Home24 SE

XETRA:H24

Earnings Call Transcript 2020-Q1

[Operator]

Good day, and welcome to the home24 Q1 2020 Financial Report Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Marc Appelhoff, CEO. Please go ahead, sir.

[Marc Appelhoff, Chairman of the Management Board & CEO]

Thank you very much. Good morning, everyone. I hope you're all fine in these crazy days. Welcome to the home24 Q1 trading update, and let's jump right into the summary.We have, as indicated, started steering into 2020 with a priority on profitability and on cash. And as you can see, both goals have been really well met in Q1. We've had a very strong currency-adjusted growth given the fact that we reduced 10% in marketing expenses prior -- compared to prior year. So we've had a 14% constant currency growth, and at the same time, we've been able to improve our adjusted EBITDA margin by 13 percentage points. And as a reminder, again, Q1 is an investment quarter. Q2 and Q4 are harvesting quarters. So we are very well on track when it comes to our full year profitability goal. The significant improvement in EBITDA margin is confirming that not only the one-off effects have disappeared that we have incurred, but also the post-IPO investments are truly paying off. And the profitability we've shown in Q4, that core profitability that we have -- had reached by the end of last year is also going to continue in the future. In terms of cash flow, we've only burned EUR 3 million in the last quarter. It was the second quarter in a row with a positive operating cash flow. And if we now sum up the last 3 quarters, we've only reduced cash by EUR 8 million, which also shows that we are very well on the right track and taking our profitability and cash focus serious.Now at -- during the course of Q1, we've had to deal with the effects of the COVID-19 pandemic more and more, and we had already started dealing with it in early Q1 because of our Asian sourcing organization and our team based in China. But as the quarter evolved, we saw more and more implications from supply chain restrictions, factories closing to the mandatory closure of our retail activities in Europe and Brazil but also quite some volatility in customer demand. And we'll give you some detail later on. But as of now, we've been able to benefit from the circumstances that people spend much more time at home. And if we turn to the order intake, we share with you today that the order intake has accelerated significantly since mid-March after people had been accustomed to the new circumstances. And the acceleration reached 88% in Europe and 39% in Brazil, where Brazil entered the lockdown period with a 2- to 3-week delay. So it's only a matter of trajectory there. And as a consequence, the Q2 will be profitable on an adjusted EBITDA basis, just as expected but obviously even more so looking at the current order intake. And it won't come as a surprise that we don't just look at the current trading, but also at the uncertainty when we speak about our financials outlook. It's impossible to predict where the COVID-19 pandemic takes us in the next quarters. We are focusing on managing the uncertainties as they come. We are a very agile, data-driven organization that reacts and also takes action very, very swiftly. But given circumstances, we have decided to not change our guidance upwards for this year based on the current trading. But for now, we keep the growth expectations in the range of 10% to 20%, aiming for the full year adjusted EBITDA profitability in the range of a plus or minus 2%.So before we go into the COVID-19 details, let's spend some time on the Q1 financial breakdown. And let's start with GOV, yes? So as indicated, we have reduced marketing spend year-over-year by 10%. And nevertheless, we've been able to increase our GOV growth by 13 percentage points. The reduction in marketing spend was not due to missing opportunities. It was purely a profitability and cash focus decision, where we have indicated that our priority is on reaching cash flow profitability in the second half of the year and on reaching full year profitability for the year, and therefore, we've consequently followed that path. And the fact that we've, nevertheless, been able to grow in Q1 by 13 percentage points shows that not only are we able to profitably acquire new customers, but also our repeat customer share is continuing to grow. It wasn't a customer number-driven growth with average order value more or less stable. In euro terms, we've seen a negative effect from the Brazil currency, but both regions had quite a stable basket development in Q1. And just one word also on the Brazilian currency where on Slide 4, we indicate that the reais lost significantly from BRL 4.3 last year to EUR 4.9 -- BRL 4.9 in Q1 2020. We've seen even higher fluctuations in the last weeks with BRL 6.3 in recent days. So we're obviously monitoring this development closely, and we will, yes, continue to focus on balancing that out. The good news is that in Brazil, we only have a translation impact because we procure most of our sales in Brazil, and we also have pretty much all our cost in reais.The 13% constant currency growth in GOV terms translated into a 14% constant currency growth in IFRS terms with a further gross to net tailwinds helping there. And again, in IFRS terms, we do invest in marketing significantly more in Q1 and in Q3 in what we call the investment quarters. So Q2 and Q4 will benefit from this development. Q2 is actually seeing a negative EBITDA effect because of that. We also saw some fluctuations towards the third month in the quarter with COVID-19 impact where, obviously, our retail activities both in Europe and in Brazil had to close. And we also saw some fluctuations going into the crisis, which we will share with you in the COVID-19 update.And now if we look at bottom line, we have a very significant positive effect not only because of the reduction in marketing spend and continued profitable growth, but also based on the one-off effects disappearing and the fulfillment platform and our data platform