Allegro.eu S.A. (ALE) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by. I am Gaily, your Chorus Call operator. Welcome, and thank you for joining Allegro Group earnings call and live webcast to present and discuss the fourth quarter 2022 and annual financial results. [Operator Instructions] The conference is being recorded. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Michal Kuzawinski, Head of Investor Relations. Mr. Kuzawinski, you may now proceed.

Thank you, Gaily, and good morning, everybody. My name is Michal Kuzawinski, and I'm Head of Investor Relations at Allegro. It's my pleasure to have with us today our CEO, Roy Perticucci, who will talk to you about our Q4 business results and also future outlook; and our CFO, Jon Eastick, who will talk in more detail about financials and Q1 expectations. You may find a copy of our results presentation on our website at allegro.eu and you also have the link on the webcast screen. If you please turn to Slide #2 with the disclaimer. This is just a reminder that today's presentation and discussion contains forward-looking statements. Our actual results could differ materially from the plans expressed in these statements. Our call is being recorded and a recording will be available on our IR website. And now we are ready to begin. Roy, over to you.

Thank you, Michal. I'm excited to be with you here today for the third time now. And for the first time, I'm able to present to you Allegro's full year results as its Chief Executive. Overall, if we go to Page 5, I'm very pleased with the overall resilience of Allegro's networks business. We've continued to grow. Our focus on profitability and leverage reduction began to deliver results in the last quarter of last year, and we achieved this despite facing a series of challenges, which I also mentioned in my letter, specifically: persistently high inflation, in relatively high double-digit numbers in Poland; the ongoing war next door; and resulting uncertainty that many of us feel. As Jon will explain later, however, we're also off to a very good start to this year. So we've seen some considerable shift in Polish consumer shopping habits towards more value-orientated items within the context of overall growth, but I'm pleased to say that within the context, we've been able to grow GMV by 14% year-on-year in Q4 in Poland. Consolidated GMV grew by 25% year-on-year, and that reflects the performance -- consolidated performance, including the Mall segment. Polish operating revenue increased by 26%. Consolidated revenue grew by 92%. It's key that revenue grew faster than overall GMV performance. Active buyers also grew by a more modest 4.2% year-on-year, but in absolute terms, that means that there are nearly 600 additional -- 600,000 additional consumers who started shopping with Allegro in the last 12 months. Adjusted EBITDA is a factor that reflects our work on both growth, monetization and cost-reduction initiatives. EBITDA performance in Poland was up 41.2% year-on-year, excluding Mall, and the margin -- the GMV margin was up to 4.9%, which is something that we're very pleased with, given the Polish context of challenging trade conditions and inflation. Consolidated adjusted EBITDA, including Mall, grew by 33% year-on-year, so also there, a considerable acceleration. The Allegro performance -- Allegro Pay performance exceeded its target and more than doubled its activity over the course of last year and we continue to get ready for the 3P marketplace launch, which is imminent in the Czech Republic. The Mall segment as a whole has met its guidance for the first quarter since acquisition and it's encouraging to see the progress as we continue to double down on efforts. I should also say that leverage is down to 2.9x versus the peak of 3.54x post the Mall acquisition and I think this is a great achievement and reflects solid cash flow generation that we focus on. Overall, we're pleased with both Polish operations, which continue to show resilience and really appreciate the loyalty of Polish customers, particularly in these difficult times. And we're happy with the readiness for the Czech launch, which is coming forward. If we move on to Slide 6. I've introduced the 7 priorities in, I think, my first call. Just to remind listeners, we have 3 growth initiatives: one, focused on continuing strong position in Poland, focusing particularly in under-index segments, which include health and beauty, ambient, grocery and apparel; scaling up the Allegro Pay operations, particularly in Poland; while having a successful launch in both Czechia and Slovakia of our marketplace model. Those are our 3 growth initiatives. We also have 3 cost improvement initiatives. Number one on our list, of course, and probably our biggest cost block is improving our Smart! and delivery economics; we also are focusing on SG&A expenses as a whole, which you've already seen -- begin to see results there in our EBITDA results; and also the improvement of the Mall -- existing Mall 1P business in anticipation of launch of the 3P. So there's 3 cost initiatives. There are 3 growth initiatives. And finally, one that I touched on more extensively in the letter than I will do here, this is our focus on people and culture, which, of course, funds, progress in all of this in terms of intellectual horsepower. We're going to move on now to the growth priority 1, which is our Polish business. We continue to focus on customers, and we do this in a number of ways. A key one, of course, is to continue to build out selection. We now have over 290 million active offers on the platform, and we continue to acquire new merchants and both new merchants and offers are up considerably year-on-year on the platform. Price competitive, particularly at the moment, a priority given Polish consumers' focus on value. Of the 10 most popular items sold on the Internet, we have the best price for 9 of them and we continue to improve also our price monitoring of everyone trading on the Internet, and we now monitor, on a regular basis, 500,000 new products. All of these measures help consumers save money. We also continue, I think, to move from strength to strength in convenience. We're particularly proud of winning the Star of Customer Service, a Quality Award for the sixth consecutive year. And I think personally, as an ex operator, was very pleased with the performance of the operations team. We were able to extend order cut-off by 2 full days in Christmas. The last orders for Christmas were placed as late as 10:00 p.m. on the 22nd, so well done to the team. Of course, I'm also very happy with the ubiquity of our mobile app. It's very convenient to use, one of the most popular e-commerce apps in Poland and is currently serving about 11 million average monthly users. So I think as a whole, it's indicative that customers are happy with our service levels, though obviously, we continue to work to improve. Advertising is also a growth opportunity for us. And I'm happy to see that our business in this area has been able to grow twice the rate of GMV with ad revenues currently up 30% year-on-year in the last quarter. Advertising revenues reached 1.4% of GMV, up from 1.2% a year ago, and we have much more ambitious plans in this area. Moving on to priorities 2 and 3, namely our marketplace expansion into other Central European countries and Allegro Pay. The 3P preparations continue to proceed at pace. We are preparing the grounds well. We're currently in friends and family testing, and I feel confident that all of the end-to-end testing is going to be wound up successfully, all indications that we will be able to please Czech customers when we introduce the marketplace later this year. Allegro Pay also continues to go from strength to strength. We originated twice the volume of the previous year using our insights about consumer behavior to do that well and we're extremely pleased with the cooperation with Aion Bank. In Q4, we were also able to extend our successful cooperation, which not only includes the sale of some of our originated loans, but also includes the introduction -- imminent introduction of Banking-as-a-Service, which would enable us to offer savings and payment accounts. All of this allows us to continue to scale up our fintech offering while reducing working capital to drive that growth. Move on to the next page, cost priorities. Cost, of course, is equally important. Our cost savings give us -- keep the cash to fund growth. We introduced the subscription fee change to PLN 59.90, up from PLN 49 per month, which was the first price raise since we launched the product in 2018, and this price change seems to have been accepted by customers fairly well. We've also split the minimum order value to PLN 45 for lockers and PLN 65 for home delivery, up from PLN 40 for both. And over time, this ought to drive the delivery mix towards less expensive shipping methods. Of course, it will take us up to a year to drive these changes as customers renew their annual membership. Meanwhile, we also in August last year, changed the delivery cofinance charge to share more evenly the cost of deliveries with Smart! program merchants. And churn has remained remarkably stable despite all of these pricing changes, and we continue to monitor customers' behavior after the changes. Also, we should talk about the delivery performance. Again, I mentioned earlier, I was very pleased with the fact that we're able to extend customer -- or excuse me, Christmas ordering by 2 additional days and 99.6% of orders were delivered before Christmas as promised. We've got 2,500 APMs that are installed as of the end of '22, and we continue to expand installations in the course of this year, focusing as well, as always, when we make investments, on the most profitable positions. And we're working this year, I should say, also to selectively improve utilization. The Mall turnarounds of the 1P business, priority 5, we've dedicated considerable effort here. We recruited an experienced seasoned retailer, Jean Charretteur, late last year, and he's been focusing on both improving selection but also making sure that availability continues to rise where we've made considerable progress while simultaneously also reducing levels of idle stock. Much more still here to do, but I think the key thing to say is that I'm very happy that the Mall business hit its guidance in the course of the quarter. Last on this slide, of course, is priority 6, fit to grow. We want to create a single organization that operates effectively across 6 countries. We want to make sure that talent is deployed as productively and as clearly as possible within this post-merger structure, and we're continuing to look for synergies. We, of course, continue to be highly disciplined about our expense policies and capital investment. I think we're seeing the results of this. And this, we're expecting to be an ongoing mindset as the business shifts towards higher cost consciousness. Lastly, less immediately visible is the our prioritization of projects. As I said in my first presentation, we want to be focused on projects that will realize the highest returns and accept the fact that, that may require us to do some prioritization and scaling back on other areas. And again, the focus is on return and realization risk. And again, I'm quite happy with some of the progress we're making here. I think key here are some of the things that we're doing also in logistics. For example, we're consolidating our 2 warehouses in Poland, in [ Borne ] and [ Adamov ], and there will be more here going forward. We've continued to be very careful about hiring and actually in the Czech Republic, we made our first reductions in the Mall Group, particularly in delivery experience and recruiting. Slide 10. I think the key highlight here is something that I think we're all very proud about is that the MSCI upgraded our ESG rating from A to AA. I think that's a very good achievement and is indicative of some of the efforts we're making here. Other key examples are that the climate targets approved by the Science-Based Targets have focused on Scope 1 and Scope 2 greenhouse gas emission reductions. We were able to reduce our carbon footprint by 10.4%. 23% of our energy consumption is coming now from renewable sources. And 98% of our waste in warehouses and depots was recycled. So at this point, let me hand over to Jon, who will take you through the financials. I'll be back to talk with you about the management outlook. Jon?

