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

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

Good day, everyone, and welcome to Cnova's First Half 2021 Financial Results Conference Call. Our CEO, Emmanuel Grenier; and CFO, Maxime Dubarry, 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. And I now turn the call over to Cnova's CEO, Emmanuel Grenier.

So hello, everyone, Emmanuel speaking. So we start Slide 4 of the presentation. And today, I'm happy to confirm our robust performance in the first half, which can be declining 3 points. First, the marketplace showcased a high performance of 10% growth year-on-year and up 33% compared to the pre-pandemic levels. The marketplace now accounts for 46% of our product GMV. Second, our digital marketing continued to expand, growing an average almost 60% over the past 2 years. With digital marketing, suppliers and merchants can invest marketing at a discount to boost their sales. Suppliers and merchants' robust service are using it more and more. Marketplace combined with digital marketing, our 2 most profitable businesses, have led to a strong growth of our marketplace revenues, which reached EUR 200 million on a 12-month basis. Third, Octopia, Cnova's turnkey marketplace service for retailers and e-merchants, more than tripled its GMV over the past 2 years. This is only the beginning of the journey for Octopia, and there is still a lot to come that I will be happy to detail in the coming slides. The robust 2021 first half performance allowed us to confirm our full year EBITDA guidance of EUR 160 million. Next slide, Slide 5. We had a solid activity with promising business and operational trends considering COVID and market evolution in the last 2 years. First, our H1 GMV is 13% higher than it was in 2019, thanks to the growth of the marketplace at 33% versus '19 and the growth of services at plus 79% versus '19 and the takeoff of Octopia. Second, our unique monthly visitors have grown mid-single digits during the same period. We have consolidated our #2 position in France with 22 million unique monthly visitors on average in the second quarter. The 3 TV campaigns were strong support to our traffic with a Cdiscount brand awareness increasing by 4 points year-on-year. Finally, our current trading is more dynamic with GMV growing plus 13% in the last 4 weeks, benefiting from anticipated summer sales and continuous improvement of services. Slide 7, as you know, our marketplace is at the heart of our profitable growth strategy. Marketplace GMV has increased by 1/3 over the past 2 years and now amounts to over 46% of our product GMV or plus 8 points compared to '19. Our growing marketplace has resulted in an increase of our marketplace revenue over the last 12 months, which are now at EUR 200 million. And 2 main drivers grew considerably in the marketplace. The first driver is the number of merchants. We have increased the number of merchants by 24% at 14,000. The more merchants, the more products and the better pricing, so the more competitive the discount is. At the same time, we have raised our quality standards by selecting only the best merchants. Our delivery times have accelerated and our claim rate is now under 1%. The second driver is the fast-growing Cdiscount Fulfillment. 35% of our product GMV is now fulfilled by Cdiscount with more than 2,700 merchants using this service. With Cdiscount Fulfillment, we delivered twice as fast to customers compared to direct delivery from merchants and with higher quality levels, too. Customers have loved that Cdiscount Fulfillment is boosting their product sales by 80%. Our '25 target is to reach 50,000 qualifying merchants and 50% of our marketplace GMV fulfilled by Cdiscount. Thanks to our enhanced quality standards and the expansion of Cdiscount Fulfillment, our NPS has tremendously improved by 11 points in the last 2 years. Next slide. A part of our product strategy is to focus on higher-margin Home & Deco, DIY, Sports and Leisure. And we can confidently say our strategy is paying off. Let's take Cdiscount Home & Deco, has increased by 21% in the first half compared to last year as nontechnical goods make up the growing shares of GMV. These categories generate higher margin for our direct sales and higher commissions for the marketplace. Besides, these categories drive a higher mix of repeat business and therefore sustainable revenue growth. In 2021, we are investing in high profile media campaigns to support growth here, boosting our Cdiscount brand awareness by more than 4 points at the end of June. Next slide, 9. Cnova's enhanced customer experience through personalization and data. This has translated into the optimization of user experience and conversion rate. We are now using artificial intelligence to enhance the customer journey. Two examples. First, thanks to AI, we have created what we call the [ cat score ] to show to the customers only the most qualitative products. Concretely, we are filtering more than 100 million SKUs on our search engine. Products are classified in 5 categories: category A for the best product and category E for the worst. And we follow 4 types of criteria: one, quality of product, description reviews and photos; two, quality of the merchants, reviews and claim rates; three, quality of delivery and shipping costs; four, price positioning. And according to their overall rating, only the best ones are pushed on the search engine. So we are showing to the customers only the best products. Second, the customer journey is getting more personalized. Today, 50% of our baskets are carried out through personalized banners on the site. And we have a midterm target to reach 25% with 2 priorities: First, we are doubling the positions dedicated to personalization on the site by year-end. Second, we are developing new algorithms to propose more relevant products. For example, we will propose more complementary