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Edited Transcript of ZO1.DE earnings conference call or presentation 14-Nov-19 9:00am GMT

Nine Months 2019 Zooplus AG Earnings Call

Nov 30, 2019 (Thomson StreetEvents) -- Edited Transcript of Zooplus AG earnings conference call or presentation Thursday, November 14, 2019 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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* Adam Stuart Tomlinson

Liberum Capital Limited, Research Division - Analyst

* Nikolas Mauder

Kepler Cheuvreux, Research Division - Junior Equity Research Analyst

* Tobias Sittig

MainFirst Bank AG, Research Division - Head of Equity Research Germany & Senior Equity Analyst

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Presentation

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Operator [1]

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Dear, ladies and gentlemen, welcome to the conference call of Q3 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, who will lead you through this conference. Please go ahead, sir.

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

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Good morning. And warm welcome to everybody who has dialed in to the 9-month investor and analyst presentation of zooplus. We will focus, in particular, on the most recent developments in Q3 and informing you about the transition that we make from a fairly aggressive growth with declining margin to a situation of stabilized margins, and yet, a retained sales momentum that continues to be at the top of everybody competing with us in the same category.

I will go through the sales figures first.

Let me take you through slides, to Slide 3. We see that combined for the first 9 months in our -- both in local currencies and also in euro terms, we have seen a growth rate of 13%. That is, in itself, almost exactly within the bandwidth. If we look into the third quarter, we see an increased momentum and a growth rate of 14% over the year before, taking us to total sales of EUR 378 million in that quarter alone. So it is -- that's not so surprisingly, again, a record quarter when it comes to sales, and we continue to grow the business for almost more than 20 years now. The company was founded in 1999. And we see that as we've observed it and explained it many times before, the sales were driven by high customer loyalty. We've seen an impact of GDPR on this one, I mean, since mid of last year. And then through a set of measures, we are now finding, let's say, the same grip of activating and -- on-boarding, activating and making customers loyal as we did in previous stages.

It will take another 3 quarters till that onetime hit that we took through GDPR introduction and the necessary changes in our site will be fully outgrown. What you can see is that the absolute growth, I mean, in this year, so far, is EUR 130 million. We all know that the fourth quarter is usually one of the stronger quarters. So we are, give and take, approaching $200 million in total growth for the full year of 2019. We are seeing a bit of a difficult situation when it comes to growing the accessories business. So the sales growth is mainly driven by our food sales, which make up the substantially larger part of total sales, more than 85% of total.

We like food sales because they have repurchase cycle, and this is why we should not be too worried about the relative flat development that we have in the nonfood section. If we go into a regional breakdown of where we grow our business, and we can see that we continue to be particularly strong in markets with well-developed logistic solutions. We see that most prominently, not only in Germany, Austria and Switzerland region that we've been active in for 20 years by now, and we still see a growth rate of 14% over the previous year, it's also very much visible when we look into Central and Eastern Europe, that is Poland and there are countries like Czech Republic, like Hungary and Romania, where we see a total growth of 25% over previous year. And if we combine that with the information about the market share that we have in geographies like Poland, and we stand at 16% of the total market, and one can clearly see that logistics is a key contributor to, I mean, how successful we can expand our business in all corners of Europe. Having that said, then we go back to this a little bit later on. And we are improving the logistics infrastructure for key markets like the U.K., where we've seen a massive shift of the parcels that we ship to our customers, to our Coventry location that we set up 1.5 years ago and now in full operational mode. We also have done the same step of localizing logistics with, let's say, kind of backstop, using the larger network fulfillment centers in Central Europe. We would have done the same thing now for Spain with the location in Madrid; and in Italy, with the location close to Milano, which allows us now also to decrease delivery speed in these markets and increase -- decrease -- to increase deliveries speed, sorry, and decrease logistics costs. It will be complemented by building direct sourcing relationships in these markets and, in some situations, of course, straight from factory into the fulfillment center, and then with one more hop to the customer. So that explains why we are seeing currently single-digit growth rates in the U.K., in Spain and Italy, and that is, let's say, part -- transitory in our perception and because as we will grow the logistics facilities in these markets, we're going to improve the delivery experience for our customers. And then we'll see growth rates picking up again in these geographies, too. Key takeaway, our total market share in all of Europe is now at rate of around 6%. If you benchmark against the specialty trade, which roughly makes up for half of the market, slightly less than half of the market, we talk about a market share of specialty trade which is closer to 12% to 15%, depending on, let's say, how strict you are in defining specialty trade. That shows that online in pet specialist goes together extremely well, in particular, if done by zooplus.

