Company Announcements

X5 REPORTS 14.3% REVENUE GROWTH IN Q2 2019

ADJUSTED EBITDA MARGIN UNder IAS 17 REACHES 8.4%

ü X5 delivered revenue growth of 14.3% year-on-year (y-o-y) on the back of positive like-for-like (LFL) sales and selling space expansion.

ü Gross margin under IAS 17 improved by 105 b.p. y-o-y to 25.0% (25.4% under IFRS 16) in Q2 2019, mainly driven by decreasing shrinkage and improved logistics efficiency.

ü SG&A expenses under IAS 17 (excl. D&A&I, LTI and share-based payments) increased by 36 b.p. y-o-y to 17.3% as a percentage of revenue, mainly due to higher staff costs and other expenses.

ü Adjusted EBITDA⁽¹⁾ under IAS 17 increased by 24.2% y-o-y in Q2 2019, reflecting gross margin expansion, while the adjusted EBITDA margin under IAS 17 rose by 67 b.p. to 8.4% (13.3% under IFRS 16).

ü Net profit under IAS 17 increased by 55.5% y-o-y in Q2 2019. Net profit margin under IAS 17 increased by 82 b.p. to 3.1% (2.7% under IFRS 16).

ü The net debt/EBITDA ratio under IAS 17 was 1.59x as of 30 June 2019.

Amsterdam, 15 August 2019 - 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 2019, 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:

"In the continuing tough consumer demand environment I am pleased with the progress X5 is making. Our business is competing strongly, growing market share through increasing customer traffic and balanced network expansion, while delivering improving returns to investors and taking important steps to evolve into a digital-driven omnichannel retailer. On the back of improved profitability and reduced selling space growth, we continued to keep debt at comfortable levels after distributing dividends for the second year.

"Our performance in the second quarter was the result of ongoing efforts by the management team to improve operational efficiency through a number of initiatives involving new technological solutions and innovations. As an example, at our proximity format, shrinkage has declined due to new business processes and additional quality controls introduced by the new management team, while staff productivity has improved and staff turnover declined through adjustments to the compensation and motivation schemes.

"In addition to strong performance at our bricks-and-mortar business, we continue to develop X5's online and omnichannel offerings. Our parcel locker and pickup point network continues to grow by utilising our logistics and transport network to deliver third-party goods ordered online. Our own online supermarket, Perekrestok.ru, handled 266 thousand orders in Q2 2019, which is more than four times higher year-on-year and keeps us on track to become Russia's leading online food retailer by the end of next year.

"We paid RUB 25 billion FY 2018 in dividends in June, which represents an 87.3% payout ratio. I believe that our performance in the first half of 2019 has built a solid base for the next dividend, which we plan to pay out next year."

Note:  The financial measures under IAS 17 are used in this financial results press-release as upon adoption of IFRS 16 management continued to apply IAS 17 for leases for the performance assessment mainly due to the absence of comparatives under IFRS 16. The reconciliation of IAS 17 and IFRS 16 figures is presented further in Section "Effect of IFRS 16 on X5 Retail Group's financial statements".

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

Profit and loss statement highlights⁽²⁾

* For more details on IFRS 16 impact please refer to page 8.

Net retail sales

Total net retail sales growth reached 14.4% y-o-y in Q2 2019, driven by:

§ 5.0% increase in LFL⁽⁴⁾ sales; and

§ 9.4% y-o-y increase in net retail sales from net new space, resulting from a 14.1%
y-o-y rise in selling space.

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

Q2 & H1 2019 LFL store performance by format, % change y-o-y

In Q2 2019, LFL sales performance remained strong at 5.0% y-o-y.

For more details on net retail sales growth please refer to X5's Q2 2019 Trading Update.

(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)  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 profit margin under IAS 17 increased by 105 b.p. y-o-y to 25.0% in Q2 2019. The increase was driven primarily by successful measures to decrease shrinkage levels and better logistics efficiency, while the commercial margin remained flat y-o-y due to balanced promo activity.

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

* For more details on IFRS 16 impact please refer to page 8.

In Q2 2019, SG&A expenses excluding D&A&I, LTI and share-based payments under IAS 17 as a percentage of revenue increased by 36 b.p. to 17.3%, mainly due to increased staff costs and other expenses.

Staff costs (excluding LTI and share-based payments) as a percent of revenue increased by 31 b.p. y-o-y in Q2 2019 to 7.8%, mainly due to initiatives to decrease staff turnover in order to improve service level in stores by aligning in-store personnel compensation to market benchmarks at the end of 2018, primarily at Pyaterochka.

LTI and share-based payments expenses amounted to RUB 464 mln in Q2 2019.

Lease expenses under IAS 17 as a percentage of revenue in Q2 2019 decreased by 3 b.p. y-o-y. The impact of a growing share of leased space in X5's total real estate portfolio was offset by a positive operating leverage effect from strong LFL store sales growth.