and recurrent products to the customers. Next slide, Slide 10. Best-in-class delivery and after-sales service is also key to our customers. First, more products are delivered faster. The number of SKUs that are now eligible for express delivery have grown from 1.1 million to 2.3 million in just 2 short years. Second, we are rolling out our "yes to the client" policy where already 90% of our most loyal customers' claims are getting an immediate and positive response. And we intend now to stretch it to new customers. And this has led to 2 major achievements. We now have 2.3 million customers in our loyalty program, Cdiscount à volonté, growing 100,000 in just 1 year. Second, our NPS has increased by 12 points over the past 4 years. Slide 11. As a reminder, 2 priorities to grow our Cdiscount e-commerce platform, marketplace and digital marketing. So now going to Slide 12 on digital marketing. Our digital marketing acceleration is powered by Cdiscount Ads Retail Solution, what we call CARS. It has grown 44% to EUR 29 million over the first half. So this is a win-win proposition for suppliers and merchants. They have access to these 2 main services. It can drive traffic from the web to the product on Cdiscount by using our Google Shopping campaign tool, and they can increase the visibility of their product in the Cdiscount search engine by using our sponsored product solution. And we shall stress out that these 2 services are powered by our leading in-house AdTech platform, providing 2 key advantages: the benefit from first-party data, which enables them to enhance the ROI of their marketing campaigns, and they benefit from real-time monitoring of the return of their campaign. They know for each euro invested how much sales this is generating. Thanks to that, merchants and suppliers can enjoy an incremental growth of 20 to 30 points of their sales when using Cdiscount. And today, already more than 5,000 merchants are using the platform and we have a 95% repurchase rate. Second, this is a great success for Cdiscount. CARS alone has grown by more than 94% in the first half, and digital marketing is our most profitable business. The major part of this revenue is translating to EBITDA. Slide 13. Now going to our B2B ramp-up acceleration. Leveraging on our leading e-commerce platform, we are developing 2 businesses: C-Logistics, which is offering full service of e-commerce supply and transport; and Octopia, our unique ready-to-operate marketplace B2B solution. So going to Slide 14. Here, our mission is to become a leading integrated e-commerce logistic player. So the commercial ramp-up of our turnkey transport solution for bulky products, C Chez Vous, is accelerating. We have signed on 13 new clients, including BUT and miliboo with another 6 agreements. This represents several million euro potential sale, and the feedback from our customers is excellent. Second, a full C-Logistics service, warehousing plus transport, has just been launched with a first live client and 5 other in the pipe. This logistics B2B solution certainly enjoyed great success in just 6 months. Slide 15. Our second B2B pillar, Octopia, offers a unique and disruptive value proposal to enable websites and retailers to create or accelerate their marketplace. Marketplace is the bullish market of e-commerce growing more than 20% in the first past year, while classical e-commerce sites were growing less than 10% a year. So 80% of the executives are willing to launch their marketplace in our addressable market. EMEA, Americas are expected to be over EUR 1 trillion in 2025. And Octopia's principle is straightforward, connecting thousands of merchants to thousands of websites. For websites, they can launch or accelerate their own marketplace, thanks to the Octopia platform, which provides them with a complete bundle of services: AdTech platform, the access to thousands of merchants and fulfillment services. For merchants, they have one-click access to thousands of websites. So Octopia generate value from day 1. Once connected to merchants and the website, sell products at a glance. And on the long term, Octopia boasts a stronger long-term performance, thanks to scale effects. In short, Octopia brings the full power of marketplace to the e-commerce ecosystem. Concretely -- Slide 16, Concretely, Octopia offer 4 services. It allows our B2B customers to add products to small and medium websites, to attract merchants to existing marketplaces, to transform existing websites into marketplaces and all the while offering end-to-end logistics. Product-as-a-Service and Fulfillment-as-a-Service have been up and running for more than 2 years and generating EUR 53 million of GMV in the first half, growing 60%. Merchants- and Marketplace-as-a-Service solutions are now fully operational with the go-live of our first marketplace in the first half and benefit from the dynamic commercial ramp-up. 4 deals and 3 LOIs have been already signed. Now a lockdown into our CSR initiative in Slide 18. First, environmental initiatives. We have been leading the way for more than 10 years on sustainable development. Having launched our 0 product destruction policy more than 10 years ago, Our 3D packaging machine 5 years ago, we are still pioneers with the use of reusable packaging, which can be employed 100 times. It is planned to be rolled out from the beginning of '22. We are also a pioneer on the use of blockchain to track bulky product deliveries to improve traceability and efficiency. The second pillar of our CSR policy is to support the economy. We have offered free access to our marketplace to local merchants to support them to face sanitary crisis. And all in all, over the past year, Cnova contributed to the creation of 47,000 jobs in France and 92,000 in Europe. And now I would like to turn the discussion over to Maxime, our CFO, who will comment on our first half '21 financial performance. Maxime?

