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Edited Transcript of MGNT.MZ earnings conference call or presentation 6-Feb-20 2:00pm GMT

Full Year 2019 Magnit PAO Earnings Call (Unaudited)

Krasnodar Feb 19, 2020 (Thomson StreetEvents) -- Edited Transcript of Magnit PAO earnings conference call or presentation Thursday, February 6, 2020 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Albert Avetikov

Public Joint Stock Company Magnit - Chief IR Officer

* Elena Milinova

Public Joint Stock Company Magnit - CFO & Deputy Chairman of the Management Board

* Jan Gezinius Dunning

Public Joint Stock Company Magnit - CEO, President, Chairman of Management Board & Director

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Conference Call Participants

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* Alexey Krivoshapko

Prosperity Capital Management Ltd - Portfolio Manager

* Artur Galimov

Sova Capital Limited, Research Division - Analyst

* Elena Jouronova

JP Morgan Chase & Co, Research Division - Research Analyst

* Maxim Nekrasov

Goldman Sachs Group Inc., Research Division - Research Analyst

* Victoria Petrova

Crédit Suisse AG, Research Division - Research Analyst

* Yulia Gerasimova

Goldman Sachs Group Inc., Research Division - Equity Analyst

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Presentation

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Operator [1]

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Good day, and welcome to the Magnit Quarter 4 2019 Financial Results Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Albert Avetikov. Please go ahead, sir.

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Albert Avetikov, Public Joint Stock Company Magnit - Chief IR Officer [2]

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Good evening, good afternoon, and good morning, ladies and gentlemen. Thank you for joining us to discuss Magnit's operating and unaudited financial results for the fourth quarter and full year of 2019. With me to review the results are our CEO, Jan Dunning; and CFO, Elena Milinova. The announcement and presentation are available on our website. And of course, after our remarks, we look forward to taking your questions.

I would like to remind you that today's financial results are based on the management accounts and may slightly differ from audited financial statements under IFRS to be reported by the company on March 16.

I will now turn the call over to Jan Dunning. Jan, please.

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Jan Gezinius Dunning, Public Joint Stock Company Magnit - CEO, President, Chairman of Management Board & Director [3]

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Yes, thank you, Albert. Good day, everyone, and thanks for joining us. Let me start as usual with the key highlights before we jump into the details. First, we have opened around 2,400 stores on a net basis and redesigned more than 2,300 stores in 2019. The selling space growth slowed down a bit, while still remained double digits despite a high base. Sales growth in the fourth quarter accelerated on stronger trading in the like-for-like stores, driven by traffic improvement.

We've seen like-for-like traffic improvement each consecutive month of the quarter across all formats. Positive momentum continued in January with even stronger like-for-like sales growth, despite much, much lower promotivity.

Gross profit margin in the fourth quarter weakened on the back of price investments to drive sales, combined with slightly lower supply chain efficiency. Notably, both logistic costs and shrinkage were improving throughout the year. SG&A costs remained under control, where higher depreciation and amortization expenses, utilities and rental costs were partially compensated by a reduction in advertising, packaging and staff costs.

EBITDA margin came in below our expectations, mainly driven by stronger promo intensity and the introduction of our loyalty card. I'll go back to that later. Net income significantly shrunk due to gross profit dynamics, higher depreciation and amortization and increased finance costs. Our guidance for 2020 reflects greater focus on efficiency of business processes, stricter return requirements, proper capital allocation and value creation for all shareholders.

Now I will run you through main achievements and development of the quarter. The sales growth supported by like-for-like improvements from sustainably better traffic. Despite slower selling space growth of 12.7%, sales growth in the reported quarter accelerated to 11% and was supported by improvements in the like-for-like stores.

Like-for-like sales growth was positive during 2 months of the quarter despite negative quality of days in December. So normalized like-for-like sales growth would be around 1 percentage point higher.

Like-for-like traffic was the key driver of sales growth and was recovering steadily each month of the quarter across all formats. In December, it turned positive, including in core convenience format first time for the last 3 years. This was driven by further improvements in assortment, shelf availability and the loyalty card rollout.

What we actually did, we have invested to get traffic up to show that our stores have improved. I would like to note that very significant contribution to like-for-like came from matured stores, actually those that have opened before 2018. At the same time, the younger stores continued delivering strong double-digit like-for-like sales growth. Traffic was well supported by increased frequency of visits, which is partly related to the rollout of the loyalty program. Growth in the number of unique customers was another contributor to the hike in traffic. In the second half of the year, we have finally started seeing positive net inflow of new customers, coming predominantly from larger format regional chains and traditional retail, evidencing positive customer reaction to our initiatives.

Promo intensity remained elevated in the fourth quarter while significantly reduced in the beginning of the year. Promo share picked up in the reported quarter due to seasonal year-end effect. However, sales growth is also explained by further inventory selloff, deeper discounts not fully covered by suppliers and faster-than-expected growth in loyalty card penetration. Although these price investments put additional pressure on ticket growth and margin, which is not fully covered by suppliers, that allowed us to get customers in showing all the changes and initiatives we have implemented in the stores.

We saw quite aggressive behavior from some of the competitors, including large formats and some market disruptors. We believe that at the moment, our pricing is fully relevant and attractive. Promo share growth slowed down in December without any impact on traffic, which continued improving. In January, the promo activity in our stores was much less visible compared to the fourth quarter, while both like-for-like traffic and sales growth showed further pickup. In January, like-for-like sales growth exceeded CPI level. And given that this year, we don't have any effect from VAT changes, which was 0.6% last year, that makes our trading results even stronger. Of course, I would like to see this as a sustainable trend, supported by both strong consumer and quality improvement in our stores, combined with healthy promo activities.

Then, active rollout of the loyalty card adds incremental sales. We continue actively rolling out our multi-format loyalty card. The very first results came above our initial expectations, and we have reached already 58% of penetration in sales, provided by around 20 new and active cardholders. And penetration is even bigger in the larger formats. The rollout is expected to be completed within the first quarter 2020. At the moment, this is a pure price investment from our side, which is aimed to drive customers' loyalty, retaining and regaining new customers. We are targeting further quick uplift in penetration this year, which will allow us to start transformation of these investments into better supply chains and better customer proposition. And of course, having lots of information on customer transactions will bring us new knowledge to improve marketing, category management, et cetera, to satisfy changing customer needs.

Like-for-like ticket growth remained positive, although deteriorated to 0.3% in the fourth quarter, primarily driven by lower average number of articles in the basket. Shelf price dynamics was negative and in line with the official food inflation. Although record low on-shelf inflation put pressure on ticket growth, it wasn't the key reason for weaker sales. Negative average number of SKUs in the basket was the main factor for such trend, especially pronounced in December due to the high base of comparison of last year.

In the last year -- the last month of 2018, we had the promo campaign, The Nutcracker, which stimulated actually consumers to buy larger basket, and we didn't repeat that in 2019. Trading uptrend continued and was even more pronounced quarter-on-quarter as a result of ongoing improvement in the [store].

Now I would like to turn the call to Elena to comment on the financial results.