Thank you very much, Roy. Good morning, everyone. It really is a pleasure to be here to take you through what you already heard is a very strong set of results for Q4 and also looking very encouraging as we get into the first part of 2023. So if we start from Slide 12. As usual, I'll go through the Polish operations first. This slide, just really there for your easy reference of all the really critical KPIs. And let's start the more detailed comments from Slide 13, with active buyers and spend per buyer. So we actually had a very good quarter in Q4. We increased our active buyer base by 245,000 customers; that's 1.8% growth to 14.1 million, the highest total that we've ever had. And the annual growth was 4.2%. It seems now that the bubble from COVID is well behind us. In terms of our off-platform communication with potential customers, we've really been focusing on the trust that you can place in Allegro as a place to shop and the great pricing that you can find on Allegro and that does really seem to be resonating with the people that don't shop so much with Allegro already. Looking at spend per buyer, we continue to tick upwards, another 1.9% of progress in Q4 to PLN 3,500 on an annual basis of spend per buyer, and we're up 11.3% on an annual basis. The macro environment did start to deteriorate in the fourth quarter as we feared it might and you can see on Slide 14, where I'll talk about GMV, that retail sales in nominal terms did slow during the course of the fourth quarter by 6.4 percentage points compared to Q3. Now against that backdrop, I think managing to deliver 14% growth is actually an excellent performance. 14% growth in our GMV, very, very resilient, with GMV coming in at PLN 14.4 billion for the quarter. That meant for the full year, we delivered PLN 49.4 billion in GMV, up overall by 15.9%. And, yes, a very strong performance. If we look at the trends around the growth comparing Q3 to Q4. Obviously, the growth rate did slow reflecting the macro situation. But it's important to point out that we still continued to grow, even in Q4, the actual volume of transactions. And the slowdown in inflationary impacts within the growth is really reflecting customers moving their spending into more everyday categories away from discretionary and also from trading down. Now the good thing with Allegro is we have all the selection, huge selection across all the categories, and that's what provides us with the resilience. Last thing to mention on this slide. As we know, Smart! is an important growth driver for us. And during the fourth quarter, we made the first changes that we've ever made to the tariff or to the terms and conditions of Smart! In particular, we increased the MOV rates. This has so far affected only 23% of the Smart! base through the end of December. That's because people -- as their existing subscription finishes, it's the moment that they have to confirm that they'll roll onto the new terms and conditions. Very encouragingly, we're seeing hardly any drop-off and no real churn because of the change in the rates. As you'll see as we move through the presentation, we're already starting to see the first benefits in terms of impact on our cost and margins. So moving on to revenue. Performance really very, very strong. The 14% of GMV translating into 26.5% of revenue growth. We booked PLN 2,025 million of revenue for the fourth quarter. You can see the combined impact of the marketplace GMV growth and the take-rate increases on the first bar there at 26% growth in the marketplace. Advertising continuing to grow faster than GMV, growing penetration up 30% in revenue. Price comparison gone back into positive growth during the course of 2022, at 10% and our retail business growing strongly, although still well under 2% of GMV and growing with stable margins. Looking at take rate. The overall growth over the 4 quarters was just over 1 percentage point. We finished Q4 on 10.9% take rate. The 2 major moves that we made during the year, just to remind you, in February, we increased cofinancing and we increased cofinancing again during August, very little happening on the core take rates for commissions on the individual transactions. So moving on to adjusted EBITDA on Slide 16. Really pleased to be announcing such progress, 41% increase year-on-year is really a very satisfying performance. We landed on PLN 708 million of EBITDA for the fourth quarter. Now where is this growth coming from? I think the first thing to acknowledge is that the baseline is benefiting now in that the headwinds we created for ourselves by the investments we made in the Smart! offering in 2021, are now basically out of the numbers in Q4, which creates a nice baseline to grow from. But much more importantly than that, the -- what you see is the impact of both the resilient GMV growth and the higher take rates on the left-hand side of the bridge, marketplace revenue contribution. Advertising, obviously, the growth there drops straight through to the bottom line, very little in the way of incremental cost. And then on the right-hand side of the bar, you see other SG&A at PLN 53 million year-on-year increase. It's important to remember that if you look at that same bridge back in Q2, this was almost PLN 100 million higher on an annual basis. And it really shows the progress we've been making on cost control, on headcount management and the fit-to-grow initiatives to see this improvement. 11% growth on -- in Q4 year-on-year means we're now growing SG&A more slowly than GMV, which is obviously for the long term, exactly where we need that metric to be. Now in terms of a drag on EBITDA growth, the only area of drag really is net delivery costs. As the Smart! penetration grows, obviously, more and more GMV comes accompanied with free delivery. And on an overall basis, we had 52 basis points increase in cost of delivery relative to GMV, but behind that, there's a number of positives. First of all, that result absorbs the indexation increases from our largest delivery partner, which kicked in from November. And our unit costs overall are up only 7% year-on-year after taking increases, justifiable increases given the inflationary environment, from all our very valued delivery partners. Also very importantly, the first impacts of the Smart! changes are manifesting themselves in a reversal of the trend towards using courier for delivery. The share of courier in the fourth quarter was down 3 percentage points versus the third quarter. So more of that to come as more of the customers switch to the new tariff. So that's EBITDA. Capital investment over on Slide 17. And it's nice to be announcing a 14% reduction in capital investment, down to PLN 129 million for the quarter. That's coming from an number of areas. First of all, on our delivery experience rollouts, we're very focused on efficiency and utilization of the investments already made. So the speed of investment is slowing somewhat. The office development projects and leasehold improvements that result from those are now behind us. Really, the last big spending was in Q2 and Q3. The fit-to-grow project is having a big impact in terms of our CapEx policies and our benchmarks or hurdles for making investments, which is also contributing. And the freezing of the headcount means that the tech organization is no longer growing in size, and it means, therefore, that the capitalized development costs are basically flat year-on-year. So that's it on the Polish operations side. What about Mall? On Slide 18, again, you have the key KPIs set out for you. Here, we're showing you versus a pro forma for you to help you interpret the rates of growth on the various metrics, but obviously, in our consolidated actuals, we only have 3 quarters of Mall's performance reflected in the numbers. So looking at Mall in more detail then on Slide 19. Obviously, the fourth quarter for them as a business that's very focused on consumer discretionary was the key quarter of the year, so much, much stronger absolute GMV. And that also obviously translates into better margin performance. But as Roy said, we're super happy that they met the expectations that were set and executed very well. Behind the scenes, there's a lot of work going on, on selection, and we launched Smart! as you've heard earlier, also on pricing and extending the use of our toolbox to help them with running their operation. Their 3P GMV continues to take share within the total, up 16.8%, and it's now 17% of the total GMV. Also very encouraging was inventory management performance, 6 days better than a year ago. And that, together with just the seasonality of the fourth quarter, contributed to PLN 130 million cash flow -- inflow from working capital. The final thing to mention here is if you look at the final row in the table, capital investment of PLN 29 million includes actually a significant component of capitalized development cost coming from the Polish team who are working hard to prepare the integrated allegro.cz marketplace platform that we're intending to launch in the upcoming months. So then moving on to the consolidated group. Again, you have the metrics on Slide 20. And the key thing really to discuss here is a little bit more detail on the leverage performance, which Roy was already calling out at the beginning of the presentation. So we moved down from 3.44x at the end of September, down to 2.91x adjusted EBITDA at the end of December, which is a really tremendous performance overall. It's coming from a number of areas. First of all, the very strong Polish EBITDA more than offset the first time consolidation of the loss from the Mall business, helping the overall adjusted EBITDA. The progress we made on the scope of cooperation with Aion to sell down even more of the loans originated by Allegro Pay made a big contribution, as did the work that Mall did on their working capital. All in all, that allowed us to actually pay down PLN 500 million in the revolving credit facility, so our gross debt moved down to PLN 6.5 billion, all of which doesn't expire until 2025. We continue to be very focused on the leverage, and we intend to bring it down during the course of 2023. So with that comment, it's a good moment to hand it back to talk about management's outlook and I'm handing back to Roy.

