Hello, ladies and gentlemen. Welcome to first quarter 2023 Eurocash financial results presentation. Here with me today, Paweł Surówka, the CEO, and myself, Adam Kucza, Investor Relations Director. We are going to have usual presentation of the slides, and after that, we will have Q&A session. You can use Q&A tab at the ribbon in Microsoft Teams to type in the questions there during the presentation and later on during the Q&A session, we'll pick up the questions. Paweł?
Thank you very much, Adam. Before I start, please allow me to just send you greetings from my friend and colleague, Jacek Owczarek. Jacek, who is currently recovering from a small surgery that he underwent and, you know, I'd like to use the occasion to wish him all the best and a very speedy recovery. I'm very sure that next quarter he'll be already with us and, you know, could he be watching us, I'm definitely sure that he will be very missed during this presentation. I'll do my very best together with Adam to replace him in a dignified way. Definitely you're gonna see his absence. Nevertheless, we're trying to walk you through everything as good as possible and, as you can see, there's a slightly different technological setup today. We're on Teams.
Nevertheless, I hope we can go through that speedily and well. If we go and jump right into, takeaways from, you know, this quarter. You know, I'd like to point out and I think that if you remember our last meeting during the last quarter, I already pointed out this was not an easy quarter for Eurocash. There were a couple of headwinds working against us, in the form of, first of all, a base effect. Obviously the first quarter of last year, that was already the beginning of the war. First influx of refugees and also, you know, some different shopping behavior linked to that. In some areas like cash and carry, we did see the impact of that base effect.
On the other hand, as I already alluded to last quarter, we do see a certain weakening of the consumer. You know, inflation does not translate directly into sales growth, and we do see that consumers are, you know, starting to save and really think about the way that they spend their money. We can see it, as you will maybe see and, you know, the dynamics of, you know, the market and consumer spending overall. We also see it, for example, in our retail numbers. Then there's a certain cost base that also comes in in the first quarter, particularly I'm thinking here about, you know, wage increases, labor costs, the minimum wage impact, rental costs, some energy costs, and then, you know, finance costs.
We do see, obviously, that there's a big difference year-on-year, in terms of, you know, the interest rates. Last quarter of last year was, you know, still the last quarter where we had relatively low interest rates. Today, obviously, we've fully assumed the interest rates hike that we've seen here in Poland. We have seen that, you know, albeit, the relatively, you know, good EBITDA levels that we had and the nice progress, we have seen, you know, that that did not translate as much into net income as some of you have predicted. That is again, linked, I believe, to the interest rate cost, probably also to a one-off that we had in last quarter.
Generally, I think that my guidance here is that on the one hand side, obviously the financial cost is going to get better with every quarter that we [deleverage] the company, and you will see that we do that in a very disciplined manner. Obviously, as we go into the next quarters that obviously from a sales point of view and also from an EBITDA point of view are much stronger. You will see, you know, them weighing much less into our overall results and some net to margin, net profit margin should come up significantly, I think more in line with what you would have expected. Overall, I would say being given those relatively, you know, challenging headwinds from us, we are relatively satisfied with this quarter.
We've been able to generate a healthy growth in EBITDA, which on a pre-IFRS margin is growing by PLN 12.5 million. It's PLN 14 million after IFRS and after IFRS, it's even a 30% increase. Generally, we've been able to increase operational results quite significantly. Even though we had relatively stronger financial costs, we've been able to improve slightly on the net income. Here I'd like to point out particularly to the operating cash flow that we've been able to generate, which came in much stronger this year than last year.
As a matter of fact, this has been the first year since 2016 that we've actually had a positive operating cash flow, and you would speak about that later on. I would say in light of everything that I said, you know, a good result with PLN 100 million more cash generated compared to last year. Generally, when we look at now the different segments we have, I would say very healthy... No, please stay on that side. I, you know, we have different... I will say click. Okay. We will have a, we have a very strong sales increase in wholesale year-over-year, 18%.
Please bear in mind that the overall wholesale inflation is not exactly the inflation that you see in Poland, because obviously we have a quite strong mix, so quite strong share of tobacco and alcohol products in our mix, and that they have lower inflation. Overall, I would say that the sales growth of 18% that we now see in the wholesale segment are above inflation. We consider that we are expanding our market share in the wholesale market here in Poland and obviously Eurocash Serwis as the tobacco distributor having the strongest growth. We are also expanding our digital growth quite substantially. In the retail segment, we definitely do see a weakening of the consumer.
We do see that, you know, inflation times and times where cost starts to be the number one concern for a lot of consumers is a time that, you know, does not allow the supermarket channel to really translate inflation into like-for-like directly. We have seen this in other countries. You can see other countries as well, like I'm thinking about Germany for example, where discounters do grow quicker than supermarkets. You know, it needs to be said that, yes, in times like these discounters, you know, they are on their playing field and they generally tend to have bigger growth than, for example, proximity supermarkets or convenience stores.
Having said that, you know, we first of all don't believe that this is a long-term trend, and we believe that with inflation coming down, which it already has also this quarter, and consumer sentiment rising again, which we can experience a little bit in those last weeks, these things will start to normalize again. We'd also like to point out that, you know, the 10% increase in our retail market is still significantly higher than some of the growth that we've seen from other peers like, for example, the numbers that Carrefour has shown. Players that are in a similar market like us, in a similar model, have, you know, relatively lower like-for-like.
Still we would say the 10% lower than inflation, but, you know, compared to the channel, I would say, still keeping up, and particularly, despite that, despite the fact that we obviously had to invest a lot in consumers, fight for competitiveness of prices, and we had the cost effect that I mentioned. We came in flat in terms of EBITDA, and I think that that's also something that speaks to the efficiency of the team and the focus that they put on, you know, improving and working on the operational excellence of this group. Third element, our projects came in generally, you know, very strong in terms of sales, but also much better in terms of their profitability and EBITDA generation.
