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Edited Transcript of DHER.DE earnings conference call or presentation 28-Apr-20 8:00am GMT

Q1 2020 Delivery Hero SE Earnings Call

May 4, 2020 (Thomson StreetEvents) -- Edited Transcript of Delivery Hero SE earnings conference call or presentation Tuesday, April 28, 2020 at 8:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Emmanuel Thomassin

Delivery Hero SE - CFO & Member of the Management Board

* L. Niklas Östberg

Delivery Hero SE - Co-Founder, MD, CEO & Chairman of the Management Board

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Conference Call Participants

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* Andrew Geoffrey Ross

Barclays Bank PLC, Research Division - Research Analyst

* Andrew Ian Porteous

HSBC, Research Division - Analyst, European Retail

* Giles Thorne

Jefferies LLC, Research Division - Senior Research Analyst and Technology Research Analyst

* Hubert Jeaneau

UBS Investment Bank, Research Division - Director and Research Analyst

* Joseph Barnet-Lamb

Crédit Suisse AG, Research Division - Research Analyst

* Marcus Diebel

JP Morgan Chase & Co, Research Division - Research Analyst

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Presentation

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Operator [1]

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Dear ladies and gentlemen, welcome to the conference call of Delivery Hero. At our customer's request, this conference will be recorded. (Operator Instructions)

May I now hand you over to Niklas Östberg, Founder and CEO of Delivery Hero SE, who will lead you through the conference. Please go ahead, sir.

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L. Niklas Östberg, Delivery Hero SE - Co-Founder, MD, CEO & Chairman of the Management Board [2]

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Good morning, everyone. Hope you are safe and healthy. And now looking forward to sharing our Q1 trading update.

We had a fantastic development in Q1, which took a bit of a hit towards the end of the quarter. Despite some initial negative impact from COVID-19, we grew orders with 92%. Now we're back on track again or even ahead of pre-COVID levels in almost all markets. Later on, we will speak more on how COVID-19 has impacted the way we operate and what measures we took for the safety of our customers, rider, restaurants and employees.

Now moving to the next slide. Never before has our vision been more real. We always deliver an amazing experience fast, easy and to your door. We have always been very clear about our vision, and it starts becoming more visible in how we keep innovating. We have accelerated investments outside of our core food delivery business to increase customer loyalty to our service and leverage our platform of customer, merchants and riders.

Now before going into the financials, a quick recap on our strategic partnership with Woowa Brothers, which we signed on the 13th of December 2019. Woowa is, as you know, the largest online food delivery platform in South Korea, and the transaction is reinforcing our global leadership and strengthening our position in Asia. We are super excited about this partnership and can't wait for it to close. We do not expect that COVID-19 will impact the time line of closing the transaction and remain to expect a closing of the transaction during H2 this year. In the last month, we have been successfully conducting and preparing economic analysis and responding to KFC's request for information. The numbers in this presentation do not include Woowa Brothers.

Then to next slide. In Q1 2020, we delivered 239 million orders, resulting in order growth of 92% year-on-year on a like-for-like basis. This was despite this strong negative impact from the COVID-19, which totally impacted us with 9.3 million orders between 12 and 31st of March. Gross merchandise value in Q1 2020 was up 58% on a constant currency basis to EUR 2.4 billion, slightly higher on a reported basis. Including Woowa, this number would have been closer to around EUR 4.5 billion with similar year-on-year trajectory.

But as I said, we do not report including Woowa at this point in time, so all numbers excluding Woowa. Revenues continued to grow rapidly with 92% growth for the first quarter on a constant currency basis to EUR 515 million. And then looking on a quarterly basis, as you can see on this slide, our growth on a pro forma basis is significantly above that of other listed peers despite significantly more scale, with exception then, of course, of Ele.me and Meituan. We believe we can keep outgrowing everyone in the industry for many years to come.

Looking back at our early promises, starting with growth. At IPO, we promised above 40% growth in the short and midterm. As you can remember, the IPO was happening in mid of 2017, so over 2.5 or almost 3 years down the track. And as shown, we have continued strong order growth of 92% as well as revenue growth of 92%. In the long term, we are more bullish about our trajectory than ever but have no new guidance here.

With Woowa's unique regional insight, we will also be able to specifically execute on the growth opportunity across Asia.

On leadership, we keep winning market shares in every region against every competitor in the markets where we operate. In Q1 2020, we reached market leadership in 86% of the markets or of the countries where we are present. This was partially achieved by securing leadership position in one additional market and divestment of 2 non-leadership countries.

We keep flexibility of additional investments of up to EUR 200 million with a vast majority not yet spent and is intending to use it opportunistically to extend leadership position where required. As we're now making gross profit per order despite aggressive pricing, additional EUR 200 million gives us tremendous flexibility to invest very aggressively if need be.

The transaction with Woowa also reinforces our position in Asia. And we are committed to invest in the Korean ecosystem and allow Woowa to expand its leadership position there.

On technology and product, here we are making fantastic progress to become a third generation on-demand platform. We believe we are clearly ahead of our competitors here. We consider ourselves pioneers in delivery space. In Q1, we reached 52% own-delivery share. And we have been used -- we have been using this as an advantage during the COVID-19.

Delivery Hero will also support Woowa's expansion into new verticals. We will share global best practices, innovate together and create beneficial (sic) [benefits] for all stakeholders with more choice, better service and more technology.

