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Edited Transcript of ZO1.DE earnings conference call or presentation 25-Mar-20 9:00am GMT

Full Year 2019 Zooplus AG Earnings Call

Apr 4, 2020 (Thomson StreetEvents) -- Edited Transcript of Zooplus AG earnings conference call or presentation Wednesday, March 25, 2020 at 9:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Cornelius Patt

zooplus AG - Chairman of the Management Board & CEO

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Conference Call Participants

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* Alvira Hamid Rao

Barclays Bank PLC, Research Division - Research Analyst

* Hans Christian Salis

Hauck & Aufhäuser Privatbankiers AG, Research Division - Equity Analyst

* James Letten

Joh. Berenberg, Gossler & Co. KG, Research Division - 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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Dear, ladies and gentlemen, welcome to the conference call regarding the presentation of the full year report 2019 of zooplus AG. At our customers' request, this conference will be recorded. (Operator Instructions)

May I now hand you over to Dr. Cornelius Patt, CEO, who will lead you through this conference. Please go ahead.

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Cornelius Patt, zooplus AG - Chairman of the Management Board & CEO [2]

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A very warm welcome to this conference call. We would like to have met in person with you in the Capital Markets Day, but this unfortunately postponed. So consider this as a conference call on earnings. We will, at a later stage in the course, schedule a Capital Markets Day with physical presence and with an in-depth presentation of many of the details of our business.

We have roughly 1 hour now in order to go through 3 topics that are of key relevance in our perception. And the one topic is an update on how our business is running and affected -- and possibly in the future affected by the COVID-19 crisis or corona crisis. We would like to give you a first-hand information on how we're doing in this respect.

The second part of the presentation is going to be the main topic. It is the full year 2019 results, but we go into all details of the business.

Lastly, we are daring even in difficult circumstances to give guidance for the year of 2020. We have a couple of indicators how the business is going to perform in this year. We have caveat, that is the development of the corona crisis. But other than that, we are confident to give you guidance for 2020, we would like to share this information also today.

So now we go first to the topic #1 and into the update on how the company is doing in the COVID-19 crisis.

Key aspects for us are safety first, and safety first is first safety for the team, logically, but is also safety for all the teams of the partners that cooperate and work with the zooplus, and that is the logistic people, I mean, that work in the fulfillment centers. This is our distribution partners, and that also includes our customer care partners.

The second aspect of the business is going to be the stability of the business, how are we going to perform under the difficult circumstances in infrastructure and also in business dealings in these days.

And lastly, we will cover the topic of availability of product and services also as the year progresses.

The safety first topic hits the company, we would say, well prepared because the company has a background in IT, and that helps because the infrastructure for remote work is excellent. So we made already, as early as of the 12th of March, home-office mandatory for all people working at zooplus in all offices.

So we moved a little bit ahead of the official regulator, making sure that the team is safe and sound. The same is also true for the people in customer care that now are also working individually, either from home or in locations where the safety distance of 2 meters is guaranteed between the different locations or the seating of the employees.

In fulfillment, we have a situation where we have rather a large footprint of our fulfillment centers and allowed for safe operation.

Logically, logistics can't work in home-office mode. Logistics services is a physical service and needs to be performed by people and that's headed up to that.

We also see that distribution so far in all countries of Europe is still working. That's again an excellent commitment to service by the parcel delivery service providers.

We're very happy to have them all with us. We're very happy to give a maximum of safety given the circumstances.

When we look into the business, it's all more important that we have all hands at deck, and even if it's virtual and remote. And we have seen, over the last 28 days, rather substantially increased influx supporters.

The growth trend that, as you know, roughly 14% over previous year has now seen an increase to levels of almost 50% increase over 1 year before, measured on a basis of 20 of the last 28 days.

If you translate that into extra business, this means that the last 28 days brought in, on top of the usual growth rate, another 10 extra days of business or sales worth roughly EUR 50 million.

Of these 10 days of extra sales, logistics did the excellent job of putting already 7 of these 10 days of extra load into parcels. So we've seen a spontaneous surge and burst in output by roughly 25% by our logistics partners.

We see that as an excellent proof of the resilience, not only at the design of the campaign but also the resilience and strength and quality of all partners that work with zooplus.

We will put, in this situation, maximum priority to serving our long-standing loyal customers first. And we took also the precaution of shutting down several traffic acquisition measures, which would simply, in these circumstances, endanger a very good service level that we see as the hallmark of all our activities and that we see as the core promise towards our customers.

We also have been looking into the issue of financial stability and the security of future supplies. The financial stability is performed in a way of a stress test, what would happen if sales take hit because of the temporary shutdowns of operations imposed by regulators as we see in offline retail. We see that the credit lines and the opportunities we have gives us an ample room to maneuver and adjust, if such circumstances would occur, enough time to react in adjusting the supplies that come in from our delivery partners -- from our brand partners, from our suppliers. And on that note, I would like to go to the issue of availability of products and services. And what we can see is that our brand partners are happy to have uninterrupted supplies to their or our joint customers through the sales channel of zooplus.

So we see full support of access to existing stock. And we also have some -- almost all suppliers assurances and guarantees that future production and future stock will be made available to us.

That, in total, means that zooplus is the business model that don't let their customers down. It's a business model that do not let any of their brand partners down.

And this is due to the committed service and super professional attitude of all people in logistics.

You can hear, and we're proud of how the whole setup proves its competence and performance in such a crisis situation.