fully benefiting from the investments we've taken in '18 and 2019. We see further margin uplift in pretty much all P&L line items, in gross margin and fulfillment costs. And in SG&A, it's not primarily marketing spend-driven. And as you can also see, we saw a very significant improvement in Europe with 70 percentage points improvement in EBITDA in Europe. So you also see that the temporary negative effects we saw in Europe post-investment are truly now gone. And after the first profitable quarter in Q1, we are very well on track on our goal to also be profitable for the full year 2020.If we look at cash, we had the second operating cash flow profitable quarter in a row. And over the last 9 months, as indicated in the summary already, we've reduced our cash level only by EUR 8 million. This was helped by an extension of a B2C factoring line by EUR 3 million but also by significantly reduced investing activities compared to prior years.Now probably to the point that most of you are most curious about, how do we deal with the impact and the effects of the COVID-19 pandemic. Before we go into any details, let me also start by the positive news that up until now, we've only had one COVID-19 positive-tested colleague, and he's already back at work after a 2-week quarantine. So we're all faring well. And in these days, this is our utmost priority. So we are very focused on implementing social distancing and health protection measures and looking after our teams so that we can also service our customers without any interruptions and, yes, that we all keep the great spirit that we still have in these times, yes?So looking into the details. We have implemented various measures already in early February in the warehouses but then also later on in our offices, where the entire team in Europe and Brazil is in home office, in remote working setup in Germany, and we call that home office curiously. And we also are very proud of the team that have flexibly embraced the new situation. We haven't really seen any decline in productivity. In the contrary, everyone is very focused and looking at the current opportunity at hand and delivering very solidly, yes?So what have we been focusing on? So our supply chain has been disrupted at various points during the last months, first in China, but then also moving on to Vietnam, Malaysia, Eastern Europe and Brazil. And now at the moment, it's India that's still closed. And on the retail side, we've had to react very quickly on the temporary closure in Europe. As of this week, all European activities are opened up again. In Brazil, we still have to face a closure until at least the beginning of June. And I think the most important is that we have been able to react quickly. We have a full digital setup. And we've not only been able to do so internally, but also we've iterated when it comes to best serving our customers, where we've reinforced the video consultation setup that we had implemented in the past anyway for the showroom customers but also telesales activities for our physical outlets. And I'll come to speak to that in a second.Last but not least, we, yes, have already entered the year saying profitability and liquidity are key -- are our key priorities. But obviously, in these current times, we even take a bigger focus on a very conservative investment strategy to be certain that we come out of the COVID-19 crisis strengthened, not only in terms of market position but we're also able to fully tap into the market opportunity that we are very certain will open up for the online leaders.Now looking at demand. We've decided to share with you the weekly development of the demand as it has evolved in Europe and in Brazil. And this also demonstrates how quickly we were able to react and then also benefit from the current strong demand. And looking at the orange line, you see that after beginning of March, we did see a dip in demand, and we also saw customers facing the uncertainty of the current situation but they then very quickly turned around and spending more times in their homes. Off-line stores being closed, they tapped into online demand with an unexpected high demand growth. And what you can also see is that the blue line in Brazil has seen that uncertainty period extend up until calendar week 13 and only afterwards seen a gradual but less steep decline. And that has also continued into May for Brazil. And the positive trading continued throughout the month, and we also have seen a continued positive trading momentum in May, where we see the retail now, obviously, being opened again in Europe, but we also see that the increased demand year-over-year remains higher than prior to entering the lockdown period.And if we look at the -- our supply base, we wanted to share with you again our redundant setup, where -- when we say that we can react quickly and we can proactively manage the disruptions that have incurred, we really benefit from our home24 2-pillar model, where, as a reminder, we complement a broad, curated third-party assortment with a highly concentrated and focused private label assortment that we procure globally at the best source to offer great value for money to our customers, give -- pass on a portion of our manufacturer margin but also realize significant private label margins for ourselves. And we've pretty much seen a tour of the globe in terms of disruptions. It started in China just after Chinese New Year, where, usually, yes, we see a 2- to 3-week closure of the factories. That extended to 6 to 8 weeks, and that only eased off towards the second half of March. So we received the first significant shipments towards the end of March, again, from China. But what then happened was that towards the end of March and the first half of April, we saw the disruptions in Europe, in particular Eastern Europe that was facing challenges with the customs controls being extended or our suppliers in the Ukraine or Belarus even facing issues to enter the European Union for a couple of weeks. And we then also saw trickle-on effects of the Chinese shutdowns in Malaysia