And last, on the profitability, we are a believer in driving profitability through scale and automation. And we continue to target long-term EBITDA margin of 5% to 8% of GMV. Again, we have no urgency to get there, and we are fine if some markets are lower or loss-making for years to support achieving our first 3 pillars. And as previously stated, post the transaction, over 70% own-delivery GMV comes from markets with profitability.

Now moving to our business update. So on the choice side, we reached 500,000 contracted restaurants on our platform in January, making us the largest platform with the widest selection among listed peers or among outside of China, I think also among every peer outside of China. We added 50,000 restaurants only in the last 3 weeks of March as even more restaurants seek an online presence during COVID-19 pandemic. Some restaurants are temporarily closed. Thanks to a hybrid delivery setup, more than 75% of restaurants still -- are still active as of today.

On speed, we have significantly improved operations to keep customers and riders and restaurants safe and gain trust in the ecosystem. At the same time, we reduced delivery times to below 28 minutes globally, and that is a 20% improvement.

On new occasion, or here labeled as seamless ordering, we accelerated the expansion into multi-vertical and added 1,500 partners only during the last week of March -- last 3 weeks of March. And as of today, we have launched 104 Dmart stores in 9 countries across MENA, Asia and Americas. And Dmarts, for those who don't know, are small local warehouses that allows the delivery in less than 15 minutes. It's the comfort that we are currently building out. They have historically often been referred to as delivery stores, cloud stores and sometimes also dark stores. I'll come back to this later.

When it comes to COVID-19, we are the world's leading local delivery platform and we understand the important role we have in supporting our communities, restaurants and delivery ecosystem. Here, you see some of the global and local initiatives that we've done around governments, communities and customers. I think in interest of time, I think I'll leave it up to you to read.

On the next slide, you see some initiatives for riders and restaurants and, same here, I leave it up for you. I think these activities have not been without cost, but we are confident that the return in form of trust is going to support us in the years to come. So overall, we are very positive to actually take on or haven't made those costs during the COVID-19 outbreak.

Moving on to the next slide. So far, we have been mainly a leader in the food delivery industry. Now we can properly say that we are pioneering in the quick commerce category. This is a category that has truly emerged during the COVID-19 crisis. I'd like to spend a moment explaining quick commerce.

And if you go back then to early 2000 traditional commerce as dominating all trades, but thanks to Amazon, e-commerce started to gain popularity. Now people didn't have to visit stores to get things delivered from mega warehouses. Deliveries have often done -- been done with delivery trucks and delivering -- or deliveries arriving 2 to 3 days after order, and in some cases, even next day.

Price is key. What we're now seeing in the third-generation commerce -- quick commerce, and that is that quick commerce is delivery of products in under 1 hour; and with our Dmarts, even in 15 minutes. But quick commerce has fewer items, smaller baskets and, in particular, suitable for 1-person household. Delivery is often done by 2-wheelers, and warehouses are small and centrally located, so very different. And the main difference then to e-commerce is the simplicity of fewer items and the speed being more important than price. These are very early days, but we expect the quick commerce industry to start reaching the S-curve probably some time this or next year and will reach EUR 56 billion in size in the market as delivery recovers and EUR 458 billion (sic) [EUR 448 billion] globally by the end of 2030.

We cover this category both through partnership stores as well as our Dmart stores, as mentioned earlier. And Dmart is still a very small part of Delivery Hero, but it is growing exponentially. Today, we have 104 stores in 9 markets across MENA, Asia and Americas.

Food will remain by far the largest category, but at very small verticals further complement our service offering to our customers. We should be able to operate this category profitably, and an enormous amount of work and technology has been developed, everything from inventory management, rider operations, AI solutions for routing, mapping, dynamic pricing, area optimization, time estimates, forecasting, customer personalization, yes, only to mention a few.

I believe our focus on delivering and making experience fast and easy to the door is the right focus and not in parallel trying to solve very different challenges of transportation, which in the future can result in a much larger industry. But transportation is not for us. We stay very focused on delivering an amazing experience, fast and easy to the door. And that focus makes a lot of sense.

Then speaking on delivery. In Q1, we delivered 52% of overall orders. We now cover approximately 530 cities globally. Operational improvements and new contactless delivery led to global reduction in delivery time to now being less than 28 minutes on average. And we have enhanced utilization of the riders by 22% year-over-year.

We -- even more importantly, we have significantly improved our gross profit contribution for the group, and it is soon to reach the target where it is on parity with that of marketplace. Here, we are proving what we always said that if you operate very efficiently and you keep focus, and we have been doing that for 5 years, this can be a profitable business.

Now over to Emmanuel for the financials. Emmanuel?

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Emmanuel Thomassin, Delivery Hero SE - CFO & Member of the Management Board [3]

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Well, thank you, Niklas. Good morning, ladies and gentlemen, and welcome to the first trading update of 2020.

In this first quarter, we -- the world faced a so far unknown situation in the recent time with COVID-19 with unprecedented consequences in terms of impact and reorganization. Our employees and structure have proven how resilient, flexible but also creative and inventive they are to serve our customers, to help our partners and also to protect our riders as well as our employees. This is a real stress test for all of us and, obviously, also for Delivery Hero. And quite frankly, we are managing this crisis in a very good manner. Despite the impact of the coronavirus, the lockdown and other curfews that Niklas mentioned before, the company managed to continue its strong growth trajectory.

Our reporting growth rate as a result of our tremendous efforts but also our aim to invest into what we see as the year to expand on the success of our company, our vision to provide an amazing takeaway experience. And given the exceptional situation we've been living in the last 3 months, I'm really proud to see how Delivery Hero could maintain higher -- high customer acquisition levels while supporting governments, also local communities, our customers, the restaurants throughout the COVID-19 crisis.

