Ladies and gentlemen, thank you for standing by. Welcome, and thank you for joining Delivery Hero's Q3 2022 trading update Conference Call. Throughout today's recorded call, all participants will be in a listen-only mode. After a short introduction by the management, there will be a question-and-answer session. If you would like to ask a question, you may press star followed by one on your touchtone telephone. Please press the star key followed by zero for operator assistance. Would now like to turn the conference over to Christoph Bast, Head of Investor Relations. Please go ahead.
Hello and welcome, everyone. We hope you are well, and thank you for joining our Q3 2022 Earnings Call. We trust you have all received the press release and the presentation which we published this morning. These documents are also available on our website. We would like to remind you that this call is being webcast, and a replay of the audio webcast will be available later today on our website. With me today, we have Niklas Östberg, CEO, and Emmanuel Thomassin, CFO of Delivery Hero, who will take us through the most relevant aspects of our Q3 performance and share further details on our outlook and path to profitability. After that, we look forward to answering your questions. Now let me hand it over to you, Niklas.
Thank you, Christoph. Hey, everyone. Thanks for dialing in. Despite the challenging environment, we are very proud of what we have achieved with the teams, in particular when it comes to our promises regarding improving profitability. Q3 also marks the first quarter that we consolidated Glovo into the group. We had a great quarter together, and we are more excited than ever about their performance. Today, we like to focus on our trajectory on profitability as it's something that is top of mind for both you and us. We will therefore run through the other parts of the presentation much faster than normal. Let's already jump to slide six. Some key highlights. In Q3, we achieved a healthy GMV growth of 12% despite difficult COVID comps in APAC and a continuous strong focus on profitability.
All other segments outside of Asia grew by more than 30% combined. This was achieved while improving EBITDA with more than EUR 200 million quarterly compared to Q4 last year. I'm personally not aware of any other delivery company doing this size of improvement in the last three quarters. We started our initiatives at the end of last year, as you remember, with some tough decisions to divest Germany, Japan, push AOV was something we spoke a lot about in Q4. We cut also our Dmart rollouts, as you remember. We did budget reductions and more. It was pretty painful back then, but it has now put us in a very strong path to profitability. I believe that we were probably ahead of the curve in some of those initiatives.
Also like to highlight that we built a profit engine of EUR 800 million run rate in Q3, growing 25% or roughly 25% in Q4 to EUR 1 billion. That's EUR 2.5 million a day, and I believe none of our direct competitors in the food delivery or quick commerce has this kind of profit pool. I believe it's gonna be challenging for them to develop this as they don't have the market scale or position that we do. We also put ourselves in a position where we can commit to free cash flow breakeven during H2 next year. This will be another point of strength when we get there. Now handing over to Emmanuel to run us through the numbers. Emmanuel.
Thank you, Niklas. Welcome everyone, also from my side. First I'd like to remind everyone that we complete the Glovo acquisitions in July 2022, so this year, and effectively we start to manage the business since then. Those, we now include the Glovo in our reporting numbers for the first time. For better comparison purpose, we decide to include Glovo's financial data on the pro forma basis for Q1 from Q1 2021 onwards. Otherwise, not much there to add on the group level to what Niklas just mentioned, besides that, being very pleased with the results. The adjusted EBITDA improvements have been exceptional, while we managed to keep the growth high. Let's move now to slide eight, please.
The graph on the left side is showing the development of the frequency of ordering pre, during, and post-COVID. We all have always had an increase in frequency every year, but during COVID, the frequency accelerate two to three times faster than normal. We have now seen our frequency drop back a bit after the lifting of COVID restrictions. However, it's still clearly higher than pre-pandemic levels, and we hope obviously to build on this on this level going forward. On the right-hand side, you know, a global macro level. On the global macro level, the GDP growth for our top 15 countries expecting to be much significant compared to other region of the world. Now into the next slide, where I will skip over the regional deep dive for this time.
Just let me make some two, three remarks on the segments, with the exception of Asia, and save time for the upcoming case studies as Niklas just mentioned. Let's start with Asia. The GMV development in our platform business in Asia was rather flat in Q3 on a year-to-year comparison. This is the mixed effect with both tougher comparison in APAC as the region benefit from COVID restrictions in Q3 last year. South Korea had also an unexpectedly softer quarter due to both better and poorer weather conditions. First, uncharacteristically less humid weather in the beginning of the quarter, people choose to eat more out than usual. Then later, the most powerful typhoon that hit South Korea in years impacted restaurants and delivery capacities for a couple of days in September.
Adding to this, the South Korean won decline against the euro by more than 5% from mid-August when we shared the GMV guidance for Q3 until the end of September. If we were to strip out the adverse effects in Korea, GMV for the Asia segment would have grown close to 8% quarter-on-quarter, which is in line with our earliest guidance. We'd also like to highlight that we continue to gain market share against all peers in South Korea. The segment revenue developed nicely during the quarter, growing by 14% year-on-year as we advance on our profitability strategy, which include our further developing advertising products and introducing service fees in the APAC region. The advertising revenue further improved in the Asia segment.
