Ceconomy AG
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Ceconomy AG
XETRA:CEC
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Ladies and gentlemen, thank you for standing by. Welcome and thank you for joining the CECONOMY AG conference call. [Operator Instructions]I would now like to turn the conference over to Sebastian Kauffmann, Vice President, Investor Relations. Please go ahead.
Good morning, everyone. Thank you very much for joining us today for our investor call on occasion of our First Quarter Results. With me is CEO Pieter Haas and CFO Mark Frese, who will lead you through the presentation.Before we start, let me briefly address the usual organizational and legal topics. As in the preceding quarters, please be aware that this call is being recorded and a replay will be available on our website later today. Also, I would like you to note that today's presentation and some of answers to your questions during the Q&A session contain forward-looking statements. For additional information, let me refer you to our disclaimer.Regarding the sequence, Pieter will kick-off today's presentation with a short overview of the first quarter and background on our ad hoc released 3 weeks ago. Mark will then provide you with a deeper insight into our Q1 performance. And finally, Mark will also take you through our outlook for the rest of the year, especially the actions and measures implemented to reach our full year guidance. And after the presentation, there will be a Q&A session.And now let me hand over to Pieter.
Thank you, Sebastian. Good morning, everyone.Independence was what we wanted, as you know, and independence was what we got. We saw and enjoyed the positive aspects of independence, the full financial focus, full transparency and no distractions from our business, and in the first quarter of the new financial year 2017 and 2018, we have however also seen the flip side of independence, and again, it's full accountability and full visibility also in tougher times. And we know that the ad hoc announcement came as a surprise to you and it was definitely not the start of the new fiscal year we had in mind.It was a quarter of mixed feelings, to be honest. One the one hand, Black Friday was the strongest sales day we ever had in the history of MediaMarkt and Saturn. IT and logistics functioned well in spite of the huge volume of orders we processed. On the other hand, our December sales and results were not as strong as we expected.The first quarter was impacted by 3 major topics that together led to the decline in our EBIT compared to the prior year period. First of all, we knew that Q1 would be negatively impacted by so-called technical effects in Italy. In the first quarter of the last financial year, the former Italian management was fairly confident on its full year performance and they accordingly booked accruals for supplier contributions.During remainder of the past year, we had to reverse these accruals since Italy, as you know, did not perform as plan. And of course, all of this has already been taken care of in the annual accounts of 2016, so there's no surprises for this fiscal year, but we see the effects now in the comparison on a quarter-to-quarter basis.Second, we knew that we would have higher costs for the buildup of the CECONOMY holding than we had last year. A large part of the year-on-year cost increase for the full year was incurred in Q1, so the effect on a comparison basis will be lower in the coming quarters. We planned for these 2 effects to be compensated by strong Black Friday sales and especially a sound business in December, just like we saw in December 2016 and December 2015.To start with Black Friday, Black Friday was indeed very successful across all channels. It was the strongest single sales day for us ever. Sales on just that day were around EUR 250 million for the group. Overall, we recorded double-digit year-on-year sales and customer traffic growth rates in the days around Black Friday, Cyber Monday and Cyber Week.Our IT and logistics functioned flawlessly. We were also one of the few retailers that managed to make Black Friday both an online as well as a store event, which shows us that multichannel was the winning model also during the Black Friday period.Last year of course December sales were also impacted by Black Friday, but we still recorded a very sound Christmas business in December. We expected a similar development this year, but that did not happen as we anticipated. Especially, in Germany, we did not reach our sales ambitions. This left us with a disappointing development in December and too high, yet fresh stocks at the end of the year that negatively impacted net working capital.The strong Black Friday pull-forward effect was for the first time not balanced by high and more profitable sales during the traditional Christmas business in Germany and this impacted our targeted EBIT significantly.Not participating in Black Friday is however definitely not an option. Black Friday is a phenomenon that became popular outside the US only a few years ago and will continue to be an important sales opportunity for us, both online and mobile as well as in our stores. However, we will be better prepared in the future. We will cooperate closer with suppliers, do more bundles and sell more services directly linked to the discounted offers.This is, for example, exactly what Spain already did during this Black Friday period. Like Germany, Spain saw strong sales growth around Black Friday with weaker sales in December. However, Spain offered more supplier negotiated bundles that helped to protect profitability despite the strong sales pull-forward to Black Friday.Spain also realized a high attach rate for additional services like extended warranty during the Black Friday period. Therefore, the country now serves as group-wide best practice for steering of Black Friday going forward.Some of you have asked why we did not address the profit decline already during our annual results conference on December 19. The answer is really very simple. At that point in time just before the typically strong sales days right before and right after Christmas, we could not know how sales would work out and the behavior of customers was significantly different this year compared to last year. I'm sure that you've read that also other retailers in Germany and in the UK reported a similar development.While last quarter's earnings were certainly a disappointment, I believe it's important to stress that our strategy, our growth drivers remain intact. We believe that our strategy is the right answer to the massive changes in the consumer electronics market. This also means that we're confident that we will be able to achieve our targets for the full year. We initiated extensive actions plans, identified additional cost measures to safeguard our forecast.Undoubtfully, our buffer to offset unknown adverse developments has decreased, but we are committed to achieving the targets we have set. Mark will present the details of our action plans later in this presentation. We have everything in place to accelerate our growth in the remainder of the year, both top and bottom line and we are committed to compensate for the shortfall.Let me briefly talk about sales and net working capital before Mark takes over. Adjusted for currency effects, our total sales increased by 1.3% in the first quarter. Sales in Germany was slightly higher, Spain and Turkey on the other hand were the countries with the strongest growth on exchange rate adjusted basis, while Russia and Switzerland recorded lower sales.Once again, our Online and our Mobile business performed very well, with a year-on-year increase of 22%, that is excluding our pure-play activities, i.e., redcoon, so growing 22% on the last quarter. We're also pleased to see Sales and Services go up by another 6%.In terms of EBITDA and EBIT, as already announced, we incurred a noticeable decline in profitability in the first quarter and Mark will elaborate on that in just a second. Our net working capital position declined in the first quarter. The change in net working capital was around EUR 400 million lower compared respective period -- prior year period.You might recall that we mentioned a figure of EUR 380 million in our ad hoc release. The difference is mainly due to positive FX effects, which are not shown in the change in net working capital, but in our other operating cash flow line. Still for the year as a whole, we continued to expect a slight improvement in net working capital corresponding to our sales development.Let me now hand over to Mark for a deep dive into our first quarter performance, followed by the outlook. And I of course look forward to answering your questions at the end of this session. Thank you.