And continuing into 2020, we are in a comfortable position to develop a higher growth rate while making positive our unique economics on every single order executed and continuing to improve it.

And now let's start with our group financials. So first, and Niklas mentioned it, but first, please note that the strategic partnership with Woowa is not reflected in any of the figures until closing of the transaction, which we expect to take place second half of the year 2020.

The group orders increased by 92% year-on-year in Q1 2020 to EUR 239 million despite the 9 million negative effect on orders after mid-March driven by COVID-19. If adjusted for all the investments and acquisitions, the group had grown by 89% year-on-year on a like-for-like basis. Our revenues continue to grow at an outstanding pace with year-on-year growth of over 92% on a constant currency basis, EUR 515 million. Here again, and similar to the previous quarter, our revenues on the group level have been impacted by the application of the so-called IAS 29 or the impact of inflation accounting for Argentinian operation. I will come back later on in our Americas section.

The positive impact on acquisitions of the current situation is expected to expand the market opportunity and also to be beneficial for the online food delivery as well as all sorts of fast delivery service like our quick commerce in the long term.

Moreover, own-delivery orders increased to 52% of the total orders in Q1 2020, driven by increased customer demand and city expansion across all markets. And this will be supported by positive unit economics on group level and improving unit economics for own-delivery orders across all segments.

As we announced during the previous quarter update, we will now be reporting Integrated Verticals as our new segments following the platform business reporting. And I would like to specify upfront that orders are not public content for platform business and Integrated Verticals. That revenues for Integrated Verticals are defined as GMV for the platform business. And GMV for Integrated Verticals include both the revenues but also the VAT. And also, given the exceptional circumstances, our COVID-19 update will be shown for each reported segment, starting now with the group update on the next page.

So the impact from the COVID-19 pandemic differs from market to market and also has evolved rapidly. In general, we note steady growth of acquisitions throughout this COVID-19, driven by expansion of the customer base beyond typical demographics. We see orders now being 11% lower than March 11, 2020, and almost back to pre-COVID levels but -- and on a good trajectory.

And we can also classify order growth into 2 phases as shown on both graphs. The Phase 1, where global governments reacting to COVID-19 with different kind of measures, some with country lockdowns and some others with curfews with limited food delivery permission.

And then in Phase 2, we're almost back to pre-COVID levels. Overall, we have -- we see a positive effect from COVID-19, except in markets with strong lockdown and curfews. We also see average basket size increase, netting out orders' negative impact. Also, we see that most governments are slowly lifting restrictions. And today, only a handful of countries are still under strict curfews, limiting food delivery to certain hours. This is the case of KSA or Saudi Arabia, Kuwait, Turkey, Jordan, Pakistan and Bangladesh.

What we see also in the second phase, we see that the safety measures have been applied and also communicated. We see that local communities support -- have been supported through partnerships and also that we target and we introduce efficient restaurant acquisition. That's the point that we see during the second phase.

Now let's move to the performance of the 4 operating segments for platform business, and I'd like to start with the biggest segment, Asia. Asia has continued to be a focused area of growth for us in Q1 2020. As mentioned in the previous trading update, we clearly see the impact of previous investments to improve our city coverage, customer experience through faster and more reliable delivery as well as greater restaurant selection. And as a consequence, we see a record in order acceleration of 261% in Q1 2020 to 110 million in orders generated on our platforms. This is circa 4x the year-on-year growth that we achieved in Q1 '19, so a year ago. And this growth is mainly driven by early stage markets in APAC, where we see growth of double digits in some markets. And in addition and which I've also mentioned, the strategic partnership with Woowa is expected to help us to expand our footprint in the region.

Asia's GMV increased substantially by 126% on constant currency to EUR 939 million. And the revenues reached EUR 201 million for Q1 2020, growing at 198% compared to Q1 '19 on adjusted constant currency basis. The stronger revenue growth compared to GMV was mainly due to the increase of own-delivery orders, reaching 70% of total orders. And we are further accelerating the rollout of own-delivery by focusing on customer experience and also decreasing delivery times. Beside the Asian food delivery business, we have seen also growth in new verticals, and 16 Dmarts have been successfully launched in Singapore and Taiwan.

So now let's move to the COVID-19 slide for Asia. In Asia, we've seen a slight acceleration of acquisition in a few markets during the peak of the global pandemic, while Pakistan and Bangladesh introduced partial curfews including food delivery. And as a consequence, we see our pre-COVID-19 levels for less impacting market and recovery trends for Bangladesh and Pakistan, with orders now being 11% higher than March 11, 2020, for the whole segment. And this resilient development took place as the Asian governments were reacting in a very decisive and fast manner for -- to the pandemic.

Now let's move on with our next segment, MENA. In Q1 2020, 85 million orders were generated, and this is representing a growth of 31% year-on-year. And those figures are representing the significant order loss that we noted during the COVID-19. While we also operate strong EBITDA in the first 2 months of the quarter, the crisis or corona has impacted our profitability during March as some countries have applied strong curfews, and that has not been repealed in some cases yet. The GMV for MENA grew by 28% year-on-year in Q1 to EUR 957 million on a constant currency basis, and with 29% growth, even higher, on the reported currency basis. Continued revenue progression with year-on-year growth of 38% in Q1 and on currency basis to EUR 202 million.