We have on the one hand side, Frisco sales coming in at 12% year-on-year. I would say still, very consequently growing, despite the fact that we have, you know, again, a challenging environment for e-grocery, which, you know, by some people is perceived as something like a, you know, convenience and luxury service. The e-grocery market as such, and also e-commerce as such as we see in Poland, has generally not been growing very fast and sometimes even in some sectors declining. Frisco on that relatively decreasing e-grocery market growth has been able to grow significantly higher than the market.
We see that the 12% are still a sign of the fact that Frisco is building its market share and its, you know, reach out to a bigger and bigger number of customers in a consequent manner. You will see this also in this later slide. Duży Ben again, you know, working consequently, and we have both on expansion and building their like-for-like. So, you know, in terms of sales, over 50% of sales growth, which is obviously very, very good. On the one hand side, 16%. Again, please bear in mind that this is a store that is predominantly trading alcohol, so their sales coming above inflation expectations.
Again, in, you know, big numbers, I would say, we are happy about this quarter, particularly as we see strong fundamentals to further improve EBITDA and also in the next quarters translate our EBITDA into a bigger net income margin. We see this particularly in light of the strong cash generation that we have in the different segments. Next slide, please. Okay. Overall EBITDA, as we already said, pre IFRS, that's almost 10% growth year-on-year. You can see a certain slide on the EBITDA margin, which however we do not perceive to be concerning or, you know, something that we'll say.
We believe that, you know, this is mostly due to the fact that our fastest growing segment in this quarter was the tobacco distributor service. They have a slightly lower margin. I would say that despite the fact, you know, I would rather reckon that despite the fact that we had those cost elements coming in this quarter, we had the financial costs still being very high. We had a kick in of minimum wage increase and energy costs and absorbed all that. Obviously, we did have to invest into prices and consumers in different areas of the business to maintain traffic and to maintain volume.
I would say that still maintaining this 2.2% margin is a win, and our obviously target here is to maintain our overall EBITDA margin throughout the year, and, you know, keep growing EBITDA accordingly throughout the entire year. Again, in terms of sales, as I said, strong and healthy rebound in sales or growth on sales in wholesale. Retail, obviously growing, but at a slightly lower rate than inflation. Projects growing quite dynamically and with an increase in profitability. Next slide, please. Again, that's a chart that most of you know very well. You know, again, this is just to underline the relative difficult market environment that we've been operating in this quarter.
On the one hand side, obviously, GDP growth coming down, translating into, you know, a worrisome sentiment both in the industry, but particularly at the consumer. That translates into retail sales in Poland, in food, beverages and tobacco. Please do mind the difference in inflation that we have between CPI food and then particularly tobacco and alcoholic beverages, that, if you make a blend of it, you're probably closer to our real product inflation compared to maybe other retailers. Thank you very much. Next slide. Again, you know, the debt ratios. We are really focused on delivering the deleveraging of the company. You know, the impact of interest rates on our financial costs does motivate us to debt more than ever.
We have, you know, we are maintaining, and we have delivered on our promise to keep our debt- to- EBITDA ratio below 1.5 on a pre-IFRS basis. We, you know, considering this, you know, this is from an indebtedness point of view of the company, you know, one of the best quarters, first quarters that we had. We are continued in our effort to further bring the leverage of the company down just to make sure that we can deliver on, you know, more net profit out of our sales and EBITDA growth. As you can see on the next slide, this is something that, you know, is already underway.
We have been able to work out, as I mentioned, a positive operating cash flow, and that is, you know, also thanks to an improvement in the cash conversion cycle and also our work on the financial income side. What we are currently working on all the time, and that's particularly true for Jacek and his team, but also everybody involved in cooperation with our producers, is on the one hand side trying to improve our cycle and then also improve our financial income. Obviously, we have a growing cost on the financial expenses side that is also representing the relatively higher cost that we have in bearing, for example, our factoring lines.
We do think that, obviously they should be offset by a proportion of financial income that is coming, for example, from cash discounts from the very fact that we are paying our liability is quicker than we should when it comes down to the payment date. Normally, traditionally, our financial income has been able to offset our financial expenses on the factoring side. This is exactly what we try to get it to in these discussions. On the same side, obviously, we try to just bring down the volume of indebtedness of the company overall. I think we have singled that out on one element is that year on year, when you take the entire volume of debt, so both bank debt and then factoring, I think we've decreased the overall volume by more than PLN 500 million.
PLN 582 million, yes.
Almost nearly PLN 600 million. Obviously this is all volume that, you know, now generates less cost, and we will continue to do that. I think that this quarter is already showing those results and showing, you know, also what I would reckon is something that I spoke with you about on our strategic days and also on the yearly reviews. It's really the big advantage of this model that we have, and that sometimes people understand, sometimes not.
Really, you know, this franchise model that we're operating in, which is, you know, very CapEx-light, very asset light, and very capital efficient. Its strong element is really the possibility to generate cash on the back of our results. I think that, you know, the numbers that you can see here and the numbers that we want to produce going forward and that we have in our plans will contrast favorably with the cash conversion that you can see in some of our peers that you know are traded much higher than us and are much more kind of hyped on the stock market. I think you know who I'm talking about.
You know, honestly, when you look at the cash conversion and the possibility to generate, net profit on the back of relatively, disciplined, CapEx spendings, you will see why we have decided to go down the route of, you know, working on wholesale and then also the franchise model more, why we favor it to our previous strategy, which was building own stores, and why I am very much convinced that this is, a model that you can, you know, really make the competitive advantage of Eurocash in that market.
When you just look at, for example, you know, our free cash flow yield that we are trading on compared to our market cap, I really believe that, you know, this is something that is still grossly undervalued when it comes down to the possibilities that we have in cash generation. Okay. If we could go to the wholesale segment and directly to the next slide. Again, as I said, here you can see growth in all segments. Probably the segment that was least growing is the Cash & Carry.
