Earnings Call Transcript - HEPS Q2 2024

Operator, Operator

Ladies and gentlemen, thank you for standing by. I'm Mina, your chorus call operator. Welcome and thank you for joining the Hepsiburada Conference Call and Live Webcast to present and discuss the Second Quarter 2024 Financial Results. All participants will be in listen-only mode, and the conference is being recorded. The presentation will be followed by a question-and-answer session. At this time, I would like to turn the conference over to Ms. Nilhan Onal Gokcetekin, CEO; Mr. Seckin Koseoglu, CFO; and Ms. Helin Celikbilek, Investor Relations Director. Ms. Celikbilek, you may now proceed.

Helin Celikbilek, Investor Relations Director

Thanks, operator. Thank you for joining us today for Hepsiburada second quarter and first half 2024 earnings call. I'm pleased to be joined on the call today by our CEO, Nilhan Onal Gokcetekin; and our CFO, Seckin Koseoglu. The following discussion, including responses to your questions, reflects management's views as of today's date only. We undertake no obligation to update or revise this information except as required by law. Certain statements made on today's call are forward-looking statements, and actual results may differ materially from these forward-looking statements. Please refer to today's earnings release as well as the risk factors described in the Safe Harbor slide of today's supplemental slide deck, today's press release, the 6-K, our Form 20-F filed with the SEC on April 30, 2024, and other SEC filings for information on factors that could cause our actual results to differ materially from these forward-looking statements. Also, we will reference certain non-IFRS measures during today's call. Please refer to the appendix of our supplemental slide deck, as well as today's press release, for a presentation of the most directly comparable IFRS measure and relevant IFRS to non-IFRS reconciliation. As a reminder, a replay of this call will be available on our Investor Relations website. With that, I will hand it over to our CEO, Nilhan.

