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Good day, and welcome to the Lenta Q1 2020 Operating Results Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Maria Rybina. Please go ahead.
Hello. Good morning, good afternoon, ladies and gentlemen. I want to thank everyone who could join this call today so we can inform you about our company's results for the first quarter as well as to tell you about our current activities. I want to welcome Herman Tinga, our Chief Executive Officer; and Rud Pedersen, our Chief Financial Officer, who are here today at this call to present the results. We disclosed our announcement and presentation this morning, which are available on our website at lentainvestor.com. After our remarks, we will be happy to answer all your questions.I will now turn the call over to Lenta's CEO, Herman Tinga. Herman, please begin.
Well, thank you, Maria. Good day, everyone. First of all, I would like to thank you for joining us today as it may not be easy to connect from remote locations. I hope you're all working remote, stay safe at home. And yes, despite current challenges, we had a good start of the year with supportive microenvironment and positive effects from our own initiatives. We saw accelerated retail sales growth and improved consumer confidence in the first 2 months of the year. However, later in March, we were challenged with the COVID-19 and volatility of the ruble. Clearly, it impacted our business due to a rapid change in consumer behavior.Consumers started to stock up, which was a response to various measures implemented by authorities in March. On some days, we saw sales go up more than 70% with a great demand for essential dry food and nonfood items. As an example, sales of canned meat rose 10x year-over-year and fish, 5x. Sales of grains were almost 7x higher compared to the previous year. The safety of our employees and customers became one of our key priorities these days. So let me describe to you a bit more in detail our actions related to COVID-19. As you've seen in the announcement this morning, we implemented comprehensive measures to protect our customers and employees. We off-sited employees from our offices to remote work. And currently, around 95% of them work from home. In the stores, frontline workers above 55 years old were offered to change their job positions to minimize exposure to the risk of infection. Our people were also provided with safety equipment such as masks, gloves and sanitizers. We also equipped locker rooms with bacterial lamps, we do temperature and health checks as they're mandatory in our offices, stores and also our DCs. We changed the planning or scheduling to minimize contacts between shifts in stores and our DCs. We also developed an action plan to mitigate negative impact of a temporary disruption on our operations. For our customers, we equipped the stores with sanitizers, floor markers to keep the social distance and protective screens at cashiers and the culinary sections. We also launched many social initiatives to support vulnerable group of customers during this difficult period. This includes free delivery, volunteer and charity program and additional discounts to medical workers. Customers who are more exposed to risk can make their purchases with an additional discount at specific hours that we dedicated with cash registers especially for them. This is just a small part of what our team has set up during this period. And I can say I'm very proud with our actions so far. Our team is doing a great job to minimize the impact on our operations and to provide customers with safety, something that they are now specifically looking for in these days, like in grocery shopping. The demand that we saw in March put a lot of pressure on our commercial department, operations and logistics. So other priority for us was to protect our supply chain. When people started to stock up, our logistics and operations departments quickly reacted to minimize the risk of out-of-shelf availability by fast-implemented measures. So for example, we started to fill pellets we delivered to stores with only one SKU or only one supplier. That allowed us to refill promptly our shelves with the most demanded item very fast.On top of that, we immediately built stocks for the most popular essential products for the next 6 to 8 weeks so we will not fast be out of stock. Overall, our proven logistics infrastructure and better stock capacity of our hypermarket allowed us to maintain a very high level of on-shelf availability. Additionally, we were able to carry out all our operations using our own human resources so we did not need to hire extra labor force. We closely monitor our inventory and continue to work with suppliers. And I'm also very grateful to our partners who strongly supported us these days and still supporting us. Now going to some numbers about trading. I'm actually very pleased with what we achieved in the first quarter. If you look at total sales, it increased by 7% driven by an increase of 7.5% in retail sales. The retail sales increased, thanks to a strong like-for-like sales growth, positive effect from 1 additional operating day in February and selling growth space of 1.7% over the year. Adjusted from the February leap day, our like-for-like sales increased by 4% despite last year's high base. In the first quarter of last year, 2019, our