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Edited Transcript of DPEU.L earnings conference call or presentation 11-Sep-19 8:30am GMT

Half Year 2019 DP Eurasia NV Earnings Call

London Sep 11, 2019 (Thomson StreetEvents) -- Edited Transcript of DP Eurasia NV earnings conference call or presentation Wednesday, September 11, 2019 at 8:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Aslan Saranga

DP Eurasia N.V. - CEO, Head of Leadership & Executive Director

* Neval Korucu Alpagut

DP Eurasia N.V. - CFO

* Selim Kender

DP Eurasia N.V. - Chief Strategy Officer & Head of IR

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Conference Call Participants

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* Lucy Sharma

Liberum Capital Limited - Executive

* Nikolay Kovalev

VTB Capital, Research Division - Equities Analyst

* Wayne Mervyn Brown

Liberum Capital Limited, Research Division - Research Analyst

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Presentation

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Aslan Saranga, DP Eurasia N.V. - CEO, Head of Leadership & Executive Director [1]

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Thanks for coming, everybody. Good morning. Welcome to our 2019 interim result presentation. My name is Aslan. I'm the CEO of DP Eurasia. I have my colleague, Selim. He's the Chief Strategy Officer. Today, we are going to make the presentation for the interim results.

We are pleased to report another strong and resilient set of results for the first half of 2019, and I would like to a little bit speak about highlights. Both Turkey and Russia had a solid top line growth driven by our stores additions and like-for-like growth, accompanied by increase in EBITDA. Our system sales has increased 27%, revenues are up 22%, and this has been translated to 15% increase our -- in our EBITDA that's brought up to TRY 47 million.

Turkish operation has successfully increased its like-for-like from 2.5%. As you will remember, we had a slow start to the beginning of the year. And now, like-for-like, as of half one, has come up to 8% in Turkey. And in Russia, our like-for-like growth is 5%. But on the other hand, I would like you -- I would like to remind you, last [2] years , our like-for-like in Russia was 30%. And we are competing to FIFA World Cup last year in Russia, which was quite strong short, but we are still keeping our guidance of high single digit for the year 2019 in Russia.

Like-for-like is driven, as you know, with our online delivery sales, and this is growing very strong and healthily. Our online share has increased 8 percentage points compared to last year, which is bringing us to 68%.

DP Eurasia achieved solid, strong store growths in the period with 64 stores opening in the last 12 months. And that's bringing us to total number to 736 stores. Now our target is to be 200 stores in Russia in a very short period of time, and we are -- we want to be 800 stores as a group in DP Eurasia.

Innovation is the core of our business. It's the strategic driver for -- of our strong performance. We are continuously innovating in product and innovation. Every time I come here, every 6 months, I'm talking about new things going on in the company. And this period, we are entering with a very exciting innovation.

Now I would like to talk about -- little bit about Dürümos. Dürümos means wrapped in Turkish. Wrap is a very big market in Turkey. There are thousands of wrap shops, and we thought that will --- that product could be very complementary to our pizza product. We have been testing it in the last 3 months. We have seen very good results, 15% product mix, extra like-for-like on the tested areas. And we have launched the product this week. This week, it's in all of our stores in Turkey.

We believe it will be -- it will bring extra sales, especially to this area of business. And the price point is -- will be around $1.5, which is very important to launch such kind of products, especially in this difficult macroeconomic situation in Turkey. And also in Turkey, we have started price segmentation in order to manage the price increases more delicately, in order not to hurt the customers who are looking for good value. And these are some of the reasons why our like-for-like has increased in Turkey.

As you will remember, we have large GPS Tracker in the beginning of the year because the inflation is high, and the costs are rising in Turkey, and we need to come up with this kind of innovations. And that innovation worked very well for us. It increased the labor efficiency, our orders per delivery has increased, and stores has better delivery time, which is improving our customer experience.

In Russia, we are continuously coming up with new promotions, new campaigns to grow the market in Russia. One of them is the one that we are going to start this next week is mix-and-match promotion with RUB 180. This is a very exciting price point, not only for the pizza business, also a quick service restaurant business. And I believe, with the RUB 180, you are able to buy more pizzas, different side items. And I think that will drive a lot of sales for our business. Also, we have launched pineapple pizza, a new dessert pizza, and that was -- which has been received enthusiastically by our customers in Russia.

