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Ladies and gentlemen, thank you for standing by, and welcome to the X5 Retail Group Q1 2019 Financial Results Call. [Operator Instructions] I'd like to advise you the call is being recorded today, Thursday the 25th of April, 2019. I would now like to turn the conference over to your first speaker today, Natalia Zagvozdina, the Head of Corporate Finance and Investor Relations. Please go ahead.
Thank you. Good morning, good afternoon, ladies and gentlemen. On behalf of X5 Retail Group, let me welcome you to our call today dedicated to the release of our first quarter 2019 financials. Here with me today are our CFO, Svetlana Demyashkevich; our colleagues from IFRS Reporting and Investor Relations departments. I would like to remind you that some of the information announced during this call may contain suggestions and forward-looking statements regarding future events or future financial performance of X5. Please refer to Page 7 of our press release for a full disclaimer with regards to such statements. We disclosed the press release as well as financial statements this morning by our usual means of our communications, they are available on our website in the Investor Relations section. Now without further delay, let me pass the floor to our CFO, Svetlana Demyashkevich, please.
Thank you, Natalia. Good morning and good afternoon, ladies and gentlemen. Thank you for joining us today. Since we held our 2018 year-end financial results conference call just a month ago, I'm not going to give a long introduction. What I'd like to do is to briefly go through the market environment in first quarter, provide an overview of our financials and the monthly results in April, and then move to Q&A session. As you know from first quarter of 2019, X5 has started reporting its financial results under 2 standards: the new IFRS 16 as well with the old IAS 17 standard, which is comparable with the previous this year. I won't go into much detail on IFRS 16 as you can see all those numbers in today's press release, but we will be happy to answer your questions after the presentation. So to begin with, let me say a few words about the external environment. In first quarter 2019, food inflation continues to accelerate and approached 5.8% compared to 3.6% year-on-year in fourth quarter 2018. At the same time, our analyst community expects inflation to start slowing during the next quarter. Growth of food retail [indiscernible] in real terms in first quarter was 1.4% year-on-year compared with 1.6% in fourth quarter 2018. This trend was expected on the back of increasing inflationary pressure supported by the [indiscernible ] increase. Real disposable income showed a decline of 2.3% in first quarter compared with near 0% change in 2018. Weak real income performance is a key risk associated with food demand for 2019 as a whole. The market environment remains challenging, but we see a few positive trends for food retail sector. Food inflation is picking up, the unemployment rate is resuming. It was 4.7% in March. And the consumer confidence in this is slightly improving, to minus 16 from minus 17 in fourth quarter 2018. The ruble exchange rate depreciated by 6.2% over the first quarter and started the second quarter on a strong foot, helped by the high oil price. Moving onto X5's financial performance during the quarter. Revenue increased by 15.5% year-on-year to RUB 406 billion on the back of positive like-for-like sales of 5.0% and a 15.1% rise in selling space. X5's like-for-like sales growth accelerated quarter-on-quarter to 5.0% from 3.7% in last quarter of 2018 driven primarily by improved traffic. Like-for-like sales growth was positive for all X5 formats. X5's like-for-like traffic and basket growth accelerated to 2.7% and 2.2% respectively. I would like to stress that like-for-like traffic in Pyaterochka in Moscow turned positive during the first quarter after being negative in 2018. Like-for-like traffic in the Pyaterochkan regions other than Moscow also remained positive in the first quarter of 2019, just as it was in 2018. We had [indiscernible] positive like-for-like traffic dynamics for our efforts deemed as improving quality of products and services in our stores. This work is ongoing, and the year 2019 will see many more initiatives from our teams across all X5 formats in this area. Looking at margins in the first quarter. Gross profit margin increased by 98 basis points to 24.8%. The increase was driven mainly by successful measures to decrease shrinkages levels, especially in our proximity format and better efficiency in logistics while commercial margin remains flat year-on-year due to our balanced approach to promo. In first quarter 2019, SG&A expenses, excluding depreciation, amortization, impairments, LTI and share-based payments as a percentage of revenue, increased by 18 basis points year-on-year mainly due to higher staff costs, lease expenses and utilities costs. Adjusted EBITDA in first quarter increased by 32.6% year-on-year. Our adjusted EBITDA margin increased in line with gross margin by 94 basis points to 7.3%. In first quarter, we continued to accrue the expenses covering the old and new LTI programs. LTI expenses, including social taxes accrued for the old program totaled RUB 209 million, while LTI expenses for the probable achievements of the targets to maintain revenue leadership from the new LTI program amounted to RUB 236 million. Depreciation, amortization and impairment costs increased as a percentage of revenue by 23 basis points versus the same period last year to 3.1%. This was due to our continuously growing share of assets with shorter useful life in property, plants and equipment. Net finance costs increased by 2.1% year-on-year to RUB 4.3 billion due to the increased level of gross debt as of end of first quarter compared to end of March 2018. The effect from the increased level of gross debt was partially offset by the decreased weighted average effective interest rate on X5 total debt. In April, X5 issued RUB 5 billion in ruble-denominated bonds maturing in 3 years, with an annual coupon of 8.45%. As a result of our store network expansion, a balanced approach to [ promos ] and additional efficiencies achieved on different levels of our operations. In first quarter, the company net profit increased by 65.2% year-on-year to RUB 9.3 billion, while the net profit margin increased to 2.3%.Turning to our balance sheet. At the end of the quarter, our net debt-to-EBITDA ratio was at 1.6. Going forward, we seek to maintain this ratio below 1.8, while paying dividends in line with our policies. In second quarter of 2019, we expect total debt to increase due to the need to raise funds for an upcoming dividend payment plan for early June. Turning to the cash flow. Net cash flow generated from operating activities