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Edited Transcript of DPEU.L earnings conference call or presentation 27-Mar-20 9:30am GMT

London Apr 9, 2020 (Thomson StreetEvents) — Edited Transcript of DP Eurasia NV earnings conference call or presentation Friday, March 27, 2020 at 9:30:00am GMT

DP Eurasia N.V. – CEO, Head of Leadership & Executive Director

DP Eurasia N.V. – Chief Strategy Officer & Head of IR

Aslan Saranga, DP Eurasia N.V. – CEO, Head of Leadership & Executive Director [1]

Good morning, everybody. Welcome to DP Eurasia’s 2019 Year-End Results Presentation. My name is Aslan Saranga, I am the group CEO of DP Eurasia. I have my colleague, Selim Kender, he’s our Chief Strategy Officer. I will make my speech through a presentation. This presentation is in our website, dpeurasia.com. You can find the presentation from there, and you can follow the — my speech from there also.

Now I want to start my presentation with COVID-19, of course, all the world’s problem, and we have been working closely with wider industry and governments, and we are keen to do all we can support our customers and communities for COVID-19. Of course, all of our plans has changed, and there is big uncertainty surrounding the spread of the COVID-19 outbreak. Therefore, I’m not in a position to provide meaningful guidance on the likely financial and operating results for the current year. On the other hand, I would like to explain what kind of strategy we are planning and what kind of actions we are taking against COVID-19.

If you will look at Page 5 on the presentation, we have created — you will see that we have created 4 strategic pillars to fight against COVID. Number one is people. The second one is the customers. Third one is the continuity of our business. Fourth one is the finance. Let’s start with the people.

Our first and most important priority in this outbreak is safety of our people and our customers. We are acting according to our missions and values. We are taking all the necessary measures to keep our employees safe and motivated. We took all the security and sanitation actions needed. At the moment, we do not have any supply or manpower problem in all of our stores operating in Russia and Turkey. Sanitation program has been immediately developed with our training department. All of our employees has been trained, and we have created special teams to audit the sanitation program in stores. We have also rolled out a number of measures to protect our supply chain and distribution centers. So far, everything is working effectively. Right now, dining sections of our stores are closed, which is 10% to 15% of our business. We do not have any problems with delivery and take-away part of our business. All of our stores and commissaries are working safely. We have created contingency plans for our commissaries also.

In these difficult times, we are also aware that we have responsibility for our community. Since day 1, all of our stores, including our franchisees, are giving and helping hospital workers. We are giving free pizzas to support them. As a delivery company, we are also giving support to elderly people who are above age of 65. In all of our actions, we comply with all government measures and make sure that all the actions we take immediately communicated to our customers. I believe our product and systems have huge advantage compared to rest of the competitions and aggregators. Domino’s is the best delivery company in the world, full stop. For the last 6 years, we are known as most trusted brand in delivery, and our customers trust us.

Second important thing is we control all the value chain from taking orders, making pizzas and delivering pizzas to our — to the door of our customers. We can make sure everything is 100% under our controls. All of our products are cooked in 245 degrees oven. We took all the menu items who are not baked in the ovens. And as of last week, we have started contactless delivery to our customers, and all of our customers can make online payments for the delivery. Therefore, we have lots of competitive advantage, and we are continuously communicating our brand’s value, safety measures and Domino’s system advantages to our customers.

Now I would like to give a little bit update on our current savings outlook. In Turkey, first 2 months, our like-for-like was around 20%. Turkish government has indicated its preparedness to support companies and encourage banks to maintain access to credit facilities so as to assist the corporate sector manage through the crisis and maintain employment. In Russia, first 2 months, like-for-like was minus 10%. End of February, we started our new marketing campaign. We see good positive trend. Our like-for-like has dropped down to minus 4%. However, in more — both markets, we are just starting to experience the effects of COVID-19. The COVID-19 has started after Europe. It’s now in the early stages, both in Turkey and Russia. We are closely monitoring the situation. It is still early days. And as soon as we see the financial impact of this, we’ll update the market. We have enough cash at hand and available bank lines to combat any short-term effect of COVID-19.

There is no indication whether government measures will have an effect in preventing a further spread of the disease around the world. It’s a pandemic, and its impact on the business lasts for a protracted period. It’s likely to have more detrimental effect on the financial performance of our company. We have taken proactive measures to ensure that our customers and employees continue to be safe and has established internal task force to ensure that supply chain is managed, critical inventory is available and restaurants remain adequately staffed. We are closely monitoring the potential impact of the pandemic on the company, particularly with regard to the wellbeing of our colleagues and customers, and we have a comprehensive contingency plan in place, and we’ll further update the financial markets in due course. So this is all about what we have done about COVID.

Now on the Page 6 of the presentation, we see some visuals about what we are doing about contactless delivery. Both — contactless delivery are in place, both in Russia and Turkey. And a lot of our customers are using that, and we are communicating with our customers. (technical difficulty) going out of the oven from 245 degrees, and it goes to the customers with contactless. We have high quality ingredients. All of our ingredients are locally supplied, and we have the extra hygiene actions in place in the stores. By the beginning of this week, we’ll start a special delivery campaign for our customers, and then we’ll follow up the results.

Page 8. Now I can — would like to make little bit comments on the 2019 highlights, it’s on Page 8. We have — I am pleased to report another year of solid growth and resilient set of results for 2019. Our group revenue is up 15%, and system sales is up 22%. Group’s absolute EBITDA grew by 13% to TRY 125 million. Turkish business performed strongly in 2019 despite macro headwinds, and we have posted 13% like-for-like. Due to our strong innovation and marketing strategy, new marketing strategy, last 6 months, our like-for-like in Turkey has been above 20%.

