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Edited Transcript of FIVE.L earnings conference call or presentation 27-Mar-17 1:00pm GMT

Thomson Reuters StreetEvents

Q4 & FY 2016 X5 Retail Group NV Earnings Call

Moscow Mar 27, 2017 (Thomson StreetEvents) -- Edited Transcript of X5 Retail Group NV earnings conference call or presentation Monday, March 27, 2017 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Dmitry Gimmelberg

X5 Retail Group N.V. - CFO

* Igor Shekhterman

X5 Retail Group N.V. - Chairman of Management Board and CEO

* Maxim Novikov

X5 Retail Group N.V. - Head of IR

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Conference Call Participants

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* Brady Martin

Citigroup Inc, Research Division - Director

* Marat Ibragimov

BCS Financial Group, Research Division - Retail and Development Senior Analyst

* Maria Kolbina

VTB Capital, Research Division - Head of Consumer Goods, Retail, and Real Estate

* Victoria Petrova

Crédit Suisse AG, Research Division - Research Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to the X5 Full Year 2016 Financial Results. (Operator Instructions) I must advise you all that today's conference is being recorded on Monday, 27th of March, 2017.

And I shall now hand over to your speaker for today, Maxim Novikov. Please go ahead.

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Maxim Novikov, X5 Retail Group N.V. - Head of IR [2]

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Good morning and good afternoon, ladies and gentlemen. Thank you very much for joining us on this call, where we will discuss X5 Retail Group full year 2016 financial results. Participating in this call today are Igor Shekhterman, Chief Executive Officer; Dmitry Gimmelberg, Chief Financial Officer; and myself, Maxim Novikov, representing company's Investor Relations Department.

I would like to remind you that we have sent the annual report, including the financial statements, to everyone who is on our distribution list. Also, the report, as well as the results presentation and all other materials are available on our website in the Investor Relations section.

Before we start, we would like to draw your attention to the fact that some of the information announced during today's call may contain projections or other forward-looking statement regarding the events or future financial performance for X5 Retail Group. For more information, please refer to the beginning of the presentation, where you can find the disclaimer.

I will now pass the word to Igor, who will start our call.

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Igor Shekhterman, X5 Retail Group N.V. - Chairman of Management Board and CEO [3]

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Thank you, Max. Hello, ladies and gentlemen, and thank you for joining us on this conference call today. I will begin my commenting on our performance and key achievements in 2016 and we will then talk about our plans going forward. After that, our CFO, Dmitry Gimmelberg, will take the floor to talk about our financial results in more detail. Then we will proceed to Q&A session.

In last year, we delivered on all of our strategic and annual targets. X5 is now Russia's largest food retailer. By the end of 2016, our company was larger, stronger and is also growing faster than the competition. Looking ahead, we remain committed to building a sustainable business that will benefit all stakeholders over the long term, including consumers, employees, partners and investors.

Turning our attention to the specific performance results in last year. I want to highlight a few key achievements. As of the fourth quarter 2016, X5's market share increased to 8%, up from 6.3% in 2015. Total revenue growth accelerated to 27.8% in 2016 and exceeded RUB 1 trillion. The main contributor to top line growth was sales base expansion, 86% of which was organic growth. We have now been the fastest-growing public retailer in Russia by revenue for 5 quarters in a row.

Like-for-like sales growth was positive across all major formats despite a significant slowdown in the pace of food price inflation. We improved our adjusted EBITDA margin from 7.3% in 2015 to 7.7% in the 2016, which is the highest level for the company since 2010.

Even as growth has accelerated, we haven't seen any decrease in the quality of new openings. Over the last few quarters, the share of store in clinic has decreased, and we have also not seen any increase in the ramp-up period of recently opened stores, which is clear evidence of the improved quality of our growth.

We are happy with the results of our renegotiation campaign with suppliers, as a result of which we were able to achieve the targets set in the budget for 2017 and to renegotiate over 60,000 agreement with suppliers. However, I believe that there is still potential for further improvement of our terms, especially considering X5 growth ahead of the market and competition. We have set targets for this year to further improve purchasing terms and also to develop strategic partnership with our suppliers.

