U.S. Markets close in 31 mins

Edited Transcript of EUR.WA earnings conference call or presentation 13-Nov-19 1:00pm GMT

Q3 2019 Eurocash SA Earnings Call

Dec 4, 2019 (Thomson StreetEvents) -- Edited Transcript of Eurocash SA earnings conference call or presentation Wednesday, November 13, 2019 at 1:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Cezary Giza

Eurocash S.A. - IR Director

* Jacek Owczarek

Eurocash S.A. - Financial Director & Member of the Management Board

================================================================================

Conference Call Participants

================================================================================

* Jakub Krawczyk

Raiffeisen CENTROBANK AG, Research Division - Financial Analyst

* Michal Majerski

PTE Allianz Polska S.A. - Senior Equity Analyst

* Michal Potyra

UBS Investment Bank, Research Division - Director and Equity Research Analyst - Delta Coverage

* Michal Kuzawinski

JP Morgan Chase & Co, Research Division - Research Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Ladies and gentlemen, welcome to the conference call of Eurocash. At our customers' request, this conference will be recorded. (Operator Instructions)

I now hand you over to Jacek Owczarek, Chief Financial Officer, who will lead you through this conference. Please go ahead.

--------------------------------------------------------------------------------

Jacek Owczarek, Eurocash S.A. - Financial Director & Member of the Management Board [2]

--------------------------------------------------------------------------------

Good afternoon. Welcome from Eurocash team side. So together with me, I have today Cezary Giza and Jan Domanski. We'll share our presentation together. First of all, thank you that you are devoting some time to listen us. So we hope to just give you a brief information what happened really in Q3 results. Generally speaking, from our side, the results are quite good. And exactly, as we said, as expected. Without any surprises, we continue to deliver on the strategy we announced, which just to shortly to remind all of you, we communicated we wanted to keep wholesale growing market share and delivering cash flow and profitability and at the same time, integrate retail. So generally speaking, what we'll share with you in a few minutes, on Cezary's presentation, you will see that both the wholesale and retail segment, they are growing faster than market share, observed by Nielsen, which is solid results on our side.

On the wholesale side, generally speaking, all segments are delivering quite nicely. You don't see it, but also we are in the middle of integration of alcohol business with distribution, which is almost over. Eurocash.pl is delivering quite a nice result. Altogether, we are expecting to sell already PLN 3.6 billion out of the digital platform. And generally speaking, Cash&Carry as well had a very nice result, also taking into consideration, as [part] of you remember, generally speaking, the small stores are overweighted in soft drinks, beer and tobacco and generally speaking, the weather was little bit better last year in Q3 than Q3 this year. And generally speaking, also we sold a little bit less (inaudible) this result, but even taking this into consideration, like-for-like in Cash & Carry was positive at 0.7%. So that's also a quite

(technical difficulty)

[good] result.

On the retail side, which I think also, we spent some time trying to explain you where we are. Generally speaking, we are on time with the integration program. So new team is in the place. We already shifted a big part of the stores to the final IT solution, logistic, it's working right now. We are unifying the assortment and price policies. So altogether, I think we are on the good track to deliver full integration as promised.

And then summarizing Q3, 2 more aspects, cash flow, operational cash flow is at the very good levels. Again, Q3 is our good quarter when we are generating quite nicely cash, so it's also proved this year to be true. And net debt is at a very [secured] level. So all of this, I think, makes us happy that we are delivering quite nice results for Q3.

So let me just pass to Cezary, who will lead you through the detailed presentation. Thank you.

--------------------------------------------------------------------------------

Cezary Giza, Eurocash S.A. - IR Director [3]

--------------------------------------------------------------------------------

Hello, everyone. Let's start with the presentation. I'm on Page #3 of our presentation where we show you food market development in last 12 months. Here, you may see that discounters were growing by 9.5% while small format stores were growing by 4.4%. Supermarkets between 300 and 2,500 square meters, they grew by 3.2%. Here, you have to be aware that Nielsen data that we provide for a long time has been revised, with one of the top -- one of the growing supermarket chain that you already know that was included in current databases. That's why you may notice nowadays 3.2% growth. Hypermarkets were declining by 0.7%.

