ANNUAL
REPORT
2021

Dear stakeholders, After successfully navigating the unexpected storm brought on by the COVID-19 pandemic in 2020, X5 adapted to accelerated changes in our market and maintained its growth throughout 2021. Despite several significant external factors that continue to impact the Company as we enter 2022, namely challenging macroeconomic factors that affect everything from labour supply to price inflation and consumer sentiment, and fierce competition both in offline and online, the Company has maintained its strong performance and high growth level.

At the same time, we are taking steps to address these challenges and ensure that our position as Russia’s #1 food retailer is secure over the long term. The success of these actions is reflected in our performance: revenue growth accelerated to 11.5% year-on-year in 2021 to RUB 2.2 trillion, and we achieved a 7.3% EBITDA margin pre-IFRS 16. Despite the challenging external environment, X5 delivered solid performance in 2021. We take a long-term view of our business and we seek to anticipate consumer demand and ensure we are well positioned across all commerce channels. As such, we continue to develop our digital businesses, which comprise e-grocery services, 5Post and Mnogo Lososya. Revenue from our digital businesses rose 140% year-on-year to RUB 47.9 billion and contributed 2.2% to our consolidated revenue for 2021 (including a 2.7% share in Q4 2021).

ESG performance was another area where we excelled, with the Company on track to achieve or over-delivering on the 2023 targets set by the Supervisory Board. X5 improved its key ESG ratings (MSCI ESG, S&P Global, CDP) and published its first sustainability report under GRI Standards in 2021.

We achieved other key strategic milestones in 2021: we expanded the reach of our offering to cover all stages of the customer journey, with the launch the Food-centric media platform Food.ru, which attracts customers looking to plan meals and discover new food ideas; Food.ru already has 21 million MAUs.

We also launched payment services and piloted subscriptions, which will be integrated into our existing loyalty programmes.

Our core grocery formats have continued developing with a focus on adjusting their CVPs to market and customer trends. Based on the current macroeconomic situation and long-term dynamics in real disposable incomes in Russia, we took a decision to launch a new offline format, the Chizhik hard discounter brand. We believe that in the medium term, the hard discounter segment will be the fastest-growing part of the food retail market, and Chizhik gives X5 exposure to new groups of customers, complementing our existing footprint.

We maintain our position as one of market leaders in Russia’s fast-developing e-grocery segment, thanks to our scale, efficient logistics, customer loyalty and strong in-house digital capabilities.

Looking at internal processes, we are working to reduce capital expenditure as a percentage of revenue. Capital investments under pre-IFRS 16 in 2021 amounted to RUB 97.9 billion, or 4.4% of revenue vs 4.5% in 2020. We opened 1,414 new stores and six DCs. In addition to new openings, we refurbished 1,037 stores and invested in projects to improve efficiency, logistics and new businesses. We also completed the next stage of our digital transformation programme, which had a positive impact of RUB 18 billion on X5 Group’s FY 2021 EBITDA. Despite the significant investment programme in 2021, our net debt/EBITDA remained at a comfortable level of 1.67x under pre-IFRS 16 at year end.

On top of that, X5 significantly strengthened its free cash flow generation, driven by a continued focus on working capital improvements. In FY 2021, we delivered an adjusted FCF under pre-IFRS 16 of RUB 73 billion, which is RUB 56 billion higher than in 2020.

In 2021, we implemented changes to our senior management team with the appointment of Vsevolod Starukhin as CFO of X5. In January 2022, Vladislav Kurbatov, previously General Director of Perekrestok, was appointed General Director of Pyaterochka. The seamless transition of both Vsevolod and Vladislav into their new roles has further strengthened X5’s senior team, ensuring we are ready to seize opportunities as they emerge in the year ahead.

