Ceconomy AG (CEC) Earnings Call Transcript

Ladies and gentlemen, thank you for standing by. Welcome, and thank you for joining the CECONOMY AG Investor and Analyst Conference Call. [Operator Instructions] I would now like to turn over the conference call to Sebastian Kauffmann, Vice President, Investor Relations. Please go ahead, sir.

Good morning, everyone, and thank you for joining our Q1 results call. With me today are our CEO, Karsten Wildberger; and our CFO, Florian Wieser, they will guide you through today's presentation. Before we start, the usual formalities. Firstly, this call is being recorded. A replay will be available on our website later today. Secondly, don't forget that today's presentation and some answers to your questions may contain forward-looking statements. For additional information in this regard, please refer to the disclaimer. But now let me hand over to Karsten.

Thank you, Sebastian, and good morning, everyone. This is Karsten Wildberger speaking. Thank you for joining our Q1 results presentation. We'd like to briefly take you through our performance update of Q1, give you also a brief outlook, especially current trading performance and also update you on the progress we are making with regards to our strategy implementation. Well, on Slide 4, an overall summary, the first quarter, and this is October, November and December last year was still very much affected by strong external headwinds. Although we can't choose the conditions we operate in, we can and we do choose the way we react and act as a company. And I can confidently say that we remained focused, we executed and we delivered. We generated solid results despite supply shortages, despite being hit by a cyber attack in early November, and despite COVID restrictions in our home market, Germany, and even lockdowns in the Netherlands and Austria. At the same time, we've made further operational progress and improved the omnichannel experience for our customers. I will also share a few tangible examples in this short presentation. Clearly, in absolute terms, we aren't satisfied with the outcome in these difficult times. The results do not reflect the underlying capacity of our company. And clearly, we also have more work to do, but I'm convinced that we'll emerge stronger from the current turbulence, revealing the underlying strength of our business. So let's turn to Slide #5, and let's have a closer look at our development in Q1. Firstly, it was a robust performance, given the severe headwinds we faced. Sales and EBIT were below the record-breaking level of prior year 2020-'21, but still in line with pre-pandemic levels 2 years ago. And gross margin was even up, driven, besides others, by our Services & Solutions business. All of that was achieved in spite of COVID restrictions, supply shortages in certain product categories and a cyber attack, as I just mentioned. It's also important to emphasize that we performed particularly well in countries with no or limited COVID restrictions. EBIT in all segments, except the DACH region, was either on par or above the previous year. Finally, if we compare our development over a 2-year horizon, and I'll show you in a second why we think this is a better comparison, we see total sales growing by around 3% and online sales by more than 80%. As you can see on Chart 6, last year's first quarter was one of the most successful quarters in the company's history. We benefited from high momentum in Consumer Electronics, driven by a boost from pent-up demand after lengthy lockdowns and a peak Christmas demand. At the same time, COVID restrictions were relaxed in that quarter, and business losses from previous periods were compensated by local government. In some countries, there were even temporary measures to stimulate demand, such as the VAT reduction in Germany. In the current year, however, the situation was completely reversed during the peak season. COVID restrictions in Germany, Austria and the Netherlands caused a drop in frequency up to 40% in our stores during the high season, and in Austria and the Netherlands, stores had to completely close for 3 weeks what's more in Q1 '21, there was little or even no government support. That's why comparing this year's first quarter to the last year is difficult. And in our view, the pre-pandemic level 2 years ago is a better standard of comparison when the business was running stably under conditions that were still normal without external headwinds. That's why we think that reaching pre-pandemic levels is a fairly good performance and a more suitable benchmark. Let's talk on the next chart about Black Friday and Black November. During the entire month of November, in particular on Black Friday itself, for the first time, we ran group-wide aligned campaigns in all our 30 country organizations. And they were very successful for we managed to double our online sales compared to the pre-pandemic level of November 2019. And responding to short supply in some areas, we were able to reduce excess inventory in certain product categories such as TVs by diverting demand. The results are clearly below the levels we deliver under normal market conditions, but given the circumstances, we performed respectively. Let's turn to Page 8. We've received lots of questions regarding the latest sales performance. So let me give you a sneak preview of how we did from mid-December onwards until the end of January 2022. Since mid-December and to be precise, since calendar week 50, we've seen an underlying increasing sales trend. The fundamental development over the last 6 weeks has been very encouraging also on an absolute level. And relative to prior year, we've experienced a substantial uplift because last year was the period when we started to suffer from more severe COVID restrictions, including full store closures. So for the last 6 weeks, we've seen sales growth of almost 40% for the group and of around 75% in Germany. Thanks to that positive sales momentum, CECONOMY's total sales for the first 4 months of this current year are on par