Delivery Hero SE (DHER) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by. Welcome, and thank you for joining Delivery Hero's Q3 2022 Trading Update Conference Call. [Operator Instructions] I would now like to turn the conference over to Christoph Bast, Head of Investor Relations. Please go ahead.

Hello, and welcome, everyone. We hope you are well, and thank you for joining our Q3 2022 earnings call. We trust you have all received the press release and the presentation, which we published this morning. These documents are also available on our website. We would like to remind you that this call is being web cast and a replay of the audio web cast will be available later today on our website. With me today, we have Niklas Oestberg, CEO; and Emmanuel Thomassin, CFO of Delivery Hero SE, who will take us through the most relevant aspects of our Q3 performance and share further details on our outlook and path to profitability. After that, we look forward to answering your questions. And now let me hand it over to you, Niklas.

Thank you, Christoph. So despite the challenging environment, we are very proud of what we have achieved with the teams in particular when it comes to our promises regarding improving profitability. Q3 also marks the first quarter that we consolidated the logo into the group. We had a great quarter together, and we are more excited than ever about their performance. Today, we like to focus on our trajectory on profitability as it's something that is top of mind for both you and us. We will, therefore, run through the other parts of the presentation much faster than normal. So let's already jump to Slide 6. Some key highlights. So in Q3, we achieved a healthy GMV growth of 12% despite difficult cohort comps in APAC and a continued strong focus on profitability. All other segments outside of Asia grew by more than 30% combined. This was achieved while improving EBITDA with more than EUR 200 million quarterly compared to Q4 last year. I'm personally not aware of any other delivery company doing this size of improvement in the last 3 quarters. We started our initiatives at the end of last year, as you remember, with some tough decisions to divest Germany, Japan, push AOV was something you spoke a lot about in Q4. We cut also our [ Dmart ] roll out as you remember. We did budget reductions and more. It was pretty painful back then, but it has now put us in a very strong path to profitability. And I believe that we were probably ahead of the curve in some of those initiatives. Also, I would like to highlight that we built a profit engine of EUR 800 million run rate in Q3, growing 25% to roughly 25% in Q4 to EUR 1 billion. That's EUR 2.5 million a day. And I believe none of our direct competitors in the food delivery or [ e-commerce ] has this kind of profit pool, and I believe it's going to be challenging for them to develop this as they don't have the market scale or position that we do. We also put ourselves in a position where we can commit to free cash flow break even during H2 next year. This will be another point of strength when we get -- when we get there. Now handing over to Emmanuel to run us through the numbers. Emmanuel?

Thank you, Niklas, and welcome everyone, also from my side. First, I'd like to repeat to remind everyone that we complete the Glovo acquisitions in July '22 of this year. And effectively, we start to manage the business since then. And those are -- we now include the Glovo in our reporting numbers for the first time. For better comparison purposes, we decided to include Glovo financial data on the pro forma basis for Q1 -- from Q1 2021 onwards. Otherwise, not much to add on the group level to what Niklas just mentioned, besides that we have been very pleased with the results. The adjusted EBITDA improvements have been exceptional while we managed to keep the growth high. So let's move now to Slide 8, please. The graph on the left side is showing the development of the frequency of ordering pre, during, and post COVID. We all have always had an increase in frequency every year, but doing COVID, the frequency accelerate to 3x faster than normal. And we have not seen our frequency drop back a bit after the lifting of COVID restrictions. However, it's still clearly higher than pre-pandemic levels. And we hope, obviously, to build on this level going forward. On the right-hand side, a global macro level on a global macro level, GDP growth for our top 15 countries expected to be much more significant compared to other regions of the world. And now into the next slide, where I will skip over the regional deep dive for this time. But just let me just make some 2 or 3 remarks on the segments with the exception of Asia and save time for the upcoming case studies, as [indiscernible] just mentioned. So let's start with Asia. The GMV development in our platform business in Asia with we have flat in Q3 on a year-to-year comparison. This is [indiscernible] effect. We've both tougher comparison in APAC as the region benefit from COVID restrictions in Q3 last year. South Korea [ had ] also an unexpectedly softer quarter due to both better and [ improved weather ] conditions. First, [indiscernible] less humid weather in the beginning of the quarter. People choose to eat more out than usual. And then later, the most powerful typhoon that -- to hit the South Korea in years. It impacted restaurants and delivery capacities in -- for a couple of days in September. Adding to this, there is a [indiscernible] decline against the Europe by more than 5% from mid-August when we share the GMV guidance for Q3 until the end of September. So if you were to strip out the adverse effects in Korea, GMV for the Asia segment would have grown close to 8% quarter-on-quarter, which is in line with our earlier guidance. We'd also like to highlight that we continue to gain market share against all peers in South Korea. The segment revenue developed nicely during the quarter, growing by 14% year-on-year as we advance on our profitability strategy, which include further developing advertising products and introducing service fees in the APAC region. The advertising revenue further improved the Asia segment. And if you look at the APAC region, so excluding Korea, it reached 2.4% as a percentage of GMV in the quarter, almost a full percentage point improvement year-on-year. We have further developed the offering in the region, improving CPC and developing new channel where vendors and brands can list and reach new customers. The CPC or which is our advertising product in South Korea continues to trend to gain traction after the [ launch ] and the vendor penetration is developing quite nicely and already at around 10% with very high retention rate. The return on advertising spend for vendors is currently close to 6x, which is above the group average. This is naturally converged over the coming quarters. We have also launched service fees in 3 new markets in the segment, namely Pakistan, Bangladesh, and [indiscernible] with most effective impact on GMV. And in total, we have introduced the service fees in 7 of our 13 Asian markets. So we continue to roll out the service fee to other markets in the region where we see Russia in competition. So adjusted EBITDA continues to develop nicely, already reaching the mean double-digit million range in the quarter, and we expect this positive momentum to continue in Q4. And those -- the segment should amount to a positive adjusted EBITDA for the full year. So overall, we continue to make progress in rolling out service fees, increasing ad tech penetration in the countries and making subscription available for more consumers across the APAC region. So now let's move to MENA on Slide 10, which is, as you will see, exceptional. With profitable countries, which represent 70% of the segment, we grew fast while increasing our adjusted EBITDA to GMV margin after group cost to 4.5%. And also happy to see a strong sequential GMV growth in Turkey again with GMV growing 6% in Q3 2022 in relation to the second quarter of this year. Now also a small [ remark ], if we move to Europe on the next slide. This segment had a clear sequential increase in growth, both with and without global growth overall clearly above our peers for the region. On the Americas segment on the next slide, well, not much to say regarding the Americas segment other than this is a pure pleasure to see how things develop on both top line and bottom line. GMV continues to grow above our expectations, and we keep interest in gross profit and adjusted EBITDA margin on a quarterly basis. And now on the Integrated Verticals segment, we progress our global footprint review and closed down a net of total 60 of their underperforming and nonstrategic stores, and we'll continue closing additional underperforming stores in Q4 and optimize our portfolio. So on to the next slide, please, we show contribution margin. So a fully loaded [ GPE ] development, including fortress and discounts, quarterly keeps moving upwards. And besides this one, it's worth to mention out again that the development of our tech revenue. So we know at 2.4% of GMV outside Korea and Glovo, including Glovo in Korea, which we launched in April 22, we're at 1.5% of GMV already. So this means that we are on a clear path to generate over EUR 2 billion in our [ tech ] revenue between 2024 and 2025. Now Niklas will take -- the case studies. Niklas?

