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Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to today's X5 Q4 and FY 2018 Financial Results. [Operator Instructions] Also I must advise you, this conference is being recorded today, 20th of March 2019.I now hand you over to your first speaker, Natalia Zagvozdina.
Thank you. Good morning, and good afternoon, ladies and gentlemen. Thank you for joining us today on this call where we will discuss X5 financial results for the last quarter and the full year 2018.Participating in the call today are Igor Shekhterman, X5 CEO; Svetlana Demyashkevich, our CFO; Andrey Vasin, Head of IR; and myself, Natalia Zagvozdina, Head of Corporate Finance and IR.Before we begin, I would like to remind you that some of the information announced during this call may contain projections and forward-looking statements regarding future events or future financial performance of X5. Please refer to the beginning of the presentation for a full disclaimer with regards to such statements. We disclosed the press release and financial statements this morning via our website, on RNS, and through our e-mail distribution list. All documents and the presentation for this call are now available on our website in the Investor Relations section.I will now pass the floor to Mr. Igor Shekhterman, who will take you through the company's key achievements and strategic priorities. Igor, please?
Thank you, Natalia. Good morning, and good afternoon, ladies and gentlemen, and thank you for joining us in the call.I would like to begin the call with year-to-date results followed by key achievements in last year and update on where we are in terms of our strategic priorities. After that, our Chief Financial Officer, Svetlana Demyashkevich, will take the floor to talk about the external environment and our financial results in more detail. We will then be happy to answer all your questions.X5 net retail sales year-to-date increased by 16.5%. Our like-for-like sales rose by 5%, with traffic being positive. Half of our like-for-like came from traffic and come from -- top from ticket. We are satisfied. We're proud with how the year 2019 started for the company. In last year, retailers in Russia faced tough market condition with low food inflation and continued weak consumer confidence. Despite these, our results, expect for the weak first quarter, are encouraging. I am very pleased with the trend at Pyaterochka led by the current management team and by the continuous strong performance of Perekrestok.The financial performance that we reported today is a result of hard work by the entire X5 team, and I am grateful to every member of our team for the achievements and contribution to another successful year. While we are satisfied with our results, we recognize that competition remains high. We see the Russian food retails emerging into a broader food delivery market, where traditional retail players [ achieved ] by rated food delivery services and so where omnichannel becomes an essential part of the retail CVP. We retained our leadership in traditional food retail despite the fact that we had slowed down new opening and have strict requirement for new openings in order to maintain margins and returns.Going into this year, we have an increased focus on our omnichannel offer to our customer as well as on the use of innovation and advanced analytics to achieve our long-term goals.Let me now highlight some of our achievements in the last year. We sustained growth in like-for-like traffic and basket at the group's level. Like-for-like traffic growth accelerated in Q4 last year at both, performance compared to the previous quarter. The company gross profit margin in last year increased by 27 basis points year-on-year, primarily due to the improvement in the commercial margin resulting from a more balanced approach to promo in the format mix effect from proportionally more sales at Perekrestok.Management initiative focused on reducing shrinkages levels in second half of the last year, had a positive impact on our gross margin. Finally, higher food inflation in Q4 was also a supporting factor. Our EBITDA margin was in line with our internal target and remains above 7.0 for the year, despite a challenging macro environment.Our online offerings saw fast growth in last year mostly due to addition of the second [ DC ] store in Moscow. The number of online orders to date reached over 2,600 in December and did not note decline in the beginning of this year. We are also piloting our last-mile delivery service for a network of parcel lockers in our stores.During the last 2 years, we analyzed technology from over 500 startups, often with the cooperation of these specialized funds and accelerator. In total, we launched 68 pilots in our store, distribution center and corporate center. Of these 68 pilots, we have already 9 tech innovation in rollout phase in areas such as pricing, process automation, energy efficiency and customer personalization. The company continued to develop its loyalty