Now I will like to move to our retail formats. Pyaterochka remained the main driver of our growth during the last year and had the strongest like-for-like performance in the sector. Moreover, Pyaterochka set another new record by adding 9,007 (sic) [968,600] square meter of new space in the last year, which is the largest annual selling pace expansion ever anywhere in the world for this format. We achieved this result due to the following factors: The exceptional work of the teams in both our headquarter as well in our divisions and clusters; further improvement of the GIS system; constant adaptation of the value proposition to the needs of our customers.

As a strategic plan to Pyaterochka, I would highlight the following: We will continue piloting customized promotions and royalty program before launching them across the chain. We will be implementing projects and at increasing direct input, limited -- limiting pauses [ph] and improving operational efficiency.

As we expected, last year was a year of significant improvement to the Perekrestok business, and I am happy with the result we achieved in our supermarket format. Like-for-like traffic was positive for 4 quarters in a row and continued its upward trend to reach the highest level among all X5 formats in each month of the fourth quarter of the last year.

The refurbishment of existing Perekrestok stores is one of the -- our top strategic priorities in 2016. The program has shown impressive results in terms of achieving a critical mass of stores operating under the new concept and the brand perception, with 52 of stores operating under the new concept by the end of the last year.

Last year, we also started piloting a regional supermarket model which we expect to be popular in the regions and become another growth driver for the format. We have adapted the value proposition to successfully meet the needs of regional customers. Based on successful pilot in last year and the beginning of the current year, we aim to roll out this model as part of Perekrestok expansion into new geographic areas and smaller cities in Russia.

In terms of marketing, a key area of focus for us in 2016, was the development of our royalty program as well as increasing the private label assortment. We have already seen the benefit of this, but the main effect will be in this year.

Some of Perekrestok key plans for the current year include: As I said, a successful pilot program for our regional model and further development of this format; further optimization of our assortment; pursuing initiative to support more targeted marketing and promotions. Looking ahead, we believe that there is significant potential for Perekrestok to develop further as the supermarket segment is still highly fragmented and we will be one of the major consolidator.

Moving on to Karusel, where the last year was a period of optimization of new business process. The new team focused on improving the store portfolio and started developing a new approach for our hypermarket business. We have already started to see results from the incremental changes that have been introduced at Karusel, and this is, to a significant degree, thanks to the new business process that you have put in place. The format delivered positive like-for-like sales, traffic and basket growth in quarter 4 of the last year despite the challenging situation in the retail sector.

The Karusel team had been tasked with the developing and launching a new commercial model which will better fit the needs of the hypermarket target audience. The new commercial model is due to be tested in the course of current year, after which, we aim to roll it across the whole chain.

Looking ahead to 2017, Karusel priority include: Finalize the new concept for the updated commercial model; to complete business process revision on a store level; further optimization of assortment and inventory while developing and refining promotion; complete the new management team. Also, I am happy to say that so-called CEO minus 1 [ph] team in Karusel is already in place.

In addition to the strong performance by our retail formats, I want to spend some time talking about operational efficiency, which has been one of the keys to our sustainable, profitable growth. To do this, I will talk about our logistics, transportation and the team.

In last year, our company opened 7 new distribution center and closed 7 as part of its ongoing program to optimize DC operation. Our logistics operations have become more comprehensive, covering a wider range of services from direct input to gross booking. By expanding our logistic infrastructure, we aim to support X5's continued rapid growth while ensuring reliable and high-quality operation.

This year, we will continue to work on improving the quality and sustainability of our logistic operation. In particular, we set ourself the target of developing and improving a new logistic strategy covering the next 8 years. We have taken a more comprehensive approach, continually adding new element, and this is just the beginning. We look forward to updating you about further success we achieve in this area in due course.

We have continued to improve the efficiency of our transport operation and to grow our own fleet to keep pace with new store opening and new regional expansion. We purchased almost 1,000 new trucks in the last year, expanding our fleet by 48 year-on-year to over 2,300 trucks.

