Farfetch Limited

Good afternoon and welcome to the Farfetch Q2 2023 results conference call. My name is Luke and I'll be your conference operator today. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. Thank you. I'd now like to turn the call over to Alice Ryder, VP of Investment Relations. Ms. Ryder, you may begin your conference.

Hello and welcome to Farfetch's second quarter 2023 conference call. Today's update will include prepared remarks from Jose Neves, our Founder, Chairman, and Chief Executive Officer, Elliot Jordan, our Chief Financial Officer, and Stephanie Ferrer, our Group President and Chair of NGG. Jose and Elliot will also be available to take questions following the remarks. Please note that unless otherwise stated, all comparisons on this call will be on a year-over-year basis. During today's call, we will also be displaying a slide presentation throughout our prepared remarks, which can be accessed as part of the live webcast at farfetchinvestors.com. Following the call, the presentation will also be uploaded to the site. Before we begin, we would like to remind you that our discussions today will include forward-looking statements. Actual results could differ materially from those indicated in the forward-looking statements, and forward-looking statements made today speak only to our expectations as of today. We undertake no obligation to publicly update or revise them. For a discussion of some of the important risk factors that could cause actual results to differ, please see the risk factors section of our Form 20-F filed with the SEC on March 8, 2023. In addition, we will refer to certain financial measures not reported in accordance with IFRS on this call. You can find reconciliations of these non-IFRS financial measures to the IFRS financial measures in our earnings materials, which are available on our website at farfetchinvestors.com. And now I'd like to turn the call over to Jose.

