Ozon Holdings PLC

Dear ladies and gentlemen, welcome to the Ozons fourth quarter of four year 2020 financial results call. Before I pass the floor to Ozons management, I would like to advise you that some of the information you will hear today may include forward looking statements under the Private Securities Litigation Reform Act. Forward looking statements are based on management's beliefs, assumptions and information currently available and are subject to known and unknown risks and uncertainties, many of which may be beyond our control. We caution you that the forward-looking information presented is not a guarantee of future results and that actual results may differ materially from those made or suggested by the forward-looking information presented in today's call. Any forward-looking information presented is made only as of the date of today's call and we do not undertake any obligation to update or revise any forward-looking information. We encourage you to refer to the cautionary statements contained in the company's press release issued today and SEC filings for a more in-depth explanation of the inherent limitations of such forward-looking statements. During today's call, the company will also discuss some non-IFRS financial measures and other metrics, which Ozon believes provide useful information for investors. Ozon will include an explanation of adjustments and other reconciliations of our non-IFRS measures to the most comparable IFRS measures in the company's press release issues today and company's investor presentation available on Ozon Investor Relations website. Now I will pass the floor to Aleksandr Shulgin, CEO of Ozon. Please go ahead.

Thank you. Good morning everyone and good afternoon. Thank you for joining us today and welcome to Ozon's inaugural earnings call. Today we will discuss first quarter and full year 2020 results. Together with my team, we are going to make some comments about the business development, financials and the outlook for 2021. and we'll try to give as much time as possible for the Q&A. Before diving into the numbers, I would like to recap our vision for you. Ozon aims to transform shopping experience for Russian consumers by offering the maximum convenience and providing the widest selection of goods online and fast and reliable delivery service for our buyers. We also aim to empower our partners across Russian e-commerce ecosystem to achieve greater commercial success through partnership with Ozon. To deliver on this mission and to achieve scale and leadership, we will continue to invest in our core business and new initiatives, and we will expand our offering for buyers, sellers, and a variety of our own business partners. Russia is one of the largest consumer economies globally with strong fundamentals. Interim penetration is high by global standards at 83%. In contrast, Russian e-commerce market remains under-penetrated with only 9% e-commerce penetration. Plus, the market is still very fragmented with only 24% market share for top three players. This is a result of limited investment and fulfillment and logistics infrastructure by e-commerce players over the past decades. And due to step-up in investments by players such as Ozone in the last two to three years and additional tailwind from COVID-19, the market is set to grow at least three times in the coming five years. Combination of all these factors presents us with a unique opportunity. We aim to drive not just e-commerce, but broad online services adoption in Russia. Let me say a few words on how we are going to achieve this. Our strategy is to build a platform and to connect thousands of merchants to millions of customers in Russia via our marketplace. In order to do this, we have been and will continue to invest in logistics and technology, so that we can offer highly reliable and convenient service and best user experience to our customers and to all of our business partners. We see strong positive network effects stemming from fast-growing buyer base and improved customer loyalty. This is attracting more sellers to the platform, which contributes to ozone assortment expansion. This further drives firewall effect and accelerates growth. Longer term, Ozone aims to build a diversified platform around our core Ozone marketplace and first-party direct sales business, including new adjacent verticals such as FinTech services for customers and merchants, and online grocery, for example. The last three years have been transformational for Ozone. Our primary focus was scaling up. To achieve this, we launched Marketplace and invested in fulfillment and logistics. In three years, we more than quadrupled our fulfillment footprint from 50 to over 220,000 square meters with nationwide coverage. During this time, we also made significant investments in product development. This concerted effort enabled us to create leading multi-category marketplace, which attracted millions of buyers and thousands of sellers. Our buyers made 74 million orders on Ozone platform in this past year, in stark contrast to 2017, when our platform generated only 8 million orders. Our marketplace currently accounts for over 50% of our JNV and allowed us to accelerate growth from 46% in 2017 to 144% year-on-year in 2020. But we are just getting started. With JNV of $2.7 billion in 2020, Ozone accounts for only 7% of the e-commerce market and less than 1% of Russian retail market. We believe we're best positioned to benefit from e-commerce adoption as we aim to drive further penetration of e-commerce within total addressable market, which is already worth more than $450 billion. And as we're developing our platform and expanding into adjacent verticals, our total addressable market will keep on growing. Now, I would like to say a few words about our new verticals. Although Ozone Marketplace is the main traffic generator, We can offer our buyers and sellers a number of complimentary online services, which enhance customer experience. These services create additional monetization opportunities for Ozone and bring more customers and business partners to the platform. Let me highlight our initiative in financial services. In this past year, we expanded and diversified the portfolio of financial services that we offer. We developed both payments and lending solutions within B2B and B2C streams. The idea is to deliver smooth and frictionless experience to our buyers and sellers when using Ozone payments and lending solutions. This increases loyalty and engagement of our buyers and sellers. In our B2C domain, we are testing buy now, pay later solution at Ozone. Our lending solution is aimed at making higher value purchases more affordable for our buyers. B2C Ozone payment solution increases customer retention. We see 60% higher order frequency amongst Ozone card holders. This means greater customer lifetime value and faster payback period for these buyers. As of the end of 2020, customers activated over 450,000 cards. Adoption of Ozone card has been accelerated materially by the launch of the virtual card in G4 2020. In our B2B stream, we aim to support our sellers with developing their business via easy access to financing. Now, online grocery adoption was accelerated by COVID globally. In Russia, penetration of e-commerce is less than 1% in the grocery retail market. Thus, online grocery market represents an immense opportunity for our zone. Online grocery is also an important driver of higher frequency and traffic generation tool for a platform such as ours. It also increases the number of touchpoints with the customer, which helps to promote brand recognition. And due to our large existing customer base, the customer acquisition for online grocery products within our platform is easier and very cost efficient. We rolled out a network of dark stores in Moscow that allowed us to deliver groceries to our customers in Moscow within an hour. Our dark store concept offers a wide range of food and non-food items, including some unique assortment not typically offered by classic DarkSol operators. The total assortment was nearly 22,000 SKUs as of year-end, and is currently closer to 24,000 SKUs. We aim to further fine-tune the model and expand XonExpress into regions in 2021. Before we proceed, I would like to announce the appointment of Daniel Fedorov as Chief Operating Officer of Xon, and Igor Gerasimov as chief financial officer. I would like to take the opportunity to thank them for their incredible dedication and contribution to our success story so far and to congratulate them and wish them both good luck in their new roles. I look forward to working with these two very talented individuals and building the best-in-class local e-commerce champion that transforms the way Russian consumers shop. Now, I will pass the floor to Daniel Fedorov to discuss our quarterly results.