In terms of IT. In 2016, our main focus was on the ongoing implementation of X5's IT strategy for 2015-2017, including initiatives aimed at improving our customer-centric operations, enabling us to better analyze our customer and their behavior, as well as to develop products to improve store management and further enhance EDI.

As regarding the operational environment, I will repeat that we see some hints of stabilization. However, it's still too early to speak of full recovery. To date in the current year, things remain the line with the last-year trends. Customer remain extremely rational and continue to seek out the best prices and promo. Nevertheless, we remain focused on achieving the targets set out in our business plan, and we believe that we must continue to fine-tune the value proposition of our retail format in order to do so.

I am also pleased to say that we are off to a strong start for the year and posted excellent result in the first quarter, which is coming to end. Dmitry will give more details on our performance year-to-date. Also, for now, I can confirm we are proceeding in accordance with our business plan.

I already listed our priorities for the format and key business area for the year. At the same time, we would like to speak to our usual policy and refrain from giving any specific guidance on revenue and EBITDA. We continue to follow our long-term guidance of reaching 15% market share while maintaining margin by the end of the 2020 which was announced at our Capital Market Day last year, and we are now working towards this ambitious target. On the subject of opening, this means that we should maintain the current level of growth in absolute term and open 2,000-plus new stores across all format by the end of this year.

To conclude, I would like to point out that such impressive performance for last year is a result of the transformation process that we have started 4 years ago. Key factors that are supporting this transformation process include our true multiformat operation model, as well as highly efficient and coordinated work between teams at the corporate center and retail format. And I'm very grateful to our team for their excellent work. We delivered on the objectives that were set for them and who will receive bonus payment in accordance with the LTI program that we have already talked about a lot.

Now let me thank you for your attention and pass the floor to Dmitry, who will talk about our financial results in the last year and our performance in the beginning of the year in more detail.

Thank you,

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Dmitry Gimmelberg, X5 Retail Group N.V. - CFO [4]

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Thank you, Igor. Good morning and good afternoon, ladies and gentlemen. Thank you very much for joining our call today. Let me start by providing an overview of some of the key trends in our financials.

Revenue. In 2016, X5's revenue increased by 27.8% on the year-on-year basis and amounted to RUB 1.03 trillion, making the company's highest pace of growth since 2010, 2011.

Net retail sales for 2016 grew by 27.5% year-on-year, driven by a 7.7% increase in like-for-like sales and a 29.1% rise in selling space.

Margins. Moving on to margins. Despite the fact that we have improved purchasing terms and achieved some substantial positive effect from our ongoing initiatives in logistics and transportation, in the current environment, we are not able to transform -- to transfer this into gains on the gross margin level. We also saw changes in the contribution to revenue by format, with the share of Pyaterochka continuing to rise. The rapid expansion of the store base and increasing share of stores in ramp-up phase also affect X5's gross margin. All these factors led to a 34 basis point year-on-year gross margin decrease to 24.2% in 2016.

To offset the decline in gross margin, we focused on prudent control of all our operating expenses, including sales, general and administrative cost. And we achieved our budget targets in 2016, with the reduction in adjusted SG&A expenses as a percentage of revenue by 75 basis points (sic) [78 basis points] to 17.2%. The key drivers for improvement in SG&A expenses were staff cost, third-party services, security cost and other expenses. You can find the detailed breakdown regarding this in our today's published annual report.

But I would like to add that this result would not have been possible without successful implementation of a substantial number of operating efficiency initiatives that we have been rolling out to different areas of our businesses. As a result, we delivered a strong adjusted EBITDA margin of 7.7%, 35 basis points higher than the year ago and the highest level since 2010.

Turning to the LTI program. As you will have seen, following our trading update in January, we have achieved all targets for the deferred part of the first stage of the program, and expenses under the first stage amounted to a total of RUB 1.2 billion. Moreover, as we are very close to achieving the target under the second stage of the program, we have decided to make an additional accrual in the amount of RUB 1.5 billion in 2016 financial statements. All in all, expenses for all stages of the program, including associated social tax, amounted to RUB 3.3 billion for 2016 financials.

