Allegro.eu SA

WSE:ALE

Earnings Call Transcript 2023-Q1

[Operator]

Ladies and gentlemen, thank you for standing by. I am Yuta, your Chorus Call operator. Welcome, and thank you for joining Allegro Group Earnings Call and Live Webcast to present and discuss the Allegro First Quarter 2023 Results Presentation. At this time, I would like to turn the conference over to Mr. Michal Kuzawinski, Head of Investor Relations. Mr. Kuzawinski, you may now proceed.

[Michal Kuzawinski, executive]

Thank you, Yuta, and a warm welcome to everybody who joined our earnings call today. My name is Michal Kuzawinski, and I'm Head of Investor Relations. It's my pleasure to have with us today Allegro's CEO, Roy Perticucci, who will talk to you about the business highlights of the first quarter; and our CFO, Jon Eastick, who will talk in more detail about financials and Q2 outlook. Our quarterly presentation is available for download from our IR webpage at allegro.eu. You may also download slides from the link available on the webcast screen. As a reminder, today's presentation and discussion contains forward-looking statements. Our actual results could differ materially from the plans expressed in such statements. Please make sure you review the full disclaimer on Slide 2. This call is being recorded, and the recording will be available on our website at allegro.eu. And now, I'd like to turn the call over to Roy.

[Roy Perticucci, executive]