Yes, thank you, Alexander. Hi, everyone, and thanks for joining us on our first earnings call as a public company. As you have already seen, this morning, 2020 was a very successful year for Ozone, and we ended the year on a high note with a strong operational performance and successful IPO during Q4. Before I move on to discuss our financials in more detail, a few words on COVID-19. Pandemic had a mixed effect on our business, and it's impossible to determine precisely the impact of COVID on our operations in 2020 and future performance. On one hand, COVID accelerated adoption of online services in Russia, which is positive for our business. But on the other hand, COVID impacted our employees, our customers, and our business partners. During COVID, it was more important than ever for millions of customers across Russia to be offered fast, reliable, and safe delivery options. We facilitated contactless payment methods and contactless deliveries from Q1 2020 onwards. Since the start of the pandemic, contactless door deliveries increased to more than 80% of our courier deliveries. Ozone also ensured safe working conditions for our employees and our outsourced staff. To keep our employees, our customers, and staff of our business partners safe, Ozone introduced a wide range of policies and provided protective equipment across its countrywide network fulfillment centers, cross-docking stations, pick-up points, and query services. We enabled merchants to migrate online, ensuring business continuity for many SMEs and large retailers in Russia. To support the transition online, we launched our e-commerce online school for entrepreneurs that wanted to sell products online. The platform offers regular webinars by industry experts, Ozone product team, and current Ozone sellers. On behalf of our management team, I can say that we are proud of the way our zone rose to the challenge, becoming a lifeline and a reliable partner to many businesses across Russia and ensuring safe provision of essential and non-essential products to millions of Russian households. Now moving on to quarterly results. I'm pleased with the execution across our business units in Q4. To sum up, GMV and Q4 were significantly accelerated year on year. In addition to accelerated growth of the business, we also reached positive operating cash flow and improved significantly adjusted EBITDA margins. Now let's look at our financials in more detail. In the fourth quarter, GNV growth accelerated on the back of ongoing rapid shift to marketplace. Strong adoption of e-commerce among Russian buyers and sellers across Russian regions and positive network effect. GNV including services increased to 75.8 billion rubles with growth accelerating to 147% year-on-year. On a full year basis, GMV reached 197.4 billion rubles, up 144% year-on-year. The growth was primarily driven by strong water growth of 137% year-on-year, the back of 75% increase in the number of active buyers, and more than 30% increase of order frequency on average amongst both new and existing buyers in 2020 compared to 2019. We also saw greater contribution from our regional expansion. Regions now constitute around 50% of our GMV. The biggest driver of GMV growth was fast-growing ozone marketplace. In Q4, share of marketplace reached 52.3% of group's GMV. which is more than double compared to Q4 of 2019. Much greater contribution from Ozone marketplace is attributable to significant growth in seller base. The seller base nearly quadrupled and is now well over 20,000 sellers. This jump in number of sellers was fueled by Ozone attractive and comprehensive offering for the merchants. Ozone offers merchants national wide fulfillment and logistics services access to a large and fast-growing customer base, and also trading and analytical tools and advertising business solutions. In addition to FBO and FBS, we are now also offering extended FBS solution, allowing for full flexibility around fulfillment and logistics. Essentially, Ozone offers a plug-and-play solution for the sellers where they build logistics backbone that's used in their business needs. Lastly, as Alexander mentioned, we have launched a lending service for our merchants. Although it is still in its infancy, initial results are encouraging and gives us confidence that sellers will use this solution to grow their business. We see a big potential to grow our seller base. These initiatives will help us attract sellers to our own marketplace. We believe that we could see as much as 350,000 sellers on our platform in the long term. Strong GDP growth is underpinned by the growing number of buyers that has increased by 75% year-on-year to 13.8 million customers in 2020 and almost tripled in two years. It is also important that order frequency and retention are increasing as well. We believe that the current levels of frequency is a small fraction of what can be further achieved, which is multiple times lower