With regards to this program, in 2017, we expect an additional accrual in the amount of around RUB 2 billion. You can find more details about our LTI program in our annual report. I would reiterate once again that the total size of the program has not changed and is equal to 12% of EBITDA in the year when the substantial leadership is achieved, so most likely, 12% of this year's EBITDA.

Depreciation, amortization and impairment cost increased in 2016 as a percentage of the revenue by 39 basis points year-on-year to 3.0% for 2.6% in 2015. The growing share of leased stores and our large-scale refurbishment program led to some significant changes in the structure of the property, plant and equipment, with the share of assets with shorter useful life increasing. On the back of these changes, the company has decided to fine-tune its approach to the useful life of assets, which led to the -- to an increase in depreciation and amortization cost for the period.

The company's debt finance cost in the reporting period increased by just 4.7%, and, as a percentage of revenue, were 36 basis points lower than a year ago. The higher level of gross debt was offset by the decreased weighted average effective interest rate, which declined from 12.7% for 2015 to 11.3% for 2016. Our efforts to minimize interest expenses and the declining interest rates in Russian capital markets were the main reasons for the lower cost of debt. For 2017, we expect the further reduction of our effective interest rate. For example, year-to-date rate is remaining below 10%.

In 2016, X5 effective tax rate totaled 22.2%, which is slightly higher than a year ago when we had the one-off effect from the release of the tax liabilities accrual. As a result of all these factors, the company's net profit in 2016 increased by 57.3% while our net profit margin improved by 40, 4-0, basis points and reached 2.2%. While net margin, adjusted for LTI and the contribution from the change in the useful life on the property, plant and equipment, would have reached 2.8%.

Turning to our balance sheet. Thanks to the strong EBITDA growth at the end of 2016, our net debt-to-EBITDA ratio increased to 1.81x, the lowest level in the X5's history and down significantly from 2.45x at the end of the previous year, of 2015.

Operating cash flow. Our net operating cash flow more than doubled in 2016. Solid cash flow from the operating activities before changes in the working capital, which increased by 33.6% on the year-on-year basis, was strongly supported by improved working capital, mostly attributable to increase in the accounts payable due to rapid business growth, as well to a decrease in other accounts receivables and to changes, positive changes, in other liabilities.

Capital investment. X5's CapEx increased year-on-year in 2016 by 13.5% and amounted to RUB 80.7 billion, of which approximately 52% went to the expansion of our store base. The next-largest category was store refurbishment, which accounted for approximately 24% of the CapEx during the reporting period. The remaining CapEx was made up of IT, logistics and other investments.

Operating environments and year-to-date results. I would like to speak about our current operating environment and our results year-to-date. As Igor already mentioned, the operating environment remains challenging and we still prefer to be cautious. However, we do see some signs of stabilization in the form of deceleration in the food inflation to 6% for the full year of 2016 and to even further deceleration in favor of the current year to 3.7%. Also, real wage growth was positive in 2016, recovering from the negative 9% in 2015 to 0.7% in the previous year, and then continues to grow in January, reaching 3.1%.

Moreover, due to ruble appreciation, since the beginning of the year, we have seen meaningful deflation in ForEx-linked categories, such as fruit and vegetable, sugar, vegetable oil, et cetera.

Nevertheless, we are on track to deliver on both our strategy and our business plan this year. And I'm happy to share with you some of the year-to-date operational result of X5 and our major formats, which are, without doubt, very strong.

X5 net retail sales has increased by around 26% year-on-year basis, and like-for-like sales growth amounted to 7%. Pyaterochka showed the higher growth rate, with the net retail sales up by around 29% while like-for-like sales grew by -- grew to 6%. Perekrestok net retail sales increased by around 20%. Like-for-like sales growth has reached 11%. Finally, Karusel net retail sales increased by around 10%. Like-for-like sales grew by 9%. We will provide all the other operating results on the 20th of April during our regular operational update.

