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Good afternoon, ladies and gentlemen, and welcome to the X5 Q2 and H1 2020 Financial Results Conference Call.[Operator Instructions] And just to remind you all: This conference call is being recorded.I would now like to hand over to Natalia Zagvozdina, Head of Corporate Finance and IR. Please begin your meeting, and I'll be standing by.
Thank you very much. Good morning, good afternoon, ladies and gentlemen. This is Natalia Zagvozdina, Head of Corporate Finance and Investor Relations at X5 Retail Group. On behalf of X5, let me welcome you to our call today dedicated to the second quarter 2020 financial results, which are presented according to IFRS 16 as well as IAS 17 accounting standards.We'd like to remind you that some of our -- 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 13 of our results release for a full disclaimer with regards to such statements. We disclosed the press release as well as financial statements this morning via all the usual means of communications. They are available on our website, in the Investor Relations section.Some of our team members participate in today's call remotely, and we apologize in advance for any technical inconveniences should they occur.At this point, let me pass the floor to X5's CEO, Igor Shekhterman.
Good afternoon, ladies and gentlemen. We trust you are all in good health and fully adjusted to the new day-to-day reality that has been reshaped by the COVID-19 pandemic. We all hope that the worst is behind us, but we remain prepared for any development.Let me start today with a recap of the company's main achievement in Q2, then I will finish with some information about our strategy, as financial topics will be covered by our CFO, Svetlana Demyashkevich, as usual. Let me start with brief overview of our results.We are very pleased with the strong operating and especially financial results that X5 achieved in quarter 2. Our company continues to increase the revenue gap versus main competitors in Russian food retail. In terms of absolute revenue from groceries, X5 is larger than our closest competitor by 42%, and this absolute revenue gap increased by another 16% in the first half of this year. We are delivering this performance even though we are already the largest food retailer in Russia. We have maintained our fast growth and we are developing new services for our clients. And the COVID pandemic had a modest directional impact on X5 businesses. It was clearly positive for proximity and online operation. At the same time, it was somewhat negative for supermarkets and hypermarkets, but we managed to overcome the challenges and take advantage of the new opportunities. X5's strong quarterly results, especially our solid profitability, are driven by fundamental factors, which results are not just the reflection of the abnormal market situation and will have a larger effect in the quarters ahead.I want to stress that our margin improvement was based on a broad set of components, from gross margins to operating costs, Svetlana will cover in more detail later. In the first half of the year, our business performed ahead of budget in terms of revenue, EBITDA, net profits and cash flow generation. Now in the middle of the first (sic) [ third ] quarter, we continue to see positive momentum for growth as well as margin. Our current expectations for the second half of the year are more positive than they were a quarter ago both in terms of the revenues and the like-for-likes as well as profitability.During the second quarter, we faced significant change to our normal operational patterns, especially during the lockdown from the late March until mid-June. Looking back, we are proud to say that our company dealt with operational challenges in a systematic manner, proving the advanced level of our corporate and business process. We also saw high levels of engagement and [ triality ] from employees across the company. Our personnel turnover and NPS showed steady improvement in Q2. Annualized personnel turnover declined by 41.7% by June, and our [ lead ] NPS in Perekrestok shows an improvement of 6. We have continued to enjoy a positive response from our customers. NPS numbers in our stores have seen material improvement during the second quarter. This has been the case across our formats. The teams at Pyaterochka, Perekrestok, Karusel and our business units have demonstrated full dedication to the corporate goals during Q2. We have focused on safety of our stores; operating cost reduction; and smart use of investment to support growth, profitability and returns.On top of the progress in our off-line operation, in the second quarter, X5 also took the leadership position in online grocery in Russia. This market segment saw explosive growth in Q2 and, we expect, may triple in value during 2020. In large part, this rapid pace of growth is driven by the response to the COVID-19 pandemic. Revenues from our online supermarkets and express delivery reached RUB 5.1 billion in Q2. What is very encouraging is that our online was EBITDA positive in May. The overall profitability of X5's online platforms was also well ahead of budget targets for the quarter. We also piloted a dark store model for our express delivery operations. To date, 7 Pyaterochka stores have operation as dark stores. Sales in these pilot stores significantly exceed the sales previously generated by the off-line stores that were located in the same [ premium ].Thanks to strong cash flow generation, we didn't have to sacrifice any attractive investment projects. We have, however, prioritized them in terms of the highest-return order. We are also taking into consideration the strategic importance. Our manageable debt level and solid cash flow generation enabled us to distribute RUB 30 billion in dividends in June, as planned.Now I would like to say a few words about the operating environment for X5 in Q2. The operating environment in Q2 was clearly influenced by COVID-19-related changes in customer behavior, actions by competitors, government relations and consumer market uncertainty. When I last spoke with you about our business in March and April, the management of X5 had a cautious view on consumer income and demand. Real disposable income in Q2 was down 8%. At the same time, nominal wages started to improve and in May increased by 4% year-to-year. This leads to an overall food retail market decline of 4.4% in Q2 in [ nominal ] terms. On a positive note, in June, underlying