The Platform Group SE & Co. KGaA (TPG0) Earnings Call Transcript & Summary

Good morning, everyone, and thank you for joining our Q3 earnings call. As you know, this quarter will be our first quarter reporting consolidated numbers, including the consolidation of Brandfield starting with July. Therefore, all numbers we're presenting will be in a pro forma -- on a pro forma basis, otherwise stated on the representing slide. As always, I will go through the presentation first, with the focus on giving you enough time at the end for your questions. Let me start with a quick summary of the Q3 results. First of all, and most importantly, we have 2 main milestones achieved. The migration of our logistics service provider and the reperformance of our customer experience levels, the integration of Brandfield and also the continuation of profitable growth of Brandfield and a very strong start into Q4, which provides a lot of confidence going forward. As you know, we've moved our logistic capabilities to a new logistics service provider starting in Q2, but realizing the transition in Q3. After the challenges at the beginning of the quarter, we are fully back on track delivering the customer experience as we've always done in the past, which is also reflected in a super strong start into the Q4 with 29% order growth in October for fashionette alone. In Q3, we have seen significant growth of 25%, which converted in 10% net revenue growth. Please be reminded that the revenue growth -- net revenue growth is affected by accounting impacts, given the fact that the growth of our orders came in late in the quarter and by accounting standards are moved into Q4. Very promising and something the team is super proud of is the results we are able to present around active customers. We increased the amount of active customers 41% in Q3, comparing this to 2 years ago, we actually present a growth of almost 100%. As I said before, the integration of Brandfield is very successful, still ongoing, but already leveraging great results. For example, the group has already achieved a 10% owned brand revenue share in Q3. and Brandfield, since we took over full ownership of Brandfield starting with July 1, has accelerated its growth every month in Q3. In total, we are really reiterating our guidance for the full year of 2021. Let me start with recouping the changes of the logistics service provider in Q3. You all know that we were not satisfied with the developments on the results of the transition at the beginning of the quarter. But as always communicated, we'll work very hard and actually achieve the same results as before the logistics transition from a customer service perspective, by the end of September. As you can see on this slide, with the pink line, there's a number of hours we are required to meet in order to fulfill our customer promise. Exactly with the communication at the end of September, we've been constantly over delivering the shipping promise in October, and continue to improve our efficiencies together with our partner in November, being fully ready for Q4 and the acceleration of order volumes coming in November and then also in December with the holiday season. I think it's clearly visible with the growth of 29% in orders that customers are taking the improvement very, very well and are continuing to buy products from us and actually appreciate a significant improved customer experience. The Brandfield integration has been going very well. I've already communicated that we are really happy with the performance of the team and the financial results they are able to achieve. Brandfield has actually achieved or exceeded all expectations in Q3 and continues to deliver outstanding results in Q4. We've already leveraged the first synergies from Brandfield -- from fashionette to Brandfield, especially the integration of our top-selling leather goods brands, but also the other way around the largest own brand owned by Brandfield is Isabel Bernard, which already has become the second best-selling jewelry brand on fashionette. In the longer term, obviously, we will leverage our technology stake. This has always been a great focus of ours and a great opportunity to improve the customer experience and ultimately financial results of Brandfield in the next years. While we've already fully integrated our BI stake, which is essential for the active management of all marketing channels, buying behavior, forecasting, et cetera, the next steps will be also to leverage our technology platform from a customer-facing perspective, so our webshop and some of the back-end systems. We will continue to increase the selection of both brands, so driving the integration of own brands on fashionette, but also continue to drive selection expansion on Brandfield field, mainly in the leather goods categories, which will also boost average order values and customer returns over time. As already communicated in the past, the teams have been working on integrating or on delivering a fully integrated own brand strategy, which we will communicate more about next year, but also give some more updates later in the presentation. On Slide #5 of the presentation, we want to give you a short intro of the private label or own products, as we call them, of Brandfield and now also of the fashionette platform. As discussed before, in Q3, we've already achieved a 10% net revenue share of owned products, 37% of our order sales on fashionette in the jewelry category are generated by own brands, and 42% of the total order sales of Brandfield are contributed by own brands. Obviously, the biggest upsides are not only higher gross margin, but full control of the 360-degree brands appearance. And with Isabel Bernard, we believe we have a significant value in our hands for our future, developing it to a really strong and also independent brand, not only sold on fashion at platforms. but internationally on other opportunities. Brand -- today, Isabel Bernard is not only active in jewelry, which remains the strongest category, but we've already invested in selection expansion, if you -- we had to go to Brandfield website or also fashionette website, but also to the stand-alone Isabel Bernard website, you can see that we've expanded our selection also into leather goods already. Quick updates on Q3. As discussed, 10% net revenue growth with