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Elena Milinova, Public Joint Stock Company Magnit - CFO & Deputy Chairman of the Management Board [4]

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Thank you, Jan. Gross profit margin dynamics was negative in fourth quarter, driven by high promo intensity through the rollout of loyalty program, weaker supply chain efficiency and higher shrinkage. However, growth from activity with deeper discounts led to increased investments into prices, not fully covered by supplies. The pace of the loyalty card rollout was faster than originally planned. And what is more important, reached higher than expected penetration ratio. This was another reason to drive investments not yet covered by suppliers, although, at this stage, with penetration of 58% in sales, we still consider this is a pure investment. Loyalty card becomes one of the major utility element. Growing on-shelf availability, assortment change in large formats and other factors resulted in weaker year-on-year supply chain efficiency and higher shrinkage in fourth quarter.

However, looking at the quarterly development, we see gradual reduction of logistic costs on the back of several initiatives launched in the second half of 2019. For example, standard for external transportation, review of delivery schemes, limited suppliers and the others. But the same dynamics we see -- and the same dynamics we see in shrinkage. We have started the year with a very high base. So although it increased by 55 bps in 2019 versus 2018 on higher share of fresh and ultrafresh products and better on-shelf availability, in fourth quarter, shrinkage already reduced by 39 bps quarter-on-quarter. We were seeing step-by-step reduction in shrinkage throughout the year. Since September, the gap between 2019 and 2018 has almost disappeared. And this plan has to be supported by further growth of the share of drogerie.

SG&A expenses remained under control. As you have seen from the announcement, SG&A as a percentage of sales increased by 38 bps year-on-year. And this was predominantly driven by improved depreciation and amortization, [higher-end] and countrywide indexation of tariff. Personnel costs slightly improved both year-on-year and quarter-on-quarter, thanks to continuous automation of key business processes and optimization of the headcount. Personnel costs constantly improved, thanks to reduction of workload, optimization of induction programs and [others]. We are well on track with remediational changes related to decentralization of front office functions and centralization of back office functions.

Growth of cleaning expenses was caused by increased tariffs and higher frequency of cleaning as a result of higher standards applied to the stores in accordance with the new CVP. Increase in electricity cost was related to annual indexation in July 2019.

While on year-on-year basis, rental costs increased by 33 bps due to growing share of leased selling space to 77% in fourth quarter 2019, which is steady quarter-on-quarter improvement of lease terms resulting in lower rental cost per square meter of selling space. And another factor is definitely related to better quarter-on-quarter sales density across all formats.

Depreciation of assets in the fourth quarter 2019 was 50 bps higher year-on-year due to changes in management judgment of useful life of assets and impairment of assets in the amount of RUB 1 billion recorded in the reported period.

Other operating expenses increased predominantly due to insurance costs as a result of introduction of insurance program covering all network of stores and distribution centers. The amount of increases were well offset by optimization of marketing and advertising expenses and improvements in packaging and raw material expenses.

Reported EBITDA margin came below our expectations in fourth quarter, resulting 6.1% for the full year. EBITDA adjusted for one-off and LTI expenses came at 6.8% for 2019. As a result of the gross profit margin dynamics, not fully offset by G&A improvements, EBITDA margin in fourth quarter came below management's expectations. LTI expenses contributed 0.12% in the reported period, resulting in pre-LTI margin of 5.5% while for the full year, LTI expenses amounted to 0.15%, leading to EBITDA pre-LTI of 6.2%. There's no one-off expenses we recorded in fourth quarter adjusted EBITDA pre-LTI level, while for the full year, it stood at 6.8% as a result of previously announced one-offs.

Net interest expenses in fourth quarter increased by 50% or 27 bps year-on-year due to a combination of larger average amount of volumes and higher cost of debt compared to the previous year. As a result of taxes mentioned above, net income in fourth quarter decreased to RUB 4 billion with a margin of 1.1%.

Effective tax rate was negative as the result of amended tax declaration for the previous year with regards to deductible expenses. I would like to mention that normalized effective tax rate of Magnit stands at around 22%, in line with the full year 2019.

Net debt increased year-on-year on higher total debt and lower cash balance. You may have seen from our announcement that at the end of the year, we had total debt of RUB 184 billion and the cash position of around RUB 9 billion, resulting in a net debt of RUB 175 billion. This year-on-year increase was driven by first half borrowings while in the second half total debt declined. Sales dynamics was mostly attributable to acceleration of the redesign program and store openings, investments in buyback program and 2 dividend payments within 2019 versus 1 within 2018.

The net debt increase was due to higher gross debt and global cash position related to different calendarization of payment days in 2019 and 2018. Net debt-to-EBITDA ratio was 2.1x, unchanged versus end of the first half of 2019. In 2020, we see room for improvement in cost of debt with positive effects on the bottom line. CapEx in 2019 amounted to around RUB 59 billion. CapEx in the reported year was slightly higher than a year ago, due to more store openings and redesigns completed in 2019. At the same time, it was lower than the guidance range as a result of stricter return requirements implied for all projects in fourth quarter and global investments per square meter of selling space. Detailed discussion of CapEx expenditures as well as debt portfolio will be provided on March 16 when Magnit reports full year audited IFRS financials.

Inventories showed some increase within 2019 as a result of structural changes. You would notice from the announcement that inventory level reached RUB 219 billion at the year-end, increasing versus beginning of the year. This was partially related to continued focus on shelf availability on the back of ongoing assortment review resulted in additional purchases. On-shelf availability improved across all formats. And other factors included organic growth of the company's own network, inflation in purchasing prices and assortment mix. Fast-growing drogerie business had an impact as well. Cosmetics segment reached a record high of 8.7% of net retail sales in fourth quarter. With more extensive assortment in that format and lower rotation of such items, it had an impact on total inventories. The team achieved good results in reducing old stock, [was] before 2019, with insignificant amount left. As to the [purchase metrics], we now reach comfortable level of around 8%, 10% of inventory, which is in line with the industry practice. As you may remember, we had more aggressive plans last year. However, we underestimated impact from assortment change, uplift of on-shelf availability and other factors.

Going forward, we are not going to lower the stock in absolute terms, but we will target organic reduction of turnover days without pressure on promo share and margins. In 2019, we managed to improve payable days turnover year-on-year by 2.5 days to 45 days.

And now I will give the floor back to Jan for guidance and closing remarks.

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Jan Gezinius Dunning, Public Joint Stock Company Magnit - CEO, President, Chairman of Management Board & Director [5]

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Yes. Thank you, Elena. 2020 forecast reflects greater focus on operating efficiency and optimization of key business processes rather than on faster growth.

Before I go through the figures, I'd like to tell you that what is key here. It is definitely prioritization of our efforts on profitable growth and returns aimed to create additional value for stakeholders. Yes, there is a slowdown in our organic expansion to a moderate level, which is visible in our net opening targets for 2020 versus 2019, but it is still 1,300 stores with focus on the best products in the strongest regions where we have high confidence of reaching acceptable returns. And we will continue our redesign program with another 1,300 new stores planned for refurbishment as well in 2020.

Of course, we will also continue to look for bolt-on acquisitions, small to medium sized, if such value-accretive opportunities arise. Our closure program is well analyzed. Considerable part is actually a replacement of older stores by better locations as well as some closures in the weak catchment areas.

