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Good day, and thank you for standing by. Welcome to the X5 Q2 and H1 2021 Financial Results Conference Call. [Operator Instructions] And please be advised that today's conference is being recorded.I would now like to hand the conference over our first speaker today, Natalia Zagvozdina, Head of Corporate Finance and Investor Relations. Thank you. Please go ahead.
Thank you. Good morning, good afternoon, ladies and gentlemen. On behalf of X5, let me welcome you to our call today, which is dedicated to our Q2 and the first half of 2021 financial results presented in accordance with IFRS 16 as well as pre-IFRS 16 accounting standards. Please note that the management will be discussing the results on today's call under pre-IFRS 16 basis.We would like to remind you that some of the information announced during this call may contain projections and forward-looking statements regarding X5's future financial performance or events. Please refer to Page 13 of our press release for a full formal disclaimer. The press release and financial statements were published this morning and are available on our website in the Investor Relations section.Today, we have 3 speakers on the call, CEO of X5 Group, Igor Shekhterman; Vsevolod Starukhin, our CFO; and Sergey Goncharov, General Director of Pyaterochka. Unfortunately, Igor will need to leave after his presentation. So Vsevolod and Sergey will be taking your questions at the second part of this call.Without further delay, let me pass the floor to X5 Group's CEO, Mr. Igor Shekhterman. Igor, please?
Natalia, thank you. Good morning and good afternoon, ladies and gentlemen. Thank you for joining our call today. I will start with an update on X5 operations and key performance over the last few months. I am delighted to welcome on the call, Vsevolod Starukhin, who joined us as CFO in May. He will provide more details on our results and give an overview of year-to-date trading. After that, the General Director of Pyaterochka, Sergey Goncharov, will give an update on our pro forma performance and key initiatives in Pyaterochka.Let me start with our results. Revenue increased by 10.7% year-on-year basis. 9.6% of the growth was contributed by offline sales and 1.1 percentage points by our digital businesses. Despite last year's high base when we were dealing with panic buying and the lockdown effect, X5 delivered double-digit growth for the quarter. We can confirm with confidence our previously announced guidance of above 10% revenue growth in current year.We continue to gain market share. In absolute terms, we are adding more incremental sales than any other retailer in Russia. Our gains in market share are a reflection of the growth we have done to improve all aspects of our customer offer and to the high standard of customer service we are delivering both in-store and online.In the first half of the current year, our express delivery services and Vprok online hypermarket fulfilled over 10 million orders and 77,000 order on peak days, which allowed us to sustain market leadership in a grocery by total GMV for both the second quarter and first half of the year. Our GMV in Q2 reached RUB 11.9 billion. And for the first half of this year, GMV totaled RUB 23.6 billion, a 2.8x increase on last year's base. For the full year, we expect GMV from our online sales to be in the range of RUB 50 billion.In Q2, total monthly active users of X5 digital services increased by 82% year-on-year basis to 13.7 million. Our recently-launched food.ru media platform should help us to further increase on our online audience. Our gross margin remained flat in Q2, current year, year-on-year basis, which we can see a solid result given the competitive pressure from both offline and online players. Despite rising operating costs, for which there were some on off and some structural reasons, we are able to deliver the EBITDA margin of 8.3% for the quarter and 7.7% for the first half before LTI.While the pandemic is not over, we aim to be flexible and to provide customer-oriented service. We have been able to retain a strong level of consumer demand by continuing to adapt to changes in consumer behavior. These behaviors include remote homeworking, higher online demand and preference for healthy and fresh products. We continue to improve our core business while developing our digital businesses and online capabilities.Now I would like to say a few words about the operating environment X5 in Q2 and the beginning of Q3. Since April, we have been seeing a gradual normalization in the frequency of the in-store transactions and in basket size. This is something we expect to continue. We see increasing consolidation trends in the Russian market and generally positive. The share of the top 5 players in Russia is just 32%, while in other European markets, it exceeds 60%, 70%. Recent acquisitions in large cities indicates that competition will be accelerated [indiscernible], but returns on such investments remain to be seen. Market consolidation is generally positive for the consumer and for the economy and could also result in a higher predictability in terms of promo activity in the market.The recent drills haven't had an immediate impact on X5 as acquired players have always been our competitors. Moreover, consolidation is not the only factor affecting the sector. New disruption is coming now from digital players providing grocery and food delivery. The external environment in the grocery segment continues to be very competitive with many technology players, promoting waste services is a significant marketing budget. This has contributed to a structural shift towards fast delivery services for consumers not only in the capital, but in the regions as well.In the first half of the current year, the grocery market has continued to deliver strong growth, increasing in value by 2.5x year-on-year. The GMV of X5 online sales has increased by 2.8x this year, which is quicker when the market [indiscernible] were for helped to improve our market share in the grocery while growth in the online grocery segment in Q2 slowed to 88% from 324% in Q1, which was only due to the high base effect of the COVID lockdown. And [indiscernible] forecast that the grocery market will increase in size by 2.6x in the current year, and we agree with its projection.In our view, due to COVID, consumers have become used to buy groceries online and having them delivered faster than before. And this habit is only being supported by the market and efforts of new players. This is, of course, positive for market development. One structural shift that we are now absorbing in the grocery segment is the growing popularity of delivery within one hour, which we are responding to by expanding our express delivery capability. On-site effect of such growth in the online offering in the temporary shortage of logistic workforce in some markets, especially Moscow and the Moscow region. This situation has been further affected by the migrant labor deficit in the country due to COVID restrictions.In July, X5 experienced delivery shortages in its [indiscernible], which led to stock shortage, especially in the fresh category of fruit and vegetable. We responded to this situation by increasing the wages of our drivers who supply store out of our DC as well as distribution center staff. And we aim to be slightly higher when the Moscow regional market for this types of workforce and to make sure the July situation doesn't repeat itself. Despite stock shortage in some categories, July retail sales growth remained above 10%. Competition for logistics and store [indiscernible] is currently a challenge across the entire market. Our company is working towards better personal retention, which may require some additional investment.COVID vaccination rate and COVID-related restrictions differ across Russian regions. We are taking steps to promote vaccination in order to protect the health of our employees and to ensure operation. At X5, around 130,000 employees have received either 1 or 2 doses of vaccine. We estimate that in this year, the total cost related to vaccination will be amount to RUB 350 million, of which the majority will arise in the second half of the year.Let me now give you a brief overview of strategic initiatives and new businesses in Q2. We continued our