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Edited Transcript of MEO.DE earnings conference call or presentation 7-Feb-20 8:00am GMT

Q1 2020 Ceconomy AG Earnings Call

Dusseldorf Feb 14, 2020 (Thomson StreetEvents) -- Edited Transcript of Ceconomy AG earnings conference call or presentation Friday, February 7, 2020 at 8:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Bernhard Düttmann

Ceconomy AG - CEO, Labour Director & Member of Management Board

* Karin Sonnenmoser

Ceconomy AG - CFO & Member of Management Board

* Stephanie Ritschel

Ceconomy AG - Head of IR

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Conference Call Participants

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* Fabienne Caron

Kepler Cheuvreux, Research Division - Head of Food Retail Sector

* Nicolas Langlet

Exane BNP Paribas, Research Division - Research Analyst

* Tushar Jain

Goldman Sachs Group Inc., Research Division - Research Analyst

* Volker Bosse

Baader-Helvea Equity Research - Co-Head of Equity Research

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by. Welcome, and thank you for joining the CECONOMY AG conference call. (Operator Instructions)

I would now like to turn the conference over to Stephanie Ritschel, Vice President of Investor Relations. Please go ahead.

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Stephanie Ritschel, Ceconomy AG - Head of IR [2]

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Good morning, everyone, and welcome to our Q1 results call. With me today are CEO, Bernhard Düttmann; and CFO, Karin Sonnenmoser, who will guide you through today's presentation.

Before we start, let me briefly address the usual formalities. Firstly, please be aware that this call is being recorded. A replay will be available on our website later today. Secondly, please keep in mind that today's presentation and potentially also some answers to your questions during the Q&A session may contain forward-looking statements. For additional information on this context, please refer to the disclaimer.

But now let me hand over to our CEO. The floor is all yours.

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Bernhard Düttmann, Ceconomy AG - CEO, Labour Director & Member of Management Board [3]

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Good morning, everyone, and thank you for joining the call. Today, I would like to begin with a quick review of our first quarter. I will then pass over to Karin, who will guide you, as usual, through the financials and the outlook for the year. We will close, also, as usual, with a Q&A session, where we are happy to answer your questions.

Ladies and gentlemen, I would like to pick up where we had ended the last call and emphasize that our utmost focus is on execution. In the first quarter, we executed with a focus on the Black Friday period as well as the Christmas trading. And this year's Black Friday period was again successful. On the flip side, however, as Black Friday continues to gain importance, we again noticed that the Christmas business was impacted by a pull-forward effect.

The improvements of our online platforms in the past financial year and our service offerings have supported solid growth rates in our online business as well as the Service & Solutions business. Higher income from Service & Solutions as well as our cost optimization efforts contributed to our bottom line results improvement. Our operations in Germany performed particularly well in the first quarter. Karin will come back to this later.

At the same time, however, we also faced some challenges in the first quarter. First, the performance of the Polish business is still not satisfying. We have worked out an action plan and long-term management changes to steer against the negative development. Second, we faced an overall unfavorable macroeconomic environment in some countries, paired with intense competition. We're keeping a close eye on this and want to make sure that we deliver a resilient performance also in this environment. These developments reflected well on our sales and earnings. Let's take a quick look at the [guidance] relevant key figures for the first quarter.

Our sales adjusted for FX and portfolio effects were down 0.5%. If we also exclude the iBOOD business, which is not treated as a portfolio measure, the underlying sales development would have been almost flat. Adjusted EBIT increased by EUR 20 million versus the prior year period. This figure underlines the progress we have made over the last month. To sum this up, we managed to build the foundation for a sound financial year 2019, 2020.

Let's now take a closer look at our Black Friday performance. In 2018, for the first time, we set up a focused concept to leverage this important season of the year in the best possible way. It worked out well. We have, therefore, built on this proven concept in 2019 and managed to even be better prepared. For example, the countries were equipped with a detailed harmonized playbook in advance to ensure a very disciplined campaign across the whole period and across all segments. In this context, the clear focus on services and the cross-selling of bundles has proven to be the right one for our customers. Our recent updated web platform functions very well without any disruptions, which is crucial in peak trading periods like this one, coupled with a better availability and a strong improved delivery performance, has led to big improvements in customer satisfaction.