food retail spending by consumer was already slightly up year-on-year base. Shopping malls were closed to the public for most of Q2. This leads to the significant decline in traffic for roughly half of our supermarket. At the same time, freestanding Perekrestok store saw a 24% increase in revenue, and the supermarket's performance started to accelerate when the lockdown measures were lifted in June. We continued closing and transferring Karusel hypermarkets, in line with the transformation plan.Despite these difficult market conditions and operation challenges, X5 achieved 12.9% revenue growth for the quarter, including a 4.3% improvement in like-for-likes even with the high base of Q2 2019 at 5%, which means that X5 continued to increase its leading market share. We also continued to expand, adding 828 stores on a net basis since the beginning of the year. Consumers dramatically changed their shopping patterns in Q2. This was due to safety concerns and COVID-19-related mobility restrictions. Store visits becomes less frequent, but when consumer came to our store, they choose more expensive products. We also expanded via basket with new products while the HoReCa sector was closed. Our consumers quickly started buying fresh products again instead of just stocking up on dry groceries.We think that many Russians were pleasantly surprised when they visited via local Pyaterochka or Perekrestok during Q2, even if it was not by a first choice, before lockdown. We think that our visitors appreciated the variety and quality of our assortment and price and promo. We also thinks they were impressed by the comfort and safety of our store as well as service levels. We hope that this situation has brought us new loyal customers. And we hope that our new concept and CVP will enable us to retain them. Consumers feel particularly impressed by the improved selection and quality of fresh product as well as the overall services and [ piousness ] of our personnel. The Pyaterochka price index continues to show that we hold a leading position in the proximity segment. The competitive landscape in Q2 was rather natural for X5. The proximity format was very relevant and attractive for consumers and required no additional price investment of promo from us or our peers. Supermarkets and hypermarkets saw customers leave them in favor of proximity formats. Traditional retail lost market share to large retailers who are better stocked and have more attractive pricing. The pace of new store opened by our competitors was significantly below that of X5. Our analysis shows that, in Q2, the impacts on X5's proximity store from the formats direct competitor and specialist was declining. We continue to grow our loyal customer base, which shows an increase by 3% during the quarter. Over the last 2.5 years, the number of highly loyal customer increased by 21%. They now account for about 12% of our customers but generate more than 40% of sales.Our efforts to better serve our customers received full support from the government. During the quarter, we extended our social support and charity activities with a greater focus on the needs of elderly people during the lockdown. For example, we reserved delivery slots and a dedicated hotline for pensioners for Perekrestok online operations. We have also had morning hours in our off-line stores that were exclusively for elderly customers. We worked with volunteers to deliver food to low-mobility customer, and we were quick to roll out our express delivery operations in Moscow and St. Petersburg and a few other cities. This systematic change to our operation was a great help to Russian citizens during the lockdown. We also supplied meals from our smart kitchens to a number of Moscow hospitals. Finally, we introduced 0 commercial margin price for several socially important goods during the lockdown. We were glad to see that some of our largest peers in the sector joined us in this initiative. After the lockdown was lifted, our retail sales growth continues to accelerate during the third quarter. This is driven by high consumer engagement in our proximity format, the recoveries in our supermarket division and steadily growing contribution from online services. Svetlana will share more details on our [ 2 free trading programs ].Let me now give you a brief review of the new businesses and strategic initiatives in Q2.I would like to start with our update on the new store concept. In a sample of more than 1,100 stores across various regions, we continued to see a positive like-for-like revenue response in store refurbishments and the new concept. In Q2, like-for-like in new concept store was 1.5 percentage points higher than for old store, and in July, like-for-like reached 14.1% in refurbished Pyaterochka stores. Nearly all new stores are opened, uses the new concept. The new stores are seeing significantly higher NPS. We have reported 52 points compared to 34 before. We also have higher personnel engagement, low personnel turnover as well as stronger sales densities. We also managed to reduce CapEx for the new concept by 39% for the new store and by 28% for the refurbishments compared with the 2019 levels. This was very encouraging. This strategic initiative, which we started to develop in 2018, has aimed at the fundamental improvement in the existing store base, not only the attractiveness of X5 new stores.Our success in customer service during the lockdown in Q2 wouldn't have been possible if we had not already invested in our online capability, infrastructure and teams. In May, Perekrestok online, together with express delivery operation, achieved market leadership in Russia e-grocery market. We surpassed the delivery service Sbermarket and the online e-grocery player Utkonos. May was the peak month for X5 in terms of daily fulfillment of Perekrestok online and express delivery orders. We delivered over 22,000 orders per day and also saw the highest levels in terms of order value and delivery densities. In July and August, demand for X5's online service has remained notably above the pre-COVID levels. In May, both online operations were fully EBITDA positive. Our unit economies for each dark store have been positive since April. The financial results of our online platform in Q2 underscored its end expectation that X5 is able to operate in the e-grocery segment market profitably, thanks to our skills and the ongoing digital transformation of our operation. In Q2, we launched express delivery and order pickup from our