Cdon AB

STO:CDON

Earnings Call Transcript 2022-Q3

[Operator]

Welcome to the CDON CEO, Peter Kjellberg, and CFO, Thomas Pehrsson. Please begin your meeting.

[Peter Kjellberg, executive]

Thank you, operator, and good afternoon, everyone. Slide 2, please. Today's presentation will be conducting by myself Peter Kjellberg CEO CDON, Thomas Pehrsson CFO. Slide 3, please. Some reflections of the 3 quarters. In this market climate to strength of the marketplace business model becomes very apparent with an assortment of over 12 million products we can adjust our offering to our customers enabling us to stay relevant, independent of the market climate, and we are performing better than the market share to date.

We continue to focus on building our core categories with higher commission levels. As a result, our commission has grown and the marketplace net says continue to grow. Considering the uncertainty in the market, we have reduced our cost level, where most of the effect is expected to materialize in Q1 next year. We have continued our work on optimizing the effect of our performance marketing and underlying and our initiatives have yeild very good results the organic traffic continues to improve. [indiscernible] the line metrics related to SEO show a strong increase -- the repositioning of CDON progresses according to plan.

The first step towards launching CDON 2.0 will be in Q1. We have developed a CDON app and our focus is pre-owned products. Pre-owned is one of the fastest-growing categories in the market. 50% of the nonconsumers have bought preowned goods in the last 12 months. 25% of our online shoppers have bought premium goods in the last month. The estimated market in Sweden alone is about SEK 20 billion with a 15% annual market growth.

The current economic situation will most likely result in further price functions consumers and markeet growth of preowned. Preowned will also be the foundation for our sustainability work as a corporation. We could all reduce the greenhouse gas emissions by 40% by just switching to a more circular economy. So I hope that you're now going to App Store and that you [indiscernible] download our new Preown app, CDON preowned that is available from today actually. They -- again, that for today contains an introduction to CDON followed by Q3 update. Thomas will then present our financial performance and directives. After that, we will open up for the Q&A session.

Slide 5, please. So let me first give a short introduction to CDON. Slide 6, please. CDON has the right products at the best prices. It's enabled through our marketplace business model in the Nordic markets. We are currently offering around 12 million products in core categories. It's everything from simple everyday products to capital goods for well-known respected premium brands. In many core categories, we have the biggest assortment in the Nordic region. We have more than 1500 active merchants operating on one or several of the Nordic markets in our core categories. We are active in all Nordic markets. Sweden is, of course, our biggest market by history, but we aim to grow on all markets.

We work with 360 [indiscernible] marketing and we have integrated campaigns, focused messaging across multiple points of consumer contacts -- the brand, CDON is, as you know, well known. It's clearly related to e-commerce. Our brand awareness in the Nordics is very, very high. We have a modern, scalable platform that gives us flexibility, possibility to grow number of customers, merchants, products at the same time. We have today about 90 million [indiscernible] per year and 2 million active shoppers.

Slide 7, please. The international proven marketplace model is underpenetrated in the Nordic markets. In Asia, 90% of all e-commerce goes from our marketplace. In U.S., it's about 50% in Europe between 25% to 40%. In Nordics, it's below 5%. This gives us an unprecedented opportunity of growth. The main reasons why the market model is underpenetrated in the Nordics are, in our view, related to 1. maturity. We are still in the early phase in the Nordics.

CDON converted to our marketplace in 2019. We are the undisputed market leader. In the more mature European markets like Poland, Netherlands and so on. They have about 10 years head start before us, and they are now showing 25% to 40% market share. And our ambition is ofcourse to have the same development in the Nordics. Reason 2. The current shopping experience at [indiscernible].com. -- it can be improved for sure. And we are now taking vital steps to become the natural shopping destination with the launch of CDON 2.0 in Q1.

Slide 8, please. We estimate the total available marketing in Nordic to be SEK 450 billion. Our core categories represent 48% of the total online market, that this gives us [indiscernible] available market of about SEK 200 billion and this excludes the building material groceries, clothing, shoes and pharmacy products. Our current market share is approximately 1% of this market, and that gives, of course, a great opportunity for growth for us.

Slide 9, please. So let's move into the quarterly update, Slide 10, please. So the gross merchandise value, the GMV for CDON marketplace 3P decreased by 11% to SEK 430.5 million. The market decreased by 2% in the third quarter, while CDON Marketplace GMV decreased by 11%. But adjusted for the Froland merchant activity in 2021, we remain flat in the third quarter compared to the same period last year. Net sales for CDON Marketplace increased by 2% to SEK 40.6 million. CDON retail net sales decreased according to our plans by 27% to SEK 48.5 million due to the process then of reducing sales of our inventory. Our gross margin increased by 6.8% [indiscernible] to 51.2% total loss before depreciation on [indiscernible] are now hit to SEK 19.7 million. Profit and loss for the period amounted to SEK 26.5 million.