Thank you, Pieter, and welcome from my side.I would like to give you some more details on our sales and earnings development as well as other achievements during the quarter. Thereafter, I will take you through the building blocks for the following quarters to reach our full year targets.Let's kick-off with a closer look at our sales performance. Group sales were up 1.3% adjusted for currency effects. The main growth drivers were Eastern Europe, with a plus of 5.3% adjusted for FX effects, followed by Western and Southern Europe, with an increase in sales of 2.6%.Sales performance in the DACH region was flat year-on-year and was impacted by slightly rising sales in Germany, but lower sales in Switzerland. On the contrary, we were satisfied to see a stabilization of sales in Italy and Sweden, while they declined in Russia. Sales in Russia came in lower because of our stricter margin focus and the rightsizings of our local store portfolio. While this led to decline in sales, we recorded an immediate positive impact on margins.The development in Russia was fully compensated by further sales growth of our Turkish operations. On a currency adjusted basis, sales in Turkey were up in the double-digit percentage range. It is a country that exemplifies our ability to write successful turnaround stories.To provide you with a full overview of the extended Christmas season including January, let's have a short look at our 4 months trading from October until January. Group sales adjusted for currency effects were up by 0.5%. Excluding the Saturn VAT campaign in Germany in January 2017, sales increased by 1.6% compared to the respective prior year period.Let's move on for an in-depth view of our Online and Mobile sales performance. In the first quarter, Online sales continued to be strong and were once again the key driver of sales. Online sales generated by our core brands MediaMarkt and Saturn increased by 22%. Overall, group Online sales amounted to more than EUR 800 million just in this quarter 1 and made up for almost 12% of total sales as compared to 10.5% in the prior financial year.We are pleased to see that our pick-up option is further being adopted by customers and continues to pay off. This option was selected in around 44% of all transactions generated online and reflects an improvement of 2 percentage points compared to the prior year period.We have also made further progress in growing the part of the business which goes beyond the pure sales of products. Services and Solution sales increased in Q1 by 6% to about EUR 400 million. This growth was largely driven by our repair services as well as a strong demand for insurances, financing and extended warranties. Overall, Services and Solution made up to close (sic) [ made up close to ] 6% as a share of total sales compared to 5.6% a year ago.Another key driver of our Services and Solutions growth continues to be our SmartBars offering. The number of stores with the SmartBar focused on repair and other services increased by 40 since September to now 682.Furthermore, we successfully expanded our at-home and installation service offering, Deutsche Technikberatung. This service is now promoted in 225 stores in Germany and it is further growing. We will complete the full roll-out to all German stores already by the end of this summer. Overall, all countries are well underway to increase their service share and to expand their service offering.We have also seen continuous progress in our 2 customer programs, the MediaMarkt Club and the Saturn Card. At the end of December, our customer programs counted in total more than 16.2 million members across 10 countries. On a standalone basis, MediaMarkt Club Germany welcomed around 500,000 new members in Q1 and now counts more than 3.7 million members in total. Our Saturn Card in Germany also had great demand. The number of members rose by 300,000 to almost 1 million members.To which extent this number of members in loyalty programs translates to actual sales is displayed in the lower left-hand corner. Following the roll-out of the MediaMarkt Club Germany, sales generated by members were at 18% of total sales. One year later, we find ourselves with a sales contribution of 27%.These trends have also led us to the decision to roll-out our customer programs to additional countries. In December, we launched, for instance, MediaMarkt Club in Spain. The first sign-up numbers were quite promising. Further countries will follow.Let's now have a look at our current store portfolio. We opened 13 new stores in total, excluding shop-in-shop formats. The focus of our selective expansion strategy was once again on smaller stores and shop-in-shop formats. Just in October and November 2017, we opened 84 additional shop-in-shops in Russia. Overall, we have now close to 100 shop-in-shops solutions in place in Russia, Belgium and Hungary. Our measures to further reduce the average store size have also paid off. We recorded a decrease by 7% in the first quarter compared to September 2017.Key contributing factors were the closing of a large scale store in Russia, the shop-in-shop openings, as well as further rightsizings, especially in Russia and Italy and we plan for further store rightsizing in selected countries that should bring down the average store size further and positively impact sales productivity.Overall, looking at the full year, we want to keep our momentum and continue to expect a low to mid double-digit number of net openings, excluding the shop-in-shop formats.Let's now move on to our profitability development. As stated earlier, the earnings development in the first quarter was not satisfactory. Gross margin came in at 19.1% after 19.8% in the prior year period. EBITDA decreased to EUR 315 million, while EBIT came in at EUR 258 million or 3.7% of sales.A few things that I would like you to keep in mind. The technical effect in Italy in the prior year is the reason why we had to run against the unusual high comparison base this quarter. The effect will fully reverse over the course of this year and the biggest effect will happen in Q4. Our initiatives in Italy to improve earnings are otherwise on track. I will talk about these in more detail when I take you through the outlook in just a few minutes.In terms of