Allegro.eu SA

WSE:ALE

Earnings Call Analysis

Strong Q1 Performance with Encouraging Future Outlook

In the first quarter, GMV growth accelerated by 10% to PHP 13.6 billion, driven by a 4% increase in active buyers in Poland and a 5.8% rise in GMV per buyer. Revenue surged by 22% to PHP 2.82 billion, with a robust take rate of 12.18%. Adjusted EBITDA in Poland soared 37% to PLN 820 million. Looking ahead to Q2 2024, the company expects a 10-11% GMV growth, 22-24% revenue growth, and a 26-29% increase in adjusted EBITDA. Key to future success includes leveraging consumer loyalty and maintaining an efficient cost structure.

Strong Performance Amid Economic Headwinds

In the first quarter of 2024, the company reported robust growth despite challenging economic conditions. The Gross Merchandise Volume (GMV) in Poland increased by 10% year-over-year, reaching PHP 13.6 billion. This growth was driven by an increase in active buyers, up 4% to 14.8 million, and an improvement in purchasing per active buyer, which grew by 5.8% to just under PLN 3,800 annually .

Revenue Growth and Improved EBITDA

Revenue growth outpaced GMV, rising 22% to PHP 2.82 billion. Key contributors to this growth included marketplace, advertising, and the expansion of Allegro Pay. The adjusted EBITDA margin saw a significant improvement, growing by 37% year-over-year to PLN 820 million, or 6% of GMV. This improvement was bolstered by various cost management initiatives, including lower net costs of delivery and increased subscription revenue from SMART buyers .

Revenue and EBITDA Guidance for Q2 2024

Looking ahead, the company provided guidance for the second quarter of 2024. Revenue is expected to grow between 22% and 24%, driven by a further increase in growth rates to 10%-11%. Adjusted EBITDA is expected to rise between 26% and 29%. The company plans to increase its commercial investments in campaigns and marketing spend to fuel this growth .

International Expansion and Marketplace Growth

The international market showed significant progress, with GMV growth for the first time. Despite a decline in revenue due to a shift from 1P to 3P GMV, the adjusted EBITDA loss is expected to contain between GBP 130 million and GBP 150 million. The company highlighted the success of its international marketplaces, Allegro.cz and Allegro.sk, which together have acquired 2 million active buyers in less than a year since their launch .

Leverage and Financial Health

Leverage improved dramatically, with a reduction from 2.84% to 1.38% over the past year. This improvement was driven by the completion of projects to switch merchants to netting at source and the removal of GBP 0.9 billion in receivables from the balance sheet. The company expects leverage to continue decreasing, though at a more gradual rate .

Investments in Technology and Consumer Loyalty

The company continues to focus on technological innovation and consumer loyalty. It emphasized the importance of maintaining a strong technical edge and enhancing customer experience to drive growth. Over 25% of customers now shop weekly, highlighting successful engagement strategies .

Challenges and Competitive Landscape

Competitors like Temu have started affecting marketing costs, particularly in PPC. However, the company remains focused on delivering value to consumers and merchants. Continuous feedback and adjustments are part of their strategy to maintain a competitive edge .

Earnings Call Transcript 2024-Q1

[Operator]

Ladies and gentlemen, thank you for standing by. I am Jota, your Chorus Call operator. Welcome, and thank you for joining Allegro Group Earnings Call and Live Webcast to present and discuss the first quarter 2024 results. [Operator Instructions] The conference is being recorded. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Tomasz Pozniak, Investor Relations Director. Mr. Pozniak you may now proceed.

[Tomasz Pozniak, executive]

Thank you, Jota, and welcome to everybody on our call. It is again my pleasure to have with us today, Roy Perticucci the CEO of Allegro, who will guide you through the business highlights of the first quarter and Jon Eastick, our CFO, who will elaborate on financials and the outlook for the second quarter.Our results presentation is available for download from our investors website at Allegro.eu. You may also download these slides from the link available on the webcast. As a reminder, today's presentation and discussion contains forward-looking statements. Our actual results could differ materially from the expectations expressed in the statements.Please make sure you review the full disclaimer on Slide #2. Please note also that this presentation and the Q&A session are being recorded and will be available for a replay on our website at Allegro.eu.With this, I would like to hand over to Roy. The floor is yours, sir.

[Roy Perticucci, executive]