I already mentioned that in Turkey, our like-for-like is 8% from a lower base in the beginning of the year. And still, like-for-like is driven by our online growth in online channels, which is 24% in Turkey. Our main strategy in Turkey in the last one -- in this difficult macroeconomic situation is to -- was to keep our margins, and we did that. And we are using different methods like I showed you, the new innovations, new price points, new price segmentations in order to increase our average check price and in order to preserve our margin.

In Russia, it's 5% compared to high like-for-like in the previous years. And again, driven by the growth in online channel, 17%, and apps are the leading category. Apps are the fastest-growing channels in -- both in Turkey and Russia.

Share of online ordering growing healthily. Online delivery system sales, as a share of delivery system sales reached 68%, 8 percentage points higher than last year. In Turkey, it grew by -- to 62%, and in Russia, our online delivery has come up to 79%. In a very short period of time, we are targeting to be 800 stores. In the last 12 months, we have opened 64 stores in Russia and Turkey, 19 of them was opened in Turkey, 45 of them were opened in Russia. We are keeping our guidance of 65 to 90 stores for the year of 2019. And we have a strong pipeline of stores for the half 2.

Now, I think, this is one of the important part of our -- my presentation. Russia update. As you know, our -- we are a growth company, and Russia is the important part of our business. But before I start the update, I would like to give the framework where we have been in Russia and where we are now. In the last 3 years, our Russian business has been one of the most successful business in the Domino's world. We have grown the Russian business 8x in the last 3 years from [RUB] 76 million to RUB 465 million despite increasing competition, and we are continuously improving our EBITDA in Russia. Pizza market is growing rapidly in Russia, which is supportive of our business in terms of pizza eating habits. In the last 12 months, we have opened 45 stores in Russia. We are keeping our guidance for Russia. We will open 40 to 60 stores for this year in Russia, and our franchise stores and in the last 2 years, we have been growing with the franchisees a lot. Our franchise stores now 86 -- we have 86 stores now. Right now, 46% of our system in Russia is franchise stores. We see healthy ramp-ups in the region stores -- in the stores -- in the Greater Moscowian regions, and these stores like-for-like will be in the bucket -- like-for-like bucket next year in 2020.

We are continuously growing and investing in Russia. Our second dough production facility opened in Rostov, which is above Moscow in -- to serve Voronezh, Rostov and Krasnodar. That facility will decrease the transportation cost of the regional stores and improve the store economy. It took us 2 to 3 years to develop highly effective strategy for Greater Moscow franchisee, and we had been very successful there.

Now, unfortunately, we started opening stores in regions. Unfortunately, franchisees' expectations were not managed very well this year in the stores in the region, and there were some miscommunications. And we had some communication problems with our franchisees. Therefore, we have decided to change our franchise strategy in the regions for Russia. We will acquire approximately 15 stores from franchisees to corporate. Our target will be to improve the store economies of these stores in the ramp-up period, and from now on, we will be very careful on growing franchise stores in the regions. We will award only one store to the new franchisees for the period of 6 months, and we will decide whether to open more stores with them. We have very successful franchisees in Greater Moscow. We will incentivize them. We will incentivize our successful franchisees to open more stores in the region. We will go on opening some corporate stores in this -- in the areas where we are operating in the regions. As I mentioned earlier, we'll get much more efficiencies from the supply chain system. And we will have more tailored and focused local store market in the regions, and we'll invest on more operational overhead. These are the main things that we are [counting] and I believe in the very near future, we will see very nice ramp-ups in the regional stores in Moscow. We are also reviewing our aggregator strategy. We are already -- our digital share is 79% in Moscow. We believe we are in a healthy point right now. And I think, we believe it's the time to start working with aggregators as we are working in Turkey, which will bring us extra like-for-like. We are renewing our beverage agreement, which will be good for our company.

So I mean, to sum up, our Russian business has come to a new level. As the CEO of the company, I'm spending a lot of time in Russia with my team in the field, and we had been, in the beginning, a startup company. Now we are more developed. We are on a certain level. We have franchisees and corporate stores. So we are reorganizing our Russian operation for more successful growth in Russia. And as you know, our CEO left a couple of months ago, and our CEO search is still going on. And we'll have -- we are working on it.

