Earnings Transcript for OZON - Q2 Fiscal Year 2021

Operator: Ladies and gentlemen, welcome to Ozon's Second Quarter 2021 Earnings call. Before I pass the floor to Ozon management, I would like to advise you that some of the information you will hear today may include forward-looking statements under the Private Securities Litigation Reform Act. Forward-looking statements are based on management's beliefs, assumptions, and information currently available, and are subject to known and unknown risks and uncertainties, many of which may be beyond our control 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 SEC filings. During today's call, the company will be referring to certain non-IFRS financial measures and other metrics, reconciliations and definitions of which you can find in company's press release published today. Now, I will pass the floor to CEO of Ozon, Alexander Shulgin. Shulgin, please go ahead.

Alexander Shulgin: Thank you. Hello everyone and welcome to our second quarter 2021 results call. Before we go into our Q2 results, let me remind you that with the onset of COVID-19 from March 2020, we faced extraordinary challenges in the business. While we manage to step up to the challenge and deliver goods to millions of customers across Russia in a safe manner. As a result, we achieved an unprecedented GMV growth of 188% in the second quarter of 2020. This means that we are cycling the extremely tough comp this year. In the second quarter this year, our GMV grew by 94% year-on-year. We nearly doubled the size of our business yet again. And it is even more impressive in the light of the extremely tough comps. And if we try to normalize for the high base effect of the last year and look for example, as a 2-year compounded annual growth rate, our GMV growth actually accelerated from 124% in Q1 to 136% in Q2. Despite COVID restrictions gradually removed from Q3 2020 onwards, we continue to see strong demand for our services from consumers and no signs of the interest [indiscernible] out from the merchant side either. Speaking about our user base, the number of active customers has risen by 80% and exceeded RUB80 million. This means every seventh Russian is now using our platform. And the more customers use our platform, the more attractive we will become for regional and national merchants. The number of active sellers more than tripled compared to the second quarter of last year attracted by a large customer base, our wide logistics footprint and our constantly improving proposition for the merchants. Growing merchant base drives great assortment which reached 27 million SKUs. This is more than double compared to the start of the year. Now a few words about infrastructure. We expanded our fulfillment and logistics footprint significantly in the last 12 months. We operate over 260,000 square meters of fulfillment space. Our infrastructure and processes enable us to achieve a great milestone of 1 million parcels shipped per day during Q2, of which 97% are steadily delivered on time. Greater fulfillment and logistics footprint enables us to store goods closer to consumers and ship them faster. This year, we aim to nearly double our fulfillment footprint. Improving delivery time is one of our key priorities. Within this, the faster we deliver goods to our consumers, the more convenient outsource becomes and more customers will use our platform to meet their daily needs. We have launched same day delivery in 13 cities of Russia. In cities where Ozon has fulfillment centers, about 60% are fulfilled by Ozon orders are delivered same or next day. But we're only scratching the surface. Russian e-commerce market is still quite fragmented. The top three players account for less than 30% of the market. The Russian retail market exceeds US$450 billion and with e-commerce penetration in Russia at around 9%, the market remains highly underpenetrated compared to 15% to 20% in other markets with similar interim penetration. So the opportunity is tremendous. We focus on building scale faster and they'll take in market share. To enable us to do so, we have stepped up investments in fulfillment and delivery infrastructure, talent acquisition in particular in IT and customer acquisition. This should help us to cement our position as one of the leaders of the e-commerce in Russia. While we see -- while we still see a lot of scope for growth in our core e-commerce vertical, we're also thrilled about our new verticals. Ozon fintech is increasingly becoming an important lever, enable Ozon platform to gain better traction with consumers and merchants. In our fintech business, we aim to serve as many of the financial needs of our buyers and sellers associated with Ozon as possible After acquisition of a banking license, our fintech team is focused on creating comprehensive suite of digital financial services for our buyers and for sellers and for our partners. Ozon card, our flagship consumer payments product has gained great traction with the customers with over 1 million cards activated as of the end of the second quarter. This is more than double compared to 2020 year-end. In Q2, Ozon card became one of the top three payment methods on Ozon platform. Ozon cardholders exhibit 60% high frequency of purchases on the platform. Our B2B financial services products are gaining traction with our sellers. In Q2, we launched a flexible payment plan for the sellers. Essentially, this will allow sellers to better manage their working capital and free invest them to scaling their business faster. Over 2000 sellers already adopted this service within just 2 months after the launch. This service has increased loyalty of the sellers to our platform in my view. Ozon Express is our quick service -- our quick service platform solution. We started to scale the business from the last year. After launch in Moscow over the course of 2020 in Q2 of this year, we launched Ozon Express operations in Saint-Petersburg. The format currently offers over 20,000 SKUs of what 50% of which is food. As I mentioned, the Russian retail market is worth over US$400 billion and grocery is the single largest category within the consumer retail, accounted for around half of the total retail sales. Within the grocery, represents a huge opportunity on a standalone basis. However, for us, it is also an additional benefit. Grocery and the [indiscernible] categories generate traffic to the platform and increased customer order frequency and loyalty. Secondly, it aids Ozon to become a top online brand assistant with the customer acquisition. As of the end of Q2, we operated over 35,000 square meters of the Darkstores fulfillment space. In the coming quarters, we will continue to scale OZON Express quite aggressively as we push into higher frequency model. Now I will pass it over to Daniil Fedorov, who will talk about our operational performance and dynamics in our marketplace.