In Russia, our like-for-like has been 0.7%. The challenge in Russia in terms of like-for-like growth in 2019 was mainly attributable to record advertising spend by online aggregators fighting for market dominance and new delivery competition from QSR entering to the market through aggregators. We think this effect is onetime effect from aggregators. We have launched a new marketing strategy in Russia with effect from the end of February to address the now new market dynamic.

Digital continues to drive our business forward with significant growth achieved in both of our markets. Online ordering as a percentage of delivery has reached 70% across the group, an increase of more than 9 percentage points from 2018, with the Russia business exceeding 80%. We successfully resolved certain issues with regional franchisees by acquiring and converting 22 stores to corporate stores. We continue to grow our store portfolio by adding 41 stores during 2019, reaching a total of 765 stores across our 4 countries of operations.

Now I would like to, a little bit, talk about group operating highlights. Our group’s like-for-like has been 11% this year and this is mainly driven by growth in the digital. Our digital online like-for-like has grown 29%. It is — so 9%, I mean, higher than last year. So right now 70% of our delivery is through digital and half of our sales are through digital, 50%. As I mentioned earlier, we have opened 41 stores, and 37% of our sales are through takeaway and dining and 63% is through delivery.

I want to give now, on Page 10, more details about the Turkish operational performance. In the beginning of the year’s first 2 months, our like-for-like was very low in Turkey. It was like 2% to 3%. And we have a really difficult economic situation in Turkey, I mean, in overall economy, we had lot of macroeconomic headwinds. So we have created a new marketing strategy. We started with a new pricing strategy. We clustered our stores in terms of prices. We clustered our products in — again, with the new marketing strategy, and we started to communicate that. Until June, there wasn’t a positive trend in our sales.

After June, we started a new campaign with a famous social media person, and we launched a new product called Dürümos, which is wrap. Wrap is a very famous local product in Turkey. So you don’t see it in organized international QSR much. So we launched it with TRY 9.9, which is like $1.5, and it created very good results. And as I mentioned earlier, last 6 months, our like-for-like has been 20% in Turkey. Online like-for-like growth has been 32%, and our online delivery sales has increased like 9% to 64%. We have opened 17 stores in Turkey. It is a little bit lower than previous years. That’s — the reason is the high interest rate in Turkey in the first 3 quarters of 2019, interest rates has went down in the last — since in the last quarter. By December, it was around 9%. Now it’s in low teens. So — and — so this is the situation right now in Turkey.

And in the next Page 11, you see the — our Turkish operating highlights in the graphs, 13% like-for-like. It’s the highest like-for-like in the last 4 years, and it’s driven by digital, 33% like-for-like in digital. As I mentioned earlier, 17 stores has been opened in Turkey. 36% of our sales are through takeaway and dining. 64% of our sales are through delivery.

Now Page 12, I want to, a little bit, give you an update about our Russian operational performance. In Russia, like-for-like has been a challenge this year, 0.7% and first 2 months, it was minus 10%. Main reason for the challenge in the like-for-like is the aggregator. Last 4 years, we have been the fastest-growing Domino’s pizza in the world in Russia. We have — in the last 5 years, we have grown from 0 to 200 stores. But in the last 1.5 years — and during this period, pizza was the only product in delivery. With the entrance of the aggregator, burgers, chickens, everybody is delivering. But we believe this is a onetime disruption.

We had the same situation in Turkey 6, 7 years ago when we had the new aggregator. And we are seeing these effects now in Russia, and we are also planning to enter to the aggregators. So that hopefully, after the effect of COVID is finished, we’ll have much better results in Russia. So we are implementing a detailed plan to turn the sales around. Online like-for-like growth has been 15.4%. Online sales as a percentage of delivery is 82%. And we had 24 store openings this year. And we have solved the regional franchise issues by buying 22 stores from franchisees to corporate stores because we thought we could make the turn — we can fix the stores in the Russian regional better with our competitor stores.

So Page 13, you see the graphs of what I have mentioned earlier, online digital is growing 15%. Last year, 1%, like-for-like. And 38% of our sales are through takeaway and dining, and 62% of our sales are through delivery.

Now I want to, a little bit, get into the details of our — the plan for Russia. How are we going to solve the — our challenges in Russia. Number one, change is in the organization. 2020 will be a transition for — year for Russia. We are implementing a detailed plan to address the challenges in the Russian market, and we are continuously taking proactive steps. As you may remember, in the — by June 2019, we agreed with our ex-CEO, and he left the company. And since then, our CFO, who has been in our company since day 1, and he was managing the commissaries, purchasing, transportation and finance part of our business, so we — he was the acting CEO from June. And he — and by the beginning of the January, he became the CEO of the company. Mustafa, he knows Russian, and he has been living in Russia many years, and he has a family in Russia.

And we also hired Tarun. Tarun is from India. He’s been working — he has worked in Domino’s India more than 20 years, and he was the leader of the operation from 100 stores to 1,000 stores. So he’s a very experienced Domino’s leader. I believe he will be very helpful to our business. And we also hired a CFO from Domino’s Pizza Russia. So this is about our organization.

We are working on long-term improvements to product, service and technology, and we are furthering investment in the brand. We are adapting a new marketing strategy, making use of celebrity endorsement, cluster-based pricing, different channel mix and simpler price-led advertisements. This campaign was launched by the end of February and our like-for-like — and we had a positive trend, and like-for-like was down from 10% to — minus 10% to minus 4%. And we have lot of — we have plans to — with new products and new campaigns for the rest of the year as soon as the COVID effect is finished.