Main highlights of 2021

• X5 continued to deliver revenue growth and securely maintained its #1 position on the food retail market, despite consolidation by major competitors during the year.
• Our e-grocery business continued its aggressive expansion, remaining firmly on track to achieve profitability and maintaining a high quality of service that attracts and retains customers for our offline businesses. The number of express delivery orders increased by four times to 19.2 million in 2021, while Vprok.ru Perekrestok delivered 4.7 million orders, up 30.1%.
• Our 5Post e-commerce delivery service reached positive EBITDA in 2021, having delivered 27.0 million e-commerce packages, finishing the year by handling 5.1 million parcels in December through its network of 5,692 parcel lockers and 16,943 delivery points at X5 stores.
• We maintained an EBITDA margin pre-IFRS 16 of 7.3% and continued investments in digital transformation and the development of the Chizhik format.
• We sustained positive momentum in personnel turnover and labour productivity: turnover declined 1.5 p.p. to 36.4%, and our average labour productivity improved by 7.4%.
• We continued to roll out new concepts and CVPs in our proximity and supermarket formats, having refurbished 1,037 stores (992 proximity and 45 supermarkets). The new concept stores continued to demonstrate strong like-for-like and NPS dynamics compared with the previous concept.
• We began the rollout of Chizhik hard discounter stores, with 72 stores as of 31 December 2021 and plans to open over 3,000 stores in the next three years.
• The Food.ru media platform was launched in July 2021. This new digital media platform helps us to attract customers at the search and discovery stage of the customer journey.
• The formats’ loyalty programmes are adding joint initiatives with its strategic banking partner.
• We entered the Irkutsk region in November 2021 — our 67th region of our presence in Russia.

Delivering on strategic targets

X5 remained the leader in food retail, with a market share of 12.7%, up from 12.6% in 2020. We also remained among the top players in e-grocery, with digital sales growth continuing at a rapid pace, rising by 140% year-on-year to RUB 47.9 billion. Our digital consumer platforms had a combined total of 26.8 million MAUs, up by 78% year-on-year.

In line with our goal of strengthening our existing business, we achieved higher sales densities, which rose to RUB 271.5 ths/sqm from RUB 262.3 ths/sqm in 2020. In addition, we continued to increase the number of active loyalty card users, with a rise of 3.2% year-on-year to 62.6 million in FY 2021.

At the same time, the overall performance of X5’s retail store portfolio is at an all-time high with the number of retail stores in «clinic» at a record low.

With a relentless focus on efficiency and improving the customer experience, X5 is a market leader in digitalisation.

Client-facing and back-office digitalisation projects had a positive impact of RUB 18 billion on EBITDA for 2021, compared with RUB 7 billion a year earlier.

Our strategy aims to create value for all of our stakeholders, including our shareholders. In 2021, EBITDA margin was 7.3% under pre-IFRS 16, and total shareholder return over the last three years was 31.8% in RUB as of December 2021. Adjusted ROIC (pre-IFRS 16) increased by 1.0 percentage points year-on-year in 2021; FCF improved by 315% in 2021. I believe this demonstrates that we have been effective in delivering what our shareholders expect, while creating value for all our key stakeholders.

Our environmental, social and governance performance is another strategic priority for X5 Group. We will disclose our progress against our ESG strategy targets in our sustainability report, which will be published in May 2022.

Market environment

While the market environment was challenging in 2021, X5 was among the best placed to continue to create value for a wide range of stakeholders, during the year. Real GDP growth turned positive in 2021 and was 4.7%. Real disposable income also moved into growth territory, rising 3.4% for the year.

Despite these positive trends, customers began demonstrating rational behaviour in the context of high inflation levels in 2021, while also continuing to shift towards using online services as an essential part of their food shopping routine.

Unemployment continued to fall, reaching 4.3% at the end of 2021, the lowest level since August 2019. Demand for labour remains strong, while supply is restricted amid reduced labour migration and a declining working-age population due to the ongoing Covid-19 pandemic.

At the same time, food inflation grew faster than disposable income, reaching 8.4% for the full year and leading to cost-conscious customer behaviour. Increasing costs and prices have spurred higher government involvement in the food market, as officials seek to keep inflation under control.