Thanks, Emmanuel. So now to the core of what we've been prioritizing for the last 12, 13 months, which is to reach cash flow positive without sacrificing growth or market share. I hope the slides are helpful for you. We, in this slide, we separate the business in 3 pieces: profitable platform business, loss-making platform business and integrated verticals with focus on [ Dmart's ]. We then summarize this on the last slide, but let's start with the profitable platform business. We decided to bring back an update view on the last quarter's case study. We updated the graph with our Q3 numbers. What you can see is that we did roughly EUR 400 million more in Q3 than what we previously guided to. In Q4, we expect less of a performance than we were pushing for, but expect to be right on target of EUR 1 billion EBITDA run rate. Reason for the Q4, not the performing or outperforming is due to slightly lower volumes as highlighted in our group guidance, but also investments in 2 countries in MENA, of which one being part of the profitable markets. We think the return here will be very good. Moving into 2023, on the next slide, so here, you can see that we expect improved run rate EBITDA by more than 25% by the end of next year. And from there, grow it by double digits for the next [ few ] years. EBITDA growth next year is coming mainly from increased profitability in the existing markets, but we will also have increasing help from more markets moving into profitability. Next year alone, we expect 8 to 10 additional countries to be moved into the profitability or profitable platform business. Then let us move to the unprofitable markets. These markets can be categorized in 3 groups. And we have the start-up markets. Example here would be Iraq. These markets are very early stage and therefore, too early for us to claim leadership. In total around 15% of GMV are in these unprofitable markets or are in this part of unprofitable markets. It will take probably 3 to 5 years for this to be break even. So there are long-term investments, but they will generate a growth engine for many years to come also on the EBITDA side and once they turn profitable. Then you have the second category, which our leadership markets, example here would be Romania. Here, we have high growth, strong market position, sometimes with a contender, sometimes not. But more importantly, we are still sub scale to drive large sustainable profits. EBITDA is between one and maybe max 3 years away. So much closer to this part. And roughly, I would say, in this part, it's roughly 75% of the markets of the unprofitable markets are in this portion. And then the last 10% of the unprofitable markets will be in this a little bit more tricky basket, which is second place positions. Examples here, it will be Peru and Poland will be good examples. Markets in this segment, we believe are some of the markets are in a good path to gain leadership and others are a little bit further away from that. As you know from the past, we are rational in driving consolidation and have been approached by several interested parties in a few of these markets. Any rationalization here would, of course, free up capital to invest and win in other places. So I wouldn't expect that we're going to sell all of them, but we might sell some of them and freeing up capital to making sure that we win the rest. Looking on an aggregated basis. You can see on this slide that losses have come down. And we also see adjusted EBITDA margin to GMV has dropped from 9% a year ago to 5.8% in Q3. We expect this development to continue and reach negative 3% by the end of next year. I should also highlight that this is on target to reach 4.5% already in Q4 this year. If we then move to the next slide, you can understand why we are confident about the improvements in adjusted EBITDA development of this bucket of countries and why we are also confident that they are going to profitability. So we go, I think, Slide 21. This overview was first introduced during our Q1 trading update and illustrates how we expect to reach our long-term adjusted EBITDA margin. We reconfirm the 5% to 8% EBITDA margin target, and I think we are more confident than ever about this. As you can see then from the platform -- a profitable platform business is already operating at better operational leverage than what we guided to long term. But now let's look at the unprofitable markets in Q3. As you can see, gross profit margin is already aligned with profitable markets. The largest difference to profitable markets, but also to a long-term target is that the level of marketing investment we invest. The reason for that is that we are at sub scale. And in order to use OpEx as a proportion of GMV to the long-term target, we essentially need to double the businesses or cut OpEx. Between this option, we believe cutting OpEx will lead to insufficient restaurant coverage and tech deficiencies and making ourselves uncompetitive. So therefore, we rather keep OpEx flat while increasing GMV and gross profit. This, however, cost us money, and that's been clear with this. We invest -- over invest in marketing to grow the business, to get operational leverage such a break even. We don't shortcut ourselves to profitability because [ with other alternative shortcuts it ] by cut. But then you also don't build a long-term sustainable strong business. So now moving to the integrated verticals. Here, we focus on [ Dmart ], which is roughly 75% of the losses in this segment. As you can see on the left-hand side, growth has been very solid despite essentially no new store openings and a clear push for economics is visible on the right-hand side. We expect [ Dmart ] to achieve gross profit break even mid next year and reach scale enough to drive EBITDA in the midterm. We believe this to be a very strategic part of Delivery Hero and our product offering to our customers. We also believe that in most markets, we are the only one with scale to reach profitability in this business. As mentioned before, you need a lot of scale in this business to drive prices, procurement and building distribution facilities and so on. So that's why we believe they are the only one who can drive that scale here and it will be very strategic for us. For the food IV segment, we expect absolute EBITDA to also come down, and we expect it to drop to almost half between Q4 '22 and Q4 '23. I think worth pointing out when we're on this slide, as you see, we grew actually our GMV faster than in any other quarter in absolute terms despite actually being more conservative, no store openings and so on. So I think that shows the strength and also differentiation towards the quite commerce player who rather been declining lately. Now moving to the next slide, which is more of a summary slide on what we have shown in the 3 different buckets that constitute our business. And what you can see is an improvement from minus 3.2% EBITDA in GMV in Q4 '21, including Glovo to be at 0.7% in H2. So I don't know, that's a 2.5% improvement where I would also add that Q4 is significantly better than Q3. If we also triangulate and summarize the comments made on the previous slide, we expect to be above half a percentage in EBITDA to GMV for the full year 2023 and about 1% EBITDA to GMV in H2 next year. Now turning over to Emmanuel to give a guidance on the 2022 outlook section.