Coming back to small format. Here, the good point for us is that small supermarkets are growing by 3%, almost 3%, which is a nice result. And convenience stores between 40 and 100 square meters, they were growing by 9% in last 12 months. Small grocers and specialized stores, they are in the different dynamics with small grocers minus 4%, and specialized stores with 9% growth.

Let's look at the Page #4, when we may see inflation. On the left-hand side, you may see chart with inflation split by food and alcoholic beverages. Food inflation noted very high results, with 6.7% food inflation in third quarter. On the other hand, we may see alcoholic beverages growing by 1.2% in third quarter. Please keep in mind that [growth] statistics, means Central Statistical Office data are based on enterprises having more than 9 employees. So this does not include a big part of our market. Nevertheless, it is worth to follow all of this data because it also shows you the trend between different categories.

And as you may be aware, vegetables were growing by more than 20% in the last 9 months while all other categories also accelerated with bread, food, sugar, meat above 4%. Our categories means categories overweighted in small format stores, where as I mentioned before were between 0% and 2% year-on-year.

Let's move to our results. On Page #5, you may see wholesale segment performance. And here, we are continuing to grow by 6% -- more than 6%, which is PLN 315 million sales growth in third quarter 2019. On the other hand, we have EBITDA development with PLN 130 million EBITDA in third quarter 2019, which we perceive as a strong result knowing -- taking into account that last year, summer was very strong. EBITDA after IFRS 16 amounted to PLN 177 million. When we look at the EBITDA margin, it is worth to notice that it amounted to 2.56%. And it is somehow deteriorated by different mix of sales with fast-growing tobacco business diluting EBITDA margin. For us, the most important is EBITDA in absolute terms.

On Page 6, you may see development of different distribution formats within the wholesale segment. Wholesale increased by 6.6%, which is PLN 315 million and out of this number, PLN 270 million comes from tobacco business. In tobacco business, you might be aware from previous quarters that we gained one key account but also the [legal sales] of tobacco in Poland is growing quite nice. So we are beneficiary of these trends.

Cash & Carry, we already talked about, noted 0.7% like-for-like, which is in line with our plans. Distribution business grew by 0.9%. But here, you have to look deeper. When we look at [sales] store, our franchisees, again, we noted very strong performance, with 14% sales increase year-on-year. Excluding Alcohol business, Eurocash Distribution increased sales by almost 12%. Alcohol business is being merged with Eurocash Distribution right now. We are going for synergies that will be visible in the future. And now we are discontinuing sales to sub-wholesalers, which are basically our competition at the end.

Let's move to Page #7 where we may see performance of our retail business. Retail sales increased by 7.5%, and in third quarter, we -- the retail sales amounted to PLN 1.5 billion. When we look at the EBITDA performance, here, we have opposite effect that we mentioned in previous charts. EBITDA of retail business increased by PLN 21 million, going up from very low results last year and this year, amounted to PLN 32.5 million. After IFRS 16, EBITDA of retail business amounted to almost PLN 74 million. This result was driven mainly by ex-EKO chain and Mila supermarkets as well.

Looking deeper into retail business development on Page #8. You may see that both own supermarkets as well franchise supermarkets grew quite nice. Own supermarkets increased sales by 8.6% while franchise supermarkets increased by 6%. And the last part of this segment is Inmedio, growing nicely by 8%. When we look at the like-for-like, you may notice that Delikatesy Centrum chain retail like-for-like amounted to 4.1%. Inmedio newsagents like-for-like amounted to 5% in third quarter 2019.

Let's look on projects on Page #9. Projects are driven mainly by Duzy Ben expansion, and all segment sales revenues amounted to PLN 27 million, which is 126% of growth. EBITDA amounted to PLN 10.7 million, negative, and this negative EBITDA is driven by the expansion of Duzy Ben as well as Kontigo. Duzy Ben ended the quarter with 57 stores and Kontigo ended -- finished the quarter with 20 stores. Like-for-like in both of these chains are about 20%.