In 2020, we plan to close around 480 stores. Notably, over 80% of closures will happen in the first half year and more than 90% will be in the convenience segment.

The intention to slow down expansion in 2020 should not be seen as a lack of confidence in the long-term attractiveness of the market, nor does it indicate a lack of opportunities. It is a sign of our confidence in Magnit's market position and our greater focus on value creation for shareholders. If environment becomes more favorable and our trading continues improving, we may revise these targets.

With this, you see us spending from RUB 60 billion to RUB 65 billion of CapEx, while investments in organic expansion and redesign will slightly reduce, we will increase spending on efficiency projects focused on business development, such as optimization of supply chain and IT infrastructure and others. Our key focus this year will be on further development of loyalty program, balanced promo with better coverage by suppliers, continuous improvement of supply chain, expenses, shrinkage, further optimization of SG&A costs and reduction cost of debt to drive margins. All this is aimed to improve our products and create additional shareholder value.

Speaking on cash distribution to shareholders, Magnit has a long track record of dividend payments, which we do twice a year. This definitely an authority of the Board and shareholder meeting to decide on dividend payments. Meanwhile, I don't see any reason -- business reason, to expect lower absolute amounts going forward.

Some closing remarks from my side. We remain fully committed to fulfilling customer needs by the implementation of our adjusted CVP. We are focused on fixing and improving the processes of our core business, while continuing to enhance cross-functional cooperation to ensure effective decision making. We will invest in developing our human capital, private label offering, direct imports, and we'll upgrade and modernize our IT infrastructure to optimize business processes. We're taking the first steps in development of our omnichannel digital concept focused on new trends and overall customer journey, with all relevant instruments allowing to identify customers and their consumption patterns with structured proper advanced analytics and personalization as well as to enrich our overall omni experience, including different potential ecosystem elements.

Our main focus is now on profitable growth with efficiency gain, managing [payment areas] and business processes aimed at higher returns and value creation to stakeholders. Thanks for listening, and I think we're ready for questions.

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Albert Avetikov, Public Joint Stock Company Magnit - Chief IR Officer [6]

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Thank you, operator. We're ready for the Q&A session.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We will take our first question today from Victoria Petrova from Crédit Suisse.

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Victoria Petrova, Crédit Suisse AG, Research Division - Research Analyst [2]

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Jan, you have been with the company for 1 year. Now in this 1 year, I noticed that operating profit dropped by 31.5%, net income by 50%. I can imagine that with your also relatively recent role, you have been discovering some news related to the company's business model. And obviously, the guidance given on the 29th of October of 6.5% EBITDA margin for the full year has not come through. Could you please share what was new, surprising? What went wrong in November and December this year? And what can be fixed in the next 2 quarters? That would be my first question.

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Jan Gezinius Dunning, Public Joint Stock Company Magnit - CEO, President, Chairman of Management Board & Director [3]

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Yes, thank you, Victoria for the encouraging introduction. Now to be quite honest, it didn't go wrong in November, December. It was already wrong earlier. And what is wrong was that we have not anticipated enough the investments that have been done and an increase of promo share. It is clear that we have not optimized supplier compensation for those. Due to this, the commercial team experienced too late, that gap was not able to close. And then on top, as you have seen, as of September, we have also started to roll out the loyalty program. And there was -- by the way, there was a deliberate investment into margin. But we simply anticipated a different number. We thought that the penetration will be lower, looking as well at market experience with other businesses. And we found ourselves all of the sudden at 58%. And that was a margin, in fact, that we didn't anticipate. And that therefore, especially in November, December when we saw that hiking up, we tended to realize at least that this is where we have to make sure for the next year that we close that gap. Those are actually the most important elements. The good thing, though, is that -- as you know, I'm an eternal optimist. The good thing, though, is that this has at least translated into a pretty big traffic increase, which we haven't seen for a long time. And we see as well that now in -- and in December and in January, especially in January, and the first couple of days in February that, that translates well in like-for-like sales. So I think our...

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Victoria Petrova, Crédit Suisse AG, Research Division - Research Analyst [4]

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But traffic was negative in the fourth quarter?

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Jan Gezinius Dunning, Public Joint Stock Company Magnit - CEO, President, Chairman of Management Board & Director [5]

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Sorry?

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Victoria Petrova, Crédit Suisse AG, Research Division - Research Analyst [6]

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I saw that -- but from the results, I see that traffic for the fourth quarter is still negative. It's minus 0.2%.

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Jan Gezinius Dunning, Public Joint Stock Company Magnit - CEO, President, Chairman of Management Board & Director [7]

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For the fourth quarter in total, yes, but for December -- yes, but for December, not anymore. And we see that, that has translated into better dynamics. So I think our objective for this year has to be to make sure that the activities that we develop on the commercial side are well enough coverage by funding of suppliers or by different scenarios of getting margin balance difference. And I think that's one of the things that we work on now, and I trust that, that is going to work.

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Victoria Petrova, Crédit Suisse AG, Research Division - Research Analyst [8]

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So basically, you expect positive traffic in the next quarters. And then you can ask for some rebates from suppliers to finance your loyalty card?

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Jan Gezinius Dunning, Public Joint Stock Company Magnit - CEO, President, Chairman of Management Board & Director [9]

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The normal procedure is -- the normal procedure, Victoria, is that if you plan certain activity, that you go and sit with suppliers and ask for, okay, "what kind of programs can we run? What kind of compensation do we get that on invoice?" Or do you do that in a different way by exclusivity or whatever, those things have not been covered enough.

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Victoria Petrova, Crédit Suisse AG, Research Division - Research Analyst [10]

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And it's very...

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Jan Gezinius Dunning, Public Joint Stock Company Magnit - CEO, President, Chairman of Management Board & Director [11]

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And that's also -- it's part of the learning curve of category management because that's what we haven't been too strong at.

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

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My second question is on gross profit. I also noted that the gross profit is down versus third quarter when you had already this inventory sell off. And we believe that it's sort of as a third quarter one-off, but it appears again. And it's also sort of treated as a one-off when I look at your definition of adjusted EBITDA. What exactly is this? How much is left? How should we look at it going forward for the next year?

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Jan Gezinius Dunning, Public Joint Stock Company Magnit - CEO, President, Chairman of Management Board & Director [13]

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Yes. The -- we had -- entering the third -- fourth quarter, we had around RUB 17 billion of old stock. Finishing the year, we had RUB 3.8 billion of old stock. So that's part...

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

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Is it the same as passive stock? Or is it...

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Jan Gezinius Dunning, Public Joint Stock Company Magnit - CEO, President, Chairman of Management Board & Director [15]

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No. No. This is stock that was really old, bought before 2019. There's no passive stock. The other ones, of course, which came as a surprise, is simply the not fully compensated promo increase. I think that's a tough lesson, and that was not well organized.

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

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So it should be really treated as a one-off and should disappear in the first quarter next year?

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Jan Gezinius Dunning, Public Joint Stock Company Magnit - CEO, President, Chairman of Management Board & Director [17]

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Yes, that's what -- we work on that day-by-day. So that will not happen as we did in the fourth quarter. And then also

(technical difficulty)

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Operator [18]

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Ladies and gentlemen, please stand by, as we are experiencing a momentary interruption in today's conference. Thank you for your patience. Please continue to hold.