Our own-delivery business is ramped up to -- at an accelerating pace and reached now 35% of total orders compared to 27% of total orders in Q1 last year. MENA platform business adjusted EBITDA is expected to remain higher in 2020 versus 2019, and this despite a negative impact up to EUR 50 million from COVID-19 curfews. For the platform business, the MENA segment successfully invested into Dmarts and virtual restaurants. We will refer to this after at Integrated Verticals. And in MENA today, we operate 85 Dmarts across Turkey, Kuwait, Saudi and UAE.

Now let's move to the next slide and let's look at the COVID-19 impact for this segment. Given the COVID-19 emergency, acquisition has seen a strong growth in countries not implementing curfews. Due to the prominent government restriction implemented locally such as 24 hours curfews in KSA, we registered a decrease of 48% in orders since March 11. So similar to acquisitions, orders are showing sign of recovery. As for example, Egypt is starting releasing curfews restriction or Saudi allowing deliveries under special permission; Kuwait allowing deliveries after sunset.

And nevertheless, curfews and significant restrictions are still in place for several markets, but also safety measures have been successfully introduced in others like the contactless delivery, which is, for example, the case at Hungerstation. Or we also support local entities by donating meals to the most vulnerable and medical staff. And also here in MENA, we focus on restaurant acquisition with targeted sales actions.

So now let's move to our next segment, Europe. So the Europe segment shows continuously strong growth compared to our peers. In Europe, we generated 25 million orders in Q1 2020. This is a growth of 33% year-on-year. And in other words, we are outgrowing by far our European public listed competitors with Just Eat growing orders by just 6% in Q1 2020, and takeaway pro forma growth being at 16% for the same quarter. Europe grew -- GMV grew by -- at 40% to EUR 321 million, while the revenues grew by 58% year-on-year on a constant currency basis to EUR 58 million.

During the quarter, there was an increase of customer acquisitions in more markets, especially Nordics currently growing faster than precrisis level. Our own-delivery orders are now at 19% of the total orders.

Let's have now a quick look at the COVID-19 implication for Europe. With a consideration of this crisis, Europe saw significant growth of acquisitions in Northern and Eastern Europe as new customer groups are trying food delivery services during country lockdown. And after an initial drop in orders and acquisitions, even Greece and Balkans experienced a sharp increase in acquisitions during the last weeks.

There's also acceleration for Nordics and Eastern Europe, while rest of Europe is on track to reach a pre-COVID-19 level as we see governments lifting restrictions, like this is the case in Hungary; or we also introduced safety measures like for our foodpanda Romania activities; or we support the local communities, like also here donating medical equipment supported by iFood and the customers in Greece; and also finally, also to foster the targeted restaurant acquisitions, starting, for example, free delivery for home zone areas cosponsored by vendors. And this is what we do right now in Nordics.

And now I'd like to finish with Americas as a platform segment. Americas generated 19 million orders in Q1 2020. This represented a year-on-year growth of 79% compared to the same period in 2019 and a significant acceleration in Q1 despite slight negative impact of COVID in March. The 79% year-on-year growth is significant acceleration from previous quarters. And still, we continue to operate in a very early stage market, and we expect this growth acceleration to continue.

The GMV grew by 42% in our reported currency. And on constant currency, GMV growth has been 48%, amounting to EUR 162 million. The revenues grew by 103% on a constant currency basis and amounted to EUR 38 million, boosted by the investment in our own-delivery capacity as well as the further rollout of multi-vertical offering, including groceries and also other on-demand items. Own-delivery orders are now at 62% of total orders in Americas. And moreover, as of today, 3 Dmarts have been launched in Argentina, Chile and Uruguay.

Obviously, asset headwinds from the region are impacting our results in Europe significantly. And for the revenues as well as GMV for Americas, I mentioned before, have been impacted by the application of the IAS 29 that came into action since September 2018. The impact of considering Argentina as a hyperinflationary country with negative of EUR 370,000 for -- in Q1 2020 regarding revenues, negative EUR 1.7 million in terms of GMV for the same quarter.

Let's look at the COVID-19 page for Americas. We see strong acquisitions, except in countries enforcing stricter COVID-19 measures. Orders decreased mid of March as governments started to implementing COVID-19 measures. But presently, orders have been stabilizing, trending to pre-COVID-19 levels and beyond with a total increase of 25% since March 11. And the reason for it is that we see the government lifting restrictions, for example, in Panama; or the safety measures also have been applied and communicated, which is the case for contactless option via our app, like it was the case in foodora Canada; and as well as local communities have been supported through partnerships like social services for the community in Chile. And finally, we undertake here also like a very targeted and efficient restaurant acquisitions, so targeting local key account churn in the past to win them back. And that was one of the key focus of PedidosYa in this quarter. And we continue to do it, obviously.

So now I'd like to turn over for -- to our new segment, the Integrated Verticals. So as per Q1 2020, we introduced for the first time our fifth segment, the Integrated Verticals. The segment captures the activities that we are operating as a principal versus food platform, where we are acting as an agent and i.e., where we are in full ownership of the restaurant or Dmart, we refer to as Integrated Verticals. Well, Integrated Verticals business did make up to a small portion of the overall business. We expect them to grow over time with fundamentally different economics to our platform business, and that's why we separate them from the other segments.

In Q1 2020, the segment registered 3 million orders, and the GMV reached 18 million orders (sic) [EUR 18 million], while revenue we're at 17 million orders (sic) [EUR 17 million]. And looking at the March data results, the increase of Dmarts customer acquisition, an increase of 218% month-on-month; and order growth, an increase of 28% month-on-month, continued throughout COVID-19 pandemic as customers preferred to order from home during times of social distancing. And these acquisitions -- all acquisitions that we've seen for Integrated Verticals occur at close to 0 CAC, so no marketing spend to acquire these restaurants. We also recently noted a substantial increase in AOV as these customers become more familiar with using our services.