With this, I would like to pass to Selim for financial results.

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Selim Kender, DP Eurasia N.V. - Chief Strategy Officer & Head of IR [2]

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Hello, everyone. Let's dive into the financials where we had another strong half year. But before we do that, I would just like to remind you that at DP Eurasia, we adopted the new accounting standard, IFRS 16 as of January 1, 2019, applying the modified respective method -- retrospective method. What that means is that we did not restate results for prior to January 1, 2019. So our results for the first half of 2018 do not include IFRS 16. Therefore, all financial data that I'm going to talk about right now, like adjusted EBITDA, cash conversions, net debt, et cetera, are going to be given for the first half of 2019, excluding the impact of IFRS 16, so that you can compare the performance in the first half of 2019 versus the first half of 2018.

We had healthy system sales growth at 26% coming from both, like-for-like growth in the same stores as well as the expansion of the estate. We're continuing to run a hybrid store network, where we were operating both corporate and franchise stores. This is skewing towards the franchise side. As of June 30, 68% of our estate is franchise stores, that's an increase of 5 percentage points from 12 months ago, which is normal for a system our size. We've had 64 additions to the estate over the last 12 months.

In terms of EBITDA, we grew by 15%, reaching TRY 46 million EBITDA in the first half of 2019. We had a slight margin drop for the overall group number that was mainly due to, first, the Turkish-Russia mix effect. As you know, Russia is becoming a bigger part of our group as time goes by. And we also had a slight decrease in the Russian margin. Cash conversion has been strong. We are keeping tight controls on CapEx, and with the improvements in EBITDA, we've been able to increase our cash conversion from 17% to 36%. Just a reminder here for our cash conversion definition, it's adjusted EBITDA minus CapEx divided by adjusted EBITDA. Adjusted EBITDA, of course, excluding IFRS 16, as I've previously pointed out.

Turkish system sales is up 11%, including Azerbaijan and Georgia. We added 17 stores in Turkey over the last 12 months. It's coming mainly from the franchisee network and as such, we had a 3 percentage point increase in our franchise mix in Turkey as well. Now 3/4 of our Turkish stores are franchise stores. Going forward, this is expected to increase further, as we will be adding stores mainly through the franchisee network. But where we see opportunity, we'll not shy away from opening corporate stores either. EBITDA grew by 13% to TRY 41 million. The good news here is that despite the volatility that we've been experiencing in the Turkish macro scene over the past 12 months, we've been -- not only been able to manage to hold -- preserve our margins, but we've improved above 0.2 percentage points over the last 12 months.

Cash conversion is reflective of our emphasis on CapEx. It increased from 43% to 54%. And overall, CapEx fell by a couple of million Turkish lira in the first half this year.

In Russia, we've experienced solid system sales growth. Sales grew by 63%, which in Turkish lira terms, more than 30% in Russian ruble terms. We had 45 openings year-on-year. The franchisee development is ongoing. We've reached 86 stores, so half the -- almost half the estate in Russia right now is franchised. We expect this to even grow further in the coming years as we develop the system in Russia. Our expectation for this mix is to be similar to what we have currently in Turkey when Russia reaches Turkish store numbers. EBITDA -- Russian EBITDA grew by 17% from TRY 7.4 million to TRY 8.6 million. We had a slight margin decrease due to the lower like-for-like growth in Russia. This was mainly due to our years of averaging 30% like-for-like in Greater Moscow, so the stores are quite developed there and increased competition in Moscow from a retail store point-of-view. Our expectation is still for the Russia margins to converge with those of Turkey's over the medium term. CapEx, again, we have a slight decrease in CapEx in Russia in Turkish lira terms as well, which is reflective of our emphasis -- the recent emphasis on opening franchise stores.