and Vietnam. And last but not least, obviously, since we procure most of our Brazilian sales locally in Brazil, pretty much our entire supply base was also closed there for a period of 2 to 4 weeks. The good news is that most of our supply base is back up and working again. And we have flexibly been able to shift demand from sold-out items to the remainder of our assortment that's still brought and relevant enough to not lose sales. And we're juggling and, yes, just updating our purchase algorithms on a much more frequent basis to ensure that we don't get sold out over a long period of time. Obviously, in the last month, that demand phase was unexpected and we hadn't forecasted that, but obviously, we now want to tap into the market opportunity without going in unnecessary risk on the working capital side and -- as we just don't know how the crisis will continue to evolve. As a fact, we've been able to do that successfully, which you can see that the average web shop delivery time has only gone up by roughly a day. So if you look at that general assortment breadth, then the average delivery times for all items on display hasn't really gone up significantly. And also, the number of products that temporarily we weren't able to sell has only been reduced by 4%, which demonstrates that we're really well set up with our supply base and we've been able to manage that effectively.In terms of the physical supply chain, our warehouses have been able to deal with a significant increase in handling volume very effectively. We've seen a stable or the same very high efficiency that we've also seen in the holidays season. Our delivery networks have had to deal with a volume that even exceeds the holidays season volumes. And obviously, especially the parts and service providers were caught by surprise because, especially over the Easter period, there was a lot of demand. And the good news for our 2-man-handling setup is that we benefit from a lot of the B2B activities not -- yes, not being at high demand at the moment so that those networks have sufficient capacity to also deliver consistent quality and service levels. Nevertheless, we had to adapt service level to our customers. So because of safety and hygiene measures, we only deliver to the doorstep of your fourth floor apartment without an elevator. So we still carry that up, but we don't carry into your apartment anymore to the room of assembly so that the drivers and carriers don't enter their apartments. And we also, at the moment, don't offer an assembly service.And last but not least, we had the significant challenge that we do have to, just in time basically, clear all our returns. As a reminder, conceptually, we have just below 10% of net sales in returns. And we have invested heavily into a mega outlet setup with regional returns, collection and clearance in the south, east, west and north of Germany. And obviously, when we had to close our retail -- physical retail presence, we were quite worried how we would be able to deal with that and whether returns would stockpile up until we could open again and we would then have a big backlog there. But the great news is that our team has been able to pivot from a physical sales to a telesales approach, basically broadcasting the daily available assortment on Instagram and Facebook. And now we've been able to realize more than 60% of the January average during the closure period, which is a great success. So we've partly been able to compensate the closures. And given the outlets are now up and open again there for the second week, we're in good shape when it comes to returns clearance. And we haven't piled up inventory that's not digestible for our systems in the coming weeks. Now looking into the outlook for the year and our priorities. We have confirmed our financial outlook, as mentioned. So just zooming in again on where profitability effects came from in Q1, they came from all P&L line items, 2 percentage points from gross margin; 3 percentage points, fulfillment; 4 percentage points, marketing; and 3 percentage points, SG&A. With marketing in particular, the one that breathe is in investment quarters and harvesting quarters. So we're definitely shooting for a positive adjusted EBITDA Q2 but also still very confident that we will reach that result for the full year. On the current trading, with low customer acquisition cost will also help the coming quarters because it increases our active customer base. And we have, in particular, seen customers tapping into the smaller basket -- the new customers tapping into the smaller baskets for the time being. So we still have the larger baskets, in theory, to come in the next month. And we have, nevertheless, decided to not change our guidance upwards because we just don't know how the global recession will impact demand over the coming quarters. So that's why we still have that broad growth range of 10% to 20% even though, obviously for Q1 and therefore the first half of the year, we expect a quite significant growth and also the corresponding profitability.But it's not all about COVID-19 implications, yes? We do focus on that with a high priority because it's the prerequisite to tap into the market demand. Our key priority for 2020 remains in strengthening the home24 key differentiators but also communicating them better to our customers. So we continue to highlight that we focus on great value products people love. And with the positive coincidence that our new TV campaign was focusing on the customer insight that they should discover their home from new perspectives, and we had a cat walk through an apartment and explain that there's so much potential and so much new inspiration that you can bring to your apartment. And obviously, that's a great insight at times where people spend more and more time home. So we continue to work on our assortment breadth but also on our private label offering. And we make great progress on that part of the business while, at the same time, managing the COVID-19 implications on the supply chain. But we also, obviously, focus again on