with previous year's level despite the sales decline in Q1. And this is largely driven by brick-and-mortar sales, which will also facilitate our profitable Service & Solutions business. What we are currently seeing confirms our ability to perform once our stores are allowed to open in a more stable environment. And at this time, we are therefore enjoying very encouraging sales momentum and remain positive. However, we continue to live with many uncertainties and will keep alert. Overall, we remain positive because regardless of the environment, we are continuing to execute on our omnichannel model. And on Slide 9, I'll give you some examples and proof points of what we've executed and achieved recently. So also during Q1, we focused on implementing our omnichannel strategy further. And here are a few examples I'd like to share with you, 4 areas of progress that are important. Firstly, customer experience is super critical for business success. And we steer and monitor the business using the so-called Net Promoter Score, NPS. And NPS measure is where the customers recommend us to their friends and family, called advocates, or if they're unhappy with us, called detractors. The NPS can lie between a minus 100 and the plus 100 and plus 100 means we would only have advocates or raving fans. And currently, we stand at plus 50, and this is a 7 points improvement versus prior year. And our NPS improved online and off-line. And we also use as an important source of inside customer's abidance where customers tell us where and how to improve but they also give us increasingly positive feedback. And just 3 examples are shown on the right-hand side here. I will give a bit more color on the following 3 areas that are important when it comes to omnichannel and how we bring that to life and where we're making progress. The first one is the important and differentiating customer proposition of after sales; and here, I will share progress from Spain. The second one is our important focus on creating and growing our marketplace to our existing business. And the third one is the critical field of logistics and delivery. So let's talk about aftersales because it's very differentiating and a relevant customer proposition for us. And this means when it comes to repairing devices, giving advice or when it comes to refurbishing products. And in Spain, our team has made big progress in this area. It's also an element to strengthen loyalty of our customers, but it's also about creating additional sales. And in our newly established repair facility in Madrid, we cooperate also with several partners there. We offer all sorts of repairs, and we did repair almost 100,000 devices in Q1 with a reduced turnaround time by 35% and improved quality. In aftersales, we also offer personalized service. That means a customer has a dedicated service person ensuring consistent end-to-end delivery of the aftersales process, including a final product test so that the device is really working. And this has led to an NPS improvement of plus 17. And now we are working on best practice sharing from our Spanish businesses into the other markets. Let's turn to the next one, the marketplace. An important pillar of our omnichannel strategy is extending our customer offer and growing our business through our own marketplace. And we are running marketplaces in Germany since summer of 2020 and since October last year '21 in Spain. If we compare our Q1 results of the marketplace to the previous year, we see that our gross merchandise value, GMV, has grown 400%, the number of sellers has grown 4.5x and the number of SKUs offered increased 5x. That's a very good growth. And we are delighted that customers appreciate our marketplace offering. The marketplace is EBIT-accretive, and we are working now on accelerating our marketplace further. We have a rigorous process in place onboarding sellers to ensure that we have a great customer experience. And with marketplaces running in Germany and Spain, we will further expand to the Netherlands and Austria in 2022. And by the way, the marketplace broke even already in its first quarter of operation after the launch in October. Let's turn to Slide 12. I'd like to give a brief update on how we are optimizing logistics and delivery and on the progress we've recently made. Overall, our customer satisfaction with our delivery promise and actually delivery performance is improving across the group. The NPS increased by 6 points. And this is driven by many enhancements and operational improvement initiatives. For example, we reduced fulfillment lead times in our warehouses by more than 40%. And our substantial share of online orders in Germany are now ready for store pickup within 30 minutes, that means a customer clicks online to buy and you can pick up -- the customer can pick up the product 30 minutes later in a store. And of course, there's more to come. New urban hubs now make home delivery more convenient for our customers and reduce also our own logistics cost. And in the next sessions when we update you, we will continue to provide more clarity on how we are improving here further. So before handing over to Florian for the financials, on Slide 13, I'd like to share an important step in our sustainability strategy. We have globally launched our umbrella logo BetterWay. BetterWay is a critical communication and branding concept like an umbrella, if you like, to drive awareness and consistency in the field of sustainability. BetterWay makes sustainable product offerings more visible, and BetterWay helps our customers make the right buying decisions. And BetterWay highlights products that are certified along key dimensions such as responsible manufacturing, emission and energy efficiency, the ability to recycle or to become part of a circular economy. And you will find a logo in our web shops in our stores. And today, we offer more than 1,200 products carrying that logo, and we will double this number by the end of the year. Let me now hand over to Florian to guide you through the financial section.

