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Edited Transcript of DIXY.MZ earnings conference call or presentation 27-Apr-17 11:00am GMT

Thomson Reuters StreetEvents

Q1 2017 Dixy Group PAO Earnings Call (IFRS)

Sep 5, 2017 (Thomson StreetEvents) -- Edited Transcript of Dixy Group PAO earnings conference call or presentation Thursday, April 27, 2017 at 11:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Denis Davydov

DIXY Group PAO - IR Director

* Sergey Belyakov

DIXY Group PAO - Deputy Chairman and General Director

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Conference Call Participants

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* Brady Martin

Citi - Analyst

* Nikolay Kovalev

VTB Capital - Analyst

* Maryia Berasneva

Morgan Stanley - Analyst

* Marat Ibragimov

BCS - Analyst

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Presentation

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Operator [1]

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Good day and welcome to the DIXY Group's First Quarter 2017 Operational and Financial Results Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Denis Davydov. Please go ahead.

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Denis Davydov, DIXY Group PAO - IR Director [2]

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Good afternoon, everybody. Thank you for joining us with our conference call, which is devoted to the publication of our first quarter operational and financial results. Today, we will be presenting you this information together with Sergey Belyakov, our General Director; (inaudible), who is our Finance Director; and our Investor Relations team; myself, Denis Davydov, as Investor Relations Director; and Irina Karacharskova, who is our Investor Relations Manager. We'll have a short introductory speech and then we will pass the floor to the Q&A as usual. So, now I would ask Sergey Belyakov to start. Sergey?

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Sergey Belyakov, DIXY Group PAO - Deputy Chairman and General Director [3]

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Thank you, Denis. Good afternoon, everyone. In Q1, DIXY continues its business turnaround bringing more efficiency in preparations and working on better cost control, higher price competitiveness and optimizing further assortment with strong focus on private labels.

We reassessed our store portfolio, closing non-performing stores and opening new stores solely in our core regions. As we told you earlier this year, our view on expansion on DIXY division has become predominantly project-oriented. Our opening plan for 2017 remains unchanged and we expect to open around 180 stores on the gross basis, mainly in the second half of the year.

Our like-for-like traffic and ticket in Q1 both were impacted by overall market weakness and intensifying competition. In those circumstances, we continue to work on improving our pricing offer and rethinking our promo approaches. We became more active in our communications with consumer, particularly via TV and the Internet. Our new marketing policy provides for greater focus on low pricing and attractive offers.

Meanwhile, with largest share of promo activities and further optimization of our pricing proposition, we saw our commercial margin under some pressure in the first quarter. Our new DIXY store concept, DIXY For Fresh, is being tested and gives us some encouraging results. We continue to improve our store operations. In the beginning of 2017, we're all about so called checklist systems in our DIXY stores. It is a dedicated tool, which helps us on one hand to track down the execution of major store improvements and innovation. On the other hand, this is an efficient tool to properly motivate the store personnel. It also helps us to unlock the weak areas of our store operations and fix them quickly by setting up balanced and timely targets.

Our strong focus on private label remains in place. In the first quarter of 2017, we launched 52 new SKUs under our own brands, while the share of own brands at DIXY revenue reached over 17%. As I already said, the operating leverage effect didn't help us in the first quarter; however, our major initiatives in cost controls and working capital optimization supported positive cash generation, which allowed us to pay back RUB1.8 billion of debt.

Our initiative on shrinkage reduction continues to play favorably in 2017. In the first quarter, shrinkage as a percentage of revenue declined further by 60 basis points, thanks to more efficient logistics and supply chain, as well as improved controls on the store level.

We also had good progress in staff expenses, which went down by [130] basis points as a percentage of revenue due to implementation of our new system for staff planning and flexible workload measurement. Operating lease expenses grew by 4% year-on-year, which can be explained by rental rates indexation, as well as store openings of 2016. At the same time, we observed the first positive outcomes from rent rates negotiation program and store base reassessment. Year-to-date, we have achieved savings in excess of RUB700 million.