Thanks a lot, Emmanuel. Hello, everyone. So moving to Slide 20 on GMV. As already mentioned, our GMV had a solid annual growth rate of 7% in average over the last 2 years and 13% compared to 2019. This is driven by an accelerating marketplace. This was thanks to 4 underlying growth drivers. First and foremost, over the past 2 years, our marketplace GMV rose by 9% in average. Second, our B2C services, sorry, offering grew by 35% compared to '20, thanks to very strong energy performance growing close to 70% in the first half. Here Octopia has experienced a solid takeoff with the GMV multiplied by 3 over the past 2 years. And finally, direct sales remained close to stable as we continue to execute our strategy to promote nontechnical product and higher-margin marketplace activity. Moving to Slide 21 on gross margin. Our gross margin has continued to improve in 2021. Our gross margin rate as compared to net sales has increased by 3 points a year. The main drivers are: first, the growth of our marketplace; second, the product mix evolution towards higher-margin categories; and finally, the fast pace of our digital marketing offering. Moving to Slide 22 on cost and SG&A. SG&A represented 23% of sales. This is a 3.4% increase compared to last year. Fulfillment was stable over the period versus a tough comparable base related to 1H '20 that has seen a boost in activity due to COVID. Marketing grew by 1.4 points due to our media advertising campaign, especially the TV campaign that we launched in the first semester, and low comparable expenses during the lockdown period last year. Every euro invested in marketing is profitable. We are generating EUR 6 of consumer lifetime value for every EUR 1 we invest. Tech and content has increased by 1.6 points as we accelerated the development of Octopia. If we take a step back and look over a 2-year basis, our cost structure increase has been limited to 3.6 points of net sales. This is lower than the gross profit that has increased by close to 6 points over the period, generating 2 points of additional EBITDA margin. Moving to EBITDA on Slide 23. Our first half EBITDA remained stable in '21 at EUR 49 million as compared to last year. This is a significant improvement compared to '19 figure where we see a 57% CAGR between 2019 and '21. As we said previously, this was due to outstanding marketplace growth, direct sales margin improvement and increased digital marketing revenues. Operating EBIT remains positive at EUR 6.5 million and up EUR 18 million compared to '19. We are facing a EUR 4 million reduction of EBIT compared to '20. This is related to accelerated investment in Octopia that are resulting in additional depreciation and amortization over the past 12 months. Looking at free cash flow on Slide 24. Our last 12 months free cash flow between -- before financial expense is minus EUR 6 million or a negative change of EUR 41 million compared to prior year. The change in working capital includes a negative EUR 50 million impact in the first half. This impact is related to cash placed as collateral for amounts due to third-party merchants in connection with European regulation that we have implemented in the second semester in 2020. On a like-for-like basis, our free cash flow before financial expense would have been above EUR 45 million or up EUR 10 million compared to 2020 over the same period. As a key driver of the free cash flow, with our growing EBITDA, that has reached on the last 12-month basis EUR 133 million. If we move to the next slide, 25, on liquidity. Excluding IFRS 16 lease debt and restricted cash position, our net debt was EUR 376 million at the end of June '21. This is a stable amount compared to last year. Our gross debt amounts EUR 382 million, and we have 2 sources of liquidity. Our first source of liquidity is a shareholder loan with Casino Group. This loan has 2 tranches. The first 1 is a term loan of EUR 150 million that is due 2026. And the second tranche is a cash pooling agreement from an amount of up to EUR 400 million, of which EUR 101 million were drawn on June 30, 2021. The second source of liquidity is a state-guaranteed loan of EUR 122 million, including the accrued interest. The maturity of this loan has been extended to 5 years in the first semester. This concludes the financial presentation, and I hand back to you, Emmanuel for the conclusion.