Perekrestok store in Moscow, the Moscow region, St. Petersburg, Kazan, Krasnodar and Rostov, which is currently fulfilling about 1,500 orders per day placed via the Perekrestok Bystro mobile app. To support our express delivery operations which are available from our proximity stores and supermarkets via dedicated mobile apps, X5 started its own food delivery service in Q2. As you know, we continue with a number of digital initiatives. The big data-driven pricing tools for our proximity format was fully rolled out in June. It's now [ rolled ] across the entire [ Perekrestok.ru ]. This has given us a more positive outlook for the format's gross margin. And as example of our digital transformation is assortment automation. We have applied this to over 2,000 SKUs for our proximity format's assortment. It has enabled us to better satisfy customer demand while not expanding the assortment, which has also led to higher revenue and slow inventory and low shrinkages in these products categories. This is a type of fundamental change that will create a solid base here for sales density improvement in our stores as well as profitability gains.We estimate the total positive impact from our digital projects in 2020 EBITDA at RUB 3 billion.I also want to say, [ if you look on our customers best ] initiatives, the number of daily active user, DAU, across all X5 mobile and online platform in Q2 2020 reached 1.15 million, [ Vyruchai or ] Pyaterochka loyalty and express delivery app at 51%. Monthly active user, MAU, in Q2 2020 was 9.34 million, of which 70% were users of Pyaterochka app, and 30% of Perekrestok app. In Q2, we updated the mobile apps for Pyaterochka, Perekrestok and Perekrestok online. They now all have much more advanced [ customers best ] features and functionality. Our big data team is now working with [indiscernible] in order to feed the information into our assortment decision-making and our dialogue with supplier. Since the beginning of this year, we have received 46 million customer ratings on our assortment. This help us -- this helps our retail operations to better satisfy our customers' needs and to stay ahead of the competition. In our strategy, we aim to have 30% of customers providing us a fair feedback in mobile applications by 2023.Developments in private label were very positive in Q2. In Pyaterochka, private label accounted for 17% of revenue. And it brought 12% of revenue for Perekrestok. The growth of the private label category in Q2 was 52% year-on-year base. This proves that our focus on the quality of this product was timely and that we have executed well. This category was also supportive of our strong gross profit in Q2.In our 5Post operations, while we were affected by the COVID-19 situation and -- the number of [ Utkonos ] orders through our store-based delivery network was below budget. We discount our [ Utkonos ] customer base and added new customers so that on revenue and profitability we were able to mitigate the impacts of the lockdown. Our 5Post revenue in Q2 was up 36% over Q1. In half -- in first half of 2020, we delivered 1.4 million parcels through our network and continued expanding our client base and our strong facilities. In addition to our parcel local network, we also opened 5 dedicated order delivery units with fitting rooms. We aim to increase this number by 40 by the end of the year.Finally, we are making progress towards opening pilot hard discounter stores in the fall now that we have a dedicated team headed by [ Ilya Jocson ] and a detailed strategy developed for [indiscernible].Let me conclude with a few words about our strategy. Every 3 years, our company revisits its medium-term strategy. We reflect the recent customer trends, the change in retail markets landscape and the most recent technology solution available. X5's management is developing a new 2021, 2023 strategy, which we will present to you at our Capital Market Day in October. [indiscernible] on wire, and it is scheduled for October 27. Today, I will only speak about some very high-level key ideas behind the strategy. I would also ask you to [ disclose ] any strategy-related questions until our dedicated event in October.The new strategy has our time-aged focus on the food markets, where we expect to improve significantly our competitive strength and efficiency. We will continue to concentrate on our core business. At the same time, we are expanding the borders of our market and introducing a new approach to customer journey which was significantly influenced by technological progress over the last several years. Today, customer journey starts long before the entrance on the store, where -- at least 2 stages of his journey before the actual purchase. These stages are plans and choice. In today's reality, [ we're have ] multiple options to address the need to each. Every day, people decide how to satisfy this need in each particular moment. If it is a decision to cook, customer investigates [ what and now ]. If it is a decision for ready-to-eat food, customer needs to make a choice between grocery store and restaurants. Where the choice is made will build another choice: go to the location or order express delivery and so on. All these steps constitute today's customer journey in the food market. And the store visit is in the fact very much the end of his journey. Our new strategy will give the clear answer how we meet the customer in the beginning of the journey, which in today reality is critical to remain the top-of-mind food provider and secure leadership position. Without disclosing too much details, I can say that a significant component in achieving this growth is the reliance on our digital and advanced analytics capability, which we developed over the last 2 years. This digital transformation was a key priority of our previous strategy and that is [ prepared to expire ] to the next strategic step.Finally, I would like to mention that another key priority for our new strategy is care for the community. We want to be the leader in customer safety, which is particularly important due to coronavirus. As well, we set ambitious targets on sustainability with a focus on our social and environmental impact. For our future financial results, the new strategy means an acceleration of revenue growth, sustainable profitability levels, ROIC-oriented investment decisions and steady growth in dividends.With this, I conclude my presentation today and pass the floor to our CFO, Svetlana Demyashkevich. Thank you for your attention.
