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Edited Transcript of CNV earnings conference call or presentation 24-Jul-19 2:00pm GMT

Half Year 2019 Cnova NV Earnings Call

Eindhoven Jul 31, 2019 (Thomson StreetEvents) -- Edited Transcript of Cnova NV earnings conference call or presentation Wednesday, July 24, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Emmanuel Grenier

Cnova N.V. - CEO & Executive Director

* Emmanuel Wetzel

Cnova N.V. - In Charge of IR

* Gautier Bailly

Cnova N.V. - Group CFO

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Conference Call Participants

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* Fabienne Caron

Kepler Cheuvreux, Research Division - Head of Food Retail Sector

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Presentation

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Operator [1]

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Greetings, and welcome to the Cnova Half Year 2019 Financial Results Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Emmanuel Wetzel, Head of Investor Relations. Thank you, you may begin.

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Emmanuel Wetzel, Cnova N.V. - In Charge of IR [2]

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Good day, everyone, and welcome to Cnova 2019 second quarter activity and first half financial performance conference call.

My name is Emmanuel Wetzel, and I will be hosting today's call. Our CEO, Emmanuel Grenier; and CFO, Gautier Bailly, will be making today's presentation. The conference call slides can be downloaded from our website, cnova.com. This call is also being audio webcast, and a replay will be available on our website later today.

Please take a moment to read the forward-looking disclaimer on the Slide 2.

And with that, I now turn the call over to our CEO, Emmanuel Grenier.

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Emmanuel Grenier, Cnova N.V. - CEO & Executive Director [3]

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Thank you, Emmanuel, and hello to all listeners. The first half of 2019 has been a great success for GMV group by 13% in the second quarter and by 11% over the entire first half. The marketplace share of GMV touched the 40% mark for the first time, increasing by close to 350 basis points in the second quarter.

Our new B2C services are really picking up, especially our online travel services. And we are seeing good growth in our monetization revenues. As a result, our profitability is improving. In fact, our first half performance has paved the way for sustainable profitable growth.

Next slide. The strong results are driven by our progressive shift towards the platform model, which is based on 3 assets: our customers, our partners and our technology.

First, we have a growing and more loyal customer base, mainly 20 million unique monthly visitors and 2 million Cdiscount à volonté members. Second, our expanding partner base is more than 1,500 suppliers and 12,000 marketplace sellers. Finally, our technology and logistics performed are the bridge between our partners and sellers who seamlessly offer their products and quality to our customers. This combination of cutting-edge assets allows us not only to grow our marketplace of products at a very fast pace but also to launch and rapidly expand our marketplace of services, such as online travel and energy. Furthermore, we have expanded our product sales outside of France and now cover 25 European countries.

Finally, we want to go further monetizing our assets. We have successfully developed our B2B revenue streams. Now we're working to monetize our logistics and technology assets.

And now, let's drill down into what has made us a fast [projector].

Slide 7. Our marketplace is growing at a fast rate and representing for the first time over 40% of GMV at 3.5 points in Q2 2019 compared to the same period last year. This improvement is driven by, on the one hand, the one share of increase of our market-based product catalog, which totals now EUR 55 million of SKUs.

On the other hand, the development of our marketplace vendor of delivery service, Fulfillment by Cdiscount, which is we're shipping more than 1/4 of our marketplace owner. More marketplace vendor of SKUs are eligible for free next-day deliveries for Cdiscount à volonté members.

Next slide. Looking beyond our traditional activity of selling products to our customers, we have developed finance, daily life and leisure services that are also creating GMV growth. Since 2016, we have introduced 9 new B2C services from online phone to consumer credit, mobile phone subscription and home energy. These services combined to increase our first half GMV growth by 4 percentage points, and we just introduced Cdiscount Santé, which allows our customers to buy health insurance and prescription eyeglasses. We plan to add additional clarity in the future.

Slide 9. On this slide, I wanted to show you why we are so excited about the fast growth potential of our expanding services' offering. One of our biggest successes has been our online travel platform, Cdiscount Voyages, Cdiscount travel, averaging at EUR 23 billion market in France, and starting off by offering online flight reservations. Next, we introduced packages, holidays, and our customer can now choose from more than 9,000 offers. This expanding business already added over 3.2 (sic) [2.3] of second quarter of GMV growth, and this is accelerating. Our goal is to have one of the largest online travel offering in France by 2020.

Slide 11. As you all know, the customer is key and the word itself, customer, is a [lucid] customer. Our customer loyalty support on Cdiscount à volonté, or CDAV for short, is the backbone of our customer approach. CDAV has permanent free next-day delivery for our product collection that has tripled over the last year to cover over 1 million products, 1 million SKUs. And we're not stopping there. Free next-day delivery is key for our 2 million CDAV members who end up buying 3x more often than non-CDAV members.