our shopping experience. Even though for a limited time period, our service levels in terms of assembly service or delivery right into the apartment of the customer has been temporarily reduced, it's even more important that we control our supply chain end to end and have a very reliable and flexible delivery. And that's also in times where demand in a month like April now led to an 88% increase in order intake. Our customer service still remains effective even though we've, obviously, been able -- not able to scale that up immediately, and it took a couple of weeks to really follow the demand. And also, in terms of touch and feel, we had temporary disruptions, but we're doing more and more now to think about how the customer journeys will look like not only during the COVID-19 pandemic but also post the COVID-19 pandemic to already prepare for that and offer the most relevant content and inspiration that's also valid after we've come out of the current social distancing phase. And, yes, even more so, we believe that the market opportunity for home24 will even be significantly improved going out of this COVID-19 phase because the market has always been huge, but it's always been characterized by very low online penetration with every source stating online penetration at significantly below 10% in our market. And what we see currently is that many new customer groups, especially also older customers, are tapping into the online offering. And we see a huge catch-up potential if we service them well, and we see very stable customer satisfaction or increasing customer satisfaction levels also during the current time. So we're very happy that our customer value proposition remains relevant and is being seen by many more people. So we believe we will be able to benefit from that also coming out of the crisis.Our customer value proposition is even more relevant than it has ever been. A best value offering in a non-branded vertical going into times where consumers might also look for the best deal because they might be facing challenges in a market that enters recession is something that's truly relevant and that we have seen already in Brazil in the years of '16, '17, where the country was in a difficult time. And our customer-centric go-to-market approach will evolve, and we'll focus on whatever the customers are demanding during the various phases. We firmly believe that our market opportunity will not get smaller but that the changed customer behavior will prevail also after the COVID-19 crisis has gone away or a vaccine has been found.In terms of data and technology, we are currently proving that our platform is truly scalable and that we are getting faster and faster and iterating and taking data-driven decisions and not reacting with a long response time to the new and changed market environment. And last but not least, our value chain is holding up. It's finally benefiting from the very significant investments we've seen and also benefiting from the automation investments we've done over the last years.But to sum up, it's the fact that uncertain times will be a reality for the coming quarters. So what we are focusing on as a team is that our -- that the changing circumstances that we're facing for our customers, for our suppliers but also for employees, that we deal with them on the most effective basis. We want to tap into the temporary increased online demand, and we want to take that opportunity very seriously. We also believe it's a fact that especially the off-line competitors will enter a difficult phase and will react with price wars, but there will also be a big shakeout of the market. So we will react accordingly, and we are very confident that despite a likely global recession, the significant growth potential for online will rather increase, yes? So the online penetration finally will reach levels that we've also seen in the U.K. and the U.S. previously or in other consumer verticals in our markets. And we'll work hard to make our customers happy so that once they have tested us during the current social distancing phase, they won't want to return to their off-line dealers but want to continue to work with us. And we believe the speed of learning and adapting will be much more important than any long-term strategy that's in place at least for the coming weeks. So what we're doing is that we are advancing the data-driven decision-making and automation that helps us take faster decisions especially if you think about our purchasing in the current high, volatile market environment. And we believe this will rather be a source of competitive advantage over our -- yes, primarily off-line characterized markets in the coming months and quarters, yes? But we're also very well positioned long-term with our home24 2-pillar model and the fact that we have now a fully invested data and fulfillment platform that we can benefit from.So last but not least, let me close with just reiterating our terminal margin profile because we get asked that quite a lot in recent days. We're still shooting for -- towards the 50%-plus level of gross margin, and we still see vast potential in both buckets of the home24 model both in the third-party assortment level but also in the private labels. And we also still see potential in fulfillment, which would then bring the gross margin post-fulfillment towards the low 30s. In terms of marketing expenses, we do see already that we can sustainably reduce marketing expenses, as we've demonstrated in Q1. Nevertheless, in a market that's characterized by the absence of strong consumer brands in mass market, home and living, we believe that our platform brand still needs a low teens, 10 to 12 percentage points marketing expansion also long term, which nevertheless brings us with operating leverage, reducing SG&A to an adjusted EBITDA margin in the low teens. And we are very confident that this is what we are able to achieve in the coming years.With that, let's open up the line for questions that you might have after the presentation. Thank you very much for taking the time to listen.