Thank you, Igor. And good morning, good afternoon, ladies and gentlemen.Let me start with the external environment, after which I will give an overview of our financials and also provide you with some insights with key quarter-to-date results.In Q2 2020, our food inflation increased to 3.6% year-on-year from 2% in first quarter 2020. It further accelerated in June and reached 3.9% year-on-year. Key drivers of this acceleration's are ruble depreciation on the back of low oil price and factors related to COVID pandemic. Consumer demand in second quarter deteriorated, unfortunately, compared to 4.3% year-on-year growth in first quarter 2020. This was primarily due to the lockdown regime. And consumers' demand for stockpiling increased with the spread of COVID-19, with a trend towards less-frequent shopping but a larger shopping basket. On the positive side, July food retail sales were already slightly up on the year-to-year nominal basis. And also, international travel to the limited number of countries has [ been evolved only from places ], which is making a seasonal impact on Q3, food consumption less pronounced this year.Moving on to X5 financial performance in the second quarter. I will start with saying that, as you know, revenue increased by 12.9% year-on-year in second quarter on the back of solid like-for-like sales, selling space expansion and ongoing store refurbishments. Refurbished stores are showing like-for-likes well in excess of comparable stores that still operate under the old concept. Like-for-like sales composition by traffic and basket in second quarter reflect the impact of COVID-19 lockdown with less-frequent customer visits to stores and larger purchases per visit. On balance, X5 saw consumers trading up across all retail formats, which can be partially attributed to the closure of HoReCa segment during most of the second quarter as well as to ongoing improvements to the variety and quality of the assortments across our formats.Looking at margins. In the second quarter, the gross profit margin increased to 25.3% in second quarter, up 23 basis points year-on-year and 93 basis points higher than in first quarter. This growth was mainly due to decrease in shrinkage and lower share of promo. Gross margin for the core formats Pyaterochka and Perekrestok was higher compared to the X5 average mainly due to the ongoing Karusel transformation and inventory sell-offs that are required before the closure or transfer of stores. As of now, we do not plan significant price investments. Our share of promo in Q3 so far is lower than last year, and this trend is likely to continue.In second quarter 2020, SG&A expenses, excluding depreciation, amortization, impairment, LTI and share-based payments, as a percentage of revenue increased 21 basis points year-on-year mainly due to the reclassification of Perekrestok.ru and express delivery last-mile costs to SG&A expenses from cost of sales. Excluding this reclassification, SG&A expenses decreased as a percentage of revenue, driven by lower staff and utilities costs.And we are currently satisfied with in-store personnel compensation levels relative to market benchmarks for the food retail sector. We are encouraged by the low personnel turnover numbers and high labor productivity and expect personnel costs to stay flat or be even lower as a percentage of revenue in the second half of the year. We achieved certain savings on better rent rates for a number of our hypermarkets, but level of rent payments in the proximity segment where trading was very strong in Q2 and in supermarkets, even though the ones in shopping malls suffered from low traffic, remains at regular levels. At the same time, new stores that X5 continued to open in Q2 have signed [ all ] leases on more attractive terms due to the COVID situation.EBITDA in Q2 2020 increased by 14% -- 14.4% year-on-year. Our EBITDA margin rose by 11 basis points to 8.4% even compared to a high base of Q2 2019 and is the highest level since Q2 2017. These results are more than just a reflection of the current margin situations. We have improved margins due to a right set of factors ranging from gross margins to operating costs. These are fundamental factors and should be sustainable in future periods. I would highlight that our like-for-like growth comes on the back of high base in Q2 2019, that our overall revenues have been impacted by the closure of shopping malls due to the pandemic in Q2 2020 as well as the ongoing reduction of commercial footprint. In parallel, we have continued to grow our online operations at a very fast pace, which in my view makes our EBITDA profitability of 8.4% in Q2 even more impressive.Costs related to COVID did have an impact on our EBITDA in Q2. We estimate the amount to be RUB 1.8 billion or 36 basis points of revenue. These costs were mostly related to personal protection items such as masks and gloves as well as more frequent disinfection of premises. We also granted rent holidays during the lockdown to help our small tenants that are subletting space at our stores. Some socially important goods were sold with 0 markup during the period. And we saw an uptick in losses during the period of abnormal demand. We also have to pay more for extra working shifts in our logistics functions to ensure smooth operation across our stores during spikes in demand. At the same time, there was a positive impact as consumers traded up when the HoReCa sector essentially shut down and we saw a more profitable category mix. We also got better rent terms on some of our hypermarkets during the lockdown period. Taken together, this reduced the negative impact of COVID-related costs.In Q2, we continued