card program. In total, X5 free retail format had almost 38 million active loyalty card user as of end of December last year.The loyalty penetration in traffic in December reached 87% at Pyaterochka, 89% at Perekrestok and 81% at Karusel. Based on our solid financial results, we continue dividend payments and recommended a dividend for last year of RUB 25 billion or RUB 92.06 per GDR, which represents an 87.3% payout ratio.Now I would like to discuss some achievements across X5 format in more details. Starting with Pyaterochka format. We were disappointed with Pyaterochka results in the first quarter of the last year, which was affected by negative trends that continued from 2017. I am satisfied with what the current team has delivered in a short period of time. Our shrinkage level has been going down since quarter 3 last year, while stock turnover reduced by over 6% points year-on-year in the second half of the last year. Like-for-like traffic was negative in Q1 last year, but turned positive from the quarter 3 last year and is positive in the beginning of the current year.In Q3, we launched an transformation process at Pyaterochka and selected 16 key projects aimed at updating our first level CVP, store concept, cost optimization, logistics and target areas to assist with decision-making on pricing and assortment. Sergei Goncharov, the former COO, is personally involved in implementing this project. As you know, in 2018, we slowed down new opening and supplied tougher requirements for new store location. The current Pyaterochka management team became more focused on operation efficiencies. Considerable intention is being placed to reduce the shrinkage and providing business process in stores. These initiatives are designed to support margin and return on invested capital.As recognized, the importance of customer experience and customer joinings, we want to make adaptation of our CVPs and product mix to the changing needs of our customers, a continuous process. In last year, we finally saw changeable process of profitization for our proximity stores and optimization of assortment in accordance with the store site's location and regional demographics, which incorporate our loyalty card data. We are in the pilot stage of the project to automate pricing, which should provide us with a more sophisticated and more transparent pricing system.Another project we are working on is a new automated assortment management system that will use advanced analytics. These initiatives are expected to generate a positive effect across our Pyaterochka network later this year.Our fresh products offerings is central to the Pyaterochka CVPs, and we keep improving our quality. We adjusted the fruit and vegetables mix and added new products such as freshly baked bread by piloting bakeries in our stores. In the ultra-fresh category, we reduced supply chain delivery time by 39%. In price labels, we shift our focus from enterprise offering to unique product mix to improve the quality of private label product with a top and dedicated team and used feedback from customers when developing new products. We have analyzed all product categories and defined the target of shares of private labels in each category.Pyaterochka loyalty program has demonstrated impressive performance to date and we can consider it to be an agent to our future growth. As of December, we had 29 million active card users according for 64% of annual sales in proximity format, while penetration rate reached 48%, up from 42% a year before. The most loyal customer, which comprise 10% of the total number, accounts for 40% of sales. And we believe it is critical to increase the share of loyal customers.Another focused area last year was to improve promo efficiency. While keeping the shale promo stable, we tried to select the most effective one. The pilot of Pyaterochka demonstrated that we can decrease the number of promo position by 10%, without any effect on retail sales. Around 1,600 targeted marketing campaigns were launched in last year, increasing net retail sales of Pyaterochka by RUB 8 billion.We have continued to develop targeted promo base on big data analytics in order to enhance efficiency of product selection, timing and pricing of our promo activities.Now about achievements in Perekrestok. In last year, Perekrestok showed outstanding performance, reaching a record with 122 new stores opened and the highest like-for-like among X5 Retail Group's format. Its like-for-like traffic grew by 6.2%. We continued the refurbishment program with 37 stores upgraded last year. With new openings, we brought the total sales of stock operating under the new concept to 86%.Improving fresh and fruits and vegetable quality is a top priority for Perekrestok. We believe it is a key to the farmer's success going forward. In response to the consumer trends evolving in Russia, we expanded the product range in fresh fruits and vegetables and healthy food categories. We continue adding unique product assortment by developing private label as well as healthy