Earnings Transcript for OZON - Q4 Fiscal Year 2020

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

Alexander Shulgin: Thank you. Good morning, everyone and good afternoon. Thank you for joining us today and welcome to Ozon’s inaugural earnings call. Today we will discuss fourth quarter and full year 2020 results. Together with my team, we are going to make some comments about the business development, financials and the outlook for 2021, and we'll try to give as much time as possible for the Q&A. Before diving into the numbers, I would like to recap our vision for you. Ozon aims to transform shopping experience for Russian consumers by offering the maximum convenience and providing the widest selection of goods online, and fast and reliable delivery service for our buyers. We also aim to empower our partners across Russian e-commerce ecosystem to achieve greater commercial success through partnership with Ozon. To deliver on this mission and achieve scale and leadership, we will continue to invest in our core business and new initiatives, and will expand our offering for buyers, sellers, and a variety of Ozon businesses partners. Russia is one of the largest consumer economies globally with strong fundamentals. Internet penetration is high by global standards at 83%. In contrast, Russian e-commerce market remains underpenetrated with only 9% e-commerce penetration. Plus, the market is still very fragmented with only 25% market share for top three players. This is a result of limited investment in fulfillment and logistics infrastructure by e-commerce players over the last – over the past decades. And due to step-up in investments by players such as Ozon in the last two to three years and additional tailwinds from COVID-19, the market is set to grow at least 3 times in the coming five years. Combination of all these factors presents us with a unique opportunity. We aim to drive not just e-commerce, but broad online services adoption in Russia. Let me say a few words on how we are going to achieve this. Our strategy is to build the platform and to connect thousands of merchants to millions of customers in Russia via our marketplace. In order to do this, we have been and will continue to invest in logistics and technology so that we can offer highly reliable and convenient service and best user experience to our customers and to all of our business partners. We see strong positive network effects stemming from fast-growing buyer base and improved customer loyalty. This is attracting more sellers to the platform, which contributes to Ozon's assortment expansion, this further drives buyer effect and accelerates growth. Longer term, Ozon aims to build a diversified platform around our core Ozon Marketplace and first-party direct sales business, including new adjacent verticals such as fintech services for customers and merchants and online grocery, for example. The last three years have been transformational for Ozon. Our primary focus was scaling up. To achieve this, we launched Marketplace and invested in fulfillment and logistics. In three years, we more than quadrupled our fulfillment footprint from 50,000 to over 220,000 square meters with nationwide coverage. During this time, we also made significant investments in product development. This concerted effort enabled us to create leading multi-category marketplace, which attracted millions of buyers and thousands of sellers. Our buyers made 74 million orders on Ozon platform in this past year, in stark contrast to 2017 when our platform generated only 8 million orders. Our Marketplace currently accounts for over 50% of our GMV and allowed us to accelerate growth from 46% at 2017 to 144% year-on-year in 2020. But we are just getting started. With GMV of $2.7 billion in 2020, Ozon accounts for only 7% of e-commerce market and less than 1% of Russian retail market. We believe we are best positioned to benefit from e-commerce adoption. As we aim to drive further penetration of e-commerce within total addressable market which is already worth more than $450 billion. And as we’re developing our platform and expanding into adjacent verticals, our total addressable market will keep on growing. Now I would like to say a few words about our new verticals. Although Ozon Marketplace is the main traffic generator, we can offer our buyers and sellers a number of complementary online services, which enhance customer experience. These services create additional monetization opportunities for Ozon and bring more customers and business partners to the platform. Let me highlight our initiative in financial services. In this past year, we expanded and diversified the portfolio of financial services that we offer. We developed both payments and lending solutions within B2B and B2C streams. The idea is to deliver smooth and frictionless experience to our buyers and sellers when using Ozon payments and lending solutions. This encourages loyalty and engagement of our buyers and sellers. In our B2C domain, we are testing buy now, pay later solution at Ozon. Our lending solution is aimed at making higher-value purchases more affordable for our buyers. B2C Ozon payment solution increases customer retention. We see 60% higher order frequency amongst Ozon cardholders. This means greater customer lifetime value and faster payback period for these buyers. As of the end of 2020, customers activated over 450,000 cards. Adoption of Ozon card has been accelerated materially by the launch of the virtual card in Q4 2020. In our B2B stream, we aim to support our sellers with development of their business via easier access to financing. Now online grocery adoption was accelerated by COVID globally. In Russia, penetration of e-commerce is less than 1% in the grocery retail market. Thus, online grocery market represents an immense opportunity for Ozon. Online grocery is also an important driver of higher frequency and traffic generation for a platform such as ours. It also increases number of touch points with the customer, which helps promote brand recognition. And due to our large existing customer base, the customer acquisition for online grocery products within our platform is easier and very cost-efficient. We have built a network of dark stores in Moscow that allowed us to deliver groceries to our customers in Moscow within an hour. Our dark store concept offers a wide range of food and non-food items, including some unique assortment not typically offered by classic dark store operators. The total assortment was nearly 22,000 SKUs as of year-end and is currently closer to 24,000 SKUs. We aim to further fine-tune the model and expand the Ozon Express into regions in 2021. Before we proceed, I would like to announce appointment of Daniil Fedorov as Chief Operating Officer of Ozon and Igor Gerasimov as Chief Financial Officer. I would like to take the opportunity to thank them for their incredible dedication and contribution to Ozon’s success story so far and to congratulate them and wish them both good luck in their new roles. I look forward to working with these two very talented individuals and building best-in-class local e-commerce champion that transforms the way Russian consumers shop. Now I will pass the floor to Daniil Fedorov to discuss our quarterly results.

