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Good day, and welcome to the Lenta first quarter operating results conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to the Albert Avetikov, Director for Investor Relations. Please go ahead.
Thank you, John. Good evening, good afternoon and good morning, ladies and gentlemen. Thank you for joining us to discuss Lenta's first quarter sales and operating results. With me to review the results are our CEO, Herman Tinga; and CFO, Rud Pedersen. As usually, announcement and respective presentation are available on our website at lentainvestor.com. And after our remarks, we look forward to taking your questions. I will now turn the call over to Lenta's CEO, Herman Tinga. Herman, please.
Thank you, Albert. Good day, everyone, and thank you for joining us. You will see from the announcement that our retail sales growth was strong in quarter 1 and almost doubled the selling space growth. Like-for-like retail sales growth was the strongest of the last 2 years, thanks to solid increase in traffic. The hypermarket business showed healthy, positive development while supermarkets made a big step forward with like-for-like sales growth over 20%. Before we move to Lenta's operating results, I would like to remind you some other recent developments. As you are aware, on April 1, Severgroup announced agreements with TPG and EBRD to acquire a stake of approximately 42% in Lenta at a price of $3.60 per GDR. Just before the call, by the way, we got the news that the [ first ] approval has been issued, and it's now expected that the TPG and EBRD sale will close, and the NTO will be launched probably not later than the 1st of May. Lenta has not received any competing offers since the announcement of the 1st of April. If Lenta receives a bona fide competing offer, independent directors will ensure that it's well [ picked ] in accordance with the articles and we'll update the market as appropriate. And now I would like to discuss in more detail our operating results for the first quarter. Now the first quarter was still challenging for retail industry with consumers remaining under pressure. The macro environment remains tough with an uptick in inflation and falling real incomes. Real disposable income declined in 9 of the last 10 months, and the decline in the first quarter was the biggest since the second quarter of 2017. Real wages also declined in February and March for the first time since 2016. The weak macro, tough competition and continuing high levels of [ promo ] intensity makes this a challenging time for retailer. Consumers continue to feel more change, shopping around for the best prices, club fee and promotions. But amidst all these challenges, Lenta demonstrated a boost in sales driven by high-quality improvements. Total retail sales grew almost 10%, which was almost double than the selling space growth of 5%. Total sales growth of 6% was lower compared to the first -- to the fourth quarter and mostly reflected the P&L's significant look in our wholesales business. Lenta continues to deliver feasible improvements in same-store performance with like-for-like retail sales growth, accelerating to 5% from 2.1% in the fourth quarter in 2018. Please note that Lenta has not made any changes in its like-for-like calculation. We report both total sales and like-for-like sales, excluding VAT. In other words, we showed a change in actual Lenta sales, not the change in sales plus taxes. VAT will be -- from the beginning of this year, if we included VAT in the like-for-like calculation, then our like-for-like sales growth in the first quarter would grow up to 5.9%. This is what you might want to use for comparison if any retailers would include VAT in their like-for-like calculation. Acceleration of the like-for-like retail store sales growth was mainly driven by improved customer traffic, which grew by 3.8%. This gain is a result of a rapid growth in the number of new, unique customers with more than -- which was -- which more than offset the slight reduction in their frequency. We continue bringing customers from other hypermarket place, including both federal and mutual chains as well as from traditional retailers. Importantly, we know this very positive customer change in Lenta's customer mix with growing share of our loyal customers. Like-for-like ticket grows by 1.2% as well as sort of ongoing trading-up effects, which were, again, partly offset by on-shelf deflation. And some other words about the deflation. The shelf-price deflation is markedly showing improvement in each consecutive month of the first quarter, but the average in the first quarter was still negative. The promo activity has started to stabilize. We could finally see inflation on our shelves in March after 2 years of continuous deflation. Trading up was not really higher year-on-year and also quarter-on-quarter. In the average number of articles in the basket declined, and this reflects the combination of excessive selling space throughout the industry and the weak consuming spending power. Food and nonfood sales, like-for-like sales remained positive in the first quarter, but customer proposition continues to improve, including significant improvements in assortment. For example, our Europe categories continue to grow faster than the total retail sales, so that means that our initiatives are on track. Private label is also a big initiative for differentiation for us. They also grow faster than the retail sales and in the first quarter, the private label share grew 1 full point year-on-year. And we're continuously adding new assortments. So already in the first quarter, we already added 300 new SKUs. Fresh food was the fastest growing category with double-digit like-for-like sales growth. Some words about promotions. The promotional activity in the first quarter increased only marginally year-on-year, but that was mainly because of a one-off promo contained within January. It was fairly successful, but that has also resulted in a higher promo share. In