In Q2, we are planning to concentrate on comprehensive reviewing of the assortment of the Company to support sales and to improve profitability of the business. I'm confident that the current management team of DIXY would be able to overcome the existing market challenges and to deliver successfully on sales growth. Having said that, I would like to open the floor for Q&A session.

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Denis Davydov, DIXY Group PAO - IR Director [4]

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Thank you, Sergey. We are ready now to take the questions from the line.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Brady Martin, Citi.

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Brady Martin, Citi - Analyst [2]

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A couple of questions from me. First on the gross margins, in your press release, you say that part of this gross margin decline year-on-year was due to the liquidation of delisted stocks. I am curious whether you can quantify how much that was in Q1. I assume this is more of a one-off in nature. You also mentioned in your opening remarks that you would do a review -- comprehensive assortment review in Q2. I assume we will see more such charges in Q2. Just trying to figure out how -- what's the magnitude of this and how long we're going to see these charges? That's first question. The second is just in terms of store closings. You were quite aggressive in closing stores in Q1. Just wondering how far along you are in this process of closing unprofitable stores? Did you complete that in Q1 or should we expect similar closings in Q2 or in the second half of this year? Thanks.

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Sergey Belyakov, DIXY Group PAO - Deputy Chairman and General Director [3]

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Thanks, Brady. I would start with the second question regarding store closures. This is the program which was adopted in Q4 last year and it was largely finished by the end of Q1 this year. So going forward, I don't expect that we will have as much closures as we had in Q1. However, we are quite pragmatic and depending on the sales results of particular stores and particular locations, we might still have some case by case store closures going forward. But again, if we speak about the program then it's massively finalized in Q1.

So speaking about your first question regarding gross margins, yes, indeed, we were affected by the liquidation of delisted stock. Let's say, based on our estimates, the effects can be as much as 1%. Going forward, I don't expect that there would be a similar impact on our gross margins first of all because in the first quarter this year, the gross margin was also quite heavily affected by the changes in the law on retail, which basically led us to the situation when the back margin was limited and we had quite a lot of stock accumulated in 2016 at a higher base price compared to what we're getting in 2017. So that's number one.

And number two is that this review of the assortment that we are undertaking, it's not as massive as we had in the beginning and in the middle of the last year when there was a major overhaul of the assortment. So now we are mostly focused on kind of filling in the gaps that we left from the previous process. That's why, as the result of this exercise, I do not expect that we will have a high accumulation of delisted stock. Thank you.

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Operator [4]

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(Operator Instructions) Nikolay Kovalev, VTB Capital.

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Nikolay Kovalev, VTB Capital - Analyst [5]

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Hi, I have two questions. The first one is on the gross margin. Can you comment if there was some negative impact on this results based on the actions of key competitors within the convenience format. And my second question is on salaries, I don't get precisely what happened so that you can optimize the salary so much on a year-on-year comparison. Can you comment on your actions?

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Sergey Belyakov, DIXY Group PAO - Deputy Chairman and General Director [6]

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Sure. Thanks, Nikolay for your questions. So speaking about gross margin, of course there is some effect from the competition. As you know, we have undertaken last year a massive price repositioning of DIXY versus our peers. So we've made quite a lot of investments in our prices and the intention is that we will continue doing it because based on the statistics that we are getting it on the market research, the customers continue to be extremely sensitive to prices and promo activities of all retailers. That's why some pricing pressure is generally being experienced by the retail industry and we have just to meet the challenges that are in the market. That's why some impact on the gross margin can be expected from lower pricing, that's for sure.

Regarding your second question on salaries, the explanation is that we have undertaken a major shift in terms of how we consider our operating expenses. So basically, we tried to move as much as possible from fixed-cost base to flexible-cost base and we have undertook the program on linking the salary expenses and the amount of hours that are being spent by our labor to a certain productivity target. And we've been rolling out this program throughout Q1 and it has already provided for quite significant improvements and results and we expect to benefit from it going forward. So basically, the key achievement is that we have managed to implement quite strict controls which are based on the productivity in our stores. Thank you.