Thank you, Michal. It's great to be here again to present the results for the first quarter of 2023. I'm very happy to say that we met or exceeded all of our Q1 outlook metrics. We did especially well with the adjusted EBITDA metric, which rightly received a lot of management attention. During every one of my presentation for you, I have cited the combined impacts of the Ukraine war and rampant inflation. And this time is no exception. There has been a material shift in the shopping habits of Polish customers and they continue to trade down to more value-orientated items. I highlighted the resilience of the network aspects of our business model on several occasions. Allegro connects over 135,000 independent merchants to millions of customers. The collective decision-making power of those independent merchants leads to rapid adjustments to selection in pricing. Our Q1 performance underlines this strength. We continue to grow. Quarterly GMV in Poland grew by 14% year-on-year for the second quarter in a row. Consolidated GMV grew by over 21% year-on-year, reflecting the effects of the inclusion of the Mall segments for the last time before we reached the first anniversary of the integration. We have also been able to continue to make progress in improving profitability and reducing leverage. Revenue from Polish operations grew by nearly 23%. Group revenue grew by over 66% year-on-year, again reflecting the consolidation impact of Mall for the last time. I should also point out that revenue continues to grow faster than overall GMV. The shopping intensity of our consumers continues to grow faster than their overall numbers, even as we added over 780,000 new active buyers to our Polish customer base, a near 6% increase, GMV per active buyer grew by 1.5x -- sorry, 1.6x faster. Adjusted EBITDA is a factor that reflects our work on GMV growth levers, monetization, solid growth in margin-accretive advertising revenue, as well as continued fit-to-grow cost reduction focus. Polish EBITDA grew by nearly 30% year-on-year, comfortably ahead of our quarterly outlook. Quarterly EBITDA margin rose to 4.87%. So we're getting closer to our 5% north star. Consolidated adjusted EBITDA, including Mall, grew by 14.7% year-on-year. We introduced a number of monetization improvements to Allegro Pay, including the shortening of the duration of interest-free credit for SMART! buyers from 3 months to 2 months. Despite these changes, Allegro Pay continues to grow very strongly with loan origination growing by an impressive 80% year-on-year. This while the loan book grew by only 4% year-on-year, and we believe this is an impressive result. We'll talk about Allegro Pay in more detail later in this presentation. Over the course of Q1, we completed the initial work on our 3P marketplace in Czechia, which began serving customers on May 9. We are treating this first phase of an international expansion as an investment, where we will learn how to educate new customers about our marketplace and to develop a playbook for future launches. We do not expect to start building trade until later this year. The 7% to 8% real term contraction in retail demand in the Czech Republic [ that hit our ] 1P business hard, defending volume within this context has adversely affected margins. Mall adjusted EBITDA lost nearly PLN 70 million, although this also includes about PLN 16 million of start-up costs related to the 3P marketplace preparations. Despite this challenge, our work on growth levers, efficiencies and cost savings, improved profitability and lowered leverage from the 3.5x peak following Mall acquisition in Q2 '22 to 2.8x as of Q1 '23. We are particularly proud of how we were able to make progress in this particular time of year, despite the seasonal working capital outflows typical following Christmas peak. So overall, we must balance our satisfaction with Polish operations and the commencement of trading on the Allegro.cz site with the need to double down on the turnaround of the Mall legacy business. We'll get there. The executive team and I formulated our 7 priorities and presented them to investors within the first 30 days of my tenure. We've given most of our attention to the first 3, which focus on reenergizing growth and the second 3, which focus on continuously improving our cost structure. Key amongst our cost reduction priorities, the fit-to-grow program is delivering growing benefits. I view this project as a starting point for the building of a company mindset for continuous improvements. As business, we need to be constantly working to improve the quality of our selection, the reliability of our services and, of course, our own cost structure. We should not lose sight of the fact that a key determinant of success for any company is the quality and motivation of the people who work for it. Our work on people and culture. The last but not least of our priorities is seeking to articulate how we would like our leaders to behave, as well as building the mechanisms to identify talent and develop it over time. We're very thankful for the loyalty of Polish customers and the agility of our member merchants. Because of them, we have been able to maintain our position in most categories where we have been traditionally strong, whilst getting traction in underpenetrated ones such as health and beauty, fashion and ambient grocery, which, by the way, this last is -- refers to non-refrigerated and non-frozen grocery. So things held at room temperature. We're also intensifying our attention to business customers via our specialized sales channel. So let me walk you through some of the quarter's achievements. We have grown available products by high double-digit percentages year-on-year, mainly with our priority categories, ambient grocery, health and beauty and fashion, and we've added more than 170 new key accounts with over 30 new key brands in quarter 1 across all categories. Allegro continues to innovate to offer the best value to customers. In April, we launched the Best Price Guarantee campaign, which provides a refund of the price difference if a buyer finds a lower price in one of the several dozen online shops within 72 hours. The variance is compensated by a voucher. The Best Price Guarantee currently covers over 350,000 offers and is attracting more and more customers. We also launched AlleObnizka to support merchants in offering great prices. During the Allegro days, in February and March, we proposed attractive deals for increasingly price-conscious customers. In terms of convenience, we introduced a simplified Allegro.pl main page with even more personalized content based on recently viewed offers. In Q1, we implemented machine learning routing of customer support queries to further simplify and speed up responses. The AI applications led us automate about 1/3 of frontline support tasks, saving over 200 potential customer support heads. In advertising, we reached 1.5% of GMV, growing at a rate over 3x faster than GMV growth in the period. Our progress was achieved, thanks to being able to maintain strong price encounter to trends in the rest of the market as our click-through rates kept improving. Also, the number of new merchants advertising on our site grew by 50% versus last year, and we're able to expand the ads inventory available to the home page carousel. We've been successful in Poland, and we want to repeat our success in the rest of the countries of Central Europe. Our international expansion is the strategic bridgehead to extending our addressable retail market to PLN 1.1 trillion and our base of potential customers to nearly 70 million people. Our work to create a single company serving customers across 6 countries, leveraging Allegro's proprietary tech stack has gathered significant momentum. Earlier this month, Allegro.cz opened its virtual doors and began serving Czech customers. It had been our goal ever since we became an international group just a year ago, and it is a new chapter for Allegro and for all of our Czech customers, both buyers and merchants. We are confident that Mall's clients will be delighted by the selection and attractive prices that they find on our marketplace. So I want to emphasize the significance of the expression soft launch. Our Czech marketplace is open for business, but we're using this period to learn how customers shop and assess how the site is received. Only once we are confident that we are ready, we'll be start putting serious money behind our new customer recruitment. Retail history is littered with examples of successful companies who have gone abroad with the implicit assumption of reaching in a few short months or years, the same level of loyalty that took decades to achieve at home. We're ready to make plenty of mistakes as we learn how to serve Czech customers, but the assumption of immediate success will not be one of them. To paraphrase a well-known quote, this is neither the beginning of the end, nor even the end of the beginning. This is the beginning of the beginning. Before I move on to talk more about key highlights for Allegro.cz on the next slide, let me just comment briefly on our third growth priority, Allegro Pay. Allegro Pay continues to scale up strongly. Originated loans grew by 82% to PLN 1.8 billion, whilst non-performing loans remained under tight control. The loan book increased by just 4% year-on-year to PLN 379 million, limiting the negative working capital impact as we sell the loans to our partner, Aion Bank. We see huge potential from fintech revenue streams. In short, we're focusing on the monetization measures to improve cash generation and increase the share of interest-bearing installment loans. In March, we cut the interest-free period for SMART! users from 3 to 2 months and introduced a new interest charging 3-month loan. And we announced last week that we'll begin charging merchants a fee of 35 basis points of GMV to finance Allegro Pay from July onwards. So let me touch now on Allegro.cz. The total addressable market for our 3P marketplace now extends to nearly 50 million people. Thanks to the joint efforts of teams from across our group who are going ahead with what is already by far the widest selection the Czech market has ever seen. Allegro.cz provides over 100 million offers, which is 10x more than competitors, including 600 -- including 300,000 offers from Mall and CZC legacy platforms. It's a proprietary marketplace translated and integrated for the Czech market. And we have already about 400,000 Mall customers who have already experienced the SMART! loyalty program on Mall's legacy platforms and are now able to enjoy even better benefits also on Allegro.cz marketplace. Allegro.cz also offers local payments and delivery methods with logistics integrated with Mall's WE|DO capabilities. This is the first time in our exciting journey of learning how to operate a marketplace in a new country. And as I said before, we're developing a playbook for further international launches while offering the list ones, sell everywhere opportunity further -- with further geographic expansion, Allegro intends to build an attractive marketplace for local businesses everywhere. Cost-effective central organization running the marketplace in Czechia will be easily replicated for the other 4 countries in the region, and we'll gradually begin to build traffic with investments proportionate to customer response, keeping flexibility of the pace of advertising and traffic acquisition. Having gone through the key growth priorities, let's discuss now our equally important cost efficiency initiatives. SMART! customers continue to switch to the new pricing terms we announced back in November of 2022. Nearly half of SMART! customers had rolled over their annual contracts by the end of March, and we've reported no impact on the churn rate. The full margin benefits of the revised terms will be achieved within the next few quarters. We recently announced revised co-financing rates effective from July this year, which will partially offset rising delivery costs from our delivery partners. We continue to bear a lion's share of the delivery costs for the lowest order values, protecting the profitability of our merchants. In aggregate, we'll continue to fund approximately 2/3 of the total net cost of delivery of SMART! orders. When it comes to our delivery network, we now have more than 2,700 APMs installed, with a steadily improving utilization and Net Promoter Score for One Box deliveries, and we continue to enhance our machine learning engine for further improvements in next-day delivery promise. Regarding the Mall 1P turnaround, we dedicated significant attention to Mall's 1P turnaround in cost optimization with progress in overall and SG&A savings while defending the top line. We closed most of the stationary outlets operations across the CE-5, saving nearly 5% of total SG&A costs of the Mall Group. This includes marketing expenditure. We want to reinvigorate Mall's customer perception with the retail basics principles and therefore, we've significantly expanded sellers' availability, improving price perception and continued development in service quality and customer experience. Finally, Allegro.cz has now become a new sales channel for both Mall and CZC as merchants. Last but definitely not least on our list of cost priorities is fit-to-grow. I said at the beginning of my presentation, it's a key initiative amongst our cost reduction priorities. And here's the number of the past quarter's achievements. We reviewed all cost categories across Poland and the CE-5. We introduced strict spending control, which helped us achieve Q1 savings. The key wins were in staff, contractors, IT and warehouse management costs. And for the first time in a few years, we reduced the Polish headcount quarter-on-quarter, namely by 1%. And we consolidated our Polish 1P warehouse with a fulfillment center in Adamow, while in Czechia CZC and Mall warehouses will soon emerge. Moreover, last week, we announced fee netting for selected merchants, which will be effective from July. Merchants have the possibility to adopt the change in advance, which will otherwise take effect from February of next year. With this move, we're making the lives of our merchants easier by netting the bills we send to them and deducting the commission at source. At the same time, this will improve our net working capital. And lastly, following the feedback we received, we are introducing changes to our pricing for merchants, which will greatly simplify the terms and make them a lot more transparent. Great. Jon, over to you.