the month after, you see that decelerating. In February and March, we see almost no growth in promo share. And if you look at the total promo share in the first quarter, then it's 4 points lower than the quarter 4 last year. And important to notice here is that we did this without losing any attractiveness for the customers, and we expect this trend to continue. Our price monitoring shows that despite some stabilization of promo, Lenta is maintaining its price competitiveness versus other players, including smaller formats. Now let me focus a bit separate on some of the remarks about hypermarkets and later, supermarkets. So first about the hypermarkets. So this sales trend continue to improve in our hypermarket for the second consecutive quarter. The hypermarkets showed retail sales growth of almost 7%, up from 3.8% growth in quarter 4. Now selling space growth remained at around 4%. Sales of [ entity in foreign ] shelving furthered this [ deflation ]. Like-for-like retail sales growth improved significantly, grew 4% versus 1.8% in quarter 4. Ticket continued to benefit from trading up and ease in deflation, while traffic improved, thanks to our initiatives that aimed to strengthen differentiation from other marketplace and improve our customer offering. Although it's good to see that in St. Petersburg, our home-base market, it's improving. We saw in our older stores a further acceleration in comparison to the previous quarter and [ for the champ ] of the ex-Kesko hypermarkets continue to deliver double-digit year-on-year growth. Also in Moscow, we have positive dynamics if you look at the ex-NASH stores, they're growing ahead of expectations. In the regions, the picture is a bit more mixed with sales in many older stores under pressure due to weak consumer spending power and cannibalization. Nonetheless, we do see some signs of easing.Then -- and now a few words about the supermarkets. As we announced before, we are not happy with the supermarket business, and we are working hard to improve our customer offer. And I think our initiatives in the supermarket business started to pay off with our energetic new supermarket team. Total sales in supermarkets rose by 55% year-on-year, more than double the selling space growth of 23%. Supermarket share as a percentage of our total Lenta business went up to 9%. Like-for-like sales growth in the 4 months skyrocketed to almost 22%, mainly driven by like-for-like traffic growth of 19%. Growth in traffic was a combination of new customers going to our stores and higher visit frequency, and the last one is a good signal for quality improvement indicating growing customer loyalty. We worked pretty hard on the assortment. We revised the assortment in the supermarkets across the whole country. We clearly defined the hero categories for this format to differentiate us further from other retailers. So we include now food and vegetables, meat and fish, own culinary, bakery as well as nonfood and in addition, we strengthened our regional offer, increased number of our SKUs in the hero categories and improved also their price levels. Another important change that we're dealing with marketing. We realize that the shopping mission in the supermarket is different from hypermarkets and requires another marketing approach. And that's what we aim to do. So our -- this initiative resulted in a notable decline in the share of promo as a percentage of supermarket sales in the first quarter. And we are especially pleased that the lower level of promo did not affect inflow of customers to our stores. And as a result, we see a positive development in the profitability of the format, although there's still plenty of work to be done this year [ by the smarmy ] smile of the new format leader and this thing. Some last words about wholesales. The decline of our wholesales continue putting pressure on our total sales growth in first quarter. As announced earlier this year, the volume of our wholesales operations are declining in part due to changes in the distribution strategy of our large suppliers. Wholesales accounted for around 2% of the total sales, and its sales dropped by more than 60% in the first quarter. We expect this trend to continue throughout 2019, laying on the total sales growth until the fourth quarter when the basis for comparison a bit more favorable. Now I would like to hand over to Rud to talk about recent trading and expansion.
Thank you, Herman, and good day to everyone. Let's take a look at our trading results for month-to-date in April. We've seen retail sales in the first 3 weeks being slightly weaker than the Q1. However, we believe that this is due to the different calendarization of the Russian Easter. And as such, we do anticipate stronger retail sales growth in the rest of April. In Geroev, what we have seen is that the positive trends from Q1 is continuing into April, with early indications that on-shelf inflation is further picking up from the levels that we saw in March. At the same time, we have also seen the promo share as a percentage of sales decrease, not only month-on-month, but also year-on-year while, as mentioned by Herman, it was flat in March. At the same time -- sorry, so on the back of April month-to-date, we are optimistic with regard to the outlook for April. A few comments on our expansion plans. We opened 1 compact hypermarket in Kazan in January as part of our organic expansion plans for the year. And we closed 1 hypermarket in Moscow. We also closed 4 underperforming leased supermarkets, most of which were in the Moscow region. We expect overall that this will have a positive impact on the supermarket format profitability. Having said that, we maintain our guidance on opening 15 stores this year, including 8 hypermarkets and 7 supermarkets. So just to sum up, based on the month-to-date performance we have seen in April, we are optimistic on the outlook for April, and we confirm our previous guidance with regards to store mix. With that, I'll turn the call back to Herman for a few closing remarks.
