Ceconomy Ag Ord

Good morning, everyone, and welcome to our Q3 results call. With me today are our CEO, Bernhard Duttmann, our CFO, Karen Sonnmoser, and Ferran Rivera, CEO of the MediaMarkt Saturn Retake Room. They will guide you through today's presentation. Before we start, let me briefly address the usual formalities. Firstly, please be aware that this call is being recorded. A replay will be available on our website later today. Please keep in mind that today's presentation and potentially also some answers to your questions during the Q&A session may contain forward-looking statements. For additional information in this context, please refer to the disclaimer. Well, but now let me hand over to our CEO. Please go ahead.

Good morning, everyone, and thank you for joining the call. As you know from our trading statement, we are looking back on a third quarter which has been exceptional in many ways. I will kick off today's presentation by highlighting how we navigated through this challenging time. I would say we did this successfully. And we eventually came out better in the third quarter than we had originally expected. Farhan will later shed some light on the progress in our strategic areas. We will also share insights on yesterday's announcement regarding our new operating model, which we will implement across the entire business. Karin will, as usual, guide you through the quarterly financials and our outlook for the full year. In the end, we will, of course, wrap up with the usual Q&A session. Ladies and gentlemen, last time we talked in mid-May, we had just started to reopen our stores after weeks of lockdown. At that point in time, it was uncertain how fast consumers would come back to our stores and what their shopping pattern would be. I'm very pleased to report that our business recovered very fast. You could also say that we managed to hit the ground running when the lockdown was lifted. Actually, we resumed the good development we had in the first five months before corona. With stores reopening from mid-May onwards, our business quickly picked up pace. Based on diligent preparation during the lockdown phase, we had all necessary measures in place to provide customers with a safe shopping experience. The traffic in our stores remained lower compared to previous year, yet this was compensated by higher conversion and a higher checkout value. In short, less people came to our stores, but the ones who came had a clear shopping mission. At the same time, the strong shift to our online sales channel continued in all countries. The good news is the strong sales momentum from June even continued into July. Actually, it remained strong until today. We are definitely in consumers' minds. But we assume that demand shift effects will gradually phase out. We also remain cautious regarding the macro perspectives in key markets across Europe. Nevertheless, with all due caution, the positive trend registered since the end of the lockdown is encouraging and makes us feel optimistic for the business going forward. Chart six summarizes our perspective on the quarter. From our point of view, the positives clearly are more and outweigh the negatives. Due to the strength of our omnichannel business and diligent preparation, we were able to quickly capitalize on the easing of the COVID-19 restrictions. Our proactive crisis management also paid off. Our measures for mitigating the crisis were a key factor in delivering a better-than-expected Q3 result. On the other hand, we faced some headwinds on our growth margin. mostly due to the shift to online and lower revenues in service and solutions, fortunately easing month by month. Moreover, we have seen that the age structure of our inventories has deteriorated due to the lockdown of our stores. To wrap up the third quarter, let's take a quick look at our headline figures. In slide seven, you see, despite more than six weeks of widespread store closures, on that is half of the Quarter, sales adjusted for currency and portfolio effects were only down by 8.4%. Adjusted EBIT, excluding associates, came in at minus 45 million euro, which is on prior year's level. Ladies and gentlemen, COVID-19 has imposed a huge level of disruption on the retail industry and all of us. I am proud of how our teams at economy and mediamarkt.org have responded with determination and promptness. They spent massive time and energy to successfully steer the company through this unprecedented crisis. At the same time, we did not lose sight of our strategic initiatives. We continue to make tangible progress. In a minute, Farhan will highlight a few of our recent achievements. As you can imagine, with all COVID restrictions, Digital growth was the main focus in the last quarter. Here we focused on quick wins to really respond immediately to the market, but also on more strategic initiatives, which will improve our online business in the future. For example, we aim to push service and solutions more also in our online business. Centralization of processes remain key for our initiatives and our strategic direction. We are now in the middle of the transformation. Therefore, we cannot wait longer to implement a streamlined and identical organization across all countries. The standardized processes that are uniform throughout the entire business. This is the reason we now come with a new operating model. It will enable us to become faster and more custom-oriented. During COVID, with only a small agile team working under a strict protocol, we had a good experience in gaining speed with standardized processes. We will now implement these across the entire countries and our whole business. So much from my side. Now, Ferran, please go continue and talk about our details and the new model.