[Jonathan Eastick, executive]

Thank you very much, Roy, and good morning, ladies and gentlemen. It's a pleasure to be with you to take you through Allegro.eu's group financial results. And I will begin, as usual, with the Polish operations starting from Slide 12. And here, as usual, you have the key KPIs all laid out for your convenience on that single slide. In terms of detailed comments, moving on to Slide 13. Let me start with active buyers, and you'll see here that our growth of the active buyer base is now really firmly established with this being the fourth quarter of consecutive growth. Overall, we've added 787,000 new active buyers over the past 12 months. That's almost 6%. 1.1% added just in the last quarter alone. And we're now at 14.2 million active buyers at the end of March. Now, this is reflecting very effective communication efforts that we've been making around pricing, around promotion and Allegro days and such opportunities to buy at low-cost and also the trust that you have -- that you can have buying on Allegro and covering any risk from individual merchants. It's all working extremely well. On the spend per active buyer side, we continue to make very good progress in what is a deteriorating economic environment over the last couple of quarters. We've grown 9.7% our spend per active buyer over the last 12 months, 2% progress during Q1, and we've landed now on PLN 3,582 spend per active buyer over the last 12 months. This is, obviously, reflecting the massive selection that Allegro has, which means we're able to satisfy the consumers' requirements no matter what their shopping mission. And we are seeing significant changes in how they're spending their money, given the pressures on their spending power. So moving on to the GMV, which is on Slide 14. And as you see, we maintained our growth rate from Q4 in the first quarter with a 14% year-on-year growth in GMV. That translates to PLN 12.3 billion of GMV for the first quarter. The GMV for the last 12 months, therefore, moves up to PLN 50.9 billion, which is a 16.1% year-on-year increase over the last 12 months. Now, within -- we see this performance actually in a very positive light taken in the context of an 11 percentage points slowdown in retail sales in nominal terms during the course of Q1. The December reading was 15.5% and it had come all the way down to 4.8% year-on-year by March of 2023. And in real terms, growth has basically gone from flat in December to minus 7% in March and that level has continued with this week's news for the April retail sales. Now, in that context, we think that 14% growth is a very solid result. And within the composition of that growth, it's important to note that the actual share of the transaction growth has accelerated significantly from the fourth quarter. And this has enabled us to offset what is an increasing trading downtrend on the part of consumers. They continue to move away from discretionary consumption items and they continue to look for cheaper solutions in any particular category. Allegro is, obviously, extremely well placed because of our wide selection to meet those requirements. In terms of category mix, we've actually seen acceleration in growth quarter-on-quarter in electronics, in automotive, and in health and beauty. It's been harder for home and garden and sport and leisure in the first quarter but that's also partly down to the fact that this time last year there was a loss of spending related to the outbreak of the war in Ukraine with people sourcing tents, power generators and these kind of items for their -- due to their concerns over the situation in Ukraine. So moving on to revenue on Slide 15. And, as usual, Allegro post revenue growth ahead of GMV growth. This time 22.7% at PLN 1.7 billion for the first quarter. Big contributions, obviously, from marketplace and from advertising. Marketplace 14% GMV growth was supported by a 57 basis point increase in take rate versus Q1 a year ago, 11.02%, and combine that results in a GMV in a marketplace revenue growth of 20.1%. Advertising, as you've heard from Roy, had a stellar quarter, growing 48% year-on-year. And you can see, in fact all categories of revenue growth or revenue have had very solid growth figures during the course of Q1. So looking at the cost side and therefore, the adjusted EBITDA. You can see on Slide 16 that we grew 29.7% year-on-year at the adjusted EBITDA level for the Polish operations. We moved from PLN 463 million in Q1 of '22 to a PLN 600 million adjusted EBITDA in the first quarter of '23. In terms of margin, that's 4.3% a year ago as a percentage of GMV, is now 4.9% for the first quarter. On the bridge, you can see, obviously, the contribution of that strong revenue growth on the left-hand side of the chart. Focusing my comments on the cost side. Let's start with the net costs of delivery, which were PLN 126 million higher than a year earlier. This corresponds to 61 basis points of GMV. And this is coming from a number of factors, obviously. The volume drivers are the continued growth in the SMART! customer base, plus the increasing or the over-index growth in the number of transactions that I mentioned in the context of GMV growth a moment ago. There's also additional cost coming from the higher prices that we're paying to our delivery partners, which is averaging 8.3% year-on-year increase per package. And I hasten to add that that would have been a higher increase if not for the SMART! changes that we introduced in November, which we're working into the base, and that's delivered a 5 percentage point reduction in courier deliveries, which are more expensive in the delivery mix. Very importantly, our SG&A continues to -- growth continues to slow. We're down to 10% growth for Q1, so it's only a PLN 15 million drag on our EBITDA. A big component of this is related to the continued control of staff costs, which have actually resulted in a reduction in the employment level by 1% in Q1. But it's basically fit-to-grow across the board, having a positive impact on our SG&A expenditures. Moving on to capital investment on Slide 17. And our actions around fit-to-grow are really paying off here as well, 31% lower CapEx than a year earlier, coming in at PLN 111 million, and this is now only 6.5% of revenue. As we flagged at the previous quarterly announcement, this year, we're focusing our work around delivery experience on the utilization of the existing investments. So, whilst we are still investing in expanding the APM network, we're doing so at a much slower rate than in the previous year. Office development projects that were present in last year's numbers, those projects are now all completed. Our fit-to-grow initiatives include introducing much stiffer hurdle processes around CapEx projects and various changes in policies. And our capitalized development spend growth is slowing down because we've basically capped the size of the tech team and therefore, the increases reflect mainly pay rises over the last 12 months. It's also important to note that about PLN 10 million of expenditure by detecting relating to the development of the Allegro.cz marketplace is actually booked in the Mall