If you look in the APAC region, so excluding Korea, it reached 2.4% as a percentage of GMV in the quarter, almost a full percentage point improvement year-on-year. We have further developed the offering in the region, improving CPC and developing new channel where vendors and brands can list and reach new customers. The CPC or, which is our advertising product in South Korea, continues to gain traction after the launch in April. The vendor penetration is developing quite nicely and already up to around 10%, with very high retention rates. The return on advertising spends for vendors is currently close to six times, which is above the group average. This will naturally converge over the coming quarters.
We also launched service fees in three new markets in the segment, namely Pakistan, Bangladesh, and Laos, with no significant impact on GMV. In total, we have introduced service fee in seven of our 13 Asian markets. We continue to roll out the service fee to other markets in the region where we see rational competition. Adjusted EBITDA continues to develop nicely, already reaching the mid-double-digit EUR million range in the quarter, and we expect this positive momentum to continue in Q4. Thus the segment should amount to a positive adjusted EBITDA for the full year. Although we continue to make progress in rolling out service fees, increasing ad tech penetration in the countries, and making subscription available for more consumers across the APAC region.
Now let's move to MENA on slide 10, which is, as you will see, exceptional. In the profitable countries, which represent 70% of the segment, we grew fast while increasing our adjusted EBITDA to GMV margin after group cost to 4.5%. I'm also happy to see a strong sequential GMV growth in Turkey again, with GMV growing 6% in Q3 2022 in relation to the second quarter of this year. Now also a small remark if we move to Europe on the next slide. This segment had a clear sequential increase in growth both with and without Glovo. Growth overall clearly above our peers for the region. On the Americas segment on the next slide.
Not much to say regarding the Americas segment other than this is a pure pleasure to see how things develop on both top line and bottom line. GMV continues to grow above expectations, and we keep increasing gross profit and adjusted EBITDA margin on a quarterly basis. Now on the Integrated Verticals segment, we progress on a global footprint review and close down a net total of 60 of their underperforming and non-strategic stores. We continue closing additional underperforming stores in Q4 and optimize our portfolio. Onto the next slide, please, we show contribution margin. A fully loaded GP development, including purchasing discounts, gradually keeps moving upwards. Beside this one, it's worth mentioning again that the development of our tech revenue.
We're now at 2.4% of GMV outside Korea and Glovo. Including Glovo and Korea, which we launched in April 2022, we are at 1.5% of GMV already. This means that we're on clear path to generate over EUR 2 billion in AdTech revenue between 2024 and 2025. Now, Niklas, we take you for the case studies. Niklas.
Thanks, Emmanuel. Now to the core of what we've been prioritizing for the last 12, 13 months, which is to reach cash flow positive without sacrificing growth or market share. Hope the slides are helpful to you. In this slide, we separate the business in three pieces: profitable platform business, loss-making platform business, and Integrated Verticals with focus on Dmart. We then summarize this on the last slide. Let's start with the profitable platform business. We decided to bring back an update view on the last quarter's case study. We updated the graph with our Q3 numbers. What you can see is that we did roughly EUR 40 million more in Q3 than what we previously guided to. In Q4 we expect less overperformance than we were pushing for, but expect to be right on target of EUR 1 billion EBITDA run rate.
Reason for the Q4 not performing or outperforming is due to slightly lower volumes. That's highlighted in our group guidance, but also investments in two countries in MENA, of which one being part of the profitable markets. We think the return here will be very good. Moving into 2023 on the next slide. Here you can see that we expect improved run rate EBITDA by more than 25% by the end of next year, and from there, grow it by double digits for the next years. EBITDA growth next year is coming mainly from increased profitability in the existing markets, but we will also have increasing help from more markets moving into profitability. Next year alone, we expect eight to 10 additional countries to be moved into the profitability or profitable platform business. Let us move to the unprofitable markets.
These markets can be categorized in three groups. We have the startup markets. Example here would be Iraq. These markets are very early stage and therefore too early for us to claim leadership. In total, around 15% of GMV are in this unprofitable markets. It will take probably three to five years for this to be break-even. They are long-term investments, but they will generate a good growth engine for many years to come, also on the EBITDA side, once they turn profitable. You have the second category, which are leadership markets. Example here would be Romania. Here we have high growth, strong market position, sometimes with a contender, sometimes not. But more importantly, we are still subscale to drive large sustainable profits.
EBITDA is between one and maybe max three years away, so much closer to this part. Roughly, I would say in this part is roughly 75% of the markets of the unprofitable markets are in this portion. Then the last 10% of the unprofitable markets will be in this a little bit more tricky basket, which is second place positions. Examples here, yeah, will be Peru and Poland will be good examples. Markets in this segment, we believe. Or some of the markets are on a good path to gain leadership and others are a little bit further away from that. As you know from the past, we are rational in driving consolidation and have been approached by several interested parties in a few of these markets.
Any rationalization here would of course free up capital to invest and win in other places. I wouldn't expect that we're gonna sell all of them, but we might sell some of them and freeing up capital to make sure that we win the rest. Looking on an aggregated basis, you can see on this slide that losses have come down, and we also see adjusted EBITDA margin to GMV has dropped from 9% a year ago to 5.8% in Q3. We expect this development to continue and reach negative 3% by the end of next year. Should also highlight that this is on target to reach 4.5% already in Q4 this year.