Members of our loyalty programs took on the early access option to shop ahead of everyone else. With these efforts, we were successful in building again a profitable Black Friday, both in our stores and online. We are grateful to our thousands of committed colleagues who work hard to deliver a great customer experience every day. The Black Friday period was on top of all our minds and look at the figures on the next slide underlines this.

Black Friday was, again, the strongest single day ever for us. In total and compared to the prior year, we sold more than 1 million more items. Samsung and Apple smartphones as well as Samsung TVs were among the top 3 of our best-selling items with respect to net sales as well as the total number of sales units. [Size and] floor care products were also very popular while gamers were eager to get a Nintendo Switch. We recorded around 15% more online shoppers who visited our web shops. In addition, we welcomed around 2% more customers in our stores during the 5-day Black Friday period versus last year. These are impressive figures. All in all, we generated double-digit sales growth rates during that Black Friday period for both our stores as well as online.

To give you some more flavor, let me briefly highlight that, in particular bundled offerings were very well received by our customers. And this plays exactly into our -- in our service strategy. We have successfully linked product sales with services and accessories. Especially popular were ready-to-use preinstalled smartphones and notebooks, both showing an impressive sales boost of about 60%. The same holds true for sales in screen protection offers, which increased by almost 70% compared to previous year. Both services are part of our core service offerings at the SmartBars. Let me remind you that the increased focus on the attachment of Service & Solutions certainly support our bottom line. Taking all of this together, we are very satisfied with the well-executed Black Friday period.

So this is it from my side for the moment. Let me now pass over to Karin for the deep dive into the Q1 financial performance.

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Karin Sonnenmoser, Ceconomy AG - CFO & Member of Management Board [4]

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Thank you, Bernhard, and good morning to everyone on the call. Ladies and gentlemen, I'm pleased to look back at a solid first quarter of the year. Let me guide you through the quarterly development in detail.

Total sales came in at around EUR 6.8 billion. This represents a slight decline of 0.8%. Adjusted for ForEx and portfolio effects and iBOOD, sales came in roughly on prior year's level. A look at the individual segment reveals a mixed picture. In DACH, sales more or less stayed flat despite a demanding comparison base. In Germany, we recorded a strong double-digit increase in sales over the Black Friday period. However, as Black Friday continues to gain importance, this was also [accompanied] by our sales pull-forward. Consequently, the Christmas business in the first weeks of December was weaker than in the previous year. This was also reinforced by the late timing of Black Friday and a deliberately less campaign-intensive post-Black Friday period.

In Western and Southern Europe, ForEx and portfolio-adjusted sales declined by 2.9%. In Spain, the absence of a strong VAT campaign in the prior year period had a negative impact on the sales development. In Italy, sales were down on the back of a currently weaker consumer climate and intense competition. In the Netherlands, sales continued to decline. However, we have noticed a slight trend improvement towards the end of the quarter as the initiated countermeasures seem to start taking effect.

In Eastern Europe, we saw a mixed picture, and in total, a sales increase of 11.3%. Turkey recorded a mid-double-digit sales growth, particularly driven by a positive market environment. On the other hand, in Poland, the sales decline continued, which was linked to an intense competitive environment.

On the other segment, Sweden showed a solid sales development in local currency. The sales decline of the segment is linked to the sale of iBOOD. In Q1 of the prior year, iBOOD still accounted for around EUR 15 million of sales.

Let me now talk about online and Service & Solution. In the first quarter, online sales, excluding the Greek MediaMarkt business, increased by around 4% compared to last year. Adjusted for iBOOD, online sales even increased by 6%. Keep in mind that we faced a challenging comparison base with 28% online sales growth in the prior year period. The strong Black Friday campaigns had a particularly positive effect on the online business. Another reason for the positive development is our pick-up option, which continues to be very well received amongst our customers. 47% of all online orders in the first quarter were picked up in our stores.

I'm even more pleased to look at the development of our Service & Solution business in this quarter. Services & Solutions developed very positively with sales up [to] 10%. This growth was largely driven by a strong demand for extended warranties, thanks to our improved offerings. Although demand for our SmartBars services was soaring in this reporting period, we experienced double-digit growth rates for all 3 core services: ready-to-use, screen protection and in-store repairs. Finally, overall business with mobile contract increased slightly.

