operating EBITDA basis for the first time in Q2. For the half, as you can see on the page, we still show a small loss of EUR 1.8 million or 8% of revenue after a lot of investment into marketing efficiencies in Q1.

Furthermore, we successfully implemented our new manufacturing technology in both of our Australian sites in Q2. And we've actually started to see positive impact on both quality and productivity since then.

On our Woolworths partnership, which Fabian mentioned, we only entered into in June, but we're happy to see the first marketing campaigns and cost actions already bear fruit in August. I mean, too early to share any specific numbers here, but I think it's a positive -- really positive to see both partners jumping into action right away, so happy with that.

In the middle of the page, the U.S., we grew strongest and have the highest contribution margin increase year-on-year. Of course, these 2 factors are also related as we continue to see benefits in purchasing as well as higher productivity with the increase in scale. Overall, our 2-brand strategy with Martha & Marley Spoon and Dinnerly is really working well for us there in the U.S., but we're actually starting to see this more and more in Australia, too.

Performance in our European segment was a bit more mixed in the half with some -- we implemented our new manufacturing technology early in the year in the Netherlands, which then made it also possible for us to consolidate our German site into this Netherlands one. So this is an important one cost-saving move, but also great learning for us as a company going forward, as we now know and are able to manufacture multiple Marley Spoons and use all of the same sites. In fact, we're now planning to do the same with our Austrian site in the second half of the year. So going forward, we'll just have that one centralized Netherlands site. However, short term, the consolidation put some pressure on margins. So overall, the M was down a point to 17% for the half for the Europe segment.

A good story in Europe, again, both from a cost and strategic perspective. It's the start there of our global shared services hub in Portugal. We only opened this in March, but already today, it's handling virtually all of our customer communications for the Australian and U.S. businesses.

If we're turning to Page 10, next one, and I think Fabian mentioned a little bit on the P&L. Fabian mentioned most of the highlights here. Maybe a couple of additions from me. Firstly, on marketing, so we employed a much more pronounced seasonal strategy, which really worked well for us, I think. We spent EUR 12 million in Q1 on marketing, and 6 -- only EUR 6 million in Q2, and we were overall very satisfied with the new customer acquisition volume but also quality and costs we were able to generate that way. So going forward, look for us to continue this, also similarly between Q3 and Q4.

Secondly, you can see there's a large different -- much different marketing spend was then also the main driver for development in our quarterly operating EBITDA loss. So we had a loss of EUR 12 million in the first quarter and only EUR 5 million in Q2, so largely driven by marketing. So that covers it on Page 10.

If you go to Page 11, cash flow. Cash flow from operating activities was a couple of million ahead of income. Nothing new for you to see. One category where we continue to -- maybe to highlight where we continue to perform really well is on inventory where the balance has now remained around EUR 3.5 million, and really, the end of 2017, as you know, the business has massively grown since then.

The middle of the page, CapEx was higher year-on-year at around EUR 3 million. We continue to invest into our 2 new sites in the U.S., in New Jersey and Texas. Fabian mentioned almost tripling the footprint. And then, of course, we rolled out the new manufacturing technology in both Europe and Australia. We talked about that also.

The financing flows on the page, which quickly explain the 3 main drivers. The Q1 convertibles, the Woolworths investment, so they were Q1 and Q2, and then we repaid the Moneda loan. So that was a net of EUR 22 million. And as we communicated at the release of our 4C a month ago, we continue to assess funding options, both debt and equity, and expect to be able to share an update here soon.

With that, I'd like to turn it back to Fabian.

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Gilbert Fabian Siegel, Marley Spoon AG - Co-Founder, Chairman of the Management Board & CEO [6]

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Thanks, Julian.

So let's move on to Slide 12. After presenting the financial performance of Marley Spoon in the first half of 2019, I'd like to spend a moment to take a step back and review what we have been building over the past years.

At Marley Spoon, we are making weeknight cooking easy and accessible to families, couples around the world, but we're actually doing more. We're building a direct-to-consumer platform of global scale that we believe to be highly defendable.

Now our strategic focus is on 3 layers that build on top of each other. At the bottom, our base layer, is our manufacturing core, in which we have been an industry leader since we started Marley Spoon in 2014. In fact, we see manufacturing as our core competency. This year, we have rolled out our patent-pending third generation, computer-aided manufacturing process in Australia and Europe. Now this technology can help us to improve quality, drive productivity and most importantly, allow us to further increase customization of our service to even better meet customer taste and preferences.