Thank you, Bernhard, and good morning also from my side. No doubt, in the past months, we continued to make noticeable progress in all the strategic initiatives. That shows we stay on track and we deliver what we promise, even in exceptional times. Let me explain to you a bit more in detail what we achieved in the third quarter, beginning with Omnichannel. First and foremost, we have performed strongly in online, with almost 3 million new registered online customers since March. This strong growth in online was also driven by our increased focus on online marketing, While online marketing accounted for 30% to 40% of our total media investment before COVID-19, it is now at 60% to 70%. And the majority of this online marketing spend is performance-based, with very attractive returns. As a step into new business models, we have launched our own marketplace in July and are quite pleased with the initial momentum and the strong interest we see from the seller community. So traffic has obviously suffered from corona during the third quarter. But we see traffic now recovering step by step, and pickup rates are already up above 40% again. Within our stores, we have realized a significant efficiency improvement through our new employee app. This new app enables our employees to provide better and faster service to our customers by accessing all relevant information directly on their smartphone. It reduces the time required for a sale or for the preparation of a pickup by one third. This frees up a lot of capacity. We have completed the rollout of this new app in Germany and we will finally roll it out across all our markets. And not to forget, we have started to prepare for the rebranding in Austria and Luxembourg, where we will rebrand our Saturn stores and Saturn online channel into MediaMarkt by end of this calendar year. Given the specific situation in these two countries, focusing on one strong brand is the right way forward there. In Germany, where we run more than 150 Saturn stores, we plan to continue our two-brand approach. In services and solutions, sales, have recovered to previous year level in June. Again, this has been supported by our new employee app. Sales with the app have a 25 higher touch frame, which is quite significant. But sales have also improved because of usability measures when we have taken in our online channels. We have implemented the technical ability to build services in monthly subscriptions. also in our online channel and have launched our warranty extension, Guaranty Plus, as a monthly subscription service in Germany. This capability to build monthly subscriptions will be rolled out across all our channels and markets and will be a key enabler for future growth. We have also completed the rollout of our after sales and repair IT platform in Germany. This platform enables us to offer these services in a much more efficient and customer-friendly way. And our net promoter score in after sales has immediately improved after the platform went live. In category and supply chain management, we have now introduced a standardized assortment and supplier framework for each country. This will create significant benefits over time. In procurement, we have made further progress with our centralization approach, We are now at 90% centralized procurement in Germany and over 95% centralized procurement on country level across the group. We are much more efficient now, have more transparency and control. Furthermore, we have launched a number of new category pilots, for example, solar in Spain and health and wellness in Germany, and we see significant potential in these categories going forward. In logistics, we are continuing to implement our so-called omnichannel spine to create one stock across all channels and borders. And we are making steady progress in enhancing our customer experience. For example, in Germany and Benelux, we are now already delivering more than 80% of our parcels within the next day. In terms of organization and cost structures, we are continuing our efforts to make our costs more flexible. One main driver here is rent contracts, where we are succeeding in implementing turnover rents, especially when agreeing new rent contracts. Given that, our average lease period is roughly three years. We will capture these benefits step by step over time. Last but not least, we are introducing a new operating model as a major step in the further development of our company. It will be the organizational basis for our way forward. I will come to that in more detail in a moment. So, we achieved a lot in the past month, and we have learned a lot. During corona, we demonstrated that we can react fast to fundamentally changing conditions. Our agile, group-wide contingency approach proved to be highly effective and successful. We are now ready to take the next big step on our way to becoming a very efficient and consistently customer-oriented company. We will now introduce a new operating model and thus further accelerate our transformation process. We are happy that both shareholders, economy, and the family Kellerhaus owner of Convergenta support the concept and the program of the new operating model. Our new operating model is about standardization, and harmonization of structures and processes across the entire company. This applies to the administrative functions in our countries as well as the organization of our stores. And it includes a new form of cooperation between our holding in Ingolstadt and the headquarters in the individual countries. We will harmonize management structures in our 1,000 stores across Europe and align store formats company-wide. And very importantly, we will transfer administrative tasks from the stores to the headquarters of our countries. In this way, we also support the further standardization of key processes, for example, in category management, procurement, or logistics. Above all, however, we ensure that our colleagues on site can concentrate on what really matters, our customers. We will establish, group-wide, unified structures with clear responsibilities for strategic guidelines, standard design, and execution of activities. All our countries will have the same leadership structure with the same departments to facilitate a seamless collaboration across our company. In addition, we will form regional clusters and bringing together Belgium, the Netherlands, and Luxembourg to form the Benelux region. We have already merged the Iberia region, Spain, and Portugal beforehand. In our stores, we will focus everything on best possible customer orientation. Besides the introduction of an efficient uniform management organization, we are strengthening our consistent customer focus with further measures. Under the title Passion for Customer, we are investing in our people. We empower them with a dedicated training program to offer outstanding customer service. In particular, we want to further improve the service quality and advising skills of our teams. The smartphones and digital tools we keep our colleagues in the stores with also contribute to this approach. A good example is the employee app. I already touched upon this topic at the beginning. The guiding principle we follow in our operating model is clear. Ensure maximum customer orientation and a consistent customer experience based on lean, unified structures and fast processes. Our way forward also includes the continued review and optimization of our store network across Europe. In response to COVID-19 impacts, we plan to permanently close 14 of our more than 1,000 stores. The number of European stores may decline further slightly over the coming month. To avoid any misunderstandings, we are talking about individual cases. We are talking about those stores where in light of COVID-19, it is not foreseeable that we will be profitable within a reasonable period of time. The stores are and will remain our biggest asset. They are the heart of our company and the core of our omni-channel model, even in a post-corona world. That's why it is less about closures and more about optimizations. This includes right sizing as well as continued flexibilization of rental costs. By the way, right sizing is more than less space. It's about the right alignment of the safe floor to the respective store format. Above all, we will invest in the effectiveness of our stores. We have formulated a clear goal for this. We will leverage our store network as the ultimate showroom with immediate availability and for click and collect fulfillment. To achieve this goal, we will expand the services and experience areas for our customers. We will increase the visibility of particularly strong brands, and we will further strengthen our pickup points. Furthermore, we will also continue to introduce new store formats. Just in the last few weeks, we have opened two concept stores in Italy, and the next opening is scheduled for Cologne, the so-called Experion area. will be inaugurated in early September. The store focuses on e-gaming. Ladies and gentlemen, to put it in a nutshell, by implementing our new operating model and optimizing our store network, we will gain speed and quality. We will sustainably improve the competitiveness of our entire company, our subsidiaries, and our stores. We will make sure that our customers across Europe have an attractive and consistent omnichannel experience when shopping at media malls at all. Our lean and efficient organizational structure will also lead to significant cost savings. We expect that the implementation of the new operating model and the selected closures of stores will lead to sustainable savings of slightly more than 100 million euros per year. We only expect limited earnings contribution next financial year. but then savings should be significantly accelerated in financial year 21-22. By financial year 22-23, we expect to realize the majority of anticipated savings. One-time expenses for the execution of the program amount approximately €180 million. A significant part of these expenses is expected to still become earnest effective in the current fiscal year. The implementation of the new operational model and the review of our store network are also associated with job adjustments. That's unavoidable, unfortunately. Within the next two to three years, company-wide, a total of up to 3,500 full-time jobs could be reduced, primarily in our foreign European countries. Such decisions are never easy to take. As a responsible company, we will handle This matters with decency, professionalism, and in accordance with social standards in the best possible sense, as we have done in the past. Let me make it very clear. All decisions to be taken are based on comprehensive analysis and serve a very clear purpose. We want and we will become an even better company in each and every respect. Therefore, we are not talking about a simple cost-cutting program. We are talking about our way forward. The new operating model is the organizational basis for the next phase of our transformation. We have a clear plan, which I would like to outline only briefly at this point. In simple terms, the strategic development of our company follows three main directions. First, we go for growth. Therefore, we will further strengthen our core business. We will grow online, expand into new categories like healthcare and solar, and combining it with the new income pools. That also means, for example, that we will step into new business models such as our own marketplace. Second, quality matters. Therefore, we will further strengthen our key differentiators. We are the category authority. We rely on our omnichannel model, and we believe in our people. They make the difference. Third, we want to speed up. Our new operating model will enable efficient operations and we will make even better use of technology and big data. That means we want to get more out of our own data, data of our segmented customer groups, and we'll combine them with improved data analytics capability. We will become a data-driven smart retailer. Ladies and gentlemen, there are many individual projects behind these three strategic dimensions. We will implement them very consistently in order to fulfill our ambition to become customers' first choice. This is our way forward. We have not yet reached our destination, but we are well underway. So much from my side. Thank you. And now over to you, Karin.

