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Good day, and welcome to the home24 Q3 2021 Trading Update Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Marc Appelhoff, CEO. Please go ahead.
Thank you very much, and Good morning everyone. Welcome to our home24 Q3 trading update. We hope you're all well out there and faring well through those current post-COVID times. In today's call, we want to share our Q3 trading information, but not only that, we will also present progress on select key strategic initiatives on our path to building the home24 destination platform for home and living. And to start with the best news, as you might have already glimpsed, looking at the numbers, we're continuing to make great progress with year-to-date revenue growth now at 40% and also order intake growth in Q4 -- Q3 still significantly positive.And I think, yes, we all have to put this into perspective. We achieved this year over growth of 10% in Q3 in EU and 6% for the group despite the negative total financial demand after reopening post pandemic and strong comps in the previous year, which is something that makes us very confident looking at the future, given we are able to keep the elevated demand levels and elevated operating levels we have gained in the past year. This now brings us to our run rate revenue of EUR 616 million in group level, with Europe already above EUR 500 million, and we achieved this with a positive year-to-date EBITDA, in line with our profitability guidance for the year.As you all know, Q3 is an investment quarter, where we typically then use up some of the positive EBITDA we generated in the first half of the year and then Q4 and similar is the harvesting quarter again. So we're fully in line with our strategy of taking share and as you also can see from our cash position, we feel very confident with the use of funds to date and the ample cash we have available for future growth and strategic investments. We're narrowing down our top line guidance now to 28% to 32%, which is right in the middle of the guidance range that we set out at the beginning of the year between 20% and 40% and we're also looking at all those trading signals out there and the progress made to date, we feel we're very well on track to achieve our midterm goal of EUR 1 billion annualized revenues by the end of 2023.And to zoom in on how we want to achieve that, we've brought some select strategic initiatives, zooming down and narrowing down to Europe because as we have shared also in the past calls, Mobly is obviously starting to tell their own narrative and Europe's revenue share is now remaining above 80%. So if we look at the market position we've achieved, we feel in a very strong position. Now EU alone is above EUR 500 million run rate and more than 40% growth year-to-date in a market that's definitely more difficult than in 2020, which can be seen by peers and market indices.And we see our strategy confirmed by the fact that especially in the current market environment, where total order demand is down, we continue to take significant market share and do that while keeping core profitability. And we, therefore, feel very well positioned to continue to take share also in the years to come. And now I want to take you through a few select building blocks and investments that are just exemplary for the many amazing projects that the home24 team is realizing every quarter.And to just put that into perspective, we want to revisit one of our historic slides and the main growth drivers for the long run. So we have structural market platform and expansion as the main pieces of the growth parcel that we're working on. Today, in this earnings update, we will share 4 key investment areas on our platform development, all of which improve the end-to-end customer experience of the home24 platform and lead to lasting benefits in terms of customer satisfaction and loyalty which does not mean at all that we do not also make gradual progress on market penetration, on expansion, looking at select M&A opportunities. So we're obviously looking into any growth opportunities out there.Today, we just wanted to share the foremost relevant growth initiatives and investments on the platform development with you. Starting with probably a bit more short term investment, but probably the most relevant one in the current volatile and uncertain market environment, we've taken a deliberate investment into inventory to ensure high product availability and short delivery times to end customers in these times where supply chains are uncertain and we do ourselves benefiting here from the good control we have over supply chain even during these current times, especially for our private label business.When especially ocean freight disruption started escalating and rates exploded, we decided to take deliberate temporary step-ups of those buffer stocks and investments in inventory that we usually keep on a very efficient just-in-time replenishment logic. And the total effect is EUR 18 million higher inventory levels this year and we see this as a strength that ensures lower dependency from global supply chains, which obviously continue to remain fragile, reading the news with part, container and shipping capacity shortages.And as a result, we can offer short delivery times that also reflected in lower level of contract liabilities that Philipp will present later on when we look at financial working capital. So in sum, we feel very well prepared in terms of customer offering and customer happiness for upcoming peak seasons in Q4 and Q1 and expect to continue to take share from offline, especially. Over the course of 2021, we've invested into a very relevant extension of our product offering and we've hinted at that before we want to share today that we've made very significant process, especially in repeat driving categories to further increase customer engagement, and this is particular investment into the future.The assortment extension