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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, and thank you for joining us today for our investor call on our second quarter result. With me today are CEO, Pieter Haas, and CFO, Mark Frese, who will guide you through the presentation. But before we start, let me briefly address the usual organizational and legal topics. As always, 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 answers to your questions during the Q&A session may contain forward-looking statements. For additional information, let me refer you to our disclaimer. Pieter will kick off today's presentation with an overview of the strategic and financial highlights of the second quarter. He will also give you more background on the recently announced retail alliance between MediaMarktSaturn and Fnac Darty. Afterwards, Mark will take you through our second quarter financial performance in more detail, followed by the outlook. After the presentation, there will be a Q&A session. And with that, let me hand over to Pieter.
Thank you, Sebastian, good morning, everyone. If I summarize the second quarter in just 1 word, the word would be progress. And if I may add, progress as planned and as expected. Following the unsatisfying start into the fiscal year, we put all our efforts into driving forward our strategic agenda and accelerate the measures needed to support the operational results and get back on track. We had a clear target compensating the Q1 shortfall and catching up on our full year targets. And we've made good progress in the second quarter. Let's have a look at the key figures. Sales adjusted for currency effects increased by 0.8%. On reported basis, sales were EUR 5.2 million -- billion and were broadly identical to prior year. These developments however need to be seen in the light of our decision to not repeat last year's Saturn's VAT campaign in Germany and instead focus on improving the bottom line, so no more sales at any price or any cost. Also the closedown of redcoon had a negative impact on the previous year's comparison in terms of sales. The resulting sales gap was however partially compensated by the Easter shift from Q2 -- Q3 into Q2. The main growth drivers in Q2 were again our Services & Solutions business and our online/mobile activities. They grew by 15% and 5%, respectively. Online/mobile adjusted for both orders related to the Saturn's VAT campaign as well as the redcoon closedown was up around 12%. We've also seen a favorable development on the earnings side. Our EBITDA was EUR 97 million compared to EUR 40 million before special items in Q2 last year. Our EBIT improved from a loss of EUR 19 million to a profit of EUR 38 million, both figures include EUR 21 million earning share of Fnac Darty's net income. Excluding the Fnac Darty earnings, our EBITDA improved EUR 36 million year-on-year. We communicated after our Q1 results that we expected to recover around half of the Q1 shortfall in the second quarter. The improved Q2 results have actually compensated around 75% of the Q1 shortfall. Partially, the improved results were supported by positive one-off effects. And to be clear, we do not mean special items as an accounting term that we used in the past, but we talk about effects that have a onetime impact on the results. For example, as previously communicated, our earnings were supported by the absence of the Saturn VAT campaign, and they were also impacted by the losses related to the insolvency of a business partner in the Netherlands in 2017. In addition, positive effects from inventory valuation, the wind-down of redcoon activity, so no more losses, and higher Services & Solutions income had a positive impact on our earnings. We also improved our net working capital position in the second quarter. We recorded the lower rise in inventory and simultaneously cashed in more of the supplier receivables. Our net working capital was supported by significant yet temporary improvement in our trade payables due to a weekday effect, which will Mark explain in more detail later. Overall, change in net working capital improved by EUR 185 million. In the context of the Q2 development, we remain confident that we can achieve the strategic and financial full year targets we've set. We are certain that our strategy is the right answer to the dynamics in the consumer electronics market, and we are certain that we will continue to lead and transform our industry. We continued working on all the valuation creation -- value creation potentials. While we make progress in each topic, let me focus for today on the work we've done to prepare for the announced European retail alliance between MediaMarktSaturn and Fnac Darty. This alliance is the foundation for the cooperation between the 2 companies and the elementary building block of CECONOMY strategy to be the leading consumer electronics platform in Europe. Creating the leading CE platform in Europe does not just mean consolidating through investments and/or acquisitions. It is also about smart ideas to jointly create value to partnerships. 