Ozon Holdings PLC

Welcome to Ozon's Third Quarter 2021 Resorts Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised, today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Maria Berezniewa-McManara, Head of Investor Relations. Please go ahead.

Good afternoon everyone and welcome to Azon Q3 2021 results call. Today's presenters are Azon's Chief Executive Officer Alexander Shulgin, Chief Operating Officer Daniil Froderov and Chief Financial Officer Igor Gerasimov. During the call we will share company's key strategic, business and operating highlights and discuss financial performance for the third quarter. This will be followed by a Q&A session in which you're welcome to ask your questions. You can also find a copy of our earnings release and presentation on Ozone IR website. Before I pass the floor to our management, I would like to advise you that some of the information you will hear today may include forward-looking statements under the Private Security Litigation Reform Act. Forward-looking statements are based on management beliefs, assumptions and information currently available and are subject to known and unknown risks and uncertainties, many of which may be beyond our control and actual results may differ materially. We encourage you to refer to the cautionary statements contained in the company's press release issued today and our SEC filings. During today's call, the company will be referring to certain non-IFRS financial measures and other metrics, reconciliation and definition of which you can find in the company's press release published today. And now, with great pleasure, I will pass the floor to Alexander Shulgin, CEO of Ozon.

Thank you, Maria. Good afternoon, everyone, and welcome to our third quarter 2021 earnings call. Let me outline key highlights of the third quarter performance, and then Daniel and Igor will discuss marketplace dynamics and our financials in more detail. We are very happy to report our best quarter with the highest GMV orders, active buyers and seller numbers in our history, resulting in strong performance across our core business and verticals. Compared to Q2 2021, we also achieved an improvement in unit economics and EBITDA as percentage of GMV on a like-for-like basis, which is really important for us. Now, let me provide you with a few operational highlights. Within our core e-commerce business, we saw strong momentum in GMV growth, supported by an outstanding buyers and sellers base expansion, and a big step up in engagement with the platform. GMV, including services, increased 2.5 times compared to Q3 2020, supported by the record growth in number of orders up 239% year on year. The number of buyers exceeded 21 million and the number of active sellers reached 60,000, both showing stellar year-on-year growth. Following an inflection in demand for online services since the start of the COVID-19 pandemic, we ramped up investments and made huge progress in infrastructure expansion. Our infrastructure increased 2.5 times year-on-year and our last-mile network nearly doubled. The infrastructure expansion allowed to provide best-in-class service for our buyers and sellers with 98% on-time delivery and greater share of orders delivered same or next day. With greater proximity to consumer, our strategy of shifting to a high-frequency model is bearing fruit and is reflected in stronger cohorts. During the third quarter, our distance verticals made tremendous progress, which gives us confidence in their scalability and significant potential for creating value for Ozone Group. Russian retail market is worth $500 billion and represents a huge opportunity in terms of e-commerce. We see strong market fundamentals in GDP per capita, internet and mobile penetration as precursors to growth in e-commerce penetration, which is currently half of where it is in other markets with similar internet penetration. The e-commerce penetration is expected to exceed 20% within total retail by 2025, as e-commerce market grows by 29% on compound annual growth rate basis until 2025. And we aim to be the key driving force of this transformational offline-to-online shift. By focusing on high-frequency model, we believe we are deploying the right strategy to win the market. Furthermore, we are expanding our total addressable market by entering new geographies such as Belarus and Kazakhstan. In Q3, ozone growth accelerated and returned to triple-digit territory, reaching 145% year-over-year. The stellar GMV growth was boosted by a record high year-on-year odor growth of 239%, on the back of a big improvement in odor frequency by 50%, as well as an extremely strong growth in the customer base, up nearly 90% year-on-year. The uptick in frequency is a testimony to our progress towards a high-frequency model. Ozone has already become a go-to destination for more than 21 million buyers. Our customers enjoy the widest multi-category assortment on the market, along with convenient and reliable delivery, which in turn translates into step-up in purchase frequency. Ozone financial services provide buyers and sellers with a comprehensive suite of digital financial services and ensures frictionless shopping experience when it comes to transacting or lending on and off platforms. After acquisition of a banking license, we continue to build our B2B and B2C payment and lending business verticals under Ozone Bank brand. Ozone Card, our flagship consumer payments product, showed tremendous performance with over 1.6 million cards issued. And Ozone Card holders transact 60% more frequently on our platform. Within our B2B stream, I would like to highlight our flexible payment plan product, which is gaining a lot of traction and is very popular with our sellers community. More than 5,000 sellers leverage this product to enhance their cash management, improve working capital profile, and scale their online business with Ozone faster. After we laid foundation this year, we have a solid product pipeline for the next 12 months. We plan to share the updates with you on a wide array of FinTech products that are currently under development. Last year, we started to scale Ozone Express, our quick commerce vertical, which enables us to achieve higher shopping frequencies. Express accelerates our overall last mile and allows us to tap into one of the largest grocery markets in Europe. This deliver anything fast offering resonates incredibly well with the buyers. After piloting this vertical in 2020, we started to scale this year. We're encouraged by the results At the moment, you have dark stores operating for more than 12 months, which show much better unit economics. Over the last few months, we expanded this business to metropolitan areas in the regions outside of Moscow and St. Petersburg. We opened new dark stores in central Russia, for example in Tver, and in the south, in Krasnodar and Rostov-on-Don. In addition to 20,000 of branded SKUs, we expanded the selection with our own private label and launched our ready-to-eat meals offering. The dark source footprint more than doubled quarter on quarter and exceeded 60,000 square meters by the end of Q3. We believe this is a very attractive segment with huge total address flow market of nearly $250 billion and less than 1% e-commerce penetration. We see enormous opportunity for Ozone in this segment. So far, we have barely scraped the surface and we believe in our ability to execute and penetrate this market. To sum up, we had a tremendous quarter with GMV growth accelerating to 145% in Q3. We achieved an incredible GMV growth of 123% in the first 9 months and had a strong start to Q4. Trading during the high season is progressing well with the record 6 billion GMV generated in the single day of November 11 and 5,000 orders a minute placed on the platform during the peak hours. Given our strong performance here today, we are raising our guidance to 120% GMV growth in 2021 compared to last year. Now I will pass it over to Daniel Fedorov, who will elaborate on our operational performance and dynamics in the marketplace.