a significant impact of revenue recognition going into Q4, but still growth coming mainly from Brandfield, contributing to the growth of Benelux and an increased share of the non-DACH revenues. Others is obviously heavily affected by the U.K., our strongest country, which was the strongest country outside of the DACH and the Benelux region. And because of the legislative impact of the Brexit, it's very complicated to grow the European market share, which as said before, will require a strategic decision, either of an acquisition in the U.K. or a potential organic internationalization, which will require a physical presence or logistics solution in the U.K. Let me remind you that 1 of the strategic reasons why we decided to move our logistics service provider to a new partner was the international footprint. ITG has more than 200 locations all around the world, giving us the opportunity to easily and without any CapEx investments internationalize our warehouses very quickly. Customer growth remains super strong. Both brands delivered positive numbers, Brandfield continues to accelerate its revenues throughout the quarter and in Q4. But fashionette also saw a strong recoup when we communicated that in the press release at the end of September, with acquiring more new customers and driving the future platform growth of our group. Very important is that we obviously see the benefits of the strong customer experience deliverable in September -- at the end of September, but mainly in October, and also in November and I'll come to the November and outlook later. The number of orders have significantly increased 25% growth driving the order growth continuously forward. Very important here, more than 40% of active new customer -- active customer growth of fashionette, which provides also significant opportunity for the long term given the much, much larger customer base, which we have developed over the last 24 and 36 months. The financial performance is obviously impacted by the logistic migrations. Obviously, the customer experience had some impacts on marketing efficiencies, but also on distribution cost ratio and even on gross margin, but with some discounts we had to give to customers who receive their products much, much later than originally expected. The picture has significantly changed already in Q3 or Q4. Therefore, we are expecting a significant upside from gross margin in Q4, add a significant faster growth rate which ultimately will also leverage significantly higher profitability in Q4, which we're excited to demonstrate next year. A quick update on the operational performance. Some of you might have read, we have actually launched our beauty category as expected by mid of October. We launched a category with about 3,000 SKUs and more than 100 premium luxury brands. We expect the category to continuously grow in selection up to about 5,000 SKUs by December. Very important for us, the first customer insights, every second beauty order was an additional product order for fashionette accessory products. So every second order was actually not meant to be a beauty order, but customers added at least 2 beauty products to their order. 80% of the customers are returning customers, so active customers from fashionette. And on average, every beauty order consists of to 2 units, which is exactly what we expected, but also wanted to achieve. Therefore, we are very, very happy with the launch and are super strong about the outlook of beauty, especially in the mid- to long term when duty will contribute significantly to the growth of our group. As mentioned before, the start into Q4 has been super successful. October was a very strong starting point, but November actually saw accelerating growth rates on a daily basis. Therefore, Q4 months quarter-to-date is already exceeding our internal budgets. And therefore, providing a very positive outlook, not only for Q4, but also in the long term, especially given the fact that the Q4 comparisons given the COVID lockdown last year are super strong. For us, this is a strong sign of the successful operating model that we've developed, given also the integration of Brandfield higher owned brand share will leverage not only short-term but long-term success. We are only 6 weeks into the Q4, and you know how important Q4 for us is, again, we are positive about the developments that we have seen. Improved customer experience already leverages significantly higher growth rates in terms of revenue, but also new customers and active customers, Brandfield has performed since day 1 of the acquisition, and we are confident that the team is able to remain super active in improving customer experience, customer offerings, and therefore, looking forward to a strong Q4. Especially on the fashionette side, we came in very light in inventory last year. If you remember, this year, we are significantly better prepared for the growth that we expect in Q4 already yielding results in the first 6 weeks of the quarter. And we expect significantly improved gross margins in Q4, but also mid- to long term, which will also help us to leverage more profitability on the bottom line. Therefore, reconfirming our guidance and looking forward to a successful and good customer experience in Q4. Let me just conclude real quick. Most importantly, given the importance of Q4 in the whole business, we are excited about the acceleration of growth post the improvement of our customer experience. The growth of new customers despite the logistic migration has remained super strong, and the first 6 months provide a significant upside to Q3 and a promising start into Q4. The strategic initiatives are all on track. We've expanded our selection continuously both on an SKU and the brand basis. We've already leveraged the first synergies from Brandfield, also realizing 10% of net revenue conversion from own brands and overall Brandfield is extremely value accretive and providing a great opportunity to expand our internal footprint just as we communicated the targets for an acquisition in the IPO process. Therefore, overall, the guidance is confirmed. And also for long term, I think Q4 provides another upside of the long-term outlook given the strong comp and the successful start into the quarter. With that, I would hand over to you guys with -- for your questions. Thank you so much.