So on top of that, on top of this manufacturing layer, we are building a technology layer which digitizes all supply chain and manufacturing processes throughout our global ERP platform. And in order to enable more choice, we have built a centralized product development platform for our menus. Now this will allow us to continue to extend recipe choice. Finally, our technology layer includes our direct-to-consumer digital brand experience platform for web and mobile devices, making it easy for customers to sign in, manage their subscription, select recipes they want to cook and so forth.

Now the final layer consists of our data warehouse, which aggregates supply chain, customer profile and customer behavior layer. Now as we deliver, for example, over 10 million meals in the first half of 2019 alone, we continue to accumulate data points that will be custom preferences. Now this proprietary data allows us to predict customer behavior, customer taste preferences, and we can use that to improve supply chain efficiency and more importantly, to provide a personalized menu in the future. Now as customers continue to use our service, we get to know them better and better, which can in turn support ARPU as we improve retention and offer cross- and upselling to our customers. Now we believe this 3-layer platform, which we continue to invest in, allows us to scale our business while providing extendable barrier to entry as we continue to innovate in our industry.

Now moving to the final slide, 13. In summary, so we had a strong first half of 2019. The business grew revenue 55% year-on-year led by the U.S. business with overall stable customer acquisition cost into a $200 million run rate revenue business. And more than 90% of that revenue was by repeat customers.

While we are facing operational challenges in Europe consolidating our manufacturing centers, we were able to improve global contribution margin nevertheless by 2 points to 24%. And this was driven by a strong year-on-year performance in the U.S. primarily.

Now our operating EBITDA margin improved from minus 36% in the prior year to minus 28%, exiting Q2 at minus 16%. And we continue to be on track to reach EBITDA profitability on an operating level by '22 (sic) [2020], as guided previously.

So overall, we believe that we are operating in a vast category. Now as groceries are experiencing shifts of purchase pattern moving to online shopping, we believe that we have a massive opportunity to grab its reaches in day 1. Now our strategy will continue to be based on strong partnerships, like our alliance with Woolworths; invest in the industry-leading technology and continuous product innovation, which in the past with Dinnerly, with more choice. You always have seen us doing new things in the industry, which often worked very well.

Now with this strategy, we believe we're well positioned to capture a big part of this future opportunity. On the back of the positive development in our 2 largest segments, we reaffirm our guidance of reaching a global contribution margin in the mid- to high 20s after the 24% in the first half of the year.

Now finally, as Julian already mentioned earlier, we look forward to sharing the progress of our recently started Woolworths partnership with you in the coming months and quarters. And as we start to realize growth and cost synergies, we'll be happy to report back.

Now thanks so much for taking the time this morning. And with that, I'd like to open the call up for 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 Ian Jamieson with tkdy.

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Ian Jamieson;tkdy Advisors;Partner, [2]

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I just wanted to make sure I understood how you got the higher revenue growth with less growth in customers. So that would imply that the average revenue per customer has increased. Is that just a function of moving into customers that have been with you longer, therefore, they're higher euro customers?

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Gilbert Fabian Siegel, Marley Spoon AG - Co-Founder, Chairman of the Management Board & CEO [3]

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Yes, so that's a good question. And I think if you look to the slides, I think it was the Slide 5. You actually see a very important dynamic of our business model. So a customer discovers Marley Spoon. And once they decide to have us be the provider of weeknight cooking for them, they switch a part of the supermarket shopping to us on a continuous basis. Now the average customer that's been with us, they cook actually up to 9 nights during a month with us. So that means they're cooking 3 nights a week with us and they cook around between 2 and 3 weeks per month with us. So it's a very recurring behavior. And that leads to us generating already 91% of our revenue in the first half of 2019 from those repeat purchases. Or if you more granular look into this, 64% of our orders were of order #6 or higher, and that has increased over time. And this is a very important dynamic. So therefore, most of our revenue comes from these existing customers. As we add new customers on top, it only incrementally adds to this very stable recurring base of revenue that we have.

Now quarter-over-quarter, as we try to explain earlier, we have different dynamics. So in Q1 and Q3, these are always quarters where it's great to acquire lots of customers because you have either back-to-school or you have new year's resolution. And this quarter, therefore, allow us to acquire a lot of customers at very attractive rates. And then in Q2 and Q4, these normally tend not to be the amazing quarters to acquire customers. So we acquire less customers. So it doesn't make sense to look at active customers quarter-over-quarter. It makes sense to look at active customers year-on-year. And there, you see the strength that as we add more customers and retain all these existing customers, you will probably see also in the future that our revenue growth will be higher than our new customer growth. So that's -- I think it's a very important and I think very exciting dynamic of the business.

