Company Presentation #1 Russian specialized children’s goods retailer
May 2017 Disclaimer
IMPORTANT: You must read the following before continuing. The following applies to this document, the oral presentation of the information in this document by Public Joint Stock Company “Detsky mir” (the “Company”) or any person on behalf of the Company, and any question-and-answer session that follows the oral presentation (collectively, the “Information”). In accessing the Information, you agree to be bound by the following terms and conditions.
The Information is confidential and may not be reproduced, redistributed, published or passed on to any other person, directly or indirectly, in whole or in part, for any purpose. This document may not be removed from the premises. If this document has been received in error it must be returned immediately to the Company. The Information is not directed to, or intended for distribution to or use by, any person or entity that is a citizen or resident of, or located in, any locality, state, country or other jurisdiction where such distribution or use would be contrary to law or regulation or which would require any registration or licensing within such jurisdiction. The Information is not for publication, release or distribution in the United States, the United Kingdom, Australia, Canada or Japan.
The offer and sale of the securities referred to herein (the “Securities”) has not been registered under the Securities Act of 1933, as amended (the “Securities Act”), and the Securities may not be offered or sold in the United States unless so registered, or an exemption from the registration requirements of the Securities Act is available. The Company does not intend to register any portion of the offering of the Securities in the United States or to conduct a public offering of the Securities in the United States. This document and its contents may not be viewed by persons within the United States unless they are qualified institutional buyers as defined in Rule 144A under the Securities Act (“Rule 144A”). The Securities may not be offered or sold in the United States except to QIBs in reliance on Rule 144A or another exemption from, or transaction not subject to, the registration requirements of the Securities Act. By accessing the Information, you represent that you are (i): a person that is outside the United States or (ii) a QIB.
The Information is directed solely at: (i) persons outside the United Kingdom, (ii) persons with professional experience in matters relating to investments falling within Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 as amended (the “Order”), (iii) high net worth entities, and other persons to whom it may lawfully be communicated, falling within Article 49(2)(a) to (d) of the Order and (iv) persons to whom an invitation or inducement to engage in investment activity (within the meaning of section 21 of the Financial Services and Markets Act 2000) in connection with the issue or sale of any securities of the Company or any member of its group may otherwise lawfully be communicated or caused to be communicated (all such persons in (i)-(iv) above being “Relevant Persons”). Any investment activity to which the Information relates will only be available to and will only be engaged with Relevant Persons. Any person who is not a Relevant Person should not act or rely on the Information. By accessing the Information, you represent that you are a Relevant Person. FCA/ICMA stabilisation.
The Information does not constitute or form part of, and should not be construed as an offer or the solicitation of an offer to subscribe for or purchase the Securities, and nothing contained therein shall form the basis of or be relied on in connection with any contract or commitment whatsoever, nor does it constitute a recommendation regarding the Securities. Any decision to purchase the Securities should be made solely on the basis of the information to be contained in the offering memorandum (or equivalent disclosure document) produced in connection with the offering of the Securities. Prospective investors are required to make their own independent investigations and appraisals of the business and financial condition of the Company and the nature of the Securities before taking any investment decision with respect to the Securities. The offering memorandum (or equivalent disclosure document) may contain information different from the Information.
The Information has been prepared by the Company. Credit Suisse Securities (Europe) Limited, Goldman Sachs International, Morgan Stanley & Co. International plc, SIB (Cyprus) Limited, JSC Sberbank CIB and UBS Limited and any other manager (the “Managers”) acting in connection with the offering of the Securities are acting exclusively for the Company and no one else, and will not be responsible for providing advice in connection with the Information to any other party. Subject to applicable law, none of the Managers accepts any responsibility whatsoever and makes no representation or warranty, express or implied, for the contents of the Information, including its accuracy, completeness or verification or for any other statement made or purported to be made in connection with the Company and nothing in this document or at this presentation shall be relied upon as a promise or representation in this respect, whether as to the past or the future. The Managers accordingly disclaim all and any liability whatsoever, whether arising in tort, contract or otherwise (save as referred above) which any of them might otherwise have in respect of the Information or any such statement.
Please note that the preliminary financial information as at and for the year ended 31 December 2016 included and referred to herein was prepared solely by the Company and has been neither audited nor reviewed by independent auditors.
The Information contains forward-looking statements. All statements other than statements of historical fact included in the Information are forward-looking statements. Forward-looking statements give the Company’s current expectations and projections relating to its financial condition, results of operations, plans, objectives, future performance and business. These statements may include, without limitation, any statements preceded by, followed by or including words such as “target,” “believe,” “expect,” “aim,” “intend,” “may,” “anticipate,” “estimate,” “plan,” “project,” “will,” “can have,” “likely,” “should,” “would,” “could” and other words and terms of similar meaning or the negative thereof. Such forward-looking statements involve known and unknown risks, uncertainties and other important factors beyond the Company’s control that could cause the Company’s actual results, performance or achievements to be materially different from the expected results, performance or achievements expressed or implied by such forward-looking statements. Such forward-looking statements are based on numerous assumptions regarding the Company’s present and future business strategies and the environment in which it will operate in the future.
