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Good day and welcome to the conference call on Q1 2019 operating results. Today's conference is being recorded. And at this time, I'd like to turn the conference over to Veronika Kryachko. Please go ahead
Good day, ladies and gentlemen. My name is Veronika Kryachko, Head of Investor Relations at O'Key group. I'm honored to conduct today the conference call on first quarter 2019 operating results. Our call will start with update on the group's operating performance and key developments provided by Chief Executive Officer, Armin Burger, followed by Q&A session. The senior management team, Konstantin Arabidis, Chief Financial Officer; Anton Farlenkov, Head of Corporate Development, are joining us today and will be happy to answer your questions. That's all on my side. And I hand over to Armin Burger. Please, sir, go ahead.
Thank you, Veronika. Dear ladies and gentlemen, I'm happy to welcome you to our first quarter 2019 operating results conference call. The consumer sentiment overall has remained mixed due to VAT increase and high inflation. The Consumer Price Index, CPI, for food jumped to 5.8% during the first quarter, largely driven by a tighter supply/demand balance on the sugar market, rapid growth in meat and poultry prices and higher prices for grains. These trends have had twofold impact on our top line. Firstly, we had a higher overall basket, and secondly, lower traffic at the beginning of the year, especially in January. The hypermarket like-for-like basket increased by 2.9%. This is excluding VAT in the first 4 months of 2019. Traffic at the same time was down by 4.5% for the first 4 months. However, it is notable that initiatives which we launched at the end of 2018, aimed at improving logistic operations and overall quality of fresh and ultra fresh goods at our hypermarkets, led to a subsequent traffic recovery in February, March, and especially, in April, which supported overall revenue in the first 4 months of the year. We see a similar positive trend in May. It is, what we see in the moment, very encouraging. Striving to improve our customer value proposition in the first quarter, we pushed the effort to strengthen such key business areas as service level, assortment mix and quality of fruit and vegetables, meat and fish. Subsequently, we want to be the destination for the customers' fresh and ultra fresh shopping. In order to be more attractive to different customer profiles, we also continue to develop middle and premium assortment ranges at our hypermarkets. To strengthen our position in the imported goods category, we expanded the wine and spirits sections at our Litvinovo distribution center. Further strengthening of our own import is a strategic priority.Ladies and gentlemen, some comments to our discounter business. Our discounter business has demonstrated very good results in Q1 and also in April and now in May. The growing appreciation of the business model focused on higher quality of fresh foods, fresh products and our private label assortments continued to give a solid like-for-like traffic growth of 12.5% in the first 4 months. In sales, we had a like-for-like growth of around 20%. This growth was supported by an increase in customer numbers, a better basket mix and inflation. In the first quarter, we continued to enhance our assortment metrics by listing of additional private label brands, such as our new Farm brand. At the same time, customer demand for cheaper private label products increased, as inflation forces customers to save money. Here, the first time since I'm in Russia, the discount kicks in, and we see very nice increase in customer numbers and also in our sales. To our 2019 guidance, we expect hypermarkets' top line growth to be around 0 for the whole year as previously already said and predicted. We will continue to develop the discounter business by opening up to 13 new discounters by the end of the year. We expect the discounter business to deliver double-digit like-for-like growth in 2019. That means we continue the current positive trends and to be breakeven by the end of the year and definitely breakeven the whole of next year. This concludes my update. And now we are ready to take your questions. Thank you.
Thank you, Armin. Ladies and gentlemen, we are now ready to take your questions.
[Operator Instructions] And we'll take our first question from Marat Ibragimov with Gazprombank.
I'd like to ask a very simple question. What exactly have you done in hypermarkets between January and April, which made the traffic to jump from minus 7% to plus 4%? Or whatever the -- yes, to 2.5%. What was done wrong in January what you managed to fix in April?
As you know, I took over in September last year. And we analyzed the trends which were not very positive last year, and we analyzed the initiatives we have to take and have to take to turn the sentiment around. This is not a very easy and fast process, but it's a continuous process. Mainly what we did, we changed our advertising. We focused more on freshness. We changed our logistic. We changed our supply chain. We tried to have fresher products in our store. If necessary, we reduced them earlier, write off earlier and give the customer a better shopping experience. Together with this additional advertisement, this leads slowly but steadily to an increase in customer numbers. It's not -- we have to understand we didn't have a customer base which left us. We had the situation that the customers came less often to us. Due to this fresh advertising, they come more often again. And we see also, if they come to our stores, they buy additional products. This is the whole recipe we have behind this increase.