compared to 30 to 60 orders per annum in a more mature e-commerce market with e-commerce penetration of over 15 or sometimes even 20%. Expanding our fulfillment logistics infrastructure with focus on regions allowed us to improve delivery times and improve overall quality of service. Over 95% of our parcels were delivered on time in P4 and is even higher so far this year. Improvements in buyer's behavior can be seen from our cohort's performance. Both frequency and GV per buyer increased in 2020 cohorts compared to 2019 and older cohorts. Order frequency for 2020 cohort compared with the cohort of 2019 increased by 28% and almost doubled compared to 2018 cohort. Retention keeps on growing as we improve our quality of service and delivery. Also, cohort trends are continuing in the first quarter as well. Now let's move to the operating expenses. Our main expense items are fulfillment delivery, sales and marketing, IT, and G&A. Across all cost lines, there was a significant increase in absolute terms. Ozone is an investment stage, and growth in our operating expenses reflect the ramp up and the expanding of our fulfillment and delivery infrastructure, growing business volumes and increasing headcount. Our general and administrative expense increased the most, up 86% year-on-year, as we invested in enhancing our talent pool. In 2021, we plan to accelerate investments into talent acquisition to accelerate our platform development. Fulfillment and delivery costs were the second fastest-growing expense, up 78% year-on-year, as we processed nearly 30 million orders in Q4, 137% high compared to 12.5 million in 2020. Q4 2019. Sales and marketing and technology costs saw increase of 47% and 46% respectively. Sales and marketing increase was attributed to digital and offline advertising and then technology by investment in talent and product development to improve our seller experience and our customers UX as well as our data capabilities. However, the percentage of GMV of all our expenses decreased noticeably thanks to operating leverage great utilization of logistics and growing scale. After significant investments in 2019, adjusted EBITDA as a percentage of GMV improved in 2020. And in Q4, adjusted EBITDA as a percentage of GMV showed marked improvement from negative 17.1 percent in Q4 2019 to negative 4.7 in Q4 2020, thanks to operating leverage economies of scale and disciplined cost control. In 2020, Amazon reported positive operating cash flow. The total operating cash flow on a full year basis reached 6.6 billion rubles compared to negative 14.3 billion in 2019. A big part of operating cash flow was generated in the fourth quarter, nearly 10.6 billion of cash flow, cash inflow compared to negative 2.7 billion rubles in Q4 2019. This is a function of higher sales volume and greater contribution from negative working capital during the high season. Free cash flow, which we calculate as net cash from operating activities, less capex and principal portion of lease liabilities, was near break even in 2020 on the back of strong operating cash flow. A quick word on the company's balance sheet position. We ended the year with a very strong balance sheet. Cash and cash equivalents was under for approximately $1.4 billion at the end of 2020. We have further strengthened our balance sheet this year by issuing convertible bonds for $750 million in February. Now, I would like to provide you with an outlook for the full year 2021. Please bear in mind that our guidance reflects reflects the zone's expectations as of today. As I mentioned, it is difficult to assert an overall impact of the coronavirus pandemic on new potential disruptions that may be caused by COVID-19. Overall, we would like to be conservative in our guidance. We expect our GNV to grow by 90% taking into consideration tough comps, especially in Q2, and COVID-related uncertainty. but we believe the growth could potentially be greater. So overall, the guidance would be 90% or greater. We believe and we plan to invest in our future growth for the core and new adjustment verticals. For our marketplace, Ozone plans to continue to further scale its fulfillment capabilities and investment product to stay ahead of the growing demand and rapidly increasing volume of orders on this platform. Ozone expects capital expenditure to be higher this year compared to 2020 and to be between 20 to 25 billion rubles. Although we are not giving any guidance on profitability, we will remain focused on execution and building scale. We plan to keep investing in building scale, strengthening our competitive position and cementing our leadership in the Russian consumer market. We believe that with greater scale comes improving unit economics and longer-term profitability. And overall, I would like to say thank you for your support so far, and I look forward to liaising with you in my new capacity in the future. And I guess we are ready to proceed with the Q&A.