Once again, this is also benefiting from a tech infrastructure, which is simply designed to withstand all type of effects and challenges.

On that note, we'll go back to the corona impact a bit when we go into the guidance for 2020.

I will now move out of the current crisis situation and take a larger or a long-term view on what we are doing and what we've been learning out of the achievements and challenges of the year of 2019. So now we look into the full year 2019 results, and then we will go back to the future prospects for 2020 in the third chapter of our presentation.

So we start with the sales performance, and the sales performance has been the hard work and the success we worked in the year of 2019.

We see that we totaled growth of some EUR 182 million of sales, we have the total output now at a level of -- I mean, more than EUR 1.5 billion, and that is excluding VAT.

So if you include VAT, we are doing something like even closer to the EUR 2 billion in sales than to the EUR 1.5 million that we have met.

So overall, you can see we are on a good trajectory. We can also see that when going into the details of the quarter-by-quarter growth, we started and that's a like-for-like comparison. So it's adjusted for seasonality because you compare directly one quarter against the same quarter 1 year ago, you see that we started out in 2019 with a growth of EUR 41 million in the first quarter, that it was 13%.

We then took that to EUR 43 million in the second quarter, which is usually the slowest when it comes to seasonality at zooplus, growth rate was at 14% then.

And in the third quarter, we took the growth rate to EUR 47 million, and that's a 14%. And in the last quarter, we did more than EUR 50 million. So on an annualized basis, we will be on a growth level of plus EUR 200 million.

That shows that the efforts and the multiple actions that we took in 2019 seems to all payout.

Looking into the markets, we see that all markets contribute to growing the business.

We see that the typical situation that -- from markets also are double-digit in growth. There are 2 markets that stick out that's minimally are, say, growth rates substantially below 10%. And that's the U.K. and that is Italy, and we have specific reasons for these markets to grow a little bit slower.

We had and that's something that we will cover later. We have seen in 2019 partial disruptions of availability of products relevant to multiple markets.

And U.K. and Italy are particularly exposed to that specific risk of unavailability of relevant offerings to the customer.

And now on the latest figures, bouncing back to double-digit growth in all markets, in all corners of Europe.

If we look into the gross margin situation, we see that the stabilization that we already have in place for now full 2 years has been successful.

And the gross margin is up by 30 basis points. And that's the mix of 3 effects.

And in fact, we see the positive and increasingly positive semi impact of our own brands portfolio.

That is not only that the sales of the own brands portfolio grows roughly double the speed of the rest of the business, but also the margin, which is already above -- massively above average of food sales and has a tendency to grow to even faster than the rest of the business.

So put differently, the margin delta between our own brands and standard brands is increasing and the sales share is increasing.

We see a neutral situation when we look into the margin for all other food segments, be it a grocery brand, especially certain brands and premium brands. We're happy to see that. Internet and retail is fiercely competitive. We're happy to see a margin stabilization happening there. And we are, I think, inevitably forcing this.

Lastly, we see some adverse trend for the overall margin mix because the sales share of accessories, nonfood items, and the dropping accessories typically carry margins which are above average.

Since the private label is a substantial driver for the margin, it's also important to look at it and how does it impact our top line performance.

You see here a view on the performance of private label between 2015 and 2019. The CAGR is at 34%.

We also see that in the year of 2019 with a total growth

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labels is very important. We refer to private label in reference to our own

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we go the opposite way, and we place our own brands at the top end of the markets, so-called super premium and premium segment of the market or as what we call Inspiring Specialty Trade brands.

These are the sectors that we also cover with our own brands. We are doing a very good job to be a little bit modest in the year.

Our brands have a perception of brands that are developed by professionals that do that for many years.

We fast learned how to professionally run this business too.

If we look into the 2 challenges of 2019, we see 2 topics in which we have seen substantial challenges.

The one is the so-called retention rate or sales retention rate, where we measure the sales that we take out of the combined business from the previous year.

We used to have a sales retention rate or revenue retention rate. And that is moving between 92% and 95% over the last couple of years with an average of 94%. So we see that as a trademark, not only for zooplus but also for the business model that we run. And that, I mean, the revenue retention took a hit in the year of 2019 for reasons which we see as transient or one-off effects.

One is, as mentioned before, certain limitations in the completeness of our offering to relevant customers.

So we had temporary issues with unavailability at some brands, and some product after relaunches in the food segment. And we have probably not been good enough in offering a complete range of products for accessories that matches the quality of our assortment in the food segment.

So we're actively working on this one, and that is the issue that can be fixed.

We also have seen a relative loss of reach of direct marketing. And with this problem, probably not alone and the resolution after looking into all experience of 2019 is that we see a loss of significant to direct marketing relative to the rest of the business and in the future, very simply, a little bit of some -- beyond peak situation for email marketing. There are harsh restrictions on this one imposed by GDPR, and that's probably also a little bit of a fatigue on the customer side.

And when it comes to the email-based marketing. What we see is that the loyalty tools, and we've been developing loyalty tools rather soon in the development of the product and service at zooplus. The loyalty tools will drive, I mean, the future revenue retention.

You can already see that the revenue retention has been stabilizing in Q3.

It is taking a slight tick up in Q4. And we see that this trend continues.

So we see that we go back to the trademark level of revenue retention that we have seen in past years.

The second challenge that we had in 2019 was to learn how to best use new channels for customer acquisition.

And if you put the numbers together, we've been successful in the respect that we took the registered new customers from 2.5 million that we had in 2018, to the levels of 3 million in 2019. So we're up roughly 22%, but it came at substantial extra costs.