Thank you, Alexander. Hello, everyone. I will provide you with a few comments on company's growth results and key operational updates. 145% growth of GMV and 239% growth in orders in Q3 is a phenomenal result. Even companies scaled and white-tapped comps base of Q3 2020. We're very focused on excellence in execution, delivering best customer experience for all users of our platform. Buyers, sellers, and our logistics partners. Budget assortment best in class fulfillment and logistics infrastructure. Proximity to buyers and sellers enables us to expand platform user base and drive high engagement, augmenting flywheel effect. Our merchant base increased by 3.6 times in the last year. The outstanding growth in the merchant base to over 60,000 contributed to the rising share of marketplace, reaching 67% of G&V. Sellers appreciate access to 21 million customer base, variety of fulfillment and delivery options. Ozone proprietary market and business analytic tools help sellers to make more informed decisions about their business plans and better understand market landscape. Our advertising instruments and financial services assist sellers in scaling their business faster. Our cross-border business, Ozone Global, is also gaining traction. As of now, we have over 6,000 international businesses selling their goods on our platform, adding to variety and choice. In Q3 2021, we also launched sole proprietor sales on our platform that should encourage more entrepreneurs to join the platform and start doing business with us. Such initiatives make the platform's assortment more attractive to buyers. In fact, Ozone's assortment increased five times between Q3 2020 and Q3 2021. And Ozone currently offers to buy this assortment across multiple categories. head and shoulders above core competitors. More choice and more availability coupled with more convenience brings more customers to the platform. As a matter of fact, during Q3, Ozone attracted approximately 1 million new active users per month. As a result, we surpassed the 20 million milestone in active buyers, which is 87% more than a year ago. We observe increasing frequency and engagement of our buyers across Our offering resonates with shoppers, which translates in purchase frequency increased by 50% year-on-year, reaching 7.5 orders per year. That's the average number. And our cohort showed great progress quarter-on-quarter, but this is still way behind our ambitious long-term targets. However, as an indication of what progress we can achieve, I'll give you some illustration. Our most loyal audience, which places orders at least once a week, increased to nearly 2 million customers in October this year versus around 500,000 a year ago. Formation into a high-frequency model is coupled with marginal contraction of average order value more frequently, but with a lower basket size. We believe that this model is more sustainable in the long term, as it assures greater performance of cohorts and high customer lifetime value. Key drivers of order frequency growth are strong assortment growth and availability. Increasing proximity to customers through expansion of pickup points network boosted by services such as premium subscription and our adjacent verticals such as express delivery and FinTech solutions such as the Buy Now, Pay Later and the Zone Car. We'd also share insights into our cohort performance. Ozon continues to improve proximity to customers through network expansion, build better products and develop new products and services to enhance UX and consumers' demand for greater convenience and high-quality service. Being a one-stop shop, we emerged as the go-to destination for online shopping for Russian consumers. Today, Ozon is the most recognizable e-commerce brand among Russian marketplaces. And based on consumer feedback, our top-of-mind share increased dramatically since the beginning of 2019 and continued to go from strength to strength outpacing our peers. As a result, we are seeing more and more consumers choosing to order on their own versus other marketplaces. Our mobile app user audience more than doubled year-on-year, exhibiting the highest pace of growth amongst peers based on third-party data. Cohort performance has been amazing amongst both for new and existing cohorts. We believe our obsession over custom experience is contributing to the growth in buyers' greater retention as well as greater order frequency. Order composition chart shows that recent cohorts contribute substantial part of and those new cohorts show high repurchase rates, which gives us confidence that our custom proposition keeps improving. Improving cohort characteristics give us confidence that focusing on a high frequency commerce is the right strategy long-term. All of this would be impossible without having a solid logistics backbone. Fulfillment and logistics is the bedrock of Ozone's e-commerce business, as it enables Ozone to handle rapidly rising volumes of orders, huge assortment, as well as offer faster delivery. Ozone expanded its total warehouse capacity by over 150% year-on-year, Our total warehouse space exceeded 700,000 square meters. Last quarter marked the largest increase in our footprint in history. Our offline peak applications almost doubled since the year end. With greater proximity to consumer, our strategy of shifting to a high-frequency model is bearing fruit, with order frequency doubling in the last two years. Furthermore, our infrastructure enabled us to reach a great milestone of More than 1 million parcels shipped per day, of which 98% are steadily delivered on time. Last but not the least, the infrastructure expansion in Q3 prepares us for in demand and trading during the high season, delivering on our growth guidance for 2021 and positioning us for strong growth in 2022. And I'm also pleased to say that we have secured over 80% of new space plans for opening during 2022. All of this should translate into the better cohort performance and boost order frequencies for years to come. Before we turn over to financial performance discussion with Igor, a few words on our international expansion. Ozone continues to scale its operations. The company is now present in Belarus and Kazakhstan. During Q3 2021, Ozone launched a sorting center in Belarus. There are more than 3,000 unbranded offline pickup locations where you can collect our orders. And just last week, we launched branded franchising of pickup points in Belarus, which we believe could replicate the success of the model seen in Russia. Ozone is gaining popularity faster than sales in Belarus have grown by approximately 10 times since the beginning of the year. The sales of sellers from Belarus on Ozone increased five times since March 2021. With this, I would like to hand over to Igor Gerasimov who will discuss further our financial performance.