Thanks, Jon. So at this point, I'd also like to sort of share our intentions to move to different guidance policies. I think it's often the case when a new Chief Executive takes over. We'd like to move to a quarterly guidance policy in the effort to give you more precise numbers of what to expect for the coming quarter. And also, I think this is true, I think, for many companies in our segment. When they give guidance at all, they tend to give quarterly guidance, and that's exactly what I think is the best thing to do. That shouldn't, however, distract us from the fact that we do have very clear midterm aspirations. I think one of the key things, and this is coherent also with the 7 priorities, we want to have continued profitable GMV growth in Poland. We want to focus on a number of clearly under-indexed categories or segments and continue to achieve low double-digit GMV CAGR, with a fairly consistent profitability performance. We want to enhance the Polish marketplace with the expansion of Allegro Pay and increasing penetration of advertising services. In addition to our basic business of connecting merchants to customers, we think these are other things that will be attractive offers for consumers and, of course, one of the things I think has been a very heavy theme in this presentation, we're focusing on the efficiency. We want to move Poland to a GMV margin back towards the sort of 5% target and continue to do progress on the Mall's 1P business as well. GMV growth acceleration is likely to come predominantly through expansion of our marketplace model in new countries, and we are starting with both Czechia and Slovakia, hopefully, both in this year. Also, I think the broad working title that we've had has always been fit to grow or fit for growth, where here, it's as much a mindset of continuous improvement and effectiveness of our operations. And also, I think a methodical way of working through -- using processes to make decisions both in terms of capital expense and large OpEx expenditures. All of this, of course, within the optics or with the intention of reducing our leverage further over the coming years. It shouldn't be of any surprise given these sort of longer-term goals that our priorities for 2023 are: One, coherent with those overall aspirations but also coherent with the 7 priorities as I've been outlining with you since I've been Chief Executive. So there's not really anything hugely here that I'd like to call out other than, I think, to point out that we do expect the growth within Poland will be driven, in a very significant part, by our focus of these under-indexed categories. About 1/3 of total growth ought to come from them this year. We are feeling confident that the end-to-end execution of our marketplace in a new country will run well. And I think I'm particularly pleased with some of the collaboration that we've been able to do with some of our suppliers to achieve that. And again, I think the Allegro Pay is a spectacularly attractive new business for us, and I'm also very pleased with our collaboration with Aion there. So I'm not going to make any more comments about this slide. Of course, if you have any specific questions, happy to answer them in the Q&A session. I'd like to hand back now to Jon to do the next quarterly outlook.