Nilhan Gokcetekin, CEO

Thank you, Helin. Welcome, everyone, and thank you for joining us. I'm delighted to be with you today to present our second quarter and first half results. We delivered another solid set of results in Q2 ‘24, exceeding our guidance for both GMV growth and EBITDA as a percent of GMV. We achieved these results despite the prevailing macroeconomic headwinds. In the first half of the year, our GMV doubled compared to the first half of the previous year, and our EBITDA reached 2.4% of GMV, unadjusted for inflation. Adjusted for inflation, we recorded nearly 22% real GMV growth and 1% EBITDA as a percent of GMV. Due to consumer demand moving forward to Q1, we took a prudent approach to considering our overall first half performance. Moreover, in the first six months, we delivered the highest first half free cash flow since our IPO. These results confirm that strategically speaking, we remain on the right path. Now let's look at a few of our operational metrics. With our exceptional customer experience, top-notch logistics services, and diverse affordability solutions, our NPS metrics again confirm we are Turkiye's most recommended e-commerce brand. Our active customer base continued to increase and reached 12.1 million. Customer loyalty and retention are central to our strategy, and Hepsiburada Premium has played a key role in strengthening these relationships. Just two years after its launch, it's hugely encouraging to see that Hepsiburada Premium has scaled to the 3 million subscriber mark. Returning to the second quarter, we recorded 36.7 million orders, which represents a 33% year-on-year growth. Our order frequency over the last 12 months reached 10.6, up by 23%. With the onboarding of additional brands, particularly in the fashion and lifestyle categories, by the end of the quarter, our selection on the platform reached 264 million SKUs. These are offered by an active merchant base of around 101,000. Now let me provide a snapshot of the quarterly progress on our four strategic priorities. First, let's look into our loyalty program, which is key to our loyalty strategy. The program's rise to 3 million subscribers is a testament to the attractiveness of the program's value proposition. The program has an NPS of 84, which is the highest among loyalty programs in Turkish e-commerce, reflecting the trust and appreciation of its members. Premium members tend to prefer Hepsiburada as their go-to shopping platform. We observed that they generate 36% higher frequency after joining the program, strongly contributing to overall order growth. Our local streaming partner, BluTV, was acquired by Warner Bros Discovery in December '23. Accordingly, a broad range of the best international services and shows from Warner Bros will soon be available as part of the premium program benefits, enriching the exclusive experience enjoyed by these members. We remain dedicated to retaining satisfied customers while welcoming new ones into the fold. Next slide, please. Moving on to our other strategic priority, which is differentiation with our superior delivery services. Central to achieving this is our HepsiJet's continued penetration on our platform. HepsiJet, which is our last-mile services company, delivered 73% of total parcels dispatched during the quarter. This is up by 6.8 percentage points year-on-year. Its volume expansion in oversized parcel delivery is also very impressive. In Q2, 68% of all oversized parcels on Hepsiburada were delivered by HepsiJet XLarge. This marked an 8.9 percentage point year-on-year increase. HepsiJet's high NPS confirms its commitment to differentiation with service excellence, fueled by flexible and convenient delivery options. Being a new generation logistics company committed to sustainable practices in a pilot project, HepsiJet added seven electric vans to its fleet in the quarter. With the target to increase this number to 50 by year-end, this initiative marks a further step towards addressing the bigger environmental issue. In this context, as the first e-commerce player to publish a sustainability report in Turkiye, I'm delighted to announce that we recently published our report for 2023. Our third priority is capitalizing on our clear differentiation with affordability and lending solutions. Hepsipay's comprehensive suite of payments and lending services gained further significance in a continued environment of tight liquidity. Our affordability solutions, which include our in-house Buy Now Pay Later solutions, consumer finance loans, and shopping loans from partner banks, have gained more traction. The quarterly share of these affordability solutions in GMV rose to 6.1% from 4.9% a quarter ago, which is around a 20% increase. The consumer tendency to use general-purpose loans for shopping on our platform has also increased. As such, including the impact of those spent on the platform, GMV penetration of our overall affordability solutions rose to 8.1% in Q2 from 5.8% a quarter ago. Hepsiburada is the largest non-bank BNPL solution provider in the Turkish market. Our BNPL volume more than tripled year-on-year during Q2. Our overall BNPL and shopping loans were utilized in nearly 1.3 million orders over the last 12 months. We diligently manage credit risk in our BNPL with a cost of risk around 2.6% in August. On a broader scale, over the last 12 months, total lending volume on our platform reached TRY11.2 billion, with an incremental of around TRY3 billion over the last quarter. Nearly half of this volume was issued through our partner banks. Shopping-related credit receivables create limited balance sheet loss, with average durations of 3.7 and 4.2 months for BNPL and consumer finance loan solutions, respectively. We aim to grow this business line profitably by continuing to leverage Hepsipay solutions and those of our partner banks while growing our e-commerce business. Aside from the affordability aspect, Hepsipay scaled up on the payment front. Its wallet pay gross reached $16.7 million, covering 19.5 million store cards by the end of August. Hepsipay further enhances customer experience with the recently launched auto top-up feature in the wallet. Hepsipay remains committed to becoming Turkiye's primary digital wallet in both physical and online retail. Our fourth key priority is offering our strongest muscles to off-platform customers, and let me start with HepsiJet. With over 9 million parcels delivered, HepsiJet doubled its external customer volume year-on-year. Accordingly, in Q2 '24, its off-platform share rose by 11.1 percentage points year-on-year to nearly 36% of its total, thanks to doubling its volume with many trusted customers off-platform. As an appealing logistics partner, HepsiJet continues to expand its customer portfolio through several key accounts. Next is Hepsipay's one-click checkout solution, Pay with Hepsipay. We continue to expand this convenient solution to many other retailers. Hepsipay is now integrated with 50 leading retailers in Turkiye, having almost tripled its total payment volume in Q2 compared to Q1. Hepsipay aims to continue winning key accounts by also launching its proposition in the SME market. And now, I will end my part with our guidance for Q3. For the second half of the year, we remain cautiously optimistic about market conditions, and yet we are truly confident in our ability to execute on our strategic initiatives for the period ahead. Accordingly, in the third quarter, we expect to deliver GMV growth within the range of 70% to 75% year-on-year. We have continued our prudent cost management in place, and we foresee an EBITDA of around 2.2% of GMV. These figures I've referred to are adjusted for inflation. With this, I thank you for listening, and I'll leave the floor to Seckin, our CFO, to provide further insights into our strong financial performance.