And these extra costs are in our conceptions, not within acceptable amount.

We see that the cost per new account is up from EUR 12 to EUR 17.

We also see that some of the alternative channels have performance issues when it comes to the cost per new customer, but also when it comes to repurchase likelihood and long-term customer quality.

If we go through the new channels, we see that Google continues to perform what we see cost increases in cost per click, that also drives up the cost per new account.

We see that alternative channels, as mentioned before, fall roughly into 3 categories, but we see that offline customer acquisition does not works well in most of our markets.

So we have rather high cost of acquisition and a slightly below follow-on activity and offline acquired customers footprint and reflects.

You see that retargeting is something that can be more efficiently done using our own loyalty tools. So that's another channel that we've been trying out.

And lastly, we see that social media is fantastic for communication. It's something that we actively do but it's not a great channel for acquisition of new customers.

So the outlook for the future is that we will see a decreased overall spend and an increase in the cost of new customer efficiency.

This is a necessary adjustment of our business model. But if you look into the 2 sectors of our business, the repeat customer business and the new customer business.

Repeat is defined all customers that we acquired in previous years. New customers is all the business that we do with a customer in the year of acquisition, we see that we have not only a towering relevance of our Repeat business, which grew from EUR 1.05 billion in 2018 to 1 point -- more than EUR 1.2 billion in 2019.

We also see that the profitability of that business weight up. And then we look at contribution margin, which is a healthy level of more than 12% now in 2019 with regard to repeat business.

The contribution margin takes in the sales income and that's all -- I mean, cost of goods sold.

It takes away all variable logistics costs. And it takes away the cost of customer acquisitions.

Hence in that respect, that's not existing these type of costs for repeat business. And in our new business, one can see that a minimal positive contribution margin in 2018 turned into a substantial negative contribution margin, including the follow-on sales of new customers.

So we see that we simply need to rebalance the cost for acquiring new business and also the quality of the new business that we take in.

But this is the key learning of 2019, the loyalty drives the business. We will rebuild the loyalty with rebuilt loyalty. There is also a better return on the cost of customer acquisition.

You see that displayed on the next page, where we have put onto the customers that do a repurchase, now customer acquisition cost of EUR 36 in -- per account with repeat transactions.

With these accounts, we do in the year of acquisition already EUR 182 of sales, but that is only a fraction of the future sales. And the future sales based on the current net results on revenue retention due to each of the accounts that have at least 1 repurchase and a statistical future value of EUR 1,500 in sales and -- EUR 1,500 in sales. And that includes EUR 160 of contribution margin and projected over that period of time.

So we see that we have a perfectly healthy business model and what we see the opportunity to drive down the customer acquisition cost. And when you see the latest trends of profitability of our follow-on business, you could probably also assume that our estimates for contribution margin per account is likely conservative.

So there is more in each account. And that's the reason why we continue to work on making this service as available as possible using all-digital channels.

If you look at Page 16, we now see that the company and the customer have successfully made the, I would say, the move to mobile traffic, and we're now having 3 or, in fact, 4 different traffic sources that all have their specific strengths.

We call this digital multi-channeling at zooplus. We see the desktop, we see the tablet, we see the mobile traffic using a browser, and we see the mobile traffic using the app, which is very popular and highly rated at 4.8, 4.9 points and on the platform of iOS and Android, respectively.

So what we see is that the visits grow the fastest in mobile. Here, the share went from 2018, 43% to 51% in 2019.

We see that when we look into orders, the biggest relative gains come from the mobile app, which as a sales channel at a growth rate of 40% and took its sales share from 10% to 14%. So that's quite significant achievement. If you look into the conversion rate, we still see that the desktop is massively transactional.

We see that we have one transaction for each site visits that we encounter with desktop traffic.

So we love the desktop because it is a slightly shrinking share of visits but it is transactional, as it already was.

So we're not going to give up our digital multi-channeling strategy, we believe, in all 4 channels to have a strategic mission at zooplus.

And that's also true for the tablet. The tablet leads by the indicator of basket value. And that's a hint towards the opportunities that we have in that situation. Shop from the company, from your own in, a relaxed situation, with it to up-sell and cross-sell and increase the basket value and user sales tools that we're going to roll out.

So this is the traffic and transaction view per channel.

Now a different topic, logistics, and we already had some initial comments on how our logistics system performs, challenged by the extra quantities that customers now want to have a stockpile at their homes and we work with 11 fulfillment centers across Europe. The latest addition to the network of fulfillment center is an Italian location close to Milan, performing very well also in these days. We see that all of our fulfillment center partners, a total number of 6 that we have there and that they're doing a great job in the crisis,they're doing a great job also at the moment, or say, year in, year out. We see that I mean, the network aspect of our logistics now allow us to shift extra loads that does not come in equally at each time, say, the crisis peaks are market by market, sometimes more pronounced more peaky, and sometimes they're also coming in different moments. Our network allows us to shift load between different countries and different footprints in terms of left and right.

And that gave us the opportunity of also packing that 10 days of extra sales work into the customer shipments already to a degree of more than 70%.

So the networks exactly in the crisis situation, in a situation of special challenges proves to be one of the best design elements at zooplus.

And lastly, the distribution at doorstep, that so-called last mile is done by parcel companies that usually work -- we had at least 2, if not 3 different service partners in each of the markets, also an element of sales is designed that now proves to be very, very valuable.

