D-Market Electronic Services & Trading

Ladies and gentlemen, thank you for standing by. I am Mina, your Chorus Call Operator. Welcome and thank you for joining the Hepsi Broda Conference Call and Live Webcast to present and discuss the second quarter 2024 financial results. At this time, I would like to turn the conference over to Mr. Shigan Onal-Jotetekin, CEO, Mr. Shetkin Kiosheoglu, CFO, Mrs. Helene Celik-Bilek, Investor Relations Director. Mrs. Celik-Bilek, you may now proceed.

Thanks, Operators. Thank you for joining us today for Hepzibur Oda's second quarter and first half 2024 earnings call. I'm pleased to be joined on the call today by our CEO Nilhan Onal Gökçetekin and our CFO Seçkin Köseoğlu. The following discussion, including responses to your questions, reflects management's views as of today's date only. We undertake no obligation to update or revise this information except as required by law Certain statements made on today's call are forward-looking statements, and actual 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 Safe Harbor slide of today's supplemental slide deck. Today's press release, the 6K, our Form 20, filed with the SEC on April 30, 2024, and other SEC filings for information on factors that could cause our actual results to differ materially from these forward-looking statements. Also, we will reference certain non-IFRS measures during today's call. Please refer to the appendix of our supplemental slide deck as well as today's press release for a presentation of the most directly comparable IFRS measure and the relevant IFRS to non-IFRS reconciliations. As a reminder, a replay of this call will be available on our MSC Relations website. With that, I will hand it over to our CEO, Nilhan.

