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Edited Transcript of DSKY.MM earnings conference call or presentation 7-Nov-19 2:00pm GMT

Nine Months 2019 Detskiy Mir PAO Earnings Call

Nov 8, 2019 (Thomson StreetEvents) -- Edited Transcript of Detskiy Mir PAO earnings conference call or presentation Thursday, November 7, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Anna S. Garmanova

Public Joint Stock Company Detsky Mir - CFO & Member of Management Board

* Sergey Levitsky

Public Joint Stock Company Detsky Mir - Head of IR

* Vladimir Sanasarovich Chirakhov

Public Joint Stock Company Detsky Mir - Chairman of the Management Board, CEO & Executive Director

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Conference Call Participants

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* Artur Galimov

Sova Capital Limited, Research Division - Analyst

* Kirill Panarin

Renaissance Capital, Research Division - Equity Analyst

* Nikolay Kovalev

VTB Capital, Research Division - Equities Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, welcome to the Detsky Mir Group Discussion on the 9 months 2019 Unaudited IFRS Financial Results on the 7th of November 2019. (Operator Instructions)

Before we start, we would like to draw your attention to the fact that some of the information during this call contains projections or other forward-looking statements regarding future events or the future financial performance objectives of the group. You can identify forward-looking statements by terms such as expects, believes, anticipates, estimates, intends, will, could, may or might, the negative of such terms or similar expressions. We wish to caution you that these statements are only predictions and that actual events or results may differ materially. We do not intend to update these statements to reflect events and circumstances occurring after today's date or to reflect the occurrence of unanticipated events.

Many factors could cause the actual results to differ materially from those contained in our projections or forward-looking statements, including, among others, deteriorating economic and credit conditions; our competitive environment; risks associated with operating in Russia; rapid technological and market change in our industries; as well as many other risks specifically related to Detsky Mir Group and its operations.

May I now hand you over to Vladimir Chirakhov, CEO, who will start the meeting today. Please go ahead.

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Vladimir Sanasarovich Chirakhov, Public Joint Stock Company Detsky Mir - Chairman of the Management Board, CEO & Executive Director [2]

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Good evening. My name is Vladimir Chirakhov. With our team, Anna Garmanova, Head of Finance; and Sergey Levitsky, Head of IR, we will do a small presentation and share with you some financial results over the first 9 months 2019.

So I will start presentation from Page #3. And my colleagues will continue with presentation.

So 9 months of 2019. What I would say, first one about store openings. We are going to open not less than 100 stores this year. We already opened 45 by the end of September. Nowadays, for example, we opened about 50 stores. But as usual, we are going to open the biggest part, not less than 55 stores, during the last quarter. Because -- in this case, because it is much more profitable for us. We increased EBITDA with stores which we opened during the last quarter. So again, we are going to open not less than 100 new stores in 2019, including Belarus.

About like-for-like. I think you already know, during the third quarter, our like-for-like was more than 10%, and this is the best result among all public retailers in Russia. So for the first 9 months, our like-for-like was more than 8% and the total revenue growth for the first 9 months was more than 17%. And I believe it's a good result.

About profitability. Growth of our adjusted EBITDA is even higher than the growth of our revenue. So adjusted EBITDA margin in percentage even increased. And again, I am satisfied with our profitability. Even more, at the same time we opened 100 new stores, I mean, we invest money, we pay dividends to our shareholders. You already know that we are going to pay dividends by the end of this year. And at the same time, we keep quite low pressure, net debt-to-EBITDA even more by the end of this year.

Net debt to EBITDA ratio, we are going even decrease in comparison to previous year. Anna Garmanova will describe in details later.

In the bottom line, what I want to say, we have one of the highest growth in Russian market of online business. It was about 70% for the first 9 months. We are going to keep such growth of our online business. In September, the share of our online in total sales was about 12%. For example, in October, it was about 14%. So it's growing very, very well.

And just to provide some more words about our online business, how it's growing, what we finished during the first 9 months. What we already did, we started fast delivery. We have 2 kinds of fast deliveries. It is next day, which we provide in 80% of our stores in Russia. We have same-day delivery, which we have finished throughout already. During the first 9 months, we already finished rollout of our new website, mobile website, it increased conversion to orders. It increased our revenue primarily. We already launched our online business in Kazakhstan. It helps us to increase not only online revenue, but also in [our stores] of course, because 80% of sales are made by click-and-collect. So people comes to our stores to collect their orders and usually buy something else, increase in 30% of the check.

We started -- we finished already our mobile application. The first part with our loyalty program. And this Friday, we are going to launch our full feature mobile application. On Friday, 2% of our customers could get this mobile application. And by the end of the year, we are going to finish full rollout of our full mobile application with the possibility to buy goods also. And again, it will help us to increase online revenue.