Just summarizing financial performance on Page #10. Here you may see consolidated numbers when our net sales revenues increased by almost 7% within the quarter. Gross profit was stable or amounted to 12.5% comparing to 12.6% last year. Here, you may see effects of deterioration of margins from fast-growing tobacco business that is basically low-margin business. Below, you may see EBITDA development and EBITDA amounted in this quarter to PLN 129 million, which is 23% growth. EBITDA was partially impacted by one-offs. One is positive, which is more than PLN 12 million PayUp earn-out and negative -- minus PLN 8 million Sushi 2 Go write-off. Sushi 2 Go was one of our projects. EBIT increased by 46% while net profit increased by 7% this quarter. EBITDA after IFRS 16 amounted to PLN 219 million while net profit amounted to PLN 25 million.

On Page #11, you may see development of EBITDA by different segments. Wholesale was flat, retail increased EBITDA by PLN 21 million, projects deteriorated EBITDA by PLN 3 million, while others improved EBITDA by almost PLN 6 million. And here, we recognize this one-off that I already mentioned.

Just quick look on the 9 months results. Our 9-month sales revenues increased by 9.5%. We have around PLN 290 million of EBITDA, which is PLN 560 million -- almost PLN 560 million after IFRS 16. Net profit amounted to PLN 57 million and PLN 32 million (inaudible)

On Page #13, you may see our cash flow performance. Before IFRS, we generated PLN 177 million operating cash flow and PLN 75 million comes from working capital. When you look at the cash conversion cycle. Here, you may see that our net working capital rotation amounted to negative 25 days, which is a stable result for last couple of quarters. All other parts of net working capital were impacted by different sales mix. The most important for us is that we are at the long-term net working capital rotation.

On Page #14. Here, you may see our balance sheet, basically net debt, and our net debt amounted to PLN 521 million, which is 1.17x EBITDA. Net debt after IFRS 16 amounted to PLN 2.3 billion. Please note that our bank covenants are based on net debt-to-EBITDA before IFRS 16.

On one of the last slides, you may see that we have received already the rating from MSCI ESG Ratings. And we received AA, which we perceive as a nice result, knowing that we already started to measure all of this part -- all of these indicators. Nevertheless, we outperformed a lot of big peer companies all over the world.

And summarizing the quarter, it was a good quarter with visible improvements in the retail business. Wholesale keeps stable, sales increased with strong EBITDA despite hot summer previous year. Retail like-for-likes are improving, and EBITDA is growing, especially in ex-EKO and Mila chains. We -- once again, we noted strong operational cash flow with net working capital at very good stable levels. Our long-term strategy to expand in total food distribution in Poland is on schedule for both wholesale and retail. I give voice to Jacek for one moment.

--------------------------------------------------------------------------------

Jacek Owczarek, Eurocash S.A. - Financial Director & Member of the Management Board [4]

--------------------------------------------------------------------------------

Yes. So let me also at this time to announce one more information. So I'm delighted to say that Cezary will join our Delikatesy Centrum team. So he's getting promotion. So congratulations. So it's last time he's together with us. Jan will take this post temporarily. And you know -- most of you know quite Jan Domanski. So I think it's not a big problem. But generally speaking, the message is that, really, on one hand, congratulations to Cezary, on the other hand, will really count on him right now. So he goes to [real] business.

Thank you. And right now, we can open line for the questions.

--------------------------------------------------------------------------------

Cezary Giza, Eurocash S.A. - IR Director [5]

--------------------------------------------------------------------------------

So thank you very much. We are ready for...

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) The first question is from Michael Potyra of UBS.

--------------------------------------------------------------------------------

Michal Potyra, UBS Investment Bank, Research Division - Director and Equity Research Analyst - Delta Coverage [2]

--------------------------------------------------------------------------------

I have 3 questions, please. One, I just wanted to check if there was any visible impact from the PKN contract in this quarter. The second question about like-for-likes in the Cash&Carry segment. It looked quite weak, taking into account the food inflation, maybe if you could comment on that? Was it the weakness of the smaller stores, abc, or some other factors at play? And the last question is about the margin in the retail segment, if you could just give us your view how far are we from the target margin for that business? And maybe what is the difference between the margin in the, let's say, old Delikatesy Centrum stores and EKO and Mila currently?

