St. Petersburg, Russia; 30 August 2017 – Lenta Ltd (“Lenta” or the “Company”), one of the largest retail chains in Russia, today announces its reviewed consolidated IFRS results for the half year ending 30 June 2017.
1H 2017 Financial Highlights:
- Total sales grew 16.7% to RUB 163.5bn (1H 2016: RUB 140.1bn);
- Adjusted EBITDA[1] of RUB 15.6bn, up 14.2% (1H 2016: RUB 13.7bn) with a margin of 9.6% (1H 2016: 9.8%);
- Gross margin of 21.7% (-0.15 p.p vs. 1H 2016) decreased as better supplier terms, supply chain improvements, shrinkage and more efficient in-store production were offset by investments in prices and a one-off effect of around Rub 0.9bn as a result of the new Trade Law;
- SG&A rose to 15.9% of sales (+0.4 p.p vs. 1H 2016) despite continuing successful productivity measures in the like-for-like stores, due to combined effects of the high number of new stores in the ramp-up phase, rise in depreciation and increases in utility and communal costs;
- Capital expenditures of RUB 10.0bn, a decrease of 38.3% compared to 1H 2016 (RUB 16.1bn) linked to lower investments in land acquisition and hypermarket construction;
- Net cash generated from operating activities, before net interest and income taxes paid, of RUB 7.3bn compared to RUB 7.2bn in 1H 2016 (an increase of 1.7%);
- Net interest expenses of RUB 5.4bn, an increase of 21.3% compared to 1H 2016 (RUB 4.5bn) primarily due to higher amount of borrowings not compensated by lower cost of debt;
- Net Profit[2] of RUB 4.5bn, up 3.8% (1H 2016: RUB 4.3bn) with a margin of 2.7%; and
- Net Debt of RUB 98.3bn as of 30 June 2017 (Net debt/Adjusted EBITDA of 2.9x).
1H 2017 Operational Highlights:
- Four hypermarkets and 11 supermarkets opened during the first half of 2017;
- Total store count reached 254 stores as at 30 June 2017, comprising 195 hypermarkets and 59 supermarkets;
- Total selling space increased to 1,173,416 sq.m as at 30 June 2017 (+27.1% vs. 30 June 2016);
- Like-for-like (“LFL”)[3] sales growth of (1.8%) vs 1H 2016;
- LFL average ticket increased by 0.6%;
- LFL traffic growth of (2.4%);
- Number of active loyalty cardholders[4] increased to 11.5m (+23% y-o-y) with approximately 94% of transactions in the second quarter made using the loyalty card.
Material events during and after the reported period:
- In May Lenta completed placement of Rub 5.0bn 3-years bonds with semi-annual coupon and an interest rate of 8.7%;
- The Company issued 98,217 new ordinary shares (491,085 GDRs) under Management Incentive Program (MIP) and Long-Term Incentive Program (LTIP)[5]. As a result share capital increased to 97,416,963 shares (487,084,815 GDRs);
- Lenta signed an agreement to lease 14 hypermarkets in Moscow and Russian regions currently operated under the NASH brand; and
- Analytical credit rating agency (ACRA) assigned Lenta a rating of A+ (RUB). The outlook on the rating is “Stable”.
Lenta’s Chief Executive Officer, Jan Dunning said:
“Lenta’s results demonstrate the Company’s ability to combine strong profitability with rapid growth despite the challenging macro and consumer environment. We adapted well to recent regulatory changes and managed to achieve an improvement of underlying profitability and cash generation, excluding the one-off effects of the new Trade Law.
We have made good progress in developing our organic pipeline and also signed an agreement to lease 14 former ‘Nash’ hypermarkets, including 7 hypermarkets in Moscow. This will significantly strengthen our position in the strategic Moscow market and is complimentary for our expansion in other regions. As a result we have upgraded our store opening guidance to about 40 hypermarkets in 2017 while adjusting our opening schedule which enables the larger number of new hypermarkets without increasing capex guidance for the year”.
Store Developments and Supply Chain
Lenta opened four hypermarkets and 11 supermarkets during 1H 2017, while one supermarket was closed[6], taking the total number of hypermarkets to 195 and supermarkets to 59. The Company entered one new city in the reported period and was present in 78 cities[7]. Total selling space as at 30 June 2017 increased to 1,173,416 sq.m, up 27.1% compared to 30 June 2016.
Since the beginning of 2017 the Company has opened four hypermarkets: three owned compact stores in Shakhty, Cherepovets and Engels and one leased compact store in Lipetsk. Lenta has also opened 11 new supermarkets, including the Company’s first three supermarkets in Novosibirsk.
After the end of the reported period the Company signed the agreement to lease 14 hypermarkets trading under the Nash brand in Moscow and other large Russian cities with total selling space of around 78,400 sq.m. All the stores were closed for renovation and rebranding and will be re-opened under the Lenta brand in November 2017.
