Earnings Call: Q1 2021

Apr 21, 2021

And hello, everyone, and a very warm welcome to our earnings call. My name is Markus Lindqvist, and I'm the interim CEO of CDN until the 1st May. As we yesterday announced is when our CEO, Christophe Wallachario, will return back to his duties. As we have many new investors with us on this call, we will start by giving you an overview of our marketplace business and how we look at the dynamics in the market. So with that, let's jump into the presentation. Could we move to Slide 3, please? Over the last 20 years, CDN has been a pioneer within Nordic e commerce. And over the last couple of years, we have made a transformation from a vertical e commerce retailer to become a leading local marketplace in the Nordics. And in just 2 years, We have gone from having a 20% of our business being third party sales So now having almost 80% of our sales coming from merchants. We have 2,300,000 active consumers as customers and more than 1700 merchants are now live in our platform. Next slide, please. Analyst reports tells us that market status have a 50% share of all e commerce business on a global scale. But when we look at the Nordics, the marketplace economy That's not account for more than low single digits, which is interesting if compared to other markets such like the UK, Germany and the Netherlands, for example, who all are on the 30% level. In perspective, the Nordic economy is equal in size to more populated European markets, And the Nordics also have a GDP that is almost 2x the European Mean. As the Nordic e commerce market will mature, we at CDN aspire to take a leading position. Hence, we see a great opportunity to further grow as the market matures. Further, we do not believe that the Nordics will be a winner takes it all market As we can see that in most other regions, there are more than one successful marketplace. Let's move to Slide 5, please. So why do over 50% of global e commerce business go places. At the marketplace, customers get access to a large assortment of products and merchants get access to new customers. And with that, they can drive their sales more efficiently. And so what we at Cinion want to be is to be the starting point for shopping in the Nordics for consumers And for merchants, we want to be the best partner to drive their sales. Let's move to Slide 6, please. So What do we mean by being a sales engine for merchants? Over the last year, We are focused at creating a good merchant offering. We have developed tools for merchants to make it easier to onboard and drive their sales. We now have tools for automatic onboarding, data insights, monitoring of pricing and content optimization. We have also invested and grown our merchant onboarding team to give an even better local support for our merchants. And as a result of this, we can now see that we have a good momentum In our onboarding team, showing a steady inflow of new merchants. Let's move to Slide 7, please. Customers, on the other hand, go to CDN for our wide assortment in grain prices. By shopping at CDON, the customer can choose from products for more than 1700 merchants with one single checkout. But to be successful at the market base, You need to have an excellent experience for both the consumer as well as the merchant. And even though We have a wide assortment and great pricing. We're not happy with the customer experience that we have today. Therefore, we have started to and will continue to accelerate our focus, investments and efforts to improve our consumer experience. Next slide, please. We are still in an early phase, building the best possible experience and have a lot of work cut out for us. But if we succeed, the upside is very attractive for Silio. To give you an idea of the opportunity, Looking at the Netherlands, which has a similar population and culture as the Nordics, The leading marketplace, bol.com, has captured approximately 20% of the market. Should CDN in the future reach a similar position as pol.com as the market matures This equals to a NOK 55,000,000,000 in GMV. So How do we get there? Let's go to Slide 9. When you're building a successful marketplace, this follows a well known and established playbook. As you grow merchants, you increase your assortment and improve prices, and this adds to the customer experience, which in its turn drives more traffic in sales, making the marketplace more relevant for even more new merchants to join. When you get all of these 4 components Of the flywheel in place, you can accelerate investments in merchant and customer acquisition with the best possible return on investment. Let's move to the next slide. At CDN, we will always prioritize the weakest spot in our prior year. Our current strength are in the assortment and our broad consumer merchant base, which creates the critical mass necessary to run the marketplace. This is also, in our view, the toughest parts of the journey when you build the marketplace. Cinion has achieved its critical mass over the last couple of years. And as our aspiration is to be the leading Nordic marketplace, We will now need to intensify our focus on our weakest spot, which is the customer experience. Slide 11, please. As I previously mentioned, CDN has reached a favorable position as we now have a critical mass of liquidity in our platform. Since this is now reached, we will increase our efforts to optimize our business. And coming important steps include an upgrade of our checkout and simplified navigation and categorization on the site. We expect gradual improvements in these areas, both short term and on a continuous basis, as we are establishing an organization and leadership in the business to maintain a rapid improvement in these specific areas. A part of this work is to optimize and position the organization according To our current