2 days ago, MediaMarktSaturn and Fnac Darty informed you about such a smart idea and an exciting new strategic initiative. MediaMarktSaturn and Fnac Darty has signed a memorandum of understanding to set up European retail alliance. The overall aim is to bundle the strength of leading European market players to drive value creation throughout the industry and most importantly, to uncover so far untapped potential. Initially, the alliance will be a joint venture of the 2 founding members, Fnac Darty and MediaMarkSaturn. However, the alliance will be open to additional members. At its start -- and I want to mention that specifically because it does not mean that the alliance is limited to that. At its start, the alliance will focus on 4 value creation areas: partnerships, private label sourcing, innovation and data insights. Partnerships is the first pillar. The alliance seeks to establish joint strategic supplier partnerships on an international level. We aim to jointly negotiate and harmonize so-called on-top conditions with suppliers such as additional discounts for bundled volumes or bonuses for the achievement of certain quantitative and/or qualitative targets. In addition, we plan to align our services to suppliers and codevelop new services like smart replenishment, repair services or new after-sale services. Second topic, MediaMarktSaturn and Fnac Darty plan to create 1 single private label organization. In this new entity, we envisage to combine our private label and licensing activities and generate efficiencies in sourcing and in cost overall to run a private label organization. Furthermore, we obviously, on that basis, plan to improve our private label portfolio, increase private label sales that, as you know, is good for our overall margin. Thirdly, innovation. Fnac Darty will participate in MediaMarktSaturn Retailtech Hub accelerator program. The alliance plans to run a sister accelerator program in France starting in 2019. Retailtech Hub, as you may know, is a platform where retailers can and work together with start-ups to learn and get insights into new concepts and technologies that may have an impact on retail in the future. It's an open platform and open program with also other participants like LiDL and Kaufland. And finally, MediaMarktSaturn and Fnac Darty consider working together in levering the data and the data insights we have including the monetization of this data. All in all, the alliance has the potential to increase our relevance through scale and create value. Since we're still working on setup of the alliance, we do not expect any EBIT contribution in 2018. Starting in 2019, we will gradually see the benefits of this cooperation. We believe that we are absolutely on the right path with regard to our strategy. And sales and earnings wise, we've made also progress in the second quarter. We have, however, still 6 demanding months ahead of us, and we do realize that there is still more than enough homework to do for us. Let me address a few important operational topics that we've tackled in the past months or we're now working on at this moment. In Poland, we have just decided to integrate the 2 brands MediaMarktSaturn under 1 single brand MediaMarkt. All 22 stores -- all 22 Saturn stores will be rebranded as MediaMarkt stores. And by doing so, we will establish MediaMarkt as a clear market leader in the Polish market again. We choose MediaMarkt since this brand has had a presence in Poland for 20 years and is widely known and liked by the Polish consumers. Following the relabeling of Saturn in Poland, there are now only 2 countries left that successfully pursue a two-label strategy, Germany and Austria. And in both countries, we have the #1 and the #2 position, which is clearly different from the situation we had in Poland. In Germany and Austria, having 2 brands pays off and gives us the highest possible market share and the best profitability than just 1 brand ever could both in Germany and Austria. With respect to Saturn in Germany, it is true that we've not been satisfied with the operational performance of Saturn. We believe that Saturn can achieve significantly more, but that is not related to having 2 brands in 1 country. And as you might have seen, we have taken the necessary personnel measures to address this topic a few weeks ago. On the MediaMarkSaturn retail group level, we've also implemented some structural changes. Wolfgang Kirsch, former CEO of the German country organization is now focusing full time on his responsibilities as COO of the MediaMarktSaturn Holding, so to speak, my colleague in the board of MediaMarktSaturn. His responsibility includes all country operations, brand management, procurement and supply chain as well as IT. He handed over the country organization in Germany to Ditmar Krusenbaum, who has previously been the CEO of our very well performing Austrian subsidiary. Means, we have dedicated full-time senior managers on all key positions now both with regards to Germany and with regard to the group. This leaves me with 2 topics that I haven't talked about yet. First of all, Russia. Concerning a potential sale of our Russian business, we do not have any additional information to share today. We're still in talks with M.video, and we will let you know once there is anything new. We believe that we cannot build a leading position on our own, and we're looking for the right solutions with regard to the Russian market. Finally, a brief update regarding the discussions with the Kellerhals family. As explained at our general assembly, the 2 shareholders of MediaMarktSaturn agreed to enter into a standstill agreement, which has been recently prolonged. Convergenta and CECONOMY are in the process of jointly exploring possible ways for an amicable solution and we will get back to you as soon as there is anything new to report in this topic.Let me now hand over to Mark for a deep dive into our second quarter financial performance, and I'll look forward to your questions at the end of today's presentation. Thank you.