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Nikolay Kovalev, VTB Capital - Analyst [7]

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It's clear. Just a follow-up. So, in just the salaries, if you take comparative metrics, I see optimization up to like 20%. Are there any downside risks that you see to in-store experience of clients or service level you see in the store from such a dramatic optimization?

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Sergey Belyakov, DIXY Group PAO - Deputy Chairman and General Director [8]

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I do not expect any negative outcomes as a result of this work, because we have changed not only our productivity targets of our staff, but we also introduced the new motivation system, which provides for best performing store center for our staff who reaches the KPIs that they have much better remuneration compared to what they have. That's why basically we get in the situation when people are being rewarded for their performance rather than for solely being in stores. That's it from my side.

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Operator [9]

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Maryia Berasneva, Morgan Stanley.

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Maryia Berasneva, Morgan Stanley - Analyst [10]

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My first question is on top-line trends. When I look at the top line I can see that it's -- the sales growth improved during the first quarter and the sales were down 1% on mid-March. Did the run rate continue to improve in April? And how do you expect the sales to evolve in Q2, Q3 and Q4? Given -- I just want to get a sense from you how you think about it, because the consensus is currently assuming 6.7% growth in revenues year-over-year for the full-year 2017, which is obviously a long way away from where the Q1 came in.

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Sergey Belyakov, DIXY Group PAO - Deputy Chairman and General Director [11]

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Thank you, Maryia. I would say that it depends how you view our sales because basically on a like-for-like basis that you see that the results are negative, and in Q2 the trend most likely will continue due to the effect on the high base and the extreme promo activity of the Company in 2016.

If we speak about absolute numbers and given the fact that we are currently quite low in terms of the store openings, then we definitely expect some improvement going through Q2 and in the second half of the year. That's why, for me and for the management team, at the time being, the major focus is on the improvement of the sales and we believe that there is quite a lot of potential to grow the sales through this additional effort on assortment optimization, and that's exactly what we're dealing with at the moment.

To provide any exact guidance on the how much growth we will be able to deliver going forward, I guess, it's a little bit premature due to the fact that the situation currently doesn't provide, let's say, very strict evidence or let's say a lot of statistics to support to use it, you know, I will be presenting. That's why I would refrain for the time being from providing the exact guidance, but clearly the aim of the management and the major task is to grow sales going forward on absolute basis.

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Maryia Berasneva, Morgan Stanley - Analyst [12]

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I hear you, but given that we are approaching the end of April, would you be able to say but at least in one way it has improved in April versus March? You don't have to give us specific numbers.

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Sergey Belyakov, DIXY Group PAO - Deputy Chairman and General Director [13]

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I can tell you that the hallmarks of April is that we already had Easter and we're approaching our May holidays and this should, kind of major holidays of April give us some comfort and some positive feeling about ourselves.

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Maryia Berasneva, Morgan Stanley - Analyst [14]

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I also would like to touch upon gross margin a little bit and I was hoping that you could maybe quantify for us -- now you said that the delisted stock was responsible for about 1% hit to gross margin, if I understood you correctly. You also mentioned higher share of promo price investments and adjustments in the supply agreements to new retail law as the other types of drag on the gross margin. So could you maybe break down how much each of them contributed to the decline in gross margin, if you have those figures?

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Sergey Belyakov, DIXY Group PAO - Deputy Chairman and General Director [15]

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Maryia, sorry, I just wanted to correct myself because when I was speaking about 1%, this includes all factors. So, that's the delisted stock together with the stipulations of the trade law. Now, to provide the exact breakdown honestly I would refrain from doing it at the time.

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Maryia Berasneva, Morgan Stanley - Analyst [16]

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But if we think about gross margin evolution going forward, if I hear you correctly, the price investments and promo is something that you would expect to continue to impact gross margin. But the delisted stock effect and the trade law effect would effectively be more of a one-off, if we think about the rest of the year.