Seckin Koseoglu, CFO

Thank you, Nilhan, and welcome, everyone. I am delighted to be with you today to present our second quarter and first half results. We delivered a solid performance across all metrics, both in Q2 and the first half, in a still challenging macroeconomic environment. Here, it's worth taking a minute to recap what Nilhan said regarding consumer demand dynamics over the two quarters of the first half, which consequently impacted our quarterly growth performance. Overall, Q1 consumer demand was high due to widespread expectation of price increases post-March 31 local elections, which pulled consumer demand forward from April to March. Therefore, we see the merit in considering our overall first half GMV growth performance, which came in at 21.6% adjusted for inflation. On the profitability side, we recorded an 11.2% gross contribution margin and 1.0% EBITDA as a percentage of GMV in the first six months of the year. Let me now go over the details of the second quarter performance. In the second quarter, around 4% real GMV growth came mainly through order growth. Higher VAT rates also contributed to this growth this year. We achieved the highest gross contribution margin since our IPO at 12%, with a solid 2.6 percentage point improvement on a yearly basis in Q2 '24. Our EBITDA as a percentage of GMV continues its uptrend, reaching 1.1%, with a 0.9 percentage point rise year-on-year when the one-off provision reversal for the Competition Board investigation concluded in July 2023 is considered. Let's move on to the next slide to look at our GMV breakdown. In Q2, with a 4 percentage point shift compared to Q2 last year, our marketplace operations corresponded to around 71% of our business. This shift came as a result of a 5.1 percentage point shift towards non-electronics, which is in line with our broader strategy. Change in market dynamics with a slowdown in the electronics market also had an impact on this shift. Let's have a look at our revenue and gross contribution dynamics in the next slide. While Q2 revenue growth was nearly flat, our revenues grew by 20.5% in the first half. Flat revenue performance in Q2 '24 was mainly due to a 13% decrease in our 1P revenue compared to Q2 '23, offset by the strong growth in our delivery service revenue and other revenues, including advertising services revenue and loyalty program revenue. The 13% decline in 1P revenue was mainly due to the 4 percentage point shift in GMV mix towards 3P. Our strategic priority to expand the services offered to third parties and scaling our advertising services, as well as our loyalty program, were instrumental in this quarter's gross contribution margin expansion by 2.6 percentage points. Let's move on to our EBITDA performance on the next slide. We recorded 1.1% EBITDA as a percentage of GMV in Q2 '24, with a 0.9 percentage point improvement on a yearly basis, excluding the one-off item last year. This improvement was driven by a 2.6% rise in gross contribution margin, partially offset by a 0.9% rise in shipping and packaging expenses, a 0.5% rise in advertising expenses, and a 0.4% rise in payroll and outsourced staff expenses. The increase in shipping and packaging expenses as a percentage of GMV was mainly driven by higher order volume on our platform and rising volume in HepsiJet's third-party business. A rise in delivery fees per unit outpacing the average inflation in Q2 '24 compared to Q2 '23 also had an impact. Next, let's have a look at our cash flow dynamics. In Q2 '24, cash used in operations improved by TRY503 million compared to a year ago. This improvement resulted from a TRY121 million increase in EBITDA, a TRY448 million decrease in realized FX losses, a TRY73 million increase in the change in operating monetary gain against a TRY107 million decrease in the change in net working capital, and a TRY32 million decrease in other non-cash items. With TRY407 million in CapEx, our free cash flow was around negative TRY645 million in Q2 2024. Considering the first six months, we delivered the highest first half free cash flow since our IPO. We can move on to the next slide. I would like to leave you with the following takeaways from today's presentation. Despite Q2's continued macroeconomic headwinds, we achieved real GMV growth on a year-on-year basis, contributing to 21.6% growth in the first half. Building on our strategic priorities, we recorded the highest gross contribution margins since our IPO at 12% in Q2 '24. The uptrend in EBITDA continued in step with our sustained cost optimization efforts, reaching 1.1% of GMV in Q2 '24. Our controlled cash management enabled us to record TRY472 million in free cash flow in the first half of 2024, the highest first half since our IPO. As we reflect on our good results in the first half of the year, we are committed to growing sustainably and profitably going forward. Thank you for listening. We can now open the line for questions.

