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Good day, and thank you for standing by. Welcome to the X5 Retail Group Q1 2021 Financial Results Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions]I would now like to hand the conference over to your first speaker for today, Natalia Zagvozdina, Head of Corporate Finance and IR. Please go ahead.
Thank you, operator. Good morning, good afternoon, ladies and gentlemen. On behalf of X5, let me welcome you to our call today dedicated to the first quarter 2021 financial results, which are presented according to IFRS 16 as well as pre-IFRS 16 accounting standards. Our management today will be discussing the results on a pre-IFRS 16 basis.We'd like to remind you that some of the information announced during this call may contain projections and forward-looking statements regarding future events or future financial performance of X5. Please refer to Page 7 of our press release for the full disclaimer with regards to such statements. The press release as well as financial statements were published this morning and are available on our website in the Investor Relations section.Speakers on the call today are Igor Shekhterman, X5 Retail Group's CEO; and Svetlana Demyashkevich, our CFO. Also present at our discussion today is Vsevolod Starukhin, currently the adviser to CEO.At this point, let me pass the floor to X5 Retail Group's CEO, Mr. Shekhterman. Igor, please?
Thank you, Natalia. Good morning and good afternoon, ladies and gentlemen. Thank you for joining us today in the call. I would like to begin with an update on X5 operations over the last few months. After that, our CFO, Svetlana Demyashkevich, will provide more details on our results and give an overview of year-to-date trading. Following our presentation, we will be happy to take all your questions.Before we move on, I would like to comment on the untiming changes to our management team. As you may know, on May 17, Svetlana Demyashkevich will step down as our CFO as she will take a new project for Alfa Group. This includes overseeing the launch of new branch between X5 and Alfa Bank in the fintech sector. Svetlana will continue working as my adviser in order to ensure a smooth transition. From May 17, Vsevolod Starukhin will become the company's CFO. Vsevolod is an experienced manager with a background in a variety of industries, which includes financial management in the Russian and international FMCG sector as well as an operational management and experience with the functional and digital transformation of company as a CEO. We are confident that the diversity of Vsevolod's experience, combined with his professional competencies and personnel quality, will help X5 to implement its strategy. We expect Vsevolod to continue work on effective financing of new business while also contributing to X5 targets to improve the efficiency of our traditional formats.I would also like to take this opportunity to thank Svetlana for her valuable contribution to developing a successful, efficient and digital finance function at X5. Her efforts in this area have helped significantly reduce funding costs and build productive relationships with investors, analysts and credit rated agencies. Under her management, we significantly strengthened X5 risk and internal control systems as well as improved the budgeting noncommercial procurement and investment process. I am confident that her experience and knowledge will be available to support X5 in launching even dark stores. Svetlana, thank you on behalf of the entire X5 team.I will now summarize X5's key developments in Q1 2021 and the progress of our online businesses. Given that we held our 2020 financial results conference call just a month ago, I will refrain from giving a long introduction. Revenue increased by 7 -- by 8.1% year-on-year driven by 6.4% growth in off-line sales and 1.7% contribution to sales from our digital businesses. Last year, we had 2 assets pushing quarterly sales higher as the extra Leap Year day in February and abnormal consumer demand starting from March 14 where customer began to stock up ahead of the COVID lockdown. Excluding both of this one-off effect, our normalized revenue growth would have been 13.2%, which I personally consider a solid result.In Q1, X5 sustained market leadership in the grocery by total delivery from our pro and express delivery services. In Q1, total monthly active user of X5 digital services increased by 91% year-on-year to 14.7 million. Sales increased across all formats and channels. Like-for-like sales remained positive despite the higher base effect in Q1 last year when our like-for-like was 5.7%.In Q1 2021, we improved our gross margin to 25.2%. This was largely a result of our improved commercial margin, shrinkages level and increased logistics efficiently.Our EBITDA margins including LTI -- excluding LTI, remained stable at 7.0% under pre-IFRS 16 standard. I would