Well, thanks, Niklas, again. So we most likely update our 2022 full year outlook. We expect GMV, including global, to come in the lower end of the GMV guidance from EUR 47 million to EUR 46.9 billion range, which is still a very healthy year-on-year growth rate of close to 20%. The adjustment to GMV also trickles down to the total segment revenue, which we now also expect towards the lower end of [ near ] EUR 9.8 billion to EUR 10.4 billion range. So the main reason for these adjustments are that we might still see some [ lab ] effects from COVID during Q4, in particular, APAC in Korea. And also some uncertainties on potential macro or geopolitical developments that could impact the customers' discretionary spending. The start with, Q4 has been on par with Q3, and we don't see anything that would suggest the macro environment has had a strong impact on the business deal. We have decided to take a more prudent approach and not to assume acceleration of year-on-year growth rate in Q4, but rather GMV growth in line with Q3, meaning low double digits, which bring us to the lower end of the guidance. We continue also to push share on profitability, and we once more update our target for integrated verticals. We now expect an adjusted EBITDA to be between negative EUR 380 million to EUR 400 million down from the Q2 revised projection of up to EUR 475 million. The above adjustments results in a better-than-expected adjusted EBITDA margin, which has not been revised to range between negative 1.4% to 1.5% of the group in 2022, including global on a pro forma basis versus the previous range of minus 1.5% to minus 1.6% of GMV. So looking ahead to 2023, we have further specified our outlook and now expect a positive adjusted EBITDA to GMV margin of more than 5% for the full year and more than 1% for the second half of the year 2025. And on top of this, we are fully committed to break even on free cash flow level during H2 2020. So with that, I hand over to Q&A and Christoph.

Thanks, Emmanuel. So before we start with the Q&A, the usual reminder from my side, please, as we would like to give every analyst the opportunity to ask a question, I would kindly ask you to limit your questions to one only. So operator, please go ahead.

[Operator Instructions] The first question is from the line of Joseph Barnet-Lamb from Credit Suisse.

I have many, but I will just ask one. You haven’t given explicit GMV guidance for next year is low double-digit GMV growth, a reasonable place for investors to be? And how dependent is your margin guidance on delivering that top line growth?