Operator, Operator

Ladies and gentlemen, at this time, we will begin the question-and-answer session. Ladies and gentlemen, there are no audio questions at this time. We will now proceed with the written questions from our webcast participants.

Helin Celikbilek, Investor Relations Director

Thanks, operator. The first question is, your GMV guidance implies a bigger premium to inflation in Q3 than in Q2. What's driving that?

Nilhan Gokcetekin, CEO

There are a few drivers that will deliver higher growth in Q3 versus inflation. Number one is the impact of our strategic initiatives, Premium, which is driving higher loyalty, our investments with HepsiJet, which already doubled volume off-platform, and our improvements in ad and premium revenues. Additionally, we are also going to benefit from the positive seasonality of the back-to-school period. Hence, we are expecting solid growth in Q3 ahead of inflation.

Helin Celikbilek, Investor Relations Director

The second question is, what was the impact of the second quarter holidays on GMV?

Seckin Koseoglu, CFO

We would probably have roughly an additional 6% real growth on top of our existing growth, bringing our real growth to 10%.

Helin Celikbilek, Investor Relations Director

Third question is on the seasonality of cash flow. For the second half of 2024, would you expect to return to positive free cash flow like in 2023?

Seckin Koseoglu, CFO

Yes, definitely. I'm confident that we will have positive free cash flow on a full-year basis. We will continue to improve our EBITDA and manage working capital diligently in the second half of the year. On the flip side, we had a sizable realized FX gain last year, which may not necessarily be the same this year depending on the Turkish lira devaluation.

Helin Celikbilek, Investor Relations Director

Thank you. The fourth question is shifting GMV towards Marketplace, 3P. Is that a seasonal shift or is it a strategy?

Nilhan Gokcetekin, CEO

We definitely have a strong strategy to improve our mix for higher non-electronics, thanks to our premium and loyalty programs. Hence, this shift to non-electronics is coming towards 3P because sectors like home and fashion, all these non-electronics categories, have a much higher rate of marketplace on our platform. This is the strategic aspect. Conversely, the slowdown in electronics markets in Turkey is also bringing a higher mix shift to non-electronics almost beyond our control, serving as a tailwind to our platform as well.

Helin Celikbilek, Investor Relations Director

Thank you. The fifth and last question in this question set is, as inflation subsides, how will IAS29 accounting impacts evolve as we go into 2025 on revenue, EBITDA, and free cash flow specifically?

Seckin Koseoglu, CFO

Sure. On revenue, on an unadjusted basis, the growth will be lower as price increases will be decreased in the market with lower inflation. But on an adjusted basis, there will be no real change in real growth. On EBITDA, this is going to have a positive impact as inflation goes down; the impact on the cost of inventory will decrease, making it positive. On FCF, adjusted and unadjusted FCF will be almost the same, so it's going to have a limited impact on that. However, as EBITDA improves, this positive impact will also positively affect FCF.

Helin Celikbilek, Investor Relations Director

So back to you, Mina.

Operator, Operator

Thank you. We will now move on to further written questions. The first one is from an undisclosed source. Hi, could you please talk about measures being taken to address the rise in finance costs due to higher rates? Thanks.

Seckin Koseoglu, CFO

As interest rates have risen and remained elevated for quite some time, we have adjusted our credit card policy, modifying the thresholds for interest-free installments to our consumers as one mitigating impact. We continue to increase our affordability solutions, which help us manage the overall cost of financing. We are on a positive track, as Nilhan explained, and we will focus on these measures to ensure that credit card costs and overall financing costs remain manageable moving forward.

Operator, Operator

Our next webcast question is from Maksim Nekrasov with Citi. Thank you for the presentation. Can you comment on the consumer environment in Turkey?