Thank you, Farhan. And good morning to everyone on the call. As usual, let me guide you through the quarterly numbers in detail. Let's start with a look at the sales development on chart 18. Currency and portfolio-adjusted sales were down by 8.4% year-on-year. This decrease is exclusively related to the COVID-19 lockdowns in most of our countries. The Dutch region saw a decline of currency-adjusted sales of minus 7.3%. Lower sales in Germany, Austria, and Switzerland due to the COVID-19-related store closures in April and partially in May contributed to this development. After the easing of restrictions during May, sales in these countries recovered, also driven by catch-up effects. The sales momentum further accelerated in June. In Western and Southern Europe, currency and portfolio adjusted sales were down by 9.9%. Spain was particularly hit due to the store closures in April and subsequent restrictions regarding floor space and products. In Italy, sales also declined sharply as a result of the closures. Also, a recovery was already evident when the stores reopened in May. The Netherlands avoided a total lockdown and those recorded a strong increase in sales in the third quarter. This was especially due to significant growth in the online business, which is also attributable to a low comparison basis. In Eastern Europe, currency adjusted sales were down by 11.1% due to the stock closures in Poland and Turkey in April. In Turkey, the stores were even closed for the whole month of May, driven by the late reopening and corresponding strong catch-up effects. Turkey recorded high double-digit growth rates in June. In the other segment, the sales decline is slowly related to the sale of iBoot in the last financial year. Sweden, which was not affected by closures, showed a strong sales development with double-digit growth rates. This is also a result of the initiated restructuring and repositioning in Sweden. Ladies and gentlemen, considering that our stores were closed for at least six weeks in the third quarter and some countries continue to face restrictions with regard to space and opening hours, this is a very positive development under difficult circumstances. In some countries, like Austria and Turkey, show even post-positive year-to-date days growth after nine months. In light of the unprecedented situation in Q3, we have decided to also provide you additional transparency about the development of our monthly business development. The upper diagram shows the year-on-year sales development from January until June. The economy continued on its cross path until February before COVID-19 started to impact the business with a 28% sales decline in March and a 43% decrease in April. I would like to highlight that we basically managed to hold on to almost 60% of our April 2019 sales. Also, on average, 86% of our stores across Europe were closed. This achievement was driven by a massive surge in online sales and is a result of our robust and agile online capabilities that are embodied in our powerful omnichannel business model. The diagram in the middle shows that total online sales rose by 58% in March and more than tripled in April. The right side of the page underlines the quick pace of recovery. Total sales gained momentum rapidly and were up 3% year-on-year in May and 12% in June. We benefited from the reopening of stores across all markets. At the same time, the sustained high level of online crawls continued despite the gradual reopening even in countries that were not affected by the closure of their stationary business. While we are talking about the state's recovery, let me also give you some color on our current trading. We see that the trends observed in June continued in July and the first days of August. Nevertheless, we still expect state momentum to soften over the course of Q4 as we assume that demand catch-up effects will gradually phase out. Let's now take a closer look at the online and service and solution business on slide 20. In the third quarter, online sales rose by 145% year-on-year to 1.4 billion euros. Their share of total sales increased from 13% in the prior year period to 35%. We further strengthened our position in the online business and welcomed nearly 3 million new online customers in our webshops across Europe since March. Around 32% of all online orders were picked up at the stores. The year-on-year decline in the pickup rate is partly due to the fact that the pickup option was not fully available in the closed stores in April. Moreover, in light of the lockdown, the possibility to picking up goods ordered online in the stores was less frequently used by customers. As the stores reopened, we were pleased to see the pickup rate recovering in June. It was already back to 43%. It should not come as a surprise that the store closures and generally lower traffic covered with in-store restrictions after the reopenings had a negative impact on our services and solution business. Without access to stores, customers were not able to use our popular in-store services at our smart bar. And online, the service attachment rates are generally lower. This led to a decline in the services and solution business of 17.8% in Q3. Towards the end of the quarter, however, services and solutions sales began to recover, with the result that sales in June were already back at the previous year's level. Let us now move on to slide 21 for a view on cross-margin, OPEX, and EBIT. As a result of COVID-19, our adjusted cross-margin declined by 260 basis points to 16.1% in the third quarter. This has been caused by multiple effects. The strong performance of our online business and in particular the ship from store option led to a rise in logistic costs. We also saw a change in the product mix during the lockdown period. Customers demand for home office solutions and TVs, for example, was up. While demand for higher margin categories like white goods was down. In addition, lower services and solution income also had an adverse effect on cross-margin. On the positive side, it is worthwhile to mention that we saw a sequential improvement of the cross-margin trend from April to June, particularly due to the recovery of store sales. We managed to compensate the lower cross-margin in the third quarter by acting quickly on the cost side. As Bernard has briefly outlined, we rapidly took substantial contingency measures. These included short-time work compensations for our employees, reduction in marketing spend and location costs. More than half of these savings became effective in April alone. When around 86% of our stores were closed due to the COVID-19 restrictions, And over 30,000 employees in the crew were in short-time work schemes. As stores began to reopen and sales to recover, we also