If we then move to the next slide, you can understand why we are confident about improvements in adjusted EBITDA development of this bucket of countries and why we are also confident that they are going to profitability. If we go, I think slide 21. This overview first introduced during our Q1 trading update illustrates how we expect to reach our long-term adjusted EBITDA margin. We reconfirm the 5%-8% EBITDA margin target, and I think we are more confident than ever about this. As you can see then from the profitable platform business is already operating at better operational leverage than what we guided to long-term. Now let's look at the unprofitable markets in Q3. As you can see, gross profit margin is already aligned with profitable markets.
The largest difference to profitable markets, but also to the long-term target, is that the level of marketing investment we invest. The reason for that is that we are at subscale, and in order to raise OPEX as proportion of GMV to the long-term target, we essentially need to double the businesses or cut OPEX. Between this option, we believe cutting OPEX will lead to insufficient restaurant coverage and tech deficiencies and making ourselves uncompetitive. Therefore, we rather keep OPEX flat while increasing GMV and gross profit. These however cost them money. And that's then clear with this. We over-invest in marketing to grow the business, to get operational leverage such that we break even.
We don't shortcut ourselves to profitability because that would be the alternative, shortcut it by cut, but then you also don't build a long-term sustainable, strong business. Now moving to the Integrated Verticals. Here we focus on Dmart, which is roughly 75% of the losses in this segment. As you can see on the left-hand side, growth has been very solid despite essentially no new store openings and a clear push for economics as visible on the right-hand side. We expect Dmart to achieve gross profit break even mid next year and reach scale enough to drive EBITDA in the midterm. We believe this to be very strategic part of Delivery Hero and our product offering to our customers. We also believe that in most markets, we are the only one with scale to reach profitability in this business.
As mentioned before, you need a lot of scale in this business to drive prices, procurement, building, distribution facilities and so on. That's why we believe they are the only one who can drive that scale, here, and it will be very strategic for us. For the full IV segment, we expect absolute EBITDA to also come down, and we expect it to drop to almost half between Q4 2022 and Q4 2023. I think worth pointing out when we're on this slide, as you see, we grew actually our GMV faster than in any other quarter in absolute terms, despite actually, being more conservative, no store openings and so on. I think that shows the strength and also differentiation towards other quick commerce player who rather been declining lately.
Now moving to the next slide, which is more of a summary slide on what we have shown in the three different buckets that constitutes our business. What you can see is an improvement from -3.2% EBITDA in GMV in Q4 2021, including global, to 0.7% in H2. I don't know, that's a 2.5% improvement. Where I would also add that Q4 is significantly better than Q3. If we also triangulate and summarize the comments made in the previous slide, we expect to be above half a percentage in EBITDA to GMV for the full year 2023 and above 1% EBITDA to GMV in H2 next year. Now turning over to Emmanuel to give a guidance on the 2022 outlook section.
Well, thanks, Niklas, again. We most likely update our 2022 full year outlook. Now we expect GMV, including global, to come in the lower end of the GMV guidance from our EUR 44.7 billion-EUR 46.9 billion range, which is still a very healthy year-on-year growth rate of close to 20%. The adjustment to GMV also trickles down to the total segment revenue, which we now also expect towards the lower end of our EUR 9.8 billion-EUR 10.4 billion range. The main reasons for these adjustments are that we might still see some lag effects from COVID during Q4, in particular in APAC and Korea, and also some uncertainties on potential macro or geopolitical developments that could impact the customers' discretionary spending.
The start to Q4 has been on par with Q3, and we do not see anything in our data that would suggest that the macro environment has had a strong impact on the business still. We have decided to take a more prudent approach and not to assume acceleration of year-on-year growth rate in Q4, but rather GMV growth in line with Q3, meaning low double digits, which bring us to the lower end of the guidance. We continue also to push our profitability and we once more update our target for Integrated Verticals. We now expect adjusted EBITDA to be between -EUR 380 million and -EUR 400 million, down from the Q2 revised projection of up to -EUR 475 million.
The above adjustments result in a better than expected adjusted EBITDA margin, which has now been revised to range between -1.4% to 1.5% of the group in 2022, including global on a pro forma basis, versus the previous range of -1.5% to -1.6% of GMV. In looking ahead to 2023, we have further specified our outlook and now expect a positive adjusted EBITDA to GMV margin of more than 5% for the full year and more than 1% for the second half of the year 2023. On top of this, we are fully committed to break even on free cash flow level during H2 2023. With that, I hand over to Q&A and Christoph.
Thanks, Emmanuel. Before we start with the Q&A, the usual reminder from my side, please. As we would like to give every analyst the opportunity to ask a question, I would kindly ask you to limit your questions to one only. Operator, please go ahead.
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 touch-tone telephone. If you wish to remove yourself from the question queue, you may press star followed by two. In the interest of time, please limit yourself to one question only. If you're using speaker equipment today, please lift the handset before making your selections. Anyone who has a question may press star followed by one at this time. One moment for the first question, please. The first question is from the line of Joseph Barnet-Lamb from Credit Suisse. Please go ahead.
Excellent. Thank you for taking my question. I have many, but I will just ask one. You haven't given explicit GMV guidance for next year. Is low double-digit GMV growth a reasonable place for investors to be? How dependent is your margin guidance on delivering that top-line growth? Thank you.
Thanks. Look, it's still early, and there are still some uncertainties, which is why we don't want to give guidance yet. We also haven't finalized things ourselves. If I try to give some guidance or some color, I believe that if we execute well, we should be able to drive growth, CAGR growth over many years for around 20%, maybe 25% on a GMV basis. Now, of course, there are some differences between markets. One is a market like, let's say, Korea, which is a big portion of our business today, will probably grow significantly slower. It's probably the hardest one to predict.