ready-to-eat and ready-to-cook products. The in-line private label was launched to address the rising demand for healthy food among our customers for supermarket format. Around 160 Perekrestok stores now have special sales food corners inside. As examples of our unique private label are Sarafanovo and Verhovye, which offers high-quality meals and other products. Such exclusive brands are crucial part of our CVP as well as strategic partnership with suppliers.Ready-to-eat is another promising opportunity for X5. We are really excited about the potential to develop the ready-to-eat category for Perekrestok, and we think this represents an important new way of development for the company. In order to upgrade and expand our product offering in this category, our own kitchen factory will launch production in the end of the current month. We'll also supply Pyaterochka store in Moscow and the Moscow region and we plan to start construction of another kitchen factory for St. Petersburg in Northwest region later this year.Perekrestok is also actively developing targeted marketing. It helps to better manage traffic, boost average ticket, frequency of purchaser as well as number of items in a basket. Targeted marketing in Perekrestok's loyalty program helped to increase retail sales by RUB 5 billion or 2% of the 4-month net retail sales in last year.Our efforts to improve operational efficiency started to deliver results. New regional openings now require less CapEx and we are testing low OpEx model for regional supermarkets. Logistics cost of both declined by 9.5% year-to-year. Our incentive and training system improvement contributed to reduction in personnel turnover by 14% in last year. We improved the promo planning efficiency, which help us to better align promo product inventory with demand.We continued to roll out our Perekrestok Online business. This is a separate business unit within Perekrestok that has its own strategy, its own P&L, infrastructure, logistics and team. I am happy with the results, which we have seen so far.In terms of average monthly ticket, omnichannel customer off-line plus online spent 70% more than the off-line customers. In December, the average number of order per day exceeded 2,600 and this trend has continued well in this year. The average check was RUB 3,100 in quarter 4. In February this year, the daily number of order has reached as high as 4,000 per day and payout reached 83% in December last year, well above our internal target. 2 new [ DC ] stores that were opened in Moscow and St. Petersburg in last year, will help us to more than triple our capability in processing orders as well as to double the product range. Traffic to the website increased 2.3x in the last year. And we saw the conversion rate improved from 1.3% in 2017 to 3.2% in the last year. We have ambitious plan for our online business growing in this year.Finally, a few words on our efforts to improve our current business at Karusel. Hypermarket segment is under pressure in Russia and worldwide, and Karusel is no exception. We are not pleased with the performance in last year, but we are focused on improving the business and implementing a number of new initiatives. Sales density improvement remains our top focus for existing stores, combined with conservative approach to new openings. In last year, we began to roll out a new concept at Karusel. Product range optimization was a top priority last year. As product quality and healthy foods are becoming increasingly important to Russian consumers, we aim to expand our range of healthy products. We are considering option to improve space utilization and increase traffic by inviting partner to our hypermarkets.We're also testing the live supermarket format. We currently have 2 Karusel stores being managed by the Perekrestok team, both in the region, and we plan to transfer 3 more stores over to Perekrestok this year. As part of our omnichannel approach to CVPs, we plan to launch Click & Collect in Karusel hypermarket in Moscow and Perekrestok supermarket in Moscow and St. Pete. If all goes well, the project will be roll out to other major cities of the country.Now let me update you on our strategic priority, which is creating new innovation and omnichannel capability. Our work on innovations has a focus on improving the customer joining, which will support our sales. Another big area where we expect to benefit from innovation is achieving higher efficiency across the business. The company has now established procedures to select pilots and implement innovation to each of the 3 formats. We are mostly interested in projects focusing on marketing, store operation, logistics and our service centers. Key products that we piloted at X5 store include video monitoring of shelves, smart shelves, facial recognition and WiFi recognition, customer queue video. Based on successful pilot, we have taken the decision to roll out video monitoring of customer to use in all Perekrestok stores.We operate a lab store under the Pyaterochka brand, where innovative