Daniil Fedorov: Yes. Thank you, Alexander. Hi, everyone, and thanks for joining us on our first earnings call as a public company. As you have already seen this morning, 2020 was a very successful year for Ozon, and we ended the year on a high note with a strong operational performance and successful IPO during Q4. Before I move on to discuss our financials in more detail, a few words on COVID-19. Pandemic had a mixed effect on our business, and it’s impossible to determine precisely the impact of COVID on our operations in 2020 and future performance. On one hand, COVID accelerated adoption of online services in Russia, which is positive for our business. But on the other hand, COVID impacted our employees, our customers and our business partners. During COVID, it was more important than ever for millions of customers across Russia to be offered faster, reliable and safe delivery options. We facilitated contactless payment methods and contactless deliveries from Q1 2020 onwards. Since the start of pandemic, contactless door deliveries increased to more than 80% of our courier deliveries. Ozon also ensured safe working conditions for our employees and our outsource staff. To keep our employees, our customers and staff of our business partners safe, Ozon introduced a wide range of pauses and provided protective equipment across its countrywide network of fulfillment centers, cross-docking stations, pickup points and courier services. We enabled merchants to migrate online, ensuring business continuity for many SMEs and large retailers in Russia. To support their transition online, we launched our e-commerce online school for entrepreneurs that wanted to sell products online. The platform offers regular webinars by industry experts, Ozon product team and current Ozon sellers. On behalf of our management team, I can say that we are proud of the way Ozon rose to the challenge, becoming a lifeline and reliable partner to many businesses across Russia and ensuring safe provision of essential and non-essential products to millions of Russian households. Now moving on to quarterly results. I’m pleased with the execution across our business units in Q4. To sum up, GMV in Q4 were significantly accelerated year-on-year. In addition to accelerated growth of the business, we also reached positive operating cash flow, improved significantly adjusted EBITDA margins. Now let’s look at our financials in more detail. In the fourth quarter, GMV growth accelerated on the back of ongoing rapid shift to marketplace, strong adoption of e-commerce among Russian buyers and sellers across Russian regions and positive network impact. GMV including services increased to RUB75.8 billion, with growth accelerating to 147% year-on-year. On a full year basis, GMV reached RUB197.4 billion, up 144% year-on-year. The growth was primarily driven by strong order growth of 137% year-on-year on the back of 75% increase in the number of active buyers, and more than 30% increase of order frequency on average amongst both new and existing buyers in 2020 compared to 2019. We also saw greater contribution from our regional expansion. Regions now constitute around 50% of our GMV. The biggest driver of GMV growth was fast-growing Ozon Marketplace. In Q4, share of Marketplace reached 52.3% of group’s GMV, which has more than doubled compared to Q4 of 2019. Much greater contribution from Ozon Marketplace is attributable to significant growth in seller base. The seller base nearly quadrupled and is now well over 20,000 sellers. This jump in number of sellers was fueled by Ozon’s attractive and comprehensive offering for the merchants. Ozon offers merchants nationwide fulfillment and logistics services, access to a large and fast-growing customer base and also trading and analytical tools and advertising business solutions. In addition to FBO and FBS, we are now also offering Extended FBO solution, allowing for full flexibility around fulfillment and logistics. Essentially, Ozon offers supply constraint solution for the sellers where the build logistics’ backbone that’s used in their business needs. Lastly, as Alexander mentioned, we have launched a lending service for our merchants. Although it is still in its infancy, initial result is encouraging and gives us confidence that sellers will use this solution to grow their business. We see a big potential to grow our seller base, these initiatives will helps us attract sellers to Ozon marketplace. We believe that we could see as much as 350,000 sellers in our platform in the long-term. Strong GMV growth is underpinned by growing number of buyers that has increased by 75% year-on-year to a 13.8 million customers in 2020 and almost tripled in two years. It is also important that other frequency and retention are increasing as well. We believe that the current levels of frequency is a small fraction of what can be further achieved, which is multiple times lower