to accrue LTI expenses covering the new LTI program; and both of its targets, which are maintaining leadership by revenue and EBITDA multiples relative to peers. This totaled to RUB 527 million. Accruals will continue in approximately the same quarterly amount throughout 2020 if both targets are achieved. Depreciation and amortization and impairment costs decreased as a percentage of revenue by 4 basis points to 3.1%. This was due to revenue growth outpacing growth in the gross book value of assets.In second quarter 2020, net finance costs increased by 7.7% year-on-year due to higher gross debt and partially compensated by a decrease in the weighted average effective interest rate from 8.1% for the first half 2019 to 7.3% for the first half 2020 as a result of declining interest rates in Russian capital markets as well as actions taken by X5 to minimize interest expenses. At the end of June, we completed a RUB 10 billion bond offering with a coupon rate of 5.65% per annum.X5's effective tax rate for the quarter totaled 26.2%, including the accrual of deferred tax associated with potential dividend payments.The company's net profit in the reporting period increased by 20.5% year-on-year to RUB 16.3 billion, while net profit margin increased by 21 basis points year-on-year and reached 3.3%. For the first half of the year, X5 already recorded RUB 24.5 billion of net profit. This compares with the full year 2019 net profit of RUB 28.8 billion, when profitability in the second half of the year was notably impacted by Karusel-related costs as well as our own price investments which are not currently required due to the stable pricing environment and sufficient demand from customers.Turning to our financial leverage. At the end of second quarter 2020, our net debt-to-EBITDA ratio was at 1.68x under IAS 17. Going forward, we seek to maintain this ratio below 1.8x while continue paying dividends.Turning to cash flow. Net cash flow generated from operating activities in Q2 was RUB 17.1 billion. Our operations generated RUB 57 billion of operating cash flow, which is up 16.5% year-on-year and reflects both the growth of our business as well as solid profitability of our operations.The change in working capital in the second quarter of 2020 was negative RUB 15 billion compared with positive RUB 1.9 billion reported in Q2 2019. This was primarily due to a decrease in accounts payable due to the higher purchases at the end of March driven by COVID; and a larger increase in the inventories, reflecting business growth and partially impacted by COVID. Inventory levels in Q2 2020 were in line with the year-end 2019 levels. The change in working capital over the first half of the year was positive RUB 40 million. We remain focused on faster inventory turnover and are confident then we can continue improving in this respect.Now a few words about CapEx. Net cash used in investment activities increased to RUB 20.7 billion in Q2 compared with RUB 18.2 billion in Q2 2019, driven primarily by the Pyaterochka's organic expansion and the refurbishment program launched this year. 103 Pyaterochka stores were refurbished into the new concept in Q2 2020. X5's total capital expenditure amounted to RUB 21.8 billion in Q2 2020, in line with Q2 2019. 53% of projects went to expansion of our store base. 14% was refurbishments. And another 14% was maintenance CapEx; the rest, to logistics, IT and the new businesses. Our investments into development of new online businesses was accelerated in Q2 to better meet high consumer demand, but the overall planned CapEx for 2020 new businesses will not increase. We'll continue with efficiency-related CapEx and digital transformation projects according to the general plan but with greater focus on required return for each individual investment project beyond off-line retail.Our CapEx in first half 2020 totaled RUB 39.3 billion, which is below our budget for the first half of the year. Our current expectation of that CapEx in 2020 should not exceed the level of 2019 which amounted to RUB 81 billion.Finally, I will give a short update on the quarter-to-date results before we go to a Q&A session.Net retail sales excluding VAT in third quarter, so far, have grown by 16.1% year-on-year, where Pyaterochka actually grew by 19.3%. And like-for-like sales have risen by 7.6%, where Pyaterochka have risen by 9.3%. Our positive profitability trends seen in second quarter continued in July even following the lifting of lockdown measures.With that, I would like to conclude the discussion of our results. And thank you very much for your attention.
[Operator Instructions] We have a question coming from the line of Henrik Herbst from Morgan Stanley.
Yes. I guess you've talked a little bit about the July trends in -- from July and what we've seen so far in August in terms of sales trends. I was just wondering if you could elaborate a little bit on also sort of what you're seeing at Perekrestok in terms of, as things open up again, how fast sales are recovering. I guess we can back out sort of the number from your total sales number, but any visibility would be helpful. And then also, in terms of the basket growth, if you can maybe break that down, if possible, in terms of how much you're seeing in on-shelf inflation; trading up, I guess; and volume growth. What the -- components and drivers are there? And then I guess the last point would be on margins. As you were pointing out, I guess your comps were pretty tough in Q2. And as we go through the year, comps are getting easier. To what magnitude can we expect margins to improve in the second half? Obviously a lot of uncertainty, but any thoughts there would be very helpful.
