1. Russia - Ukraine Sales/Profits and Issues 2014-2015 By Dr Daniel Thorniley 4 August 2014

2. Business trends and issues (1) The following slides show that while Russia has been knocked off its top spot as the best market for sales growth in the Ceemea region, it still remains a very solid market for sales and profitability ---indeed one of the very best First point: until July this year Russia is way ahead as the priority market in the greater CEE region with 77% of respondents putting Russia as their No 1 priority market for the next 3 years. Poland and Turkey come along way behind with 45% and 33% respectively This priority is clearly reflected in the large lead Russia holds as the market where executives plan to raise headcount with 60% planning to do so followed a long way behind by Turkey (20%) and Poland and Kazakhstan When we combine volume and sales growth, Russia is by far the most important market in the whole CEE region (see later slides)

3. Business trends and issues (2) However, Ukraine and Russia rank as 1 and 2 for companies planning to cut back on headcount and this is a big negative shift for the Russian market where staff cuts have been a low focus in recent years Some companies are downsizing while others are growing their headcount and some companies are doing both, re-jigging their HR to fit the new market demands Some 21% of companies are also planning to cut sales and marketing costs in Russia while the number is almost 30% in Ukraine. We reckon that this figure will rise sharply for Ukraine and tick up little more for Russia In other main CEE markets, only 10% or fewer companies plan to cut back so the trends in Ukraine and even Russia are quite significant and negative We are not surprised that 25% plan to adjust their route to market in Russia and this in fact is probably lower than previously as many companies have already completed this process and may be pausing to catch breath There is not much difference across business sectors regarding companies looking to change route to market with most clustered around 20-32% of respondents

4. Business trends and issues (3) More companies want to control their route to market as their business grows in Russia and companies are also now re-assessing their operations in the changing environment Generally we see that companies want to do more of their own distribution and warehousing or at least to have control and close monitoring of the process. This can often entail reducing the number of wholesalers/distributors in order to ensure closer and deeper relations with a smaller number of partners Curiously while the trend is for more “do it yourself”, when it comes to point of sale activities slightly more companies are looking to outsource this element of the business Issues with receivables have grown over the last 18 months from very low levels to now when about 30% of companies are affected Again most sectors are affected equally, when originally it was pharmaceuticals which reported increased challenges at the start of 2013 It should be noted that so far we are rarely talking about real bad debts, rather longer payment terms and some delays

5. Priority markets for the next three years

6. Hiring plans

7. Headcount

8. Cutting sales/marketing cost

9. Route-to-market

10. Receivables

11. Staff turnover

12. Countries ranked by revenue growth forecasts for 2014 and 2015

13. Countries ranked by profit growth forecasts for 2014 and 2015

14. Sales and profit trends (1) The growth of sales here applies to the rate of top-line growth and not the volume While Russia now lags Turkey and Azerbaijan (and Kazakhstan in 2015), it is a hugely bigger market than these other ones and in the case of the other CIS market it is often 50 times bigger (!) so the comparisons needs to be qualified When we combine volume and sales growth, Russia is by far the most important market in the whole CEE region Russia still accounts for 35-55% of the whole CEE market in terms of sales volumes This may soften in 2014-15 as Russia lags and other smaller core CEE markets surge comparatively after they have experienced a tough 3-5 year period The figures show that about 10% of respondents are going to have a tough time in 2014 with negative sales results and a further 12% will post flat sales Almost one half (47%) of firms will report single-digit sales this year But this still makes Russia different and better compared with most CEE markets where this proportion of single digits hovers in the 60-70% range

15. Sales and profit trends (2) Russia has been transforming into more of a single-digit growth market but what is positively surprising is that in this Survey still 29% of respondents forecast double- digit sales in 2014 We think this could soften given the negative events of the end of July but still about 20-25% of companies can expect double-digit sales this year This proportion is down on the 51% who had planned for such double digits in their original 2014 budgets, which means that about 20% of companies have re- forecasted their sales down this year from double-digits to single digits We know from discussion that for many companies double digits still means good ones at 8-9% range but that more companies are creeping down into a cluster of 4-8% which is still comparatively good

16. Russia - sales and profit trends and expectations for 2013-2015

17. How are the business sectors doing in 2014? (1) When it comes to sectors, most saw their sales decline steadily in 2013 with B2B and pharmaceuticals and health stumbling into single digits or lower in the last quarter of last year and the first quarter of this year Regarding profits this year, more companies are coming under pressure admittedly from very good historic levels but across sectors 20-30% of companies now forecast flat or negative profit trends this year Relatively it is the B2B sector which has fallen the furthest and the quickest in the last 6-9 months whereas the decline in sales growth for IT was more steady and started in early 2012 Similarly consumer products saw a gradual steady deceleration throughout 2013 Most sectors saw their average sales dip from good/low-double digits into high or middle-single digits and this marks the trend for the large majority of companies with outliers to the up and downside Consumer products (50% of these firms ) this year are clustered in single digits with 15% flat or negative and another 33% in mostly low-double digits

18. How are the business sectors doing in 2014? (2) B2B companies were rolling in good double digits until summer 2013 but now the sector is divided with one third looking at flat/negative sales, one third in single digits and the remainder spread across low and high-double digits: so quite a spread. The divergence will depend on sub-sectors, investment plans, state spending and access to financing I imagine there is still some downside here as financing could get tougher this year In the last 3-4 months more pharma/health companies re-forecasting flat/negative sales this year with again the rest spread across single and double-digit growth This sector is the best for strong double digit growth (22% of firms) Executives are clear that retail is the fastest growing sector while hospitals and regions follow with federal programs bringing up the rear. This is a very strong market perception One third of IT firms predict flat growth after a tough 18 months and the majority of the rest forecast single-digit sales with only 10% looking for double digits. Tighter financing could delay any strong recovery for this sector as well