Thank you. Ladies and gentlemen, if you wish to ask a question, please press star and 1 on your telephone and wait for your name to be announced. Should you wish to cancel your request, please press the hash key. So start on one on your telephone to ask a question. Your first question comes from the line of Slava Degtarev of Goldman Sachs. Please ask your question.

Yes, thank you very much for the presentation. A couple of questions. First one, exactly a year ago, we were in the midst of the lockdown crisis with abnormal elevated demands. As we are lapsing those days currently, Can you comment how the GMV growth currently stands, the performance maybe of the average ticket or frequency these days, and any comparison with the end of March of the last year would be helpful? And secondly, you made a CapEx outlook, but if you can directionally comment about the free cash flow generation going into 2021, that would be helpful. Thank you very much.

Sure, Slava. It's Igor. Let me please take your question. So speaking about the first one, about the impacts of COVID last year and the comms, I guess it will be fair to say that the COVID comms are indeed quite tough and the growth rates last year, amid the introduction of lockdown measures in Russia, Indeed, we're quite elevated. Therefore, it might be a bit of a challenge to demonstrate extremely high growth rates compared to the months most impacted by COVID. Nevertheless, we're quite confident in our guidance for the full year. And as you probably can remember, in Russia, COVID lockdown measures used to be in effect starting from the end of March to approximately mid of June or early June, varying on region by region basis. So far, I mean, we're only making our first steps in the month and time periods which have been most impacted by the COVID outbreak last year. And therefore, probably it is a bit early to say. Despite that, I mean, we're quite confident that the guidance which was communicated previously by my colleagues is something which we're quite confident in. Can you please repeat your second question?

Yes, it was with regards to the free cash flow generation for 2021 given the guidance in CAPEX.

Yeah. We had our CAPEX on operational cash flow that was targeted to be near break-even. Therefore, I mean, just mathematically keeping in mind that we plan to keep investing into our infrastructure and we need to keep expanding our footprints further into the Russian regions and also near Damascus. Our free cash flow in 2021 will remain negative. The biggest driver of that will be our CapEx. Okay, thank you very much.

Thank you. My next question comes from the line of Miriam Adisa of Morgan Stanley. Please ask your question.

Great, thanks everyone. Thanks for taking my questions. Firstly, just on take rates, could you just give us a bit more color on how we should expect take rates to trend this year after some of the changes that you made towards the end of last year? And then you mentioned the 350,000 sellers as the sort of long-term targets. Can you sort of give any guidance on sort of where you would expect sellers to be by year end or sort of how long it would take to get to that 350 number? I think previously you said you had, I think, 60,000 or 70,000 sellers sort of backlogged that you were looking to onboard. If you could just give us an update on that. And then finally, just in competition, if you could just comment on what you're seeing at the moment in terms of advertising spend from your competitors. Has there been any change in level of regression on pricing or anything like that? Thank you.

Yes, let me just address on the take rates. Yes, as I think we already discussed previously, we made the decision to decrease take rates from February 2021. This is a conscious decision. We are making tactical investment, which allows us to unlock part of the market and also to align the commission structure closer to the real cost structure so that actual sellers help us to manage the unit economics, and we see that our strategy is already bearing fruit, and we've already seen an inflow of sellers to the platform on the back of this strategy. We do not give any numbers on the number of sellers joining currently. I think we're going to report Q1 in May, but we see some acceleration in sellers joining the platform on the back of all the effort that we're taking.

As for the competition... Yeah, I can say a question on the competition. To be honest, I mean, there is very little which has changed versus our previous communications with respect to the competition. We still stick to the view that the market is very large, and at this stage, whether or not It would be very hard for us to feel any potential impact of any aggressive actions or claims of aggressive actions by our competitors. Therefore, I mean, largely there is nothing new which we can communicate here. We still believe that the biggest risk for us and for our growth is our execution and our ability to deliver on our own ambition, i.e. expanding the infrastructure, making the product changes to the marketplace, which we want to make, launching new product initiatives, and many, many others.

