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

Q3 2019 Marley Spoon AG Earnings Call

Nov 7, 2019 (Thomson StreetEvents) -- Edited Transcript of Marley Spoon AG earnings conference call or presentation Wednesday, October 30, 2019 at 11:30:00pm 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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* Owen Humphries

Canaccord Genuity Corp., Research Division - Senior Industrials 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 quarterly results and investor conference 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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Thank you. Yes, good morning, and thank you 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.

So this morning, we released our Appendix 4C for the third quarter of our financial year, and we're pleased to use the opportunity to provide you with an update on the business performance as well as an update on funding. And at the end, as usual, we'll open the call to your questions.

So together with today's 4C filing, we are happy to announce that, as outlined in some more detail in our 4C cover note, a debt funding of around AUD 22 million from a reputable Silicon Valley-based lender. The debt facility has been agreed in principle between the parties and is subject to finalizing contractual documentation and satisfaction of conditions, including due diligence and formal approval of existing secured lenders, and Julian will provide further details about this pending deal later on this call.

Let's have a closer look at the development of our business first.

So over the past year, Marley Spoon has made solid progress in building a sustainable, recurring revenue business with global operations and scalable manufacturing technology. We feel we are well positioned to take advantage of the ongoing transition from grocery shopping from offline to online, which is likely to continue for the years ahead. And as you know from prior calls, we are in the early stages of a 5-year strategic partnership with Woolworths Group, and the growth opportunities and operational synergies from this collaboration have only just begun.

Now in Q3 2019, Marley Spoon generated revenue of EUR 33.1 million, which is up 38% on the previous corresponding period, or 36% excluding FX impacts. Year-to-date revenue is up 49% compared to the previous corresponding period, or 46% excluding FX impacts, with both the U.S. and Australian segments showing strong growth, up 59% and 54%, respectively, excluding FX impacts. Now we improved our operating profitability in the third quarter with an operating EBITDA loss of about EUR 10 million compared to an operating EBITDA loss of about EUR 12 million in the third quarter 2018. Our operating EBITDA margin improved significantly by 18 points to minus 31% in Q3, up from 49% negative in Q3 2018. Now the lower loss was driven by higher revenue and contribution margins, while marketing spend was flat at EUR 10 million year-on-year.

We also significantly improved operating cash flow in the third quarter with an outflow of about EUR 6 million compared to an operating cash outflow of EUR 11 million in Q3 2018, thanks to lower operating losses and improved working capital. At the end of the third quarter, the cash balance was about EUR 8 million.

Now operational highlights of the quarter included the execution of the first marketing campaigns and cost-saving initiatives with Woolworths Group as well as reaching record labor productivity in Australia after the rollout of our new manufacturing technology in the second quarter 2019. In Europe, we continue to lay the foundation for future growth and profitability by preparing the consolidation of our Austrian manufacturing center and launching our service in Denmark. Both were realized in October with production out of the company's sole remaining European manufacturing center in the Netherlands, which now is serving 5 different countries.

The ability to produce multiple brands and serve various regions from a single manufacturing center is one of those benefits of our third-generation manufacturing technology, which is now operational in Europe and Australia and is planned to be rolled out in the U.S. in 2020. Furthermore, this technology allows us to continue to innovate and provide additional choice to our customers, like the recent expansion of our menu in Australia where we added 3 weekly vegan choices. Now this expanded our menu to a best-in-class 23 weekly changing options for Marley Spoon customers.

Let's take a close look at our funding package, for which I'll hand over to Julian.

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

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Thank you, Fabian.

As you know, over the past months, we've been working on various funding options to support our path to profitability, and we're happy to have found and agreed to terms with a strong long-term-oriented debt provider and are now tasked to close this transaction over the coming weeks. And talking about a senior secured facility from a reputable Silicon Valley-based lender in a total amount of approximately AUD 22 million.