Here again, Cash & Carry, as you, those of you who cover us on a regular basis know they are the channel that is mostly servicing those smallest stores, the abc stores, those convenience or mom- and- pop stores, how you could call them. Obviously, on the one hand side, they are the ones that have to manage their inventories and their cash best on the one hand side. On the other side, they are very much, you know, dependent on consumer spending, also on price sensitivity and on weather. That's actually quite significant from this niche. In this respect, the first quarter was not helping Cash & Carry. As I mentioned, Cash & Carry was the format that was quite benefiting first quarter of last year.
We had a lot of people just going into the Cash & Carry and buying food for refugees and some of the big supplies that we had, people going to the border and you know, buying food for the incredible inflow of refugees that we had in Poland last year. A lot of that was coming from Cash & Carry. On a like-for-like basis, that hasn't obviously repeated itself this quarter. On the other side, we do see that the stores, you know, had lower sales volume and were also managing their stocks much more shrewdly, I would say.
Obviously, when you have such big inflation and you have the element of the fourth quarter from last year, you really have to also think about how you stock yourself and how you manage your money. We've seen in particular with alcohol category, those smaller stores were not stocking themselves as they would last year. Probably inflation had a big effect on that liquidity. Something that, by the way, we see reversing now. Again, first quarter was not easy.
What Eurocash has done, in the meantime is we've have invested quite in price positioning, but what particularly what we see is that now around the May holidays and the very good weather that we now have in Poland, this is a factor that is really working very much in the camp of the small stores. We see pickup here. I believe that Cash & Carry will be able to show better sales growth in the coming quarters. Eurocash Serwis, again, very strong growth and taking market share constantly. Distribution, as I mentioned, very healthy growth above inflation and food services also performing well. Overall, very good sales growth. EBITDA also growing healthily. Margin coming down slightly, as I mentioned, that is partially because...
Mostly because, we have Eurocash Serwis proportionally growing in the mix. Obviously, their much, much thinner margin that you have on tobacco distribution are weighing on the overall margin. Cash & Carry had to invest more into their clients. We believe that we will definitely be able to deliver our, you know, EBITDA margin levels this year like we did last year. Next slide, please. A couple of slides on franchise and on partnership. Maybe something you would like to tag, Adam?
Yeah. With the growth of stores, we've added 32 stores this quarter. You remember that at the end of 2022, beginning of 2023, we did a review of abc stores. The ones that remained with us are the ones more active, and we cut out the ones that were not generating any sales for a certain period. The, the key for the growth was obviously Duży Ben, the recent and most successful concept, which just announced 350 stores yesterday. That was the store opened in Warsaw. This is the most quickly growing of our formats.
All in all, we still keep our fingers crossed and our efforts to develop the collaboration with further franchisees and to add stores in the year rather in hundreds than in dozens, like this quarter, right? This is the message from this slide. In the next one, we see something that has worked really well, especially with abc stores. One of the operational KPIs we've mentioned already in August with the announcement of the 2025 strategy was to integrate more and more POS, as point of sales, of traditional trade into one platform that would support them in the end. Here we see some results of such support.
We just started this quarter with abc stores integrated in so-called EuroPlatform or our collaboration with Comp that was signed last year. You see that couple of ideas that were implemented. Selling of multi-pieces, lowered price for integrated stores. You see that on the, that example of the T-Brand. You see different pricing levels, 70 gross difference, so more than 10% difference, for example, on that product in a particular promotion offer for the ones who are integrated with us with their POS, with their data. Similar thing with margin return.
If the store fulfills, participates in the promotion, agrees to participate in the POS and fulfills the conditions, the franchisee is receiving the margin return at the end of the period. That could go per product even up to 20%, depending which type of product it is. The thing that we are most proud of in this area is that even 2/3 of abc stores participated in such promotions. That's really a change for us because in the past, and as all of you know, abc stores, this is the softest of our models, the softest of the franchise agreements we have.
Usually the participation of abc stores in particular promotions was rather low. Was sometimes 10%, 20%, maybe at good times, 30% of shops participated in promotions. Now we see that it's more than 60% already of the ones who participate in this EuroPlatform, so that they have the POS that is integrated with us. The number of POS is growing. It's more than 4,000 right now. We have quite ambitious targets to deliver more and more each quarter of this year and in the following years.
Yes. I'd just, you know, I'd just like to highlight even more what Adam said is that obviously this seems like an anecdote, and obviously retailers do promotions all the time. Again, it is something of a revolution for us in this particular market that, you know, used to be really a traditional market and really definitely very difficult to work on. I think that, you know, this mechanism that we are showing here really shows the strength of the cooperation that we have set up between Eurocash and Comp and how it puts to work this mechanism that, you know, until recently, we tried to work on from, you know, our ERP product and come through M/platform.
I think by joining our forces, we were able to deliver to our clients something that is of real value for them, and it allows us to put into the work, you know, for the first time, the entire value chain. In the sense that when discussing with producers on those promotions, we can really give them a very good, you know, sense of how those promotions are going to be executed, how they're going to translate into the stores. Also, you know, give them relatively good feedback on what was the actual number of stores that participated. Then when, for those stores who participate, we can give them a very good feedback on, you know, what are the prices that they can achieve and what is the actual benefits for them and their consumers for being integrated.
To a certain extent, you can call it almost a pay-per-performance scheme. In that sense, obviously, that is nothing very unusual for a normal retailer. Normal retailers have this kind of control over the stores, but for the first time, we're speaking about Eurocash, which, you know, traditionally would be just the supply chain partner for those stores, being able to really put itself into the position of, you know, what we try to be more and more, really the platform on which this traditional market is standing and becoming a retail platform, not only for the Delikatesy stores or the grocery stores that have been really connected to us in the franchise agreements for a long time, but for a vast majority of those stores, and thereby increasing our, you know, breadth of services and our reach farther and further.
That is a really important milestone, and I'm very, very pleased with the work that the team has been doing so far, both on the commercial and the technological side. It's really a milestone for delivering what we have set out in our strategy, which is setting forth to integrating the traditional markets stronger around retail concepts and becoming more and more from a classical retailer to really a platform that unites them and gives them competitive advantages. When we could go now further to retail. Here, as I pointed out, we have, you know, obviously growth, but growth which again, compares favorably with some other players who operate in the same segment as we do, which is local supermarkets and convenience stores.