like to specifically focus on 63 basis point improvement in EBITDA margin of our region for Pyaterochka, which reflects the team's successful efforts to boost efficiently of operation. The margin improvement comes despite the fast-growing express delivery services, which has accounted for the format margin. Improvement in profitability generated by Pyaterochka enable us to balance our temporary weaknesses in Perekrestok Vprok margin. And what is more important, to invest in new digital businesses in 5Post in high discount and to do so without the impact on the consolidated margin of the group.While the pandemic is not fully over, we are well placed to build on the momentum of the successful past year. We continue to strength our core business while developing our digital business and online capability. We, as always, remain committed to providing great value and support to our customer in challenging time.In Q1, we continued our program to refurbish Pyaterochka and Perekrestok stores, in line with our plan to refurbish 1,500 stores this year. New concept store continued to demonstrate significantly higher like-for-like sales growth and NPS level with the pro successors, and by the end of the March, represented 17 of our Pyaterochka and 14 of Perekrestok stores.Like our digital competitor, we see huge market potential in the grocery and aim at 20% share of this market segment in 2023. As a Russia region food retailer, we have important advantage over our competitors due to our vast infrastructure, purchasing power and data on customer preferences in groceries. We are aware, however, that achieving this growth will require to sustain certain levels of investment in growth. We are considering various option of future development of our digital businesses after planned cap out into a separate company and would be able to share more detail on it later this year.Revenue from our digital business grew by 4.6x in Q1 2021, with pro and express delivery successfully fulfilling over 74,000 daily order during peak period in March. Or digital business as a share of digital sales saw its fastest growth in Moscow and the Moscow region where our penetration to sales reached 4% in Q1 2021. And Perekrestok Vprok continued to expand organically by growing its assortment, attracting new and retaining existing customers. Its total number of project doubled year-on-year base to 1.2 million in Q1. This service fulfilled 15,000 daily order on peak days.We continue to expand the reach of our express delivery from Pyaterochka proximity store and Perekrestok supermarket. It is now available in 24 cities from 1,300 stores. The service fulfilled on average 45,600 orders per day in Q1. The number of unique customers using these services exceeded 500,000 in March. Despite its relatively recent launch in December 2018, express delivery contributed 52% to X5 total digital revenue in Q1 this year. We see significant growth potential for this segment.Orders fulfilled by X5 post e-commerce delivery service reached 4 million in Q1 2021 from 17,000 pickup points. The online hypermarket pro through Pyaterochka is expanding its original delivery and it's roped by using existing 5Post infrastructure. The service will be made available in 43 regions by the end of June. This means it will be accessible to 66% of the country population. This will delay the foundation for developing the online hypermarket into the marketplace. By making use of X5's existing infrastructure, it will have a unique competitive edge. Over the course of this transformation of pro Pyaterochka assortment will be doubled and reached over 100,000 SKU by the end of the current year.In April, we announced the acquisition of Mnogo Lososya to enter the kitchen market segment. This deal diversifies our Ready Food business. While the kitchen currently cover just 5% of the ready-to-delivery market, their growth outpace our online HoReCa segment. Our Okolo aggregator already features Mnogo Lososya registered brands in its offer.To ensure that X5 covers all stages of the customer journey, we're now planning to launch a media platform in a few months that we will spend and price comparison sites. This will be available through online platform and the mobile app. It will enable us to communicate with the customer more efficiently and to enable us to suggest food purchasing options. In fact, including payments and subscription, another area of focus for X5 for this year.By the end of 2021, we plan to launch a subscription service that will offer customers the opportunity to receive special discount at X5 and partner store. Together with Alfa Bank, X5 also begin offering fintech service to its clients as part of the digital discount project. This project will include integrating a new payment solution into the mobile application for all X5 businesses.I would like now to hand over to X5's CFO, Svetlana Demyashkevich. Thank you for your attention.