--------------------------------------------------------------------------------

Jacek Owczarek, Eurocash S.A. - Financial Director & Member of the Management Board [3]

--------------------------------------------------------------------------------

Okay. Thank you for the question. So let me take one by one. First one is ORLEN. So generally speaking, I must admit we are not following the contract on the daily basis. But as far as I'm recalling, the big part of the volume was moved to ORLEN itself in September. So if the question is, how much of it's in drop in revenue. Unfortunately, I don't know, and we need to come back to this. But generally speaking, it's all in line. So I think it's not a big issue for the third quarter. Like-for-likes in Cash&Carry, generally speaking, taking into account the -- our overweighting beers, especially in the -- and soft drinks in Cash&Carry, I don't think the result is weak from our perspective. Because please remember, if you are thinking how these 2 categories are distributed in Poland, it all makes sense, that they are distributing through cash and carry because they are quite heavy and logistical cost of one pallet is relatively low. So generally speaking, all of the producers are using cash and carries to deliver these 2 categories. And taking this into account that we had a weaker summer than next -- than last year. It was not weak, but simply weaker. The like-for-like, we don't see it as a big (inaudible) internally, rather we are quite happy with the positive results still developing in Cash & Carry, which, as you remember, probably 2 years ago, almost everybody was thinking it's a dead body and it's growing quite nicely quarter-on-quarter. And still, we are not giving too much visibility as usual on the future. But generally speaking, the trends are kept. So the wholesale is still developing. And also October is behind us, so we can confirm here that Cash&Carry's like-for-likes in October were positive. And the third quarter, regarding margin in retail. Of course, your point is a valid one because in reality, starting points in ex-Delikatesy Centrum, in ex-EKO and ex-Mila were different ones. Right now, I can't recall whether we have big differences in gross margins. But...

--------------------------------------------------------------------------------

Cezary Giza, Eurocash S.A. - IR Director [4]

--------------------------------------------------------------------------------

We improved slightly gross margin in both, in ex-EKO and Mila.

--------------------------------------------------------------------------------

Jacek Owczarek, Eurocash S.A. - Financial Director & Member of the Management Board [5]

--------------------------------------------------------------------------------

But still, we have a difference between EKO and Mila, which I am not recalling right now. But it's not like 1 or 2 points, it's below 1%. So you still have some rebalancing effect. But I think all of this, if you're asking us a little bit about future, it's connected with the discussion about how to set the unified Delikatesy Centrum profitability against competitors in the future. In reality, what we are trying to do is to cluster all of the stores in Poland, not geographically, but based on the different features like, for example, rural versus urban or the competition -- Biedronka competition or somebody else competition or no competition, whether we have the school close or schools far to travel going to -- altogether, we will have big number of these clusters and within each cluster, we'll next year work how to reposition the pricing model of Delikatesy Centrum. So altogether, I think we are not expecting the margin drop. We still have some opportunities. But then the whole discussion, I think, which will be running next year is also how to improve profitability of our franchisees. So a big part of the margin improvement we want to give also to our franchisees to help them and also taking into consideration, as you perfectly know, and big part of the participants as well, that this year, it's year of the integration. So for example, expansion is not a big priority. So to start again, expansion in the franchise model, we want to improve profitability of our franchisees next year. So all of this, I think, has a chance to be reflected in the margin. However, I really think part of this will go into better pricing for the franchisees.

--------------------------------------------------------------------------------

Operator [6]

--------------------------------------------------------------------------------

(Operator Instructions) The next question is from Michal Kuzawinski of JPMorgan.

--------------------------------------------------------------------------------

Michal Kuzawinski, JP Morgan Chase & Co, Research Division - Research Analyst [7]

--------------------------------------------------------------------------------

So just following up on PKN question. So you expect the impact -- was the first quarter with full impact in Q4, correct, of this contract discontinuation? Or is there -- or is it being discontinued in steps?

--------------------------------------------------------------------------------

Jacek Owczarek, Eurocash S.A. - Financial Director & Member of the Management Board [8]

--------------------------------------------------------------------------------

It is in steps, but I really can't remember the percentages right now, and you really ask on the [ORLEN] side because simply, we have the

(technical difficulty)

[side] for the delivery, and right now, it's in their hands, whether they would like to phase out through few weeks or sharply, so I really can't remember right now. So -- but the fact is that the full quarter result in Q4 in sales, yes.