In August Lenta opened one owned compact hypermarket in Kamensk-Uralsky and two leased supermarkets in Novosibirsk and St.Petersburg as a result of which total selling space as at the date of this announcement reached 1,178,949 sq.m.
Lenta continues to invest in its supply chain: the Company purchased 130 new trucks and trailers, almost doubling its own truck fleet to 290 vehicles. The average centralisation ratio increased to 53.6% in 1H 2017 from 48.7% in 1H 2016.
Operating performance
Lenta’s total sales in 1H 2017 increased 16.7% compared to 1H 2016 due to an increase in sales from new stores opened in 2017 and new stores opened in 2016 which are not yet part of the like-for-like panel, partly offset by 1.8% decrease in like-for-like sales. Net selling space increased by 27.1% as of 30 June 2017 compared to 30 June 2016.
Sales growth remained under pressure due to the combined effects of the challenging macro and consumer environment and higher cannibalization as a result of the Company’s rapid expansion in cities with existing Lenta presence.
| YoY growth | 1Q 2017 | 2Q 2017 | 1H 2017 |
| Total sales | 17.2% | 16.3% | 16.7% |
| LFL sales | -1.7% | -2.0% | -1.8% |
| LFL traffic | -2.0% | -2.9% | -2.4% |
| LFL ticket | 0.3% | 0.9% | 0.6% |
Financial Performance
Lenta demonstrated strong overall performance during the first half of the year. Gross margin decreased 15bps to 21.7% as improved supplier terms, higher efficiency of in-store production, lower shrinkage and further benefits from supply chain development were offset by additional price investments, higher promo share and a one-off effect caused by the new Trade Law. The Company continued to deliver efficiency improvements in the like-for-like stores, but these did not fully offset further investments in growth, increased depreciation and elevated utility costs and communal payments which led to an increase of SG&A expenses as % of sales in the first half of the year. As a result, Adjusted EBITDA margin for 1H 2017 slightly decreased to 9.6%. Net profit grew 3.8% with a margin of 2.7% impacted primarily by an increase in interest expenses due to higher total debt and higher depreciation as a result of the Company’s rapid expansion.
Income Statement Highlights
| RUB (millions) | 1H 2016 | 1H 2017 | % Change 1H 2017 – 1H 2016 |
| Sales | 140,087 | 163,531 | 16.7% |
| Gross profit | 30,656 | 35,534 | 15.9% |
| Gross margin | 21.9% | 21.7% | -0.2 p.p |
| SG&A, % of sales | 15.5% | 15.9% | 0.4 p.p |
| Adjusted SG&A[8], % of sales | 11.7% | 11.8% | 0.1 p.p |
| Adjusted EBITDAR[9] | 15,372 | 17,601 | 14.5% |
| Adjusted EBITDAR margin | 11.0% | 10.8% | -0.2 p.p |
| Rental expenses, % of sales | 1.2% | 1.2% | – |
| Adjusted EBITDA | 13,676 | 15,623 | 14.2% |
| Adjusted EBITDA margin | 9.8% | 9.6% | -0.2 p.p |
| Operating profit | 10,076 | 10,880 | 8.0% |
| Profit before income tax | 5,650 | 5,560 | -1.6% |
| Net Profit | 4,326 | 4,492 | 3.8% |
| Net profit margin | 3.1% | 2.7% | -0.4 p.p |
The new Trade Law effective from 1 January 2017 created a one-off negative effect on the gross profit of around RUB 900m in 1H 2017.
The major effect came from later recognition of promo compensation and supply chain income which became part of the net-net purchase price realised on sale of products whereas previously this income was realised when the applicable services were invoiced. As supply chain income is now realised on sales, Lenta also decided to activate supply chain cost first and realise these costs on sales as well, as required under IFRS. The balance of all these effects resulted in a one-off negative impact.
The one-off effect on supply chain cost contributed 20bps to the reduction of supply chain cost as % of sales to 0.9% in 1H 2017 vs 1.2% in 1H 2016. Further reduction of average distance for goods transportation (to 585km/pallet in 1H 2017 vs 593km/pallet in 1H 2016), higher centralization ratio and share of deliveries by the Company’s own truck fleet resulted in a further 10bps decrease in supply chain cost.
Optimisation of operational processes also led to 25bps y-o-y improvement in own production result and lower shrinkage (-6bps) despite the high share of immature stores.
Lenta continued successful productivity measures in the like-for-like stores in the first half of the year which led to further reduction of staff cost as % of sales – by 16bps to 5.9% in 1H 2017 vs 6.0% in 1H 2016. Cost saving initiatives combined with efficiency improvements resulted in a noticeable 66bps reduction of SG&A expenses as % of sales in the LFL hypermarkets primarily driven be better staff costs – 40bps decrease y-o-y.