That concludes the discussion of our results. Thank you for your attention. And now we can move to Q&A session.

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Maxim Novikov, X5 Retail Group N.V. - Head of IR [5]

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Ladies and gentlemen, this concludes our presentation. And now we are ready to take your questions. This session will last possibly 30 minutes. (Operator Instructions) Operator, can we have the first question, please?

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from Martin -- sorry. Brady Martin from Citi.

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Brady Martin, Citigroup Inc, Research Division - Director [2]

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Two questions. First one is about the noncash charges on depreciation and impairments. I read the notes in your financial statements. Just wondering on -- how are we supposed to look at this going forward? It looks like D&A was around 3% of sales. Was there any one-off there for 2016? Or is this kind of a sustainable level going forward? Also, impairments as well. I'm not sure how to look at this. I know it's noncash, but this kind of grew in line with sales and was -- created a miss, versus our estimates, anyway, and I think versus the market. So that's really the first question, on these noncash charges. The second question is just on payables. It looks like payables did contract very slightly, payable days, but only 1 day. I mean, it's still 61 days. I was kind of surprised that you didn't see more of a contraction there. Considering the changes in retail loss, I'm just wondering, is this -- can you explain why you didn't see more of an impact there? And is this a level that you're comfortable with now?

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Dmitry Gimmelberg, X5 Retail Group N.V. - CFO [3]

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Thank you very much of course for the questions. Let me start with the first one. So these noncash charges, depreciation, amortization and impairment, first of all, their growth has different nature. Let's start with depreciation and amortization. As I already mentioned, we have adjusted on our accounting policy after consultation with our previous and the current auditors. We decided that to better reflect the composition of our assets with increasing shares of the short-term assets, such as leased stores, we have decided to adjust this useful lifetime and the depreciation period accordingly. So this means that the new accounting policy will be long-lasting in terms of our approach to calculating the depreciation charges. Percentage-wise of the sales revenue, this can be changed, or this is a variable or independent variable, as our sales grows much faster than our asset base. So percentage-wise, the depreciation and amortization charges can go and should go down for the next years. Coming to the impairment. The increase in the impairment charges for the year are associated purely with the additional write-off of the obsolete store equipment, such as shelves, fridges, et cetera. The increase was purely related to the additional 4 Karusel stores that have been either closed or refurbished, 4 stores in addition to 2015 result. So in those additional 4 stores just created additional RUB 877 million of impairment charges. It's just a coincidence that the increase in this charge is equal to the growth of the business itself. So it will not have any long-lasting effect and we can call it a one-off event. So coming to your second question about the payables. You are right; indeed, our payables, days-wise, have been -- have not changed substantially. Depending on how you calculate it based on revenue or cost of goods sold, both calculations show that they have unchanged. Basically, we have reached this by working closely with different operational areas, such as purchasing and debt handling. Again, the effect of transition to the new trade law conditions did not substantially affect the 2016 result, as only a fractional number of agreements have been reconcluded in course of the previous years, so before the year-end. And therefore, the impact of the new conditions of these re-signed agreements, only fractional impact from this event took place in 2016. We will see a more significant impact on the working capital in the current year, in 2017. So the overall impact that we expect will be in a range of RUB 7 billion to RUB 10 billion, so negative impact on our working capital because of the combination of back-to-front transition and institution of the new payment terms. Nevertheless, this RUB 7 billion to RUB 10 billion negative effect on the working capital does not contribute or present any substantial threat to our cash flow.

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Operator [4]

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The next question comes from Nikolay Kovalev from VTB Capital.

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Maria Kolbina, VTB Capital, Research Division - Head of Consumer Goods, Retail, and Real Estate [5]

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It's Maria Kolbina, VTB Capital. Two questions from me. You commented on year-to-date sales growth. So can you shed some light on what was selling -- or corresponding selling space increase? So that's my first question. And the second question, you mentioned deflation in certain food categories. So can you specify how significant was deflation for your overall sales? So what's the kind of revenue show for deflation during the first quarter of this year? So that's all for me.