Thanks very much, Tomasz. It's my pleasure to join you again. This is my eighth call as Chief Executive to present to you the quarter 2 results for 2024. And before I step into the financial highlights and an overview of the business this quarter, I thought it might be useful to share with you how I'm spending my time as we pivot from the 7 priorities that we introduced during my first call in late 2022 to the longer-term priorities that I introduced to you in my last call with you.I think to be successful, we need to be really focused on the right set of capabilities. And I think about 4 of these, some of which we've been traditionally quite good at and got right over a long period of time and others that we're working on right now. And, I think it's important to fire on all 4 of these cylinders, if you will, in order to achieve our midterm and long-term potential.So, the first one of these, of course, is tax innovation or technical innovation. And I think this has been a long-term strength of Allegro. Right from the beginning, we've been known not only for tech excellence but also speedy adoption of new ideas as they appear in the market. And we are continuing to work on that one.And I think Poland actually is a great place to recruit talented engineers, which is also reflected, I think, of new arrivals into the country to build tech centers. The second is consumer loyalty or customer loyalty. I think one of the reasons why we've been able to follow customers over time is we've been applying technic innovation to serve customers better and better.And that does mean a particularly in Poland, we've done particularly well. We have quite a lot of customers who shop with us in total number, but also in terms of tenure. And what I think has also been very interesting is over 1/4 of our customers shop with us every week. And increasingly, we see that encouraging customers to shop with us more frequently, introducing them to new categories that they might not have shopped with online is an underlying power to growth.We see that also abroad where outside of Poland, we haven't had that much difficulty of attracting new customers to our site. I think that's also because of the power of the marketplace. Over 2 million customers now shop with us in marketplaces outside of Poland. And now, we're shifting also on international and encouraging customers not only to try us out once, perhaps a Christmas, but to shop with us as part of their weekly routine. And we'll be talking to you more about this in the coming quarters as well.Something I signaled to you already in my first call to you in September 2022 was investment returns. And when I speak of investment, I'm not only speaking about capital, but also human capital, where do we spend our time, where do we direct the efforts of those many talented software engineers that we have.And I think, the increasingly positive financial performance of the business reflects this philosophy of investing on returns. So, we continue to do this. And it's not, I think, part of our program. It is really sort of, I think, the operating philosophy of the business and how we spend our time.Lastly is something new. I've said we've introduced this side of continuous improvement in my first shareholders' letter. I mentioned it again at length in my most recent shareholder letter, but operational excellence is on multiple levels.Clearly, in order to invest on returns, you do need to have a set of processes and an operating philosophy to make sure that every time you have an investment decision to make, you make it using a consistent set of criteria. I think that bears out in both our capital expense performance and also our EBITDA improvement. But I think it also matters in terms of how you execute in the real world.Customers really do expect to get what they wanted, when they wanted it with the promise that you've made to them, and I think we're getting good at that. I do think this is an area that unlike our technical innovation is something that we need to continue to improve. So, as I said, we've got these 4 cylinders, if you will, these 4 capabilities, and we need to fire really well on all 4 of them to be successful, both in the mid and the long term, and we have every intention to do so.We move now on to the highlights. And I'm pleased to announce that the adjusted EBITDA margin has improved by 37% year-on-year, backed by GMV growth of 10% in Poland and 8.9% for the group as a whole. Behind those numbers, of course, are a robust active buyer growth in addition to the roughly 15 million customers that we have in Poland, up 4%.The group and set of buyers is now nearly 20 active sort of GMV per active buyer has also increased again steady growth backed by that thought on loyalty and the things that we're doing is up by nearly 6% or 5.8% and the average transaction is PHP 3,000.Take rate is a solid 1.15%, up percentage points up to 12.2% overall take rate and advertising continues also to show a solid growth, particularly in Poland. And is now 1.7% of GMV.EBITDA, as I already mentioned, is doing quite well, up 6.6% in Poland and 33% for the group. And probably the thing that we're most pleased with is leverage improvement, down from 2.8% last year to 1.4%. I always talk about that if it's our mortgage, I think we've got the mortgage under control. And overall, the very solid financial performance, cash flow and leverage positions enable us to invest in growth in a very targeted way with quite a bit of latitude.So, as I mentioned in our last call, we've moved to a multiyear priority network, which shifted away from the 7 priorities, which is really, if you will, our rapid action set to something to support us for longer term. really, they're not that major number of changes. I think the main one is, as I always mentioned in the capabilities discussion, we know that consumer loyalty, customer loyalty is really important for us and deserves to be treated as a separate priority.Equally, we talked about also focus on long-term returns and proper utilization of physical assets. And so, we split the low cost and reliability point as a separate priority. So, those priorities have always existed. We've just separated them out and we continue to work on sort of achieving the best combination of speed, reliability and costs. I should also add in terms of this low cost and reliability point.The other thing that I think is different is implicit also on an international expansion, but also deserves a separate point is the group-wide system architecture and software development processes. If your expansion of the marketplace outside Poland is predicated on the idea that it's a light footprint, low-cost expansion, we also need to have a common set of systems, tech systems for the entire group.We act as a group, we treat each additional national market, simply an extension of our catchment area because we want to actually work as one organization in any of the new markets we go into and to do that approved requisite is a common set of tech systems. So, not a major change in the shift. I'm just reintroducing them there to remind you what I told you last time. And now, I'm going to sort of talk through some of the main points of each one of these 9 priorities in isolation.So again, buyer loyalty and engagement is super important. We have 130,000 active buyers in Poland in Q1. Business-to-business buyers, one of the segments we introduced when we first talked about strength in Poland continues to grow, up 20% year-on-year, thanks to awareness and sourcing campaigns, and there'll be more on this segment announcement next quarter.SMART!, our loyalty program, again, that theme of loyalty continues to go from strength to strength. We're extremely pleased to have cleared the 6 million mark in terms of active users, over 90% of SMART users being also paying customers, which reflects at least from my perspective, the considerable value that the program offers to them.We've prioritized a number of segments for growth and Supermarket and Health & Beauty, in particular, employees and ounces up 1.5x to 2x the overall GMV growth rate. And BestBuy guarantee has grown to cover 730,000 items in Poland. Selection continues to grow. So, I think overall, steady progress there in terms of our merchant program as part of the rate change on the 29th of February, we've continued to simplify the rate card.About this time last year, we had no less than 230 lines in the rate card. I think that is hard for anyone to cipher, and we've brought that down to 47%. That ought to be the only change we make this week, again, merchants need to plan their business and bringing it down and also sort of saying there won't be that many changes, more changes this year, certainly not in the overall fee structure is a good way to enable them to build their own business, which in turn helps us on the flywheel.The merchants are up to 150,000 or actually over that. That's 11% growth this year and reflects the expanding number of international sellers that participate on our platform. Our engines, both growth engines like the strong advertising and Fin Tech continues to grow. There's the robust pricing changes are holding up on ads. And we've actually even or in recognition of our programs in advertising outside of Poland with the e-commerce award as the best sales and growth solution from e-commerce in Germany.The progress in Fin Tech, I think, continues to go with alacrity. We've launched like cash pilot, which offers an integrated bank account with the marketplace, which offers up to 2% cash back again, that theme about loyalty reflected in the new things that we're introducing in financial services. We've signed on a new financing partner in terms of Santander with a revolving credit of up to EUR 3 billion in funding, and we've generated EUR 2.1 billion in loans in the quarter, 27% up year-on-year.Driving the share of Allegro Pay finance GMV up to 14.4%. Our philosophy in delivery is, you don't need to do it all. You might not want to do much. The key thing is, can you optimize? Do you have sufficient choice to get the right combination of speed, reliability and cost? We've launched also minipacco, which lowers for small and light products, the MOV down to and have expanded cooperation with the Logistic partners, DPT and Orlen and again, also watch the space.I'm very pleased also on the progress in reducing unit costs in our own operations that are quickly approximating the home delivery costs, in particular, of any of the other alternatives. Marketplace in Slovakia was 4x faster and 1/5 of the cost of our check launch.Again, we emphasized at the time that we were spending time with Czech to get the various processes right, introducing into a new market and that I think has gone exceedingly well. Slovakia was launched with a mass media campaign in March with a very similar to the offer the one that we had in Czech Republic in terms of number of offers and the size of those relative to the next best proposition.We are doing quite well in that market in that country as we move in. Overall, in international, we've expanded our potential accessible market by EUR 16 million on top of the 38 million poles and we now have 2 million active buyers, 1.3 million of those who are new to the Allegro Group that's 45,000 merchants, which is up 20% quarter-on-quarter. Those are local merchants as well. So, I think overall, our footprint model expanding to countries where we're likely to be welcomed is very important.Moving on to the mall segment. We saw Q1 management changes and revised turnaround plan approved, and we are accelerating to shrink selection to focus on margins. We're managing the overhead quite tightly, which is down 13% year-on-year for the quarter and headcount was reduced by 11% in April.I've already touched on what I was introducing new priorities, our work on solid fundamentals, particularly on tech and we've introduced group-wide procurement, and we've completed the group-wide unified workplace as well as introducing the first elements of a common shared HR system.In terms of people and culture and ESG, the double materiality matrix, identifying the top priorities for ESG metrics have been approved by the Board and probably one of the most exciting things, I think, in terms of incentives, quite unusual. I think not only in Poland but across Europe is we have a very broad-based incentive program.We offered 2.1 million shares to 1,300 managers and experts. That's our third year of vesting and I think a very exciting development for most of our employees as well. At this point, I'm going to hand over to Jon, who's going to take you through the financial results.