Thank you, Maxime. So to conclude, in the first half, we have been implementing the transformation of our business model at a good and steady pace, we call it a solid performance. Our e-commerce platform is accelerating its development with 2 clear drivers, a growing marketplace and expanding digital marketing revenues. And our clear ambition is to leverage our e-commerce assets and become a global marketplace ecosystem leader, developing a disruptive ready-to-operate marketplace B2B solution, Octopia, which is ramping up very fast. Our excellent first half performance as well as our B2B prospect for the rest of the year allow us to confirm our full year 2021 EBITDA target of EUR 160 million. So thank you for your time and attention, and we are ready to take your questions. So operator, may we have the first question, please?

[Operator Instructions] We have the first question from [ Charlie Meyer ].

I've got to several, but I will keep them brief. Firstly, it's very good that you confirm your full year EBITDA guidance. Can you also confirm that the target for GMV growth and revenue growth for the full year are also maintained?

Yes, we can confirm that as well. You can see that we had the growth acceleration quarter-by-quarter when we look at the comparison to '19, plus 11% in Q1 to 16% in Q2. So the trend is good and we have 3 priorities around the growth. First, the dynamic marketplace growth, thanks to the new merchants and fulfillment development. Second, acceleration of our A-brand plan to support the 1P growth. We are strengthening the relations we have with the strongest brand all over the world working with us like Apple, Samsung, Bosch and Ingram significantly. And the third thing is customer experience on the site, personalization plus EPS increase.

And my second question, you said that your growth was 13% in the last 4 weeks. Can you just clarify that, is that since the start of July? What is the period? And can you tell me from last year, it was very volatile, what was the growth rate last year in that 4-week period, please?

Last year, we had a Q3 or growth Q3 of 0% on the whole Q3. So the plus 13% are calculated in the last 4 weeks or end of June to yesterday. So there are 2 main things in this 13%, but the sales are not at the same period compared to last year because the sales were during July this year and will be -- and were, last year, between the mid-July and mid-August. So we are -- so far we have benefited -- we are benefiting from that. And the second thing is that our services are very dynamic, travel is accelerating and energy is still very dynamic as it was in H1.

Okay. And my last question before I promise to pass to other people. Your technical share of GMV in product, GMV declined suggesting that your absolute GMV declines. I just wonder, do you think that is a reflection of the weaker electricals market in the first half of this year? Or is this a deliberate acceptance of market share loss to focus on profitability.

No. The reason of the -- you're speaking about Q2 growth?

H1 because you only gave the technicals for H1.

There is somebody talking in the phone at the same time. Okay. So please go ahead with the question, to be sure that I understood well the question.