We see also increased momentum, and that is good news for the years to come, in new customer acquisition. We have seen a strong investment in customer acquisition. You can also see that when we look into cost, we also see the upshot of it. The registered new customers are now 2.2 million in the first 9 months of 2019, and that is a healthy 25% plus over 1.75 million that we had in the 9 months in the year of 2018.

So now the key job is, I'd say -- first, I will explain what exactly have been the drivers, I mean, for that new momentum in new customer acquisitions, and then we will look into what is now the job to be done to turn new customers into activated customers, that means customers that do a couple of transactions until we turn them into regulars that we roughly equate with having done at least 7 transactions. We see that we've done 2 things -- or 3 things now, I should say, when it comes to increasing the growth of new customers. I'll say we continue to, let's say, use Google to maximum extent. And Google is a very powerful direct marketing and traffic acquisition tool for everybody that is working in e-commerce. And Google continues to scale and it goes up in cost. So in fact, that's what brings us -- we have slightly longer to wait to be breakeven with the individual customer. And -- but that is not diminishing the fact that zooplus and Google combined, after 20 years of operation, are still able to scale new customer acquisition. On top of that, we are using a broader mix or broader [spectrum] of traffic acquisition tools, including social and including, let's say, retargeting tools also for partners other than Google. And lastly, I will get to that quite soon, we are also using different and broader messages for our customers. You can see that on Page 6 now, we are, let's say, clearly more emotional. We are more brand conscious. And we are also more collaborative with other brands when it comes to traffic acquisition. And left hand, you see an example of us teaming up with some fast food franchise, Burger King, and that was a campaign launched in Germany, very successful and a quite daring move of -- from both partners to combine healthy dog food with, you can see [the salad leaves], also healthy food for humans. And if you go into the middle section, we do something that make all of us proud with 20 years in the business, and we took that as a good enough reason and -- to send zooplus on tour to all corners of Europe and then also do special events, and partly in markets and that are, let's say, quite obvious, the German markets, but then also we allowed ourselves to celebrate the 20 years also in markets, say, the Spanish market, in which we're not yet operational for 20 years. And -- but then it's the celebration of a company that defines itself as pan-European. If we look then into how we use social media, one can also see that social media is not only is seen as, let's say, a toy and tool for our retail brands, zooplus and bitiba and MEDOCA, but we also use it for pushing our own brands and our private-label offerings. We will go into the private label and significance of our offerings later as we are, I think, progressing this call.

Next is the issue of sales retention. As mentioned before, we've seen a dip or a dent in sales retention, and that used to sit between 92% and 94% for the larger part of the years between 2015 and 2018. We had peak in sales retention and exactly in the -- after the first 9 months of 2018. After that, we've seen the full impact of not being able to reactivate the customers due to restrictions and implications of GDPR. So anybody acquired in July and August, September 2018 was difficult to reactivate in the period after. You see then the full impact of this in the 9-month figures of 2019, where we've seen a significant drop in sales retention compared to 1 year ago.

The good news that I can offer here is that we fully understood not only the size of the problem, but also developed a set of countermeasures that developed impact. We first see that in the, what we call, short-term sales retention. So what happens to new customers acquired and how fast do they return and to what degree or to what share percentage do they return within, say, 63 days, which includes 9 months -- 9 weeks. And this indicator, which is, let's say, a leading indicator for later development of the sales retention rate, is picking up and it's picking up since late summer, where, as mentioned before, a set of countermeasures to mitigate the impact of GDPR were implemented. So we expect to stabilize the sales retention rate at current levels, short term. And then mid- and long term as we go through, let's say, the full 12 months cumulative effect, we will see the sales retention rate picking up in the course of 2020.