Recapping the balance sheet, we have a conservative leverage ratio. Cash conversion has increased to 36%. As Russia develops, we expect the overall number to catch up with the Turkey-only numbers with respect to cash flow generation. Our leverage ratio is still at the comfortable and prudent 1.9x EBITDA. We had some increase in net debt compared to the end of 2018. There were 2 main reasons for this, one was the Russian ruble appreciated against the Turkish lira. As you know, we have a Russian ruble facility in Russia, so, therefore, there was [translation] effect that came into effect. And then secondly, from a seasonality point-of-view, our half-year interim -- half year debt is generally higher in Turkey compared to the end of the year because of the Ramadan effect. As you know, again this year, we had month of Ramadan at the end of the first half. However, looking at our gross bank borrowings, we don't have any more hard currency bank debt exposures. Late last year this time, 2/3 of our bank debts were denominated in Euros. Right now, we have completely refinanced that and currently, 2/3 of our bank debt is denominated in Russian rubles, and the remaining 1/3 is denominated in Turkish lira.

Let's look into the future. Management guidance, we are not changing anything from what we announced at the beginning of the year over the medium term. In Turkey, high single-digit like-for-like growth. In Russia, this year, high single. Next year, we're expecting to go back up to double digits as the regional stores come into the like-for-like bucket as well, as Aslan explained. Store openings, Turkey, 25 to 30 stores. Predominantly, franchise; opportunistically, corporate. Russia, 40 to 60. We expect an even mix between corporate and franchise. The potential we see in our markets is still there. In Turkey, we think we can reach 900 stores for full potential. In Russia, that number is 1,500. So which is a total of 2,400 stores. We are getting closer by the day to our 800 stores, but still, there is a -- there is an opportunity to triple -- more than triple the store base. Still, we're not revising our CapEx figures either. Turkey is TRY 30 million in CapEx. And Russia, RUB 450 million for this year.

With that, I would like to hand it over to Aslan for his conclusion remarks.

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Aslan Saranga, DP Eurasia N.V. - CEO, Head of Leadership & Executive Director [3]

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Thank you, Selim. Now as a conclusion, we are happy with the -- we are pleased with our half year 2019 performance. And if we sum up, we have 27% system sales top line increase, 15% increase in EBITDA. We have opened 64 stores in the last 12 months. Online delivery share come up to 68%, 8 percentage points higher than last year. And we don't have any -- no change to business fundamentals. And we expect EBITDA to be in line with the expectations. So thanks all listening to us. And I would like to open the floor for the questions, and now we will get questions for the telephones.

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Questions and Answers

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Wayne Mervyn Brown, Liberum Capital Limited, Research Division - Research Analyst [1]

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Wayne Brown from Liberum. Can you just talk about price segmentation? You mentioned that earlier in Turkey, I presume that has something to do with entry prices, products, delivery promotions and how you're bundling those promotions to highlight to the customer what the value is, but just to give us a little bit more flavor, if the price segmentation, how are you approaching that?

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Aslan Saranga, DP Eurasia N.V. - CEO, Head of Leadership & Executive Director [2]

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I mean, Wayne, we start with this [inflationary] environment in Turkey. We knew that by just increasing the [average] check price, it will not be -- we will not be successful. So we started working with a consultant by the beginning of the year. And what we tried to find out, because the customer is really stressed, there is a demand. But there is a demand for good value. So we with -- while making research with our customers, we find the specific price points. And to that specific price points, we come up with new innovations, as I mentioned to wrap, Dürümos, the price is TRY 9.9, which is like $1.5. And we come up with the promotions for that price point. If you will check our Internet site, you will see how it is done. That worked very well for us. We started to get market share from the competition, and the other thing was price segmentation. We analyzed the stores according to the competitive environment, according to the demography, according to the income levels, and we looked at what was -- how these stores were affected from the previous price increases. With this, we segmented our stores to the 6 levels, and we also -- that started by, I think, by May, and we see quite good results on that also.

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Wayne Mervyn Brown, Liberum Capital Limited, Research Division - Research Analyst [3]

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And then, clearly, you -- it's -- in that inflation environment, you still managed to get an improvement in EBITDA margins in Turkey. So can you talk to us about how you've been able to deliver this investment that you're talking about in price segmentation, obviously value products, the value impacts on orders? And then also consequently on the supply chain side, what work has been done in leveraging the scale of the business, buying in greater volumes et cetera, and how that's also helped to deliver the margin flow-through?

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Aslan Saranga, DP Eurasia N.V. - CEO, Head of Leadership & Executive Director [4]

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Yes, I mean, that was partly on the pricing side. On the supply chain side, since we are the biggest buyers in the pizza category, our food inflation, for example, in Turkey, it is about 20%. Our inflation is around 10%. That has also helped to improve our margins. On the other hand was the GPS Tracker that I told you. The minimum salary wages increased by 26% in Turkey by working on with GPS Tracker, by focusing on delivery times, we have improved our -- we were able to be efficient in the labor side of the business. So overall, helped us to keep our margins in Turkey.