No representation, warranty or undertaking, express or implied, is made as to, and no reliance should be placed on, the fairness, accuracy, completeness or correctness of the Information or the opinions contained therein. The Information has not been independently verified and will not be updated. The Information, including but not limited to forward-looking statements, applies only as of the date of this document and is not intended to give any assurances as to future results. The Company expressly disclaims any obligation or undertaking to disseminate any updates or revisions to the Information, including any financial data or forward-looking statements, and will not publicly release any revisions it may make to the Information that may result from any change in the Company’s expectations, any change in events, conditions or circumstances on which these forward-looking statements are based, or other events or circumstances arising after the date of this document. Market data used in the Information not attributed to a specific source are estimates of the Company and have not been independently verified. 2 Children Goods Retail Market Leader
Key Facts Market Positioning1
#1 specialized children’s goods retailer in Russia 2015 Structure of Children’s Goods Retail Market in Russia (%) 1 “Detsky Mir” is an iconic brand with 97% prompted awareness Other (incl. 521 stores as of 31 March 2017 non-organized − 468 Detsky Mir branded stores in 171 Russian cities, 41 Early Learning retail market) 32% Center (“ELC”) stores 11% − 12 Detsky Mir branded stores in 7 cities in Kazakhstan Internet Specialized 2016 Market 8% 9% share of 44%7 Diversified product portfolio comprising toys, fashion, products for newborns and Stores other children’s goods2 41% 8% 7% Exceptional growth and return metrics: adjusted EBITDA 2013-2016 CAGR of 44% General Food 4% and 2016 adjusted ROIC of 61%3 Retailers 40% 40% c.156 million visits in 2016 Other Players Average store size of c.1,400 sqm, located in modern shopping malls with product range of 20,000–30,000 SKUs 11,653 employees as of 31 December 20164 DM is the undisputed #1 player in the Market capitalization (MOEX:DSKY) – RUB 64.9bn5 #1 specialized children’s goods market Revenue Breakdown Financial Snapshot8
2016 CAGR 1Q 1Q 2013 2014 2015 2016 13-16 2016 2017 Large items and other2 Number of stores 252 322 425 525 28% 429 521 11% Selling space, k sqm 320 390 491 596 23% 495 596 Revenue, RUBm 36,001 45,446 60,544 79,547 30% 16,414 21,061 % growth 30% 26% 33% 31% 35% 28% % 12m trailing LFL growth 9 15.3% 14.6% 13.7% 12.3% 13% 11% Newborns RUB Toys % LFL growth based on 31% 79.5bn6 10 13.4% 13.7% 12.3% 10.8% 13% 11% 33% calendar year Gross profit, RUBm 13,908 17,263 21,904 27,108 25% 5,479 6,462 % margin 39% 38% 36% 34% 33% 31% Adj. EBITDA, RUBm11 2,771 4,463 6,185 8,203 44% 806 1,109 Fashion % margin 7.7% 9.8% 10.2% 10.3% 4.9% 5.3% Adjusted profit for the period, 25% 1,153 1,685 2,189 3,826 49% 102 137 RUBm12 Adjusted ROIC, %3 56% 88% 78% 61% 4% 5%
1 Source: ”Children Goods Market in Russia” report by Ipsos Comcon (December 2016) (“Ipsos Comcon report”). Poll was conducted in 8 The Group's consolidated financial statements for 2013 under US GAAP and 2014–2017 under IFRS. For the December 2016 line items and the periods presented, there was no difference between the calculation of numbers or presentation 2 Including large items, stationery, sports and seasonal goods under US GAAP and IFRS 3 Calculated as operating profit divided by average capital invested (simple average of capital invested as at the respective dates). Capital 9 LfL growth includes only DM stores in Russia that have been in operations for at least 12 full calendar months. invested is calculated as net debt plus total equity (deficit). Invested capital is adjusted for amounts receivable under a loan granted to CJSC “DM- 10 LfL growth includes only DM stores in Russia that were in operations for one full prior calendar year Finance”, carrying amount of Yakimanka building and net book value of the building occupied by the Bekasovo DC in 2015. Operating profit is 11 Adj. EBITDA is calculated as profit for the period before income tax, FX loss, gain on acquisition of controlling adjusted for LTI expense and for gain on sale of Yakimanka interest in associate, effect on disposal of subsidiary, net finance expense, D&A, adjusted for the one-off effect 4 Including ELC personnel relating to disposal of the Yakimanka building in 2014, as well as share-based compensation and cash bonuses 5 Market capitalization as of 31 March 2017 under the LTI program 3 6 Consolidated revenue inlc. ELC 12 Adjusted for one-off effects relating to disposal of Yakimanka building in 2014 , impairment of goodwill in 2015 7 Based on Ipsos Comcon report of specialized channel volume (RUB200.0 Bn incl. VAT) for 2016 and assuming average VAT rate of 10% and expense under the LTI management program Our Customer Proposition and Retail Concept
Our retail concept Newborns
Share in DM 2016 revenue: 31% 5 1 Market share: 20% Interactive emotive shopping experience for One-stop children’s shop with Key competitors General food/grocery retailers children and parents with comprehensive assortment visual merchandising across categories
Toys
Traffic generator Traffic Share in DM 2016 revenue: 33% 4 Market share; 30% 2 Long-term bonding with Affordable prices Key competitors: Specialised children’s stores
customers through loyalty generator Traffic focused on middle- programmes income families
Large items 3 Conveniently located in Share in DM 2016 revenue: 4% modern shopping-malls and Key competitors: Specialised children’s stores densely populated residential areas Standardized store layout
Stationery and other
Share in DM 2016 revenue: 7% Market share; 5%