[Jonathan Eastick, executive]

Thank you very much, Roy, and good morning, ladies and gentlemen. It's really a great pleasure to be with you and to take you through what we believe is actually a really strong set of results and yet another very strong set indeed.Moving on, as usual, I'll start my comments on the financial results with the Polish Operations. You have, as usual, the key KPIs set out for your convenience on Slide 14. But let me start with detailed comments by moving on to the next slide. And as you've heard from Roy, we're pleased to be reporting today that the Q1 GMV growth has accelerated. And this is coming after operating during 2023 into a fairly strong economic headwinds. So, we're pleased to see this rebound.And I'm pleased to say that when I look at these 2 key KPIs that make up the GMV performance, I can report that it's a very balanced growth that we can see here. Starting with the active buyers, we're up 4% in Poland year-on-year to 14.8 million active buyers and 200,000 of that increase has actually come in the last 3 months, which is really impressive and a good dynamic and a good start for the year.Similarly, on purchasing per active buyer, so long-term GMV, last 12-month GMV per active buyer, we've also done very well. It's 5.8% growth on an annualized basis. We moved on to just under PLN 3,800 per annum per average buyer.And again, what I'm really happy about is to see that the rate has accelerated sequentially from 1.1% in Q4 to 1.4% coming through in Q1. So, putting that together, we get to the GMV performance, which I mentioned accelerated. It's up by 150 basis points to 10% for Q1. So, right at the top of our guidance range.The GMV came in at PHP 13.6 billion. And the focus sectors, as you've already heard from Roy, the supermarket in health and beauty categories are again leading the growth, coming in between 1.5 and 2x the average growth rate across the categories.I think it's also really worth noting that after several quarters of talking to you in great detail about how trending down is affecting the average selling price during those difficult economic months, I can now tell you that there's the first evidence of this trend unwinding in that, the speed of the decline in the average selling price has dropped back by about 3 percentage points quarter-on-quarter.You can see that in the 11.6% items sold growth versus the 10% GMV, meaning, there's only been 1.6% contraction in the course of Q1. So, that could be the beginning of moving back to positive growth from average selling price over the course of this year.So, moving on to revenue. And, as you're well used to by now, our revenue is moving much faster than GMV. Revenue was up 22% at PHP 2.82 billion and also, as you see, the main contributors are the usual suspects, the marketplace up 22%.The advertising another strong quarter at 26% and big increases in the other category primarily coming from the expansion of Allegro Pay. The big story for the quarter is obviously around the take rate. Roy was commenting in detail about the changes that we've made. We decided to move the take rate change right to the beginning of the year, which means the monetization growth is flattered because last year, the increases were mostly in July.But, by moving it forward, as Roy was explaining, we're giving much more certainty to the merchant base as to what they can expect during the course of the year. The rate itself has moved up to 12.18%, which is up 1.15 percentage points on last year. Some of it is coming from co-financing changes in July last year, and the rest is coming mainly from co-financing but also from take rate in that February increase.So, moving on and looking at adjusted EBITDA, I'm really happy to report that, that 22% revenue growth has dropped through to a really excellent 37% increase in our adjusted EBITDA in Poland. We landed on PLN 820 million of adjusted EBITDA, and our margin as a percentage of GMV has moved up to what is really an exceptional 6% level and above our medium-term guidance target.I've already explained where the revenue is coming from. So, on the left-hand side of the bridge, you can see how that has dropped down into the EBITDA. I'll limit my comments more to what's on the right-hand side and the cost development. And in particular, the biggest item, as usual is net cost of delivery. But if you, like me, have these bridges committed to memory, you'll know that, that PLN 956 million is actually the lowest number that's been there for many, many quarters.And that's coming from the various initiatives that we're running to manage the delivery cost, constantly negotiating with suppliers for the best speed, reliability and cost. The MOV changes we made way back when in the end of 2022 in the SMART program continue to bring benefits in that the courier share in the mix continues to go down. It was 5 percentage points down in Q1 on a year-on-year basis.And finally, as Roy was mentioning, we're up to 6 million SMART buyers paying and the vast majority of them are paying the higher subscription fee that we introduced at the end of 2022. So, that means that there's a lot more subscription revenue being netted off against the delivery costs in that number.Overall, the unit cost per parcel is up 4.2% year-on-year. Looking at marketing and other SG&A, we're moving a little bit away from the fit to grow stands and making targeted investments. So, those numbers are a little bit bigger than you've seen in the last few quarters.So, moving on to the final slide on Poland, which is capital expenditure. We have flagged that we'll be investing more, but the increase in Q1 is very modest. It's only 4% up year-on-year. We're continuing to focus very hard on our ROI metrics and that asset utilization, setting tough challenges for the teams. But nonetheless, we've managed to invest more in hard assets, $36.9 million versus $28.5 million a year earlier.We're spending a bit more on DeX and quite a lot more on IT projects as Roy was describing. When it comes to capitalized development costs, we're tightening up considerably on gating processes around what projects we're working on. That's reflected in a lower amount of money being capitalized in the quarter compared to a year ago.We're also spending quite a bit of effort on implementing various new regulations, which is not capitalizable spending. So, that concludes the Polish comments. Let me move on now to international, and I'll start with the Legacy Mall segment, the business that we bought back in 2022, key KPIs laid out on Slide 20.The key story is all laid out on Slide 21 and the main message here is that the losses that you see on the right-hand EBITDA bridge are contained despite the fact that we continue to navigate a fairly strong rate of GMV contraction.As you know, we've been very focused on trying to move away from unprofitable selection and items which cost too much to market for us to make money. That means that we were on a steady downward trajectory in terms of the GMV of around about 30% year-on-year. But that's been inflated by a significant FX headwind from the strengthening Zloty versus the Crown which the Zloty is actually about 13% stronger than it was in Q1 a year earlier.And that's actually pushed, therefore, the GMV decline down to 38% at GBP 493 million. And as I said, that's not really reflected in any way, shape or form