like-for-like sales grew by 5%. Now the dynamics of like-for-like sales was improving throughout the quarter. We had good holiday sales in February, achieving positive like-for-like sales growth of more than 2% in the particular month. In March, sales growth accelerated and -- as customers started to stock up, and this resulted in bigger baskets and eventually higher average ticket. Our like-for-like sales, including the extra leap day, increased by 5.7%. Adjusted like-for-like ticket grew by 2%. In the first 2 months of the quarter, like-for-like ticket was under pressure due to falling inflation and declining numbers of articles in one basket, a trend that we saw also in the previous quarters in 2019. This was partly compensated with strong trading-up effects.In March, the situation completely changed due to COVID-19. The average ticket increased by more than 10% in both formats due to customers stocking up. During the period of stocking up, consumers were less sensitive to promotions, so its share declined in our sales in the last 2 weeks of March. Overall, looking at promotional share, it declined compared to the previous quarter but remained around 4% higher versus the same period of previous year.Like-for-like customer traffic in the first quarter increased by 2%, adjusted for the 1 extra day. Traffic dynamics were also uneven throughout the quarter. So for example, in January and February, we saw strong traffic inflow of new customers in both our formats, and we continue to see higher frequency of customers visiting our supermarkets. We had several effective promo campaigns and in-store communication devoted to Russian holidays that we believe helps us to attract new customers. Like-for-like traffic turned slightly negative in March as people started to minimize their store visits for safety reasons.And if you look at our analytics, and I'd like to share with you, yes, the recent customer behavior suggests that the consumers chose fewer shops than before for their grocery purchases. After the authorities implemented the restrictive measures, however, they significantly increased the average spending.So what does it mean for us? So consequently, we see a decline in traffic by around 16% month-to-date in April. However, those customers who choose to stay with us concentrated their wallets in Lenta, and we saw an increase of average ticket by more than 30%. As a result, in April, our like-for-like sales growth accelerated significantly compared to the previous month.Interestingly, traffic became more even throughout the week, whereas previously, we recorded higher sales during the weekend. In the end of March, the authorities closed all shopping malls and allowed only grocery stores to stay open. And among those grocery stores, of course, we had the Lentas inside the malls. There was uncertainty whereas these locations would see a significant drop in traffic and sales. But so far, currently, we see that sales are still growing in these stores in the shopping malls driven by higher ticket while traffic expectedly declined. Yes, as the authorities put more restrictions on mobility of the citizens, more people switched also to online for grocery purchases. In light of increased demand, we decided to accelerate in the development of our key online initiatives. And I'd like to explain a few of them.So the first one, we continued to expand our cooperation with various delivery companies across Russia. Currently, we are working with 22 partners in 29 Russian cities. Sales to this channel more than doubled in the first quarter this year compared to the first quarter of last year given our rapid expansion in collaboration with these partners and the higher demand that we saw in March. This business model implies that the customer would make purchase to the website of the delivery company and then choosing Lenta from the list of retailers and placing an order.And based on these successful partnerships, we also decided to accelerate the launch of our own online platform. Customers can now place orders through our regular website, lenta.com. The service is currently already available in 21 large and regional cities of Russia where deliveries are carried out by one of our partners, Sbermarket or Igooods. And we will continue to expand the geography of presence of these delivery initiatives and plan to bring to more than 40 other cities.We also decided, the last one, to roll out our fast delivery project, Lentochka. We launched this pilot in December last year in Moscow, and we did this from 2 dark stores and we offered around 1,500 SKUs. And given the increased number of orders in the first quarter, we opened 5 additional locations in Moscow based on our supermarket infrastructure. We also extended the range of offering to 2,500 SKUs. And overall, we plan to open up now 30 extra locations in the next few months, including expansion to St. Petersburg. So looking at overall online sales, we can see it is a rapid growth in the first quarter and accounted for around 0.5% of our total sales. And if you compare with the last quarter of 2019, there, we had 0.2%. And we believe that the current environment gives us an opportunity to expand our online initiatives given they do not require heavy capital expenditures. So, so far, from my part, I would like to hand over to Rud to give an update on our financial position and our outlook.
