Allegro.eu SA

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Earnings Call Transcript 2022-Q3

[Operator]

Ladies and gentlemen, thank you for standing by. I am Gelly, your Chorus Call operator. Welcome, and thank you for joining Allegro.eu earnings call and my webcast to present and discuss the third quarter 2022 financial results. [Operator Instructions] And the conference is being recorded. [Operator Instructions]

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, Gelly, and a warm welcome to everybody who joined us on this earnings call. My name is Michal Kuzawinski, and I'm Head of Investor Relations. It's my pleasure to have with us here today, our CEO, Roy Perticucci, who will talk to you about our priorities and quarterly business highlights. And our CFO, Jon Eastick, who will talk in more detail about financials and outlook.

As always, you can download a copy of the presentation from our web page at allegro.eu. As a reminder, today's presentation contains forward-looking statements. Our actual results could differ materially from the plans expressed in such statements. Please review the full disclaimer on Slide 2. This call is being recorded and will be available for a replay on our website at allegro.eu.

And with that, let me now hand over to Roy.

[Roy Perticucci, executive]

Thanks very much, Michal. I'm thrilled to be with you again today. As most of you will probably remember, I introduced myself and our 7 priorities briefly in the last quarterly presentation, but this is the first time that I'll be able to fully participate in the earnings call.

Move on to the next slide. There we go. Whilst there are reasons to not -- to be not entirely satisfied with the results, we are positive about our Q3 performance. As you can see, we delivered strong results in the quarter with Polish GMV accelerating to over 21% year-on-year, up from 16% during the last quarter. Consolidated GMV included mall growing by 30.4%.

We've returned to positive year-on-year adjusted EBITDA growth for the first time in a year and that grew even faster than GMV at nearly 25%. Key contributions were the latest changes of take rate, and a growing stream of high-margin advertising business moves.

Consolidated EBITDA included Mall -- sorry, consolidated EBITDA, including Mall, grew by 13.9% year-on-year compared to 13.5% decline in the previous quarter. So that was a considerable swing.

I've just given you the headline numbers, but I can assure you that these positive trends where we've replicated across each of our shopping categories. It just underlines the resilience of Allegro's every day shopping selection at attractive prices.

Probably the most important trend I want to mention is that our active buyers grew by 3% in the last 12 months. That percent may seem small, but it reflects our scale in Poland. In absolute terms, we've added just over 400 new customers, half of these in the last quarter. We're also seeing an increasing annual spend per buyer, an indication of growing loyalty of shoppers as the cost of living rises. And overall, I think that's an impressive result given the economic backdrop. That's quite different from the trading situation that many of the competitors are facing.

We also to continue to note excellent performance of Allegro Pay, which grew lending by over 2.5x, while keeping extremely high customer satisfaction rates of really an unbelievably high 95. Unfortunately, we're also facing some challenges, and John will explain some of these later as we had to recognize an impairment of mall assets to bring down its value by PLN 2.3 billion. Seen in retrospect, it's clear that we paid over the odds but it does meet our strategic aim of building a bridgehead into the rest of Central Europe. So this doesn't diminish our intentions to achieve a leading marketplace status in Central Europe nor does it diminish our intentions to turn around Malls 1P business.

Next slide. So the last time we were here together, I introduced to you our 7 priorities. These have been produced by our executive team and agreed with the Board. What I can do today is to assure you that the entire organization is working towards these 7 agreed goals. I'm going to take you through these one by one. But before I do, I should say, again, I remind you again that we have 3 main growth priorities that are funded by work on 3 priorities of cost improvement. And of course, the whole strategy is underpinned by some work on people and culture.

I touch on our first priority, probably our largest 1 is to continue to be strong in Poland. Poland still represents about 90% of our business and we need to make sure that we continue to maintain share in those categories where we're already quite strong. However, what it also means is getting traction in ones that currently are underpenetrated. These are categories, specifically like health and beauty, fashion and ambient grocery. These categories making up 1/3 of our total -- 1/3 of our total growth, but only 1/5 of our total revenue.

So we know that we need to grow by attracting new merchants to our platform. And to do that, we need to direct the same passion that we already feel for customers towards improving the merchant experience.

Let me take you through some of the achievements for the quarter. We've made good progress in selection where our customers can now choose from over 260 million active offers. Q3 also saw us making further improvements in productization, which enables customers to shop by product rather than offers, and this capability is going to be especially important as we launch in the marketplace for Czechia customers.

We've also made great progress in removing duplicated offers and improve findability and search functionalities, generally improving the overall user experience.

In the last quarter alone, we onboarded 3 -- 30 new key brands, and they include Triumph, Cody, Porsche and Iveco spare parts as well as leading toy producers such as HABA and Tomi.

In terms of price competition or price competitiveness, we think that we're particularly strong during these times. We know that it's important to focus on price and we tried to be -- remain price competitive and we believe this is 1 of our key strengths. 9 out of 10 of what we call top selection have -- we have the strongest price in the market. And this helps customers save money and that's exactly how they see us. Based on our survey of 1,600 customers, the most commonly cited reasons for shopping at Allegro, are promotions, discounts and attractive prices. And of course, that's followed up by convenient online shopping.