technical development needs, for example, as our new platform allow for a higher degree of automation, We have, during the quarter, redesigned parts of the organization to increase our capabilities to focus on the customer experience. And as we see our customer cohorts improving, we will then gradually ramp up customer and merchant acquisition accordingly. Slide 12, please. And with that, let's look at the summary on the Q1. During the quarter, We had the highest merchant intake ever with more than 200 new merchants joining our platform. We could also see a continued marketplace growth, where our marketplace business in the quarter grew 25%. During the quarter, we also changed our ERP system, and I'm happy to say This was done without any disruption to the business. We also made several investments directly linked to our efforts to improve our customer experience. On the negative side, We still do have some challenges linked to the release of our new platform back in October last year, And those were mainly related to merchandising and indexing of products in our traffic channels, which in its turn had a negative effect on our traffic volumes during the quarter. With that, let's now jump into the financials. So Niklas, could you please go ahead? Yes. Thank you, Markus. So let's move to Slide 13. Here, we can see the transformation that we have done in the past year. We have successfully built the marketplace with sales and number of merchants that has reached a solid liquidity. And at the meantime, we have also phased out our CDON Retail business. Looking at the quarter, we can see a continued GMV growth from CDON Marketplace of 25% And total sales amounting to SEK 380,000,000. In total, now 80% of our GMV comes from the marketplace business. Moving to next slide, please. Our income statement. We can see that the growth of GMV for resulted in a net sales of EUR 41,000,000, an increase of 20% and a gross profit that increased with 20% to EUR 38,000,000. The commission from merchants grew 29%. However, lower ad and financial income is the main reason for net sales and gross profit not growing line with GMV. Cinion Retail declined with 39%. However, we see an increased gross margin Related to the remaining part of the business has a higher underlying margin structure. As a result of the rapid change in business model, total net sales declined with 29%. This also impacted our gross margin as we increased high margin third party volumes and reduced lower margin retail business. This resulted in a gross margin that increased with 12.5 percentage points in the quarter and amounted to 36.5%. In the quarter, EBITDA amounted to €99,000,000 We did have increased operating expenses in the quarter. This is related to further investment in new competencies, but also a one off cost related to a reorganization of SEK 1,600,000 and currency effect versus last year of SEK 1,600,000. EBIT was minus EUR 14,000,000, which is EUR 1,000,000 better than last year. Last year, we did derive ton of an intangible asset of approximately EUR 7,000,000. Moving to next slide, please, and looking at some of the drivers of the business. Starting with traffic or number of visits. We did see a decline of 9%. We did, as mentioned before, have problems related to the platform, which did impact our visits negatively. Total number of orders were flat versus last year. Thus, the growth of GMV came from a higher average order value. Our customer base, as mentioned before, continues to grow. And in total, now 2,300,000 customers have purchased at CDN in the last 12 months. Momentum of adding new merchants is also good. We have 54% more merchants compared to Q1 2020. And in total, 212 merchants joined us in the quarter, which is all time high. Moving to next slide and looking at the cash flow and the balance sheet. As a result of the CDN Retail business being phased out, we continue to decrease our inventory accordingly. It amounted to EUR 21,000,000, which is EUR 41,000,000 lower than last year. The cash flow from operations during the seasonally weak Quarter amounted to minus EUR 100,000,000 compared to minus EUR 126,000,000 last year. This is mainly driven by large outflow of payables to suppliers and merchants during January coming from high season with very large volumes. In the quarter, we invested SEK 6,000,000, which is about the same level since last year, which resulted in a total cash flow of €107,000,000 and a cash balance of €63,000,000, which is EUR 18,000,000 higher than the same time last year. So with that, I hand back over to you, Markus. Thank you, Niklas. Let's move to Slide 17, please. So what should you take away from today's call? The Nordic marketplace opportunity It is attractive and it is up for grabs. And at the same time, We have reached the tipping point of critical mass in marketplace liquidity. We will now further accelerate Our pace of development investments, meaning that we will use the room for investments that our cash flow from operating activities allows to accelerate the pace of development. And in the near term, our focus will be on improving our customer experience. So with that, we're ready with the presentation, and we are now ready to answer any questions that you might have. Operator, do we have any questions? Thank We have a question from the line of Niklas Feld from SEB. Please go ahead. Your line is open. Thanks, operator, and good afternoon, everybody. My first question actually goes to the Sort of advertising and service related income. And I was just going to ask you if the 1700 odd merchants now on the platform, Are they all now paying the €2.99 monthly subscription fee? Hello, Mikael. Hey, Mikael. What are very much for your questions to be here, but I was kind of expecting more. But yes, they are. Yes, perfect. And to follow-up then, I