Let us now move to Slide 13 for a view on gross profit, OpEx and EBIT. In the first quarter, we had a slight trend improvement in the gross margin compared to the previous quarter. The gross margin only declined by 10 basis points to 18.3%. However, we continue to see pressure on the [goods] margin. In the first quarter, this was partly compensated by our growing exposure to Services & Solutions. Our gross margin also benefited from the successful management of the Black Friday campaign period in the first quarter.

At the same time, due to our strict cost management, we reduced operational expenses by 50 basis points. This was largely driven by lower personnel expenses, supported by our reorganization and efficiency program, but also other operating cost savings related to an optimized personal deployment in our German stores. Furthermore, lower material and location costs had a positive effect. As a result, adjusted EBIT increased by EUR 20 million to EUR 289 million. This includes a positive effect of IFRS 16 in the amount of EUR 2 million.

Underlying EBIT growth was driven by the DACH segment. Germany posted a significant increase in earnings while the development in other countries in DACH was stable. Our active operational cost management has greatly contributed to this development in Germany. Also, the execution of our strategic initiative continues to take effect. This translated into a higher income from Services & Solutions. Unfortunately, the group's earnings improvement was not supported by all region. Earnings in Western and Southern Europe were impacted by a weak consumer climate and an intense competitive environment in Italy. The lower sales in Spain, due to the timing differences and promotional periods, also had a negative impact on the result of the segment. We expect to catch up the slight earnings shortfall during the next quarter.

In the Netherlands, earnings continued to decline, while we saw a slight trend improvement towards the end of the quarter.

In Eastern Europe, the continuing difficult and competitive environment in Poland continued to weigh on profitability in the region. In Turkey, earnings developed slightly positive in our supportive market environment. Overall, it is fair to say that we see first improving momentum, especially in Germany, with even more to become visible in the [craft] of the year.

I will now shortly explain the bridge from adjusted to reported EBIT. In the first quarter, we booked a positive EBIT effected -- sorry, we booked a positive EBIT effect related to the Greek transaction, which took place at the end of November. This effect amounted to EUR 33 million and mainly resulted from the deconsolidation of the negative net asset book value for MediaMarkt Greece and our consolidated CECONOMY account and from a positive fair value of the 25% joint venture stake.

On the other hand, we still had some training, restructuring expenses related to the reorganization and efficiency program. Those -- the positive net gain amounted to EUR 30 million. We still expect a limited amount of training, restructuring expenses to come in in the next quarters. So in total, we continued to expect a smaller positive net effect of around EUR 10 million in this financial year.

Taking the positive earnings effect into account as well as the other adjustment items related to Greece and Fnac, reported EBIT came in at EUR 319 million in Q1. This represents an improvement of EUR 84 million compared to the prior year period. As you might recall, in the prior year period, charges for top management changes and restructuring in the amount of EUR 34 million burdened the result.

Let us now look at the bridge from EBIT to EPS on Slide 15. Please keep in mind here that we now see the reported figures. In the current period also, the effect from IFRS 16 are included.

Along with the EBIT improvement, earnings before taxes improved by EUR 92 million to EUR 327 million. This was additionally supported by an increase in the net financial result from the M.video dividend in the amount of EUR 13 million. Higher interest expenses, mainly due to the recognition of the interest component for operating leases under IFRS 16, had an upper side effect. The tax rate improved by 5.3 percentage points to 32%. This improvement is mainly related to the nontaxable gain related to the Greek transaction.

Our underlying tax rate, which means before any effects from associates, M.video, or the restructuring, stood at 38%. Please keep in mind that the improvements from tax consolidation projects in the past 2 financial years stemmed from the activation of tax loss carryforwards and of those mainly onetime expense reductions, while the structural tax improvements that we executed are sustainable. At the same time, we are also currently working on additional minor improvements in Germany and in other countries. Therefore, we continue to expect the underlying tax rate to develop towards 35% in this financial year.

On the back of the lower tax rate and the EBIT improvement, earnings per share increased by EUR 0.17 to EUR 0.47.

Moving on to Slide 16. Free cash flow in the first 3 months amounted to EUR 1.421 billion, an increase of EUR 27 million compared to the prior year period. However, this increase is related to the adoption of IFRS 16. We will also provide you with a lease-adjusted free cash flow, subtracting the repayment of lease liabilities for better free cash flow comparability under IFRS 16. Of course, there's no overall change in total cash flow for the group from the first-time application of IFRS 16.