Therefore, it could be between 5% and 15% CAGR, depending a little bit on how user behavior continues from where we are now and so on. That's a big range, obviously. Same could be markets like Kuwait and so on based on where they stand. There are so many orders and frequency is so high, so it's very hard for me to say where does it go next. Of course, you have some early-stage markets. We have a lot of early-stage markets that can probably grow 50%+ for many years, so they can CAGR much higher rates. Of course, they're tiny now. They don't really contribute to the underlying growth. It might add 1% or 2% on the overall growth.
Long term, they can hopefully have a larger impact to our overall CAGR. As they are still as small now, they don't contribute so much to it. Same if you look at the Integrated Verticals or if you look at quick commerce in general. Here we can probably grow much faster than the average over, I don't know, probably the next five, 10 years at least. Again, same here. This is a very small part of the business today, so it doesn't really impact our growth this year, next year, only marginally. It will impact our growth probably in two, three, four, five years when it becomes a larger portion of our business.
If I say that if you look on an aggregated basis, with good execution, we should hopefully be able to CAGR 20%-25% for many years. As I said, there is a little bit of mixed effect. Korea is still a big part of the business, and that one will grow slower, so it could be slightly less growth in the short term. Then you also have the effect of Q1, where we had big COVID lockdowns in Korea, here again, where we at least had a 10% extra growth coming in there. That means if you look on a full year, we have to lapse that quarter a little bit. It’ll be a little bit lower growth in Q1 for that reason.
Again, therefore, I don't want to say a specific number. I think what you mentioned, yeah, that sounds reasonable. Hopefully over time, we should be able to grow faster, but reasonable. We will. As I said, Korea is a big range now. It's a little bit hard now with COVID, and it was a long time since we were kind of in the normal phase of growth with no COVID and no impact. That's why it's a little bit challenged. That's why I had to give such a big range of 5%-15% long-term CAGR, because it's not there. We will know a little bit more sometime in, I don't know, Q1.
I don't know, either through the next trading update or in our full year results, we should have a much clearer guidance on where growth will be. In terms of EBITDA, I don't know, growth is pretty predictable. I don't know. Even if I was very vague here in giving specific numbers, we are still probably speaking ±3% maybe from some midpoint. The question where that midpoint is. Yeah, we have plenty of room to deliver EBITDA. We will also have plenty of room to deliver more EBITDA than what we are guided to. We don't think that is probably the right thing to do. That's why we felt comfortable to be above 0.5%, and that's what we're committed to. Yeah.
The GMV growth will not impact our EBITDA. If we grow faster, maybe we have a little bit more room, then the question is that incremental gross profit gonna be back to profitability or will it be more opportunities of investing? That is also to be seen.
Excellent. Thank you, Niklas.
Thank you very much.
Next question is from the line of Miriam Josiah from Morgan Stanley. Please go ahead.
Great. Thanks for taking my question. Just to follow up on the last one, how much of a variable with competition in reaching that 0.5% margin target for next year? I mean, have you left a lot of scope in there for reinvestment? 'Cause I guess you mentioned there that you could deliver more EBITDA than your guidance. Have you already sort of given a bit of buffer there? If you just comment on what you're seeing in your markets at the moment, are there markets where competitors are still pretty aggressive or are you seeing that rationalization across the board? Thanks.
We definitely see a lot of rationalization across the board. I would expect that to continue. We still put a plan in place where we feel like we have room to operate on what we believe is the best way of running our business long term. Since we are operating in a lot of markets, and there is no one single market that is. I don't know, Korea maybe, but even that is. I don't know. We are not dependent so much. If there is a market with increased competition, we will easily be able to allocate a little bit resource from a market that is less competition to fight it off.
We are also in a position where we don't compete aggressively, like most of our peers, where they have to make trade-off. They wanna fight a competitor in market A or competitor B. If nine out of ten markets are not in that position, then there will always be enough room to fight the competitor if need be. I think we are in a good position. We can double down in a market without hurting our bottom line. We will still be there. Yes, we have significant room to invest in a way that we think is the best for the long term.
Great. Thank you.
It would also be on an early stage here of the year, and we of course want to also be cautious. We wouldn't go out with a number if we wouldn't feel very comfortable with it, at this early point.
Next question is from the line of Rob Joyce from Goldman Sachs. Please go ahead.
Hi. Thanks very much for taking the question. It's on the Integrated Verticals segment. Trying to understand the path to profitability there. Why is that segment, given the absence of competition, still gross profit negative? If we look into the second half, why is the guidance that profitability should sort of get worse in the second half, given the 500-600 basis points improvement we're seeing in that gross margin in the Q3 already?
All right. Thanks, Rob. Yeah. First question, why still negative on EBITDA margin there? Well, we're still early-
On gross profit.
Yeah, on gross profit. We're still early. There's still room. We still need a lot of orders to drive gross profit there. You need a lot of orders per store. We are not yet there. You need a lot of GMV per store is probably a better metric. I don't know, discussed before, we include probably a lot more than maybe our competitors, everything. Of course, pickers, store managers, facility centers or distribution centers and so on. We need a certain number of orders in order to optimize that. We also have taken the cautious choice to not up price our offering like most of the quick commerce players have done. They have urgently increased prices and so on in order to get the gross profit positive, because that's a strong message to investors.