Now I'd like to continue and taking a look at our current cash position. On this slide, we highlight our cash position pre and post the Woowa transaction, which, again, we expect to close in the second half of 2020. We ended the first quarter with a net cash and liquid asset position of EUR 2.8 billion, and this is excluding the so-called restaurant cash. The EUR 2.8 billion includes the proceed of the amount of EUR 2.3 billion from the convertible bonds, insurance and also the equity offering that we raised in January 2020.

And if -- or after earmarking EUR 1.7 billion that is expected to be paid for the cash component of the Woowa transaction, we will then end up Q1 2020 with a net cash and liquid asset position of more than EUR 1.1 billion. This cash will be used for general corporate purposes and also potential M&A activity. We don't expect any major impact from COVID-19 on this cash position, but we do believe that the strong balance sheet will be a competitive advantage in terms of [social] funding.

Now let's move to the next slide and our equity value bridge. In terms of impact of the transaction of -- on our equity valuation, it's helpful to look at our enterprise and also to equity value bridge in more detail. So if you start with our enterprise value, you will -- you would add the cash and liquid assets at March in the amount of EUR 1.1 million (sic) [EUR 1.1 billion] as I just described the slide before and also add the latest portfolio valuation of other minority investment in the amount of EUR 728 million, of which clearly Rappi and Glovo being the largest. And this results in an increase of EUR 1.8 billion of the equity value compared to the enterprise value.

And now let's move to the guidance for 2020. In terms of 2020, we maintained our previously set guidance and continue to expect full year 2020 revenues in the range of between EUR 2.4 billion to EUR 2.6 billion, with an adjusted EBITDA guidance for the group of being negative 14% and negative 18% as a percentage of revenue. This guidance is excluding additional investments of up to EUR 200 million with the majority not spent yet and that we intend to utilize to extend our leadership in selected markets where required. We are confident that 2020 will be a crucial year for consolidation, and, therefore, we are even more pleased having this flexibility to act in our opportunistic plan.

COVID-19-related costs will be absorbed in our group guidance, including the negative impact of the EUR 50 million on adjusted EBITDA experienced in MENA platform business due to the COVID-19 curfews. While at the group level we continue to invest, the direction is clear for us. The EBITDA margin from here is clearly improving as we grow in scale and we can lever on improving contribution margin. And furthermore, we have proven to deliver [enhanced] profitability for 2 of our platform segments, Europe and MENA. So Europe expects to be -- to remain at breakeven during this year and MENA adjusted EBITDA to expect even higher in 2020 than 2019.

And now I hand over to Niklas to wrap up this presentation.

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L. Niklas Östberg, Delivery Hero SE - Co-Founder, MD, CEO & Chairman of the Management Board [4]

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Thanks, Emmanuel.

So to wrap up, 92% year-on-year growth during Q1 despite a temporary dip due to some strict curfews, increased leadership positions to 86% of our countries. We rolled out third-generation platform, including groceries, Dmarts and virtual restaurants. We have been helping local communities throughout the COVID-19 crisis. We reduced delivery times to under 28 minutes on average. And last, now more than 500,000 contracted restaurants on our platform.

And with that, I'd like to thank you again for your tremendous support. I think this will be another fantastic year for us. And now opening up for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question received is from Marcus Diebel of JPMorgan.

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Marcus Diebel, JP Morgan Chase & Co, Research Division - Research Analyst [2]

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Niklas, I have one question on competition, if you can elaborate a bit more. In terms of the EUR 200 million spend, how is that related to competition? Could you tell us a little bit more how you're thinking about when and if to spend it, what your thoughts are here in this regard? I guess we all read the comments from Uber and other players in terms of their profitability aspirations. Have you seen any major funding issues at some of your competitors? Do you think that funding is coming down, therefore, you have an even better position? And again, how does this square to your thinking how much to spend in this context?

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L. Niklas Östberg, Delivery Hero SE - Co-Founder, MD, CEO & Chairman of the Management Board [3]

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Right. So -- we've given commitments that we will win in markets where we operate, and we have managed to achieve that in almost all markets. We now like to make sure that we have the firepower to keep pushing on this path. Additionally, we see also good returns on our investments, and we have been growing several times more efficient than our competitors, as you can also see from the financials of some of them. And we know that we cannot burn cash forever. So we are ready to attack when the time is right.

So in essence, we haven't used or only used a smaller portion of this. We still keep it at hand. I think we'll deploy a significant portion of it as I think that we'll have a lot of opportunities, so probably more opportunistically than defensively. But we also want to make sure that we have enough firepower to take any fight. And luckily, we don't have that many fights. So we might speak about 3, 4, 5, 6 markets. So EUR 200 million is a substantial amount that we can deploy if need to be.

In terms of the competitors, I'm sure that we'll keep -- we'll probably get funding. I think they've had a little bit harder time lately. We've also heard some players who -- or seen some players struggling a little bit there. So that probably does change a little bit. But I think the largest change is not if people have capital or not, it's more that the sentiment that you have to prove efficiencies. And I think that is a mantra that we had for the last few years to operate efficiently such that every euro we spend goes into growth, while I think some of the private players have you spent money without looking at efficiencies. And therefore, they keep on burning money despite cutting down on their aggressiveness. So therefore, we don't really see them as very threatening at this point in time. But we expect that we'll get more efficient, and we'll make sure that we have the firepower to fight it when that day comes.