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Wayne Mervyn Brown, Liberum Capital Limited, Research Division - Research Analyst [5]

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Any opportunity to give us numbers around that? (inaudible) the orders per delivery driver or orders per hour.

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Aslan Saranga, DP Eurasia N.V. - CEO, Head of Leadership & Executive Director [6]

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It was 1.8 before with the GPS. It comes to 1 driver per, this is the number of orders, drivers taking. Now it's come to 2.02.

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Wayne Mervyn Brown, Liberum Capital Limited, Research Division - Research Analyst [7]

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And then in Russia, how many franchisees are there? Are you clearly going to be buying 15 back? Can you just talk to me about their financial position? Are these 15 the stressed ones or ones -- or that -- or just maybe underperforming?

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Aslan Saranga, DP Eurasia N.V. - CEO, Head of Leadership & Executive Director [8]

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As I've said, I mean, I don't see because I have been doing this business for a very long time. If you look at the orders and the profitability, it was more or less -- was according to our expectations. As I mentioned earlier, the expectations and the communication were not done. That was our mistake. So we are going to buy, like 4 franchise groups, yes.

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Wayne Mervyn Brown, Liberum Capital Limited, Research Division - Research Analyst [9]

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4 or 5.

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Aslan Saranga, DP Eurasia N.V. - CEO, Head of Leadership & Executive Director [10]

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With 15 stores, and I can tell you that 2 out of 4 is in breakeven, stores are in breakeven. And 12 of them are losing money. And with the friends from Domino's International, we have people in the field. I mean, we are analyzing in very detail the stores to make the ramp-up and to fix the store economics. So these were the most of the, how do you say, fast-rated franchisees. In the Greater Moscow side, we don't have any problems with our franchisee. Actually, their like-for-like is higher than our corporate stores, if you break it down. So psychological part of the problem is solved as far as I am concerned.

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Unidentified Analyst, [11]

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First of all, on the adjusted EBITDA for Russia, I might have missed that, but what was the reason that, that came down?

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Aslan Saranga, DP Eurasia N.V. - CEO, Head of Leadership & Executive Director [12]

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It came down, I think, the adjusted EBITDA in Russia.

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Selim Kender, DP Eurasia N.V. - Chief Strategy Officer & Head of IR [13]

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Yes, our like-for-like came down in Russia. As a result, that hit our EBITDA margin as well. The reason that like-for-like in Russia came down is over the past 4 years, we've been constantly averaging 30% like-for-like. So that came down a bit. So there is less payment. Stores get to a certain level and that is difficult to get those outside sales growth continuing into perpetuity, that's one reason. But there is also increased competition in Moscow -- in Greater Moscow. We lead the market there. We're #1 in Greater Moscow, but our 2 competitors have been also opening stores, which in the medium term, we also see there's a plus because the silver lining, I guess, is there are now more pizzas of -- there are now more Domino's stores serving the same map, but also, more pizza stores savings -- serving the same map. But our sales are still increasing, albeit that's at a lower clip, which means that the pizza market is growing.

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Unidentified Analyst, [14]

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Okay. So at this point in time, how sensitive is the Russia EBITDA margin to the -- like how many percentage points in the same-store sales growth would cause the -- sort of a similar margin contraction?

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Selim Kender, DP Eurasia N.V. - Chief Strategy Officer & Head of IR [15]

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Going into the year, late 2018, our guidance for Moscow was low double digit. We missed that by about 5 percentage points, which resulted in the slight contraction.

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Unidentified Analyst, [16]

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And out of the stores in Russia, what proportion would be considered to be mature in terms of margins versus other nonprofitable?

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Selim Kender, DP Eurasia N.V. - Chief Strategy Officer & Head of IR [17]

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Yes. I mean, look, we have 187 stores in Russia, about half of those are in the same-store basket. And the regions where we are -- where we've entered recently in 2018, which are showing good ramp-up are not even included in the same-store because they are too young. So they will move into the same-store basket starting in 2020. That's going to behoove our overall like-for-like figures as well.