You know, being given, I think, the consumer wariness in, in these times, I think is positive. Nevertheless, we obviously do see that this is an environment where we need to fight for the consumer, we need to invest into the consumer, we need to constantly work with our partners from the producer side to make sure that we have very good promotions, very good prices. We have ongoing discussions around, you know, on the one hand side, price increases, but also more and more price decreases. As we can see raw material prices coming down quicker than some of the grocery products, you know, obviously we need to negotiate better and better.
You know, I do hope and, you know, very much believe that Delikatesy and our entire retail market will be able to generate the kinds of like-for-likes, you know, a very healthy sales growth together with a very healthy growth in profitability, or in profit. I also see that, you know, we, that is an environment where we will have to make sure that we invest into the consumer. In terms of margin, again, like in wholesale, I think we will be able to deliver the margin that we had last year, and, you know, fighting mostly for volumes, for traffic, for consumers. Projects. I talked a little bit about Frisco.
One thing that you can see here, those of you who are in Warsaw have probably seen it a little bit everywhere. Frisco is now coming into a new phase of promotions. The idea is really to make people understand that Frisco is particularly because it has the breadth of assortment of a whole of a hypermarket. When you look at the price positioning of Frisco, it's actually positioned below supermarkets, sometimes actually in discount levels. It was important for us in these times where consumers are very much looking at price to point out to the fact that we have a big portion of our assortment already at discount prices. What...
We started a campaign which is pretty much to guarantee best price for a basket of products that people buy and love. In combination with the fact that Frisco, from a certain ticket onwards is delivering for free. We believe this is a very strong consumer proposition. If people understand that actually they can get the same prices that they would get when traveling to a discount store, standing in line, making their shopping, they could get the same prices and actually just stay at home and get delivered, I believe that it's something that a lot of consumers will react to. We just started that campaign. We already see a pickup quite nice in terms of consumers.
Again, this all goes in line with our goal of, you know, building Frisco as not only a niche player in Warsaw, but really as a offer for 25% of households in Poland. We do it also in preparation of, you know, one very important milestone that we have for Frisco at the end of this year, which is the fact that our second big automated warehouse will start delivering in here. That means that we will have the possibility to really make a step change in sales. Something you would like to add?
Maybe just immediately one question from the chat, actually. I picked up just one. We already received a couple of them. Thank you for that. Exactly about Frisco.
Okay.
They're like-for-likes. That the 12% is significantly lower than previous quarters, right? When we've seen like 25%, even 30% growth last year. What could be the reason? What could be the guidance? How we see that?
One of the reasons, and, I know it's difficult to, you know, remember that, because I think mentally we have all, closed our, you know, closed COVID as a concept in our minds, particularly since the World Health Organization confirmed it officially being over. Believe it or not, last quarter of last year, we still had the impact of the pandemic in some areas.
In Q1, 2021.
In Q1, yes. When you compare just the base of Frisco last year. In some areas, schools were still closed almost until the end of the quarter. You still had a lot of people, a lot more people grounded in homes. There was something of a pandemic effect quarter-on-quarter. I think here that might be a base effect when we compare sales to sales. We do see, obviously that, you know, e-grocery is, as, you know, as a market, as a niche, is coming down slightly.
It is, I think, something that we should have expected in an environment where people are looking more to price, that e-grocery, which for some consumers is considered to be more of a luxury service, is something that they might consider not that something that they would like to afford. That's why that pretty much plays into what I said before. That's why we are doing these campaigns, just trying to make people understand that actually Frisco is not a luxury service. It's actually a way to save, and you are able to get discount prices and on the same side, save time and even save fuel costs.
Net-net, it can come up as a very economic way to make shopping. Yes, we do see, you know, quarter-on-quarter, or rather year-on-year increases being below our, you know, usual growth rate. We still, you know, think that Frisco is behaving very well compared to the e-grocery market and other e-grocery players. We actually see Frisco building market share in its market. A lot of that will depend on consumer. We believe that Frisco is very well-positioned towards, you know, really having lead, you know, building out its pole position not only in Warsaw but also in other cities. I actually see it taking market share for some of its relevant competitors.
A lot will depend, obviously, you know, on the strength of the consumer, on the pace at which e-grocery as a market, you know, and the shift to digital will continue. I'm absolutely serene about the mid to long-term prospect because I just believe that digitization is a fact that is not going to go away. When it comes down to this quarter and next, how, you know, how quickly grocery will continue growing, this I don't know. I just know that, you know, Frisco in its market is really the best proposition and is taking over market share and is best positioned to take up any consumer who would likes to go on. We particularly would like to point to the fact that, you know, with the opening of the new warehouse, I don't know whether we have it on the slide.
Yeah, in the next slide, I think, metrics for Frisco as well.
With the coming of the new warehouse in Warsaw, we will have a real spike in sales at the end of this year and particularly starting next year, because we will more pretty much double our capacity in Warsaw. What we can see is that, you know, at the end of the day, in a wholesale market where we have more than, you know, over 60% of market share, it has sometimes, and particularly around those bottlenecks like Christmas, it has been mostly a capacity game.
We believe that by doubling our capacity, we will be able to expand our sales accordingly. You know, yes, this quarter might still be challenging, but we believe that overall, we are not going away from our long-term guidance towards Frisco's growth prospects, which are, you know, close to 30% CAGR. We are not going away from our guidance with that, Frisco by 2025 should reach PLN 1 billion of sales and actually be profitable.
One last point before we jump to questions. We have about 12 questions already. That's about Duży Ben. We see +50% you know, sales growth and 16% like-for-like for the liquor market, for which inflation is obviously much lower. This is a concept that's developing really nicely. What we need to work on is the profitability is the margin of these stores. Obviously, in Q1, it is seasonal impact. That's why lower sales on that. It should improve in the following quarters also seasonally.