predominantly focuses on those repeat driving categories such as, boutique, home textiles, lamps or carpets that enable us to focus on full presentations of rooms and complete emotionalized storytelling settings. The total home24 assortment increased very significantly net more than 30,000 gross significantly more than that, which represents more than one-third increase versus past year. And in parallel, we've also doubled down on some of the existing strengths and extended core categories such as upholstery so we don't sacrifice one for the other.And we can assure you, we are not planning to lose our curated approach that customers cherish and appreciate where we promised to not overwhelm customers and give them opportunity to filter for choice in terms of style, price, delivery time or material in a very efficient way. But most importantly, why this is an important investment in the future is that not only will it enable our merchandising and brand teams to start telling more complete stories around the entire home and complete settings in terms of upsell and cross-sell potential. These new additions also historically are the lever to revenue share and revenue growth in the year post activation.So this is a true investment into the future, not only through loyalty and repeat, but also because in those new categories, we will see growth then especially helping next year's growth. Now historically, we spoke, especially also about NPS as one of the measurements that we took very seriously also during the pandemic, not only pre-pandemic. We have talked a lot about not maximizing top line to the fullest, but always keeping an eye on the customer satisfaction remaining stable. And we present to you today a very important leading KPI out of customer satisfaction as well that we consider proves the home24 value proposition. As a reminder, it's very easy to return if we order with home24 in Europe.You just call us and tell us we shall pick up the item from your apartment again, and we come and pick it up again, and we refund 100% payments. And so the fact the continuous investments into reducing return rates is paying off is a very good proxy of the shopping fulfillment experience becoming better over time and becoming a key strategic differentiator for home24. The sustainable improvement that you see over that trajectory of now 3 years is testament of the advantages of our curated assortment selection.With regard to product and fulfillment quality, but it's also showing that because we own the supply chain for our private label businesses, we are able to offer solutions to better cater to customer fulfillment, demands. For example, increasing the spare part offering and availability for our core assortment and the reduced return rate of 7%, the proof that these investments into customer satisfaction are paying off and a competitive advantage in our view when we go forward. And this is not the end, we still have many ideas to further improve our service offerings, especially as we grow into new categories.And one of these investments is our own 2-person delivery service in Europe that is readily following what we've already been offering and building in Brazil over the coming years. We cannot remind often enough how tricky and challenging it is to transport large and bulky items from the source to the customer, but especially also the last mile, where every picking and packing and cross-docking is prone to increase damage rates and claim rates, obviously, then from customers. And that personal impression when you deliver the goods to the end customer is a very important driver of customer satisfaction and it might surprise you, and we're quite proud as well that today, already, our last mile delivery share in Germany is at above 20%.We've gradually rolled this out, we haven't made a big fuss about it before we've proven that we can deliver great NPS at a very efficient cost rate because the last mile is such an important physical customer touch points, we wanted to get it right before we now also go and gradually increase this rate and increase that offering to many more customers in our core markets. We've obviously also done that step to make us independent of third-party capacities as we grow. And we've seen, especially in the last 4 quarters that this strategic move was really important because there were capacity constraints into manhandling with some of our trusted and long-term handling partners that we continue to operate with and will continue to operate with and it's really complementing of the service offerings with those partners that we achieve, and that in the end results in a better customer satisfaction.We do roll this out in 2 approaches, either by own delivery with fully owned chain control, so we hired also the personnel and lease the trucks, but there is also a more asset-light model with distributed operated partners that we select for regions. So we're very flexible, and we adapt to the local circumstances to find the best solution to cater to our customers' needs. And we are in no way going to roll this out to a service share that will risk not being able to fill our own capacity even during the season low.So you see we've not sit back and just enjoyed the covenant use demand push to online. On this slide 19, we share with you again, as a summary, that we feel very well on track on our midterm goal of EUR 1 billion annualized revenue by the end of 2023 and obviously, one of the key underlying drivers is the increase in online penetration that over the past quarters has seen a significant boost through changing consumer behavior patterns in the COVID times and the under-penetration rate probably is now somewhere in the mid-teens already. So that first driver of growth in terms of online penetration is happening, but we're not just -- for us to take advantage of in the coming quarters.With this, let me pass it over to Philipp, who will take you through the financial update of our Q3 numbers.