The lease adjusted free cash flow in the first 3 months remained below the prior year's level. This can be partly explained by the expected cash outflows related to the reorganization and efficiency program. Also keep in mind, please, that the positive EBIT effect related to the Greek transaction are not cash effective, and those weighed on the other operating cash flow line. Furthermore, in the prior year, the other operating cash flow benefited from lower trade tax receivables and the settlement of receivables in connection with the Russia transaction.

Another reason for the decline of the adjusted free cash flow, a higher cash tax payment. In the previous year, we benefited from lower tax expense payment due to tax optimization measures in the financial year '17, '18, which became largely cash effective in the first quarter of the financial year '18, '19. We expect to receive a major share of tax refund for the most recent tax optimization in the current financial year, which should result in a year-on-year decline in cash taxes in the coming quarters.

Let's now move on to the outlook. The underlying assumption for the financial year '19, '20 that we presented during our full year call are still valid. With this in mind, we confirm our outlook for this financial year. With regards to sales, we still expect a slight increase in ForEx-adjusted sales compared to the prior year. We continue to expect our adjusted EBIT to come in at EUR 445 million to EUR 475 million. This includes a positive effect of [pre as only] EUR 5 million to EUR 15 million due to the transition to IFRS 16. Our view on the development of the segment also remains unchanged. We expect DACH to contribute to the positive EBIT development and, in particular, Germany. At the same time, we stay cautious with respect to the development in the Netherlands and Poland. Therefore, the segments Western, Southern Europe and Eastern Europe are expected to perform broadly on prior year's level.

The outlook is adjusted for portfolio changes and nonrecurring effects in connection with the reorganization and efficiency program. Also, the earnings effect from associates such as Fnac are not taken into account.

With respect to Fnac, as you are aware, the share price has declined quite strongly in the last weeks. At the current share price level, there is a risk of an impairment as of the next end of period, that is end of March. However, let me be clear here, a potential impairment of Fnac stake would, of course, not be cash effective, it would not trigger a capital increase nor affect our guidance. Overall, the market, and we believe that the Fnac shares are currently undervalued, and expect them to converge towards the fair value.

I would now like to turn the call back to Bernhard for his closing remarks. I look forward for your questions at the end of the session.

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Bernhard Düttmann, Ceconomy AG - CEO, Labour Director & Member of Management Board [5]

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Thank you, Karin. Ladies and gentlemen, let me briefly summarize. In the first quarter, we succeeded in laying the foundation for a solid full year. We focused on Black Friday. And also, we not only succeeded increasing our online sales, but also in attracting more customers to our stores, which is our pillar of MediaMarktSaturn. This proved again to be a core asset in an omnichannel business model. At the same time, our focus was on further implementing our key initiatives, and we are making progress.

So overall, Q1 was another important step on our journey. At the end of March, we will show you where we want to go from here. Therefore, I'm happy to invite you to our strategy update the 26th of March. I'm looking forward to this event. We have a lot to present. We will share our view on the market and a customer-centric business model with you. We will also include deep dives on selected operational initiatives. Moreover, we will provide you with a road map as well as financial impact. So you will be able to track our implementation process. An invitation, including all details, will be sent out early next week.

With this, I would like to conclude our presentation. Thank you, everyone, for your attention. I will now turn the call over to the operator for your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from the line of Nicolas Langlet with Exane BNP Paribas.

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Nicolas Langlet, Exane BNP Paribas, Research Division - Research Analyst [2]

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I have got 3 questions, please. The first one on the gross margin. So among the 10 basis point decline in Q1, was there anything exceptional in there? Or do you think this 10 basis point decline is a good indication for the next quarters?

Second question, how much of the savings related to the reorganization and efficiency program were generated in Q1? And what's the outlook for the coming quarters? And finally, Fnac Darty recently said they are looking at strategic options for their business in the Netherlands. Could you be interested by that asset? And do you think it's feasible from an enterprise perspective?

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Bernhard Düttmann, Ceconomy AG - CEO, Labour Director & Member of Management Board [3]

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Nicolas, let me start with the third question on Fnac and their stake in the Netherlands business. I think we have our own table of work to do. For that reason, we are not keen on taking new assets in countries before we have done the execution on our core tasks, and that we always say it's a transformation of our business doing cat-man, doing logistics, doing the systems, bringing them into the game on making them ready. And everything else would be a distraction. So we are not keen on these assets.