Thank you, Pieter, and good morning to everyone who dials in today. I would like to take you through our financial performance in more detail. Afterwards, I will present you the outlook and walk you through the building blocks for the next 2 quarters. Let us start with our sales development. Adjusted for currency effects, group sales were up 0.8% in the second quarter. Pieter already mentioned that sales in this quarter were negatively impacted by the absence of the Saturn VAT campaign, but positively impacted by the shift in Easter sales. Adjusted for these 2 effects, we would have seen an increase in FX-adjusted sales by 1.8%. The DACH region recorded a slight decrease in sales. In Germany, this was mainly due to the absence of the mentioned Saturn VAT campaign. Excluding this campaign, we saw a stable to slightly positive development in Germany. In addition, we recorded a solid increase in sales in Austria and Hungary. In Switzerland, however, we experienced a drop of customer footfall. We are happy to see that our turnaround case Turkey continued its successful path. In the quarter under review, Turkey led again the sales growth on an FX-adjusted basis. The country seamlessly picked up on its growth momentum from the previous quarters. We were also very pleased to see an ongoing stabilization in Italy and also Sweden. The recently implemented and accelerated measures in these countries are increasingly bearing fruit. Let's have a closer look at our online/mobile activities. We have faced quite high comparable figures for online business in Q2. The reason is that the Saturn VAT campaign last year was predominantly carried out via online and mobile channels. Despite this, and the fact that we further reduced our redcoon activities in Germany, we recorded a plus in online sales of around 5% overall. As all of you know, we have recently decided to finally close the German redcoon operations so that we expect a minor negative impact on online sales for the next quarters as well. The online business of our core brands MediaMarkt and Saturn developed very dynamically with an increase of 11%. As of today, the online/mobile segment stands for 12.2% of total sales after 11.6% in the referenced period. Yet another strong sales growth driver in the second quarter has been our Services & Solutions segment. Our service portfolio grew sales by 15% to EUR 343 million. This development was driven by all our categories, which includes offerings around insurances and financing, telco contracts as well as extended warranties and repair services. A key element in this area is our SmartBar offering, which can now be found in around 750 stores as of today. Despite the increased demand for our repair services, our total repair capacity is not yet fully utilized, which weighs on earnings in the second quarter. Typically, we expect that the SmartBars reach breakeven in the second year of operation. We have also seen continuous progress in our 2 customer programs, the MediaMarkt Club and the Saturn Card. We are counting now over 5.3 million customer program members in Germany alone by the end of March. And close to 17.5 million members across 10 countries. All in all, we have therefore already exceeded our full year target of signing up 2 million new members in this financial year. Considering the continued success of our programs and the increasing sales contribution by our loyalty members, we have decided to expand the rollout. We plan to introduce our customer programs to Austria, Poland, Switzerland and Turkey in this year after having opened the customer program in Spain in December last year. Let's switch from our customer programs to an overview of our store portfolio. Within the scope of our selective expansion strategy, the focus of our portfolio management was once again on opening smaller formats, rightsizing stores and executing selecting -- selected store closures. We opened a total of 7 stores, excluding shop-in-shop in the second quarter. 5 of them were in Turkey and 1 store each in Germany and Poland. At the same time, we closed 10 stores. Our measures to further reduce the average store size has paid off. We recorded a decrease by 7% since September. If you exclude all the shop-in-shops, the average store size reduced by 1.2% in this financial year. As stated at the beginning of the year, we continue to expect low to mid-double-digit number of net openings, excluding the shop-in-shop formats. Turkey will be the country leading the field in terms of expansion this year. Let's now move on to our profitability development. While our gross margin recorded a minor improvement of 10 basis points to 20%, we have recorded significant improvements in our EBITDA and EBIT. Excluding the EUR 21 million contribution from Fnac Darty, our EBITDA increased by EUR 36 million compared to the previous year. As Pieter said before, we expected to recover around a half of the Q1 setback in the second quarter. Ultimately, we managed to recover around 75% of the Q1 decline. As we've previously communicated, we benefited from the absence of nonrecurring effects in the prior year such as the insolvency of Dutch business partner of the German Saturn VAT -- and the German Saturn VAT campaign. We also recorded positive effects from inventory evaluation. Moreover, sound dynamics in our Services & Solutions business as well as a wind-down of redcoon helped our earnings. And finally, we see our additional cost-saving initiatives bearing fruit. We have realized an initial single-digit million euro amount of the additional cost savings communicated after the first quarter. A major share of the EUR 30 million savings, however, will be realized in the remaining 2 