Convenience in terms -- is not only in terms of the most obvious things, it also includes aspects such as trust. And for this reason, we have upgraded our buyer's protection plan in covered -- in coverage terms, we've extended coverage from 6 months to 2 years. and doubled up the coverage to PLN 20,000. We've also launched a new machine learning backed version of contact form that now enables customers to resolve the problems within seconds using bots in over 40% of cases.

Advertising is another key area, and we're particularly happy to see that our advertising business is growing faster than GMV, with ad revenues up by 30% year-on-year. In terms of share of GMV, advertising revenue grew by 1.2%, up from 1.1% a year ago. And clearly, we have much more to achieve in this ambitious area.

Moving on to our second and third priorities, having fully committed ourselves to the Mall acquisition, we want to make sure that we successfully launched the marketplace business in both Czechia and Slovakia, and over the course of the next year, we'll need to convince check and later slow back customers of the attractiveness of shopping on an online marketplace.

We're currently running what's called the friends and family testing, and we are working all the way through the value chain. This includes testing that customers are able to select from the product catalog and receive deliveries from Poland and use local payment methods. It looks like we're on track to launch the marketplace later next year.

Allegro Pay is another strong highlight. We've had another good quarter with new lending and client onboarding progressing at very high rates. And of course, customers are enjoying those fabulous NPS scores that I mentioned earlier. We continue to -- our successful cooperation with AION Bank, which allows us to scale up our fintech offering while reducing working capital requirements that drive that growth. We move on to the cost side of things, the funding of our growth and touch on first, both smart and the delivery experience. The last time I was here, I mentioned that we needed to rebalance the economics of SMART!. And of course, we have now done that. Just recently, a few years ago, as we informed customers about the increase of subscription fee from PLN 59.90 up from PLN 49. And this is the first price increase since we launched the product over 4 years ago.

We've also split the MOV again moved it to PLN 45 for lockers and PLN 65 for home delivery, that's up from PLN 40 for both until the change. Over time, these ought to drive an improvement in delivery mix moving to less expensive shipping methods. And of course, unfortunately, it will take us some time to drive this change through as customers renew their annual membership.

Meanwhile, in August, we had also changed delivery co-finance to share the cost of delivery more evenly between ourselves and the SMART! program merchants, and we expect to maintain a constant contribution of our respective sides over the next year.

In terms of delivery, we continue to make progress in delivery speed with a share of next-day deliveries up by another 2 percentage points. And we continue to expand our coverage of 1 box lockers is paying special attention to the returns that each new location should give us. The Mall 1P turnaround is gathering steam I'm very happy to announce that we were able to appoint a new director of the Mall business, [ Jean Charter ], who joined us just a few weeks ago, 7th of November. Jean brings a -- Jean brings a long retail history with him also in Czechia, and we're quite pleased that you'll be leading the charge.

In Q3, we made significant progress in top sellers availability and price competitiveness which supported the Q3 GMV recovery with Mall GMV up by 6.5% year-on-year in the quarter versus a negative 6% in the previous quarter. Of course, we're also working on improving inventory turns and driving down aged stock to improve cash flow. Probably the thing I'm most pleased about is that we launched the Smart Service for Czechia customers right in time for Black week last Thursday. And that ought to help us grow not only business growth in the short term, but also help us in identifying key customers to aid in the transition to the marketplace.

Last but not least on this slide, we want to be Fit to Grow. And we want to achieve this by 3 main things. First of all, we want to create a single organization that operates well across 6 countries. We want to make sure that talent is deployed as productively and as clearly as possible within this post-merger structure, and we're looking for synergies.

Secondly, this is something I think I emphasized last time we need to be disciplined with our expense policies and our capital investment decisions. And I think the opportunities in this area should be quite obvious since we already talked about them, but we continue to make progress in this area. Lastly, we need to prioritize projects, particularly given the fact that our cost of money has markedly increased over the last year and we continue to evaluate our project portfolio, both in terms of return on investment and realization risk. And that means we're deciding which projects we want to stop and which ones we want to double down on. So let me hand over now to Jon, who will take you through the financials. I'll be back with you to participate in the questions-and-answer session.

[Jonathan Eastick, executive]

Thank you very much, Roy, and good morning, everybody. Thank you for joining us, and it's going to be my pleasure to take you through the third quarter results and comment on our expectations for the balance of the year later in the presentation. .

I will kick off with the Polish operations. And looking at Slide 11, you have here for your convenience, all the key KPIs laid out. And just a quick reminder that the Polish operations are backwardly fully comparable with the business as it looked prior to the Mall acquisition in 2021.

So first of all, moving on to Slide 12. Let's look at the key components of our GMV growth, the active buyers and the spend per buyer. And starting with the active buyers. As Roy mentioned, we've had a very good quarter. 226,000 customers added brings us to a new record of 13.8 million customers active on the Marketplace platform, 1.7% growth just in the quarter alone.

Few things behind this. I think, first of all, the noise that we have in the trends from the COVID lockdowns of 2020 and 2021 are now pretty much behind us, and we start to see an underlying trend emerging again. And secondly, we've been investing very methodically in removing issues, which our potential customers flag as reasons why they're not particularly keen on Allegro, notably findability and questions of trust over the marketplace. We've been working very hard on these areas, and we've also been working hard on communication that, in fact, we're really very good in both of those areas. And it really starts to come through, we think, in terms of the new buyer growth.