[Operator]

[Operator Instructions] And our first question comes from Graham Renwick with Berenberg.

[Graham Ian Renwick, Analyst]

Marc, it's Graham here from Berenberg. I hope you're safe and well. Can you hear me?

[Marc Appelhoff, Chairman of the Management Board & CEO]

Yes, we can hear you well.

[Graham Ian Renwick, Analyst]

Okay. Just these 3 questions from me, please. So firstly, on Q2 trading, I appreciate it's probably difficult, but are you able to give us any sense? Is there any sort of analysis you've done internally to try and determine how much of that very strong 88% order growth you think has been driven just by pull-forward demand from H2? People making purchases, they would have made anyway but earlier ahead of the lockdown, but also due to just one-off demand in categories such as home office, which perhaps isn't going to be sustainable going forward.Secondly, on gross -- on Q2 margins, sorry. Would you have been profitable in Q2 even without a strong COVID-19 boost to trading? And also, just to give us some help modeling the P&L. What is the drop-through on that strong incremental revenue growth in Q2? Are you able to give us a sense of what costs are going to be fixed going into Q2 versus variable? Just so we can try and model out what the EBITDA result would be. And lastly, on marketing, Wayfair had recently talked of lower advertising costs as off-line players scale back on marketing. Is that something you're seeing? Did that actually help your marketing efficiency in Q1? And do you think that would continue to support your marketing efficiency in Q2 and beyond? And also, are you seeing potentially similar savings in other cost lines, such as shipping costs, if demand from off-line players is scaling back?

[Marc Appelhoff, Chairman of the Management Board & CEO]