Slide 11, please. We are now moving into our financially strongest part of the year which is the Q4. We are doing it with more activities than ever. It goes from singles' day that moves more or less seamlessly into the Black Friday that moves seamlessly into Christmas and finally, into winter sales. And as I said this will be our most active period ever. On the right side of the slide, you can see at the same draft of the new interface of the CDON site that we will launch in Q1. And as you can see, it's much more modern. It's a much more consumer and feeling than we have today. Slide 12, please. Now I would like to give the word to Thomas to present the financial performance.

[Thomas Pehrsson, executive]

Thank you, Peter. Let's move over to the financial performance. Next slide, please. Good income statement. As Peter said, the market decreased by 2% in the third quarter while CDON marketplace GMV decreased by 11%. Adjusted for the fraud merchant activity in 2021, we remain flat in the third quarter compared to the same period last year. Increased commission levels and a solid product mix that led to gross profit, which was 3% higher than the corresponding period last year. According to plan, we are phasing out of our retail business, and as a consequence of that the next section of the gross profit to the segment decreased.

Team been investing in activities for future growth such as marketing, product categorization, fulfillment and attracting key expertise. We have recognized [indiscernible] expenses in this quarter compared to the same period last year, which is in line with what we have communicated at our calls in the last quarters. This means a lower EBITDA and EBIT than the third quarter last year. Next slide, please, group balance sheet. Last year, we acquired shares in the associated company, Shopping as well as a minority stake in extension commerce, so our fixed assets and [indiscernible] as compared to the same period as last year.

As I said we are phasing out our retail business, and this leads to a lower inventory. We now have a cash balance of SEK 80.3 million. Next slide, please. Group cash flow statement. We recognized a lower operating result versus the same period last year, mainly due to lower sales and specific investments to enable growth, as mentioned. We are not content with the result. However, as I said, we have a cash balance of SEK 80.3 million going into our financially strongest part of the year while we are accelerating several of our ongoing growth initiatives we are in parallel adapting our spending to the current market situation.

Next slide, please. Financial directives and targets. Since the marketplace business model is still relatively unknown in the Nordics, we have now decided to communicate financial directives, which will be commented upon on a quarterly basis. Our financial directives are that our 3P business shall continuously gain market share in the Nordic e-commerce market. Our 3P take rate show increased over time, we shall enjoy stronger incremental margin as a result of its high gross margin 3P business and relatively fixed nature about [indiscernible] and general costs. After this quarter, quarter 3, we have the following comments.

Adjusted for the frauded merchants in 2021, we have performed better than the market for 5 consecutive quarters. Our take rate from the 3P business increased 1.4% points and gross margins increased by 6.8% percentage points compared to the same period last year. SG&A expenses, excluding marketing costs have reduced continuously throughout the year and is expected to continue in Q4 and in Q1 2023. In Q3, our marketing cost in relation to total GMV decreased by 0.3% points compared to the last quarter.

Next slide, please. Our target for 2023 is that we shall be at least EBITDA breakeven unless we find growth initiatives opportunities where we believe that internal rate of return significantly exceeds our cost of capital or the macro environment undergoes further material deterioration from lower levels expected in Q4 2022 and our midterm target for 2025 is to getting the market share to at least 2.5% in the Nordics. Thank you, and over to you, Peter.

[Peter Kjellberg, executive]

Thank you, Thomas. Next slide, please. So to sum CDON up, the Nordic marketplace opportunity is very attractive. It's up for grabs. CDON is uniquely positioned to win and rapidly scale the marketplace models in the Nordics -- we have a highly scalable business model with strong work to captives with a scalable OpEx space that allow us for rapid growth and profitability. Our very goal is to open guarantee market relevance regardless of the economy in the market into times and in bad times.

CDON does not deliver the right consumer experience today. But with the launch now of CDON 2.0, we feel that we will be able to unleash the business potential for reining the company. Next slide, please. So thank you all for listening. And with that, I would like to open up for the Q&A.

[Operator]

Thank you. [Operator Instructions] And our first question comes from Nicklas Fhärm.

[Nicklas Fhärm, analyst]

So my first question would actually be to look at your statement from yesterday evening on your financial ambitions targeting, obviously, a 2.5% share of whatever the market is in 2025. And if we just -- for this purpose, assume that there is absolutely no growth in the market and you were taking 2.5% share in about 4 years, that would probably imply a CAGR of between 40% and 45%, at least per annum in terms of 3P GMV growth. Now could you give us some sort of what's your internal discussion on landing in this target in terms of average order value contribution, traffic contribution. Could you break that down? So it makes a little bit easier for us to understand how you get to that number, please?

[Thomas Pehrsson, executive]

Thank you for the question. First and foremost, we don't predict in the long term such metrics as average order value and conversion rate and similar. Nevertheless, as you say, with that assumption of the market, the CAGR looks very good for the 3P business. And we would also like to say that is I'm sorry No, I would say like this. I go back to what I started to say, we are, of course, seeing in our own terms and our own calculations that we're growing those metrics that you were mentioning, but we don't want to exactly state what they are. Can you hear me? We lost you. Operator -- sorry, again will ask you still there?

[Operator]

This is the web operator. We are working on getting the operator back.