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Sergey Belyakov, DIXY Group PAO - Deputy Chairman and General Director [17]

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Exactly. Moreover, I would like to add that we are not just trying to grow our share of promo and through this to have more kind of a -- losses in our gross margin, but we are trying to make our promos more smart. And by this I mean that we have much better blending and much more focus on our internal process on how we do a promo and let's say, it's better to forecast and better preparation for the promo. This leads to more efficient cooperation with our suppliers and to more efficient use of the marketing budget that they provide us, without sacrificing the gross margin of the Company. Okay?

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Maryia Berasneva, Morgan Stanley - Analyst [18]

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Clear. Just on the promo, would you be able to share us what percentage of sales is it currently at, as opposed to maybe the same time last year?

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Sergey Belyakov, DIXY Group PAO - Deputy Chairman and General Director [19]

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Let's say that we have provided some data in our presentation on general promo activity and Russian retail industry, which increased from 15% to 19%, 2016 over 2015. So we are kind of more or less in line in terms of the gross rates, but to expose the exact number of promo sales in our revenue mix, I would refrain. Let's say, with respect to the promo, we are not targeting to be above the market and to be above our major peers, but to match them and to offer the same level of attractive discounts and products to our consumers.

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Maryia Berasneva, Morgan Stanley - Analyst [20]

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So when we talk -- when we think about promo and we think that Magnit and X5 are between 25% to 30% of sales, what you're saying is, you're not looking to be miles off your key competitors, yes?

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Sergey Belyakov, DIXY Group PAO - Deputy Chairman and General Director [21]

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Exactly.

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Maryia Berasneva, Morgan Stanley - Analyst [22]

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And just to wrap up the discussion I guess on the profitability, would you say that the Q1 margins -- do you see them as a trough when you think about your financial planning for the rest of the year and what you have in your sort of models?

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Sergey Belyakov, DIXY Group PAO - Deputy Chairman and General Director [23]

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Maryia, I would want to say so, but as you understand it all depends on the sales trends. So let's say, we do have quite a lot of faith in the restructuring programs that we are running currently in that this would still have additional positive effects on our cost side. But to a very large extent the degree of the profitability of the Company will depend on how successful we are in terms of the growing of sales. But overall, I can tell that if our plans are fulfilled, then we should see better profitability going forward compared to Q1.

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Maryia Berasneva, Morgan Stanley - Analyst [24]

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And last question from me, I promise. Could you talk a little bit about how you think about management of balance sheet and where could the leverage go, going forward? And sort of what -- how comfortable do you feel with the current level? So, maybe that's a question for the CFO?

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Sergey Belyakov, DIXY Group PAO - Deputy Chairman and General Director [25]

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For the time being I will take this question as well. So I would say that our balance sheet, from my perspective, it looks quite conservative on absolute numbers because you know that we have annual retail sales of over RUB311 billion. Meanwhile, our total debt -- bank debt for the time being is just a little bit under RUB30 billion and including our financial it is RUB31 billion. So it doesn't look excessive on absolute numbers. However, if you take the financial ratios, such as total debt to EBITDA, then at the time being it's quite elevated and standing at 3.3 times. And of course this is quite discomforting for us, but I see that the major improvement in our financial leverage ratios should be coming through the improvement of the profitability of the Company rather than through the need of major reduction of debt.

However, I understand that the situation is quite precarious and that there are both positive and negative trends going on. That's why, the way the organization is managed, is it rely solely on the cash flow, which is generated either directly from the operations or from the improvement in working capital management. And we are very much focused on reducing the absolute amounts of debt as much as possible till the Company bounces off and starts to deliver better profitability. And I believe that the numbers speak for themselves. If I'm not mistaken, then since the beginning of the last year, we have managed to reduce our debt by approximately RUB4 billion.

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Maryia Berasneva, Morgan Stanley - Analyst [26]

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Well, I'll let my colleagues ask further questions and then maybe I'll come back with a couple follow-ups. Thank you.

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Operator [27]

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(Operator Instructions) Marat Ibragimov, BCS.

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Marat Ibragimov, BCS - Analyst [28]

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I have a first question on assortment policy. What's the focus of your policy in your assortment? As far as I understand, maybe I'm wrong, please correct me, but the previous management team was aggressively introducing the brands which generated higher margins for you. But they are not well known among customers, so that negatively affected the loyalty of customers, negatively affected the traffic, et cetera. So what's your policy on assortment? I understand that you are focusing on private labels, but besides that, what's the main goal of your policy in that respect?

