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Edited Transcript of DSKY.MM earnings conference call or presentation 26-Aug-19 2:00pm GMT

Half Year 2019 Detskiy Mir PAO Earnings Call

Sep 9, 2019 (Thomson StreetEvents) -- Edited Transcript of Detskiy Mir PAO earnings conference call or presentation Monday, August 26, 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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* Kirill Panarin

Renaissance Capital, Research Division - Equity Analyst

* Maxim Nekrasov

Goldman Sachs Group Inc., Research Division - Research Analyst

* Nikolay Kovalev

VTB Capital, Research Division - Equities Analyst

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Presentation

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Operator [1]

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(technical difficulty)

you can identify forward-looking statements by terms, such as expect, believe, anticipate, estimate, intend, will, could, may or might, and 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 the 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.

Speakers, 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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Hello again. My name is Vladimir Chirakhov, I'm CEO of Detsky Mir Company. With our team, Anna Garmanova, our Head of our Finance department; and Sergey Levitskiy, Head of IR. We will do small presentation about financial results of the first half of 2019.

So I will start presentation from Page #3. Financial highlights. So we changed our plan for this year. For new stores, our previous plan was to open at least 70 stores. Now we are completely sure that we will open more than 90 stores for this year. We already opened during the first half of the year 23 new stores. Till today, we opened already 33. So as usual, we are going to open majority of new stores during the last quarter of 2019 and we are completely sure that we'll open more than 90 stores this year.

Somewhat about like-for-like growth, growth of our revenue. So now this, our revenue growth is more than 16%, like-for-like for our company for the first half was 6.9%. This is the highest like-for-like between all public retailers in Russia. And we are sure that we'll continue our growth this year with the same speed with quite similar like-for-like because we see what, for example, back-to-school season, our sales are quite good.

About profitability, adjusted EBITDA growth was about 20% and we have the same EBITDA margin -- approximately the same EBITDA margin. So we are completely sure that we will finish 2019 with the same adjusted EBITDA margin like we had in 2018, for example, not worth any case.

Cash generation, the same picture. We have quite high cash conversion, 83%. So this year, we are going to open not less than 90 new stores. We're going to pay dividend to our shareholders after 9 months. And at the same time, we are going to close the year with same, even maybe better net debt-to-EBITDA ratio by the end of the year.

And I'm proud to say with our online growth are quite high, more than 70%, and we are going to keep the same high speed of online growth because our team is focused in growth of our online business.

Let's move to the next slide. Key business initiatives. The main important thing, I think, is our e-commerce business. What we did during the first half of the year, we already launched mobile application in Kazakhstan. Couple weeks ago, we launched in-store pickup in Kazakhstan stores, and I'm sure with -- during the next 2, 3 years, it would be one of the key driver of growth of our revenue in Kazakhstan. Maybe the most important thing is that some weeks ago, we launched in 17, our largest cities, new service. It is cheap and fast delivery. According the service, we deliver goods in 17 largest cities in average in 6 hours and it costs just RUB 99, so less than $1.5. It worked very well. It's growing very fast. We see it in our reports. We have idea to start a project, which is called Marketplace, but it would be better to say about it, I think, during the beginning of 2020. Now this, we just collected the team for this project.

About geographical expansion, we successfully entered Belarussia market. We have some stores in Belarussia. We are completely satisfied with revenue, which we have in those stores and I can say with profitability of our business in Belarussia is even higher than profitability in Russia market. So we are going to continue our expansion in Kazakhstan. In Kazakhstan, we have extremely like-for-like. Like-for-like in Kazakhstan is 37%. We increased our revenue in Kazakhstan more than 150% this year. And of course, we are going to continue new store opening in Kazakhstan market also.

Some words about private brands and direct imports. I want to say that we continue to increase share of our private brands. The biggest impact it had in toys category. We increased share of direct import and private brands in toys from about 20% to 27%. I think it helps us to keep high margin on this category.

And some words about Zoozavr. We already opened some stores, 8 stores. We're just testing with category. It's too early to say about financial results, but we are going to continue new store opening for Zoozavr stores also.

Thank you. Anna Garmanova will continue our presentation.