Thank you, Daniil. I will share some insights into our Q3 financials. Our platform generated GMV including services of 108 billion or 1.5 billion USD. This means 2.4 times increase compared to Q3 2020. Quarter on quarter, we made great progress. Not only GMV accelerated to an impressive 145% year-over-year compared to 94% in Q2, but also we managed to deliver a visible improvement in underlying EBITDA on a life-for-life basis. This was primarily driven by the improvements in gross profit margin and marketing expense as a percentage of GMV. to give you more on the drivers of gross profit and marketing improvements. As I shared with you in August in Q3, we started to optimize the price investments within our 1P business, which we ramped up during Q2 2021. As a result of this effort, we achieved better gross margins in Q3 compared to Q2 2021 under like-for-like methodology. As discussed in August, we also focused on optimization of our marketing expense. We aimed to increase the efficiency without having negative impacts on the customer acquisitions. The result is encouraging in my view. Marketing and sales expense decreased to 6% of GMV in Q3 2021 versus Q2. Yet our customer base grew faster in Q3, 87% year-over-year compared to approximately 80% average run rates for the last seven quarters. These achievements were somewhat offset by the rising cost pressure from our record infrastructure expansion. We have increased our warehouse capacity by 1.6 times Q-on-Q in preparation for the high season and the next lack of growth in 2023. To sum up, underlying EBITDA calculated on a like-for-like basis and excluding one-off, it corresponds to 9.6% as a percentage of GMV in Q3. This represents an improvement of 70 basis points in Q3 versus Q2. Next slide shows dynamic in our operating expenses at the aggregate level. The increase is elevated by GMV and others growth, as well as 2.5 times growth in infrastructure year over year, as well as strategic investments into new verticals and products. Higher operating expense also reflects the cost of transformation to a higher frequency model. A few points I would like to highlight on this slide. Our marketing expense increased due to concentrated effort around customer acquisition, which really paid off year over year. I would like to remind you that our marketing expense includes costs associated with CAD processing, which inflates this cost line. Despite all of this, we achieved greater marketing efficiency with sales and marketing expense as a percentage of GMV, declining to 6% in Q3 2021 compared to 6.4% in Q2 2021. Turning over to technology, the increased Q on Q can be largely attributed to a one-off expenditure on R&D, which I have mentioned, as well as ESOP components, which doesn't impact EBITDA. Finally, I would like to note that JNA was impacted by non-cash ESOP components, which increased substantially both year-over-year and Q&Q because of the new grants and share price appreciation. Our AOV contracted, driven by our transition to a high-frequency model. This transition is part of our strategy. We are seeing increasing loyalty and rising repurchase rates with customers, engaging in buying across all categories. This makes our business and economics more sustainable and less dependent on the category mix in the future. This produces, however, temporary cost pressure on our bottom line. But we can already say with confidence that this is paying off and would result in higher GNV per buyer. And therefore, it is diluting our cost per order basis, which I will comment on in the next slide. higher revenue per user increases our returns on customer acquisition costs. I know Sasha already highlighted to you, but I would like to mention this once again and draw your attention to the tremendous order growth and growth which we achieved between Q3 this year and Q3 last year. This number of orders, nearly quadrupled, reaching 56 million of orders in Q3 compared to 17 million of orders last year. We have delivered one of the strongest orders growth in the industry, which is one of the key volumetrics showing ultimate commitment of our buyers and sellers to our platform. This incredible growth in orders is positively impacting the dynamics of cost per order. Namely, fulfillment and delivery costs per order went down from 393 rubles per order in Q3 2020 to 330 rubles per order in the space of 12 months, despite 2.5 times increase in their housing capacity. Sales and marketing costs went down from 144 in Q3 2021 to 116 rubles per order in Q3. It went down from 144 in Q3 2020 to 116 orders per order in Q3 2021. What this means is that we were able to reduce marketing cost per order whilst nearly doubling active user base. With further order growth and continuing improvements in frequency, there is room for further cost dilution on per order basis. and better unit economics. Lastly, a few words on our cash flow dynamics. Cash outflow from operating activities was minus 9.1 billion rubles. Our working capital dynamics remains favorable. Our capital expenditure amounted to 4.6 billion rubles as we progress with planned infrastructure launches. Thank you for your attention and let us move now to Q&A session.