Slide 12. Alongside loyalty reinforcement, we are also increasing our customer base, thanks to the strengthening of our brand awareness. Cdiscount is the second-most recognized e-commerce brand in France and is gaining on the market leader. Our brand involvement increased by [interest immensely] compared to last year. And this achievement was driven by 2 main levers. First, strong media coverage, just to give an example, we recently did a TV campaign related to the release of Disney's new movie, Aladdin, that was seen by 29 million viewers. Second, a very active social media presence of Sunbathe in going rapidly, surfing, swimming in [in the waters]. And our most recent success with Cdiscount Voyages Sunbathe with close to 100,000 fans [in the midst of a few short weeks].

Slide 14. Our monetization revenue streams continue to increase at a fast pace. These were up by more than 20% in the second quarter alone. First, our B2B services are mostly driven by premium packs and online advertising services for our marketplace vendors. Second, as we have already mentioned several times, Cdiscount Voyages is leading the charge of our B2C early growth. And finally, our financial services, such as short-term consumer credit and credit card issuance services continued to turn in solid performances. These services are key components to our gross margin expansion plan.

Slide 15. Our international strategies are developing along [3 areas]. First, the traditional way, delivering directly from our extensive French-based warehouse network to 4 neighboring countries, with Belgium leading the way. Second, the new model based on our platform capabilities making available our core and marketplace SKUs on European websites. These websites are [super stellar] covering 25 countries with a catalog of more than 32 million products. Third is new development. We are able to generate new revenues at almost no additional fixed cost.

Slide 17, innovation. All these integrations are ways to invest in the future. First, we start up partnerships. The Cdiscount logistics incubator, which we call The Warehouse continues to be very successful with the second round already listing 5 new startups. For example, Agrikolis, the network of farm-based pickup points for the delivery of heavy products to remote locations is a very big success. We plan to increase the number of pickup points by the end of this year. The startup from last year, Exotec, now has a fleet of significant robots in our Réau warehouse in Paris. And reaching now on the success of the warehouse, which is logistics incubator, we launched a lab, Le Lab, a new incubator dedicated to market consultants. Second, after startup partnerships, building in-house innovation initiatives. We focused on artificial intelligence. Once okay, we'll develop AI-dedicated staff as in one example, customer journey was enhanced through the development of real-time personalized promotions.

Slide 18. We have long been committed to creating in an environmentally and socially responsible manner. Our bill repackaging is designed to save cardboard raised by 30%. And this results in [70%] sure of delivered carts on the road. We were the first in Europe to do so.

Starting 10 years ago, we connect to pioneering trends, we have been committing to shift the economy through the renovation, sale or donation of secondhand products. And just a reminder, CSR is not only about being green and about the environment but also about social inclusion. So we have launched a program that allows for visually impaired customers to be able to use our website with ease.

And with that, I would like to turn the floor over to Gautier, who will take us through on the numbers. Gautier.

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Gautier Bailly, Cnova N.V. - Group CFO [4]

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Thank you, Emmanuel. On Slide 20, and so as you've seen, our GMV grew quite nicely in the first half. Our underlying growth drivers remain all well-oriented. First, our marketplace activity is robust and share of GMV is growing at the fastest, gaining more than 3 points in the first half.

Second, our customer loyalty program keeps attracting more customers. As previously mentioned by Emmanuel, we now have 2 million Cdiscount à volonté members, who end up by trading 3x more often than non-Cdiscount à volonté customers. And finally, our state-of-the-art mobile customer now generates almost half of our GMV, and our unique monthly visitors on mobile now represents about 60% of our total profit.

Slide 21. It's encouraging to see that we have consistent GMV growth and that is accelerating growth in the first half of the year, which is just 13% in the second quarter. Approximately, 1/3 of this growth came from the marketplace, another 1/3 came from services and especially online travel and in addition, our [Triange] added around 3 points as well to GMV growth.

Slide 22. The gross margin continues to improve and seated us at 17.5%, up almost 3 points. This improvement is due to the usual suspects, spending marketplace share of GMV. New locals will be streamed as well as, of course, continued improvement in all core business profitability.

Slide 23, SG&A was 18.9%, an increase of 2.2 points over last year for 3 reasons: first one, fulfillments are slightly down, thanks to productivity improvements in processes and automation; second, we are investing more on marketing and this is paying off as our brand awareness increased by 9 points during the half and we have the second highest traffic volume among e-commerce players in the French market; third, we are currently investing in our technology platform, explaining the tech and content expense increase and 2 other expenses, new business using part of the G&A that also refills the effect of last year acquisition.