Okay. Thank you. Thank you. Our next question comes from the line of Ivan Kim of Extellis Capital Partners. Please ask your question.

Yes, good afternoon. Two questions from my side, please. First on CapEx, which increases quite a bit versus 2020. So given that the fulfillment expansion was contracted already, where is this incremental CapEx channel to? Is that mainly as an express development or something else? And then secondly, I understand that you do not give the guidance on profitability, and that's probably tricky, but can you probably just comment directionally on your contribution profit margin or just the dividend margin, whichever is easier for you for 2021? Thank you.

Sure, Ivan. Thank you for your questions. On CapEx, there are a few reasons behind the increase. First of all, the steel prices up, which kind of produced a bit higher capital expenditure on every square meter of fulfillment space, which we need to open. And secondly, we see that there is more opportunity and more demand for our infrastructure, especially preparing for 2022. Because as you probably might remember many of the objects which were actually building have quite a lot quite lengthily time Therefore some of the capital expenditure needs to be born in advance In order for us to be prepared for the growth in 2022 Additional expenditure related to ozone Express initiatives is also one of the drivers behind increased capex because we see that express delivery model is in big demand among our consumers and people are buying into value proposition of getting something delivered within one or two hours. And this doesn't necessarily apply exclusively to fresh, although it is an important category for express delivery, obviously. It's also related to electronics and all adjusted things which Russian consumers are eager to get delivered fast. On profitability and on contribution profit, at this stage, I mean, as we were communicating previously, we're more focused on the cash flow generation, and this is why we're communicating guidance on operating cash flows. We believe that, I mean, operating cash flow is a way better metric which demonstrates healthiness of the business model and its ability and ultimately its sustainability as opposed to EBITDA or profit or any other P&L metrics. Largely because, as you probably might remember, in our case, negative working capital is one of the very important contributors to the operational cash flow.

Okay, thank you.

Thank you. Our next question comes from the line of Catherine O'Neil of Citi. Please ask your question.

Great, thank you. I just wanted to understand a bit more about express in terms of how many dark stores you have now if there's a sort of target for 2021 or medium term and and more specifically how you're managing that last mile delivery and on express I know you previously said that you know in Russia people don't really expect to pay for delivery but with the sort of on-demand delivery around express are you able to charge consumers a higher delivery fee And then the other question I had was around the use of cash. You've obviously got quite a lot of cash on your balance sheet as of year end, and you've issued the convertible. How should we think about your deployment of cash? Are there any areas of M&A you might look to target? I mean, we noticed some of the competitors are pushing a bit more aggressively into fintech from an M&A perspective, for example.

Hi, thank you for the question. This is Alexander speaking. So our approach to Express is that we need to operate as many dark stores as we need to provide one-hour delivery within Moscow. And as we expand to the Moscow region and some other regional cities, obviously, we'll open more. So at this point in time, first of all, we started the initiative in, I would say, mid-last year. At this point in time, we operate nine dark stores in Moscow. We plan to open more because we see there is very strong demand for the service. courier delivery terms are very similar to standards on courier delivery fees yes and all the all the limitations which apply to courier delivery so the goal is to provide wide assortment and fast delivery in this business model and expanded first of all to cover all Moscow and Moscow regions and it and Russian regional cities Maybe a few words on CAPEX also to follow up on the previous question. We see a very strong potential for growth and we see very high correlation between speed of delivery and assortment and reliability of delivery. As we improved timeliness of delivery over the last three years, we saw that customers thanked us with higher frequency and higher retention. Therefore, we decided to make forward investment in fulfillment and delivery infrastructure And now as we build larger facilities, it takes more time to build them. So partially this capex is for the high season of 2022. But as we discussed, despite that period of COVID lockdown is fast since July, the growth and customer behavior metrics are very strong. Therefore, we need to forward invest. Now on cash flow, Igor, our CFO will comment.

Yeah. On M&A, I mean, as we've been discussing before, we remain conscious of various potential opportunities to feel our growth, both organic and inorganic. And at this stage, we do not have any exact targets in mind. or anyone who would like to acquire. I mean, but having said that, with the cash cushion which we have on our balance sheet, we can allow ourselves to be a bit opportunistic in case we see that some deals can be very accretive and can help us to speed up rollout of new product initiatives, also strengthen our team not to be present in the verticals where we have very poor footprint at this stage. But the key use of the cash which we have is and will remain organic development of the business.

Okay, great. Thank you. Actually, I just had one more question. I noticed recently you've launched a group buying service and a services marketplace. Could you maybe just comment on the plans there, how the sort of economics work and how meaningful these could be longer term?

