Home24 SE

XETRA:H24

Earnings Call Transcript 2022-Q1

[Operator]

Good day, and welcome to the home24 Q1 2022 Trading Update Conference Call. Today's conference is being recorded.

At this time, I would like to turn the conference over to Marc Appelhoff. Please go ahead, sir.

[Marc Appelhoff, executive]

Thank you very much, and good morning, everyone. After many record quarters in the last 2 years, we are today sharing our progress and financials in a much less favorable market and macro environment. And we are focused on ensuring a sustainable supply chain environment for our customers, for our operations and retaining short-term profitability perspective, while, at the same time, delivering upon key strategic priorities like the Butlers integration and the launch of a curated marketplace still within Q2 of this year. And this is basically also the main highlights that we will present to you today.

Starting with the management summary. And I think, overall, we can also sum it up by saying we're progressing well on our key strategic projects in a weak consumer sentiment environment where in line with markets in recent weeks, we report a decline in order intake and revenue for Q1.

And in Q1, revenue declined 14%, while we reduced marketing spend by EUR 6 million. So we do react to the environment and ensure we keep our return on investment on our investments into customer acquisition. And we also focus on safeguarding our profitability goals to trading off short-term growth with profitability.

Nevertheless, the Q1 revenue base is still significantly higher than pre-COVID, with 61% against Q1 2019 and 42% versus 2020, which is a reminder of the scale we have reached and the operating leverage we will be able to tap into over the long term after we've mastered this temporary environment on the macro side.

It's important to note that Q1 still excludes Butlers' financials as the transaction only closed on the 1st of April. And that's our -- sales and EBITDA development, obviously, as of Q2 will be significantly influenced also by the integration of Butlers.

The profitability in Q1 suffered from the more difficult macro environment, meeting margin pressure on the supply inflation logistics side, but also that our cost base will only reverse back to prior year levels as of the second half of this year, as we have already shifted focus to profitability and spending discipline to best navigate the market environment, both in Europe and in Brazil -- and especially in Brazil, post-IPO investments that were executed on the warehouse space side, on megastore retail side that drove CapEx and OpEx, which are now easing in Q2 and ending as of the second half of this year. And the key focus will lie on best managing the working capital now in these volatile times.

Next to best reacting to external factors, like inflation, by pricing these in primarily. We are glad to be able to have 2 short-term impact strategic projects that would start having impact as soon as of the second quarter of this year. And we will, today, share with you some initial successes on the Butlers integration and also lay out the timing and the next steps of our curated marketplace launch still expected to be launched in a soft launch phase in May.

And lastly, we will share our thoughts on the current trading environment, which is obviously terribly difficult at the moment. But we also will lay out why we confirm our guidance as we have already built in a certain level of conservativeness on the demand side at the time of setting that just 6, 7 weeks ago, at the end of March, that we believe that we'll be able to show growth combined with profitability gains. And obviously, with the Butlers business contributing significantly to that development throughout the year.

Now moving to the business update. I just need to flip through the slide control to reach the right slide. Starting with the demand side. We wanted to bring you also just a very high-level view on why we believe we are doing the right thing in the right moment in time.

And we don't need to explain what's happening in the macro environment, I guess. So we want to share our thoughts on the effects on our industry. Consumer sentiment, obviously, is hit hard, and we prepare for it to not recover in a hockey stick way. And we do focus on resilience, both by pricing our private label assortment to full value in line with price increases happening across the board in the market, but also by reviewing the best end-to-end procurement locations globally for any given private label products we're offering.

We're focusing on loyalty and retaining customers we have won over the past years that might, at the moment, also be considering to postpone purchases or investments of larger furniture in the current situation. And therefore, we are strengthening our range of items that require lower spending, both through the acquisition of Butlers, where we've expanded our range to include a large number of lower-priced home accessory items to also strengthening our own brand expertise. But also on the marketplace side, we're now obviously in a position to move much faster to fill gaps, especially also in the range of home accessories and smaller ticket sizes. And that's -- it's also not a surprise that these 2 strategic projects are the deep dive of today's presentation.

Starting off with the marketplace. Now what are the key benefits of introducing a curated marketplace next to the 2 existing pillars of the home24 model with a short-tailed, very selective private label investments and then also the curated third-party partnerships we have created over the last 10 years.

