X5 reports 27.5% revenue growth in Q2 2017

X5 reports 27.5% revenue growth in Q2 2017

 EBITDA MARGIN IMPROVES BY 73 B.P. TO 8.7%

ü Revenue growth accelerated from 26.5% in Q1 2017 year-on-year (y-o-y) to 27.5% in Q2 2017 year-on-year (y-o-y) on the back of solid like-for-like (LFL) sales and strong selling space expansion.

ü Pyaterochka was the main driver of growth: net retail sales rose by 31.9% y-o-y.

ü X5 added a total of 689 new stores in Q2 2017, delivering selling space growth of 270.6 th. sq. m.

ü The gross margin improved by 12 b.p. y-o-y to 23.9% in Q2 2017 (margin had been lower in Q2 2016 due to tactical promotions carried out during the period).

ü SG&A expenses (excl. D&A&I) as a percentage of revenue improved by 64 b.p. y-o-y to 15.9%, due to operational efficiency gains and as a result of operating leverage.

ü EBITDA grew by 39.1% y-o-y and reached RUB 27,833 mln in Q2 2017. The EBITDA margin improved by 73 b.p. y-o-y in Q2 2017 to 8.7%.

ü Despite continued strong top-line growth, the Company's net debt/EBITDA ratio remained at a comfortable level of 1.83x as of 30 June 2017, thanks to increased self-funding as a result of good returns and high-quality investments over the last three years.

Amsterdam, 2 August 2017 - X5 Retail Group N.V. ("X5" or the "Company"), a leading Russian food retailer (LSE ticker: FIVE), today released its interim report for the three months (2Q) and six months (1H) ended 30 June 2017, 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's Chief Executive Officer Igor Shekhterman said:

"I am very pleased with the results that we managed to achieve in the first half of 2017, with revenue growth of 27% and an EBITDA margin of 8.1%. In addition, I would highlight the excellent performance of X5's three major formats, which all showed positive LFL growth.

"We remain the fastest growing public retailer in Russia and are moving steadily towards achieving our long-term aim of having 15% of the food retail market in Russia by the end of 2020. At the same time, we are growing while continuing to implement a customer centric approach, as we carefully adapt our value proposition to meet consumer needs. For example, in April we launched a loyalty programme at Pyaterochka, which generated very positive feedback from our customers and we are already seeing the results of this programme.

"I would also point out that we are starting to benefit from our efforts to increase operational efficiency. Not only have they helped to enhance the customer experience overall, they have also translated into higher levels of profitability.

"Looking ahead, I am confident that we can continue to outpace the market in terms of our growth, as we maximise performance across all three of our core formats, thanks to our efficient, decentralised business model."

Profit and loss statement highlights (1)

(1) 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.

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

Net retail sales

Q2 & H1 2017 average ticket, number of customers, net retail sales growth by formats, % change y-o-y

Total net retail sales growth accelerated to 27.7% y-o-y, driven by:

§ 6.6% increase in LFL sales; and

§ 21.1% y-o-y increase in net retail sales from net new space, resulting from a 28.7% y-o-y rise in selling space.

Pyaterochka was the key driver for X5's Q2 growth: net retail sales increased by 31.9% y-o-y.

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

Q2 & H1 2017 LFL(3) store performance by format, % change y-o-y

In Q2 2017, LFL sales performance remained strong at 6.6% y-o-y.

For more details on net retail sales growth please refer to X5's Q2 2017 Trading Update.

(3) 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.

Gross profit margin

The gross margin improved by 12 b.p. y-o-y to 23.9% in Q2 2017 on the back of a low base effect from the same period last year.

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

In Q2 2017, SG&A expenses excluding D&A&I as a percentage of revenue were down y-o-y by 64 b.p. to 15.9% (by 104 b.p. to 15.4% excluding the LTI and share-based payments), mainly due to improved staff costs (excluding LTI and share-based payments), utilities, other store costs and other expenses.

Staff costs (excluding LTI and share-based payments) as a percentage of revenue were reduced y-o-y by 30 b.p. in Q2 2017 to 6.9%, mainly due to the positive operating leverage effect.

LTI is a two-stage programme that will be in effect at the Company until 31 December 2019. Each stage of the programme includes a deferred component of conditional payouts, maintaining focus on long-term goals throughout the programme and also providing for an effective retention mechanism. The Company met the targets for the first stage of the LTI programme and its deferred component as of 31 December 2015 and as of 31 December 2016, respectively, and started to make an accrual for the second stage of the LTI programme in the financial statements for the year ended 31 December 2016.