I'll -- so look, it's still early and there are still some uncertainties, which is why we don't want to give guidance yet. We also haven't finalized things and ourselves -- but if I try to give some guidance or some color. I believe that we should be -- if we execute well, we should be able to drive growth -- CAGR growth over many years for 20%, maybe 25% on a GMV basis. Now of course, there are some differences between markets. One is a market like, let's say, Korea, which is a big portion of our business today will probably grow significantly slower. It's probably the hardest one to predict. Therefore, it could be between 5% and 15% CAGR depending a little bit on how user behavior continues from where we are now and so on. So I don't -- yes, so that's a big range, obviously. Same are, could be markets like Kuwait [ that's ] one based on where they stand there. So many orders and frequencies so high. So it's very hard for me to say where does it go next. Then of course, we have some early stage market. We have a lot of early-stage market. You can probably grow 50-plus percent for many, many years, so they can CAGR much, much higher rates. But of course, they're tiny now. They -- so they don't really contribute to the underlying growth. They might add 1% or 2% on the overall growth. Long term, they can hopefully have a larger impact to our overall CAGR. But as they are still small now, they don't contribute so much to it. Same if you look at the integrated verticals or if you look at quick commerce in general, here, we can probably grow much faster than the average over, I don't know, probably the next 5 to 10 years, at least. But again, same here, this is a very small part of the business today. So it doesn't really impact our growth this year, next year only marginally. It will impact our growth probably in 3 -- 2, 3, 4 or 5 years when it becomes a larger portion of our business. So therefore, if I say that if you look at an aggregated basis, with good execution, we should hopefully be able to CAGR 20% to 25% for many years. But as I said, there is a little bit of mixed effect. Korea is still a big part of the business and that will grow slower. So there could be slightly less growth in the short term. Then you also had the effect of Q1 where we had big COVID lock downs in -- here and Korea, where we at least had a 10% extra growth coming in there. So that means if you look on the full year, we have to lapse that quarter a little bit. So it will be a little bit lower growth in Q1 for that reason. So therefore, I don't want to say a specific number. I think what you mentioned, yes, that sounds reasonable. Hopefully, over time, we should be able to grow faster, but reasonable. We will, as I said, Korea is a big range now. It's a little bit hard now with COVID, and it was a long time since we were kind of in the normal phase of growth with no impact. So that's why it's a little bit challenged. That's why I had to give such a big range of 5% to 15% long-term CAGR because it's not there. We will know a little bit more sometime in Q1. I don't know either through next trading update or in our full year results. We should have a much clearer guidance on where growth will be. And then in terms of EBITDA, no it's -- growth is pretty predictable. So it's still -- even if I was very vague here and giving specific numbers, we are still probably speaking plus or minus 3% maybe from some midpoint, the question where that midpoint is it's -- yes, we have plenty of room to deliver EBITDA. We will also have plenty of room of delivering more EBITDA than what we have guided to. We don't think that is probably the right thing to do, and that's why we felt comfortable to be above 0.5%, and that's what we're committed to. Yes. So the GMV growth will not impact our EBITDA. If we grow faster, maybe have a little bit more room, then the question is that incremental gross profit going to be back to profitability, or will there be more opportunities to invest in that also to be seen.

Next question is from the line of Miriam Josiah from Morgan Stanley.

Just a follow-up on the last one. How much of a variable was competition in reaching that 0.5% margin target for next year? I mean have you left a lot of scope in there for reinvestment? I guess you mentioned there that you could deliver more EBITDA than your guidance. Have you already sort of given a bit of buffer there? And then if you could just comment on what you're seeing in your markets at the moment. Are there markets where competitors are still pretty aggressive? Or are you seeing that rationalization across the board?

We definitely see a lot of rationalization across the board, and I would expect that to continue. But we still put the plan in place where we feel like we have room to operate on what we believe is the best way of running our business long term. And since we are operating in a lot of markets, -- and there is no one single market, that is Korea maybe, but even that is -- we are not dependent so much. So if there is a market with increased competition, we will easily be able to allocate a little bit resource from a market that has less competition to fight it off. We're also in a position where we don't compete aggressively like most of our peers, where they have to make trade-offs, if want to fight the competitive market [ A compared with B ]. If 9 out of 10 markets are not in that position, then there will always be enough room to fight the comparator if need be. So I think we are in a good position that we can we can double down in the market without hurting our bottom line. We will still be there. So yes, we've got significant room to invest in a way that we think is the best for the long term. We are early stages here of the year. And we are, of course, going to also be cautious. So we won't go out with a number if we wouldn't feel very comfortable with it at this early point.

Next question is from the line of Rob Joyce from Goldman Sachs.

It's on the integrated vertical segment. Trying to understand the path to profitability there? Just I guess, from -- why is that segment given the absence of competition is still gross profit negative? And if we look into the second half, why is the guidance that profitability should sort of get worse in the second half given the 500, 600 basis points improvement we're seeing in that gross margin in the third quarter already?

All right. Thanks, Rob. So yes -- first question, why still negative on EBITDA margin there...

On gross profit.