In a nutshell, it's speed asset-light execution that will allow us to better monetize our existing and future customer relationships, adding more value to our customers, but also amortizing customer acquisition investments significantly better going forward.

And let me take you through each of those points mentioned on here because they're all relevant. Firstly, we can scale assortment faster, especially in the complementary long tail that would not be focused internally with the highest priority, but are still relevant for our target customers and as we position ourselves as the online destination for home and living.

And especially also for our less mature markets in Europe. We're thinking about France, Italy, Netherlands. There is many localized offerings that we will be able to better localize and increase engagement by offering full room solutions and more inspiring solutions for the entire home and garden and not just the home24 core categories.

And all that obviously shall build customer loyalty and increase the destination attractiveness and appeal to our customers so that they think first of home24 whenever they start a home and living journey, and that they come back to the home24 platform much more frequently.

That's why we think -- why we believe it's an attractive strategic pillar for us, but why would sellers want to partner with us. And also here, the key benefit will be that we provide massive reach across Continental Europe that's not available in the home and living space in any comparable platform.

With a clear home and living focus and expertise and also our key intention to not sacrifice NPS, efficiency, our customer value proposition that, in the end, also culminates a low return rate and high customer satisfaction. And we therefore say it's a curated marketplace. We tightly control who we let on. We have strict KPI management on the performance afterwards. And therefore, sellers who meet those expectations will benefit from our value and delivery experience and reputation management, resulting in similar low return rates and success for their own sales potential.

And this curation is not meaning we're not taking a mass approach because, as you can see on Page 16, we've not only taken this seriously by hiring a dedicated marketplace team, setting up the technical requisites in a very professional way with testing ongoing before launch, et cetera, and we've also filled the funnel and already signed more than 100 sellers that have already created more than 30,000 products that are ready for go live. Obviously, the pipeline of those 100 sellers, much, much broader afterwards. And we are focused on the complementary assortments that will add value both for our customers and ourselves or hopefully immediately.

But we also start filling gaps in complementary offerings for seasonal offerings like, for example, garden, which -- well, we're still in the garden season. So we're very curious to see how that will complement our existing offering, which is much more focused on the private label side for home24. After going live in Germany, with the soft launch still planned in May, primarily for learning, and then only once we have successfully ensured the end-to-end process works well, we will launch the German marketplace also with marketing and external communication events. We will then launch the French marketplace in the second half of this year as we see most potential outside of Germany there.

And that's also why of the partners we are approaching and signing up, we do focus on multi-country competence so that the partnership we are entering to is then paying off not only in one of our countries, but multiple countries. And as you can see, more than 70% of the currently signed sellers can also ship to France.

With that, moving to the Butlers acquisition. We have talked about the rationale of the deal before. And obviously, the deal was signed prior to the macro environment significantly worsening, especially also with the situation in Ukraine. We are, as a company, taking the macro environment very seriously. Butlers has franchise partner stores in Ukraine that we had to close.

So rest assured, we are not only focusing on the future strategic benefits of a combined group, but we're also focusing very much on the day-to-day and the short-term maximization of benefits as well.

But zooming out again, why is this a winning combination in our view? And it's not only the strengthening of the platform, but it's primarily the extension of the competence of the private label offering through the Butlers accessories and decoration, home textiles, 20-plus years expertise and the fact that Butlers owns 3 profitable channels with more than 40 million visitors a year, and that we can start monetizing those customers jointly and also ensure that the Butlers' offering meets many more customers online by introducing that to the home24 platform.

Yes. So we will both accelerate the Butlers digital growth, but also gain share of wallet in existing home24 and Butlers customers, by offering furniture on the Butlers side, but also the accessories on the home24 side.

And today, we want to show you first expenses after just 5 weeks of being a combined company. Obviously, we're not there yet. We haven't executed on all our strategic potential. But we're steadily progressing and gathering the momentum of a combined operation, while, at the same time, ensuring we execute well in the current market environment.

So the Butlers product selection that is valid for a home24 offering is live. It's live webshops in Germany, Austria and Switzerland for the moment. And we see it gaining traction. We're starting joint campaigns. We are basically labeling that together, it completes the home. So in German, [Foreign Language], where the claim of home24 stand-alone was [Foreign Language], home is what you like, and Butlers is now bringing the -- to how the dimension that we really are inspiring for full rooms as we've also shared with the graphics at the time of signing of the deal.