I mean, just to sum up maybe this quarter, again, we have had a couple of headwinds working against us. Seeing that, I think that, we are pleased that we could maintain our promise to the market to constantly improve our operating results and also improve our net results. I think we will deliver on that promise even more in the coming quarters. I do believe, obviously, that consumer sentiment will be a big challenge for all of the sector. You know, I see it improving already slightly with, you know, the good weeks and the weather that we have now in the traditional market.
We are completely focused on, you know, our long-term projects, which are about cost efficiency, deleveraging and increasing, you know, the market share and operational excellence of the company. This year is very crucial for us. We have a lot of projects going on, particularly the integration of wholesale. They are actually producing more costs this year than they do synergies, and those synergies will come in mostly next year. Overall, I believe that when, you know, when together with, you know, still a healthy sales increase that we expect for this year, healthy EBITDA increase and the work on cash conversion, on cash cycle, on deleveraging, we will be able to significantly improve our net result accordingly. That's I think that the first quarter, even with the headwinds that we've experienced, has shown that.
Yep. Let's go to questions. Thank you for all the ones that already typed them in. From Tomasz Sokołowski, from Santander. There's a question about the cash flow. Apart from increasing in 2023 EBITDA, right? Even with more or less flat margin, but increasing revenues, where do we see the room for growth for generating cash flow? Is it more about CapEx being capped at around PLN 40 million-PLN 50 million quarterly? For CapEx, we indeed guide that for the strategy period to be between PLN 200 million up to PLN 250 million, maybe towards the end of the strategy, PLN 200 million. That would translate more or less to what you are saying, Tomasz. Surely, CapEx efficiency and being prudent about our capital investments is one way to look at also, as you mentioned, the asset-light development model that we've chosen. Then EBITDA, right?
I mean, again, in terms of, you know, the possibility to further generate cash and offset financial cost to a certain extent. Again, what we have ongoing now is, you know, we have net debt and we have factoring lines. Traditionally, the factoring costs that Eurocash incurred has been at least to a certain amount, even to a significant amount, been offset by cash discounts that we were able to receive from our, you know, partners, producer partners for whom those factoring lines were in place, for the very fact that we are shortening payment periods. Today with, you know, interest rates, you know, growing, that offsetting element has, I would say, gone disproportionately towards the financial expense side and less on the financial income side.
We are now very strongly and very much focused on the work, and that's also something that Jacek Owczarek is doing day in, day out, to make sure that financial income follows financial expense and that we'll be able to offset factoring costs accordingly. That's first point. Second point, obviously, you know, we definitely will use the cash that we generate to further decrease our leverage and that's an easy one. We also said that, you know, when it comes down to the owned stores, we have now set on the target of converting some of them into franchise stores and, you know, as we continue doing that should also to a certain extent, further lighten our cash expenses on those stores.
I think these are elements that might be beneficial for our cash conversion, obviously on top of EBITDA growth, yes. Maybe last point that I should point out is, you know, again, projects. Projects that have been quite capital heavy and, you know, quite CapEx heavy didn't translate always into sales. As you have seen, we have pretty much drastically lowered the number of projects that we are now reporting, and they are in line with the projects that we kind of focus on.
The more we bring our projects to, you know, full potential but then also the possibility to generate cash themselves, the more this will also show you that, you know, bring the overall cash generation of the company in line with what you would expect from such a big company and this is where I see further potential. There is also, I would say, a general cost-saving potential in the company. Again, I said integration of the wholesale is one element, but we are also undergoing currently a zero-based budgeting exercise where we are looking through, you know, pretty much everything from marketing spends to consultant fees, to, you know, our entire non-commercial buying department.
I do believe that we still have, you know, even so we've always been a quite thrifty company, I still believe that we have ways and means to get even leaner. As we are reducing our complexity, coming down from a number of business units to pretty much wholesale and retail, when you look at the big numbers. That should also mean that we will bring down central head office and head office altogether. I see further grounds for cost savings there.
A follow-up on that question was, so as we see the strong free cash flows in coming quarters, is there any target that we have for the net debt? Are we going to pay it out totally? I would say that we don't have any target for particular net debt EBITDA, apart from this 1.5. Regarding debt, I would say it's rather a function of financial costs, right? Than not using debt at all in our financing.
Yes. I mean, our target is not to become zero debt because I don't think it's also efficient from a capital, you know, allocation model. You know, obviously, I think my target is then to bring down the overall leverage and volume of the company still down proportionately and, you know, it's as Adam said, it's mostly a function of cost.
I think that, you know, the more we deleverage the company to a point where, you know, we'll be able also to work on the actual, you know, risk premium that we pay, then and the margin that we pay, we will be able to bring our, you know, overall capital allocation model to something that I would consider as being healthy and sustainable. That, in my mind, still requires further deleveraging. Yes, I believe that the company, as I see it, should be able to work with a lower total debt level than it has today.
Next question from BNP Paribas Bank, who had some issues with the chat function, but we received them via email, and that's about the own stores of Delikatesy Centrum. Are we still planning to sell that? What's the perspective? When could it be done or maybe transformed into a franchise agent model?
Again, I, you know, it's an ongoing question, and I think that, you know, it's always difficult to become, you know, to be commenting things that, you know, we don't fully control. I said, and I think I was consistent in that, you know, from the first moments is that, you know, we have really identified in our function that own stores are non-core, and we have branded them as such, simply because. I'm speaking for the entire management board here. We believe in the franchise model. We believe in it because it has a lot of elements. Particularly, we believe it's asset and capital efficient, but we also think it makes sense from a consumer point of view.
We believe that those independent store owners and partners that we have, they are very well-positioned to make the difference in going after the consumers. Wherever we see, franchise stores and own stores neck and neck to each other, we see that franchise are delivering better sales per square meter, less loss, better overall cost structure and just better contribution. They are healthier. They react quicker to new competitors. Generally, they do not have to fear the Biedronkas and the Dinos of this world. By the way, this is not only an observation on Eurocash. When we look at a couple of players that have own stores and franchise stores, normally it's the franchise stores that perform better.