The other great news about logistics is that we were able to bring down the logistics cost in the year of 2019 over the levels of 2018 by another 0.7%.

That is very important because it also allows us to compete -- outcompete other online and offline competitors in our area, somewhere by a wide margin, much more efficient as a distribution system and traditional retail, as is also very hard for smaller onliners to compete with our level of logistics efficiency.

You need to bear in mind that for each EUR 100 of sales value, zooplus has to ship roughly 30 kilos or that's, I think, the conversion would be 65 some pounds in weight.

So it is a challenging operation. If you look at the logistics cost and benchmark against other sectors of e-commerce, be fair in making that comparison.

We are extremely pleased with the achievements of the logistics team has brought in the course of 2019, bringing logistics costs down this 0.7%.

You also see that we benefit from scaling effects. So we are in a positioned to invest into IT and into all the available people at zooplus. And still all IT costs, all administration and all personnel combined is only 6% of total costs.

And that is the benefit of a larger sales base and a fairly compact organization still less than 800 people on our payroll.

The marketing spend has been discussed before.

As one last comment, we had simply one-off effects also because we had a 20-year campaign for zooplus. That is campaign designed for brand building and not designed for sort of short-term growth.

And we see that ourselves as a one-off item on our expense in this. That was there in 2019, but it won't be there in 2020.

Now let's finish with the numbers, with the financials, we have seen a positive EBITDA in a challenging year, with especially investments. In fact, EBITDA is up slightly by EUR 3.0 million to EUR 12 million in 2019. We are within the guidance that we were aiming for EUR 10 million to EUR 13 million of EBITDA. We've seen the extra investment. We've seen the extra costs that we had as a one-off effect in 2019. We've seen also that the short-term loss of sales retention also caused a bit of contribution margin. So we're very happy contribution in total coverage. We're happy to see the EBITDA still being where it is, and we see room for improvement in future years. We also see that the cash flow remains positive at a rate of some EUR 25 million, and that gives us a very comfortable position when it comes to the equity ratio. And it also gives us a very comfortable position when we look into the working capital intensity for future growth of this company. This is depicted on Page 20. We see that the net working capital is included in this one also on trade receivables. So, in fact, some remuneration for services the company gives to our brand partners, which are at the end of the year due, so we still receive it from our suppliers. And if we combine all the net working capital, including the trade receivables, the supplier receivables, sorry, we now have a situation where we have shrunk the net working capital from EUR 63 million to EUR 52 million in the course of 2019. And relative to sales, we now have a new best benchmark less than 4%, 3.6% to be precise, of working capital relative to sales. There is advantage in our business model, but that will take another couple of years to unlock the opportunity to run the business net working capital negative, and that is fantastic, in particular, interested at growth initiatives as we do.

So the summary is that 2019, gave us a revenue and EBITDA performance within the guidance. And we have positive free cash flow. We see the tremendous momentum that own brand portfolio has when it comes to growth at 29%. The overall margin here with 29.6% includes other revenues, 0.6% that come on top of the gross margin that we do. And we are almost at the target level of 30%, which is an important benchmark for us in respect of margin development. We see that we have transient issues denting the revenue retention. We're confident that this will -- can be compensated for a rather faster than we think. We also see that we have best-in-class logistics in operational stability, but also when it comes to efficiency and reach. And we see that the marketing push that we were applying in the year of 2019 led us into inefficient territory and willing to go back into efficient territory. So marketing, we got to be efficient in future years. The push has been full of good learnings, but also with a clear indication that there is inefficient territory that we shouldn't touch. Lastly, the net working capital has been reduced. So overall, I would say a very good year. And that takes us into 2020 because we will reap the benefits of what is not yet visible in the achievements of 2019. And beginning of the year of 2020, there is a very, very challenging situation out there, which makes it very hard to predict of what's going to happen in the second half of the year. It's also not that easy to predict the short-term additional costs that might be a consequence of the corona crisis. So we take a cautious approach. We will take it through these element by element. Let's start with the top line performance, where we come from total sales of 2019, which is, say, let's start with 2018, you see that we had sales of EUR 1.34 billion and in that year of 2019, revenue retention of 91%, allowed us to extract sales of EUR 1.22 billion in the year of 2019 out of all the customers acquired until the end of 2018. We then took on top of that a little over EUR 3 million new registered accounts that were delivering combined sales of EUR 307 million, which gives the each account an average sales value of EUR 100. We've seen room for improvement when we look into 2020. The first improvement, and that's very important is that we're going to take the revenue retention from 91% for the full year until the end of the year to levels of 94%, and that will allow us to extract EUR 1.43 billion of sales out of the sales base that we have acquired a customer base that we have acquired until the end of 2019. If we would remain at the level of 91%, there is no reason to assume that. We would have a delta of EUR 45 million. So we're happy to have that EUR 45 million of extra sales baked into the measures that we're going to deploy in the year 2020. We then see that this is going to give us the opportunity to dial back a little bit in new customer acquisition. We also do that in the view of the crisis, where in the second half of the year, customers might have civil new restricted budgets, where other businesses are probably chasing customers kind of at all cost in order to compensate for the losses of the crisis.