As mentioned before, a part of the job to be done is understanding the new rules for e-mail and direct marketing. We also are increasingly aware of the potency of our loyalty programs, and we put them into use of building loyalty in earlier stages of the customer lifetime cycle. Lastly, retargeting is a somewhat costly or deficient tool of on-boarding customers successfully from the first transaction to the [seventh] transaction, the benchmark order after which the repurchase likelihood is sitting well above 90%, where you can really call the customer a regular. And right side, you also see that it's not all about advertising. It's also about competency, enhancing the customer experience, and that ranges from the obvious mobile experience as in mostly internet traffic, in particular, consumer internet traffic shifts to mobile devices. We have an app-first policy. So as we see the people moving to the mobile devices, making them use native apps is just a technological next step for it. The app also allows this functionality, in particular, when it comes to personalization, that is not to the same extent possible on the desktop. We also see that the app offers convenience when it comes to push notifications about delivery, when it comes to log-in mechanisms that are simply more evolved and more, I'd say, friendly to use from a customer perspective.

Personalization, we've briefly covered this one. It's something that would benefit from our shift to the app and to the -- to putting mobile first. And there is room to improvement for how personal the shopping experience at zooplus is. We have all the data, and now we'll also make use of it in the most friendly possible way. We will make the website and all our digital channels as personal as possible and without really, let's say, prying into customer privacy. We don't do that. There's no need for that. Two quite analog aspects of optimization is the completeness of the assortment that is not only to have all leading brands, but also to have all leading brands in all markets of Europe. So we are increasingly collaborating, cooperating with some specialty brands and local champions in all corners of Europe. And we're very happy to make our top end and quality-conscious customer base available to the contributors to, say, a healthy pet life and to the healthy development of our sector.

So I mean, this one is, let's say, a lot of work in detail in optimizing the assortment. The first 80% of overlapping assortment all across Europe is covered. And now it's about being as good as possible in all corners of Europe, making the zooplus experience as much a Spanish experience, a French experience, a German experience, British experience, probably also Swedish and the Polish experience as possible. And that leads to the last point.

We've built, as mentioned before, a network that stretches to all across Europe, very cost efficient, but now we need to improve the last-mile delivery. That is a kind of speed disadvantage that we had until today in a couple of relevant geographies of Europe. And lastly, I also want to make sure that the delivery is manageable by the customer and that the delivery happens friction-free and free of any unwanted surprises, including the delivery at the doorstep of the customer. Let's not forget about that.

The business is not that much about advertising. It's not that much about financials. It's about a great user experience. On this one, we've focused with increasing progress.

You can see that as announced, as promised, we are stabilizing gross margin, and in fact, there's even an uptick of 0.5%, and that had a couple of contributors. First, I would say, it's not accessory because what we see in accessories is that we had flat sales, and accessories usually carry better margin than food sales. But the gross margin improves, although we have kind of adverse sales mix when it comes to selling food versus accessory. What we see is that we have a small but increasing share of other income, that is mainly shipping charges or small contributions to the -- from the customers to our shipping costs, and that is counting towards the gross margin. What we also see is that we are tackling the business from the, let's say, the bottom end. We are not trying to squeeze more margins out of a very profitable order, but we simply are reducing the share with loss-making brands and loss-making products, and that clearly helps. But the biggest individual driver -- I'm really proud of that one, we'll get to this one little bit later -- to improvements in gross margin is our improved sales mix when it comes to brands and our own brands.

The own brands grow fast and the own brands also carry a healthy margin extra compared to the brands that we are, let's say, operating with in collaboration with brand owners, be it the Mars Group, be it Nestle or be it many depreciated small and medium-sized companies with a focus on specialty trade, and also niche brands. We don't pick one thing against the other. But combined, we see that margin management is now a successful operation at zooplus.

Here, you can see why private label begins to play a somewhat significant role in our margin structure, and private label continues to grow more than double the speed of our normal business. And if you look at the figures for the 9 months of -- from 2019, you see that the private-label share on -- in food and in cat litter, which is also replenishable, has seen a growth from 13.9% to 15.5%. So we are simply, let's say, within 1 year, improving the private-label share 1.5%. We see that for the full year, and we're going to see the first time, more than EUR 200 million of sales in -- with our own brand portfolio, which makes us easily one of the top 10 brand portfolios in all of Europe. We will see over the next 3 to 5 years us, let's say, moving into a position of being one of the top 4 brand owners in Europe, and that is very good news because the private-label business carries a healthy double-digit margin surplus for extra margins compared to the branded good sales that we have in food and cat litter.

So very good news here and a continued strong momentum of 29% growth rate versus 13% to 14% that we see in our branded business.