CECONOMY holding costs, in the first quarter we saw a higher base effect compared to the remaining quarters. For the full year, we expect holding cost to rise by EUR 10 million or less. This figure is already reflected and accounted for in our current guidance. In other words, much of the anticipated rise has been taken in Q1.As Pieter already explained, we expect in Q1 our operational business to more than compensate for these 2 effects. Before I continue, let me assure you at this point, the profit decline in Q[ 1 ] was a setback, but this has not changed our ambition. Our financial buffer to offset the unknown risk has reduced, yet we keep on working towards our full year targets and continue to drive forward our action plans.The decline in EBIT also had its effect on net earnings and the EPS level. However, the decline was softened due to the positive development of our taxes.But let's start with the net financial result. It came in at EUR 2 million and was basically unchanged to the prior year level. The reason behind this has been the very low interest rates on new debt instruments, namely our [ short-term ] and our commercial paper program. Both instruments clearly reveal how solid capital markets assess our financial health.In the first quarter, we have experienced a significantdecrease in our tax rate. It stood at 44.4%, which is close to 4 percentage points lower than in Q1 last year and in line with the tax rate of the past financial year 2016-'17. Minority expenses decreased slightly by EUR 2 million. The share of minority interest currently stands at the lower end of our full year expectation of 25% to 30% of profit or loss for the period.Taking it altogether, EPS declined from EUR 0.37 in Q1 2016 --'17 to EUR 0.33 this quarter. On a reported basis, however, EPS increased from EUR 0.24 in Q1 last year.Change in net working capital came in at around EUR 1.2 billion. This was around EUR 400 million lower than in the respective prior year period. The decline was caused by a rise in inventories, particularly in Germany, resulting from weaker sales in December.Payables, on the other hand, decreased due to change in product mix. Specifically, we sold more products with shorter payment terms like mobile phones. Further, receivable increased, driven by lower income and the higher sales of telecommunication contracts.The rise in stocks might raise questions regarding further promotions to balance stock levels. Let me make this clear right away right away. The current inventory is nothing we worry about. It is fresh stock which accumulated as a consequence of lower sales in December and it's an effect which we expected to make up for in the next months in the normal course of business. We see no need for further extraordinary promotional campaigns to reduce stock levels.In general, we still expect our net working capital to improve for the year as a whole. This will be supported by 3 factors: one, reduced purchasing volumes and the regular sell down of our inventory; cash-in of later income that we already earned in Q1; negotiations with our suppliers to partially extend payment terms.Overall, free cash flow for the first quarter stood at nearly EUR 1.4 billion, a decrease of around EUR 400 million year-on-year. This is largely attributable to the weaker net working capital development.After the deep dive in our performance of the last quarter, let me now take you through our outlook for the rest of the year. We stated earlier today that our growth drivers and enablers remain intact and we are also certain that our strategy is the right answer to the changes in the consumer electronics market. Hence, we are confident that we will be able to achieve our targets for the full year despite the unsatisfying start.Let me confirm our guidance. For the full year 2017-2018, we expect a slight increase in sales on a year-on-year comparison. Correspondingly, our net working capital is expected to improve slightly as well. Further, we expect EBITDA and EBIT both excluding our investment in Fnac Darty to show at least mid-single-digit percentage growth.I would like to give a bit more flavor on how we expect to achieve our targets for the full year. In order to better understand our plans it is probably worth first having a look at the quarterly development in the past financial year. The 2016-2017 EBIT bridge illustrates the main contributors and the challenges we faced in the past financial year. While back then Q1 was broadly in line with our sales development, we faced severe headwinds in Q2. For one, we had to deal with a strong and tough comparison base in the prior year that set the bar high.Furthermore, the German Saturn VAT campaign in January last year was greatly supporting sales and strengthened our leading market position. However, it negatively impacted profitability. In addition, we incurred a one-off effect in the Netherlands in the high single-digit million range because of a telco supplier going out of business. The absence of these 2 one-off effects will have a positive impact on this year's Q2 performance.In Q3, next to ongoing operational improvements we focused on cost control and our marketing spend. We saw our Online business flourish and our gross margin improved, which was also supported by higher supplier contributions. Turkey continued its progression and also Germany and Spain operated very profitable. On the other hand, earnings in Italy and Russia were lower than in the prior year period.Following a strong Q4, we ended the financial year with an EBIT increase of EUR 6 million to EUR 471 million. The development in the past financial year shows that we had the right strategy in place and we were well equipped to achieve our guidance. We faced some headwinds, but we were always -- we always had the right means and adjusting screws in place and immediately addressed the challenges.Against this backdrop, let's have a closer look at the developments in Italy in the past and in this financial year. Italy is and continues to be an important market for us. In the past financial year, Italy incurred a significant decrease in profitability. We had to recognize that this market in the past was for various reasons not well managed to live up to its full potential.One factor that