Yes, on gross profit. We're still early. There's still room that we still need a lot of orders to drive gross profit there. You need a lot of orders per store. We are not yet there. A lot of GMV per store is probably a better metric. So as discussed before we include probably a lot more than major competitors, [ everything ]. And of course, bigger store managers, facility centers, distribution centers and so on. So we need a certain number of orders in order to optimize that. We also have taken the cautious choice to not up price our offering like most of the quick commercial players have done that urgently increase prices and so on in order to get the gross profit positive because that's a strong message to investors. We'd rather set the price where we believe that we can drive our long-term gross profit target where we can achieve our long-term gross profit target. So if you're a minus, so if you're -- let's say, that your long-term target would be 10%, if you're minus 4.5%, that essentially means that you believe that there's another 14.5% improvements you can do without touching pricing, at least more than marginally touching pricing. That means that you increase your baskets, that will be a few percent from there, advertisement revenue. We think that we can get 5% to 10% from advertisement revenue. We are still in the low single digit there. [indiscernible] we can get better store management utilization, so more efficiency of the pickers and the store managers. So we still think that we have a significant amount of improvements in remain. If we would do the other way around, that we think that we can do another 14.5% improvement in gross profitability prescale over time, but we're already now priced at 5%. And essentially, we overpriced it to consumers. We charge too much because if you haven't done those initiatives, if you haven't done the scale, but still price it on a very good gross profitability, yes, the only way to get there is that over price. So as we are not doing that. It's also not so relevant when they are at this size. Still, if you look at it, we still have larger losses, not from negative gross profit. But still, there is overhead is still larger than the gross profit loss. So therefore, driving size is more important than driving gross profit in that sense or at least artificially driving gross profit because then you also reduce size. So that's how we think about it, now looking at it. If you look at next year, we are going to go from the negative 4.5% to positive during the year or midyear. So we are definitely getting there by gradually increasing the size and orders per store, [ GMV stores], basket size, ad tech revenues on. And we will significantly improve also profitability in that [ DMR ] segment. Yes, if you look overall for the integrated vertical segment, we are reducing it by half. [ Dmart ] is kind of reduced with more than half in next year. But there are still a few other things that will also keep on smaller investments to learn and develop.

Okay. And that's what's keeping the losses high in the second half of '22?

And thank you for reminding me, yes when we set the initial plan, I think, 525, we were still expecting that the market there will be aggressive competition [indiscernible]. So I think we were planning back then that we would lose something like EUR 140 million in Q1. I think in Q4, we lost like EUR 120 million, which was the peak of losses Q4 last year. We were planning to invest a little bit more in Q1. I think it was 139 or 140, let's say, -- we then realized that the market changed [ without a doubt ]. I think we ended up with more like just above 100 instead. But that was the [ amount ] that instead of going from 140 to 120 to 110 to 100, we more or less took down to 100 and been staying more closer to that 100 level, 110 and moving it more close to 100. And the thing here is also -- why doesn't it drop faster? And do you see that the gross profit margin is improving. So you would expect that losses would come down. But think about it this way, if you double your business, while at the same time, you take your gross profit from minus 10% to minus 5%. But you doubled your business on a negative margin, then you essentially keep your gross profit flat -- so even if you double the business and half the negative EBITDA margin -- or gross profit margin, gross profit is fixed. And that's a little bit what you have seen now in this year. And then, of course, on top of that, you have the overhead cost that has been more or less flat this year. The big difference then to profitability is going to start getting close to zero. And when you can start moving to positive [indiscernible] because then incremental growth and size is going to reduce your losses. Before your gross profit positive incremental size worsened profit. So that's why you will see larger improvement in profitability next year than what you have done this year.

Next question is from the line of Giles Thorne from Jefferies.

The question I had was on advertising. If you equate the quality of the opportunity with the quality of your reach, which I guess is hard of any advertising model, then your market leadership presumably give you a structural advantage. So I'd be interested, Niklas, to hear your thinking on whether advertising for you is viewed purely through the lens of profitability? Or could it be a new dimension of competition, using that leadership to generate a high-quality, high-margin revenue stream [ which you trying ] to be weaponized to reinforce that market leadership? Or are you just not there in your thinking on that? [ That was it from me ].

Yes. So you're right that if you have larger size, you will be able to drive more percentage marketing dollar. I mean just look at Google and Facebook and their advertisement revenue to whatever sales or size versus small advertiser. And that is, as I said, why bother on the smaller ones. I don't know, maybe some do, but I don't know if you compare Google with Yahoo, I don't know, Yahoo is not driving advertisement at all because no one cares. It is too irrelevant. It's too small. So yes, you're right, the more volume you have, the more percentage advertisement revenue you can create -- and this becomes even particularly true when you look at more [ Dmart ] and groceries and the CPG companies and so on. I think it's on the same line that many other things are beneficial when you have size. If you have size, you also have better logistic efficiencies, you can stack more orders. You can also improve the product experience because you can deliver faster because you have more predictability. So there are many levers that means that you have a better margin as the #1 of gross profit margin. You also have a better return on your own advertisement spend with awareness being high, then usually have a better [indiscernible] advertisement efficiencies there. So overall, I think with the leadership positions that we're having, we think that we can generate EBITDA of 5% to 8%. It doesn't mean that others cannot achieve the same, but if you take away that maybe you're 1% or 2% or 2% lower advertisement percent if you're a [ decent ] number two, maybe logistic efficiency means that you are another 2% worse on your logistic efficiency or CPO rider cost. Maybe it means that your marketing is a little bit less efficient. You have to spend 1% more on marketing to GMV. And your overhead might also be, I don't know, 1%, 2% worse in terms of operating leverage. So if we would drive 7%, maybe the competitor will 1% or 2% on EBITDA to GMV. And so yes, it is a comparative advantage to have that size and scale and use the advertisement revenue for creating more profitability. The alternative is that the number two will also drive, I don't know, 5% to 8% EBITDA margin, which I think is feasible, but it will then be at the cost of having the best product experience. It will be a little bit more expensive, it will be a little bit more niche. And I think you can be highly profitable as a niche player, too. It's just that then you're probably more like 10%, 20% of the market.