And about the growth — about — we are testing 50 stores in the aggregator. We have seen positive results there. And now our target is to move all the system to aggregator in a very short period of time. Regarding the store growth, we are, right now, of course, waiting to see the effects of COVID but the plan is to create new cafes in the region. So our first target is the Krasnodar, south of Russia. We have 10 stores there, and these stores are, right now, breaking even. So we want to invest on these stores in terms of marketing and maybe open new stores in the future, and we want to create our new castle in the southern of Russia. And we have also lots of cost-cutting measures to bring Russia to its good profitable level.

Page 15, you see, of course, innovation is the biggest strategic driver of our strong performance. In Page 15, you see some of our innovations. On the left side, Dürümos, our product wrap, which has been very successful. On the right side, our new price point in Russia, RUB 99, which is like $1.5 new pizza product. Our pizza tracker, sandwiches, a new dessert pizza in Russia. So these are the — all developments in our markets.

Now I would like to hand over the presentation to Selim for financial highlights.

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Selim Kender, DP Eurasia N.V. – Chief Strategy Officer & Head of IR [2]

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Hello, everybody. I’d like to take you to Slide 17 on our deck to look into the financials, to start with the financials where we had another successful year in 2019. System sales continue to grow robustly, improving by 22% year-over-year and reaching TRY 1.4 billion. With respect to EBITDA, we had 13% growth overall and 11% growth within our operating segments. You will notice that there is a slight drop in the overall EBITDA margin as a percent of system sales from 9.8% to 9.1%. That’s mainly due to the Turkish-Russia mix effect where Russia is growing to become an even larger part of the whole group. And also the — we also had some margin drop — temporary margin drop in Russia as well.

With respect to cash conversion, we went from 29% in 2018 to 14% this year. The main reason for this was the increase in Russian CapEx due to acquiring the troublesome regional franchise stores in Russia, which was a onetime event, obviously. And just as a reminder, with respect to our definition of cash conversion, it’s adjusted EBITDA minus CapEx divided by EBITDA.

Flipping over to Slide 18. Looking at Turkey, our growth continues, owing to both our strong like-for-like performance as well as our store openings. We grew 15% year-on-year, in line with the previous year. Our EBITDA grew by 13% in Turkey, reaching TRY 109 million. Margin is stable, as you see. And as we had remarked on our — at the time of our IPO as well, we — our expectation was for Turkish margins to stable going forward. And over the past 3 years, we see that oscillating between 12.5% to 13%.

Cash conversion increased in — due to our controlled approach to capital expenditures. We’re continuing our investments for digital and IT, but in the face of Turkish lira devaluation as well as inflation in the Turkish economy, we’ve kept our CapEx in Turkey at TRY 37 million, consistent at the same amount with the previous 2 years, as a result of which our cash conversion increased from 62% to 66% in Turkey.

Looking in more detail to Russia on Slide 19, our system sales went up by 35% in Turkish lira terms and 18% in ruble terms. This growth was mainly driven by store openings in Russia where we didn’t have a great year in terms of like-for-like, as you know. EBITDA, the like-for-like performance that I mentioned had also — also had an impact on our absolute EBITDA figure as well as our margins in Russia. EBITDA was pretty much flat in Turkish lira terms, and it decreased by about 10% in terms of rubles. We see that margin decrease as temporary, owing to the increased competition in the market. And our medium-term plan remains — the expectation remains that Russia margins will converge with Turkish margins over the medium term.

Just as a reminder, the Turkish margins really started increasing once we hit the 400-store mark in Turkey. So we’re halfway there in Russia at the moment with 200 stores. CapEx, we came in a little above guidance due to — like I explained, due to the regional franchisee store acquisitions in Russia. Otherwise, CapEx was stable as well.

Let’s take a look at our balance sheet on Page 20. First of all, once again, with cash conversion, we expect these numbers to converge with that of Turkey as Russia grows and matures. We maintained the no hard currency exposure on our balance sheet for this year as well. All our bank borrowings are denominated in Turkish liras or Russian rubles. With respect to our leverage ratio, we continue to carry a conservative leverage ratio with — at about 1.8x EBITDA in terms of net debt. The increase in our indebtedness and the leverage ratio in 2019 was mainly due to the increased Russian CapEx, as I’ve explained, the Turkish lira’s depreciation against the ruble throughout 2019, and the high Turkish interest rates that prevailed during the 4 — during the first 3 quarters of 2019.

What we’ve also — in 2018, we had gotten rid of our euro-denominated loans, as you know. What we’ve done this year is to make progress in aligning the borrowing currency mix of our business with the cash flow generation mix. As you know, majority of our EBITDA is generated in Turkey. So while at the end of ’18, about 90% of borrowing was in Russian rubles, we have a more even split this year at about 50-50. Currently, more than 90% of our Turkish lira-denominated bank loans have fixed interest rates for 2020, as we wanted to take advantage of the relatively lower interest rates that are prevailing in the face of uncertainty in the coming months with respect to COVID, and we wanted to lock those rates in for 2019 — for 2020, I’m sorry. And in light of the recent market developments, we have also been drawing down on our unutilized — previously unutilized bank lines, in excess of our immediate needs so that we have a war chest, so to speak, to fight the COVID-19 with respect to any short-term reduction in cash flow that could result from this uncertainty. But we still have additional borrowing capacity available from our Turkish banks as well, which we can draw down for further liquidity.

Flipping to Slide 22, I wanted to briefly talk about guidance. While we are very comfortable with our medium-term financial guidance, there is a lot of uncertainty and fluidity surrounding the spread of the COVID-19 outbreak. Therefore, it’s very difficult to project its impact on our business and the wider economy as well. Hence, we are not in a position to provide meaningful guidance on the likely financial and operating results for 2020 in particular, with the exception that we are minimizing CapEx until this COVID situation resolves itself.