Yes. Sorry. The -- over the -- in H1, the share of technical products in product GMV declined year-over-year, suggesting that your sales overall in absolute terms to those categories shrank. So I just wondered if you thought that was a reflection of the more subdued demand for electrical products in the French market?

No. This is more, in fact, a clear path of our strategy, which is to accelerate our nontechnical goods we have accelerated and we have launched in strategy 2 years ago. And we wanted to accelerate on DIY, Home & Deco, Sports and Leisure, and we are doing it because these categories, nontechnical, are generating more margins in 1P and more commission in the 3P, and they are generating more recurrence from the customers as well. So this is a deliberate strategy to accelerate on nontechnical categories.

We have now a question from [ Anne Preach ].

I've got 3. First of all, looking at average order value in the first half, it looks as if that was down 1% year-on-year. Does that reflect product mix? It's quite difficult sort of thinking about it in terms of the masks last year, for example.

Yes, it can reflect product mix because when you are selling nontechnical categories, obviously, the average value of the product is lower than for technical goods. In any way, the comparison with '20 is always very difficult, the second quarter was a bit exceptional.

Okay. And then secondly. Please, could you talk a bit about your market share trends in the major product categories? For example, the ones you're targeting like Home and DIY, how did your market shares trend in the first half, please?

Sorry, but we don't have market share trend by category. The only market share that we have are for the whole 2020 period. We don't have that for H1. And in the 2020 period, for 2020 period, our market share according to Kantar was at 7%. What we can say about that is that if you look on the last 3 years, '18, '19, '20, we were up 8% in '18, and in '19; 7% in '20. So we have lost market share, but all the pure players have lost market share, Amazon too and NVP too, for example, because the brick-and-mortar is having their stores closed and were up in terms of market share. But in this trend, we were the most resilient in the market with Amazon because our market share were down minus 40% -- 14%, we have the best result for the past few years with Amazon in the 2020, but we don't have information for 2021.

Okay, understood. And then thirdly. Please, could you talk a little bit more about the reusable packaging? How does that work in practical terms from the customer's perspective?

Yes. This is reusable. This is like a bag. This is like a bag which will be used by our warehouses and then the products will be put in a bag and the bag will be sent back by the customer because the customer will have make the decision. We have to make the decision to take the bag, the residual packaging. And we are doing that with a company called Hipli and this bag is reusable 100 times. So we have made tests during Q2, the pace -- this is positive. So we are going to roll out at the beginning of 2022.

Do the customers send the bag back in the post?

Yes. The customer will send bag in the past, and he can do that because he has made the decision to be delivered with this new reusable packaging.

And will you meet the cost of that postage? Or is this to do with Hipli?

And the customer will pay for that. That will be a cost for the customer.

We have now questions from [ Oliver Chavez ].

I would have several questions. I will take them sequentially. So in terms -- when I look at the take rate in Q2, I see, I would say, 12.1%, that's below Q1 at 12.8%. I was just wondering, looking at last year's development, which was similar, but obviously, that was especially here with COVID. Is this only seasonal due to product mix? And what should we expect for the full year, please?

Can you tell me how you calculated your 12.1% and 12.8%, which is the ratio you have made?

Yes, just bear with me. I can also take that question for later. Yes. I'd do the second one, just a sec. But second one in between is when I look at the presentation, you had in early June in your H1 report, Page 5. I was just looking at the commercial development that you've seen. Could you clarify what you've seen in Merchant-as-a-Service and Marketplace-as-a-Service? I mean if I look at the slide, Slide 91 of your presentation in June, you were mentioning 1 active client in Merchant-as-a-Service and Marketplace-as-a-Service. I just wanted to know how we can compare this to the data that you've just presented in your presentation.

Yes. In fact, we are still very dynamic in terms of commerce, and we have in the H1 and until yesterday, we have signed 4 deals and we have 3 LOIs, which are signed as well. In fact, this is the situation at this stage. So we have accelerated and we have several Merchants-as-a-Service and Marketplace-as-a-Service in the pipe. 4 have been signed and 3 LOIs have been signed. The second thing is that we have reinforced -- sorry.

Is that since June -- since early June or...