It has been a strategic decision from us early on, announcing the strategy to say, we are focusing on developing our franchise model and then integrating our franchise banner stronger, own stores and own core. That means for us that we will do something with them. One option, obviously, is that we get a very good price for it, and that's always an option. You know, in two sorts of extent, everything in life has a price. We believe those assets, they are quite valuable in the sense that they represent market share that maybe people would like to buy.
On the other side, you know, we also were very clear from the beginning on, and I think I always, I also was when being confronted with those questions in previous meetings, was that, you know, we definitely do not feel compelled to sell those stores, and we will not sell them below their fair value. You know, we will definitely not do any transaction where I would not have the impression that I'm building value for you or investors. In that sense, you know, as you know, it always takes two to tango. We do not, you know, we cannot just, you know, have one plan.
If we get a good transaction or if we have a good interest from the market in our stores, it's probably something that we will analyze and look upon. Other than that, our base case now is to say that we will transform those stores into agent/franchise stores. We've already transformed nearly 80 of them into franchise stores. We see very good comparisons, where they are generally 5% better on a sales per square meter level. They have much lower losses and generally are performing better compared to our own stores. We have now set up a dedicated team and will continue with switching more and more of them towards agent/franchise models. Should we not, you know...
We will probably transform the bulk of them into that model, unless, in the meantime, we have, you know, we have a bid that, you know, might cause us to change our mind. As a matter of fact, you know, this, again, I believe, will translate into better overall operational results for those stores, and I also believe, better returns for us on those stores because that could further lighten our, you know, capital and cash engagement on those stores. Let's say it this way.
A follow-up on that one was about the lease payments that we have, the rents on own stores. All right? The analyst here quoted about PLN 400 million in financial cash flow that we pay, that is the outflow that we pay for the leasing costs in total for the whole group. How could it change with possible transaction or, yeah, how would the transaction could influence that? As we checked the own shops, they their leases are about one-fourth of this number. More or less, let's say PLN 90 million-PLN 100 million annually. That's the whole scope of leases. Obviously, if all of them are sold, then this figure also decreases. That would work like that. Two questions about the dividend. When and what would be the payout or the approach to dividends in the future?
No, I mean, obviously the, our approach clearly as a group is we want to come back to become a dividend-paying company. We have been that in the past. We have halted it for the time of the corona pandemic and the time where the company has, you know, had relatively weak results compared to the previous times. This is generally a time that we consider as being temporary.
We'd like to come back to our general rule of paying, our, you know, paying dividends. From a long-term point of view, and we've also said it as strategy, we want to be a dividend-paying company again. Unfortunately. This is what I can say about, you know, the overall statement. When it comes down to last year and the recommendation year, I would still need to ask you for, really not much, but still, a little bit of patience because we will announce our recommendation probably in the weeks to come.
Okay. We have a couple of questions from Grzegorz, from Trigon. Eurocash Serwis and its influence on margins. Is it EBITDA margin dilutive or gross margin dilutive in wholesale segment? Yeah, surely it influences the first level of margins or gross margin. That's where the impact goes. Generally, the sales of tobacco-related products, its distribution is a lower margin activity. Yeah, that's the gross sales gross margin.
Yeah. Eurocash Serwis, again, this is a particularity of the, you know, tobacco distribution segment, is operating on lower margins. They are operating on very high volumes because obviously cigarettes are a relatively pricey produce and therefore but, you know, they have regulated prices and therefore margins are relatively low. That's why, you know, they've always been a part of our portfolio. They've always contributed to the overall EBITDA margin. You know, now they're growing quite fast and faster than the rest, so their contribution is palpable in the overall mix. As a matter of fact, we are also working on improving their profitability, particularly their net profitability.
We've seen effects of that already last quarter, and I believe it's also something that we are going to see even stronger this year. Eurocash Serwis, which, you know, as you can imagine, is working with only a handful of producers and, you know, is operating on a very big working capital because, you know, we have a lot of sales involved. Here they're particularly exposed to, you know, our factoring limits. As we are working towards improving not only our overall leverage and our overall volumes, but particularly the financial income side of that equation, I think Eurocash Serwis is one of those areas where we will see the biggest increase of financial income when compared to financial expenses. Particularly their net profit should go up.
Next question from Grzegorz, was about profitability erosion, that we've shown, that you commented on in Q1, that the cost base increased, and we slightly lose the EBITDA margin during this seasonally more challenging quarter. Will it be the case also for the upcoming quarters? How do we see that developing?
No. Again, I don't know whether you allude to erosion of profitability in net income.
EBITDA margin, I guess, yeah.
I just see profitability, so I don't know-
Oh, yeah.
What is meant. You know, when it comes down to net income, again, We have seen that in the consensus, some of you have, you know, We have been able to beat the EBITDA targets, but some of you have put in net income higher than what we have than what we have shown. We believe that this is probably due to a one-off that has positively impacted our financial income last quarter. Particularly that was, I think, foreign exchange impact.
Q4 2022.
Um-
PLN 15 million.
I think that was something that, you know, just was a positive impact that did not materialize this quarter, that probably you didn't have in your model and that might have led some of you slightly overestimating net income this quarter. We don't believe that this will continue next quarter. Again, we will have a lower influence of financial costs in, you know, EBITDA, first of all, because everything is going to be seasonally bigger, and financial expenses are not going to grow together with EBITDA. They are going to stay pretty much flat. We will have lower volumes. We are working on increasing financial income. I believe that, you know, we cannot speak about an erosion of profitability. Generally, our assumption for this year is that we will maintain EBITDA margin and improve, significantly improve net profit margin.
Partially it goes to the next question from Grzegorz about the cost of financing that we reported. We've shown the financial costs increasing. I guess one of the reasons is the base effect of Q4 actually, right? That the financial costs that we reported in Q4 were 15%, PLN 15 million lower because of this positive effect of Polish zloty strengthening against euro. Grzegorz is also asking about the breakdown of cost of banking, debt, factory, leasing. We will not go so much into detail in general, we all know that how the interest rates have increased year-on-year comparing to Q1 of 2022. What's in our hands is obviously to reduce the level of debt, right? That's as we said already at the strategy, the priority for the board to deleverage the company and choose the most suiting financing structure, be it debt or be it factoring lines.