19. Russia - sales and profits expectations for 2014 all sectors, June 2014 survey

20. Preparing for the 2015 budget (1) Executives have to presume a middle scenario in Ukraine without a massive escalation. As one MD stated a couple of months, “If I look at the very worst case, I don’t have a business or any property, so let’s move on” Executives do predict that 2015 will be better for business but they are managing expectations and are by no means over-excited about any sharp bounce back As we have noted before, the “double new normal” means for many companies (59%) single-digits sales with a good proportion (25-33% depending on sector) looking for double digits in 2015 For profit growth 26% of respondents are looking to double-digit improvements while fully 63% forecast single-digit profit growth spread evenly across high and low For sales the shift in 2015 compared with 2014 takes place less in the double-digit forecasts (about 30% of firms in both years), whereas those foresting flat negative improves from 24% in 2014 to just 10% in 2015

21. Preparing for the 2015 budget (2) And therefore the change occurs in the single-digit category which expands from 47% of respondents in 2014 to 59% in 2015 So Russia is expected to become more normal and similar to other CEE markets but 1) at a slightly better level with a good clustering in high-single digits and 2) still 25-30% looking to double digits. It is these two features which will still distinguish the Russian market in a positive fashion Consumer products though stay predominantly stuck in single digits (with many in high-singles); only 5% forecast flat/negative growth while just over 20% foresee double-digit growth Executives in the B2B sector predict a solid improvement in 2015 after a shaky 2014: still 6% will be negative and 7% flat next year but over 40% of B2B firms plan for double-digit expansion and with one fifth predicting high-double digits The newly imposed sanctions and limited access to capital could hinder this upbeat scenario but it is clear that the sector sees the current downturn as a short cyclical blip

22. Preparing for the 2015 budget (3) Pharmaceuticals and health also look to a better 2015 and trust that 2014 was a temporary wobble: only 8% of firms look to flat/negative growth next year and 55% expect single-digit sales and mostly high-single digits while a hefty 35% forecast double-digit sales growth This outlook is for a return to the more normal days of mid-2013 with many companies reporting growth in the mid-teens or at least around 10% growth That said, it does look like more of these companies expect to remain in single digits and this stems from lower federal spending and it is sensible to manage expectations here The IT industry budgets for a mild recovery in 2015 but nothing too strong More than 20% of IT firms forecast flat/negative sales which is the worst sales outlook by sector for 2015 while almost 55% predict single digits and almost one quarter foresee double-digit expansion So a solid IT recovery but not yet a comprehensive one

23. Russia - sales and profits expectations for 2015 all sectors, June 2014 survey

24. Ukraine business outlook 2014-15 (1) The outlook is clearly bleak and Ukraine ranks bottom in our Survey of 23 CEE markets for the rate of sales growth in both 2014 and 2015 What has been encouraging is that many companies reported that their business held up and survived at least through to the April and May period and some executives were genuinely shocked at the market resilience to the large devaluation and civil conflict in eastern Ukraine But as inflation kicked in during the summer and the fall in GDP accelerated, so too business has started to crumble The outlook is of course extremely challenging Sales and profits will decline in 2014 for 60% of respondents and another 20% forecast flat sales with the remainder predicting small growth built on the first months of the year Most sectors are performing equally badly but consumer products and food & beverages survive better followed by pharmaceuticals on the basis that people have to eat and drink and consume medicines

25. Ukraine business outlook 2014-15 (2) But it will be B2B and IT which will be starved of financing and government spending and so they are hurt the most: all IT companies expect flat or negative growth this year for example These B2B sectors also expect the weakest recovery in 2015 but despite that some 20% of such firms predict a strong double-digit rebound next year Overall across sectors some mild recovery is predicted for 2015 with consumer products leading the way with expectations of low-single digit growth Pharmaceuticals and health are also among the relatively optimistic for 2015 But B2B and IT see both years (2014 and 2015) as hard ones: even though 20% of these companies look to double-digit recovery as we just noted, this still means that 80% expect a slower pick-up What is also noticeable is that most executives are not anticipating a huge bounce- back effect in 2015, rather just a soft pick-up This implies a 2-year hiatus for business and this is of course on a best/middle case scenario where we presume no further major escalation with Russia or any long extended guerilla war

26. Ukraine - sales and profit trends and expectations for 2013-2015

27. Ukraine - sales and profits expectations for 2014 all sectors, June 2014 survey

28. Ukraine - sales and profits expectations for 2015 all sectors, June 2014 survey

29. Disclaimer, copyright, sources © 2014 CEEMEA Business Group* *a joint venture between DT-Global Business Consulting GmbH, Address: Keinergasse 8/33, 1030 Vienna, Austria, Company registration: FN 331137t and GSA Global Success Advisors GmbH, Hoffeldstraße 5, 2522 Oberwaltersdorf, Austria Company registration: FN 331082k Source: DT-Global Business Consulting GmbH and CEEMEA Business Group research Basic data sources come from central banks, own intelligence network, CEEMEA Business Group corporate survey, governments and other public sources. Interpretation, views, forecasts, business quotes and business outlooks by DT-Global Business Consulting GmbH and CEEMEA Business Group. This material is provided for information purposes only. It is not a recommendation or advice of any investment or commercial activity whatsoever. The CEEMEA Business Group accepts no liability for any commercial losses incurred by any party acting on information in these materials. Contact: Dr Daniel Thorniley, President, DT-Global Business Consulting GmbH M: +43 676 534 6852 / E: danielthorniley@dt-gbc.com / W: www.ceemeabusinessgroup.comdanielthorniley@dt-gbc.comwww.ceemeabusinessgroup.com