--------------------------------------------------------------------------------

Michal Kuzawinski, JP Morgan Chase & Co, Research Division - Research Analyst [9]

--------------------------------------------------------------------------------

And Cezary, can you comment about the retail segment improvement ex-EKO? I believe -- I'm just a bit confused. Does that mean that the improvement happened outside the EKO chain? Or is that improvement also in EKO?

--------------------------------------------------------------------------------

Cezary Giza, Eurocash S.A. - IR Director [10]

--------------------------------------------------------------------------------

Within. With ex-EKO, [we mean] in all -- because in our internal -- internally, we don't say that we have EKO stores. They are Delikatesy Centrum or we can call them Delikatesy Centrum (inaudible). It means then in all -- that in all EKO stores, we are improving operations and margins. This was what I meant.

--------------------------------------------------------------------------------

Michal Kuzawinski, JP Morgan Chase & Co, Research Division - Research Analyst [11]

--------------------------------------------------------------------------------

Okay, okay. That's clear now. And I read your interview with (inaudible) from today where we were asked, among other things, about the impact of minimum wage hikes. So I know your view, but I just wanted to follow up on what you said about the small stores because you are concerned that the small stores would be more impacted than the modern retailers and that as a result, you may want to give them better pricing, and it kind of reads as a potential overhang on your gross margin. Is that the correct interpretation here of your consumers?

--------------------------------------------------------------------------------

Jacek Owczarek, Eurocash S.A. - Financial Director & Member of the Management Board [12]

--------------------------------------------------------------------------------

No, it goes too much. Of course, you know what we are telling it's exactly reality. So generally speaking, the cost of this employment, I mean, [sellers again sell a bit] higher in the smaller stores than in discounted by definition because discounted it's much more efficient model. In discounted, it's around 6%, in the smaller stores it's around 12%. So if you are thinking about increasing salaries proportionally in both segments and of course, profitability in the nominal terms somehow has the smaller stores more. Here -- so that's the fact, yes. And on the other hand, we're not elaborating -- I was not elaborating too much with [stress] because they were not asking about that. But the fact is that on one hand, it raises questions like we did in the previous statement. On the other hand, we look at this as an opportunity because you may remember that still on the wholesale side, the average store will have something like 5, 7 different deliveries, I mean, different companies delivering to one shop. So generally speaking, we are looking at this as an opportunity in a sense that from the shop owner's perspective, they need to think not only about the prices and consumer but also how to cut costs from the supply chain perspective. And of course, (inaudible) [academic] example, but the fact is that receiving 1 delivery per day, it's cheaper than receiving 3 deliveries per day. So somehow, due to the fact that we are the biggest operator, wholesale operator, we are rather looking at this as an opportunity to push further through integration and also taking into consideration that probably I would risk the statement most advanced in terms of technology through our Eurocash.pl. It's also we are looking at this as an opportunity to integrate with them even further. So I don't think -- so the fact it's theoretically in favor of the organized [trade.] In reality, if you are looking from the opportunity side from Eurocash perspective, I think it's not as bad as you concluded. So I disagree with that statement.

--------------------------------------------------------------------------------

Michal Kuzawinski, JP Morgan Chase & Co, Research Division - Research Analyst [13]

--------------------------------------------------------------------------------

Okay. So there was no hinting at potential kind of bigger necessity of gross margin investment, correct? Yes.

--------------------------------------------------------------------------------

Jacek Owczarek, Eurocash S.A. - Financial Director & Member of the Management Board [14]

--------------------------------------------------------------------------------

No, no, no. I think it's much more about how to cut costs from the -- please read it as how to cut costs from the supply chain. By definition, discounters will always be the most efficient. So by definition, our supply chain, I mean -- us as a wholesaler [trust] independent shops. It's more expensive, but we are not working much on the integration here. So if you are following a little bit what is happening -- what was happening in the much more mature markets, I think they went through quite a similar cycle where they needed also to talk about costs, not only about prices.

--------------------------------------------------------------------------------

Michal Kuzawinski, JP Morgan Chase & Co, Research Division - Research Analyst [15]

--------------------------------------------------------------------------------

Yes. And just to conclude on this -- on the cost side. So we heard Jerónimo is expecting double-digit wage inflation in Poland that was also reiterated by Dino. They also think low double-digit cost inflation next year. And what level of inflation would you expect?