program to refurbish Pyaterochka and Perekrestok stores. The new concept stores continue to demonstrate significantly higher like-for-like sales growth and NPS level when the old concept. By the end of the June, we represented 21 of all Pyaterochka and 17 of all Perekrestok stores. Like-for-like sales in our refurbished stores increased by 5 percentage points for Pyaterochka and 12 percentage points for Perekrestok. The Pyaterochka team has already reduced its refurbishment CapEx to a level of RUB 18 million and is aiming to bring it down by a further 10% next year. Sergey will elaborate further on this subject.Digital business net sales as a share of X5 consolidated net sales saw the fastest growth in Moscow and Moscow region, where we share a digital sales for Q2 of this year reached 3.6% compared with the average 2% contribution to total sales for X5 Group. Vprok continued to expand based on its existing infrastructure of 4 dark stores. The total number of orders increased by 13% year-on-year basis and exceeded 1 million in Q2 of the current year, delivering growth despite the high base in Q2 last year. The average Vprok basket in Q2 of the current year increased by 6.3% year-on-year, reflecting further expansion in the assortment to 69,000 SKUs. This also reflected a more normalized basket compared with Q2 of the last year when a full lockdown was in place for most of the quarter. In Q2 of the current year, Vprok expanded in a regional delivery network to 42 regions by using existing 5Post infrastructure. We are in a good position to continue capitalizing on higher online demand with fast delivery. We will continue the rapid expansion of express delivery services from Pyaterochka proximity stores and Perekrestok supermarkets. This service fulfilled on average 46,600 orders per day in Q2. It is now available from 1,450 stores in 36 regions compared with 439 stores and only 6 regions a year ago. In addition, ready-to-eat food delivery was available from over 200 restaurants via the Okolo aggregator app. Okolo has expanded to major Russian city. It is now available in St. Petersburg, Voronezh, Nizhny Novgorod, Kazan, Krasnodar and Rostov-on-Don.Through our loyalty program, we see that around 25% of express delivery customer and new for us, and the average monthly spending of an omnichannel customer is 37% higher compared to our loyal but purely off-line customer. The 5Post e-commerce delivery service fulfilled 4.7 million order in Q2 of the current year from 19,000 pickup points is about to become formally EBITDA positive this year.In June, we announced the restructuring of our digital business. The Vprok online supermarket, express delivery grocery services and Okolo aggregator platform into a separate business unit within X5. The developing digital businesses is one of our priority under our 2021-2023 strategy. To take this, we intend to capitalize the value of our digital assets to make it transparent to our customers and partners. We will communicate more details about the time line and the steps we will take to develop a new business in due course.To continue piloting our Chizhik hard discounter format, customers have responded positively to the first store we opened in Moscow and the Moscow region. According to surveys, the main advantage of our Chizhik store are their low price, the ability to make [indiscernible] purchase, our friendly staff and the pleasant atmosphere in the store. The Russian customer remains price sensitive and take a very rational approach to purchases. We currently have 20 Chizhik stores but plan to increase this to [ 50 to 70 ] stores by the end of the year and opened several hundred stores in 2022. We can see the hard discounter to be an attractive segment in the Russian food retail market. The hard discounter format accounts for less than 3% of the Russian market compared to the 20%, 40%, its account for the mature European markets. Using our existing logistics infrastructure and purchasing power, we see an opportunity to provide an attractive customer offering. By the end of this year, private label goods will account for 40% of Chizhik sales, up from the current 10%. Without disclosing any precise figure, we expect that the sales density and labor productivity in our hard discounter format will be at least 50% higher than the rest on other region Russian retailer. Our pilot has fully confirmed this assumption. And in 2022, we will open several hundred Chizhik stores. To be present at all stages of the customer journey, which starts long before the customer enter one of our stores and stretches into the online environment, we launched our own food.ru media platform. Consumer preferences are increasingly shaped by the media, particular social networks, food-related sites, blogs and podcast. Food.ru is an important communication channel that connects X5 with our customers at the purchase planning stage. In July, the platforms MAU already totaled over 3 million in addition to over 6 million subscribers through social networks and messengers.The amount of content we created exclusively in-house for this platform exceeds 10,000 units. We expect the launch of food.ru to improve the user experience and certification of our customers. This will be achieved by enriching the company's user data in order to improve the quality of personalized offer. Also, we use the media platform will create a seamless user experience. In the future, for example, you will be able to go from a recipe you like at food.ru to an online supermarket or express delivery service and see a basket already put together on the basis of the recipe.In addition, tips from food.ru will be integrated with the shelf in off-line store. For example, user will be able to scan through our course, installed to get recipes that can be prepared using the products on a particular shelf. In addition, integration into retail chains will make it possible to provide customers with ideas on what can be cooked using the products currently on promo.The Mnogo Lososya ready-to-eat online services, which became part of X5 Group in later March current year, expanded to St. Petersburg. It was operating 30 dark kitchens as of the end of June, and it delivered over 2,400 daily orders in June with the average ticket of RUB 1,500. Currently, 24 sushi points operate in Perekrestok store. And in August, we are piloting delivery from Pyaterochka dark stores. In the last -- in the next year, Mnogo Lososya will enter 6 new cities, Nizhny Novgorod, Kazan, Ekaterinburg, Novosibirsk, [indiscernible] and Krasnodar.We continue testing a subscription service, which will offer customers the opportunity to receive special discounts at X5 and its partner stores. We are also working on the development of fintech service together with Alfa-Bank and X5. Together with Alfa-Bank, we will begin providing financial services to the company customers. We plan to launch the [ MVP ] for payment service in Q4. In particular, the payment system will be integrated into the mobile application of all X5 businesses. At the beginning of next year, we plan to launch full-scale banking service, featuring a bank card and unique offer for X5 customers.Our management is currently updating our 3-year plan for '22-'24, which will be presented to you at our Capital Markets Day. This will be held and it's scheduled for October 27. We will focus on the pathway to support a double-digit growth and further increase in efficiency to support profitability.Finally, I am proud of our ongoing efforts to drive sustainability in the business, including is disclosure. In May, we published our first sustainable development report under GRI Standards, which capture our progress to date against the medium- and long-term goals set in our sustainability strategy. I am confident that we will meet our target for 2023 and 2030 and be leading contributor to sustainable development and to achieving the United Nations Sustainable Development Goals.Our progress to date has already been noticed in the international level. For example, MSCI ESG Research upgraded X5 Group sustainability rating from BB to BBB. And X5 was ranked first among retailer companies for its performance in sustainable development by the rating agency RAEX Europe.Now I would like to pass the floor to our Chief Financial Officer, Vsevolod Starukhin. Thank you for your attention.