Please go ahead.

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Jan Gezinius Dunning, Public Joint Stock Company Magnit - CEO, President, Chairman of Management Board & Director [19]

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Yes. Victoria, just -- I don't know where we dropped off there. So just as a repetition. So gross profit impact in fourth quarter was higher promo share, higher loyalty than we expected and not sufficient funding of suppliers in earlier months like October, September.

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Victoria Petrova, Crédit Suisse AG, Research Division - Research Analyst [20]

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If I may just also clarify on EBIT and EBITDA margin. Do I understand it correctly that there was about RUB 2 billion full year LTI and around RUB 400-plus million for the fourth quarter. Is it linked to the share price? Should we expect first quarter LTI to be higher given that share price performance, at least so far, has been quite strong.

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Elena Milinova, Public Joint Stock Company Magnit - CFO & Deputy Chairman of the Management Board [21]

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Okay. Let me answer this question. You're right. So LTI total amount is RUB 2 billion, and that's a big amount, yes. So if the share price will go up, down, that will not influence at all LTI expenses. That's all.

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Victoria Petrova, Crédit Suisse AG, Research Division - Research Analyst [22]

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And these are not subject to the number of core team members?

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Elena Milinova, Public Joint Stock Company Magnit - CFO & Deputy Chairman of the Management Board [23]

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No. No. It could be increased only if the other members will be included into LTI program. But it's not material, yes, as currently we see. So that's fixed and it will not be increased due to share price increase, okay?

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Victoria Petrova, Crédit Suisse AG, Research Division - Research Analyst [24]

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So we should assume RUB 2 billion for the next year?

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Elena Milinova, Public Joint Stock Company Magnit - CFO & Deputy Chairman of the Management Board [25]

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Right.

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Victoria Petrova, Crédit Suisse AG, Research Division - Research Analyst [26]

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My pretty much last question is related to your comment on Page #13. You're saying that you changed methodology to account for rebate allocation between closing inventories and cost of goods sold. I don't understand why the adjustment was -- for 2019 was significantly higher for 2018.

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Elena Milinova, Public Joint Stock Company Magnit - CFO & Deputy Chairman of the Management Board [27]

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That depends on the amount of bonuses by types, by category, which accumulated each year. And second, that depends on the amount of inventory which is on the balance sheet. Because it's increased, the impact in 2019 is higher than in 2018.

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Victoria Petrova, Crédit Suisse AG, Research Division - Research Analyst [28]

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But inventories have not increased by over 50% and the adjustment has?

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Elena Milinova, Public Joint Stock Company Magnit - CFO & Deputy Chairman of the Management Board [29]

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It depends on the structure, as I said. It depends which type of, category -- the structure of inventory on the balance sheet and the structure of bonuses which were collected. For example, if in the fourth quarter, new bonuses related to drogerie or detergents where we have higher bonus, then that means that the impact would be higher. And this year, we have increased in our sales of these nonfood categories where the bonuses are higher.

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Jan Gezinius Dunning, Public Joint Stock Company Magnit - CEO, President, Chairman of Management Board & Director [30]

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It is also the format that was growing the fastest, so that had an impact, yes.

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Victoria Petrova, Crédit Suisse AG, Research Division - Research Analyst [31]

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Yes. Yes, I also noticed that, obviously, your drogeries were growing. And wholesale related to mostly nonfood, if I understand it correctly, has demonstrated significant growth in the fourth quarter. Can you disclose anything on the margins there?

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Elena Milinova, Public Joint Stock Company Magnit - CFO & Deputy Chairman of the Management Board [32]

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We do not disclose the segment's financial results, as you know. But I could say that it's a low single-digit number for that format. For that type of sales, profitability will happen.

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Victoria Petrova, Crédit Suisse AG, Research Division - Research Analyst [33]

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And my very, very last question is related to dividends. You mentioned that absolute dividends business-wise should remain flat. So net income -- decrease in net income would not affect dividends basically? Your payout ratio would double?

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Jan Gezinius Dunning, Public Joint Stock Company Magnit - CEO, President, Chairman of Management Board & Director [34]

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One thing I want to say very clear. The dividend payments and the policy is defined by the Board of Directors and Annual General meeting, AGM. But from a business perspective, I do not see any reasons that we will see changes in the dividend policy, as we've seen over the last couple of years.

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Operator [35]

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(Operator Instructions) At this time, we have not received any further telephone questions. (Operator Instructions) Apologies. We have received a question -- a follow-up question from Victoria Petrova of Crédit Suisse.

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Victoria Petrova, Crédit Suisse AG, Research Division - Research Analyst [36]

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I think I'm probably the only one on the line because my colleagues keep writing me that they don't hear anything. But maybe I can use this opportunity to ask an additional question in the meantime, if I may.

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Elena Milinova, Public Joint Stock Company Magnit - CFO & Deputy Chairman of the Management Board [37]

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Victoria, let us all redial because we should have the floor open for all.

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Albert Avetikov, Public Joint Stock Company Magnit - Chief IR Officer [38]

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Are you sure?

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Victoria Petrova, Crédit Suisse AG, Research Division - Research Analyst [39]

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I just got the message from Michael Krasnoperov, he doesn't hear anything.

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Albert Avetikov, Public Joint Stock Company Magnit - Chief IR Officer [40]

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Okay. Operator, can you perhaps fix it all? We need to redial.

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Operator [41]

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Okay. One moment, please.

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Elena Milinova, Public Joint Stock Company Magnit - CFO & Deputy Chairman of the Management Board [42]

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Marli, is there any update on the situation, please.

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Operator [43]

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Just as an update, I'm in the participant conference at the moment and have been for the duration. I'm not hearing any audio issues apart from that slight disconnection we had earlier.

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Elena Milinova, Public Joint Stock Company Magnit - CFO & Deputy Chairman of the Management Board [44]

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What we hear from other co-participants is that, that was just a one-on-one discussion with the -- with Victoria Petrova. So probably you're like in a private room right now.

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Victoria Petrova, Crédit Suisse AG, Research Division - Research Analyst [45]

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Yes, I'm still on the call, and I get a lot of messages from investors and analysts, they don't hear us.

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Elena Milinova, Public Joint Stock Company Magnit - CFO & Deputy Chairman of the Management Board [46]

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No one else can hear our dialogue, unfortunately.

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Operator [47]

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So no one can hear us speaking at the moment?

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Jan Gezinius Dunning, Public Joint Stock Company Magnit - CEO, President, Chairman of Management Board & Director [48]

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Except for Victoria.

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Elena Milinova, Public Joint Stock Company Magnit - CFO & Deputy Chairman of the Management Board [49]

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Yes. It seems like it's one-to-one with the management. Exactly.

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Victoria Petrova, Crédit Suisse AG, Research Division - Research Analyst [50]

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No, we redialed. It's a huge honor for me, but I'm just a little bit concerned about other people.

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Jan Gezinius Dunning, Public Joint Stock Company Magnit - CEO, President, Chairman of Management Board & Director [51]

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It's also an honor for us, I think, yes.