Key competitors: Specialised children’s stores Profit generator Profit Fashion (apparel and footwear)
Profit generator Profit Share in DM 2016 revenue: 25% Market share; 11% (apparel), 11% (shoes) Key competitors: Apparel and footwear retailers, sports goods retailers
Source: Company data, Ipsos Comcon 4 Newborns market share includes large items. Stationery & other market share is for stationery only The Market Leader in an Attractive Specialty Retail Sector
1 • >RUB 500bn market #1 player in a large, fragmented market with attractive fundamentals • 3x the size by revenue of the second largest competitor in 2015
2 Iconic, category defining brand with attractive multi- • 97% prompted brand awareness category customer proposition
3 Well-defined four-pillar growth strategy: (A) taking over • 31% revenue growth in 2016 whitespace; (B) growing e-commerce platform; (C) focus • Double-digit LfL growth and on traffic generation and (D) execution excellence EBITDA margin
4 • Network of 525 stores Expansion platform designed for future growth • 2 modern DCs
• 2016 adjusted ROIC of 61%1 5 Asset light sustainable business model providing attractive shareholder return • c.100% dividend payout for the last 4 years
6 Experienced management team with well-established • Proven execution track record governance and supportive shareholders • 292 stores opened in 2013-20162
1 Calculated as operating profit adjusted for LTI expense divided by average capital invested (simple average of capital invested as at 2015 and 2016). Capital invested is calculated as net debt plus total equity minus amounts receivable under a loan granted to CJSC “DM-Finance” 5 2 Detsky Mir stores only 1 #1 Player in a Large, Fragmented Market with Attractive Fundamentals
Growing Birth Rate Drives Structural Changes in Russian Population with Growing Share of Children Large and Growing Addressable Market
2011–2020F Russian Children’s Goods Market (Nominal Prices, RUBbn) 19.2 19.6 20.2 20.8 21.7 22.2 22.6 +0.5 +0.4 +0.6 +0.5 +0.9 +0.5 +0.4
13,3 13,3 13,3 545 554 13,2 13,0 500 516 520 528 536 12,5 12,6 487 396 437 304 331 348
2010 2011 2012 2013 2014 2015 2016F2016 Birth rate (per 1,000 inhabitants) Children Population (under 12 y.o.), m Net Increase in Children Population (under 12 y.o.), m Source: Rosstat Source: Ipsos Comcon report
With Proven Resilience in Downturn Times Compared to Many Destky Mir is The Largest Specialty Children Goods Retailer Other Retail Segments with Rapidly Growing Market Share 2014-2015 YoY, Nominal Growth in RUB terms (%) Detsky Mir Market Shares in Russia (%)
8,3% 44% 3,0% 3,7%
1 32%
24% (3,7%) (5,6%) (4,9%) 16% 17% 17% 14% 13% 10% (10,0%) 8% 6% 7% (14,1%)
Consumer Furniture Fashion DIY Real GDP Children's Nominal FMCG Electronics Goods GDP 2011 2012 2013 2014 2015 2016 Total Children’s Retail Market Specialized Children's Goods Sales Channel
Source: Rosstat, Ipsos Comcon report Source: Company data, Ipsos Comcon report
6 2 Iconic, Category Defining Brand with Attractive Multi-Category Customer Proposition
Leading Customer Proposition
Bigger and Better Than Competition
Stores in Total Number of Stores in Other Average Selling Moscow and Moscow Poll: Prompted Brand Poll: Purchases in Stores Regions Space per Store Region Awareness L12M (1Q17) (1Q17) (ths. sqm) (1Q17)
1 1 1 468 #1 146 #1 322 1.42 97% 71%
193 144 49 0.7 40% 21%
151 48 103 1.2 75% 32%
108 57 51 0.5 42% 16%
62 1 61 1,0 74% 16%
3 5 0 5 0.5 47% 20%
Source: Company data, Ipsos Comcon report
1 Excluding ELC stores and Kazakhstan 2 New store roll-out: gross space 7 3 Deti + Zdorovy Malysh + Mama, entered into bankruptcy 3 Well-Defined Four-Pillar Growth Strategy
A Taking over Whitespace in Large and Small Cities
Number of Stores (Incl. ELC) Significant Long-Term Expansion Potential
4801 DM stores
525 135 50-100K cities with no DM Presence 90 Malls identified as priority locations for DM 25 Medium-term target locations in Kazakhstan 600+ Malls with no DM Presence
425 Moscow and Moscow Region 147 10 20 322 54 8 5 71 46 252 16 14 61 44 18 11 216 33 23 10 45 11 31 15 12 25
2012 2013 2014 2015 2016 Central Siberian Ural Volga Southern North-Western Kazakhstan
Source: Company data
1 Only Detsky Mir branded stores as of 31-Dec-16 8 3 Well-Defined Four-Pillar Growth Strategy (cont’d)
B Growing e-Commerce Platform with the Leading Online Market Position
Key Achievements in 2013-1Q20171 Accelerated Online Revenue Growth Underpinned by Launch of In-Store Pickup Function in All Opened Stores Took the leading market position in 2016 and kept it in 1Q17 (RUBm)1,4 Revenue CAGR`11-16 of 133% (>1.8x - 1Q17vs1Q16) 0.6% Price leadership across all categories 0.2% 0.5% 1.0% 2.1% 3.5% 3.0% 4.3%
Low marketing expense on the back of the iconic brand Profitable on standalone basis2 2,776 Over 97m website visits in 2016 ( +27% in 1Q17vs1Q16)
Double-digit conversion rate growth YoY (2016 2x growth) Launched In-store pickup Product range - 40,000 SKUs 1,260 900 Instore pick-up in all offline DM stores in Russia (468 stores as of 31 March Launched 443 491 2017). Share of in-store pickup in # of orders c.50% Online 227 40 127 Delivery to point3 (922 points as of 31.03.2017)
Home-delivery service – largest ATV 2011 2012 2013 2014 2015 2016 1Q 2016 1Q 2017 Online Revenue Online as a % of Total Revenue User Interface/Experience Evolution Russian Top-5 Online Children’s Goods Stores (Online Sales Volume in 2016, RUBm, incl. VAT) Now
New version PC5 3 110 6.8% Since 2011 Mobile5 2 750 6.0%
1 820 4.0%
1 810 3.9%
1 800 3.9% The omni-channel strategy leveraging Detsky Mir’s existing store network throughout Russia Market Share (%) Source: Company data, Ipsos Comcon Source: Company data, Data Insight, Ipsos Comcon report