segment, which I'm going to come to now. So moving on to Slide 18, the Mall segment, and again, you've got the key KPIs all laid out on that slide. And they are compared for the last time to pro forma information pre-acquisition, in this case to Q1 of 2022. Looking at Slide 19 and some more detailed comments on the performance of the Mall segment. Let's start with the GMV, which came in at PLN 800 million and that is only a 0.5% decline compared to a year earlier. In the context of the extremely difficult macro environment, particularly in the Czech Republic, where there has been a real contraction in consumer spending now for about a year, this is actually a very solid result in our opinion. And all the more so, given that Mall is very focused on consumer discretionary selection. There are signs when we look at the things like visits or app downloads that Mall is actually holding its own within its own categories in terms of segment share, and that is very promising. The 3P GMV has been a cornerstone of this performance is up 30% and reaching 17% of the total GMV in the first quarter. On the other hand, we do see declines on the 1P side, plus better price competitiveness and investing in top seller availability is all contributing to pressure on margins. And that pressure is, obviously, then feeding through into the adjusted EBITDA results. On a like-for-like basis, the Mall segment lost PLN 53.4 million of adjusted EBITDA in Q1 down from 40 -- [ worth ] relative to PLN 40 million a year earlier. And in addition, PLN 16 million of the cost of the team from the Allegro organization from the Polish organization that has been working hard on the marketplace startup project has also been charged for the first time to the Mall segment. On the CapEx side, the number includes that PLN 10 million that I mentioned on the previous slide. And, as Roy pointed out earlier, there's quite a lot of significant restructuring projects going on within Mall, which are now starting to be completed and will be reflected in the numbers as we go forward. Moving onto the consolidated group, you see the key KPIs here on Slide 20. Obviously, the growth rates reflect the first time consolidation of Mall. And that inflated inflation -- inflated growth effect that you see, for example, in revenue growth of 66% will drop out of the numbers from Q2 onwards. The one area to comment on the consolidated numbers is, obviously, around leverage, which is on Slide 21. We made further progress in the first quarter with 7 basis points improvement down to 2.84x net debt in leverage. And this is -- this progress was achieved primarily because of the higher EBITDA in the Polish operations combined with the lower CapEx that I outlined earlier. Against that was a significant headwind that Roy referred to earlier, which is the seasonal outflow of cash to suppliers of the Mall business during the first quarter, where they settle up all the investment in inventory that was associated with the fourth quarter peak trading season. This is a one-off effect that we should expect each year in the retail business that we purchased. And it doesn't recur during the remaining 3 quarters of the year. So that leaves us very well placed to further improve our leverage situation during the remaining 3 quarters of the year. There's nothing new to report on the debt or on the hedging side in Q1. So, that takes me to the management outlook, which is laid out on Slide 23. And the first thing to highlight here is that, versus our expectations for Q1, the Q1 numbers that we report today have come in ahead of expectations across the board, all the metrics, basically in both the Polish operations and the Mall segment. And just to remind you, in accordance with the policy change that we made at the beginning of the year, the guidance that I'm about to go through now relates to 1 quarter ahead, so Q2 of '23. So starting with the Polish operations, the GMV may come in somewhat slower in terms of growth than we saw in Q1. We're expecting between 11% and 12% growth. And this is reflecting the ongoing deceleration in Polish consumer spending. However, this is still representing an absolute growth in the region of PLN 1.1 billion to PLN 1.2 billion more GMV than in Q1 of 2023. As usual, the revenue is expected to grow above GMV for the second quarter. And for the second quarter, we expect it to be in the 16% to 18% range due to the fast growth of advertising and the remaining impacts from the August '22 co-financing increase. It's important to note that we just announced the range of price increases that will be applicable to merchants from the 3rd of July and lift our take rate in the third quarter relative to the take rate comps that we have from the second half of '22. Roy went through those increases earlier. Adjusted EBITDA is expected to be up by 13% to 16% for the second quarter. Trading down is reducing the GMV per subsidized parcel, which is creating a drag on our costs of delivery. The growth rate also reflects the strong recovery in Q2 '22 relative to the 2 earlier quarters, which is raising the bar in terms of what it takes to deliver percentage growth. In absolute terms, this growth translates to PLN 620 million to PLN 640 million of EBITDA, which is around PLN 20 million to PLN 40 million more than in the first quarter. Our capital investment is expected to come down to PLN 110 million to PLN 120 million range, driven by the fit-to-grow projects by slower growth in development expenditure and still including some growth in the locker network. Important to note that the Polish teams working on the Mall country marketplace rollouts are being charged with the Mall segment as OpEx of development costs. Moving on to Mall, the Q2 guidance reflects the combined legacy Mall business and the initial trading results of the Allegro.cz marketplace. We'll be providing detail retrospectively in the actual results going forward. GMV declines for Q2 are expected to be in the 3% to 6% range, reflecting the ongoing shrinkage of real consumer spending and falling inflation in the Czech Republic, plus a weakening uplift from currency translation. This quarter-on-quarter deceleration obscures the positive impact from the first weeks of trading by Allegro.cz ahead of a potential acceleration of marketing and media spending in the near future. The mid-size that Mall is defending its share quite effectively, there is no denying that this is costing margin. Revenue is expected to be down by 8% to 11% faster than GMV due to the contraction of dominant legacy 1P sales. Adjusted EBITDA should land between PLN 110 million to PLN 120 million loss, including the cost of the Allegro.cz startup. Capital investment, including Allegro.cz development is expected to come in at around PLN 35 million to PLN 40 million. Consolidated guidance reflects the relative size of the 2 segments with Mall having an over-indexed impact on consolidated revenue due to the preponderance of 1P retail revenue in their GMV, but a much smaller impact on the other metrics in the Polish operations. So with those comments, I'd like to hand over to Michal and the operator to take us through the Q&A session. Thank you.