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Operator [52]

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Okay. And just to make sure those participants are connected to the audio bridge because I do think that a lot of people dropped and -- just while we had the slight interruption to the conference earlier, perhaps they just haven't rejoined because I'm listening from where the participants will be listening currently.

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Elena Milinova, Public Joint Stock Company Magnit - CFO & Deputy Chairman of the Management Board [53]

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We currently have 68 in the system, but neither of them can hear us, as per Victoria. If people are on the line, but they can't hear us.

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Operator [54]

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We have had another participant join the question queue. Would you like to take their questions?

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Jan Gezinius Dunning, Public Joint Stock Company Magnit - CEO, President, Chairman of Management Board & Director [55]

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(inaudible). Sure.

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Elena Milinova, Public Joint Stock Company Magnit - CFO & Deputy Chairman of the Management Board [56]

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[Sure, let's see.]

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Operator [57]

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Okay. We have a question from [Valencia Shorebank] from Merrill Lynch.

(Operator Instructions) Perhaps they've got away from the phone. Just one moment, please.

(technical difficulty)

Please go ahead.

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Albert Avetikov, Public Joint Stock Company Magnit - Chief IR Officer [58]

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Hi, everyone. I hope you still hear us. Sorry for the technical issues with the line. We're still open for your questions.

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Operator [59]

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(Operator Instructions) We have received a question from Yulia Gerasimova of Goldman Sachs.

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Yulia Gerasimova, Goldman Sachs Group Inc., Research Division - Equity Analyst [60]

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I have 2 questions, please. The question number 1 is about the traffic dynamic. So when I actually see these 3 factors such as high promos, as you mentioned, material decline in gross margin and low basket growth. To me, these 3 factors actually point to very high intensity in the price investment. And that actually could have contributed also to the traffic improvement we have seen. And I wanted to understand how dependent is Magnit traffic to consider also the price investments going forward? Do you really have to continue to invest that heavily to keep seeing the traffic in the positive territory? And also, to that, what's actually giving you confidence that this positive momentum is going to continue, if it's just not temporary event-driven volume is like the base effect and more active payments? That's my first question.

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Jan Gezinius Dunning, Public Joint Stock Company Magnit - CEO, President, Chairman of Management Board & Director [61]

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Yes. Thank you, Yulia. Just to give you a bit of dynamics, I do think that the promo investments that we have done in October has led to the inflow of customers. But I think what happened after that was that our promo intensity came down. And in December, actually, it was -- in comparison to the year before, it was a bit higher, but not that much as we had in October. But we saw in the first time in the year that we had traffic, plus, in December. So what I think what happened is that customers that have come into our store in October have seen that the new initiatives in CVP, customer value proposition, that we put in place is something that brought them back. Because if we look at the dynamics of new customers, we see that actually -- we saw actually that in December, the traffic increase was primarily led by new customers coming inside the store.

Looking more specific at January this period, we see the trend of slowing down of promo, but we see that traffic keeps growing. So the -- what I do think in a nutshell is, yes, the promo intensity in October -- September, October has helped, but it has helped to convince customers that Magnit is, again, a place to go to. If you look at the dynamics, November, December, January, you'll see that is confirmed. And that's also obvious because the efforts on category management, the efforts on attractive assortment and relevant assortment have clearly been recognized by consumers, and that's why they're coming more.

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Yulia Gerasimova, Goldman Sachs Group Inc., Research Division - Equity Analyst [62]

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And just a clarification to that. If I recall correctly last year from November to February, you have a special format, actually -- which actually was aimed to increase the average basket size, and which actually negatively affected the traffic. Could this be also the factor that contributed to the fact that you have seen November, December, January as a good month because that's almost due to traffic until February 2019?

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Jan Gezinius Dunning, Public Joint Stock Company Magnit - CEO, President, Chairman of Management Board & Director [63]

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No, there's actually -- of course, we had to look at this because we took the decision not to repeat direction as we saw already that margin investments was already done. So why do additional one? There actually was enough traffic, in which customers spending a certain amount were getting a scratch card to get additional discounts on an additional item that they would buy. So that was -- that action was more stimulating the bill, but it was not traffic-related.

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Yulia Gerasimova, Goldman Sachs Group Inc., Research Division - Equity Analyst [64]

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Okay. Understood. And my second question would be on the margins. Basically, in 2019, so you had 6.1%, but adjusted for the certain one-off, 6.8%. If I'm wrong, correct me. Do you think that 6.8% is more like normalized level we should expect the company to be at given the no one-off -- a similar one-off moving forward? And do you think that we are already ongoing to see like a further decline from that level? It's more like we are talking about stabilization of the margins given that -- given your initiatives of the efficiency and cost optimization?

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Jan Gezinius Dunning, Public Joint Stock Company Magnit - CEO, President, Chairman of Management Board & Director [65]

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Yes. Yulia, the -- actually, probably you have noted, we're actually not more giving any indication on EBITDA. I think what you can expect from us to do is that we will be focusing on profitable growth, that we will be focusing on getting more control on income, that we're also focusing on these activities that we do, commercial activities. Investments are -- do make sense. And last but not least, we're also now focusing on, okay, the loyalty card is so, so successful. How can we get more knowledge out of this in order to be more efficient in reaching out to customers, but also more efficient in allocating margins to these activities?

So you've got it right that the normalized EBITDA was 6.8%. But I'm not going to give any indication. But in transformation, we think that we are in the right turn, that the business is picking up, and it might partly be also the macro. But it's good to see that we're, at least, exceeding sales growth -- like-for-like sales growth now. So we're doing better than CPI, which I think is pretty incredible.

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Yulia Gerasimova, Goldman Sachs Group Inc., Research Division - Equity Analyst [66]

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Sorry. And my last question, just wanted to check about the inventories. I think Elena already mentioned some comments about that. And I'm actually too surprised that, I think, in the beginning of 2019, there is the expectation of the same working capital release [which was for] inventories, and you have been selling a loan also during the year. I mean, why is this guidance was first to be lower than what realized at all related to inventories? Why -- and what should we expect going forward? Do you -- because if I recall correctly, one of the factors that should continue to the return improvement was actually improvement in the working capital, and inventory management as a key of that product. So how should we look at the working capital, and especially inventory management, in 2020? Should it continue to increase inventory levels because of the structural shift into your business? Or we should expect some positive impact on the free cash flow.

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Jan Gezinius Dunning, Public Joint Stock Company Magnit - CEO, President, Chairman of Management Board & Director [67]

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We -- I think part of the growth is connected to the mix change of the stock due to the growth of the cosmetics. You've seen as well that we will continue growing our cosmetics business this year, but we have, at least, set us out a target to not grow the stock levels any longer. We should try to be more efficient and get more rotation numbers in. So the idea is to -- with the same amount of stock and eventually higher sales.

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Operator [68]

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We will take our next question from Elena Jouronova of JPMorgan.