Perfect. Thank you Marc. A little bit has been already said about the financials in the summary section, so let us have a closer look on the details now together. As you can see on the order intake, we're very happy to see that it remains on a sustainably high level, demonstrating that we are able to stay on that growth track in the current challenging market environment. Looking at the like-for-like comparable base, home24 grew its order intake in Q3 2021 by 6% and remained in Europe on double-digit growth level despite the strong last year comparable.And as usual, all figures or GOV growth figures are communicated in constant currency. Even though this quarter, the constant currency effect on the GOV rate is even slightly negative. And also, as a second very brief reminder, due to the change in order creation logic in Europe in May 2021 and the like-for-like GOV figure represents currently the more accurate proxy for revenue predictions and marketing efficiency compared to the non-adjusted figure due to the structurally lower cancellation rate as of that implementation.Overall, our Q3 order intake approves a robust online customer demand and supports our confidence of continuously increasing online penetration rates in the future. If we take a look in more detail on the GOV and the individual drivers, we see that the growth was supported by higher basket sizes due to higher sales price levels on the one hand, slightly more items per order, but also just different category weights. The active customers also increased by more than 20% year-over-year and remained broadly stable compared to the last quarter, in line with the year-over-year GOV development.And of course, we'll continue to focus strongly on new customer acquisition, but we should not forget that our aim is also to increase the customer engagement and the customer interaction on the website. So in the long run, we would not be disappointed to see the active customer base growing slightly less than the order intake as this would yield towards an improving monetization of the current number of active customers. Turning to revenue, our Q3 growth in constant currency of 17% brings the year-to-date 2021 growth rate to 40%, which is a further acceleration compared to the same period in 2020, which saw 38% revenue growth in constant currency.Looking at the segments individually, Europe shows an especially robust performance in Q3 with a growth rate of 22%, supported by the good customer demand, but also by faster revenue realization as a result of the positive inventory development that Marc was mentioning beforehand. Also, the LATAM segment showed positive growth in Q3. On a very high previous year comparable with plus 88% growth in constant currency last year and if we look at LATAM from a 2-year angle, the 2-year growth rate in Q3 is even close to 100%.So even though the Q3 figure this year might look quite low on a 2-year basis, everything is completely fine and the same holds true from a year-to-date perspective, both segments show very, very similar 2-year growth rates of around 90% in constant currency and we are, therefore, very satisfied with the general trend in both segments and are also very happy accept slight differences and fluctuations in consumer behavior in individual quarters. In terms of the FX effect, Q3 is the first quarter in a while where there's only a very limited year-over-year FX effect on LATAM and the group with the real currency growth, even slightly higher than the constant currency growth.Looking now at the profitability and our adjusted EBITDA in more detail. As usual, Q3 is an investment quarter for home24, where profitability levels are seasonally lower and the same holds true for Q1 and Q3 and then we have our harvest in quarters, Q2, Q4, on the other hand, and the effect is mainly related to the timing, and we spend the marketing to acquire customers on the website compared to the revenue and profit realization when we deliver the goods. Despite the weaker gross margin, as a result from higher import costs, the overall profitability level remains well in line with guidance range of 0% to 2% ahead of the peak season.And the current EUR 2 million in EBITDA translate in 0.4% EBITDA margin. Especially in Europe, our general strategy to invest further into the growth opportunity, while keeping our structural profitability remains intact. And in Brazil, the profitability is obviously affected also by post-IPO investments, such as new warehouse or opening of further mega stores in São Paulo and yes, strong customer acquisition, but also due to the continuous pressure on gross margin in a difficult market environment, this brings the LATAM segment temporarily to an overall negative adjusted EBITDA margin.The group's cash and cash equivalents remain very high at roughly EUR 130 million and as you can see very well, the decline of the cash position from Q2 to Q3 is mainly related to working capital. And then yes, some CapEx and FX effect, but not necessarily the operating business. As previously mentioned, we invested significantly in higher inventory levels that led in parallel to a further decrease of customer prepayments resulting from shorter delivery times. So the prepayments that we received from customers happened shorter on our balance sheet, which reduces our payables position.The working capital increase in LATAM, still results on the other hand, also as previously mentioned, from an increase in trade receivables segment caused by the waiver of early payment of receivables arising from installment purchases. And as a result of the improved level of capital resources following the successful IPO, we continue to extend that going forward. And yes, once we probably see Q1 numbers next year pass, we will have a stable level of receivables that would then just only grow in line with the revenue development.But until then, we will have further cash outflow. Rational, of course, to save interest expenses as long as the cash levels are compatible and most important, this can be revised anytime bringing up the cash again. So all the receivables on the balance sheet for Brazil, we could turn into cash immediately. So the available cash plus the potential additional cash from the anticipation of installments receivables in Brazil leaves us ample financial flexibility to continuously expand our market position, both in Europe and in Brazil over the next quarters and years.