And the last one, what I want to say about our pilot project marketplace. We already started this project. We are satisfied with the results. Nowadays, we have just 5,000 SKUs in our marketplace. We already see our sales. And our mid-term goal is to increase the number of suppliers, number of SKUs, I suppose, by the end of the year. Over next year, we will have about 150 suppliers with 150,000 SKUs in our fashion marketplace.

So thank you. Anna Garmanova will continue the presentation with details on the financials.

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Anna S. Garmanova, Public Joint Stock Company Detsky Mir - CFO & Member of Management Board [3]

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Thank you. Dear colleagues, let's move to the Page #5 and discuss our financial results. First of all some words about top line growth of our company. As Vladimir has mentioned before, we were satisfied, our like-for-like for the Q3, it was 10.5% for the Russia segment and 10.7% was both segment for Russia and Kazakhstan. Especially, we would like to pay your attention that we had the highest like-for-like number of the ticket for the last 2 years, more than 9%. And also, we have positive like-for-like average ticket paid of plus 1%.

Due to the growth of our revenue, Q3 was 19%. And for the full 9 month period, it was 17% and they were about RUB 90 billion in absolute.

In part of our e-commerce, the share of our e-commerce revenue the total revenue of our company, in Q3, it was more than 10%. And for the full nine months period, it was over 10%. Especially, I would like to pay your attention that the share of e-commerce revenue for October, for example, in the total revenue is more than 14%. And so every month, we increase the share of our online revenue in the total revenue of the company.

That's why we changed our guidance. And now, in [the term], we think that the share of our e-commerce revenue of the total revenue could be about 70% of the total revenue of the full company.

Let's move to the next slide. Page #6, some words about our stability. In Q3, we continue to invest in our retail price. Due to it, we decrease our gross margin. In Q3, the decrease it was about 2%. For the full 9 months period, it was about 1%. But in absolute, our gross margin has increased by 13% and was around RUB 29 billion.

From the other side, we continued to decrease our G&A cost as a percent of the revenue. And we decreased it more than [3.1%.] The main drivers of such a decrease was for the rent and our payroll cost. Due to it and from the one side, we significantly improve the growth of our revenue. From the other side, we decreased our G&A costs. And due to it, the growth of our adjusted EBITDA for the 9-month period was 18% without effects from IFRS 16. And in total, we improved our EBITDA margin by 10 bps.

Now let's move to the next slide, Page #7. Some words about our cash flow. We continue to keep very high level of cash conversions and ROIC. And at the right part of the slide, you can see that in the 9-month period, we significantly improved our operating cash flow.

Our operating cash flow for the 9-month period of this year is RUB 3.9 billion compared with the fact -- figures for the last year, it was only minus RUB 300 million. The main effects which influenced to such significant increase in our operating cash flow was decrease in investment in our working capital due to improved inventory turnover and also normalized receivable turnover also.

In part of the CapEx, for the 9-month period [of this year] , we were to RUB 2.5 billion in CapEx, including RUB 400 million for buying equipment for new DCs. And also, we have invested about RUB 1 billion for opening a new store in the center of Moscow.

Let's move to the next slide, Page #8. As Vladimir has mentioned before, we decreased our debt to the end of the 9-month period. And what that means? It means that -- let me remind you that to the end of 2018, our debt was RUB 18 billion and the difference between our net debt to the end of 2017 and 2018 was RUB 8 billion.

The main causes which -- such increase in our debt in the last year was an investment in the new DC, in working capital and other one-off costs. This first 2 quarters of this year, we kept the difference between our debt in 2018 and 2019, about RUB 8 billion. But for the Q3 of this year, we decreased the difference from RUB 8 billion to RUB 4 billion. And now we're solidly sure that to the end of this year, our net debt will be normalized. And as Vladimir has mentioned before, our leverage to the end of this year will be lower than we had 1 year ago.

Now let's move to the next slide, Page #9. Our net profit for the 9-month period, accordance with IFRS standards, is RUB 3.7 billion. As you know, our Board of Direct approved our recommendations to pay it as a dividend. So we are solidly sure that our shareholders will confirm such recommendations. And in the end of December of this year, we will pay our interim dividend in the amount of RUB 3.7 billion. And in this case, the total growth of dividend payment for this year will be about 15%. And we'll continue to pay all our net profit as a dividend, as we do -- as we've done during the last 5 years.

Let's move to the next slide, Page #10. In part of our guidance, we confirm all our guidance, which were announced before. And additionally, as I have mentioned before, I now believe that the share of online revenues, the total revenue of the company in the mid-term will be about 30%.

That's all. We are ready to try to answer your question.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question is from Nikolay Kovalev of VTB Capital.