lowered the number of employees in short-time work schemes and those COVID-19-related cost savings reduced. Yet at the same time, we also continue to benefit from ongoing savings from last year's reorganization and efficiency program. We effectively reduced costs by around €185 million, most of which are personal cost savings. Thanks to the aforementioned cost measures and the sales recovery in May and June, we managed to fully compensate the COVID-19-induced decline in sales in cross-margin. We thus reached an adjusted EBIT on prior year level. Looking at the earnings development per segment, the DAS region generated a slightly positive adjusted EBIT based on a solid performance in Germany. The cost reduction were clearly instrumental for this result. Earnings in the other DAS countries came in at previous year's level. Western and Southern Europe saw an adjusted EBIT decrease to minus 30 million euros. Spain recorded a significant decline in earnings as a result of lower sales and margins, mainly due to a low income in the services and solutions business. As a result of COVID-19, earnings in Italy also declined sharply. In the Netherlands, on the other hand, earnings developed slightly positive due to the strong sales development as well as cost reductions. In Eastern Europe, the negative development is exclusively related to a decline in earnings in Poland. Turkey managed to achieve a stable result despite the COVID-19-induced sales disruption in the third quarter. In the other segment, earnings improved year on year, driven by an improvement in Sweden and lower central costs at the economy AG. Let's now move on to slide 23. which explains the bridge from adjusted to reported EBIT. In the third quarter, the reported EBIT stood at minus 64 million euros. In view of lower customer frequencies in the stationary business due to the COVID-19 pandemic, we have already decided to close 14 stores permanently throughout Europe. Ferran already reported about this. Reported EBIT includes non-recurring effects of around minus 19 million euros from asset impairments in connection with the aforementioned store closures. On a nine-month basis, non-recurring effects amount to a gain of 9 million euros. The training restructuring expenses and the expenses for the already decided store closures were fully compensated by the Greek transaction gain booked in Q1. Let us now look at the bridge from EBIT to EPS on slide 24. Please keep in mind that we now see the reported figures also including the effects from IFRS 16 in the current period. Net financial result declined compared to the prior year mainly due to the recognition of the interest component for operating leases under IFRS 16, as well as expenses for loan and commitment fees relating to the syndicated loan. Moreover, in the prior year, the financial result benefited from the sale of the 5.4 percentage meter stake. Moving on to taxes. We disclosed higher tax expense in the third quarter, which is a result of the integral tax approach that we used. On a nine-month basis, the tax rate stood at minus 54.5%. This is basically a more technical figure. The negative tax rate is essentially due to the SNAC-Dati impairment. You might recall that for this financial year, given the current circumstances and the FNAC.T impairment, we expect a distortion in the tax rate. For the coming financial years, however, we continue to expect the underlying tax rate to develop towards 35%. All in all, earnings per share declined by 16 euro cents to minus 29 euro cents in the third quarter. Moving on from earnings to cash flow. The free cash flow in the first nine months amounted to 27 million euros, an increase of 547 million euros compared to the prior year period. However, this increase is essentially related to the adoption of IFRS 16. Looking at the lease-adjusted free cash flow, which subtracts the repayment of lease liabilities for better free cash flow comparability under IFRS 16, we see an increase of €149 million year-on-year. This improvement mainly results from lower cash taxes due to refunds relating to prepayments in the previous year, which led to a cash inflow. Moreover, comparatively fewer tax prepayments were made. Also VAT payments were deferred as a restriction to COVID-19, which positively impacted the other operating cash flow. We have also seen an increase in cash investments. Just to be clear here, this increase is related to the cash effective investment into the joint venture increase in the first quarter. Modernization and expansion investments were clearly below the prior year period. Due to the effects of the corona crisis on the business, planned modernizations and new openings were suspended. For the full year, we now expect capex to be at around 1% of total sales. Let's now move on to the outlook. On the basis of the business development during the first nine months and the information available at this point in time, we decided to further specify the outlook for this financial year. Our outlook assumes that there will be no further restrictions related to COVID-19 in Q4 that could again impact the business. Regarding sales in the fourth quarter, let me repeat that I am pleased to say that the positive sales trend from June seamlessly continued in July, thanks in particular to the VAT reduction in Germany and continued strong demand for home office, home schooling, and home entertainment products. Nevertheless, we still expect that the sales momentum will soften over the course of Q4, as pent-up demand from the lockdown period probably fades out. There's also significant uncertainty about the short-term macro landscape, which we need to consider. On the margin side, we expect that we will face some trailing corona-related headwinds in the fourth quarter. We may also see some effects from a partial reduction of old stock as some goods, which have not been sold during the lockdown, have aged. And on the cost side, We obviously expect a significantly lower level of COVID-19 related cost savings as, for example, almost all short-time work schemes ended in Q3. Let's look at how these assumptions translate into the outlook for the current financial year. Based on the recovery during the third quarter, for full year, 2019-20, we now expect only a slight decline in forex adjusted sales compared to the previous year. As announced with our trading statement, adjusted EBIT is anticipated to come in at between 165 million to 185 million euros. This is expected to include a positive effect of between 5 and 15 million euros due to the introduction of IFRS 16. Given the historic crisis we have faced and successfully managed during the past month, I believe that this is a solid outlook for the full year. So far from my side, and I hand over to you, Bernhard.