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Elena Jouronova, JP Morgan Chase & Co, Research Division - Research Analyst [69]

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I have a few questions. First of all, Jan, Elena, I have to note that, in my opinion, there was some lack of consistency in the message of management during 2019 and quite a lot of unexpected developments and one-offs. And forgive me for that message, but I think I have to say this. So understandably, I know that you're quite cautious right now of guidance. But I would like to understand why, in principle, we have this situation. Is it because Magnit's business is so incredibly complex that forecasting reliably where the margins could be and where the working capital could be is just very difficult? And if that is the case, Jan, why do we -- why do you need to see an improvement of that? Because, frankly, when we were talking at the start of the year about potentially a very strong improvement in working capital, and I believe the market was already penciling that in the DCFs and the earnings expectations, and now we see that effectively, you most likely had the cash outflow from working capital instead of an inflow. And the same comment on margins, whereas you're giving guidance at the end of Q3 about the promo intensity, your plans to reduce that, and your plans for the margin are still not there. So apologies for taking so much of your time. But in that sense, why is it so difficult to simply -- to forecast correctly what the results are going to look like? And how can it improve in the future, in 2020?

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Jan Gezinius Dunning, Public Joint Stock Company Magnit - CEO, President, Chairman of Management Board & Director [70]

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Elena, you don't need to apologize. I think the apology should be from our side. I think what you mentioned is correct. We have had difficulties to forecast. And part is the mix change that we have underestimated, which had an impact on margins. Part was the loyalty program that was bigger than we expected. I think also the mix change has taken us by surprise with regards to stock. I think it took the team a while to understand if you push in that direction, then that happens from other sides. Also on the agreement with suppliers, not everything was covered with the activities that we were doing. And therefore there's, from our view, a lot to improve.

Then the forecasting problem is also, by the way, is something that we try to resolve as well. We've started with [Hyperion]. We tried to resolve now with investments in IT and ERP, because it's clear that the level of stability that we have there now is not sufficient and cannot be tolerated. So what our focus of the current management team is, is to get a hinge on the business to start to control so that we also know, okay, what's -- what are -- what's happening if we increase our share of cosmetics? What does that do to the margin? What does that do to the stock? Because I think, overall, that has not been anticipated well enough. And a similar thing you can say about the promo activities, we simply didn't cover our base with the suppliers, and that's not smart.

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Elena Jouronova, JP Morgan Chase & Co, Research Division - Research Analyst [71]

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Okay. And then I have some smaller questions. First of all, the accounting change. Does it mean that we should now expect a sustainably lower gross margin for Magnit or no? Because I didn't fully get the rationale for the change -- or rather not the rationale, but the details of it. But since it hasn't made this impact on the margin and the P&L, does that mean a slightly lower gross margin going forward or not really? I mean I understand the impact is very small, but still for me to understand what's going on there.

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Elena Milinova, Public Joint Stock Company Magnit - CFO & Deputy Chairman of the Management Board [72]

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Let me take that question. I think that the impact on margin last year on accounting change will not have a material effect in the future at all. Especially if we keep our stock not growing in absolute terms, then it's 0 impact or close to 0.

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Jan Gezinius Dunning, Public Joint Stock Company Magnit - CEO, President, Chairman of Management Board & Director [73]

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Yes. The only thing that might lead the mix change, and that's what we're analyzing at the moment as well because what's the impact there? So the composition of the stock will change as the format growth is changing. And we're currently in the process of analyzing. And we get a good feel that has to be done.

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Elena Jouronova, JP Morgan Chase & Co, Research Division - Research Analyst [74]

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Okay. And also, I would like to know how are the sales densities of the stores with new CVP and new design, how are they performing versus like similar stores that have not been redesigned and still have an old CVP? Can you give different numbers on that, please?

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Jan Gezinius Dunning, Public Joint Stock Company Magnit - CEO, President, Chairman of Management Board & Director [75]

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Elena, what we have seen -- and that's more historically. What we saw is that in 2018, the remodels were actually not delivering what we expected. But we see now that in 2019, in the combination of an operational and commercial improvements that the uplift gets stronger. And that depends as well a bit on the areas where you look. If you look at Moscow, we see a pretty big uplift. But on average, it's 8% to 9% of uplift that we see at the moment.

So that's -- we think that's encouraging, and which means that the combination of what we did in the past, only the navigation plus hygiene, of course, didn't give the uplift than now in combination with the assortment. And we believe that now with the implementation of the loyalty card, we actually are -- we'll see even a better uplift going forward. And the loyalty card clearly is appreciated.

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Elena Jouronova, JP Morgan Chase & Co, Research Division - Research Analyst [76]

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All right. And the final one for me is, if you're indeed seeing better performance of these revamped stores and the CVP is actually working, you're seeing better like-for-like traffic in December. January is also looking solid, as you say. So why actually cut the store openings guidance? I understand the point about closures. I see that, but it sort of doesn't make sense to me right now. Are you just simply too cautious because you want to see a few more months of sustainable improvement? Or are you not sure that improvements come from the CVP, or they're just driven by price investments?

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Jan Gezinius Dunning, Public Joint Stock Company Magnit - CEO, President, Chairman of Management Board & Director [77]

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Elena, maybe I'll recall your first question. So yes, there is a certain cautiousness on our side, and the guidance cannot be based on January only. So yes, we have -- we are influenced by what happened in 2019. But trust me, and you know me, if this is sustainable, we do not think that the market is limiting us in opportunities. What we do think is that we need, at the moment, a bit of different priorities with regards to getting control, get higher efficiency, get less complexity in our business, and make sure that we'll focus on like-for-like and EBITDA improvement. And that's what we currently aim to get to. Is that in a couple of months sustainable? Then I hope I won't surprise you with a bit of a bigger CapEx number because then, at least, returns are secured. But for the time being, I'm cautious.

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Elena Jouronova, JP Morgan Chase & Co, Research Division - Research Analyst [78]

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Okay. And if actually you have to increase -- not have to, but if you decide to increase CapEx because things are looking better and you have a higher degree of conviction, is that a risk to dividends?

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Jan Gezinius Dunning, Public Joint Stock Company Magnit - CEO, President, Chairman of Management Board & Director [79]

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That is connected. If our results are improving as they do, then I can assure you the dividends will sure be there. But the -- what we will have in that -- it's a good point to embrace. We are limited in spending because we want to pay dividends coming out of a positive cash flow. So the -- we don't think it's sustainable to pay dividends where we have a negative cash flow. So we, as a management team, we have to make sure that the business develops in such a way that we generate cash in order to reinvest. And if there is a decision to pay dividend, we have to make -- take that into account as well.

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Elena Jouronova, JP Morgan Chase & Co, Research Division - Research Analyst [80]

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And can you remind us up until which level are you prepared to lever the balance sheet, if you want to accelerate growth and continue paying dividends?

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Jan Gezinius Dunning, Public Joint Stock Company Magnit - CEO, President, Chairman of Management Board & Director [81]

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Are you asking about the governance? Or what do we feel comfortable with?

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Elena Jouronova, JP Morgan Chase & Co, Research Division - Research Analyst [82]

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No, what do you feel comfortable with as a management team?

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Jan Gezinius Dunning, Public Joint Stock Company Magnit - CEO, President, Chairman of Management Board & Director [83]

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I think we are not really set to increase the leverage. I think we're around 2.1, last year as well. And that's a level, 2, 2.5, where we feel comfortable.

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Elena Jouronova, JP Morgan Chase & Co, Research Division - Research Analyst [84]

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2, 2.5. Okay...