weighed on profitability were the purchasing and stock level decisions in the past. But also the Services and Solutions offering was underdeveloped. Overall, Italy did not meet our sales and earnings aspirations. However, we have already several initiatives in places that will help us grow again and to achieve a significant earnings improvement in Italy this year.Already end of last year, we have changed 3 out of 4 members of the management team. For the current financial year, we are planning together with the new management team to accelerate our initiatives.Let me give you some examples here. We have introduced a centralized category management approach, which we believe will lead to a more focused assortment. We're also adapting our pricing approach in Italy; one of the measures will be to leverage the full potential of the digital shelf labels to cope in a still highly competitive market.Another one is a review of our current and currently scheduled promotional campaigns. Another initiative is the strengthening of our Services and Solutions offering. In the first quarter, we have already seen increased sales from warranties and financing services due to a more streamlined offering at more attractive conditions. This is supported by a dedicated staff training program across all stores. Moreover, we expect to benefit from the efficiency measures that we initiated in the last financial year in Italy, including a reduction of headquarter and stock costs.As you can see, the key drivers have already been set in motion. CECONOMY and the new country management are determined to drive forward the implementation of these measures.Let's turn to the building blocks and key drivers for EBIT growth for the remainder of this financial year. In Q2, as just mentioned, we will benefit from the absence of the German Saturn VAT campaign in the previous year that negatively weighed on profitability. Another positive contributing factor will be the absence of the one-off effect in the Netherlands.We furthermore expect our restructuring efforts in Russia and Sweden to have an increasingly positive impact not just in Q2, but also in the following quarters. The same accounts for our redcoon operations, where we will enjoy the benefits of the closed country operations last year. In addition, we expect a reduction of redcoon costs from leveraging our MediaMarkt and Saturn IT and logistics infrastructure in Germany.Overall, we expect to recover a significant part of the Q1 loss already in Q2. In Q3, in addition to the positive dynamics from Russia, Sweden and redcoon, we expect positive impulses from the FIFA World Cup. Moreover, we expect our initiatives in Italy, as just described, to take off and to take real effect. So technical effect in Italy that Peter was referring to earlier will be predominantly reversed in Q4.Speaking about the fourth quarter, despite the relatively high comparable figures in the previous year, we see ourselves well positioned to also improve our EBIT in Q4.No doubt because of our Q1 performance, our risk buffer has certainly decreased. This is the reason why we on top of the effects and the initiatives just outlined, put in place additional cost measures to safeguard our forecast. This refers to reduced administrative expenses at various holding entities and country organizations.All in all, we are confident that these building blocks will drive our EBIT performance and help us to achieve our full year's targets.With that, we would like to thank you for your attention and look forward to your questions now. Thank you.
[Operator Instructions] The first question comes from the line of Volker Bosse of Baader Bank.
I would like to start with a clarification on the 4 months sales performance, is it right plus 0.5% in euros and plus 1.6% ex currency effects? And it would be kind if you could break out also the like-for-like performance in January to see the trend? And second question would on your earnings guidance. We saw a shortfall roughly of EUR 50 million in Q1. So coming to your Q2, you already stressed out the exceptionals in Q2 last year, but how would the EBIT level look on a normalized basis? Are you confident to achieve a positive EBIT contribution in the second quarter? And also related to that is your cost cutting measures which you know start. At Reuters you have quoted that the headquarter cost should sum up to EUR 30 million in total. So can you confirm the EUR 30 million quoted at Reuters and how much of that will be already realized then in '17-'18 and therefore help you to compensate your shortfall in Q1? And finally just on the tax rate, your significantly lower tax rate in Q1, is the 44% still the guidance also for the full year, so is a 44% full year tax rate unchanged?
Starting with your question on the 4 months sales, it's correct that the number was for the 4 months period, plus 0.5%. If we would adjust for the VAT campaign in January 2017, which we haven't done this year for very good reasons, on a profitability basis the number would be plus 1.6%. The trend -- and that was also questioned -- the trend in January was absolutely positive when you take out the VAT campaign. Your second question on the guidance. So to make up for the EUR 50 million in Q1, you said if we will have a positive trend already in Q2 and a positive contribution. Yes, we can confirm that. Third question was on the headquarter and country headquarter and central headquarter cost reductions of EUR 30 million. Yes, we can confirm the EUR 30 million as a target we have set for ourselves and plans are already set out. That is correct. And we should expect a big part of that that we will see it already in '17-'18. I would go as far to say we should have an effect of EUR 30 million for this year. Third one, tax rate 44% is -- yes, still the guidance is valid for the full year. It's also the full year target we are having. And you know our medium-term target was to go into the direction of 44%. To clarify maybe on question number 2, question 2 on the Q2 performance, delta EBIT will be for sure positive, so there will be a positive contribution, but not fully -- I don't know if also that was your question -- not fully make up for the loss or the reduction of the loss or reduction we have seen in Q1.