Looking ahead -- so having shared financials to date, we see our growth momentum remains healthy and in even more challenging times for the home and living space than last year, especially in the offline space. We see that normalization of consumer behavior in our markets is leading to a gradual normalization out of online demand. And we are very pleased to see that we are able to keep our growth momentum and our profitable growth that is actively taking share, especially from the offline players and that our growth strategy is paying off.We're currently seeing a very healthy trading in Q4 to date as well. At the same time, it's close to impossible beating the previous year's Q4 in Europe, especially where COVID restrictions were in place, offline retail was closed or partly closed. We do concentrate on what we can influence ourselves, which is to continue to focus on excelling in customer experience and satisfaction and to continue to take market share and deliver positive NPS for our customers. And we are able to -- we're glad that we're able to confirm that we see the full year turn out on the revenue side in the mid of our initial revenue range at the beginning of the year.So we are narrowing down that range to 28% to 32% at the lower end of the previously increased range, but still mid of the range that we guided at the beginning of the year and that just shows that we're not isolated from the competitive environment out there -- in a very uncertain market environment, both the demand and the pricing side is volatile. Some market participants have not yet priced their cost increases into consumer prices, and we just need to deal with that and consumers adapt to that as well. And on the supply side, especially ocean freight rates and delivery times remain difficult to steer.Looking at our results also compared to those of our peers, we see ourselves very well positioned with the control we have over the supply chain of our NPS and especially also after the investments of the inventory. We see ourselves in a very good position to continue to deliver very strong results going forward. And that's also why, with an unchanged EBITDA margin, we want to reiterate that we see ourselves well positioned to benefit over the midterm -- over the coming next 2 years where we keep our midterm growth goal of EUR 1 billion annualized revenue by the end of 2023 live and see this even confirmed with the trading to date.Having said that, in the current more volatile markets, profitability will be more in focus over the coming quarters as well so that our strategy in 2022 will ensure that we do not jeopardize that core profitability by overpacing in terms of growth and also managing our liquidity as Philipp has already hinted at in a way that does not reduce our cash position in Europe significantly in the next year, especially because also those working capital investments will come back eventually.With that, we want to thank you for your attendance this morning and to close our presentation to open up for questions and answers.
[Operator Instructions] We'll take the first question from Christian Salis from H&A.
So a couple of questions from my side, please. So on the gross margin, this was down quite significantly in Q3 and I think you have raised prices a little bit. So apparently, there seems not a big impact so far. So what could we expect in terms of gross margin for the fourth quarter? Maybe a little bit of a gross margin outlook would be helpful there. And then on freight costs, freight costs have increased obviously quite significantly, but your fulfillment cost ratio looks quite solid -- it's even down. It's even slightly below prior year, I think.So what has been the negative impact from the higher freight rates? And then on current trading, so the COVID infection rates are strongly rising again in Germany in the past days and weeks. Have you seen any pickup in terms of website traffic recently as people might start to avoid, visiting offline stores again? And finally, on the midterm outlook in terms of profitability, so the margins are still -- despite the decline year-over-year, are still significantly ahead of pre-C COVID levels also now in Q3. So what gives you confidence that you can sustain this improved level of profitability in the coming years?
