D-Market Electronic Services & Trading

Ladies and gentlemen, thank you for standing by. I'm Poppy, your course call operator. Welcome and thank you for joining the Hepsi Burada conference call and live webcast to present and discuss the first quarter 2022 financial results. All participants will be in a listen-only mode and the conference is being recorded. The presentation will be followed by a question and answer session. Should anyone need assistance during the conference call, you may signal an operator by pressing star and zero on your telephone. At this time, I would like to turn the conference over to Ms. Helin Çelikbilek, Investor Relations Director. Ms. Çelikbilek, you may now proceed.

Thanks, Poppy. Thank you for joining us today for Hexibroda's first quarter 2022 earnings call. I'm pleased to be joined on the call today by our CEO, Murat Emirdağ, and our CFO, Korhan Öz. The following discussion, including responses to your questions, reflects management's views as of today's date only. We do not undertake any obligation to update or revise this information, except as required by law. Certain statements made on today's call are forward-looking statements. Natural results may differ materially from these forward-looking statements. Please refer to today's earnings release, as well as the risk factors described In the same Harvard slide of today's presentation, today's press release, the 6K, our Form 20F filed with the ACC on May 2nd, 2022, and other ACC filings for information about factors which could cause our results to differ materially from these forward-looking statements. Also, we will reference certain non-IFS measures during today's call. Please refer to the appendix of our supplemental slide deck. as well as today's earnings press release for a presentation of the most directly comparable IFRS measure, as well as the relevant IFRS and non-IFRS reconciliations. As a reminder, a replay of this call will be available on the Investor Relations page of HEP2Broadhouse website. And with that, I will hand it over to our CEO, Murat.

