X5 Q2'18 REVENUE UP 19.3%, ADJ. EBITDA MARGIN 7.7%

X5 REPORTS 19.3% REVENUE GROWTH IN Q2 2018

ADJUSTED EBITDA MARGIN GREW TO 7.7% in Q2 2018 Q-O-Q

ü X5 delivered revenue growth of 19.3% year-on-year (y-o-y) on the back of positive like-for-like (LFL) sales and strong selling space expansion.

ü Gross margin improved by 11 b.p. y-o-y to 24.0% in Q2 2018 despite tough external environment driven by commercial margin improvement y-o-y due to stable share of promo.

ü Low food inflation at 0.4% in Q2 2018 drove up SG&A expenses (excl. D&A&I) as a percentage of revenue by 123 b.p. y-o-y to 17.1%, primarily due to higher staff costs, lease expenses and utilities costs.

ü Adjusted EBITDA(1) totalled RUB 29,464 mln in Q2 2018, while the adjusted EBITDA margin grew to 7.7% quarter-on-quarter (q-o-q).

Amsterdam, 14 August 2018 - X5 Retail Group N.V. ("X5" or the "Company"), a leading Russian food retailer (LSE and MOEX ticker: FIVE), today released its interim report for the three months (Q2) and six months (H1) ended 30 June 2018, in accordance with IAS 34 "Interim Financial Reporting" as adopted by the European Union. The interim report has been reviewed by the independent auditor and has not been audited.

X5 Chief Executive Officer Igor Shekhterman said:

"X5 continues to demonstrate strong revenue growth, delivering an increase of 19.6% year-on-year in the first half of 2018, and remains the fastest growing public retailer in Russia. The adjusted EBITDA margin in the first half of 2018 was 7.0%, recovering in the second quarter to 7.7%.

"We continue to face headwinds in the current operating environment: food inflation remained at a record low level of 0.4% in the second quarter of 2018, which negatively affected both sales and margins for food retailers.

"We continue to focus on operational efficiency at our three core formats, especially at proximity stores. The main priorities of the proximity format are: (i) delivering healthy balanced growth, (ii) improving operational efficiencies and reducing shrinkage levels by revising in-store business processes (iii) decreasing staff turnover, and (iv) adapting assortment and promo to a more local level.

"We are also positioning the Company to remain an industry leader in the years ahead by emphasising innovation, big data and omni-channel sales. We have identified the priorities for X5's strategy and are developing and implementing our key projects in these areas."

Profit and loss statement highlights(2)

Net retail sales

Total net retail sales growth reached 19.4% y-o-y in Q2 2018, driven by:

§ 1.0% increase in LFL sales; and

§ 18.4% y-o-y increase in net retail sales from net new space, resulting from a 23.3%y-o-y rise in selling space.

Selling space by format, square meters (sq. m) 

Q2 & H1 2018 LFL(5) store performance by format, % change y-o-y

In Q2 2018, LFL sales performance remained strong at 1.0% y-o-y.

For more details on net retail sales growth please refer to X5's Q2 2018 Trading Update.

Gross profit margin

The gross profit margin increased by 11 b.p. y-o-y to 24.0% in Q2 2018 due to some improvement in commercial margin as a result of promo level stabilization and a format mix effect from proportionally more sales coming from Perekrestok, with a higher commercial margin than the X5 average.

Selling, general and administrative (SG&A) expenses (excl. D&A&I)

In Q2 2018, SG&A expenses excluding D&A&I, LTI and share-based payments as a percentage of revenue increased by 149 b.p. to 16.9%, mainly due to increased staff costs, lease expenses, utilities and other expenses.

Staff costs (excluding LTI and share-based payments) as a percent of revenue increased by 54 b.p. y-o-y in Q2 2018 to 7.4%, mainly due to aligning in-store personnel compensation to market benchmarks, made in Q3 2017.

Lease expenses as a percentage of revenue in Q2 2018 increased by 37 b.p. y-o-y mainly due to the growing share of leased space in X5's total real estate portfolio (75% as of 30 June 2018, compared to 70% as of 30 June 2017) as well as lease inflation rising faster than food inflation.

Utilities costs as a percentage of revenue in Q2 2018 increased by 31 b.p. y-o-y to 1.9% due to tariffs growing faster than food inflation.

Other expenses as a percentage of revenue in Q2 2018 increased by 33 b.p. y-o-y to 0.9% mainly due to the low base effect of Q2 2017 associated with the release of provisions.

In H1 2018, SG&A expenses excluding D&A&I, LTI and share-based payments as a percentage of revenue increased by 136 b.p. to 17.5%, mainly due to increased staff costs, lease expenses, utilities and other expenses.

LTI and share-based payments expenses amounted to RUB 598 mln in Q2 2018. The Company accrued a liability for the second phase of the 2015 LTI programme and a liability for 2018 LTI programme.

Lease/sublease and other income

As a percentage of revenue, the Company's income from lease, sublease and other operations changed immaterially in Q2 2018 compared to Q2 2017, totalling 0.7%.