Daniil Fedorov: Thank you, Alexander. Good afternoon, everyone. I will provide you with a few comments on the performance of our marketplace, which is the core part of our business. Ozon marketplace is the biggest driver of GMV at this stage. We demonstrated stellar growth of 155% year-on-year, boosting growth for the Group overall. As a result, the contribution from 3P continues to climb higher. 3P share reached 62%, up from 47% last year. The growth in 3P was augmented by the acceleration growth of our merchant base. The number of active sellers on our platform exceeded 50,000, approximately doubled since the beginning of the year, an increase of more than three-fold year-on-year. The seller side attracted by logistics, analytics and financial services that we offer. Most importantly, we provide our sellers with the access to large user base of over 18 million customers, which means that the merchants can generate more sales in our platform. I would like to point out that we have been gaining substantial traction with the merchants outside of Moscow and Moscow region, and has had over 50% of our active sellers on the marketplace platform are from regions outside of Moscow. And doing that, this demonstrates that our expansion of fulfillment and sorting facilities as well as delivery infrastructure regions is very improved. The new commission structure introduced in February this year incentivize sellers to utilize and engage with our regional infrastructure more. This should lead to faster delivery time for the customers which was -- which as we can see drives greater engagement on the platform and high frequency. Although wide use of services for our sellers through -- sorry, through a wide series of services of our sellers -- to our sellers we are aiming the best position to cater for the needs of individual businesses. For example, rollout for SBO and MBS [ph] as well as storefront mobile. In addition, we're constantly launching new analytical advertising tools as well as run seminars and big events for sellers to aid them in business development. Our marketplace performance is driven by powerful network effects from a very large customer base, which is now growing by nearly 1 million a month, and a constantly expanding merchant base. The latter resulted in us being able to offer the widest selection on the market with 27 million SKUs. This coupled with faster delivery and great user experience is supporting our 80% growth in active customers. As I mentioned, the larger customer base attracts more merchants further propelling the flywheel effect. The growth in annual order frequency by 40% is something that we're very proud of. But we are not being complacent and acknowledge that there is a significant upside and room for growth. This is an interesting slide. As you can see from the data on the slide, is that the new cohort account for over one-third Ozon orders. What is even more interesting is that those new cohorts show higher [indiscernible] rate which combined with improvements in the order frequency -- in the order cohorts resulted in 40% increase in the overall order frequency and contribute massively to the tremendous 180% growth year-on-year. We increased fulfillment footprint and launched new fulfillment center in the regions. We have made tremendous progress in the building out, sorting our footprint as well. And there is a high correlation between open and fulfillment center in the region and accelerates in order growth rate. Since the closer goods are located to the consumer, the faster we can deliver, which results in higher rates of conversion and better or frequencies. The next slide in our presentation speaks to the same point. We expanded our logistics aggressively this year. In breaded pickup points we exhibit 15,000 by the end of second quarter, 50% increase versus 10,000, which we had in operation by the end of last year. If we compare it to our network a year ago, it actually stand at four-fold. The scaling of the pickup points network was enabled by a franchise model. Today we estimate that about 85 million consumers are able to get goods delivered with walking distance now. Now I will hand the floor to Igor Gerasimov, who will discuss our financial results in more detail.