So this is why we are planning on taking in slightly less new customers in the year of 2020 with -- so higher sales value per annum, just slightly, so we are up about 5%. And that, combined, will allow us to grow in that challenging year of 2020, at least at the level of the year before, so at least EUR 180 million of extra sales, and it would take total sales to EUR 1.7 billion for the year of 2020. Here is the important message. This factors in the crisis as we have it, as we can see it now if there would be harsh actions like also shutting down direct deliveries to customers and due to the special deterioration of the crisis that would be factored in. But it already factors in also that we see for Europe and this is the market in which we operate and almost inevitable recession for the year of 2020

We are not economists here, I mean the main profession, but we can do the math, the simple fact that 1 month lost in output is already 8% loss in output for the whole economy in each week, the opportunity to damage, I mean, the growth by up to 2%.

We see a lockdown on all types of services in -- across Europe. And we see, as a consequence, also reduced budgets for customers.

We see our strength, the strength for your pet as something which is less exposed to risks. But then we also have to acknowledge that the type of crisis we're going to see is going to be the most severe crisis in macroeconomic sales that this company has ever seen.

So we say, we think this is a guidance that is factoring in at what we see until now.

It's a guidance that should tell all investors out there that the business model of zooplus is a business model which will go rather unaffected and undamaged through the crisis of -- inflicted by corona and the countermeasures.

We also want to make zooplus is a very strong investment case, not because of corona. We are a business that is independent of that crisis situation it's also business which is not negatively affected to a larger degree by the situation that we find here.

If we look into the growth drivers and now let's go out of the crisis situations, again, into the longer-term view. We see that we have 3 strong pillars for growing the top line.

We see the brand portfolio with 3 core elements. It's more than 200 pet food and accessories brands that we've lined up in order to make the most complete offering to all customers in all corners of Europe and to keep it available.

We've seen minor glitches in 2019 in this respect. But we're going to have the best fit possible as for in the year of 2020 at a new benchmark for customer satisfaction when it comes to completeness of that.

We have the strong profile of our 2 sales lines, pan-European retail brands that we operate, that is zooplus and that is bitiba, both has been growing double-digit. And bitiba growing slightly faster at a lower absolute levels, but both of them are clearly positioned and have their loyal followership in each of their markets. And lastly, we spoke about the own brands portfolio that continues to amaze with its performance and top line and but also in -- as a contributor of extra margin and a contributor of customer loyalty.

The customer experience has the 3 core elements of the digital experience. We spoke about the digital multichannel profile that we have developed.

We spoke about the delivery experience, even in difficult situations like this, which is impressing our customers positively.

Then lastly, we have the care experience that also relates not only to customer care but also to all issues of pet care, where a vertical dedicated to its categories and can outperform general merchandise platforms.

When we look into the loyalty drivers, we see product promotions and campaigns that we developed in association with -- and corporation with our brand partners. And we also do that for our own brands.

And we see the bonus points and the savings plan as the key tools for keeping loyal customers loyal by appreciating the loyalty.

Bonus points are an auto enroll loyalty program that by now is used by more than 80% of our repeat customers.

And the savings plan is a service that we use -- that we offer to our most transactional and most active customers.

We do 45% of all sales with customers that have a stable plan.

And in fact, there is an internal nickname for it. It's called zoo prime and probably by now, it also has the same relevance when it comes to sales, like what Amazon Prime has to Amazon.

So with that setup, we are sure that we can grow the sales in the future based on 3 very powerful pillars.

When we look at the profitability of the business, we see opportunities when it comes to managing the portfolio of sales and brand partners that we operate with and the continued growth of own brands.

We see opportunities in upselling, which is good not only for margin but also for increasing the basket size.

And of course, mathematics on this one is also very simple. If you add into existing shipments, one more item that usually comes at a fraction of the variable logistics cost that you have on average for the rest of the order, so the basket size is an important driver for profitability.

We haven't made much of progress as you can see with the traffic chart with the overall basket size in 2019, what we now have been -- have taken a couple of measures that already show effect, obviously, the baskets going up.

The marketing efficiency topic has been covered. We are aiming for a total spend marketing, which is at the level of slightly, of the level of 2% for the year of 2020. And we're going to see scaling effects and as a result of stronger top line growth, that continued top line growth that we're planning for 2020.

The most important long-term strategic asset of the zooplus is depicted on Page 26. It shows the total market and in the structure, as we find it as a pan-European picture, we see that 55% of all sales in our category, are quality grocery products, grocery products or even a lower quality level of discount on white label offerings, that do more than half of the market.

We see that specialty trade and aspiring specialty breakdowns has been roughly 25% of sales in some markets. In Asia, these small medium-sized companies have a slightly larger share in some of the market side, the smaller share.

We then see that on top of that one, a 20% premium and super premium segment of the total market. Now if we you look at the sales structure at zooplus, we see that we do roughly 10% of our sales in grocery.

And this one is really just quality grocery. So the lower bit of the market is massively underrepresented at zooplus.

At the top end of the market, in super premium, premium, we have 60% of our sales, including the sales that we do with our premium and super premium position on our own brands.

And if you take this one here over-index by a factor of 3. If you take the total European market share we have that sits at 6%, you can take from this one that in super premium and premium, we've already almost own 20% of the total European market.

And that is very good news, not only for us but it's also very good news for our brand partners because we offer opportunities to move the customer towards a quality orientation, towards premium, super premium and more value created both for the customer, but also for the brand.

So this activity of having special focus on that category can naturally bring you into a positive selection of customers.

So we are having best customers out there. And probably that's in a nutshell, the learning from 2019.

And let's not count a number of accounts, let's look into the quality of the accounts, and that's also indicated by the products that they buy.