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Operator [4]

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The next question received is from Giles Thorne of Jefferies.

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Giles Thorne, Jefferies LLC, Research Division - Senior Research Analyst and Technology Research Analyst [5]

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The first question, I guess, is an extension of the previous question around access to capital for your competition. I wanted to comment it from the angle of marketing efficiency. What are you seeing happen to your marketing efficiency or customer acquisition costs? And if you could focus your comments on those regions where you've been facing off against Softbank-backed platforms, that would be really useful, so I guess, Asia and Americas. Any change in your marketing efficiency and customer acquisition costs in 2020?

Second question, the multi-vertical and the greater and greater push into grocery. Now there are still voices out there that says it makes no sense and shouldn't be done. It feels to me that multi-vertical and grocery is going to be a greater and greater driver of competitive dynamics as we move forward. So I'd just be interested in your view. Can a multi-vertical proposition influence the path to market leadership?

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L. Niklas Östberg, Delivery Hero SE - Co-Founder, MD, CEO & Chairman of the Management Board [6]

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Yes. I think there has been a clear change. I think also the fact that we have improved our economics as you saw in our delivery economics on one of the slides and this was particularly in Asia segment. So we have improved our gross profit, which means that we are improving our lifetime values. So therefore, when we look at our cash versus lifetime value, we feel very confident. We have probably seen a little bit of a pullback, but we have paid a little bit more attention on where we have our returns and that -- making sure that we make the investments. But right now, it looks very good. And in particular, then since mid of March or end of March, we have seen very positive CAC as many users have come also for free, to be honest. So we have -- obviously, the fact that we have a strong awareness in the market also means that we get a significant portion of free traffic and free users during this crisis.

Then on the multi-vertical, yes, I've heard that it doesn't make sense. I've heard also that logistic doesn't make sense. And I think e-commerce, also heard that it doesn't make sense. And then still we have Amazon worth $1 trillion. So I think you -- over and over, you will hear skepticism. That's okay. And we will just have to prove that we can make economics.

Having said that, it's not easy to make economics in this business. It's also not easy to make economics on delivery. It requires years of operating this. And the same with the multi-vertical. It's very tough. But I think we have found ways, and that's always the way we look at it. We'll always look at it from a consumer point of view. What do the consumer want? And then the question is how do we price it and how do we make it work. And I think -- here, I think we have good developments, and we are, of course, yes, very satisfied with the current development there.

We are very happy with the dark stores that we've been launching. And I do think that our focus -- and of course, every company have their focus, and I think that's the right thing. We have our focus to deliver an amazing experience fast and easy to the door. We think that is a large enough focus, but not -- but it is a focus. I think some players have a focus of doing everything. I think that's very tough. And I think they are not very synergistic to do -- driving people and delivering items. So therefore, we think that's a way too big focus, and then other players are focusing only on food. Everyone is taking their own approach. Our belief is and our mission is what makes sense for us, and we believe that our customers are going to value us more over that.

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Giles Thorne, Jefferies LLC, Research Division - Senior Research Analyst and Technology Research Analyst [7]

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And just to -- Niklas, just to push you on that last point, if the utility of a marketplace defines the competitive outcome in any given country, do you think a traditional food-focused marketplace can beat or win out against a multi-vertical marketplace that also does hop through or vice versa? Or they just coexist?

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L. Niklas Östberg, Delivery Hero SE - Co-Founder, MD, CEO & Chairman of the Management Board [8]

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No. I think it can. And as always, to venture on new things, you have to have a very strong team and strong operations to manage multi-areas, and it does drive extra complexity. So I think it can. In some markets, we might find that groceries and other items might not be large enough to justify it, and a food player can focus on a slightly different customer segment and still make a good return and profit. So I think it can both coexist, and it can even beat a multi-vertical approach. I'd rather have a focused -- a singular focus on food than a distracted focus on a lot of things.

Luckily, I think that we can handle the focus and we are able to, and we will have a lot of synergies there. I also think that we have enough scale to operate both these verticals or these verticals while it -- many other players will not have the scale to operate this. So I think there is also a time and a size and a scale in order to do this effectively and profitably. And we have that scale and size, and many others don't have that size. And therefore, I also think it will be tough for them to do multi-vertical.

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Operator [9]

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The next question received is from Joe Barnet of Crédit Suisse.

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Joseph Barnet-Lamb, Crédit Suisse AG, Research Division - Research Analyst [10]

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So the first area of questioning is around the gross margins of marketplace versus logistics. Can you talk a little bit about what drove the significant step change in logistics profitability or margin in the quarter? I think you touched on Asia, but any more color you could give around that? As a follow-up to that, how long will it take to get to parity, logistics with marketplace? And what happens when you get there? Will you look to reinvest any excess profitability from logistics? Or could we see conceivably logistics margins going above marketplace? That's question area number one.

And question area number two, as a result of COVID, you brought in measures to aid restaurants including delivery fees, and I think in some areas even lower commission rates. Can you help us understand the cost of that? And how and when you get back to a normal fee-paying environment?

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L. Niklas Östberg, Delivery Hero SE - Co-Founder, MD, CEO & Chairman of the Management Board [11]

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Yes. So I'll cover a little bit on the gross profit. So we always had the approach that we'll price things at where we think that we can make the profit contribution parity over a foreseeable future. I used to do the rating before. And foreseeable for us was the 6, 9 months on the track that we saw, and we clearly have initiatives in the pipeline that can drive us there. And that's why we front-loaded some of our aggressive affordability push last year in particular because we saw that we can get more efficient on our driver logistics and so on. And that's why I've seen a big improvement now in Q1 because we took our affordability to that level, and then we have kept it at that level while we have actually improved our efficiency before -- our efficiencies than after.