Igor Gerasimov: Thank you, Daniil. Good afternoon, everyone. I will comment on the financial performance. Let me recap. The Group generated RUB89 billion in GMV in the second quarter. As Alexander and Daniil mentioned, we delivered strong 94% GMV year-over-year growth on the back of a 180% orders growth. Although the average order value decreased, this has been driven by customers ordering on our platform more frequently. The stock order growth marks the beginning of our transition to high frequency shopping model and becoming a go to destination for shoppers online. Both cohorts and order rates have improved, which means more traction for the entire platform. The increase in the number of customers and high frequency demonstrate that our strategy is working. Our marketplace commission revenue increase by 178% as a result of the marketplace seller growth, which now accounts for 62% of GMV. Our advertising revenue show strong growth of 105%. Sellers and brands increasing their usage of our advertising platform and leverage as a marketplace strong brand awareness to promote and grow sales. Our advertising platform now offers over 30 tools for promotion and every seller uses our advertising tools. That should allow us to increase monetization of the platform going forward and we see significant potential in that revenue. Now moving on to operating expenses. Although fulfillment and delivery expense increased by 108% year-over-year, they remain largely reflect Q-on-Q as a percentage of GMV on the back of high utilization of existing fulfillment and logistics facilities, offset by a ramp up effect of our early launch funds. Infrastructure expansion is instrumental to support frequency and GMV growth going forward. Sales and marketing expenses increased mainly due to a depressed base of marketing costs in Q2 2020 when COVID-19 provided a tailwind in terms of customer acquisition costs. In addition, in Q2 this year, with my targeted digital advertising instruments that contributed to 80% increase in the buyer base. What I would like to note that on a cost per order basis, the sale and marketing costs slightly declined year-over-year. On technology and G&A, we accelerated talent acquisition, especially in IT. Those investments -- of that, essential in order to continue accelerated growth and support grow and scale of our platform energy infrastructure. This is important as the IT backbone together with our logistics footprint allows us to process and deliver 3x more orders compared to second quarter 2020 and 7x more order compared to second quarter 2019. We're also building teams in order to scale our new verticals, such as fintech and Express. Adjusted EBITDA as a percentage of GMV was negative 2.3% in second quarter 2021, compared to negative 3.9% in second quarter 2020 and negative 6.5% in the first quarter 2021. The key drivers were, first of all, a full quarter of the new marketplace conditions after the adjustments which we have introduced in February 2021. Going forward, growing share of marketplace will become a more prominent driver of the gross profit recovery from the second quarter 2021 levels. Secondly, our targeted investments in a selected number of high frequency categories of our 1P business. In the second quarter, we have been testing various pricing strategies to support the growth of 1P business and drive increase in the frequency of orders. We analyzed the efficiency of the investments we made, and we will be optimizing them over the course of the several quarters and seek for those which are most efficient. Over the next couple of quarters, we expect to see some improvement in the gross profit profile of our 1P business. First, part of our EBITDA loss is attributable to Express model scaling up, which will remain one of our strategic priorities from now on. We accelerated investments into Express and we're prioritizing development of high frequency model because it drives higher customer value, and it is more sustainable in the long run. As we accelerate that investments into marketing and talent acquisition to support future growth of core and new verticals, we believe it should be valued at over time as we grow scale across our platform. Now moving to cash flow metrics performance. Cash flow was in slightly negative territory, mainly as a result of EBITDA loss offset by healthy working capital dynamics. Working capital profile of our commerce division continues to fare well. Multiple cash flow generation stays intact and positive for Ozon Group performance with a further marketplace share increase. On 1P working capital currently widening some stock investments ahead of the high season, but we expect better performance in the year-end. We invested RUB3.9 billion in capital expenditures in second quarter, and we expect higher CapEx in the second half of the year. I'll finish up with our guidance. Our core platform Q3 performance and our trading performance in Q3, as well Express model growth so far gives us confidence that our ability to deliver higher growth and increased market share. We expect our order growth to remain strong for the remainder of the year. And therefore we raise our GMV grow guidance to 110% for the full year. We also reiterate our capital expenditure guidance of RUB20 billion to RUB25 billion for 2021. This concludes our presentation and operator I suggest we will move to Q&A now.