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Ian Jamieson;tkdy Advisors;Partner, [4]

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And sounds good. And one last one from me. I know you don't want to talk about Woolworths because it's so early, but given it's such a huge opportunity, can you at least talk about maybe what type of marketing you have done thus far or is there any other detail you can give on Woolworths?

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Gilbert Fabian Siegel, Marley Spoon AG - Co-Founder, Chairman of the Management Board & CEO [5]

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I mean, we're just starting to test the various opportunities. There's 2 large opportunities that we have. On the one hand side, there's Woolworths Rewards. Now Woolworths Rewards is the largest Australian rewards card program and the benefit here is, of course, that Woolworths also has good understanding about these customer profiles, their preferences. So it will be easy for -- it will be interesting for us to test this to find out which otherwise audience we can address. And so what we've done already this month, we launched a first test campaign where we sent e-mails to selected audiences of this group to start testing. Now what converts well and what is -- where do you find the relevant money for the customers. So that's super exciting. There's also a new marketing platform that Woolworths is just starting, Cartology. And Cartology basically aggregates all the assets that Woolworths has. It starts with the in-store screens. It goes to the online supermarket grocery sales for the boxes that go to the customer's house. It then goes also into digital properties that Woolworths has. So basically, it allows you to access cross-media, view all the properties that Woolworths has. That's a new platform and that's another one that we can potentially test and see whether it's good toward our business. So it's too early to give any more details because we're just testing. But the Woolworths team and our team is very actively engaged. They're very excited. And there's lots of things that they are testing and working on right now.

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Operator [6]

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The next question comes from Stuart Foster with Foster Stockbroking.

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Stuart Foster, Foster Stockbroking Pty Ltd., Research Division - Executive Chairman & CEO [7]

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It's Stuart Foster here. The business, looks like it's growing very well, so well done. But I guess, I just wanted to clarify your working capital needs. According to Slide 11, you've got about EUR 10.5 million left at the end of June. And I'm just trying to understand a little bit how are you going to fund the business through to be cash flow breakeven in 2020. I saw you withdrew the resolution yesterday at the meeting to issue more shares to Woolworths and things and if I can (inaudible) in terms of there will not be. But can you just give me some color on the working capital? Because obviously, the market -- the stock market's more worried I think in the short-term here that are you going to have to come back and raise capital to fund any deficit in working capital that may arise? Can you try and answer those?

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Gilbert Fabian Siegel, Marley Spoon AG - Co-Founder, Chairman of the Management Board & CEO [8]

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Yes. Well, those are good questions. Yes. So I think we've -- if you look at the numbers also quarter-over-quarter, you see that -- demand just continues its path to improve profitability of the business. You saw the EBITDA margin or the loss go from EUR 12 million in the first quarter to EUR 5 million in the second quarter. And our ability also shows that we actually have this clear path to EBITDA profitability to get to this point by 2020. Also, there's very interesting and important working capital dynamic as our business, in fact, works with the customers when they pay for our box, we get the funds right away. So whether it's 6 days before delivery, but then as usual on the grocery industry, we pay our suppliers on average 45 days later. And so as the business grows, it also generates cash. So you will always see that working capital will be ahead of results.

Now having said that, and we've mentioned this also in the release and also in the past, we're actually actively considering additional funding options, both equity and the debt to support the path to profitability. And also, as our business continues to grow and at stable acquisition costs and softer unit economics, you will see that we'll balance these 2 things out. We balance growth and we balance out reaching profitability as guided. So does that make sense?

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Stuart Foster, Foster Stockbroking Pty Ltd., Research Division - Executive Chairman & CEO [9]

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Yes. Why did you withdraw the resolution that you set out in '18 to issue Woolworths more...

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Julian Lange, Marley Spoon AG - CFO & Member of Management Board [10]

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With the announcement -- yes, with Woolworths, I mean, this is basically just more of a technical thing. So I think Woolworths has done the same investments we announced and basically just clarifies whether Woolworths get shares or convertible for that particular amount involved. So I think this is a technical legal thing. It doesn't change the overall investment amount by Woolworths, just to clarify that.

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Stuart Foster, Foster Stockbroking Pty Ltd., Research Division - Executive Chairman & CEO [11]

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All right. Okay. So I think that the -- so the second tranche they're getting is convertible notes rather than shares.

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Gilbert Fabian Siegel, Marley Spoon AG - Co-Founder, Chairman of the Management Board & CEO [12]

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I think they're getting a convertible note for that small piece that they convert into shares if they elect to do that, which then leads to the same outcome. It was more a technicality. And it wasn't a whole resolution. It was just this point 7 of the whole AGM, which passed this morning. Yes.