Thank you, Helin. Welcome, everyone, and thank you for joining us today. Before diving into the first quarter dynamics and our actions in more detail, Let me quickly refresh our memory on the operating environment in Q1 2022. Challenging macro dynamics continue to shape the operating environment, including the rising inflation in Turkey and global markets, continuous devaluation of Turkish Lira, ongoing challenges on the global supply chain, and headwinds from the tragic war in Ukraine. India's operating environments are solid performance underlying the strength of our business model as well as the soundness of our customer and merchant value proposition. Accordingly, we delivered 8.3 billion GMB, corresponding to 84% year-on-year growth in line with our expectations. A strong order growth of 63% year-on-year was mainly instrumental in this performance, driven by tons of growth of active customers and order frequency, which I will discuss on the next slide. Similarly, we had a strong revenue growth of 82% on a yearly basis, mainly driven by the increased share of 1P operations, which grew by 92% in revenue. Our gross contribution margin was at 8.3%, lowered by 1 percentage point on a year-on-year comparison, while a continuous sequential margin improvement was achieved by 1.2 percentage points on top of previous quarters. in line with efforts for our path to profitability. Our best-in-class customer experience, powered by our robot logistics and technology infrastructure, was once again confirmed with our NPS leadership in the sector, with a significant improvement by 4 points compared to Q4 2021. We strongly believe that customer experience is a long-term success factor for our business, and we are keen to continue building on our strengths. We are grateful to our customers for their trust in our brand. As diverse set of affordability options becomes more important in customers' eyes, Haxley Brothers stands out with its innovative payment solutions and services such as multi-credit card payments, payment in installments, instant customer loans, store credits such as buy now, pay later, and charge-to-billing ability with a telco partner. Within this context, Pepsi Pay continues its expansion in our customer base, reaching 7.1 million open wallets by the end of the first quarter, up from 5.2 million just a quarter ago. We are excited about our financial services as they continue to progress towards evolving into best-in-class fintech solutions across online and offline channels. Now let's take a closer look at the first quarter dynamics and our actions in more detail. We took a firm step into the year despite several challenges, as I already mentioned. We are glad to share that all of our four growth drivers continued their healthy lives, which is one of the key building blocks of our strategy. Our active customer base grew by 27%, reaching 12 million. Our order frequency reached 4.9 this quarter, up from 4.1 a year ago. Our strong performance in customer experience enhanced by our nationwide logistics network and data-driven marketing has played an important role in the consistent increase in both of these indicators. We achieved a broader active merchant base and wider selection resulting in improved availability across long-tail products and services. With nearly 83,000 active merchants, We now have over 110 million SKUs on our platform. Compared to the first quarter of last year, our selection has particularly increased in fashion and supermarket domain. Our unique 1P3P hybrid model helped us quickly adapt to the changing operating environment where our robust 1P operations have provided us greater flexibility with product availability and pricing in a rising inflationary environment. Last but not least, it is important to reiterate that we believe our affordability solutions complement our customer value proposition quite well, especially in the current macroeconomic environment. Therefore, in February 2022, we launched a new store credit solution called Buying Our Pay Later, marking a first in Turkish e-commerce. While the early demand for this new store credit solution has been encouraging, We plan to scale our offering cautiously and roll out new features gradually in the remainder of 2022. Next slide, please. Let's take a deeper dive on our progress with respect to our value propositions for our customers, as well as our merchants. We design our customer journeys to provide peace of mind to our customers with compelling experiences, including frictionless return, next day delivery, and convenient two-man handling cargo service, all enabled by our robust logistics and technology infrastructure. As a result, based on future bright market research, we continued our MPS leadership in the market in Q1 with an MPS of 72. Likewise, we remain focused on enhancing the end-to-end customer journey for HEPSA Express, our on-demand delivery service, including grocery, water, and flour. By monitoring our perfect order ratio performance and constantly exploring different service models, we aim to achieve a more sustainable business model in the long term. Our comprehensive merchant value proposition and our progress in enhancing merchant lifecycle management helped us increase our active merchant base to around 83,000 in Q1 2022, up by 55% compared to a year ago. As a result, the number