Yeah, I'll address. This is Daniel. Well, the honest answer is always from us. I mean, that would be that we have no idea, actually. We see that group buying is definitely something that we should be working on, and we see very good examples, as you know better than us, globally and especially in the Chinese market. It's a very viral social buying industry there, and we're making our first steps. On the services, I think it's essential for us to provide value-add services So existing assortment that we have. And we also want to try beyond that. But again, this is more like experience, very first steps. We don't want to make you overly optimistic or even optimistic about that. We're just going to try and keep you posted how it goes.

Okay, brilliant. Thank you.

Thank you. Your next question comes from the line of Joliana Lemval-Sakeya of UBS. Please ask your question.

Hi, everyone, and thanks for the call. Firstly, I wanted to clarify, and I apologize if I missed this in the beginning, on the current infrastructure versus competitors. Could you please tell us what is your fulfillment capacity at the moment in school? I mean, there is and if possible to compare that to Wildberries and Yandex.

Sure, Liana. We do not disclose any numbers on the competitors because honestly we do not possess them. However, if there is anything publicly available, you probably need to be mindful. of the fact that the methodology behind the numbers might be different. And therefore, it might be very difficult to run into conclusions without knowing how any of these numbers was calculated. In our case, by the end of 2020, total efficient fulfillment space in use exceeded 100,000 square meters. But if you also multiply this by additional flows, which you have, this number obviously would have been different. I can say that, I mean, as a rule of thumb and a general sentiment, which we see on the market, we're probably one of the largest players in terms of the infrastructure buildup. both in last mile channels, and to remind you, we have the most diversified last mile delivery network among all of the Russian e-commerce players. And we have very robust build-up in terms of the fulfillment capacity, which we have. And every player measures the capacity in different metrics. In our case, we measure the capacity by the big day parcels. And if I tell you the number without the context of what it is when it comes to other players, probably it will tell you very little, unfortunately. But I'd say that we remain very focused on making additional investments in our infrastructure. And our new guidance on CapriX shows that. Because we see that on the one hand, demand for our own infrastructure, i.e. for the bio model, is quite high. And the fulfillment solutions, which we offer to our merchants, are best in class on the market right now. Therefore, we do not see any significant competition in terms of price versus quality when it comes to the fulfillment service, which we offer.

That's very helpful. Thank you, Igor. And secondly, I wanted to discuss the unit economics or maybe cohort performance in regions versus big cities. So you've mentioned that regions are now more than 50% of GMV. What are the differences in unit economics and user behavior in Moscow or big cities versus regions?

Yeah, sure. In regions, surprisingly, I mean, analysts sometimes expect to hear that Russian regions are poor and everything is disastrous there. But in our own numbers, we see a completely different setup. Regions are performing very well, partially because of the fact that regional consumers, albeit they have problems, pretty decent levels of disposable income. They are deprived of the assortment which people in bigger cities like Moscow and St. Petersburg have. Therefore, for them, lack of properly developed offline retail and lack of top brands and other things influences their online purchasing patterns. And therefore, cohorts and regions perform as well as cohorts in the bigger cities. In some of the regions cohort performance is even better.

In terms of unit economics that we just had quickly, it's so long term we expect actual regions to be on the far with Moscow in terms of or St. Petersburg in terms of unit economics. Today Moscow and St. Petersburg is better, but that's mainly because of ramping up infrastructure in the regions. So, because the fulfillment centers and last mile delivery units, either pickup points or, let's say, lockers or hubs, they're ramping up and being in an investment stage, they generate poorer unit economics. Not drastically poorer, but maybe a couple of percentage points, but still, I mean, Moscow and St. Petersburg is much better.

Okay, thank you. And when you say 50% regions, the remaining 50% would be just Moscow and St. Petersburg, right?

Remaining is Moscow region and St.

Petersburg. Thank you.

Thank you. Your next question comes from the line of Kirill Panarin of Renaissance Capital. Please ask your question.

Hi, everyone. Just two questions, please. Firstly, a follow-up on competition. You said there isn't any material impact on ozone from competition at this stage, but could you share your thoughts on your marketing budget for this year? Should we expect further material improvement in marketing costs per order or as a share of GMV? And more generally, has anything changed in terms of your vision on path to profitability since the IPO? That's number one. And secondly, could you talk about the B2B segment within Ozone, your key ambitions and key initiatives here? And if you could also give some color on the size of the opportunity, key categories, and maybe competitive landscape, that would be helpful. That's it. Thanks.