Yes. Thank you very much for the questions. And I combine your first 2 into one because it is part of the answer. The freight costs of the transportation of goods into our warehouse flows into gross margin. So it's included in our cost of goods sold and that's one of the key reasons why gross margin was down in Q3 because especially the spot rates that we didn't secure over a longer period of time have seen unprecedented level across the industry and not just for us.We have been able to secure midterm rates that are less than half of what we've paid in the peak for the coming quarters, but still have to accept paying so-called peak season surcharges to just get capacity on ships. So even if you have a guaranteed rate, it doesn't mean you get a slot on a ship you need to take with that rate. So in terms of gross margin, the pressure will only ease once that freight pressure on the import goods, which is not our entirety of this other, but an important one is easing plus that the market has priced on for the comparable part of the assortment also those price increases. And that's the second main reason why we haven't seen gross margin recovering fast. It's basically that some more traditional players in the industry have not increased prices yet. We believe it's because they have input prices leading to their consumer pricing and not the replenishment prices. So pretty much a vast majority has priced up, but not everyone and in times where consumer demand is again on very elevated level compared to previous levels, but we need to acquire customers also in performance marketing, competing against those who haven't priced up yet.It means that we either decide to compete or not on that part of our assortment that is price comparable. Looking forward, we believe gross margins will trend rather slowly towards our midterm gross margin guidance of 50% so we believe gross margin pressure will prevail at least for the next one or 2 quarters. We're looking at global supply chains and also looking at the stage that some of the off-line players are in. They've been now kept afloat also with COVID aids. We believe some of them might go out of the market in the coming quarters but yes, only the future will tell, this will not lead to the highest price discipline and therefore, gross margin will remain probably the element in our midterm guidance that has a trajectory rather over the next 3, 4 quarters to reach the pre-COVID midterm guidance levels in all the profitability ambitions that we have.Looking at delivery rates, on the contrary, this is a great achievement despite the fact that diesel surcharges have been quite high. So the delivery costs were negatively influenced temporarily and I think this also shows that our own human handling is not only helping NPS but is also very efficient. So we see a sustainable and lasting competitive advantage here also in terms of costs. In terms of traffic and COVID infection rates, leading to demand peaks for online this is not something we have seen yet. And we all have children ourselves. My other son is now at home because his class is in quarantine again so we all hope that we're not going back to a closed market again.And in our guidance, we haven't built in any hope that the increased transaction rates might lead to elevated online demand in Q4 and through Q1. And yes, the margins ahead of pre-COVID levels I've hinted at that -- the core profitability we've achieved is not going away. So looking at profitability margins, at the moment, we are rather depressed because we have seen gross margins below our true potential levels temporarily and also in terms of performance marketing, Q3 as an investment quarter is definitely not showing our terminal margin guidance of 10% in terminal margin goals. So we see ourselves very well positioned to play that core profitability versus market share gain strategy going forward.And even though it's probably the most difficult times to manage this trade-off at the moment because consumer demand is very difficult to predict in these volatile times. Likewise, is replenishment times and delivery times. We see that the fact that we do have control of our supply chains gives us a certain edge in current times. I hope that did answer your questions.
Very helpful. And maybe just a follow-up on the -- could you maybe talk about quarter-to-date GOV growth?
I think I did that in the outlook section, it's close to impossible to really predict what will happen. What we have definitely seen is that stores are open again, right, also our own stores. So in Europe, it will be impossible to beat a quarter that was probably the peak demand with everyone home in the first half of Q4 last year and then the second half of Q4 even retail closed. So we're very confident and seeing a very healthy trading and very healthy LTV performances of the cohorts we can acquire. We don't have a crystal ball and for us, we basically concentrate on continuing to take share and continue to deliver positive customer satisfaction. Everything else will be difficult to predict.So we have decided to not share individual numbers of, for example, October GOV growth because we feel that, that will not be representative necessarily of the entire quarter. With consumer demand patterns back to a more normalized level, we also believe the Black Friday sales season towards end of November will become a more decisive factor in Q4, and this is still ahead of us so that's why, please accept that for now, the guidance corridor should speak for itself that we are cautiously confident that we will continue to take share in a very positive way, but we don't guide on GOV for Q4.