Thank you, Helen. Welcome, everyone, and thank you for joining us. I'm delighted to be with you today to present our second quarter and first half results. We delivered another solid set of results in Q2 2024, exceeding our guidance for both GMV growth and EVTA as persons of GMV. We got these results despite the prevailing macroeconomic headwinds. In the first half of the year, our GMV doubled compared to the first half of previous year, and our EBITDA reached 2.4% of GMV, unadjusted for inflation. Adjusted for inflation, we recorded nearly 22% real GMV growth and 1% EBITDA as percent of GMV. Due to consumer demand coming forward to Q1, we argue the prudence of considering our overall first half performance. Moreover, in the first six months, we delivered the highest first-half free cash flow ever since our IPO. These results confirm that, strategically speaking, we remain on the right path. Now, let's look at a few of our operational metrics. With our exceptional customer experience, top-notch logistics services, and diverse affordability solutions, our MPS metrics yet again confirm to be Turkey's most recommended e-commerce brand. Our active customers continue to increase and reach 12.1 million. Customer loyalty and retention are central to our strategy, and Hepsiburada Premium has played a key role in strengthening these relationships. Just two years after its launch, it's hugely encouraging to see that Hepsiburada Premium has scaled to 3 million subscriber mark. Returning to the second quarter, we recorded 36.7 million orders on 33% year-on-year growth. Our order frequency over last 11 months reached to 10.6, up by 23%. With the onboarding of additional brands, particularly in the fashion and lifestyle categories, by end of the quarter, our selection on platform reached 264 million SKUs. These are offered by an active merchant base of around 101,000. Now, let me provide a snapshot of the quarterly progress on our four strategic priorities. First, let's look into our loyalty program, which is our key to win with loyalty strategy. The program's rise to 3 million members is a testament to the attractiveness of the program's value proposition. Program has an NPS of 84, which is the highest among loyalty programs in Turkish e-commerce, reflects the trust and appreciation of its members. Premium members tend to prefer HepsiBurada as their go-to shopping platform. We observed that they generate 36% higher frequency after joining the program. This strongly contributes to overall order growth. Our local streaming partner, Bulu TV, was acquired by Warner Bros. Discovery in December 2023. Accordingly, a broad range of best international series and shows from Warner Bros. will soon be available as part of the premium program benefits, enriching the exclusive experience enjoyed by its members. We remain dedicated to retaining satisfied customers while welcoming new ones into the falls. Next slide, please. Moving on to other strategic priority, which is differentiation with our superior delivery services. Central to achieving this is our HepCJET continued penetration on our platform. HepCJET, which is our last mile services company, delivered 73% of total parcels dispatched during the quarter. This is up by 6.8 percentage points year on year. Its volume expansion in oversized parcel delivery is also very impressive. In Q2, 68% of all oversized parcels on HepsiBurada were delivered by HepsiJet X-Large. This marks an 8.9% year-on-year increase. HepsiJet's high MPS confirms its commitment to differentiation with service excellence, a commitment fueled by flexible and convenient delivery options. Being a new generation logistics company committed to sustainable practices in a pilot project, Hepstijet added 21 electric vans to its fleet in the quarter. With the target to increase this number to 50 by year-end, this initiative marks a small step towards addressing the bigger environmental issues. In this context, as the first e-commerce player to publish a sustainability report in Turkey, I am delighted to announce that we recently published our report for 2023. Our third priority is capitalizing on our clear differentiation with affordability and lending solutions. HepsiPay's comprehensive suite of payment and lending services gained further significance in a continued environment of tight liquidity. Our affordability solutions, which include our in-house buy-now-pay-later solutions, consumer finance loans, and shopping loans from partner banks have gained more traction. The quarterly share of these affordability solutions in GMV rose to 6.1% from 4.9% a quarter ago, which is around 20% increase. The consumer tendency to use general-purpose loans for shopping on our platform has also increased. As such, including the impact of those spent in the platform, GMV penetration of our overall affordability solutions rose to 8.1% in Q2, from 5.8% a quarter ago. Hexaburada is the largest non-bank BNPL solution provider in the Turkish market. Our BNPL volume more than tripled year-on-year during Q2. Our overall BNPL and shopping loans were utilized nearly 1.3 million orders over the last 12 months. We diligently manage credit risk in our BNPL, with a cost of risk around 2.6% in August. On a broader scale, over the last 12 months, total lending volume on our platform reached 11.2 billion lira, with an incremental of around 3 billion lira over the last quarter. Nearly half of this volume was issued through our partner banks. Shopping-related credit receivables create limited balance sheet loads with average durations of 3.7 and 4.2 months of BNPL. and consumer finance loan solutions, respectively. We aim to grow this business line profitably by continuing to leverage HepsiPay's solutions and those of our partner banks, thereby growing our e-commerce business nicely. Aside from the affordability aspect, HepsiPay scaled upon the payment fraud. Its wallet base rose to 16.7 million, covering 19.5 million store cards by end of August. HepsiPay further enhanced customer experience with the recently launched Otetopa feature in the wallet. HepsiPay remains committed to becoming Turkey's primary digital wallet in both physical and online retail. Our fourth key priority is offering our strongest muscles to off-platform customers. And let me start with HepsiJet. With over 9 million parcels delivered, HepsiJet doubled its external customer volume year-on-year. Accordingly, in Q2 2024, its off-platform share rose by 11.1% year-on-year to nearly 36% of its total, thanks to doubling its volume with many trusting customers off-platform. As an appealing logistics partner, HepsiJet continues to expand its customer portfolio through several key accounts. Next is HepsiPay's one-click checkout solution, Pay with HepsiPay. We continue to expand this convenient solution to many other retailers. HepsiPay is now integrated with 50 leading retailers of Turkey and having almost tripled its total payment volume in Q2 compared to Q1. HSTP aims to continue winning key accounts by also launching its proposition in the SME market. And now, I will end my part with our guidance for Q3. For the second half of the year, we remain cautiously optimistic about market conditions, and yet we are truly confident in our ability to execute on our strategic initiatives for the period ahead. Accordingly, in the third quarter, we expect to deliver a GMV growth within the range of 70% to 75% year-on-year. We continued our prudent cost management in place and we foresee an EBITDA of around 2.2% of GMV. These figures I refer to are an adjustment for inflation. With this, I thank you for listening and leave the floor to Seçkin, our CFO, to provide further insights into our strong financial performance.