Next question comes from the line of Fabienne Caron of Kepler Cheuvreux.
I've got 2 questions. The first one, would you be in a position to quantify the 3 elements that you quote at the beginning of the presentation for the miss in Q1 in term of numbers? And the second question is regarding Germany and the way it is structured. Is it fair to say that because the store manager books rebates on a store level, it takes a bit long for you to see the full profitability and it would be -- and if it is the case, over which time frame do you think that you could see profitability kind of live compared to having to wait for all the store managers to put the rebates in the system?
On the 3 elements for Q1, I think I would refer -- you can see how the developments was in Southern Europe. So that element is Italy, so therefore you can see what will be the positive over the next quarters coming just from Italy. And the other 2 effects are close to be on the same level.
On the second point -- Pieter here. It's not completely right as you said it because of course store managers do not book all rebates on store level. That is just those rebates that are negotiated on store level. And the most significant part of the terms and conditions are obviously negotiated on a national and on an international level. So, yes, it might be the case and that's why we always we book things very carefully, as you know. That's why we have always a very good Q4, because then we sort of take -- all of the rebates and all of the negotiations we had on store level we take them in and that you see in the development over the year. But that's only a small portion in the total amount of all rebates we get.
Next question comes from the line of Cedric Lecasble of Raymond James.
I actually have 4. So first one is technical. How do you consolidate exactly Fnac Darty in your EBITDA and EBIT as Fnac Darty has not published yet and does not disclose quarterly results? So how does the mechanic work? It would be interesting to have positions on that. The second question is the different countries which were loss-making. You gave some elements on Russia, on Sweden, on Turkey. Could we maybe quantify those or identify those countries which will be breakeven or positive at the end of the year? The third question is on the ramp-up of your loyalty schemes in Germany. How should we understand that on a profitability standpoint? Is there a ramp-up phase with some investment phase and what is the sweet spot to start having good returns on these new loyal customers? And the last question is on global sourcing, maybe you can tell us what progress you have made on those last months?
On the Fnac Darty consolidation, we do that at equity basis. And there is -- as we have to base our consolidation on public information, there's always a timing difference between the publication and our consolidation. So you might see that in this quarter. We couldn't consolidate actual numbers out of the quarter of Fnac Darty. And there will be always the effect that we have a time difference of -- it will be around about 5 to 6 months.
So you took H1 and took a 1/4th of that? How does it work?
First of all, the technique you can see in -- how we do that and how the timing effect, you can see on a chart in our appendix in full year 2016-'17 presentation, so to read that. And it's -- yes, we haven't seen anything yet and we will see the full result then mid of the year probably. That is how we see it.
Pieter here on the other questions. The entities we mentioned in 2016 as trouble areas, Russia, Sweden, Turkey and redcoon, we have resolved 2 of them. Redcoon is -- basically, the closing procedure has stopped, so that goes to 0. And Turkey is positive and -- sustainable positive in our views. So those 2 topics have been resolved completely. In Russia and Sweden, as Mark mentioned earlier, we do expect improvements out of the restructuring programs. That will not be enough to break both countries to breakeven, but we were committed, as we said earlier, to resolve those issues also in the remainder of this calendar year. With regard to the CRM scheme in Germany -- not just in Germany -- we're now up to about 16 million people, so we are definitely out of the ramp-up part of it. We have implemented the same CRM infrastructure, IT infrastructure in all countries now. So we now get into the phase where we start working with the data. We have roughly 1/3rd of total sales now covered by loyalty programs. And we see now we can start playing with the data, but also playing with what we know of the customers, make more personalized offers. And that is the significant part of CRM, not as much monetizing the data, but mainly focusing on more personalized offers and getting more money out of the single customer we have by making more personalized offerings and understanding the customer better. And that is happening now. So it is already mentioned as the #3 value driver in our equity story and in the strategic overviews we gave all the time. So CRM as a part of the 3 major drivers. Services, Online and CRM the 3 major drivers of our top line and bottom line profitability.
Even in Germany where the process is more recent?
Well, definitely in Germany, because in Germany we are now close to 5 million subscribers to the loyalty program. So that is the country that started first and is now -- in Germany MediaMarkt alone is now the second largest -- just after [ IKEA ] the second largest retail loyalty program in just 2 years from starting it. So that runs very well and we get now to the phase where we can start working with the data and be more personalized towards our consumers. On the on the global sourcing, you need to help me, because what do you mean exactly with progress over the last month because we've always been doing global sourcing. Can you explain that question a little bit more?
Yes. Well, you said there was some potential to improve supplier terms. It was not only linked to putting together purchases, but it was also linked to logistics and to the way you were supplying the stores. So maybe it's a little more global as a questions and only sourcing.
I now understand. Sorry for that. Yes, we are working on -- that was the fifth major part of value driving, that is the centralization and more coordinated approach towards assortments, towards supply chain and towards pricing, that we see well on track. We have defined Spain as the country that is dealing with the standard of all our category management approaches. So what Spain is doing will serve as the best practice for all other countries and we will bring that way of defining assortments to all other countries over the next couple of months. We are working on every single country in the multilayer approach in terms of logistics. So that is also happening. There's differences between all countries because in large countries you will have multiple regional warehouses. In a country like the Netherlands, it's enough to have only one central warehouse. And in terms of pricing strategy, Germany is the lead country. And we have, as you know, all the technology in place. And we're now working on continuously learning how to play with pricing in both directions, understand price elasticity and make sure we understand -- also, for example, in a period like Black Friday, because of the investments we made in pricing technology, we were able to adjust prices on the day before Black Friday and overall in the whole country by just pushing one button adjusted prices upward again after Black Friday. So, yes, all of those initiatives are on their way and progressing as we have planned and communicated.