Thank you, Igor. Good morning and good afternoon, ladies and gentlemen. Thank you for joining our call today. Let me start with the macro environment, after which I will give an overview of our financials on the IFRS 16 and provide you with some insights on the quarter-to-date results.Food inflation in Q2 remained high at 7.3 percentage points year-on-year, peaking at 7.9% in June. Key drivers persist inflation of fruit and vegetables at around 8%, sugar at 42%, eggs at 41% and vegetable oil at 26% compared to the previous year. This was influenced by the acceleration in global soft commodities price inflation and poor harvests. The exchange rate remains rather stable and did not add much to food inflation during the quarter.Growth of nominal wages accelerated to around 10% in Q2 versus the previous year compared to 6.9% in Q1 2021, which supported domestic consumption. Unemployment in Q2 decreased to 4.9 percentage points compared to 5.6% in Q1 of this year. The migrant labor supply started to slowly recover. The number of labor payments issued in June declined by 13% year-on-year compared to 42% year-on-year decline in March. But the shortage of entry-level labor in the market is still noticeable, especially in the retail industry and which Igor have already mentioned.Looking at margins in the second quarter. As Igor already spoke about our revenue drivers, so I won't repeat what he said. Pyaterochka, Perekrestok and our digital businesses were the main contributors to -- and the contribution to our revenue growth from selling space and like-for-like was comparable for the quarter. We managed to keep our gross profit margin flat year-on-year at 25.3% in Q2.Two items put pressure on our gross margin in Q2. First, we experienced higher logistic costs [indiscernible] rising market competition, for logistics personnel from online players was impacted by higher COVID cases and low supply of migrant labor. Second, we had highly -- we had slightly higher shrinkages in fresh categories in Q2 due to the abnormally hot weather in our operations, core regions. For the first half of the year, however, our shrinkage level is down 10 basis points year-on-year. These negative effects were fully mitigated by better commercial terms, favorable product mix and that reflected the abnormally hot weather in the central part of Russia and stable promo levels year-on-year. In Q2 '21, SG&A expenses, excluding depreciation, amortization, impairment, LTI and share-based payments as well as impact of Karusel transformation as a percentage of revenue, increased by 39 basis points year-on-year mainly due to the growth in the full year costs in our fast-growing express delivery service followed by the higher staff costs and marketing expenses. Full year costs increased in line with physical expansion of our express delivery service to the new regions, while we continue working on the other full-year cost reduction by improving full year utilization rate. Higher staff costs were driven by the hiring of additional personnel at Pyaterochka to continue the formal digital transformation. We also executed in Q2 our planned salary indexation for in-store personnel across the regions. The level of salary indexation was slightly above the CPI level for the period. Beyond the reporting period in July, we started increasing wages for our logistics personnel according to our annual schedule and also responding to the more challenging situation with the labor in Moscow and Moscow region.Finally, the level of marketing expenses in Q2 have normalized against revenue as they were lower last year on the back of reweighted revenue during the COVID. As a result of stable gross margin and minor pressure from operating costs, our adjusted EBITDA margin totaled 8.3% in Q2 and 7.7 percentage points in the first half of the year, which we consider a solid profitability result given the ongoing investments in our new businesses.In the first half of the year, the total negative impact on EBITDA margin from our digital sales, which include Vprok, express delivery from Pyaterochka and Perekrestok stores, Okolo aggregator and 5Post, is estimated at 38 basis points, which is up from 16 basis points a year ago. Our core off-line business represented by Pyaterochka and Perekrestok result, the express delivery sales demonstrated a solid 8.2 percentage points margin in the first half of the year, flat year-on-year.LTI and share-based payments expenses amounted to RUB 1.2 billion in Q2, which was higher than previous quarters due to structural changes. In the Q2, we continue to accrue the liability for deferred conditional payout related to the previous LTI program 2018-2020. And they started accruals for the new LTI program for years '21-'23, alongside the new LTI program for our new businesses like 5Post, Chizhik and Okolo included in the previous periods. The accrual going forward will be lower compared to Q2 of 2021 at around RUB 800 million, RUB 900 million per quarter.D&A and impairment costs increased as a percentage of revenue by 30 basis points to 3.4 percentage points. This was mainly due to the increase in the gross book value of assets, which outpaced revenue growth and the accelerated depreciation rate, which was driven by the increased number of refurbishments at Pyaterochka and Perekrestok. This is 805 store refurbishments in the first half of the year, which is more than 2x over the prior year.In Q2 '21, net sales cost declined by 6.2% year-on-year, driven by the fall in the weighted average effective interest rate on X5 total debt from 7.3 percentage points last year for the same period, down to 6.1 percentage points in the first half of this year as a result of low interest rates in the Russian capital markets as well as actions taken by X5 to minimize interest expenses. X5 effective tax rate for the quarter totaled 25.2 percentage points, including the accrual of deferred tax associated with potential dividend payments. The company net profit margin in the reporting period, in line with EBITDA margin trends decreasing 35 basis points year-on-year, down to 3 percentage points. Turning to our financial leverage. At the end of Q2, our net debt-to-EBITDA ratio was 1.68x. Going forward, we aim to maintain this ratio at a comfortable level below 1.8x, while continue to pay dividends. Turning to cash flow now. The net cash flow generated from operating activities in Q2 was RUB 36.7 billion. For the first half of the 2021, our operations generated RUB 61.1 billion of operating cash flow, which is 7% up year-on-year and reflects both growth of our business and the solid profitability of our operations.Positive change in the working capital of RUB 932 million in Q2 compared to the negative change of RUB 15 billion in Q2 previous year reflects the normalized seasonality of working capital trends. The abnormal negative change in the working capital that occurred in Q2 2020 was actually due to inventory turnover and changes in accounts payable, owing to the fact that consumers were stocking up in March 2020 ahead of tough COVID restrictions.Now a few words about CapEx. X5's total capital expenditures amounted to RUB 23 billion in Q2 compared to RUB 21.6 billion a year ago. The growth of 6.5%, driven primarily by the front-loaded number of refurbishments in our proximity format. 