We've also taken trade-off decisions. And we're moving -- trying to move fast to reduce complexity and focus on the biggest potentials, which is demonstrated by the fact that we've discontinued the Butlers France independent webshop and are diverting the traffic of Butlers France to the home24 French website to shop-in-shop, where the brand is now celebrated in a similar way. But given the lower brand awareness, we felt that a joint market approach in France is the right thing at the current time.

And next to those online or promotional efforts, there's also already tangible experience that you could experience. And for example, if you come to Berlin next time, the Butlers store, which is located across from the KaDeWe in West Berlin and Tauentzienstraße is now our first co-branded store where we experiment, where we learn, where we've intentionally moved fast to iterate how to best combine the Butlers offering with the furniture offering of home24.

You see that there is now a dual branding on the outside wherever that's possible with sufficient size. That's definitely an option we are continuing to explore for most of the Butlers stores that will not be possible. But at the same time, we will be introducing glimpses of the furniture offering that's possible now also for Butlers. And we'll obviously try to get into the shopping bag and tap into cross-marketing potential as soon as realistically executable. So there is more to come, and we will continue to share the progress in our next update, so the next one, mid-August.

And with that, I pass over to Philipp to take you through a more detailed financial update.

[Philipp Steinhauser, executive]

Yes. Thanks a lot, Marc. Let's start with a view on our order intake.

So as you can see, the weaker year-over-year development in order intake is visible in both segments in Europe and in Lat Am, with the decline in Europe of minus 20%, like-for-like being slightly more pronounced. The inflationary effects are visible in the development of our average order value as price increases from suppliers have been passed on to a significant extent to our end customers. And as can also be seen in the AOV development, the effect of those price increases across all categories outweighed other effects that we also see at the same time that consumers tend to slightly lower price points within a category.

Also, yes, clearly visible is a positive FX effect in Brazil. The negative GOV growth in constant currency of minus 11% translates into plus 1% GOV growth in reais currency as can be also observed in the significant basket size increase, which is largely FX-driven in Brazil.

On the active customer side, we see a decline as could be expected from the GOV development. And looking at the drivers a little bit in more detail, the decline can be attributed to a larger extent to significantly lower new additions than usual and contrast to churn or dropouts being on, yes, expected or regular levels.

If we then turn to revenue growth or revenue development, yes, as could be expected from the order intake, the effect of the weakened market environment paired with very strong. Previous year comparables is also reflected in the year-over-year revenue development of minus 14% in constant currency.

And if we look at it from a 2-year or 3-year development, as Marc already said, this is still in line from a long-term trend perspective, as can be derived from growth rates of 42% on a 2-year view and 61% on a 3-year view all-in constant currency.

The more positive development of revenue year-over-year versus order intake year-over-year signals the significantly faster revenue realization compared to last year and proves that we took the right decisions throughout the year on desired stock levels and available Butlers stocks to ensure high level of availability to our end customers.

Looking at today's inventory level, also supply chain disruptions as -- yes, currently visible as we had in the last weeks, part of Shanghai, et cetera, should not meaningfully impact customer experience.

The average FX rate from the Brazilian reais changed significantly, as already mentioned, from EUR 6.6 to EUR 5.8 in Q1 2022 compared to Q1 2021. As a result, the slightly negative growth in reais currency could be overcompensated by FX effects, and Mobly finished Q1 with a positive reais currency growth rate of 4%.

Now what does it mean in terms of profitability? Of course, as a result of the lower top line, we also see a decline in our adjusted EBITDA to minus 4%, with Q1 being usually a seasonally weaker quarter in terms of profitability within a year in a similar way as it is in Q3. And the decline in profitability can basically be attributed to 3 effects, all broadly of a very similar size. And one is the missing operating leverage from the lower top line level. Second one is slightly lower profit contribution margins, post marketing expenses. And the third one is the higher fixed cost base for overhead and OpEx.

Looking even closer at the unit economics in detail, we see a relevant decline in gross profit margin year-over-year of around 2.6%, as a result incurred price increases and higher import container cost, but with a positive trend. So Q1 2022 actual gross margin is already slightly above Q2 2021. And it is also increasing step by step for the second quarter in a row, all despite the fact that we increased in the -- yes, in the gross profit margin. The devaluation of our inventory position from Q1 -- from Q4 2021 to Q1 2022 by EUR 1.2 million. So EUR 1.2 million negative onetime effect for Q1 due to the increased inventory reach and the safety stock levels as a consequence of the ongoing uncertainty of global supply chains and consumer demand.

