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Edited Transcript of OKEY.L earnings conference call or presentation 27-Aug-19 2:00pm GMT

Half Year 2019 O'Key Group SA Earnings Call (IFRS)

Moscow Aug 28, 2019 (Thomson StreetEvents) -- Edited Transcript of O'Key Group SA earnings conference call or presentation Tuesday, August 27, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Anton Farlenkov

O'Key Group S.A. - Corporate Development Director & Member of Management Board

* Armin Burger

O'Key Group S.A. - CEO & Member of Management Board

* Konstantin Arabidis

O'Key Group S.A. - CFO & Member of Management Board

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Conference Call Participants

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* Alexey Krivoshapko

Prosperity Capital Management Ltd - Portfolio Manager

* Anna Butko

Aton LLC, Research Division - Analyst

* Egor Makeev

Raiffeisen CENTROBANK AG, Research Division - Research Analyst

* Maxim Nekrasov

Goldman Sachs Group Inc., Research Division - Research Analyst

* Nikolay Kovalev

VTB Capital, Research Division - Equities Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, welcome to the O'KEY Group Conference Call on the first half 2019 financial results. (Operator Instructions) At this time, I would like to turn the conference over to Mr. Anton Farlenkov, Head of Corporate Development. Please go ahead, sir.

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Anton Farlenkov, O'Key Group S.A. - Corporate Development Director & Member of Management Board [2]

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Hi, everyone. My name is Anton Farlenkov, Head of Corporate Development at O'KEY Group. The team we have on the call includes CEO of the company, Armin Burger; CFO, Konstantin Arabidis, and myself. Our call will start with update on the group's financial performance and key developments provided by Armin followed by Q&A session. All discussed numbers are based on new accounting standard if not stated otherwise.

That's all on my side, and I hand over the call to Armin, please.

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Armin Burger, O'Key Group S.A. - CEO & Member of Management Board [3]

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Thank you, Anton. Dear ladies and gentlemen, I'm happy to welcome you to our first half 2019 financial results conference call. After a very difficult start, especially in our hypermarkets in January and February of this year, month by month, we had a very steady recovery. Overall we can be very satisfied with our first half's year results. I will give you now some of the key figures.

Organic Group total revenue, excluding the effect of the supermarket business sale, increased by 3.4% year-on-year. Organic revenue generated by O'KEY hypermarket, excluding the effect of the supermarket business sale, increased by 0.4% year-on-year with very positive momentum in the last couple of months and we see this to continue. Revenue generated by DA!, our discount format, grew by 36.8% year-on-year to RUB 8.61 billion supported by steady growth in traffic and the average ticket and also customer numbers.

The group EBITDA grew by 3.9% year-on-year to RUB 6.34 billion compared with RUB 6.1 billion in the first half 2018, while the EBITDA margin increased by 13 basis points year-on-year to 7.9%.

O'KEY's EBITDA decreased by 0.4% year-on-year to RUB 6.509 billion, while O'KEY's EBITDA margin increased slightly to 9.1% due to a slight decrease in operating expenses as a percentage of revenue. The EBITDA generated by DA! improved from negative RUB 432 million, this is minus 6.9% of our sales in the first half 2018 to negative RUB 169 million, this is minus 2% of sales. That means we had considerable better results in the first half of 2019 driven by new store openings and the higher like-for-like sales and also relatively better-buying conditions.

Our group net debt position improved also by RUB 2.3 billion to RUB 29.7 billion at the end of the first half 2019 in comparison with RUB 32 billion at the end of the first half 2018.

I'd come now to the guidance for the year 2019. After careful consideration of our development and we see here very positive aspects, we are revising our organic hypermarkets' top line growth guidance slightly upwards and now expect it to grow to a low single-digit number for the whole year. As before, we expect the double-digit like-for-like growth for DA! and plan to open 20 discounters in 2019. On our last call, I told you we will open up to 30 discounters. In the meantime, we decided together with the Board of Directors to exchange some of the rented locations we wanted to open into very good own locations and, therefore, open only 20 stores. From the owned locations, on the other hand, we expect similar returns on investment as from these lease locations.

Some words to dividends. Due to the positive development of our businesses, we will open and recommend to our Board of Directors to pay dividend of approximately 5.6% -- USD 0.056 per share, which equals around RUB 1 billion in total.

Let me talk about our strategy and initiatives that we made to keep the business on track. I allow -- but let's just start with the hypermarkets. Firstly, the operational business in our stores. Here we concentrate currently on freshness that means providing to the customer more freshness in our Fruit & Veg, better fruit qualities and wider assortment. On the other side, own production also part of the freshness, we've revised the assortment and also our product range to serve more of the customer needs and the modern customer needs.

