Detsky mir group announces audited financial results for the full year ended december 31, 2013

DETSKY MIR GROUP ANNOUNCES AUDITED FINANCIAL RESULTS FOR

THE FULL YEAR ENDED DECEMBER 31, 2013

March 3, 2014. Moscow, Russia – OJSC Detsky Mir Group (“Detsky Mir” or the “Group”), the largest children’s goods retail chain in Russia, announces its audited US GAAP financial results for the full year ended December 31, 2013.

2013 FINANCIAL HIGHLIGHTS

o  Total revenue up 27.2% year-on-year to US$ 1,130 million (30.3% in RUB terms);

o  Like-for-like sales grew 13.4%[1] (8.2% in number of tickets and 4.8% in average ticket);

o  Gross profit up 23.8% year-on-year to US$ 437 million with a gross margin of 38.6% (versus 39.7% in 2012);

o  SG&A expenses fell as percentage of revenue to 31.0% from 33.8% in 2012 due to increased operating efficiency and cost cutting measures;

o  Adjusted EBITDA[2] increased 61.7% year-on-year to US$ 91.5 million, with a margin of 8.1%;

o  Net profit more than doubled year-on-year to US$ 36 million;

o  Net debt[3]/adjusted EBITDA stood at 1.7x at the end of 2013;

o  As of December 31, 2013, the Company’s net debt amounted to US$ 154.7 million.

2013 KEY CORPORATE HIGHLIGHTS

o  Opened 41 new stores, including 33 Detsky Mir branded stores and 8 ELC branded stores, and increased its total selling space to 319.9 thousand sq. m.[4] from 290.8 thousand sq. m. as of 31 December 2012;

o  Launched a new store design concept at the “MEGA Belaya Dacha” shopping mall in the Moscow region;

o  Repurchased 25%+1 share from Sberbank;

o  Paid out annual dividends for 2012 in the amount of US$ 12.7 million;

o  Expanded its online store coverage from 66 to 98 cities across Russia.

Vladimir Chirakhov, Chief Executive Officer of Detsky Mir, commented:

“2013 was a year of acceleration of top line growth and improved operational efficiency for Detsky Mir. While the Group had strong revenue growth stemming from the roll-out of new stores and steadily improving like-for-like sales to 13.4%, our focus throughout the year has been on optimising operational efficiency resulting in a sharp increase in the adjusted EBITDA margin to 8.1% in 2013 compared to 6.4% in 2012.

Gross margin decreased slightly from the 2012 level as we expanded our product offering and actively pursued our price leadership strategy. This reduction has been more than offset at the EBITDA level as we aggressively improved operational efficiency by increasing the number of sales per square metre, optimising in-store personnel costs, improving logistics and reducing central office costs and rental expense as percentage of sales.

While the Group’s net debt increased mainly due to the buyout of 25%+1 of our shares from Sberbank, we remain fully committed to conservative financial policy, maintaining our leverage at a comfortable level.

We are looking forward to 2014 as operational changes implemented in 2013 continue to bear fruit in 2014. We continue our nationwide expansion, introducing our new concept across the retail chain and vigorously pursuing further operational cost-savings at all levels of our business.”

FINANCIAL SUMMARY

US$, millions	2013	2012	Year-on-Year Change
Revenues	1,130.4	888.4	27.2%
Gross Profit	436.7	352.8	23.8%
Gross margin (%)	38.6%	39.7%	-110 bps
SG&A % of revenue	31.0%	33.8%	-280 bps
EBITDA	85.2	55.0	54.9%
Adjusted EBITDA	91.5	56.6	61.7%
Adjusted EBITDA margin (%)	8.1%	6.4%	+170 bps
Operating Income	67.1	35.4	89.5%
Income before income tax	49.4	24.0	105.9%
Net Profit	36.2	14.7	146.7%
Net margin (%)	3.2%	1.7%	+150 bps

Revenue and Gross Profit

The Group generated a 27.2% year-on-year increase in revenues to US$ 1,130.4 million, driven by high revenue growth dynamics in stores opened in 2012, like-for-like revenue growth and new store openings. LFL revenue growth of 13.4% was mainly driven by improvements to our product mix and by implementing a new pricing strategy, which resulted in a 8.2% increase in traffic and a 4.8% increase in average ticket. Overall, Detsky Mir retail chain’s contribution to the Group’s total revenues amounted to 95.6%. ELC stores’ revenue contribution doubled year-on-year to US$19.0 million, mainly due to having a full year of operation in 2013. In 2013, Detsky Mir opened 33[5] new stores.