quarters. While we improved our EBITDA and EBIT, our net financial result was negatively impacted by an impairment of our METRO AG stake. Due to METRO's recent share price decline, we partly impaired our stake to EUR 14.39 per ordinary share and EUR 14.25 per preference share at the end of the quarter. The impairment totaled EUR 131 million. Obviously, the effect could not be entirely offset by the EUR 25 million dividend we received from METRO in February. Consequently, we recorded a net financial result of minus EUR 110 million for the second quarter. Given the further decline of the METRO AG share price following METRO's adjustment of its full year outlook mid-April, we might face an additional impairment of the stake in our balance sheet. Direct consequence of the recent impairment is the decrease in our earnings per share. Our EPS came in at minus EUR 0.21 after minus EUR 0.04 in the reference period. Adjusted for the impairment of our METRO AG stake, underlying EPS would be plus EUR 0.13. One more point related to our METRO stake before we move on to the cash flow development. We are currently assessing all opportunities, and we are assessing the opportunity to transfer our pension liability into a contractual trust agreement, in short a CTA. We consider funding the CTA with our METRO shares and would, therefore, remove the related assets and liabilities from our balance sheet. Nothing has been decided though, and we are still validating different options and will inform you about progress once decision has been taken. As Pieter already mentioned, we improved our change in net working capital position in Q2 by EUR 185 million. This was predominantly supported by a significantly favorable yet temporary swing in trade payables in the low triple-digit million euro range due to weekday effect. Still, the improvement was not sufficient to fully offset the unsatisfying net working capital development that we faced in the first quarter. On a half year basis, change in net working capital was EUR 260 million lower than in the prior year period. For the year as a whole, we continue to expect a slight improvement in our net working capital position. This will be supported by reduced purchasing volumes and the regular sell down of our stock, consequent cash-in of later income that we already earned and partially optimized payment terms. Free cash flow from the first 6 months came in at minus EUR 15 million, was therefore EUR 125 million lower than in the prior year period due to the weaker net working capital development. Let me now come to a topic that has caught your attention in the past weeks and months [indiscernible] margin. We view this as an important topic and, obviously, we would like to avoid potential misperceptions. So let us shed some light on this and you can see that on the chart. The illustration on the left gives you an idea of where our gross margin is originating from. As you can see, a share of only about 5% of our combined front and back margin is dependent on reaching annual sales targets that we've agreed on with our suppliers. About 14% of our combined front and back margin relates to marketing campaigns and other supplier contributions, which by nature are short in duration and are typically cashed in after just a couple of weeks. Most importantly, the vast majority, namely 81%, comes from either general front margin gains or fixed purchase conditions in the back margin. Neither depends on meeting specific annual sales target. But most of the fixed purchase conditions are cashed in on a quarterly basis, some are cashed in only on an annual basis. In the backup of this presentation, you can also find an example how variable purchase conditions are treated accounting wise. What I would like you to keep in mind is that we have good grip on our business and sufficient visibility when it comes to our margin targets. Speaking of targets, let's now move on to our outlook for the remainder of the year. We have seen rising EBITDA and EBIT in the second quarter and have already recovered a large part of our Q1 setback. We have another 6 months demanding ahead of us but remain confident that we will be able to achieve our targets. For the full year 2017-'18, we expect a slight increase in sales on a year-on-year comparison supported by all segments. 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. Please keep in mind that our outlook is adjusted for currency effects as well as portfolio changes. Let me now give you an update on the building blocks for the last 2 quarters. You might recall that the additional cost savings that we have identified refer to reduced administrative expenses at various holding entities in the magnitude of EUR 30 million. In addition, there are several additional drivers to support our EBIT development in Q3 and Q4. Firstly, we expect our restructuring efforts in Russia and Sweden to continue having a positive impact. The same accounts for redcoon, where we will enjoy the benefits of the restructuring and ultimate closing of the German operations. In addition, we expect positive contributions from this summer's FIFA World Cup in our Q3 figures. Finally, our measures and improvement initiatives in Italy will continue to take effect. The technical effect in Italy, which we saw in Q1 will be predominantly reversed in Q4. As mentioned before, our headroom is still lower compared to the beginning of the financial year. However, we have initiated necessary measures to close the gap to our full year expectations. With this outlook, I would like to conclude my presentation. Thank you, everyone, for your attention. I would now like to hand over to the operator to open the lines for your questions.