--------------------------------------------------------------------------------

Jacek Owczarek, Eurocash S.A. - Financial Director & Member of the Management Board [16]

--------------------------------------------------------------------------------

No. So we are not [as related title]. So whatever is happening in economy is hitting us directly. So as you know, the minimum salary is growing next year around 12%. So if you would count only for the part of the employees who are lower paid, it's single digit, I think, but also throw in (inaudible) in Dino by the way. But generally speaking, we'll need to follow the law. So I'm not expecting here that will be different.

--------------------------------------------------------------------------------

Cezary Giza, Eurocash S.A. - IR Director [17]

--------------------------------------------------------------------------------

In third quarter, our wage increase was about 9% to 10%. So -- and we were able to reduce our costs. So we have some plans.

--------------------------------------------------------------------------------

Jacek Owczarek, Eurocash S.A. - Financial Director & Member of the Management Board [18]

--------------------------------------------------------------------------------

So that's similar pace probably.

--------------------------------------------------------------------------------

Michal Kuzawinski, JP Morgan Chase & Co, Research Division - Research Analyst [19]

--------------------------------------------------------------------------------

You said 9% to 10% per headcount, correct?

--------------------------------------------------------------------------------

Jacek Owczarek, Eurocash S.A. - Financial Director & Member of the Management Board [20]

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

Michal Kuzawinski, JP Morgan Chase & Co, Research Division - Research Analyst [21]

--------------------------------------------------------------------------------

Cezary, congratulations on your appointment.

--------------------------------------------------------------------------------

Cezary Giza, Eurocash S.A. - IR Director [22]

--------------------------------------------------------------------------------

Thank you.

--------------------------------------------------------------------------------

Jacek Owczarek, Eurocash S.A. - Financial Director & Member of the Management Board [23]

--------------------------------------------------------------------------------

And good luck. You will need it.

--------------------------------------------------------------------------------

Operator [24]

--------------------------------------------------------------------------------

The question is from Jakub Krawczyk of Raiffeisen.

--------------------------------------------------------------------------------

Jakub Krawczyk, Raiffeisen CENTROBANK AG, Research Division - Financial Analyst [25]

--------------------------------------------------------------------------------

Congrats on the results. Congrats, Cezary. I think you have like an exciting opportunity ahead of you. I have just a question on the retail side, if I understand correctly, Jacek, I think you have -- I think you said that expansion is not your priority next year. Did I understand that correct?

--------------------------------------------------------------------------------

Jacek Owczarek, Eurocash S.A. - Financial Director & Member of the Management Board [26]

--------------------------------------------------------------------------------

No, no, no. This year, I'm sorry, let me rephrase. As you remember, we said that 2019 is year of integration, so this year. And also, as you can see in our results, we grew the number, but it's not very big number. So we always said when we finish integration, so beginning of 2020, we'll need to come back to you at the -- the market itself and discuss what's really the growth speed yes. So generally speaking, that was my statement or what I meant. I'm sorry, if I rephrased wrongly.

--------------------------------------------------------------------------------

Jakub Krawczyk, Raiffeisen CENTROBANK AG, Research Division - Financial Analyst [27]

--------------------------------------------------------------------------------

Okay, understood. So I'm jumping the gun, asking now about retail expansion for 2020. Is this something which you will tell us at the next call?

--------------------------------------------------------------------------------

Jacek Owczarek, Eurocash S.A. - Financial Director & Member of the Management Board [28]

--------------------------------------------------------------------------------

I think the beginning of -- yes, at year-end, I think that's one of the topics we'll need to come back to all of you because otherwise, we'll be unable to really discuss whether the growth is in retail or it's not there. Yes.

--------------------------------------------------------------------------------

Operator [29]

--------------------------------------------------------------------------------

The next question is from Michal Majerski of PTE Allianz.

--------------------------------------------------------------------------------

Michal Majerski, PTE Allianz Polska S.A. - Senior Equity Analyst [30]

--------------------------------------------------------------------------------

My question is about [local alcohol,] it's the only category with substantial growth year-over-year. Has this volume moved to our (inaudible) Dystrybucja or other [formats] or you just lost it?