Looking at spend per buyer. This trend, it has for many, many quarters been the main driver of growth and the third quarter is no exception. We moved on another 2.9% to PLN 3,449 spend annually per average buyer. and that's really quite a phenomenal performance. It's up 13.3% on a year-on-year basis. And this really reflects the different ways we engage the customers like the SMART! program, more recently, Allegro Pay and obviously, our relentless focus on the retail basics and in particular, pricing and selection.

Moving on to the next slide then and putting those 2 KPIs together. We saw the expected acceleration that we were looking for in the third quarter with GMV growth moving on to 21.4% year-on-year growth, that's 5.4 percentage points faster than in the second quarter and delivered PLN 12 billion GMV figure for the Polish business. That 5.4 percentage points of incremental growth is split quite evenly between year-on-year transaction growth, so the actual volumes of business going through the marketplace. And on the other hand, the impact of core inflation, which is continuing to go up month-to-month in the Polish market and is obviously feeding through into the prices that the merchants are quoting to the consumers.

It's also worth mentioning eBilet which contributed nearly 0.5 point to the growth rate. Obviously, it's a much smaller business that specializes in concert tickets and event tickets. This business has rebounded incredibly well from the lockdowns that throttled it for a long period in 2020 and 2021. And it's almost store -- is actually back to the levels that it was seeing in 2019. So that is a really strong performance.

Talking then about current trading in the fourth quarter. October was very similar to the third quarter growing above 20%. But we are now starting to see some slowdown in growth rates as we anticipated and as we were talking about on our previous earnings call back in September, we are seeing some slowdown in growth rates at this point in time. And it's also the case that the World Cup, which unusually is now in the -- happening in the fourth quarter rather than in the summer is also having some impact on engagement of shoppers. We do think that some of those effects will unwind over the remainder of the year and into the pre-Christmas period.

So moving on to the revenue, which is on Slide 14, and here, you see revenue growing faster than GMV by about 10 percentage points, up 31.9% to PLN 1,627 million for the quarter. That growth is underpinned by 30% growth in the marketplace with the booster coming from the increase in take rates, but also good contributions from advertising at 30.5% and our retail business has grown by 60.5%, although it's still only 1% of our total GMV.

And finally, it's worth to mention that our price comparison business produce some decent growth figures in the third quarter as well after a few quarters of difficult trends.

Looking at the take rate. The take rate moved on to 11.05% in the third quarter. The main change was the introduction of another increase in cofinancing in -- from the beginning of August. This takes the average take compared -- from merchants to fund the SMART! program to about 30% of the total cost of delivery. And this was done in anticipation of the increases in unit prices that we're paying to our delivery partners as a result of the indexation that we have in their contracts. And those increases kick in from November. So you don't see them in the third quarter results, you will see them in the fourth quarter.

Moving on then to the adjusted EBITDA, which grew again in line with our expectations, accelerating significantly as we move into the second half of the year. It grew by 24.6% to PLN 587.6 million level for the third quarter. And looking at the bridge, obviously, you have the -- on the left-hand side, the new sources of revenue in the first 2 captions. But looking more on where we've invested the money, first of all, the net cost of delivery are up by PLN 134 million year-on-year. And that's coming really from 2 things. Obviously, 1 is the increase in SMART! penetration year-on-year. The second key factor are the MOV changes that we made September of 2021. So we're still lapping those changes in most of the third quarter. And that, as you know, led to a bigger share of courier in our in our customer -- in our cost mix, up by 13 percentage points on a year-on-year basis.

We'll be lapping those effects in the fourth quarter and the changes that Roy mentioned to the SMART! program should dial back somewhat the share of courier over the course of 2023. It's also worth noting that our other SG&A expenses, while still growing are growing more slowly than they had done earlier in the year. In particular, we've made a lot of progress in stabilizing the staffing. We're happy with the size of the organization. We're focusing on prioritization now and Fit to Grow, as Roy was mentioning. We've only added 4.6% of new staff during the last 6 months and it continues to slow. And we have all the positive impacts that we're expecting from the Fit to Grow program to come through the numbers over the next few quarters.

Moving on to the next slide and the capital investment. Capital investment is also slowing. It was down to 10% as a percentage of revenue in the third quarter. And this reflects a few drivers. First of all, by slowing the growth in the development team, we have less hours to capitalize in development projects. So that trend is slowing. Secondly, we've been investing quite heavily in leasehold improvements to prepare our new offices, which have now all come online. And that -- therefore, that investment will be rolling out of the numbers in the upcoming quarters.

Lastly, the lockers that we need for our 2022 rollout program, you'll recall that we've been targeting 3,000 lockers by the end of this year. Most of those lockers are already in inventory here in Poland as of the end of September. So the capital investment cost in the fourth quarter will also be lower.

Moving on. That's the end of the Polish update. Moving on to Slide 17. You have here the key KPIs from the Mall segment. We've managed to add pro forma comparatives for all of these key KPIs. So you can look at those as we go through the material.