Sure, Kirill. Let me start with the question on competition. Honestly, marketing spending is an extremely poor proxy of the competitive dynamics. And even if you will spend infinite amount of money on marketing without having developed infrastructure and without having developed product and value proposition for your sellers and buyers, it will yield nothing. it probably would result in zero conversion rates. I mean, huge traffic probably, zero conversion rates, and ultimately, incredibly poor marketing from the investment standpoint. Therefore, it is very, very deceiving to think of marketing spending as any proxy of the competitive dynamics. But... As I've mentioned earlier, indeed, we do not experience any significant competitive pressure. We obviously are aware that the competition exists, and especially post Ozone going public. I mean, there are lots of rumors and ambitions and, I mean, big claims about some of our big competitors with respect to the development in the commerce space. But even if all of their plans are to materialize for 100%, still we are of the view that the market opportunity is too big at this stage for us to feel any damage from the development of the competitors. On the path to profitability, once again, we do not communicate any formal guidance on profitability. And why doing this deliberately? Because we're way more focused on the cash flow generation. Because for us, this is a way better proxy of the business and business model performance. However, I mean, having said that, obviously, I mean, if we want it, And I hope this is quite evident from our 2020 results. We're going to send the company to positive EBITDA, but we'll have to sacrifice the growth. And from our view, it would have been a huge strategic mistake. I mean, prioritizing EBITDA and earnings per share, as opposed to gaining the market share and building our footprint in Russian e-commerce landscape. What was your last question? On B2B?

Let's go one by one. On B2B, we see a huge opportunity there because we don't see that there is a lot of competition there. We definitely see potential. I mean, there are several segments. There is B2B2C segment where, you know, some online, offline segment. And there is segment for offices. There is a tender segment. So there are multiple segments there. And we believe it's very old school and inefficient market overall there. And that's why we see big opportunity. What we're doing there is in Q4, we just launched very basic steps. So you just got the So we just enabled businesses to register as a business consumer, not as a private consumer. We worked out some, you know, some CGM for businesses so that they can receive documents that they require, so on and so forth, you know, to recover VAT, for example. And now we continue working on the product, integrating integrating some of the FinTech products. And in Q2, we're going to start working on the more on the commercial matters, you know, working on the funnel, some advertising, some marketing. We don't guide on any specific condition there because, again, as usual, I mean, we just don't know how big it could be and we have some big internal targets. But we indeed believe that it's a huge market. I mean, in terms of competition, difficult to say. I mean, there's more and more traditional players. We believe that, you know, if we apply our effort correctly, it would be close to impossible to compete with us. And we're ready to provide all these services to businesses and including smaller businesses, including our actual seller base. So we'll continue working there. Today, this business represents about, I think it's about like 3% to 5% of overall business from zero in, for example, last year. So we'll continue working on that. We'll see how it goes.

Great, thank you. And just quickly, quick follow up on the B2B in terms of category breakdown, would it be similar to your core business or something different?

Well, it looks like most likely, you know, less of food, less of books, less of apparel. So beyond those three categories should be similar.

Okay, great. Thanks a lot.

Thank you. Your next question comes from the line of Elena Juranova of JPMorgan. Please ask your question.

Hi, ladies and gentlemen, and congratulations with results and a special congrats to Daniil and Igor for their new roles and good luck. A few questions, please. So first and foremost, coming back to eGrocery, what are your current thoughts about path to profitability? I mean, I wonder if it can actually have positive unit economics at some point, or is it going to be a drag to your profitability for a while? And a related question, do you think that cooperation with an offline player would make sense in order to give you purchasing scale?

Yeah. Yeah. Let me try this. Look, um, We believe that, I mean, the challenge of this category is that low value item, low item value. So that's the biggest challenge there. And item value has impact on unit economics. Longer term, we're absolutely sure that this segment should be profitable. And I think you can use Coupang for the reference, which sells mainly FMCG, including food. And it looks like they're close to breakeven. One important thing there is that, yes, low item value is a challenge, but marketing is low as well because the category by itself generates traffic. So we actually have quite a good level of comfort at this category on its own. I mean, overall with MCG, right, you shouldn't look at food. People do not buy just food. It's never the case. FMCG itself should be okay from an economics perspective. It would never be very profitable, but it could be break-even. Sometimes we actually have some tolerance for some subcategories to be loss-making because we look at these categories as a marketing rather than a category. And we measure, we tend, you know, we work on it right now actually to start measuring the the economic efficiency of these categories from marketing perspective. How much LTV do these categories bring? So overall, I mean, we believe it should be breakeven, but even if it's slightly negative, it should be okay, because it generates traffic for all categories.

And then the small without cooperation with any offline player in the grocery segment? Is that something that could make sense for you to improve your purchasing scale?