We'd rather set the price where we believe that we can drive our long-term gross profit target, where we can achieve our long-term gross profit target. Let's say that your long-term target would be 10%. If you're on -4.5%, that essentially means that you believe that there's another 14.5% improvements you can do without touching pricing, at least more than marginally touching pricing. That means that you increase your baskets. That would be a few percent from there. Advertising revenue, we think that we can get around 5%-10% from advertising revenue. We are still in a low single-digit% there.
There will be that we can get better store management utilization, so more efficiency of the pickers and store managers. We still think that we have a significant, I don't know, amount of improvements that we made. If we would do the other way around, then we think that we can do another 14.5% improvement in gross profitability per scale over time, but we're already now priced at that 5%. Essentially we overprice it to consumers. We charge too much because if you haven't done those initiatives or haven't done those scale, but you still price it on a very good gross profitability, yeah, then the only way to get there is that you overprice. As we are not doing that, it's also not so relevant when they are at this size.
Still, if you look at it, we still have larger losses, not from negative gross profit, but overhead is still larger than the gross profit loss. Therefore, driving size is more important than driving gross profit in that sense, or at least artificially driving gross profit because then you also reduce size. That's how we think about it. Now, looking at it, if you look at next year, we are gonna go from the - 4.5% to positive during the year or mid-year. We are definitely getting there by gradually increasing the size and orders per store, GMV per stores, basket size, AdTech revenue and so on. We will significantly improve also profitability in that Dmart segment.
If you look overall for the Integrated Verticals segment, we are reducing it by half. Dmart is gonna be reduced by more than half in next year. There are still a few other things that we also keep on smaller investments to learn and develop.
Okay. That's what's keeping the losses high in the second half of 2022.
Oh, thank you for reminding me. Yes, when we set the initial plan, I think 525, we were still expecting that the market, there would be aggressive competition and so on. We were planning back then that we would lose something like EUR 140 million in Q1. I think in Q4, we lost like EUR 120 million, which was the peak of losses, Q4 last year. We were planning to invest a little bit more in Q1. I think it was EUR 139 million or EUR 140 million, let's say. We then realized that the market's changed. We have to adapt. I think we ended up with more like, I don't know, just above EUR 100 million instead.
that also meant that instead of going from 140% to 120% to 100%, 10% to 100%, we more or less took it down to 100% and been staying more closer to that 100% level, the 110%, and moving it more closer to 100%. The thing here is also why doesn't it drop faster? I know you see that the gross profit margin is improving, so you would expect that losses would come down. Think about it this way, if you double your business while at the same time you take your gross profit from -10% to -5%, but you double your business on a negative margin, then you essentially keep your gross profit flat.
Even if you double the business and half the negative EBITDA margin or gross profit margin, gross profit is fixed, and that's a little bit what you have seen now in this year. Of course, on top of that, you have the overhead cost that has been more or less flat this year. The big difference then to profitability is when you start getting close to zero. When you can start moving to positive ideally, because then incremental growth and size is gonna reduce your losses. Before your gross profit positive, incremental size worsen your profit. That's why you will see larger improvement in profitability next year than what you have done this year.
Okay. Thank you.
Thanks, Rob. I hope it was clear.
Next question is from the line of Giles Thorne from Jefferies. Please go ahead.
Hi there. It's Giles Thorne here. Question I had was on advertising. If you equate the quality of the opportunity with the quality of your reach, which I guess is at the heart of any advertising model, then your market leadership presumably give you a structural advantage. I'll be interested, Niklas, to hear your thinking on whether advertising for you is viewed purely through the lens of profitability, or could it be a new dimension of competition? You know, using that leadership to generate a high quality, high margins revenue stream, which then could be weaponized to reinforce that market leadership. Or are you just not there in your thinking on that? That was it. Thank you.
Thanks, Giles. You're right that if you have larger size, you will be able to drive more percentage marketing dollar. I just look at Google and Facebook and their advertisement revenue to whatever sales or size versus small advertiser. That is, as I said, why bother on the smaller ones? I don't know. Maybe some do, but I don't know if you compare Google with Yahoo. I don't know, Yahoo is not driving advertisement at all because no one cares. It's too irrelevant. It's too small. Yes, you're right. The more volume you have, the more percentage advertisement revenue you can create. This becomes even particularly true when you look at more Dmart and groceries and CPG companies and so on.
I think it's on the same line that many other things are beneficial when you have size. If you have size, you also have better logistics efficiencies. You can stack more orders. You can also improve your product experience because you can deliver faster, because you have more predictability. There are many levers that means that you have a better margin as a number one, a gross profit margin. You also have better return on your own advertisement spend. With awareness being high, then usually you have a better also, advertisement efficiencies there.
Overall, I think with the leadership positions that we're having, we think that we can generate EBITDA of 5%-8%. Doesn't mean that others cannot achieve the same, but if you take away that maybe you're 1% or 2% lower advertisement percent, if you're distant number two, maybe logistic efficiency means that you are another 2% worse on your logistic efficiency or CPO, rider cost. Maybe it means that your marketing is a little bit less efficient, so you have to spend 1% more on marketing to GMV, and your overhead might also be, I don't know, 1%-2% worse in terms of operating leverage. If we would drive 7%, maybe the competitor will drive 1% or 2% on EBITDA to GMV.
