OREANDA-NEWS. On 29 February 2008  X5 Retail Group N.V., Russia's largest food retailer in terms of sales, published today its preliminary unaudited IFRS results for the quarter and full year ended 31 December 2007 based on management accounts.

Lev Khasis, X5 Retail Group CEO, commented:
“2007 was a very successful year for X5 in terms of sales and market share growth – we are proud that our client-oriented approach and continuous investment in customer loyalty resulted in stronger competitive positions and enhanced market leadership. This year we plan to continue with our growth strategy to capitalize on untapped opportunities both in terms of regional expansion and multi-format approach. Furthermore, the growing scale of our business creates new opportunities for our relationships with suppliers, resulting in more attractive value proposition for our customers. Thus, we confirm our sales growth guidance for 2008 at 36-38% in rouble terms.”

X5 Retail Group CFO Evgeny Kornilov said:
“We have delivered another year of strong growth and plan to continue on this path. Moreover, having operated as a joint Company for over a year, now we can reinforce our focus on improving efficiency both at operational and headquarters level by upgrading logistics capacity, improving IT infrastructure and optimizing business-processes. While we do not expect to see an immediate impact from these measures on the Group’s financials, we believe they are critical for strengthening X5’s competitive position and ensuring sustainable efficiency levels in the coming years.” He added: “In 2008 we will also be working hard to ensure that our financing strategy is tailored to meet the Group’s growth targets for 2008 and beyond.”

Net Sales Performance
Total net sales for the fourth quarter 2007 increased by 59% in US$  terms to US$  1,703 mln, translating into a 53% increase year-on-year to US$  5,320 mln for the full year 2007.

Net Retail Sales Dynamics

Total net retail sales for the fourth quarter 2007 increased by 57% in US$  terms (48% in RUR terms) to US$  1,692 mln, translating into a 53% (44% in RUR terms) increase year-on-year to US$  5,284 mln for the full year 2007. Impressive retail sales surge was due to a very strong performance of soft discounters in the regions and in Moscow, outstanding results demonstrated by supermarkets across all regions and improving performance of hypermarkets opened at the end of 2006.

Gross Profit & Gross Margin Analysis

For the fourth quarter 2007, gross profit increased by 47% to US$  458 mln, translating into a 51% year-on-year growth to US$  1,404 mln for the full year. Gross margin for the fourth quarter 2007 totaled 26.9% versus 28.9% for the same period a year ago, while full year 2007 gross margin amounted to 26.4% compared to 26.7% in 2006.
High gross margin achieved in the fourth quarter of 2006 reflects the result of revision of the purchasing contracts that Pyaterochka and Perekrestok had prior to their merger and takes into account significant additional discounts that the joint company managed to obtain as a result of those negotiations. In 2007 the Company took advantage of its enlarged scale and invested certain share of its post-merger margin increase into consumer loyalty. This approach proved to be a success leading to very strong traffic growth and sales surge.

Selling, General and Administrative Expenses (SG&A)

For the fourth quarter 2007, SG&A expenses totaled US$  343 mln – an increase of 56% year-onyear. For the full year 2007, SG&A costs increased by 50% over the same period a year ago to US$  1,142 mln primarily due to growth in staff costs, higher lease expenses and D&A charges.

Staff Costs

For the fourth quarter 2007, staff costs, including ESOP totaled US$  153 mln and increased by 46% compared to the same period of last year, translating into a 39% year-on-year increase for the full year 2007 to US$  513 mln. Net of ESOP costs, which in 2006 included one-off restructuring expense of the previous ESOP, full year 2007 staff costs grew by 53% on the back of continuing wage inflation and extensive hiring for new store openings. ESOP costs for 2007 totaled US$  48 mln which represent proportionally accrued expenses related to the first and the second tranches of current ESOP. As reported earlier, in 2006 the Company reported US$  65 mln ESOP-restructuring charge.

Lease Expenses

For the fourth quarter 2007, lease expenses increased by 60% year-on-year to US$  52 mln on the back of rent inflation and expansion. Full year 2007 lease expenses totaled US$  176 mln, an increase of 55% year-on-year. As a large proportion of the Group’s stores are owned, this reduces its exposure to the growth in rent prices.

Depreciation & Amortization

Full year 2007 D&A charges totaled US$  142 mln, an increase of 64% year-on-year. Increase in D&A expenses is explained by the Group’s aggressive expansion in terms of store area and distribution centers.
Non-Operating Gains and Losses

Finance Costs

Finance costs for the fourth quarter 2007 amounted to US$  28 mln versus US$  29 mln in the fourth quarter of 2006. Full year finance costs totaled US$  129 mln – an increase of 79% year-on-year, which is explained by an increase in outstanding debt as well as one-off debt restructuring costs incurred in the third quarter of 2007 aimed at reduction of the Group’s interest rate exposure and improvement of its debt structure.

In the fourth quarter of 2007 the Group continued to focus on optimization of its debt portfolio: in December it raised US$  1.1 bln in a three year syndicated loan fully pre-funded by a consortium of banks. The facility bears interest of LIBOR + 225 bps p.a. during the first year. Starting from the second year, spread over LIBOR will decrease to 200 bps or lower depending on the Company’s Net Debt/EBITDA ratio.

The proceeds of the facility were used to re-finance X5 Retail Group’s one year US$  1 bln bridge loan, which enhanced X5’s financial flexibility, improved its debt structure and enabled the Company to avoid a significant step-up in the interest rate on the refinanced loan.
At 31 December 2007 net outstanding debt of the Group totaled US$  1.54 bln versus US$  1 bln at 31 December 2006, while effective interest rate was 7.1%.

FX Gain/(Loss)

Full year FX gain amounted to US$  32 million on the back of significant depreciation of US$  against RUR during the year. As X5 Retail Group employs hedging strategy to minimize its foreign exchange and interest rate exposure, FX gains on its US$  1 bln denominated bridge loan were partially off-set by mark-to-market result on the hedging facility. The Company continues to apply hedging policy and has hedged its recently raised US$  1.1 bln syndicated loan.

Income Tax

Effective tax rate for the fourth quarter 2007 totaled 35%, translating into the full year effective tax rate of 41%. The Company is undertaking measures to further improve its tax efficiency.

Capital Expenditure

Full year 2007 CapEx totaled approximately US$  870 mln. Increase over forecasted US$  700 mln is explained by US$  devaluation against RUR, inflation in real estate and construction prices as well as the fact that a bigger than planned amount (about 20% of full year CapEx) was spent on stores to be opened in 2008 and further, including purchasing of landplots for future hypermarket construction.