So in other words -- to sum up what you said, you are increasing the offer in the fresh foods and vegetables, in other words, all fresh offering, and you actually advertised that through your customers, right?
This is correct. What we try to do is to bring customers more often that means every week into the store. Fresh products means you have to come weekly doing your shopping. And if the customer is happy with us, and this is what we want to achieve the next couple of months, they will come weekly instead of probably 1.2 or 1.5 times a month.
Okay. And my other question on discounters. Have you done such exercise by calculating your cost, fixed cost, operating cost per square meter and compare them with publicly listed competitors, for example, Magnit or Pyaterochka. And if you've done that, where do you less -- where the discounter solicitation, in Magnit or Pyaterochka?
The fixed cost, depending now how you define fixed cost, we did, obviously, our calculations. We have a much higher turnover per square meter already now and growing. That's 0.1 and 0.2 of fixed cost, aimed to be lower in comparison with the competition.
So in other words, what you are saying that your EBITDA per square meter should be higher -- should be better than that of Pyaterochka or Magnit. Is it true?
Put it like this. As soon as we have the right number of stores, you have obviously an overhead buying department, management and so on, which you have to distribute over a certain amount of stores and turnover. As soon as we have the critical mass, this is for me around 120, 130 stores. That's why we, next year definitely, will be in a nice positive trend. As soon as we achieve this, we have better cost structures than other's competitors. This is our aim.
Okay. And final question on the hypermarkets guidance. You earlier said when you released full year '18 IFRS results that you are targeting low single-digit top line growth. But now you're saying 0 top line growth for hypermarkets? Why are you downgrading your forecast, especially given the fact that food inflation is picking up as far as we see?
We don't want to downgrade our forecast. I was only careful. I do see a very positive trend currently, and if you call it now a 0 to low digit growth both, I do think we achieve more than low -- 0 growth.
[Operator Instructions]
Ladies and gentlemen, it's Veronika, Head of IR O'Key. We have some questions that were submitted online for us from one of our investors. And I will just would like to read it on his behalf.So the question is, when do you expect discounters to breakeven for the whole year? What do you need to do to achieve breakeven? What areas should be improved to achieve breakeven?
So obviously, this question, I answered already. We will breakeven the first time around the end of this year and the whole of next year. One of the areas where we have some additional potential is the margin side. We have a very positive trend here, and we will continue having it next year. Here we use also the synergies between the 2 chains, that means between O'Key, and DA!. With other words, both sides will at the end subsequently have positive impact of this cooperation. The other areas to improve to achieve the breakeven is obviously always the cost side. Here we work very hard to increase our productivity in the stores, and also the additional store numbers will help us to diminish the fixed cost and split them in between more turnover.
Operator, do we have some more questions in line?
We do have a few more phone questions. And we'll take our next question from Egor Makeev with Raiffeisen.
Actually I have a couple of questions. So my first question is where's the company now in terms of reaching synergies between the 2, 4 months?
Here, we currently started a very close cooperation between the buying departments. Import is one of the key areas of synergies. We -- food and veg want to do together. There's no problem doing it. We have synergies in the private label business and in the branded business. Private label business, here we have a core business unit in DA!. This is business of discounters. On the other hand, in the branded business, we have obviously, all the capacities in O'Key, which in combination, gives us a lot of possibilities to purchase together and have synergies.
Okay. And when the effect of the synergies should be seen in full in your opinion?
We see already first signs now, especially when I look at the commercial margin in DA!. Obviously, during the year, as soon as we increase the joint buying, we will have additional synergies. But I do see within the first year of cooperation that we see the full impact.
Okay. And are there any potential synergies in SG&A? And where is the company now in terms of realizing such synergies?
Good. We have some synergies in buying of equipment. That's a typical area where we can jointly probably get better terms and conditions, and we do it pretty intense already. In all other areas, I tend to keep the businesses separate to keep the identity of both formats. Discount, and hypermarket are 2 different kettle of fish, and I don't want to mix up the 2 different identities.
It's clear. And my second question is do you plan to open any hypermarkets this year? And well, maybe you could share the openings pipeline for the next year as well?