In the past, we changed towards efficiency but also reduced the pricing. That's why you never saw that improvement in gross profitability that effectively. But that's basically what happens. So when we reach them -- that parity, first of all, we will not -- we still have a lot of things to -- or we still have a lot of work to get there. There's a small difference maybe. But -- and we speak about every single cent matters here, so we speak about even fractions of cents when we work on our improvements in efficiencies. So even getting to parity, it's still going to be some work, but we are confident that we get there. If you overshoot, then we're probably priced too high and we should have taken down pricing, and maybe we'll do take down pricing even further to making sure that we keep that parity because that's where we want to be. We don't want to make excessive profits on logistics, but we want to make similar profit on logistics when we've gone to logistics. So that's the plan.

In terms of COVID and the cost there, so most of the costs have been one-off costs when they are more directly related to COVID. We are doing a giving-back thing, which is slightly larger in -- during Ramadan to have a slight cut in commission during 1 month, but that's more of a Ramadan, giving back to the community, showing that we're building on our trust of having the region and the relationship we have there. So that's just a 1 month of cost there. Then, of course, we have more costs -- COVID costs related to -- that we have lower order levels, and we make a significant profit contribution per order. So we are taking a significant loss indirectly as long as order levels have not returned to normal. The last few days have been very good, especially since we started Ramadan. We hope, of course, that the curfews will be over when we get out of Ramadan, but this we cannot plan on. We will have to see when we get there, and that's why we are putting EUR 50 million expected hit on MENA to be on the safe side there.

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Joseph Barnet-Lamb, Crédit Suisse AG, Research Division - Research Analyst [12]

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Niklas, maybe one very brief follow-up, if that's okay. With regards to setting that profitability level of logistics equal to marketplace, you spoke about the affordability you sort of brought in. As you stand now, knowing more than you did 12 months ago, do you think you did set that affordability at the right level? Or do you think it's conceivable that in the next 6, 12, 18 months, you actually bring in another round of affordability, thus driving growth up because it is trending above marketplace profitability?

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L. Niklas Östberg, Delivery Hero SE - Co-Founder, MD, CEO & Chairman of the Management Board [13]

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Right. I do not expect that there will be further affordability cuts or at least not on a global level that would be visible. I think we have also taken it almost as far as we can take it, to be honest. So we have been doing -- there's a lot of free delivery. There's a lot of low minimum order values, a lot of low delivery fees. So I don't even know if you can take it much lower. It would really just be marginal if that is even possible to do. So I do not expect that there will be anything more that could even be done even if we would want to. So from this level, we should be fine. Yes. And then -- yes.

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Operator [14]

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And the next question received is from Andrew Porteous of HSBC.

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Andrew Ian Porteous, HSBC, Research Division - Analyst, European Retail [15]

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A couple from me. First of all, a quick one around MENA. Just trying to understand what's assumed within that EUR 50 million impact on MENA this year. I mean, presumably, you can't keep going at minus 50% orders for too long a period. Just trying to understand what sort of recovery you're assuming there when you're calculating that impact?

And the second, just on the impact on the economics of the grocery side of the business really on dark stores, could you just talk about how the economics stack up in terms of basket size, gross margin, delivery fees, et cetera, just to help us understand it? Because I can understand why people are skeptical given what you sort of see from those grocery businesses. Just trying to see why you might take a different view on that given the economics that you see from your side.

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L. Niklas Östberg, Delivery Hero SE - Co-Founder, MD, CEO & Chairman of the Management Board [16]

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Emmanuel, do you want to cover the first?

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Emmanuel Thomassin, Delivery Hero SE - CFO & Member of the Management Board [17]

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Yes. Yes, absolutely. I mean -- so our expectations on MENA, first, as Niklas said, we've been cautious because the visibility that we have with MENA is not exactly the same that we have for the other segments. I mean in the other segments, we've seen the restriction lifted by the government. While in MENA, we are still experiencing curfews and lockdown by the government. So it's quite difficult, combined with the Ramadan, to see what would be the impact for the future. The negative EUR 50 million EBITDA is mainly coming from a reduction of orders, clearly. I mean you've seen the impact of 48% on Q1 already since 11 of March. So that -- we were assuming that what could be the worst-case scenario. That's why we're talking about up to EUR 50 million negative EBITDA.

We're assuming that Q2 will be very special because we have a combination of COVID-19 plus Ramadan starting. We do have some costs related to our efforts. I mean we make donation. We also increased our operations to support the onboarding of the restaurants, making sure that we onboard them faster. It had also some costs on riders because we recruit. But basically, this reduction of the EBITDA that we are turning today or we are forcing today is clearly mainly linked to the reduction of the orders. When is normality kicking back or when do we go back to normality? There -- this is like an assumption. Probably, then during Q4, we will see an improvement, but that -- we were pricing in the evolution that we see today. As I said, the visibility of MENA is quite different from what we have from the other segments, and we've been cautious.

Do you want to continue on Dmarts, Niklas?