Well, as I mentioned, we already see very strong results for July both in terms of growth of revenue, like-for-like, traffic and profitability actually. And we also see that, so far, the trends continue improving. So our expectations and -- well, I will say our worries about the third quarter, so far, are not realizing. So we see that the seasonality is not impacting the third quarter negatively as with usual result. So within these good results, in respect of increase in consumer demand and positive trends in like-for-likes, as Igor mentioned, we really see that a lot of people visited Pyaterochka, being the closest store, during these several months of pandemic. And they actually realized the changes that occurred in this format during the last several years. And of course, these changes are positively taken by the consumers, including the changes in the assortments and more quality assortments, more private label assortments, excellent freshness of the products and excellent prices, actually service and atmosphere, everything. So we see that it's positively taken by the consumers. In addition to that, people are not leaving the country and staying in the country. And in addition to that, it's quite a warm summer compared to last year. So all these factors give us very positive expectations of the third quarter, and so far, we don't see the factors, potential negative factors, which could influence that. At the same times, of course, we realize that we live in quite a volatile environment; and there are some expectations of potentially a second wave of the crisis, et cetera. Of course, we will be ready to react to that and we are prepared to that, but still we're quite positive on our prognosis for the second half of the year. We see positive developments and fundamentally positive developments both in our gross margin and in our SG&A. And we need less price investments to attract customers than we needed last year. We have quite high inflation in the range from 3% to 4%, which is the very optimal level for us, I will say, and it's in line with our budgeted numbers. We still see trading up. So some of the customers are still rechanneling their consumption to retail compared to HoReCa and not -- I wouldn't say that demand in HoReCa is fully recovered. So all of these factors actually are positive for us. So I do -- yes. Sorry...
Excellent. Let me just add something. I think the decrease in consumer income may lead a shift in consumption to lower-price segments. However, our positions are very strong in this segment. Pyaterochka is seeing a large influx of -- inflow of customer. We don't see a trading-down trend and don't see the need to invest in price in the current environment. The sales promo decreased in Q2 year-on-year based.
We have another question. It comes from the line of Max Nekrasov from Goldman Sachs.
I also have a few questions on margins. So basically you reported 23 basis points increase of gross margin in the second quarter, and I was wondering maybe you could provide a more detailed breakdown and the contribution of the key factors to that. I mean, what was the impact of shrinkage and lower promo activity? And also I just wanted to clarify. What was the impact on gross margins coming from the reclassification of some costs that you mentioned in the press release? That's the first question.
Well, the biggest impact on growth of gross margin was from decrease in shrinkages, which is the continued trend for us and the target for operating business. And you see this trend started already in end of 2018, so that's just the continuation of this positive trend and our management working on freshness of products and improving our operating processes and controlling shrinkages level. Second biggest factor is promo lower than the promo of [ third ] quarter of the last year. Promo stays at the range of below 35% for the whole year and which is a very stable and good level for us. And you know that we made the decision to try to keep promo levels at the same level, stable level in the beginning of the year, and so far, we don't see the need to increase this level. So we are happy to stay or in the medium term to decrease these sales. And actually the impact of reclassification is minimal, around 8 basis points, as far as I remember. So as I said, 2 biggest factors are decrease in shrinkage and decrease in promo.
And so let me add something regarding the operational efficiency because, last 1.5 years, we did a big focus on the operational efficiency. And it's also important that we reduce [ that to nowhere ] in the network. This is at an all-time low in 2020. We also increased our labor productivity, which was up by 8.6% in Q2. And it's also due to the transformation such as assortment optimization, [ pricing automation ], [indiscernible], automation of finance and commercial function, development of [indiscernible]. All these give us potential influence on our EBITDA margin as well.
Understood. A follow-up on this, maybe you could share what is -- like indication. What is further potential for improvement in shrinkages? And also basically, last year, you invested in prices and wages after a very high margin in the first half of the year, so from your previous comments, do we understand correctly that at least for now you are not planning any similar investments this year in terms of prices and wages?
[ It's right ]. Well, at the moment, we do not have any plans to do additional investment into price. As well, we haven't any plans to have any additional investments into wages.
Yes, I will agree with Igor. We see that our levels of salaries are at benchmarks or even higher than benchmarks at the market. And we're happy and satisfied with both [indiscernible] productivity and staff, so no, we're -- so we're not expecting any investments in staff costs. At the same time, on shrinkages, of course, we will continue our efforts on improving shrinkages level, but the overall potential is not that significant if we compare with overall this year effects to last year effects. But still we do expect some further improvements.
I just maybe add something regarding the wages. As you remember, last year, we did some investments in our operational staff. And at the moment, we are quite satisfied with the current level of staff levels.
Very clear. And probably last question, and apologies if I missed it, but maybe you could share what are the NPS levels that you see in the refurbished stores compared to the old stores and, for the most important, compared to your key [ competitors ].
So we definitely see that NPS levels in new concepts are significantly higher than in the old concept, around sort of 20 points level at -- if we compare new concept and old concept, yes. So that's why also we see that's following increased like-for-likes in the new concept, which we already see also in July and August are following these increased NPS levels, yes. So for example, if for new concept, we have 52 points in NPS. So in the old concept, it's like 34. [ So that's following that ].