[Operator Instructions] We will now take the next question from Catharina Claes from Berenberg.
You briefly touched on order delivery and the impact on costs. Maybe can you give us a reminder or give us an overview of how you think this will play out in the future, potentially in a more -- well, normalized world post COVID, I would say. And then I think my second question -- most of the other ones were already asked, would be on average order value. So we have seen now an increase, and you've touched on this briefly as well. Do you think that, that will -- that this is a level which is sustainable? Or do you expect further increases there because of further shift in the product mix that is acquired, maybe?
Yes. Thank you. So on our delivery cost, I mean, first, we don't do it only for the cost so we do it for customer satisfaction because we see it will -- it is paying off. It is increasing loyalty as well and obviously, when we start doing our own human handling delivery hubs, we do those where we have highest density, so it's also easier to be very efficient there. The advantage on delivery cost is there to stay. In the end, our order delivery is also always a mix of human handling and parcels. So the future, as always, is difficult to tell and it's also somewhat linked to your second question, depending on the structure of our average order value of our deliveries.The delivery charges will develop in the same way, where the addition of small items can lead to smaller baskets temporarily, but also hopefully to larger baskets in terms of cross and upsell. So when we've now seen a trend of order value increasing, this does not necessarily mean that we will only see this gradual trend continuing. We already have a quite sizable average order value, if we compare that to peers and especially to businesses that have high purchase frequency. And our ultimate strategic goal as the home and living destination is to bring customers back to our platform very frequently, which would then also lead to possibly reducing customer order values on average, but obviously, then higher lifetime values over time, and therefore, it's a mix of both.We are very confident that this benefit will stay. So speaking about terminal margins again, gross margin is the one that has the biggest recovery potential back towards the 50% terminal margin profile. The delivery cost where we have already shown great progress towards the mid-teens that we've always guided at, which doesn't mean that this is the end because we still have many, many good ideas. And lastly, to delivery costs on our progress in terms of sustainability and ESG goals you might all remember that we already measure and compensate our last mile delivery costs as well, including the returns, and we have plans to make those delivery costs also and the delivery CO2 footprint, more prominent and transparent to our customers so that they can take a very deliberate decision on their consumption patterns, which might help return rates further.And obviously, a reduction in return rate is also a reduction in delivery charges. So do we see further potential? Yes. Do we see much more potential in terms of terminal margin improvement of gross margin ratio and marketing ratio? Also, yes.
Okay. And maybe one last question for me. In terms of the inventory, just to double check, there is no risk that you have to write-down inventory or put it out because I think you -- from previous calls, you mentioned that you obviously have an inventory level to be able to meet the upper end of the guidance, which was at the time, 38% revenue growth, just to make sure that I'm not missing potential impact here.
So what we take on the inventory is typically the private label business, which are proven top sellers. So if you recall, there is not the seasonality or the risk that products could go out of fashion quickly. We don't have any sell-through curves to consider so that reduces the risk of write-offs on stock even though we could have some longer ranges than usual. So is there -- could there be a little effect, yes? Should it be a relevant risk, I would say, no, from today's perspective.
Yes. And I mean, we've deliberately taken that trade-off decision, knowing what IFRS rules are, we value the benefit of being able to deliver our best seller to our customers in these volatile and uncertain times higher than some rules saying that's off a certain bestseller, we have too much, we would need to take an accrual, which will be released once we sell that best seller again, right. So I think the good news is that this is stuff we want to have on stock. This is not Christmas decoration that we have, right. So it's best-selling blue-chip franchises.
As there are no further questions, I would like to hand the call back over to your host for any additional or closing remarks.
Yes. Thank you very much. I think the closing remarks are stay safe. We've heard in the question that COVID infection rates are increasing again. We do hope we get through this together as soon as possible. Zooming out, we remain very, very confident that the elevated demand patterns post COVID will be to our advantage, and we will do the best to combine great customer fulfillment experience, great customer satisfaction with continued profitable growth. So thank you very much for following us on that path and your trust. We remain at your disposal if there's further follow-up questions, as always, Philipp and Anne are reachable through the mutual channels. So thank you very much and have a great day everyone.
Thank you. That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.