EBITDA and EBITDA margin

As a result of the factors discussed above, adjusted EBITDA in Q2 2018 increased to RUB 29,464 mln, or 7.7% of revenue, compared to RUB 29,165 mln, or 9.1% of revenue inQ2 2017.

In H1 2018, adjusted EBITDA totalled RUB 51,697 mln, decreasing as a percentage of revenue to 7.0% compared to RUB 51,869 mln, or 8.4% of revenue inH1 2017.

Segment reporting

In H1 2018, Pyaterochka's EBITDA margin decreased by 148 b.p. y-o-y to 7.6% due to higher level of known loss, increased compensation for in-store personnel in line with market benchmarks in Q3 2017, growth in lease expenses due to the growing share of leased space and the high base effect in H1 2017 associated with the release of provisions.

Perekrestok's EBITDA margin decreased by 73 b.p. y-o-y in H1 2018 to 6.3% mainly due to aligning in-store personnel compensation to market benchmarks, higher lease expenses due to the growing share of leased space and growth in utilities costs.

In H1 2018, Karusel's EBITDA margin declined by 126 b.p. y-o-y to 4.6% on the back of a higher share of promo, increased compensation for in-store personnel and the closing of six stores for refurbishment in Q2 2018.

Other segments include Perekrestok Express.

Corporate expenses rose by 10.1% y-o-y in H1 2018, mainly due to the formation of the Big Data Department in the Corporate Centre.

D&A&I

Depreciation, amortisation and impairment costs in Q2 2018 totalled RUB 12,631 mln, (RUB 22,666 mln for H1 2018), increasing as a percentage of revenue by 25 b.p. y-o-y to 3.3% (for H1 2018: up by 24 b.p. to 3.1%). This was due to continuous changes in the composition of buildings, with a growing share of fixtures and fittings versus foundation and frame driven by the growing share of leased space in X5's total real estate portfolio.

Non-operating gains and losses

Net finance costs in Q2 2018 increased by 8.2% y-o-y to RUB 4,444 mln. The effect from the higher level of gross debt as of 30 June 2018 compared to 30 June 2017 was partially offset by the decreased weighted average effective interest rate on X5's total debt from 9.85% for H1 2017 to 8.59% for H1 2018 as a result of declining interest rates in Russian capital markets and actions undertaken by X5 to minimise interest expenses.

In Q2 2018 income tax expense decreased by 14.6% y-o-y to RUB 2,914 mln. X5's effective tax rate for the quarter totalled 25.1%, driven by deferred tax on investments accrual in Q2 2018 associated with potential dividend payments.

Consolidated cash flow statement highlights

In Q2 2018, the Company's net cash from operating activities before changes in working capital increased y-o-y by RUB 748 mln, or 2.7%, and totalled RUB 28,742 mln. The lower change in working capital of RUB (8,126) mln in Q2 2018 compared to RUB (11,873) mln in Q2 2017 was due to seasonal decrease in accounts payable and a decline in accounts receivable due to VAT deductions driven by the transition to more effective interaction with counterparties. However, larger increase in inventories in Q2 2018 compared to Q2 2017 was driven by the growing share of regional stores with lower turnover.

Net interest and income tax paid in Q2 2018 increased by RUB 1,890 mln, or 39.4%, and totalled RUB 6,688 mln. The rise in interest paid was in line with the higher level of gross debt y-o-y. Income tax paid grew due to the increase in income tax accrued in Q1 2018 compared to Q1 2017.

As a result, in Q2 2018, net cash flows generated from operating activities totalled RUB 13,928 mln, compared to RUB 11,323 mln in Q2 2017.

In H1 2018, net cash flows generated from operating activities totalled RUB 27,632 mln, compared to RUB 10,905 mln for the same period of 2017 mainly due to improvements in working capital.

Net cash used in investing activities, which generally consists of payments for property, plant and equipment, increased to RUB 23,797 mln in Q2 2018 from RUB 19,138 mln in Q2 2017 due to cash payment for the acquisition of Polushka stores in Bashkortostan and partial payment for O'KEY's supermarket business. For H1 2018, net cash used in investing activities rose to RUB 49,453 mln from RUB 36,775 mln in H1 2017.

Net cash generated from financing activities grew to RUB 10,729 mln in Q2 2018 from RUB 8,372 mln in Q2 2017. This increase was related to the drawdown of available credit lines to finance the Company's investment programme. In H1 2018, net cash generated from financing activities decreased to RUB 8,027 mln from RUB 14,455 mln in H1 2017.

Liquidity update

As of 30 June 2018, the Company's total debt amounted to RUB 224,164 mln and comprised 28.3% short-term debt and 71.7% long-term debt. The Company's net debt/EBITDA ratio was 2.18x as of 30 June 2018, and according with the Company's business plan should gradually decrease during H2 2018.

The Company's debt is 100% denominated in Russian Roubles.