compared 30 to 60 orders per annum in the more mature e-commerce market with the e-commerce penetration of over 15% sometimes even 20%. Expanding our fulfillment and logistics infrastructure with focusing the regions allowed us to improve delivery times and improved overall quality of service. Over 95% of our parcels were delivered on time in Q4 and this is even higher so far this year. Improvements in the buyer’s behavior can be seen from our cohort’s performance. Both frequency and GMV for buyer increase in 2020 cohorts compared to 2019 and all the cohorts. Order frequency for 2020 cohort compared with the cohort of 2019 increased by 28% and almost doubled compared to 2018 cohort. Retention keeps on growing as we improve our quality of service and delivery. Positive cohort trends are continuing in the first quarter as well. And now let’s move to operating expenses. Our main expense items are fulfilment, delivery sales and marketing and G&A. Across all cost lines there was a significant increase in absolute terms, Ozon is an investment stage in growth in our operating expenses reflect the ramp up and the expanding of our fulfillment and delivery infrastructure rolling business volumes and increasing headcount. Our general and administrative expense increased the most up 86% year-on-year, as we invested in enhancing our talent pool. In 2021, we plan to accelerate investments into talent acquisition to accelerate our platform development. Fulfillment and delivery costs were the second fastest growing expense up to 78% year-on-year as we processed nearly 30 million orders in Q4, 137% high compared to 12.5 million in Q4 2019. Sales and marketing and technology costs increased of 47% and 46% respectively. Sales and marketing increase was attributed to digital and offline advertising and then technology by investment in talent and product development to improve our seller experience and our customers’ units as well as our data capabilities. However, as a percentage of GMV all our expenses decreased noticeably, thanks to operating leverage, great utilization of logistics and growing scale. After significant investments in 2019, adjusted EBITDA as a percentage of GMV improved in 2020 and in Q4 adjusted EBITDA as a percentage of GMV showed market improvement from negative 17.1% in Q4 2019 to negative 4.7% in Q4 2020. Thanks to operating leverage, economies of scale and disciplined cost control. In 2020, OZON reported positive operating cash flow. The total operating cash flow on a full year basis reached RUB6.6 billion compared to negative RUB14.3 billion in 2019. Big part of operating cash flow was generated in the fourth quarter, nearly 10.6 billion of cash flow, cash inflow compared to negative RUB2.7 billion in Q4 2019. This is a function of higher sales volume and greater contribution from negative working capital during the high season. Free cash flow which we calculate as net cash from operation activities less CapEx and principal portion of lease liabilities was near breakeven in 2020 in the back of strong operating cash flow. A quick word on company's balance sheet position, we ended the year with a very strong balance sheet. Cash and cash equivalents was RUB103.7 billion or approximately US$1.4 billion in the end of 2020. We have further strengthened our balance sheet this year by issuing convertible bonds for $750 million in February. Now I would like to provide you with an outlook for the full year 2021. Please bear in mind that our guidance reflects Ozon’s expectations as of to-date. As I mentioned, it is difficult to ascertain overall impact of the coronavirus pandemic or new potential disruptions that may be caused by COVID-19. Overall, we would like to be conservative in our guidance. We expect our GMV to grow by 90% taking into considerations of comps, especially in Q2 and COVID related uncertainty, but we believe the growth could potentially be greater. So overall, the guidance would be 90% or greater. We believe – and we plan to invest in our future growth for the core and new adjacent verticals. All marketplace Ozon plans to continue to further scale its fulfillment capabilities and invest in product to stay ahead of the growing demand and rapidly increasing the volume of orders on this platform. Ozon expects capital expenditure to be higher this year compared to 2020 and to be between RUB20 billion to RUB25 billion. Although we are not giving any guidance on profitability, we'll remain focused on execution and building scale. We plan to keep investing in building scale, strengthening our competitive position and strengthen our leadership in Russian consumer market. We believe that with greatest skill comes from improvement in unit economics and long-term profitability. And overall I would like to say thank you for support so far, and I look forward to liaising with you in my new capacity in future. And I guess we are ready to proceed with the Q&A.