Thank you, Niha, and welcome everyone. I am delighted... to be with you today to present our second quarter and first half results. We delivered a solid performance across all metrics, both in quarter two and the first half, in a still challenging macroeconomic environment. Here, it's worth taking a minute to recap what Nilhan said regarding consumer demand dynamics of the two quarters of the first half, which consequently impacted our quarterly growth performance. Overall, Q1 consumer demand was high due to widespread expectation of price increases post-March 31st local elections, which pulled consumer demand forward from April to March. Therefore, we see the merit in considering our overall first-half GMB growth performance, which came in at 21.6% adjusted for inflation. On the profitability side, we recorded an 11.2% gross contribution margin and 1.0% EBITDA as a percentage of GMB in the first six months of the year. Let me now go over the details of the second quarter performance. In the second quarter, around 4% real GMB growth came mainly through order growth. Higher VAT rates also contributed to this growth in this year. We achieved the highest gross contribution margin since our IPO at 12%, with a solid 2.6% point improvement on a yearly basis in Q2 2024. Our EBITDA as a percentage of GMB continued its uptrend, reaching 1.1%, with a 0.9% point rise year-on-year when the one-off provision reversal for the competition board investigation concluded in July 2023 is considered. Let's move on to the next slide to look at our GMB breakdown. In quarter two, with a four percentage point shift compared to quarter two last year, our marketplace operations corresponded to around 71% of our business. This shift came as a result of a 5.1 percentage point shift towards non-electronics. which is in line with our broader strategy. Change in market dynamics with a slowdown in electronics market also had an impact in this shift. Let's have a look at our revenue and gross contribution dynamics in the next slide. While Quarter 2 revenue growth was nearly flat, our revenues grew by 20.5% in the first half. Flat revenue performance in Quarter 2-24 was mainly due to a 13% decrease in our 1P revenue compared to Q2 2023, offset by the strong growth in our delivery service revenue and other revenue, including advertising services revenue and loyalty program revenue. The 13% decline in 1P revenue was mainly due to the 4% point shift in GMV mixed towards 3P. Our strategic priority to expand our services offered to third parties and scaling our advertising services as well as our loyalty program were instrumental in this quarter's gross contribution margin expansion by 2.6 percentage points. Let's move on to our EBITDA performance on the next slide. We recorded 1.1% EBITDA as a percentage of GMB in quarter 2024. with a 0.9% improvement on a yearly basis, excluding the one-off item last year. This improvement was driven by a 2.6% rise in gross contribution margin, partially offset by a 0.9% rise in shipping and packaging expenses, a 0.5% rise in advertising expenses, and a 0.4% rise in payroll and outsource stop expenses. The increase in shipping and packaging expenses as a percentage of GMB was mainly driven by higher order volume on our platform and rising volume of Hepzijet's third-party business. Rising delivery fees per unit outpacing the average inflation in Q2 2024 compared to Q2 2023 also had an impact. Next, let's have a look at our cash flow dynamics. In Q2 2024, cash used in operations improved by 503 million TL compared to a year ago. This improvement resulted from 121 million TL increase in EBITDA, 448 million TL decrease in realized FX losses, 73 million TL increase in the change in operating monetary gain against 107 million TL decrease in the change in networking capital and the 32 million TL decrease in other non-cash items. With 407 million TL in capex, our free cash flow was around negative 645 million TL in Q2 2024. Considering the first six months, we delivered the highest first half free cash flow since our IPO. We can move on to the next slide. I would like to leave you with the following takeaways from today's presentation. Despite Q2's continued macroeconomic headwind, we achieved real GME growth on a year-on-year basis, contributing to 21.6% growth in the first half. Building on our strategic priorities, we recorded the highest gross contribution margin since our IPO at 12% in Q2-24, The uptrend in EBITDA continued in step with our sustained cost optimization efforts, reaching 1.1% of GMB in quarter 2024. Our controlled cash management enabled us to record 472 million TL free cash flow in the first half of 2024, which marks the highest first half FCS since IPO. As we reflect good results in the first half of the year, we are committed to growing sustainably and profitably going forward. Thank you for listening. We can now open the line for questions.