However, these improvements were not enough to fully offset the combined effects of the high number of new stores in the ramp-up phase and increases in other costs such as utilities, cleaning, repair and maintenance. This led to an increase in Adjusted SG&A as % of sales by 9bps to 11.80% in 1H 2017 compared to the same period of last year.
Rent expenses remained flat y-o-y at 1.2% as % sales as share of owned selling space was almost unchanged at 82% of total space with the majority of new openings last year in ownership. Depreciation, which was the main driver of the increase in total SG&A expenses, grew 33bps to 2.9% as % of sales in 1H 2017 as a result of fast expansion last year. Total SG&A as % of sales increased to 15.9% in the reported period, up 42bps vs 1H 2016.
As a result of the factors described above, Adjusted EBITDA in the first half of 2017 reached RUB 15.6bn (+14.2% vs 1H 2016) with an Adjusted EBITDA margin of 9.6%.
| RUB (millions) | 1H 2016 | 1H 2017 | % Change 1H 2017 – 1H 2016 |
| Adjusted EBITDA | 13,676 | 15,623 | 14.2% |
| One-off Expenses and Income | – | (4) | – |
| Reported EBITDA[10] | 13,676 | 15,619 | 14.2% |
Net interest expenses increased 21.3% to RUB 5.4bn largely due to the increase in the average level of borrowings to fund organic expansion and acquisition of Kesko food retail business in late 2016. This was partly compensated by significantly lower cost of debt – the weighted-average effective interest rate decreased 170bps from 12.41% for 1H 2016 to 10.71% for 1H 2017 through the combined effects of improvements in the terms and conditions of its major long-term loan facilities, debt repayments, refinancing and continuing reductions in MosPrime rates.
Net income was up 3.8% vs the same period of last year to RUB 4.5bn. As a result net income margin decreased to 2.7% compared to 3.1% in 1H 2016. The increase in interest expenses was the primary reason why growth in net income in the first half of the year lagged sales growth. The effective tax rate decreased from 23.4% in 1H 2016 to 19.2% in 1H 2017 – while last year it was influenced negatively by a one-off impact in fixed asset tax values of assets acquired in 2014, in the first half of this year it was impacted by a reversal of the effect of permanent difference related to acquisition of Kesko food retail business in 4Q 2016.
Cash Flow and Balance Sheet
Net cash generated from operating activities before net interest and income taxes paid amounted to RUB 7.3bn compared to RUB 7.2bn in 1H 2016 (+1.7%). Excluding the effects of the new Trade Law, cash generation from operations grew significantly faster than sales. Trade payables were reduced as a result of lower invoice prices due to the shift to net-net purchase prices and the shorter payment terms prescribed by the new Trade Law, which came into full effect on 1 January 2017. Trade receivables decreased considerably as a result of reduced bonuses and service income under the new Trade Law. The lower stock turn was influenced by the large number of new stores in the ramp-up phase.
Capital expenditures in 1H 2017 were 38.3% lower than in 1H 2016 and amounted to RUB 10.0bn, mainly reflecting lower investments in land acquisition and store construction as most of the hypermarket openings will appear in the second half of 2017, while acceleration of expansion in a supermarket format does not require significant additional investments.
As of 30 June 2017, Net Debt to Adjusted EBITDA stood at 2.9x and Adjusted EBITDA to Net Interest at 3.3x. As of 31 December 2016, Net debt to Adjusted EBITDA stood at 2.8x and Adjusted EBITDA to Net Interest was 3.4x. The increase in leverage was attributable to the usual seasonal change in working capital after the year-end which has the highest amounts of payables in the year and the impact of the new Trade Law on working capital.. Headroom against leverage covenants in Lenta’s loan agreements remains substantial. In addition to its total drawn debt of RUB 109.8bn, Lenta had RUB 54.6bn of undrawn short- and long-term facilities and a cash balance of RUB 11.5bn as of 30 June 2017. Net Debt was RUB 98.3bn as at the end of the reported period. All of Lenta’s debt is denominated in Russian Roubles and is unsecured. 82% of debt is long-term with an average maturity of around 2.3 years. The weighted-average cost of debt decreased 170bps from 12.41% in 1H 2016 to 10.71% in 1H 2017. The company projects the effective cost of debt to decrease in 3Q 2017 to 9.85% (based on the current MosPrime rates) and sees more opportunities to further reduce cost of debt in the coming quarters.
Guidance
Lenta updates its 2017 hypermarket opening guidance to about 40 new stores following the agreement signed to lease hypermarkets currently operated under the NASH brand. Supermarket opening guidance remains unchanged at about 50 new stores this year. Full year capex guidance is also confirmed at RUB 30-35bn, including investments in renovation of new leased stores mentioned above.
The full set of accounts for Lenta Ltd. for 1H 2017 and financial years of 2011-2016 are available at www.lentainvestor.com