If we go to Slide 18 we're very happy with 1 key thing around the Mall 1P business in the third quarter, and that's that we managed to stabilize the situation and slow the decline in EBITDA as I'll come to in a second. How do we do that? First of all, we managed to move from a 6% decline in GMV in the second quarter to turn that around to a 6.5% increase in GMV in the third quarter through focusing on retail basics, through increasing selection and focusing on price, in particular.

More importantly, in fact, we managed to do that without deteriorating the margin any further. The margin was stable at 11.9%, the same as in Q2. And all of that, therefore, then fed through into a better performance on the bottom line in adjusted EBITDA. We cut the loss by 25% from PLN 67 million in Q2 to PLN 50 million in Q3.

So then let's move on to look at the consolidated group. And here, you see higher growth rates then for the Polish business, obviously, because we're consolidating Mall for the very first time this year. So it lifts the growth rates on the various KPIs, but more importantly here, obviously, we did make the decision this quarter to take a noncash impairment adjustment to our goodwill value for the Mall segment in the amount of PLN 2.3 billion.

We reached this conclusion that we see signs of impairment a few weeks back earlier in the quarter, and we performed an impairment test that our Board accepted on Monday and this resulted in finalizing the amount of the impairment, and we've included it in our financial statements. I'll come back to this in a moment to explain a little bit more what's behind the adjustment itself.

Before I do that, let's just quickly take a look at the leverage situation for the group on Slide 20. The key thing here is that we started to -- on our journey to bring the leverage back down from the peak that we achieved a 3.5x when we acquired the Mall business earlier in the year. We brought that down now to 3.44x EBITDA, and that's coming from 2 main drivers in the quarter. One is the acceleration of the EBITDA coming off of the Polish business. Secondly, we've had a good quarter in terms of selling receivables from Allegro Pay to AION, which is also helping on the cash on the balance sheet.

It's worth also noting that the PLN 1 billion bridge loan that we had due in 2023 at the end of the previous quarter has now been refinanced and becomes part of our senior debt facilities which expire in 2025 in October, which obviously gives us considerable more flexibility in terms of cash flow and liquidity.

So then moving on to Slide 21 and a net profit bridge for the consolidated business. Obviously, the main topic here is the cash impairment charge. The main learning here, obviously, is that whilst we negotiated the transaction in the middle and towards the end of 2021 and agreed the final price and signed the contract in November of 2021. We did pay -- we do recognize as a management team that we paid a full price for this asset because we -- from a strategic perspective, it's extremely important to us to unlock our potential to take Allegro outside of the Polish market.

On the other hand, in retrospect, it's very clear now that we were doing that transaction at the top of the cycle. And in the meantime, over the last 12 months, we see that most listed peers are down between 50% and 70% in the e-commerce segment. And in particular, businesses with negative free cash flow are in the bottom part of that range.

So with that in mind, we decided that we needed to update our valuation of the project and perform an impairment test. The key change in the results of that test is that the cost of capital has gone up considerably over the last 12 months. And secondly, the Mall business itself, because of the economic situation in the Czech Republic has started to quite considerably underperform our original expectations, creating some significant negative free cash flows that weren't factored into the original business case.

So when you combine negative free cash flows in the short term with the free cash flows we expect to generate from deploying the Allegro marketplace, as Roy was describing earlier from 2023, those are multiyear consistently growing cash flows, which obviously when you use a higher discount rate do not have nearly the same value as they had a year ago in different economic circumstances.

So putting all that together, we got to this PLN 2.3 billion reduction from a carrying value of PLN 4.1 billion prior to the impairment on our balance sheet. Now together with Roy and the Board, we decided that it makes sense to recognize these issues emphatically and allow the team to focus on the future. The project remains the key building block for the rollout of our international 3P platform. And when it's successful, it will provide us with the business model and playbook with both 3P and 1P capabilities that we need to advance confidently into further new markets in the future. Accordingly, we stayed focused on 2 of the 7 priorities that address the Mall project, and we move forward from this setback.

So finally, let me talk about our expectations for the remainder of the year. The short answer or the short conclusion here is that the expectations remain unchanged from the update we did back in -- at the end of September. If we talk about the Polish business, the slowdown in growth that I was mentioning earlier in my comments on current trading was something that we anticipated and had factored in targeting the 15% to 17% year-on-year growth for GMV. So we feel we're tracking towards that, and there's no need for any changes in our guidance.

When it comes to the Mall business, we recognize that we really need to focus on stable GMV, stable active buyers and highly engaged active buyers because those buyers will be critical to activating the use of the Allegro.cz marketplace when we deploy it next year. We need to take those active buyers from Mall, migrate them on to using the Allegro.cz marketplace and encourage them to start shopping there, taking advantage of all the massive USPs that our marketplace experience provides. So we're focused on that rather than on the adjusted EBITDA. We've made initiatives like the launch of Mall SMART! as Roy was outlining. And that means that in terms of the adjusted EBITDA and the guidance overall, we're probably going to be towards the lower end of the mall range, but still within the range.

So with those comments, I'm going to pass it back to Michal, who will lead us through the Q&A.

[Michal Kuzawinski, executive]

Thank you, Jon. And Gelly, we are ready for Q&A.