Operator: [Operator Instructions] And your first question comes from the line of Miriam. Miriam comes from Morgan Stanley. Please go ahead. Your line is now open.

Miriam Adisa: Great. Thanks for taking my questions. First one just on the gross margin contraction. So -- and there's some of the commentary you made just then. So could you just go over again, the sort of the drivers for that contraction? And perhaps if you could sort of break down that sort of 360 bps contraction between the different drivers? What were the biggest ones? And how should we think about what that looks like in the second half? And then secondly, on the marketing cost as well. So you saw I think about 120 bps sequential increase there as well. So to what extent was this driven by some of the customer acquisition that you mentioned for Express? Or to what extent was this a result of competitive pressures? Have you seen any increase in advertising costs? And then, thirdly, if you could just comment on the -- I think RUB10 billion loan that you took out in August, because clearly the cash balance is pretty solid. So if you could just explain what that is going to be useful. Thank you.

Alexander Shulgin: Sure, Miriam. So on gross profit margins to give you some more granularity. As you all probably remember, in February 1, 2021, we have introduced a new commission structure. And therefore second quarter of 2021 is the first full quarter when we operate on the new commission structure. We do not see any deterioration or weakening of our commission structure. And therefore, we expect it to remain relatively stable going forward. Another thing to note here is that we're growing share of marketplace operations and our GMV, we should see an uptick in our gross profit margins going forward as well simply because of how fees of structure. The biggest contributor to the decline in gross profit margins Q-on-Q were our pricing strategies and investment targeted at the growth of our 1P business. We were analyzing efficiency of the investments which we have been making over the course of the second quarter 2021 and we see that they were paying off with higher frequency of orders and Hi GMV growth both year-on-year and on year-over-year terms, which is especially -- which looks especially strong, taking into account the high base of the second quarter of 2020. Going forward, however, we expect the bulk of the investments will be optimized and therefore gross profit profile of our 1P business will be better versus the second quarter of 2021. On your question about marketing. We saw that our cohort performance is improving on the monthly basis. And therefore we have been making investments in order to drive customer acquisition. And we've managed to attract significantly more new comers to our platform versus first quarter of 2021. And with such cohort performance from our standpoint, it is relatively a safe investment to make, because with growing frequency and improving retention, this is evidently paying off. Nevertheless, as we see from our trading updates, share of marketing spending as a percentage of GMV will be -- this is a rating in the second half of 2021. On the ruble loan, so we're basically just leverage an opportunity to get a loan at very decent rate. So it's just the percentage points above the key rate of the Central Bank. And therefore, we just decided to use it in order to improve our capital structure. And it will be used mainly to finance our working capital and it's mostly covenant free. It's a 1-year facility, which provides us with sufficient degree of flexibility to manage liquidity on the Russian operational companies level.

Miriam Adisa: Great. Thank you. Just to follow-up on the first one. Could you give any color on the categories that you were making those pricing investments in?

Alexander Shulgin: Sure. Those investments were mainly we have been targeting two categories which attract most of the traffic and most of the customers. And those categories naturally are electronics and FMCG. Electronics is an important category to generate traffic, and FMCG is a great important vertical of strategic importance for us, which is driving frequency and create long run and stimulate the growth of the long run adoption of e-commerce shopping.

Miriam Adisa: That's great. Thank you a lot -- so much. Thanks.

Operator: Thank you. And your next question comes from the line of Vyacheslav Degtyarev at Goldman Sachs. Please go ahead. Your line is open.