Yes. Thank you very much, Roy. And I'll therefore take you through the final slide of the presentation, #25. It's important just to start off by acknowledging the fact that for 2022, we did meet all our expectations, all our guidance right the way across the board, both on the Polish operations and on the Mall segment, which is something that we're obviously very pleased and proud to be able to say. So moving on to the guidance then under our new policy, which is focused on the first quarter of '23, I'll start with the Polish operations, and I'll start with trading and the GMV. The trading has gone actually very well in the context of the retail sales in Poland continuing to slow during the course of the quarter. We're actually now, after the February data, seeing a 5% negative growth in retail on a real terms basis in the Polish economy, but despite that, we're actually going to -- with high confidence at this late point in the quarter, going to be able to report very similar growth to the growth we had in Q4, knocking on the door of 14% growth. That shows really that, again, underlines the resilience of Allegro's model. What we're actually seeing in the quarter is quite a significant further acceleration in transactions growth in percentage terms. So that's ticking up very nicely as consumers continue to show the same trends as in Q4, which is move to more everyday shopping, less discretionary categories and trading down somewhat in terms of the choices that they actually make. So very much steady as she goes in a deteriorating environment on -- from the macro perspective when we look at GMV. Looking further down the P&L, therefore, not surprisingly, revenue continues to move well ahead of the GMV growth. We're expecting 20% to 22% for the Polish business. Compared to the fourth quarter, we have to take into account that we're now lapping the first of last year's cofinance increases that took place in February, and that really accounts for the slightly slower top line growth. All the efforts that we're making around cost management and the fit-to-grow project continue to bear fruit when we look at adjusted EBITDA. We would expect it to move up slightly faster than revenue, meaning a better margin. And that's despite the fact that we're now obviously taking a full quarter impact of the indexation of the biggest delivery contract that we have within our cost base. Moving on to capital investment between PLN 100 million and PLN 110 million expected for the quarter, and that compares to PLN 160 million for the first quarter a year ago. Looking at the Mall segment. Again, the macro situation in those countries is not great. There are some signs of improvement in terms of the rate of contraction is starting to slow, but it's still a very difficult trading environment. And in that context, we're expecting a 1% to 2% year-on-year pro forma decline, which is really not too bad. That will then translate into slightly lower revenue growth, between 2% and 4% down. And that's mainly because the 3P part of the business continues to grow well, converting retail sales into take rates. Adjusted EBITDA in the Mall countries -- in the Mall segment, PLN 75 million to PLN 80 million, but it's very important to underline that we're now starting to account for the 3P launch project as part of the Mall segment, which means that the team that's working extremely hard getting everything prepared for the launch is now included in the segment cost. And you can see that mentioned in footnote 5, PLN 15 million, PLN 16 million for the first quarter on top of the legacy Mall business losses. And similarly, on capital investment, a big chunk of that PLN 20 million, PLN 30 million is actually the ongoing development work going into preparing the marketplace. So that's the summary of the guidance. The group consolidated is just the arithmetical results, so I won't go through that in any detail. So with that, it's time to open things up to Q&A. Thank you for listening to the prepared presentation. Michal, back to you.

[Operator Instructions] The first question is from the line of Andrew Ross with Barclays.

It's Andrew here from Barclays. I'll start with 3. The first one is on Mall Group. Can you just give us a sense in terms of how much you're expecting to lose for Mall Group this year? I appreciate you haven't given a broader guidance, but that's the one bit of the model that is very difficult for us to model actually, and there's a lot going on with the timing of the 3P launch. So that would be helpful. The second thing is to go through the cash flow for this year. It looks like the CapEx is down quite a bit year-on-year in Q1, but should we assume that continues for the rest of the year? Is there anything else to call out on the cash flow we should be aware of? And then the third thing is your plans on take rate for this year. Any more changes to cofinancing or otherwise we should be aware of that is planned for 2023? Thank you.