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

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So first of all, let me remind you that also the company has applied IFRS 16 from the 1st of the January of 2018. We'll continue to present our financial results which we'll calculate accordance with the old and new standards, because we think that this approach allowed to more accurately assess the dynamic of our business growth. Also, I would like to pay attention that, that methodology of calculating the lease term was updated for the audited results for the full 2018. That's why the financial results using the IFRS 16 for the Q2 and the first half of 2019 are presented according with the updated methodology.

Let's move to the Slide #5 and discuss our financial results in detail. Despite on tough macro and decline in consumptions demand, we continue to keep very high level of the like-for-like and sales growth. Our total revenue growth for the Q2 was 16%, the same growth we had in the first half of 2019. And of course, the main drivers of such growth was our like-for-like. As Vladimir has mentioned before, we had the best like-for-like among the all public retailers. And for the first half, it was 6.9% for the both segments, Russia and Kazakhstan, including very high level of number of the ticket, more than 8%.

In part of Kazakhstan where different project results. In Kazakhstan, the revenue growth was about 50%, and in Q2, we reached revenue in amount of RUB 676 million. Also, continued to expand our retail chain. In Q2, we had opened 17 new stores. And in April, we opened 4 stores in Belarussia in (inaudible). We're more than happy the results in Belarussia. It has, in our expectations, swung and we're going to reach breakeven EBITDA in Belarussia for the full 2019.

Some words about our assortment. We had successfully sales in toys and the fashion. The total share of toys sales in our total revenue was 26%, and we significantly increased the share of private label and direct import in the toys and we reached 16% in Q2. Also, as I mentioned before, we had good sales in the clothing and footwear, and it's in our total revenue in Q2 was 27%.

Some words about our online segment. The growth of our e-commerce in Q2 was 71% and for the first half of this year, it was also 72%, and we significantly increased the share of online sales in our total revenue. For the first half of this year, it was 9.8%. 1 year ago, we had only 6.6%.

Let's move to the next slide. Some words about our profitability. We continue to keep very attractive retail price for attract new customers from our competitive retailers. As a result, our gross margin slightly decreasing. In Q2 and in the first half of this year, we had the same dynamic and our gross margin was 31.5% compared with 1 year ago when we had 32.3%. But despite on it, we generate a lot of traffic, and we think that it's our strategy successfully.

I told you that we continue to develop our own private label. In Q2, the total share of our own private label and direct import reached the level of 42% in Q2. On the other side, we continue to keep our strategy in part of improving operating efficiencies. That's why we continue to decrease our SG&A cost as a percent of the revenue. For the Q2, we decreased this cost by 1%. For the first half of this year, it was more than 1%. The main drivers of such decrease, I think, was rent and our marketing cost. Due to it, the growth of our adjusted EBITDA for the first half of this year was 21% and we reached RUB 5.3 billion in absolute figures. The EBITDA margin was 9.5% and it was higher than we had 1 year ago. 1 year ago, it was 9.2%.

Let's move to the next slide, Page #7, some words about our cash flow. As you can see, the bottom left part of the slide, we continue to keep very high level of cash conversions, not less than 83%. In spite of our operating cash flow, you can see that we had negative influence from investment in our networking capital, but there are some issues which influence to such investments, such as all our seasonality of our business. You know that usually we have very high sales and purchase in Q4. So for the next year, we needed to pay for such purchase and its influence to our investment and working capital. Also, we were confronted with some reschedule of purchase and payments between quarter in part of our private label and direct import contracts. In case of private label supplies, the volume of purchase is larger, but the frequency of the purchase is less. So we needed to pay the more and earlier compare with the contracts which we had before with some representative orders in the Russia. But on the other side, let me remind you that the gross margin for such contracts is higher, above 10% compared with other contracts.

In part of the CapEx, we invest in the first half of this year about RUB 1.6 billion in CapEx, including about RUB 300 million advance payment for our building, which we had bought for our flagship stores and also we pay about RUB 378 million for recruitment for our new DC. That's why our free cash flow for the first half of this year was minus RUB 4.6 billion, but [as far as the usually station] since we're absolutely sure that we improve our operating cash flow and our cash flow in the second half of this year.