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Dmitry Gimmelberg, X5 Retail Group N.V. - CFO [6]

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So coming to your questions. For the first question, unfortunately, we are not in a position to disclose additional information at the moment. We will come with full answer by 20 of April, as I mentioned earlier. Coming for your second question, if I understand this correctly, you are interested in the deflation pace in some of the categories, am I right? Because there were some interruptions on the line.

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Maria Kolbina, VTB Capital, Research Division - Head of Consumer Goods, Retail, and Real Estate [7]

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Yes. And what was the overall effect? So how significant, how material the effect of deflation for the sales in the first quarter?

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Dmitry Gimmelberg, X5 Retail Group N.V. - CFO [8]

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We think there are some categories where we clearly see the deflation process, such as, for instance, sugar, where the deflation was up to 20%; and also in some vegetables, where the deflation was in around 10%. Of course, this has some significant impact on our retail sales. But nevertheless, our shelf inflation, as we call it, is well above 3%. And this creates a positive impact for reaching the budgeted numbers in the sales areas. Thank you.

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Maria Kolbina, VTB Capital, Research Division - Head of Consumer Goods, Retail, and Real Estate [9]

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Okay. And I just want to clarify here on the first question. So is the selling space addition is higher than increase in overall sales in absolute terms in the first quarter, if you can comment? And coming to the second question, so like, what is, like, overall share of items in which you saw deflationary trends in the first quarter? Like 5%, 10% of overall sales? So just to get an idea how significant and how material these trends were during the first quarter of this year. So that's all from me.

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Dmitry Gimmelberg, X5 Retail Group N.V. - CFO [10]

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Okay. Let me give some additional flavor. On the first question, the run rate for the opening new stores and the increase in our sales square meters is roughly in line with the growth of the business. On the second question, the relative portion of those categories where we see the deflation, I would say, is in the range of 15% to 20%. So it has certain impact. But as I said, the overall shelf inflation is well above 3%. So the impact of those categories where we see deflation is significant, but not tremendous.

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Operator [11]

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(Operator Instructions) The next is from Victoria Petrova from Crédit Suisse.

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Victoria Petrova, Crédit Suisse AG, Research Division - Research Analyst [12]

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I see that your operating profit margin is down year-over-year, obviously, which suggests that 1% increase in EBITDA margin comes from depreciation, amortization and impairment. Could you -- and at the same time, I see savings on SG&A expenses. Could you maybe comment briefly on the fourth quarter dynamics in operating profit? Is it purely LTI? Or should we -- or is there anything else which affected operating profit negatively? Does management have any motivation for sustainability of EBIT, not EBITDA, relative to LTI? That would be my first question. And my second question, obviously, you just provided a very impressive sales growth indication for the first quarter. Are you seeing a significant discrepancy in consumer behavior between the largest cities, St. Petersburg and Moscow, where you have quite strong operations in the regions? Or do you see a similar trend led by refurbishment and quality of your stores as well as customer proposition?

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Dmitry Gimmelberg, X5 Retail Group N.V. - CFO [13]

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Okay. Thank you for the interesting question. So to coming for your first question, you are correct in your assumption. The one-off, such as LTI accrual and change in the approach to depreciation, amortization charges, they affected our operating expenses in the last quarter of 2016. Coming back to your second question regarding the differences in the consumer behavior. Actually, we have not seen any significant differences from the metropolitan-located stores to the regionally located stores. So basically, customers perceive very well the newly refurbished Pyaterochka stores, and they appreciate pretty much the -- our continuous improvements in assortment in the matrix. So they see how we adjust our value proposition to meet their needs. So therefore, more or less, the customers' behavior didn't change significantly, at least from what we've seen.

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Victoria Petrova, Crédit Suisse AG, Research Division - Research Analyst [14]

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And regarding LTI, do you have -- do LTI terms have any relationship to operating profit? Or only to EBITDA margin sustainability?

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Dmitry Gimmelberg, X5 Retail Group N.V. - CFO [15]

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So at the moment, the -- as you probably know, so the LTI is straightforward linked to EBITDA.