And we are by a factor of 3 over-indexed in super premium and premium. We are under-indexed in that state when you -- when it comes to the grocery channel by a factor of 5. This is our GP. And this is also something that flows into our thinking when we go into the development of private labels and/or exclusive brands or own brands. We simply don't see the need to put these brands at the bottom end of the quality period simply because our customers are also really, really conscious and appreciative of good quality.

And this is why we see our brands being nicely positioned between specialty trades, premium, super premiums, complementing the offerings that our are brand partners demand.

We see that the total sales share went up from 14% to 16% as a measure to our sales -- of all sales without accessories.

We see that the share of first order sales also went up from 6% to 7%, so our own brands are increasingly capable also attracting new business. And we see that the growth index our own brands versus the total business has gone up from 1.6 to 1.8. So a great job of people at zooplus that are developing product brand.

All this information combined, let's just make a daring move of issuing guidance for 2020 in a situation when nobody knows what happens over the next 4 weeks.

Please bear in mind that we are very committed, there is that one caveat in our guidance that we say if things take a massive turn for worst when it comes to the corona crisis, that guidance needs to be modified. So it's, in a sense, a conditional guidance that we have to issue.

We are now 60 quarters into being a stock listed company.

And in these 60 quarters, we managed to be very good with our guidance. In fact, we had to update negatively our guidance only twice in these 60 quarters.

I think that is a very good overall performance. And so -- and here with us now on the guidance for 2020. When it comes to sales, we are committed at delivering sales at least with growth momentum on total growth in the same -- at the same level of 2019. So we will grow our total sales by at least EUR 180 million.

We will take total sales at more than EUR 1.7 billion in the year of 2020, even though we expect harsh economic provisions for most of our customers in the second half of the year or already beginning of the year.

When it comes to EBITDA, we need to acknowledge that the current crisis might also require us to assist our logistics partners to carry extra costs. It might also impact the level of new customer acquisition efficiency.

This is when we also dialed back with an ambition of acquiring a certain amount of customers. And then there is also added burden of collaborating remotely.

Of course, very happy that everybody can still work, but we lose some efficiency internally by not being able to use our premises.

So put together, we are seeing some negative effects when it comes to cost efficiency in the year of 2020, but we still are committed to delivering a positive EBITDA, maybe slightly below the level of the year of 2019, but it will remain in positive territory.

So that's the guidance we offer. It took us a bit longer this time to go through all the information, but that's due to the nature of the more than complete agenda. I'm very happy to open up for Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions)

We've received the first question. It is from Volker Bosse of Baader Bank.

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Volker Bosse, Baader-Helvea Equity Research - Co-Head of Equity Research [2]

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First question on the COVID-19 and to the start in the first quarter. So how was your sales in the first quarter affected by the effect we heard about hamster in Germany, food and cans and tins were up by 500%, so food for human being. So is that -- but you also something which you envisaged in your first quarter? And how did the customer flow developed?

Did you see increased website traffic, increased new customers a bit more -- some details on this would be helpful.

And also, in regards to cost, you mentioned transport costs or the magnitude of increased transport costs, which you saw in the first quarter so far?

And second question was on marketing efficiencies. You outlined your potential to increase marketing efficiencies.

So how -- in which direction you want to work in order to improve your marketing, especially as how do you think Google Ads is progressing in that current environment?

And finally, last question on 2020, regarding the gross margin, gross margin stabilized quite nicely over the last 2 years. Is that an effect you expect to continue so the underlying stabilization of prices, is that ongoing?

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Cornelius Patt, zooplus AG - Chairman of the Management Board & CEO [3]

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Okay, happy to answer all the questions. When it comes to the sales impact of COVID, currently, we see and we touched briefly at the beginning that for the last 28 days, the growth rate in sales went from 14% to levels of close to 50%.

And put differently, the extra 10 days of sales that we took in and we surely give the first quarter a growth rate of above 20%. That's simple mathematics.

But the key question is going to be how much of this stockpiling is going to come at the expense of future sales? Of course, every of these 500% extra cans that some people bought, they sit in the shelves and they're going to block future sales.

So we are careful in modeling this one in order to find out what is the true extra sales related to the crisis and what is sales, which are just shifting forward or front loading.

When it comes to transport cost, there is, so far, relatively little indication of specifically higher cost per truck, but in order to manage the extra input of orders, we sometimes have to use what we call secondary or backup fulfillment centers, say the Italian business can't be all served out of the Italian fulfillment center.

So we roll the orders over to the German fulfillment center, the Polish fulfillment centers, and that induces extra transport cost.

It's too early to give a measure on this one. We are in day 13 of crisis handling, remote work, we were seeing a deluge of extra orders coming into market.

So you need to be patient on heaving more on that impact because we put the business and our customers and the service to our customers first.

When it comes to marketing efficiency, you also see some 2 data points that give you a helpful indication.

We expect to be able to deliver the growth as promised with less new accounts. A little over 10% less new accounts than the year before, and we also commit to bring the total cost of some traffic acquisition to levels of 2% or slightly above.

That gives you an indication of we plan to drastically improve the cost per new account in the year of 2020.

Lastly, the gross margin, of course, the gross margin is going to stabilize.

We underwent all the effort of stabilizing the gross margin. We now see the added impact of private label, when we see some opportunities to recover lost ground in selling accessories.

So that overall, we expect the gross margin to have a potential to go up over time.

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Operator [4]

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The next question we received is from Christian Salis of Hauck & Aufhäuser.

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Hans Christian Salis, Hauck & Aufhäuser Privatbankiers AG, Research Division - Equity Analyst [5]

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2 questions from my side, please. So first of all, on the top line development again. So I understand that you don't really want to calculate what's the true extra safety in 2020.