One of the key highlights of 2013 was the opening of the first new Detsky Mir store concept in the “MEGA Belaya Dacha” shopping centre in Moscow. When developing the new store concept, the Group conducted a detailed study of the target audience’s needs and spending habits, and reviewed the practices of major international retailers. The store has been fitted with modern retail equipment using environmentally friendly materials. New standards of visual merchandising have also been introduced. The new concept at Belaya Dacha has proven to be popular with shoppers due to its attractive, convenient and modern shopping environment, which has led to a significant increase in the store’s revenue and traffic performance.

In 2013, the Group’s gross profit increased by 23.8% year-on-year to US$ 436.7 million, driven mainly by revenue growth at Detsky Mir. The gross margin slightly declined to 38.6% in 2013, compared to 39.7% in 2012, largely due to Detsky Mir’s strategy of focusing on the competitive pricing of certain SKUs to drive traffic growth.

EBITDA and SG&A Expenses

Detsky Mir’s EBITDA[6] increased by 54.9% year-on-year to US$ 85.2 million resulting in the EBITDA margin increasing sharply to 7.5% in 2013 from 6.2% in 2012, which was stimulated by enhanced control over the operating expenses and increasing operational efficiency. Adjusted EBITDA[7] grew by 61.7% to US$91.5 million.

Selling, general and administrative expenses (SG&A) increased by 16.8% year-on-year to US$350.3 million, primarily due to cost inflation in Russia and new store openings. However, SG&A expenses declined as a percentage of revenue to 31.0% in 2013 compared to 33.8% in 2012.

‒  Payroll expenses decreased to 12.5% of revenue in 2013 from 13.9% in 2012 (HQ personnel costs decreased to 2.2% of revenue from 3.1% while in-store personnel costs declined to 10.3% of revenue from 10.7%);

‒  Rent costs (incl. utilities) fell to 13.1% of revenue from 13.5%;

‒  Security expenses declined to 0.7% of revenue in 2013from 1.2% of revenue in 2012.

Reconciliation from EBITDA to adjusted EBITDA

	2013	2012
EBITDA	85,180	54,978
Foreign exchange (loss)/gain	1,834	(874)
Interest in net earnings of associates, net of tax	(605)	(857)
LTIP 2012	(585)	690
Loss on disposal of fixed assets	1,207	293
Impact of annual uplifts in rent	3,646	147
Force majeur (fire)	(176)	1,510
Termination payments to management	966	683
Adjusted EBITDA	91,467	56,570

Key adjustments to the EBITDA include removing indexation of rent provision and the effect of foreign exchange losses. Indexation of rent provision is a measure which accounts for future rent increases in certain contracts using straight line method, i. e. rent expense is higher than cash payment of rent due each year. The Company therefore adjusts for it to get a true measure of profitability for 2013.

Net Profit and Operating Cash Flow

In 2013, Detsky Mir’s net interest expenses increased by 29.0% year-on-year to US$ 15.9 million as a result of increased debt required to repurchase the 25%+1 share from Sberbank of Russia.

Foreign exchange losses amounted to US$ 1.8 million, due to losses recognised on the revaluation of liabilities denominated in foreign currency, predominantly accounts payable, as the ruble depreciated against the U. S. dollar during the period.

Depreciation and amortization in 2013 was US$19.9 million compared to US$18.7 million in 2012.

The Group’s net profit in 2013 more than doubled year-on-year and totalled US$ 36.2 million with net margin expanding to 3.2% compared to 1.7% in 2012.

In 2013, net cash from operating activities increased by 26.7% year-on-year to US$ 63.6 million compared to US$ 50.2 million in 2012.

Financing and Debt

As of December 31, 2013, Detsky Mir’s net debt increased to US$ 154.7 million compared to US$ 44.9 million in 2012, mainly as a result of the buyout of 25%+1 share from Sberbank, which led to a total debt increase of 83.3% year-on-year to US$ 181 million as of December 31, 2013. As of 31 December 2013, 100% of debt liabilities are denominated in rubles.

In 2013, Detsky Mir’s leverage remained at a comfortable level with a Net Debt/Adjusted EBITDA ratio of 1.7x.

Capital Expenditures

During the reporting period, Detsky Mir continued to invest in developing its store network. The Company opened 41 new stores with the asset light model providing for reasonable and controlled capital expenditures. In 2013, Detsky Mir’s total capital investments amounted to US$ 24.2 million compared to US$27.7million in 2012.