Vyacheslav Degtyarev: Yes. Thank you very much for the presentation. A couple of questions. Firstly, a broader question on costs. So most of the cost items as percentage of GMV increased in Q2 compared to the last year, which is obviously a factor of the high base effect of 2020. But also the increase Q-on-Q as percentage of GMV. Can you characterize how much of that was driven by the deliberate decision to invest into the long-term growth that will basically flatten the GMV deceleration curve in the long run? And how much were driven by other maybe certain non-controllable factors like competition, or maybe non-controllable factors like inflation, spike in average wages, etcetera? And, secondly, you did not change the CapEx guidance for the full year. But as for the medium term, do we see more challenges in rolling out the fulfillment capacity, given the high demand in the markets, basically in -- either for you or for the competition? And do you think that the market is ready to absorb hundreds of thousands of the fulfillment capacity construction per annum to build -- to be built out in Russia over the next couple of years? Thank you.

Alexander Shulgin: Sure. Vyacheslav, thank you for your questions. So the growth in year-over-year terms is mainly attributable to the fact that in the first half of 2021, we have been making deliberate investments and expansion of the infrastructure, both last mile infrastructure and infrastructure of our fulfillment centers. Therefore, naturally, there is a significant ramp up component as opposed to second quarter of 2020 because with the growth of 180% in GMV last year, our fulfillments were overly utilized, amid the spike of COVID. This year, I mean, mainly it is a reflection of the ramp up. As a percentage of GMV fulfillment and delivery costs remain relatively stable Q-on-Q, taking into account continued rollout of the infrastructure. I wouldn't say that any of the cost items, as a percentage of GMV, have been affected by competition, or things like complicated rollout of the infrastructure is just a reflection of our ambition to support the growth, frequency of buying and making sure that we're able to improve our delivery promise. And we aim to improve speed of our delivery in second half of the year, plus fulfillment and delivery components also campaigns Express verticals and courier fees. Therefore, it is one of the items not that evident from our accounts, which is also contributing to the OpEx as a percentage of GMV. You have also asked about difficulties in rolling out our fulfillment infrastructure going forward. The thing is that most of our fulfillment facilities are built to suit, and therefore they have been contracted well in advance. Therefore, basically, we have been expanding warehousing and fulfillment market for ourselves for a couple of years already. And we will stick to that strategy because we never thought that existing supply of the space on the market is sufficient to accommodate our demand and our technological requirements as well.

Vyacheslav Degtyarev: Okay.

Alexander Shulgin: Does that answer your question?

Vyacheslav Degtyarev: Yes, maybe just a clarification. Would you envisage sudden spike in costs versus what you thought before given certain inflationary trends on the fulfillment rollout or maybe certain bottlenecks that you envisage here?

Alexander Shulgin: I wouldn't say that any spike or change on the market conditions should dramatically affect us in the mid to long run. Potentially, practically, there might be some spikes, although we do not see them that pronounced in our P&L level and cost structure right now.

Vyacheslav Degtyarev: Okay. Thank you.

Operator: Thank you. And your next question comes from Kirill Panarin at Renaissance Capital. Please go ahead. Your line is now open.

Kirill Panarin: Thanks. Hi, everyone. A few questions, please. Firstly, any comment on current GMV trends quarter-to-date. Secondly, on competitive dynamics in Moscow, some of your peers seem to have made material progress in this region. So I just wonder if there is any impact on Ozon's growth and margin in Moscow, in particular, any color on the trends here versus regions would be helpful. And lastly, just to follow-up on 1P gross margin. I understood all -- everything you said. I just wanted to ask, do you have sort of a sustainable longer term target for 1P gross margin? That's it. Thank you.

Alexander Shulgin: Okay. So the first one, on GMV.

Daniil Fedorov: So GMV trends, I think the way we look at GMV internally, because of the volatility of the period over the last year, isn't a 2 year CAGR. And we see -- on 2-year CAGR basis the trends are quite stable. So we like I think the trend that we indicated in the second quarter, they continue into the third quarter. Talking about Moscow and Moscow region, I would say that, no, we don't see any issues there. It's continued growing. Our regional GMV is growing faster, because we rollout a lot of infrastructure. But at the same time, we'll say that performance is healthier, especially on the back of rollout of our Express service. And as for the comments from some of the players, we see them rather controversial and a bit surprising. I would say that, in turn, we see that our Moscow region GMV is quite similar to the biggest GMV number they report overall for the for whole business. So we'll see.