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Sergey Belyakov, DIXY Group PAO - Deputy Chairman and General Director [29]

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Thank you, Marat. I would say that a classical discount model in Europe and anywhere in the world is based on the high share of private label and secondly on quite limited assortment, which is enough to cover the daily basic needs of the consumers. Which is still quite narrow, let's say, compared to conventional store format. This is exactly the strategy that we started implementing in 2016 and I guess with respect to (inaudible) some of the things that didn't work properly out is that we had too much of reductions or choose of the assortment in certain categories. So now we are trying to fix the problems through quite comprehensive reassessment of assortment and introduction of the brands that are valued by our customers. That's why I would say that generally the approach of the current management team is that we are not trying to manage the Company by (inaudible) -- try to build all of our decisions on the basis of the preferences and of the market conditions in Russia. That's why we will be giving enough brands and SKUs that are demanded by our customers in order to meet their daily requirements, but not more.

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Marat Ibragimov, BCS - Analyst [30]

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So to summarize, you are expanding your SKU range again -- back again, right?

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Sergey Belyakov, DIXY Group PAO - Deputy Chairman and General Director [31]

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No. That's exactly the point that I was trying to mildly make. We are not going into the expansion of the assortment, we rather speak about the quality of our assortment. So maybe we shall have not that particular brand, but another brand. But overall, we can confirm that we stay with the same strategy of having the limited assortment. And we're not going to see any drastic major expansion on the assortment going forward.

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Marat Ibragimov, BCS - Analyst [32]

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But you will shift your assortment towards the brands which are better known to customers, am I right?

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Sergey Belyakov, DIXY Group PAO - Deputy Chairman and General Director [33]

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Let's say, we will shift our assortment to meet the expectations of our consumers, whether this will be a brands or non-brands, it actually doesn't matter. We just need to deliver whatever brings the best quality for our customers at the most attractive price.

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Marat Ibragimov, BCS - Analyst [34]

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And another question, this is a follow-up on staff costs. I thought I understand you did not reduce employees per store -- the number of employees per store, but you reduced the remuneration schemes on average income per (inaudible) of your staff has declined by a quite significant number. So the question, once you implemented this new motivation scheme, how did the sales in each particular store be affected? Have you seen an increase in sales per employee in those stores where you introduced this new system?

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Sergey Belyakov, DIXY Group PAO - Deputy Chairman and General Director [35]

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Well, Marat, this is not correct to say that we reduced the remuneration of our store staff. And I give the answer to your question is very simple. We operate in highly competitive environment and that for sure if our people in our stores would have been getting less than that, they would naturally flow to some other company's [store], which is not happening to a major extent. That's why, I would rather say that it's not that we manage and keep the same number of -- the same headcount in our stores, but we manage it on so-called full-time employees basis. Which is calculated from the number of working hours spent in a particular store, because an employee in one store, then she can walk in another store and so on and so forth. So there is a lot of additions and deletions of the working hours depending on the day of the week and depending on a particular season. So all in all, again, I would like to reiterate that the new motivation system for our store staff, it provides much more incentives for growing sales and reducing the shrinkage compared to how it used to be. And secondly, we have become much more flexible and precise in terms of how we will keep the working hours to particular stores.

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Marat Ibragimov, BCS - Analyst [36]

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I see, but then after you have introduced this new system, what's the result on sales per employee if at all or something like that, have you seen any improvement in efficiency?

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Sergey Belyakov, DIXY Group PAO - Deputy Chairman and General Director [37]

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Of course, we see the improvement in efficiency and it is reflected in our P&L. And let's say, I would be hesitant to disclose the exact target, but for every employee, there is certain target of productivity. And productivity is measured by sales volumes against the number of hours spent at store.

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Operator [38]

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(Operator Instruction) Brady Martin, Citi.