Just a few words on our medium-term guidance. To recall, as you know, in Turkey, it’s high single digits like-for-like growth. In Russia, it’s low to mid-teens. Turkey, it’s 25 to 30 stores per year; and Russia, it’s 40 to 60. Obviously, these medium-term guidance will be effective once COVID-19 subsides, and we’re operating in a more normal environment.

With that, I would like to give the mic back to Aslan for his conclusion remarks.

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Aslan Saranga, DP Eurasia N.V. – CEO, Head of Leadership & Executive Director [3]

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Thank you, Selim. If we summarize all the presentation we made, the conclusion is as follows. Number one, strong system sales, and we have adjusted EBITDA growth in the year 2019. We have opened 41 new stores, and online shares continues to increase, 70% of delivery, 9 percentage points higher than previous year. We have explained our detailed Russia plan. It’s in place. And we are continuously monitoring the COVID effect. As soon as we see financial impacts, we will update the market accordingly.

Thanks for listening to us. And if you have further questions, we’ll be happy to answer.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Harry Whelpton of Vergent Asset Management.

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Harry Whelpton, Vergent Asset Management LLP – Investment Analyst [2]

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I had several questions. First one is on Russia. And obviously, the like-for-like was very weak. And you said that’s due to increased competition from aggregators and other QSR. And you also mentioned this as a one-off. And I just wanted to get your reasoning why you think it’s a one-off. And yes, so that would be the first one.

And then the second one, if I’m not wrong, the idea was to buy back 15 of the provincial stores in Russia, but this is now at 22. And so I just want to get a sense of — first of all, apologies if that’s not correct, but if that was, why that was more.

And then the third one is testing on the aggregators in Russia. And I think you mentioned the idea being to eventually bring more onto the aggregators. But to me, this kind of negates the strength of the — I’ll say, the appeal of the — of Domino’s Pizza value proposition, given that the app is — and the online business is meant to be so strong. So I just want to get your — maybe your view on why that hasn’t been the case as it has been in other regions? Yes. So those 3 are the questions. Much appreciated.

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Aslan Saranga, DP Eurasia N.V. – CEO, Head of Leadership & Executive Director [3]

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Okay. Thank you. Let me start with why I think this is a one-off effect. I have experienced this in Turkey, and I had this kind of — I have seen this kind of effect in many markets in Europe and Asia. When the aggregator — before the aggregator, usually, pizza is the #1 delivery product because like chains like McDonald’s, KFC, burgers and sushi, they do not have the network of delivery. Now when the aggregator comes, it gives an opportunity for these kind of products to be delivered and also some local chains. So this — when this happens in the first stage, it has a big effect.

But what happens afterwards? Afterwards, the delivery market grows much faster. So — and everybody takes — starts to take its shares. And of course, Domino’s Pizza takes more share because it’s the largest and best delivery company in the world. And secondly, Domino’s has lots of advantages compared to all products and compared to all systems in terms of delivery. That’s what happened in Turkey 6, 7 years ago, and that’s what happened in most of — part of the Europe. So this is why I am thinking it’s a one-off effect.

And secondly, so I will come to your third question, we are also becoming a part of the aggregators. So aggregators are the reality of the world, and I don’t think they will go anywhere. And again, in Turkey, we are in the aggregator. So throughout the years, we had an experience to — and know-how to manage the aggregators. So we make our contract in such a way that — so that the cost is — should be low and we have the control of the promotions. And we organize the aggregator that — so that we get extra new customers. So it should be the win-win for both parties. So that’s what we have done in Turkey also.

I mean half of our digital sales are true aggregators in Turkey. In Russia, in the beginning, we decided not to do it because we — first, we wanted to take all the customers to our digital. Right now, 80% of our sales are through digital. So we are already very strong in digital — in our digital. So we don’t see a big risk of entering to the aggregators and also we own the customers. We have all the kind of information, data of the customer in our database. So we believe, going forward, by being part of the aggregator, we’ll be able to take more market share from the aggregator market.

About regional stores, I am not sure if we said 15 or we mentioned any numbers there, but maybe, yes. But the final number is 22 because the main reason for that, we didn’t want to lose time with the psychology of the franchisees, right? You need to focus 100% on product, service and image. When you started to talk about other issues like economics, like quality of how you are giving service, you are losing time. So we choose to go all in and take all the stores back. So it was 22. And now we are focusing on fixing these stores as quickly as possible so that — and I don’t see — I don’t foresee more on this. And I think this is the number right now, 22 corporate stores in the region.

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Harry Whelpton, Vergent Asset Management LLP – Investment Analyst [4]

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Okay. Sorry, could I just follow up on the — you mentioned that half of the Turkey sales — delivery sales are going through your aggregators. Is that — are you able to give some color on what that would be for other operators, say, Domino’s Pizza Group or Domino’s Pizza Enterprises?

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Aslan Saranga, DP Eurasia N.V. – CEO, Head of Leadership & Executive Director [5]

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I mean I don’t have exact information, and I don’t know if it’s confidential information from — for them. But most of the companies are in the — are working with the aggregators. But I am not in a position to announce their numbers.

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Operator [6]

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Our next question comes from the line of Gabriela Burdach of Wood & Company.

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Gabriela Burdach, Wood & Company Financial Services, a.s., Research Division – Equity Analyst [7]

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It’s Gabby from Wood. Could you give me more current light on what is going on in Turkey and Russia. I mean you discussed first 2 months of the year, but the situation is very dynamic. So could you share how much looks like in Turkey, especially post stores lockdown. I understand that from March, restaurants can only do delivery, right?