You can also see that our private-label business is not what you would usually associate with the term private label. It's not an extension to the market -- of the market to the bottom end. We are positioning our own brand portfolio exactly at the core of our focus of zooplus, and that is quality conscious, high involvement, quality-seeking customers. And you can see that if you just look at something like Concept for Life, which is a brand that's now been structured into the veterinary diet segment of the market, which is what sits on top of super premium. So you would have premium, you have super premium and then you have the veterinary diet products that help the cat and dog to stay healthy, and even in, let's say, difficulty with life or with difficult conditions when it comes to digestion in food, when it comes to age-related degeneration that also happens naturally in the life cycle of

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And that is also the retail activities, zooplus and bitiba. By now, let's say, we've developed a skill in brand management, and that is, I'd say, quite impressive and shows -- and bears good results from a customer perspective and also from a commercial aspect for zooplus.

Now, different topic. We will now talk about the cost structure, and the margin situation, we already explained. We see that the total margin, that also includes a couple of other incomes, the income is up by 0.5%. And that compares favorable to an adverse trend. When we look into the cost structure, we see a significant shift in more money moving into advertising.

We're up there from 2% to 3.3%. So that is to be seen in conjunction with a 25% growth rate that we see in new customer acquisitions. You don't have a linear opportunity to scale, so if you want to have more customers, you need to accept also a slightly higher cost per customer, and that explains why the cost of traffic acquisitions are significantly up over the year before, and that is price for investment we are willing to do since we see the long-term benefit of growing the company and also growing the customer base at zooplus.

We see, I mean, significant improvements in the logistics. The 1.5% are, let's say, a little bit exaggerating picture because we see a reallocation of cost due to the IFRS 16 new regulation. If you neutralize for that effect, which shifts some of the logistics costs into D&A, we would still look at 0.8% lower logistics costs than 1 year ago. And we see that as a powerful proof that, although we see higher, let's say, input of factory cost in logistics, that means higher labor costs in some markets, also higher cost of distribution of parcel, we see the powerful network effects and a smart strategy on where to put extra capacity, and that amount pays off and makes it possible that you have a flat value of -- let's say, basket value. And we have seen slightly increased value per parcel. So we're packing more efficiently. We are routing more efficiently, and that combined makes it possible that you have higher factory costs, but lower cost per parcel. It also hints towards a still, let's say, partly untapped potential of decreasing logistics costs, improving margins by moving the basket size up. The basket size has not moved in any significant way between 2018 and 2019. We expect the basket size to go up in the year of 2020 due to set of measures that we're currently implementing. If you look at the remaining costs, admin [positions] payments, including losses in, let's say, customers not paying, is stable at 1.1%. Also something that is benchmark and a very presentable figure, IT and personnel combined is at the 6% of our cost base, and it shows the we run a very, let's say, tight ship and a very efficient operation across the stack from advertising and marketing, through logistics and the payment, IT, and also we have a highly productive team, and that makes it possible that we run the whole system and have personnel costs of 3.5%.

Yet, we finish that off with 2 bits of information, a move on logistics and then lastly on cash flow. Logistics has been touched before. We now have a pan-European network of fulfillment centers, which are located with physical presences in all core volume markets of Europe, ranging from the U.K. through Spain, through Italy, Poland or going to the Netherlands and Belgium, which for us is also a volume market due to the larger market share that we have there. Of course, we also have a physical footprint in Germany with one large location and one smaller location. And if you look at this one, the only question would be, do we need something, say, further into Eastern Europe, say, something in Hungary or Romania. And basically, both of these markets can be competently served using our Wroclaw fulfillment center location. And if you look into the Nordics, you see also no physical presence there because we use our Krosno -- which is, say, a mid-Poland location. We use our Krosno location launched in 2018 to serve these markets.

The markets, as one can see, stretch out geographically, quite substantial. So the delivery times are more influenced by the size of the countries, in the case of Finland and Sweden, quite massive, Norway, equally, than by the location of the fulfillment center. Or put differently, we trade in, let's say, the cost efficiencies of using a large-scale Polish operation for slightly longer lead times before the parcels hit the local market. But then within the local market, we're equally fast [or not so] fast as our competitors that work with local fulfillment center solutions. When it comes to sourcing, logically, we're way better off with using the input, the delivery into our Polish factory -- fulfillment center because many of the factories tends to sit either, let's say, in Central Europe or they sit straight in Poland, and it's easy to deliver into the Polish fulfillment center, and from there, into the Nordics.