[Michal Kuzawinski, executive]

Thank you, Jon. And Yuta, we are ready to begin the Q&A session.

[Operator]

The first question comes from the line of Holbrook, Luke with Morgan Stanley.

[Luke Holbrook, analyst]

You laid out quite frankly the moderation in Polish retail data as we passed through February, March and April. Just wondering to hear a little bit on what you're seeing from consumers and the dynamics into April and May, in particular, and has that just worsened as we got through the quarter. And secondly, just on Mall Group, you described it really as a soft launch. Are you being a bit more cautious than you might otherwise have been a couple of months ago on scaling the business, given the wider Czech weakness? And then thirdly, you've described, I guess, Mall as the test ground and the playbook for which to try and expand into other geographies. Just wondering what we've got to expect, I guess, later this year or into next in terms of that.

[Roy Perticucci, executive]

Okay. So on the first question. Okay. On the first question, what I'd say is, overall, we've just seen and I think the statistics reflect that from March and April that overall in real terms, there has been a contraction of demand. And I wouldn't be surprised that we don't have a rapid recovery from this sort of added caution from Polish consumers, it means, fairly -- I think it's a trend throughout Central Europe and I think actually Poland has been the last of the countries to sort of show this behavior. I think the second question was referred to the -- to our soft launch. I would sort of say, the first thing about this is, there is no additional caution. This was always the plan. I think we've actually described use those words soft launch in repeated earlier presentations to this group. The fact of the matter is, this is something that is relatively new for us. And we want to be sure that we are super buttoned up on execution because there's only one chance to make a first impression. And that includes, does the website work properly? Are the prices listed properly? Are the translations, not only intelligible, but more or less is perceived by Czech customers as a natural language? Does the logistics work? And as I've mentioned, I think elsewhere there are some relatively innovative things that we've been doing in that category as well. So all of that stuff has to work well. And once we've understood that, one, it works well, and 2, the customers that are already shopping on our site are showing that they get us, if you will, because the marketplace is new for Czech customers. They are used to shopping on 1P sites, which means for every product there's one offer. And for us on our marketplace, it's a different shopping experience. And again, we want to make sure that that's flawless. So, no change to plan. No change in confidence, at least in our ability to execute. And the playbook I referred to is -- it's not so much, this is a playbook -- we are developing a playbook, to answer your third question, which is, typically, when you do something new it takes you longer to execute because you need to understand what all the pieces are, what sequence you need to do it, who needs to do it and how much it's going to cost, et cetera. And that's what we are writing down, if you will, now, so that when we move to the next launch, we can do that much more rapidly. So, without getting into specifics, because I don't actually say -- I don't think we've said when we want to go into -- or what -- even what sequence we want to go to in terms of the other countries in the CE-5. We do expect that we'll do the next one in a much shorter time period and probably the subsequent ones in a much faster succession. Now, I think the only caveat that, of course, is how many of those countries would we want to start servicing before peak. But otherwise, I think if the answer would be is, the better we get at introducing the marketplace to new countries, the faster we'll go.

[Luke Holbrook, analyst]

Okay. I understood. Yes. I wasn't quite clear on your first comment on trends into April and May. But yes, I'll let other analysts ask questions.

[Roy Perticucci, executive]

I don't know, can I answer him? It's like I don't think we should be overly optimistic that consumer demand in Poland is going to recover rapidly, and we're certainly not assuming that that's going to be the case. So I think if you plan for the worst and it gets better, then you're in a better position right away.

[Operator]

The next question comes from the line of Ross, Andrew with Barclays.

[Andrew Ross, analyst]

I've got 3. So, first one is follow up on Luke's question around current trading. So in the release, you talked around growing 11% to 12% in the quarter to date in Poland. Can you just clarify that? And did you see any acceleration in the back end of April and into May like your Polish peer had done? That would be helpful to understand. And, I guess, as part of that, you've moved SMART! week into May. What does that mean? The second question is on the commercial strategy for Mall Group. It looks as though you've launched with 0 commission to merchants and 0 fees on SMART! And therefore, I guess, if you start to spend more heavily on marketing at some point, it's possible you could lose quite a lot of money in sort of build-out phase. Can you just help us with the commercial strategy? And, I guess, maybe give us some comfort that the losses won't dramatically step up from here? And then the third question is on the balance sheet, whether there's anything new around, latest thinking around when a good moment to kind of refinance debt maybe given that there are quite a few maturities coming in 2025.

[Jonathan Eastick, executive]

Andrew. Thank you, Andrew for the questions. I'll take the first one regarding the current trading. What we've seen in the early part of the quarter as I was mentioning our current trading is between 2% and 3% decline compared to the 14% growth that we had in Q1. If we talk about May, basically May for us has been, as for everybody else, the first week was dominated by a long weekend which was basically 2 days off which turned in for many, many people into a 1-week holiday. And then of the remaining trading we've had the SMART! week, which as you mentioned, we moved into the second quarter. And that's actually gone very well. But given the nature of the aggressive promotion that we were doing, it's not a very useful read on the consumer sentiment overall, yes. So, basically, with the guidance we're being cautious on what will happen to the balance of the quarter based on what we've seen so far. In terms of things like our traffic share and everything like that, it's still holding up very well. We're actually growing our traffic where -- when you look at the statistics for the top 150, they have been reporting declines in the first quarter. That seems to be still the trend. So we're holding our own. But I repeat Roy's comments that we need to be cautious. On the financing, maybe I'll take that one whilst we're here. We are starting to think about the potential moves we can make around refinancing, but there's nothing concrete to report at this point in time. Obviously, we've got well over 2 years still before the refinancing debt.