Utilities costs as a percentage of revenue in Q2 2019 decreased by 4 b.p. y-o-y to 1.9% due to strong LFL growth offsetting utility cost inflation.

(5)  The Company made a decision to reclassify income from sale of recyclable materials from other expenses (SG&A) to lease/sublease and other income as of 1 January 2019. Other expenses include acquiring and encashment costs, property tax, travel costs, etc.

Other expenses under IAS 17 as a percentage of revenue in Q2 2019 increased by 15 b.p. y-o-y to 1.0% due to the reclassification as of 1 January 2019 of proceeds from sale of recyclable materials to other income and an increase in acquiring costs driven by increasing penetration of card payments.

In H1 2019, SG&A expenses excluding D&A&I, LTI and share-based payments under IAS 17 as a percentage of revenue increased by 27 b.p. to 17.8%, mainly due to increased staff costs and other expenses.

Lease/sublease and other income

As a percentage of revenue, the Company's income from lease, sublease and other operations under IAS 17 totalled 0.6%, a decrease of 6 b.p. y-o-y in Q2 2019, supported by the reclassification of income from sale of recyclable materials from SG&A expenses⁽⁵⁾.

EBITDA and EBITDA margin

* For more details on IFRS 16 impact please refer to page 8.

Segment reporting (under IAS 17)

Upon adoption of IFRS 16 the Management Board continued assessment of the performance of the operating segments based on a measure of sales and adjusted EBITDA under IAS 17.

The accounting policies used for segments are the same as accounting policies applied for the condensed consolidated interim financial statements, except for the accounting of leases under IAS 17 instead of IFRS 16.

In H1 2019, Pyaterochka's EBITDA margin under IAS 17 increased by 87 b.p. y-o-y to 8.5%, driven primarily by gross margin expansion due to successful measures to decrease shrinkage levels and better logistics efficiency.

Perekrestok's EBITDA margin under IAS 17 increased by 74 b.p. y-o-y in H1 2019 to 7.0%, mainly due to positive operating leverage effect, in particular deceleration of staff costs and lease and other expenses as a percentage of revenue.

In H1 2019, Karusel's EBITDA margin under IAS 17 declined by 28 b.p. y-o-y to 4.3%, as the format continues to suffer from the structural outflow of customers to proximity formats and online shopping options, leading to negative operating leverage in hypermarkets. The transfer of three hypermarkets to Perekrestok in H1 2019 also created pressure on Karusel's margins.

Other segments include Perekrestok Express, which was fully closed in March 2019.

Corporate expenses under IAS 17 rose by 11.6% y-o-y in H1 2019, mainly due to additional costs related to development of HR and security departments.

D&A&I

Depreciation, amortisation and impairment costs under IAS 17 in Q2 2019 totalled RUB 13,803 mln, (RUB 26,312 mln for H1 2019), decreasing as a percentage of revenue by 15 b.p. y-o-y to 3.2% (for H1 2019: down by 3 b.p. to 3.1%). This was due to revenue growth outpacing the growth of gross book value of assets.

Non-operating gains and losses

* For more details on IFRS 16 impact please refer to page 8.

Net finance costs under IAS 17 in Q2 2019 decreased by 6.5% y-o-y to RUB 4,154 mln due to lower gross debt and a decrease in the weighted average effective interest rate on X5's total debt from 8.59% for H1 2018 to 8.14% for H1 2019 as a result of declining interest rates in Russian capital markets, as well as actions taken by X5 to minimise interest expenses. In H1 2019, the weighted average effective interest rate was the lowest since X5 started borrowing solely in the Russian ruble.

In Q2 2019 income tax expense under IAS 17 increased by 62.6% y-o-y to RUB 4,738 mln due to the low base of Q2 2018 impacted by an amended tax return. X5's effective tax rate under IAS 17 for the quarter totalled 26.0% (including the accrual of deferred tax on investments associated with potential dividend payments).

Consolidated cash flow statement highlights

* For more details on IFRS 16 impact please refer to page 8.

In Q2 2019, the Company's net cash from operating activities before changes in working capital under IAS 17 increased by RUB 7,550 mln, or 26.3% y-o-y, and totalled RUB 36,292 mln. The positive change in working capital under IAS 17 of RUB 1,939 mln in Q2 2019 compared to negative RUB (8,126) mln in Q2 2018 was mainly due to an increase of accounts payable and lower increase of inventories y-o-y due to better inventory management.

Net interest and income tax paid under IAS 17 in Q2 2019 decreased by RUB 276 mln, or 4.1% y-o-y, and totalled RUB 6,412 mln. The decline in interest paid was in line with the lower level of gross debt and lower effective interest rate y-o-y. Income tax paid under IAS 17 decreased y-o-y due to a one-off tax refund in Q2 2019 following tax overpayment in previous periods.

As a result, in Q2 2019, net cash flows generated from operating activities under IAS 17 totalled RUB 31,819 mln, up 128.5% from RUB 13,928 mln in Q2 2018.