And any indication on the key competitors?
You mean in terms of NPS levels.
Yes, yes.
Well, of course, our target is, by NPS, to exceed the levels of our competition, at least of our largest competitors on federal level. And we usually achieve these targets.
We have a question coming from the line of Maria Kolbina from VTB Capital.
Congratulations on the numbers. I have a question regarding Igor's comments in the press release. You say that results will have lasting effect on the quarters ahead. Should we consider there's long-lasting probably positive effects on profitability as well? So do you think you will be able to keep a comparable level of margins in the third quarter? Will you have -- if we based on the numbers for the 1.5 months of the third quarter, it seems that maybe we'll be able to achieve comparable numbers in the third quarter, at least, in terms of profitability. The second question: Can you remind about your CapEx program? Have there been any changes? Or do you stick to the guidance [ exactly it is ] both in terms of number of openings and CapEx [indiscernible]?
Svetlana, can you start, please?
So on Q3 margins, as I said, our [ profitability ] in July is above our budget and above our expectations. At the same time and also as I said, seasonality doesn't have such a negative effect as it usually has and is less than we expected. At the same time still, usually the third quarter has some seasonality. For example, a lot of people are leaving big cities and going to outside of big cities. [ So that, as you know ], affects our operations. So overall third quarter compared to third quarter will, I think, have very positive developments. And -- but of course, the third quarter compared to fourth -- the second or fourth quarter is usually has some [indiscernible] just clear. So..
[indiscernible] Maria, thank you for the question. Let me give the comments regarding the CapEx and opening. As Svetlana mentioned in her speech, we have a plan to have our CapEx at the levels below the level of the last year. Regarding the opening, our initial plan was to open up to 2,000 convenience store and supermarkets, gross, in 2020. In addition, we plan to renovate 1,300 Pyaterochka stores and [ strategic ] Perekrestok supermarkets. As you see, the number of new opening is low year-on-year base in first half of the -- due to the coronavirus situation. The opening program may be decreased by about 15%, 20%. The final number will depend on demand dynamics, competitions and the market environment.
Can I ask you about your plans regarding people, keeping people in the office? So how do you see the workload distribution between office and working from home, at least [indiscernible]?
Thank you. Very interesting questions. I will tell you that I think we were one of the first company in Moscow who, when the pandemic started -- to transfer most of our office staff to the remote work. At the moment, we're still around 90% of our staff work from the home. I will tell you, from the efficiency point of view, we think that...
90%, 9-0...
9-0, yes. 90% of our [ workers ] in Moscow still work from the -- remote. And from the efficiency point of view, I will tell you that we are quite happy with the results and even better than we expect. We haven't any plan at the moment to transfer, to move most of our staff from home to the office. We just decided to do it step by step. And we have a plan maybe in August to come back from the home around 10%. And in the end of the August, we'll have a Board meeting where we will be -- discuss the next plan how to move people from the home during this year.
Okay.
And just to add a small comment on the margins, coming back to the first question, I just want to highlight that we do expect on the third quarter profitability results to be stronger than third quarter last year; and overall, for the second half of the year, also EBITDA margin being stronger than second half of last year. Thank you.
We have a question coming from the line of Elena Jouronova from JPMorgan.
Congratulations with the very good results. I'm wondering if you think now is the case for Russian food retailers, in particular yourself and some of the bigger competitors, to perhaps make sustainably better margins. So do you think that current trends on your profitability might be sustainable for beyond 2020? Because there has been like permanent shift in consumption habits. Or because consumers, as you correctly pointed out, have appreciated the new concept, which far exceeds anything else that's out there in the food retail sector. So just a question about your thoughts on the long-term margin potential in your current business.
So thank you for the question. Well, judging from the present situation, we are quite positive. And we do see the fundamental factors for us to have a strong position in terms of profitability and improve our profitability. At the same time, it's Russia. It's potentially second wave of COVID. Of course, we should be prepared for any or different scenarios. And that's why, usually when we do our prognosis or when we discuss long term, we have several scenarios, but in our base case scenario, I will agree with you. I think, yes, we're quite positive. And we see that large retailers should benefit from the situation, should benefit from the consolidation of the market; that we already see, should benefit from the competitive advantages that we obviously have compared to small peers. And also, of course, we're in a very strong position because of our format mix, with proximity being the largest format and hypermarkets being -- the share of revenue from hypermarkets decreasing for us and being transformed. And also, we were able to ensure digital transformation, beginning of digital transformation; and investments in big data; and investments in new businesses quite early [ for Russian ] retailers. All of these give us very positive expectations of the future for this year and overall for medium and long term.
Yes. [ If I may ]: So I remember you making a comment in one of your interviews in early June about the [ cries for ] seeing potential to increase the dividends payments substantially this year. Well, I mean for this performance year. Any way as to or color you can share with us about the discussions that are taking place? By what percentage could the company potentially increase the div payments for 2020?