Igor Gerasimov: Sure. And the question on the 1P gross profit margin. In the long run, I mean, it's quite hard to guide on the relative metric because it is affected by the mix. And we're now focusing on two categories which have completely different profile of gross profit margins in fact. And electronics naturally gross profit margins are much lower, because of the high average item value, while in FMCG gross profit margins traditionally are very higher. Just take a look at the gross margin of offline retailers like expire [ph]. Therefore, it's hard to tell where we'll end up because it is subject to the sales mix. But obviously, it's safe to assume that we will be working on a significant improvement of our purchasing power and bargaining terms.

Kirill Panarin: Okay, that's great. Thank you very much.

Operator: Thank you. And your next question is from the line of Ivan Kim from Xtellus Capital. Please go ahead. Your line is now open.

Ivan Kim: Hi. Just maybe three questions from me, please. Firstly, on sell onboarding, it looks like you accelerated sell onboarding in the second quarter versus the first quarter, do you expect that to continue? And what was the driver for that? That’s the first question. The second question on Ozon Express. Maybe you gave useful stat on average daily order number. But can you maybe share what’s Ozon Express as a share of Moscow GMV right now? And on the margin side, how long do you think it will take for you to approach purchase in terms of bigger grocery retailers for within Express -- as on Express business? And then thirdly, just on the fulfillment. So you said you want to double the fulfillment this year, right, which means on my quick calculations is about 170,000 additional square meters in the second half. I just wanted to reconfirm that's correct. Thank you.

Daniil Fedorov: Okay. So the first one on the increased number of sellers, I think I can say something dramatic has happened. I will highlight three things. First, we started doing much more public events and we had a major event in June for sellers, where we basically embrace all sellers, new sellers, current sellers and someone who's thinking about marketplace, and we already did one in Siberia just several weeks ago. So that's one. So, I think we just became a bit more active publicly. Second, I will say that there is quite a significant improvement in product in -- and also in onboarding process. So the time of onboarding actually accelerated on average for sellers, especially in LBS [ph] model. And that helped basically the overall funnel. And third, I would say that with the development infrastructure, it actually opened up marketplace for original sellers, and a lot of sellers that joint platform during the second quarter were actual from regions. And that's just because we have fulfillments, right, appearing in the regions and also drop of points for LBS sellers. So I think overall all our trends are quite healthy. We, of course, want to continue increasing number of sellers, accelerate in processes, accelerating onboarding time. So probably that should -- should rather continue. But I think here what’s also important is to develop sellers to make sure that it's not just the platform going with each sellers is growing and developing this business. And on the other question. So for Ozon Express, in the latest months, we see that share of Ozon Express as a total GMV in Moscow for the group is over 10% right now. So it is becoming quite considerable. On the purchasing power, I mean, let's -- it's a function of several things because we're trying to fast forward growth a bit. I mean, in this category, therefore, part of the impact, which you saw is driven by fewer investments in order to attract more consumers and lock them on our platform. And purchasing items is a bit different story. But I guess it's -- I mean, the roll of [indiscernible] is we need at least year-over-year and a half to build sufficient scale in that category. But even then it will be varying on -- in terms of the sales mix, yes, because we need to build a back of sales on per single SKU basis and with every single supplier. And, yes, did I answer all your questions?

Ivan Kim: Yes. Thanks very much.

Igor Gerasimov: Yes. So Fedorov said -- this is Igor speaking. We plan to finish the year with approximately 500,000 square meters of total fulfillment capacity, yes. This means operational. Yes, I mean, not only committed but already in operation.

Ivan Kim: Great. Thank you very much.

Operator: Thank you. And your next question comes from the line of Anna Kurbatova at Alfa Bank. Please go ahead. Your line is now open.

Anna Kurbatova: Yes. Good afternoon and thank you very much for the call. Also, I have one question with regards to your CapEx guidance. So based on one half number, like almost RUB6 billion, it is expected that in the second half you will spend between RUB14 billion and RUB19 billion. So that my third question would be this difference, the range, it reflects your kind of flexibility in terms of projects and the pace of commissioning, or in some part it maybe reflect some cost inflation that you might be like forecasting, yes, until the end of the year. Because you tell us that more or less you have, like six fulfillment capacity target until the year -- end of the year. So it would be great to understand like the mathematics and the nature of this CapEx range for the second half. Thank you.