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L. Niklas Östberg, Delivery Hero SE - Co-Founder, MD, CEO & Chairman of the Management Board [18]

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On the groceries. Yes. So -- I mean let's do with the Dmarts. So if you look at the grocery, when you are the purchaser or principal of items, and you -- depending on which item you choose and the selection and so on, you can have margins anywhere between 20% and 50% on your items. Then it's fairly similar to the fees that we have when we deliver food. So that's where it makes the margin. Then, of course, we have some costs associated to it, but we also have some less costs related to it. So logistics is shorter distances. And the picking is -- can also be covered through a small delivery fee or so on. So we can -- so the simple way of looking at it is that the margin we'll get from the product is equivalent of the margins that we get from our restaurants when we do the service. And of course, we have to adjust the delivery fee and other items to making sure that we cover the other potential items and item costs.

And then if you look at the groceries, then it's harder. And here, I think it's a more difficult job to get the economics when you -- when there is someone in between or a grocery store who also needs to make margin on the products. But they're also here. And they're working directly with the CPGs. You also have a possibility to making additional revenue there.

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Andrew Ian Porteous, HSBC, Research Division - Analyst, European Retail [19]

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Just a quick follow-up. What was the split between perishable and nonperishable grocery within Dmart?

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L. Niklas Östberg, Delivery Hero SE - Co-Founder, MD, CEO & Chairman of the Management Board [20]

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We do not disclose, but we have both.

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Emmanuel Thomassin, Delivery Hero SE - CFO & Member of the Management Board [21]

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I just wanted to comment on these fixed costs that we may have at Dmarts compared to grocery. Obviously, our stores are smaller, so we can optimize on the cost structure. And it has an impact on the margin that we can generate from Dmart, which are supposed to be better than the groceries one.

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Operator [22]

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And the next one is from Andrew Ross of Barclays.

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Andrew Geoffrey Ross, Barclays Bank PLC, Research Division - Research Analyst [23]

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Just 2 topics to touch on. First one, to follow-up on the D stores. I think you're targeting around 400 to the end of this year. Maybe you could just confirm that. But then kind of into '21, how should we think about ramp-up there? So is there anything you can share with us in terms of kind of how many stores per population you think you need in the market? Any kind of work you've done on that would be helpful. And I guess, as an extension to that, how much negative EBITDA is there in the guidance related to these stores this year?

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Emmanuel Thomassin, Delivery Hero SE - CFO & Member of the Management Board [24]

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Well, on Dmart -- yes, sorry.

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L. Niklas Östberg, Delivery Hero SE - Co-Founder, MD, CEO & Chairman of the Management Board [25]

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Please.

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Emmanuel Thomassin, Delivery Hero SE - CFO & Member of the Management Board [26]

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No. Go ahead.

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L. Niklas Östberg, Delivery Hero SE - Co-Founder, MD, CEO & Chairman of the Management Board [27]

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I think on Dmart, yes, we -- the ambitious target is to get to 400. It's going to be a lot of work, so it's not easy. But -- and it's a very aggressive ramp-up, and we're doing our best and hope that we get there. In terms of '21, I do not dare to speak out on that now. It depends very much on the order density that we can generate because we don't want to open Dmarts when we don't have enough order density. We know roughly how many customers we need in a certain area in order to justify having a Dmart.

And of course, if you see that the cohorts and behavior and -- that is changing during the year. And of course, we can build even more Dmarts, have even closer proximity to the customer, making even better economics on it. So it's really around driving scale per Dmart store. I do not know yet how much scale we can drive in order to even having a closer proximity there. So unfortunately, I won't be able to answer that. But we will make -- we will have the best coverage of Dmart stores in all markets that we operate for sure.

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Andrew Geoffrey Ross, Barclays Bank PLC, Research Division - Research Analyst [28]

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And just in terms of the EBITDA contribution this year?

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L. Niklas Östberg, Delivery Hero SE - Co-Founder, MD, CEO & Chairman of the Management Board [29]

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We haven't given guidance on the EBITDA contribution, but I think we gave, in the last update, an approximate CapEx as well as OpEx for ramping up those stores. We have a similar view today. Emmanuel, anything you can share other than what we shared above?

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Emmanuel Thomassin, Delivery Hero SE - CFO & Member of the Management Board [30]

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No. You're right. We didn't disclose the EBITDA contribution. In terms of CapEx, we mentioned around EUR 300 million for this year for global CapEx. And we stick to the 400 Dmarts that we want to launch this year, 2020.

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Operator [31]

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And the last question for today is from Hubert Jeaneau of UBS.

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Hubert Jeaneau, UBS Investment Bank, Research Division - Director and Research Analyst [32]

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Just one given the time constraints on the -- if you could give a comment around the cash balance and the bridge between the EUR 1.4 billion number that was given in February and the EUR 1.1 billion now would be great.

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Emmanuel Thomassin, Delivery Hero SE - CFO & Member of the Management Board [33]

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I mean like the bridge that we saw today is the cash flow at the end of March, excluding restaurant money and including our assets like Takeaway shares that we still own. That's what -- this is what we're presenting today. I will say the bridge -- I don't have it on top of my head, from EUR 1.4 billion to EUR 1.1 billion. I will have to verify this information, Hubert.

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L. Niklas Östberg, Delivery Hero SE - Co-Founder, MD, CEO & Chairman of the Management Board [34]

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And again, I'd like to thank everyone for your trust and support. And I'd also like to use the opportunity to thank the Delivery Hero team. I really couldn't be more proud of what you have delivered over the last 2 months. I know it's been incredibly hard, but the world has never needed us more than now. So thank you very much, and stay safe, stay healthy.

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Emmanuel Thomassin, Delivery Hero SE - CFO & Member of the Management Board [35]

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Yes. Thank you, everyone. Stay safe. Talk to you soon.

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Operator [36]

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Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect.