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

Thank you. Hello, everybody. Welcome to the Q3 '22 results presentation for Fashionette AG. Thanks for sticking around. So my name is Georg Hesse. I'm here since Dubai. For those that have noticed, I'm also here with our Head of Finance, Oliver; with Armin, congratulations. He can also take questions. Thomas, obviously, our COO. So we have enough time for questions after that, let's dive into the highlights. So Q3 generally saw an increase in net revenue growth when we talk about that. So we grew by 22%, despite the strong macroeconomic headwinds. We saw solid new customer growth of 27%. We were able to decrease the marketing cost per order and the customer acquisition cost. And we're super happy to have a positive operating cash flow in that quarter, leading to our comfortable liquidity position of almost EUR 10 million by the end of Q3 2022. We did still adjust our guidance. Net revenue expectation is now EUR 165 million to EUR 175 million, so between 7% and 13% growth; and we now plan for adjusted EBITDA between EUR 1 million and EUR 4 million, and we'll talk about that in the [indiscernible]. So those are the highlights. But maybe first talk about some qualitative capability topics. So one of the capabilities that we've acquired when we acquired Brandfield last year is their very strong expertise on creating own premium brands. And we're very happy to have in this Q3 now, another of their collections of the premium [indiscernible]. One of the most important premium brands that they have, Isabel Bernard, is now available also in Fashionette. Fashionette obviously being a traditionally handbags brand in the first place, very strong in handbags. So having leatherware there now, obviously, there's great potential and that does show some of the synergies we have and some of why this is a strategic, good acquisition. We also have a shoe collection that is now live in Q4 on Fashionette. So early results are already super promising. Why is that good and why is it strategically important? So we are obviously complementing our existing premium handbag portfolio on Fashionette, where we are already strong, and we can offer a premium quality at very attractive prices. So this is really very good leather stuff, it's not cheap stuff. It's not to replace our lower end, but it's really an important addition to the overall premium portfolio. And it has attractive gross margins. So you'll hear me talk more about gross margins throughout this presentation. So this is one of the drivers that helps us turn around the gross margin. So that's one of the things we are doing. I'm super proud of -- is what our communications department did, which is create the new brand campaign, We Are Fashionette. And this is more than just a brand campaign. This is really exemplifying us getting more clarity about who we really are, what our role is, what our niche is and what our position is versus competition in this segment. And I've been talking about it. So we are not your average premium and luxury platform. We are on the side of the customer. We have the best customers in the world: hardworking women that don't need us to take an elitist stance and become an ivory tower of style. But they know what they want, and they know how they want to complement their style with our products. And this is how we create our website, how we talk to our customers. This is also how we talk about us now publicly. So we are an approachable premium luxury fashion accessories retailer. We are a community that strives for individuality, inspiration and inclusion. We are not an ivory tower of style that is really a platform for different brand styles. So we are more than that. We are close to our customers and the new campaign really exemplifies that. I'm very proud of that, and that's actually a forcing function also for us internally to continue on that path to be -- have this very special role within premium luxury that we have. So you see that throughout Q4 and in Q1, obviously, around cyber week, Christmas, sale events this year, it's not just branding, we also have performance spots around this all the time. And again, very proud of making this step. This is just moving us closer and closer to the clarity of the company we want to build and who we want to become. So now into the numbers, right? So financial update. First, revenue growth, 22%, very solid. So we did expect revenue growth to accelerate after a soft half year 1, obviously driven by the crisis, by the shock event in February, we saw some softness there, especially in the Netherlands. And we now see all those regions recover. We saw double-digit growth everywhere. Still Benelux lagging somewhat behind slightly. So -- but still double-digit growth there. In the half year 2 -- in half year 1 results, we mentioned that the very soft growth of Benelux, which was actually negative in half year 1, for us was a litmus test to understand the macroeconomic impact on customer demographics that were slightly different than what traditionally was Fashionette. Because our Benelux customers -- that cohort is obviously different because it mainly comes from our Brandfield acquisition with a slightly lower average sale price that we have there. So this is a good indicator of what it does to more average customer demographics when you have this network, when you have new arrangements, you have inflation coming out of this. And we still see that. So Benelux is still somewhat lagging behind the list. But in general, very solid growth also in DACH, and obviously, the others coming from a very small basis of 11%, growing 50%. So that's nice. We see order value mostly flat, even slightly up. Number of orders growing even more strongly than we do on the net revenue. So why is that? As a reminder, return rates are back to the pre-COVID