OREANDA-NEWS. X5 Retail Group N.V. (the “Group”), Russia's largest food retailer in terms of sales, is pleased to present today financial results for the first half of 2007. In 2007, the Group adopted reclassification of costs related to distribution and transportation of goods from OPEX to the Cost of Sales.  For convenience of comparison, the financial results in 2006 have been also reclassified when applicable.

- Net sales increased by 49% to US$ 2,348 million, which represents an acceleration of growth in comparison to 43% in 1H 2006 (pro forma, not including Merkado store operations).

- Gross profit increased to US$ 617 million, up 53% vs. 1H 2006.

- Gross profit margin increased from 25.6% to 26.3%.

- EBITDA, including new ESOP launch costs of US$ 22 million, increased to US$ 212 million, or 74% increase vs. 1H 2006 (EBITDA before new ESOP launch costs increased to US$ 234 million).

The Group will publish its 1H-2007 IFRS audited accounts on 24th of September, 2007 which will be available on the Group’s website - www.x5.ru.

Reclassification of handling and delivery costs
To align its reporting practices with the international retail sector, starting from January 2007 the Group adopted a change in the classification of expenses related to goods’ distribution and transportation.  These costs have been reclassified from Selling, General and Administrative expenses to Cost of Sales, and comparatives for 2006 have been adjusted accordingly.  This new reporting lowered the Group’s reported gross margin by 1.1% to 25.6 % in 1H 2006, and by 1.3% to 26.3 % in 1H 2007.   This new IFRS reporting format has no P&L impact at EBITDA level or below.

New employee stock option program
Under the new Employee Stock Option Program (ESOP) as approved by AGM in June 2007, the total number of share options has been capped at 10,824,008 GDRs. The program will run through to 18 May 2010 and options to employees have been granted in four annual tranches starting from June 2007.   The exercise price of 1st tranche in amount of the 1,395,000 options was set at $18 per GDR (GDR price at the date of the merger of Pyaterochka and Perekrestok on 18 May 2006), and the exercise price of the remaining unvested three tranches will be equal to the average market value of the Group’s GDRs during the 30 days prior to the vesting date of each of these options. The total number of participants is not limited and will vary during the program’s lifetime, but it is expected to cover initially over 150 key employees and managers of the Group in 2007.

Although the first tranche and a part of the second tranche are covered by the Group’s treasury stock of approximately 3.6 million GDRs purchased in 2006 (the market value of treasury shares as of 30th of June was US$ 106, million vs. the acquisition costs of US$ 77 million), the relevant full ESOP costs have been reflected in the Group’s results in accordance with IFRS.  Therefore in the 1H 2007 accounts, USD 22 million has been included in Selling, General and Administrative expenses, related to the ESOP costs. 

Operational highlights

- During 1H 2007, the Group continued to strengthen its positive like-for-like sales trends to reach +23% in US Dollar terms (composed of traffic +10% and basket +13%) or +16% in Rouble terms (composed of traffic increase of +10% and basket growth of +6%), with the first positive traffic indicator in recent years for Pyaterochka stores in St. Petersburg region, Russia’s most competitive market.

- In total during 1H 2007, the Group gained additional net selling space of approximately 50,000 sq. meters.

- In March 2007, the  Supervisory Board approved the Group’s 5-year strategy and objectives with clear identification of key formats, target market share and financial objectives, geographic expansion and SCM performance targets.

- The Group has successfully completed integration of the ex-Merkado stores acquired in November 2006: as of today 10 of the stores are operating under the Perekrestok brand and 7 stores under the Pyaterochka brand.

- The Group continued its regional expansion by gaining control over 40 Pyaterochka ex-franchised stores with a total net selling space of approximately 14,000 sq. meters in Chelyabinsk region and integrating them into Pyaterochka filial in Ekaterinburg which demonstrated exceptional 38 % LfL sales growth in 1H 2007, benefiting from operational and commercial know-how of the Group.

- A new distributional center “Sholokhovo” was opened in the Moscow region with an additional capacity of approx. 20,000 sq. meters.

- The former Merkado Distribution Centre became the new Group’s HQ, consolidating three leased office locations in Moscow and resulting in savings on rental and operational costs as well as facilitating business integration processes.  The Group launched a service centre in N. Novgorod, which is planned to centralise and transfer accounting, payroll and other back-office functions from HQ, regional offices and stores in 2007 – 2008, which is expected to streamline business processes and deliver tangible savings going forward.

- Recognizing X5’s strengthened positions in the Russian food retail market, Standard & Poor’s Rating Services upgraded its outlook for X5 Retail Group N.V. and its subsidiaries to stable from negative, and Moody’s Investors Service upgraded the outlook on the B1 corporate family rating to positive from stable in July 2007.

- X5 completed restructuring its borrowing portfolio by repurchasing 3 issues of Pyaterochka and Perekrestok rouble bonds, and simultaneously, issuing the first tranche of X5 Finance’s 7-year rouble bonds with a total nominal value of 9 billion roubles.  It was the first transaction of this nature in the Russian rouble bond market history and it allowed the Group to improve its debt structure, decrease its funding costs and provide the Company with additional resources to fund further expansion.

- In June, X5 raised US$ 1.0 billion through a loan facility to refinance the existing syndicated loan and short-term credit lines on attractive terms to optimize the Group’s capital structure and lower funding costs.
Quotes

Lev Khasis, Group CEO:
“Our financial results figures reinforce our leadership position in the Russian market. The Group is showing outstanding progress in all formats and across its areas of operation, with especially encouraging  results in the Russian regions. We are continuing to implement our growth strategy and see major opportunities for the Group in the market in the remaining months of 2007.”

Vitaliy Podolskiy, Group CFO:
“Strong and positive trend in underlying store profitability as well as the chains’ integration savings and purchasing scale more than off-set our integration costs and strategic investments into the future of the Group.  Current performance allows us to improve our outlook on the Group’s future capital structure and its financial projections, which gives us a higher confidence in ability to finance our ambitious growth plans as well as flexibility to respond to new growth opportunities.”
1H 2007 Financial Highlights

X5 Retail Group N.V.
• Net Sales of US $2,348 million; up 49% vs. 1H 2006;
• Gross profit of US $617 million, up 53% vs. 1H 2006;
• Gross margin of 26.3% vs. 25.6% 1H 2006;
• EBITDA including ESOP costs of US $212 million, up 74% vs. 1H 2006; EBITDA margin of 9.0% vs. 7.7% 1H 2006;
• EBITDA excluding ESOP costs of US $ 234 million, up 44% vs. 1H 2006, EBITDA margin of 10.0% vs. 10.3% 1H 2006.

Pyaterochka chain stand-alone
• Net Sales of US $1,306 million; up 44% vs. 1H 2006
• Gross profit of US $326 million, up 46% vs. 1H 2006; Gross margin of 25.0% vs. 24.7% 1H 2006

Perekrestok chain stand-alone
• Net Sales of US $1,042 million; up 54% vs. 1H 2006
• Gross profit of US $291 million, up 61% vs. 1H 2006; Gross margin of 27.9% vs. 26.7% 1H 2006.