As of 30 June 2018, the Company had access to RUB 295,919 million in available credit limits with major Russian and international banks.

Related Party Transactions

For a description of the related party transactions entered into by the Company, please refer to note 7 of the consolidated condensed interim financial statements.

Risks and Uncertainties

X5's risk management programme provides executive management with a periodic and in-depth understanding of X5's key business risks and the risk management systems and internal controls in place to mitigate these risks. For a detailed description of key risks that the Company faces, please refer to the 2017 Annual Report. It should be noted that there are additional risks that management believe are immaterial or otherwise common to most companies, or that it is currently unaware of. The Company has assessed the risks for the second half of 2018 and believes that the risks identified are in line with those presented in the 2017 Annual Report. For a description of the financial risks faced by the Company, please refer to note 22 of the consolidated condensed interim financial statements and the Company's 2017 Annual Report.

Interim report

The interim report, including the full set of reviewed IFRS condensed consolidated interim financial statements and notes thereto, is available on X5's corporate website at:  

https://www.x5.ru/en/Pages/Investors/ResultsCenter.aspx

Information on Alternative Performance Measures

For more information on Alternative Performance Measures, which provide readers with a more detailed and accurate understanding of the Company's financial and operating performance, please refer to pages 104-107 of the Annual Report 2017.

(1) Adjusted EBITDA is EBITDA before costs related to the LTI programme, share-based payments and other one-off remuneration payments expense.

(2) Please note that in this and other tables, and in the text of this press release, immaterial deviations in the calculation of % changes, subtotals and totals are due to rounding.

(3) Net retail sales represent revenue from the operations of X5-managed stores net of VAT. This number differs from revenue, which includes proceeds from wholesale operations, direct franchisees (royalty payments) and other revenue.

(4) Including Perekrestok Express

(5) LFL comparisons of retail sales between two periods are comparisons of retail sales in local currency (including VAT) generated by the relevant stores. The stores that are included in LFL comparisons are those that have operated for at least 12 full months. Their sales are included in the LFL calculation starting from the day of the store's opening. We include all stores that fit our LFL criteria in each reporting period.

(6) As a result of IFRS 9 adoption the Company changed presentation of its condensed consolidated interim statement of profit or loss by reclassification of net impairment losses on financial assets out of selling, general and administrative expenses.

Note to Editors:

X5 Retail Group N.V. (LSE and MOEX: FIVE, Fitch - 'BB+', Moody's - 'Ba2', S&P - 'BB', RAEX - 'ruAA') is a leading Russian food retailer. The Company operates several retail formats: the chain of proximity stores under the Pyaterochka brand, the supermarket chain under the Perekrestok brand, the hypermarket chain under the Karusel brand and Express convenience stores under various brands.

As of 30 June 2018, X5 had 13,178 Company-operated stores. It has the leading market position in both Moscow and St Petersburg and a significant presence in the European part of Russia. Its store base includes 12,314 Pyaterochka proximity stores, 691 Perekrestok supermarkets, 93 Karusel hypermarkets and 80 convenience stores. The Company operates 40 DCs and 2,983 Company-owned trucks across the Russian Federation.

For the full year 2017, revenue totalled RUB 1,295,008 mln (USD 22,193 mln), Adjusted EBITDA reached RUB 99,131 mln (USD 1,699 mln), and adjusted net profit for the period amounted to RUB 33,768 mln (USD 579 mln). In H1 2018, revenue totalled RUB 734,077 mln (USD 12,368 mln), adjusted EBITDA reached RUB 51,697 mln (USD 871 mln), and net profit amounted to RUB 14,313 mln (USD 241 mln).

X5's Shareholder structure is as follows: CTF Holdings S.A. - 47.86%, Intertrust Trustees Ltd (Axon Trust) - 11.43%, X5 Directors - 0.06%, treasury shares - 0.01%, Shareholders with less than 3% - 40.64%.

Forward looking statements:

This announcement includes statements that are, or may be deemed to be, "forward-looking statements". These forward-looking statements can be identified by the fact that they do not only relate to historical or current events. Forward-looking statements often use words such as "anticipate", "target", "expect", "estimate", "intend", "expected", "plan", "goal", "believe", or other words of similar meaning.

By their nature, forward-looking statements involve risk and uncertainty because they relate to future events and circumstances, a number of which are beyond X5 Retail Group N.V.'s control. As a result, actual future results may differ materially from the plans, goals and expectations set out in these forward-looking statements.

Any forward-looking statements made by or on behalf of X5 Retail Group N.V. speak only as of the date of this announcement. Save as required by any applicable laws or regulations, X5 Retail Group N.V. undertakes no obligation publicly to release the results of any revisions to any forward-looking statements in this document that may occur due to any change in its expectations or to reflect events or circumstances after the date of this document.

Elements of this press release contain or may contain inside information about X5 Retail Group N.V. within the meaning of Article 7(1) of the Market Abuse Regulation (596/2014/EU).