Thanks, Graham. I hope you're also safe. So let's start. I noted down 5 questions, not 3. But let's start with Q2 trading. So it's -- from our current analysis, it's not demand that's been brought forward, but it's rather the fact that 90%-plus of the market was still off-line and that portion of the market was temporarily closed. And now you have to line up. If you want to enter, wear a mask. And it has changed significantly. So what we have seen in terms of the addressable customers that have turned to online, that we see many new customer groups that we haven't seen before, also all the customer groups. So the current trading is new customer-driven. And we believe that if we service those new customers well, then they will also remain. It's -- we've obviously seen an increase in home office and garden items that we sold during the last 2 months, but they did not grow and the other categories shrunk. So we have seen more demand for home office and garden. My personal opinion is that it won't necessarily become less if many companies now implement home office policies. And we might have to face the reality of social distancing until a vaccine is found in 1.5 years, and then the world will be changed forever. And so we don't, at the moment, foresee that it's been just a onetime effect driven by single categories. And obviously now, off-line retail is open again. So for the full quarter, the demand will likely be below the 88% we've seen in Europe in April. The trend in Brazil, where the pickup in demand started later, has shown continuous improvement now also in May. For Europe, the off-line opening has meant that demand remained very, very strong but not in the levels of April. So I think it's much too early to say what will happen in June. And that's why we've decided to just give you the facts and not speculate. And I am very realistic that it won't help you with the modeling, but it's just the reality that we face at the moment.In terms of Q2 margin, the answer is yes. So we've always planned, and we would have been Q2 EBITDA breakeven also in the absence of the positive trading effects. And that then leads me to question 3, how to model the current effects. I think it's fair to assume that the extra demand will translate into positive contribution post-marketing without any significant impact on SG&A, yes? So it will be a significant bottom line driver in Q2 and hopefully also in Q3.In terms of marketing, in Q1, we haven't seen significant effects. So in general, our LTV to CAC and our marketing efficiency is and was already in Q4 better than the pre-IPO levels. And we've seen that increase even pre-COVID-19 phase. What happened with the lockdowns and the shutdowns of the off-line retail was that many players stopped their marketing temporarily. But very, very quickly, they -- we've rather seen the density of players that now do online marketing increase, yes? So many of the off-liners that didn't even do online marketing previously have now turned towards online marketing because it's the only demand that they can tap into in the absence of traffic increasing or off-line being closed. So yes, we have seen an effect on marketing efficiency, but it was a demand-driven effect, not a competition-driven effect. So we've just seen more volume we could tap into, and therefore, that was a very profitable customer acquisition that we did. We've also been very disciplined in not overinvesting at the current times but spending what we had initially envisaged. So in terms of marketing efficiency, obviously, Q2 will -- IFRS will look very good because, yes, we have the harvesting quarter effect and the demand effect. Looking beyond, it's obviously very difficult. We are very certain we will keep our LTV to CAC positive and efficient customer acquisition. We will also, if we consistently deliver customer satisfaction, be able to raise our repeat revenues. So we feel that we're in a good position to also react to demand fluctuations going forward because we have a very disciplined and effective marketing steering that we -- where we could also react to weaker demand periods if we have to.And in terms of shipping, unfortunately, there's no short-term benefits here. As mentioned already, the parcel service providers, they've been dealing with an extra demand. So they've -- especially over the Easter period, they've had to deliver holiday season volumes without being prepared for that. So we've been able to prevent peak season surcharges, but we didn't see any negotiation power there. And in terms of 2-man handling, the service reduction in not carrying into the home of the customer but to the first door is a very minor saving. So that won't help fulfillment cost significantly. What obviously helps is the general volume flowing through the system, but that's then rather an operating leverage effect. I hope that answers your questions, Graham.

[Graham Ian Renwick, Analyst]

Yes, that did. That's very clear.

[Operator]

[Operator Instructions] Our next question comes from Christoph Bast with Bankhaus Lampe.

[Christoph Bast, Analyst]

Christoph Bast, Bankhaus Lampe. Marc, can you give us a quick overview of the relevant lockdown rules at home24? To me, it seems like every federal state in Germany is introducing its own rules. So I mean, which of your showrooms and outlets are allowed to open doors again and under which circumstances? And which capacity utilization should we expect here? Secondly, you have experienced another improvement of your profit contribution margin in Europe of 2 percentage points at least compared to Q4, whereas the margin in Brazil has dropped by 1 percentage point. Can you just quickly elaborate a bit on the moving parts here? And last question, I mean still your 2020 guidance is -- it's quite a broad range. Could you help us or explain us what the underlying assumptions here are? And under which circumstances you would rather reach the upper end or the lower end of the range? That's it.