in the adjusted EBITDA, that's only down by GBP 5 million at PLN 58 million.The GBP 33 million of decline in GMV in margin is all coming really from the GMV. The actual gross margin is stabilizing as a result of the measures that we've taken. It's only down by 15 basis points year-on-year. And you can see the efforts that we're making to reduce marketing spending and reducing other SG&A as we rightsize, rationalize the business.So, let me then move on to our new babies, right? Our international marketplaces. And I'll move on to Slide 23. But just to remind you, so the international marketplace is Allegro.cz. and since February, Allegro.sk, they're both up and operational and you can see the combined data in terms of physical KPIs on this Slide 23.So, starting with the active buyers, we're really very, very happy with the way that we've been able to acquire new customers who are making at least one transaction on the website. We're at 2 million active buyers after just 8 months from when we commercially launched the .cz website, which I think is really an exceptional performance in a country of 10 million people.And it was up 26.8% Q-on-Q compared to $1.6 million at the end of 2023. Now, we don't have such great dynamics when it comes to traffic and items sold. And this is mainly because it's turned out that a lot of the traffic that we were seeing in Q4 was very much seasonal around the Christmas peak and the Black Week. And the Q1 really should be in that context, I think, look, it makes more sense to look back to the comparison with Q3, which is a more typical demand environment.And there, you can really see progress. The traffic came in at $63 million, the item sold at 3.9%. And we continue to do better quarter-on-quarter in Q2 as I'll mention when we get to the guidance.Looking at those 2 marketplaces in financial terms, the GMV for Q1 was PHP 264.4 million. And there, you can see versus that Q3 number, it's up considerably, and in constant currency terms, bearing in mind that the Zloty has been strengthening primarily since September, it would have been more like about $285 million if the FX rate was exactly the same in Q3 versus Q1.Revenue has not declined versus Q4 anywhere near as fast as GMV, and that's because the take rate continues to move up. And the adjusted EBITDA and in particular, the margin relative to the GMV, which is obviously the number we're really focused on as we drive the business towards breakeven over the next few years, has improved 5 percentage points Q-on-Q from 26.6% negative to 21.1% negative, less ATL spending in particular compared to Q4 in the Christmas environment, but also good progress on direct contribution margin, about 2 percentage points better than it was in Q1. And we're obviously looking to drive that quarter-to-quarter.So, that's the international business. And there are slides there showing you in summary, those KPIs and also the consolidated group KPIs. Let me limit comments on the group to the leverage situation, which Roy alluded to earlier in his comments. Actually, in Q1 alone, we're down almost 0.5 turn to 1.38x our last 12-month adjusted EBITDA, which is obviously a tremendously fast rate of decline.That's partly coming from or in major part coming from the completion of the multi-quarter projects we've been running to switch our merchants on to netting at source rather than billing in arrears.Over the course of the 2 quarters, 2 to 3 quarters, actually that, that project was running, which finished in Q1, we've actually removed GBP 0.9 billion of receivables from our balance sheet and move that money into our cash balances. And it's accountable for about $0.32 of the leverage reduction that you see since Q1 of last year, where we've come down from 2.84% to 1.38%. Now, the rest is obviously coming from the improved margins and the adjusted EBITDA increases.Looking forward, now that, that project is behind us, and by the way, I also mentioned, it should also translate into a much lower bad debt expenses as well going forward. As we look forward, the leverage should continue to come down, but it should be at a much more gradual rate without this project in the numbers.So, that concludes the comments on the financials, and that means I'm on to the last slide, and it means that it's time to talk about the Q2 outlook for Q2 2024. So, let me, as usual, start with the Polish operations. We're expecting to see further progress in our growth rates, moving up probably another 100 basis points or so to between 10% and 11% for Q2.And that will obviously then feed through into faster revenue growth as well, a little bit quicker at 22% to 24%. The take rate that we changed in February, obviously, will be present for a full quarter in Q2 but we also made a few adjustments in Q1 of last year around our discount schemes and that we had for merchants. And there's about a 20 basis point increase Q-on-Q in the historical numbers as well.So, that's why the 22% to 24% revenue guidance. That then runs through into what we're expecting of an adjusted EBITDA increase between 26% and 29%. Two things here to call out. One is that we are increasing our commercial investments in campaigns and also our marketing spending to help drive the growth faster.And secondly, the prior year comp, again, in this case, a result of the fit to grow initiatives really starting to gain traction in the second quarter of last year. The comps are moving up in terms of margins. So, the growth rate, although not a 36.6% is, I think, a very creditable 26% to 29% and a very, very good result in itself.When it comes to CapEx, a bit more spending than in Q1, various projects starting to pick up speed, so PLN 140 billion to PLN 150 million. We also implemented our annual pay around in April. So, amongst other areas, the tech teams are earning more money, which means there'll be a bit more capitalized development costs than there was in Q1.Now, moving on to international. And here, the highlight is that the 3.6% year-on-year is suffixed with the word growth. We are now, for the first time, seeing the GMV growing in the international operations, which is obviously the combination of the international marketplace is growing quickly together with the mall, at least on a constant currency basis, some slowing of the impact and importance of that impact in absolute terms relative to the international marketplace.So, we've reached an inflection point. GMV is starting to grow internationally. And obviously, that's critical for our journey towards profitability over the next quarters and years. Now, in terms of revenue, we obviously still see significant contraction because we're swapping 1P GMV, which has got a lot of revenue content from retail sales for 3P GMV, which produces only commission revenue and take rate revenue. So, that continues to decline.Looking at adjusted EBITDA, we're expecting between GBP 130 million and GBP 150 million loss across the international market. Mall, again, we think we will contain the losses, but we are investing more behind driving the international marketplaces, which, as I mentioned, they are up sequentially quite significantly on Q1. The CapEx, PLN 25 billion to PLN 35 million in international.So, that's my final comments regarding the outlook. Thank you for listening. I'm going to pass back to Tom, who will take you through or introduce the Q&A segment.