[Operator Instructions] The first question comes from the line of Fabienne Caron of Kepler Cheuvreux.
I have got three questions. The first one on the management change in Germany. If you please -- the guy responsible for Services & Solutions left as well. Can you confirm and explain why? And if you could as well explain why you are not happy with development of the Saturn brands and what is really happening there? The second question would be regarding Kellerhals and the standstill situation. Can you confirm that in theory, you could strike a fiscal deal with the family without having to buy the stakes, [one has] nothing to do with the other? And the last point would be, Pieter, if you look at the underlying performance in Germany, so if you clean from the VAT campaign, the stock valuation, redcoon, are you happy with the performance in the second quarter?
Good morning, Fabienne. Happy to answer, obviously, all your questions. Let's first talk about the German situation in terms of management. Yes, the 2 responsible people for both Saturn and for Services & Solutions left and they left because we were not happy with the performance of their respective areas. And being not happy does not mean, and you know that, Saturn is not the restructuring case. I compare it more with an old campaign that Avis and Hertz once had in the United States, where Avis was #2 and Hertz was #1, and Avis made a famous campaign where they said we're #2, so we try harder. And we believe in line with the advertising campaign that Saturn used during Christmas, where they said, Saturn, you can do more. We believe that Saturn can do more. We believe that we can be even quicker in implementing Services & Solutions. So from that point of view, both with Saturn and with Services & Solutions, we believe that we can do significantly better than we have done over the last couple of months. Again, which does not mean that it's in any way an unprofitable business or it doesn't mean in any way, as I said before, that the Saturn brand as a brand as such is under discussion in Germany. The second point, just -- I am not sure whether I understand you correct, but of course, we can make any adjustments to the structures in the company, MediaMarktSaturn, if we agree as shareholders and, of course, making decisions to optimize the fiscal structure within MediaMarktSaturn can be completely unrelated to buying the stake of Mr. Kellerhals or the family of Mr. Kellerhals still being part of the shareholders of MediaMarktSaturn. So there is no direct relationship. If that's at least what you mean, but otherwise you have to clarify.
That's what I meant.
All right. And the third, but last topic. If you take out the fact that we have the inventory valuation, the VAT campaign that we didn't do anymore, Saturn absolutely, extremely happy with the performance. MediaMarkt has been -- MediaMarkt has been performing over the last couple of years in a very aggressive, very focused way with a clear new positioning. And with regard to the other 2 main elements, Saturn and Services & Solutions, I already made the statement that we believe that we can achieve more than we have done over the last couple of quarters.
The next question comes from the line of Cedric Lecasble of Raymond James.
I have three questions, if I may. So first one related to your online [distribution], you explained that [indiscernible] conduction of the VAT campaign at Saturn had a big impact on this. Could you provide us with the online sales development in Germany maybe excluding this impact? And what the online figure would have been globally excluding this impact? And should we expect an acceleration or deceleration in the next quarters? The second point is on the phasing of certain number of negatives or at least negatives in the past, which could turn more neutral or positive. Maybe you can help us a little bit with the phasing of Italy and give us some color on the restructuring entities in terms of earnings contribution going forward? And the last one is on -- is more technical. Maybe for Mark on inventory evaluation, temporary swings and trade payables, there seems to be some technical issues on working capital, I'm not sure I fully understood.