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Aslan Saranga, DP Eurasia N.V. – CEO, Head of Leadership & Executive Director [8]

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So you want to get information what happened after COVID, is this the question?

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Gabriela Burdach, Wood & Company Financial Services, a.s., Research Division – Equity Analyst [9]

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No. I mean you discussed January and February situation in Turkey and Russia, and I would like to hear more on how March month looks like?

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Aslan Saranga, DP Eurasia N.V. – CEO, Head of Leadership & Executive Director [10]

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How much? How much?

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Gabriela Burdach, Wood & Company Financial Services, a.s., Research Division – Equity Analyst [11]

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March, March.

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Aslan Saranga, DP Eurasia N.V. – CEO, Head of Leadership & Executive Director [12]

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March, March. Okay, okay, okay. Sorry. So in Turkey, the like-for-like has been plus 20%. We are going a similar marketing campaign like Q4, and it’s working very well for us. In 2 weeks of March, it was even better. We had a record sales week on March first week and second week. So it was 30-plus like-for-like. So this is about — and then the COVID started. As I mentioned earlier, our dining section is closed. So we have only 7 days data. It’s very volatile. So I don’t want to comment on these sales right now. As soon as I see a clearer picture, I will update the market.

About Russia, we started the year with minus 10%. And the last week of February, we started our new marketing campaign. And like-for-like dropped down to minus 4%. Actually, with the new campaign, we see a big increase in our orders, especially in the regions, they were — in terms of orders, the increase was like 20%, 30% in the region parts. So we had a very positive effect with the campaign, first 2 weeks of March. But again, with the COVID, we need to shut down our dine and carryout business — dining business in Russia, and again, I don’t want to comment. It’s again very volatile. As soon as I see a clearer picture, I will update the market.

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Gabriela Burdach, Wood & Company Financial Services, a.s., Research Division – Equity Analyst [13]

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Okay. And do you see any problems on the supply side?

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Aslan Saranga, DP Eurasia N.V. – CEO, Head of Leadership & Executive Director [14]

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No. We have enough — as Selim said, we have enough cash. We have enough inventories for the critical supplies. And we have contingency plans in place for our commissaries. We don’t see any problem there.

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Gabriela Burdach, Wood & Company Financial Services, a.s., Research Division – Equity Analyst [15]

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And last question is, what is the feedback from franchisees in Turkey and Russia? Like do you — do they need additional supports from your side? Or do you see the risk that some of them are quitting either existing franchise or from your pipeline the risk that potential franchisees could resign?

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Aslan Saranga, DP Eurasia N.V. – CEO, Head of Leadership & Executive Director [16]

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Well, actually, right now, yes. I mean we need to be very careful for our franchisees because they are — although — because we have all the credit lines and cash available. And so we — actually, we had this experience where we had a very big economic crisis in Turkey like 2 years ago, and we supported our franchisees. So yes, we are going to support our franchisees. We are going to help them in case we need. So we are very closely monitoring our franchisees in Russia and Turkey, and we have the resources available to do that.

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Operator [17]

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Our next question comes from the line of Wayne Brown of Liberum.

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Wayne Mervyn Brown, Liberum Capital Limited, Research Division – Research Analyst [18]

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I hope you can hear me okay. I just got a few questions. Firstly, can you tell me what the Turkish government has said with regards to government support? And allowing that, if — what franchisees, what — if they have access to loans or holidays on taxes, et cetera, and any other cash support on that front?

My second question is, you said you did about half of your online sales through Yemeksepeti in Turkey. If you can — what the margin differential is between those sales and your own online delivery sales?

And then just lastly, head leases on all the stores in both Turkey and Russia, are those — does the plc — does the corporation have the head lease and then you sublease to the franchisees? Or is your system slightly different?

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Aslan Saranga, DP Eurasia N.V. – CEO, Head of Leadership & Executive Director [19]

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I think about the government in Turkey, they are — they have been very helpful, and they have been very positive so far to support small enterprises in Turkey. So they immediately could put in action a big fund, around $15 billion to $20 billion of money to support the small businesses. Number one, they have postponed all the taxes in April and May for — and June for the next 6 months. So that’s very helpful for our franchisees. Number two, if you prove that your sales are down for certain percentages, 60% of the salaries are paid by the government. And our President announced that none of the state banks or normal banks are — can ask their credit lines back, and they asked them to open more lines, especially through the state banks to the small enterprises. So all of them are very positive actions for our franchisees in Turkey.

About your question, aggregator margins, our margins in aggregator are the same with our other delivery channels. There is no difference. Our check price — average check price is higher in the aggregator compared to other channels, and we have a very good deal with the aggregators. Both in Russia, in Turkey, 90% of our land contracts are done through us. So we are making the contract with the landlords and then we sublease it to our franchisees.

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Wayne Mervyn Brown, Liberum Capital Limited, Research Division – Research Analyst [20]

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Okay. So that gives you quite a bit of significant protection on top of everything else.

Just going back to the taxes, you said that the government’s postponed taxes for April, May and June. Is that an affirmant of taxes? Or is that just a postponement? Or is that a cancellation of certain taxes? Can you just give us a little bit more flavor of what that looks like, please? Because that sounds quite material.

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Aslan Saranga, DP Eurasia N.V. – CEO, Head of Leadership & Executive Director [21]

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It’s the postponement of taxes, but they also asked the state banks to give credits for these taxes to be paid in a year or 2.

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Operator [22]

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Our next question comes from the line of Alexander Gnusarev of VTB Capital.