Yes, it is a comparative advantage to have that size and scale and use the advertisement revenue for creating more profitability. The alternative is that the number two will also drive, I don't know, 5%-8% EBITDA margin, which I think is feasible, but it will then be at the cost of having the best product experience. It will be a little bit more expensive. It will be a little bit more niche. And I think it can be highly profitable as a niche player too. It's just that then you're probably more like 10, 20% of the market.
Thank you very much.
Thanks, Giles Thorne.
Next question is from the line of Christopher Johnen from HSBC. Please go ahead.
Yes. Hi, everyone. Thanks for taking my question. It's a little weird to be on the other side of the line, but
Mm-hmm.
Good to be back, I guess. One question from me as well. I would like to pick your brain on the competition, particularly on the Meituan situation. I mean, it's obviously an important topic. It's an important competitor. I'd love to hear if you have any thoughts you'd wanna share with us. Thanks.
No. We—I don't have so much. I think Wang and the team is doing a great job in China. They're a big inspiration. Fantastic executor, operator. Yeah, we like the team very much. Yeah, I don't know. I think there is a clear possibility that it will go out of China. We have seen that also with Didi. They went out of China. I think they are in Latin America mainly. Yes, I think there is a clear possibility. If they will be successful or not, I don't know, is still to be seen. I think, yeah. I know Meituan is definitely a competitor that we think is very good. Yeah. I don't think.
I know they're good, like, the same way we respect Uber and DoorDash and Deliveroo and so on. I know we also have a lot of respect for Meituan. Let's see. Maybe we will have overlapping markets over time.
Thank you.
Thanks.
Next question is from the line of Sherri Malek from RBC. Please go ahead.
Hi. Thank you for the helpful detail in the presentation. I was wondering if I could push for a little bit more related to slide 20, where you split the GMV of unprofitable markets into those three categories. Would you also be able to indicate what the rough split of actual losses is between those three categories as well, please? Thank you.
Yeah. Yeah, good question. I know we didn't put it in there. I'll be kind to still share a little bit. I would say startup markets is 15% of GMV. Those are usually smaller losses. That would be a small amount today. Usually, the losses will go up a little bit over time before it comes down. Usually, the largest losses you will have is shortly before profit. I think that is also true for Delivery Hero. Our largest losses were last year or this year, even. I don't know, at least beginning of the year, in absolute terms, in percentage terms, not until you then very quickly go to profitability, which we have also seen here.
Usually in early stage, it doesn't cost so much, and then it costs increasingly. As you scale up marketing and you have good coverage and you have high efficiencies of your marketing spending, and therefore you want to scale it up. Therefore the first one is not a lot. Then you have the leading markets. That is the vast. That's the largest amount of spending is there because in some of those, they are at exactly that point. They are leaders, but they are not large enough. We invest a lot to kind of get to the operational leverage. We have good product. We have good return on advertising spending and therefore we scale up. That's
Those are probably the largest part of the losses, but also coming down then also the fastest when they are in this position. In some of them we also have competitors that we might not be at our target rate of relative size to number two, which is the main metric we look at. Therefore we keep spending until we feel like we are in that position or that we have a good trajectory towards that position. We have a few markets there that are sizable, large and still not profitable because we feel like market share is not yet at our target level. You have the second place, and that's proportionally to GMV, probably the largest losses. Yeah.
That is a disproportionate amount of losses to its GMV. The GMV is only 10%, but the losses are in proportion to its size. It's the largest. Not as large in absolute, but in proportion to its relative size, which is only 10%, as I said.
Thank you. Thank you for the kind call.
Thanks.
Next question is from the line of Catherine O'Neill from Citi. Please go ahead.
Great. Thank you very much. I just had a question on your 2023 EBITDA guidance. Well, several parts of it, I guess. I just wanted to see if we could unpack it a little bit more in terms of understanding what you're thinking on Glovo losses for next year after the EUR 300 million you're guiding to for this year. Also within it, are you assuming that MENA will be higher margin than Asia for next year if we're looking at sort of slightly slower growth in Asia? On those unprofitable markets as a second point, do you assume that you sell some of those within your assumption of the at least 0.5% margin?
That was a good one question.
Thank you.
On the first one, Glovo, if you take that, I would say is fairly similar to the other unprofitable platform markets. It's kind of an, I would say, average there, more or less. As I said, and you've seen the growth, the growth is very nice. The EBITDA margin to GMV is coming down quickly. I would say that it's more like an average of the unprofitable markets. There are also categories there, which is some are startup markets, Kenya, I don't know, Tunisia, and so on. Some are in leadership, I don't know, Spain, Romania, where we have leadership, but they're very close to profitability, or actually they are in profitability.
Some are a little bit further away. We have some second-place markets there too. I would say that's an average there. On the second one, I didn't completely fully understand between Korea or Asia and Middle East. The margin for Middle East is higher, but I didn't fully.
Oh, yeah, no. I was just checking around 2023 whether you'd expect that to still be the case, that MENA is generating-
The margin.
A higher than Asia.