368 Pyaterochka stores were refurbished to the new concept in Q2 this year. This is a 3.6x more than a year ago. In the second half of '21, of this year, we plan to refurbish about 200 Pyaterochka and 25 Perekrestok stores. So we can say that only 20% of refurbishments are left to be done in the second half of the year.36% of CapEx in Q2 went to the expansion of our store base, 27% of refurbishments and another 14% to regular maintenance, totaling 77% of our total CapEx for the quarter. Logistics CapEx was 2% of the total, IT represents 6% and other investments accounted for 15%, which was RUB 3.5 billion on a quarterly basis and consists of CapEx on digital businesses, the efficiency projects for the retail chains and the corporate center and the business support function. Our CapEx in the first half of the year totaled RUB 43.6 billion, which was slightly below our budget for the first half of this year, mostly due to the changes in the implementation of our various IT and efficiency projects.Finally, I will give an update to the quarter-to-date results as well as our annual guidance. Net retail sales in Q3 so far have grown by 10.5% year-on-year and like-for-like sales have risen by 3.6%. Both like-for-like traffic and average ticket have been positive since July. Our new store openings are confirmed at 1,500 stores across all formats, including pilot Chizhik stores. Refurbishments will be slightly lower than originally guided 1,300 stores at around 1,100, 1,200 stores. Our current expectations is that CapEx 2021 should not increase ahead of our revenue growth. And finally, our year-end EBITDA margin guidance is upgraded to at least 7.3 percentage points from above 7% before given strong margin we achieved in the Q2.With that, I would like to conclude the discussion on our results and hand over to Sergey Goncharov for an update on Pyaterochka performance, our main growth and profitability driver.
Yes. Thank you, Vsevolod, and good morning and good afternoon, ladies and gentlemen. I will start with an update on Pyaterochka's operations and key achievements over the last quarter. After that, our team will be happy to take questions.Let me start with our results. Pyaterochka's net retail sales increased by 10.3% year-on-year in Q2 2021. 10%, 9.9% to be exact, of that growth was contributed by our off-line sales and 43 basis points by express delivery. Our stores are getting stronger, and our e-commerce capabilities are expanding as we continue to grow.Pyaterochka generates more than 80% of X5 Group's consolidated sales and 90% of the profitability -- EBITDA profitability. Pyaterochka's EBITDA in first half 2021 reached the margin of 8.4% after LTI. The impact of express delivery on EBITDA in the first half of this year totaled 13 basis points, which we can see are quite manageable. The main margin support came at the gross margin level with solid commercial margin and stable share of promo were the main positive drivers.I also would like to reiterate our continued focus on efficiency of our operations, including the focus on lowering the shrinkages. Just to inform, our shrinkages level reached 2.9% in first half of this year and in June, 2.8% as a percentage of net sales. Just to remind, it's 1.3% below that figure about 3 years ago. And also, we will continue our work in this respect, and we believe that this is one of our key profitability levers. Pyaterochka's revenue growth was supported by a 7.8% year-on-year increase in selling space and like-for-like performance. Our network expansion this year is currently slightly ahead of our initial plan of 1,400 stores on a gross basis. And today, I estimate that our format will grow by 1,400 stores this year before any store closures. We already have 3,560 new concept stores, of which 1,405 are stores that were refurbished since 2019. The refurbishment contributed positively to our 3.7% like-for-like sales growth as new concept stores have 5 percentage points higher like-for-like compared with -- to that of old concept stores.Our positive like-for-like reflects a record high NPS level of 10% -- 10 points as of June 2021, which will have a long-term structural support to Pyaterochka like-for-like sales. Also, on this note, I would like to point out that the net sales grew by 10% in first half and EBITDA increased by 15%, which signifies a 50% higher growth of profitability versus sales.Starting from April, we have seen a reversal in the -- in some trends that we've witnessed last year. Our customers are now making more frequent visits to stores with a smaller basket size compared to 2020. Like-for-like traffic increased by 13 percentage points year-on-year, while like-for-like basket decreased by 8.3% in Q2. This is mostly due to the smaller number of items customers are buying. The average check at Pyaterochka has normalized at the level of RUB 400 in second quarter 2021.Given the strong positive customer response to our new concept stores, we front-loaded our refurbishments in first half of this year. And in second quarter, we refurbished 368 Pyaterochka stores, bringing the number of refurbishments in first half to 793 stores. In second half of 2021, we plan to refurbish around 200 Pyaterochkas so that the annual total number reaches 1,000. We opened 659 new concept stores in first half, and the total number of stores operating under the new concept reached 21% of the Pyaterochka store base as of June 30, 2021.As you know, the equipment and construction costs per store depend on a number of factors, including the region and the needs of local customers. We are constantly making changes to adjust CapEx by using simpler but more durable materials and equipment while improving the customer experience through a debt assortment and convenience. The new Pyaterochka and the store and the new Pyaterochka concept is continuously evolving and improving. The number of closures remained at a low level of 46 stores during the quarter, which reflects the increased quality of new openings in recent years.In first half of this year, the food retail industry faced a number of challenges. High food inflation makes it difficult to shift price increases entirely onto the shelf. But we were able to balance out the negative impact of rapidly rising food inflation and prices and maintain customer loyalty, thanks to the efficiency of business processes, including Big Data-powered assortment planning and pricing as well as automation of various operational processes. At the same time, we maintained our promo level at around 35% of revenue, which was stable year-on-year and allowed for solid margin performance in the quarter, as I indicated earlier.Among other challenges, we experienced a temporary shortage of logistics force -- logistics workforce in some regions, driven by the deficit in migrant labor in the country due to COVID restrictions, which led to temporary shortages in our stores. This was most notable in the Moscow region. We responded to this