technology and idea are tested in the real-life environment to help us estimate where potential invest for all our formats. Perekrestok is set to host our second lab store this year. Last year, our big data department provided a technology platform to collect store and process data that X5 accumulates. We are focused on improving how we go with this data and the goals of our analytics. This will enable us to further enhance our data-driven decision-making. With all our 100 people in the big data team, they are introducing several projects in data analytics to determine promos, pricing and assortment.In addition to Perekrestok Online, in last year, we roll out our on network on parcel lockers in our store to generate additional traffic. The lockers are now installed in over 1,700 stores. If successful as the pilot, we'll extended to the entire team. We are partnering with a number of company to develop a local network.Let me finish my speech with our priorities. Our set of goals is balanced business growth with stable returns for new openings. For the longer term, to sustain our market leadership and profitability, we need to focus on customer experience and deploy advanced analytics on different level of our operation and decision-making. First we need to look at how we can improve the customer journey. To achieve this, we should develop our omnichannel offering as part of CVPs of each format or as a separate line of business. If it doesn't reach in this -- the current CVPs, we must constantly update our CVP and our product range. We should adopt our assortment with focus on fresh, fruit and vegetables, private label and ready-to-eat to meet our target within demand. We should better engage store personnel to improve service level and further develop our loyalty programs and targeting marketing. These measures will help us to improve customer service and NPS across all formats. Second, we need to further develop our expertise in technologies, innovation and big data. It is already clear that retail, as many other consumer sector, will see an increased use of advanced analytics and we should remain on top of these trends to support our business development.Now I would like to pass the floor to X5 CFO, Svetlana Demyashkevich, who will comment in more detail on the company's financial results for the fourth quarter of the last year and our guidance for this year. Thank you for your attention.
Thank you, Igor. Good morning, good afternoon, ladies and gentlemen. Let me start with a market update, after which I will give an overview of our financial results and highlight and guidance for this year.So first, I will say a few words about the external and competitive environment. In the fourth quarter of 2018, full inflation accelerated at a fast pace, reaching 4.7% year-on-year in December, versus 2.5% in September on the back of lower harvest last year, volatility in global financial markets and some other factors. Food retail trade grew 1.9% in real terms in fourth quarter from 1.0% in the previous quarter. Overall market growth in 2018 was 1.7% in real terms and 4% in nominal terms. And the market value reached RUB 15 trillion.[Audio Gap]Real disposable income dynamics remained weak, declining from 1.1% year-on-year in fourth quarter.For the full year of 2018, real incomes fell by 0.3%. Consumers remained rational and sensitive to promo. The consumer confidence, it has remained negative. The macro environment remains challenging, but full inflation started to pick up. It reached 5.5% year-on-year in January and 5.9% in February. We see this trend continue in March, which is supportive for all retailers, including us, of course. We have frequently asked questions via our investors about the change in competitive environment. Competition has increased over the past 2 years, not only from traditional retailers, but also from ready-for-delivery segment. The largest traditional players continued their sound pace, but expansion plans for 2019 have moderated. At the same time, new formats have appeared, which indicates consumers are receptive of new CVPs. We'll also see new trends in the markets, while consumer behavior is changing, as Igor has already mentioned, and this puts pressure on retailers, which is especially pronounced in Moscow. All of this have impacted X5 and especially Pyaterochka. This was especially visible in the beginning of 2018. For now, proximity formats traffic in Moscow was negative. However, thanks to the initiatives of the current team at Pyaterochka, including projects aimed at updating CVP, assortments, cost optimization and shrinkage share reduction, we managed to achieve an improvement in like-for-like traffic in Moscow, which is positive year-to-date in the first quarter of 2019. At the same time, traffic in Pyaterochka in the regions remained positive during the whole year of 2018 and is still positive now in the first quarter.Before we move to the financial results, I would like to say a few words about return on investments, as this question also