Yes. It will also have a higher EBITDA margin than Asia. Yeah. It will still have higher margin there. On the fourth one, we do not make a guidance that is based on assumption that we are not in control of. Things that we are in control of or feel very high confidence of. This is part of the guidance, but not something that is out of our control or where we don't have full confidence. Yeah, I hope that gives a little bit of a flavor to that.
Yeah. That's great. Thank you.
Thanks.
Next question is from the line of Jürgen Kolb from Kepler Cheuvreux. Please go ahead.
Yeah, thank you very much. One question really on the D-Marts. You reduced the number of D-Marts this quarter again, and you stated that you're planning to cut the losses in half or more than in half, actually. How much of these cut in losses is coming from further store closures and how much is really coming from, say, the underlying business that you see improving? Thank you.
We wouldn't expect. We've done most of the store closures, and we had a review. We went through all the stores looking at, does it make sense to have a store at this point in time here? I think in a competitive environment, we would have said yes. In a less competitive environment, we say like, "Well, it's gonna cost more than the return that it's gonna give. It's gonna take too long to get to EBITDA, and therefore we'd rather build up the kind of behavioral change for our local shops, and then maybe in one or two or three years, we can relaunch those locations, when we think that we can drive it faster to profitability, those stores." We've done that review.
There might be still a few places that we would consider, but that is really the minor part. The main part of driving profitability is that we're growing and we're improving gross profit. The rest is really minor, nuance, I would say.
Very good.
Smaller footprint. Yeah, maybe Emmanuel, do you wanna cover also, we had a little bit Dmart footprint, maybe you also wanna cover that.
I've because I think this is also one of the questions of Rob before. One thing that we have to keep in mind is that in H2, we reduced by 60 D-Marts our portfolio, so the former portfolio of DH. We also integrated the D-Marts from Glovo as we reported from the first of July onwards. I think that's important, like, you know. Basically, in total, we have 1,197 D-Marts, including Glovo and also the acquisition we've done in Greece. We're reducing the footprint of Delivery Hero, and that's having a positive impact. We were also like, I should say, like, you know, we keep on being conservative in our forecast.
We improve our guidance, but we still have, like, you know, we don't fully capture for this year, maybe the closing. We capture this probably next year. To keep in mind, as I said, that we had a portfolio reduction of 60 D-Marts per delivery year, but at the same time, we integrate the Glovo ones. That's, you know, why it's difficult to compare H2 to H1 completely.
Makes sense. Sorry, Emmanuel, how many is the D-Marts you have currently?
1,197, if I'm not mistaken. With Glovo, right? With Glovo and the Greece one.
Yes. Very good. Got it. Thanks very much, guys. Super.
Thank you very much. I feel like I could maybe.
Thank you.
Add more clarity to previous questions. As I said, if there would be a sale of assets, that is not necessarily taken into account. We don't need to do that in order to get to 0.5. If we were about to sell something, it doesn't mean that we automatically will move up our guidance. It means that maybe we see that we can use that. Maybe there are more investment opportunities, other reasons why we still think it makes sense to not lift the guidance in connection to that. I just wanna be clear. We have not yet given that guidance.
Next question is from the line of Clément Genelot from Bryan, Garnier & Co. Please go ahead.
Thank you. I would like to come back on the second place countries. Is it referring to, let's say, the whole of this Southeast Asia business? If you fail to find a buyer or maybe a partner there, would you be able to simply close it and exit the region? Thank you.
If you look at Southeast Asia, and keep in mind we are a leader in more than half of that segment, in Southeast Asia, and not including Korea. Keep in mind, we have Taiwan, we have Hong Kong, we have Pakistan, we have Bangladesh. We have a few other markets there, that are leadership, Laos, Myanmar, Vietnam. I think we are in a very strong position in Malaysia, Philippines. I don't know, we are not number two in that region. We are number one in most of the markets of that region, and the majority of our GMV is coming from leadership markets. There are a couple there that are in number two. There are also a couple in Europe that are in number two.
There are two in Central and South America that are number two. We are number two in a couple of places in all segments. Yeah, we are not looking to sell our Southeast Asia business. There may be markets in Southeast Asia or in other regions where we are in discussions, but I can't comment more on that.
Next question is from the line of Adrien de Saint Hilaire from Bank of America. Please go ahead.
Yes. Good afternoon, everyone. Hopefully, you can hear me okay. I've got one question around cash, which may regroup a couple of topics, I'm afraid. First of all, what is the level of gross cash that you expect at the end of 2022? I'm so sorry, I could squeeze in one sub-question around this. You talked about being free cash flow positive during second half of 2023. What do you mean by during? Is that one month, one quarter? When is the first year that you expect to be free cash flow positive over the whole year?
Yeah, I may cover that, Adrien de Saint Hilaire, if you want.
Sure.
By September, October, as you know, we don't disclose our balance sheet. We disclose it on half year basis only. What I can tell you is that basically today we're tracking better than expected on cash, meaning that, you know, our liquidity position by the end of 2022 would be stronger than our instant internal forecast. That's the reflection of not only the good EBITDA performance that we mentioned today, but also the measures that we've been optimizing in terms of, for example, CapEx, but also like leases and working capital. If I take, for example, the CapEx to GMV ratio for this year, excluding Glovo, I give you that.