Okay. I'll take those questions, Andrew. Thank you. Yes. So first of all, on the Mall Group, and maybe also using the opportunity to comment on the policy change around guidance. The Slide #24 is also -- which kind of summarizes what we're doing in terms of the key priorities, is also there to help you kind of judge what is -- what we do expect will happen over the course of the year. So taking that in that context, I can try and answer your question. When it comes to the Mall legacy business, we're working extremely hard on making it trade more effectively in the difficult market, but we're also working hard behind the scenes to streamline the way it operates and working on integrating the -- what is basically a disparate collection of e-stores into 1 organization. So that will give us the basis to confidently do what we said here on this slide, which is reduce Mall's losses on a year-on-year basis. And we'll be giving you updates obviously in terms of where we think we'll land quarter-by-quarter. The second aspect is the 3P launch, okay? So priority #2, the international marketplace. We're not saying exactly when we're going to launch because we don't want to alert competition to exactly what we're doing, okay? But we're making considerable progress in being ready. And the way that project will be run will be very similar to what we've done on previous large projects, such as Smart!, such as Allegro Pay, where we start with a testing phase, calibrate all the key KPIs and calibrate our assumptions. And based on that, we'll decide exactly how we're going to go into the full commercial hard launch and how much weight we'll put behind that in terms of resources. So in other words, it's actually a little bit difficult right now to say exactly what we'll spend because we really want to get through that test phase before we solidify exactly what the plan looks like. Now the rest of the question was?

So the second question was just around your expectations for the cash flow for this year. So CapEx, working capital, or anything else we should be aware of when we're thinking about how much you delever through this year?

Yes, yes. Yes. So again, I mean, it's -- we're not going to give any hard number for the full year. The themes that we're executing on are laid out in the presentation. When it comes to delivery experience, we're very focused on the return on the investments we've already made, but we are continuing to expand the APM network. We're not giving any specific targets in that regard. But we do continue to expand. Yes. And then the final question was regarding the take rate. Take rate changes is something that we don't announce in advance. So anyway, we have to announce giving fair notice to the merchants, and we always do that. This year is about cost control and that is the main focus. But when there are increases in take rate, they'll get announced and publicized.

The next question is from the line of Luke Holbrook with Morgan Stanley.

Just a couple from my side. Just one, if Roy, you could touch a little bit on your fulfillment strategy into this year. We've got a lot of network now that's down to 2,500. So just anything you can provide in terms of color on where you see capital allocation from a fulfillment perspective. Also touch on your courier network and where you see that heading? And then just the second question is, and I'm going to try my luck a little bit here, just on the Smart! users. Can you disclose roughly how many Smart! users you now currently have?

I'll answer the second question first, and I would say I'm very sorry, but no, we won't be able to share that. I think the first question deserves an extensive answer and work hard here to sort of navigate what I can and can't say. But I do think it's clear that over the previous years, we made substantial investments -- capital investments in creating our own Polish capabilities, both in fulfillment and in delivery. We have a network of roughly 2,500 lockers in Poland. And I think our focus now is utilization, do everything possible to make sure that merchants are very happy with our fulfillment capabilities as we sort of refocus our 1P aspirations that were also effective there. And I think the name of the game, as is true in any logistics business, is a continuous, I'd almost sort of say, bloody-minded attention to unit cost and reliability, in the jargon normally referred to as speed, reliability and cost. And so that will be, I think, a focus overall. I have to say also that I quite like some of the assets that we acquired with Mall. I think we have an attractive array of assets there as well. And I think there's also some things to be learned from our activities at scale in the Czech Republic, in particular, that we may bring back also to Poland. But I think, by and large, I think in all countries in which we operate, all 6, the predominant focus is to drive more volume through our own assets and get unit cost down.

Okay. And just in terms of -- in light of your key performance, let's say, provider raising the cost to you by high teens this year. That's not fundamentally changing the rate at which you think that you'll need to push your fulfillment side?

Well, I mean, to be very honest, first of all, I think a number of our suppliers, particularly if you're referring to couriers, kind of know what they're doing and quite a lot of the costs that they're wrestling with are applied to all of us. So if we were to do it or if they were to do it, we're still dealing with the fact that fuel costs are what they are and inflation is what they are and salaries expectations of employees are what they are. So I don't think -- I think that's a false trade-off. What we should focus on is to make sure that regardless of what channel, what capabilities we use, our own or others, that we're actually getting the best unit cost possible. And obviously, with growing volumes, the expectation is, is that we can achieve that. Within the constricts of inflation, yes, yes.

Mr. Holbrook, are you finished with your questions?

Yes. Sorry, I forgot, yes. That's very helpful.

The next question is from the line of Lisa Yang with Goldman Sachs.

Can I just follow up firstly with your comments on the Mall Group and the expectations of the start of losses, the launch cost. So is it fair to assume so without that, the underlying trends should be better in '23 versus '22? But with the sort of losses, you expect the losses to be higher than 2022? And really, I know we don't have a specific figure, but like what sort of range are we talking about? Like is it PLN 100 million to PLN 300 million, PLN 100 million to PLN 500 million, like just so we can at least just get a bit prepared for like the magnitude of those investments? That's the first question. The second question is, I understand you don't want to give -- you're working away from basically giving full year guidance, but when we think about the comments on the EBITDA margin improvement in Q1, I'm just wondering how you're seeing the sequencing of the EBITDA margin improvement through the year. I think in H1, you still benefit to some extent from the increase in the cofinancing, but at the same time in H2, I think you see the ramp-up of the benefit of the Smart! prices and those things. So how should we think about margin improvement for in H1 versus H2 more specifically? And thirdly, very quickly, your midterm target of low double digit, are we talking about 10% to 19% or 10% to 30%? I'm just curious like what that double digit means. Is that in the teens? Or is that 10 or does that start with a 1 or a 2?

