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Detsky Mir Group Adjusted EBITDA Increased by 48% YoY in June 2020

Moscow, Russia, 25 August 2020 – Detsky Mir Group (“Detsky Mir”, the “Group” or the “Company”, MOEX: DSKY), Russia’s largest specialized children’s goods retailer, announces its unaudited financial results in accordance with International Financial Reporting Standards (IFRS) for the second quarter and the first half ended 30 June 2020.

Q2 2020 Financial Highlights[1]

Group unaudited consolidated revenue increased by 2.9% year-on-year to RUB 28.8 bn, compared to RUB 28 bn in Q2 2019.
Online revenue[2] increased 3.2x year-on-year to RUB 8.7 bn.
- The share of online sales in total revenue of Detsky Mir in Russia increased 3.1x year-on-year to 31.1%.
- The share of courier delivery service grew by 10.8 p.p. year-on-year to 23%.
Revenue in Kazakhstan decreased by 17.3% year-on-year to RUB 634 m.
Like-for-like sales[3] at Detsky Mir stores in Russia and Kazakhstan grew by 0.8%. The number of tickets decreased by 11.3%, while the average ticket grew 13.7%.
Like-for-like sales at Detsky Mir stores in Russia grew by 1.1%. The number of tickets decreased by 11.0%, while the average ticket grew by 13.5%.
Detsky Mir opened 12 new branded stores[4] in Q2 2020. The Group had 850 stores[5] as of 30 June 2020:
- Three Detsky Mir stores have been temporarily closed in Russia. The Belarusian retail chain Detmir and Kazakhstan’s Detsky Mir remained open.
Total selling space increased by 10.1% year-on-year to approximately 855,000 sq. m.
Gross profit decreased by 6.6% year-on-year to RUB 8.9 bn, with a gross margin of 30.8%.
SG&A as a percentage of revenue[6] decreased by 3.1 p.p. year-on-year, driven by increased operational efficiency.
Adjusted EBITDA[7] increased by 2.9% year-on-year to RUB 3.6 bn; the adjusted EBITDA margin was flat year-on-year to 12.3%. EBITDA[8] totaled RUB 3.5bn (+4.4% year-on-year).
Adjusted net profit[9] amounted to RUB 1.4 bn (-29.4% year-on-year). Net profit totaled RUB 1.4 bn (-28.6% year-on-year).
The net debt[10]/adjusted EBITDA LTM ratio improved to 1.6x as of 30 June 2020.

1H 2020 Financial Highlights

Group unaudited consolidated revenue increased by 7.1% year-on-year to RUB 59.9 bn, compared to RUB 55.9 bn in 1H 2019.
Online revenue increased 2.7x year-on-year to RUB 14.1 bn.
- The share of online sales in total net revenue of Detsky Mir in Russia increased 2.5x year-on-year to 24.6%.
- The share of courier delivery service grew by 4.6 p.p. year-on-year to 19.9%.
Revenue in Kazakhstan decreased by 6.1% year-on-year to RUB 1,601 m.
Like-for-like sales at Detsky Mir stores in Russia and Kazakhstan grew 2.5%. The number of tickets decreased 3.0%, while the average ticket grew 5.7%.
Like-for-like sales at Detsky Mir stores in Russia grew 2.4%. The number of tickets decreased 3.1%, while the average ticket grew 5.7%.
Detsky Mir opened 20 new branded stores[11] in 1H 2020, as well as one new Detmir Pickup store and one new Zoozavr store.
Gross profit increased by 2.1% year-on-year to RUB 18 bn, with a gross margin of 30%.
SG&A as a percentage of revenue decreased by 1.6 p.p. year-on-year, driven by increased operational efficiency.
Adjusted EBITDA increased by 9.1% year-on-year to RUB 5.8 bn; the adjusted EBITDA margin improved by 0.2 p.p. to 9.7%. EBITDA totaled RUB 5.4 bn (+8.4% year-on-year).
Adjusted net profit amounted to RUB 1.4 bn (-42.5% year-on-year). Net profit totaled RUB 1.1 bn (-49.7% year-on-year).

Q2 2020 Key Events

In June 2020, the Annual General Meeting of Shareholders approved a dividend for 2019 totaling RUB 2.2 bn, or RUB 3.0 per ordinary share.
In June 2020, PJSFC Sistema (the majority shareholder of the Company) and the Russia-China Investment Fund (RCIF) successfully priced the offering of Detsky Mir shares. The offering size was 118 million existing shares in Detsky Mir, representing 15.9% of Detsky Mir’s issued share capital. The offering increased the Company’s free float to 75%-1 share. PJSFC Sistema has a remaining ownership interest of 20.38%, and RCIF has a remaining interest of 4.62% in the Company.
As of 31 May 2020, 38 Detsky Mir stores in Russia, as well as all 58 ELC and ABC stores were temporarily closed due to the spread of the coronavirus (COVID-19).
As of 30 April 2020, 83 Detsky Mir stores in Russia, as well as all 58 ELC and ABC stores were temporarily closed due to the spread of the coronavirus (COVID-19). In Kazakhstan, 36 stores were temporarily closed, although pickup points for online orders were set up at most of the closed locations.
In April 2020, Detsky Mir successfully issued its series BО-06 exchange-traded bond with a nominal value of RUB 3 bn, a coupon of 7.0% p.a. and a 3-year put option.