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Stuart Foster, Foster Stockbroking Pty Ltd., Research Division - Executive Chairman & CEO [13]

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Yes. Okay. Okay. Now I feel like, well, the business, it certainly looks like it's growing very well. So well done. But I guess, the stock price hasn't reflected that, I guess, just on these concerns of the working capital needs. So I look forward to seeing what will come out within due course.

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Operator [14]

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(Operator Instructions) The next question comes from Shaun Weick with Macquarie.

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Shaun Weick, Macquarie Research - Analyst [15]

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Just one quick one. You've obviously mentioned within the pack there that you've seen tax remain stable. But could you just talk a bit about, I guess, the underlying cohort dynamics? What we've seen from a retention or churn perspective? And I suppose how that's evolving between the older cohorts versus the newer cohorts as the business scales and the offering becomes stronger and broader.

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Gilbert Fabian Siegel, Marley Spoon AG - Co-Founder, Chairman of the Management Board & CEO [16]

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Yes, that's a good question. And we -- in general, the answer is pretty straightforward. Woolworths are very stable. And so we see, long term, very similar user behavior patterns. So as we acquire customers at the same stable CPA, we see this same attractive unit economics of roughly pay back 6 months and roughly 3 weeks return LTV versus CAC. The reason why we didn't include the slide is we thought we'd bore everybody to death to show the same slide over and over again. But nothing in here has changed. And I think that's the exciting part here.

What we wanted to focus this time really is on the amount of our business that's already recurring. And that's -- I think you've seen the marketing efficiency slides. And that's why marketing efficiency also trends up.

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Shaun Weick, Macquarie Research - Analyst [17]

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Yes, yes. No, that makes sense. And maybe just another one in terms of how we should be thinking about the profile of the Australian business going forward. Like, is the expectation that in the short term, it might be a little bit lumpy in terms of the movement between cash flow positive and cash flow negative as that marketing dollar's up and down? Like, how we should think about that I suppose over the next kind of 6 to 12 months?

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

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Yes. I think that's correct, Shaun. So as I mentioned before, we are now doing this a bit more seasonal marketing pattern, which means now, you probably saw some out-of-home or TV marketing that we currently have out in Australia right now as well as through August, September into October tends to be a good time for us. So Q3 should show a bit higher marketing spend again. So that could lead to a small up again temporarily. But I think the trajectory, of course, now with top line growing, margin stable to up. I think you'll continue to see profit overall now. But it depends a bit on the marketing spend in any given quarter, as you mentioned.

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Shaun Weick, Macquarie Research - Analyst [19]

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Yes. And maybe just one final one. Are you confident that quarter-over-quarter -- Fabian mentioned earlier that's not necessarily a great way to look at the active customer trend. But would your expectation be then with unit economics stable and marketing costs increasing into 3Q, that you should see that active customer number start to build again quarter-over-quarter?

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Gilbert Fabian Siegel, Marley Spoon AG - Co-Founder, Chairman of the Management Board & CEO [20]

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I think it makes sense to look at active customer number always year-on-year. But then, I think you will see this consistent growth trajectory in our business. And so therefore, I don't want to comment quarter-on-quarter. Q3 is always a great quarter to acquire customers and we see great traction at very attractive, stable acquisition costs. But -- so I think I just want to make sure that when we look at a metric, which is a 3-month average over a customer who bought a box, then looking at it quarter-over-quarter can be misleading and that's why we will just encourage that specific metrics to group at -- on a year-on-year basis. I think what is important is that the top line keeps growing. And I think that is what shows you that this business overall is growing.

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Operator [21]

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There are no further questions at this time.

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

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Gilbert Fabian Siegel, Marley Spoon AG - Co-Founder, Chairman of the Management Board & CEO [22]

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Yes. Thanks so much, everybody, for joining on our investor call. We -- for us, it was a very big milestone, 1 year being a public company. We believe when we look at our progress operationally, I think we've achieved a tremendous amount. The business is developing continuously further and we're very proud what the team has built. We also believe that if you look at our business and compare to other e-commerce businesses that there is still a mispricing in the business. And we believe over the long term, the equity value we're building will be also reflected in the share price.

We will be on a road show in September 9, so week after next. And we'll be in Sydney, Melbourne, maybe also in Auckland. So therefore, if -- I would love to see as many as possible. Please reach out. You have our contact details at the last slide in the slide deck, and we'll be looking forward to seeing as many as possible of you in person week after next.

Thank you very much.