Yes, thank you. Again that's a good question, I think. And yes, we are still quite positive on our potential for dividend payments. We see that our revenue generation is above our budget. Our profit generation is above our budget, and our CapEx is below our budget. Overall, at the same time, our debt level is at very good levels at 1 -- low 1.8x even after the payment of dividends for 2019 in June. So overall, we want to keep our debt level not more than 1.8x net debt-to-EBITDA. So that gives us room for paying high dividends compared to 2019, and we think that it can be up to 50% higher than 2019.
Yes. And actually a related question: There have been some talks about Russia potentially revising the double tax treaty with Netherlands, which I think might affect the tax payments. What are your current thoughts assuming that there is indeed a worsening of tax conditions? Are you planning to make any redomiciliation potentially to Russia? Or how is the company going to take it and react?
Well, it's publicly known that Russian Ministry of Finance sent letters to some foreign jurisdictions in order to change the terms of double tax treaties. We know that Netherlands has received such letter, but as far as we know, the negotiations have not been started yet, yes. At the same time, we'll also analyze the situation. We see that Cyprus recently has agreed protocol to the double tax treaty. And within that, it is expected that new provisions will, say, reduce tax rates and dividends to public companies. They need -- or to public companies that meet certain criteria. So we'll see how the situation develops. At the same time, we are not planning any changes in our structure. We have developed group structure, and we have our holding company located in Netherlands. We have operations and office there. So, so far, we are not changing any of our actions. And I think, of course, if legislation changes, we will be in compliance and we will be in full -- we will follow all the requirements and changes and rules as soon as they're introduced. So I think we'll -- might have more information. And we'll comment on our Capital Markets Day end of October and also on our call for the results of the [ first quarter and ] of the year.
Okay. And then the final small question from me. I believe that right now X5 and the Board must be drafting the new LTI program. Correct me if I'm wrong. And if I'm not, then what are the current thoughts about key KPIs for the management team for the next few years to come?
Let me start. First of all, at the moment, we have our recent LTI program that we will finish in the end of this year. Regarding the new generation of LTI, it will be developing just in the end of the year, but the key parameter will be definitely ROIC. And more details, we will give you in the beginning of the next year.
We have a question coming from the line of Marat Ibragimov from Gazprombank.
My congratulations to your good results. The first question, on your EBITDA margin. You said that, the second half of the year or this year, it will be not less than last year, but last year, it was very small. It was 6.4%, according to my calculations. And -- but last year, you invested in prices. And you're -- if you are not planning to [indiscernible] should we expect a higher margin? I think your current guidance on EBITDA margin, which is in fact [ 7.5% ], looks [indiscernible] conservative. Don't you plan to update, upgrade your EBITDA margin guidance for this year?
Well, we don't give guidance for EBITDA margins for the year, and we just can explain some of our trends and explain some of the prognosis that we can make. So you're right that last year, in the second half of the year, we had the opportunity to invest in prices and in salaries because we had a very strong first half of the year. And we were also able to increase our market share and increase our revenue significantly and above our expectations, above the market and above all of the rest of the competition. So it was a business decision last year that we made and it was the right one. This year, we see that our strong growth and like-for-like growth continues without additional investments in price. And that's why, so far, we don't see the need to do what we did last year. And in addition to that, we see that also the promo levels of our competitors are quite stable also. We don't need to react to the actions of our competitors, which was the case last year. So if this situation continues, that's yes, we are quite positive about the second half of the year in terms of margin levels.
And my next question, about your expansion plans. You say that you're cutting your original target on new store opens by 15%, 20%, but for me it looks counterintuitive because I think you need to go the opposite way if to take advantage of the weakness of your competitors, both food and nonfood retailers, [ in order to ] open more stores at more favorable [ lease bumps ] and given more favorable labor market situation. What -- how would you comment that idea?
As I mentioned, we had a plan to open around 2,000 stores, but due to coronavirus, we delayed the opening of the new stores. At the moment, we're considering that our expansion plan will be approximately 15%, 20% below the 2,000 stores, but we will see for the macro situation, for the competitive behavior. And maybe we will accelerate the growing at the end of the year.
And my last, really small question. The Alfa Group, your major shareholder, announced their decision to postpone the payment -- the dividend payment in favor of them. Did the -- did you transfer dividend to them? Or what's the situation with dividends to Alfa?
Yes, the dividend is fully paid as at the beginning of July. As I commented earlier, our situation with liquidity and with debt levels is above our expectations, positive. So the company has the opportunity to pay dividends in full.
We appear to have no further question at this point, so I hand the conference back to you.
Ladies and gentlemen, thank you for your attention and your interest in X5 Retail Group. We will follow up with the more details about our Capital Markets Day planned for the end of October and hope to virtually speak to you there.Thank you. Have a good day.
Thank you, and bye.
Thank you, and goodbye.
Ladies and gentlemen, thank you for your participation today. This concludes today's conference. You may now disconnect your line. Thank you.