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Unidentified Analyst, [18]

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Okay. Is it 2 years?

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Selim Kender, DP Eurasia N.V. - Chief Strategy Officer & Head of IR [19]

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Just -- we do it by vintage. So it doesn't roll during the year. So basically, we're in 2019. So stores that have been opened prior to December 31, 2017, are in the same-store basket. So on average, the youngest ones are, on average 18 months old.

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Lucy Sharma, Liberum Capital Limited - Executive [20]

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Lucy Sharma from Liberum. Have you had to adjust the Russian cost base and because of that lower like-for-like coming through, can you -- you're talking about sort of the EBITDA margin in time getting to the same level as Turkey when it gets the store numbers. What's going to happen in the more shorter term and the fact that the like-for-like haven't come through as strong as you hoped, have you -- can you just clarify it?

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Aslan Saranga, DP Eurasia N.V. - CEO, Head of Leadership & Executive Director [21]

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I think this will have an effect on this year's EBITDA margins. So what we saw in the first half is probably going to reflect the second half as well. But look, we -- I mean, we are still in -- we're still growing both from a store point and system sales point of view. We increased the estate from 140 to 187 over the last 12 months, so that's over 35% store growth -- close to 25% store growth. Sales have increased by 60%. So in terms of streamlining, yes, we can take that into effect. But we'd more do is use what we have in the headquarters in a more effective way because we're growing at...

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Neval Korucu Alpagut, DP Eurasia N.V. - CFO [22]

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Yes, I would like to also add. We knew that from our experience, regions for the first 2 years' regional growth will be not -- will be challenging. So while we did the business plan, actually the numbers in the business plan that we put for the regions is not a big gap -- there's not a big gap. As I mentioned earlier, smart psychology and the mind setup of the franchisees.

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Lucy Sharma, Liberum Capital Limited - Executive [23]

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And then following on from that sideshow, from the franchisees, you said it's -- it's a more distant chance of franchisees that you're buying in. I mean, is that because they want to get out or the fact that actually, you feel that you want to understand the economics better?

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Neval Korucu Alpagut, DP Eurasia N.V. - CFO [24]

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Both, both, both. We thought because both while we grew in Moscow and Moscow region, we first opened corporate stores, made it profitable and then started franchising. We didn't do that in regions. So then we evaluate all the situation instead of losing management time. We thought of buying it back and fixing it and go on franchising with good franchisees and showing the historical earnings through the franchisees.

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Lucy Sharma, Liberum Capital Limited - Executive [25]

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So how long do you think you will keep those stores if we refranchise them out? How long does it take?

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Neval Korucu Alpagut, DP Eurasia N.V. - CFO [26]

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I mean, I don't have a time limit. I can still keep these stores as long as they are profitable. And if I find the right place, I might sell them. But the idea is to have profitable stores. So either we can open new stores, and if I see strategically there's a need to sell some of these stores, we can sell, but I will not make, right now, a decision for it.

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Unidentified Analyst, [27]

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Sorry, just one last question on Turkey. The first 2 months are obviously quite sluggish, the payroll plus 2%, plus 2.5%. The like-for-like in Turkey for the half of 7.7%, but that the math would tell you that for the other 4 months, may be 10%. But what was the exit run rate that you are seeing and potentially, how should we think about Q3 for the new innovations et cetera?

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Selim Kender, DP Eurasia N.V. - Chief Strategy Officer & Head of IR [28]

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Look, you do the math right when we announced the full year's few months back. First 2 months were at 2.5%. We were already seeing encouraging signs in March where we were up to high single digits getting that average to 8%. Now, it's obvious that the second quarter April, May, June were in double-digit territory. So that was the exit from the first half. But look, it's still a volatile, sensitive, macro consumer situation in Turkey. So we're guiding for high single digit, and we were confident that we'll get there, but it's too early to say that things are rosy once again in Turkey from a macro perspective. We're living it and learning it as we go along it.

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Unidentified Analyst, [29]

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Could you talk a little about the gross margin, please? The real pressure came in cost of food, nonfood and transportation costs. Is there a mix issue in there? And how is that allowed to progress going forward?