Hello and thank you for joining us today. I am delighted to be taking you through our Q2 results, a quarter which saw an acceleration of our digital platform growth, as well as further progress across key strategic priorities for 2023. And thanks to the decisive actions we've already taken in terms of fixed costs, we are confident we remain on track to be adjusted EBITDA profitable and free cash flow positive for full year 23. Before we dive into the details about our results and outlook, I think it's important to take a step back and look at the long-term opportunity for Farfetch. As the founder of Farfetch, I am proud to be celebrating our 15th anniversary in the coming weeks. Since our founding, our strategy has been to build Farfetch to become the global platform for luxury by developing a platform with unrivaled technology, logistics and data capabilities. And in parallel, we built a global community of boutiques, brands and customers across all major luxury markets in the world. This strategy remains our North Star and thanks to our progress on all of these fronts, today we occupy a unique leadership position in Global Luxury with an extremely exciting future ahead. Underpinning this strategy, luxury has continued to demonstrate its resiliency and has become an integral part of culture, now more than ever before, which I believe will pave the way to many more years of industry expansion. Still, the digitization of luxury is in its early innings, with digital sales just over 20% of the mix, but expected to expand to over 30% by 2030. This means Farfetch, as a leader at the intersection of technology and luxury, is poised for significant growth and profitability. This reinforces our confidence in our previously stated plans to scale to a $10 billion GMV business, generating approximately $400 million in adjusted EBITDA and strong free cash flow by 2025. In spite of the unprecedented macro challenges since 2022, the decisive actions we've taken in light of these factors make me as confident as ever in our prospects for achieving these targets. The events of 2022, which led to the stoppage of our business in Russia, then our third largest market, a slowdown in China and adverse effects, all amidst considerable macro volatility in the US and Europe, raised an imperative for decisive action. As a result, in 2022, we moved swiftly to implement a significant set of actions on costs and capital allocation, making profitability and cash generation a non-negotiable priority over growth after a 14-year stretch of rapid expansion. This is now set as our philosophy for cost and capital allocation moving forward. These decisive actions included not only reductions in headcount and other fixed costs, but also a complete redesign of our organization structure and a significant bolstering of our leadership team. And this June and July, we went even further. We doubled down and executed the most significant cost rationalization in our history as a company. Specifically, the actions taken in the past two months are expected to eliminate $150 million of planned 2023 fixed costs through the remainder of the year. This means G&A and technology expenses are now expected to be a combined $800 million for full year 2023 as compared to the previously guided $950 million. This delivers $50 million in savings versus 2022, despite incremental resources to support the launch of Reebok and new FPS launches planned for 2023 and 2024. Just in this last round, we've removed approximately 800 roles, or over 11% of starting headcount in 2023. As a result of these reductions, as well as other cost cuts, costs related to some of our key teams, such as our marketplaces, technology, finance, legal and people teams, will be back to 2020 spend levels, which means they have essentially rolled back three years of fixed cost expansion. And the costs of our operations, which provide end-to-end support of orders, are only expected to be 25% above 2020 levels, whilst order volume is running 60% higher than three years ago. Finally, NGG and FPS costs were also rationalized. As these reductions are structural in nature, we expect even greater savings for full year 2024, which we believe increases our ability to achieve our stated 2025 profitability goals. This also means we have made a range of business decisions, including discontinuing beauty as a category on the marketplace and exploring strategic options for Violet Cray, further reduction in our real estate footprint, closing several offices and unprofitable retail locations worldwide, and concentrating NGG's resources on key brands, among several other actions across the Firefetch Group. I want to emphasize a very important point here. Our North Star remains absolutely intact. Amidst executing this strategy of decisive action, we remained focused on delivering on all the strategic initiatives discussed in our Capital Markets Day. Our 2023 FPS launches remain on track, including the continued global rollout of Ferragamo, as well as Bergdorf Goodman, which is expected to launch in Q4. I am delighted to report that we launched three additional e-concessions as a service brands for Harrods and that Harrods have also proactively initiated and signed an early renewal of their FPS contract, which extends our partnership into 2028. Additionally, our announced transaction with Richemont continues to advance through the regulatory review process. We continue to work closely with regulators to obtain the final outstanding approvals for the transaction, following approvals in the UK, China and Italy, among others. As a reminder, approval is not required in the US. I am confident the combination of our decisive actions in terms of focus on profitability and cash generation and our unwavering commitment for our long-term vision will result in more big wins across our key strategic initiatives while driving us towards achieving our stated 2025 profitability targets. Turning now to more recent trends. I am pleased to report that Farfetch continued to grow in Q2, with digital platform GMV up 7% and a stronger profitability profile. Total G&A and technology expense was 7% lower, and our focus on cash generation meant free cash flow was positive for the quarter. I want to highlight that across most regions, our marketplace business is performing very strongly. In Q2, GMV in EMEA grew double digits. And in the Americas, excluding the US, it grew more than 20%. Overall, active customer growth was 7% and order growth was 9%. Our margins remained stable with digital platform or the contribution margin of 31% and brands and boutiques continue to double down on Farfetch with over 40% unit growth of supply. In the US, GMV accelerated with Q2 performance sequentially better, although still single digit negative year on year, together with a 10% reduction in demand generation spend. However, as in the case of many others in the luxury industry, we have seen a less buoyant luxury customer in the US. we have seen similar macro dynamics in mainland China. Although we are seeing improvements with Q2 performance sequentially higher, GMV was also in single digit decline. The reality is that the recovery has not been as robust as we had expected when we reported our Q1 results. And as a consequence, we have also reduced demand generation investment in this region. Like in the US, we believe this is not far-fetched specific, as other luxury brands have similarly indicated China is not growing as quickly as previously expected after its reopening in December. Whilst brands are reporting strong in-store growth against comps during the previous year's strict lockdowns, Online sales have not recovered as quickly as expected by many in the luxury industry. The slower recovery in these two large markets, offsetting the strong momentum we continue to expect in most other regions, leads us to moderate our second half 2023 growth expectations for the marketplace. Our Group Outlook for 2023 also factors in recent developments in NGG's business, which Stephanie will discuss. Overall, I am delighted to confirm Farfetch is growing, our key strategic initiatives remain on track, And thanks to the decisive actions we've already taken in terms of fixed costs, we are confident about our objective to be profitable at the adjusted EBITDA level and generate positive free cash flow for full year 2023. Turning to our executive team and the evolution of our organization. Tim Stone has joined Farfetch to assume the CFO role as Elliot Jordan ends his more than eight-year tenure at the end of this month. We're delighted to welcome Tim to Farfetch. He has 20 years experience at Amazon and was also CFO of Farfetch. Tim brings extensive knowledge of best-in-class customer-centric marketplaces and e-commerce platforms, along with experience in scaling SaaS businesses, proficiency in both 3P and 1P businesses, and has a deep understanding of digital as well as physical retail. He shares my vision of building Farfetch as a leading company at the intersection of tech and luxury, with a very strong profit and free cash flow generation profile for the long term. Tim is moving to London this month and will be a key member of the exec team taking Farfetch to its next level. And he has big shoes to fill. Elliot leaves us with the fondest of memories and will always be an important part of the Farfetch history. Having joined Farfetch as our first CFO and partnering with me to multiply our revenue by 16 times during his tenure, transitioned the company from private to public and leading so many amazing teams and projects. We have significantly strengthened our organization and leadership over the last 12 months. Overall, these additions of exciting talent fill our ranks with an even wider skill set, hunger for success, and huge amounts of energy as we approach a new, very exciting chapter for the Farfetch group. And now I'll turn over to Stephanie to update us on NGG.