And the facility's clause should contain the following key terms: a principal amount of USD 15 million to be disbursed in 2 tranches, USD 10 million at closing of the transaction, which is contemplated for November, and USD 5 million in mid-2020 and subject to the company meeting certain revenue and expense targets. The interest rate on the facility is set at 12%, plus a final payment amounting to 2.5% of the amount funded. Term is 42 months, and it includes an initial 12-month interest-only period. The lender will also be granted warrants to purchase shares or CDIs in the company up to an amount of USD 3 million. The exercise price will be equivalent to the 30-day volume-weighted average price prior to closing of the transaction. Warrants will be exercisable for 5 years from the termination of the loan agreement, to be governed by German law and subject to shareholder approval. Finally, in lieu of the -- of exercising these warrants, the lender alternatively has the option for a cash settlement of USD 5.75 million upon earlier change of control or December 31, 2024. Those details are, of course, also in our covenants.

When we approach the end of calendar year 2019, we also want to take the opportunity to further specify the guidance. Currently, expect calendar '19 revenue to grow 35% to 40% year-on-year with a full year contribution margin within the lower end of the previously guided range after we finished at 24% through the first 3 quarters. And for Q4, actually, we expect margin tailwinds from a price increase being implemented at the start of October in Australia as well as seasonally with lower packaging and logistics costs you should see in the U.S as we enter the winter months in the northern hemisphere. And for 2020, we expect continued robust revenue growth with solid margin, operating EBITDA improvement. Contribution margin actually in 2020 should improve similarly as we've seen in 2018 and 2019.

Second half of this year, of 2019, should furthermore mark the point from which operating EBITDA losses in each half year period are lower than in the prior corresponding period. So we'll continue to work to be -- work towards turning operating EBITDA positive by the end of calendar year 2020.

To give you a bit more color around the EBITDA. The key sensitivities here on, from the certain guidance for operating EBITDA includes the rate and timing of the expected contribution margin improvement, the timing and scale of marketing investments, the time frame -- and finally, the time frame for realizing the anticipated growth and synergy benefits from the Woolworths alliance. And these will be key inputs to watch as we go.

With this update on our guidance, I'll pass it back to Fabian.

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

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Thank you, Julian, yes. So over the past year, we've proven our business model in Australia. And we are now seeing improvements to our profitability, attractive unit economics, high incremental margins and growing global subscriber base. And as consumer behavior in grocery switches to online, we see significant opportunities for growth and have invested in our manufacturing capabilities globally, which allows us that we can ensure we have the right foundation to support continued expansion and customization.

Now in the third quarter, we continued to see strong growth, which allows us to guide overall revenue growth for 2019 to be up to 40%. We also expect to continue to see robust revenue growth in 2020. As the business grows, we have experienced improvements in the operating EBITDA margin as a percentage of revenue to such an extent that we should now reach the turning point also on absolute operating EBITDA losses. And as Julian mentioned, operating EBITDA losses in each half year period should now be lower than in the prior comparable period going forward.

The debt funding we have announced today resets our capital structure and brings onboard a reputable, long-term-oriented debt provider with significant experience in the technology sector and supports our path to profitability. Thank you for taking the time this morning.

And with that, I would now like to open the call 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.

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

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Just a quick question around the tranche 2 of the debt package. Just -- can you just flag what the revenue and margin hurdles are for that tranche 2?

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

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No. We'll -- Owen, we'll share that at closing of the transaction.

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

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Right. Okay. But is it within -- [it feels like] -- how much is required in terms of growth and margins? What's the probability of that tranche 2 coming through in your view?

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

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The reason why we are quite comfortable with the structure is [it's structures] on 2 metrics that in the past we've been able to control and forecast quite well internally, which is one is our top line revenue. And we feel that we have a very good understanding of the seasonality acquiring customers. The user behavior has been quite stable over the past. And so we feel like we have a good visibility into that, and we basically added a very good safety margin on top of what we see, plus it's a relatively short period. It's just a half year. So I think we feel there's good visibility on that metric. And the other one is the expense metrics. And in the past, again, that was one of those areas that we, I think, have shown great ability to plan and meet plan on G&A. So that's why these 2 things are very much under our control. And I think we, therefore, felt quite comfortable to give this as a performance hurdle with the appropriate margin -- safety margins built in. So that's why I think we are quite comfortable with that structure.

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

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Okay. And just quickly on Europe. It looks like -- Europe is your lowest-margin division. It's showing pretty anemic growth pcp. What's required in terms of capital? Obviously, I've had the luxury of seeing that facility in action, and it's very robust. So maybe can you talk through what's required of the capital that's needed to bring that business or to turn that business back around?