Thank you, and good morning, everyone. Let me guide you through our quarterly figures in more detail. With sales and EBIT roughly on pre-pandemic levels, I consider our Q1 results as solid overall. They represent a reasonable start into the new financial year. We usually apply year-on-year comparisons to put our performance into perspective. However, such analysis need to be treated with caution this year, given the extraordinary comparison base we had already discussed in our recent full year results call. Therefore, we added comparisons to pre-pandemic levels in this presentation wherever we felt it was appropriate. Now let me start with our main KPIs. Two years ago, in Q1 '19-'20, the very last quarter without COVID, our business environment was relatively calm. In this year's Q1, we are facing extremely adverse conditions: COVID restrictions in various countries, including Germany; reduced product availability in core categories; resurge in inflation and not to mention a cyber attack. Q1 '19-'20 and Q1 '21-'22, 2 quarters with completely different market conditions, but roughly comparative results for sales and EBIT. This is a clear proof of our continued and relentless transformation and our increased operational effectiveness. Today, we are in far better shape than we were 2 years ago. Judging our performance by only comparing against prior year's record quarter would thus only be misleading and overshadow our clear involvement. Despite lower sales and EBIT compared to previous year, we are therefore satisfied with what we have achieved. Total sales came in at EUR 6.9 billion, and EBIT stood at EUR 274 million, a sales increase of plus 3% against pre-pandemic levels as well as an almost stable EBIT. Now to online sales on Page 16. It comes as no surprise that the trends to shop online with us is unbroken. Thus, the online sales share remained on an elevated level of around 28% in Q1. The online channel also benefited from partial or full lockdowns and store access restrictions in various countries, including our home market, Germany. At the same time, total online sales were cumbered by general product scarcity and the temporary impact of the cyber attack in November. In Q1, 36% of all online purchases were conveniently collected in a MediaMarktSaturn store. This ratio is up 4 percentage points on previous year. We will continue to make our omnichannel shopping experience as seamless as possible and work towards our ambition of an even higher ratio exceeding 40%. Let's move to Page 17 in Services & Solutions. In absolute terms, our Services & Solutions business was stable against last year. Relative to total sales, we, however, increased the share by 0.4 percentage points. Compared to pre-pandemic levels, the reduced store traffic weighed on our services business. While we managed to generally increase the attachment rate of our services, the current situation around reduced product availability impeded a stronger performance uplift. Scarcity was particularly pronounced within telecommunications, which is a category with a relatively high attachment rate. For example, you can't offer extended warranties or ready-to-use services to a smartphone you're not selling in the first place. At the same time, we continue to extend and to improve our services and solutions offerings, both on and off-line as outlined in our previous results calls. Building upon these enhancements and the generally improving circumstances in the upcoming quarters, we expect a further recovery of our strategically important and margin-accretive Service & Solutions business. Moving on to Page 18. Our gross margin stood at 17.3% in Q1, an increase of 30 basis points, driven by various factors. Firstly, the somewhat lower online share and the increased pickup ratio resulted in a tailwind from channel shift. Secondly, the relatively higher share of our Services & Solutions business. And thirdly, the goods valuations benefited our margin. On the negative side, the reduced product availability, the competitive environment as well as our deliberate efforts to improve our inventory