Operator: [Operator Instructions] Your first question comes from the line of Vyacheslav Degtyarev of Goldman Sachs. Please ask your question.

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

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

Vyacheslav Degtyarev: Yes, it was with regards to the free cash flow generation for 2021, you have given the guidance on CapEx.

Igor Gerasimov: Yes. We had our CapEx on operational cash flow that were targeted to be near breakeven, therefore, I mean just mathematically keeping in mind that we plan to keep investing into our infrastructure and we need to keep expanding our footprint further inside the Russian regions and also near the Moscow. Our free cash flow in 2021 will remain negative. The biggest driver of that will be our CapEx.

Vyacheslav Degtyarev: Okay. Thank you very much.

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

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

Alexander Shulgin: Yes. Hi, Miriam let's me just address on the take rates. Yes, as Igor discussed previously, we made the decision to decrease take rates from February, 2021. This is a constant decision. We're making tactical investment, which allows us to unlock parts of the market. And also, to align the commission structure closer to the real cost structure so that actually sellers help us to – help us manage the unit economics. And we see that our strategy is already bearing fruit and we’re already seeing an inflow of sellers to the platform on the back of this strategy. We do not give any numbers on the number of sellers joining currently. I mean, we think we are going to report to Q1 in May, but we see some acceleration in the sellers joining the platform on the back of all the efforts that we are taking. As for the competition…

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

Miriam Adisa: Okay, thank you.

Operator: Thank you. Your next question comes from the line of Ivan Kim of Xtellus Capital Partners. Please ask your questions.

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

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

Ivan Kim: Okay, thank you.

Operator: Thank you. Your next question comes from the line of Catherine O’Neill with Citi. Please ask your question.

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

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

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

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

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

Catherine O’Neill: Okay, brilliant. Thank you.

Operator: Thank you. Your next question comes from the line of Ulyana Lenvalskaya of UBS. Please ask your question.

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

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

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

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

Daniil Fedorov: Yes. In terms of unit economics let me just add quickly, it’s – so long-term, we expect actual regions to be on par with Moscow in terms – or St. Petersburg cities in terms of unit economics. Today, Moscow and St. Petersburg is better, but that’s mainly because of ramping up infrastructure in the regions. So because the fulfillment centers and last-mile delivery units either pickup points or, let’s say, lockers or hubs, they’re ramping up. And being in investment stage, they generate poorer unit economics. Not drastically poorer, but maybe a couple of percentage points of the potential GMV. But still, I mean, Moscow and St. Petersburg is much better.

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

Daniil Fedorov: Remaining is Moscow region and St. Pete.

Ulyana Lenvalskaya: Thank you.

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

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

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

Alexander Shulgin: B2B.