[Operator Instructions] And the first question is from Christian Salis, Hauck & Aufhäuser.

I've got 3. So first of all, on the Brandfield operating performance stand-alone in Q3. So if I assume low single-digit sales growth for fashionette stand-alone in Q3, this should result in more than 30%, 3-0 organic growth year-over-year for Brandfield. Could you confirm this? Would this be a fair assumption? And secondly, on current trading at Brandfield, could you please confirm that you are also seeing an acceleration at Brandfield stand-alone that you're apparently seeing at fashionette, supported by the initiatives you started and also the cross-selling potential you are seeing? And then thirdly, on the gross margin, so this improved by 80 basis points year-over-year even on a pro forma level adding Brandfield in Q3 '20. So that's kind of the opposite development we've seen in the e-commerce sector in Q3. So everybody, Zalando, Westwing, Home24 had a strongly declining gross margins actually year-over-year. So could you please talk us through the moving parts in the gross margin development in Q3? And also could you maybe talk a little bit about the pricing that you're seeing in the market in terms of -- related to markdowns and everything like that?

Thank you, Christian. Look, on the stand-alone basis, what I can tell you is confirming what I've said during the time when we had the talk announcement that we expect fashionette to come in at low to mid-single digits in net revenue growth. This was already accounting also for potential accounting impact. I can confirm that. And I guess the rest is math, and I think you're pretty good at that and we'll come to a number that is close to reality. Current trading on Brandfield, look, this is also obviously influenced by the comps, right? Again, we are super happy with the development of Brandfield. The growth rates in Q3, I would call outstanding. I'm really proud of the team and really happy with the performance. The start of Q4 is as successful as it is with fashionette. For fashionette, to be honest, the pressure was significantly higher, right, because we needed to turn around Q3, which we always expected and fully deliver on. Therefore, the acceleration in Q3 versus Q4 is significantly stronger in -- for fashionette, which also had to become through just because of the logistic migration impact. And regarding your gross margin question, we actually believe that Q3 is not displaying our full potential. Obviously, there was also a negative impact from the logistics migration. I mentioned the discounts that we had to give to some customers because of very late deliveries. So you'll see a significantly improved gross margin in Q4 and going forward. Pricing-wise, the pressure in Q3 externally remained fairly high. And I -- based on what I'm seeing right now, also making sure that everyone on the senses, one week Friday, nobody knows what's going to happen next week, has decreased and therefore, the organic gross margin improvements are visible despite the significant acceleration of growth.

The next question is from Russell Pointon from Edison.

Congratulations on the results. A few questions, please. On Slide 4, you talk about the Brandfield acquisition and there's a bit more integration work to do. Could you just talk about sort of what stage that integration work is complete? I appreciate you were probably not doing so much in your busiest period Q4. Just going back to the gross margin. So I may have missed this, could you actually quantify the underlying gross margin at Brandfield -- sorry, at fashionette in Q3? Third question is on marketing costs. you're tracking at about 14% of revenue at the moment, which is back to where you were in the early years of the business. So, do you -- can you just talk about whether you think this is rebased upwards or at what stage do you think you will start to get leverage over this? And my fourth question, sorry, is a very minor detail. At the time of the Brandfield acquisition, you said that EBITDA would be about EUR 2.8 million in the year-end, June 21. And the press release today says it's around EUR 3 million. So could you just clarify whether it's above EUR 3 million or it's more towards the EUR 2.8 million?