[Operator]

[Operator Instructions] The first question is from the line of Yang Lisa with Goldman Sachs.

[Lisa Yang, analyst]

Firstly, I think just a question on the pricing increase from your delivery partners. I think it's well known that the InPost raise prices by 12% for the 1st November. Could you maybe comment on the price increase you're seeing from the 2 door delivery partners? And that 9% increase in delivery of per unit, how do you expect that basically to evolve over 2023?

The second question actually is also related to the delivery cost. So if you think about 2023, I think there obviously increase in delivery cost will be a headwind. I'm just wondering how comfortable are you that you'll be able to offset most if not all of that increase in delivery costs. I mean if you can maybe talk about the levers you have in the business to do that, that would be great.

And third question, I think you mentioned you're seeing some though in November. Would you be able to quantify the pace of growth in November? I think InPost said they were growing so low teens versus 25%. That's obviously on volume. Is it the same magnitude in terms of slowdown that you're seeing in November?

[Roy Perticucci, executive]

All right. So I'm going to answer the first 2 questions, and I may pass on to Jon, the last one. So first of all, I think the thing that we sometimes lose track of is just how much our suppliers' costs have gone up in the last year. I mean a lot explained, particularly in the speaking world on the war in Ukraine. But actually, I think derve prices were already up at the start of the war by something like 50%. And those costs continue to go -- continue to rise.

And First of all, I think philosophically, I think Allegro understands that our suppliers need to make money. And that when their input prices rise, they're going to actually have to pass at least some portion of those prices on to us. And I think the same thing goes for us. So I think we were able to anticipate some of the rate increases with some of the take rate changes that we made in August. And that helped us, I think, in the results in the last quarter. And now we're actually seeing those -- the rate increases from InPost in particular, sort of move effect -- affect our cost structure. But I think it's fair to say that in an environment where inflation is floating right around 20%, we're all going to have to pass on our costs because our costs are going up and the purpose of business is to make money.

So high inflation, high inflation, and I would call 20% inflation high or 17%, I think, to be more precise, means that all of our cost structures will continue to move as our import prices increase. The second bit is, my personal view at least is that the longest lever of the rate changes that we had to our SMART! offer in Poland was the minimum order value change because I think 1 bit, which is under our remit to control is the shipping mix. And of course, having the same minimum order value between home delivery and blockers encourage people to take home delivery, which is a much higher delivery method, the higher cost delivery method. And I think the shift that you've seen now to PLN 45 and PLN 65 moves the mix towards, I think, more cost efficient and frankly, also more environmentally friendly ways of getting parcels to customers.

So -- and that will take a while to move through as things go on. And I won't sort of read the tea leaves in terms of what our other carriers are going to do in terms of rate hikes. But we have a fairly predictable contract renewal schedule, and I expect each time when those contracts get changed, it will involve in this environment, an increase in costs. And of course, what we'll be doing is to do our best to shift between methods to take advantage of whatever is most cost effective at the time.

Shall I pass on to you, Jon?

[Jonathan Eastick, executive]

Yes. Thank you, Roy. Yes. The final question was about the growth dynamics that we're seeing at the moment. I don't want to be absolutely specific about the level of growth, but -- in November, it did come down quite significantly in comparison to the growth rates we've been seeing over the last 4 or 5 months. So given that the fourth quarter has got a huge discretionary component in the spending, we were concerned as we came into the fourth quarter that -- so we might really start to see the impact of the cost of living crisis on the wallets of the consumers.

So we are seeing some of that coming through the numbers. The last 10 days or so, we've also seen the World Cup being in the fourth quarter for the first time in history. And that's also clearly having some impact, at least at the moment on the Polish consumer and how much of their time they're focusing on their shopping.

So we do think that things will pick up between now and Christmas, because at the end of the day, shopping needs to get done ahead of the Christmas festival. But overall, that slowdown as anticipated, really is coming through in the numbers.

[Operator]

[Operator Instructions]

[Michal Kuzawinski, executive]

And whilst we await the registrations, let's take some of your questions online. We have questions here from Pawel Szpigiel from mBank. Question number one. How do you want to downsize the cost base in coming quarters? What actions do you want to implement? And question number two, please give us some guidance on take rate in 2023.

[Roy Perticucci, executive]

There we go. So off mute. I think as 1 of the things noticed we've -- in our focus to reduce costs. We've also simplified I think, the way we run these calls. I think the current method reduces our total cost to 15% of what we were spending before. It does have the drawback that we're now working with headsets, where we have to come on and off mute. So we'll get better with this as time goes on.

So about working through the cost structure, I think there are multiple opportunities through all the cost lines. Of course, 1 of our biggest expenses, but biggest investments also in terms of people's time, our projects. We're a tech business. A lot of our work is around the development of new functionalities and new software. And I do think we need to sort of look at overall in our project portfolio and look on -- again, this is something I said also in the presentation of where we're doing more work, where we need to do still more work and perhaps in a few areas where we need to do less.

The same thing, I think, is true on some of the strategic priorities over the past 2 years. I think we've already mentioned some of the things that we're doing in terms of fulfillment centers and transportation. And I think, particularly in the trans side, particularly in the final mile, particularly in lockers. This is a place where we want to be, I think, a lot more considered in terms of future investments or current investments in this next year until we're very clear about what the best way is to utilize what we have.