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Karin Sonnenmoser, Ceconomy AG - CFO & Member of Management Board [4]

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Nicolas, well, there are exceptional effects on our gross margin. Actually, our gross margin benefited from the successful management of the campaign period around Black Friday, as Bernhard mentioned before, and in addition, through higher income from Service & Solutions. Nevertheless, we see continuing pressure on our goods margin from competition, particularly in West and Southern Europe as well as in Eastern Europe. So it's a positive trend in the margin, what we have seen in the Q1. But again, we still see pressure on the margin in the rest of the financial year.

The second was -- the second question was, what are the effects of the reorganization and efficiency program in Q1. Actually, we will not specifically break down the program-related savings on a quarterly basis. The cost savings generated in relation to the program are in line with the communicated targets. This is also visible when you are looking at our cost structure in Q1. And if you look at our cost structure, you can see cost savings amounted to EUR 44 million in Q1 before IFRS 16 effect. They were mostly driven by personnel cost savings of around EUR 26 million as a result of our reorganization and efficiency program, but also as a result of other operating cost savings, in particular, due to efficiency measures related to an optimized personnel deployment in our German store. I hope that answered your question.

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Nicolas Langlet, Exane BNP Paribas, Research Division - Research Analyst [5]

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Yes, it does.

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Operator [6]

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The next question comes from the line of Volker Bosse with Baader Bank.

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Volker Bosse, Baader-Helvea Equity Research - Co-Head of Equity Research [7]

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Volker Bosse, Baader Bank. A couple of questions from my side. First, on your adjusted EBIT. It increased by 7.4% in the first quarter, which is still below the 10% earnings growth for the full year. So my question is, what drives your confidence that the earnings momentum will gain momentum in the course of the year?

And second question is on online sales, are you satisfied with your trend with plus 4%? It looks a bit weakish, given that the market grew by plus 10%. And what is your expectations for the rest of the year?

And third question would be on your problem countries, let's call it that way, Netherlands, Spain, Italy, Poland. You mentioned you saw an improving trend at the end of the quarter. Had that improving trend continued in January? And come back on Italy: in earlier calls, you said you have achieved the turnaround here. Does the turnaround did not materialize anymore? And in regards to Netherlands, you call it the distribution center as a kind of problem in that country. You mentioned that was solved out, but it does not seem that that solved the issues in the Netherlands, perhaps a bit of background of your updated view on these countries.

And finally, as you mentioned Fnac Darty, could you give us kind of guidance? What magnitude of potential impairment risk you see at Fnac Darty at current share price levels?

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Bernhard Düttmann, Ceconomy AG - CEO, Labour Director & Member of Management Board [8]

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Volker, I will take your questions. Number one, the adjusted EBIT increase. You're asking why is that. Is it really in line with our yearly guidance because the expected increase is higher? I think we explained clearly that the savings from between 1 program will increase throughout the year. So we expected more savings in the upcoming quarters. I think that should answer that question.

The second point was online, where we -- are we happy with our online sales of 4.3%. Number one, if you take iBOOD out with a pure online business, it would have been 6%. And we are -- actually, we were satisfied with our development in our online channel because we had a lot of traffic in the online channel. We had Black Friday contributing positively to the campaigns. And we had -- actually, we had tough comps against previous year where we had increased to 20 -- by 28% in the first quarter. That was a tough comparison. So in general, we were quite happy.

But in what we also learned, and that is an experience we made in this first quarter, that we had a very successful Black Friday in many, many -- in many of our countries, in almost all of our countries. What happened was that this success surprised also some competitors. So in the time afterwards, there was fierce reaction. Apparently, there was over -- completely overstocked. So there was a fierce reaction on the market after our campaigns, which led then to also a slower Christmas business for us because they just tried to get rid of their stock. And that is reflecting right now, a situation in the market, where is -- there are some players, and we have -- basically, in almost all of the countries, we have some players -- we are tremendously under pressure, and they react -- I would partly say strangely to this situation, but they have to get their cash flow. So they're trying to get rid of whatever they have on stock. And that results in some kind of strange market situation, and that's also the reason why we have this intense price pressure in the market coming up.

And the question is -- and this question is still open, how far will this market price pressure leads? And when -- where is it going to stop? For that reason, it's crucial that we stick to our strategy going for services because Services & Solutions is our pillar where we can be really strong with our asset base, with our customer contact where online players can't have the same.