Russ, so first question was about Brandfield integration. And I think I mentioned this before, there's something called code freeze, yes. And technically, you don't make any changes, I would say, right around this time of the year, just because there's too much risk of any negative developments or impact from the technology platform. The same is true for any logistic changes, which is the reason why we moved logistics service providers during the summer. So the integration work that the teams have done was very focused on a, financial integration, which obviously is visible today as we are already reporting all numbers, not only the actuals for the consolidation period, so Q3, but also all the pro forma numbers, not only on the financials, but also the operating numbers that we are that we are delivering. The second level is the Business Intelligence integration, which we strongly believe and as you know, and pay a lot of attention and put a lot of effort in, it's also done. We launched basically the continuous monitoring that we have for fashionette, also for Brandfield and therefore, not only as a management team benefit from constant insights. I would not even call them daily, there's actually more details on an hourly level. But also the operating teams have significant upsides from way more transparency into the data and therefore, also for example, are able to manage marketing channels differently. So this was second priority. And the third priority was the focus on the revenue synergies from the integration of leather goods brands on Brandfield, which I communicated earlier, 7 of the top selling brands are already live and selling at Brandfield. And the other way around the integration of the own brands of Brandfield onto fashionette. And also, as communicated, Isabel Bernard, is the largest of our own brands already became the #2 brand in jewelry, just in the first quarter of its integration now. So those 3 are the main leverages in terms of synergies that we focused on this year. Obviously, there is more coming. The ultimate goal definitely is to move into a stage where we have a fully integrated technology stake. This is nothing that happens overnight and go step by step. But I can tell you first is clearly the focus on developing a standardized platform for our customer relationship management, which for us always starts with the intelligence we find in our data and then feed into the customer relationship management tools. This will clearly be a priority for next year. But ultimately, we also want to migrate the Brandfield platforms onto our own webshop technology, which will be the next step later down the road. So overall, fully on plan and also visible in the results as documented. The marketing cost was the third question you referred to 40% rather being high. And obviously, there are 2 effects. First of all, there is a negative effect out of the logistics migration. That's it -- as it is, and I also communicated that obviously, marketing efficiency will decrease with a lower customer experience, but ultimately also increase or efficiency will improve significantly with a higher customer experience. Also, as demonstrated over the last years, you'll see that the marketing efficiency will significantly increase in Q4. So there will be a double positive effect in Q4 coming in. And what you need to be aware of overall marketing costs for the group have changed quite a bit in the way we need to look at because of the integration of Brandfield. We have communicated that the revenue share from owned brands, already north of 50%, I think it was 52% in Q3. So in order to sell more own brand goods, you also need to do a different level of marketing. However, this is more than just cope with a significantly higher gross margin which, again, you will see over the time, continuously increasing, which is clearly our expectation. So there will be more visibility around that down the line. Your fourth question was around the EBITDA contribution of Brandfield. At the very beginning, I think we announced the acquisition or the signing of the acquisition during full year results last year, the expectation of the guidance was EUR 2.8 million. And I believe in the Q2 results, I already gave an update of the expected EBITDA contribution to be around EUR 3 million. So there is no change -- no significant change to that.

[Operator Instructions] And the next question is from Catharina Claes, Berenberg.

I really just have 1 additional question to what has been asked so far already. And that is on product availability or supply chain, just to really touch up on this issue again and make sure that we've not missed anything. What -- do you see any impact currently? What is product availability looking like? How is the -- how do you plan your inventory currently also maybe in the future? Anything we have to be aware of?

Okay. We seem to have a technical issue. [Technical Difficulty]

I'm sorry, the line got dropped. Catharina, I answer the question again. So look, we don't expect any impact from supply chain constraints in Q4. We have deliberately ramped up the inventory earlier than last year to secure product availability. The availability plays into the success we are seeing of late Q3 and also early Q4. And there is also no impact expected in Q1 as we have all the order confirmations available and don't expect any impact -- negative impact from the supply chain constraints out there. Obviously, there's a lot you can do, for example, and I think I mentioned this last time on our call, we've moved some of the manufacturing of our own brand, truly lines from Asia to Turkey to shorten the logistics -- basically distances and improved the availability through that even with an upside in profitability. So, for now, I'm confident that we managed the situation very well and don't expect any impact this year and also no impact in Q1.

[Operator Instructions] And we haven't received any further questions at this point.

Thank you very much, everyone. Looking forward to talking to you soon. We'll present an update on the Black Friday week at the beginning of December, and we'll be in touch later at the end of the year or early next year. Enjoy the holiday season, all the best. Thank you so much. Bye-bye.