1 The Group's consolidated financial statements for 2011-2013 under US GAAP and 2014–2017 under IFRS. For the line items and the periods presented, there was no difference between the calculation of numbers or presentation under US GAAP and IFRS 2 Based on management accounts 3 Incl. rented pick-up points (Boxberry + Ozon) 4 Including in-store pickup 9 5 Pilot version of the “back to school “site is completed. The Internet store is being further developed 3 Well-Defined Four-Pillar Growth Strategy (cont’d) Competitive Pricing and Effective Merchandising with Focus on Traffic Generating Categories Drive C Double-Digit LfL Revenue Growth and Growing Gross Profit per sqm
Double-Digit LfL Growth (%) Competitive Pricing Effective Marketing and Merchandising 15.3% Medium to medium-low prices Innovative store concepts based 13.4% 13.7%14.6% 13.7% 13.5% 11.2%11.2% 12.3% 12.3% 13.2% on highly interactive formats 4,8 10.8% Price leadership in traffic- 4,8 5,0 5,2 generating categories Focus on best-in-class customer 8,3 5,9 8,2 6,2 12,1 12,1 13,313,3 experience Discounts and loyalty 8,2 10,0 8,3 8,9 6,0 programmes Powerful CRM driving marketing 3,7 5,0 4,4 0,9 1,2 efforts (1,9)(1,9)
2013 2014 2015 2016 1Q16 1Q17 Number of Tickets LFL Number of Tickets LFL Average Ticket LFL Average Ticket LFL LFL growth based 12m trailing on calendar year 1 LFL growth 2
Product Gross Traffic 3 Revenue Breakdown (%) 4 Segment Margin Generation Growing Gross Profit per sqm (RUB 000) 100 100
Newborns 20 49,7 49,9 31 48,6
45,5 Toys 38 33
Fashion 27 25
Large items 15 11 and other 2013 2016 2013 2014 2015 2016 Source: Company Data
1 ILfL growth includes only DM stores in Russia that were in operations for one full prior calendar year 2 ILfL growth includes only DM stores in Russia that have been in operations for at least 12 full calendar months 3 Retail revenue only 4 Calculated by dividing gross profit for the period by average selling space for the period (calculated in thousands of square metres as simple average of selling space as of the beginning 10 and as of the end of the period) 3 Well-Defined Four-Pillar Growth Strategy (cont’d)
D Focus on Execution Excellence to Achieve Superior Operating Margins
Adjusted EBITDA2 (RUBm) Improvement of 260bps in EBITDA margin driven by:
Store operation improvements 8 203 Optimization of IT platforms and personnel
Reduction in SG&A as a % of revenue by over 730bps 6 185
Personnel per Store and Rent Costs Reductions 4 463
2 771 26 24 22 21
13,1 12,8 11,7 10,3 2013 2014 2015 2016 2013 2014 2015 2016 Personnel per Store Adjusted EBITDA Margin (%) Rent & Utility Expenses as % of Revenue
10,2 10,3 Adjusted SG&A Expenses as % of Revenue1 9,8
31,0
28,2 7,7
25,9
23,7
2013 2014 2015 2016 2013 2014 2015 2016
Source: The Group's consolidated financial statements for 2013 under US GAAP and 2014–2016 under IFRS. For the line items and the periods presented, there was no difference between the calculation of numbers or presentation under US GAAP and IFRS
1 Adjusted SG&A expenses are calculated excluding Depreciation and Amortisation and additional bonus payments under the LTI program 2 Adj. EBITDA is calculated as profit for the period before income tax, FX loss, gain on acquisition of controlling interest in associate, net finance expense, D&A, adjusted for the one-off effect relating to disposal of the Yakimanka building in 2014, as well as share-based compensation and cash bonuses under the LTI program 11 4 Expansion Platform Designed for Future Growth
Strong Infrastructure Backbone
Store Management and Rollout Distribution & Logistics IT Infrastructure
Strict investment hurdles for store openings: Well-established import trade competencies and in- Set-up SAP system manages on-stock balances house customs department: ̶ Focus on high-traffic shopping centres IT-infrastructure is able to support up to 800 stores ̶ Direct import contracts accounted for c.20% of with in-store pickup function ̶ Opportunistically consider standalone locations 2015 revenue Flexible approach to store formats with size 2 modern DC in Moscow region of approximately ranging from 600 to 2,000+ sqm 70,000 and 20,000 sqm Limited Capex per sqm due to asset-light business ̶ Target centralization level1 of 75%2 is achieved model with only 2 owned stores Increasing importance of e-Commerce as part of the omni-channel sales strategy
Detsky Mir and ELC Network of 525 Stores2 Across Russia and Kazakhstan
Imported goods
Moscow
Kazakhstan Siberian Omsk Ural Volga Cities with over 1 million inhabitants Kazakhstan Southern Cities with less than 1 million inhabitants Northwerstern Almaty Existing distribution centers Central Moscow 1 Centralization level measured as ratio of cost of goods delivered to DM stores directly from DM’s DCs to the total cost of goods delivered to DM stores 12 2 As of 31 December 2016 5 Asset Light Sustainable Business Model Providing Attractive Shareholder Return Attractive New Store Economics and Disciplined A Roll-out… C …Resulting in Strong Returns1…
Capex of c. RUB 13m per 1 standard DM store 2013 2014 2015 2016 Strict investment criteria Revenue Growth 30% 26% 33% 31% ̶ IRR hurdle rate of 40% on 7-year cash flows (not accounting for terminal value) Selling space Growth 10% 22% 26% 21% Total maturity period – 18-24 months Targeted EBITDA breakeven in 4 months after a store Adj. EBITDA2, RUBbn 2.8 4.5 6.2 8.2 opening Payback period of 2.5-3.0 years Capex, RUBbn (0.8) (1.9) (5.3) (1.7)
B ...Supported by Well-Controlled Rental Costs… Dividends, RUBbn (0.4) (1.9) (3.0) (4.4)
Primarily locations in high-traffic modern shopping malls Adj. Net Debt3 / Adj. EBITDA2 1.8x 0.6x 1.7x 1.4x Mostly more than 5-year rental agreements with fixed annual increases CROCI2 46% 59% 58% 52% Unilateral termination rights for Detsky Mir Adjusted ROIC5,6 56% 88% 78% 61% D …and a Leading ROIC5 in Global Retail Context CY20157 (%)