--------------------------------------------------------------------------------

Jacek Owczarek, Eurocash S.A. - Financial Director & Member of the Management Board [31]

--------------------------------------------------------------------------------

No, no, no.

--------------------------------------------------------------------------------

Michal Majerski, PTE Allianz Polska S.A. - Senior Equity Analyst [32]

--------------------------------------------------------------------------------

[PLN 120 million.]

--------------------------------------------------------------------------------

Jacek Owczarek, Eurocash S.A. - Financial Director & Member of the Management Board [33]

--------------------------------------------------------------------------------

Yes. So let me explain what -- I mean big part of this went into the Dystrybucja [sales] because, for example, just to take the real example from life, Lewiatan stores. So Lewiatan stores, in past, they had 2 contracts. One was with Eurocash Alkohole for specialized distribution of alcohol and for the rest of the products with Dystrybucja. So this kind of clients moved directly into Dystrybucja, however, the fact is also that we cut the sub-wholesalers because that's not our core business in Dystrybucja. And that was the point, I think, Cezary was mentioning [in part.] So in reality, what we did, for example, generally speaking, economically, you are unable to deliver to all points in Poland, so you are [sharing] through sub-wholesalers' credit risk, in fact, of the [stock] because you are selling to better potentially partners than the small stores. But generally speaking, we stopped all of this because the other side of the same coin is that you are somehow feeding your direct competition. So right now, we want to deliver directly to the stores. And of course, the drop in each individual store, is much smaller than sub-wholesalers. So volume, short term, it's really suffering from this. I don't have here the split exactly of the amount but we can look for this and provide. I really think, generally speaking, they are 2 biggest factors here.

--------------------------------------------------------------------------------

Operator [34]

--------------------------------------------------------------------------------

There are no questions. I hand back to the speakers for the conclusion.

--------------------------------------------------------------------------------

Jacek Owczarek, Eurocash S.A. - Financial Director & Member of the Management Board [35]

--------------------------------------------------------------------------------

So thank you very much. I hope -- I'm sorry because we can see that there was somebody in the system still trying to reach us with the question. If not -- so we can go with the question, if you wish.

--------------------------------------------------------------------------------

Operator [36]

--------------------------------------------------------------------------------

So it's follow-up of Michal Potyra of UBS.

--------------------------------------------------------------------------------

Michal Potyra, UBS Investment Bank, Research Division - Director and Equity Research Analyst - Delta Coverage [37]

--------------------------------------------------------------------------------

Sorry for the last minute follow-up. I actually have a couple of questions, just maybe drilling to a bit of details. Just one, maybe if you could give us like a summary of the integration process of the retail businesses? If you would say, how advanced are you? And when do you expect this to be fully completed, please?

--------------------------------------------------------------------------------

Jacek Owczarek, Eurocash S.A. - Financial Director & Member of the Management Board [38]

--------------------------------------------------------------------------------

Okay. So from the integration perspective, let me a little bit revert the question. So I would try to answer what's left, maybe, okay, maybe the easiest one. I think the 2 big points which will still -- which are still pending are connected to it. First of all, branding of Mila stores. I think we mentioned this on the last quarter call, but we're considering whether it's wise to change the brand of Mila into Delikatesy Centrum in Q4, and we decided it is better to do it after the Christmas. As all of you know, and it's proven the Christmas is the selling season. So of course, we wouldn't like to make any confusion in the heads of the consumers. So we moved the rebranding of Mila stores into I guess January, February. So -- because it's 287 stores. So altogether, it will take a few weeks. So that's one big deviation, right -- I [don't know] big. That's one deviation from our original plan. And second one is also connected with Mila. When we put the original business plan, we said that we'll migrate all of the stores into one IT platform till year-end. And in reality, part of Mila stores is going to be migrated also next year because we spent a little bit more time in integrating EKO, just tweaking the system, so being sure that, that system is working. And in reality, it's not about the technical feasibility of the system but it's much more about how to clean that data, but it might -- master data because, again, sorry, for the example, but the carrot will have the different coat in different IT systems in this country. We don't have something like master data of all the SKUs, which are sold. So it takes time, simply to clean the database of master data. And I think I can tell here that it took a little bit longer than we had (inaudible) originally. Except these 2, I think the rest of what we said with integration, it's really on time. So I don't think really from the big points, we are missing here something. Of course, I do think the beginning of next year, we would need to have the serious discussion about this expansion, like I said, and also about how to change the pricing policy in different clusters. So all of this is going to be [detailed] questions. But I'm not so sure that it's connected with integration anymore, it's simply the business-as-usual much more. So from the integration perspective, it's what really happened and we tried also to pass to all of you this information [past] and we created the team who is running right now homogeneously the full network of franchise and owned stores. And I think that was really the big integration effort. The project was not only about (inaudible) for the time being. I think part of external [work or] thinking, but really about how to integrate this internally -- create new procedures, put all people to working together. So all of this seems quite easy, but if you are thinking about managing 5,000 people or 6,000 in this segment, it's not really the easy task. So I think, except these 2 aspects which I mentioned before, nothing else comes to my mind really as -- that we are behind the original schedule, honestly.