Where we go for you to see -- I think we need to make the point that some of those losses in Czechia are actually investments because we're launching a new marketplace but I'm just going to...

Okay. Yes, so thank you for the question. So yes, coming back to Mall, which was the first question, so yes, indeed, we expect that the losses for the legacy business are going to narrow, due to all the initiatives that we're taking. You should remember that the first quarter has still not got a comparative to it, obviously. Right? Because we bought the company in Q2. But other than that, we should be looking at narrowing losses. In terms of the startup expenses, I mean, these are really investments when they get made to get the flywheel moving in the marketplace. Exactly what -- as I said in the earlier comment, exactly what we're going to do will be very much dictated by exactly how the test phase performs and how the key metrics perform, and it really is too early to say what we would spend. If the metrics are strong, we're likely actually, we would spend more rather than less and vice versa. So we really have to get through the testing phase, and then we can have more of a conversation on that.

And the margin, please?

Yes, in terms of margin improvement sequencing, right, that was the second question. Again, I mean, the slide to really look at for any direction beyond the quarterly guidance is Slide 24. The large amount of work around fit to grow in terms of identifying the savings opportunities has been done, and we're very much in execution mode. A lot of things involve internal announcements first. So we're not going to go through detail. We'll tell you retrospectively what's been happening. And this is obviously going to help us in terms of supporting margin through the rest of the year. Some element of watching how the economy moves is obviously going to be factored in, in terms of how margin performs during the course of the year. And then the final part of your question was low double digits. Yes, it's a very fair question, but it does mean that we're talking about sort of low-teen type of number. One of the reasons why we struggle with this is that in Polish, low teens doesn't mean exactly the same thing as it does in English. So we struggle with the translation, but low double digit basically means below 15%.

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

I have 2 questions. The question #1 is on Allegro Pay. If you could, please share a little bit more. The project seems to be progressing very well, but if you could, please share more on the monetization efforts anyway, how you see the NPV of that project and also on your plans to venture into banking, in the Banking-as-a-Service model, please? So that's question #1. Question #2, I know it might be hard, but perhaps you could comment a little bit on the market structure of e-commerce in Poland following the exits from Shopee and perhaps if there was any impact on your GMV over the last couple of months after Shopee exited.

Right. So I think we sort of intimated a number of things. I think the first thing is the introduction or the use of Banking-as-a-Service provided by Aion, that enables us to do things also like take deposits. And obviously, that's something that would be interesting, but I think the core of the business is going to be, certainly for the near future, very similar to what we do today, which is mostly about short-term credit, short-term consumer credit, predominantly for purchases on the site. Over time, of course, that could expand, and I think there are actually a number of well-established examples of marketplaces elsewhere in the world that might be an analog for, over time, how we might progress, obviously, with a different trading situation in Poland than in some of these other markets.

Sorry, part -- Okay? Part of your question was about the returns on the Allegro Pay investments and maybe I'll address that aspect. The Aion cooperation is actually a fabulous opportunity for us because it allows us to sell now not only the installment loans, but also the short turnover BNPL credit portfolio. We started doing that in the fourth quarter, which means that the amount of capital we have employed in the Allegro Pay project is actually very low relative to the value of the loans that we're originating. Those loans are strongly supportive to incremental GMV growth and we measure that incessantly religiously from month to month in terms of how it helps our growth performance. That generates incremental take rate. Increasingly, there are opportunities as we scale up to monetize on the loans themselves, right? The interest rates are massively higher than they were even 12 months ago. And the other important thing to remember on the Aion cooperation is that when they buy the loans, they also buy the receivable risk. There's no underwriting from our side, which is why it goes off balance sheet. And in the uncertain economic times that we're in at the moment, we shouldn't underestimate that aspect of their cooperation as well. I should say NPLs are still very much under control. We have the lid on that issue even now. There was then the question about Shopee. Roy, would you like to take it?

I'll do that. So I think this is something just to keep in mind in general is one of the things that really matters to consumers is consistency. And consistency requires time. And so Shopee was not on the Polish market for very long. And so sort of I think overall, their impact was relatively limited while they were there. And therefore, now that they have exited the market, the aftermath is relatively the same. But I think that's also true for also our expansion -- our own expansion abroad. So I think one of the things we should do is it takes a while for customers to learn about a new offer. And it's particularly, I think, the thing that customers overall in the world value, is that when a retailer or an e-commerce operator makes a promise, that consistently promise -- deliver on that promise and again, consistency takes time to establish both in the good sense or in the bad sense. We're obviously focusing very much on the good sense in our own case, as I'm sure Shopee did when they however, unfortunately, had to leave the market here in Poland.

Could you please just add a little bit more color on the overall competitive environment in the industry?

Sure. I can, although I think to be very clear, just as like we don't generally like to make comments about suppliers, we also generally don't like to make direct comments about any particular competitor in the market. What I would say is just overall this is the time, and I don't think I'm speaking directly to our 6 countries, I think this is true throughout the Western world, consumers are cautious. We've come out from COVID. It was a tough time. A lot of people stuck at home. And now we're facing very high inflation. And if you're in a country, particularly like ours, there's a war going on next door. And so even for those of us who are doing well and got good raises this year despite inflation, we're still being a little bit more careful than usual and focusing very much on value, getting the best we possibly can on the money we spend. And I think that will favor more value-orientated retailers as a whole, both online and offline. Fortunately, in our case, we are a mass market e-tailer with a very, very broad selection and frankly, also a very strong network of merchants. And so that it's, I think, easier for customers to shift their purchasing behaviors without shifting the platform in which they're making those purchases. And so I'm -- I think within the overall caution of being in a market where there's high inflation and uncertain outcomes, I'm optimistic that we're very well positioned, perhaps also better positioned against some of our more, if you will, specialized e-tailers to do well.

The next question is from the line of Hanzade Kilickiran with JPMorgan.