Thank you. We will now begin the question and answer session. If you wish to ask a question, please press star and one on your telephone and wait for your name to be announced. To cancel the request, please press the hash key. Star and one to ask a question. Your first question comes from the line of Slava Degtarov. Please ask your question.

Yes, thank you very much for the presentation. A couple of questions from my side. So firstly, if you can elaborate on the competitive modes that you have created on the side of the high frequency versus what is available at the market currently from your competitors. And do you see a material difference in frequency between the capital cities and the regions? And maybe secondly, you also mentioned you secured 80% of the target fulfillment space for the next year. can you roughly comment what is the fulfillment capacity addition you are looking for compared to this year and directionally would you expect GMV growth next year to outpace the growth in the fulfillment space thank you thank you for your question Slava let me begin and probably on some questions then can follow up on frequency what we see is we have one of the strongest orders growth

in the whole e-commerce market in Russia. And I believe that many of our competitors still have relatively inflated average order values, which means that one of the key drivers behind their GMV is electronics, meaning that going forward, probably it will be diluted once they move towards other categories and proceed with expansion in non-electronics. Also, I'd like to mention that on per item basis, growth remains very strong as well. And from the standpoint of relative growth metrics, I'd say that our growth probably is one of the best based on the information which is available to us. On the fulfillment capacity, This year, as we have previously shared with you, we aim to almost double overall fulfillment capacity on a year-over-year basis, and part of the infrastructure expansion would be attributable to the first month of 2022 as well, in order to support the orders growth, because we are setting a higher bar for us, effectively. However, we cannot produce any exact targets or guidance. I guess we will share with you updated guidance on 2022 by the time we release our new horizon.

Yes, let me, if I can add on the frequency. Look, I think what we really focus on and I think we excel and we have a best-in-class performance is I would first highlight very basic stuff, which is difficult to advertise and brand, but it's actually the most important. Well, first of all, we have super good coverage of our customers. So, and basically with the last mile network. So that's a last mile network proximity to customers. That's one. Second, we have... We manage availability of goods and localization of stock and pay a lot of attention there, which means that actually it's not like a proximity of just last mile network. It's also the proximity of goods, which means that delivery time is narrower. And on top of that, we, of course, we focus a lot on FinTech premium subscription. and in fintech we have over 1.6 million Amazon cards issued and we also have a good progress with our premium subscription and we see that those who use that product their frequency is improving drastically and on top of that last but not the least of course is express delivery which be different how other guys are doing, but we think it's actually today one of the fastest growing e-groceries in the market. We also see a huge engagement from customers and the express delivery is gaining pace and improves frequency quite dramatically. Looking versus the regions, as you asked, I think the share of high frequency buyers is high in Moscow. and particularly because of Express. But at the same time, if you look at different layers of your customers, looking by frequency, actually have a lot of customers doing weekly orders in all cities. Key is actually to have a fulfillment year so that you can actually supply next or two-day delivery.

Okay, thank you very much.

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

Great. Thanks, everyone, for the opportunity to take questions. Firstly, just on the Ozone Express, if you could just share the share of GMB that represents now, and how much was this a driver of that sort of step-up in order frequency that you saw? And then also, if you could talk about your expansion plans for dark stores over the next year, given the fact you've now sort of gone out of Moscow and you've gone into new cities, is this something, as you see, working in most of your cities, or do you think this is still something limited to perhaps some of the bigger cities? And also, how are you thinking about the size of the store as well and the relative number of SKUs per store as well? Any more color on your expansion plans there would be great. And then finally, just on your seller base, so you've seen this big growth in your merchant base. Just wondering if you're seeing sellers choosing more FBO versus FBS, if there's been any shift there any color on that as well would be great. Thank you.

Sure, Miriam. Hi, Miriam. This is Alexander speaking. So on Express, this business is fairly new for us as we discussed. We were piloting it in 2020 and are actively developing the dark store infrastructure this year. So its total share in our GNV is less than 10%. And I wouldn't say that's the key reason for the frequency increase. Frequency is driven by substantially better propositions to the sellers in terms of number of SKUs available on the platform, quality of service and speed of delivery. Obviously, Express contributes to frequency increase in the cities where it operates, in Moscow primarily, St. Pete and our recently launched Krasnodar and Rostov. But overall, the frequency increase is driven by the performance of the core business.