Let's move to the next slide, Page #8. Some words about our financial policy. As you can see, our net debt at the end of the first half of this year was RUB 26 billion and our leverage was 1.9x. The main impact, which influence the increasing of our leverage was some extra investments in our DC, which we had at the end of last year and also some investments in our networking capital. We -- also, we have undrawn credit limits to the end of the first half in the amount of RUB 23.5 billion. Let me remind you that all our debt in -- denominated in ruble, and we hadn't got any FX risk in our debt. We'll continue to decrease our average interest rate to the end of the June of 2019, it was 8.8% due to our bond, which we successfully had issued in the April of this year. The nominal value of this bond was RUB 5 billion and coupon rate was 8.9%.

Let's move to the next slide, Page #9, some words about our net income and return to our shareholders. As Vladimir had mentioned before, in the May, we paid the last part of the dividend for the last year and we continue to pay all our net profit as a dividend. And we do the best to continue this practice. You can see that in total, the growth of our net income in the first half of this year was 14%, but let me remind you that we pay dividends from our net profit, which we calculate according to IFRS standards, not -- with RAS standards, not IFRS standard, and the growth of our net income was calculated according with our RAS standards is high.

And let's move to the next slide, some words about our guidance. The main update was in the number of the stores. As Vladimir has mentioned before, we're going to open at least 90 new stores. And we'll continue to keep our strategy in part of -- keep the gross margin of EBITDA at least 10%.

I assume that's all. Ready to answer to your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question is from Nikolay Kovalev, VTB Capital.

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

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I have a question on your gross margin. We saw a quite sizable decline. It's like several parts. But first, can you comment on your commercial margin, how much it changed year-on-year given that your product mix is also changing with a greater share of private label and direct import? And also a more strategic question, you generally comment that your competitors are quite seeing deteriorating operating stands and now cannot really cope with your pricing policy. So can you guide us for how many quarters you would generally anticipate decline in gross margin and correction in the profitability and why you're doing so?

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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. So about our margin, I want to mention, like I did before some years, I think, our goal is to provide to our shareholders double-digit EBITDA. So for us, it doesn't matter how big or small is margin on our goods because idea is the following. We will provide this year, I think, EBITDA margin not less than we provided previous year, and at the same time, we continue to invest in pricing and we see the result. We have the highest like-for-like among all players in Russia market. We have one of the highest growth in e-commerce business, more than 70%. And I'm completely sure that we will provide the same by the end of this year, for example. So our main goal is to provide double-digit EBITDA to our shareholders and we don't care about margin on our goods. It could be -- it could increase or decrease, it doesn't matter. It helps us to attract people to our stores. At the same time, and you could see how we react to our competitors, if we speak about specialized retailers, main players are closing their stores. For example, Korablik Company closed 15 stores during the first half of the year. So we are focused on our strategy to do consolidation of the market. Thank you.

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

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Okay. Maybe a bit if add to my question. You, of course, in the last couple of years, saw a quite good improvement in SG&A cost, but now they're more or less stable and prime improvement comes from rent. So would you anticipate like similar improvement in the SG&A cost around next year or you still see quite sizable room for optimization?

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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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Every year we plan, but we will keep at least at the same level our rental cost. But as a fact, we see with every year, we improve our payment -- I mean, decline our payment to landlords. I think for next year, we will have the same plans and I hope the same execution.

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Operator [6]

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Our next question is from [Alexey Krivoshapko].

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Unidentified Analyst, [7]

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Can you please update us on how much money do you plan to allocate to CapEx this year? And how much of that will go into IT and maintenance and to store openings?

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

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[Alexey], thank you for your questions. You know that our plan to invest about RUB 3 billion, maybe RUB 3.5 billion as a CapEx. And for the opening of new stores, we are planning to invest about RUB 1.5 billion, I think, that about such sum.

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Unidentified Analyst, [9]

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And this RUB 2 billion remainder, how do we split between maintenance and IT, roughly speaking?

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Anna S. Garmanova, Public Joint Stock Company Detsky Mir - CFO & Member of Management Board [10]

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In part of the maintenance, usually, we invest about RUB 400 million. About RUB 400 million, maybe RUB 500 million, not more. And in this year, we also invest about RUB 300 million in SAP license.

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Unidentified Analyst, [11]

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Okay. So the remainder will be what, RUB 2 billion less RUB 300 million plus RUB 300 million?

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Anna S. Garmanova, Public Joint Stock Company Detsky Mir - CFO & Member of Management Board [12]

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Yes, but you know that about RUB 300 million -- I'm sorry, could you repeat your question?