Another key topic in operations is currently shelf availability. Here we want to be better present till the evenings in all areas of our businesses. And one big concern of our business operational business is the service and the friendly service. Here we launched a couple of training sessions with all our staff to improve this service level.

Logistics. Supply-chain optimization and logistic optimization is the main topic on this side of the business. We consider currently new warehouse locations to optimize the roots that means the cost generated by logistic and also the freshness in our stores. These topics we currently investigate and we will come soon to clear conclusions here.

Commercials. One of the biggest topics in the commercial department currently is assortment structure we want to follow. Here we want to have a clear structured assortment, with a clearly defined entry-level, a big middle segment for our families and also a premium segment, which saw -- covers all needs also of our premium customers.

In our nonfood business, we reshaped currently the thinking regarding nonfood, what product we want to have on sale, and how we clearly identify the nonfood assortment of tomorrow considering Internet and considering all the competitive advantages other channels have. One of the top priorities is regional buying for us. Here we want to be closer to the customer, we want to have more regional products in the different regions we are operating to be much more in tune with the needs of the customers.

Import. Another top priority for us. We want to import more wine, we want to import more fruit and veg. We want, therefore, to buy cheaper as well, we cut out the middleman. Here we try to have synergies with our second company, DA!, our discount label, being brought together and try to source as many synergies as possible.

Our last initiatives currently is to relaunch our private labels. We currently redesigned them and we want, therefore, also after the redesign is done, relaunch these new designs in our store.

Then store development. Here 2 key initiatives. On the one side, we look for new store concept, which will make us more competitive in comparison to our competition, which is modern, which is trendy, which gives the customer the right shopping environment to shop with us and to enjoy their shopping. After this concept is launched, we want to renovate our stores in the next couple of years. Some key initiatives in DA!. Also here we concentrate on freshness to fresh start of the business, especially Fruit & Veg and our Bakery, which is something others don't have, where we stand out in the competitive environment. Shelf availability and also service are top priorities for us.

On the commercial side, we fight for better buying conditions for better gross profit. Together with O'KEY, we buy our brands and also our private labels. Here we raise currently a lot of synergies, which help us to improve our margin. Incorporation with O'KEY, therefore, is one of the top issues and criterias. Import as well is one of the top issues here again together with O'KEY.

Under the development side, we prepare for faster growth and for a faster store opening program in 2020. Here we want to open next year 30 to 40 stores. That means we want to speed up our development after we see very positive, encouraging developments in our balance sheet. Overall, ladies and gentlemen, we see a steady growth in our business units and expect this to continue in the second half of 2019.

Thank you very much. I hand back to Anton.

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Anton Farlenkov, O'Key Group S.A. - Corporate Development Director & Member of Management Board [4]

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Thank you, Armin. Operator, we are ready to take questions. Please, go ahead.

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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 from Alexey Krivoshapko from Prosperity.

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Alexey Krivoshapko, Prosperity Capital Management Ltd - Portfolio Manager [2]

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I actually have a question on store development. I was under the impression that you have some hypermarkets in the opening pipeline for this year. Can you comment on where you stand in respect to opening them right now? Another question has to do with your sale of land plots in Moscow. And why did you do that? Can you comment on the rationale? I guess those are the 2 main queries.

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Armin Burger, O'Key Group S.A. - CEO & Member of Management Board [3]

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Firstly, to your first question, there are no hypermarket openings planned this year. We'll only open discounters in the hypermarket business the next couple of years. To answer the next question as well already, we want to concentrate on renovating the stores or making them more attractive. The development will go, that's the second part of the business into DA!. Here we want to open much higher store numbers so that we, on the one side, strengthen our hypermarket business, as really the area where we earn our cash and keep it steady and growing. Again, this is a very important thing. And on the other side, we want to develop DA! to get synergies out of higher sales and of higher store numbers to be profitable and have enjoyable figures there as well. The 2 land plots, this is a logical consequence of what I said now, we sold because we don't see them as key assets at the current time. And therefore, after we had a very good price for the 2 land plots, we decided to sell them.

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Alexey Krivoshapko, Prosperity Capital Management Ltd - Portfolio Manager [4]

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Let me ask you as a follow-up question. Are there any, as of current, hypermarket under construction on land plots, which you intend to sell? And if so, I mean, how much do you think you could get us through sort of sale proceeds?