Yes, on FBS and FBO split, let me add here, I think I can highlight two trends that we see. First, we see more and more sellers actually going into two models, because actually, and I can claim that these models, they actually do not differentiate sellers, they differentiate different categories and goods. So what we see that sellers are actually mixing models, This one, so we see a slight improvement of FBO. And I would attribute to the fact that we pay a lot of attention to regions and for FBS sellers, it's simply impossible to localize stocks. And if the share of regions increases, commissions actually works that you know commission becomes a bit higher and by the way in commissions because I look at commentaries I see some misleading commentaries actually our Commission is very similar to to some of our competitors and some of our competitors increase Commission three times this year so and we are on par and I think what we focus on and we've been talking through this very clearly over the last year. We are focusing on sustainable commissions because we built a long-term partnership with our sellers.

Great. Thank you. And just following up on the first question, it was just on sort of if you can talk about the expansion plans for your dark stores in terms of new cities and then also how you're thinking about the format in terms of number of SKUs and the size of the stores.

Sure, Miriam. So, in terms of the expansion, Expressed ducts also radio-operate in St. Pete, so they're not present exclusively in Moscow. And we're experimenting with regional expansion. However, at this stage it's mostly pilot, so we'll see. And about the number of SKUs. We're also experimenting with a number of various formats in order to make the delivery even speedier compared to the previous value proposition. Therefore, we will be trying to allow a mix of relatively narrower SKU counts versus better delivery time. But it is an early stage initiative.

Great. Thank you. Thank you. The next question comes from the line of Ivan Kim of Excellius Capital. Please ask your question.

Yes, good afternoon. Firstly, on the fourth quarter, so the growth is good in the fourth quarter so far. Can you please comment directionally on profitability level in the fourth quarter and what will be the drivers defining the fourth quarter margin? Secondly, can you please talk about the ways you can improve customer retention and increase the mode? How can you improve the adoption of the premium subscription? And probably related questions, whether you think you're fully funded for the foreseeable future, thinking about the investments you implement. And lastly, just a technical question on the 1P margin, Igor said that Like for like, it improved quarter on quarter. I was just trying to understand. It was impacted by the one-off inventory relation allowance, right? So what sort of like for like, so to say, clean 1P margin you had in the third quarter? Thank you.

Sure, Ivan. Let me take the first part of the question. So in Q4, directionally, given that we've been opening infrastructure ahead of the high season, ramp-up of the fulfillment and delivery cost component should be better. I guess this should be one of the visible drivers in Q4. On 1P margin, let me explain that. So IFRIC, I mean a committee which dictates the FRS methodology, has issued a new note saying how NRV essentially impairment reserves on stock should be calculated and evaluated and this is already impacting most of the retail organizations globally reporting under IFRS standards. In our case it resulted in an immediate cost of 500 million rubles and in our reporting 1p gross margin is net of that so therefore effectively our gross profit for 1T business should be higher by 500 million rubles. On your question with respect to our financial condition, we have over 100 billion rubles on the balance sheet as of now. Therefore, we remain comfortably funded, but would not comment on any future financing plans. On the ways to improve retention and increase the penetration of the premium subscription, I will let Dan to add.

Yeah, I think, let me split it into three buckets. First is, I would say, speed. So effectively, what I'm talking about is that increasing proximity of our last mile network, increasing proximity of stock. That would include building regional fulfillment centers, localizing stock there, and also opening more and more express ozone dark stores, actually. So this proved to be very efficient historically. Our cohorts improve continuously. And as I mentioned, just to keep this in mind, if you look at October, 2 million, almost 2 million people are doing weekly orders already. And that's compared to almost 500,000 a year ago. So that actually worked out pretty well. I mean, of course we'll talk through additional services and maybe having the ability to watch different films on your smart TV pushes you to buy more in some universes, right? So we are focusing on the very basic stuff. So that's one. Second, would add is Engaging buyers more and more and with that we are working to develop Social streaming and we are we had the most visited stream on 1111 already So and we have a big plans for next year in terms of social commerce and number three would be actually Creating motivation to show to be frequent shopper and when I say that is that relates to premium and and Ozone Card and other financial services. So that actually creates a better stickiness financially to our platform. So these three buckets. Talking about premium, how to motivate, how to develop the program, I think we did a lot of changes over the last couple months. We see good traction. I think As we mentioned previously, we're still thinking how to enrich the program. One thing we did, and it was a good thing, is in our 11.11 promo, we did one day of pre-sale for premium buyers, and the premium buyers accounted for 50% of GenV on that day, which means that we actually found a really good feature for the subscription. So I think it's basically more of the same.

Great. Thank you very much.

Thank you. Your next question comes from the line of Alina Juranova of J.P. Morgan. Please ask your question.

Hi. Good evening, everyone. I have a few questions. Let me ask one by one, please. First and foremost... I noticed that you are talking a lot about the decline in your fulfillment and delivery costs on per order basis, and you've mentioned the number 16%. Well, as a matter of fact, we've been tracking that metric every quarter, and we see that it's going down continuously ever since Q2 2020. So I'm just wondering why you decided to flesh out this particular number during today's release. And in the same context, how should we think about the improvement in unit economics when we actually see that your contribution margin deteriorated in 3Q versus second quarter? That's the first question.