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Brady Martin, Citi - Analyst [39]

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Yes, thanks for taking the second question. The question's on your rental costs. I mean, it's disturbingly high, I would say, right now, 8% of sales in Q1. And obviously part of this is due to your related to some stores that you closed. That apparently had some effect in the negative like-for-like. I'm just wondering, is there -- what's the underlying level of rental costs? I mean, where can this be by the end of this year or next year? Is this somewhere that you would expect to see significant improvement? Because if we just look at -- X5 also reported numbers today. I mean, their rental costs are high versus historical levels but still like much, much lower than yours, I mean almost half in terms of a percentage of sales.

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Sergey Belyakov, DIXY Group PAO - Deputy Chairman and General Director [40]

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Thanks, Brady. I guess the issue with rent cost is that they are effectively not a percentage of sales, but rather some fixed amounts. And the numbers that you see in percentages is basically the reflection of quite low numbers of the revenue that we had in Q1. And there are a few things that affect our rent costs. So number one is the share of rented space versus the space that we own. And you know that compared to our major peers, we have the higher share of the leased space, because we prefer not to invest in CapEx and acquisitions of the real estate at the same extent as some other companies do. So that's number one. That's why, naturally we would have higher costs per ruble of revenue.

And secondly, a lot of the agreements that they have certain clauses on indexation -- on the annual indexation of rents. And depending on the maturity of the store, some of the rent agreements they were based on the expectations of the inflation rates that were predominant a few years ago. And here I speak about 7%, 8% of ballpark. So this naturally contributes to the growth of rent expenses every year. We understand the issues and what the management is doing is that we have a comprehensive program for the review of the sales. So we permanently monitor the market, the rent rates which are available at the spaces offered for lease. And then, we have these negotiations [combined] with the landlords on adjusting the rent rates to the prevailing market conditions.

And as I mentioned, till the present time, since beginning of the year, we have been able to achieve the savings of RUB700 million. So going forward, we expect some additional, let's say, major savings to be achieved by the end of the year. And going forward it's a never-ending job that has to be performed by the management of the Company, because you cannot simply leave the rent expenses alone and not anticipate that they will grow naturally. That's why, all in all, the conclusion is very simple. So today, with the rent cost as a percentage of revenue, this is mostly the focus on the growth of revenue, because we believe that the current numbers are pretty low. And secondly, there is the implementation of the program on rent negotiation.

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Brady Martin, Citi - Analyst [41]

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So can you -- I'm not sure understand how you have RUB700 million in rental savings when your operating lease expenses -- I mean, they rose much faster than sales, but I guess faster than your selling space, right?

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Sergey Belyakov, DIXY Group PAO - Deputy Chairman and General Director [42]

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Yes. But when I'm speaking about RUB700 million, this is on an annualized basis. So that's number one. And number two, the growth of the lease expense is also explained by the growth of -- the number of stores. Because the more stores you have then it naturally grows and the effect -- the full effect that you see not exactly in the year when you open the stores, but normally the next year. Because if the store is opened in September, then you get, I would say, three or four months of rent and the next year you get the rent expense already for 12 months.

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Brady Martin, Citi - Analyst [43]

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Right. Maybe just one follow-up. The store closings you did, these 89 stores. I mean, how many of those were essentially just rent problems? I mean, where the rent was too high to make the store profitable? And how many of them were, I guess, other things besides rent?

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Sergey Belyakov, DIXY Group PAO - Deputy Chairman and General Director [44]

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Let's say, when considering store closings that we reviewed two major factors. One is the rent for that particular store and the possibility of the reduction of the rent rates. And secondly, the location itself. This is proxy to the sales of a particular store. At the time being, let's say, both of these factors are important because if you reduce the rent to quite low amounts under certain circumstances that a store can become profitable. And secondly, we also quite attentively look at what are the major impediments to sales in these particular store. It might be additional pricing support or assortment changes are required and we undertake this mitigation factor. So, let's say, before we take the decision on store closings, we explore all options that can be done in order to improve the performance of a particular store. But ultimately when we take the decision, mostly these are the two factors, the higher rent expenses and lower sales that contribute to the decision of closing a store. To give the exact breakdown, I guess it's quite difficult and again, this statistics doesn't say much because all decisions are being taken on a case by case basis with a very meticulous review.