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Armin Burger, O'Key Group S.A. - CEO & Member of Management Board [5]

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Currently, we don't have any hypermarkets under construction, and we don't plan to construct them. We want to enlarge 2 of our smaller stores. That's all what we do currently. But they are on around 1,700 square meter. Here we want to come to a square meterage, which gives us a better operational result and better sales figures, 1 in St. Petersburg and 1 here in Moscow. Land plots, we have a couple where we are under negotiations and whatever is not key for us for the next couple of years and I told you, we would like to concentrate on the renovations on this side. We will sell to generate cash and reduce our debts as we did this year.

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Alexey Krivoshapko, Prosperity Capital Management Ltd - Portfolio Manager [6]

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Clear. And, Armin, just a follow-up question, if I may. When you talk about renovation, have you kind of reconsidered the budget for renovation of your current hypermarket network? And if so, what are the amounts of money we're talking about? And what is you estimate potential impact from renovating of those stores on revenue and EBITDA?

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Armin Burger, O'Key Group S.A. - CEO & Member of Management Board [7]

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Good. We expect from the renovations. Initially, obviously, each renovation, you have to close for a certain amount of time, therefore, you have a little drop in sales. Overall, we expect after the renovations, at least a growth of 10%, that's what we saw with 2, 3 renovations we did. Therefore, a positive impact on the EBITDA and also on the sales side. To cost side, we have here in the budget around RUB 150 million, around EUR 2 million, which where we think it's sufficient amount of money to renovate our stores.

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Operator [8]

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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 [9]

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I have a few questions actually. So first question is regarding the margin trends, and I'm interested in what margin trends we expect in the full year 2019 in both of these segments. And in discounters, in particular, whether you expect to turn breakeven in terms of EBITDA based on IFRS 16 in the second half of the year? And, yes, what -- basically, what EBITDA do you expect in the segment for the full year?

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Armin Burger, O'Key Group S.A. - CEO & Member of Management Board [10]

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Okay. Margin trend here, we're expecting both. In DA!, we expect even a stronger trend. We see that in the moment, a very positive trend. We import a lot, and the cooperation in O'KEY, which is very intensified. Now we have weekly meetings, gets us very far here. O'KEY, we also expect a positive trend, which we saw in the first -- in the last couple of months at least. And we are very happy there as well. Regarding EBITDA, in both accounting standards, we do expect towards the end of the year to be positive and definitely next year as well in our discount business.

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Maxim Nekrasov, Goldman Sachs Group Inc., Research Division - Research Analyst [11]

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Okay. And my second question is regarding recent trends, which you said were quite good. And do I understand correctly that, like, like-for-like trends are -- in the third quarter so far are similar to the second quarter?

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Armin Burger, O'Key Group S.A. - CEO & Member of Management Board [12]

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Yes. This is correct and even if -- a little bit better figures in our hypermarket business, we are very happy there. We had a very rough start, to say, promptly in January, February in the hypermarket business and turned to corner now and have each month positive for its like-for-like results.

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Maxim Nekrasov, Goldman Sachs Group Inc., Research Division - Research Analyst [13]

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And what do you see driving these improvements compared to the start of the year?

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Armin Burger, O'Key Group S.A. - CEO & Member of Management Board [14]

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These are the changes we did last autumn, more freshness, concentrating on the fresh side of the business, putting the Fruit & Veg, meat, these fresh items into the limelight of the customer, advertising it, making sure that we have staff available, talking about service with our staff being more friendly that helps as well. And freshness means that -- yet on the other side that we should never forget that, that's why we do it to have more for us customer frequency because fresh products you buy weekly and if you offer the right assortment to the right price, people come more often.

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Maxim Nekrasov, Goldman Sachs Group Inc., Research Division - Research Analyst [15]

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Okay. And my last question is regarding CapEx and basically what CapEx do you expect this year and maybe next year as well?

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Konstantin Arabidis, O'Key Group S.A. - CFO & Member of Management Board [16]

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Normally we -- to read, this is Konstantin. Normally, we have CapEx budget of around RUB 5 billion to RUB 7 billion per year on both formats, and it is quite stable. And usually, split is around 50-50 between 2 formats over the last years.

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Operator [17]

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(Operator Instructions) We will take our next question from Nikolay Kovalev from VTB Capital.

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Nikolay Kovalev, VTB Capital, Research Division - Equities Analyst [18]

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Yes, I have 2 questions. My first question is on your discounter format. When you speak about the medium-term [rollout] strategy, I was wondering on what share of private label are you going to rely? And as lately we see a growing focus from food retailers in Russia on the private label. Do you see that's becoming tougher to negotiate terms with suppliers and work with them? That's the first question. And the second question is on your financials. Can you share with us estimate for consolidated EBITDA or EBITDA margin and the bottom line, if we would apply IF 17 for the first half '19?