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Karin Sonnenmoser, Ceconomy AG - CFO & Member of Management Board [9]

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Volker, regarding your first question, what Bernhard just mentioned, we expect strong growth in the Services & Solutions business, and therefore, we expect a positive impact out of that. And in addition to that, we expect accelerating savings from the reorganization and efficiency program, which will step up in the next quarters and should reach the full run rate in Q4, once all leaving employees have actually left the payroll.

Regarding your question about Fnac. If you have in mind that we had a purchase price of EUR 70 and at the current share price of around EUR 45, this would mean that we would see an impairment of around EUR 200 million. But please keep in mind that this is not guidance relevant for us. I think that answered your question.

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Bernhard Düttmann, Ceconomy AG - CEO, Labour Director & Member of Management Board [10]

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No, no, no. There is -- question is still open on the country side. You wanted to have some flavor on the countries, where are we? Number one, I think in Spain, Karin and myself, we had, recently in Barcelona, to look in our Spain organization, I think we are finally seeing an organization which is really committed in executing systematically step-by-step the transformation in category management, in systems introduction in logistics. But it will take time. They are doing -- they had done the pilot stores. They have learned a lot from it. They have started to reduce assortments quite extensively. You will hear about that on the Capital Markets Day. We will give a lot more flavor on this one.

And we also had a very positive Black Friday. And again, this is kind of what I said a minute ago about the price pressure, the after Black Friday, what's coming out of it. But Spain, I would say, is on track. Italy is basically also on track. We have seen also here the same what I said before with the good Black Friday and afterwards this fierce reaction from some competition.

Poland, Netherlands are 2 weak countries. Netherlands, you are exactly right that you said, we have the issue with -- we had the issue with implementing, at the same time, a new warehouse, changing the logistics provider and introducing an IT system -- a new IT system. All the same, it just didn't work out. We are better now to some extent. The logistics provider is working much better collaboration works. The system is also getting in place. So it's working. There is a lot training going on right now for the people to live with the change processes.

And number three, on the warehouse, we are gradually filling the warehouse, a new warehouse, basically with the goods we -- and for that, we have -- that we get to the central logistics structure in the Netherlands. By that, we also are now able to have a scheduled delivery, which was extremely important, which we couldn't test that, and we were unable to supply over the -- in the last month. Now we are in the situation that we even can schedule delivery for the next day, which is a huge improvement compared to the past. But it will still some take time that we have to convince the customers that we are able to deliver because we have disappointed the customers last year, and now we have to regain the trust from our customers.

Poland. Poland is also a tricky situation, so we implement measures to push higher-margin products and services, also specifically services, to align the incentive structure for our store personnel and accordingly. So basically, we try to really get our people really looking at these. We introduced a pricing tool in December to Poland because pricing tool right now is extremely important, especially when we have this kind of fierce price competition in the market that we know exactly where is our market, where is the price situation and how do we react to it? So it was introduced in December. So we -- they have to learn how to work with it, and I think we can slowly see some benefits from their learnings.

We're also working on measures to improve stock availability and -- what is it now, what else? We are looking also to introduce the web platform we have in Germany to roll it out into Poland because we have seen in Germany a much faster process of the web platform. Response time, 4x faster than it was before. So that, we have to also solve because website traffic is important for Poland as well. And then we can also make some more, work some more with a media budget also in line with our online -- for the online business. I think that should be it for the most important countries. I think in every country, we are looking at dedicated steps to execute on to deliver. That's what we do.

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Volker Bosse, Baader-Helvea Equity Research - Co-Head of Equity Research [11]

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Very helpful. It leaves -- just the last question. Did the improving trend, which you mentioned at the end of Q4, continued in January so far?

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Karin Sonnenmoser, Ceconomy AG - CFO & Member of Management Board [12]

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Please -- part of this -- I hope you understand that we are not analyze the [Q rather further] development right now.

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Operator [13]

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The next question comes from the line of Fabienne Caron with Kepler Cheuvreux.

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Fabienne Caron, Kepler Cheuvreux, Research Division - Head of Food Retail Sector [14]

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Two questions for me. First, Karin, the way you talked about the gross margin development within the geography, I suspect between the lines that it's fair to assume that the gross margin in Germany was up. And so as the net for the group, it was only minus 10 basis points. I'm just wondering if this positive trend in Germany gross margin should continue for the remaining part of the year? And the next question for you, Mr. Düttmann. I completely understand what you said on the Netherlands and Poland, where you are taking some measures. Do you -- can you give us a feeling of when do you expect the position of the situation there to stabilize from your side?