If you look at that map, I would say we're very competently set up. We also learned over years to really manage that load-balanced fulfillment center network very efficiently. And the key performance indicators would be stock rotation, it would be availability and it would be cost per parcel, and it will be delivery speed. We can combine a very healthy combination of the KPIs for each of the markets that they set up, as on display on Page 13 here.

So where does that take us? When we look into the future of the company, here, you get probably a glimpse of that. We will focus on growing the company as fast as possible, while maintaining the cash-generative nature of the way we run the business. The cash flow is, again, in the first 9 months of 2019, positive as it is already for a couple of years, and that simply shows that we can, let's say, grow the business and generate cash. And that is in itself already good enough. And as a message, if you look into the EBITDA, that is improving over 1 year ago, that gives us plenty of room to maneuver in reaccelerating the growth. Maybe the last key thing to remember when you look at this chart is that the biggest driver for margin improvement is our increased sales share with own brands, and that is something we are well under our own control. So what we see is we're going to reaccelerate growth. We maintain the cash flow and the neutrality or the cash-generating nature of our business, and we have the mid- and long-term perspective of better gross margins and lower logistics costs to bigger markets. So that is the outlook. And that also explains why we are talking about the transition that we are successfully managing in the year 2019, and we will see a reinvigorated and very competitive zooplus entering into the year of 2020, which is just two months away.

On that note, I would like to open up the webcast for Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question received is from Tobias Sittig from MainFirst Bank.

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Tobias Sittig, MainFirst Bank AG, Research Division - Head of Equity Research Germany & Senior Equity Analyst [2]

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Can you hear me now?

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

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Yes. We can hear you.

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Tobias Sittig, MainFirst Bank AG, Research Division - Head of Equity Research Germany & Senior Equity Analyst [4]

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All right. Sorry, I was muted. Firstly, could you comment a little bit about your Q4 outlook? You certainly need an acceleration of growth to get into the guidance bandwidth, even at the lower end. And what gives you comfort that we will see that acceleration? And maybe since the range is pretty broad, could you give us more flavor on where in the range you hope to end up? And secondly, could you be a bit more specific about the measures you're taking to improve the average basket size next year? Will that be minimum basket values, or how do you go about that? And lastly, could you expand a little bit on your free cash generation? Because I think it's a bit flatter to when you point to the free cash flow before the leasing payments. After leasing payments, it was actually rather 0-ish. And should we also look for an improvement of free cash flow after leasing payments being positive in the years to come?

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Cornelius Patt, zooplus AG - Chairman of the Management Board & CEO [5]

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Yes. Okay. Happy to do all three of it. The Q4 outlook, what makes me confident and confident about the trend being favorable, it's simply that Q3 already, let's say, clocked in exactly 14.0% of growth over 1 year before, and that was an acceleration over Q2 in -- Q2 and also Q1. So as we expect that momentum to continue, it's, I'd say, kind of too close to call to give you any specifics on the Q4 because you're just, say, midway into it. But see the momentum and see also the underlying trend of robust new customer acquisitions and now improvements in repurchase rate. That is what is giving us the confidence of having made the turnaround when it comes to managing top line performance.

If you look at the average basket size, it basically come from two ends. We are deliberately, let's say, diminishing the share of very small orders by minimally moving up free shipment and have partially free shipment or the reduced shipment charge, as we call it internally, but then we also add incentives for midsized basket to be increased even further. And that's either through -- or actually both through cross and upselling, but also to offer incentives for larger baskets. It's simply a metric of sales excellency, and it's a matter of daring to interact with the customer and to bring in bigger baskets and share the benefits of lower logistics costs and, by equal measure, to hand out part of it in terms of a better overall deal to the customer and then also maintaining a significant portion of the logistics efficiency gains due to bigger sizes -- in our own -- bigger basket sizes, in our own P&L. So that is, I would say, just an exercise of carefully [adapting] the parameters for free shipments and creating sufficiently strong incentives for adding just one more item into your basket. And that's an exercise we do across our markets and across all sales lines. And lastly, when it comes to free cash generation, what gives us confidence is the simple fact that we've been fairly focused on improving the sourcing margin with our suppliers, and we have substantial available room for improvement when it comes to payment terms with our suppliers. So free cash is going to be generated simply because the payment terms on supplier side are below usual standards that you will find in a retail [group] our size. We now pay our suppliers within 22 days on average, and that KPI is going to improve in the year of 2020, and that is going to help the free cash.