Sure. So on fulfillment and delivery cost per order, why it is important? Because in Q3 2021, we've delivered even higher growth in orders. And as you know, we do not have... Most of our orders are delivered without any artificial thresholds. Therefore, the economics, I mean, is adapted towards a higher frequency mode of operations. What does that mean? We've basically expanded our infrastructure more than two times since 2020. And cost per order didn't go up. I mean, what it tells you is that the economics of scale is working, even despite the infrastructure is not fully ramped up. I mean, so this was the point. And going forward with improving frequency, cost per order should be diluted even more than that in the future. And on contribution profit, I mean, it's subject to how you define it. If it's cross-profit minus fulfillment and delivery expense, this is because fulfillment and delivery expense in Q3 went up because of the openings ahead of the high season next year. So I don't know what to add here. The point was, that focus on frequency is paying off economically because unit economics will be improved even better because semi-fixed components in our cost structure is significant. And therefore, given current cohort performance and given the current frequency trends, costs will be continuously diluting in the future, especially, I mean, in 2022.

Okay, and is it then logical to assume that after such a big expansion of fulfillment infrastructure and the associated fixed costs in Q3, when we are in the high season of Q4, we should start seeing contribution margin improving as percentage of sales?

I mean, it depends on how you are defining the contribution margin.

Gross profit, less fulfillment and delivery costs.

I mean, we're not given exact guidance on profitability targets for Q4, but fulfillment and delivery costs in Q4 should be better because of the ramp-up.

You mean better as percentage of GMV?

Yes.

Okay. Then another question was on receivables. Why did we see growth in receivables?

I mean, but it doesn't look like a significant change given that scale of GMV has also changed. So it looks largely in line. What do you mean exactly by the question?

Well, we've seen a change in receivables turnover. And that was something that I thought was unusual. But if it's just related to fast GMV growth, fine. But it was doubling of receivables and advances in Q3 versus Q2 last year? I mean, look, if it's not important, we can take it.

There's nothing particular to add here. It's business as usual. So, I mean, in Q4, you should expect significant improvement in the working capital dynamics as usual, I mean, because of the seasonality. So, I mean, nothing unusual from my standpoint.

Okay. Can we maybe discuss a bit the outlook for advertising revenue growth? I think this is where you're surprised on the upside. What would be expectations for Q4 and next year? Do you think that advertising is going to accelerate growth or you've reached a certain level which you're comfortable with?

It's definitely an area. So the ambition is that starting from next year we're going to become a reasonably big player in the advertising market overall. And it should continue growing. We see very healthy metrics in terms of engagement of sellers into our advertising pools. Despite the fact that actually the number of sellers is growing and almost doubled since March of this year, we actually see sellers' advertising pools increasing. So meaning that the number of sellers using advertising growing more than two times since March. And it's more than half of sellers are using these pools. We have a quite strong roadmap of products. We also enhance our commercial function and next year the ambition is that we're going to become a top five players in online advertising overall in Russia. In terms of PNN metrics, we're not going to give any guidance, but the percentage points should continue growing going forward.

Understood. Then also, Daniel, I had a question on the share of 3P as percentage of GME. It's growing very nicely. When do you think it will stabilize and at what level?

It's difficult to say because I think it would be fair to say that let's say at 70% slash 75% is a level where we have no aim to push 3P share higher. So it's at a level where we're broadly comfortable, so we're not doing a specific push. And then the sellers and vendors speak. Because a lot of unexpected things sometimes happen. Sometimes big brands become sellers unexpectedly, so anything can happen. But I would say like current levels are more or less comfortable in terms of split, you know, let's say strategically. And then we will see what vendors choose to be sellers or to stay 1P brands.

Yeah, that's clear. Another one I had was actually on sales and marketing. So these costs went down as percentage of GMV, obviously. GMV performance was very strong. Do you think this was really more of a one-off, or this is the beginning of a trend, so we'll see in the future that sales and marketing costs go down as percentage of GDP?

So it's not a one-off. I mean, it's a result of the effort to optimize the marketing spending. And within sales and marketing, I mean, you have separate items reported in aggregate. Marketing component per se, I mean as a spending on online advertising and offline advertising, has improved even more drastically versus second quarter 2020. The rest of the cost is attributable to a number of factors. So one component is the sales team, which is necessary to ensure the GMV growth. And another component is cost of processing of the ozone card.

I also add that the trend continues. Look at our historical financials. I remember when I joined Tozon, this level of sales and marketing, especially if you look at the true marketing component without any other businesses or without HR costs, we were dreaming to have it like that. So yeah, it will continue.

Thank you. And just a final one, if I may, please. So you've announced a couple of interesting things that I picked up on, and that is expansion to Belarus and Kazakhstan. And then you also touched upon the positive impact on GMV you're seeing from the FinTech initiatives, B2B, B2C lending. Is there a way to quantify what GMV increments can we be talking about here in a more strategic sense, maybe? How do these projects increase your mid-term GMV growth outlook?