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Karin Sonnenmoser, Ceconomy AG - CFO & Member of Management Board [15]

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You're right, the gross margin development in Germany was slightly up. We have seen a positive trend there, and hopefully, we will see this positive trend in the rest of the financial year, mainly -- or based mainly on the development and the growth rate of our Service & Solution business.

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Bernhard Düttmann, Ceconomy AG - CEO, Labour Director & Member of Management Board [16]

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Fabienne, Netherlands and Poland, what is the trend? As I said before, when you disappoint customers, you have to convince them again that you are -- that you have become better. On that, you do not overnight. That's something tough. We have to realize it's just a situation. But if you think about yourself, if you are disappointed in the market, it takes some time until you go there again or until you are willing to change your mind. And I think that's the reason why we cannot just say we have disappointed last year, and now we are basically up to normal. No, it's -- we have to earn our way through dedicated work to get back to the former situation where we were.

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Fabienne Caron, Kepler Cheuvreux, Research Division - Head of Food Retail Sector [17]

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But this is for the Netherlands, right, not for Poland?

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Bernhard Düttmann, Ceconomy AG - CEO, Labour Director & Member of Management Board [18]

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So they are -- that's -- sorry, again. What it is just asked? It's for the Netherlands and not for Poland?

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Fabienne Caron, Kepler Cheuvreux, Research Division - Head of Food Retail Sector [19]

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No, no. I'm just saying, I understand that you disappointed customer in the Netherlands, and it will take time. But I think in Poland, it was more company-specific, yes.

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Bernhard Düttmann, Ceconomy AG - CEO, Labour Director & Member of Management Board [20]

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That's right. In the Netherlands, it will take some time. So we will -- only gradually, we see the change. In Poland, it's up for our -- that's -- no, I don't want to make a projection here because, as you have said, we have rolled out tools into Poland. We have worked on measures, but I cannot say how much, how quick, how quick the transformation or how quick the use of these tools will help to improve the business. I don't have a glass ball in front of me to really be able to say that.

I'd just say on that, I think, it took too long. It really took too long. Unfortunately, we didn't have Poland as -- last year on our map, although we could already see the slight deterioration at the beginning of [the year], we didn't have it on our map for immediate measures to take on. And unfortunately, turn out worse, and we just need -- the important thing is we -- Poland is still a dynamic market, and we need to grow as fast as the market. And for that reason, we have to improve on several things in Poland.

And I said already, online business is a part of it. And I said, the tools we're doing on online, but that's -- I don't want to make a promise here because we have started with the initiatives, with the action plans. But please, no promise here.

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Operator [21]

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The next question comes from the line of Tushar Jain with Goldman Sachs.

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Tushar Jain, Goldman Sachs Group Inc., Research Division - Research Analyst [22]

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Just a couple of questions from my side. First of all, on this bundling and services. Just trying to understand, do you get a sort of a disproportionate effect during Black Friday? Order growth rate was more or less broadly stable throughout the quarter, and that's the sort of 400 we should be expecting. That's the first thing.

Second one, in terms of pricing in different regions, I mean there are some operational inefficiencies there, which clearly can be sort of restored. But do you think you need to invest in pricing as well in some of the regions that are struggling?

And finally, inventory was up. I just wanted to understand how -- I mean are you comfortable with the inventory situation?

Hello?

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Karin Sonnenmoser, Ceconomy AG - CFO & Member of Management Board [23]

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Yes, we are still here, Tushar. Well, actually, I mean regarding your question to services and online -- and the online growth doing the Black Friday period during the first quarter. I mean yes, in the first quarter, the online was more or less stable with a growth rate of 4.3%. But please, have in -- or what you have to know is that we saw a pretty good online growth during the Black Friday period, as Bernhard already described. But we also saw that there was a pull-forward effect in December, and that led to the fact that, in summary, the growth rate end up with 4.3% in the online business. But still, I mean the Services & Solutions growth was 10% in the Q1 is a very good one in my mind. And as Bernhard also mentioned, I mean, we have seen a big increase in the Service & Solution business based on the fact that we saw bundles during the Black Friday period.