[Operator]

Mr. Ross, are you done with your questions?

[Andrew Ross, analyst]

Sorry, the second quarter on...

[Roy Perticucci, executive]

Yes, the second question. No, I got it. I guess, I can probably to answer -- add on to it. So -- what? I'm already on. Yes. So I think the key thing here is, we're still in the learning phase. As I said before, we want to make sure that everything works. We're also, I think, increasingly disciplined about managing our advertising spend. We look very closely at return on investment. And we will dial up our advertising in above-the-line campaigns as we see the right responses from customers. And you're entirely right, it is, to some extent, a balancing act between driving trade without overspending and we're going to be managing that very, very, very tightly.

[Andrew Ross, analyst]

If I can just follow up on that? Is it right that for now you are charging 0 commission for merchants and 0 SMART! fees on Allegro.cz, so there is no monetization at all at this point?

[Jonathan Eastick, executive]

Yes, Andrew, that is correct. But it's for a limited period of time. So it's a typical launch strategy for a new market entry, so the merchants won't pay any fees during this early stage.

[Operator]

The next question comes from the line of Potyra, Michal with UBS.

[Michal Potyra, analyst]

I have 2 questions, please. The first one is about the impact of the pricing changes you will be implementing from July. So I wonder if you could perhaps help us to quantify the impact you expect from that. And also, maybe a little bit color, are you hearing any feedback from merchants? I guess, it's like a third or fourth round of increases. So I'm just wondering if there is any feedback or any impact from that. And also, within this question, I recall that last quarter you commented that it's quite unlikely that you'll be changing prices if I remember correctly. So I'm wondering what has changed that you have changed your mind. So that's the first question. Apologies, it's so long.

[Jonathan Eastick, executive]

Yes, thank you for those questions. So I'll take those. So regarding the increases, they kick in right at the beginning of July. So you'll see an impact, obviously, in the third quarter. We're not giving any specific guidance on what that impact will look like. But I can say, compared to the rates for Q3 and Q4 of 2022, it will be tens of basis points uplift relative to last year. I think there's enough information out there publicly that you can make a reasonable stab on how much. But we're not talking about whole percentage points increases, right, tens of basis points. Regarding feedback from merchants, we started co-financing for the first time if I recall back in beginning of '22 -- '21, back as early as 2021. So it's been a gradual process. In the meantime, we've added many merchants, many brands, much selection over time, and we'd expect that to continue. It's very important that the merchants are realistic, they understand the cost of delivery are going up. And these changes basically just put us back to the position that we were in the second half of last year before the increases from our largest delivery partners took the share that's covered by the merchants back down below 30%. These changes put it back to about 1/3 of the total costs being covered by the merchants. And the third part of the question was...

[Michal Potyra, analyst]

What made you change your minds about price increases?

[Jonathan Eastick, executive]

Right. Yes, I wouldn't say that we changed our minds, but what we did say was that we wanted to focus the organization on its own efficiency and roll out the fit-to-grow project, which, as you can see, is really embedded itself into the organization over the last 2 or 3 quarters. There is, obviously, a prospect still of increases in delivery costs while inflation stays high going forward, and we need to take that into some consideration. So that is the main motivation for some increases. And on the Allegro Pay side, we've been making really big investment, which is having a huge benefit in terms of the amount of GMV growth that the merchants are enjoying. So we think it is about the right moment now to introduce a small charge in consideration of that.

[Michal Potyra, analyst]

I mean, just the last part actually ties with my next and last question about Allegro Pay. Roy said, you see like fast opportunities to monetize that and grow going further. So if you perhaps can add a little more color on that? What could be the end product? What could be the further upside? How far can you go here?

[Roy Perticucci, executive]

So I think the main thing is, we don't like to pre-announce new products. We're working on a series of things that harness the fact that we have very high loyalty of our customers. We know our customers' behavior is probably better than most banks do frankly. And that we have the traffic, and the reason for extending credit or managing anything else. So, there are multiple aspects to any financial service. There's lending activity, which is most of what we've been doing, their payments and their deposits, and those are all areas that will, in the course of the next year, 2 or 3 years, be implementing. But watch this space, I think it's just obvious though that if you have a broad base of customers that frequently visit the site, there is an opportunity to extend other services over and above the marketplace stuff that we do right now.

[Michal Potyra, analyst]

Are there any companies which inspire you in this context?

[Roy Perticucci, executive]

Well, I think there are some really clear analogs in the market, right? So, hang a second, which I mentioned. Yes. So, I mean, I think a clear success story over multiple years is MercadoLibre. I would say, of course, that you have to keep in mind that Latin America is not Poland. Some of the things that MELI did made total sense in an under-banks set of economies that in an economy like Poland may not be quite as interesting. But overall, yes, I mean, I think they've been quite good at meeting needs of the consumers within the context of transaction, both on their side and out. And there's probably a lot of things there that we'd love to emulate reflecting the different trading conditions that we have in Poland versus Latin America.

[Operator]

The next question comes from the line of O'Neill, Catherine with Citi.

[Catherine O'Neill, analyst]

I've got a few questions. On Mall on the 2Q guidance for EBITDA, I just wondered if you could break out the impact of the 3P launch versus 1P losses as you did in the previous quarter. My other question on the Mall losses was just to get an understanding of whether 2Q losses are likely to be peak in terms of -- you will start monetizing Allegro.cz maybe as a marketing spend ramps up and therefore, and the losses shouldn't expect much further. Again on Mall, I just wanted to understand, do you -- the net costs of delivery for Mall where you're delivering into Czechia from Poland. Just wondered if you could give a sense of how that compares to the costs per delivery in Poland on that sort of unit cost basis or even on a relative basis. And the Poland, I think in the 4Q results call, you talked about net cost delivery being moderately higher as a percentage of GMV this year. Is that something you are still expecting to see? Or does the high transaction volume -- I mean, that actually could be slightly higher than you'd expected?