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Tobias Sittig, MainFirst Bank AG, Research Division - Head of Equity Research Germany & Senior Equity Analyst [6]

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One follow-up, if I may. Could you also expand a little bit on the relative decline in accessory sales? What's been driving that? Is that competition? Or just the market overall?

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Cornelius Patt, zooplus AG - Chairman of the Management Board & CEO [7]

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Well, it's probably a bit of both. It's competition that probably believes in -- that accessories are at the heart of customer acquisition. We put food at the heart of customer acquisition because we find it more natural then for one first food purchase to turn into a consecutive food purchase. And secondly, we focus our logistics on being super superefficient, and that comes at the expense of not being completely expandable when it comes to the size of SKUs that's offered. So the relative decline of accessories and [loss], because we don't go into offering 20,000 SKUs just to make sure that even, let's say, much -- the least that we have is also available in your favorite hue of a color that you would like to see on your dog. That is something that we see as a less good investment compared to availability of food products and cost efficiency in logistics.

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Operator [8]

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The next question received is from Nikolas Mauder from Kepler Cheuvreux.

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Nikolas Mauder, Kepler Cheuvreux, Research Division - Junior Equity Research Analyst [9]

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They center on the topic of logistics. When you were talking about the geographic sales growth split, you mentioned a couple of logistics-driven effects, apparently, in CEE. Your growth rates are elevated due to the introduction of a new fulfillment center. You expect a similar effect next year in Italy. Would -- and we -- I think we've seen something similar when you introduced your fulfillment center in Spain, 2018 maybe. Then would it be fair to assume that if you expect an acceleration in Italy next year due to your fulfillment center, how should we look at the growth rate in CEE next year? Is there a special effect in there as well that's going to wear off?

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Cornelius Patt, zooplus AG - Chairman of the Management Board & CEO [10]

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The logistics thing, it has 2 components.

The one component is how efficient is distribution on parcels in comparison to traditional retail. And what we see, in particular and noticeable in Poland and to some lesser extent in Germany, is that we have very efficient parcel operators in these markets, and they allow us to work with cost structures that out-compete not only the specialty trade when it comes to their off-line cost structure, but also we can compete head on against supermarkets that also carry or have a bit of an overlap in assortment, I mean, with zooplus. So that is the one thing to bear in mind, and that is the key reason why Poland is such a wonderful success story. And there is just open-minded consumers, and there is extremely efficient parcel distribution. And then there is also a specialty trade segment that probably has not been built over 40 years, but just had maybe 10 to 15 years to develop due to the rather late introduction of market economy -- of a market economy into that region of Europe. And then the second part is exactly what we call the home-market advantage. Once we set logistics into the market, that usually, I would say, it boosts customer experience, but probably also it boosts confidence and morale within zooplus. So if you look into the Netherlands, a market that quite early on have seen a local fulfillment center because -- not because of the Dutch market, but because we saw that as a very suitable location for anything that was going on in Western Europe, including France. The Dutch market is one of the markets with the highest market penetration, and that is because we run fulfillment center operations for a long, long time there. The same thing we see logically in Germany, where parts of the Wroclaw facility can be seen as something that we optimize for serving parts of Germany. So we have a double home-market advantage there. We see the very favorable situation that we see in Poland, low distribution costs and very competently operated fulfillment centers, 2 of them sitting in Poland. And we now want to replicate that strength of -- as a pan-European reach with local efficiency and delivery speed by expanding into the U.K., into Spain and into Italy. It's very important to note that it takes time for these things to kick in to full extent. And it's because you need not only to set up the fulfillment center there, you need to increase the share of parcels packed locally, and you need to build the sourcing infrastructure around it. And we're in the process of doing that, but we -- yes, we see the opportunity of double-digit growth rates for all of these markets, that's U.K., that's Spain and that's Italy, for the year of 2020.