[Tomasz Pozniak, executive]

Thank you, Jon, and thank you, Roy. So, we are now ready to take questions from the public. Jota, the floor is yours.

[Operator]

[Operator Instructions] The first question comes from the line of Tiron Cesar with Bank of America.

[Cesar Tiron, analyst]

I have 3, if that's okay, but they're easy. The first one, can you please say a few more words on Allegro Cash, that that pilot was the aim there? I just wanted to understand it better.Second question is on your take rate. Is there still room to increase that? Or do you think you've maxed out the increase after all these changes to red cards and co-financing over the past couple of years?And then third question, it does look like the other questions in the past as well, but the cash seems to be accumulating on the balance sheet. Obviously, the company is deleveraging. Have you thought about the uses of that cash, would be used at the point to repay down debt? Do you want to return that to shareholders in some form? That would mean tough to have some comments on that.

[Roy Perticucci, executive]

Okay. So, I'll take the first 2 and then hand over to Jon. I think he'll probably also have some things to say about particularly the take rate. So, what we're seeing is, particularly since we have so much insight in our customer behavior that we've been a fairly successful lender. And I think for any fintech business, there are sort of 3 major components.One is the ability to extend credit. This is the one that we've been working on. I would say it's a natural one to think about in a market, particularly like Poland, which is its own advanced banking system. And the other 2 sort of major components about this is, being able to hold some form of deposits and also have some form of payment scheme, and that's the direction we're going.In terms of for customers, sort of standard consumers is, we have every intent to continue to carefully build out our service offering and what are the typical 3 components of financial services for consumer-facing services at least.I think I should emphasize, we have no aspirations certainly in the short term to be a bank. That's why we entered in the collaboration with AION. We're doing most of the things that we do is Banking-as-a-Service with their considerable support. And it's, again, and I think you've seen this in other areas of our business as well, the idea is not to build some very large capability and assume that consumers will come, but to actually to learn over time and actually have a service and service delivery capability that is appropriate to the scale of the business that we have at any one time.So, so much for Allegro Cash. I think, and you've seen this elsewhere around the world, this is an area that has growth opportunity, and we're beginning to manifest that. Take rates. We are very focused on delivering value for customers and customers also, to some extent, include our merchants. And we always want to be a value service provider.And so, I do think the fact that our costs of trading are considerably less than any of our benchmarks and that this is a competitive advantage. So, success fees, I sincerely hope that we make no further changes to those this year. Merchants have told us very clearly that they like simplicity and also that we chunk up the changes as opposed to triple them in so that they can actually plan accordingly.I think buried in take rate, of course, are a couple of things. Also some of our advertising is reported in the take rate number. And also included in the take rate number is also co-financing. And I do think merchants in terms of co-financing get a good deal twice. One, Allegro pays the majority of those costs for SMART. And secondly, of course, as we negotiate delivery fees that I don't think any individual merchant would be able to match in their negotiations if they even are able to do some.So, there may be some shift in how we split dive that up. But I think on the others, we need to be cautious to assume that we can do, and frankly, I think there are other players in the market who do that more aggressively. I do think we should be very cautious about how much of a share we want to take from merchants to GMV. So, there we go. I think those are 2 points.