frequently asked by investors and analysts. Well, Moscow and St. Petersburg continue to demonstrate the highest levels of return on investments, outperforming our regional operation. You might remember that it involves decreasing trends -- negative trends in Moscow and St. Pete's return on investment for almost a year in the second half of 2017 and first half of 2018. But now what we see in our post investment analysis of the fourth quarter 2018, this trend has stabilized, which gives us optimism for 2019. At the same time, return on investments and profitability trends in the regions are encouraging. While returns in the regions are lower than in Moscow and St. Pete, the rate is growing and exceeding our hurdle rates, which is 19% IRR, implying increased quality of openings in the regions.Moving on to X5 financial performance, during the quarter, revenue increased by 16.9% year-on-year to RUB 423 billion in fourth quarter. X5 like-for-like sales and traffic growth accelerated to 3.7% and 2.2% year-on-year compared with 0.5% (sic) [ 1.5% ] and 0.9% in the third quarter. X5 like-for-like basket growth in fourth quarter reached positive territory on the back of increasing food inflation.Looking at margins. In the fourth quarter, the gross profit margin increased by 30 basis points year-on-year to 24.1% of revenue, due to the stable share and more balanced approach to promo and the positive impact on the commercial margin from proportionally more sales coming from Perekrestok, which reached 16% of net retail sales during the fourth quarter. Successful measures to control shrinkage levels also had a positive year-on-year impact on gross profit margin.The negative year-on-year effect from SG&A reached 91 basis points and was due to increased stock costs, lease expenses and utilities costs. These 3 cost items had roughly equal impact on our quarterly profitability. All the details of the factors of SG&A expenses are disclosed in today's press release.The adjusted EBITDA margin totaled 7.2% in the fourth quarter of 2018 and was fully -- and we fully met our internal targets for the year as expected and as communicated at our previous calls, so we were within our prognosis.In the fourth quarter of 2018, we continued to accrue LTI expenses covering the old and new LTI programs. The LTI expenses, including social taxes, accrued for the old program totaled RUB 386 million and for the new program, RUB 184 million.Depreciation and amortization and impairment costs increased as a percentage of revenue by 28 basis points to 3.4% versus 3.1% for the same period last year. This was due to continued growth in the share of assets with a shorter useful life, driven by the growing share of leased space in X5's total real estate portfolio.In the fourth quarter, net finance costs were 36% higher year-on-year. The effects from the increased level of gross debt was partially offset by the decreased weighted average effective interest rate on the total debt, from 9.51% in 2017 to 8.39% for the fourth quarter of 2018.In February 2019, X5 placed a RUB 5 billion bond with a coupon of 8.5% per annum. The company's net profit in the fourth quarter totaled RUB 6.2 billion, increasing by 2 basis points year-on-year to 1.5% of revenue.Turning to our balance sheet. At the end of the year, our net debt-to-EBITDA ratio decreased to 1.7, the lowest level in company's history. We consider this level of leverage to be comfortable and we'll seek to maintain a ratio of below 1.8, while paying dividends in line with our policy going forward.Turning to cash flow. The change in working capital in the fourth quarter of 2018 was plus RUB 21.2 billion, compared to RUB 4.5 billion in the fourth quarter of 2017. This was primarily due to high increase in accounts payable driven by business growth and higher food inflation in fourth quarter as well as improvements in accounts receivables collection.Net cash used in investing activities, which generally consist of payments for property, plant and equipment, decreased to RUB 23.8 billion compared to RUB 27.4 billion for the fourth quarter of 2017, driven by low investments in store openings.Now few words on CapEx. X5's total capital expenditure amounted to RUB 27.5 billion in the fourth quarter 2018 compared to RUB 38.1 billion in the fourth quarter 2017, approximately 55% of the quarterly CapEx went to expansion of our store base. The remaining CapEx includes refurbishments, logistics, IT and other investments. Total CapEx in 2018 decreased by 15.7% year-on-year, reaching RUB 83.2 billion. Finally, let me confirm our previously announced plans to open around 2,000 gross stores across all formats in 2019, while maintaining our profitability and returns. CapEx is planned at our, more or less, stable level around RUB 90 billion. We also remain committed to continue dividend payments in line with our dividend policy.That concludes the discussion of our results. Thank you for your attention.
Thank you, Svetlana, Thank you, Igor. Operator, can we please start the Q&A session? Thank you.