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Jan Gezinius Dunning, Public Joint Stock Company Magnit - CEO, President, Chairman of Management Board & Director [85]

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Yes. But lower is also, looking at the opportunities in the market, I think it's -- we should take that.

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Elena Jouronova, JP Morgan Chase & Co, Research Division - Research Analyst [86]

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I just don't remember, Jan, that you have that kind of leverage on a lease adjusted basis at the previous organizations you've worked. Because 2x, right now, means 3.5x lease adjusted. And we always used to look at that on a lease adjusted basis. So it's kind of at the border line, but that's my view.

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Operator [87]

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We will take our next question from Maxim Nekrasov from Goldman Sachs.

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Maxim Nekrasov, Goldman Sachs Group Inc., Research Division - Research Analyst [88]

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I have a few questions on CapEx. So despite fewer organic openings, you target a slight increase of CapEx in 2020. Can you please comment if you include any CapEx for small M&As in your guidance? And maybe you could provide examples of the efficiency projects that you plan to invest more this year.

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Jan Gezinius Dunning, Public Joint Stock Company Magnit - CEO, President, Chairman of Management Board & Director [89]

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No, M&A is not included. And if we have the opportunity with M&A, M&A is difficult to plan. If they arise, then we should -- of course, how we balance it out with organic growth. Getting to the second part of the question, efficiency investments. So we're currently running a WMS implementation in order to be better in the whole goods management. We are doing a replenishment and forecasting efforts to get better control about automated reordering of stores plus the connection to the suppliers. We're investing in SAP, ERP. We signed at the end of last, 2019, a contract, which will lead to higher efficiency as well in accounting.

So I think we are trying to look at time management and workforce systems. We'll also become more efficient in controlling the number of hours and make sure that we pay the correct number of hours. We do a much less CapEx intense, but we do a top-down and bottom-up process analysis by department to see how we can slim and get better and quicker decision-taking but also information. Then we're investing into big data, which should help us to -- at least on the cash management side, but also on the supply chain and logistics side, to be able to better understand customer demand and therefore, improve our business. There's actually a continuous process ongoing also in the controlling to help the business understand the business better. And yes, I think that will help us improve our results.

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Maxim Nekrasov, Goldman Sachs Group Inc., Research Division - Research Analyst [90]

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Also, you mentioned in the press release that you will be seeking for small and medium-sized M&A. And I was wondering if you would consider a large-scale M&A if such opportunity appears on the market.

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Jan Gezinius Dunning, Public Joint Stock Company Magnit - CEO, President, Chairman of Management Board & Director [91]

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I think what you've -- this -- in a nutshell, what are we doing? We're downsizing our growth because we think that we should focus on our existing business. In that scenario, really bigger acquisitions would not be logical.

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Operator [92]

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(Operator Instructions) I would like to hand our conference back to our host for any additional or closing remarks.

Apologies. We have just had additional questions. Would you like to take them? We have received some additional questions. Would you like to take them?

We will take our next question from Victoria Petrova from Crédit Suisse.

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Victoria Petrova, Crédit Suisse AG, Research Division - Research Analyst [93]

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Obviously, with some cut in openings, you will be much more dependent on your like-for-like sales growth performance. Have this decision on the number of openings being made with an assumption of positive like-for-likes, especially positive traffic through entire point-to-point?

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Operator [94]

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Ladies and gentlemen, as we are experiencing a momentary interruption in today's conference. Thank you for your patience. Please continue to hold.

(technical difficulty)

Please go ahead.

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Albert Avetikov, Public Joint Stock Company Magnit - Chief IR Officer [95]

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Operator, we're ready for the next question, please.

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Operator [96]

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(Operator Instructions)

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Victoria Petrova, Crédit Suisse AG, Research Division - Research Analyst [97]

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My really last clarification question is on your number of openings versus like-for-like versus growth. When you have made the decision to cut the number of openings, have you operated under assumptions that traffic will remain positive for the full year 2020?

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Jan Gezinius Dunning, Public Joint Stock Company Magnit - CEO, President, Chairman of Management Board & Director [98]

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We took a decision to downsize the number of store openings earlier. You understand that the first quarter of this quarter, openings are initiated in October, November. So there is no connection to current trading. What I answered to Elena is, if this is sustainable redevelopment, we will come back and might adjust.

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Victoria Petrova, Crédit Suisse AG, Research Division - Research Analyst [99]

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Understood. Are you comfortable with the low double-digit sales growth? Because, obviously, your sales growth has been driven by openings in the last years, not by like-for-like.

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Jan Gezinius Dunning, Public Joint Stock Company Magnit - CEO, President, Chairman of Management Board & Director [100]

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Yes. But the good thing is, that's what I commented already in the script, if we see now that is the main driver of the like-for-like, then there are the stores before 2018. It's the old stores, not the new ones. The newer ones performed well. But in the past, you saw that the new stores were actually driving the like-for-like. Now we see that like-for-like is also driven by older stores.

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Operator [101]

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We will take our next question from Alexey Krivoshapko from Prosperity.

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Alexey Krivoshapko, Prosperity Capital Management Ltd - Portfolio Manager [102]

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Just, finally, the questions. Is it possible that you quantify this kind of decrease in gross margin Q4 versus Q3 because it came down a lot like 200 basis points? Can you kind of break it down between higher share of promo, loyalty and losses, maybe, if possible?

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Jan Gezinius Dunning, Public Joint Stock Company Magnit - CEO, President, Chairman of Management Board & Director [103]

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I will say that, no. In principle, no. We do not provide the bridges of margin. I think the components that have mattered are mentioned. And I think that's important to know.

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Alexey Krivoshapko, Prosperity Capital Management Ltd - Portfolio Manager [104]

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Can you just please tell us what was the promo share in Q4?

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Jan Gezinius Dunning, Public Joint Stock Company Magnit - CEO, President, Chairman of Management Board & Director [105]

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Yes. It was in the mid-30s. Have you got the idea, Alexey, that we also sold down old stores?

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Alexey Krivoshapko, Prosperity Capital Management Ltd - Portfolio Manager [106]

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Yes. Yes. I guess, that, you mentioned.

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Jan Gezinius Dunning, Public Joint Stock Company Magnit - CEO, President, Chairman of Management Board & Director [107]

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That has actual impact as well, yes.

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Alexey Krivoshapko, Prosperity Capital Management Ltd - Portfolio Manager [108]

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But one thing I really wanted to understand is that -- kind of it came from like RUB 18 billion to RUB 3.6 billion. But I guess the starting number was not entirely clear. Was it end of Q4? Or was it end of Q3? I didn't quite get it, to be honest, during the call.

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Jan Gezinius Dunning, Public Joint Stock Company Magnit - CEO, President, Chairman of Management Board & Director [109]

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It's end of Q4.

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Alexey Krivoshapko, Prosperity Capital Management Ltd - Portfolio Manager [110]

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Okay. From RUB 18 billion to RUB 3 billion, kind of minus RUB 15 billion. Clear. I guess my other question is like this. If you do the estimates of CapEx kind of line-by-line on gross openings, rebranding some and what have you, and at the [map,] it's actually quite far, from RUB 60 billion to RUB 65 billion. I mean, like, really far, maybe half the number. Where does it come from?