was going to ask you if you could share with us the levels of advertising And other non sort of take rate sales in Q1, please? Yes. I mean, as I did mention, the main Revenues that we have there is the advertising that today is very, very low from very low levels. And the financial income, that is the main two Apart from the take rate and the subscription fee that we take from merchant? Yes. Would it be fair to say that the So take rate on 3P G and D was slightly lower in Q1 this year compared to Q1 last year? We don't disclose the exact the credit. But as I say, it grows 29% compared to a GMV of 25%. So yes. Thank you. And my final question would be, When we look into the remainder of this year, do you expect to keep up sort of the growth rate in the number of merchants added To the platform in Q1 also for the remainder of 2021? It's a tough question to answer, Niklas, but we have a good momentum and we have for quite a while now. I mean, as Niklas also mentioned, Our intake in the Q1 was kind of on a very, very high level to look at it historically. We believe we can There are more, of course, but cannot really kind of disclose on what levels we will grow that during the year, but we have Continue to have and see a good momentum also at the start of this quarter. Wonderful. Thank you for answering all these questions. And maybe I can come back later into the call. Thank you, Niklas. Have a question from the line of Adam Wyden from AVW Capital. Please go ahead. Hi, guys. Thank you for taking my question and congratulations. It looks like you guys are making great progress and Definitely, really appreciate your marketing materials and investor presentation. I think that probably covered my first question. I think You guys laid out nicely if you guys get similar penetration in the market like Netherlands, you guys are looking at like a $55,000,000,000 Opportunity in terms of GMV and obviously the rates of gross margin, if your take rates are better, you'll probably make even more gross profit. So that's really helpful And sort of framing the scale of the opportunity. But my question really revolves around how you get What I would call comparable growth in the early evolution of marketplaces. I think you talked about you have these early adopters and Now you need to improve the customer experience. So you don't turn away you don't have merchants log on and then log off and then you never get them back. I think that was what I was interpreting through the slide. So that means that you guys want to do investment on the customer experience, which we love because obviously, when your fans are not customers, they keep coming back and basket size goes up. But you still haven't really gotten your cost of capital. And I noticed you guys Put on Savneet Singh as a Board nominee and obviously, these have great experience in terms of getting the market to understand the value of this platform and raising capital around that. I mean, Can you talk a little bit about how you think about what I would call burning cash or Spending money in excess of EBIT, so you can accelerate product development to kind of reinvigorate GMV growth such that we get back to like 50% or 100%. Because reading between the lines, it kind of feels like you guys have You've hit a not a hit a wall, but you're growing at a nice clip, but you want to make sure that you grow Healthily and athletically in a way that you can serve your customer. And in order to do that, you've got to reinvest a lot more and you don't really have The market has not really availed us the opportunity of raising capital to finance this opportunity. So can you talk a little bit about that? Yes, sure. Let's try to kind of get a little bit more into that. So as we mentioned in the presentation. We will kind of increase our investments when it comes to Bettering and making our customer experience better, The levers that we will kind of invest into that will be on what we can kind of finance out of the operations. And as you know, any kind of further investment is more of a discussion for the Board and for the owners to have at the AGM and so forth. So I will kind of stay out of that and kind of not speculate on that level. But the kind of cash flows, if you look at it over a cycle, actually allows us to do quite a lot if we put that money in the right place. And that's why we're trying to kind of Get more of that into the customer experience, making sure that we fix some of the kind of low hanging fruits So that investments when we then start to kind of more drive new customers and new merchants into the site actually makes sense following kind of the development on our customer cohorts. So I cannot Be more precise than that, Adam, but that's the kind of thinking around it, right? So you guys don't plan on spending more And what you're internally generating is kind of the plan as it is today, but that's obviously subject to change? Yes. That's subject to change, but that's Specific is a subject for the board and for our shareholders to discuss. So it's nothing I want to kind of Speculating what that discussion or might be discussions will eventually unfold for us. So what we can plan as a management team is what can we do with the means that we have, and that's what we're doing now. So just reading between the lines, you guys think that with the means that you have today that you can see GMV growth go back to kind of Level that we saw last year, I mean, substantially higher than where we are right now? Well, that's kind of a timing discussion then, Adam. So what we are focusing now and what we will focus on now is to kind of invest in our customer experience. That needs to improve, and then it's kind of prudent to start to kind of more move that investment into customer acquisition. And then, of course, you should see a