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Tushar Jain, Goldman Sachs Group Inc., Research Division - Research Analyst [24]

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So just one on that point. So the bundles just get a little bit more a disproportionate effect during Black Friday, but the run rate could be much lower for the rest of the year? That's what I'm just trying to get a sense.

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Bernhard Düttmann, Ceconomy AG - CEO, Labour Director & Member of Management Board [25]

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No, no, no. I wouldn't say that. I wouldn't say that, Tushar. The issue, what we did last year, and I told you [already], we're putting the basics in services. So we said we have clearly offerings at our SmartBars. We had new contract for insurance for guarantee plus. So we have put the basis -- the foundation already last year.

So in Q4, we could see that across board, it was increasing. In Q1, it was very strong. Across all countries, we could see double-digit growth rates on services. So we are finally getting there that the people take it in all regions, they work on the concept of selling services to the customers. So certainly, we had a Black Friday -- we had a peak. Yes, we had a peak because it was a peak day anyway. But in general, the concept is now being understood that we are really going for services and also executing it in all regions.

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Tushar Jain, Goldman Sachs Group Inc., Research Division - Research Analyst [26]

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Noted.

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Karin Sonnenmoser, Ceconomy AG - CFO & Member of Management Board [27]

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Sorry?

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Tushar Jain, Goldman Sachs Group Inc., Research Division - Research Analyst [28]

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That's great. Just on inventory.

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Karin Sonnenmoser, Ceconomy AG - CFO & Member of Management Board [29]

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Okay. Okay. Inventories, yes, the inventories increased by EUR 119 million in Q1, mainly to the Black Friday related demand pull forward and subsequently lower December sales, and that's the one reason. The other one is that we took over a logistic hub in Sweden that -- and the logistic hub was operated by an external service provider in the past. So that's the 2 main reasons why you see an increase in inventories. But I mean, we are very well aware of that, and we are taking measures to reduce the inventory in the next quarter.

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Tushar Jain, Goldman Sachs Group Inc., Research Division - Research Analyst [30]

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Makes sense.

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Bernhard Düttmann, Ceconomy AG - CEO, Labour Director & Member of Management Board [31]

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Increasing price, you asked pricing in different regions, do we need to invest in prices. We certainly carefully look at the market at the prices in the market. We see competition with very low earnings being fierce in market -- in pricing. So we also -- we have [partly wrecked] with the question that these competitions or this competition, who is really almost making no money or being at a loss situation and offering the lowest prices, how far will they continue to under beat prices in the market? That is the question. To some extent with our price analytics, we see that coming, and we have to react to it. And that's what we will do. So for that reason, we have also in our guidance, clearly, set from the beginning that we expect continuous pressure on the product prices. But we want to compensate it, and that's the reason why the service solution impact is so important that we want to compensate it more and more with Service & Solutions.

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Tushar Jain, Goldman Sachs Group Inc., Research Division - Research Analyst [32]

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That's very clear. Can I just ask a sort of a high-level question in terms of when you look at through the quarter, getting a good Black Friday sales, offset by Christmas. Do you think it's a -- probably, I don't know whether it's a better strategy to be less aggressive over Black Friday and get a proper sell-through or Christmas period? Or just wondering if you have any sort of hindsight thoughts on that strategy that you implemented last year?

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Bernhard Düttmann, Ceconomy AG - CEO, Labour Director & Member of Management Board [33]

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Just think about it, we would not participate in Black Friday. Just think about it. What would happen?

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Tushar Jain, Goldman Sachs Group Inc., Research Division - Research Analyst [34]

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No, no. I'm just saying there's being less from now. I know it's a very difficult time to take going into Black Friday.

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Bernhard Düttmann, Ceconomy AG - CEO, Labour Director & Member of Management Board [35]

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We did Black Friday campaign selectively, very selectively. We didn't do it across board. So it was steered selectively. And I think that is also a very good approach.

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Operator [36]

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At this time, there are no further questions. I hand back to Stephanie Ritschel, Vice President, Investor Relations, for closing comments.

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Stephanie Ritschel, Ceconomy AG - Head of IR [37]

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Ladies and gentlemen, this concludes today's results call. Thank you for your time and questions, as usual. And in case you have any follow-up, please feel free to contact us at Investor Relations. We look forward to talking to you. Take care, and bye-bye.