6 Median: 20 Median: 25 Median: 26 78 79 72
48 34 37 29 25 27 26 22 20 17 18 15 14 16 15 14
8 9 10 10 9
High Performance Specialty Retailers Russian Food Retailers Children’s Goods Retailers Source: Companies disclosures and reporting 1 The Group's consolidated financial statements for 2013 under US GAAP and 2014–2016 under IFRS. For the line items and the 5 Calculated as operating profit divided by average capital invested (simple average of capital invested as at the periods presented, there was no difference between the calculation of numbers or presentation under US GAAP and IFRS respective dates). Capital invested is calculated as net debt plus total equity (deficit) 2 Adj. EBITDA is calculated as profit for the period before income tax, FX loss, gain on acquisition of controlling interest in associate, 6 Invested capital is adjusted for amounts receivable under a loan granted to CJSC “DM-Finance”, carrying amount of net finance expense, D&A, adjusted for the one-off effect relating to disposal of the Yakimanka building in 2014, as well as share- Yakimanka building and net book value of the building occupied by the Bekasovo DC. Operating profit is adjusted for based compensation and cash bonuses under the LTI program LTI expense and for gain on sale of Yakimanka 3 Adj. Net Debt is calculated as total borrowings (long term borrowings and short-term borrowings and current portion of long-term 7 Calendarized to December year end borrowings) less cash and cash equivalents adjusted for amounts receivable under the loan issued to CJSC “DM-Finance” 8 Calculated using average Invested capital as of February 2016 and February 2015 4 Calculated as Adjusted EBITDA divided by average gross capital invested (simple average of gross capital invested as at the 9 Calculated using average Invested capital as of March 2016 and March 2015 respective dates). Gross capital invested is calculated as follows: (Total assets - DM-Finance loan - DC in Bekasovo - cash & cash 10 Calculated using average Invested capital as of January 2016 and January 2015 13 equivalents - current liabilities excluding interest-bearing liabilities + Accumulated depreciation of fixed assets & intangibles) 6 Experienced Management Team With Well-Established Governance and Supportive Shareholders
Highly Experienced Management… …With Strong Track Record…
New Management 1 Team Vladimir Anna Farid Pavel 103 100 Chirakhov Garmanova Kamalov Pischikov 47 56 Chief Executive Chief Financial Chief Operating E-Commerce 33 Officer Officer Director 21
Officer Openings New Stores Stores New
Joined in 2012 Joined in 2008 Joined in 2012 Joined in 2017 2011 2012 2013 2014 2015 2016 Held senior Held senior Held senior Previously positions at positions at positions at E-Commerce Director at Korablik, M.video Podruzhka, MediaMarkt, 33,2% 31.4%
Understanding and Korablik, M.video Dochki-synochki 30,3% 26,2% , % ,
Reconciliation Fund 2 20,1%
15,1%
Revenue Revenue Growth Maria Maria Tatiana Vyacheslav Davydova Volodina Mudretsova Mikhnenko 2011 2012 2013 2014 2015 2016 Deputy CEO for Apparel and Marketing Director Head of Commercial Affairs Footwear Commercial Logistics
Director , % ,
Joined in 2013 Joined in 2011 Joined in 2014 Joined in 2012 3 14,9% 13,4% 13,7% 12,3% 10,8% Held senior Held senior Held senior Previously positions at Enter, positions at Sela, positions at Operational 5,6% Svyaznoy, MDK, Reebok Rus, Kira Osnova Telecom, Logistics Director Arbat Prestige Plastinina, TJ Beeline, DDB and at X5 and Chief Growth Collection Publicis Logistics Officer at Kopeyka LfL 2011 2012 2013 2014 2015 2016
…Supported by a Strong Governance Framework… …and a Prominent Shareholder Base
. BoD of 10 members including 3 INEDs . Established Audit, Strategy and Nomination and Remuneration Free Float committees 52.1% 14.3% 33.87% ˗ 2 INEDs are members of each of the committees
1 Doesn't include ELC stores 2 The Group's consolidated financial statements for 2011 – 2013 under US GAAP and 2014–2016 under IFRS. For the line items and the periods presented, there was no difference between the calculation of numbers or presentation under US GAAP and IFRS 14 3 LfL growth in RUB terms. LfL growth includes only DM stores in Russia that were in operations for one full prior calendar year. Strong Financial Performance
Exceptional Revenue Growth Trajectory… …Underpinned by Strong and Consistent Like For Like Growth4
15.3% 79 547 13.4% 14.6% 13.7% 13.7% 13.2%13.5% 11.2%11.2% 12.3% 12.3% 4,8 10.8% 60 544 4,8 5,0 5,2 8,3 5,9 45 446 8,2 6,2 12,1 12,1 13,3 13,3 36 001 8,2 10,0 8,3 8,9 6,0 3,7 5,0 4,4 21 061 0,9 1,2 16 414 (1,9)(1,9)
2013 2014 2015 2016 1Q16 1Q17
2013 2014 2015 2016 1Q16 1Q17 Number of Tickets LFL Number of Tickets LFL Revenue (RUBm) Average Ticket LFL Average Ticket LFL LFL growth based on calendar year 5 12m trailing LFL growth6 Significant Margin Expansion with Scale Benefits Strong Cash Conversion and Financial Returns
9,8% 10,2% 10,3% 79% 77% 72% 67% 7,7% 8 203 64% 60% 4,9% 5,3% 6 185 7 88% 78% 4 463 56% 61% 2 771
806 1 109 4% 5%
2013 2014 2015 2016 1Q16 1Q17 2013 2014 2015 2016 1Q16 1Q17 Adjusted EBITDA¹ (RUBm) Adjusted EBITDA Margin (%) Adjusted ROIC³ (Adj. EBITDA¹ - Adj. Capex²) / Adj. EBITDA