Marketing expenses as a percentage of revenue are 1.6% below previous year Q1 and show the lowest percent of revenue value in the first quarter, yes, since we do IFRS closings. And this clearly reflects what Marc was already mentioning, the commitment to focus stronger on profitability improvement and very careful marketing spendings compared to revenue targets in a market environment that is just very, very difficult to predict.

The increased overhead and OpEx is attributable to a significantly larger extent to the Lat Am segment compared to Europe as a result of the investments undertaken in Brazil post-IPO, and then in Europe, partly the decision to strengthen specific functions, like commercial shopping experience.

And the results of these investments are already partially visible as you can derive from the marketplace initiatives and the assortment extension. But there is also a strong pipeline of further webshop improvements that will pay off through higher conversion rates and higher customer satisfaction ratings over the next months and quarters.

In total, it remains our clear management focus to bring profitability levels further up on a stand-alone basis with Butlers going to fuel profitability further once figures are to be consolidated as of Q2.

Now lastly, turning to cash. The group's cash and cash equivalents remain high at more than EUR 100 million, while the adjusted EBITDA contributed to roughly EUR 6 million to the overall quarter-over-quarter decline of EUR 30 million. As you can see, the main effects rises from delta working capital. And we usually have some seasonal effects in the transition from high season revenues to low season revenues.

And due to the market environment, the market demand, this effect came in earlier this year. And therefore, net working capital in the first quarter was significantly impacted by that effect and the effect of expanded inventories, the balance sheet position of our inventories increased by EUR 8 million within Q1, with the aim of increasing resilience to uncertainties in the supply chain and the inflationary trends that we see. So better to have the inventory now at probably cheaper levels than this could be at a later stage, more expensive.

The cash outflow from investing activities are, as usual, largely related to investments in internally generated software and fixed assets in the warehouses. In this EUR 9 million, there's an addition, the EUR 3 million loan granted to Butlers ahead of the acquisition, to be able to maintain sufficient liquidity for higher inventory levels prior to the finalization of the acquisition in a similar way that we -- as home24 steer the business.

And with that, let me briefly hand back to Marc for the final outlook.

[Marc Appelhoff, executive]

Yes. And it's not much of a surprise that we will continue to remain focused on taking advantage of the opportunities arising from Butlers acquisition, the marketplace launch, because those investments are done. We want to now fully leverage these. At the same time, we are facing a reality that the market environment is not favorable at the moment and will likely remain challenging.

So from all we hear, we are faring quite well. Also compared to competition, we're continuing to take market share, but we won't [ overpace ]. We will prioritize profitability over short-term sales growth to ensure that we come through this year with the profitability level that we need at the end of the year.

Current trading remains in line with the second half of Q1, also for now April and May. And obviously, we all hope it will improve faster, but we are also concentrated on the same trends faring on for quite some time. And therefore, also looking at guidance, we're reiterating the guidance [ voiced ] 5 weeks ago. We have obviously reviewed scenarios and looked at the current market trends also over the last 5 weeks.

We believe we've built in significant headroom in a way that external factors like, at the moment, inflation, geopolitical tension, supply chain and consumer climate, should not prevent us reaching these, especially where, as of April, the Butlers financials will add to profitability.

Nevertheless, strict working capital management will definitely be a theme throughout 2022 and remains a high focus for us. And obviously also managing the insecure global demand and supply side beyond 2022 to best exploit the massive growth opportunity ahead of us, but certainly, without jeopardizing our profitability, which is now the base of everything that we work for and the starting point of the years to come.

So in sum, yes, we obviously all would want to wish that we would be in a different macro environment. And rest assured, we're doing our homework. We're taking the situation seriously to ensure we continue to meet our goals.

Thank you very much. With that, handing over to Q&A.

[Operator]

[Operator Instructions] There appears to be no questions over the audio at this time.

[Marc Appelhoff, executive]

Thank you very much then, very efficient morning. And we wish you all the best in the current times and stay safe, stay healthy. If there is follow-up questions, as always, you know how to reach Philipp and myself, and hopefully, convening with a more favorable market environment whenever we speak next.

Thank you very much, and have a great day, everyone.

[Operator]

Thank you. That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.