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Nikolay Kovalev, VTB Capital, Research Division - Equities Analyst [2]

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Yes. Congratulations on the very good results. I basically have a couple of questions on the gross margin level. We saw a quite impressive dynamics in the private label category as a percent of sales. And I was wondering where do you see the private label going to strategically, maybe in the medium term? And also, if it's not -- if it was not for such a rapid expansion of private label and direct import, do you have estimate, where would be your gross margin for the reported quarter?

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Vladimir Sanasarovich Chirakhov, Public Joint Stock Company Detsky Mir - Chairman of the Management Board, CEO & Executive Director [3]

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Thank you for your question. About gross margin, as we told to you usually, for us, it's not so important question how big gross margin we have. The most important question, how big is our EBITDA margin. So we promise to our shareholders to keep at least double digit EBITDA. It means at least 10%. Sometimes, when we see that we have even higher EBITDA margin, we can invest more money into attraction, traffic attraction, in other words, invest money into lower prices. So again, the main goal is to keep double digit EBITDA.

Concerning the private brands. Our strategy in our private brands is that we -- private brands help us to solve 2 questions. The first one is to provide the lowest price in category. And we see it in quite many different categories like in toys, like in fashion goods. And the second goal, the second reason for using private brands is to increase profitability in the category. And that's why we increased share of our private brands from year-to-year.

What is our strategy? It depends on the category. For example, in fashion goods, we already have 70%, 80% share of our private brands, and we believe it's enough. So we are going to keep this level of our private brands in this category. For example, in toys, it's growing quite fast. And we are going to continue growth of share, our private brands, in such categories as toys, new brands and ours.

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Nikolay Kovalev, VTB Capital, Research Division - Equities Analyst [4]

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But for these categories, like, I don't see it's going to, of course, 70% to 80%. But where would you like it to be for private label?

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Vladimir Sanasarovich Chirakhov, Public Joint Stock Company Detsky Mir - Chairman of the Management Board, CEO & Executive Director [5]

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Again, in toy category, we are going to increase it. I think it could be even 50%. Could it be 70% or more? I don't know, because we do it step by step. We increase assortment of our private brands. We check how it was, how profitability is, which has demand. And afterwards, we do next step. In toys, for example, step-by-step, we increase our private brands, which is our strategy.

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Operator [6]

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The next question is from Kirill Panarin of Renaissance Capital.

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Kirill Panarin, Renaissance Capital, Research Division - Equity Analyst [7]

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I guess, 2 questions, please. So first of all, also on price investments increase in the third quarter. Can you talk about the current pricing environment and the gross margin outlook for the fourth quarter? Do you expect the pace of margin decline to moderate versus Q3 or remain the same or increase? That's the first question. And then second, on the online business, you mentioned you expect now online to account for 30% of sales in the medium term. What do you think it means for the company's profitability and cash generation profile? That's it.

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Anna S. Garmanova, Public Joint Stock Company Detsky Mir - CFO & Member of Management Board [8]

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Okay. Thank you for your questions. Let's start with -- from one. In part of our price investment, you're absolutely right that our price investment in Q3 was higher than we had in Q1 or Q2, for example. But it's not new situation for us. Because you know that, as Vladimir has mentioned before, for us it's very important to keep EBITDA margin for the full year.

Q4 usually has very high-margin sales category. So in Q3, we had [by theory] to invest more without any significant effects to our EBITDA margin for the full year.

So which investment in our price will be in Q4? Now it's very difficult to answer because it will depend on the situations in the market. Now we've had in Q3 very strong like-for-like. And so I think that in Q4, our investment may be -- will be not so significant. But we're absolutely sure that in total, our gross margin for Q4 will be higher than in Q3 due to difference in assortment.

In part of the second question, you know that the (inaudible), what I would like to say that our online segment has the same stability as the total stability of the company. I mean that EBITDA margin of our online segment is the same as -- more than the 10% that we have for the full company. So increasing the share of our business, I think that maybe in the first step, it will have some slightly impact to our profitability but not serious. But in total, I think that it will not have some significant impact to our profitability or to our cash flow because the turnover in this segment is higher than the turnover in our plans in the stores. So in part of our operating cash flow, or cash flow in total, I think that we'll have a nice effect.

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Operator [9]

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There are currently no further questions. (Operator Instructions) The next question is from Alexei (inaudible)

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Unidentified Analyst, [10]

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Congratulations on good results. Can you please elaborate on the performance of your new initiatives like Zoozavr stores and performance of stores in Belarus? And yes, maybe I have one more question later.

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Vladimir Sanasarovich Chirakhov, Public Joint Stock Company Detsky Mir - Chairman of the Management Board, CEO & Executive Director [11]

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Sure. Thank you for your question. So if you speak about Belarus, we are satisfied with the results even more. Our expectation was to have a negative EBITDA during the first year in Belarus. But we see reality. In reality, the financial results, we forecast that financial results even with first year in Belarus will be positive. So we have certified a lot with business in Belarus. And we are going to be #1 player in a couple years, I think, in Belarus, like we are in Russia and Kazakhstan.