Cedric, thank you. Let me first make sure because Sebastian said to me, I just want to make sure that the last question on Saturn was answered correctly. He mentioned that I said in my first sentence, I was happy with Saturn. Of course, and I think I corrected it, but of course, I am happy with MediaMarkt, and I think Saturn has room for improvement. Just to make sure that Fabienne got the answer right and there is no misunderstanding about that. On your questions, Cedric, on the online business, if you take out the impact of the not doing the VAT campaign and you take out the drop in online sales we see through our pure-play because we are stopping the activity of redcoon, you see a 12% plus in the remaining of the online business. So that's sort of the cleaned up impact of not doing the VAT campaign and redcoon and that's what we have communicated. We don't have -- we don't communicate specific figures per country on the online development, but as the overall figure, where obviously, Germany is by far the more significant part. So that's a good indication where Germany is heading also. On the phasing of the negatives of the past, that can become more neutral, mainly Italy. Italy is a double-digit million figure that we missed as we communicated in the first quarter that will be corrected partially in the third and mainly in the fourth quarter. And overall, the restructuring entity, Italy was not one of the 4 troubled countries, but we were not happy with the performance. We changed the management team last year, as you know, at least 3 out of 4, and we see significant improvement including market [ share gains ] In Italy again. So I'm confident that also without this shift, we will see significant improvement in Italy in this year already. I hand over to Mark for your last question.
Maybe, Pieter, if I may, just on Russia, Sweden and the other challenging countries. What kind of phasing can we have and do you confirm that these countries you might find some solutions and they won't [go] anymore in '19?
Sure. The -- so if you had the 4 original restructuring entities, redcoon is now history. Turkey just very briefly is on a very good track and it was profitable last year, and we see continuation of that trend both sales wise and profitability wise. Sweden and Russia are both countries where we said we are in the middle of 2 things, first of all restructuring and improving the operational result and that is happening and will be visible in both countries this year. And second of all, we're looking in both countries for partnerships for solutions to become either leaders or leavers. And it could be, of course, combined because leaving does not mean closing the door. You know we announced that we're in discussion with M.video and that discussion continues. In Sweden, at the moment, we're still looking for the right partner and be focused on the restructuring to improve the operational results.
And Mark, maybe on the technical working capital issues?
Absolutely, looking at the net working capital development after having reported a negative development in Q1, for sure, we've focused both on selling the stock and on optimizing our technical terms on the net working -- which haven't influenced on the net working capital development. The technical effect in Q2, which was a weekday constellation -- a positive weekday constellation, we talked about that, that supported the strong positive development. And I think it's fair and important to say that only a part of that was by operational development and an important part was also by this weekday constellation, which will run out over the next quarters and, therefore, we have to deliver more over the next quarters. As we said, measures are implemented and will be taken over the next quarter so that we can confirm that we will head to our guidance being positive on the net working capital development overall.
Okay, if I may, what was the one-off and what was the underlying improvement?
See that's the...
When you said -- you talk to the weekday and you said only part of this was underlying and that a big part was one-off. Can you quantify it?
Yes, the weekday effect or the positive effect there was a low triple-digit million number.
Out of which most was one-off? We should understand it like that?
Important part of it, yes.
The next question comes from the line of Kiranjot Grewal of BAML.
Could you give us a bit more color on where your central cost savings will be coming from in H2? And just coming back on point of the loss-making regions, could you give us a number of how many regions or countries are currently loss making? And potentially, if you could give us a figure on where these losses sit right now versus where they were a year ago?
The central cost savings, if you mean the part of the program that we discussed as a sort of an additional measure after Q1, they are as you say all central cost savings. They spread out over the headquarters both in the countries and in Aktiengesellschaft, and as we communicated before, they are roughly split between half of them being projects that we either postpone, start later or move into another period or set up differently, so we can save something there and EUR 15 million of additional cost savings where we either postpone or we don't hire or we can -- we postpone campaigns or try to just save anything anywhere in any way possible. Again, it's important for me to say we have carefully selected those projects and the costs. So none of the costs and none of the projects are related to anything that has strategic relevance. So we are not stopping any of the IT development on online, on mobile, on CRM. That all continues. We've just been looking at the phasing and possibility to just make some safety buffer to make sure we hit the cost-saving target that we have formulated after Q1.
All right. I mean, so then we should be assuming that these costs are into this year, the savings, and next year, the underlying costs will move back up EUR 30 million year-on-year?
Well, we have a fixed budget already, of course, for the projects for next year, and we will definitely not put the projects that we may put on hold then on top of that, so that will be just shifting into the future. It will not mean that we will spend EUR 15 million more on top of what we have budgeted now for next year. It will -- so it will not be on top of that. Some of it will come back, and we will hire some people, but then it will be included in the budget that we will present later this year.