[Marc Appelhoff, Chairman of the Management Board & CEO]

Yes. Thank you. Hope you're safe as well. So on the lockdown rules, they're evolving on a daily basis. So even though Austria was the first country to reduce the lockdowns, our square meterage in Vienna, unfortunately, was more than 400 square meters and then also 800. So Vienna opened only after most of the German showrooms had opened up again at the beginning of last week. So the German showrooms are all up and operational again. Switzerland opened this week; Austria, last week. But we have strict hygiene and distancing measures in place. So we restrict access to 10 people at the same time. So a family coming in would count as 4 if they are a family of 4. We encourage customers to actually take appointments. On all our home -- on our showroom pages, you can already see all available time slots and book an appointment and also send material upfront. And similarly, in the outlets, they are all open again. And to my most recent launch -- because as you rightly say, it changes very frequently. We've been able to start in North Rhine-Westphalia without restrictions on square meterage, which is Bottrop and Cologne. And we had to start with the reduced square meters in Hanover and Ulm, which have not been significant hindrance to us. Similarly in Berlin, the main restriction was access, yes? So we also had people lining up in front of the outlets and -- yes, and we have limited access in terms of number of customers that can enter the outlets at any given time. We have not seen a significant adverse effects on the capacity utilization because it leads to an effect that the people that actually enter have a high intention to buy. So we have quite a good conversion rate at the moment so that capacity utilization in terms of also clearing out our return volumes for now worked out fine. We obviously will now, with the increased April order intake, also see increased return volumes that the outlets will have to handle. The third-party clearance providers that we clear out the remainder that we can't sell through the outlet probably are dried up at the moment because, yes, they won't see a significant market. So it will remain a challenge. But what makes me very confident was the fact that we've tapped into a new way to sell our returns through the outlets with the telesales approach, yes? So as mentioned before, actually, you just have to remember yourselves about that fact again. We did sell 60% of the January volume with the outlets being closed through the outlets' outlets and we just delivered it to the end customers. And we basically tapped into local demand through social networks, not cannibalizing on our usual online customer acquisition. So that was very positive news.And in terms of the gross margin development in Europe and Brazil, we did see a positive continued development in Europe, primarily also outlet-driven. And in Brazil, there was a year-over-year effect in there where we had seen a positive contribution of Black Friday sales where we usually get a very good contribution for our customers and have a lot of realization of the deliveries also in Q1. And as already discussed in our full year update call, the Black Friday season in Brazil in '19 was not as good as in the previous year, and that led to that gross margin effect in Q1.In terms of outlook, yes, I mean you can do the maths yourselves. Looking at the model and which circumstances will we be at the lower end, looking at the current strong demand, it will rather be quite a pessimistic global recession scenario where off-line demand might -- and off-line market volumes might decline in significant double-digit percentages, and online might just be still sort of positive single digit, which we just cannot rule out at the moment. If we continue with the current trading volumes, then at the right time, probably with the Q2 results, we might revise outlook upwards. We just feel it's not the right time to do so at the current stage. And the same counts for profitability. When we opened up the guidance in the -- at the beginning of April, this was primarily driven to give confidence that even if growth should be more difficult this year, we would still be able to reach profitability and second half cash flow breakeven because the most pressing concern historically was our cash burn. That will hopefully either way now having delivered the second quarter operating cash flow positive and only burned EUR 8 million in the last 9 months, so it's very likely that we won't burn a lot more in the 12 months once we publish our full year figures. And then hopefully, the focus of the markets on cash might ease a little bit. But we also feel in the current market environment, we want to be prepared for unexpected effects and we rather continue to be conservatively optimistic and steer the year with a profit and cash focus to be best prepared for a favorable market situation once we get out of the crisis.

[Operator]

[Operator Instructions] All right. Gentlemen, we have no further questions in the queue at this time.

[Marc Appelhoff, Chairman of the Management Board & CEO]

Well, then let's close the Q1 call. Thank you very much for -- to all of you for taking the time. Stay safe. Stay healthy. And as always, Philipp Steinhauser and myself are available for you if you have any follow-up questions. Thank you very much.

[Operator]

This concludes today's call. Thank you for your participation. You may now disconnect.