Yes. This is one of those moments where I miss my CFO. I do, you know, I don't have in my head the exact breakdown of financial costs between banking lines, factorings and leasing. I'm not really sure that we've been disclosing those in the past. Jacob, please allow us to come back to you off air. If there's something more we can give you. We will pin down your question and come back to you. Next question I think is on financial costs. Again, really, I think that what you have seen is a one-off and generally my target is to bring it down significantly I don't... I would really not speak about an erosion of profitability. I think you will see a re-reversal of that next quarter.
The next question is about investment in pricing. I guess here, it is referred to like-for-like of discounters like Biedronka or Dino. That's the retail segment, right? Would you point out to which extent you narrowed the pricing gap?
Yes, that's true. Again, I do think that we need to, you know, really kind of distinguish a little bit, the like-for-like numbers that we see in discounters versus what we can see in the proximity supermarket and the convenience market. Yes, obviously we do see Biedronka having strong like-for-likes. Again, I think it is a reality that in times of inflations where people just believe they need to save, then, you know, the perception, the price perception of going to a discounter and saving is very much working in favor of the discounters.
That's a phenomenon that we can see honestly quite across Europe, where we see discounters, really being in their element in times like these and, you know, particularly where the consumer, you know, ready to go the extra mile to save the extra penny. I don't think that this is the consumer, that this consumer will continue doing that forever, and I don't think that this is a long-term trend. Quite on the contrary, I think that will reverse, and as you know better than me, we see inflation coming down. Hasn't really translated into sentiment yet, but we do see, you know, at least not an erosion of sentiment in the last weeks particularly. Again, I don't think that this is a long-term trend.
I think that when you compare it and really discount market and what I would say supermarket market, then you know, when you compare, for example us to a player like Carrefour Polska, who I think posted 6% of like-for-like, the 10% like-for-like that, you know, we've been able to show doesn't look, you know, that bad after all. Particularly again, it is built on the fact that, you know, we have smaller stores that are more sensitive to elements like for example, the weather influence that, you know, again, we see coming in with better weeks in the last time. Yes, there is a price sensitivity by the consumer that we have to work with.
The best way how we can react obviously is investing into price and price perception, but on the other hand, playing our strengths, playing our locality, playing the fact that we are close to consumers. It is true we have invested in price. We have brought down the price gap between, for example, delicatessens and discounters by some 3 percentage points over the year. We believe that this investment will pay off in the next quarters. It's, you know, business in the mix of, you know, regular prices, promotions, and then also adapting our assortment, including more B brands, including investing heavily in own brands. These are all things that we do and we try to work with the consumer, invest into consumer as much as we can.
You know, I'm quite confident that, you know, those investments will bear fruit. Obviously I do recognize that this year will be a year where we will have to really invest into this consumer and fight for them and adapt constantly to the also constantly changing consumer behavior. I think this will go on for the bigger part of the year, even though, you know, probably inflation will come down quite significantly at the end of the year. I think the perception will still be there. I don't think that, you know, I think that our like-for-like sales in the remaining of the year will continue to be at inflation or below.
We still believe that this should still translate into healthy like-for-like growth, one that will allow us to simply work out better profits compared to the last year. You know, particularly in the wholesale segment, but particularly in the retail segment. What I said was really just for, you know, our own retail. I believe that wholesale will continue operating above inflation like it did this quarter.
Just below we have a question from Fabian Zielonka about the EuroPlatform. What kind of shops are participating in that? Is it only for abc or for other brands as well, like Duży Ben, for example?
Just to explain, again, what the POS program with Comp is about. The idea of POS is, you know, of the EuroPlatform project, is to connect the not connected market, if you want so, right? To a certain extent, when you look at Eurocash has a couple of banners that are working like an own retail. Delikatesy is a good example. Duży Ben is a good example. These are chains that are pretty much looking like modern chains, and they're all connected. They have all the POS systems. They have their cashiers. They work not undifferent. They look like you would compare them to a Biedronka and Żabka.
On the other hand, you have those 50,000 + stores that Eurocash is working on, working with as a wholesaler, that are not connected at all with nobody, and they are developed with this independent market that, you know, we've always said has, you know, incredible advantage of being local, of being entrepreneurial, of being, you know, extremely cost efficient. Its big disadvantage is that it is relatively inefficient to reach all of them because you need, you know, you need a big army of salespeople to be able to do a promotion, right? From the standpoint of a big national producer, it's difficult to give, to make like a very, very good promotion with very, very good discount prices for those stores.
Because you don't actually know, you know, which stores are going to take those prices. You don't actually know what the prices they have will actually be set. One of the biggest problems in the traditional market is that all of them have different prices. It's, you know, it's difficult to make a campaign and promote it to consumers saying, like we've shown you in the, in the poster before, like, you know, "Buy this yogurt and it's only PLN 2.49." Because at the end of the day too, all of those stores, they set their own prices. You know, even as we sell them as a wholesaler, those products much cheaper, they can decide that, you know, they will have this yogurt now for PLN 4.99. PLN 2.49, but they will have it for PLN 4, right?
When we said, "Okay, we would like to kind of be the platform that changes that," our EuroPlatform was implemented and is being implemented in all the stores that are not connected yet. These are not Duży Ben, these are not Lewiatan, because Lewiatan has also their own systems. This is, if you want so, everybody else, right? This is what the EuroPlatform is about. To a certain extent, what this creates is to create the possibility for Eurocash to, you know, become a platform, not only for those chains that it recognizes within its own retail and franchise system.
So Delikatesy, Duży Ben, partially Lewiatan, but to become this retail platform and operate as a retail platform for a much, much bigger part of that market. This is obviously our biggest hope. Europlatform is the infrastructure through which we can communicate with the stores and, you know, continue our strategy of becoming for them much more than just a wholesaler. Again, a long answer, but this Europlatform is for all those stores that are out there except Delikatesy, Duży Ben and Lewiatan.