Ladies and gentlemen, let me briefly wrap up today's call. I think the crisis we had were really severe. Actually, for MediaMarkt Saturn, it was the worst crisis which could happen because store closures, which is the main pillar of our business, is something which should not happen. We have had it over six weeks in the last quarter. But we demonstrated our ability to act during the crisis. Our omnichannel business model has proven to be very robust and successful. And as you could see, we did take a KFW loan as insurance for a possible second wave of COVID, but we never used it. And we were able to repay nearly everything of our own bank loans So we are much better progressing through this crisis than we have anticipated. And that's due to the case that we were able to ramp up our online business. And if you think a couple of quarters back, I think nobody of you have guessed that we would be able to supply 60% of monthly sales just on our online channel. At the same time, we showed you today that we have made further progress in our strategic areas. In order to accelerate our transformation, we will now implement a more streamlined organization with standardized processes that are uniform throughout whole Europe. It is the fundament for driving and executing the strategy. The big task now is to assess how consumers will adapt. to the new world of retail and what we can expect in terms of future habits. For example, we expect that online shopping will remain on a higher level than before the pandemic. Other behaviors may phase out when returning to the new normal. We are currently analyzing the changing consumer landscape and we will take into account relevant conclusions in our strategy update. but actually we don't know yet how the market will develop. We will, of course, reschedule our Capital Market Day as soon as the circumstances allow for it, and that means when we have some certainty how the markets will look like in the future. With this, I would like to conclude today's presentation. Thank you, everyone, for your attention. I will now turn the call over to the operator for your questions.