Just to come back to the first question on Fnac, is it possible to have a number just to be sure on the contribution to EBITDA and EBIT in million euros?
There was no contribution in Q1.
So I'll work on that and call you if I struggle.
But to make that clear, there was no contribution in Q1 of Fnac Darty in the result.
And the next question comes from the line of Geoff Ruddell of Morgan Stanley.
Can I just ask 2 questions please? The first one is what exactly your trade receivables are and why they are up 50%? As I understand it, a lot of it has to do with mobile phones, but seems a very big number and I'm surprised if your mobile phone sales are up 50% year-on-year. And secondly, could you just talk a little bit more, following on from Fabienne's question, about the amount of profit you book through in Q4 each year to do with over-riders, because on my numbers if you're going to hit your full year guidance, you're probably going to have to book as much profit in Q4 as you've booked over Christmas in your Q1 numbers. And I'm struggling slightly to understand how that profit can be so big in that quarter. Obviously, there's a lot of over-riders there. But my concern is that if you've had a poor performance in your key trading period over Christmas, then maybe your over-rider payments later in the year are going to be impacted.
So concerning your question on trade receivables, let me maybe wrap up a little bit on the net working capital development. So the main driver I think that is important today in the negative development of our NVC [sic] [ NWC ] was clearly higher inventories we had and higher receivables, which we could not compensate it by increase in payables. The higher inventories are a result of the weaker expected December sales, as expected. So we said that -- quite a substantial numbers. The receivables increased driven by later income and higher sales of telecommunication contracts. So it's 2 effects or 2 main factors which are in here. On top of that, we have to say that changes in the product mix are also responsible for the lower increase in payables. So what it means is that we sold higher share of products with below average payment terms, like, for instance, mobile phones. So that is the full picture on the developments. And one effect...
Sorry, could I just understand on -- on the inventory and the payables I think I understand. It's the trade receivables I don't understand. That that number is up about EUR 500 million year-on-year. I just would like to understand a little bit better what that is please?
So let us check that number again. If you're talking about an increase of EUR 500 million, what we have seen is the increase from -- let me check that again that I'm clear here -- from EUR 300 million...
So I'm just looking from Page 13 of the quarterly statement you put out this morning. You have receivables due from suppliers' balance of EUR 1.849 billion, so we'll call it EUR 1.85 billion. And this time last year that was EUR 1.246 billion. So there's almost exactly EUR 500 million increase there -- actually, more than EUR 600 million increase.
I think we should follow up on that. What I'm seeing right now, you are comparing not quarters. You are comparing end of year to a quarter development. And I think if you put that together on a quarterly and on a yearend basis, the numbers are much more understandable. Maybe let's follow up on that as we are -- maybe that is not clear on the papers here.
Okay, okay, we'll take it offline. And then on the point about the big over-rider payments -- booked income in Q4 please?
Just to make it clear, Geoff, you had one more question on the first part or we go to the second point now?
No, no, sorry the second part. I'll take the other one offline with you.
Well, the Q4 also this year will obviously be a high Q4. We do not expect it -- in the last year, we had one very high quarter in the first quarter, 2 quarters that even were below 0 partially, and then one more profitable quarter in the fourth quarter. What Mark already indicated, we do expect also already significant improvements in the 2 quarters, Q2 and Q3. So not as much increase in Q4 as we may have seen last year, but still a very good Q4 that is related directly still to the booking and the way in which we are booking the results of all our deals and negotiations with our suppliers. That has not changed. We are still very careful there I think for good reason and I think we have got used to that. But we do expect already, and Mark will elaborate on that a little bit more, already first improvement in Q2 and Q3 compared to last year also.
What I was just trying to understand is if you had a poor or relatively poor performance in your peak trading period, will that not have an impact later in the year on the over-riders you book in Q4?
I think the most important thing there is that the problem that we had was not sales related. If it had been sales related, then I would agree with you that it would be very unlikely that we would get the same type of contributions from our suppliers in the fourth quarter. But you've seen that definitely around Black Friday, Christmas, end of Q4 or the 4 months period, definitely sales was not our problem and we've increased sales again. So we are not afraid that it will have any impact on the Q4 bookings in terms of our supplier contributions. It's more that the margin and the other topics that Mark mentioned were a problem and not the level of sales, and therefore, not a jeopardy for the supplier contributions in Q4.
And maybe just referring again to what we have said on the development of the quarters coming up now, so second, third and fourth quarters this year. I think it's important to say that we -- as we said it also to a question already, that we will see a positive effect already in Q2, mainly due to the effect we have discussed already talking about the restructuring entities, talking about the absence of the one-off effect in the Netherlands and also the VAT campaign in Germany. And that will follow on in the next quarters, so we should not see the whole development in Q4. We will see also a development in 2 and 3. I think that's important to say again.
Next question comes from the line of Tushar Jain of Goldman Sachs.