As previously disclosed by the Company, it is management's assessment that the targets under the second stage of the programme are likely to be achieved in the near term. Moreover, based on the Company's performance in the first half of 2017 the probability of achieving the targets set for the deferred component of the second stage have increased, therefore starting from Q2 2017 the Company began to accrue expenses for the deferred component of the second stage of the programme. All the described changes will not lead to an increase of total available fund for all payouts under the LTI programme.

Lease expenses as a percentage of revenue in Q2 2017 slightly decreased y-o-y by 2 b.p. to 4.5%. The effect from the growing share of leased space (70% as of 30 June 2017, compared to 65% as of 30 June 2016) was offset by improved rental terms from property owners.

Utilities costs as a percentage of revenue declined y-o-y by 7 b.p. to 1.6% in Q2 2017 due to the continued effect from installation of energy-efficient equipment in stores and distribution centres and the positive effect from abnormally low temperatures in the reporting period, which led to lower electricity consumption.

Other store costs decreased by 28 b.p. as a percentage of revenue in Q2 2017 compared to Q2 2016, driven by a reduction in security costs and lower maintenance and repair expenses.

In Q2 2017, third-party services expenses as a percentage of revenue changed immaterially compared to Q2 2016.

In Q2 2017, other expenses as a percentage of revenue decreased by 40 b.p. y-o-y, primarily due to higher income from sale of recyclable materials and release of provisions.

In H1 2017, SG&A expenses as a percentage of revenue decreased y-o-y by 66 b.p. to 16.5% due to the impact of operational efficiency projects and operating leverage.

Lease/sublease and other income

As a percentage of revenue, the Company's income from lease, sublease and other operations changed immaterially in Q2 2017 compared to Q2 2016.

EBITDA and EBITDA margin

As a result of the factors discussed above, EBITDA in Q2 2017 grew by 39.1% and totalled RUB 27,833 mln, or 8.7% of revenue, compared to RUB 20,005 mln, or 8.0% of revenue in Q2 2016.

In H1 2017, EBITDA increased by 37.0% and amounted to RUB 50,000 mln, or 8.1% of revenue, compared to RUB 36,498 mln, or 7.6% of revenue, in the corresponding period of 2016.

Segment reporting

In H1 2017, Pyaterochka's EBITDA margin increased y-o-y by 82 b.p. to 9.1%, driven by the solid performance of mature stores operating under the new concept.

Perekrestok's EBITDA margin decreased by 20 b.p. in in H1 2017 to 7.0% mainly due to quarterly LTI expenses accrual starting from Q4 2016.

In H1 2017, Karusel's EBITDA margin improved y-o-y by 48 b.p. to 5.8% on the back of further optimisation of the store portfolio, improved in-store efficiencies and stores opened in Q4 2015 having reached maturity.

Other segments include Perekrestok Express, where the EBITDA margin decreased y-o-y to 2.1% in H1 2017, mainly due to negative operating leverage effect.

Corporate expenses increased by 56.7% y-o-y in H1 2017 due to the transition to quarterly LTI expenses accrual starting from Q4 2016.

D&A&I

Depreciation, amortisation and impairment costs in Q2 2017 totalled RUB 9,794 mln (RUB 17,502 mln for H1 2017), increasing y-o-y as a percentage of revenue by 85 b.p. to 3.1% (for H1 2017: up by 65 b.p. to 2.9%). This was due to significant changes in composition of buildings, with a growing share of fixtures and fittings versus foundation and frame.

Non-operating gains and losses

Net finance costs in Q2 2017 declined y-o-y by 7.4% to RUB 4,107 mln due to the decreased weighted average effective interest rate on X5's total debt from 11.67% for H1 2016 to 9.85% for H1 2017 as a result of declining interest rates in Russian capital markets and actions undertaken by X5 to minimise interest expenses.

In April 2017, X5 issued its debut RUB 20 bln Eurobond due April 2020 with a coupon rate of 9.25% p.a. In May 2017, X5 issued 001P-02 series exchange-listed corporate bonds in the total amount of RUB 10 bln with a coupon rate 8.45% and a 3.5-year put option.