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Unidentified Analyst, [13]

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No. I mean you said that CapEx will be between RUB 3 billion and RUB 3.5 billion for '19, of which store openings will be approximately RUB 1.5 billion. And you also said that maintenance is around RUB 300 million and SAP is around RUB 300 million. So my question is, like, what will be the rest?

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Anna S. Garmanova, Public Joint Stock Company Detsky Mir - CFO & Member of Management Board [14]

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You know that we invest about RUB 1 billion for buying the building for our flagship store.

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Operator [15]

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Our next question is from Kirill Panarin, Renaissance Capital.

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Kirill Panarin, Renaissance Capital, Research Division - Equity Analyst [16]

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Two questions, please. Firstly, on the Marketplace. I understand you don't provide many details at this stage, but maybe you could just tell us a bit about the reasoning why you want to try a launch of the Marketplace, which seems to be a highly competitive segment. So just what's the rationale behind the idea? That's the first question. And then secondly, on the working capital, it's quite clear on the payable side, but what is the reason behind inventory turnover days increasing in the first half and what do you expect going forward?

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Vladimir Sanasarovich Chirakhov, Public Joint Stock Company Detsky Mir - Chairman of the Management Board, CEO & Executive Director [17]

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Thank you for your question. About Marketplace, I want to say that there were 2 reasons for launching this project in our company. The first is that we see that we demonstrated high growth of online business in our company during the last, I don't know, 5 years, and became one of the leader in e-commerce in Russia. Our forecast for the end of the year, for December, is something like maybe 14% of online in whole our revenue. So we have quite strong team for growing e-commerce business. This is the first reason. And the second is that we see huge demand from customers for a wide assortment, especially in fashion goods like clothes and shoes. And we are going to be focused in this segment, first of all. And after that, maybe we will increase assortment in Marketplace.

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Anna S. Garmanova, Public Joint Stock Company Detsky Mir - CFO & Member of Management Board [18]

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Okay. Let's answer to the second part of your question, the part of the networking capital. You're absolutely right that we invest a lot in our networking capital and it's negative insurance to our -- to know of our inventory. And there are 2 factors which influence to it. First of all, as I have mentioned before, we increased -- significantly increased the share of private label. That's why we purchase -- our purchase are [lighter] but the frequency of this purchase are less. That's why we needed to pay more earlier. And we have now rescheduled between the quarter. And the second issues which influence to decrease in turnover of our inventory is our new DC. You know that at the end of the last year, we have bought the second DC. It's about 1,600 square meters. So it's normal that it's negative influence to the turnover of our inventory, but we're absolutely sure that it's temporary impact we encountered with such influences in 2015, which we have bought out of DC. And then in 1 year, the turnover of our inventory was improved. In this case, I think that we'll front it with such influences in the future.

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Operator [19]

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(Operator Instructions) Our next question is from Maxim Nekrasov, Goldman Sachs.

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Maxim Nekrasov, Goldman Sachs Group Inc., Research Division - Research Analyst [20]

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Congratulations for the strong first half results. I have a couple of questions. So first one, do I understand correctly that such slow effective tax rate in the second quarter was a one-off? And what tax rate should we expect for the full year 2019?

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Anna S. Garmanova, Public Joint Stock Company Detsky Mir - CFO & Member of Management Board [21]

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Okay, Maxim, thank you for your questions. You know that every year, we clarified our tax rate for the previous period, but usually, we make it in the second half of the year. In this year, we made in the April. So we had such impact to our tax rate for the first half. But I'm absolutely sure that our tax rate for the full year will be normalized and will be the same level, which we had 1 year ago. But you need to understand that our net profit for the first half of the year is about [30%] from the full -- our net profit for the full year. That's why we're going through such influx to our tax rate in the first half of this year.

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Maxim Nekrasov, Goldman Sachs Group Inc., Research Division - Research Analyst [22]

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Okay. And the second question is on LTI. As I can see, the LTI costs have decreased in the second quarter, year-on-year and I was wondering whether you can provide the guidance for the LTI cost for the full year.

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Anna S. Garmanova, Public Joint Stock Company Detsky Mir - CFO & Member of Management Board [23]

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We think that our LTI cost for the full year will be about RUB 550 million.