[Jonathan Eastick, executive]

Yes. Thank you very much for those questions. So let me take the first couple regarding Mall. When we report the second quarter, we will be providing segment information in the financial statements that will also reflect in the presentation to give you a detailed split between what's coming from the marketplace performance, on the one hand, and the legacy Mall business on the other. So we're not making that split in the context of guidance or our expectations, but we will provide it to you retrospectively, so that you'll be able to track. Regarding the monetization, it's a limited period promotion for the merchants that they are basically getting a 0 commission to help us through this soft launch phase, where we're testing everything, as Roy was explaining. The charges will start to come in later after a few months. And that will, obviously, give us some offset to increase marketing spending when we decide that everything is ready for a full-on launch. Cost of delivery, Roy, you want to comment on that?

[Roy Perticucci, executive]

Yes, I think if you think about it, we're running a typical injection operation, where over that past this initial run-in phase, we'll be collecting packages from merchants here in Poland and then line hauling them to our sortation operations in Czech Republic. So the incremental cost is really predominantly the cost of an additional sort in line haul, so we should be able to contain the costs, I think, quite well that way.

[Jonathan Eastick, executive]

And then the final question regarding cost of delivery in the Polish business, we're very happy actually to see the strong reliance that the consumers are placing on Allegro in these difficult times. And therefore, our growth seems to be outpacing really the segment generally. But, obviously, that does come with higher transaction volumes. And it is somewhat ahead of what we were expecting. And therefore, the average GMV that we're earning per package is a bit lower than we were expecting. So in that context, obviously, it is a bit of a drag on our margin development going into the remainder of the year.

[Operator]

Ladies and gentlemen, there are no further audio questions at this time. I will now give the floor to Mr. Kuzawinski for any questions from our webcast participants.

[Michal Kuzawinski, executive]

We indeed have a number of questions from the webcast participants. Let's start with Cesar Tiron from Bank of America. First question, is the Mall launch going as planned? Or is it slower and more capital-intensive than planned? The second question is about the definition of the soft launch in a Mall. And if we say that this is soft, why the losses are going to be so high in the Mall segment in the second quarter? And then the final question about the net cost of delivery in Poland, how big a share will merchants cover after the increases that we planned since the third quarter?

[Jonathan Eastick, executive]

Okay. So thanks for those questions. So starting with the soft launch, as Roy already said, this was always the game plan, right, is to learn through actually working with real consumers to understand how they receive the website, how they convert repeat purchases, things like this, which are really quite critical input into deciding how when we do the hard launch, how hard we push in terms of traffic acquisition and consumer acquisition, yes. So that's the key input and we don't know the answer to that question until we've collected data over a period of time. We're only 2 weeks into that launch phase. So that's what the soft -- that's what we mean by the soft launch. In terms of capital intensity, I think the way that we're booking the capital investment is quite instructive -- should be quite instructive for you. And that, we did book some CapEx in Q4 and again in Q1 related to the cost of taking our international platform, which we took the Polish platform and made it multi-country compatible during the course of 2021 and launching Allegro.eu commercial website at the beginning of 2022. Since then, the money that we spend on specifically preparing the Czech version. So that means the translation, all the integrations that we've done around payments and delivery, for example, all of that accumulated to around about PLN 30 million of development expenditure. Now, when you consider that's giving us access to an additional 10 million consumers for the marketplace, I think that's a pretty impressively low number in terms of CapEx spend, right? And that's one of the reasons why we were so excited about the international expansion and the potential of our software platform to go international. And the third part...

[Michal Kuzawinski, executive]

The question about the merchant share and the cost of delivery.

[Jonathan Eastick, executive]

Right. Okay. Yes, I did lose that I think earlier. So after the changes come in on the 1st of July, we'll basically be back to approximately 1/3 of the costs being covered by the merchants. This is roughly where it was in August of last year when we made the increases. And we made those increases in anticipation of the fact that there would be higher delivery costs coming in later in the year, particularly in Q4 last year. After those increases happened, our -- the coverage from the merchants have dipped back below 30%, right? So, in Q1, we're basically recovering less than 30% of the delivery costs from the merchants. In Q3, we'll be back to 1/3.

[Michal Kuzawinski, executive]

Question from Piotr Lopaciuk, PKO BP. The second quarter outlook for Mall includes reclassification of costs from Polish operations just as in Q1.

[Jonathan Eastick, executive]

Sorry, I was just trying to catch the question clearly. Yes. So the guidance for Q2 includes both the cost of the team that is running the projects on the Polish side, so that is a continuation of the sort of number that you see from Q1. The composition of the team may change over time depending on what the roles are. But there will be a spend on the Polish side of the organization that will get recharged to that segment. Then, obviously, the direct costs as we start to build GMV, will also start to appear in the results. And we've allowed for that in our guidance for Q2. And as was pointed out by Andrew earlier with his question, in the short run, there won't be much revenue generation because of the commission-free period that we've given to the merchants, but the revenues will start to build once those periods run off.

[Michal Kuzawinski, executive]

Two questions from Alexey Philippov from JPMorgan. In the first question, Alexey is asking about the drivers of the net cost of delivery in the -- from the second quarter through the remainder of the year in terms of the impact of the delivery channel mix, rollover in SMART! subscriptions, and indexation.

[Jonathan Eastick, executive]

Yes. So I think the short answer to that is basically, you just need to map out those impacts and the continuation of the trend. So if we start with courier, as we're basically half of the SMART! base being on the new rates as at the end of Q1, the other half will roll on to those new rates by November, which was what the anniversary of when the rates were changed. And that should continue to reduce the courier share relative to the out-of-home share. There will be some inflationary increases coming. We're always in discussions with our delivery partners and we know that they need to make money, too, and some of their costs are going up. What the outlook is for that, it's hard to say. Those negotiations are ongoing. And thankfully, fuel costs are actually not rising anymore, they're actually falling in Poland, which may help us in terms of those negotiations. But you need to factor in that unit cost will be moving up during the course of the year.

