Cnova N.V. (CNV) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the Cnova webcast. I now hand over to Emmanuel Wetzel, responsible of Investor Relations. Sir, please go ahead.

Good day, everyone, and welcome to Cnova Full Year 2019 Financial Results Conference Call. Our CEO, Emmanuel Grenier; and CFO, Gautier Bailly, will be making today's presentation. The conference call slides can be downloaded from our website, cnova.com. This call is also being audio webcast, and a replay will be available on our website later today. All listeners are reminded to read the forward-looking disclaimer on the Slide 2. I now turn the call over to Cnova's CEO, Emmanuel Grenier.

So hello, everyone. 2019 was another successful year for Cnova when -- where Cdiscount has enjoyed the fast growth but also generating more profit. First, our GMV grew by more than 9%. EBITDA improved by EUR 31 million, reaching EUR 79 million. Second, the marketplace share of GMV is pushing up against 40%. Third, our B2C travel service Cdiscount Voyages enjoyed a tenfold increase in its activity. And finally, Cdiscount à volonté is very dynamic. Its membership base increased to more than 2 million customers, and they can now take advantage of fixed price delivery on more than 1.2 million products. As a result, Cdiscount has delivered more profitable growth, and we expect this to continue in 2020. Next slide. Our GMV is close to EUR 4 billion, and it growth is being driven by our marketplace and our B2C services. Our travel activity multiplied by 10 in 1 year with a very strong brand awareness. We are now the top-of-mind brand according to the latest studies. Besides, our home energy offer, Cdiscount Energie grew by 86%. So we are confident that the marketplace and the ramp-up of B2C services will continue to drive GMV growth. And now let's look at this more closely on the following slides. Next slide. Our marketplace is performing very well. It accounts for 38% of our GMV and offers our customers a selection of 64 million products. That's an increase of more than 33% by the way -- 33%. Above all, the key growth driver is the number of SKUs eligible to express delivery. We have 2 means in hand, Fulfillment by Cdiscount and Express Seller service. First, the Fulfillment by Cdiscount is doing very well. Almost 1/3 of orders are now fulfilled by us with more than 80,000 SKUs. Second, we have launched in Q4, our Express Seller service. It allows our best marketplace sellers to directly deliver to the customer. As a result, more than 900,000 additional SKUs are now eligible to our CDAV, Cdiscount à volonté program. This assortment is growing very fast, and we are closely monitoring the quality of delivery with mandatory tracking of each shipment. To sum up, our marketplace growth is due to its capacity to offer wide range of products and fast delivery. Next slide. In terms of B2C services, Cdiscount with its offering, is able to facilitate our customers' daily life. The customer can book their travel arrangements with Cdiscount Voyages, other leisure activities with Cdiscount Billetterie, keep their homes with Cdiscount Energie, subscribe mobile offer with Cdiscount Mobile and have access to a variety of convenient and fast consumer credit offers. So the expansion of our B2C offers is another, particularly effective GMV growth driver. Next slide. On this slide, we'll drill down into the details of Cdiscount Voyages. To put it simply, the incredible success of this initiative holds down to 3 things. One, we are expanding the offer, now having the widest assortment in the market. Our customers can choose from over 15,000 offers, and we want to keep it growing. Second, we are partnering with the best and here, I mean, Disneyland Paris. We have generated thousands of sales in the fourth quarter alone. And finally, our brand awareness is growing by leaps and bounds, thanks to traditional and social media campaigns. As said, we are now top-of-mind brand -- the top-of-mind brand according to latest studies. The more offers and more brand awareness are serving our customers well and generating GMV growth. The expansion of our marketplace of products and services remains one of the key achievement of 2019, but we also made considerable progress in tightening the bond with our customers. The next slide. So here, I want to draw your attention on 2 key figures, 36% and 1.2 million. Let me explain. Our customer loyalty program, Cdiscount à volonté, remains the backbone of our customer approach. A well-served customer is a repeat customer. Our over 2 million CDAV customers, growing double-digit over the last year, have access to free unlimited next-day delivery on 1.2 million SKUs, a tremendous fourfold increase over last year. Cdiscount à volonté customers now account for 36% of our GMV, plus 1.7 points compared to 2018, driving the increase in the [indiscernible] business. And according to the latest [ compare ] study, CDAV is in the top of the most effective and value-added loyalty program in the market. Next slide. Another reason we had such a good year is our traffic flowing to our site as well as the fact that our brand awareness increased at a fast pace. First, our 20 million unique monthly visitors grew faster on mobile than our main competitor. And second, our brand awareness has risen significantly by 7 points over the year. This is the result of several important TV campaigns, bringing millions of viewers closer to our brand. We keep on building on this off-line media success this year. And on top of that, our social media leadership also reinforced this bond. Our fast-expanding communities gathering now close to 300-odd million people. Next slide. Offering best-in-class delivery options and multichannel experience is also key to our success, bringing our products offering faster and closer to our customers. As one of the French experts in logistics, we offer same-day delivery in France's 6 main cities and 2 more cities to come this week. We remain the only player in the market to offer such a service to the customer. Our strength is also our capacity to offer convenient delivery options to our customers in rural areas. For example, we partnered with Agrikolis to develop pickup points in farms for big products. This is a huge success, which continues to grow way above our initial target. Furthermore, we continue to deploy our in-store showroom throughout the Casino Group store network, and we added 5 corners in Franprix stores. And what could be more emblematic that our newly opened French wine cellar in Paris. Moving on to Slide 15. Another GMV growth driver is our international development, which is expanding at a very high rate. Our strategy is to make available our core and marketplace SKUs on hundreds of European websites. This makes us the super seller, covering 25 countries and already 47 websites connected at the end of 2019. Through this strategy, we are able to generate new profitable revenue streams at almost no additional fixed cost. Another pillar of our successful strategy in Europe is our international marketplace network reaching 230 million potential customers. Using our exclusive technology developed by our BeezUP subsidiary, we have already attracted more than 300 sellers. As a result of these 2 initiatives, international sales are becoming a significant GMV growth driver and are expecting to accelerate in 2020. Moving to Slide 17. Cdiscount has long been committed to operating in an environmentally and socially responsible manner. First, our 3D packing machine reduced empty space by 30%, and this results in very fewer delivery trucks on the road. Second, starting 10 years ago, making us a pioneer in France, we have been promoting the circular economy through the renovation, sales or donation of second-hand products. Third, Agrikolis, our rural pickup service for big products that I already mentioned, remain one of the success stories of 2019 with already 83 farms contributing to the rural economy by bringing extra revenues to farmers, reducing environmental impact and reaching record satisfaction rate among our clients. All those CSR initiatives were appraised by numerous awards in 2019. Taking care of our world is a part of our responsibility, and we are committed to continue to be at the forefront of sustainable development in this coming year. Now I would like to turn the discussion over to Gautier to comment on our 2019 financial performance.