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Jan Gezinius Dunning, Public Joint Stock Company Magnit - CEO, President, Chairman of Management Board & Director [111]

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What I have is in IT, supply chain, maintenance CapEx. So like I mentioned, we spend energy on the additional business to improve in order to get to a better customer value proposition. And that's what we do.

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Alexey Krivoshapko, Prosperity Capital Management Ltd - Portfolio Manager [112]

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And just out of curiosity, like, how many trucks do you plan to buy? And how many DCs do you plan to open? Because, again, this is quite a lot of money, not so much of selling space growth. I understand the kind of long-due IT investment, but I guess the rest looks quite oversized, to be honest.

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Jan Gezinius Dunning, Public Joint Stock Company Magnit - CEO, President, Chairman of Management Board & Director [113]

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It's also, I would say -- as usual, there is an overlooked -- overflow of CapEx from 2019 into 2020. Then we have finished the DC in Surgut, which we plan for this year. Yes, there's also a substantial amount of CapEx reserved for internal transportation in DCs and trucks. The exact number, I don't know by heart, but I know that that's part of the supply chain CapEx.

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Alexey Krivoshapko, Prosperity Capital Management Ltd - Portfolio Manager [114]

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I see. And I guess the final question to Elena is, if we look at the current debt portfolio, what is the current cost of debt for the portfolio overall? You've mentioned the recent bond issues, which also we see on the screen. But what is the current cost of debt weighted to the portfolio?

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Elena Milinova, Public Joint Stock Company Magnit - CFO & Deputy Chairman of the Management Board [115]

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The current portfolio cost is 7.6% on average.

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Alexey Krivoshapko, Prosperity Capital Management Ltd - Portfolio Manager [116]

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That is quite good.

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Elena Milinova, Public Joint Stock Company Magnit - CFO & Deputy Chairman of the Management Board [117]

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And we are planning to decrease further because we see that we are in a negotiation process with the banks where we have a long-term loan. And I see that we have an opportunity to go down further in the first quarter.

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Operator [118]

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We will take our next question from Artur Galimov.

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Artur Galimov, Sova Capital Limited, Research Division - Analyst [119]

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I've got a question about like-for-like in January, which is pretty good, and probably around 2.5%, mostly driven by traffic, as far as I understand. So Jan, I think the question is what makes you think -- or what makes you feel confident that those improvements in like-for-like sales, particularly in like-for-like traffic you observed in January, are driven by improvements in assortment, product availability, logistics and so on and so forth, all those operating initiatives rather than being just a function of a pretty low base of last year, I mean, beginning of 2019, and also the function of increased frequency visits, not necessarily due to internal company-specific reasons? So basically, is it the -- could it be the case that we are just seeing a reversal of the trend of last year when there was a higher average spending per visit and lower frequency visits, which is being reversed in January. So what do you think could be the split of the factors that drive current performance if we look at operating improvements and like, more statistical base effect?

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Jan Gezinius Dunning, Public Joint Stock Company Magnit - CEO, President, Chairman of Management Board & Director [120]

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Yes. Thanks for the question. First of all, by not reacting on the like-for-like level, I'm not confirming the numbers that you mentioned. Getting more to the question. The -- what we see now out of the data is that we, first off, October, we see an inflow of new customers. If we would see a reverse of last year, then that would actually exclude those people. So we need to find a reason why they come. So I think the first reason in October was the promo share increase. But in November, December, we have lowered that down. And we're seeing the dynamic of new customer inflow actually growing. And we are seeing the dynamics of traffic improving up to the level that we've seen in December, positive, and in January as well.

So I think -- and I am also -- allow me to convince you there are a lot of elements that have impact, but I do think generally that the GDP or the hygiene operating the availability, but also the category management are leading to a better shopping experience for our customers. Having said that, we also have the system of NPS, Net Promoter. And we see that, that number has grown as well in the second half of last year. So people start speaking more positive about Magnit. And that, I think, is the biggest cause of them visiting us. And yes, we are gaining traction with regards to the commercial proposition.

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Artur Galimov, Sova Capital Limited, Research Division - Analyst [121]

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Right. And just to clarify on like-for-like number. I think you mentioned it's running above CPI in January and I think the CPI number announced today was 2.4% growth in January year-on-year. Is that the number you had in mind?

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Jan Gezinius Dunning, Public Joint Stock Company Magnit - CEO, President, Chairman of Management Board & Director [122]

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No. What I have to told you is that it's exceeding, so it's better than CPI. If CPI is 2.4%, then we have a higher like-for-like in January.

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Artur Galimov, Sova Capital Limited, Research Division - Analyst [123]

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Well, yes, that's what I meant. Just a benchmark I referred to. And I think the second question is, well, I admit it's pretty theoretical. So I do not expect you to give the precise answer, but maybe just to give some sort of indication. In terms of assortment improvement, in terms of the rollout of the new federal SKUs, which are in the new federal assortment metrics you approved, I think, in the first half of 2019, do you have a rough idea in what percentage of stores this federal assortment is, at least, close to what you'd like it to have in the entire chain, given the sellout of illiquid and asset metric stocks in Q3 and Q4?

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Jan Gezinius Dunning, Public Joint Stock Company Magnit - CEO, President, Chairman of Management Board & Director [124]

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Yes, I have a view there. So what happened is that the capital management efforts were done in the second quarter, and that continued in the third. What was our problem in the second quarter with the implementation of the new assortment was actually that on the shelf, we have a -- relatively a lot of old stock but we had to clean it. The fact that we cleaned that in the third quarter, led immediately to an inflow of new assortment [federal].

And continuing forward with the sell-down of old stock, we won't be able to get more and more of the active metrics on the shelves. If you look then [federal-wise,] we know by region what is actually the availability levels of the active markets or the targeted markets, and that is close to 86%, 87%. So there's still assortment that has been selected, which still has to get into the stores or, first, into the DCs. But that's a big, big step forward to where we were at the end of the second quarter, which was close to 72%, 73%.

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Artur Galimov, Sova Capital Limited, Research Division - Analyst [125]

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Okay. And just to clarify, this is the percentage of SKUs in the total assortment that basically comes from the new metrics -- from the active metrics?

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Jan Gezinius Dunning, Public Joint Stock Company Magnit - CEO, President, Chairman of Management Board & Director [126]

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So there is -- the category has a targeted market in mind. So this is what my range should look like. And then, of course, because you were asking of the federal, to which extent can I get that range in the stores that I want it to be in? And that depends on availability of all the big locations in the distribution centers and that depends on availability of shelf space inside the stores. And we also have done similar activities inside the DCs to make sure that we have better and higher capability for all the big locations. Now that's -- that has gone from low 70% to end of 80%.

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Operator [127]

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This will conclude today's question-and-answer session. I would now like to turn the conference back to our hosts for any additional or closing remarks.

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Jan Gezinius Dunning, Public Joint Stock Company Magnit - CEO, President, Chairman of Management Board & Director [128]

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Thanks, everyone, for listening and the next reporting is on 16th of March. Thank you.

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Operator [129]

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This will conclude today's conference call. Thank you all for your participation. You may now disconnect.