If I move on to sort of more OpEx-related lines, but I'll stay within trans and fulfillment, I think we've acquired a fabulous set of assets with Mall both in terms of fulfillment. We have 2 fulfillment centers in Czechia, other fulfillment centers elsewhere in the region and also transportation capabilities. And I think there, we've already begun sort of a program of continuous improvement to increase service reliability and reducing operations costs. And actually, I'm quite excited about the fact that this is a place. These are markets where we not only already now have a SMART! program, but we can tie SMART! directly with continuous improvement in reducing unit costs in delivery to customers.

So I think there's quite a bit there, just actually deploying the resources we have in a more effective way than we have in the past. Similarly, I think if you look at sort of central costs, SG&A. I think we mentioned also the last time that this is a place of high opportunity. And I'd say probably #1 on this is to take, if you will, a zero-based organizational approach and look at the organization. We've got 3 big offices and multiple small ones and actually, so to say, are we actually laid out in the best way to treat these 6 countries in which we operate really as a single reason -- region and operate within there as well as we possibly can. And that's really in sort of across all functions.

So I think those are sort of overall sort of key areas that are implicit also in the 7 priorities, as I mentioned quite a lot of what I'm talking about within the sort of the cost 3 priorities and I think that's overall what we're doing. I think 1 last thing I forgot, which is implicit also, of course, in the 1P turnaround is we're looking very carefully about how we manage stock, how we manage availability, how we actually manage the range to maximize the commercial performance of the 1P operations that we have. I mentioned availability. And I think we not only had sort of some cost and margin opportunities, but quite frankly, some sales opportunities simply by getting availability of key lines back onto the site. And again, [indiscernible] the last sort of 3 months has made considerable process the progress in sort of improving those aspects of our operations in Czech as well.

[Operator]

Our next question is from 1 of our webcast -- 1 of our audio participants, excuse me, Mr. O'Neill Catherine with Citi. Ms. O'Neill. I'm very sorry, but you're -- can you hear me, Mr. O'Neill, I'm sorry, your is very bad. We cannot hear you well. Please disconnect your line and call back and reregister for a question.

[Michal Kuzawinski, executive]

And then meanwhile, we had also the second question from Pawel, which John will answer the 1 which I mentioned earlier, if we have the outlook for the take rate for 2023.

[Jonathan Eastick, executive]

Yes, sure. So we don't have any firm plans to make changes in the take rates next year. We are very much focused on the efficiency drive and the Fit to Grow program and the other aspects that Roy was just going through. And we look to increasing merchant pricing really as the last resort. We understand that everyone is under pressure in this economic environment.

So if we are going to make changes, we would probably make that clear once we finished our planning and we announced our guidance and expectations when we come back together to look at the fourth quarter in March. But in any case, when we do or if we do make any changes for merchants, obviously, we announced that to the merchants first and don't preannounce anything. But as I said, we're really trying to avoid significant increases in take rates for the time being.

[Roy Perticucci, executive]

I think just 1 other thing we should also keep in mind, and I think this is true for almost all of us, I think I was about 12 the last time we were facing a period of especially high inflation. And it's this idea of fiscal drag. So of course, our take rates are mostly expressed in quantum terms. And of course, that means that if we don't make any adjustments in the quantum measures the percentage of take would actually decline.

And so I do think 1 thing we will look at is actually making a relatively stable rate of takes in percentage terms as time goes on.

[Michal Kuzawinski, executive]

And we had quite a few questions on Mall group from participants on the written Q&A. So let me start with Daniel Zagada from PFR. What was the reason behind the impairment in Mall Group, is weather impairment possible in the future?

[Jonathan Eastick, executive]

Yes. Thank you for the question. So I tried to give an explanation during the presentation, but to repeat that the -- basically, the -- obviously, the cost of capital has gone up significantly since we agreed the price and committed to the acquisition back in November last year.

Cost of capital has gone up, valuations of similar businesses have gone down considerably between 50% and 70%, which really is what we saw as the indicator that we needed to do an impairment test and look at the carrying value of the asset. The test itself, we did by taking our business plan from our investment case and rolling it forward. So we look at both the cash flows from the 1P merchant business that we bought, i.e., Mall CZC and the operations across those 6 countries on the 1 hand.

And combine that with the cash flows that we'll expect from deploying the Allegro marketplace and the Allegro business model into the Czech Republic and then the other countries over the next year or 2. When you combine the 2, what we see in combination with our higher cost of capital, is that in the short term, Mall loses more money, burns more money than we were originally expecting, which obviously has a negative impact on the DCF.

And then secondly, those cash flows that are coming in the future from the marketplace deployment also have a lower net present value because of the higher cost of equity. So that's the reason why there's this really significant drop in the carrying value by about 56%. We will update the calculations in the normal scheme of closing the year as impairment test of goodwill have to happen routinely at every year-end, but we tried to be very conservative here in our approach. We want to move on and really focus on the operational side of the project, which is tremendously exciting in terms of unlocking growth potential for Allegro.