Thank you very much, Herman, and good day to everyone. As mentioned by Herman, our main priority in dealing with COVID-19 are the safety of our colleagues, customers, support of our suppliers and availability of food on our shelves.The specific challenge across Lenta are threefold: firstly, of course, the potential impact of COVID-19 on our colleagues; secondly, the change in buying behavior of our customers; and thirdly, Lenta's financial resilience. We had strong trading in Q1. And while we do not report our financials on a quarterly basis, I can say that they are comparably strong in Q1. And we see this continuing into April.Our hypermarkets and supermarkets have shown to be resilient and to fit well to changed customer behavior, as mentioned by Herman. Consequently, our financial position remains solid. We'll, of course, monitor the situation closely to preempt any potential impact the current environment may have on our operations and our cash flow. With this in mind and on the back of strong trading to date, we forecast no liquidity constraints. Our current cash flow forecast includes...
I think you lost the sound there, Rud.[Technical Difficulty]
All right. I'm back again. Apologies for that little technical issue. I seem to have been thrown off the call. So let me try and catch up on where we were.We had strong trading in Q1. And while we do not report our financials on a quarterly basis, I can say that they are comparably strong in Q1. And we see this continuing into April. Our hypermarkets and our supermarkets have shown to be resilient and to fit well to changed customer behavior, as mentioned by Herman. And consequently, our financial position remains solid. We'll, of course, monitor the situation closely to preempt any potential impact the current environment may have on our operations and cash flow.With that in mind and on the back of strong trading to date, we forecast no liquidity constraints. Our current cash flow forecast include repayment of a RUB 5 billion bond issue that is maturing in May. We have sufficient credit facilities available. And although our current performance does not indicate any need for increased external funding, we do have a total of about RUB 139 billion undrawn long-term and short-term facilities available. As we navigate through COVID-19, we will maintain our focus on operating efficiencies and leverage, and we will continue to apply strict cash and cost discipline to mitigate any negative impact that may materialize.This time, we do not revise our guidance as we cannot precisely estimate the duration and the impact of the measures taken by the authorities with regard to COVID-19. We see uncertainties stemming from further measures that the authorities may take, duration of such measures, macroeconomic volatility, consumer sentiment and changed buying behavior as well as potential additional costs related to COVID-19 mitigation.Nevertheless, we are comfortable with Lenta's financial resilience. In case we see risk materialize that may have an adverse impact on our performance, we will update the market accordingly. For now though, I expect we will have more clarity when we update you on our performance for the second quarter.And with that, I will turn the call back to Herman for a few closing remarks.
All right. Thank you, Rud. Yes, summarizing, I would say our results were very strong in the first quarter, and we continue to have great momentum in April. While the environment's changed due to COVID-19, but we continue to evolve and adapt ourselves to the changing landscape. Based on our customer trends, we believe Lenta is well positioned to provide better shopping experience under current restriction measures.Our commercial proposition remains effective with big-basket purchases with wider range of items. Our hypermarkets are located in urban areas within 10-, 15-minutes' walk or drive, so we believe our consumers could use that opportunity to leave their houses for grocery shopping, and hypermarkets provide space to keep social distancing compared to smaller formats. Our key priority is to maximize the share of wallet for those customers who shop at Lenta, and we are working on in-store and commercial initiatives to achieve that.Nevertheless, we keep in mind the risk of further restrictions and deteriorating consumer purchasing power. Our team has been working on an action plan to adapt our customer value propositions to any new reality during COVID-19 and after. Financially, yet importantly, we continue to focus on our operating efficiency and cash discipline to be well prepared for any challenges ahead. So thank you for listening. And I will give back the call to Maria.
Thank you, everybody, for listening. We are now looking forward to taking your questions. So Victoria, please, we can start Q&A session.
[Operator Instructions] Our first question.
Yes. Can I have -- yes, I have a few questions. So first, maybe you could share what additional costs related to COVID-19 measures have you incurred so far and basically expect in the first half of this year. And probably we'll go one by one.
Okay. Let me take that question. We have incurred costs related to equipping our staff with masks, gloves and other protective equipment. And we have had some extra costs related to people working overtime, especially during the period when customers were stocking up.
And -- but maybe you could like quantify it.
Yes, for Q1, the incremental costs were a little bit more than RUB 200 million.
My second question is basically to the market trends. As you're probably aware, in Europe, hypermarkets have seen some deceleration of growth once the lockdown measures were announced, particularly like Italy or France. But for Lenta, it seems to be not the case. And I was wondering why do you think this is not the case for Lenta and that you actually see acceleration from April.