Slide 24, on EBITDA, thanks to our growth and gross margin improvements, we had a significant increase in EBITDA of EUR 12 million, which went from EUR 6 million at the end of June 2018 to EUR 18 million this year. This improvement is again tied to marketplace expansion and the ramp of local new revenue streams. The EUR 12 million improvement will include the debt cost (inaudible) Euros. This is a benefit to the system that we will see on the next slide. (inaudible)

As a result, operating lease expense is replaced with 2 components. First one, depreciation expense related to the asset; and second one, interest expense related to the lease liability. We provide on this slide key financial figures that were most impacted by IFRS 16 application, and to repeat very simply, the decrease in EBITDA is offset by increasing the depreciation and amortization as well as financial expense. A more comprehensive view of the P&L before and after IFRS 16 begins is provided on the next slide, Page 26. There are no -- excludes us, so we can scroll on Slide 27. This slide is presenting before IFRS 16 in the interest of clarity and transparency, but of course, you'll see this approach is providing [clarity]. Net cash from continuing activities benefited from strong fundamentals to reach EUR 50 million. First, we have a significantly positive EBITDA of EUR 35 million over the last 12 months as compared to the previous 12-month period.

Second, limited other cash operating expenses down to EUR 10 million, representing an improvement of EUR 25 million compared to the previous 12-month period. And third, a positive change in working capital of plus EUR 26 million, thanks to inventory rationalization.

As we sometimes keep an indices, the net CapEx amounted to EUR 80 million, which remained stable as a percentage of GMV just this last year, which is supposing the strategic shift towards the platform model and monetization initiatives. At last, our interest expenses are under control at EUR 50 million on a 12-month basis compared to EUR 49 million for our 2018 full year.

Thank you, and now Emmanuel will go over the outlook for the remainder of the year.

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Emmanuel Grenier, Cnova N.V. - CEO & Executive Director [5]

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Thank you, Gautier. And similarly, the first part of 2019 has been very dynamic for us. Going forward, growth priorities are very clear. There are 3 priorities: marketplace expansion; acceleration on B2C services, mainly online travel; and international development.

In terms of profitability, marketplace commissions are expected to continue to increase. Our previous monetization revenue streams are expected to continue to increase by taking the next step of our monetization strategy based on the logistics and technological assets. We believe it will lead to dynamic GMV growth and a strong EBITDA increase on the full year basis.

So that concludes our slide presentation. We are now ready to turn to the Q&A. Operator, may we have the first question, please?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Thank you. Our first question comes from the line of Fabienne Caron with Kepler Cheuvreux.

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Fabienne Caron, Kepler Cheuvreux, Research Division - Head of Food Retail Sector [2]

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The quality of the line was not that good. Maybe if you could step a bit away from the mic, it will be, I suspect, easier.

I've got 2 questions. First, if I look at your free cash flow on a H1 basis not on a 12 months, can you explain why we had such a decline in trade payables, please, because as a result, you had a weaker free cash flow in the first half of the year? This would be the first question.

And the second question, you're getting financing through Casino. We could read in the annual report that you've got EUR 550 million potential credit line from Casino. You've taken already EUR 421 million. I'm just wondering if you've got some limitations there. And what happens when you use all the EUR 550 million, bearing in mind that Casino has some financial pressure at this point in time?

And the last question would be, could you quantify the sales of Cdiscount [Sante], please? Well, I'm thinking here about not only the [corners] but [also] in the West?

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Gautier Bailly, Cnova N.V. - Group CFO [3]

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Okay. This is Gautier Bailly speaking. On your first question, concerning trade payables, so it's quite clear. Last year, we had a large plan of payments on amortization that they approved. And this year, we just remained stable. So we don't have this decrease going to [stability] on payment channel. Working up more of the belief that a priority this year is the improvement of inventory that we have started in the H1 and that we will continue and grow further in the H2.

Regarding the second question in the Casino credit line, as you know, we've been having concerns about this. Casino as a [lending] agent, we can reposition additional EUR 2.9 million in fines and leaves it well on track for what concerns it, troublesome.

Moreover, we just had [continuation] and this is reason in our semi-annual report, Page 25, we have continuation, [5 to 0] that in a while, we should (inaudible) receive receipts from the [inter-group, 313] for the next 12 months. So we don't have any concern regarding this. And for the [corner] sales, we have frequent [GMV] coming from corner growth. So, it is a good trend, but we'll continue for the rest of the year.

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Operator [4]

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(Operator Instructions) Thank you, it appears we have no further questions at this time. I would like to turn the floor back over to management for closing comments.

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Emmanuel Grenier, Cnova N.V. - CEO & Executive Director [5]

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Just come to a short conclusion about the first half, we felt first half was a very dynamic with 13% growth in Q2 and this solid EBITDA improvement. And now priorities for the second semester are to continue to grow and to improve profitability and EBITDA. So thank you.

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Operator [6]

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Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.