Okay. And on the loss-making regions?
Well, the loss-making countries that we talked about, we are seeing progress both in Sweden and in Russia. In terms of the losses, we are trying to get as close to breakeven as possible. So there, the restructuring is on track. And I don't think if you add all the countries and the regions together, we have any regions that as a total are loss making. So there is no loss-making regions. There is just a number of countries that we've identified and communicated in the past. On Italy, I already mentioned that we see there good progress, both in terms of sales, we're gaining market share again, and we expect a significant increase in terms of operational profitability compared to last year.
Okay. And you're not able to give us a figure on how the losses have changed year-on-year are you?
Not on a country-specific basis, but on track and making sure that we get as close to breakeven as possible in the real restructuring countries, Sweden and in Russia. And in the other countries, we hope and we have planned -- as you know, we have budgeted for operational improvement basically in all countries. And we see that also the countries we had trouble in last year, the Netherlands is improving well based on onetime -- on one side also, they're no longer hit by the bankruptcy of the telco provider, but also based on operational basis. So with the operational progress in all the countries, we're quite satisfied at the moment and we see that in line with the expectations as Mark has presented before.
The next question comes from the line of Amy Curry of Morgan Stanley.
Two related questions for me, please. Number one, could you split out the -- on Slide 17, there you gave us the 81% figure for front margin and fixed purchase conditions. Could you split that between front margin and back margin, please? And then second, what exactly are fixed purchase conditions?
Overall we can say that, and we have discussed it, that there is always the shift between front and back margin over time. We have seen the shift more to the back margin side, that is true. But there is no split we can give on that because that's very related to the different supplier relations we have. So that's one thing. What is in the fixed part? So the 81% and the 14% we were talking about. So the 14% is what we said everything what is negotiated and decided with the suppliers on marketing campaigns, on contributions to sell out product and special promotions that is fixed and normally is cashed in very, very regular and soon after everything has taken place, so after a couple of weeks. The 81%, which is as we said, a mix of front and fixed purchased conditions, which you would call back margins, are very different things. It's for sure buying price reductions and everything what is related to the relationship and the sales development we plan with our suppliers. You should realize that everything what we normally negotiate with suppliers is discussed, what we plan for tomorrow. So how we would like to develop. So therefore, they're fixed conditions, how the work is realized between suppliers and us in our stores.
If I can add one thing to it just to hope to clarify some of the confusion we had over the last couple of months. There is a difference between front and back margin on the one side and fixed and variable conditions on the other side. And I think some of the confusion was that there was sort of a question whether all back margin is variable and all front margin is fixed. And what Mark explained just is that is not the case because only like 5% of all our conditions are variable and a significant higher part is so-called back margin because it is not immediately deducted from the invoice so to speak. But those are completely unrelated topics, and I think that's what caused a lot of the confusion over the last couple of weeks, and we try to resolve that in all the one-on-one discussions, but I'm hoping it's now clearer for everybody.
The next question comes from the line of Warwick Okines of Deutsche Bank.
I was wondering if I could ask about the positive effects from revaluation of inventories that you talked about. If I am understanding this correctly, then this helped to offset the OpEx in Q2. How big was the change in millions euros year-on-year? And are all of these sellout -- sell-off bonuses are related to sales made within the quarter or do they relate to COGS booked in the previous quarters?
So with the second part of your question, we have said that this re-effect we were referring to account for about 50%. I think that's on that point. And secondly, what is the difference or positive effect from the inventory evaluation to get that right? So what we have done over time, we have rendered the estimation of the parameters for the allocation of the sellout bonuses more precisely. So we know now or we know better now which part of that is a part of that when we sell it so that we can book for it, so when goods sold. And because we have more precise information, we have seen that we were slightly too conservative on that and that money is already in the house you can say and, therefore, we book for it, which is necessary -- which we have to and, therefore, that rendered that positive effect from the difference in valuation out of the sellout bonuses.
And if it is -- is that done within the quarter? Or is that relating to previous sales -- sales that you may have previously booked in prior quarters?
Note that on this stock we have in our -- we have sold and if the stock was bought before, but it's focused on the sales we have done in that quarter.