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Armin Burger, O'Key Group S.A. - CEO & Member of Management Board [19]

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Good. First to the discounter business and the private label share, currently, we have, in sales volume, nearly 50% of our volume in private labels. We want to keep it like this. On the one side, we have our specialized private label. When we go to new areas, we need to offer certain amount of trends that people find their used environment and slowly but steadily, they go then and buy our private labels as well. And, especially, in older stores where we are couple of years already in the business, we see a much higher private label share already. This is a strategy long-term around 50% of our products in private label. To the negotiation and the possibilities to achieve the prices we want, here we see a very positive trend for us. We are growing, people know that we are in the market, people know that we will stay in the market. This is always a doubt when you're a little startup, will the mother company pull you through or not. In our case, we proved that we want discounters and the suppliers to understand this now and, therefore, we have better buying conditions and better negotiations standpoints as before. Therefore, it's quite a positive environment.

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Konstantin Arabidis, O'Key Group S.A. - CFO & Member of Management Board [20]

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Regarding your question about IFRS -- IF 17 results, actually, management in the beginning of the year decided to switch fully to IFRS 16 numbers given that in your budget, it was prepared in accordance with amended standards. That's why we are not fully supporting IF 17 result. We didn't have any review of IF 17 numbers. Therefore, we prepared for you IFRS 16 result for first half 2018 for comparable reasons and we believe this is the most correct way of looking on the numbers now because IF 17 is the best, and supporting of 2 of parallel formats is something we don't want and don't have to do. We don't think this is right. So please refer to IFRS 16, and if you have any questions, you can ask Anton or myself offline, we are ready to answer.

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Operator [21]

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(Operator Instructions) And we will take our next question from Anna Butko from Aton.

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Anna Butko, Aton LLC, Research Division - Analyst [22]

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I just have 2 quick questions. First is the small clarification. Am I correct to assume that the proceeds from the sale of 2 land plots in Moscow are presented under other operating income? And the second question, so you had the partnership with Familia to boost sales density in hypermarkets. Can you please update on the partnership results?

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Konstantin Arabidis, O'Key Group S.A. - CFO & Member of Management Board [23]

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Regarding your first question, yes you're correct. The net result of the new -- regarding sale of land plots is presented in other operating income and expense and the respective note in statements.

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Armin Burger, O'Key Group S.A. - CEO & Member of Management Board [24]

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Regarding the partnerships with Familia, we still consider each other as partners, but on the other side, we also talk with other partners or future partners to give us the best, depending on the location, the best possible solution. We are quite flexible, in other words.

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Operator [25]

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We will take our next question from Egor Makeev from Raiffeisen Bank.

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Egor Makeev, Raiffeisen CENTROBANK AG, Research Division - Research Analyst [26]

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Could you explain please what's the source of the FX gain in first half rising from intragroup loans?

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Konstantin Arabidis, O'Key Group S.A. - CFO & Member of Management Board [27]

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Yes. Actually, it's quite easy. We have intragroup loan from Luxembourg to Russian companies and according to IFRS, ForEx exchange gains and losses on this kind of balances, even though they are intragroup and if you can see last year figures, we had a huge loss. On this line, this year, we have just better ForEx for us for this loan. Therefore, you see a gain. That's it.

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Armin Burger, O'Key Group S.A. - CEO & Member of Management Board [28]

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Your accounting.

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Egor Makeev, Raiffeisen CENTROBANK AG, Research Division - Research Analyst [29]

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Okay. And is it correct to assume that the sensitivity of this FX gain or loss to ruble FX rate will remain as it is now?

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Konstantin Arabidis, O'Key Group S.A. - CFO & Member of Management Board [30]

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Yes. It will remain as the same at least before we will return the money from Russia to Luxembourg and actually, we are not willing to do this in the biggest scale. It's actually more or less, internal financing stories for the group and this rotation, maybe it will be a little bit less, but not a lot depending on the exchange rate.

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Operator [31]

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(Operator Instructions) We do not have any further questions on the line, speakers. I'd like to turn it back over to you.

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Anton Farlenkov, O'Key Group S.A. - Corporate Development Director & Member of Management Board [32]

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Thank you. Thank you so much to everyone. Please get in touch with me if you have any further questions. You know my number and e-mail. Have a good evening. Thanks for joining.

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Armin Burger, O'Key Group S.A. - CEO & Member of Management Board [33]

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Thanks a lot from everybody. And have a good evening.

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Konstantin Arabidis, O'Key Group S.A. - CFO & Member of Management Board [34]

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Thanks a lot. Bye.

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Operator [35]

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