of SKUs reached roughly 111 million with continued expansion in non-electronic and long-tail products, up by 110% compared to last year. In parallel, the penetration of our value-added services amongst our merchants continued to grow. Wire have suggested delivered around 53% of total marketplace parcels in Q1, the number of merchants using Hepsi Logistics' fulfillment services reached 330, up from 191 at the end of previous quarter. Moreover, over 9,000 merchants used AdTech solution, HepsiAd, in Q1 2022, compared to 6,000 a year ago. At Hepsi Global, the number of active SKUs reached 2.7 million with over 1,400 participating merchants. With our cross-border capabilities, we aim to enable our merchants to export their products through our convenience model. Following this pilot phase, we began enabling export to the Azerbaijan market in the first quarter of 2022, which we aim to scale gradually with strong focus on customer experience and asset-like business models. We are committed to standing by our customers and merchants as a reliable companion as we continue to enhance experiences for both. Let me now elaborate on a strategic asset in our portfolio, EPSI Pay, and our progress in financial services at EPSI Buada. Next slide. At EPSI Buada, our innovative payment solutions and services play an instrumental role in our customer value proposition. We offer a wide range of solutions such as one-click checkout, payment installments, multi-credit card payments, instant customer loans, store credits such as buy now, pay later, and charge-to-billing ability with a telco partner. Within that context, our wallet solution, PepsiPay Wallet, continues its strong momentum by reaching 7.1 million in Q1 2022. In the first quarter of 2022, around 40% of total GMV passed through HepsiPay wallet. In February 2022, we also launched a new store credit solution called Buy Now, Pay Later for purchases at our HepsiBrothers store, marking a first in Turkish e-commerce. Buy Now, Pay Later limits are defined based on the financial history of our consumers, combining their track record at the Credit Bureau of Turkey and their shopping history at FC Brother. While the early demand has been encouraging, we remain focused on closely monitoring the credit risk behavior, including early delinquency and default rates, before scaling the offer further. In the current customer experience, the credit limit are up to 5,000 Turkish Lira and up to six installments with minimal exceptions. The installments are charged to the users' credit cards on the platform. Also in February 2022, we made progress to enter the consumer finance sector by completing the acquisition of a consumer finance company. Once fully implemented, we expect to be able to offer our customers consumer financing solutions matching their needs, in addition to those already offered by leading banks on our platform. At Eftiburada, as we keep expanding our capabilities and offering innovative payment solutions, we aspire to evolve into a best-in-class fintech player across online and offline. In line with this, I am glad to welcome one of the prominent figures in the banking and fintech sector in Turkey to our leadership team to lead our financial services under a unified vision. Next slide. Before I end my presentation, I would like to remind you of our strategy as we pursue our path to profitability. Our strategy is built on three key executional priorities. Accelerate growth drivers, differentiate and monetize via logistics and technology, and expand strategic assets to offer a diversified ecosystem. Let me quickly provide brief insights on each. Attracting more customers, driving further order frequency, expanding our merchant base, and increasing our selection are of strategic importance to us. In particular, we are focused on executing segment-based customer initiatives, primarily addressing women, running targeted marketing campaigns, scaling our automated growth engine journeys, and customizing lifecycle management along each stage of the lifecycle for our customers and merchants. Second, We have a nationwide logistics network and footprint, which we will continue to couple with our technological capabilities to further differentiate in both customer and merchant experiences while adding monetization opportunities. Last but not least, we will continue to diligently build a diversified and coherent ecosystem with select strategic assets such as EPSI Pay, EPSI Express, and EPSI Global. As we deliver on these executional priorities, our disciplined cash and cost management remains as the core guiding principle on our path to profitability. As we wrap up, we have started the year with a solid growth performance in line with our plan, driven by strong order growth, fueled by healthy momentum in our growth drivers. Considering the current dynamic, the limited visibility on the inflation trajectory, and its impact on consumer behavior for the remainder of the year, we are not making any adjustments to our GMV growth guidance at this time and keeping it around 50%. Powered by our disciplined cash and cost management, we move forward on our tax profitability and commit to not raise capital for another 18 months from the end of Q1 onwards. I will now hand over to our CFO, Korhan, to give more call on our financial performance. Thank you for listening.