[Jonathan Eastick, executive]

Okay. Thanks, Roy. Let me take the final question regarding the cash balance that we have, which is at PLN 2.9 billion, as you can see on the leverage slide in our materials. I think the first point to make here is to remind what we said about 2 months ago when we reported the fourth quarter, and we also issued some midterm guide rails for your consideration.One of the things we said then was that we would aim over the medium term to keep the leverage at around about 1x our adjusted EBITDA and we also said that we want to maintain financial flexibility, which I would equate with having cash balances on hand and also reserves or undrawn reserves that are readily available to us.Now, it's going to take us quite a few more quarters to get all the way down from 1.38 to 1x leverage. And that's because we don't have the turbocharging effects of the merchant fee project anymore. And in that period of time, what Roy and I anticipate is that, we will be engaging with our Board of Directors, which some of you may have realized will have a few changes coming at the AGM in next month or towards the end of June, in that we have a new chairperson and some other changes in the lineup.And we will expect to engage with them and discuss in detail exactly how we want to flesh this policy out in terms of what is enough financial flexibility, what that capital structure should ideally be looking like going forward. And obviously, the end product of all of that will be any comment around what shareholders might expect in terms of what we would do with any excess cash, yes.So, it's going to take us a few quarters to get down to that 1x and I think we'll make everything clear by the time we get there.

[Operator]

Excuse me, Mr. Tiron, are you done with your questions?

[Cesar Tiron, analyst]

Yes.

[Operator]

The next question comes from the line of Ross Andrey with Barclays.

[Andrew Ross, analyst]

I've got 2, if that's okay. First one is a short-term one. It looks as though there's some conservative in your guidance around the growth slowing in June. Can you just talk a bit about your thinking behind that, what you're seeing in terms of the Polish consumer, the puts and takes around whether you could be better or worse?And then the second question, and I hate to ask you, but inevitable one about Temu. What's the latest in terms of what you're seeing, both in Poland and elsewhere, your sense of how big it is, the impact it's having? I really appreciate any kind of latest thinking.

[Jonathan Eastick, executive]

Hallo, Andrew, thanks for the questions. I'll take the first one. Roy will take Temu. Yes. I mean, we're trying to keep the guidance in round numbers, and we're guiding 10%, 11%. What I would say is that in the first half of the quarter, we haven't seen the year-on-year acceleration that we were talking about month to month to month when we talked about Q1, we haven't seen that continuing into the first half of the quarter. It's kind of leveled off.And I don't know if you've heard, but about an hour ago, the retail sales numbers came out actually quite a bit slower growth, still growth, 4.1% in real terms, but quite a bit slower than the market was expecting.There are a few areas of uncertainty around some of the future of some of the inflation shields and various other measures that have been in place that have been helping the consumer and there may still be a little bit of caution there on the side of the consumer.I think the overall direction is good, but the momentum is not maybe in terms of recovery is maybe not as dynamic as it was in Q1. So, that's why we came out with this 10% to 11%.

[Roy Perticucci, executive]

So, Temu, first of all, no need to apologize. It's a nice thing about retail, whether it's online or off-line is you can always see who the new competitors are. I would say, first say this is not the first large, well-funded new entrants into the Polish market, in particular, for that matter in Czech. And we always watch new entrants in particular because there's always something to learn.Every new entrant has a slightly different philosophy and may excel at something that you don't. So, there's always something to learn. I think in Temu's case, of course, yes, it is having some impact. We can see this certainly in what we have to pay for marketing for PPC in particular.I think the fact that they're well-funded and also very marketing orientated has affected, if you will, our return on investment for marketing spend. And I assume that will continue in terms of how that affects our marketing costs. And we do see some shift of some customers in shopping less so, overall, I think, into the web base, but certainly on our base sessions. And we'll have to see how it develops over time.As I said, this is not the first time someone new is coming into the market. And our primary focus, even though it may probably sound like the party line is to say very much focused on consumers and doing the best we can to serve them. And I think we're doing that fairly well.

[Jonathan Eastick, executive]

Just to build on what Roy was saying. I think there's just 2 other aspects. I think we went into quite a bit of detail last time around that the value proposition of Temu is, well, it's gaining some traction in the market, but it overlaps much more with the proposition of players like Ellie Express that have been here for 10 years than it does with the Allegro's everyday shopping model.And, we are doing surveys on a regular basis. We've been doing that for years, but we've, for the last few months, been including Temu and Shein into those surveys. And what I would say is that it is kind of strengthening that thesis, there is an upper limit to how much this particular value proposition may be able to take. And we're still seeing, when we look at share of transactions, our estimates based on these surveys are that the 2 together, Shein and Temu are in the mid-single digits in terms of the segment share in the market at this point in time.

[Operator]

The next question comes from the line of Potyra Michal with UBS.

[Michal Potyra, analyst]

I have 2 questions, please. The first one relates to the EBITDA guidance for the second quarter in Poland. If you just take the midpoint, it implies sequentially declining margin as a percent of GMV. So, that seems to be against the seasonal pattern at least over the last 2 years. So, I just wonder, are you being cautious? Or is there something else, please?And the second question is around the staff, the personnel costs. There was a pretty material increase both in nominal values and also as a percentage of GMV. If you could comment on that. And I'm just wondering if that's a new normal level or something specific to the first quarter this year.

[Jonathan Eastick, executive]