Next question is from the line of Chris Johnen from HSBC.

It's a little weird to be on the other side of the line, but good to be back, I guess. One question from me as well. I would like to pick your brain on competition, particularly on the [indiscernible] situation. I mean it's obviously an important topic. It's an important competitor. I'd love to hear if you have any thoughts, you would want to share with us.

No, we don't have so much. I think Wang and the team is doing a great job in China. They're a big inspiration, fantastic executor and operator. Yes, we like to team very much. Yes. I don't know -- they will -- I think there is a clear possibility that it will go outside of China. We have seen that was with [ DD ], they went uses of China. I think they are in Latin America, mainly. We -- yes, I think there is a clear possibility if they will be successful or not, this still to be seen. I think [indiscernible] is definitely a comparator that we think is very good. Yes, I don't think they're good like the same way we respect Uber and DoorDash and [ DeliBru ] deliver and so on. And we also have a lot of respect for [indiscernible]. And let's see, maybe we will have overlapping markets over the time.

Next question is from the line of Sherri Malek from RBC.

I was wondering if I could push for a little bit more related to Slide 20, where you split the GMV of unprofitable markets into those 3 categories. Would you also be able to indicate what the rough split of actual losses is between those 3 categories as well, please?

Yes. Yes, good question. And [indiscernible] we did put it in there. I'll be kind to still share a little bit. So I would say, startup markets is 15% of GMV -- it's -- those are usually smaller losses. So that will be a small amount today. Usually, the losses will go up a little bit over time before it comes down. So usually, the largest losses you will have is shortly before profit. I think that is also true for Delivery Hero. Our largest losses were last year or this year even, I don't know, at least beginning of the year. In absolute terms, in percentage [ turns up ] until you then very quickly get the profitability, which we have also seen here. So usually, in early stage, it doesn't cost so much and then it costs increasingly so as you spend up marketing and you have good coverage and you have high efficiencies of your marketing spending, and therefore, you want to scale it up. So therefore, the first one is not a lot. And you have the leadership markets, that is the [ waste ] -- that has the largest amount of spending is there because in some of those, they are at that exactly that point. They are leaders, but they are not large enough, and we invest a lot to kind of get to the operational leverage. We have good product, have good return on advertising spending and therefore, we spend up. And so that's -- those are probably the largest part of the losses, but also coming down also the fastest when they're in this position. And some of them, we also have comparators that we might not be at our target rate of relative size to number two, which is the main metric we look at -- and therefore, we keep spending until we feel like we are in that position or that we have a good trajectory towards that position. So we have a few markets there that are sizable, large and still not profitable because we feel like market share is not yet at our target level. Then you have the second place, and that's proportionally to GMV, probably the largest losses. So yes, that is an over proportion amount of losses to its GMV. I said the GMV is only 10%, but the losses are in proportion to its size. Yes, it's the largest. Yes. Not largely an absolute, but in proportion to its relative size, which is only 10%, as I said.

Next question is from the line of Catherine O'Neill from Citi.

I just had a question on your 2023 EBITDA guidance, well, several parts of it, I guess. I just wanted to see if we could unpack it a little bit more in terms of understanding what you're thinking on global losses for next year after the EUR 300 million you're guiding to for this year. Also within it, are you assuming that MENA will be higher margin than Asia for next year, if we're looking at sort of slightly slower growth in Asia. And on those unprofitable markets at a second place, do you assume that you sell some of those within your assumption of the at least 0.5% margin?

So that was a good one question. So on the first one, Glovo, if you take that, I would say it's fairly similar to the other unprofitable platform markets. It's kind of a, I would say, average there, more or less. As I said, I know you've seen the growth. The growth is very nice. The EBITDA margin to GMV is coming down quickly. We are -- yes, so I would say there is more like an average of the unprofitable markets. Some of the markets will also -- there are also categories there, which is some are start-up markets, Kenya and Tunisia and so on, and some are in leadership, Spain, Romania, where you have leadership wherever close to profitability or actually they are in profitability. And then some are a little bit further away. And then we have some second place markets there, too. So I would say that's an average there. On the second one, I didn't completely fully understand between Korea or Asia and Middle East. The margin for Middle East is higher, but I didn't fully...

Okay, you're now just checking around 2023, whether you'd expect that to still be the case. Is MENA generating enough in Asia?