Thank you, Murat, and welcome everyone. Q1 2020 GMB grew by 84% compared to the same period of last year when we had already experienced strong GMB growth. The share of marketplace GMB was around 65%, same level as the fourth quarter of 2021. GMV growth is an outcome of the increase in number of orders and average order value. In Q122, strong order growth at 63% was instrumental in generating the GMV growth. This order growth came through continued increase in active customers reaching 12 million and order frequency reaching 4.9. In our business model, the change in average order value and the inflation trend are not fully correlated. As at the end of Q1 2022, the annual inflation as published by the Turkish Statistics Institute reached 61%, whereas our order value rose by 13% in Q1 2022 compared to Q1 2021. We believe that several drivers impacted the increase in our average order value in the first quarter. First, the consumer purchases shifted toward more affordable alternatives. While making purchase decisions, taking the higher pressure on logos into account, customers tend to prefer lower-priced brands or products. Second, the unit sales of certain consumer electronics, such as TVs, laptops, and robot vacuum cleaners declined compared to the first quarter of 2021, which could be attributed to soaring price despite the face of disciplinary income. Third, 65% of our GLE comes from the marketplace model where the merchants decide their pricing. Last but not least, While pricing the product, it is likely that having inventory purchased at lower prices across 1P and 3P and competitive dynamics in the market play a role. Also, let me remind you that the inflation impact is more likely to be passed on to customers across the food and grocery-related product groups, which only make a very limited portion of our product mix. it is worth mentioning that Turkey is categorized as a hyperinflationary environment by the International Practices Task Force due to the fact that 36 months cumulative inflation rate was greater than 100%. Therefore, any company operating in Turkey and reporting under IFRS, including us, will be required to apply International Accounting Standard 29 financial reporting in hyperinflationary economies to their financial statements for the periods ending on and after June 30, 2022, which will be a re-initiation after more than 15 years. Accordingly, our financial statements and non-EFRS measures, such as GMB, will be impacted as a result of the implementation of these standards. As of today, We cannot predict the extent and magnitude of the future impact that the application of IAS 29 and related adjustments will have on our financial statements and consequently on our margins. Although we will be reflecting inflation accounting to our financials from the second quarter onwards, we believe we initially restated this quarter's GMB growth through this methodology for exemplary purposes. By using the official monthly consumer price index numbers, the restated GMV growth in Q1 2022 compared to Q1 2021 would be around 19%. In the next earnings call, we will spend more time on the methodology and implications of inflation accounting on our reporting. Now let's move to the next slide, where I would like to discuss our revenue and gross contribution performance. Next slide, please. Our revenue grew by 82% compared to Q1 2021, corresponding to 1.2 billion TL rise in nominal terms. This performance was achieved by 92% growth in 1P operations, 45% growth in our marketplace revenue, and 44% increase in our delivery service revenue. Our 1P operations have served well, particularly at the time where price changes were inevitable, as well as supply shortages due to global supply chain issues. Our gross contribution was 688 million TL in the first quarter of 2022, with an 8.3% gross contribution margin. While there was a 1 percentage point decline in gross contribution margin compared to the first quarter of last year, our gross contribution margin continued to improve sequentially by 1.2 percentage points in this quarter. This performance is an indication of our focus on the path to profitability. Now let's have a look at our operating expenses in the next slide. Our net operating expenses as a percentage of GMB was at around 12% this quarter. As a percentage of GMB, our net operating expenses rose 0.3 percentage points mainly due to 1.8 percentage point increase in advertising expenses and 0.2 percentage point increase in other operating expenses offset by 1.7 percentage point decrease in payroll and outsourced staff expenses. The 1.8 percentage point rise in advertising expenses reflect our investment in our brand and growth drivers in a more competitive market environment where both the need and for the cost of marketing increased compared to the first quarter of last year. The 1.7 percentage point decline in payroll and outsourced staff expenses is through the impact of the share-based payment plan where we booked the provision for the cash portion in the first quarter of last year. Normalizing for this item, our GNA expenses as a percentage of GMB would increase by 0.9 percentage points, reflecting the rise in the number of employees and also annual salary increase. The shipping and packing expenses, driven by 63% order growth and 38% unit price increase applied by our delivery partners remain unchanged as a percentage of GMV compared to the first quarter of last year. Let's move to the EBITDA margin bridge on the next slide. As a function of aforementioned drivers, EBITDA in the first quarter of 2022 was negative 303 million TL compared to negative 104 million CL in Q1 2021. This corresponds to a negative 3.7% EBITDA as a percentage of GNV in the Q1 2022, indicating a 1.4 percentage point year-over-year decline, whereas it continued its improvement sequentially by a solid 4.3 percentage point from the previous quarter. Our assumption for the cost inflation for 2022 is roughly 65%. Nonetheless, we will continue to strictly monitor the trajectory of the inflation rate and dynamically adapt by taking net reactions to make sure we pursue our path to profitability. Next, I would like to say a few words on our cash flow dynamic. Net cash used in operating activities increased by roughly 1.1 billion TL, reaching 1.2 billion TL in the first quarter of 2022, which is mainly due to decrease in change in net working capital. Higher volume of inventory procurements and increased trade and service tables, such as advertising, shipping and other operational expenses in Q4 2021, and which were paid in Q1 2022 was the primary reason for such cash requirements. CapEx was around 119 million TL in the first quarter of 2022. Over 60% of total CapEx consisted of the cost of tech-related employees who are mainly employed for the development of websites and mobile platforms. while remaining capex mainly consisted of purpose of property and equipment and software and rights. Accordingly, free cash flow was negative 1.4 billion TL compared to negative 159 million TL in the first quarter of last year. Before I end my presentation, let me also emphasize our commitment to focus on sustainable growth with disciplined cash and cost management. Our current liquidity and future plans enable us to say that we have no plans to raise any capital for another 18 months from March 2022 onwards. With this, I end our presentation. Thank you for listening. Operators, please open the floor to questions.