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Selim Kender, DP Eurasia N.V. - Chief Strategy Officer & Head of IR [30]

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There is a mix issue. Obviously, our Turkish operations are more profitable from a food point of view, especially because of our big economies of scale. In Russia, we are not at the scale, obviously. When compared to Turkey, we're subscale. So that's some of the reasons in the -- playing the numbers.

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Unidentified Analyst, [31]

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On the marketing costs, a relative consistent percent of sales over that period, is that likely to go up given the increased competition?

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Aslan Saranga, DP Eurasia N.V. - CEO, Head of Leadership & Executive Director [32]

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We would expect those to stay roughly at the same level as a percentage of system sales.

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Unidentified Analyst, [33]

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So for the new stores in Russia, are you targeting the Great Moscow area or -- and also before this plate was like half-half franchisees and corporate stores, how you see that this year, next year?

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Neval Korucu Alpagut, DP Eurasia N.V. - CFO [34]

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I can give the answer. After we started to have -- we had plans to open more stores in the region. But after we started to have problems with the franchising regions, we stopped growing in the regions. Right now, most of the growth is coming from Greater Moscow. And -- but we are keeping our guidance. We see that we can open 40 to 60 stores by the end of year that we have a strong pipeline. And by the end of the year, seeing our ramp-up, we can start to open some more corporate stores in the region, but the percentages that Selim gave, half corporate, half franchise, we are keeping that guidance also.

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Unidentified Analyst, [35]

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And now, on the food aggregators that we are -- when you'll start working with them? And do you require any specific changes in stores or how you see that?

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Neval Korucu Alpagut, DP Eurasia N.V. - CFO [36]

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Well, we are on the very last stage of our negotiations. We can start anytime. There will not be any change in the stores. From our experience, there should be some extra like-for-like coming. We feel quite comfortable on that because 79% of our sales is in digital. And we made -- we talked the contract, and we agreed on a contract that will not affect our margins. So I think it's going to be good for the business because last 1 or 2 years, aggregator business has grown rapidly in Russia.

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Unidentified Analyst, [37]

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Just a couple of follow-up questions. Could you maybe talk a bit about -- more about this franchise communication issues. Was this them expecting the higher profitability earlier on? And how -- like what is the management thinking in terms of communicating best of the expectations to other franchisees in order -- because this kind of turnover and it's probably one of the biggest costs which you have to buy back the stores, think about repurposing them as corporate stores and this generally just disrupts prices. So can you just explain a little bit about that?

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Neval Korucu Alpagut, DP Eurasia N.V. - CFO [38]

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I mean, the miscommunication was because, at that time, our paybacks in the Greater Moscow was 1.5 years, 2 years. And we have come to a new territory in Russia. Russia is a very big country. And people thought that the same momentum will go on in the regions, which was not the case. And I think we had to be more -- we should be more cautious about this new situation. I mean, looking at our -- all our volume and things like that, buying them, corporate store, it's not a really big financial problem. It can turn out to be even better because our profitability in corporate stores are much higher than franchise stores. So I don't see that there's a big risk. So that's -- I mean, we should be more careful on preparing the franchise business plan. And we should be on more conservative side. We did not do that. That was our mistake.

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Unidentified Analyst, [39]

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And, I think, Domino's last Friday was -- [clearly] was thinking about the way that they assessed their performance is looking at franchise performance and franchise demand. Have you -- can you give us a sense of what the -- I don't know if you record the backlog or pent up demand for franchises in Turkey and Russia, maybe how many people are applying for the sort of whether this is going on an upward trend or whether you sort of think the demand for franchisees is sort of plateauing in Turkey?

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Neval Korucu Alpagut, DP Eurasia N.V. - CFO [40]

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Well, the demand for franchising in Turkey is very constant, not changing a lot for previous -- from our experience. So that -- this is the performance we have been performing like the last 7, 8 years. So I don't foresee any surprises there. Of course, after the problems that happened in Russia, the demand for franchising went down. But we see that's coming back because [without] really demand problem in the Greater Moscow because the paybacks are still there. People are making money. And in the region part, probably we will grow more corporate stores at this pace, so that the company is growing. So to your question, the short answer in the regional part is, there were -- there was less demand after the problems were in the maintenance. Now we can take...

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Selim Kender, DP Eurasia N.V. - Chief Strategy Officer & Head of IR [41]

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Switch to the phone, I guess.