in first quarter was RUB 17.2 billion, up from RUB 13.7 billion a year ago. The change in working capital in first quarter was negative RUB 3.2 billion. This was mainly due to a decrease in accounts payable versus year-end 2018, which was partially compensated by a decline in inventories. The inventories declined from the level of product inventories in the seasonally high last quarter of the year that was sold during first quarter 2019. Net cash used in investment -- investing activities, which generally consist of payments for property, parts and equipment decreased from RUB 17.4 billion in first quarter compared to RUB 25.7 billion for the first quarter last year mainly due to the slower pace of new openings. [indiscernible] up on our first quarter 2019 performance, let me say a few words about CapEx. X5's total capital expenditure amounted to RUB 12.4 billion compared to RUB 16.4 billion in first quarter 2018. Approximately 67% of CapEx in first quarter went to the expansion of our store base. The remaining CapEx includes maintenance, around 13%; store refurbishments, around 6%; logistics, IT, around 4%; and other investments. Now just a few words on our quarter-to-date results. We see good results in April. Total turnover, including variety, grew by 14.6% year-on-year in 24 days of April. Please note that this year, the Easter will be on April 28, while last year, it was on April 8. So pre-Easter sales, which are normally notably higher than in other days of the month, are not yet reflected in month-to-date growth that we have given for 24 days. Based on last year's data, we estimate an additional impact from pre-Easter sales of more than 1% after net retail sales. Before Easter sales, our like-for-like sales growth in April so far is 4.2%, with traffic being the main driver. This concludes my brief presentation of the results. Thank you for the attention, and I will be happy to answer your questions.
[Operator Instructions] The first question we have today comes from the line of Maria Kolbina from VTB.
Congratulations on strong numbers for the first quarter that went ahead of consensus and our expectations, basically on all lines. So a question from my side. You showed quite significant gross margin expansion in the first quarter, which was almost 100 basis points, and I think it was the highest gross margin expansion over the last years. Do you think you will be able to maintain the same level of profitability in the second quarter or in the quarters to come? So can you provide any, like, estimates on that? My second question is on your shrinkages. I know that you don't openly talk about the level of shrinkage, but do you think you will be able to improve this ratios, this -- the shrinkage expense in this year? And what is your estimate on this improvement if? So you could comment on that. And maybe the third question, can you generally talk about the key market trends that you see for the first 4 months this year?
Well, thank you for your kind words about our results. We're also quite happy with them, honestly. And talking about gross margin. The main driver, as I was saying before, for this gross margin expansion is decrease in shrinkages level and logistics. So we still have targets within the year to improve this level. And we still see the positive trend to [indiscernible]. So I would expect that this positive factor will still be in place for the next quarters. At the same time, when we look at the commercial margin, it's stayed stable and depending on the seasonality, and you can understand the trends for commercial margins depending on the quarter, looking at our, for example, last year results. I would say that we will try to keep our promo levels at the levels compared with the last year. So we would expect that commercial margins will be performing, more or less, in accordance with the trends we have from last year. So at the same time as always, we do always look at the market, and if we need to do investments into the pricing also, we are ready to do that. We have additional surplus within our gross margin, I would say, based on the fact that shrinkages and logistics are improving ahead of the plan if you look at our budget. So I think that's probably answering the question on gross margin trends. And also the second question for me was on key market trends. For us, I would say that of course this year, this quarter, first quarter is much easier comparing with the first quarter last year because of the higher inflation and also all the changes we're doing in the 4 months and first of all in Pyaterochka. So for us probably, the main change is in our trends we see in Moscow. As I said, positive traffic in Moscow is a very good result for us. And we do expect that this effect from our operational projects and operational improvements we are doing in the 4 months will continue to give this positive results. What we also see is the -- that somewhat changes in behavior of our clients in Perekrestok that influences their baskets of Perekrestok. For example, we see that we have more younger clients. The chit for them is lower, but the frequency of coming back to supermarket is higher. We also see very strong trends for ready-to-eat assortments in all formats, and we are preparing for that. We launched our kitchen factory, which will be producing around 800 SKUs of ready-to-eat assortments. And also we see that this is given the fact of increasing frequency of clients coming to the store with a lower -- with lower average check. But overall, for Perekrestok, we're seeing that the results are exceptional, both in terms of like-for-like sales and like-for-like traffic. As I was commenting in the beginning, we still don't see a lot of positive changes in the consumer trends. But at the same time, we don't see any worsening of the situation and being presented in next segments, we think that at least improving our operations and our offer to customers, we are very well placed to benefit from the situation. And that we see, actually, in our improving traffic numbers and sales numbers and improving our sales advantages.
Okay. Coming back to gross margin. So is it fair to assume that gross margin levels should be closer to 25% in the next quarter based on IAS 17?
Well, you know that we're not giving such an exact guidance on gross margin, so probably I would not answer that.
[Operator Instructions] Thank you very much. There are no further questions on the phone at this stage.
Well, it appears that we have satisfied all the interested parties with our release and the presentation. Thank you very much for the attention. You know where to find us if you have any follow-up questions. The IR will be happy to answer those. Thank you. Have a good day. Bye.
Thank you very much. That does conclude the conference for today. Thank you for participating. You may all disconnect.