situation with a number of initiatives, including transfer of deliveries to neighboring DCs with enough distribution centers with enough capacity, indexing the wages of drivers and DC personnel based on the HR monitoring data and introducing seasonal extra payments. Other measures included strengthening and recruitment function as well as increasing the out staffing capacity. In the first half of this year, we first experienced an abnormally cold and snowy winter followed by an abnormally and hot summer, especially in the central part of Russia and in Moscow. This led to increased utility costs due to high electricity consumption and snow removal services in January through March. In second quarter, the hot weather positively impacted our sales mix in high-margin categories, but also led to some growth in shrinkages in fresh categories. However, we dealt with that very, very well, as I also mentioned a bit earlier.Overall, in first half of this year, our chain delivered 11 basis points decline in shrinkages, and we see further scope to reduce it, as I already also talked about. The number of active Pyaterochka loyalty cards, card users increased by 8.4% year-on-year to 46 million. Loyalty cards penetration in our sales in June reached 80%, while penetration in traffic was about 65%. The average ticket of a customer with loyalty card was over 2x higher than the average ticket of a customer without a loyalty card in second quarter 2021. Pyaterochka is better positioned today to connect with our customers online than it was before pandemic.Total now of the Pyaterochka mobile application in June was 7.6 million, an increase of 55% year-on-year. Pyaterochka's data capabilities contribute to a more personalized customer experience. We are scaling our CVM, customer value management system, and increasing the share of personal promo and reducing the share of mass promotions. The CVM product already has positive EBITDA with personal communications reaching 23 million customers. Further to our personalized offers, our online customer feedback program already has 140 million ratings from 4.5 million loyal customers. Customers now can decide how and when they want to shop. And they will find us ready when they want to shop in store or have an order delivered.We continue to develop an express delivery service. As of June, this service was available in 864 stores and the number of delivered orders reached 2.4 million during the second quarter. Just to remind you, we started the service in February last year with just 300 orders per day. Now we deliver about 30,000 orders per day.Unlike its sector competitors, however, Pyaterochka already has a well-developed infrastructure of retail stores across Russia. Given our leadership position on the Russian food retail market, we can offer the best prices and our stores can reach 50% of the Russian population within 30 minutes. In addition, due to high brand recognition, customers trust the quality and prices of our products and believe that we provide some same level of service and express delivery as we do in our physical stores. Brand Finance valued Pyaterochka brand as #6 in Russia ahead of the consumer brands like MTS, Yandex or Magnit. And this news just came out a couple of weeks ago.We are working to increase the efficiency of the express delivery service. We have reduced the delivery times and the cost of assembling orders to 47 minutes and RUB 141 per order, respectively, in the second quarter. In June, the service reached a positive EBITDA in Moscow on a cash basis before marketing costs and HQ headquarter allocations costs. We are piloting dark stores to fulfill express delivery and added 5 new dark stores this year, bringing the total number to 13, all of which are in Moscow now. Many of you may think that Pyaterochka is at its maximum capacity in Moscow. However, this is not the case. We continue organic development in Moscow, and we aim not to overpay for acquisitions and to engage in organic development in a highly profitable and well-known market for us. We have also revised our approach to refurbishments. We are improving stores where the environment requires it. In the regions where we are limited by market share threshold, we relocate our stores to more attractive locations and develop franchise operations. We plan to triple the number of franchisee stores by the end of 2022. The mechanics are already well developed. We give our partners an operating model and carry out high-quality control of compliance and with all requirements as well as all of the operations that require the high customer service to which our guests have become accustomed to. We are changing our approach to private label development at Pyaterochka by recognizing and prioritizing quality. We are actively developing the private label category with the current share of sales at slightly above 20% in first half 2021. The average quality rating by customers is 4.7 points out of 5 for this category.Sales of the private label products increased by 32% in the first half compared with a 10% growth of our format overall. Out of Pyaterochka top 100 products based on customer ratings, 20% are private label. In first half '21, we held over 1,000 tastings in order to further improve the quality of our private label goods.The share of ready-to-eat assortment reached almost 1% in first half this year, increasing by 0.4 percentage points year-on-year, and sales of this assortment increased by almost 100% year-on-year. The focus of Pyaterochka management remains on maintaining the strength of our customer relationship through loyalty, value and convenience. We are maintaining our commitment to making it more attractive to shop at Pyaterochka. Our success is internally evaluated by the formats, NPS and like-for-like. The formats management has ROIC as one of core KPIs for the chain. Hence, our growth is measured against the efficiency of our investments.With that, I would like to conclude this discussion of our results, to thank you for your attention and open the floor for your questions. Thank you.
[Operator Instructions] And your first question comes from the line of Kirill Panarin from Renaissance.
Two questions from me, please. Firstly, I just wanted to get a bit more color on the lack of logistics employees issue. So what was the impact on Q2 margin? How material was the increase in salaries, which you mentioned? And what sort of pressure on margin do you expect from this in the second half? And finally, could you confirm there is currently no impact on operations availability, et cetera? That's the first question.And my second question is on Pyaterochka. Can you update us on the profitability level in the new concept stores and whether we could expect a growing share of new concept to drive upside or downside to the group's margin? That's it.
Sergey, yes, if you could start on the logistics, I would have to say that we don't quote the exact profitability level at the new concept. But it doesn't deviate that much from the profitability you see for the format overall. And it has higher sales density but similar EBITDA margin. Sergey? Thank you.