Three questions for me. One is around Black Friday. The learnings from Spain, how easy is to implement in Germany and are you going to implement only those solutions in Germany or you're looking more for a wider group-wide solutions in rest of the territories as well? The second question is around cost savings of EUR 30 million. Is it sort of a one step down this year and they come back next year as we should assume that these cost savings will be there in the business for longer? And the third question if there any update around your negotiations with Convergenta or [indiscernible]?
On Black Friday, yes, we think if plenty of time given -- and we do have plenty of time until the next Black Friday -- these are things to implement, not relatively easy, but they are things to implement not just in Germany but all over Europe. And we've said that the learning is in Spain: start on time with negotiations, do bundle offers and make sure all your people are trained to sell not just the discounted products, but also related services. I think that's the magic formula. We will not avoid and we will not not participate in Black Friday, but we have to organize it better. And we have already started doing that, because it also means talking to suppliers very early to put those bundles and those offers together. On the cost savings, just to make that clear again, it's a whole set of measures. We have agreed the euro amounts with the countries, each individual country, with the holding in Ingolstadt and also the holding in Duesseldorf. CECONOMY will contribute to that. So everybody will look at their costs. Part of it will be structural, part of it may also be deferring of costs. We will look at consultancy fees. We will look at IT expenses. We will look at everything, because it's one of the things we will do to ensure that we still hit the targets that we have guided in December. With regard to Convergenta, in the moment we are respecting a 6 to 8 week I would call it morning or grace period with regard to the Kellerhals family that they requested us to do and we have communicated very clearly also to do the Convergenta and to the Kellerhals family that we are very open to start talks again and see whether we can find a solution as soon as this period is over.
Can I just have one follow up question on Black Friday? Are you going to increase your own private label penetration? Is that something you are thinking about it or it's just going to be all branded products, but better supplier negotiations and cross-bundling.
The private label products could play a role in bundling. You could sell an iPhone and then put some accessories around it and make a bundle of that. I think the private label products as such that are normally accessories and price entry products do not qualify as the main sales drivers for Black Friday. So the focus will be definitely on also branded products, but we could use private label products to create the bundles.
Maybe -- let me come back. I think we sorted out, Geoff, your question on trades receivables. Maybe let me give an explanation here that we are clear what we are talking about. So first of all, the development you have referred to is a development which is normal for the seasonality. So we are building up stock in that quarter of around a billion in the numbers we have seen here. So when you compare between end of September and end of the year, we are building up stock. With that built up, for sure we also built up in that quarter trade receivables, which is quite logical. If you want to compare the development compared to last year -- and you referred to the trade receivables -- is an increase of roundabout EUR 100 million, a little bit over, so it's close to EUR 120 million. And that is mostly attributable to the German development and that to the weaker sales than expected. So higher built up of stock and therefore also we have seen that development. So biggest part is normal seasonality -- we have seen also last year. The difference we are seeing is the development we were referring to in December.
Next question comes from the line of Kiranjot Grewal of BAML.
Firstly, could you tell us where you are at with centralization of procurement and potentially give us some color on the gross margin impact you're seeing so far? And then conversations around consolidation. There is a new management team at Dixons. Arguably you're going to be starting conversations with Convergenta as well. Do you think those 2 changes will make consolidation more imminent than it did a couple of months ago? And thirdly, could I confirm whether there is any restrictions to you selling METRO stake, and if not, whether you're waiting for a certain catalyst to sell the stake?
Let me start with the first question, centralization update. Refer back to what I said just before, because it's the topic where we said in all our presentations that we think it's at least EUR 100 million impact that we can get from there. That is not something we can say, "Okay, this quarter we had now EUR 1 million impact." It's the total impact of the 3 major activities that I just described: assortment, category management, supply chain and pricing. And we believe that it's at least worth EUR 100 million. With regard to consolidation, I don't even know whether the new management team at Dixons has started, but I think they are imminent to start. The discussions on Convergenta I just commented and I do think that, yes, we have seen a completely different landscape than like a year ago in terms of consolidation. A year ago it was still the Steinhoff Group trying to buy Darty. It was Dixons at the peak of their performance and it was us becoming independent. All of that has changed now. We have done our move with Fnac Darty. We will look and we're open to any strategic opportunities we have and we will evaluate them. But there's no imminent news, as you call it, that we have to communicate it that we are -- we can communicate. And the discussions with Convergenta, we will pick up after the mourning period that Convergenta, the Kellerhals family has asked for.
And on the METRO stake, do you have any restrictions to selling it. If not, are you waiting for any catalyst to sell the stake?
You know that the period where we would not be able to sell it is over and it's 13th of January this year. So we would be allowed. So there are no restrictions anymore. And nothing more to say to that right now.
[Operator Instructions] And the next question comes from the line of Geoff Ruddell of Morgan Stanley.
I just like to come back to this receivables point. Could you just explain really simply what these receivables due from supplies are please?
A big majority is later income. It's a buildup of later income concerning the buildup of stock.
So suppliers owe you money because you buy their stock?
Absolutely. You got it.
Why do suppliers give you money for you buying their stock? I mean, are these over-riders?
So it's booking for rebates which are negotiated and clearly in our contracts. It's for giving service to suppliers and they have to pay for that. So it's all on a contractual basis for sure. Further discussions to go in detail how that works, we can have maybe afterwards.
But most of it is inventory from suppliers rather than mobile phones -- I mean, sort of contracts and networks and things?