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Alexander Gnusarev, VTB Capital, Research Division – Equities Analyst [23]

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Congratulations on your results. I have a couple of questions. The first one, on your CapEx spending in Russia, you spent TRY 800 million CapEx. How much of it went for buying franchisees actually?

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Aslan Saranga, DP Eurasia N.V. – CEO, Head of Leadership & Executive Director [24]

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Selim, can you help me on this question?

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Selim Kender, DP Eurasia N.V. – Chief Strategy Officer & Head of IR [25]

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Sure. Our — look, our guidance for 2019 was about RUB 450 million or so. Much of the extra was due to this one-off franchisee store acquisition CapEx.

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Alexander Gnusarev, VTB Capital, Research Division – Equities Analyst [26]

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Okay. That’s clear. The second question is, your second half revenue is 9% year-on-year while system sales are 18% year-on-year. Why is there such a big difference?

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Selim Kender, DP Eurasia N.V. – Chief Strategy Officer & Head of IR [27]

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Can you say that again, Alexander?

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Alexander Gnusarev, VTB Capital, Research Division – Equities Analyst [28]

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Yes. So when I look at your second half ’19 numbers, I look at the top line, your revenue, year-on-year, it grew by 9%. If I look at the system sales for the same period, they have grown by 18%. Why there is such a big difference in these numbers? Why system sales growth exceeded the growth of your revenue so much?

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Selim Kender, DP Eurasia N.V. – Chief Strategy Officer & Head of IR [29]

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Because — it’s fairly stable in Turkey. With respect to Russia, it depends on what percentage of the year — because this was — has been a year of transition between franchise and corporate, especially with respect to the regional stores. So the transfer days matter there. Obviously, our IFRS revenue from the franchisees is lower than what they generated system sales, so that had — that made the difference between the 2 numbers.

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Alexander Gnusarev, VTB Capital, Research Division – Equities Analyst [30]

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Okay. And last question, if you may answer, what’s the — what’s your price growth in the March? You may comment on 2 weeks before COVID because it is quite unpredictable. And just to confirm, so there was like 30% increase in orders in the regions in Russia in first 2 weeks of March, right?

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Aslan Saranga, DP Eurasia N.V. – CEO, Head of Leadership & Executive Director [31]

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Yes.

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Alexander Gnusarev, VTB Capital, Research Division – Equities Analyst [32]

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Okay. And in terms of prices, so how much did they add in 2 weeks of March?

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Aslan Saranga, DP Eurasia N.V. – CEO, Head of Leadership & Executive Director [33]

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We have — as I said, it’s a new pricing strategy. We have come up with a lower-priced product, so that decreased our average check price, but it did not necessarily increase our food cost. We have launched new products there, and we have done different pricing strategy in the delivery side. But it is very early for me to comment on this. So I would mislead you. But you are right, we have decreased the average check price and increased the orders. Our frequency in our customers is around 3 times per year. So when you make such a change, you need at least to see a quarter to see the real effect.

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Operator [34]

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(Operator Instructions) And our next question comes from the line of Anubhav Malhotra from Liberum.

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Anubhav Malhotra, Liberum Capital Limited, Research Division – Analyst [35]

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I wanted to ask about the share of aggregators in Turkey, which went up by almost 6 points this year compared to last year. So what happened, were the Turkish aggregators also aggressive in their marketing this year?

And I also wanted to confirm if you have plans to launch the loyalty scheme in Russia any time soon? And if yes, then when?

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Aslan Saranga, DP Eurasia N.V. – CEO, Head of Leadership & Executive Director [36]

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Yes. Thank you. About the share of aggregator, we made a new deal with aggregators. They have decreased our commissions, and we have increased our marketing spend on the aggregator. It was, again, win-win deal. That increased our — bring us new customers and help to increase our like-for-like. In loyalty, we have — technically, the loyalty system is ready because we already made it for Turkey. But loyalty is a long-term invested — investment, so we want to test it properly. And this year, we’ll do some tests. According to the results, we are going to decide how we go on with the loyalty.

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Operator [37]

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Our next question comes from the line of Nikolay Kovalev of VTB Capital.

Okay. And we seem to have lost the line from Nikolay. So we’ll go to our next question, which is from the line of Harry Whelpton of Vergent Asset Management.

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Harry Whelpton, Vergent Asset Management LLP – Investment Analyst [38]

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So I just have a few more questions. Could you disclose how many, if any, of stores in both Turkey and Russia have been closed? And also, it’d be really helpful to get the breakdown of fixed and variable costs maybe on a store level for both?

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Aslan Saranga, DP Eurasia N.V. – CEO, Head of Leadership & Executive Director [39]

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Selim, do you want to go on with it?

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Selim Kender, DP Eurasia N.V. – Chief Strategy Officer & Head of IR [40]

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Sure. We have about 10 stores in shopping malls in Turkey. Those are closed at the moment. Other than that, everything else is open. With respect to the breakdown of costs on store basis, bear with me for a second, I mean, we’re not providing granular retail — detail, I’m sorry, on that front. But when you look at our corporate stores, they generally have margins — contribution margins of about — in the low to mid-20%. So our cost base is around 70% level. And roughly, I would say about half of that is variable, half of that is fixed.

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Harry Whelpton, Vergent Asset Management LLP – Investment Analyst [41]

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Okay. And then — so presumably, on the franchise stores, there’s barely any costs attributable to you guys. But — is that the case?

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Selim Kender, DP Eurasia N.V. – Chief Strategy Officer & Head of IR [42]

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What do you mean?

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Harry Whelpton, Vergent Asset Management LLP – Investment Analyst [43]

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Like on a recurring basis, are there any costs that you have to upfront for the franchisee?