Source: Company data. Note: The Company's consolidated financial statements for 2013 under US GAAP and 2014-2017 under IFRS. For the line items and the periods presented, there was no difference between the calculation of numbers or presentation 4 Includes only Detsky Mir branded stores in Russia under GAAP vs IFRS. 5 LfL growth includes only DM stores in Russia that were in operations for one full prior calendar year ¹ Adjusted for one-off items 6 LfL growth includes only DM stores in Russia that have been in operations for at least 12 full calendar months ² Adjusted for Bekasovo distribution center construction 7 Represents ROIC with investment capital as adjusted to exclude the construction value of the Bekasovo distribution ³ Calculated as operating profit, adjusted for the effect of disposal of Yakimanka building in 2014 and LTI bonus payments, divided center, which was completed in 2015 and was not operational for most of the year by average capital invested. Capital invested is calculated as Net Debt plus total equity(deficit) minus a loan granted to CJSC “DM-Finance” 15 Growing Profitability
Focus on Operating Costs Optimization Generates Substantial Gross Profitability is Balanced by Double-Digit EBITDA Margin Profitability Improvements2
(RUBm) (RUBm)
18,884 27 108 15,709 2 537 21 904 1 798 12,807 1 058 17 263 11,155 1 091 1 725 7 098 13 908 1 381 782 5 746 567 4 502 4 492 5,627 4,667 5 479 6 462 631 737 8 191 292 7 073 285 1 955 4 715 5 799 1 663 2 086 2 362 2013 2014 2015 2016 1Q2016 1Q2017 2013 2014 2015 2016 1Q2016 1Q2017
Gross Profit Rent & Utility Payroll Advertising & Marketing Other
(Adjusted SG&A expenses² as % of revenue)
20 45,00% 38,6% 18 38,0% 36,2% 34,1% 33,4% 31.0% 16 30,7% 35,00% 28.2% 28.4% 3,8% 25.9% 25.4% 14 3,8% 3,8% 1,6% 3,0% 23.7% 12 10,2% 10,3% 25,00% 1,7% 1,7% 3,5% 9,8% 1,8% 3,2% 1,4% 10 12,5% 7,7% 10,0% 1,3% 10,1% 8 15,00% 9,6% 9,3% 5,3% 8,9% 6 4,9% 4 5,00% 13,1% 12,8% 12,7% 2 11,7% 10,3% 11,2% 0 -5,00% 2013 2014 2015 2016 1Q2016 1Q2017 2013 2014 2015 2016 1Q2016 1Q2017
Adjusted EBITDA¹ Margin (%) Gross Profit Margin (%) Rent & Utility Payroll Advertising & Marketing Other
Source: Company data. Note: The Company's consolidated financial statements for 2013 under US GAAP and 2014-2017 under IFRS. For the line items and the periods presented, there was no difference between the calculation of numbers or presentation under GAAP vs IFRS ¹ Adjusted for one-off items 2 SG&A expenses exclude D&A expenses and adjusted for LTI bonuses 16 Strong Cash Flow Conversion
Comments Cash Flow (RUBm)
The increase in NWC significantly affected the decline in the Operating Cash flow. 2013 2014 2015 2016 1Q16 1Q17 Due to the seasonality of the business it doesn't make sense to take in account for the dynamics of NWC in the 1st quarter. Adjusted EBITDA2 2,771 4,463 6,185 8,203 806 1 109 The share of purchases and sales of the fourth quarter in the total annual turnover is significant. Most of the goods purchased and sold in the 4th quarter are paid in the Changes in NWC (93) (1,640) (4,300) (407) (1017) (4,463) 1st quarter of the following year. The purchases increased by RUB 4.8bn in 4Q16 vs 4Q16, the Sales in Cash Income Taxes Paid (477)4 (657) (1,190) (1,468) (383) (600) purchase prices amounted to RUB 3.7bn, which had such a significant Net Finance Expense impact on NWC in 1Q17. (507) (795) (1,879) (1,812) (493) (417) Paid At the same time Receivables Turnover Ratios1 improved from 10 days to 9 days, as well as Inventory Turnover Ratios1 decreased from 114 days Other Operating Cash 331 121 505 1,285 282 (58) to 110 days in 1Q17 vs 1Q16. Flow
Operating Cash Flow 2,025 1,492 (679)4 5,801 ( 806) (4,429) Cash Flow Conversion³ (%)
Capital Expenditure (772) (1,945) (5,308) (1,747) (269) (253)
79% 77% 72% DC Construction - (330) (2,842) - - - 64% 67% 60%
Store Openings, IT & (772) (1,615) (2,465) (1,747) (269) (253) Maintenance
Free Cash Flow 1,253 (453) (5,987) 4,054 (1,075) (4,682)
2013 2014 2015 2016 1Q2016 1Q2017
Source: The Group's consolidated financial statements for 2013 under US GAAP and 2014–2016 under IFRS. For the line items and the 2 Adjusted for one-off items periods presented, there was no difference between the calculation of numbers or presentation under US GAAP and IFRS. ³ Calculated as (Adjusted EBITDA – Adjusted Capex) / Adjusted EBITDA ¹ Days of Inventories / Receivables / Payables turnover calculated as corresponding metric divided by COGS / Revenue / COGS multiplied 4 Calculated as Income tax expense plus deferred tax income benefit by 365 for FY numbers. The base of quarterly ratio is LTM Revenue. 17 Sustainably High Returns to Shareholders
Comments History of Dividend Payments
Detsky Mir offers a combination of sustainable growth and Dividends (RUBm) significant dividend paying capacity 30% 26% 33% 31% − Dividends as major differentiator from the majority of Russian high-growth food retailers 4 427 Dividend policy is to pay not less than 50% of consolidated IFRS net profit of the previous year 2 973
− More than 100% of consolidated net profit (under IFRS, 1 856 corresponding to up to 100% under RAS) were paid as dividends historically 420
The decision to pay dividends must be approved by the General 2013 2014 2015 2016 Shareholders’ Meeting on a recommendation of the Board of Total Dividends, RUBm Revenue Growth, % Directors
Leverage Dynamics Dividends as % of Adjusted EBITDA Adjusted Net Debt(1) / Adjusted EBITDA(2) 1,8x 1,7x 72 67 67 1,4x 54 48 42
25
0,6x 15
2013 2014 2015 2016 2013 2014 2015 2016 2 As % of current previous year Adj. EBITDA 2 As % of current current year Adj. EBITDA
Source: Company data Note: The Company's consolidated financial statements for 2013 under US GAAP and 2014-2016 under IFRS. For the line items and the periods presented, there was no difference between the calculation of numbers or presentation under GAAP vs IFRS. 1 Adjusted net debt is calculated as total borrowings less cash and cash equivalent / adjusted for the loan issued to CJSC "DM-Finance" (Sistema’s subsidiary) in 2013 18 2 Adjusted EBITDA is calculated as profit for the period before income tax, FX loss, gain on acquisition of controlling interest in associate, net finance expense, D&A, adjusted for the one-off effect relating to disposal of the Yakimanka building in 2014, as well as share-based compensation and cash bonuses under the LTI program Conservative Financial Policy and Stable Leverage