This year, we have in mind to extend 2 smaller stores. For next year, we have the plan of building hypermarkets again. Plus the main focus is on renovation for us in the next couple of years, reinvestment in the existing store network to improve here the experience of the customers.
We will take our next question from Artur Galimov with Sova Bank.
Two quick questions for me, if I may. The first one, Armin, you just mentioned that hypermarkets saw pretty positive trends in May and part of it's similar to April. Could you somehow quantify this statement in terms of either retail revenue growth or like for like as 3 weeks of the May are behind us already?
No, it's very easy. Like for like, we have a plus currently of 3%.
That would be for hypermarkets stand-alone, right?
This is for hypermarkets. And in the discount business, we are around to 20% like for like certainly in the past. We had some changes due to the bank holidays, and the figures will turn out a little bit better than they show in the moment, that's my opinion. But let us wait for the next couple of days, the weather and the impact of other issues.
Right. Just to clarify, 2% like for like is an aggregate growth rate for the whole business, discounters and hypers? Is this correct?
Yes, correct.
Right. And secondly, do I understand correctly that the Board of Directors apparently doesn't intend to recommend any dividends for 2018 anytime soon?
The dividend is not decided yet. That's obviously up to the Board of Directors, and we will have to come back here at a later stage.
And we'll take our next question from Marat Ibragimov with Gazprombank.
I'd like to ask, how would you describe the situation with competitors? How the market environment changes since the beginning of the year or compared to the last year. Do you see any pressure for new -- for selling space for real estate or -- and then for the staff? Do you see inflation pressure on that cost? And also in general, how will you describe the competitive situation in the -- for the retail market now?
Yes, to the competitive situation, we do see that it stabilizes on a very competitive level. For all of us, it's -- currently, that's, at least my opinion. Very difficult in this inflation rate scenario, which we had the first couple of months, to stabilize our margin and to stabilize the way we operate. Therefore, I see a little bit less activity currently. We saw some inflationary pressure at the beginning of the year with some of the contractors. This problem is solved. We see overall, if you don't know about the retail margin and the margin in our goods, in the discount business, we see a very positive trend. In O'Key, we see a very stable trend on a high level. We did quite a good job here in agreeing, together with the synergies, I've mentioned before, acceptable terms and conditions.
And what about price competition? Other retailers say that the share of promos has stabilized in the beginning of this year, so they don't want to go into price cuts. Do you see a relief on that side? Do you see a relief -- less pressure on your margins from competition?
To the shelf promo, here we want to stabilize on the level we are. I don't intend to have higher promo share in the hypers, in the discount business. The discount business has obviously a very low double-digit number, the hyper's between 25 and 30. We don't want to get any higher here. It's not good for the business. We want to concentrate on our fresh activities, delivering the best quality of food to -- for our customers and being #1 here in the future. Therefore, I do see some pressure, but with our different activities and the way we compete here, we have no private -- no problem to sustain the margin we own and be very competitive as well.
And we'll take our next question from Alexander Gnusarev with VTB Capital.
Just 1 question from my side, if I may. It's not related to your operating results. It's rather related to the recent news about the Sberbank's interest on your hypermarkets format. Perhaps you could provide some maybe small update on this situation, and on the development from the interest of Sberbank?
Thank you for the question. But as you can imagine, I will not comment on any speculations in the market. We run our business and want to run it.
And we'll take our next question from Anna Butko with Aton.
I just have 1 clarification question, if I may. So you indicated that there were additional advertisement campaigns to attract traffic to hypermarkets? My question is, will we see any significant uptick in marketing costs in first half '19 as a result, or how it will be structured?
No, definitely not. We want to stabilize our cost base. I even have in mind to reduce the cost. Here we re-shift some of the marketing activities to the campaigns in the fresh sector, which are, in my opinion, much more efficient than a lot of other activities we had.
And at this time, we do not have any other phone questions. [Operator Instructions]
Ladies and gentlemen, it's Veronika Kryachko speaking. Thank you for participation in this conference call today. If you have any more questions, please contact us any time. Thank you, and have a good evening.
On behalf of the management, I would like to say thank you and thank you for your time, and have a good evening. Thank you.
And this concludes today's call. Thank you for your participation. You may now disconnect.