Ladies and gentlemen, at this time, we will begin the question and answer session. Anyone who wishes to ask a question may press star followed by one on their telephone. If you wish to remove yourself from the question queue, then you may press star and two. Please use your handset when asking your question for better quality. Anyone who has a question may press star and one at this time. One moment for the first question, please. The first question comes from the line of Kilikiran Hanzadeh with JP Morgan. Please go ahead.

Hello, thank you for the presentation. I have two quick questions. One is regarding the consumption trends in Turkey. We have observed generally very strong reporting in majority of the Turkish companies under high inflation in this quarter, and companies claim a strong pull-forward demand in their sectors. We also see the Q1 consumption trend as pull forward demand. And how do you explain the demand in Q2 so far? Because you still keep your 50% GMV growth guidance on the rising inflationary environment. I try to understand the current consumption trend. And second question is related to your cash flow management strategy. I mean, Korhan Bey has already explained about the increasing trade payables, which is the main cause. I mean, the majority of the working capital need is arising from this. What is the reason of this cut in the trade payables? And do you expect to follow a different trajectory? policy in working capital management in a way to create some inflow by the end of the year rather than outflow because you now have a limited cash in hand and I'm trying to understand the cash burn for the full year. Thank you very much.

Thank you so much for the questions, Hamzadeh. I really appreciate it. Maybe I can take the first question and Koran can take the second one. In the first question, I guess you are asking the correlation between our GMV-guided inflation as well as the consumer trend in Turkey, right? So in a high level, I guess it's fair to say it is still very limited visibility on inflation trajectory and its impact on consumer behavior for the rest of the year. And also with respect to our approach, I guess at this point I can maybe break it down in a couple of facts. One actually is our GMV actually growth is a function of AOV growth and an order growth. In the case of our business model, Korhan explained how AOV is not fully correlated to the inflation trajectory. He already explained those reasons. I'm not going to replicate. And also on the order side, from regarding the order side, I guess we also, from the consumer's point of view, realize there is a pressure on consumers' wallet. And actually we are still yet to see what is the implication will be for the rest of the year. That's why under these circumstances, we prefer to observe the dynamics a little further before making any adjustments to our top line growth expectations. But with that said, we are confident about our guidance in that sense. With that said though, with respect to consumers, there are some maybe insights I can Share at this point with you. That is definitely a pressure on their wallet. And we see consumers are seeking for more affordability solutions. And luckily at FC Brother, we are well positioned in that sense by offering a wide range of affordable solutions, ranging from the multi-credit card payments, instant customer loans, installments, and now buy now payday trends and so on. So this is actually the way we're going to address that need. And also we understand consumers are shifting their purchases towards more affordable alternatives, which is, again, thanks to our hybrid model with 1P and 3P, with our wider selection, we are trying to address that need as well. As they shift their decisions to lower-priced items and so on, we also tend to address that with our wide selection. Additionally, we can also refer to the fact that there is a kind of a decline in unit sales of certain consumer electronics, such as TVs, laptops, or robot vacuum cleaners with respect to the customer behavior. I guess in general, these are the high level areas I can refer in terms of customer insights and observations. But another detail actually I want to underline here, we also kind of observed the need for trustworthy shopping experience trusted and reliable after-sales experience also becomes very important. And also that's why our leadership in MPS actually is very relevant in that sense. With our brand over 20 years of history and with our leading experience in terms of MPS, we believe we are also offering a safe and reliable option and solution to our customers. Let me now stop here and hand over to Korhan for the second question. which I guess was referring to cash flow. Thank you, Murat.

Our free cash for Q1 2022 is negative by $1,360,000,000. And out of this, $360,000,000 is comprised of net loss for the period, roughly $240,000,000 loss, and our capex spending, roughly $120,000,000. The remaining $1 billion is coming from the changing networking capital, mainly driven by the trade tables and inventories. We have a seasonality in our business, and the highest advertising and shipping and delivery spendings are realized in the last quarter, and those tables are mostly paid in the first quarter of the following year. With scale, those payments are getting higher through time, Also due to global supply chain issues and high inflation expectations in Turkey, we procured more inventories during Q4 to get readiness for Q1 to ensure that our products are available on the platform and those payments are done in the first quarter of 2022. Also during the Q1 quarter, we continued such procurements with shorter payment terms And even in certain categories like electronics, we pay in advance. So those results are free cash to decrease during this period. Having said that, I would like to mention that our cash spending will be lower during Q2 and Q3 compared to Q1 2022, and it will be minimum during Q4 if we continue to procure in advance for readiness in the following years. All these effects have already been embedded in our business plan, and we give our 18-month cash availability according to this plan. Thank you.