Yes, thank you for the questions. I think the big points around the adjusted EBITDA are that, first of all, the comps are moving up pretty quickly as we get into the second and then third and fourth quarter as all the positive effects of the Fit-to-grow initiatives started to show up in the prior year numbers, right? So, the first point is that the hurdle is getting higher.Secondly, we're planning for an increase in marketing and commercial spending in particular. Partly alluding to your next point, the staff costs, the annual pay round took effect from April. So, those increases will be present in the Q2 numbers. And obviously, if you're seeing the corporate wages increase, as you know pay rises are actually still running quite high in the Polish economy.But, no, beyond that, yes, I think the only other aspect is that some of the spending that we were expecting to be in Q1 actually didn't appear in the final numbers as we were closing the books and those projects which are effectively slightly delayed, should start to appear in the Q2 numbers. But we think this is still a very decent growth rate.The 6% GMV margin that we're seeing in Q1, that is something of an anomaly. It's exceptional because of the decision we made to bring the take rate changes forward. We need now to, as Roy said, keep the rates where they are for the rest of the year, and we will need to absorb the residual effects of that pulse of inflation.In particular, minimum wages are still going up strongly. That affects the delivery companies. So, as well as the salary increases in our own workforce, at some point, we'd expect to be paying more for delivery as the year continues.Yes, on the staff cost, yes. Yes, I mean, there's a couple of things in there. I mean you've got significant pay increases a year ago, right, when there was very high inflation at the time. So, the pay rise is happening in April last year are reflected in the year-on-year growth in Q1 of this year.The head count is growing, not significantly, but faster than it was during the full on fit-to-grow program when we basically added freeze. And finally, as you've seen with the EBITDA, the quarter started or the year has started very solidly. And so, the bonus accruals that we've made for the annual bonus were bigger than the ones that we needed this time last year. So, those things together are the main reasons for those numbers.On the final point, sorry, almost forgot, you noticed that the capitalized development costs were a bit lower than Q1 a year ago. That money has to go somewhere, obviously, in those salaries and it's in the P&L as staff expenses.

[Operator]

[Operator Instructions] The next question comes from the line of Patulea Sebastian with Jefferies.

[Sebastian Patulea, analyst]

I've got 3, please. Firstly, do you want to discuss the possibility of new competitive entrants in Slovakia and Czechia maybe over the next 1 or 2 years, please? Is there any reason why these countries are more attractive to Allegro than other possible competitors?Secondly, do you see any possibility of partnering with Temu and probably more realistically with Shein where they can use Allegro's marketplace and access to customers as a front tax as of much more engaged user base?And lastly, during the last conference call, you said that you're retaining some marketing flexibility in order to respond to competition. The results there are very strong, and I'm more interested qualitatively in how much of that marketing flexibility did you use, please?

[Roy Perticucci, executive]

Would you please repeat the first question? I want to make sure I answer the question you're actually answering. I understood it's about international expansion and markets, but I think there was more specific interest.

[Sebastian Patulea, analyst]

Definitely. So, I was looking from your point of view, if there's any possibility that 2 years from now or a year from now, we're going to see some news that some competitors are entering Slovakia and Czechia. And the question was followed by, is there any reason why these countries are actually more attractive to Allegro specifically than any other possible competitors?

[Roy Perticucci, executive]

Okay. Well, I can probably definitely answer the second part of that question. I don't have a crystal ball. And even though it would be highly illegal, it would be kind of fun to be able to listen in on what people and elsewhere in the world and other businesses are thinking. So, it's difficult to sort of answer why they would go in.I do think that our region is one that is likely to get increasing attention over time because I think overall as a region, as a group of countries, we're all doing pretty well, Poland, I think, first and foremost, in that. So, I can't predict. I think Temu clearly is also going into some of the countries that we're in, certainly in Czech and in Poland.Why are these countries attractive to us? I think number one thing is a philosophical one. We want to go to places where we are welcome and welcome as I think, a factor of things. First one is, do we have something to offer that's not already available in the market? Most of these markets tend to have very fragmented e-commerce landscapes with relatively low Internet penetration. And we do have a bit of experience in doing that.I mean it's probably immodest to say, but there's certainly more than a grain of truth that we introduced poles to e-commerce. And we certainly have been quite successful in introducing them to categories that they may not have been shopping online with before. I think it's frankly not the best thing, but sort of something we can be very pleased about, if not proud about, probably not being something we should aspire for.So, doing the same in markets that are close to ours or countries that are close to ours is, I think, a natural extension, and I think our experience is attractive. Specifically to either Czech or Slovakia, we offer 10x the selection. And by and large, with much better prices than that what they're used to.And furthermore, we're not actually interested in world domination, but maybe more like local collaboration, which that means also compared to, I think, some of the larger players, we're not interested in doing everything ourselves. We are looking at some building relationships, leveraging our relationships in Poland, merchants, in particular, but also acquiring co-operations with local logistics suppliers and something else, and that I don't think is the attitude of everyone else expanding abroad.And also, we recognize that we need to do this in a very low cost way. You've seen our entry costs into Slovakia in particular, that have already come down dramatically than our first investment in the Czech Republic. And I think the life footprint approach means that we can fit spaces, reaches corners that not everyone can reach.I do think other players have considerably larger tech loads just to open up a tech stack for a new country. And part of that is because we don't open up a tech stack. We have the same tech stack everywhere. And then most of our incremental costs are related to ship methods and payment methods and language.And the buzzword of the moment is AI. And I think one of the things that we are very pleased with is our AI capabilities have shown that we can translate from various languages rather rare combinations like Polish to Czech, which is not maybe the first algorithm you develop, where we're cheaper than even Google can do it. And these are the sorts of things that give us advantages in these markets that perhaps by proximity, perhaps for a number of other reasons, we aspire to know a little bit more about than anyone else does.And most of these markets also tend to be smaller, and therefore, our light footprint approach where we're also very eager to understand how things work locally is more likely to succeed than some of the other elephants in the room.

[Jonathan Eastick, executive]

And the final part of your question was about marketing flexibility, which I think we flagged previously. I think the short answer in Q1 actually is that we didn't increase spending all that significantly. I think in the bridge, it was about PLN 20 million incrementally year-on-year, so not dramatic.But we do anticipate spending more in the second quarter. One of the reasons for that is that the SMART week is a Q2 event. We just had that. So, a big shopping event equivalent to prime days for our SMART consumers.But also as we were discussing when we were talking about Temu, there is a lot of competition for share of voice with customers who are shopping in particular on Google, but also on other social media platforms. And we need to be prepared to defend our position. So, that's basically what we were alluding to in saying that we need more marketing flexibility.

[Sebastian Patulea, analyst]

If I may please reask the second question just because Shein, for example, sorry, to list some of their items on some marketplaces. And the second question was, do you see any possibility of partnering with Temu but honestly, more realistically probably with Shein where they can use Allegro's marketplace and access to customers as a fronts taxes a much more engaged user base. Do you see any possibility of that?