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Operator [24]

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(Operator Instructions)

(technical difficulty)

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Unidentified Analyst, [25]

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(technical difficulty)

online retail market in general. So how do you find the competition because like some of your competitors are growing also at very healthy pace? So do you see the impact on the, like, brick-and-mortar part of your business and, yes, maybe just share your view in general on the competition in these segments.

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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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Thank you for your question. Competition is really tough, and at the same time, I want to mention that we have quite high growth, more than 70% and we have profitable business, I mean, our e-commerce part of the business has the same profitability like our offline business, also with EBITDA more than 10%. We could grow even higher if we let us decline EBITDA. With negative EBITDA, we could increase our growth, I don't know, 3, 5x, but we don't need to do it. I believe we can continue growth with the same speed during the nearest some years just because we see our competitive advantage in comparison with other online players. Our main competitive advantage is our retail chain because we use it as a infrastructure to increase our online sales also. How it works? You know what, couple of years ago, we started in-store project in our retail chain. It means when customer wants to buy something, he put order using our website, and in 1 hour, he can get his order in the store which he prefers. It was launched about a couple of years ago. Now this, we launch in our project. In our service for our customers, we deliver goods to our customers in 6 hours in 17 cities where we're presented and we see that this service has a huge demand from our customers. It is very popular and we're going to increase our sales using this service. Because at the same time, it is much more profitable for us, we don't need to deliver goods from our warehouse. We find the nearest store to our customer and deliver goods directly from the store to our customer. It declines time, which we need for delivery. It declines dramatically our cost. So using such kind competitive advantage, I think, we will continue profitable growth of our online business.

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Unidentified Analyst, [27]

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Can you also maybe provide a comment a bit on the data coming on online segment? Because if you, like, read on some articles especially on Wildberries and you see the data that, for example, online presence is growing like 70% this year and like maybe 70% last year, Wildberries is also growing like quite similar pace. But at the same time, the general, like children's good market is growing at a very low rate like 1%, like 3%.

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Vladimir Sanasarovich Chirakhov, Public Joint Stock Company Detsky Mir - Chairman of the Management Board, CEO & Executive Director [28]

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Yes, yes.

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Unidentified Analyst, [29]

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So I mean, these numbers are not matching each other. So it means that somebody is like totally losing market share.

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Vladimir Sanasarovich Chirakhov, Public Joint Stock Company Detsky Mir - Chairman of the Management Board, CEO & Executive Director [30]

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Yes, it's so.

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Unidentified Analyst, [31]

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So is it just the wrong data or something else? Is it just the wrong data or...

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Vladimir Sanasarovich Chirakhov, Public Joint Stock Company Detsky Mir - Chairman of the Management Board, CEO & Executive Director [32]

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I think who is losing market share? Of course, offline players. We've developed online channel. There are many of them. I don't want to say their names, honestly. But we see how our competitors are closing their stores.

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Unidentified Analyst, [33]

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Okay. But do you see the impacts on your brick-and-mortar part of the business as well because of the online segment?

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Vladimir Sanasarovich Chirakhov, Public Joint Stock Company Detsky Mir - Chairman of the Management Board, CEO & Executive Director [34]

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Of course, no. Of course, no. Of course, no. Again, our like-for-like in our offline stores is about 7% and this is the highest figure among all public retailers in Russia. So of course, no. We see just cannibalization of other players in the market. I just want to mention that online growth of children goods, online growth is something like 30% in Russia. It's not 0, it's about 25%, 30%, something like that. But you're right, growth of Wildberries Company, for example, is similar to our growth, about 70%, 80%.

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Operator [35]

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(Operator Instructions) We have no other question at this moment. Dear speakers, back to you for the concluding remarks.

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Sergey Levitsky, Public Joint Stock Company Detsky Mir - Head of IR [36]

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We would like to thank everyone for joining this call today. If anyone has follow-up questions, please don't hesitate and get in touch with us. Thank you, and have a good day.

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Vladimir Sanasarovich Chirakhov, Public Joint Stock Company Detsky Mir - Chairman of the Management Board, CEO & Executive Director [37]

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Thank you.

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Anna S. Garmanova, Public Joint Stock Company Detsky Mir - CFO & Member of Management Board [38]

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Thank you.

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Operator [39]

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This concludes today's conference call. Thanks for your participating. You may now disconnect.