I guess on Belarus and Kazakhstan, obviously the initiatives are at the very early stage, I mean as of now, and GMV of both countries, ex-Russia, is below 1%. So for 2021 it's fair to assume. Target for 2022, given that we're not sharing broader guidance for the whole company, we'll not communicate that, but... the pace of growth in Belarus and Kazakhstan obviously should be exceeding that of ozone on average. And sharing GMV will be growing in 2022. It's one of the targets. As for FinTech, I mean, penetration of ozone financial payment products into our GMV already well exceeds 10%, and it's closer to 15%, in fact. Therefore, incremental, I mean, uptick In frequency in JV and customer loyalty is quite material and going forward. It should be growing plus I mean we're extracting additional additional economies from reduction effective reduction of the acquiring costs because we're not paying the third parties therefore we have another incentive to drive Penetration of ozone card up going forward Okay

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

Hi, everyone. Three questions, please. Firstly, could you give some color on your pricing strategy and 1P gross margin outlook? in particular during the high Q4 season? Should we expect further optimization of pricing or a reversal of Q3 trend? That's the first one. Secondly, do you have a medium term target for fulfillment capacity? And then maybe without giving a specific number, on your plans for next year. Could you talk about how we should think about fulfillment costs as percentage of GMV in 2022? And then lastly, to sum up all your comments on margin trends. So EBITDA margin improved sequentially in Q3, adjusted for one-offs. Do you expect this improvement to continue in Q4 and next year? That's it, thank you.

Sure, Kirill. So on... On 1P gross profit margin, it's hard to guide for any exact level because it is subject to the category mix, as you well know. In some categories, gross profit margins are lower, which is offset by higher average item value. In other categories, gross profit margins are higher, which is also not necessarily good for the economics because average item value is lower in that case. Therefore, I mean, we probably abstain from guiding the exact level of gross profit margins. But we believe that the levels which we have achieved in 1P in the mid-term and going further into 2022 should be improving. I mean, because of the growing purchase power. And it's one of the targets to improve in terms of suppliers. On gross margin in general, I mean, it contains other items. It's a product of, basically, it's a sum of the commission revenue we get from marketplace, advertising revenue from the sellers and also from the suppliers, from our 1P business. And yes, 1P gross profit margins and some other not that material revenue streams. And overall, given what Daniel has mentioned about advertising revenue and given that our commission structure is relatively stable and taking into account that going forward we expect our 1P gross profit margins to gradually improve, obviously coupled with still quite ambitious growth targets, yes, it's reasonable to assume that in the following years gross profit margin for the company overall will be improving.

Thank you. Your next question comes from the line of Dmitry Vlasov of Wooden Co. Please ask your question.

Thank you very much for the opportunity to ask a question. So two for me, please. The first one is on the fulfillment and delivery cost item in the third quarter. So given such a huge increase in the fulfillment capacity, the 17.1% cost line item and the percentage of GMV actually doesn't look that terrible to me. Just curious, what would it be if you wouldn't increase the fulfillment infrastructure? Would it be better versus second quarter of 2021? And when exactly did you open those fulfillment center? Was it the beginning of the quarter or the middle? And the next question, are you maybe planning to expand in any new business verticals to improve your customer proposition, like maybe video streaming or music, or that's not an option as of now? Thank you.

Sure. Thank you for your question. Yes, you're exactly right. Without any incremental addition of the infrastructure, cost per order would go down. I mean, logically, Q and Q. And the percentage of GMV as well. And many of the openings occurred closer to the end of the quarter. So there is some impact of timing within the quarter itself. And yes, in Q4, it's logical to assume that this cost component should be better relative to Q3. Could you please repeat your other question? So on other product verticals, yeah. So on other products, we're considering, I mean, any additions which might improve frequency and loyalty of the customers and sellers on our platform. And we have a number of product initiatives, maybe mainly internal ones, which target better retention of customers and improvements in the engagement. But those are relatively early stage initiatives, and we wouldn't mention that at this stage. And I guess we have a huge customer base already, so we have one of the biggest monthly audiences in the Russian market. We have a significant daily audience, therefore it's very important for us to ensure that those people become more frequent shoppers of the core platform in the first place. Which means that we still have to follow our playbook, bringing goods closer to customers in order to improve the delivery speed, improving the delivery terms, improving the availability and reach of the pickup points and query delivery channels, adding assortments, ensuring that you have best-selling stock available in your warehousing facilities, and et cetera, et cetera. So it's a relatively complex equation which you have to manage in order to ensure great customer experience.

Thank you very much.

Thank you. And your next question comes from the line of Ivan Kim from Xtalus Capital. Your line is now open. Thank you.

Thank you for the opportunity to ask a couple of follow-ups. I just wanted to ask about the customer retention, what it has been lately, and do you see the significant improvement in churn in the recent cohorts, let's say in 2021 versus 2019, and maybe it would be possible to quantify that. And then secondly, on Amazon Express impact on profitability, I think you said in the second quarter, It was about one percentage point impact on EBITDA, so maybe you can provide a similar estimate of what was the impact on the third quarter. Thank you very much.

Sure. On cohorts, yes, you're exactly right. We see continuous improvements in the cohort performance, and in both client cohorts, in GNV, per active buyer, and et cetera, so I mean in every dissection. And could you please repeat your other question?

Yeah, the second question was just on the impact of Ozone Express on profitability in the third quarter. Sure. What sort of?

It was around the same numbers for the third quarter. I mean, in relative terms.

Okay, great. Thank you very much.