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Victoria Petrova, Crédit Suisse AG, Research Division - Research Analyst [16]

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EBITDA.

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Dmitry Gimmelberg, X5 Retail Group N.V. - CFO [17]

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Sorry. EBITDA, yes. So LTI is linked to EBITDA. And in the future, we believe that a new LTI program will address the issue of return on the investment. And while designing new program, we'll most likely consider either EBIT or net profit related to the overall investment. So -- but we are still in the process of defining and designing the new LTI program.

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Igor Shekhterman, X5 Retail Group N.V. - Chairman of Management Board and CEO [18]

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Just to add to what Dmitry said, that ROI will be definitely one of the trigger for the next step of the -- our LTI program.

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Operator [19]

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Our next question is from Marat Ibragimov from BCS.

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Marat Ibragimov, BCS Financial Group, Research Division - Retail and Development Senior Analyst [20]

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I have a question on the depreciation. You have changed the schedule of your depreciation. What was the reason for that? Is that -- for -- to reduce taxable income and to reduce income tax? If it's -- if this is the case, why the effective tax rate increased by more than 1 percentage point?

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Dmitry Gimmelberg, X5 Retail Group N.V. - CFO [21]

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The increase in the tax rate has basically little to do with our -- with the change in the approach to depreciation calculation. Probably, I shall repeat that the new approach to depreciation of the fixed assets was mainly driven by the significant change in the composition of our fixed assets. So the number of the leased stores, leased or rented stores, have significantly increased over the several last years. So therefore, we have reconsidered our approach to the useful life. And we decreased the useful life of the refurbishment cost, (inaudible) refurbishment cost. And at the same time, we have increased the useful life of the buildings themselves. So again, we have spent quite a lot of time discussing this methodological approach with our previous and current auditors to ensure smooth transition from the previous methodology to the new one. So again, this was purely driven by the intention of the company and intention of the management to correctly reflect in the financial accounts the actual business processes that the company is experiencing. With regards to your -- the second part of your question, of the increase in the effective tax rate, it wasn't driven by the depreciation and amortization charges. So the tax rate has increased compared to 2015. But if you look backwards to the previous year, years in 2013 and 2014, we are more or less in line with those previous years. In 2015, we have seen the unusually high level of reversal of the provisions, so the tax provisions. So therefore, the 2015 ETR was artificially lower than the years before and then the overall ETR that is considered correct for our business. So looking forward, I believe that the ETR rate will stay in a range of 22% to 23%, depending how well we can manage certain accounting.

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Marat Ibragimov, BCS Financial Group, Research Division - Retail and Development Senior Analyst [22]

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And another question on LTI cost. As far as I understood, you have accrued part of that cost in 2016, and then you will be accruing them in 2017 to '19 or -- equally. Or am I -- I am wrong?

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Dmitry Gimmelberg, X5 Retail Group N.V. - CFO [23]

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You are right.

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Marat Ibragimov, BCS Financial Group, Research Division - Retail and Development Senior Analyst [24]

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And how shall we -- what size of the -- what's the LTI should be accrued in 2017? Any values on that?

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Dmitry Gimmelberg, X5 Retail Group N.V. - CFO [25]

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In 2017, as I mentioned in my presentation, we are planning to accrue RUB 2 billion.

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Marat Ibragimov, BCS Financial Group, Research Division - Retail and Development Senior Analyst [26]

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RUB 2 billion, okay.

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Dmitry Gimmelberg, X5 Retail Group N.V. - CFO [27]

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And for the year -- the next year, it's going to be slightly higher, in a range of RUB 3 billion.

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Operator [28]

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(Operator Instructions) And we have a follow-up question from Brady Martin from Citi.