Thank you, Igor. Good morning, good afternoon, ladies and gentlemen. Thank you for joining our call today.As you already know, from next month, I take on a new role overseeing the launch of new venture between X5 and Alfa Bank to develop retail financial services. In the 4 years that I have been with the company, we have assembled a very professional financial team. We've introduced systemic changes to improve business efficiency, resulting in growing returns. It has been a great experience working in the management team of a public company, and I'm very grateful to Igor and to all members of X5 Supervisory Board for that opportunity.Let me start today as usual with the external environment. Food inflation in first quarter accelerated to a quarterly average of 7.4% year-on-year from 5.8% in fourth quarter 2020, peaking in February up to 7.7%. Key drivers included fruit and vegetables with price inflation of 13.5%. Sugar, eggs and vegetable oil categories, this was influenced by rising global soft commodities, price inflation and the weaker ruble.Consumer demand continued to recover and reached minus 1.1% year-on-year in first quarter compared to minus 3.8% year-on-year in fourth quarter. Nominal wage growth averaged 4.8% during the quarter, slightly decelerating from 5.3% in January to 4.6% in March. Unemployment in first quarter 2021 decreased to 5.8% compared to 6.1% in fourth quarter 2020. We still see changes in customer behavior related to safety considerations, with less frequent visits to stores and larger purchases provision due to COVID. Other than that, there were no signs of changing consumer behavior during the quarter.Now a few words about X5's financial performance in the first quarter. Igor already discussed our revenue growth, which we consider solid at 13.2% when adjusted for the effect of the Leap Year and the last 2 weeks of March. The high base for our revenue will continue in April but should start normalizing from May.I would remind you that in second quarter of last year, April revenue growth was 16% year-on-year. But May and June were already at 11% and 12.5%, respectively. High food inflation, although a challenge for retailers considering low nominal wages and negative fuel disposable income, was, of course, supporting for our revenue in first quarter. During first quarter, we opened 252 stores on a net basis, which led to 8.7% selling space increase. We also refurbished 425 Pyaterochka stores and 1 Perekrestok, bringing the share of stores operating under the new concept to 17% in Pyaterochka and 14% in Perekrestok. Gross number of store openings totaled 330 in the quarter. And together with refurbishments and investments in digital businesses, it drove quarterly CapEx of RUB 20.6 billion, which is down by 18.2% year-on-year. Approximately 45% of CapEx in first quarter went to refurbishment, 35% to new stores, 5% to logistics, 9% to IT, 10% was maintenance CapEx, and finally, other investments, which include efficiency projects and digital business development were 14% of total CapEx.Like-for-like sales increased by 2.1%, excluding the extra Leap Year day from the comparable period. On a normalized basis, we estimate our like-for-like performance at 5.4%. Like-for-like basket remains the main driver of like-for-like sales until mid-March. From mid-March due to the base effect of last year, we see a reversal in our like-for-like sales composition of traffic being the bigger driver and basket size normalizing.Digital business' net sales totaled RUB 10.5 billion, which comprised 2.1% of consolidated revenue for the first quarter. And we think that by the year-end, we should achieve around 3% of revenue in that market.Looking at margins. The gross profit margin increased to -- by 81 basis points year-on-year in first quarter. The increase was mainly driven by a reduction in shrinkages and logistics costs of 50 basis points. This was a result of operating improvements within our businesses. The balance was due to a better commercial margin on the back of lower price investments.The net effect of reclassification of income from the sale of recyclable materials and distribution centers and transportation income as well as costs related to Perekrestok stock and express, last mile delivery on the gross profit was almost 0.In first quarter 2021, SG&A expenses as a percentage of revenue increased by 109 basis points year-on-year, excluding depreciation, amortization impairments, share-based payments and the impact of the current sales transformation. This is mainly due to the higher staff costs, utilities, third-party service expenses and other expenses. It can also be attributed to the reclassification of pro and express delivery, last mile foods to SG&A expenses from cost of sales. Excluding the reclassification, SG&A expenses increased as a percent of revenue by 86 basis points, which was offset by gross margin improvements.Starting from second quarter 2021, reclassification will not affect these numbers. As a result, adjusted EBITDA in first quarter