--------------------------------------------------------------------------------

Michal Potyra, UBS Investment Bank, Research Division - Director and Equity Research Analyst - Delta Coverage [39]

--------------------------------------------------------------------------------

Also, can you remind (inaudible) logistics, is it fully done?

--------------------------------------------------------------------------------

Jacek Owczarek, Eurocash S.A. - Financial Director & Member of the Management Board [40]

--------------------------------------------------------------------------------

No, no, no, the one was the brand on the stores. And another one was the migration of the Mila stores, not all Mila stores are going to be migrated on the IT platform till year-end.

--------------------------------------------------------------------------------

Michal Potyra, UBS Investment Bank, Research Division - Director and Equity Research Analyst - Delta Coverage [41]

--------------------------------------------------------------------------------

Okay. And what's the status on logistics, please?

--------------------------------------------------------------------------------

Jacek Owczarek, Eurocash S.A. - Financial Director & Member of the Management Board [42]

--------------------------------------------------------------------------------

Logistics, it's [ready]. So technically speaking, what will happen at the beginning of December, we will merge our companies into one. And at the same time, we will sell the ex-warehouse of Mila in Kragola into Eurocash S.A. so for the common logistical platform. So it didn't happen yet, but I don't see here big risk, honestly. Simply, it depends on -- of the time when the court registers merger, legal merger and all of the papers are in the court, I think, for the last 2 or 3 weeks. So we are on the schedule here as well.

--------------------------------------------------------------------------------

Michal Potyra, UBS Investment Bank, Research Division - Director and Equity Research Analyst - Delta Coverage [43]

--------------------------------------------------------------------------------

A final question, if I may, please. I wanted to ask about franchise Biedronka stores, Biedronka was quite actively advertising them. Do you believe this may increase the competition in this segment? And also, is there a risk that some of your franchisees from Delikatesy Centrum, for example, will [seek their luck] and convert to Biedronka?

--------------------------------------------------------------------------------

Jacek Owczarek, Eurocash S.A. - Financial Director & Member of the Management Board [44]

--------------------------------------------------------------------------------

So generally speaking, personally, I haven't seen anything, except the press release regarding the Biedronka concept. So I don't have any physical right now, example, somebody converted into franchise Biedronka. So hard to really discuss something which is only in the potentially pipeline rather than on the market. So I cannot really comment on this. So I don't know the format, I don't know profitability. So I think that it's not enough to believe that it will be successful. So we need to wait whether it will materialize or simply Biedronka will go to the core business [on top of] Biedronka.

--------------------------------------------------------------------------------

Operator [45]

--------------------------------------------------------------------------------

So now there are no further questions.

--------------------------------------------------------------------------------

Jacek Owczarek, Eurocash S.A. - Financial Director & Member of the Management Board [46]

--------------------------------------------------------------------------------

Okay. Thank you very much for attending our call. We hope you find it interesting. Of course, all of us, we are -- at your disposal, so whatever questions you may have specifically, please contact us directly. Thank you very much. Bye-bye.

--------------------------------------------------------------------------------

Cezary Giza, Eurocash S.A. - IR Director [47]

--------------------------------------------------------------------------------

Thank you. Bye.

--------------------------------------------------------------------------------

Operator [48]

--------------------------------------------------------------------------------

Ladies and gentlemen, thank you for your attendance. The call has been concluded. You may disconnect now.