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Selim Kender, DP Eurasia N.V. – Chief Strategy Officer & Head of IR [44]

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No. I collect a royalty from them, yes, and I tell them — and we sell them goods through the commissaries. So that’s the ongoing relationship with the franchisees.

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Operator [45]

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Our next question comes from the line of Regiane Yamanari of Morgan Stanley.

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Regiane Yamanari, Morgan Stanley, Research Division – Equity Strategist [46]

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Just to confirm, you mentioned in the beginning of the call, the business revenue is around 10% to 15% of sales in both like Turkey and in Russia?

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Aslan Saranga, DP Eurasia N.V. – CEO, Head of Leadership & Executive Director [47]

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Yes, correct.

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Regiane Yamanari, Morgan Stanley, Research Division – Equity Strategist [48]

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Okay. In both countries. All right. And on the — I think someone already asked about the acquisition of the franchising stores in Russia. Initially, it was planned to be like 15. The 22, they were — is there any additional like situation with other franchisees that we should have in mind for this year? And the 15 was just a guidance and 22 was again — or it was more than initially planned? And the other thing is just in Russia, if you could give a little bit of color on the percentage of discounts in products that you’re offering. And is it like in the entire menu? How is it?

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Aslan Saranga, DP Eurasia N.V. – CEO, Head of Leadership & Executive Director [49]

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Yes. At the moment, we do not have any communication or any negotiation with any franchisees about buying back any more stores. So this is the situation right now. Regarding the pricing strategy, what we have done, as I mentioned earlier, we have come up with some products like some side items, which are lower like RUB 69, RUB 99. These are the price level for our carryout business, which is compatible to the QSR business like McDonald’s and Burger King. So we are also launching the wraps, a pizza called Pizza Quattro, a very small pizza, in order to get some market share from the QSR business. So we have also segmented our products to 6 segments so that we’ll have a bigger range of pizza prices in order to attract more customers. And we are also launching price points in order to attract more solo customers, single customers, in order — to our business. So these are the — and we made sure that all of our pricing points are the best for the customer and against competition. When doing this analysis, we also try to make sure that…

(technical difficulty)

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Operator [50]

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Thank you for your patience, ladies and gentlemen. We will now resume the call, and we will return to question from Regiane Yamanari.

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Aslan Saranga, DP Eurasia N.V. – CEO, Head of Leadership & Executive Director [51]

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Regiane, did you hear my answers?

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Regiane Yamanari, Morgan Stanley, Research Division – Equity Strategist [52]

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Yes. Well, we were in the middle of the last one, about the price and the new products, the 6…

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Aslan Saranga, DP Eurasia N.V. – CEO, Head of Leadership & Executive Director [53]

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Yes. I mean — so the target in the pricing strategy, to be competitive, not only for pizza, but all QSR, that’s why we launched some more items, especially for the carryout items to compete, McDonald’s — companies like McDonald’s and Burger King. And on the delivery side, again, we want to be competitive, plus we want to launch price points for single customers. We didn’t have many options to offer pizzas for a single customer. So this is a very similar strategy what we have done in Turkey, and it worked very well for us. But we just started. Probably, we’ll have to make some updates on it. But this is the main idea. I mean, usually, when you attack the one single customer than when you attack to the QSR markets, you usually get more orders. And we are very careful on not deteriorating the paybacks of our franchisees. So we are just in the beginning of this phase.

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Operator [54]

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And we have one more question on the line, and that’s from the line of Ali Al-Nasser of Vergent Asset Management.

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Ali Al-Nasser, Vergent Asset Management LLP – Managing Partner & CIO [55]

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I have a question for both of you, please. Aslan, just in terms of the delivery business and the online channel, in a world of COVID, have you seen anything from the other Domino’s colleagues that you have in — worldwide or in performance that would suggest that online picks up sales to a level that compensates for the loss of dine-in and takeaway. Can you just talk about maybe what your expectations would be? And perhaps what the company is doing to make online even easier to order in order to kind of offset any losses that you will have from the store closures? So that’s the question to Aslan.

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Aslan Saranga, DP Eurasia N.V. – CEO, Head of Leadership & Executive Director [56]

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Okay. It’s a good question. I am checking all the markets in the world constantly, and we are doing meetings. But without mentioning names, what I have seen generally, especially in the market that has been stronger, we are in the beginning phase, there was 3 to 4 weeks, some drops in the sales because of the situation in dining and delivery. And we have seen that is recovered after 4 weeks, I mean, coming to the old levels. And I see — what I see in this, there is a lot of opportunities, and there is some risks.

Let’s start with the risks. What are the risks? Now number one, consumer is also concerned about delivery food also because he doesn’t know where this food is prepared, how it is delivered to the customer. So when we checked with — we already made the research about this, 50% of our customers had this kind of concern about food delivery. And we have seen, right now, a decrease in the aggregator sales because of the closure of the stores, because of the risk that I told you.

Now the second risk, there are — there is a lot of financial instability and incomes of the houses are getting lower. So people are more careful on ordering food. So this is the risk.

The opportunity, I think, there’s a huge opportunity also. Number one, a lot of small shops might be out of business at the end of this COVID because they don’t have enough financial resources. The second thing, and our — Domino’s is the largest and best delivery company in the world, and we have the best hygiene and sanitation standards, and we have been executing it for the last 60 years. And we have very good online infrastructure. We can use our online payment infrastructure. And again, in the same research, there is a lot of trust on our brands through the customers. And we are acting, all over the world, as Domino’s Pizza, executing contactless delivery, communicating the hygiene standards. I see all of this as an opportunity.