[Operator Instructions] We have your first question. It's coming from the line of Alexey Krivoshapko.
I guess, I have 2 questions. There's one, clarification one, on 2019 CapEx, this RUB 90 billion figure, which you're referring to. Does it include VAT? And second question, does it include M&A?
On CapEx, so this RUB 90 billion is including M&A, as always. So it's an approximate number. This year, CapEx -- I mean, 2018 year CapEx actually was slightly even lower our prognosis because some of the M&As were done in the end of 2017 and some of the M&As will be included in CapEx of 2019. So there is also some timing difference.
And what about VAT? Is it also...
M&A will be a part of this number and VAT is not included. We normally give net of VAT numbers to you.
Okay. Just clarifying. And I guess, second question is maybe more serious. I guess, you indicated that you had very high losses in '17 and basically Sergei has come with a strong plan to use them and it happened in '18 already, from Q2. And that was basically one of the reasons why the gross margin has been going up. At the same time, basically we can see that it's down Q4 versus Q3 by like 50 basis points. And I'm trying to understand a little bit what is behind it, because typically the seasonality for gross margin Q4 versus Q3 is neutral to positive. So, is it so that losses started to go up again? Or did you reduce prices? What happened actually?
Thank you for your question. So you're right that Pyaterochka's team is very effective starting the third quarter of 2018 with decreasing shrinkages, and we have a steady decrease in trends, which actually continued in the fourth quarter and continued -- is still continuing in the first quarter of 2019. If you look at the gross margin of the fourth quarter 2018 comparing with the fourth quarter of 2017, it's higher, so 24.1% comparing to 23.8% in the fourth quarter of 2017. At the same time, yes, you're right that if we compare gross margin of fourth quarter with the third quarter, the main difference is due to commercial margin. And yes, during the fourth quarter, attracting traffic, which is usually the good thing to do during the high season and that would actually we do every year. We did invest in customer, mostly through regular pricing.
And what was the impact of that price reduction? What did you get in return?
As you see, traffic is positive in the fourth quarter and again continuing in the first quarter of this year, even with somewhat increased prices, including the change in VAT. We still see a positive traffic even in Moscow and Pyaterochka, which was the primary area of attention for us starting from the beginning of last year.
Do you kind of think yourself it's worth financially because, I guess, you see numbers better than we do in the real time because, I guess, there is certain trade-off between reducing prices and increasing profits. And I mean, it doesn't seem that we see it kind of financial-wise right now at this point of time. How do you think about it because, I guess, there is certain kind of price level in stores, which would not make them economically profitable for new store openings? I mean, how does your kind of -- what's your line of thinking? What is the normal level of profit in store, or I don't know, operating profit margin, operating profit -- in store, which you would basically stop as otherwise it will be economically profitable to open stores given your current CapEx levels?
So we're actually happy with the results for the fourth quarter and overall for the year. If we're talking about the gross margin performance and overall EBITDA margin performance, we are even slightly above our plans, and including return on investments. So what we see, again, as I commented when I was discussing the factors affecting the fourth quarter, so what we see is the stabilized trend of returns on Pyaterochka stores in Moscow and increasing trend on returns in the regions. So overall, we think that the changes, which are made in Pyaterochka in the second half of the year regarding category management processes, assortments, pricing and promo are very positive. And we do continue to see these trends in the first quarter of this year, while all these projects are actually continuing. We have 3 major projects in Pyaterochka on assortment, pricing and promo, which are done by our internal team, including our team of big data, where we analyzed our loyalty card program data and based on that, make our decisions on the profit assortment in particular stores. So I would say, we are becoming smarter, both in assortment, pricing and promo. And we already see it on our financial results. I think we will see further improvements during 2019.
So Svetlana, just last question. So is it fair to say that kind of FQ1 was -- you were not happy with Pyaterochka? Q2 was a bit better. So let's say, second, third, fourth quarter is the kind of level of financial performance of Pyaterochka, which you are happy with and the one which is sustainable. Is it fair to say so?