And still, I'm wondering why you are really guiding for a slowdown in the percentage growth rate to roughly 12% from 13.6% year-over-year in 2019.

So maybe could you talk a little bit about this, please? And the second question would be on, again, on marketing.

So what do you think is a sustainable marketing to cost sales ratio?

So I think you are now at 3.5%, which has almost doubled in the last 2 or 3 years. But it's still far below e-commerce peers like Zalando, for example. So they're operating at 8% basically or 8% or 9%.

So what do you think here? What is the outlook here? What should we expect here in terms of this cost ratio? Is it going to go up to, I don't know, 5% in the next 2 years? How do we think about that?

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Cornelius Patt, zooplus AG - Chairman of the Management Board & CEO [6]

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Yes. I think we go into both aspects. Let me start with the second aspect first. Our business model is based on retention.

Our business, our sales cycle is not advertising driven, but we're covering competently demand, which is there with our customers.

And we have a business model that is operating in the FMCG sector and not in the fashion business.

So the ad spend or the cost that Zalando can put into customer acquisitions is not available for zooplus. We've indicated before and we reverse that, the efficient level for marketing at zooplus is at 2% or slightly above 2%.

These are levels that you also see in the year of 2015, '16, '17 and '18 and has been good for driving the business as we do it.

We had good reasons to invest extra into 2019. We had the brand-building exercise, and we were looking into alternative channels of customer acquisition.

We came up with clear results but the best way to grow the business is based on retention and a healthy level of ad spend at zooplus is 2% to 2.5%. So now the -- our top line guidance, we assume, and I hope we are wrong -- right on this one that we will have a negative growth rate in major European markets of minus 5% for the total economy.

That's going to hit hard all of us. And that's also going to hit hard to people who have a pet and a casual dog or some other pet.

And when we see that delivering the same absolute level of growth than the year before, in that pricing situation with the economy in major markets collapsing as a bold statement. If you have more confidence about the overall development of the economy into 2020, then please share with us as the reasons that we see the deep economic crisis ahead and the natural reaction in the deep economic crisis that people tighten their budgets.

And that will be sad for our businesses. And even with these circumstances, we commit ourselves to grow the business by the same EUR 180 million or above than before.

We see that as a commitment to the resilience of our business model and to the efficiency of our business model.

So we don't want to stretch and say that all these, say, the stockpiling, the extra purchase which come on top of sales, that won't happen. There is going to be a situation in the second half of the year, that there is a tightening of budget, there is going to be good opportunities for us to adjust to grow the business in the first half of the year.

There is a clear commitment to grow the business by EUR 180 million in year of 2020 in the face of the crisis as we hold in the current size. I think that's a bold commitment.

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Hans Christian Salis, Hauck & Aufhäuser Privatbankiers AG, Research Division - Equity Analyst [7]

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All right. And then just maybe a quick follow-up. Did I understand that correctly that you are -- that you have seen growth of 50% versus 14% in the last, let's say, 2 weeks?

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Cornelius Patt, zooplus AG - Chairman of the Management Board & CEO [8]

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I repeat the numbers one more time. In the last 28 days, we've seen instead of the growth trend of 14% that we've seen throughout 2019, a temporary spike in the growth rate to levels of almost 50%.

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Operator [9]

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The next question is from James Letten of Berenberg.

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James Letten, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [10]

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I just wanted to maybe expand on the last 28 days. So obviously, you've had a very big uplift in sales increase. But I think it's really important that we try and narrow down what the equivalent increase in customer acquisition has been, just so we can get a sense of how much of that is just customer stockpiling and how much of that is new business that is going to be around in 2021.

So that will be -- it would be the -- and then -- yes, sorry go ahead.

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Cornelius Patt, zooplus AG - Chairman of the Management Board & CEO [11]

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Yes, excellent question. Which sectors or which customer segments despite the most impact we've seen increased levels of sales involve for relevant, let's say, customer cohorts, as you call them, we have new customers.

And we have, what we call, early stage repeat customers between the second and the sixth transaction.

We have then repeat customers, our quality customers with transactions setting at 33, that's already quite a bit of business that we do jointly.

And then we have outliers and that are super intense and do more than 33 transactions in their customer history.

The 2 segments that have been picking up the fastest in using the service of zooplus are obviously the customers that are long-term with us, that do 7 to 33 transactions called repeat and -- or the ones which we call intend repeat with more than 33 transactions. They have been slightly over-indexed.

We also have seen a significant increase of orders and with customers that already -- only have 2 to 6 transactions.

And in this one, we're particularly happy to see the increase because, in these couple of transactions, we experienced what they inhabit from. If they do 6 transactions, the seventh transaction is like -- is -- there is more than 90% likely of this happening.

If we enter into this one. And after a second transaction, the third transaction is depending on market-by-market only has a likelihood of 52% to 65%.

So the extra sales that we do there are very good of a habit for me. And with the new business, we see an increase in new business.

But we are careful enough to understand that the new business might also be by customers that have opportunistic reasons.

Now that they're, let's say, standard supply chain with supply weight is not available or is incapable of handling the extra load, they might go for a one-time opportunity to buy at zooplus, but they will probably not do recurring business with us.

This is what we focused exactly on the activation segments and on the repeat segments in serving these customers as good as possible because the motives of people that now rush into e-commerce might be only transient but our repeat business is the business that allowed us to build the company, and that also is driving the growth of this company.