Yes, exactly right. What Natalia just said regarding the profitability of the new concept stores. As for the situation with logistics, yes, starting from July, we have been experiencing a temporary shortage in our logistics workforce in some markets. It was particularly noticeable in Moscow and the region. And this situation was caused mostly by increased demand for logistics personnel. And the demand for the personnel came from traditional retail players as well as from the e-commerce players. And basically, it was sort of industry phenomenon in July. As for the impact on our sales impact was approximately RUB 2 billion, and we don't see any significant or material impact on either our sales level or our profitability level. And in terms of our actions, I want to highlight that in July, we had a planned indexation for our supply chain personnel, and this is within our projected figures. And we aim to be slightly higher in Moscow and regional markets for this type of work for us to make sure that July situation does not repeat itself. And this is sort of a strategic priority for us. And as I said, despite shortages in some categories, July retail sales growth remained double digit for Pyaterochka and for X5 overall. Actually, as a matter of fact, we have seen acceleration of our sales growth in July compared to the first half.
Next question comes from the line of Elena Jouronova from JPMorgan Moscow.
Yes, I have a few questions. First and foremost, please do not take this as a criticism, but I think we did find that the like-for-like sales growth in Q2 was a bit low. And maybe I'm wrong, but could you please explain to us, is that really in line with your plans and targets? Or maybe you can do something in order to accelerate like-for-like sales growth? That's the first question.
Yes, I'll take that one. The thing is that, yes, our like-for-like sales, and I'm talking about Pyaterochka is -- was about 3.7%. And -- but what is important is that you need to look at the composition of that number. And our traffic increased by 13 percentage points, while the average basket reduced by 8.3 percentage points on a like-for-like basis. We view this -- we don't look at the like-for-like sales number just in a particular period as an isolated number. We look in -- as a trend. And what we see is a very positive trend that -- the real increase. And for us, this is sort of -- we think in real terms when we think about traffic as opposed to nominal terms. And the basket can be improved by a number of movements such as increasing the promo, for example, that will increase the basket size or sort of dropping the prices on certain key value indicator products such as, I don't know, chicken or banana. But we stay away from such tactics and measures because we want high quality growth of our sales, and we are very encouraged by the fact that traffic increased 13% without us sort of resorting to such measures that I just mentioned.
Okay. That's understood. And then you're mentioning higher margins and profitable growth. So perhaps you were not investing too much in promo, right, in Q2. So gross margin stable and strong. Does it mean that competition is benign and you're not really under pressure to invest more in price maybe in the second half of the year?
First, I'll explain about the first half and then our second half. Basically, competition, of course, is there. You see it, right? And competition did not disappear. What we see, though, and what you see in terms of our profitability and gross margins that we are now able to sort of translate our initiatives and investments in our digital products and initiatives that we started about 2.5 -- 2 years ago. Remember, we explained some time ago about approach to -- a new approach to price formation and how we're able to still keep the low -- the image of Pyaterochka as a low-priced store and yet maintained -- which is confirmed by increased like-for-like traffic and still maintain a reasonable marginality on back basket. And this sort of approach would have been impossible without big data backed instruments that we developed in our pricing model.And talking about the expectations for the second half. Basically, we don't have such plans at the moment. However, the situation may change in the future. And we are committed to delivering the highest quality service to our customers while still being the -- one of the most attractive players in the market from the price point of view.
And actually, can you please comment what are roughly the like-for-likes in Moscow and Moscow region? I mean, probably you can't disclose the number, but just direction versus the average like-for-like you reported for the format.
Yes, you're right. I can't.
Sorry.
But I can comment on the dynamic and dynamics. We're quite pleased with what we have done in Moscow.
So you have like positive like-for-like in Moscow, correct?
Yes. Our dynamic is positive. However, the exact numbers we don't disclose.
Understood. And sorry, if I may continue because this is a very important topic. Actually, Sergey, you mentioned that you are monitoring traffic and it's an important metric. So we are tracking a number of customers in Pyaterochka on a quarterly basis. And what we're doing is we're estimating traffic per store and we're actually seeing that your traffic per store in Q2 2021 was 7% below what it was in 2019. We think that 2020 is not a relevant comp. So we're comparing to 2019. And to me, this looks like a pretty significant traffic migration either because you're facing more cannibalization or competition or migration to online. How should we think about those dynamics?
Well, you're talking about the overall Pyaterochka as a retail chain, all over Russia, correct? And...
Yes, I'm taking a number of customers. I think 1.3 billion dividing by average [ scores ] you had in Q2, comparing that to what was there 2 years ago.
Yes, yes, very good and incisive question. And the answer to that, Elena, is that we are expanding and quite rapidly, as you know. And since 2019, we have opened around 3,000 new stores. And those stores were opened sort of in the areas where we have lower traffic compared to Moscow and St. Petersburg. So we are expanding eastward. And into areas where we -- where naturally the traffic is lower. However, what is important is that, that traffic that is generated by our new stores is good enough and to achieve our financial targets. And the answer to that is yes. A resounding yes. We are very, very, very satisfied with the return on investment on the new store openings.Moreover, the stores which we are opening in those areas, going eastward and southward away from the areas like in St. Petersburg, where we basically can't open any new stores due to the restrictions, right? So when we go in there, the CapEx for those stores is lower. And so the return is very, very handsome. So I hope that answers your question.
Thank you, Sergey. Elena, I would also encourage you to look at the number of loyal customers, which for Pyaterochka, increased on a year-on-year basis by more than and the fact that the loyal customers spends 2x more than a passerby. And if you don't mind, we would like to give floor to other analysts, to our investors to ask their questions. Thank you.
And your next question comes from the line of Henrik Herbst from Morgan Stanley.
Yes. I think that was me at least, but hopefully, the -- I had a couple of questions. Firstly, around Chizhik. I think you said, if I heard it correct that you plan to open hundreds of stores in 2022. I was wondering if you could talk a little bit about -- more about that. Is that going to be new stores? Or is it going to be Pyaterochka stores that are transformed into Chizhik? And how should we think about that in relation to the rollout of additional Pyaterochka stories? Is this sort of coming on top? Or are you shifting spend and focus a little bit? And then secondly, I wanted to see if you could give us a little bit of an update. I know you've kindly given us the drag on EBITDA margins from your digital businesses in the quarter. I think you were saying previously at least that you expected Vprok to be EBITDA breakeven this year. Given that you now put your digital businesses in a separate unit, and we don't really know what will happen with that, does it make sense to make the businesses EBITDA breakeven already? Or has that changed? Has your thinking around investment in those businesses changed in terms of EBITDA breakeven?