Thank you, Kohambi.

As a reminder, if you would like to ask a question, please press star and 1 on your telephone. Once again, to register for a question, please press star and 1 on your telephone. The next question comes from the line of with Goldman Sachs. Please go ahead.

Hi. Thank you very much for the presentation, and . My question is related to the fintech arm and the . Could you please elaborate further on the monetization of the fintech arm going forward, maybe after 2022? What are the plans on that point? And also related to buy now, pay later segment, could you please explain how do you plan to manage very high inflation, given that there is at least one month of the period that the customers buy and pay after one month? So that would be helpful. Thank you very much.

Thanks so much, Jen, for the question. In terms of our overall approach in FinTech and how we actually also see and manage the Binance AD during the environment, let me quickly address those questions. First of all, I guess, as actually brought up, we believe that financial solutions play an integral role in our vision of leading digitalization of commerce. So it's actually a very significant part of our strategy as well. And as you know, we already offer a wide range of services and solutions, which I already mentioned in my previous answer, ranging from instant customer loans, installments, multi-credit card payments, now buying our pay data, and ability to charge the billing. And also, as you know, we recently acquired a license, a company, to be able to offer consumer financing. So it's actually a large spectrum of solutions and services. And that's why we believe we are, with our unique license, with these operational and functional capabilities, are well positioned to evolve into a leading fintech player in this market spanning across online and offline. So that is our ultimate approach in our fintech arm. With that said so, as we know, Buy Now Pay Later is a capability that we just launched in this quarter. It is one of many tools we actually offer in our portfolio. And with that said, I also want to emphasize we won't compromise on our discipline cash and cost management principles, even if we keep working on these features. And let me also replicate the fact that in Buy Now, Pay Later, even though our current focus is all about perfecting the precision of our credit scores, and making sure we show this service the right, relevant services, and also making sure we continue to perfect the customer journey. And even the early demand of this service seems to be very encouraging and promising. Actually, we remain focused on closely monitoring the credit risk behavior, including early delicacy and default rate, before scaling the offer further. So that is actually, I guess, the few things I wanted to share. Koram, do you want to add anything else? That is more of a... You said everything almost, Murat. Thank you. So basically, Cem, it is one of the many steps we're going to take, but we will take always with caution, and it's going to be always with a gradual rollout approach.

Maybe I can mention that we will be charging a commission fee to our customers to cover all the time lag and the NPL risks. for the Buy Now Pay Later product. And the initial tests are very encouraging, as you mentioned.

And did I maybe forget to mention, but it's good for Gemma and others to also know how the mechanics work on Buy Now Pay Later. Maybe they are not familiar with this process. In general, it's actually, we right now use, by defining the limit, the financial history of consumers from the credit bureau of Turkey and their shopping district, Epsiburada. And right now, the current experience is offered by OnePay. have the broader store and the credit units are up to 5,000 Turkish Lira and up to six installments with minimal exceptions. So it's kind of a verified state for us that is strictly control the progress on that end.

Okay. Thank you, Martin. Thank you.

Once again to register for a question please press star and 1 on your telephone. As a final reminder to register for a question please press star and 1 on your telephone. Ladies and gentlemen, there are no further questions at this time. I will now turn the conference over to Mr. Murat Emirda for any closing comments. Thank you.

Thank you so much for listening and being with us. I just want to leave you guys with three key takeaways from this call. First one actually is we believe Turkish markets offer a sizable opportunity given the fact that e-commerce is at an inflection point and expected to exceed 20%. penetration within total retail by 2025. The second one actually is, yes, there are many uncertainties in the macro level in terms of dynamics in the global and local markets. However, the third one, actually, we have a very well-defined and clear strategy in place to overcome those challenges. And we continue to execute with prudency and with very core principle, guiding principle of discipline, cost, and cash management, and we are very committed to progress towards path to profitability. That is actually what I wanted to highlight one more time. I appreciate your time, and thanks for listening.

Ladies and gentlemen, the conference is now concluded, and you may disconnect your telephone. Thank you for calling, and have a good afternoon.