And gentlemen, thank you very much for the presentation and addressing our questions. I have 2 questions to make a follow-up. The first one is about the category diversification. Is it possible to share the initial results on this strategy? I mean, such as, is your platform ready now in terms of technology, particularly for the fashion category providing like the best filters and et cetera? And do you see more merchants onboarding while some retailers switch their focus to offline from online? And could this be also a driver of your medium-term margin guidance of around 5% in Poland? And the second is a small question to understand the delivery cost build-up in the first quarter? How should we think about it progressing in the first Q [ export and stock ] GMV? And would it be reasonable to assume a better delivery cost progress as you start utilizing your own lockers benefiting from the economies of scale?

If you could hang on for just a minute because those were 2 long questions. Let me just make sure I process. So I'll try to answer the questions as I've understood them. I'll probably just summarize first and then I may need some help to make sure I got everything you wanted to know. So I think just broadly speaking, we don't -- we try to avoid preannouncing changes, but what I would say is that directionally, on all 3 segments, the story is very similar. What I mean by that is the first thing is we know that getting product information really, really accurate is an important element that the progress in terms of what we offer is -- requires, I think, also deep collaboration either with merchants on the site or with suppliers and that is part of what we're working on. We've prioritized specific brands. The interesting thing is that for 2 of these segments that the number of overall SKUs that make up a large proportion of the market is relatively contained. So I think that's also a great opportunity for us to make good progress this year. However, we should also recognize that shopping in some of the segments that I've described, particularly health and beauty and ambient grocery require, I think, some adjustments to the customers' shopping trip. What I mean by that is there's a lot of, if you will, let's say, regular purchases or favorites. When you build a shopping list, if you're a consumer in these 2 segments, you tend to buy the same things week in and week out. And I think that requires also some additional functionality that we're continuing -- we working on right at the moment. This is a place, and I think this is true for all of us when we're in physical retail and a supermarket. We buy our friends, yes, with the particular brands. There may even be particular packages that we just buy without even thinking about. And so I think there's quite a bit of work that we need to do here. And of course, that requires targeted investment and thoughtful development of what the UX is going to look like. So I think that's about what I can say at the moment. And I think you'll see, if you shop on our site and welcome you to do that. It's also the great thing about Allegro these days is they're available in a multiple -- multitude of languages and currencies and you'll be able to sort of see how the UX evolves. In terms of delivery costs is -- how do I say this? Derve diesel costs were exploding even before there was a war on. That's a detail that sometimes we miss. And that's also, I think, given some of the priorities the governments have given around the world, and those costs have come down slightly but not huge amounts. And so I expect that our delivery costs are going to evolve more or less along the lines of what contractually was stipulated, with our suppliers at least, and how their cost structures evolve over time. Of course, all of us, particularly good logistics operators, are always focusing on the trade-offs between unit costs and scale and doing their best to contain them. That includes our own efforts, I would hasten to add. I think there was a third part of your question, though, and I'm not sure I entirely understood it. It had something to do with the aspirations we have about GMV margin, EBITDA, GMV margin and the [indiscernible] there.

Actually, I was asking about how should we think about the delivery cost as a percentage of GMV in the first quarter? Because this is going to be the first full quarter of the indexation of InPost. And I just wonder, it is possible, I mean, to share some sort of soft guidance on this one.

Yes. Let me take that question. So the -- you've basically got 2 things that are moving in opposite directions, right? One is exactly as you pointed out. Amongst others, the full -- the impact of the price increases, particularly from InPost, right, which will have an impact on the full Q1, is going in one direction. In the other direction, with every passing quarter, more of the Smart! consumer base are transitioning to the new arrangements, which means the MOV, where they get subsidized delivery, is higher. We went from PLN 40 to PLN 45 on lockers and from PLN 40 to PLN 65 on courier. And I called out during the presentation that the 23% that had converted by the end of Q4 had already translated into a 3% improvement in reducing the mix of courier in the total because obviously, courier delivery is more expensive than locker delivery. So as the year progresses, eventually we would get towards 100% of Smart! consumers being on the new tariff and that should have a knock-on effect on their choices that they make when it comes to either courier or locker. And that is obviously going to work in our favor.

[Operator Instructions] I will now give the floor to Mr. Kuzawinski again for any written questions from our webcast participants.

Yes, that's a good idea. So we have questions from Cesar Tiron from Bank of America. Yes, 3 questions. Number one, what is the biggest challenge which you are facing in the Mall transformation to 3P? And how are you addressing it? And the second question has already been asked. This is the question about the cost of delivery. And the last one on the CapEx outlook in '23, that was also already answered. So we have essentially the question about the challenges around the Mall 3P transformation.

Okay. I think really the -- what our biggest challenge here is something I touched on in my last answer, which is the -- for me, one of the fabulous strengths of Allegro is just how attuned customers are to shopping on our marketplace here in Poland, but that is a skill, if you will. It's an experience that has evolved over 20 years of interactions between our marketplace and the Polish consumer. The marketplace experience will be for the Czech consumer, a new one. And therefore, actually making sure not only that our marketplace operates flawlessly, but also that we ease, if you will, the introduction of shopping with a multitude of offers with the Polish customer -- excuse me, with the Czech customer is going to be, I think, probably the biggest challenge. Part of that, I think, is also related to the data, is to make offers increasingly comparable over time. And of course, that will be another priority. So it's a familiarization creating the opportunities for customers unfamiliar with shopping with a marketplace operation and explaining to them how they can actually find the best deals, find the offers that they want within our model.

Questions from Catherine O'Neill from Citi. I'm just filtering, Catherine, what has already been answered and what we can provide. So then we have 2 questions. The first one is can you provide more details on the advertising plans? Where can it go as a percentage of GMV? And the second question would be the timing of 3P launch this year.