So this is why we did repeat customers and the activation cohort acts with priority.

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James Letten, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [12]

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Okay. Maybe just on the new customers. Do you not -- so the first time customers. You don't see this as an opportunity to maybe convert them to online customers permanently. Why is the focus more on customers who have already...

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Cornelius Patt, zooplus AG - Chairman of the Management Board & CEO [13]

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Yes. We've been discussing this also internally. You have 52 weeks a year in order to do customer acquisition.

Now we have 2 weeks of crisis so what is the relevance of trying to chase exactly in these 2 weeks, a couple of customers extra that probably are of useless quality anyway?

We have a clear strategy of putting the loyalty of our customers first. We have a clear strategy to serve them the best possible way, even there is a crisis raging out there.

So if other businesses think it's a smart idea now to chase the occasional extra customer, we think that they do a second class strategy.

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James Letten, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [14]

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Okay. One last question from me. Just on inventory availability. At the moment can you give us some sort of some more color on how much of your inventory is available? Also how quickly you could replenish that inventory over the next, say ...

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Cornelius Patt, zooplus AG - Chairman of the Management Board & CEO [15]

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Another excellent question. And this is what we are putting this one into our crisis preparation also prior to this one as a scenario analysis, what would happen. And the Brexit was a good case to train that. What happens if supply is disrupted. And this is why it was very easy for us to make the title, because we have the suppliers and to ensure that we have factory direct deliveries into our fulfillment centers that we replenish what we sell-out. And if something is sold out in one fulfillment center, we also have the network logistics that allows us to either shift the quantities or shift the orders into the secondary or the backup fulfillment centers for markets.

So a situation as we were informed in the U.K., and there are some disruptions in supplies also for critical grocery items, that's something that we were able to avoid at zooplus because of good supplier relationships and the powerful logistics network and a fantastic team, let's say, knowing that the moment we sell more, we also have to replenish more.

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James Letten, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [16]

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Okay. And then just expanding. So I think your inventories at the moment were over EUR 100 million and with sort of the a 50% boost in monthly sales, that's going to draw down almost within a month unless you can pull in new inventory.

You touched upon the...

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Cornelius Patt, zooplus AG - Chairman of the Management Board & CEO [17]

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I explained we already do replenish at a much faster rate so the inventory level is going to go down, but not as fast as the sales would suggest because we replenish continuously.

We do have a replenishment cycle with most of our suppliers that sits between 7 and 17 days.

So it's very fast to replenish with algorithms, a very fast edict increase in demand on individual items and articles.

So we are perfect when it comes to placing purchase orders and the vendor managers sourcing deposit made sure that our partners are also willing to deliver because they have a joint interest with us to make sure that the customer loyalty to their brand and to our service is not disrupted. So we're not worried about this one being a short or a short term problem. And we have, so far, with the crisis at current level, no indications that we will have a major stock or availability in this situation mid-term into the year.

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Operator [18]

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There are no further questions. I would like to hand back to you for some -- we now received another question. This is from Alvira Rao of Barclays.

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Alvira Hamid Rao, Barclays Bank PLC, Research Division - Research Analyst [19]

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Just 2 quick ones for me. First, on your 50% growth rate in the past 28 days, thanks for giving the color around who that's coming from. But just wanted to ask, how have basket size has been trending in that period? And then second one, just quickly on capacity, can you remind us of what is the capacity of your existing logistics network is?

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Cornelius Patt, zooplus AG - Chairman of the Management Board & CEO [20]

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Yes. Okay. I'm happy to give you information on both. The -- as you were assuming, probably the basket size went up also in that specific period, we actively discourage people from stockpiling because we see that as an act of illoyalty against other customers.

So we're also queuing the orders that have clear indications of stockpiling and to the back and we're giving priority to other customers that are ordering more responsibly.

But the basket size is up by roughly 10% in that period of time. And the second bit of information -- sorry, if you could repeat it one more time?

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Alvira Hamid Rao, Barclays Bank PLC, Research Division - Research Analyst [21]

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Yes, I just wanted to ask about capacity. Can you remind us of the capacity ...

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Cornelius Patt, zooplus AG - Chairman of the Management Board & CEO [22]

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The Capacity. Yes. Thank you. Sorry. The capacity, the output, as you can see from the fact that we have these 10 extra days of sales coming in, and we have 7 of these extra 10 days already digested in our logistics system and tells you that we've been able to increase, at very short notice, in the face of the crisis, output by 7 days, over 20 -- the 8 days were more than 20%, to be precise a little bit over 25%. So 25% more output spontaneously organized by all of our partners.

The backlog is now at roughly 3 days and shrinking. The stockpiling operation is something that looks, let's say, drastic in pictures, but the panic levels, and we're happy about this one falling and people are trusting in uninterrupted supplies. And we have the obligation to deliver on this promise. I mean, we are in a position to deliver.

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Operator [23]

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There are no more questions at this time. I hand back to you for some closing remarks.

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Cornelius Patt, zooplus AG - Chairman of the Management Board & CEO [24]

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Yes. I would say thank you very much for taking your time and listening in on the situation of zooplus currently and going throughout with us for the year of 2019, the key learnings and the cornerstone elements of our strategy for 2020 and beyond.

The guidance has been issued. The guidance comes at times of heightened levels of unpredictability. But we have a stability in our design, in our operation that allows us to make that such guidance also quite early into the year given the situation.

Again, thank you very much. And on that note, we are closing the call.

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Operator [25]

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