Okay. Thank you for your questions. Let me answer them. The first question was regarding our plans to open this [indiscernible] the Chizhik hard discounters. Just to remind you, our target is to finish the year with opening roughly 50/70 stores, which is a pilot phase when we are facing operational model and building up the private label SKUs, which should represent one of the key drivers -- efficiency drivers and then customer attraction models. So we will be ready to roll out this model next year onwards, opening hundreds of Chizhik. So we cannot, at the moment, disclose the exact number next year onwards. And this is coming on top of the organic expansion plans for Pyaterochka or Perekrestok. So there is no, let's say, cannibalization in terms of this expansion. Chizhik will be using the Pyaterochka stores. So I would say it's in vast majority of the cases, it will be the new places. And just to remind you that the target floor space for Chizhik is around 250 square meters. And this is -- also we have some Pyaterochka operating in this footprint. But in general, this is not a standard sort of a footprint for the Pyaterochka, it's operating in January and the bigger footprints.Now this is -- your second question on Vprok. That is true actually, we have in June have targets like 3 years for all our key projects for breakeven and on year 4 onwards to generate the positive EBITDA. The Vprok, which has started very well last year and then continue a good growth this year. However, I would -- at the same time, we have faced what Igor mentioned and you know very well, we have very intensified competition in the market on the fintech players who basically, since some time last year, started heavy investments in the food retail, basically part of the businesses. And that has significantly increased the competition, the cost of acquisition of the customers, the marketing expense we'll be spending. And that is moving a little bit to the right, our breakeven point for the Vprok. However, we are still targeting to break it even despite this more competitive environment.
Can I also just clarify -- sorry, very quickly on Chizhik. Did I hear it right that you said your sales densities are higher but your profitability is the same. Is that -- is the profitability in absolute terms or in margin terms, I guess, versus your existing performance? You see what I mean? I guess, if your sales sensors are higher, but your margins are the same, EBITDA per square meter or whatever should be a lot higher presumably. And presumably the investment in opening at Chizhik stores should be lower than Pyaterochka. Is that math right?
It's a good question. We are still in the -- on the stage when we opened just 20 Chizhiks, I think yesterday, the number 20 was open. So what -- we are still testing the business model and we have just -- I don't know, 1/3 of the private labels in the -- operating in the Chizhik stores. So at the moment, we still have to basically to rely on our business targets, estimates for the profitability of the Chizhik. There are some signs that it actually may be better. However, let's be cautious. So the answer is the following. At our original business model, Chizhik was looking to operate as a store with a much higher sales density and much higher labor productivity than any other standard off-line retailers in Russia.And in terms of the margins, profitability, it's however, we will be operating according to our model at slightly lower margins versus our existing trade chains. However, it will require significantly lower CapEx investments to open the store. And as such, it will be generating a better ROE per store opening, if you would compare it to the Pyaterochka or [ Krasnoyarsk ].
And your next question comes from the line of Nikolay Kovalev from VTB Capital.
I have 2 remaining questions, and both of them are more of a strategic nature. First is on your online e-grocery business. We saw an update to date from the marketing agency and you kept the first spot so congratulations. And it looks like it's prime issue for the investment case at the moment. And my question is, correct me if I'm wrong, but from the recent top management comments, it looks like the company is cautious on very aggressive pace of investments in marketing and promotion of the business. And this is a bit different from your key competition in the market, which is rather aggressive. So can you comment to what extent X5 would like to shield the market leadership position in online sales of food? And maybe you can also update us on the development of potentially JV, which you anticipated on rather shorter-term horizon.And the second question is on fintech business. Maybe you can speak about more what kind of products you would like to offer, how they can cover your existing business and potentially how significant fintech can be in your profits in the future?
Thank you for your questions. Yes, let me start with e-grocery development. Just to start you with -- to start my answer, I remind you our targets in terms of the market share in the e-grocery business, which we have set ourselves and basically shared with you already last year, beginning a 20% market share in 2023, if I'm not mistaken. And so basically, we are well oriented to this targets in January. However, what we have seen, there are basically sort of the fragmentation of online delivery services, what's taking place today. The Vprok is basically the keeper market effectively online keeper market, which is covering primarily food range. However, it's been building up a nonfood range as well as SKUs. So it's running with already close to 60,000 SKUs and continue to grow it.The second segment is express delivery from the stores, which is basically from the platforms of our stores, Pyaterochka and Perekrestok, and the Peregian museum. But why not work delivery and the hypermarkets actually operating with a longer timing in terms of deliveries, a few hours of next-day delivery and express delivery so-called with a very small range and where we are not present, like Express, Yandex, Lavka and so on, delivering in basically 15 minutes. So in all 3 segments, the -- all the 3 segments are covering different customer needs, and they have different dynamics. Still, we have to say that they are establishing themselves. So basically, they are all the players are losing quite heavily the money and then spending a lot of funds either raised on the IPO or some of the players or in different ways. But they could declare they still have hundreds of millions of dollars, equivalents of the investments in the marketing infrastructure -- so. We believe that we have, first of all, the main strengths in the express delivery because we already have the platform of 18,000 stores in the country, and this number is growing year-by-year, minimum by 1,500 stores. And we have the best probably in the market commercial power. Logistic infrastructure to deliver from DCs to our stores efficiently the products and quite easy for us to scale it up versus competition who has to invest in the overall capability and specific infrastructure to manage to do the deal with the food products and to basically try to match our prices with much lower commercial power. So all in all, we are just carefully delivering our strategy, and we are not in the game to throw heavy marketing budgets just to compete with them on their so-called quick delivery, 15 minutes segment or the hypermarket delivery. We would rather focus on how we can utilize our strengths. This way, we can pick up structural strengths and also to look for potential partners if they can add and be complementary to our platforms.This is primarily related to the Vprok hypermarket. And so far, it's still work in progress, I would say, in which we in format, we will