Yes. So yes, it will also have a higher EBITDA margin than Asia -- yes so we still have higher margin there. Then on the fourth one, we do not make guidance that is based on assumption that we can -- or that we are not in control of the things that we are in control or feel very high confidence of -- this is part of the guidance, but not something that is -- it is out of our control or where we don't have full confidence. So yes, I hope that gives a little bit of a flavor to that.

The next question is from the line of Jurgen Kolb from Kepler Cheuvreux.

One question really on the [ Dmart ]. You reduced the number of [ Dmart's ] this quarter again. And you stated that you're planning to cut the losses in half or more than half actually. How much of these carbon losses is coming from further store closures? And how much is really coming from, say, the underlying business that you see improving?

We wouldn't expect -- we've done most store closures, and we had a review we went through all the stores looking at does it make sense to have a store at this point in time here. I think in a comparative environment, we would have said, yes, in a less competitive environment, you say like, well, it's going to cost more than the return that it's going to give. It's going to take too long to make to EBITDA. And therefore, we'd rather build up the kind of behavioral change for our local shops and then maybe in 1 or 2 or 3 years, we can re-launch those locations when we think that we can drive it faster to profitability of these stores. So we've done that review. There might be still a few places that we would consider, but that is really the minor part. The main part of driving profitability is that we're growing, and we're improving gross profit. The rest is really minor. It's a nuance, I would say. Maybe Emmanuel, do you want to cover, so we had a little bit Dmart footprint.

Yes, because I think this is also a one-off question of Rob before. One thing that we have to keep in mind is that in H2, we reduced by 60 [ Dmart portfolio ], so the former portfolio of the [indiscernible], but we also integrated the Dmart for Glovo as we reported from the 1st of July onwards. And I think that's important, like we have so basically, in total, we have 197 Dmart's, including [indiscernible] risk. So we're reducing the footprint of delivery year, and that's having a positive impact. We were also like I should say, like we keep on being conservative in our forecast, but we reduce -- we improve our guidance, but we still have like we don't fully capture for this year, maybe the closing. We capture this fully next year. But keep in mind, as I said, that we had a portfolio reduction of 60 Dmart's per deliver year, but at the same time, we integrated the Glovo ones. So that's why it's difficult to compare H2 to H1 completely.

It makes sense. And sorry, Emmanuel, how many is the Dmart's have currently?

1,197, if I'm not mistaken. With Glovo, right? With Glovo [indiscernible].

I feel like I could [indiscernible] to previous questions. So as he said, if there would be a sale of an asset that is not necessarily -- that is not taken into account. We don't need to do that in order to get to 0.5%. If we were about to sell something, it doesn't mean that we automatically move up our guidance. It means that maybe we see that we can use that for -- maybe there are more investment opportunities and the reasons why we still think it makes sense to not lift the guidance in connection to that. So I just want to be clear that we are not -- yes -- we have not yet given guidance.

Next question is from the line of Genelot, Clement from Bryan Garnier & Co.

I would like to come back on the second place countries. Is it still referring let's say, the whole of the South eastern Asia business? And if you fail to find a buyer or maybe a partner there, would you be able to simply close it and exit the region?

So if you look at Southeast Asia, keep in mind, we are a leader in more than half of that segment in Southeast Asia, not including Korea. But keep in mind, we have Taiwan, we have Hong Kong, we have Pakistan, and Bangladesh. We have a few other markets there that are leadership, [indiscernible] Myanmar, Vietnam. I think we're in a very strong position in Malaysia, Philippines, -- so I know we are not #2 in that region. We are number 1 in most of the markets of that region and the majority of our GMV is coming from leadership markets. There are a couple there. There are in the #2. There are also a couple in Europe. They are #2. There are 2 in Latin America, -- Central and South America they are #2. So we are #2 in a couple of places in all segments. So yes, we are not looking to sell our Southeast Asia business, but there may be markets in Southeast Asia or in other regions where we are in discussions. But I can't comment more on that.

The next question is from the line of Adrien de Saint Hilaire from Bank of America.

Hopefully, you can hear me okay. So I've got one question around cash, which may recoup a couple of topics, I'm afraid. But first of all, what is your level of the level of gross cash that you expect at the end of 2022? And if I'm so sorry, I could squeeze in one sub question around this. You talked about being free cash flow positive during second half of '23. What do you mean by during -- is that one month, one quarter? And when is the first year that you expect to be free cash flow positive over the whole year?

Yes, can I cover that Niklas if you want?

Sure.