In H1 2019, net cash flows generated from operating activities under IAS 17 totalled RUB 49,032 mln, up 77.4% from RUB 27,632 mln for the same period of 2018.

Net cash used in investing activities under IAS 17, which generally consists of payments for property, plant and equipment, decreased to RUB 18,187 mln in Q2 2019 from RUB 23,797 mln in Q2 2018, reflecting slower pace of openings and more discipline in capex allocation. For H1 2019, net cash used in investing activities under IAS 17 decreased to RUB 35,559 mln from RUB 49,453 mln in H1 2018.

Net cash used in financing activities under IAS 17 totalled RUB 14,963 mln in Q2 2019 compared to net cash generated from financing activities of RUB 10,729 mln in Q2 2018.

Liquidity update

As of 30 June 2019, the Company's total debt under IAS 17 amounted to RUB 212,055 mln and comprised 28.2% short-term debt and 71.8% long-term debt. The Company's net debt/EBITDA ratio under IAS 17 was 1.59x as of 30 June 2019.

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

As of 30 June 2019, the Company had access to RUB 341,073 million in available credit limits with major Russian and international banks.

Effect of IFRS 16 on X5 Retail Group's financial statements

Effect on gross profit

Gross profit and gross margin are higher by RUB 1,681 mln and 38 b.p. under IFRS 16 compared to IAS 17 in Q2 2019 (RUB 3,282 mln and 39 b.p. in H1 2019), respectively, due to the lease for distribution centers, which was previously part of cost of sales, but has been excluded from the gross profit calculation.

Effect on EBITDA, operating profit and finance costs

Lease expenses, other store costs, third party services and other expenses in the total amount of RUB 19,628 mln have been excluded from SG&A expenses in Q2 2019 (RUB 39,307 mln in H1 2019) under the new standard. Additional depreciation of RUB 14,365 mln related to leased assets has been added under operating costs in Q2 2019 (RUB 28,886 mln in H1 2019) under IFRS 16.

Financial costs increased by RUB 9,326 mln under the new standard compared to IAS 17 due to the interest expense on lease liabilities in Q2 2019 (RUB 18,554 mln in H1 2019).

The implementation of IFRS 16 increases the Company's EBITDA significantly, as lease expenditure previously recognised in the income statement is excluded. Adjusted EBITDA margin is 491 b.p. higher under the new standard compared to IAS 17 in Q2 2019 (507 b.p. in H1 2019). Interest expense on liability is recognised in finance costs, below the EBITDA level.

Effect on net profit

The net FX result is RUB 281 mln higher under IFRS 16 compared to IAS 17 in Q2 2019 (RUB 1,563 mln in H1 2019) due to revaluation of foreign currency liabilities resulting from lease contracts denominated in foreign currencies.

IFRS 16 resulted in lower income tax expense due to lower profit before tax. The effective tax rate under the new standard is 26.6% in Q2 2019 and H1 2019.

Net profit and net profit margin are impacted by the IFRS 16 standard as a result of additional depreciation and interest, and are lower by RUB 1,531 mln and 35 b.p. under the new standard compared to IAS 17 in Q2 2019 (RUB 2,493 mln and 30 b.p. in H1 2019).

Effect on cash flow statement

The implementation of the new standard affects cash flow statement presentation but not the net change in cash result, as principal payments on leases will be classified as financing activities, prepayments are classified as investing activities, and interest payments are considered interest paid in operating activities.

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 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 2018 Annual Report. It should be noted that there are additional risks that management believe are immaterial or otherwise common to most companies, or that management is currently unaware of. The Company has assessed the risks for the first half of 2019 and believes that the risks identified are in line with those presented in the 2018 Annual Report. For a description of the financial risks faced by the Company, please refer to note 30 of the audited consolidated financial statements and the Company's 2018 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 122-125 of the Annual Report 2018.

Note to Editors:

X5 Retail Group N.V. (LSE and MOEX: FIVE, Fitch - 'BB+', Moody's - 'Ba1', 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 and the hypermarket chain under the Karusel brand.

As of 30 June 2019, X5 had 15,260 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 14,385 Pyaterochka proximity stores, 785 Perekrestok supermarkets and 90 Karusel hypermarkets. The Company operates 42 DCs and 3,952 Company-owned trucks across the Russian Federation.

For the full year 2018, revenue totalled RUB 1,532,537 mln (USD 24,439 mln), Adjusted EBITDA reached RUB 109,871 mln (USD 1,752 mln), and net profit for the period amounted to RUB 28,642 mln (USD 457 mln). In H1 2019, revenue totalled RUB 843,175 mln (USD 12,905 mln), adjusted EBITDA reached RUB 66,072 mln (USD 1,011 mln), and net profit amounted to RUB 22,805 mln (USD 349 mln).

X5's Shareholder structure is as follows: CTF Holdings S.A. - 47.86%, Intertrust Trustees Ltd (Axon Trust) - 11.43%, X5 Directors - 0.08%, treasury shares - 0.01%, Shareholders with less than 3% - 40.62%.

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).