Comments 31-Mar-17 Adj. Net Debt Calculation (RUBbn)
Commitment to a conservative financial policy Detsky Mir provided CJSC "DM-Finance" (Sistema’s subsidiary) with the loan to buy out 25% stake from Sberbank in 2013. Most of the loan − Fully RUB denominated debt to match RUB revenue (RUB4,875m including interest) was repaid in January/February 2016 − Relationships with multiple Russian and international banks RUB1.1 bn has been fully repaid on February 27, 2017 Leverage 2 as of 31-Mar-2017 is 1.9x of vs. 4.0x average covenant level across the loan portfolio 16,3 15,8 15,8 The weighted average interest rate3 – 11.2% (as of 31 March 2017) (0.5) Most of the debt has fixed interest rate
No contingent off-balance sheet liabilities
31-March-17 Debt Repayment Schedule (RUBm)
4 892
4 035 4 116
2 973
DM Debt Cash Net Debt Loan Issued Adj. Net Debt to CJSC 309 "DM-Finance"
2017 2018 2019 2020 2021
Source: Company data Note: The Company's consolidated financial statements for 2013 under US GAAP and 2014-2017 under IFRS. For the line items and the periods presented, there was no difference between the calculation of numbers or presentation under GAAP vs IFRS. 1 Adjusted Net debt is calculated as total borrowings less cash and cash equivalent / adjusted for the loan issued to CJSC “DM Finance" (Sistema’s subsidiary) on 3 July 2013 2 Exuding one-off effects related to the payment of bonuses under the long-term incentive scheme 3 Calculated on the basis of the weighted interest rates applying to the specified indebtedness (weighted by the principal amount of such indebtedness) as of the dates specified. 4 Including repayment of revolving lines that will be refinanced . 19 Appendix Update on Performance for 2016 and Outlook
Actual 2016 Near Term Mid- to Long-Term
Store 525 as of YE, of which 12 in Kazakhstan ~70 new stores ~250 new stores in 2017-20 Count and 45 ELC Store openings ahead of plan: opened 100 new DM stores, closed 1 DM store from an earlier relocation, opened 1 new ELC store
Revenue RUB 79.5bn Driven by store openings, LFL & ramp ups Driven by store opening, LFL & ramp ups
LFL Revenue 12.3% - 12m trailing LFL growth Double-digit, in line with 2016, including effect of new Slightly positive traffic growth, Growth store ramp-ups and 103 new stores entering LfL panel below inflation ticket growth, plus 10.8% - LFL growth based calendar year in 2017 effect of new store ramp ups
Gross Margin 34.1% Decline, but by less than 2016 vs 2015, as process of Stable offline price reductions to match online is complete
Rent & Utility 10.3% as of revenue Further meaningful decline as % of revenue vs 2016, Rents/sqm rise first slightly above Expenses with virtually no rise in rent/sqm in a continued soft inflation then in line with inflation, rentals market so stable as % of revenue
Personnel 8.9% as of revenue Further meaningful decline as % of revenue vs 2016, Stable to slightly declining as % of Expenses on operating leverage revenue
EBITDA 10.3% Double-digit supported by expectations of SG&A Double-digit Margin efficiency gains and new store ramp-ups more than offsetting the effect of lower gross margins
Source: Company data 21 Case Study: Baby Food Sales
Baby Food Sales by Channel in Moscow and Moscow Region Comments
Baby food remains a key category for children’s goods stores as traffic generator
Only children’s goods specialized stores 11,5% -1 p.p. 10,3% -0.5 p.p. 9,8% 10,0% -1 p.p. 9,2% offer a full range of baby food products 9,0% +4 p.p. +4 p.p. 13,2% 17,0% 16,1% +2 p.p. 18,1% unlike hypermarkets which are focused on “bestsellers” SKU 21,6% -2 p.p. 19,7% +2 p.p. 21,6% 20,2% -+0.5 p.p.. 20,7% Detsky Mir gained market share away from all other channels
-1 p.p. -5 p.p. -2 p.p. Notably, Detsky Mir has particularly 57,9% 56,8% 51,6% 53,8% 52,0% outperformed hypermarkets/supermarkets which have been the largest sales channel for baby food historically
FY2014 FY2015 FY2016 Q1 2016 Q1 2017 Detsky Mir’s share increased from 9.0% in 2014 to 17.0% in 2016 and from 16.1% in 1Q16 to 18.1% in 1Q17 Hyper/Supermarkets Standalone children's stores Detsky Mir Minimarkets
Source: AC Nielsen
Detsky Mir’s share in the baby food market has almost doubled over 2 years
22 Net Trade Working Capital Overview
Focus on Constant Improvement & Optimization of NWC1,2
8,8% 30 000 7,2% 24 796 (15 21 716 8,0% 17 346 5,5% 20 000 4,3% 16 550 6,0% 3,2% 8 636 2,6% 11 124 4,0% 10 000 173 d. 134 d. 164 d. 2 710 3 855 138 d. 1 457 144 d. 1 331 18 d. 1 890 2 118 2,0% 143 d. 15 d. 11 d. 16 d. 10 d. 9 d. 0 0,0% 152 d. 142 d. 114 d. 158 d. 101 d. -2,0% -10 000 176 d. (9 168) (10 993) -4,0% (13 745) -20 000 (16 718) (16 399) -6,0%
-30 000 (25 215) -8,0% 2013 2014 2015 2016 1Q2016 1Q2017
Inventories Receivables Payables NWC as % of Revenue
Increase in trade working capital in 2015 Improvements in 2016 achieved via Increase in trade working capital in 1Q mainly driven by − Improved logistics processes 2017 mainly driven by − Change of margin structure (shift efficiency − Decrease of Payables Turnover from front to back thus higher retro- − Improved AR: retro-bonuses are Ratio due to the seasonality of the bonuses thus increased AR) calculated and received on a business: 4th quarter is historically − Company has opened new DC, initial monthly basis instead of quarterly the largest in terms of share of fill-up resulted in inventory level effective beginning of 2016 annual revenue, as well as sales growth increased by 25% in 4Q16 vs Q4 − Increase in number of new stores 2015 also resulted in inventory level − Most of the goods sold were paid in growth the first quarter of 2017 − Nevertheless substantialy improved Receivables & Inventories Turnover Ratios