During this difficult year, the market underwent active consolidation, with the combined share of the top 10 players accounting for 37% in 2021.

In the digital space, ecosystems and marketplaces that did not historically specialise in food have sought to use this market as another way to keep consumers on their own platforms, often sacrificing margins and profitability to gain market share.

Responding to challenges

Years of work on developing a strong company capable of delivering sustainable growth in a changing market means we are in a good position to adapt to the challenges we face today. Amid the latest external developments, X5 has a number of strengths that support our continued growth.

The first is a robust infrastructure that has been refined during the economic challenges of 2020-21 and has proven flexible in responding to new market demands. This includes our in-house logistics infrastructure and our dedicated direct import operations, which enables us to ensure continued deliveries from suppliers all over the world. Our own digital sales platform, supports the resiliency of our business amid challenges that may arise for domestic players in the digital sphere. Meanwhile, our technology platform that relies largely on in-house developments further ensures the flexibility and information security of our business.

X5’s long-term approach to relationships with suppliers enables us to maintain a stable supply of goods while diversifying our customer offering. We focus on partnerships with local suppliers to ensure the quality and freshness of our products, and continuously bring new suppliers on board to expand our assortment. The development of X5’s private labels is a major initiative in this regard, and responds to increasing demand among rational consumers seeking the best value for their money.

We are already addressing increased competition in our offline operations through the rationalisation of our CVPs across formats and the rollout of Chizhik, X5’s hard discounter. As labour and other resources increase in cost, we are expanding the digitalisation of business processes in commercial operations, supply chain and back office, as well as optimising our supply chain and increasing our purchasing power. In response to the growing footprint of online ecosystems in the food market, we are also expanding our own digital infrastructure to reach across the entire customer journey and support our core businesses.

We are well-placed to address these challenges: X5 has a track record for innovation and strong in-house technology capabilities; organic growth is part of our DNA, and our strong brands will continue to replace smaller existing players as they expand further. We have also succeeded in quickly integrating new businesses like Mnogo Lososya dark kitchens while creating and quickly rolling out our own new businesses and services, like 5Post and express delivery. Finally, our flexible business model has enabled the Company to build up sufficient cash reserves to continue implementing our strategy in changing market conditions.

I am confident that X5 will continue to grow and adapt, remaining Russia’s top food market player and delivering value for shareholders in the years ahead.

Sustainable development

We announced our sustainable development goals for 2023 in the autumn of 2020, and I am happy to inform you that, as of 31 December 2021, we were significantly ahead of schedule or had already achieved our goals. X5’s sustainable development strategy is focused on four different areas where we can make the greatest impact: health, the planet, employees and communities. We continue to integrate these goals into our business processes and to develop sustainability projects.

However, given the current environment resulting from external events, it is extremely important to double down on our support for local communities, in particular our programme for helping the most vulnerable members of society. We plan to scale up our «Basket of Kindness» project in 2022 in order to offer food support to more people than before, including by increasing the supplies we donate to charities.

We also understand that X5 Group’s sustainability is a result of the hard work of our employees, who ensure smooth day-to-day operations, which is why we need to increase our focus on supporting our staff and improving working conditions and safety.

Sustainability will be one of X5 Group’s key strategic priorities in the years to come, and I am certain we can make an even bigger impact together.

Outlook

Looking ahead to 2022, we are now operating in unprecedented and historic times, with volatility and unpredictability becoming the defining factors influencing the Russian economy and business. While we currently continue our normal day-to-day operations without interruption, X5 Group is also engaged in contingency planning to ensure business continuity, including selection of key suppliers, liquidity management and debt portfolio diversification.

We are realistic about the challenges we face, but optimistic about our ability to continue to deliver solid financial performance in the long term. We expect to achieve double digit revenue growth, optimise capital expenditure and deliver strong positive cashflow.

Thank you for your continued interest in X5 Group. We are living in challenging times, but I wholeheartedly believe that X5 has the right team and the right strategic approach to continue to successfully navigate the difficulties we will face in 2022 and to thrive in the years ahead.