And plus it was important, Warwick, because it's one other small step to make sure we allocate and help solving the confusion we have in terms of back and front margin and to get as much as the result in the quarter when we actually have the result and to try to reduce the dependency on September figures. So we see it really as another little step to get as much as the results as right as they possibly can be. I know we discussed it a number of times in past with a lot of you.
The next question comes from the line of Christian Bruns of equinet Bank.
Yes, Christian Bruns speaking. I have a follow-up question on the CTA agreement you're trying to found or -- and to bring METRO shares in this contract trust agreement. Would this be a long-term solution for your METRO shares? Or how do you see this?
Let's say, it would be a longer-term solution. So if we would decide that, which is not done yet to be very clear, so we are evaluating if we can do that and should do that on the basis of the actual development. So if we would do that, yes, it would be a longer-term development because we would put the shares into that CTA and it's possible to restructure it again. So take them out and sell them and even the CTA can decide that. But yes, you are right, let's call it, reaction time is longer as if it would -- if we just keep the shares on our balance sheet. So -- but it's not a change in any strategy, let's put it that way.
Okay. And my follow-up on Russia. What could be an outcome here? Is it clear that you are negotiating about participation in the combined entity also? Or could it also be a clear-cut divestment?
But still as we communicated it, that we're talking about what I call a back-to-back view. M.video taking over our Russian operations. And as part of the deal, us investing in M.video. So that is the deal we've been talking about and that's what we communicated.
We now take our last question from Volker Bosse of Baader Bank.
While you provided answers, two remaining questions, first on the retail alliance. Have you already started to negotiate with further members and you stated you expect a financial impact from 2019 on. Could we expect this financial impact primarily on the procurement cost side or are other benefits you expect to kick in? And finally, would be interested to get a trading update. How did the April run and the first weeks of May, to get an indication would be helpful?
Let's start with the last one, Volker, because that's the easy one. Everybody is laughing here now, if you could see us. They say, yes, of course, we will at length talk about that but, I guess, you know the answer to that question. We cannot and we will not communicate too much on that. On the retail alliance, on quite the contrary, there I'm very happy to communicate a lot. We have kept this as a well-kept secret to be honest. So I'm very happy that there was no discussion about it. It was actually a lot of you asking over the last couple of months, so when will you make the next step with Fnac Darty? And I think this is a very important next step with the relationship -- in the relationship with Fnac Darty. And as you can imagine, it took quite some time to get this cleared from a legal point of view, making sure that we are completely aligned with all the legal requirements that if you own a company for 24.3%, what can you do and what can you not do. And we have not communicated so far either with the suppliers or with further members because we wanted to announce it as we did 2 days ago. But it's interesting because we have now had a lot of comments from journalists and journalists are helping us because journalists are now calling actually potential future members and ask them whether they would want to become a member. So I will be an interested reader in the newspapers over the next couple of days to see what our competitors answered. And then I will decide whether I will give them a call, yes or no. So yes, it needs to be an open alliance. We want it to be in open alliance. We want to include other members not just in the purchasing area, but we've done more or less the same with the innovation part. I know it seemed different as the purchasing part, but in the innovation area, we are seeing that we have to work together also. We work together with LiDL and with Kaufland on our innovation activities as an example. Other retailers will follow and now with Fnac Darty, they will also join the innovation program we have and that's not just innovation as an alibi, that is innovation because we really believe that technology changes will be more or less the same for all retailers. And not every retailer can do that on his or her own. So we need to join forces and that's the whole idea of the retail alliance. It's not just about a little bit better purchasing, it is about joining forces in those area where it makes sense to be at eye level to an Amazon on the competitor side, to an Apple and a Samsung on the supplier side and to also do positive things in terms of developing new services and using technology also to the benefit of customers. So that's the core idea of the retail alliance and that's what we have now started. We will get all the operational things going over the next couple of months. So we believe that in late summer or early autumn, we can actually be operational and start then also seeing the first financial benefits coming out of it.
I head back to Sebastian Kauffmann for closing remarks.
Ladies and gentlemen, this concludes today's result call. Thank you very much for your time and your questions. In case you have any follow-ups, please feel free to reach out to us. Everyone have a great summer. Thanks and bye-bye.