levels. And so now we're comping obviously a yield with lower return rates. We have to do more orders now to do the same net revenue, and that's what you see throughout all the financials. Has an impact, obviously. And then on the new customer growth and customer growth, very solid double-digit growth through both entities, Fashionette and Brandfield, both. Brandfield actually contributing 71% to new customer growth, growing strongly, but also Fashionette growing in the double digits. And again, active customers above 1 million for the last 12 months. So yes, that's an asset that we can do more with than just sell handbags to them. Marketing cost per order, I think same picture that you've seen. So we managed to decrease that. Now also customer acquisition costs down somewhat on Brandfield side. I think that's very positive. However, only small changes, obviously. And let's go through the overview of the financial KPIs. So the return rate there stands out. So if you look at return rates year-over-year, in Q3, you see that's a substantial increase. And we see that translate into most of the other KPIs as an impact, as previously mentioned. So we don't think that's a doom loop. We think it's certainly normal. So it's not going to be more dramatically becoming worse even next year. So we've just come back to pre-COVID levels, and that's where we are now. And the only impact then is just mix changes between categories, right? So if the shoe share would be growing dramatically, and it's not growing dramatically, then you could see a further increase. But it's a one-off impact, obviously, versus last year. Net revenue growth, if you look at the 9 months, it's about 10% now. That's also about how much we guide for the whole year now in net revenue growth. In the quarter, as we mentioned, 22%. Now the gross margin. Gross margin down 140 basis points, and this obviously driven by massive competitive pressure on not only online, but -- and also offline, with us seeing everybody coming in very heavy into this year with a lot of inventory and many people being very nervous now with lagging consumer demands to get rid of their inventory and we just see that impact. And I mentioned in the Q2 results presentation, I don't expect that to change for Q4, and I unfortunately have -- I was not wrong there. So Q4 has seen massive discounting, 50% of activities by major competitors. So we can't talk for them, but obviously, there seems to be a lot of inventory out there in the market that drives some of those declines. I think if you have 140 basis points decrease in gross margin year-over-year, then that translates pretty much down to the adjusted EBITDA margin, where we are 100 basis points down year-over-year, and you see that there. On the other metrics, distribution costs could remain leveled in spite of the more orders for net revenue, which is a good result. Marketing cost ratio -- the cost ratio, again, more orders needs to be brought in with our marketing to achieve the same net revenue. That's why even by the increase on the per order level, because of the year-over-year development and return rates, you see that we had the effect of a slight increase in marketing cost ratio. We've been disciplined on the G&A. So that's good, and that takes away some of those increases and some of that 140 basis points in gross margin. So not all of that translates down to the EBITDA, but 100 basis points do. And that's why we want to change something on the gross margin going forward. So on the cash, I think just happy about the development there. For us, we could obviously free up some of the inventory that they had, translate it into cash. So Q3 is an inventory building quarter normally. So we did, in the Q2 results presentation, warn everybody that maybe the positive operating cash flow might not be retained in Q3. It, in fact, was retained. So we are also positive there, which is great. And that's where you want to be, you want to be flexible and you want to have the liquidity when there's times of uncertainty ahead. So that's good, really happy about that. So what does it mean for the rest of the year? So on November 8th, we did adjust our guidance, we saw that we're growing nicely in Q3. We expected that, though, too. And we've seen that the early beginnings of Q4 have actually been not favorable in terms of trend. So growth has softened there. And if you do the math, we would have need to grow more than 25% for the rest of the year to retain the original guidance based on Q3 results, and then Q1 -- and then October results and the early days of November did not warrant that. So that's why we had to reduce the guidance. We also considered reduced guidance on the EBITDA that comes with the -- mostly with the net revenue decrease. There is also a change on the gross margin, but obviously, the net revenue decrease translates into a lower EBITDA outlook. So what we do assume is that just customer demand doesn't pick up noticeably remaining weeks. If we are wrong there, right, if you see an amazing cyber week and black week and a great December, that might change. But just we have to be prudent and just assume that the data that we see points us to the right way, and that's why we have the new guidance there. So how we orient ourselves around this reality, around softening demand in Q4 and the current pressures is something that will make us stronger as a company. And so we're set up to deliver sustainable profit growth for the long run, and this has to do with how resilient we are in this time of uncertainty. So how we set ourselves up is to react to a time of potential headwinds, and the answer to that is resilience there. The answer to uncertainty is flexibility. And so these are the things we're doing. For us, resilience means 3 things. It's to know what's going on, to have tactical awareness; to retain