I mean, it's difficult to imagine how that would happen. I mean, we welcome all this, all the offline, online, it doesn't matter. All the retailers are very welcome to join our platform as a marketplace, as a seller in our marketplace. And we would be very welcome for everyone to join. Any partnerships? It's just difficult to imagine how we could utilize this. I mean, we would likely anyway pay for that, right? Nobody will give it for free. If we pay for that, so it doesn't matter. If there is some equity partnerships, we don't know, maybe it's better to use cash rather than equity. So... difficult just so I think marketplace cooperation should be possible and we would very welcome them to join because we believe that as a marketplace we would really like to work you know to grow together with with our sellers so we do not look at this as a competition so we're actually ready to embrace everyone

I mean, yeah, on those, if your question is related to any of the plan retailers' potential M&A targets for us, the answer would be probably no, because among the things which they can offer and complement our business, there are some that purchase power, and purchase power is, I mean, accessible with the scale. Other than that, I mean, there is very little which... can be added to our core business, which can complement our core business. This is our thinking at this stage.

Okay, thank you. And I have a few other questions. Sorry for the background noise. So we noticed that your 1P business actually did very well in Q4, much better than we thought. Does that reflect the expansion of the Ozonexpress business? And maybe you can comment on the profitability of 1P operations, which improved slightly in Q4, and give us an idea of what to expect in 2021. Are you keeping margins low there or potentially increasing a bit?

Yeah, it's a good question. Let me address that. First of all, you're right. Part of that was Ozonexpress. But nevertheless, we... We actually do not plan to write off the idea of developing 1P. There are several categories where 1P is essential today and most likely would be essential tomorrow because there are anyway very big brands who many of them prefer to work in 1P model, which is kind of okay for us. um so for this year we actually plan to continue growing our 1p business so we believe and we plan that the share of marketplace will continue growing but nevertheless 1p will continue demonstrating a very good growth um partially that would driven by express but even without express should be growth as in terms of uh profitability expresses an investment stage so open dark stores and you know it's a lot of ramp up there um without express uh we are working to continue improving our profitability because the developing marketplace we can narrow down our assortment focus on procurement focus on better efficiency um focus on on you know now we're um first in terms which are materially significantly materially below that of of the peers in the market, not like the peers, I would say bigger players in the market. So we see huge potential actually there to improve margins and we'll continue doing that. Part of that will go into prices, but overall profitability of 1P should be improving.

Yeah, that's what I would have thought with, you know, 150% GMV growth. And a few other questions, actually. So on your working capital and payable days, first and foremost, is that related mainly to your 1P or to your 3P business?

You mean payables?

Yes, yes, payables.

I think, yeah, look, if you look at our reporting, so inventory is basically 1P. Payables would be related to both 1P and 3P. And given that the marketplace is bigger than 1P and Q4, most of that, you know, bigger part of that would be marketplace rather than 1P.

So from the accounting perspective, the 3P business, effectively when you receive the money from the buyer, that goes into your payables before you pay to the merchant or the money just belongs to the merchant straight away. How does your accounting work?

The first one, for the first case. Go sensor the payables, yeah.

Understood. And I had a final question on the CAPEX and kind of the resulting GMV growth. So I understand that the big CAPEX uplift is obviously intended not only to drive 90% GMV growth, growth into 2021. But this leaves the foundation for strong growth in the future. If I'm not mistaken, at the time of IPO, the expectation of the market was that you can do something around 50-60% GMV CAGR over the next five years. And with the uplift in CapEx, do you think that this midterm GMV growth expectation can actually be higher?

It's a tricky question. Thank you for that. But we probably wouldn't communicate any longer-term GMV growth guidance. I'd only say that in 2022, indeed, we see an opportunity to potentially accelerate a bit. And plus, please keep in mind that part of the CapEx increase is attributed to higher steel prices. and developments of our Azon Express initiative, which also requires additional spending.

Yeah, if that helps, I can tell you that the growth that you mentioned, so if we change them, we wouldn't be very happy. So that's just the maximum that you can say.

Thank you. That's very clear.

Thank you. I will now hand the floor back over to Alexander for his closing remarks.

Thank you for joining us today on this call and for your questions. To sum up, despite challenges of the pandemic, this past year was a very successful year for Ozone. The core engine of our business, the marketplace, which now accounts for over 50% of GMV, saw unprecedented growth with improving cohort performance and millions of buyers and thousands of sellers joining the platform. Following our IPO and recent convertible bonds issue, our balance sheet position is strong. We are encouraged by results, but we are not complacent. We will stay focused on building scale and growing market share in our core e-commerce market, as well as expand adjacent verticals. We look forward to updating you on our progress and our performance on our Q1 earnings call in May. Thank you and have a good afternoon.