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Operator [42]

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(Operator Instructions) And our first question is from Nikolay Kovalev from VTB Capital.

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Nikolay Kovalev, VTB Capital, Research Division - Equities Analyst [43]

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I have a couple of questions also on your franchising schemes, of course, for Russia. Can you estimate to us for -- this acquisition of 15 franchise restaurants, how much CapEx would you need? And also given this issues with franchises, whether you see any implications on the medium-term rollout, not speaking about this year, which you clarified, but for the next couple of years? And also more strategic question, so we see in Russia, like Dodo is quite aggressive on the franchise scheme, and they offer more appealing terms to partners. So given your current stance and competition stance, do you see that your terms might be revised downwards in Russia?

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Aslan Saranga, DP Eurasia N.V. - CEO, Head of Leadership & Executive Director [44]

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Okay, thanks for the question. So for your first question, negotiations are still going on, but numbers, I mean, so I cannot comment on the exact numbers of sales price. But I can tell you that it's not very off from what store development cost. So we -- one store costs around $150,000. So you can make the calculation from there. I mean, look, I mean I have been in this business for a long time. I mean, this problem seems like this happened from time to time and you learn from your mistakes and we are a company that we really learn our mistakes. And at the end of the day, my philosophy on this business, everything starts, franchisee should make money and should be happy so that's our mission. So we -- as a company, we need to do a better job. Now the franchise -- we started with a corporate business. We were more focused on corporate growth. Now, we need to be a better company on managing franchise expectations. And I think we have a lot of knowhow internationally, and locally and from our Turkish business to do that. I believe we will do this. But the other part, Russian market is very weak. I mean still -- I mean, there is a -- competition is growing, but still, when you look at the market, it's much more underpenetrated compared to other countries in the world. So my answer to you, yes, I'm quite confident that we'll be able to deliver the numbers that we made in the business plan. I think, there is a huge opportunity in Russia. And I'm very excited about it. Regarding Dodo, I mean, I like competition. Competition is good. Dodo has a different business model. We have a different business model. And we believe there is a room for all of us. As Selim said, market is growing very rapidly and there is a place. And I believe our franchise conditions right now are compatible to Dodo's franchise conditions. If you look at the store economics in Moscow and the fees that they are paying, I don't feel like we have a problem there. So that's how I feel about it. Does that answer your question?

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Nikolay Kovalev, VTB Capital, Research Division - Equities Analyst [45]

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Just to clarify, so you don't see much of the -- and you don't plan to revise your terms in Russia even in the future, if you would plan to accelerate the rollout through the franchising scheme?

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Aslan Saranga, DP Eurasia N.V. - CEO, Head of Leadership & Executive Director [46]

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No, I don't.

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Nikolay Kovalev, VTB Capital, Research Division - Equities Analyst [47]

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Okay. And also, I wanted to clarify, maybe with Selim later or on the call. Out of your 130 franchising outlets in Russia, how much -- how many located in Moscow Greater (sic) [Greater Moscow] area and how many are in the regions right now?

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Aslan Saranga, DP Eurasia N.V. - CEO, Head of Leadership & Executive Director [48]

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I couldn't understand.

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Selim Kender, DP Eurasia N.V. - Chief Strategy Officer & Head of IR [49]

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Can you repeat your question? Having some difficulty hearing you.

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Nikolay Kovalev, VTB Capital, Research Division - Equities Analyst [50]

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Yes. Just like wanted to clarify out of your franchise based in Russia, at the moment of 130 restaurants, how many are located in Greater Moscow area and how many are located in Russian regions?

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Selim Kender, DP Eurasia N.V. - Chief Strategy Officer & Head of IR [51]

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Sure. I mean, we have 187 stores in total in Russia, about 150 of those are in Greater Moscow. We have 86 franchise stores currently, about 26 of those are in the regions, so which means 60 are in Greater Moscow, around 60.

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Operator [52]

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(Operator Instructions) And there seem to be no further questions. I will hand the word back to the speakers for any final comments.

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Aslan Saranga, DP Eurasia N.V. - CEO, Head of Leadership & Executive Director [53]

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Yes. Thanks for listening to us and coming here.

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Operator [54]

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This now concludes our conference call. Thank you all for attending. You may now disconnect your lines.