Thank you, Rud. Yes. The first quarterly sales were encouraging. But of course, as always, there's more work to do. And we remain strongly focused to further improve the underlying business. And we are pleased with the achievements in both formats, but we'll keep working on initiatives we launched to ensure these dynamics are sustainable. The supermarket segment showed very good trends, exceptionally good considering the tough market. The new supermarket leadership team is full of ideas for further improvement and are working to implement these with impressive speed. However, I would caution that we'll need more time and further deconcludement before we will be ready to consider accelerating expansion in this format. Now the Lenta management team is strongly focused on shareholder value and returns on capital investment. And you can imagine that the -- due to the recent events announced -- among the announced agreements amongst TPG, EBRD and Severgroup there's a lot going on in our business, but we as a management team stay focused on the business and work very hard every day to improve our customer value proposition, and I'm very proud of the teams, both for hypermarkets and supermarkets that they, in the second quarter after quarter 4, show very promising dynamics. Thank you very much.
Thank you for listening. John, we now are ready to take the questions.
[Operator Instructions] And we'll take our first question from Elena Jouronova of JPMorgan.
Congratulations for the decent trade update. I have a few questions. So did I get your comments correct, first of all, on the level of promotion and price investments, in sense that it doesn't seem that Lenta was actually buying traffic in Q1 because the level of promotions stayed flat? I know you're not commenting on margins per se, but just please give me an idea to what extent the strong traffic trends we've seen were actually driven by price investments or not.
Elena, thank you for the very good question. I will give you some ideas, and then Herman can add on that. Speaking on the -- oops, sorry. Yes, I will leave the floor for Herman. I'm sorry, yes.
Thank you for the question. Yes, actually, we had a promotional campaign in January that was very successful, but honestly speaking that puts, I think, decompression on the margins. But if you look at the months of February and March, we see that there's a one-off effect actually was gone, and we see a slowing down in the promotional shares and we have a double effect on our margins, the first, the promo share shown is the signal for the increasing and improving the margin mix versus regular. And on the other hand, our team was capable trying to get better support from the industry, financing the promotions in the last month. So that was clearly indicated in the margins perspective.
Elena, I can add a specific case study on our supermarkets. You saw the improvement in traffic and like-for-like sales growth in our supermarket format. And that came not in a combination with the promo increase but actually in a combination with quite significant, almost 10 basis -- sorry, 10 percentage point promo decrease quarter-on-quarter in a supermarket format. And this decrease didn't result in the loss of attractiveness of the format to the customers as you can see from the results.
Yes, supermarkets, that was very clear. And just to -- can you give me an idea if the February and March traffic -- like-for-like traffic in hypermarkets was actually positive or not? Because if -- and I'm just trying to understand to what extent the positive like-for-like traffic in hypermarkets was driven by that January campaign, which was clearly the time when you had the strong traffic. Excluding January results, was traffic still positive in February and March?
Well, we did see the traffic increase across all months in the first quarter, so not only in January.
Okay. And then can I move my questions to other topics? What is the difference right now in consumption trends in different regions where Lenta operates? Let's say, Moscow versus St. Petersburg and versus rest of Russia. Are you noticing any notable differentiation and consumption patterns? Some regions doing better than the others, trading up, stronger here or there and also gaining market share from competition? Where do you see, actually, you're gaining more? And in which region?
Elena, I would say due to our customer analytics, we can see different buying behavior, of course, across regions. And there is a difference between, let's say, Northwest region, Central region and Moscow region. And we see that, let's say, in the south, for example, the economy is more depressed than in other regions. So we see more up-trading in St. Petersburg, Northwest, Siberia and Moscow region, but we see this less happening, for example, in the other regions where we are present.
And can I ask just one more question, which relates to purchasing conditions? We're used to the trend that when companies grow fast, they are able to negotiate better terms with suppliers, and Lenta is clearly slowing space growth. Does that affect purchasing conditions and make it quite difficult to demand better terms? Or not really?
Well, Elena, that's a very good question because let's say trading terms is a reward for what you deliver back to the industry. And one aspect is for skill, but there's more than skill. And actually, our position here is becoming stronger and stronger as being a hypermarket because with the industry, we are the ones that can have, let's say, larger assortments and has been also a platform for innovation for suppliers, developing new products in our hypermarkets. Also, connecting that to customer data that we share with suppliers to develop those categories. For example, if a supplier has an assortment of 300 SKUs, yes, and in convenience stores they might carry the 40 or 50 SKUs and in a hypermarket they will carry the full range, including innovations, up to nearly 200 or 300 SKUs. And that's where the power is for us in negotiating with our partners to develop the business together, and we are strongly rewarded for this, and we see that also back in our current negotiation campaign that's close to be finished, where we see that we have very, very strong results and support from the industry.
[Operator Instructions] We have no further questions at this time. I will now pass the call back over to Albert for any final or closing remarks.
John, thanks a lot. If there are no further questions, we would like to thank everyone for listening and remind that we will disclose our second quarter operating results in end July. Thank you, everyone, and goodbye.
That concludes today's call. Thank you for your participation. You may now disconnect.