Ladies and gentlemen, at this time we will begin the question and answer session. Anyone who wishes to ask a question may press star followed by one on their touch-tone telephone. If you wish to remove yourself from the question queue, you may press star followed by two. If you are using speaker equipment today, please lift the handset before making your selection. Anyone who has a question may press star followed by one at this time. One moment for the first question, please. The first question comes from with Baader Bank. Please go ahead.

Thanks for all the provided details so far. I would like to start with your transformation process. I welcome the transformation steps which you announced. However, from my understanding, centralization, harmonization, process efficiency, that has always been on the agenda. How can I read your announcement today? Are you now starting to do what you always talked about, so to say, or was COVID-19 in that respect a kind of wake-up call which now shows you the urgency to really start this transformation process? And also related to that, the 3,500 employees which will be cut. Why is it materializing, so to say, just in 24 to 36 months? This seems to be quite a long way down the road. And the 14 stores which you announced to be reduced, I mean, you have 1,000 stores. This is nearly 1% of stores. it seems to me like a normalized adjustment and not a meaningful cut, which is really worth to be mentioned in an ad hoc announcement. So to get more clarity on the background here, and perhaps finally on the costs which are related to the transformation process, 180 million, you say a significant portion will be booked in the, this year means in the fourth quarter, so can we expect an amount of 60 to 100 million one-off costs than in the fourth quarter, or how do you, what is the message you want to give us on that? Thank you.