We expect the full year to be around 0.7 compared to what we said before, which is a reflection, first of all, of the slower pace of D-Marts openings and also measures that we took to optimize our CapEx. To the second part of your question, Adrien, like, you know what that means, like, maybe the definition first, which is, like, I think is important. Basically, when you look at the free cash flow, we consider free cash flow as cash from operating activities less CapEx plus interest. Effectively it means this is our EBITDA less CapEx leases, the changes in our net working capital, which we made a lot of progress compared to last year.
If you remember, we're working capital neutral by half year already. You should expect us to continue to improve. Then also like the last point would be tax that we deduct we take into consideration for operating cash flow activities. Note that this cash flow is before interest. Both interest expenses and also interest income, before financing activities such as debt prepayment and also before any special activities like our potential M&A also. We believe that this is the definition that is in line with what our investors usually and also typically understand as our only free cash flow. What does that mean, like to be cash flow positive or break even during H2?
Basically, yes, this is not the full period of H2. This is not the full year, but this is during H2. This is what we committed to do. From there on, once we reach there, this cash flow positive, then we expect to be consistently positive free cash flow, for the subsequent months and years.
Maybe add because interest, as I said, is not part of it. I think at this point, we make more interest than we're paying in interest, or at least it's very similar. It's not that there is a big interest payment, at this point in time at least.
Thank you.
Next question is from the line of Andrew Gwynn from BNP Paribas Exane. Please go ahead.
Hi there. Could you just clarify on that last point, free cash flow. Does that include the leases, the lease payments?
Yes.
My main question, though, is just come back to the Integrated Verticals. Again, apologies for this. I suppose the case when you set out on this plan was demand was gonna be very, very strong. It does seem to be the case looking across the whole industry that demand for immediate groceries is perhaps being overstated. Is there a possibility that we could see a kind of material downsizing in a number of D-Marts? I think, you know, much more than just say 60 closures and a handful in Q4. Thank you very much.
Thank you. Yes. I think you're right. If you look at the industry as such, they have been scaling way faster than they could handle. They're being given vouchers left, right, and center. Of course, they have grown volumes unsustainably, and they also spend marketing to drive those customers. For us, it's different. We haven't really spent marketing money on it or not a lot, because we have a platform. Customers come to that platform. We don't have the negative effect of have to pull back marketing because we're running out of money or something because we don't spend much there. Secondly, you saw that before in the last, I think, Q1 update, that we're not spending that much on vouchers either.
It might be some free delivery and so on, but it's minimal. Therefore, we don't drive unsustainable customers or customer growth. That's why if you look at our growth in the Dmart, it's growing and quarter-on-quarter growth was the fastest in history for us and quite significantly so, while actually improving margin. The problem we have with all other players is that they've been funding their growth unsustainably. Of course, when they pull back the marketing and they try to move the pricing up and they take the vouchers away, they are gonna decline and quite a lot. That's why they are gonna run into those problems. For us, that's not really the case. The demand will continue to grow.
I don't know. Customers love the experience. They come back and high loyalty and so on. It will continue to grow like it has done in the last six months, last 12 months, last three months, for us. For the industry, maybe not.
I mean, the crux of the question was, are there just simply far too many D-Marts in the group? I mean, that could be a more dramatic way of shrinking the losses.
Right.
Having it a bit more focused.
Yeah, we are getting there. With the footprint that we're currently having, and we are, as I said, mid next year, we are at gross profit. Could we add another 1% or 2% by closing stores? Yes. Even those stores are on path to drive profitability. Maybe it takes one. I don't know. Maybe it takes six or 12 months longer for those stores, but the cost of closing down and open up again is higher. I don't know. It's not gonna be a big driver for profitability if we close, I don't know, 50 stores. It's very different for the pure play players who don't have the demand, they don't have the size, they're not even close to scale, and on top of that, they don't grow.
If you don't grow and a store is making losses, and it would not be profitable in one year and it would not be in two years. The only way to grow that store's gross profitability and profitability is by growing its business. We do that. It's just a matter, will it take one or two more quarters for those stores? Yeah.
Okay. Thank you very much. Commitment noted. Thank you.
Thanks. Thank you very much.
Perfect. Thank you.
There are no further questions at this time, and I would like to hand back to Christoph Bast for closing comments. Please go ahead.
Yeah, perfect. Actually, it's not me who's making the closing comment. I just wanted to let you know that it was the last question. Niklas, maybe you want to make your final remarks.
Yeah, I'm happy to. I just want to thank everyone for attending the call and for your continued support in Delivery Hero. We really hope that today's presentation also makes it clear that we always have our investors at heart. We may push hard and aggressively to pursue product and market leadership. But we do that because we strongly believe this is a strategy that has put us in an incredibly strong position today, and we will be greatly rewarded as shareholders in the long term for this strategy. Having said that, I also hope that you've seen by our development that we listen to your feedback, and we care for you, especially in times like these. The profitability improvements that we've made is unseen by any other players. I hope that that says it.
We also know that, and we need to own your trust and deserve you as a long-term partner. Your support is for that reason, very important. Again, thanks for putting your trust in our hands. We will fight day and night to not disappoint. I'd also like to send a big thanks for everyone at Delivery Hero for your commitment towards our customers, riders, restaurants, and local economies. Thank you, everyone.
Thank you, everyone.
Thank you all for attending. Operator, you may now close the call.
Thank you. Ladies and gentlemen, the conference is now concluded, and you may disconnect your telephone. Thank you for joining, and have a pleasant day. Goodbye.