increased by 7.6% year-on-year, with adjusted EBITDA margin down 4 basis points to 7.0%. Growth of digital and new businesses impacted our quarterly EBITDA by 19 basis points, up from 13 basis points in first quarter 2020.Another negative factor was the ongoing transformation of Karusel. Karusel's revenue contribution is small, but its EBITDA margin is also in the low single-digit range, which affects our consolidated EBITDA results. Having said that, we are happy to report that the Pyaterochka EBITDA margin demonstrated a 63 basis points improvement for first quarter of last year driven by commercial margin improvement, logistics and shrinkage reduction, all of which are system components. Both pro and express delivery are still showing planned EBITDA losses, but Vprok is on track to break even by the end of this year. 5Post is also expected to break even on the EBITDA level and most likely earlier than year-end. In February and March, 5Post already achieved positive EBITDA.We continue to grow LTI expenses related to the LTI program of -- to the last LTI program. According to the accounting requirement as there is a 50% deferred payments in 2022, the LTI expenses amounted to RUB 422 million in first quarter. The remaining accruals for the old LTI program are estimated at around RUB 1.3 billion. And if the targets are maintained, they will be accrued until the second payment in the second quarter of 2022. The new LTI program is at the stage of final approval, and there have not been any accrual so far.Depreciation and amortization and impairment costs increased as a percentage of revenue by 18 basis points to 3.6% in the first quarter. This was mainly due to the gross book value of assets, growth outpacing revenue growth and the accelerated depreciation rate driven by the increased number of refurbishments compared with last year.In fourth quarter 2020, net finance costs decreased by 4.6% year-on-year due to a decline in the weighted average effective interest rate of X5's total debt. This was driven by the declining interest rates in Russian capital markets and X5's actions to minimize interest expenses.In fourth quarter 2020, income tax expense grew by 14.9%, in line with the profit before tax increase. The company's net profit for first quarter increased by 12.1% year-on-year to RUB 9.2 billion, while net profit margin increased by 6 basis points year-on-year to 1.8%. Net profit was supported by smaller noncash FX as ruble in first quarter was less compared with the extreme FX moves in the first quarter of last year.Turning to our financial leverage. At the end of first quarter 2021, our net debt-to-EBITDA ratio was at the comfortable level of 1.6. Going forward, we seek to maintain this ratio below 1.8 while continuing to pay dividends.Now a few comments about cash flow. Net cash flow generated from operating activities in the first quarter was RUB 24.4 billion, down from RUB 40 billion in first quarter 2020, which was abnormally high for the seasonally low first quarter given the working capital changes related to COVID stock up. The negative change in our working capital of RUB 5 million -- RUB 5 billion in the first quarter 2021 reflects usual business seasonality. This year, X5 did not witness the normal changes in working capital that occurred in 2020. So working capital released in first quarter 2020 and investments in working capital in second quarter 2020. Last year, those changes reflected increased demand and large inventory drawdown as COVID emerged. This rise in purchases led to much higher accounts payable and faster inventory turnover.Finally, I will give a short update on the quarter-to-date results and guidance before we go in the Q&A session. Net retail sales, excluding VAT, grew by 6.8% year-on-year in the first 26 days of April. Like-for-like sales growth was at 0.5%. This is on the comparable 26 days of April 2020, which had like-for-like of 6.7%. Now that we have passed the comparable period of last year's stock up buying, we are seeing a substantial acceleration of sales and like-for-like. From the beginning of the last week of April, net retail sales grew by 16.1% year-on-year and like-for-like sales by 8.5%.Finally, let me confirm our previously announced plans to open around 1,500 stores before any planned closures across all formats in 2021 while maintaining our profitability and returns. A similar number of stores will be refurbished. The plan is for CapEx not to grow faster than revenue. We remain committed to continue dividend payments in line with our dividend policy.With that, I would like to conclude the discussion of our results. I will take this opportunity to also thank the investors and analysts that I worked with during my tenure as X5's CFO. Thank you for your interesting questions, ideas, discussions, your interest in our company and your support through these years. I will enjoy working with you all.And now we are ready for your questions.
[Operator Instructions] And our first question comes from the line of Henrik Herbst.