Events after the Reporting Period

As of 25 August 2020, all Detsky Mir stores remained open to customers.
In August 2020, the Board of Directors recommended that PJSC Detsky Mir’s shareholders approve a dividend payment of the remaining undistributed profit for Q4 2019 of RUB 1.8 bn or RUB 2.5 per ordinary share. The total amount of paid dividends for FY 2019 may amount to RUB 7.8 bn (100% of net profit under RAS), or RUB 10.6 per ordinary share.
In July 2020, the Company launched its first regional distribution center in PNK Park Rostov-on-Don, a Class A+ industrial park developed by PNK Group. Detsky Mir leased 6,000 sq. m of warehousing space for seven years with the option to expand. The project’s CAPEX totals around RUB 100 m.

Maria Davydova, PJSC Detsky Mir Chief Executive Officer, said:

“Detsky Mir has been successfully dealing with the current COVID-19 crisis. In the second quarter, our team has not only successfully recovered the revenue losses suffered in April but also increased adjusted EBITDA by 2.9%. In July, we fully brought our business back to normal, returning to double-digit growth in total sales at 13.9% year-on-year, despite a high base in July 2019 (+18% year-on-year). At the same time, we expect EBITDA for July 2020 to be up by at least 25% year-on-year.

This solid performance was driven by the Company’s successful omnichannel journey, which allowed us to quickly adapt to new market conditions. Following the lifting of lockdown measures and customers returning to normality, Detsky Mir’s online sales have continued to show strong growth. For example, the share of online sales in Detsky Mir’s total revenue increased by more than 2.5 times year-on-year in July 2020, reaching 25.3% of the Detsky Mir chain’s total revenue in Russia.

In response to new market opportunities and challenges, our team decided to update the Company’s medium-term development strategy. Detsky Mir is above all focused on maintaining its leadership in the children’s goods segment and sustaining double-digit sales growth by further evolving its omnichannel business model.

We have set ourselves the ambitious target of growing the share of online sales to 45% in the medium term by developing direct delivery and in-store fulfillment of online orders. We have set our sights on offering next-day delivery on at least 80% of all online orders by building out a robust regional logistics network. In addition, we plan to significantly expand our assortment of children’s products to 2.4 million SKUs through the development of our own marketplace.

Our key priority is to deliver a superior customer experience in all sales channels, in part by achieving leadership across all e-comm products in terms of mobile app and online store usability. We also see an excellent opportunity to expand into the market for digital services targeted at children by leveraging the traffic generated by our detmir.ru online store.

We plan to open at least 800 Detmir Pickup stores, our new compact store format, by the end of 2024, enabling increased penetration in smaller towns and locations while also improving the delivery service for online orders. At the same time, we remain committed to the Company’s targets announced in early March: we are planning to open at least 300 stores in the Detsky Mir chain’s traditional format and maintain our double-digit adjusted EBITDA margin.

Finally, we took a decision to scale up the Zoozavr chain, with medium-term plans to open at least 500 retail outlets and achieve a 30% share of online sales in pet supplies. Our goal is to become a leader in this segment with a double-digit market share.”

View the full press release

Mid-Term Guidance

The Company’s management confirms its store opening guidance, with at least 300 stores in the Detsky Mir chain’s traditional format on the horizon in Russia, Kazakhstan and Belarus. The Group also plans to open 800 Detmir Pickup stores – our new compact store format – along with 500 Zoozavr pet supplies stores.

Detsky Mir expects to maintain double-digit growth in total sales in the medium term by developing its omnichannel business model, with the share of online sales reaching 45% in the children’s goods category and 30% in the pet supplies category. The Company’s goal is leadership in both markets.

Detsky Mir’s strategic priority is to offer an affordable and wide product assortment, which will be ensured in part by a focus on private labels and the full-scale launch of our own marketplace. Within 3 to 5 years, the product assortment in the children’s goods segment is expected to grow from 150 thousand to 2.4 million SKUs.

Detsky Mir is constantly improving its customer experience across all sales channels, with a medium-term target of achieving an overall NPS score of 70%[12] and gaining user experience leadership over online peers. Furthermore, the Company will consider entering the market for digital services and other non-children’s product categories.

The Company will continue to build out its logistics network to support the fast and cheap delivery of online orders. Between 2021 and 2024, Detsky Mir expects to launch five new distribution centers: three leased regional centers and two Company-owned, federal-level centers. While the level of investment required for each federal distribution center should be no more than RUB 2.5 bn, CAPEX per regional warehouse will amount to about RUB 100 m. On top of this, Detsky Mir’s total IT infrastructure CAPEX is not expected to exceed RUB 4 bn in the medium term.

The Group will continue to improve its operational efficiency to maintain its double-digit adjusted EBITDA margin (excluding the impact of IFRS 16 “Leases”) in the medium term.