Thank you. And your next question comes from the line of Catherine O'Neill from CB. Your line is now open.

Great. Thank you. I just had one question about the average order value, which has been ticking down, as you suggested it would do, and clearly you're very focused on order frequency. I just wondered if you could give us some idea about how we should think about the average order value into 4Q and then into 2022 if you're more focused on frequency.

Average order value in Q4, I mean, we see that it should be pretty much close to the one which we saw in Q3. So we do not expect any material deviations from this target. And going forward, it's a relatively complicated to guide because we already do not have any artificial thresholds on the minimal order value for delivery towards pick up points and we have a threshold of roughly 50 bucks for the delivery via couriers and so far we do not plan to reduce it going forward but the mix in the basket might be changing because of varying customer preferences. So what we're doing here, I mean, our goal is to ensure that we're able to deliver better economics under all circumstances, still having the ability to meet the customer needs, and keeping in mind our goal to improve economics in the mid-term.

Great. Thank you.

Thank you. And your next question comes from the line of Alexey Filopov from JP Morgan. Your line is now open.

Hi. Thank you for the presentation. Could you please share some color on your performance in the more mature markets like Moscow and St. Petersburg? Is the growth in these regions materially lower compared to the group level, or it's broadly similar? That's my first question. Thank you.

Growth in Moscow is also very strong because we are deploying quite a significant, I mean, fulfillment and sonic centers capacity, and we're improving the reach of the pickup points. But the regions are growing a bit faster. But still, growth in Moscow is quite impressive, given, obviously, highways.

Yeah, that's clear. Thank you. And my second question would be on your targeting of any specific categories. So have you been particularly aggressive in any specific category in the third quarter and during November campaign? For instance, we remember that the previous quarter you were experimenting a lot in consumer electronics and FMCG. Is it still the case over the last three months or not? you scale down any specific categories. Thank you.

So this works a bit differently. So internally, given that we manage a huge assortment of, I mean, close to 50 million of SKUs by the end of third quarter, any single pricing strategy wouldn't work. Therefore, you have to combine this and you're trying to combine various product offerings. You have to... combine different value propositions towards customers. So I wouldn't say that we completely abolished all promo campaigns and et cetera, especially given that you are rewarded in advertising for some of the promo campaigns by your suppliers and by the sellers. But we have optimized the level of the investments relative to Kyutsu. And as you could have seen in our numbers, it didn't have any negative impact on on the growth of the group overall. And this is one of the most important highlights for us that the growth in fact accelerated in that quarter while we have managed to improve the pricing and rationalize marketing spend. I guess this is important.

Yeah, I can also add on. If you just talk through the categories, I think it's important. still keep in mind that we are building through a horizontal platform so we aim for for the whole retail market right so then that's that's unchanged we definitely wanna we definitely wanna see high growth in fmcg and especially through the express and what what what i can also highlight is that And there is a high growth across the board, even in books where we are already the proxy of the market in online sales. What I can mention specifically is apparel. Overall, the apparel segment is getting to become the biggest category. We see very high growth. And I think we did a good job over the last year actually to create a very good base for this category at all. So we have now pick up points with fitting rooms. We have critical mass of assortment and sellers. We have actually over 5 million in apparel. And I think so we're not where we would like to be for sure. And that's a category which is lagging historically at the zone. But we think that we reached the pivotal point to continue growing. But it doesn't necessarily mean that it's going to be like super huge investments there. But we see this category outperforming and it should continue going forward.

Yes, that was very helpful. Thank you. And probably the last question on competition. Can you probably highlight who would be the most aggressive right now in terms of marketing and promo?

We are the most aggressive. We offer the best terms for the high frequency, and our order value actually highlights this. We invest significantly into marketing, not slow terms. We are the most aggressive player there. We also are aiming to collect more so that it's actually sellers and brands paying for that, because that's what it is, effectively, because the ties are good. So we are by far the most aggressive player and the most aggressive developer of the industry, despite any numbers which you can hear publicly.

Thank you very much.

Thank you. There are no further questions at this time. Please continue.

This is Alexander speaking. Let me give you some closing remarks and with this we'll finish the call. So thank you very much for your attention. We want to thank you for joining our quarterly call and for your questions today. To sum up, we continue to focus on scaling our business and expanding our core e-commerce business as well as additional verticals, which are complementary to our business. We are pleased with the progress we have made in this last quarter, with 145% GMV growth and record order growth of 139%, with unit economics exhibiting signs of improvement in Q3 compared to Q2 2021. The efficiency initiatives which we are implementing are bearing fruit with gross profit as a percentage of GMV and marketing efficiency improving quarter-on-quarter, helping to drive margin improvements quarter-on-quarter on a lifelong basis. Looking ahead, thanks to our infrastructure additions and concerted effort around inventory stocking, we are well prepared for the high season of 2021 and for the growth in 2022. With strong momentum in our platform and great engagement demonstrated by growing user and seller base, as well as rising order frequencies, we believe we are well positioned to deliver on our long-term objective of becoming a leading e-commerce company in Russia. We look forward to updating you on the progress we make on our Q4 and full-year earnings call in March. Thank you and have a good day.