structure led to a slight decline of the goods margin. Given the relatively low prior year basis, resulting from the extended store closures, especially in Germany in 2021, we expect a further year-on-year recovery of our gross margin going forward. Let's move on to our OpEx development. The fact that we have done our homework on costs is once again evident in the OpEx development. Total costs have decreased continuously in the last years. Excluding COVID subsidies, the development versus prior year is even more pronounced. Mathematically, the cost ratio increased by 110 basis points year-on-year. Yet, given the drop in sales and the decline in COVID subsidies, this figure is not that meaningful to us. Compared to Q1 '19-'20 with a more similar level of sales, we managed to decrease our OpEx ratio by around 50 basis points and continue to focus on cost control as a key priority. We have introduced this slide in our recent full year results call, and it once again nicely summarizes the diverging performance of our segments. The blended sales drop of minus 7% is mostly driven by the DACH region with a decrease in sales of more than 11%. Here you should keep in mind that both Austria and Germany suffered from lockdowns or access restrictions to our stores. Excluding those 2 countries, the group's EBIT result was even roughly on prior year level. Thus, the group's overall year-on-year decline in EBIT is fully attributable to these countries. With regards to macroeconomic development, we see a kind of a special situation in Turkey with very high inflation and currency devaluation. But so far, the teams are staying the course and handling the headwinds well. Now very quickly on reported financials down to EPS, which were relatively straightforward this quarter. Given the absence of major nonrecurring items in both periods, reported financials are almost fully in line with adjusted one. Financial results from prior year's level and taxes reduced in line with profitability. As a result, we see a EUR 0.09 drop to EUR 0.34 in earnings per share. Looking at our free cash flow development, on Chart 22. We have finally seen the expected reversal of the negative phasing effects in the past quarters. Moreover, as announced in our December call, we initiated targeted measures to improve our net working capital position. The proof is visible today. Thanks to our deliberate stock management, we achieved a nearly stable free cash flow of around EUR 1.2 billion. This is not far away from previous year's level and was achieved despite a significant cash outflow from deferred tax payments as a result of last year's COVID regulation. As such, we are satisfied with both, our free cash flow generation and our result in liquidity position. Let's now move to the outlook on Page 24. In an exceptional context marked by COVID restrictions, supply shortages and a cyber attack, CECONOMY once again demonstrated a robust performance in this quarter. We have put the most demanding year-on-year comparison behind us and have taken an essential leap towards our full year targets, which we hereby confirm today. Given the strict lockdown situation in the last year, the upcoming quarters will have far easier comps. However, many uncertainties persist. The situation concerning our supply chain is still difficult, and from what we hear, will persist until at least our Q3. Moreover, inflation remains high. And finally, the spread of the Omicron variant is still significantly interfering with our operational business. The situation is thus likely to remain volatile, and we will communicate a more concrete guidance to you once we have better visibility. To visualize this for you, please refer to this slide, which you probably remember from our December call. It shows our sales development versus the base year 2018-'19. The substantial swings since the onset of COVID makes presales predictions very challenging. However, recent sales trends were above pre-pandemic levels, giving us confidence for the upcoming months and quarters. This completes the financial section, and now back to Karsten.