Yes, thank you for that question. By the way, we are a member of EMD, which is European buying organization. We are also a Board member there. And that case is the benefit that we get basically all insights from our colleagues in Germany and Italy. So we are in contact also with our colleagues in Italy. We also did many analytics, what happened in those countries that are, let's say, 4, 5 weeks ahead of Russia. We did see in Europe, indeed, that the hypermarkets suffered, and there was more buying in smaller formats. But there was one exception, and that is the smaller hypermarket formats, let's say, smaller than 7,000 square meter. They were more resilient in keeping the customers. And we think that's also part of the current trend that we see in Lenta because what I said earlier in the call, we have, let's say, urban hypermarkets, so not too far away from the customers where they live and they still can reach our stores within 10, 15 minutes. So that's part of the current situation, I think.
Understood. So does it mean that bigger hypermarkets closer to 10,000 square meters or more, they are -- should be relatively worse positioned compared to small hypers, right?
From what we've seen from the analytics, it looks like that, yes.
And my last question is regarding the promo activity. So with the consumers making purchases less often but at higher basket and probably switching less between retailers, do you think that promotional activity may somewhat structurally decrease in the coming quarters?
That's a good question. On one hand, a good decline. We saw, let's say, in the buying behavior in the last quarter also that at the moment, people really need essentials. They pay less attention to promotional offers because of less availability, what's more important at that moment. But looking forward to the economical impact of this COVID crisis on Russia, for sure, people will still look at good prices and within good prices, probably also promotions. So I think it might stabilize, but I don't see that it will structurally have a big decline, to be honest.
[Operator Instructions] Our next question.
This is Alexey Krivoshapko from Prosperity. I actually have just 2 questions for me. Just firstly, you do have some stores which are stand-alone and some which are in the shopping centers where there are other retailers. Do you see any difference in performance in those stores, like in the last kind of weeks of the lockdown?
Alexey, yes, we do see a difference. And actually, we were a bit afraid for it because if we are the only store open in a big shopping mall, of course, then the attractiveness of that shopping mall is much less because it has to depend only on the traffic of Lenta. So we do see that those shopping malls are having a lower traffic than the other stores. But still, let's say, the people that come there buy much more. So the total result is still positive for us, and that's a positive surprise so far.
I see. May I ask you, like, with what is happening, I guess, on the market and the difficulties which other nonfood retailers kind of are likely to face, do you plan to revise your current rent contracts in a way to kind of bring them down to the market? Is it like -- is it the plan or basically you can do as they are?
Sorry, Alexey, I couldn't hear you. Our current...
You have some rental stores. Kind of given where the market is right now with kind of nonfood suffering big time, do you think there is opportunity to renegotiate ramp down? And maybe you started this already.
Yes, this is part of the mitigation plans that we have put in place, and we are in dialogue with landlords, both for those stores that are stand-alone that we rent, but also for those stores that we have located in shopping malls.
And I guess you had mentioned that your wage pool -- that you basically, you did not incur any additional employees, yes, because of kind of this pickup in demand. I wonder if kind of you plan to actually increase the wages at all for basic employees planned through this year, again, given where the market is. So have you changed your plans on low-wage indexation?
Sorry, again, it's a bad connection, so I have a difficulty. If we have changed our plans for...
Sorry. Have you changed your plans on indexation of wages this year kind of given what's happening in the market?
No. No, changes so far. This is part of what we are waiting how the situation develops going forward.
I see. And final question, I guess, kind of if you were to kind of borrow today, and I understand that basically you'll be repaying more than borrowing, how would the current cost of debt differ from basically what you had, I don't know, late in the year? How much it has gone up?
At this point in time, we've seen no change in our average cost of capital versus what we entered 2020 with.
Thank you. And I'm showing there are no additional questions. [Operator Instructions]
Thank you, everybody, for joining us today. So if you have any further questions, please don't hesitate to contact me. So, so far, thank you very much, and have a great day.
Thanks a lot. Have a good day, and stay safe.
Thank you. Take care.
Thank you. This concludes today's call. Thank you for your participation. You may now disconnect.