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Operator [45]

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(Operator Instructions) Nikolay Kovalev, VTB Capital.

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Nikolay Kovalev, VTB Capital - Analyst [46]

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Hi. Yes, I have one follow-up on the working capital. When I look at your inventories, it went significantly down on year-on-year comparison in (inaudible). Can you comment what optimization steps you took for inventories? And also for payables, they is roughly the same year-on-year. So the question here is, is this sustainable or we should expect downside risks after amendments and your sales will be aligned? I mean, based on recent retail law?

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Sergey Belyakov, DIXY Group PAO - Deputy Chairman and General Director [47]

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Nikolay, regarding the inventory, there are two major factors that have impact on our inventory. On one hand, we have a special program and focus on the stock level of every -- set out for my category directors and for my supply chain management team in terms of what we have in our stores and at our warehouses and the service levels and the delivery schedules and so on and so forth. So this has contributed quite a lot to the improvement in the working capital and what you see in terms of inventory levels.

The second factor, which is very particular for Q1 2017, is the change in the law in retail. When the back margin was limited and the retail industry had extensive negotiations with suppliers on so-called back to front conversion of the margins. So now most of the discounts become on invoice and this naturally leads to the lower amounts of inventories booked on our accounts.

Regarding the payables, in fact, what I have is that for the end of Q1 2017, we had RUB25 billion and for the end of 2016. And I speak about the first quarter, we had RUB30 billion. That's why, in fact there was a reduction in payables, if we're looking in the same set of numbers. And this is also explained by the stipulations of the new law in retail when the deferred payment terms in certain categories were limited by the law and we have to adjust our supply agreements accordingly. All in all, I can say that, let's say, the negative impacts from lower payables, they have been offset by DIXY's better work with inventories. And secondly with receivables throughout the second half of 2016 and into beginning of 2017 as well. Thank you.

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Operator [48]

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(Operator Instructions) Maryia Bersaneva, Morgan Stanley.

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Maryia Berasneva, Morgan Stanley - Analyst [49]

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Thank you for taking the follow-ups. My first follow-up is actually also on the working capital. Even the changes you've talked us through from the retail law and some of your specific, probably, in terms of inventory review. Where do you expect the working capital to normalize? Is the first quarter quite representative for what we should take forward for the rest of the year in terms of the working capital base structure? And what contribution to operating cash flow would you expect from working capital for the full year? Because it was quite a big help in 2016 and I'm wondering how much of a help tailwind do you expect from it in 2017?

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Sergey Belyakov, DIXY Group PAO - Deputy Chairman and General Director [50]

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Maryia, I think that, first of all, the working capital position that we have at the time being, it is sustainable. So we do not expect any deterioration. And going forward, we would have an additional focus on how we manage our receivables and we also believe that there is still some potential in our inventories as well. To say that we have at the time being a clear figure that we can share in terms of the working capital release till the end of the year, I would of quite hesitant to say that. Thank you.

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Maryia Berasneva, Morgan Stanley - Analyst [51]

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But in terms of the -- well, broadly speaking, you would expect working capital to help operating cash flow? Because that's not necessarily the case for all the retailers this year, and is unusual for retail industry when working capital do not flow, but for your case, would you expect working capital to help your operating cash flow overall for the full year?

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Sergey Belyakov, DIXY Group PAO - Deputy Chairman and General Director [52]

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Of course, you're absolutely right that, from our perspective, working capital management is an important mitigation factor throughout the transition period and we still expect that it has some potential to support us through, let's say, the volatile period of -- the recovery of the profitability of the Company.

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Maryia Berasneva, Morgan Stanley - Analyst [53]

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A quick one. Would you be able to give us a figure for your on-shelf inflation in the Q1?

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Sergey Belyakov, DIXY Group PAO - Deputy Chairman and General Director [54]

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I can tell you that the on-shelf inflation that we have is lower than the official food inflation in Russia.

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Maryia Berasneva, Morgan Stanley - Analyst [55]

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All right, but is it positive or negative territory?