Daniil Fedorov: Sure. I'll try to explain. So our CapEx guidance remains intact. And indeed, we aim to spend most of the funds in the second half of the year, especially before the high season, and also before the New Year holidays. So we need to make sure that infrastructure is in place in order to support the GMV growth. And on the variability and guidance, the thing is that internally we're thinking in terms of commitments, and for us is crucial to sign legal obligations for power [indiscernible] to ensure that this infrastructure and those objects will be locked and actually built. But CapEx as a cash expenditure is a bit different thing, because you need to actually bear this cost and your [indiscernible] needs to be able to meet the deadlines and plus, you might renegotiate so that you can postpone the payments. And therefore, actual cash expenditure is a bit detached from the commitments which will have already executed with our counterparts. This is where the variability comes from. So therefore, for us, it's not -- I mean, that big of a drama if some of the CapEx will be spent in first quarters of 2022. So for instance, it is crucial to look the vendors and it is crucial to look the developers into legal contract which find to make sure that your infrastructure will be built and launched on time.

Anna Kurbatova: Thank you very much. And as a kind of follow-up on this. Could you speak a bit more about your negotiation process with your contractors, like construction contractors. So during the year, you start negotiating the cost and the volume for new capacity to be built in the second half by the end of the year. So how does it develop? So as soon as you finish and commence the projects and the object -- fulfillment objects that are already in your schedule, what's the next phase and what should -- when should we expect your like updated CapEx or your -- like targets for the next year? So understanding in general this process how you've worked with them will be helpful. Thank you.

Igor Gerasimov: Hi. Anna, this is Igor speaking. So next year CapEx guidance will be provided in our Q4 call on the process of infrastructure. So it depends on lead time of the infrastructure objects with large fulfillment centers, its 18 to 24 months, we'll have a long-term plan like on how we see our GMV growth and therefore negotiate some commitment figures in advance to make sure we have capacity available in advance of the high season of the future periods. Smaller Darkstores and sorting facilities are typically rented and available readily from different suppliers. So it's a much shorter period of time in advance we have to rent them.

Anna Kurbatova: Yes.

Alexander Shulgin: Does that answer your question?

Anna Kurbatova: Yes. Thanks. That’s clear. Thank you very much.

Operator: Thank you. And your next question comes from the line of Dmitry Vlasov at WOOD & Company. Please go ahead. Your line is open.

Dmitry Vlasov: All right. Thank you for the opportunity to [indiscernible]. So my first question would be on adjusted EBITDA. So given higher-than-expected losses in second quarter, maybe you can comment or provide some clarity on what adjusted EBITDA margin as a percentage of GMV do you expect in the full year of 2021 versus the last year? That's my first question. Second question on the CIS GMV contribution. So maybe you can provide some color on what in the current share below is GMV as a percentage of total? And maybe provide some follow-up guidance of where do you expect to see GMV to be as a percentage of total maybe in the next couple of years? Thank you.

Alexander Shulgin: Sure. So on your first question, why not provide an exclusive guidance on the EBITDA, therefore -- we will not give any precise target. But it's reasonable to assume an improvement by the end of the year because of the scale effect, which will help us to dilute the impact of the ramp up for the infrastructure and plus taken into account the things which I have been communicating previously about gross profit margin and impact of marketing. On the share of Belarus and Kazakhstan as a percentage of total GMV, it's still low single-digit and we're at the very early stage of the development in those markets.

Dmitry Vlasov: Okay. Thank you.

Operator: Thank you. And your next question comes from the line of Elena Jouronova at JPMorgan. Please go ahead. Your line is open.

Elena Jouronova: Yes, good evening. Thank you very much. First question is about the pricing strategy in 1P assortment. How did this actually work? I understand that you targeted the two categories. But in terms of prices you targeted, were you trying to price match your key competitors, or you actually aim to bring prices below competition?