Igor Gerasimov: Yes. So let's go one by one. On B2B, we see huge opportunity there because there's – we don't see that there is a lot of competition there. We definitely see potential. I mean, there are several segments. There is B2B2C segment where some online and off-line segment and there is segment for offices. There is a tender segment. So there are multiple segments there. And we believe it's very old school and an efficient market overall there. And that's why we see big opportunity. What we're doing there is, in Q4, we just launched very basic steps. So you just got the – so we just enabled businesses to register as a business. Consumer, not as a private consumer. We worked out some CGM for businesses so that they can receive documents that they require so on and so forth to recover VAT, for example. And now we continue working on the product, integrating some of the fintech products. And in Q2, we're going to start working on a more – on the commercial matters, working on the funnel, some advertising, some marketing. We do not guide on any specific ambition there because, again, as usual, I mean, we just don't know how big it could be, and we have some big internal targets. But we did believe that it's a huge market. I mean, in terms of competition, difficult to say, I mean, there's more traditional players. We believe that if we apply our effort correctly, it would be, of course, impossible to compete with us. And we are ready to provide all these services to businesses and including smaller businesses, including our actual seller base. So we're going to continue working there. Today, this business represents about, I think it's about like 3% to 5% of overall business from zero in, for example, in Q3 last year. So we'll continue working on that. We'll see how it goes.

Kirill Panarin: Great. Thank you. And just a quick follow-up on the B2B. In terms of category breakdown, would it be similar to your core business or something different?

Daniil Fedorov: Well, it looks like – most likely less of food, less of books, less of apparel. So beyond those three categories should be similar.

Kirill Panarin: Okay, great. Thanks a lot.

Operator: Your next question comes from the line of Elena Jouronova of JPMorgan. Please ask your question.

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

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

Elena Jouronova: And then the small cooperation with any off-line player in the grocery segment, would that – is that something that could make sense for you to improve your purchasing scale?

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

Alexander Shulgin: Yes. On those – if your question is related to – are any of the off-line retailers potential M&A targets for us? The answer would be probably no. Because among the things which they can offer and complement our business, there is some of the purchase power. And purchase power is, I mean, accessible with the scale. Other than that, I mean, there is very little which can be added to our core business which can complement our core business. This is our thinking at this stage.

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

Daniil Fedorov: Yes, it’s a good question. Let me address that. First of all, you’re right. Part of that was Ozon Express. But nevertheless, we actually – we do not plan to write-off the idea of developing 1P. There are several categories where 1P is essential today and would most likely would be essential tomorrow because they are anyway very big brands who – many of them prefer to work in 1P model, which is kind of okay for us. I mean – so for this year, we actually plan to continue growing our 1P business. So, we believe, and we plan that the share of marketplace will continue to grow, and nevertheless, 1P will continue and demonstrates in a very good growth partially that would be driven by Express, but even without Express should be growth as in terms of profitability Express and investments stage, so we opened dark stores and sort of ramp up there without Express we are working to continue improve in our profitability, because we’re developing marketplace, we can narrow down now with assortment focus on procurement focusing that efficiency focus on, now we’re versus in terms which are materially significant and materially below that of over the peers in the markets, not like the peers, I would say, bigger players in the market. So, we see huge potential actually there to improve margins and we’ll continue doing that part of that will be –we’ll go into prices, but overall profitability on efficiency improving.

Elena Jouronova: Yes. That’s what I would have thought with, 160% GMV growth. And a few other questions actually. So, on your working capital and payable days, first and foremost, if that related to running with your 1P or 2P or 3P business?

Alexander Shulgin: You mean tables?

Elena Jouronova: Yes, yes. Tables.

Alexander Shulgin: I think, yes, look, if you look at our reporting, so inventory is basically 1P payables would be related to both 1P and 3P and given the marketplace is bigger than 1P in Q4 most of that bigger part of that would be marketplace rather than 1P.

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

Daniil Fedorov: So, the first, for the first case…

Alexander Shulgin: Go sense of the payables. Yes.

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

Igor Gerasimov: It’s a tricky question. Thank you for that. But probably wouldn’t give you any longer term GMV growth guidance. I don’t really say that in 2022, in this we see an opportunity to potentially accelerate a bit and plus please keep in mind that part of the CapEx increases actually with the bolts are higher steel prices and developments of our Ozon Express initiative which also requires additional spending.

Daniil Fedorov: Yes. If that helps, I can tell you that the growth that you mentioned, so if we choose them, we wouldn’t be very happy. So, this is just the maximum that we can say.

Elena Jouronova: Thank you. That’s very clear.

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

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