[Michal Kuzawinski, executive]

Thank you, Jon. And now we have a question from Conrad [ Kenzupolski ] from Heiton Bank. What -- when in 2023, do you plan to commercially launch Allegro.cz? And could you give more color on Mall's expected financial performance when it may break even on adjusted EBITDA level in the current macro environment? So we have the first question about the timing of Allegro.cz and the second question about the timing of Mall's financial performance breakeven.

[Roy Perticucci, executive]

Well, I'll take the first part of that. I would say is clearly sort of the launch of our marketplace is a quite important event. I've already announced that we're -- we've started the testing phase with friends and family. We're working to make sure that all of the pieces across the value chain work. And I also mentioned that we'll be launching sometime next year, but I don't think it would be fair to preannounce when the exact launch date is when we'll announce that much closer to the date when we intend to go live.

And in terms of making -- in terms of making -- preannouncing again, when we're expecting to have a breakeven of Mall. I think that's something that clearly is a high priority for us. What I would also say to some extent, it's not entirely determined by us, but also determined by overall how trade develops both over Christmas and into the future. So -- but we will be updating you, of course, from quarter-to-quarter.

[Michal Kuzawinski, executive]

Now we have questions from [indiscernible] from Stockwatch. What is the level of debt related to Mall acquisition and its expected interest cost for 2023? And the second question from [indiscernible] is about the level of operating cash flow, which was lower year-to-date than last year, do we expect such situation also to last in 2023?

[Jonathan Eastick, executive]

Sure, I'll answer that one. So you may recall that we added PLN 1.5 billion of debt and contributed to some of the cash balances that we had on hand back in April when we closed the acquisition. So if my recollection is correct, I think we spent about PLN 2.4 billion of cash from the total acquisition price. The rest was funded with shares.

The -- that PLN 1.5 billion of incremental borrowing was not hedged in advance, so that is basically being paid out at the market rate of interest. In contrast to the long-term debt that we had prior to the transaction, where the majority of it was hedged, and we're enjoying very low rates, as you see in the presentation. And the second part of the question, Michal was? Is that the whole question? Right.

Yes. So again, as Roy said, we wouldn't want to front run the plans that we're currently working on. We're not finished yet with our planning for next year. So we'll anticipate disclosures on that theme in the -- together with the fourth quarter results probably in March of next year.

Suffice to say, with the Fit to Grow initiative, the free cash flow is a key area of focus and it's something that we're solving for and planning for in our budgeting process.

[Michal Kuzawinski, executive]

And meanwhile, we received questions from Catherine online. So the first question from Catherine O'Neill from Citi. Can you talk about your investment requirements for the marketplace rollout at most markets? And if it's reasonable to assume higher Mall losses overall in 2023, relatively to 2022? That's question number one.

The second question is a question about our CapEx plans for next year and whether we will be building more lockers. The third question is asking about the current share of Courier in the delivery mix? And then is it early days, but we would appreciate any comment on impact of the change in the MOV on the order mix. And the last question #4 is the question about the -- our plans in fulfillment.

[Jonathan Eastick, executive]

Thank you for those questions. I'll run through those. So the 3P rollouts and the marketplace launch like any marketplace entry will consume some cash next year. We're still optimizing and working hard on exactly how we're going to run that market entry and exactly what it will cost.

So we'll be sharing that information when we finished all the planning, as I said, similar to the CapEx plans when we come back together for looking at the fourth quarter later early in the first quarter of 2023.

When it comes to lockers, we're continuing to increase the size of the network next year. We do have an increased focus, as Roy was saying, within the concept of our Fit to Grow project to look carefully at the paybacks on each and every locker that we're going to be putting into the market. But big picture wise, we're going to be continuing that program going forward.

When it comes to changes or the impacts of changes from the MOV adjustments on the SMART! program. These were introduced, if I recall correctly on the 21st of November, which means only customers whose current subscriptions have run off in the last 10 days or so are now on the new terms. So it's very, very early days to collect statistics in terms of what impact those changes have had.

What we're expecting to happen over time as subscribers move to the new terms is that there'll be fewer transactions, obviously, in the PLN 40 to PLN 45 category because we've moved the lowest MOV level up by PLN 5. Some items will probably get repriced, so that they fit within the free delivery threshold, which is obviously positive for us on the take rate side.

When it comes to Courier, we went from PLN 80 to PLN 40 MOV a year ago, and that had an impact of a 13 points increase in the share of courier in our mix, as I was saying earlier. So now if we're going to go from PLN 40 up to PLN 65 in our new proposal for the customers, logically, a chunk of that shift should go into reverse, but probably not all of it during the course of next year.

Finally, on fulfillment. Again, it's a fantastic asset that we've built and a fantastic capability. And again, together with Roy and the team, we're focused on exactly what is the right go-to-market strategy to get the best results out of that investment. And before we invest any more capital into fulfillment solutions or new warehouses we first want to make this first investment pay out for us.

[Michal Kuzawinski, executive]

We have questions from Hanzade Kilickiran from JPMorgan. Question number one, what is your target leverage in 2023? And is it possible to provide some direction on how we should be thinking about total staff costs growth evolving in 2023 versus inflation rate?