continue to develop this format. But again, we are not in the game to buy the market shares and throwing RUB 1 of investments -- RUB 1 of GMV like some other players seem to be doing.Now the second question regarding the fintech, which is basically [indiscernible] at the moment, X5 Bank. We're actually combining our forces together with Alfa-Bank to stay on the last stage of the customer journey, either online or off-line on the payment stage. And basically, we plan to launch the MVP of the X5 Bank, the first payment product actually by end of the year. And there, again, it's difficult to give you a precise estimation on the impact of this platform, fintech platform. However, I can pinpoint the directions where we believe it will be contributing to existing X5 business. To start with, we believe that it will help us to actually to join potentially our loyalty programs with the payment program, is actually with the payment cards, either virtual or the physical one of X5 Bank and to make a more smooth integration of collecting the loyalty bonuses, so-called scores using the X5 payment bank. And as such, to increase the share in the wallet of the customers because we remember that the average customer has in their portfolio 6, 7 shops, to cover their needs. And we do believe that via various instruments like express delivery, like X5 Bank, will be increasing our share in the wallet of the customer replacing the competitors with presence on all stages of his journey actually.And next, we will be looking at offering the customer besides payment services, more so to a classical banking products, could be deposits and the credits, consumption credits, which may be as well, attractive enough. We generate bonuses and be competitively priced versus market products. And the short element, which we try to explore is to trying to build into the X5 Bank direct debit function, which in fact will be helping to -- should be successful in converting our large number of customers to X5 Bank as a payment instrument, helping us to address the issue of growing acquiring costs, what today we, as all retailers are experiencing. And to be honest, just to remind you the estimated acquiring cost, what we're going to pay this year will be over RUB 10 billion. So if we are able to somehow reduce it, it will be a significant impact on the profitability directly as well. So these are the few areas, which we will be looking to explore and unlock the potential as a part of this X5 Bank development over the coming couple of years.
And your next question comes from the line of Maria Lukina from BCS.
I have 2 questions. First one, can you please tell us about changes in customer behavior, which you have seen in the second quarter and started to 3Q? And the second one, can you please share with us the dynamics or trends, which you have noticed in July, August in terms of level of promo sales are online also?
Maria, thank you. Yes, Sergey, yes, will take the question. Thank you.
Yes. Thank you for the questions. And I'll start with the first one. We are not currently seeing trading down yet. And -- but it's possible, given persistently high food inflation. And we're aiming to maintain adequate and attractive prices because we believe that, that remains most attractive to our customers.In terms of trends, we also don't see much deviation from what we had expected and what we have seen over the past a few months. So the basket size, of course, decreased due to obvious reasons. And like I said before, we are very encouraged by the fact that we see in the like-for-like increase in the footfall in our stores.In terms of projections for the rest of the year. I believe that pricing will continue to be a very important factor in customer behavior. And the good thing is that we actually -- we're we very much aware of that and we prepare for that. Two number of factors. One being is our investment into our -- and strengthening of our pricing model. And second one is focusing on our private label program. And third one, focusing on our first entry price point in the market.
And your next question comes from the line of Marat Ibragimov from Gazprombank.
Question is about how you dealt with incumbent food inflation? Did you persuade your suppliers to smoothly increases as much as possible. or you passed this inflation on the customers because given the performance CFO gross margin figure year-over-year. It looks like you didn't suffer much from the food inflation, i.e., you didn't invest into prices in order to keep customers in your -- with your stores?
Yes. I was told by Natalia to take this one as well. So yes, a good question. We -- there is a combination. We did pass on part of this inflation. And of course, the second one is we have negotiated and are negotiating with our suppliers regarding the issues of trying to control the pricing as much as possible. Now the issue of being able to manage the prices for -- sorry, the gross margin like I said, gross margins, it is a combination of many, many factors. The size of the basket, the composition of the basket, also the fact that what products we are putting on the promo, we are not putting on the problem, which products we are sort of targeting with our pricing model.On average, consumer remembers the prices for about 20 SKUs. And beyond that, customers don't remember pricing -- prices. And of course, there is a number of customers. So for all of them, if we speak on aggregate, that those 20 SKUs become something like 300 SKUs, what we call KVIs, right, key value indicative products. So we approach and we've factored our model such that those items are priced at the most attractive level and then we sort of get back on the sort of back basket. And that model has worked for us very well. So and allows us to achieve these 2 things. One is Pyaterochka in general, being has been sort of perceived as a reasonable low-priced player while still maintaining the profitability on the gross margin level.
Thank you, Marat. Thank you, sorry. We're running out of time. Asking the dispatcher to give the floor to 1 more question, please. And after that, we will finish. Thank you.
Our next question comes from the line of Maxim Nekrasov Goldman Sachs line.
It's a question on margins. So do I understand correctly and if I heard correctly that now you target EBITDA margin of at least 7.2% this year, which is basically in line with last year. And does it mean that despite the higher share of online and growing pressure from online, you still expect at least the same margin meaning that excluding online, your off-line operations have been improving in terms of profitability? And what are the drivers so far those improvements?
Thank you, for your question. Yes, your understanding is correct. We are targeting actually to -- in nominal terms to deliver the same margin as of last year. However, it's including much heavier investments in the new businesses, which we haven't informed before. So actually, our objective is to continue to grow and generate efficiencies from our existing businesses like the or Pyaterochka, Perekrestok who basically enjoyed quite significant investments in the past and have a lot of the efficiency projects in the pipeline, and they also demonstrating the result of this project, digital projects, internal digital projects, which helping us to sustain this good performance and allow us to generate the funds to invest in the new businesses, which is basically increasing the footprint of the company of the future. And the answer is yes. We want to balance it.
Thank you, Nat. Thank you all participants. I would like to also thank our speakers today, Sergey, Igor and Vsevolod. Thank you, and have a good day.
And this concludes today's conference call. Thank you for participating. You may now disconnect.