Thank you, Emmanuel. So as you have seen, our GMV grew fast over the year. All our traditional underlying drivers were very well oriented in 2019. First, the marketplace share of GMV is now more than 38% of total GMV. Second, our customer loyalty program has grown and accounts for more than 1/3 of our total GMV. And finally, half of our GMV comes now from mobile devices, thanks to our technological edge in this domain. In short, a strong GMV growth, mainly driven by our marketplace expansion and enhanced by more business in mobility. Moving to Slide 20. Improvement in our gross margin was remarkable, up 230 basis points to reach 17.8% of net sales at year-end. This is perfectly in line, since it is tied to our marketplace performance, which Emmanuel has already discussed. It is also due to our expanding commission-based B2C services and dynamic B2B monetization initiative, such as advertising revenues, plus more improvement in our core business profitability has also contributed to this performance. Slide 23 (sic) [ Slide 21 ]. Turning to SG&A, which now represents 17.2% of net sales and experienced a more moderate increase of 1.5 points compared to last year level. Main driver are twofold. First, as Emmanuel previously mentioned, we are investing more on marketing spending, especially outside media. This is paying off as, on one hand, our brand awareness has increased by 7 points over the year. And on the other hand, this has consolidated #2 positioning in terms of traffic. Second, we have significantly invested in our technological platform over the last year and reaching our marketplace of products and services, enhancing our newer strategy on monetization revenues. This resulted in a plus 0.7 points impact on our tech and content expenses. At the same time, our fulfillment and initiative costs remained rather stable, thanks to productivity improvements in our processes and discipline on structure costs. All in all, the higher SG&A spend that focused on stimulating growth and evolving less rapidly than our gross margin. Slide 22. As a result of these dynamics, we had a significant increase of EBITDA of more than EUR 25 million on a pre-IFRS 16 basis. I will go over this in more detail on the next slide. Including the impact of IFRS 16 on EBITDA, it increased by more than EUR 30 million. It was due to the usual suspects: marketplace growth, traffic monetization and profitability improvement. EBITDA, therefore, recorded a second consecutive year of strong growth. Slide 23. We adopted IFRS 16 on January 1 of this year with retroactive application. As a reminder, this now requires operating leases to be treated as an asset, which is the right-to-use the leased item. The offsetting liability is the financial debt representing the discontinued value of future rentals. As a result, operating lease expense is replaced with 2 components: first one, depreciation expense related to the asset; and second one, interest expense related to the lease liability. This slide, together with this morning press release, both provide tables with 2018 and 2019 key financial figures, before and after IFRS 16. The main takeaway, EBITDA increased by EUR 28 million, which is mainly offset by increased G&A expense of EUR 26 million. Financial expense was EUR 7 million higher under IFRS 16, representing interest expense for lease liability. Slide 24. In this more detailed summary table, we can see the year-on-year evolution of all the key financial indicators. They are all very well oriented in terms of profitability, both before and after IFRS 16. Net result is also improving by EUR 11 million, if we leave aside the exceptional positive EUR 38 million tax impact in 2018. Moving to Slide 25, on free cash flow. 2018 has again proven our capacity to deliver an overall cash generation close to balance. Operating cash flow was up EUR 109 million, relating on strong fundamentals, an EBITDA increase of EUR 31 million and a solid positive change in working capital, notably driven by new inventory optimization. This more than financed of EUR 74 million capital expenditure that remained stable in 2019 compared to prior year. As a result, free cash flow before financial expenses amounted to EUR 35 million, including net interest expenses and other elements. Net financial debt evolution is limited to minus EUR 23 million. Thank you. And now Emmanuel will go over to outlook of 2020.

Thank you, Gautier. So in summary, 2019 has been a very dynamic year for us, both in terms of growth and profitability. In 2020, our growth priorities are threefold: expand our marketplace of products through the continuous increase of the share of GMV fulfilled by Cdiscount. Second, expand our marketplace of B2C services with 2 clear pillars, travel and energy. Third, expand our international development, supported by an increase of both connected websites and SKUs available. In terms of profitability, we will rely on 3 strong drivers. First, the increased share of marketplace and its associated revenues. Second, the expansion of other commission-based activities like travel as well as other monetization activities and initiatives, mostly driven by our new advertising platform. And third, taking the next step of our platform strategy, which is to monetize further our logistics and technological assets. We believe it will lead to a sustained growth of our marketplace of products and services and further EBITDA improvement. So that concludes our slide presentation. We are now ready to turn to the Q&A. Operator, may we have the first question, please?

[Operator Instructions] And so we have a first question by phone from [ Alexandre Gazet ].