Just at the bottom, we have questions from Dariusz Dadej from Pekao S.A. about the further plans about Arhelan. In the context of the information in the report about the evasion of the offer to buy the remaining part of shares of this chain, that was related to lack of integration efforts to the Delikatesy Centrum brand. Yeah, what are the plans then for further steps with Arhelan that we collaborate with?
No, I mean, again, I think we are being, we are being consequent in our approach in the sense that we said, again, that we are not setting out to build own stores. We are setting out to build franchise stores and, then therefore, you know, the idea of Arhelan and our cooperation with them from the start was to integrate Arhelan within Delikatesy Centrum, and it was also to work with, you know, the franchise organizer and the owners of Arhelan, who are our 50/50 partners, to work with them, you know, as a franchise partner.
Again, this is, you know, on the one hand side, something where we are in line with our approach of saying, "Okay, we are running franchise stores, and our strength is actually being a partner for franchisees, not so much we are running on source ourselves." You know, I think that this mention was more because we have a couple of legal elements in that I wouldn't want to comment further. Generally, I would say that, you know, when you're asking about our long-term approach to our Arhelan, it's about, you know, integrating them in Delicatessen and working with them as a partner.
The next question from Weronika Czubak is about the number of stores we would like to have towards the end of strategy, 2025, in particular formats. As we mentioned, the ambition of having or adding 500 net franchise stores each year, that's still our target, right? We didn't announce any particular number for the end.
Yes, that stays. We have not really broken down to say, You know, how many formats we want, You know, how many stores we want to grow in what format. I do recognize that probably for you, it makes it a little bit more difficult to, you know, really build the model, and I'm sorry for that. On the other hand, I mean, a little of the strengths of Eurocash here is that we have a portfolio of different concepts, and that is also something that allows us to react to different market evolutions and different, you know, needs of the consumer. As you can see now, you know, we are in a situation where we have, you know, below inflation like-for-like Delikatesy Centrum.
We have above like-for-like above inflation like-for-likes in Duży Ben. That's a trend that is going on. You know, maybe that there'll be a trend that comes in next. So we try to, you know, really, you know, look at the market and look at what is what is actually, you know, what is the potential out there. Sometimes when we have a new location that we think we can secure, we think about, okay, is it, is it a better location for a Groszek store, a Delicatessen store or for a Duży Ben store? Also, you know, when we say integrate, we integrate, you know, some of the new stores that we come in.
For us, they are green, they are greenfields more or less. We find a franchise partner, he opens a store. We, you know, kind of open it or build it together. That's one element. The other element, more often than not, is that, you know, we integrate a new franchise store by taking over an independent store and making it a franchise store. To a certain extent, you have a franchise partner who's been working as a, you know, no-name or independent store, maybe working within a different chain, and then says, "Well, I'd like to become a franchise partner of Eurocash." Here, it really depends also on the franchise partner and on his or her, kind of approach of, you know, which network they find best, you know.
There is a certain difference in touch and feel between a Groszek and a Delikatesy Centrum store, you know, from a consumer point of view, but also from a franchise point of view. Groszek is a relatively, you know, I would say is medium in terms of how strong the integration is. You still have a lot of flexibility as a franchise partner on how you want to run the store, what is the assortment, what is even the price positioning. Delikatesy Centrum is a relatively hard franchise concept, so you know, you run the store, you take a lot of entrepreneurial decisions, but on the other hand, a lot of decisions like assortment, promotions, prices, Delikarta are actually coming from Delikatesy Centrum.
In a certain way, one of the reasons why we've been able to say that we have a relatively high ambition on integrating a new and creating new franchise stores for our network in the coming years, is that we have not only one concept, but several, and people can choose which one they like best. We are kind of betting. We're having a portfolio here, and we believe that with this portfolio, we will be able to integrate the traditional market further, both in brown and greenfield, and that's why we stick to this 500 store metric, without actually saying which concepts it's gonna be.
Looking at the time, that would be the last questions from Anna Manek, from Euler Hermes. That's about financing. First of all, factoring lines. Could we compare the level of costs of reverse factoring versus revolving loan facility that we have? Currently, and generally, the reverse factoring is for us more comfortable. We use it at the higher level, simply because it's more optimal from the financial cost perspective. Not only that, we always need to add the cash discount at the very end, which makes this line of financing more attractive to businesses like ours, right?
This is also something that you see in the levels of factoring and the debt in form of loans that we have, is more or less double right now. We have PLN 1,170 million at the end of the quarter of factoring, reverse factoring used, and at the same time, we have PLN 600 million of loans. This is how we use, and this is how we finance our activities. The second part of the question from Anna is about the refinancing process, the debt refinancing. The revolving loan and factoring lines that we are planning and its impact on future costs, financial costs that we discussed so much today.
I don't, you know, first of all, I don't think we can guide towards the actual cost of it, you know, before, you know, it has been finally closed. Generally, I think that, you know, we are in, you know, at the very end stage of closing this refinancing round with pretty much most of commitments already, you know, having come in. I understand that, you know, I think some of our last partners have been still waiting for. Generally, I think that our last year results have, you know, helped us build, you know, a very good position and I think as some of last, our partners were still waiting for the first quarter results. I think that we are at the very, you know, ending line of finalizing, not only commitments, but just, you know, signing of this round.
Okay. Looking at the time and all the questions, I think that would be it. Paweł, final sentence, final word?
No, thank you very much. Again, as I said, it was, it was not a, you know, it was a challenging quarter, we're still committed to on the course and the course was, as you know by now, it must be boring, that we still believe in PLN 1 billion EBITDA pre-IFRS 2025. We believe that we need to build our EBITDA consequently year-on-year to achieve that, and this year will be yet another year, I'm confident about that, where we'll be able to show that progress. Yes, thank you very much for covering us and for being our investors.
Okay. Thank you very much, and.