Thank you, Florian. Well, we are going through still volatile times, but we have learned much better how to deal with external uncertainties. And given the external factors, Q1 was a robust performance, we confirmed our guidance and we are making progress implementing our strategy. Since mid-December, we are experiencing an encouraging sales uplift and the easing of COVID restriction means our business is performing at a higher capacity. We made further progress implementing our strategy, improving customer experience, making progress in logistics and aftersales and advancing our omnichannel business model. Finally, I'd like to point out that I do believe that the consumer electronic market remains fundamentally attractive despite COVID, supply chain challenges and inflationary pressure, because I think a key driver for consumer electronics is the great innovation happening in the consumer electronics sector with great new products and services in the pipeline of our manufacturers. And finally, we will continue to work hard to master short-term challenges, but also keep executing our strategy so that we will emerge stronger from this difficult environment. Thank you, everyone, for your attention. And now I'll turn the call over to the moderator for your questions.

[Operator Instructions] The first question is from the line of Kepler Cheuvreux, Fabienne Caron.

Three questions from my side, please. The first one, regarding your outlook of your slight sales increase for this year. Could you give us a bit more qualitative comment per region? And a follow-up on this question, could you give us another view of the rules in Germany regarding shopping? Because, for example, here in Hudson the 2G was disappeared from today, but I think it would be useful if you could have a general viewing percentage of stores? How many stores where the consumer can go shopping without any restrictions would be useful. And the last question, I'm sorry, I ask this question again, but could you give us a breakdown of the Service & Solution in percentage of sales, the main building blocks, please? Because it's a bit of a black box for me.

Yes. Thank you, Fabienne. First question and the breakdown of Service & Solutions, Florian will take. I will give a brief update on the rules in Germany regarding shopping and stores, 2G, et cetera. 2G means actually vaccinated or recovered. Florian, #1 is for you.

Yes. Happy to do so. So looking at the outlook for the full year and the various regions, we expect basically a major contribution from the segments DACH and Eastern Europe, and we expect Western Southern Europe to be on prior year's level. And obviously, as I said, many uncertainties persist. A lot will depend on the further development of the corporate regulations and inflation. But that's, yes, the assessment for the outlook. Looking at the third question, Services & Solutions breakdowns. So as I said in my speech, basically, our Services & Solutions business improved in the first quarter. So the attachment rates were rising for basically for all services, especially for warranties and for our smart power business. And the reason why we are suffering or are not living up to the ambition which we have set ourselves, is basically scarcity of products, which was especially pronounced in telecommunications and also IT. So these are categories which are very well base for services attached. And if you don't sell smartphones, if you don't sell laptops, it's tough to attach to the -- yes, there is a rather stable Services & Solutions performance it's rather linked to this lack of products and scarcity in these categories than lack of improvement. So that would be my breakdown. I hope that is -- answer your question.

Yes. I understand. Yes, I was not thinking about the momentum breakdown. I was thinking about the sales split, i.e., if you look at Services & Solutions, how much of it is warranties, how much of it is repairs, et cetera?

Yes. So if you look at this, the major part is still coming from the financial services. So looking at warranties and consumer financing. And what we see since -- yes, I would say 2 years is a strongly increasing performance of the smart buys. So this would be my answer to this one. More precise, but we do not provide.

Well, a brief update on the rules in Germany regarding shopping. So 2G vaccinated or recovered is broadly still the rule across most states. We have states like Bavaria in the Northern part of Germany, where we've seen some easing. So 2 comments to this. First, initially, it had quite a substantial decline in footfall, 30%, 35%, sometimes even up to 40%. But also currently under 2G, we see a recovery. What does that mean? Currently, footfall stands around minus 20% versus, say, comparable levels pre-pandemic. What is very encouraging that also the inner cities seem to recover a bit faster. Now the hope is that the current debate around Omicron what you see also in other countries, is easing further and we are waiting now for, say, the decisions that 2G will be lifted. There's a bit of speculation when this will take place, maybe within February, and that should help the situation further. Important to note is despite the lower footfall, we still see a very encouraging click-and-collect ratio, and we see a very encouraging conversion ratio in our stores because customers coming to us are actually making a more conscious decision and also the purchase value is higher. So it's not just the 1 thing, it's actually a combination of factors with at the moment, we are more confident and hopeful that things are improving.