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Brady Martin, Citigroup Inc, Research Division - Director [29]

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Yes, 2 quick questions. One, on the -- I know on the outlook, I understand you don't -- you have a policy of no guidance on sales and margins. But you -- since you mentioned the number of stores, wonder if you can comment on CapEx plans, investment plans. Either a range or minimum or anything would be appreciated. The second question is just on the -- is what you call other store costs in your SG&A breakdown. I mean, if we look at that kind of progression over the year, it looks like it's falling about 10 bps a quarter versus sales. Just wondering if you can remind us, what exactly is in other store costs? And why is it falling?

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Dmitry Gimmelberg, X5 Retail Group N.V. - CFO [30]

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Thank you for the good question. Let me start with the last one. The other store cost was driven down mainly by the reduction in the security cost. And actually, security cost represents the largest item here. And the security cost reduction, as you probably have noticed, was the result of this abundance of security services in our Pyaterochka stores. So we don't have security guys anymore in our Pyaterochka stores, and therefore, our security cost went down. That's to answer your second question. For the first question on the store openings. I think Igor gave you some indication that we're going to have 2,000-plus stores per year for the current years. And as for the CapEx, we don't provide guidance. We -- but I can tell you that the composition of the CapEx should stay more or less the same, so in the range of 70% of our CapEx should be attributable to stores opening and refurbishment program, and the rest, it usually will be allocated to IT, logistics and other minor items. Thank you.

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Operator [31]

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There are no further questions waiting at this time. Please continue. Sir, we've had 1 question come through. Would you like to take the question?

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Maxim Novikov, X5 Retail Group N.V. - Head of IR [32]

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Yes, please.

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Operator [33]

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Okay. It's a follow-up question from Marat Ibragimov.

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Marat Ibragimov, BCS Financial Group, Research Division - Retail and Development Senior Analyst [34]

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I have a question on supermarkets. You have said that your supermarket's performance has improved. But based on the EBITDA number which you provided, the supermarket's EBITDA margin lost 30 basis points. Can you elaborate? Can you give some more color on that?

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Dmitry Gimmelberg, X5 Retail Group N.V. - CFO [35]

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For the supermarkets. Over the last year, Perekrestok was undergoing an important program of redesigning the stores and reaffirming its new approach to customer value proposition. They have significantly adjusted the matrix, especially to address the regional needs. So on average, they reduced the price of the product that was in the matrix, so the overall check went slightly down. This was affecting the margins. Secondly, they were in a process of redesigning and refurbishing some substantial number of stores. So unlike Pyaterochka, to refurbish the Perekrestok store, they have to shut it down. And therefore, there was certain loss in the EBITDA. Going forward, we see a very solid improvement in Perekrestok's like-for-like traffic and like-for-like sales. And we believe that with the new matrix working and the new regional model working, as has improved during the fourth quarter of the last year and the first quarter of this year, we will see some important uplift in the Perekrestok's EBITDA for this year. I hope I answered your question.

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Igor Shekhterman, X5 Retail Group N.V. - Chairman of Management Board and CEO [36]

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Yes, I would add something regarding the Perekrestok. We have -- I could confirm that we have already got some positive result in the changing of Perekrestok. And we saw some result in the accretion of losses. That is a result of the remodel of assortment and operational efficiency in our regional supermarket content.

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Marat Ibragimov, BCS Financial Group, Research Division - Retail and Development Senior Analyst [37]

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But in the long term, your sustainable EBITDA margin in Perekrestok should be above that of in Pyaterochka. Am I right?

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Dmitry Gimmelberg, X5 Retail Group N.V. - CFO [38]

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Just slightly.

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Operator [39]

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Thank you very much. No further questions. I shall now hand the call back to yourselves. Thank you.

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Maxim Novikov, X5 Retail Group N.V. - Head of IR [40]

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Ladies and gentlemen, thank you very much for the call. This concludes our conference call today. Please do not hesitate to contact us should you have any additional questions or require any additional information. We appreciate your interest in our company. We appreciate that almost 100 people attended this call, and we are very much looking forward to continue the dialogue with you. Thank you very much and goodbye. Thank you.

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Operator [41]

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Thank you very much, sir. Ladies and gentlemen, that does conclude the call for today. Thank you all for your participation. You may now disconnect your lines.