I had a couple of questions. Firstly, I just wanted to check, it looks like your Moscow and Moscow region sales densities fell year-over-year. If you could maybe talk a little bit about what's going on there and how you think that sort of will evolve going forward?And then secondly, I was wondering if you could help us sort of understand a little bit better the building blocks in your EBITDA margin progression, how we should think about the margin progression for the rest of the year given that your, as you point out, Pyaterochka is delivering very, very solid margin improvement. I guess as we go through the year, the drag from Vprok should reduce if the business is getting closer to breakeven or positive EBITDA. And I guess Perekrestok has been weaker sales since it has been a bit of a drag. And if people start to return to shopping malls, et cetera, which should help that business. Why shouldn't we expect EBITDA margins, I guess, to improve for year-over-year?
Thank you for your question. Well, first of all, to comment on sales densities in Moscow region, I think the biggest driver for sales densities to decrease was actual performance of Pyaterochka. Related to the fact that in the first quarter, we still didn't see the return of traffic into the shopping malls. And in addition to that, comparing with the stockpiling effect of March of last year, also, this effect was expected.We are glad that we do see much better trends in Perekrestok lately in the end of April. And I believe that in May, June, so overall, for the second quarter, we will see a better trends overall in sales densities and also in traffic and revenue growth.And your second question on margin progression. So first of all, we do still see potential for further improvements in our gross margin related to operational improvements in shrinkages and logistics costs. In addition to that, we don't see any developments -- negative developments in the promotional environment or any aggressive behavior from the other competitors. So we think that we do have the potential for further overall gross margin improvement.At the same time, as you know, that we are continuing with our digital transformation, and we constantly see positive effects from that. So if we look at the overall effect for 2020 and 2021 coming from the implementation of digital processes in our decision-making in our core processes, the overall effect will be around RUB 20 billion in EBITDA margin. So that also gives additional potential for improvements. At the same time, you do see that in the first quarter, we did have this effect of negative operating leverage because of the high base of the last year. Totaling all of that up and also with the higher levels of food inflation that we expected in the -- in our budgeting process, I think that EBITDA margin will remain positively at 7-plus level as we always guided. And I think that the overall level will be closer to the levels of last year.
But I guess from what you're saying, why shouldn't margins improve year-over-year for the rest of the year if you're using better operating [Technical Difficulty] Are you saying basically that you will reinvest of operating leverage in the digital business? Or how should I think about it?
As you know, we are always ready to reinvest our efficiency in our core business into the development of new businesses, into the development of our personnel and engagement of our personnel. And I think it will be the case. So I think we're happy with staying at EBITDA margin above 7 and pretty much at the level of last year. And the rest we'll be investing in creating the leadership position in full e-grocery, in developing of our online proposition for the customers, in digital transformation of all businesses because we think that strategically, in long term, it's the right thing to do.
And your next question comes from the line of Kirill Panarin.
A couple of questions, please. Firstly on gross margin, there was quite a significant improvement in the trend in Q1 versus Q4. Can you give any comments on the short-term outlook, please? Is it fair to assume that the trend will continue? And if you could also talk about the pricing environment over the past month given the growth slowdown, that would be helpful. That's the first question.
And we, I think, already commented when we discussed the results of the fourth quarter of -- and overall, the results of last year, you know that we are planning based on annual budgets. And we usually, if we do have surplus in the first half of the year or 3 quarters of the year, we might be ready to invest some of surplus EBITDA margin into our customers or into our personnel or into our new projects and businesses. So that was actually the case with the fourth quarter of last year. So now in the first quarter, we just see our normalized EBITDA margin level for the first quarter as we just planned in our budget for this year. So we're just on track with our plans.
And so I just wanted to add, so when we discussed in our call in April when we discussed our year result that investments of -- in the fourth quarter is also important for us to support our businesses Q1. And you see the results in Q1 and definitely it was an impact of our investment in Q4.
The second part of your question was regarding the promotional environment. I would say that it's at a quite comfortable level for us in the first quarter of this year. We don't see any aggressive behavior from our competitors. So we are able to keep a promotional level as just the normalized trend levels.
Okay. Great. And secondly, just wanted to ask on staff costs. They grew materially ahead of sales and space in Q1, and it looks like the growth actually accelerated versus Q4 if we exclude the one-offs you previously talked about. So if you could comment on the drivers of that growth in staff costs and on the near term outlook that would be great. And also, could you remind us what share of staff cost is fixed versus linked to sales?