Source: Company data. Note: The Company's consolidated financial statements for 2013 under US GAAP and 2014-2017 under IFRS. For the line items and the periods presented, there was no difference between the calculation of numbers or presentation under GAAP vs IFRS. 23 1 Net trade working capital calculated as Receivables + Inventories – Payables ² Days of Inventories / Receivables / Payables turnover calculated as corresponding metric divided by COGS / Revenue / COGS multiplied by 365 for FY numbers. The base of quarterly ratio is LTM Revenue. Robust Like-for-Like Performance
Like-for-like revenue (in RUR)* Comments
Double-digit growth of the like-for-like sales x.x% LFL turnover growth LFL number of tickets growth LFL average ticket growth was a result of competitive pricing policy marketing activities and improvements in merchandising 25.3% Focus on attracting of new customers as result double digit LFL number of tickets 5,4% growth in 1Q2017 18.9% 18.0% 18.4%
3,8% New openings under new store concept, 14.4% 13.2% 14.0% 13.6% 13.5% 14.1% 11.2% 12.9% 12.4% attractive loyalty program and competitive 8,3% 9,9% 11.8% 11.4% 2,1% 3,0% prices are key factors supporting further like- 3,5% 9.0% 8.8% for-like growth 18,9% 9,4% 8,5% 5,5% 8,0% 10,2% 14,6% 2,9% 7,7% 1,7% Like-for-like revenue growth for 1Q17 12,1% 13,3% 10,9% 11,0% Children's 8,9% 9,1% Food retail Electronics 7,7% 7,0% retail 5,6% 6,0% 4,8% 4,2% 3,8% 4,1% 3,5% 1,2% 11,2% -1,9% 7,3%
-1,7%
-4,8% -4,9%
2Q'12 3Q'12 4Q'12 1Q'13 2Q'13 3Q'13 4Q'13 1Q'14 2Q'14 3Q'14 4Q'14 1Q'15 2Q'15 3Q'15 4Q'15 1Q'16
1Q'12 -6,5%
1Q'13/ 2Q'13/ 3Q'13/ 4Q'13/ 1Q'14/ 2Q'14/ 3Q'14/ 4Q'14/ 1Q'15/ 2Q'15/ 3Q'15/ 4Q'15/ 1Q'16/ 2Q'16/ 3Q'16/ 4Q'16/ 1Q'17/ -9,8% Detsky Magnit Dixy X5 Okey Lenta M.Video Mir
LFL growth in 2013 LFL growth 2014 LFL growth 2015 LFL growth 2016 LFL growth 1Q2017
Total 15.3% 14.6% 13.7% 12.3% 11.2% Average ticket 4.8% 5.2% 8.3% 5.9% (1.9%) Number of tickets 10.0% 8.9% 5.0% 6.0% 13.3%
Source: Company data, publicly available data with respect to other companies *LfL growth in RUB terms. LfL growth includes only DM stores in Russia that have been in operations for at least 12 full calendar months. Detsky Mir demonstrated attractive revenue growth rate (LFL +11.2%) for 1Q 2017
24 Financial Performance Evolution
(RUBm, unless specified otherwise)1 Comments
2013 2014 2015 2016 1Q2016 1Q2017 Number of stores 252 322 425 525 429 521 Strong support from both network expansion and LFL Detsky Mir stores 224 278 381 480 385 480 ELC stores 27 43 44 45 44 41 Sales growth Steadily double-digit LFL rates Selling space (k sqm) 320 390 491 596 495 596 Accelerated rate of new openings in 2016 (+100 stores) Revenue 36,001 45,446 60,544 79,547 16,414 21,061 % total sales growth 30.3% 26.2% 33.2% 31.4% 35.1% 28,3% % LFL sales growth2 15.3% 14.6% 13.7% 12.3% 13.5% 11.2% Slightly declining gross margin due to investment in price Revenue per sqm3 Improved leadership to support traffic and LFL growth 118 128 137 146 33 35 (RUB thousand / sqm) operating efficiency Over 720bps improvement in SG&A as % of sales Online sales4 227 443 1,260 2,778 491 900 over four years (-300bps 1Q17vs1Q16) Share of online sales 0.6% 1.0% 2.1% 3.5% 3.0% 4.3% Gross profit 13,908 17,263 21,904 27,108 5,479 6,462 Margin, % 38.6% 38.0% 36.2% 34.1% 33.4% 30.7% Major SG&A optimisation measures implemented by the Gross profit per sqm3 new management team since 2013 46 49 50 50 11 11 (RUB thousand / sqm) Superior EBITDA 5 260 bps margin over four years (+40bps 1Q17vs1Q16) Adjusted SG&A 11,155 12,807 15,708 18,884 4,666 5,345 margins % of revenue 31.0% 28.2% 25.9% 23.7% 28.4% 25.4% Adjusted EBITDA6 2,771 4,463 6,185 8,203 806 1,109 Double-digit EBITDA margin achieved in 2015 and Margin, % 7.7% 9.8% 10.2% 10.3% 4.9% 5.3% maintained in 2016 Adjusted Profit for the period7 1,153 1,685 2,189 3,827 102 137 Margin, % 3.2% 3.7% 3.6% 4.8% 0.6% 0.7% Asset-light business model drives cash flow generation Capex
Total Debt 5,922 9,716 18,359 14,638 13,574 16,325 Cash and cash equivalents (860) (1,670) (1,934) (2,445) 950 524 Adjusted Net Debt8 11,626 15,801 5,062 2,806 10,618 11,133 Leverage8 as of 31-Mar-2017 is 1.9x vs. 4.0x average Adjusted Net Debt / Adjusted Conservative 1.8x 0.6x 1.7x 1.4x 1.8x 1.9x leverage covenant level across the loan portfolio EBITDA financial policy
Capex (772) (1,945) (5,308) (1,747) (269) (253) % of revenue 2.1% 4.3% 8.8% 2.2% 1,6% 1,2% The Company paid RUB 4.4bn in dividends to Attractive shareholders in 2016 Dividends paid (420) (1,856) (2,973) (4,427) - - returns for shareholders The amount of dividends increased 11-fold from 2013
Source: Company data 1 The Group's consolidated financial statements for 2011-2013 under US GAAP and 2014–2017 under IFRS. For the line items and the 6 Calculated as EBITDA, adjusted for the one-off effect relating to disposal of the building occupied by the Yakimanka Gallery periods presented, there was no difference between the calculation of numbers or presentation under US GAAP and IFRS in 2014, as well as additional share-based compensation expense 2 LfL growth in RUB terms. LfL growth includes only DM stores in Russia that have been in operations for at least 12 full calendar months 7 Adjusted for the one-off effect relating to disposal of the building occupied by the Yakimanka Gallery in 2014 3 Calculated per average space for the period 4 (together with related tax effects), as well as additional bonus accruals under the LTI program Including in-store pickup 8 Adjusted Net Debt is calculated as Net Debt adjusted for amounts receivable under the loan issued to CJSC 5 Adjusted SG&A expenses are calculated excluding Depreciation and Amortisation and additional bonus payments under the LTI program “DM-Finance” (Sistema’s subsidiary), fully repaid on February 27, 2017.
25