steady growth coming out of that investment. But it's like We're allocating at the moment more into fixing customer experience than allocating for kind of growth for the sake of growth. When we have the cohorts that we have, it doesn't really make sense to put that money into growth at the time being. And it is also always a prioritization and priority now is to put that money and put those investments into in the customer experience. And then following that, we, of course, believe that we should be able to continue to grow. We have done that before, And we don't see anything hindering us to continue to do that, but we need to fix the customer experience first. Sure. Yes. No, look, the merchants grew 54%. So certainly, that is a leading indicator of future GMV growth. Yes, for sure. All right. That's it for me. Thank you, guys. Thank you, It looks like we have a call on the chat there, right? Yes. We have an incoming on the chat here, so I can read it out. So it's a question From Brad Hathaway, it is around when we expect the new platform to be optimized. And it's a very good question since We are we have had some issues with not the platform itself, but parts of that during the quarter. And just to reiterate what has been the problem. Well, one thing has been our traffic seats that has not worked the way we should likely to do. And that has had a negative effect not Only on the traffic itself, and we're then talking about paid traffic, it's not organic traffic, but on the paid traffic. So that has caused lower than expected traffic as well as a little bit higher marketing cost to drive that traffic. That is something we're working very intensely to fix, and we have done a lot of progress during the quarter. We will continue to work on that. So We see that is a problem that we are on top of and that we will manage. The other part has been merchandising that has been automated on the site itself. And that merchandising has worked, but not in the way we wanted it to do and in a way we wanted it to be. That's also something that we actually already addressed and that merchandising is now working. So we see that we make a lot of progress when it comes to optimizing the platform as we go, and we are in control of what areas that needs to be fixed. But Sometimes it takes a little bit longer than you would like it to do, but it is uncontrolled. It's not the entire platform. As said, it's our traffic seats and it's been the merchandising on the side. Any more questions on the line? Yes. We do have a follow-up question from the line of Niklas Ferm from SEB. Please go ahead. Thanks again, operator, and thanks for allowing me one more question. I just wanted to follow-up on I mean, I think, obviously, the questions we've discussed, in particular, relating to 3pg and the possibilities going forward are Clearly, the most important. But here now, I just note that in terms of costs, looking at, for example, selling to sales and admin to sales, It's obviously quite a neat year on year in net cost ratios. And even if we sort of adjust for the Slide was still one off nonrecurring item that you report in the quarter. Admin is up to pretty much 20% of sales and Selling costs are at 25% of sales. And so my question is really, do you think and I realize it relates To what you actually produce in terms of sales, but do you think there are some particular reasons for why we should expect these cost ratios to Perhaps come down a bit over the coming quarters and what would that be in more detail? Or do you think that you will have to maintain these cost ratios in 2021. When it comes to what I believe you referred to as admin cost, Those costs are, of course, operations for the platform as well. So it's not kind of bookkeeping No, no. It is operations. And also, it is directly linked to our onboarding team that supports our merchants. And in those areas, we have increased our spend or you could say, we have Invested more when it comes to resources in order to ramp up the pace of development when it comes to customer experience. We foresee that we will continue to be on these levels or a little bit higher during the period ahead because it is an investment that we believe is really, really worth putting money into. As we then start to kind of accelerate growth, we will see that the business will scale, which we have also shown previously. So we are increasing the costs or the cost levels in the company, but that's related to development pace and improvements of customer experience. And once we get that kind of On a higher level, you will see that the business will scale when it comes to sales to cost ratios. All right. So without putting words back into your mouth, but to me, it reads like we should expect somewhat Continuing higher cost levels reflecting these investments that you just laid out for this year, is that about right? It is dry, but it's also a there's kind of 2 sides of that. That is one thing. It's also that we are kind of Distributing resources internally so that we can move resources more into working with our customer experience, it doesn't necessarily mean we say that we will increase our investments in customer experience, it's all new hires, so also redistribution of the teams internally, that where we really put an effort on that to kind of get that to a better or higher level. But yes, you should read that correctly that we will be on slightly higher or higher cost levels because we need to invest in this area. Excellent. Markus, thank you so much. And Niklas and everybody else, thanks for taking all these questions. Thank you, Niklas. Thank you. We have a Thank you, Nicolas. Thank you. We have a question from the line of William Thomas from Foundation Partners. Please go ahead. Hey, guys. Congratulations on your progress so far. I think you've laid out