ambition. So not to plan for failure, not to move backwards because it has a lot of consequences that we don't want. We need to retain ambition and, at the same time, drive flexibility and having costs down. So that's the right behavior in our opinion in a situation like this where there is potential, but there's also headwinds, and there's a lot of uncertainty. And so on tactical awareness, we have a great base of data. We want to be -- that's within our mission statement, right? When to be the #1 data-driven platform for human luxury necessities in Europe. So it's very important to us that we have a democratization of the data so that all our teams can make good decisions along the way when they have to make tactical decisions. And so the proliferation of business intelligence tools that the rollout of our capabilities, also to Brandfield, our acquisition last year, so do we make similar decisions there and have a similar quality decision making there. It's very important to us how we do cash planning, outlier scenario management and that -- increasing that frequency is important in a time like this and that's what we've done. And that makes us a better company anyway, right? So it's good things. It's not one-offs that are sunk costs, but it's some things that make us a better company anyway, and so that's the right thing to do. It's also the right thing to do to retain ambition. So we still want to do double-digit growth for the full year this year, and that's -- and profit we saw, right? So that's what we aim for. That's also what we guide for. And we're very ambitious with our in-season inventory management for this Q4 especially, driving inventory turns and retaining cash. That makes us a better company, no matter what. No matter if those headwinds really come to base or if they don't. So it's the right thing to do, and we're setting ourselves up for gross margin turnaround in 2023. So I'm very happy with the welcome development in [ last year ] of gross margins. So I think we've grown nicely, but that's a trend we are turning around, and we will turn around in '23, and that's the right thing to do anyway. No matter of headwinds and uncertainty or not, and so those decisions are the right decisions. And supporting that, our cost down and flexibility activities. So in many cases, we'll be saying No For Now to experiments, to expansion activities, to many things that we love to do, we think they're the right thing and we're not saying no to them generally, but No For Now is the right focus in times of uncertainty because it buys you flexibility depending on the actuals coming in and depending on more data coming in. So headcount, we're very restrictive on pending on 2023 actuals. So let's see how this turns out and how much we really want and can afford when we have more knowledge about how a potential economic crisis is coming or not, and how the headwinds really are coming on. So we already made relevant cuts on the nonperformance marketing spend. So you saw that I'm very proud of our brand campaign and our new positioning. We have made very, very painful cuts there already in terms of how much we display that and where we show it, and we have to be very smart. And we are very smart in everything that's nonperformance-related. But also, as we retain our ambition, we don't go on the performance marketing expense. So we still want to grow and then have efficient spend. And we are hibernating basically most category expansion activities until we have more clarity about 2023. So there is a lot of stuff we can do. There's a lot of things that would be nice to have, but most of the stock is not essential. So this helps us focus. It's painful, but it's the right thing to do. It makes us a better company, a leaner company anyway to make very focused, very conscious decisions based on data coming in on how the [ expansion ] situation unfolds. And on the buying strategy, so we're also very conservative there. We are very margin conscious, very selective and flexible in how we buy because there's a core driver of the gross margin we end up having, and that's already what the teams are executing. So all those decisions will be setting us up on the right path with gross margin turnaround in '23. And they are the right things to do, no matter what happens, right? So I think running a tight ship that's ready for any storm makes you also run a fast ship when there is no storm. So that's what we're doing, and that's how we go into Q4 into '23. So key takeaways. I'd love you to take away from that is, Q3, we expect growth and profitable adjusted EBITDA for the full year. So that's the -- that's how we guide and we saw solid growth in Q3 to support that. We have positive operating cash flow and stable liquidity in Q3, which is very good, and we expect to obviously increase that in Q4. And we talked about some strategic initiatives for the long-term growth which has been established in Q3, so the own premium range, so we can just talk about that more probably in the future; the new positioning. And we said, we recognize the possibility of headwinds coming through the rest of this year on the customer demand, also in the gross margin and potentially into '23. And therefore, we optimize for resilience, retain flexibility by simplifying, by adjusting costs and risks by focusing especially in marketing, personnel and inventory. And those activities will be the right things to do anyway. They make us a better company, that will keep us disciplined and that help us with the gross margin turnaround that we'll have in 2023. So we have Armin,obviously, Director of Investor Relations that you're able to meet or contact when you don't have a chance to post questions here. Or meet us at one the events. Feel free to contact Armin going forward. And from then on, I say thank you for listening, and that's all for Q&A.