[Roy Perticucci, executive]

Sorry that I did not answer the Shein and Temu question in terms of selling on the site. But by all means, they're more than welcome to selling on our site. Whatever we call it, welcome to all comers. Anyone who wants to trade in the marketplace, it's a call the marketplace for a reason. And everyone is free to register and a transaction on the site.We'd be very happy to have them. But I think it sounds like there was another bit of a question that I missed. You repeat?

[Sebastian Patulea, analyst]

No. I think I was just looking for a more formal partnership or just the possibility of that, but you've answered the question, to be honest.

[Roy Perticucci, executive]

Yes, as I said, Shein and Temu you are free to join as merchants.

[Operator]

Ladies and gentlemen, there are no further audio questions at this time. I will now give the floor to Mr. Pozniak for any questions from our webcast participants.

[Tomasz Pozniak, executive]

Thank you, Jota. We have a few questions that came online. The first one comes from Tomasz Sokolowski from Santander. Could you comment recent trading of Base linker index, which pointed at 17% growth in Polish GMP in April? Your 10% to 11% GMV growth guidance performance seems to be correlating in this slide.

[Jonathan Eastick, executive]

Yes. Base linker tends to reflect a lot of the smaller players in the e-commerce space. And it doesn't, I think, correlate particularly well their readings with how the overall market is moving. From what I recall, the Euromonitor summary for 2023 came out at, what was it, about 12%, if I recall, right, for growth in the previous year. So, we were quite close to that overall. Monica is just double checking the number, 9.6% for retail and 12.2%. Monica's promising me, 12.2% for the overall e-commerce segment, and we were not too far away from that.So, we don't watch that closely because it's only a specific subsegment of the overall market. I think the retail sales that came out about 90 minutes ago indicate that a bit of caution is advisable as to what's happening in the overall economy.The retail sales number was a bit underwhelming at 4% of real growth. So, we're being a little bit cautious perhaps, but let's wait and see.

[Tomasz Pozniak, executive]

Thank you, Jon. Next question comes from Luke Holbrook from Morgan Stanley. Question concerns SMART. Thanks for providing disclosure. Do you see this as an opportunity to continue penetrating the customer base given below 50% of actives are on SMART?

[Roy Perticucci, executive]

Of course. So, one thing we talk about from time to time is continuous improvement and our SMART program, like any other of our initiatives can always be improved. And as I've alluded to before, there are things that we plan to do to make that offer more attractive. I do think it's fair to say that SMART customers are also disproportionately loyal and create a substantial uplift in terms of what their average transactions are, their average spend is in a year.So, I think there is headroom to sort of continue to build out the program, particularly as we add more and more benefits to it over time.

[Tomasz Pozniak, executive]

Thank you, Roy. And next question comes from Ada Koolicar Europe, asking for what was the main reason for the increase of GMV per active buyer in Poland and other countries. I think other countries was this exaggeration because we're not yet having there, but in Poland is true for the driver for the increase of GMV per active buyer.

[Jonathan Eastick, executive]

Yes. Thank you for the question. I mean what I was highlighting was that there was a quarter-to-quarter acceleration in the rate of progress. I mean the fact that it goes up is something that we've been enjoying for 25 years, right? So, it's not surprising that it is moving up from quarter-to-quarter.It reflects literally, in our case, people's lifetime journeys because most customers who actually, I think the magic numbers do about 7 transactions with us tend to never actually go to the point where they drop out of our base. So, we're really talking about people's lifetime journeys and the economy in general when we look at that metric, but also all our efforts to loyalize and increase frequency.I think what you see, really, though, looking at that Q1 to Q4 is also the impact that I was trying to explain that the decline in average selling price that was reflecting all this trading down and avoiding of discretionary spending in the course of 2023. That effect has slowed right down. And it may well, therefore, be on its way to unwinding completely, and we start to see in the next quarters growth that's coming partly from volume and partly also from inflation in the average selling price. But we're not there yet, but it's a lot better than it looked in Q4.

[Tomasz Pozniak, executive]

Thank you, Jon. And the next question comes from Roman Reshetnev from Goldman Sachs. Can you elaborate on your progress regarding local rollout during Q1 and Q2 to date? Do you see further progress in utilization metrics? And how far are you from reaching positive net EBITDA contribution?

[Roy Perticucci, executive]

Well, what I'd say is, no, we haven't opened and to an awful lot of lockers in this quarter. And, again, our point is one of the themes I said right upfront is, we focus on return on investments. And when it comes to locker space, we've robust sort of a couple of things. First of all, lockers are pretty cheap and because they're so cheap, it's almost a step function. It's an incremental, it's almost a variable cost because each one costs not very much. I don't think we disclosed what the absolute cost is.So, we don't need to open up lockers unless the ones that we have are full. So, I think you can make continued assumptions that, like I said, our target is to get cost parity. By the way, when I say that, we have no intention to sort of have a massive network of lockers anywhere. Our point is simply to have choices to optimize between those choices for the best combination of speed, reliability and cost.So, yes, as utilization goes up, unit costs come down, and that's how we think about it. We don't think about it in terms of EBITDA. It's a cost line. And it's another opportunity for us to reduce overall our cost of shipping and shipping, I think it's still our biggest cost block on the P&L.So, minimizing unit costs means that its impact on the P&L decreases, and it's just then a question of what's the best solution.

[Tomasz Pozniak, executive]

Thank you, Roy. And the last one, which let me take it. It's a question for the guidance for the second half of the year, which unfortunately we have to deny we're guiding per quarter. We have just given guidance for the second quarter. We're not commenting in the second half of the year.And that concludes the list of the questions received online from the access participants. Jota?

[Operator]

Ladies and gentlemen, the conference has now concluded, and you may disconnect your telephone. Thank you for calling, and have a good day.