Okay. So by September, October, we -- as you know, we don't disclose our balance sheet. We disclosed it on half year basis only. What I can tell you is that basically today, we're tracking better than expected on cash, meaning that our liquidity position by the end of 2022 would be stronger than our the internal forecast. And that's the reflection of not only the good EBITDA performance that we mentioned today, but also the measures that have been optimized in terms of, for example, CapEx, but also like leases in working capital. And if I take, for example, the CapEx to GMV ratio for this year, excluding Glovo that, we expect the full year to be around 7% compared to what we said before, which is a reflection, first of all, of the slower pace of the Dmart softening and also measures that we took to optimize our CapEx. And then to the second part of your question, Adrien, like your -- what means like -- we [ have the ] definition first, which is like I think it's important. So basically, when you look at the free cash flow, we consider free cash flow as cash from operating activities. So less CapEx plus interest. So effectively, it's been -- this is our EBITDA, less CapEx, [indiscernible] the changes in our net working capital, which we did a lot of progress compared to last year. If you remember, we're working capital neutral by half year already, and you should expect us to continue to improve. And then also, like the last one would be tax that we deduct, how we take into consideration for our operating cash flow activities. And so note that this cash flow is before interest. So both interests are earnings and also interest income before financing activities such as debt pre-payment and also before any special activities like potential M&A also. So that's -- we believe that this is a definition that is in line with what the investors usually and also typically understand as a unleveraged free cash flow. And what does that mean like to be cash flow positive or break even during H2? So basically, yes, this is not a full period of H2. This is not a full year, but this is during H2. This is what we committed to do. And then from down once we reach this cash flow positive, then we expect to be consistently positive free cash flow for the subsequent months and years.

Maybe add because interest, as I said, is not part of it. I think at this point, we made more interest than we're paying an interest or at least is very similar. So it's not that there is a big interest payment at this point in time, at least.

Next question is from the line of Andrew Gwynn from BNP Paribas Exane.

If could you just clarify on that last point, free cash flow, does that include the leases, the lease payments? But my main question is just coming back to the integrated verticals. And again, apologies for this. I suppose the case when you set out on this plan was demand was going to be very, very strong, but it does seem to be the case looking across the whole industry, the demand for immediate groceries is perhaps being overstated. So is there a possibility that we could see a material downsizing in the number of Dmart I think you have much more than just say 60 closures and handful in Q4.

Yes. So I think you're right. If you look at the industry as such, they have been scaling way faster than they could handle. And they have been given vouchers left, right, and center. So of course, they have grown volumes unsustainably and also spend marketing to drive those customers. For us, it's different. We haven't really spent marketing money on it or not a lot because we have a platform, customers come to that platform. So therefore, we don't have the negative effect that we have to pull back marketing because we're running out of money or something because we don't spend much there. Secondly, we have never -- and you saw that before in the last, I think, Q1 update, we're not spending that much on voucher either. It might be some free delivery and so on, but it's minimal. So therefore, we don't drive non sustainable customers or customer growth. So that's why if you look at our growth in the Dmart, it's growing and a quarter-on-quarter growth was the fastest in history for this -- for us and quite significantly so while actually improving margin. The problem we have with all other players is that have been funding the growth unsustainably. So of course, when we put back the marketing and they try to move the pricing up and I take the outages away, they are going to decline. I mean quite a lot. And that's why they are going to run into those problems. For us, that's not really case. The demand will continue to grow. It's -- we don't -- our customers love the experience. They come back -- high loyalty and so one. So it will continue to grow like it has done in the last 6 months, last 12 months, last 3 months for us, for the industry, maybe not.

But -- I mean, the purpose of the question was, are they just simply far too many Dmarts in the group? I mean that could be a more dramatic way of shrinking the losses [indiscernible] focused...

Yes. But we are getting there, [ earnest ]. So with the footprint that we're currently having. We are, as I said, mid of next year, we are at gross profit. Could we add another 1% or 2% by closing store, yes. But even those stores are on path to drive profitability, maybe it takes one maybe take 6 or 12 months longer for those stores. But the cost of closing down and open up again is higher. So we -- it's not going to be a big driver for profitability if we close down 50 stores. It's very different for the pure-play players who don't have the demand. They don't have the size. They're not getting close to scale. And on top of that, they don't grow. So if you don't grow and the store is making losses -- [ it will also not have ] profit in one year and also not in 2 years and the only way to grow that towards gross profitability and profitability is by growing its business, and we do that. So it's just a matter of will it take one or 2 more quarters for those stores, yes.

There are no further questions at this time, and I would like to hand back to Christoph Bast for closing comments.

Yes, perfect. Actually, it's not me who is making the closing comments I just wanted to let you know that it was the last question. And then Niklas, maybe you want to make your final remarks.

Yes, I'm happy to. So I want to thank everyone for attending the call and for your continued support and Delivery Hero. We really hope that today's presentation also makes it clear that we always have our investors at heart. We may push hard and aggressively to pursue product and market leadership. But we do that because we strongly believe this is a strategy that has put us in an incredibly strong position today, and we will be greatly rewarding our shareholders in the long term for this strategy. Having said that, I also hope that you've seen by our development that we listen to your feedback and we care for you, especially in times like this. The profitability improvements that we made is unseen by any other players. So I hope that has it. You also know that -- and we need to own your trust and to serve you as a long-term partner. And then that's your support is for that reason, very important. And again, thanks for putting your trust in our hands. We will fight day and night to not disappoint. I always like to send a big thanks for everyone at [indiscernible] for your commitment towards our customers, riders, restaurants and local economies. So thank you, everyone.

Thank you all for attending. Operator, you may now close the call.

Thank you. Ladies and gentlemen, the conference has now concluded, and you may disconnect your telephone. Thank you for joining, and have a pleasant day. Goodbye.