So actually, the biggest driver of growth of this structural proportion of staff cost revenue is the negative operating leverage because the growth of -- in the first quarter 2021 slowed down compared to the peak in 2020 related to COVID, and that gives this effect of a lot of the lines of our SG&A expenses looking higher than usual. We do expect that in the second quarter, all this -- the structure of the SG&A expenses should normalize. And through the year, in our annual results, you will see that we continue to increase efficiency in our SG&A.
Okay. I was just a bit surprised that staff costs didn't decelerate together with sales more materially, but that's okay. Last one for me. On express delivery, it continues to grow very rapidly. As you previously said, there was no cannibalization to the off-line sales. So I just wonder if that's still the case. And if not, are there ways to optimize in-store costs to offset the pressure from courier expenses? That's it from me.
Thank you for the question. We don't see any big cannibalization when we analyze what the customer use our expert delivery where I want new customers who joined our express delivery in Perekrestok and in Pyaterochka. And definitely, we're all time work to improve the efficiency and to reduce the -- all process of express delivery in our stores.
[Operator Instructions] And our next question comes from the line of Nikolay Kovalev.
Also, I wanted to clarify a couple of points. You mentioned a slowdown in the price investments in the first quarter, which basically lifted the EBITDA gross margin to the -- a record high level in the last -- almost like 10 years. So my question was, can you comment what kind of promo activities you see across the various segments at the moment? And what you should expect in the second quarter when revenue growth will be picking up?And my second question is on your digital businesses. If I calculate properly, you guide for 10% revenue growth and 3% in digital businesses, so roughly RUB 65 billion turnover this year. Can you potentially break it down between your various missions? So I mean stock up express delivery and 5Post?
Let's start with your question on promo, Nikolay, and we would ask you to clarify the second question, okay?
Yes. So on promo activity, for the first quarter of this year, overall level of promotions was less than 35%, where last year, it was closer to 40%. And we don't see any active promos from any of our off-line competitors. In online, I would say that it's more intense. But the influence on our gross margin is not that significant. So...
Yes, 40%, it refers to Q4 2020, right, not year-on-year?
Not year-on-year. Nikolay, and we understand your question -- the second one was about the contribution from the digital businesses to overall growth of 10% revenue per year, right?
But can I follow up on the first question, if you don't mind, because mostly, I wanted to ask, given the current level of promo, which went down and pick up in the revenue growth, do you anticipate higher promo in the second quarter or the growth is coming with a sustainable level of price investments?
Usually, we do see high levels of promo in the third and fourth quarter if you're talking about in a normal seasonality. But remembering the last year, it could be a slightly different dynamic because still 2021 coming up to 2020 we might see some abnormal dynamic. For example, last year, in the third quarter, we didn't have any additional promo activities. So in general, I would expect that in the second quarter, the level of promo should not significantly increase apart from May holidays and just seasonal promos.
Okay. That's clear. So to clarify, on the second question, I was talking about digital turnover. You guided before for total revenues to increase by 10% this year, around. And on the call today, you mentioned 3% coming from digital services. So like calculating total revenues and the share of digital, I basically got RUB 65 billion. So correct me if I'm wrong. And also, if turnover will be like that, how it's going to break down between your 3 missions online?
So I think I mentioned 1.5%, 1.7% expectation of influence of our annual growth by digital businesses. So overall, I don't think we're giving guidance for revenue in 2021 in digital businesses. But we do not expect that the growth pace should slow down. And in the first quarter, you see very good results in both Perekrestok Vprok and express deliveries. So I think it should continue.
Yes. Because the express delivery is growing now much faster but expanding geographically. In Q1, we made revenue from digital businesses that equals half of what we achieved from digital businesses last year. Therefore, of course, it's very difficult to exactly project the last quarter penetration of digital sales to revenue, but we see the clear trend that this continues increasing.
There are no further questions at this time. Please continue.
Thank you, operator. Thank you very much for taking time and participating in our today's call. At this point, we're finished, and we'll speak with you in August when we deliver our first half and second quarter financial results. Thank you, and goodbye.
Thank you. Ladies and gentlemen, that does conclude your conference for today. Thank you all for participating. You may now disconnect.