Alexander Shulgin: Sure. So basic strategy was as follows. You select the number of SKUs, which are considered to be the best levels in those categories across the whole competition, and you need to make sure that your pricing on those SKUs is based on the market. And you can play with the promise with various marketing tools and instruments in order to see how it is paying off and how it ultimately ends up in your purpose. What we have been seeing internally is that our pricing strategy in FMCG, for instance, has yielded improvements in [indiscernible] for that particular category. Plus, when you attract people with this traffic assortments, you obviously hope that they will stick with your platform and buy more of the other stuff because this assortment works as some sort of acquisition channel, similar strategy, which I'm sure you're familiar is used in offline retail.

Elena Jouronova: Yes, understood that. Thank you. Then the second question, can you share with us what was the churn in your second quarter '20 customer cohort?

Igor Gerasimov: We can follow-up with you offline, because -- I’m not -- we do not have the matrix [ph] in front of us.

Elena Jouronova: Understood.

Igor Gerasimov: And we -- yes, and I'm told by my team that we do not disclose the action. Sorry.

Elena Jouronova: [Indiscernible]. Another question, please. Can you share with us what was your GMV gross for the two categories you mentioned, in particular, electronics and FMCG? Or maybe just -- we understand it was higher than the average you reported, but by how much?

Igor Gerasimov: Yes, so it's related to 1P business, therefore, it's a bit different. So in electronics, the growth has been well over 100% in FMCG, it's a blended effect of [indiscernible] on marketplace and other categories, but it also has been about 100%.

Elena Jouronova: Okay, understood. Then I have two more questions. And one of them is again on the EBITDA loss mix for the full year. I know you don't guide, but sell side consensus according to Bloomberg is expecting 20 billion EBITDA loss this year. What do you think about this number? Does that sound realistic or not?

Igor Gerasimov: Well, once again, we do not guide on exact EBITDA levels and I guess, consensus also factors in a different GMV. Therefore, probably, you need to adjust and come up with the new target for the full year. But the trends, which I have communicated, you will see them in the following quarters, a gradual ramp up of the infrastructure, especially in the fourth quarter, gradual improvement in the gross profit margins, gradual reduction of marketing spending.

Elena Jouronova: What I don't understand really is the infrastructure is ramping up, but at the same time you're adding more infrastructure and the new infrastructure you added still is dilutive. So wouldn't one effect offset the other.

Igor Gerasimov: It depends on the base of openings. I mean, if you aim for higher growth, and you need to support high growth, you will need to be adding more objects in order to ensure that it works. Plus infrastructure in our case is not a simple total process of the volumes because our pickup points, for instance, generate GMV by themselves and generate high frequency reforms. So it's also important to support their [indiscernible] growth. Because naturally when you become closer to the customer, you will see improvements in the retention and interactions with the broader platform.

Elena Jouronova: Okay. And final question. Sorry, the most important one, actually. So what do you plan as your pricing strategy in 1P in the third quarter? And what factors will be driving your take rates in the second half, if we can just summarize all the factors again? Thank you

Igor Gerasimov: Sure. On take rate, we do not expect any dramatic changes versus the second quarter. The only factors which might be impacting that would be the mix of business models within the marketplace. But still, it shouldn't be damaging for the bottom line, because for instance, ABS [ph] business model presumes that seller spend less. But it is fair because we bear less operational expense, especially variable OpEx is being saved because you process less. But other than that, all things being equal, we do not expect any dramatic changes there. On the gross profit margins in 1P, we will be looking at what has been most efficient in terms of the customer acquisition and retention. And we will be optimizing the acquisition strategies. Overall, I guess, we should improve the gross profit margin on the blended level in the coming quarters. But if we see an opportunity to invest into a customer acquisition or retention effectively, yes, we will proceed as well. Plus, our advertising revenue for the second half of the year should be going up because our marketplace team has been working on a number of tools in order to improve their monetization.

Elena Jouronova: Thank you.

Operator: Thank you. There are no further questions. Please continue.

Alexander Shulgin: Okay. This is Alexander. So let me give some closing remarks before the end of this call. To sum up, our results demonstrate that we're making great strides to realize our mission to transform Russian economy by providing wider selection and greater convenience for the Russian consumers, and then better our opportunities for businesses already operating or migrating all lines. We want to thank everyone for joining our quarterly conference call and for your questions today. We look forward to updating your on the progress we make in our Q3 earnings call in November. Thank you and have a good day.

Operator: That just conclude the conference for today. Thank you for participating. You may all disconnect.