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Nikolas Mauder, Kepler Cheuvreux, Research Division - Junior Equity Research Analyst [11]

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Okay. Following up on something you also said on logistics earlier. You said that you now -- perhaps I quote you wrong, but the speed disadvantage in some markets has been closed. How do you see competition around this sort of [UXP] or I don't know, the customer value proposition evolving? Is -- are the others going to increase their speed again on delivery times? How do you see that?

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Cornelius Patt, zooplus AG - Chairman of the Management Board & CEO [12]

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Yes. It's a bit like, I'd say, optimizing for the best package for an electric car. Everybody wants to have range, and everybody wants to have performance, but nobody wants to pay the price. And here we have the same situation. Of course, you can speed up local delivery, but either you have then to sacrifice in cost efficiency or on the completeness of the assortment. And we kind of strike, hopefully, perfect balance or a perfect compromise between these 3 factors of fast delivery and a broad [spectrum] of articles on offering and lastly, cost efficiency. And for that reason, we've developed exactly network logistics and load-balanced logistics that allow us to run the network on, let's say, a 90% utilization rate. That is very good for cost efficiency, but with the increasing rate of locally packed parcels and only, let's say, less of the parcels need to go back, I mean, say, instead of being packed in Madrid, back to fulfillment center in France that also serves the Spanish market or if all things fail, we have to go back to the Netherlands where we have a full-range fulfillment center that can serve multiple countries, including Spain.

So it's a complicated thing. But of course, individually, one can try to out-compete zooplus, being faster in delivery, but then with a restricted assortment or being probably a little bit more complete in the assortment.

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Operator [13]

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(Operator Instructions) And the next question received is from Adam Tomlinson from Liberum.

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Adam Stuart Tomlinson, Liberum Capital Limited, Research Division - Analyst [14]

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Just a quick question, diving into regional performance a bit more, if that's okay, picking out the U.K., one of your top 5 markets. And you noted, obviously, a new fulfillment center going in there. Growth, I guess, a little bit lower, tracking a bit lower versus the other top 5 markets. And I know some of your competitors have posted some quite strong results there. So just wondering, what should we expect in terms of U.K. growth going forward? Anything you plan to do there to try and improve that growth rate? And then -- sorry, just a second question on stock levels. So a cash inflow, I guess, for the first 9 months last year, an outflow this year. Anything we need to be cognizant of there? And what should we expect in terms of building stock levels going forward?

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

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Okay. Yes. About the situation in the U.K., I won't beat around bushes there. There's two things: The competition, and that is [directed home], and that is Amazon. And we're kind of increasing the [annoy] of us making significant gains in market share in the U.K. market. And here, we see a kind of a massive move by the competitors trying to stop that. And at the same time, we are not yet complete in making our U.K. business truly, let's say, local.

We have local fulfillment, but we haven't yet built a complete local sourcing base for that market. We are still short, but we are fixing this one, of a couple of strong specialty brands. And then also when it comes to collaborating or cooperating with the big multinationals that are significant -- of significant relevance in our category, we're not yet done with having separate sourcing deals in pound sterling for all of them. And that explains -- where we are more exposed in the U.K., first to financial risk due to the currency, and then we have a challenging competitive situation. And what we see is that the U.K. behaves like any other market. Once we have built a loyal, let's say, customer base, that customer base remains loyal. And so we don't see any reasons to not push also for the U.K. because it is the second-biggest market of all of Europe.

So when it comes to cash, we see that inventory levels go slightly up, but that is within, let's say, a usual bounce, and it grows alongside with our sales increase. We see a stable stock rotation, although we have built the local presence in the U.K., in Spain and in Italy. A lot of that is also driven not that much, but logistically, by needs of efficient delivery by suppliers, and our suppliers are happy to receive only full truckload orders with us. Many of these orders now are routed directly through their factories, so they don't go through their own distribution centers. They see their own chain of operation more efficient. We are happy with the current stock levels in relation to our sales. What we expect is the main driver for cash to be generated in more appropriate payment terms with key suppliers.

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Operator [16]

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(Operator Instructions) As we received no further questions, I hand back to Dr. Patt.

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

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Okay. Then we close Q&A, which close the call for the first 9 months of 2019 for zooplus. Thanks again for your interest in zooplus. Thanks again for the questions and the deep drill, in particular when it comes to logistics and the pan-European nature of our business. I will happy to have you listen us in our next call, which will happen in 2020. Thank you very much, and bye-bye.

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Operator [18]

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