So what we are doing about it, we — since last 10 days, we immediately started to communicate the hygiene standards we are taking in the stores. We are very transparent on this. And we changed the sanitation levels in the stores. I already explained to you about in detail. And we are constantly communicating this to our customers. Now by Monday, we’ll — both in Russia and Turkey, we’ll come up with a very, very aggressive offer in delivery. So it will be — I’m very curious to see the results. So the idea is to communicate the brand, the trust, our hygiene standards, and on top of that, to come up with a really good offer to support our customers. That’s the idea in both of our markets.

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Ali Al-Nasser, Vergent Asset Management LLP – Managing Partner & CIO [57]

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That’s fair. That makes a lot of sense. Selim, a question, I guess, would be to you is on the balance sheet, you talked about the several lines of defense you have available to you. So can you just give us some numbers when you talk about how many — the size of the loans that you’ve drawn on so far and how much undrawn facilities you have access to? And how much can you reduce CapEx? I guess to what extent is CapEx discretionary for 2020?

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Selim Kender, DP Eurasia N.V. – Chief Strategy Officer & Head of IR [58]

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On the CapEx side, a lot of it is discretionary. So we can really, really stop investing on anything that doesn’t immediately help us generate revenue. Of course, to maintain our quality standards, we won’t shy away from maintenance. But most of our CapEx has been expansion-driven. And in the times of COVID, that is not a very prudent approach, so we can really minimize it if COVID brings us to — brings the world to a halt.

With respect to the line, I mean, no, we’re not disclosing that numerically because it’s ever-changing. As the situation is changing, we’re also in continuous talks with banks to increase our limits that we have with them in terms of revolving facilities.

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Ali Al-Nasser, Vergent Asset Management LLP – Managing Partner & CIO [59]

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Okay. But I guess, on the balance sheet, do you have any — I wouldn’t necessarily call it a concern, but given that the margins are — at least, in Russia, are low, and perhaps they drive on the profitability of the group at this stage. In terms of cash buffer, what’s the strategy with the balance sheet? How much excess cash would you like to keep? Maybe don’t put a numeric number on it, but maybe just give us a sense of how you would manage a situation in which sales would drop by 30%, 40% or even more. What would the cash and liability side look like?

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Aslan Saranga, DP Eurasia N.V. – CEO, Head of Leadership & Executive Director [60]

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Selim, can I answer the question?

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Selim Kender, DP Eurasia N.V. – Chief Strategy Officer & Head of IR [61]

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Sure.

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Aslan Saranga, DP Eurasia N.V. – CEO, Head of Leadership & Executive Director [62]

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So we are working on different scenarios. So I can’t be very specific about it. Up to 30% to 40% sales decrease, we can run the cash flow. We don’t need much support from outside. So our worst risky scenario is the closure of the stores, and we have enough cash about 5 to 6 months for that in order to cover this — if we don’t get any support from the government also.

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Selim Kender, DP Eurasia N.V. – Chief Strategy Officer & Head of IR [63]

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And this also includes — say that there was a governmental decree tomorrow for us to close all our stores, we have enough cash to last us for about 6 months and that doesn’t — and that assumes we don’t make any savings on payroll or rent. I think in such an extreme scenario, I think governments would provide retail players with some postponements or new regulations with respect to rent payments, et cetera, et cetera. And Aslan already mentioned about the — already the payroll help that the government is offering when sales go down by more than 30%. Obviously, store closure would mean that sales go down by 100%.

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Ali Al-Nasser, Vergent Asset Management LLP – Managing Partner & CIO [64]

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Yes, I was going to actually just ask about the assumptions there. If a store closes — I mean, in the U.K., for example, a store can close, but they’re still doing delivery and take-out. What are you assuming if the stores — if you’re asked to shut down the stores, what is the impact…

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Selim Kender, DP Eurasia N.V. – Chief Strategy Officer & Head of IR [65]

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When I say — when we say store closures, we mean store closures, 0 sales from that store.

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Ali Al-Nasser, Vergent Asset Management LLP – Managing Partner & CIO [66]

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So that includes online…

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Selim Kender, DP Eurasia N.V. – Chief Strategy Officer & Head of IR [67]

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This is a very extreme scenario, obviously. As Aslan mentioned in our call, very few countries, 2 or 3 countries have gone that way so far. And of course, all of us have stepped into the unknown. So it’s impossible to extrapolate. But extensive period of store closures would be very, very extreme case, I think.

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Ali Al-Nasser, Vergent Asset Management LLP – Managing Partner & CIO [68]

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Got it. Got it. And to confirm…

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Selim Kender, DP Eurasia N.V. – Chief Strategy Officer & Head of IR [69]

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If we give — if China is giving us an example of how long these closures last, but obviously, it can also be — cases could also be different from country to country, obviously.

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Ali Al-Nasser, Vergent Asset Management LLP – Managing Partner & CIO [70]

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Yes, yes. No, I get it. But — and just to confirm, you said you have the cash right now to run a scenario or stores closed for up to 6 months without any cost improvement or any government intervention.

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Selim Kender, DP Eurasia N.V. – Chief Strategy Officer & Head of IR [71]

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Correct.

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Operator [72]

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And we have no further questions on the line, so I’ll hand the call back to our speakers for closing comments.

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Aslan Saranga, DP Eurasia N.V. – CEO, Head of Leadership & Executive Director [73]

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Thank you for listening to us. And as I mentioned earlier, as soon as we get more updates about the COVID situation, we’ll update the financial markets. Thanks for listening to us. Thank you.

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Operator [74]

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This now concludes our call. Thank you for attending. Participants, you may disconnect your lines.

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