The Company expects to confirm its dividend recommendation of 100% of net profit under Russian Accounting Standards (RAS). At the same time, Detsky Mir expects its financial year-end net debt/adjusted EBITDA ratio to stay below 2x throughout the entire forecast period.

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Conference Call Information

Date: Tuesday, August 25, 2020

Time: 16:00 (Moscow) 14:00 (London) 9:00 AM (U.S. Eastern time)

To register for the event please follow the link below.

Detsky_Mir_Webcast

For additional information:

Julia Polikarpova

Head of Public Relations

Tel.: +7 495 781 08 08, ext. 2041

upolikarpova@detmir.ru

Sergey Levitskiy

Head of Investor Relations

Tel.:+ 7 495 781 08 08, ext. 2315

slevitskiy@detmir.ru

The Detsky Mir Group of Companies (MOEX: DSKY) is a multi-format retailer and the leader in the children’s goods sector in Russia. The Group comprises the Detsky Mir and the Detmir Pickup retail chains, the ELC (Early Learning Centre in Russia) and the ABC retail chains, as well as the Zoozavr pet supplies retail chain. The Company operates a retail chain of 782 Detsky Mir stores located in 302 cities in Russia, Kazakhstan and Belarus, five Detmir Pickup stores, as well as 43 ELC, 9 ABC and eleven Zoozavr stores as of 30 June 2020. The total selling space was approximately 855,000 square meters.

Detsky Mir Group’s shareholder structure as of the date of this announcement is as follows: PJSC AFK Sistema[13] – 20.38%; Russian-Chinese Investment Fund (RCIF)[14]– 4.62%, Free float – 75%- 1 share.

Lear more at www.detmir.ru, elc-russia.ru, ir.detmir.ru

Disclaimer

Some of the information in these materials may contain projections or other forward-looking statements regarding future events or the future financial performance of Detsky Mir. You can identify forward looking statements by terms such as “expect”, “believe”, “anticipate”, “estimate”, “intend”, “will”, “could,” “may” or “might” the negative of such terms or other similar expressions. Detsky Mir wishes to caution you that these statements are only predictions and that actual events or results may differ materially. Detsky Mir does not intend to update these statements to reflect events and circumstances occurring after the date hereof or to reflect the occurrence of unanticipated events. Many factors could cause the actual results to differ materially from those contained in projections or forward-looking statements of Detsky Mir, including, among others, general economic conditions, the competitive environment, risks associated with operating in the Russian Federation, rapid technological and market change in the industries Detsky Mir operates in, impact of COVID-19 pandemic on macroeconomic situation on the markets of presence and financial results of Detsky Mir and its subsidiaries, as well as many other risks specifically related to Detsky Mir and its operations.

([1])The Company’s consolidated financial measures for 2019–2020 and related interim periods are based on proforma financial information prepared as if IFRS 16 ‘Leases’ had not been adopted, and thus do not represent IFRS measures.

([2]) This channel includes online orders at www.detmir.ru, including in-store pick-up.

([3]) Hereinafter like-for-like average growth, like-for-like number of tickets growth and like-for-like revenue growth are based on stores in operation for at least 12 full calendar months. The store is included in the calculation of the monthly like-for-like, if the difference between the worked periods in comparable months does not exceed three business days.

([4]) In Q2 2020, Detsky Mir closed two stores.

([5]) Including 52 ELC and ABC stores, five Detmir Pickup stores as well as eleven Zoozavr stores.

([6]) Hereinafter, selling, general and administrative expenses is calculated as selling, general and administrative expenses adjusted for depreciation and amortization expenses, additional share-based compensation expense and cash bonuses under the LTI program.

([7]) Hereinafter, adjusted EBITDA is calculated as profit for the period before income tax expense, foreign exchange (loss)/gain, gain on acquisition of controlling interest in associate, finance expense, finance income, depreciation and amortization, adjusted for share-based compensation expense and cash bonuses under the LTI program. See Attachment A.

([8]) Hereinafter, see Attachment A for definitions and reconciliation of EBITDA to IFRS financial measures.

([9]) Hereinafter, adjusted net profit is calculated as profit for the period adjusted for the share-based compensation expense and cash bonuses under the LTI program. See Attachment A.

([10]) Hereinafter, net debt is calculated as total borrowings (defined as long term loans and borrowings and short-term loans and borrowings and current portion of long-term loans and borrowings) less cash and cash equivalents. Lease liabilities are not included in the calculation of net debt. Adj. EBITDA LTM is calculated as adj. EBITDA for the last 12-months period.

([11]) In 1H 2020, Detsky Mir closed four stores.

([12]) Net Promoter Score is a metric used in customer experience programs. NPS measures the loyalty of customers to a company.

([13]) Sistema PJSFC is a publicly-traded diversified Russian holding company serving over 150 million customers in the sectors of telecommunications, children’s goods retail, paper and packaging, healthcare services, agriculture, high technology, banking, real estate, pharmaceuticals and hospitality

([14]) RCIF, an equity investment fund established by the Russian Direct Investment Fund (RDIF) and China Investment Corporation (CIC), holds its stake in PJSC Detsky Mir through its funds: Floette Holdings Limited and Exarzo Holdings Limited.