[Michal Kuzawinski, executive]

And the second question from Alexey is about the strong gross margin in the Polish business -- in the Polish 1P business in the first quarter. What are the reasons for that strong margin?

[Jonathan Eastick, executive]

Right. Yes, so you may not have noticed, but in the fourth quarter, we made an adjustment to our accounting classification of certain expenses between cost of sales in the 1P business, and net cost of delivery. And this was something that our auditors rightly pointed out to us wasn't really being done in a consistent way. It was about PLN 20 million that was recognized in the fourth quarter as additional cost -- net cost of delivery. And what it relates to is the subsidies received by SMART! customers for free delivery when they happen to make a purchase from our 1P shop rather than from one of the 130,000 merchants that we have on the website. So those costs are now being treated, just like any other SMART! transaction, as a cost of meeting the contracts with the SMART! consumers rather than as part of the cost -- the operating cost of the 1P merchants. Hopefully, that explains it. So -- because we may -- we didn't retrospectively book that change quarter-by-quarter, it means, you can see a visible difference when you compare Q1 to Q1 in the margin. The IR team will be willing to explain that in more detail if you want to have a second go at it.

[Michal Kuzawinski, executive]

And a question from Harry Whelpton from Vergent. How much of the growth in GMV is coming from pricing versus volumes?

[Jonathan Eastick, executive]

How much of the growth in GMV from pricing? Right. So, yes, I was trying to give a flavor of that during the presentation. So in Q1 relative to Q4, the transaction growth rate has moved up quite significantly. And obviously, because the total GMV growth is still 14%, the inflationary part has moved down by an equal amount, which is why it nets out to the 14%. Now, the inflationary part is not so much that the prices are lower, but it's reflecting the trading down that consumers are doing. So buying a cheaper product that meets their needs relative to what they might have done previously. And it's also reflecting some of the more expensive items, which are more discretionary in nature, people just foregoing buying those, but they are spending on Allegro on more everyday products, which is why the transaction volumes are going up.

[Michal Kuzawinski, executive]

Konrad Musial from Pekao asks to clarify whether the planned increases in the co-financing are there to cover the indexation increases from 2022? Are those which are to be implemented in 2023?

[Jonathan Eastick, executive]

Yes, I mean, that's a little bit of chicken and the egg type of way of looking at the situation. I mean, over a 12-month period, in an inflationary environment, the costs are moving up. The timing of when we make changes to the rate card is much more focused on what's good for the merchants in the sense of being able to plan. We don't like to make changes in the fourth quarter, because that's the most important quarter for the merchants. So we tend to make them in the middle of the year. We're taking into account our cost structure and the evolution of the cost structure in making the decision, yes. But it's not that it's any -- particularly last year's increase or the increase is still to come, which is driving the change.

[Michal Kuzawinski, executive]

Konrad is also asking about the reason for the difference between the adjusted EBITDA guidance for Q1 and the actual performance.

[Jonathan Eastick, executive]

Yes, that's a good question as well. Obviously, we were quite late in the quarter when we reported the full results for 2022. So it's a very fair question. Basically, we -- in drawing up our expectations, we are obviously introducing an element of caution. We prefer to be on our numbers or above. In the closing process of the quarter, basically, everything went favorably. There were no negative surprises. And in particular, the fit-to-grow program, as well as the top down initiatives that we were tracking, the behavior of the employees as well surprised to the upside in terms of them from the bottom up, also being cautious on spending. So, costs came in quite a bit lower than we'd anticipated. And additional to that, advertising also was really outperforming quite strongly and over delivered in March. And obviously, the margins on advertising are very high, so that dropped through to the bottom line.

[Michal Kuzawinski, executive]

Now a question from Jorge from WhiteOak. Amazon launched back in March '21, any comments on how the competitive environment has evolved since then? How would you compare your value proposition to consumers versus Amazon?

[Roy Perticucci, executive]

It's been -- I think there has been no recent developments. I think there have been a couple of entrants and at least 1 exit. And overall, it doesn't appear to affect our trading in any way that we really have been able to notice. So I think that's the key thing.

[Jonathan Eastick, executive]

We continue to do exactly the same monitoring of Amazon's performance that we introduced when they first launched 2 years ago. We still look on a weekly basis on various metrics that we're able to gather from various sources. And just to reiterate Roy's point, I mean, we're not really seeing any significant change in trends, right? So, nothing new really.

[Michal Kuzawinski, executive]

We have questions from Sebastian Patulea from Jefferies. Can you please discuss how long will the 0% commission to merchants in Czechia last? Can you please also discuss the trends in the SMART! program in Czechia? And can you please give any indication of the trends, how you're perceived by Czech consumers?

[Roy Perticucci, executive]

The trends in the Mall -- sort of in the SMART! program, trends -- when are we going to charge merchants and what was other one? Trends in customer perception. Yes. That's kind of new. All right. So let me see if I can go through these one by one. So I think overall instead of in terms of how long this free period goes for merchants listing in the Czech marketplace. As Jon has already said, this is an initial offer as we are ramping up our operations in the Czech Republic and at some point we will actually end that because it's a limited time offer. In terms of the reception, it's still extremely early days. This is the second week of operations. We haven't launched or begun any above-the-line advertising and we've also been limiting the amount of PPC that we've been spending as we're actually running in the operation as a whole. And I think that -- so therefore -- I mean, I think it's clear that, as it's -- in our very first weeks, it's very difficult to sort of say what the reception is going to be or what the reception has been up to now. And there was a third question. I missed the third question. The trends in the SMART! program. I think, our overall -- first of all, as I mentioned in my talk that we already have 400,000 SMART! members who joined as part of the early adoption program off the Mall and CZC websites. And those are customers, I think, who are going to be most inclined also to use the SMART! program also on Allegro.cz. And we're expecting that participation will continue to grow in what must be one of the largest loyalty programs in the Czech Republic. So...

[Michal Kuzawinski, executive]

Thank you. I can see there are no further questions.