Nilhan Gokcetekin, CEO

Absolutely. So thanks for the question. I think there are two parts to this question. One part is the macro environment, where the government has taken decisive actions to combat inflation, which accelerated in early Q2. The high-interest rate environment at 50%, compared to around 8.5% last year, has created a challenging credit environment. As a result, we are seeing a contraction in discretionary spending. Conversely, there is a strong interest in our solutions, which I explained in our results. Our very competitive prices, and there will be seasonal impacts coming with back-to-school in Q4 and Black Friday that will boost demand. We also expect innovations from our recent NPI from Apple. AI innovation is also expected to bring tailwinds to our electronics market, and we anticipate building consumer demand with our strategic differentiators.

Operator, Operator

Our next webcast question comes from Hanzade Kilickiran with JPMorgan. Thank you very much for the presentation, and congratulations on strong results. My question is on your guidance, which seems a bit optimistic given the inflation and expected slowdown in consumption. Can you explain the main revenue drivers for the growth? And why do you think Hepsi may stay resilient against lower consumption across all factors for the remainder of the year? Thank you, presenter.

Seckin Koseoglu, CFO

As Nilhan mentioned in the previous question, our guidance is based on the back-to-school period, during which we expect higher GMV and consequently higher revenue. We anticipate that the electronics market in Q3 will be in a much better position than in Q2 regarding growth. This is expected to positively impact our 1P business. As the 1P part of the business rebounds, it will also positively affect revenue. Additionally, our ads business will continue to thrive along with increased trading during the back-to-school season. Furthermore, our premium revenues will keep delivering as we grow our premium user base.

Operator, Operator

Our next webcast question is from Sinan Xin with Amber Road Investors. Have you detected any shift in consumer behavior since the cross-border taxes changed as of August 2024?

Nilhan Gokcetekin, CEO

Sinan, I would say it is slightly early to comment because the changes have been effective since the end of August, and we only had a few trading days. However, I promise to comment on this in the next quarter's call. Obviously, I want to emphasize that if anything, this would create tailwind impacts for Hepsiburada demand because we have an extremely minimal global inbound share, around 1% of our business. Thus, we would expect such a change to impact global competitors that heavily rely on imports. Yet, I prefer to wait and observe the real impact before providing an estimation.

Operator, Operator

Our next question is a follow-up from Maksim Nekrasov with Citi. To follow up, do you see material pressure on consumer behavior or trading down? Would you expect competition to be tougher in the second half of 2024 and '25 as a result of higher promotional activity?

Nilhan Gokcetekin, CEO

So there is definitely pressure on the consumer because the credit environment is tougher. Interest rates remain high, and the number of available installments for consumers is becoming more limited. This presents a headwind. In the second half, we generally expect higher competition due to the seasonal impacts. However, based on our forecast, we remain optimistic about our performance, thanks to the affordability and lending measures we built, along with a growing share in our external platforms with our logistics business. Additionally, with the strategic measures we've taken, we believe we will deliver strong performance in the upcoming months and into next year.

Operator, Operator

Next question is a follow-up from an undisclosed source. As a follow-up, do you expect to achieve bottom-line profitability in the second half?

Seckin Koseoglu, CFO

As I mentioned before, we will continue to improve our EBITDA profitability. However, it would be a little premature to comment on bottom-line profitability, as our FX gain was the main tailwind last year. It's challenging to predict the dollar rate that will materialize in the market in the coming months until the year's end. Therefore, it would be difficult to comment on the bottom line at this stage. However, EBITDA will undoubtedly continue to improve.

Operator, Operator

Our next question is a follow-up from Sinan Xin with Amber Road Investors. Are there any limits to funding capacity from your funding partners or balancing capacity for your affordability solutions and Hepsi funds? Do you plan on doing further asset-backed securities?

Seckin Koseoglu, CFO

We do not have any issues regarding funding our BNPL plans, whether from our own balance sheet or using different instruments such as asset-backed securities and bond issues. We will soon initiate the second tranche of our asset-backed security program, and it will continue. Hence, as the business grows in affordability solutions, we have the right tools for healthy funding.

Operator, Operator

Ladies and gentlemen, there are no further questions at this time. I will now turn the conference over to management for any closing comments. Thank you.

Nilhan Gokcetekin, CEO

Thank you so much for listening to us. We appreciate your time and questions. Thank you.

Operator, Operator

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