Volker, I will take your questions. I will start with the questions. You asked about the transformation process. The steps have been always on the agenda. This is extremely correct what you say. That's correct. What is different? We started last year with the efficiency and reorganization project in Germany, reorganizing the full business in Germany. This time, and we also created tools which we need to be able to centralize and to standardize. Now, we are taking this approach across Europe. Mm-hmm. So that's number one. Number two is you ask, what is it in the stores? Yes, you're right. Already last year, we took out some administrative function of the stores. But now, with a more centralized purchasing, we have a completely new setup in the stores because we can refocus the stores completely on customer attention. And for that reason, it's a different approach. Farang talked about the My Store app. The My Store app is crucial to bring into the stores digital tools, new processes, how we can much better run the stores and with more productivity. And that's the reason why we only now with these tools in place can make this kind of change in the stores and adjustments, meaning number one, take out more administrative function because there is no purchasing in the stores left. So that's completely different to the past. And secondly, leading the salespeople in the stores, supporting them with the dedicated tools provided to them where we can generate a lot more efficiency.

Mm-hmm.

So that's the reason why we take up the processes now and we come to this point. I can also give you, I can make a picture. We had in some countries, we had to a management function, to the country management function, we had the online and the marketing people reporting to one person. In a second country, it was not online marketing, it was supply chain and online was reporting to that team. to that management function. So this was completely mixed in the countries. And there we bring in with a new model completely order. So we have an identical organization. And by that, we can much better harmonize also the working teams. And that was an exercise we did already during the COVID-19 lockdown when the online teams had daily calls about experience, what's running nicely, what's running good, and how do we improve our online business to really ramp it up in short time with high impact. And for that, at that time, it was not so difficult because many others were on short labor, so you can group it. But now we basically organize the country organization in the same blueprint as we have it in Ingolstadt. Second question was, why does it take so long? Whenever we do some kind of reorganization, we have to prepare for it. That means we have to talk to works counters in the countries. And you know, as of September, we are focusing purely on the business for the Christmas season, for the year-end season. That means we will be in preparation now to get the things going, but then execution will only start basically after the year-end season.

Mm-hmm.

And then we will ramp up quickly, but that is the main reason why we say we will have savings next year, but predominantly most of the savings will come the year after. About the store closures, yes, it's right. We are talking here about 14 stores, which is not a lot. That's true. But as we said, clearly, we will also review the existing stores which are not profitable at this point in time. We will carefully look how customer demand will shift and whether we will be able, with all measures we have in place, to bring them back to profitability. Otherwise, we will have a second wave, and maybe this wave could be bigger, for store closures. So this is the first step where we just, these ones, where obviously that all measures taken will not help these stores to become profitable. And for that reason, we took the decision now in August, no, in the third quarter, not in August, in the third quarter, we need to close these stores.

Good morning, Volker. You asked for the facing of the expenses for the programs. As we already mentioned, we expect to incur expenses of around €180 million. And let me give you some more favor on that. Around €130 million are attributable to store and headquarters organizations. And around €50 million of the program are attributable to store closures. So the total cost will consist of severance payments and wage expense during the notice period, as well as expenses for outstanding rental payments and asset impairments regarding the closed stores. So if we look at the facing, we expect that the majority of the $130 million regarding the store and headquarter reorganization will We will see this amount in the current financial year 2019-20. Of this, however, some costs might shift into the next financial year. But again, we expect the majority in this financial year. The 50 million expenses related to further optimization of our startup network should be predominantly booked in the financial year 2020-21. So actually, your assumption fits pretty well, Volker.

Okay, perfect. Thank you very much, and all the best. Thank you.

The next question comes line of Clement Genlo with Brian Garnier. Please go ahead.

Good morning. I've got three questions for myself, if I may. The first one is regarding the rumours surrounding the search problem of a new CEO. Could you just clarify the role of Dr. Jutman going forward? My second question is regarding the traffic, the installed traffic in the Iberian Peninsula. Do you already see, let's say, new traffic hit because of recent restrictions? How about put in place both in Spain and in Europe? And my third question is regarding the store closures. So beyond the 14 store closures, you mentioned potential new closures. In which countries do we have to expect such closures? I have in mind Poland, which is a tough country, but maybe I'm wrong. Thank you.