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Sergey Belyakov, DIXY Group PAO - Deputy Chairman and General Director [56]

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Let's say, Maryia, our IR team will follow-up on that.

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Maryia Berasneva, Morgan Stanley - Analyst [57]

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That's fine. And two quick ones on the costs. So firstly, how many of the stores already have the new system that you mentioned in place which helped you to optimize the staff costs in particular? You can give us percentage of your total store base (inaudible)

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Sergey Belyakov, DIXY Group PAO - Deputy Chairman and General Director [58]

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100%. It's implemented everywhere.

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Maryia Berasneva, Morgan Stanley - Analyst [59]

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Okay. So we shouldn't expect that to kind of -- any further improvements from where it stands today?

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Sergey Belyakov, DIXY Group PAO - Deputy Chairman and General Director [60]

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Well, that's a different question, because you asked whether we kind of rolled it out or not. So, yes, it is currently working at 100% of our stores, but it doesn't mean that all stores perform exactly up to the standards. So, we clearly see that, as always, there is a group of winners and there is a group of laggards. That's why, going forward, additional improvement it will be coming from the much closer look and focus on the group which is currently lagging.

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Maryia Berasneva, Morgan Stanley - Analyst [61]

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Is it a big group?

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Sergey Belyakov, DIXY Group PAO - Deputy Chairman and General Director [62]

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Let me put it this way, we started rolling out to a very large extent this system only in the beginning of Q1 and it continued throughout the period. That's why to say that Q1 is fully reflecting the benefits of the system would be premature. That's why I can tell you that going forward, we do anticipate that there would be additional efficiencies from the introduction of the system.

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Maryia Berasneva, Morgan Stanley - Analyst [63]

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And in terms of the rent costs, you've been talking about the campaign where you re-negotiate rents with the landlords, in sort of more systematic way this year. How many stores of all the targeted stores that you want to do that for, or are able to do it for, you have already completed negotiations at?

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Sergey Belyakov, DIXY Group PAO - Deputy Chairman and General Director [64]

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Maryia, this is an extremely difficult question, because, let's say, I would love to have endless of rent expenses if possible. And there is no particular target for our rent renegotiation team to extract certain economy from here and there. I mean, I speak about every single store, but they rather have a target in terms of the amount, they have a special motivation system to get to this target. And they can be going actually in several rounds of negotiations with the same landlords.

So even if the negotiations aren't successful, then it doesn't mean that they just simply drop the particular store from the list and never come to it. So they, a kind of permanently screening for the ways in order to make it in line with the market in terms of the rent rate. And then everything depends on how successful they are in the negotiations with a particular landlord. And if there are so many of them, because we do not have like one or two or 10 landlords providing the sites for us, then it varies to a very large degree depending on the (inaudible) for a particular landlord. That's it from my side.

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Maryia Berasneva, Morgan Stanley - Analyst [65]

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And then just on private labels, you've talked about the continuous focus on private label, growing it both in SKU terms and as a percentage of sales. Can you talk a little bit about the margins, that broadly, you are making private label and how do they compare to the Group overall? Are they -- is the rollout of private label accretive to margin or are the margins slightly lower for the private label product?

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Sergey Belyakov, DIXY Group PAO - Deputy Chairman and General Director [66]

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I would say that from my perspective, it wouldn't make any sense for retailers to engage in the programs of growing their private labels if it wasn't really accretive for it. Of course, the margins on the private label are better than you would expect on a brand.

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Operator [67]

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There are no further questions over the queue, so I would like to hand the call back to our host for any additional or closing remarks.

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Denis Davydov, DIXY Group PAO - IR Director [68]

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Thank you. I believe we would just thank you everybody for participating in our conference call and we'll close line with that. Thank you.

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Sergey Belyakov, DIXY Group PAO - Deputy Chairman and General Director [69]

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Thank you very much.

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Operator [70]

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Thank you. So ladies and gentlemen, that then concludes the DIXY Group first quarter 2017 operational and financial results conference call. Thank you for your participation. You may now disconnect.