Yes.
Next question comes from the line of Georgina Johanan of JP Morgan.
Just a couple of clarification questions on points that have been asked before. And sorry, just to come back to the supplier rebates or contributions and so on, but slightly different angle. I understand what you're saying that the unexpected miss in performance was margin driven rather than sales driven, but I'm just trying to get my head around that given that you are carrying excess stock into the New Year -- into the new calendar year and you've obviously called that out. So is it just -- that excess stock you consider that to be a relatively small number or -- I'm just trying to understand as to how you think you wouldn't have a lower level of supplier rebates year-on-year. That was the fast one. And then the second question was just coming back to these EUR 30 million of savings. So roughly what is the split in between structural and one-off if you like? Like should we be thinking 1/2-1/2? I mean, it's obviously a fairly material number in the context of your profit, so any help on that would be appreciated.
I want to get you right for the first question. So, yes, we regard that -- the higher stock level we have seen especially in Germany we regard that as an absolute manageable number, and it's fresh stock, so no problem for us. We wouldn't have it better sold, because we would go for -- we have gone for higher sales, that's true. But nevertheless it's very fresh stock, so no operational problem whatsoever. That's one thing I think that's important. And not really getting what refers to lower level of rebates with that. We don't expect to have lower level of rebates because we're giving more service, higher sales, have a good sales development not in the sequence we would have loved it, that's true, but has no effect on the rebates we're negotiating with our suppliers. So no effect here. Concerning...
So effectively you're expecting to make up the December shortfall in sales in Q2?
To the rest of the year, absolutely, yes. So for some information on the EUR 30 million savings, your question. So what it is? We clearly said that the EUR 30 million goes across all holding structures, so countries, MSH and CECONOMY. We haven't done a split here. Also a part is more efficient spent and spent especially on the IT. Also on consulting and on marketing expenses. So that are the major buckets we're seeing and we're looking at and the plans are already set out. And one-offs, nothing attributable to that, so it's more a structural cost.
There are no further questions at this time. We have a question from Chris Chaviaras of Bloomberg Intelligence.
I've got 2 if I may. The first one on the -- staying on the working capital and maybe on what you said, Mark, about the working capital to improve in FY '18. The 1Q was a pretty big shortfall of EUR 400 million. And is it possible to quantify maybe on the 3 things that you said will drive recovery between Q2 and Q4? What part could be the negotiations with the suppliers for maybe longer term payments, because if I compare your payment days with your other competitors, they are not very dissimilar. So how much of a stretch you can have there you think? That's the first question. And the second one on your expectation about recovering in Sweden and Russia, accelerating your restructuring efforts there, would that mean that potentially your tolerance to their losses becomes less? And what I mean with that, should we expect that maybe they remain loss-making this year you would consider an exit in a much shorter period of time than you would have otherwise done if you didn't have the Q1 shortfall?
Yes, let me address the most important point to your question on the net working capital shortfall we have seen in Q1. I can absolutely assure you the most important point is discipline. So for sure business development has been along the lines we have set out and for sure if you have different expectations and you are buying more and not selling it, it's not a positive effect on that and we have explained that in detail. That's one thing. The second part is to have clear discipline, not trade on that. So it's not only that we try to increase with suppliers, but to keep the levels and be fully disciplined with all negotiations also on buying terms that will have a strong effect. And that is nothing new to the table or to the party. It's just discipline. And that's what we were referring to saying we have set out clear targets by country for all country managements to clearly set out the targets. And that will have the biggest effect. And, yes, it's a challenge, to be clear on that. But we are absolutely confident and clear that we will cash in the targets we have set out to the countries and we will make sure that discipline is there.
A follow up there. I mean, the -- I understand what you say. But given that your payment days to suppliers are no significantly -- you don't pay them significantly earlier than others. Why would they accept longer payment terms? You don't deviate that much versus the industry there. Why would they -- I don't know, why would they accept that?
I think it's something which is not only something which refers to the payment days. It's total payment terms. And when you bring growth to the table and you are bringing the biggest party and dominance to the table, that is what we take as a basis for the relations we have with our suppliers. We are with our biggest suppliers, the most relevant ones, and therefore, that is the basis to develop our relation. So it's not only one factor, I think that is important to say here for that. Secondly, it's also a part -- and we talked about that -- it's also a part that we have a shift -- have seen a shift in Q1 in the product mix, which also had an influence on that and we will work on that.
With regard to your second question, I can say with a smile on my face, if you'd see me, the tolerance to incur losses was already at 0 when we started in 2016. So we made very clear at the beginning that we will not accept in the 4 areas that we mentioned, Sweden, Russia, Turkey and redcoon, any losses mid-term. So we've resolved 2 of those. Russia and Sweden are in full restructuring and we see improvement there. We don't see a relationship between the structural work we do there and the Q1 results. And we're still committed to resolve those issues in the spirit of the slogan we had "to either lead or leave by the end of this calendar year".
There are no further questions at this time. I hand back to Sebastian Kauffmann for closing comments.
Yes, thanks everyone for your interest. We hope we have provided you with sufficient background to reconfirm happened in the first quarter and why we're competent to confirm our outlook. In case of follow up questions, please reach out to us. And don't forget that our AGM will take place on next week, Wednesday. We look forward to talking to you soon again. Have a good day and bye-bye.