Ladies and gentlemen, there are no audio questions at this time. We will now proceed with a written question from our webcast participants.

Thanks, operator. The first question is, your GMV guidance implies a bigger premium to inflation in Q3 than in Q2. What's driving that?

There are a few drivers that is going to deliver higher growth in Q3 versus inflation. Number one is the impact of our strategic initiatives. Premium, which is driving higher loyalty. Our investments with Hep C-Jet, which already doubled volume in off-platform. Our improvement in ads and premium revenues. On top of this, We are also going to get the positive seasonality impact of back-to-school period, and hence we are expecting a solid growth in Q3 ahead of inflation.

The second question is, what was the impact of the second quarter holidays on GMV?

we would probably have roughly an additional 6% real growth on top of our existing growth, bringing our real growth to 10%. Thank you.

Third question is on the seasonality of cash flow. For the second half of 2024, would you expect to return to positive free cash flow like in 2023?

Yes, definitely, and I'm confident that we will have a positive free cash flow on a full year basis. We will definitely continue to improve our EBITDA and manage the working capital diligently in the second half of the year. On the flip side, we had a sizable realized FX gain last year, which may not necessarily be the same this year depending on the Turkish Lira devaluation.

Thank you. Fourth question is shifting GMV towards marketplace 3P. Is that a seasonal shift or is it strategic?

We definitely have a strong strategy to improve our mix for higher non-electronics thanks to our premium and loyalty programs. Hence, this shift to non-electronics is coming towards 3P because homes, all these non-electronics categories have a much higher weight of marketplace in our platform. This is the strategic part. On the other side, the slowdown in electronics market in Turkey is also bringing a higher mix shift to non-electronics, almost beyond our control as well, that is coming as a tailwind to our platform.

Thank you. Fifth and last question in this question set is, as inflation subsides, how will IAS 29 accounting impact evolve as we go into 2025 on revenue, EBITDA, and pre-cash flow specifically?

Sure. On revenue, on an unadjusted basis, the growth will be lower as price increases will be lower in the markets with lower inflation. But on an adjusted basis, there will be no real change on real growth. On a BCA, this is going to have a positive impact. As inflation goes down, the impact on cost of inventory will decrease. So this is definitely positive. And on FCF, adjusted and unadjusted FCF will be almost the same. So it's going to have a limited impact on that, but as EBITDA improves, definitely this positive impact will impact FCF positively as well.

Back to you, Mina.

Thank you. We will now move on to further written questions. The first one is from Tim Rashuk from Tora Capital, and I quote, Hi, could you please talk about measures being taken to address the rise in finance costs due to higher rates? Thanks.

As interest rates have gone up and stayed the same for quite some time, we have adjusted our credit card policy, adjusting the thresholds that we give interest-free installments to our consumers as one mitigating impact. We continue to increase our affordability solution which is helping us manage the overall cost of financing and we are on a very positive trend as Nilhan explained. So we will continue to focus on these measures and make sure that the credit card costs and the overall financing costs are manageable going forward.