[Operator Instructions] First question is from the line of Christian Salis from Hauck and Aufhäuser Private Bankers.

I hope you can hear me all right. I've got 3 questions, please. So first on the net debt. So at the end of Q3, net debt now stands at around EUR 17 million. But if I look at Bloomberg, the consensus expects some EUR 17 million to EUR 18 million in the full year. However, I mean, in Q4, cash flow should be quite strong, right? And therefore, the consensus number looks too high in my opinion. So could you maybe confirm that? And then secondly, on the integration of Brandfield, could you just provide an update maybe how much of the assortment is already integrated? And what are the next steps here in the coming quarters? And then finally, could you please provide a split regarding the profitability in Q3 between Fashionette and Brandfield standalone? So what's the adjusted EBITDA margin for both subsidiaries basically standalone in Q3?

So it appears we have sort of some connection issues and the quality is not very good. So I'm going to repeat the question and you can go back if we didn't understand them correctly. So I understand that you had a question on our new guidance versus consensus and that the consensus is different than the new guidance, that's how I understand it. So basically...

It's not about new guidance. The net debt figure, not about the guidance, but I don't think you have any guidance on net debt. But it wasn't about the sales or adjusted EBITDA guidance, it's about the net debt figure and the net debt expectation on Bloomberg. Maybe could you just talk about the cash generation in Q4, and whether you expect net debt to improve in the full year compared to the EUR 17 million we are seeing now in Q3.

So the question is, how much does net debt go down basically, if I understand that. And we expect that to go down by EUR 4 million. Does that answer the question? And so -- then the question was on how much of Brandfield integration has already happened and how the progress there is. So yes, we have made a major step, which is the organizational linking of the company so that basically, we have global organizations now that have global regional responsibility. So buying things, therefore, for both entities. And it's super important that I'm also the other way around, we not only have teams sitting in Germany -- that professional team is now taking global responsibility, but also the other way around. So we just make that based on where the best people sit. So I think that's a very powerful next step on the integration. And then process-wise, I mentioned 2 things. I mentioned selection. So our own brand selection is now available globally and also on the other platforms, which is great. And then business intelligence, which is a core driver of what we think is our ongoing competitive advantage, it's how we make decisions, and that is rolled out now with all the sandboxing and all the tools also to Brandfield. So some of those things happen. On the other steps, a lot more has to be done. To be honest, it's not that easy to get all the benefits in. If you think about ERP systems, split inventory, these things. There's a lot more work to do. So thanks for the question. That's progress, but we're not done yet. And then I think there's a question on profitability of Fashionette versus Brandfield, which we don't break out separately, but those are both profitable entities. I think that's important. So this is -- Brandfield was profitable when we bought it, and it is a profitable company. So both are contributing. It's not that the one is the growth driver and the other is the cash cow. It's not like that. So both are profitable, but we don't break out individuals.

Okay. Maybe just a confirmation on the first question on net debt again. So could you confirm that the net debt should decrease in Q4 from the EUR 17 million?

Yes, yes, yes. Sorry to be slow on that.

[Operator Instructions] There are no further questions at this time, and I would like to hand back to Georg Hesse for closing comments. Please go ahead.

Thanks, everybody. So I'm hearing we had conditions with the sound so sorry for that, and thanks for sticking around and listening extra carefully this time. Thanks for that. So thanks for your continued interest in the company. We see some headwinds in the macroeconomic environment. Everybody sees them. As you see, I think we're set up very well to benefit from that in that respect that we create a better company that will make us successful no matter what the external environment will look like. And stay tuned for a gross margin turnaround in '23, and have a great Q4, everybody.