Yes. I think, yes, first half of the year was challenging with the first quarter being probably -- demonstrating the most negative trends and the second half of the year was much more positive. And yes, we see positive developments in the first quarter this year.
Alexey, we hope you do not mind if you'll let other participants ask their questions.
We have another question. It's coming from the line of Nikolay Kovalev.
I have 2 questions. My first question is on the CapEx. For the guidance of flat RUB 90 billion, can you give us estimates? How much will be allocated for IT initiatives, e-commerce and establishing your omnichannel platform?
So overall, around 50%, 55% will be allocated to store openings, around 10% logistics, another 10% on maintenance, and around 25%, 30% to IT developments, big data developments and other projects, including innovations.
Okay. And also I would like to clarify on your LTI booking. Can you share with us your estimate because you have 2 programs going on? How much LTI you're supposed to book this -- in the next couple of years? And what metrics do you imply in your calculation?
So now we still have some part remaining from previous LTI for 2019. The amount is around RUB 0.5 billion. And we also started in 2018 to accrue new LTI program, which started from 1st January 2018. Overall amount, which is now accrued for this new LTI program, is around RUB 2.9 billion for 4 years. So for years 2019 and '20, overall amounts are around RUB 1 billion and further RUB 0.7 billion, RUB 0.2 billion. So if -- and second question was on the targets included in LTI program, right?
No. I mean, like as a sub-question, it was when you are talking about RUB 1 billion, what kind of triggers you implied in this calculation?
So 2 main targets for this new LTI program are leadership in revenue among Russian food retailers and second target is leadership in EBITDA multiple, among Russian publicly-traded food retailers. So we do think that the probability of us achieving first target is quite high, that's why we started to accrue this part of LTI program. The probability of us reaching second target on EBITDA is less visible at the moment, but we still have time. So we didn't accrue for 2018 and we'll see how it will develop in 2019 and '20.
[Operator Instructions] We have another question. It's coming from the line of Maxim Nekrasov.
I have a quick question on your finance cost. So the question, why your finance cost increased by over 20% in the fourth quarter compared to the third quarter, considering that the leverage has actually went down and the total debt in absolute terms also went down?
So overall, our debt level increased, if we compare beginning of the year and end of the year. At the same time, also within the quarter, there are some fluctuations of debt and it really decreased by the end of the year somewhat. And our expectations of CapEx, including expectations from M&A, were higher than the fact for the CapEx in 2018. Overall, we do see several major items impacting performance of our net profits, while the biggest actually being amortization, depreciation, which increased significantly due to quite sizable CapEx of last 3 years. And now it'll come down to this amortization, depreciation line. In addition to that, there were some smaller changes, including FX, including deferred tax from dividends, some penalties and -- but all these factors are impacting overall net profit number much less than the difference in depreciation. In addition to that, I think what is important is we still announced quite sizable dividend with increase comparing to 2017 number, both in ruble terms, in dollar terms, in terms of our payout ratio to net profit. So I would probably...
Okay. And final question. What effective interest rate would you expect in 2019 for the full year?
So the last bonds were issued was at the rate of 8.5%. So I would -- so that's our market level at the moment. We do not expect big movements, both negative and positive during the year. So probably overall rate will stay in that range. I mean, do you -- Natalia, do you have something to add?
Yes. We last year compared ourselves with the key policy regarding how it performed and [ that, I ] think the good benchmark to keep in mind is that we place the bond with the spreads of about 70 basis points. So if the key rate will be changing, we hope to stay kind of within this spread.
We have no further questions coming from the phone lines. Please continue.
Ladies and gentlemen, we would like to thank you for your interest and your questions. We would like to remind you that we will host a separate call on March 25 dedicated to the adoption of IFRS 16 accounting standard. Speak with you then, and have a nice day. Thank you. Goodbye.
Thank you.
Thank you.
Bye.
Ladies and gentlemen, that does conclude our conference call for today. Thank you for participating. You may all disconnect.