[Jonathan Eastick, executive]

Sorry, I was just recapping on the question. So the first part of the question was regarding leverage for next year. Again, that's something that we won't put a particular number on at this point in time until we finish our planning processes. But suffice to say, it is 1 of our single top priorities is to keep bringing the leverage down. We do have several levers that we will be pulling over the next 12 months or so to keep the leverage moving down steadily. And as I mentioned in the earlier remarks, we don't actually have a liquidity date until October of 2025 now, given that we refinanced the bridge. So it's giving us very nearly 3 years to be at a leverage level, which should be commensurate with being able to get debt at similar sort of margins that we pay at the moment. So in other words, I'd like to be down around 2x leverage by the time that we'll be looking to refinance the senior debt position. But that's not for 2023, that's looking longer.

[Michal Kuzawinski, executive]

Thank you, John. And Gelly, do we have any more questions from the audio line?

[Operator]

[Operator Instructions]

[Michal Kuzawinski, executive]

Let's wait to take your question from audio and I will revert to your written questions. We have questions from [indiscernible] What is the e-commerce market growth in Poland next year? And are you expecting to achieve a stable market share in Poland? And your question [indiscernible] about the local rollout has already been answered.

[Roy Perticucci, executive]

Well, I think the answer about sort of growth prognosis is there a multitude of forecasts out there in terms of how much we're -- overall, the market is expected to grow. And I think a lot of that is colored by what exactly they can consider the market, which categories are they expecting or how they define sort of how particular categories are included in the market? So I won't make any direct comments about sort of how we expect the market itself to grow. I think we should start, first of all, with overall retail spending. Again, there are a whole bunch of forecasts there. And I think it is definitely fair to expect the channel shift from offline to online shopping will continue to progress. I think in this expert, Poland, I think it's behind a number of other European countries, the U.K. being the most extreme version, which I think is now approaching 40% of retail spend is online. And so we have considerable ground to cover. And I think it's anyone's guess about just how fast that shift will progress.

What I do think is fair to say, and I think we've stated also as part of the communication of the 7 priorities, is that we want to continue to maintain our position in the segments in which we compete and actually increase our presence in those segments were either the online share of consumption is already low. Those are things like grocery, ambient grocery in particular, in areas where our overall segment participation is low, things like health and beauty and apparel. So I think the answer is that we expect our market shares -- or segment shares to continue to maintain stable with perhaps some modest increases in segments where we're already strong, but that we'll continue to focus. And then again, I've said there are 3 key areas, in particular, where we want to focus, namely health and beauty, ambient grocery and apparel, where we would want to increase our participation in those segments where we can.

[Michal Kuzawinski, executive]

Thank you, Roy. And now Harry Wilton from Virgin is asking, please, can you talk about expectations for your working capital investment requirements going forward? Just 1 second, we need to -- Jon to reconnect to the line.

[Jonathan Eastick, executive]

Sorry. So the question was working capital requirements? Yes. Yes. So there are 2 main drivers here. One is the growth of the Allegro Pay loan book. And the second one, where there's significant capital invested in working capital is obviously the Mall business. Allegro itself, the marketplace is very, very light in terms of working capital consumption.

So when it comes to Mall, we're quite focused on reducing the level of inventory that they're holding and improving their metrics quarter-to-quarter over the next year or so. When it comes to Allegro Pay, the general strategy has been to sell, as you know, the installment loans to our partner, AION Bank on a more or less a monthly basis, which leaves us holding the BNPL loans, the buy now pay later loans, which have got a very short tenor, usually just 1 month and often we get repaid more quickly than that.

So to the extent that we maintain that strategy and we continue to grow our Allegro Pay as we intend to because it's very accretive in terms of customer engagement and GMV growth that would require some additional working capital to go into Allegro Pay.

[Michal Kuzawinski, executive]

And the last question we will take today is a follow-up question from Conrad [ Kenzupolski ] , Heiton Bank. As of today, do you see a risk of old inventory write-off in the Mall? If yes, what scale could it be? If not, out of total Mall inventory balance, what pertains to old inventory?

[Jonathan Eastick, executive]

Yes, Conrad, thank you for the question. The old inventory balances are actually not all that high. They look at inventory that is over 6 months old to calculate that. And it's in the very low double digits between 10% and 15% depending on the month, yes. So -- and they're obviously like most retailers making pretty healthy provisions against stock as it gets older. So I'm not anticipating anything material in that respect. And that's partly because we're really focused on the issue of managing it as proactively as we can.

[Roy Perticucci, executive]

So what I'd like to say is I'm actually quite pleased to see how we've progressed over the last 3 months. I think we've made really quite substantial inroads on what was already a relatively slow share. We've taken advantage actually of current trading promotional times of the year peak to actually drive those levels down further. So I think this is actually a bright spot in our performance with Mall, not at all something that we should worry about.

[Michal Kuzawinski, executive]

So that was the last question for the day. The remaining questions were mainly asking about specific financial disclosures. We will get back to you individually after this call and anything we're able to share, we will provide to you. So thank you, everybody, for joining this call. Thank you for your questions and active participation, and please contact us for any other questions or follow-ups. Goodbye.

[Operator]

Ladies and gentlemen, the conference has now concluded, and you may disconnect your telephone. Thank you for calling, and have a pleasant evening.