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Gilbert Fabian Siegel, Marley Spoon AG - Co-Founder, Chairman of the Management Board & CEO [7]

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I mean we've seen in Europe continuous improvement on the margins -- EBITDA margins in the end, but also contribution margins prior to that. So what we see is, as we grow the business, the business gets more profitable, we don't have to invest into more infrastructure. So in a way, we have all the infrastructure laid out. In fact, we have consolidated this year quite some infrastructure by moving our German and now our Austrian manufacturing centers into our Dutch manufacturing center, which given our new manufacturing technology, is much more flexible to effectively serve all these countries and even enter a new country, like Denmark, without additional CapEx. So it makes it actually quite efficient. We don't have to invest any more capital on -- or CapEx into those operations.

Now when it comes to growth, what we've seen in the past and I think we also guided to this, is that we try to make sure that every marketing dollar that we invest for every customer we acquire, we have similar profitability or similar unit economics. And that is true for all regions. So in a way, from a marketing effectiveness or a payback on a marketing dollar invested, all those regions meet those targets that we also spoke to in the past, which is roughly 6 months payback and 3x return LTV-to-CAC. And this is also true for Europe. Now because of the competition in Europe among supermarkets, which leads to lower prices, and as Marley Spoon, we price our products roughly on par with supermarkets, we'll see lower margins. And also in the future, we'll continue to see margins in Europe somewhat lower, which, of course, means, if you want to have the same unit economics, our acquisition targets -- our cost per acquisition targets are also lower to have the same return on invest. Now this will also, of course, limit the channels and -- in which we can invest and deploy marketing dollars, so therefore, we'll continue to see slower growth in Europe. However, the growth is still solidly two digit. So I would argue, yes, we don't see the same high growth as in Australia, as in the U.S., but from a return on invest, we see very similar unit economics. And we'll see a little bit of a slower growth, but long term as grocery switch from offline to online, the opportunity is also a huge one in Europe, and we think we're actually well positioned to capture that over time. So from that perspective, we see that every additional user group we acquire is accretive to bringing the overall group towards EBITDA profitability as it adds to top line at the same unit economic level as in the other regions, if that make sense to you.

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

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Yes. Sure. Okay. And...

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

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And Owen, we normally don't -- no, we don't disclose the margins on a regional level by quarter, but also third quarter after we talked at the half, that first half was a bit more challenging because of the site consolidations. And the third quarter was up versus the half, so I think, obviously, Europe is moving in the right direction [from this point].

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

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(inaudible) Okay. And maybe what does robust revenue growth mean? Are we talking 20% to 30%, 30% to 40%, 10% to 20%? What does robust mean?

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Gilbert Fabian Siegel, Marley Spoon AG - Co-Founder, Chairman of the Management Board & CEO [11]

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So I think, for us, we see the opportunity to grow and acquiring customers at the right acquisition costs and have these great unit economics at the same time with transitioning our business in 2019 to a lower growth rate compared to the prior year in order to bring the overall group to profitability. So we didn't want to give specific revenue guidance for 2020, but it's something that we have very much under control. And so what we'll try to optimize is we'll try to optimize the growth to gets to EBITDA profitability as quickly as possible with limited cash burn, and that kind of guides a little bit our acquisition strategy. So we didn't want to, at this point in time already, put this on the guidance for 2020, but this remains a strong growth business, and this will continue into the future. So we also wanted to make sure that people have the right understanding of this business that this is not a business where we feel growth is slowing down or there's a trend change, which is quite the opposite. We think the channel switch from offline to online in grocery is just starting. Our acquisition costs have been trending down historically, which alludes to the TAM, the addressable market, that we think is there. So we just wanted to make sure that people and investors understand that this is also in the future going to be a strong growth business as we overall bring the company towards profitability.

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Operator [12]

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(Operator Instructions) 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 [13]

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Yes. Thanks so much for dialing in this morning.

I think we've been talking about the funding or implementation of the debt facility for quite a while. It took us longer than we had hoped and there was a continuous narrative, I think, since maybe the -- over the last 12 months. I'm very happy that we now found a very good solution. And I think it really puts the company into a better capital structure that will support our path in building this business going forward. So I'm very happy about this step.

And as always, if you have additional questions down the line, we'll be happy to answer. Please reach out, and we're happy to explain.

So thanks very much, and talk to everybody shortly.