What about Zoozavr? More or less, we are -- to say it frank, we don't have positive EBITDA in Zoozavr. But EBITDA is about -- will be about 0 by the end of the year. But we are satisfied also with this business. And by the end of this year, we will make a decision how many stores of Zoozavr we are going to open next year. I think it could be a big number of stores.

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Unidentified Analyst, [12]

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Okay. And one more question related to your online initiatives. So what kind of data you can disclose on the marketplace? I mean, how many companies are operating on this marketplace at the moment? What is the likely revenue? And on your personal like internet online store, so it's shown very impressive growth, but maybe you can also elaborate a bit on the competition in the market? And maybe say a few words of what the clients are buying, particularly on -- I mean, is there any like difference between the basket of the online clients and store clients? Just a comment, if you can.

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Operator [13]

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Next question is from Artur Galimov.

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Vladimir Sanasarovich Chirakhov, Public Joint Stock Company Detsky Mir - Chairman of the Management Board, CEO & Executive Director [14]

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Sorry, but we need to answer for the previous question.

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Operator [15]

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I'm very sorry. Please go ahead.

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Vladimir Sanasarovich Chirakhov, Public Joint Stock Company Detsky Mir - Chairman of the Management Board, CEO & Executive Director [16]

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So if we stick to the Marketplace, it's too early to say about revenue. I just can say that I'm satisfied with the results which we have nowadays. Nowadays, we have just 5 suppliers with about 5,000 SKUs, and we are just testing our business procedures, new business procedures which we established for Marketplace. And we see that we can use our current traffic for selling goods from Marketplace. It's increased our online revenue and we're satisfied with current results.

What about competition in online? We see that there are quite many players, online players, more of the pure online players with quite aggressive pricing. So we keep the same level of prices. And at the same time, we see that we can make money, make profit during this competition with quite aggressive pricing. Even more, profitability of our online channel is not less than profitability of our offline business. So we have the same level of EBITDA, more than 11% for all our online business because for us, it's much -- it's very useful to use our current infrastructure, I mean, off-line infrastructure, offline stores for delivering of orders for service for our customers.

As we told you, for example, just during the third quarter, we started delivering orders from a nearer store to our customers. So it reduced cost of delivery dramatically. It reduced time for delivery. For example, if before we needed to deliver order from Moscow warehouse to Novosibirsk, now we can do it directly from a store which is located in Novosibirsk. So it is very useful. We're using offline infrastructure for competition in online also.

So we compete with other players in online market quite successfully. Even more, we are profitable and make money. As I know, at the same time, other companies are losing money with negative EBITDA.

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Operator [17]

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Dear participants due to a technical issue, we will have to pause this conference for a few moments. Please stay on the line, and thank you for your patience.

(technical difficulty)

Ladies and gentlemen, thank you for your patience. We will now begin the conference. The next question is from Artur Galimov.

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Artur Galimov, Sova Capital Limited, Research Division - Analyst [18]

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It's Artur calling from Sova Capital. Just one question for me, if I may. Could you please give us some sense of how revenues are doing in October and maybe the first week of November?

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Vladimir Sanasarovich Chirakhov, Public Joint Stock Company Detsky Mir - Chairman of the Management Board, CEO & Executive Director [19]

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We can say that we are completely satisfied with the current growth of our revenue in online and offline also. I'm sorry to say, as I know, we cannot say figures.

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Artur Galimov, Sova Capital Limited, Research Division - Analyst [20]

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Maybe just in terms of the trend, do you see any significant changes relative to the third quarter in terms of top line and like-for-like growth?

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Vladimir Sanasarovich Chirakhov, Public Joint Stock Company Detsky Mir - Chairman of the Management Board, CEO & Executive Director [21]

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No, we don't see any significant differences in the third quarter.

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Operator [22]

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There are currently no further questions. (Operator Instructions) Thank you. We have no further questions. Please continue with any further points you wish to raise.

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Sergey Levitsky, Public Joint Stock Company Detsky Mir - Head of IR [23]

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I would like to thank everyone for joining this call today. If you have any follow-up questions, please don't hesitate and get in touch with us. Thank you and have a nice evening.

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Vladimir Sanasarovich Chirakhov, Public Joint Stock Company Detsky Mir - Chairman of the Management Board, CEO & Executive Director [24]

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Thank you.

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Anna S. Garmanova, Public Joint Stock Company Detsky Mir - CFO & Member of Management Board [25]

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Thank you.

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Vladimir Sanasarovich Chirakhov, Public Joint Stock Company Detsky Mir - Chairman of the Management Board, CEO & Executive Director [26]

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Bye-bye.

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Operator [27]

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That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.