Let's work backwards on those. So we -- then again, we tend to actually like to announce things after they've happened not before. That makes it a little bit easier for us to keep our promises to you, the investors, as well as the customers. So I would say the frustratingly vague answer is soon, but it's not tomorrow. We're working on it. We're working on it very hard. We're very, very happy with the progress in terms of execution, and we'll be ramping up the efforts this spring. And it's -- I would hasten to add it unlikely to be a big bang. It will be more of a gradual ramping up as we learn how to operate in a new country. We shouldn't underestimate the complexities and the learning that is required to do that effectively. So with advertising, I think, again, this is also, I think, a learning experience for us. We've introduced now a number of new promotional products that we can offer our merchants, that they can choose behind. Those are traditional, what we call, promotion and there's less traditional advertising. As I think you've noticed, we've made some changes to our homepage, which gives more real estate to merchants to use. And so I think this is more, I think, to sort of look how the product offering evolves over, I think, the next 6 months to 9 months, where I'm a little bit reluctant to sort of preannounce anything at the moment. I don't know if you want to add anything, Jon, here.

We have questions from [ Maciej Reluga ] from Santander [ TFE ]. Since the majority of offers on Allegro.cz will be from Polish merchants, could you please provide some more color on how we are going to solve cross-border logistics while keeping the cost at a reasonable level? That's number one. And the second question on Q1 guidance, whether there have been any particular segments driving that growth?

Right. So I think one of the interesting things, it's actually, unfortunately, sort of an unfortunate fact of life within Europe, Europe is geographically a very small place with an awful lot of people in it. And so you would think that connecting merchants to customers would be fairly straightforward because the distances involved are not very large. Unfortunately, despite the fact that theoretically, we're in a common market, every time a trailer crosses the border, costs tend to go up more than the laws of physics would imply, but we're -- I think my personal view is very, very fortunate with the collaboration that we have with a number of our carrier partners to work out ways to get things, Polish merchant products, to check at what I think is acceptable unit costs. And I think, again, as with anything, logistics is predominantly a question about volume and scale. And so as volumes hopefully increase, I see what I believe is already a good starting point to continue to improve over time.

Yes. And then there was a question, where is the growth coming from on a category-by-category basis? I think, as you know, we don't give specifics on our exact numbers by category, but what we can -- what I can tell you is that supermarket and health and beauty are on a percentage growth basis, the strong leaders in the quarter. When you're looking at it and start to consider how big the different categories are, so their overall weighted contribution, then you can also add to that list the automotive, electronics and home and garden are also very strong contributors to the overall growth, right? So again, it comes down to breadth of selection, to the pricing that we have, that means that people are able to trade down. The fact that our merchants are actively pivoting as fast as they possibly can to meet the demand that's there. And the user experience and the familiarity with the fact that you can check out in the same way on 100,000 different shops, right? I mean this is why the growth stays so strong.

Then we have for one unanswered question from [ Dominic Nish ] from [ Trigon ]. Do you expect to have more employees in the group at the end of 2023 than currently?

Oh my. I think what we've seen is that we've been very careful to prioritize hiring and be very selective of additions to our head count. And you've also seen announcements, particularly in the Czech Republic, of some relatively small head count reductions. And I could imagine that things continue to evolve more or less where they are at the moment. So what we're really looking for is to manage head count carefully as our GMV as a whole continues to grow.

Thank you. Gaily, do you have any more questions from the line?

Yes sir. The next question is from the line of Pawel Szpigiel with mBank.

This is Pawel Szpigiel from mBank Securities. 3 questions from my part. The first would be about the changes of minimum value order for your clients. How do clients perceive those changes so far?

I can answer that. I might as well answer it. Look, I think philosophically, one of the things that I think is fair is that our cost structure towards customers, if you will, what we charge or what rules we do reflect our own cost structure. And the reason why we have split the minimum order value for home delivery versus lockers, is because also it's more expensive for us to deliver to their homes. And I think we've actually sort of put in a quite soft signal. It's not like we charge differently, we've just modified the minimum order value, signaled to customers where they are actually trigging for us higher unit costs. And I think I would say this. I find customers here are very practical. They understand why things have changed. It's like they've also been wrestling with near 20% inflation for a couple of years. So they also understand why some of our rates might change. So -- and I think it's been relatively well accepted by customers that, given the fact that all of our costs, both theirs and ours, have risen by double digits, that we are going to have to adjust some of the policies. And they've, I think, sort of absorbed that quite well.

Okay. The second question, if I may.

Yes. Sorry, can you hear me now?

Yes.

Just to build on Roy's point and go back to something I said during the presentation, we're not seeing any impact in terms of churn of Smart! users or reluctance to accept the new terms and conditions when the existing subscriptions expire. I think to Roy's point, people understand the situation. And frankly, understand that Smart! is just an incredibly high value offer for them, even if it is not quite as sweet as it was back in the third quarter.

Okay. The second question is about the midterm guidance. Some time ago, you gave midterm guidance saying that GMV growth would be slightly above the 20% for the whole group. And now it's low double-digit growth. Of course, 2 obvious factors for that are macro conditions and Mall Group. But on the other hand, I was just wondering if there are any other factors affecting such [ thing ]. Still you're Allegro, so the best place in the market to catch the lowest prices. So in my opinion, less favorable market conditions should be even good for you -- for your development.

Yes. I think you're calling out the right issues, right? In a situation where the macro is deteriorating, it tends to reduce the performance of all the players, but it will have less of an impact on someone with our positioning than it will on other players potentially. That's at least our thesis. And I think the numbers that we reported today show that to be the case.

Okay. And my last question is about the current guidance, this quarterly one. Thanks for the guidance, by the way, but the quarter is over this weekend. So I would admire any highlights on what to expect in the coming months.

Yes. That's a very fair challenge. Thank you for the question. I mean the general modus operandi is going to obviously be that these announcements are more or less mid-quarter. So when we meet again, I think it's towards the end of May, we'll be that bit further away from the end of the second quarter when we announce our expectations. It's just because it was the year-end and because it was first time through for Mall, there was an awful lot of heavy lifting in the background to get the numbers ready.

Ladies and gentlemen, there are no further questions at this time. I will now turn the conference over to Mr. Kuzawinski for any closing comments. Thank you.

So thank you, everybody, for joining the call and speak to you next after we talk about Q1 results at the end of May. Thank you. Goodbye.

Ladies and gentlemen, the conference has now concluded, and you may disconnect your telephones. Thank you for calling, and have a good day.