Our next webcast question is from Maxim Negrasov with Citi, and I quote, ìThank you for the presentation. Can you comment on the consumer environment in Turkey?î

Absolutely. So thanks for the question. I think there are two parts to this question. One part is the macro environment where government has been taking actions, been very decisive to fight inflation, which has accelerated in early Q2. High interest rate environment at 50% versus last year, this time was around 8.5%, created a tendency to say credit environment has been tougher. So some of the discretionary category, we are seeing that the demand is contracting. On the flip side, there is a definitely strong interest to our solutions, which I explained in our results, affordability, our very competitive prices, and also there is going to be seasonality impact coming with back-to-school and Q4, Black Friday. That is going to flourish the demand. We are also expecting innovation from recent MPI from Apple. AI innovation is also going to bring some tailwind to our electronics market, and we expect to build still consumer demand with our strategic differentiators.

Our next question comes from Hazanbek Ilkiran with Debbie Morgan. And I quote, thank you very much for the presentation and congratulations on strong results. My question is on your guidance, which seems a bit optimistic versus the inflation and expected slowdown in the consumption. Can you please explain the main revenue drivers for the growth and why do you think Hep C may stay resilient against lower consumption across all factors in the remainder of the year? Thank you, Hazandeh.

As Nilhan mentioned in the previous question, our guidance is based on the back-to-school period where we are going to have a higher GMV, and in line with that, a higher revenue. We expect that the quarter three electronics market will be in a much better position versus quarter two in terms of growth. And this is going to impact our 1P business. And as 1P part of the business goes back, it's going to have a positive impact on the revenue. And definitely our ads business will continue to flourish together with the increased trade with Back to School. And on top, our premium products revenues will continue to deliver as we increase our premium user base.

Our next webcast question is from Sinan Zin with Amber Road Investors and I quote, have you detected any shifts in behavior from consumers as the cross-border taxes have changed as of August 2024?

Sinan, I would say this is slightly early to speak because the change has been effective end of August. So we only had few trading days, but I promise to comment on this in the next quarter's call. Obviously, I also want to underline, if anything, this would have a tailwind impact to Hepstaburada demand because we have extremely minimal global inbound share. It's around 1% of our business. So we would expect such a change to impact global competitors, which is heavily relying on imports. So this could bring a tailwind to our business, but I would like to wait and see the real impact before we give an estimation here.

The next question is a follow-up question from Maxim Negrasov with Citi, and I quote, to follow up, Do you see a material pressure on consumer or trading down? Would you expect competition to be tougher in the second half of 2024 and 2025 as a result of higher promotional activity?

So the pressure, there's definitely pressure on the consumer because credit environment is more tough. Interest rate is still high. And number of installments available for consumers are getting more limited. So this is the headwind part of it. And in half tool, we generally expect higher competition because of the seasonality impact as well. But yet, as you can see in our forecast, our expectation in terms of our own performance, thanks to all the affordability and landing muscles we built, thanks to a growing share in our external platforms with our logistics business, and with the other strategic measures we have taken, we think we are going to deliver a strong performance in the coming months and also into next year.

The next question is a follow-up question from Tim Rashuk with Frontora Capital. My quote is, As a follow-up, do you expect to get to bottom-line profitability in the second half?

As I mentioned before, we will definitely continue to improve our EBITDA profitability, but I think it would be a little bit premature to comment on the bottom-line profitability because our FX gain was the main tailwind last year, and it's very hard to predict the dollar rate that will materialize in the market in the coming months until the end of the year. So it would be very hard to comment on the bottom line at this point. But EBITDA will continue to improve for sure.

Our next question is a follow-up question also from Sinan Sin with Amber Road Investors, and I quote, Are there any limits to funding capacity from your funding partners or balance sheet capacity for your affordability solutions and HEPC funds? Do you plan on doing further asset-backed insurances? Thank you.

We do not have any issues on funding our D&C plans, definitely both from our own balance sheet and also using different instruments like asset-backed securities, and bond issues. We will shortly initiate the second tranche of our asset-backed security program, and it will continue. So as the business grows in affordability solutions, we have the right tools for funding it healthily.

Ladies and gentlemen, there are no further questions at this time. I will now turn the conference over to management for any closing comments. Thank you.

Thank you so much for listening us. We appreciate your time and questions. Thank you.