In Q2 2017, income tax expense increased by 58.2% vs Q2 2016 and reached RUB 3,411 mln mainly due to business growth and release of tax provision in Q2 2016.

Consolidated cash flow statement highlights

In Q2 2017, the Company's net cash from operating activities before changes in working capital increased by RUB 7,872 mln, or 39.1%, and totalled RUB 27,994 mln. The change in working capital increased to RUB 11,873 mln in Q2 2017 from RUB 2,914 mln in Q2 2016 primarily due to changes in accounts payable and accounts receivable as a result of the expansion of direct import operations, the effect from an increasing speed of invoicing due to further integration of electronic document interchange (EDI) and as a result of amendments to the Trade Law.

Net interest and income tax paid in Q2 2017 increased by RUB 145 mln, or 3.1%, and totalled RUB 4,798 mln. Interest paid decreased due to the lower weighted average effective interest rate on X5's debt for Q2 2017. Income tax paid increased due to business growth and the effect from tax offset in Q2 2016 following tax overpayment in 2015.

As a result, in Q2 2017, net cash flows generated from operating activities totalled RUB 11,323 mln, compared to a RUB 12,555 mln for the same period of 2016.

In H1 2017, net cash flows generated from operating activities totalled RUB 10,905 mln, compared to a RUB 18,281 mln for the same period of 2016 mainly due to the changes in working capital.

Net cash used in investing activities, which generally consists of payments for property, plant and equipment, totalled RUB 19,138 mln in Q2 2017, compared to RUB 18,596 mln for the same period last year. The higher expenditures on store expansion was offset by lower investments in the refurbishment programme for Pyaterochka stores, which is almost completed. Х5 added 270.6 th. sq. m. of selling space in Q2 2017, a 16.1% y-o-y increase. For H1 2017, net cash used in investing activities increased to RUB 36,775 mln from RUB 33,531 mln in H1 2016. X5 added 519.2 th. sq. m. of selling space in H1 2017, which is a 25.4% increase y-o-y.

Net cash generated from financing activities increased to RUB 8,372 mln in Q2 2017 from RUB 6,979 mln for Q2 2016. In H1 2017, net cash generated from financing activities increased to RUB 14,455 mln from RUB 11,728 mln for H1 2016. The increase was related to the drawdown of available credit lines and bonds issued to finance the Company's investment programme.

Liquidity update

As of 30 June 2017, the Company's total debt amounted to RUB 170,635 mln and comprised 27.2% short-term debt and 72.8% long-term debt. The Company's debt is 100% denominated in Russian Roubles.

As of 30 June 2017, the Company had access to RUB 298,696 mln of available credit limits from major Russian and international banks.

Related Party Transactions

For a description of the related party transactions entered into by the Company we 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 and internal controls in place to mitigate these risks. For a detailed description of all risks we refer to the Annual Report 2016. It should be noted that there are additional risks that management believe are immaterial or otherwise common to most companies, or that we are currently unaware of. The Company has assessed the risks for the second half of 2017 and believes that the risks identified are in line with those presented in the Annual Report 2016. For a description of the financial risks faced by the Company we refer to note 20 of the consolidated condensed interim financial statements and the Company's Annual Report 2016.

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 138-141 of the Annual Report 2016.

Note to Editors:

X5 Retail Group N.V. (LSE: FIVE, Fitch - 'BB', Moody's - 'Ba2', S&P - 'BB') 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 2017, X5 had 10,506 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 9,688 Pyaterochka proximity stores, 557 Perekrestok supermarkets, 90 Karusel hypermarkets and 171 convenience stores. The Company operates 36 DCs and 2,425 Company-owned trucks across the Russian Federation.

For the full year 2016, revenue totalled RUB 1,033,667 mln (USD 15,420 mln), Adjusted EBITDA reached RUB 79,519 mln (USD 1,186 mln), and net profit for the period amounted to RUB 22,291 mln (USD 333 mln). In H1 2017, revenue totalled RUB 613,879 mln (USD 10,587 mln), EBITDA reached RUB 50,000 mln (USD 862 mln), and net profit amounted to RUB 18,698 mln (USD 322 mln).

X5's Shareholder structure is as follows: Alfa Group - 47.86%, Intertrust Trustees Ltd (Axon Trust) - 11.43%, X5 Directors - 0.06%, treasury shares - 0.01%, Shareholders with less than 3% - 40.63%.

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).