a very compelling vision for What this business could look like given the size of the opportunity. And it sounds like you're making all the right investments in customer experience. Could you lay out what is your vision of what great customer experience looks like? So if I'm a Nordic consumer, How should I be able to experience CDON a year from now or whenever these investments are made and bear fruit? So vis a vis what it looks like now? Well, I believe that's kind of it's a little bit of a stepwise journey. So at the moment, we are kind of on a level where we are pointed with our own customer experience. That means that we need to sort out categorization, navigation, search on-site. We need to sort out delivery and ability to show you delivery method in the checkout. That's the kind of Obvious things that we will work with near term. That, of course, will mean that The customer has a very much easier way to navigate and find products on-site, which is part of the kind of first step. Looking at it a little bit long term, We will continue, as we mentioned before, looking to, for example, fulfill buy solutions. That is something we're looking into to making an ecosystem for our merchants and our customers around delivery times, preciseness of delivery. Those are kind of things that is a little bit long term or on the kind of on the horizon to work with. But here and now, it is kind of in store experience. It's the checkout. It's the delivery part that needs to be improved. Yes. That's helpful. I mean, I guess, looking at the growth you've had so far, obviously, we've had some Boost from COVID, but you've still been able to grow very nicely even before these investments have borne fruit. So the CDON of today doesn't look that different from the CDON of, let's say, a year ago. Should we read from that that one would expect as The customer experience improves substantially because these are not 2 months out investments, I assume, that we could see meaningful acceleration of growth as people experience a new To be honest, that you're able to sort of really get the flywheel going with better customer experience, driving conversions as has happened everywhere around the world Where Marketplace has been successful? Is that the right way to think about it, sort of the next few years? Yes, I believe so. So first of all, if you have a customer experience that is below what you kind of should expect, that's, of course, in their Sales, and it is affecting the cohorts and repurchase rates. So when we kind of sort that out during the year and the years to come because it's a never ending kind of work, You will see repurchase rates and customer cohorts improving, and that will drive kind of sales organically. Then on top of that, it also then makes sense to invest more in customer acquisitions, which will then fuel sales even further. So it's kind of a two way streak on that. Got it. Okay. So I mean it sounds like we haven't even started or barely started scratching the surface of the opportunity. So it would be And the state is simply linearly extrapolate from today's numbers that these things look like they can get much better over time As these things mature. Yes, for sure. We see the opportunity in the market. We kind of understand and see that there is A land grabbing opportunity to take, but we need to get our customer experience to a better level. Based on that, we can then start to be really aggressive when it comes to driving new customers and new merchants into the side. So yes, for sure, we see that opportunity. Very exciting. Thanks a lot. Thanks. We have a web question from Brad Hathaway, who wonders What is your view on long term take rates? I mean, our take rates today or we can say that we don't see any major changes from where we are today on 11th that we see. Our take rates diverse depending on the product mix and what sort of the categories that we sell in. I mean, I would say that the fluctuations over time will more depend on which categories That we grow in. But so far, I mean, The rates that or the level that we see today, we don't see any major changes to that going forward. Thank you. And we also have an overview question from the line of Charles MacDougall from Kempen Wealth. Please go ahead. Your line is open. Hi, guys. Could you maybe discuss the cadence of monthly year over year marketplace GMV sales growth in recent months, including April. Is April similar to Q1? Is there any acceleration? And then second part of that question is, Is it a goal for you guys to list in the U. S. Over the long term to kind of get that cost of capital right? Thanks, Joss. So on the first question, the sales over the Q1 month over month been pretty stable even though we started out on a low level when we had some larger issues with our traffic channel. So that kind of implies that first part of the quarter was a little bit lower and then the rest was kind of equal. Then when it comes to April 4, we don't really want to disclose and talk about trend into that. What I said is that our merchant onboarding team is continuing to do a good job. It's too early to kind of say on have a say on where we are in the quarter with the sales. So I'm not going to comment on that. When it comes to listing, that's once again something for the board and for our shareholders to discuss, not really something that we at the management team can speculate on. Okay. Thank you. Okay. Thanks a lot. There are no further questions at this time. So I hand back to the speakers. Thank you, operator. Let's then End the call, I really want to convey a big thank you for your interest in CDN and for your Participation in today's call and for all the interesting and very good questions that we got. We look forward to speaking and hearing from you again soon in the future. Thank you very much.