TRADING UPDATE

Despite seeing a temporary slowdown in like–for-like sales in the fourth quarter of 2013 to 10.2% (consisting of 7.8% growth in traffic and 2.2% growth in average ticket) compared to full year LFL growth of 13.4%, unaudited preliminary data suggests a pick up in like-for-like revenue growth in January 2014, which was 23.9% (7.5% growth in traffic and 15.2% growth average ticket). December saw weaker sales in clothing and shoes, largely due to unseasonably warm weather. Demand, particularly in this segment, returned in January with weather normalising to sub-zero temperatures across central Russia. Another factor contributing to faster growth is the inclusion of stores opened throughout 2012 into the like-for-like calculation (177 stores were included in January 2014 compared to 138 in 2013).

With respect to recent currency volatility, the Company expects to remain in a strong position. 100% of debt is denominated in rubles. With respect to our purchasing, approximately 20% of our goods sold are sourced directly from China (predominantly own brands) and given that the Group places orders well ahead of goods reaching its shelves (6 to 9 months), it has the opportunity to reflect any changes in currency rates in its pricing policy.

Approximately 40% of the Group`s rental leases are denominated in foreign currency, of which 12% have a ceiling on foreign exchange rates. The Group estimates that an initial 3 ruble devaluation against the dollar increases its rental cost by approximately 150 million rubles per year.

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For further information:

Detsky Mir Nadezhda Kiselyova, Head of the PR Department + 7 (4, ext. 2042 *****@***ru

Detsky Mir Nadezhda Kiselyova, Head of the PR Department + 7 (4, ext. 2042 *****@***ru Instinctif Partners Leonid Fink, Tony Friend, Galyna Kulachek +44 Anton Karpov +7 (4

OJSC Detsky Mir is the largest children’s goods retailer in Russia. The Group incorporates the nationwide retail store chain Detsky Mir, luxury centre Children’s Gallery “Yakimanka”, the Russian chain of ELC – Early Learning Center, and Detsky Mir and ELC Internet stores. As of December 31, 2013, Detsky Mir chain consisted of 224 Detsky Mir stores in Russia and Kazakhstan, and incorporated 27 ELC stores in Russia. The total selling space of the Group stores is c.320,000 sq. m. JSFC Sistema is the sole shareholder of Detsky Mir. For further information please refer to our corporate website: www. *****

JSFC Sistema is the largest publicly-traded diversified holding company in Russia and the CIS, which invests in and is a major shareholder of companies serving over 100 million customers in the sectors of telecommunications, high technology, oil and energy, radars and aerospace, banking, retail, mass-media, tourism and healthcare services. Founded in 1993, the Company reported revenues of US$ 9.3 billion for the third quarter of 2013, and total assets of US$ 44.4 billion as at September 30, 2013. Sistema’s global depository receipts are listed under the symbol “SSA” on the London Stock Exchange. Sistema’s ordinary shares are listed under the symbol “AFKS” on the MOEX Stock Exchange. Sistema was ranked number 315 in the 2012 edition of the Fortune Global 500 list. Website: www.

Some statements in this document may contain assumptions or forecasts in relation to forthcoming events of Detsky Mir Group or JSFC Sistema. Such statements include words “expect,” “believe,” “anticipate,” “estimate,” “intend,” “will,” “could,” “may” or “might”, their negative forms or other similar expressions. It is important to note that these statements are only assumptions and actual events or results may differ materially from what was stated. We will not reconsider such statements in order to bring them in line with real events and circumstances that can occur after the stated date or reflect events not expected to occur. Due to many factors, the actual results of Detsky Mir Group and JSFC Sistema may differ materially from those contained in our assumptions or forecasts, including, among others, general economic conditions, competitive environment we are operating in, risks associated with operation in Russia, rapid technological and market changes in our lines of business, as well as many other risks directly related to Detsky Mir Group and JSFC Sistema.

[1] Here and below LFL sales and average ticket growth is measured in RUB terms

[2] Adjusted EBITDA is defined as EBITDA further adjusted to exclude the effects of foreign exchange gains and losses, interest in earnings of associates (net of tax), income and expense associated with the long-term management incentive program, loss on disposal of fixed assets, impact of annual uplifts in rent, expense associated with force majeure events and expense associated with termination payments to previous management.

[3] Net debt is calculated as long-term and short-term borrowings less cash and cash equivalents.

[4] Including 4 stores that were relocated

[5] Including the relocation of 4 stores opened in

[6] EBITDA is defined as net profit plus net interest expense, income tax expense and depreciation and amortisation.

[7] Adjusted EBITDA is defined as EBITDA further adjusted to exclude the effects of foreign exchange gains and losses, interest in earnings of associates (net of tax), income and expense associated with the long-term management incentive program, loss on disposal of fixed assets, impact of annual uplifts in rent, expense associated with force majeure events and expense associated with termination payments to previous management.