Lemo, I will take the first question because you were asking about my office, how will it continue beyond this or when will it end? Because I think you know that I'm delegated from the supervisory board, so my current term ends on October 16th. And it's up to the supervisory board to make a decision on any measure about it. I have signaled I am flexible. I can continue beyond October if I can help the company. And I expect that the supervisory board will communicate in due time.

Okay, related to IVIDIA, well, obviously, There are some regions that are attached for the restrictions, especially city centers. Nevertheless, let me say that looking at the sales, Spain is keeping the momentum. So the sales trend in the country generally are doing fine. They are doing a good job there. And related to the network reduction, about the 14 stores, yeah, We have six store closures in Poland, four in Italy, three in Germany, and one in Spain. And depending on the trend, the further closures will come across Europe as well. But it's not yet decided.

Yes. Well, thank you.

For any further questions, please press star followed by 1 at this time. There's a follow-up question from the line of with Baader Bank. Please go ahead.

Yeah, thank you for taking my second question. I would be curious to get an indication how are the rental reduction negotiations with your landlord progressing? So, have you been able to reduce rent on a permanent basis already? The second question would be on the store frequency. Just as a rough guess, where do you see the current store frequency in your physical stores versus pre-crisis levels, so to say? And the third question would be on Sweden. You said you had double-digit growth rates. Does that change your investment plans for Sweden, or how do you look at that? process given these results on hand.

Thank you. I will start with your question regarding the traffic in our stores. We have a very positive development in the install traffic because we have seen that the install traffic recovers gradually over the course of Q3. However, it has not reached yet the prior year's level, but we also see this positive trend in the actual month. Also in June, the numbers were still well below the prior year's level regarding the in-store traffic, but again, it's very encouraging that we see this positive development again of the traffic in our stores after the reopening. And what else is very encouraging is that we see higher baskets and the higher conversion rates compensating, which are compensating the lower in-store traffic in May and in June. So I would give the next question to Faran.

Yeah, thank you. Well, related to rent renegotiations, we are focusing on rent reductions, obviously, but even more flexibilizing our costs for the future. So we can say today that one-third of our contracts are already turnover rent. And our average lease period, that is very important, we went down until three years in average.

Then you had a question on Sweden. I think we made it clear from the beginning that whatever we do, we start on the countries working on our own turnaround. And we are quite happy with the development in Sweden in this fiscal year because we have seen a lot of progress. So they are gaining market share and they are growing nicely. But still, that's a long way to go in Sweden. So for the time being, it's just no change to our previous position that we work on a turnaround of that country, but there is still a way to go.

Okay, thank you.

There's a next question from Amy Curry with Morgan Stanley. Please go ahead.

Hi, good morning. I have a question regarding this full year and back margin and supplier income agreements. I wondered if the volume targets have been adjusted for COVID-19 and if you could provide any colour around this, please.

Hi, Amy. We are just catching for your questions. I'm not sure that we got the question in the right manner. So you asked for the volume adjustment in the cross margin?

Amy, I think I got the question. I think I got it. Great. So the question is related to our business volume. The purchasing volume has been lower this year than last year, and that's the reason why we expect some tradeoffs in the back margin. And that's the reason why we are a little bit cautious in our Q4 guidance, because the negotiations are ongoing and they will continue until end of September. And for that reason, we need to stay cautious. But if one thing is clear, I mean, we have reduced the purchasing volume over the year, and that's the main reason why we need to look at it.

Sure, that's helpful. Thank you.

There's a follow-up question from the line of Plymouth, and you're with Brian Garney. Please go ahead.

Good morning again. Just one question. You mentioned that the centralization of paper trading was already reaching 90%. So do you think it is now time to once again resume Ewa's alliance with Nagavati? Thank you.

I think we are doing now the first steps in decentralization. It's true that we are at 90%, but still the category management project is ongoing, so we are not looking at this topic right now.

We always said that we focus on our internal transformation first, and we are not done yet in this regard. We have seen huge progress, but we always said it's category management, it's logistics, and it's systems. It's all three together. and only we have achieved on all of it, we are basically done with it and just the purchasing of 95% purchasing is not yet the key, so it's not yet finished.

Okay, I understood. Thank you.

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

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