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Good day, and welcome to the Lenta First Quarter 2021 Quarterly Results Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Tim Post. Please go ahead, sir.
Thank you, Nick, and greetings from St. Petersburg. Thank you all for taking the time to join us today for the Lenta's first quarter 2021 trading update and financial highlights conference call. Today on the call, you will hear from Lenta's Chief Executive Officer, Vladimir Sorokin; and Chief Financial Officer, Rud Pedersen, who'll give you an update on the trading environment, Lenta's progress in executing the new growth strategy we announced last month at our Capital Markets Day and for the first time, some financial highlights for the first quarter. After these prepared remarks, we will take as much time as needed to answer your questions. We are especially happy to have Vladimir on the call with us today. He was just this past week discharged from the hospital after fighting a COVID-19 infection, and he is now recovering at home. Since he is on the mend, Rud Pedersen will give the prepared remarks, and Vladimir will be available for the Q&A session. I'd like to remind you that you can find the full news release with our operational results and financial highlights on our IR website at lentainvestor.com. With that, I will hand the floor over to Rud.
Thank you, Tim, and thank you to everyone for joining us today. I'd like to start off by saying that we still operate in a rather tough macroeconomic environment. Consumers continue to be vary in spending, and though we are seeing some slight improvement. Compared to the fourth quarter of last year, consumer behavior during Q1 did not change significantly. The trend of less frequent visits to stores and larger tickets certainly remained intact. We continue to see a steady trend of customers trading up in the first quarter. In fact, this trend was even stronger than the second half of last year. Our sales of fresh fruits and vegetables grew by around 4.5% during Q1. This was part of a broader preference for healthy lifestyle and home cooking purchases that we also noted as a result of the pandemic. As far as the competitive situation on the market is concerned, we haven't seen any irrational behavior by our competitors. Promotion activities in the first quarter of this year was more or less in line with the fourth quarter of last year. However, if we look at it on a year-on-year basis, it was just -- were up just over 2%, including the social initiatives that we have instigated. As you saw in our press release today, our sales performance in absolute terms in January, February and March 2021, was indeed strong and in line with the fourth quarter of 2020. You'll know that during the second half of March last year, we saw a huge spike in COVID-19-related bulk buying ahead of the lockdown period. Naturally, this was not repeated in March 2021. So that unusual level of customer purchases created a very high base effect that distorts the comparison basis for our first quarter results. To try and give you a little bit more representative snapshot of our performance in the first quarter, we prepared an adjusted set of figures to normalize the results taking into account this higher base of last March -- or March from last year. Let me start by providing these adjusted figures, which are also available in our press release. Our adjusted retail sales growth in Q1 2021 amounted to 6.9%. Adjusted like-for-like retail sales growth was 7.3%. Adjusted Q1 hypermarket like-for-like sales increased by 8.3%, while our adjusted supermarket like-for-like sales decreased by 1.9%. Again, those are the figures that normalize the high base effect and demonstrate the true underlying performance of Lenta in Q1. On a nonadjusted basis, our key operational results were as follows: our retail sales rose by 1.5% year-on-year in Q1. This was driven by a 10.3% increase in average ticket, despite an 8% drop in traffic. Hypermarket sales grew by 1.7%, while supermarkets experienced a 1.1% decrease. Both results were due to higher average ticket despite lower traffic numbers. Like-for-like sales grew by 1.3% year-on-year in the first quarter, like-for-like average ticket came in at 11.6%, while like-for-like traffic was down by 9.3%. Our online sales continued to show strong results. In Q1, total online sales grew more than 7x year-on-year. Total online sales reached RUB 3.8 billion, and our online orders reached nearly 2.2 million. We continue to roll out our online services to more and more cities during the quarter, and we are now covering 89 cities. We were very pleased that many of you joined us for our Capital Markets Day back in March. During that Capital Markets Day, we unveiled our new growth strategy and the key areas where we plan to focus our efforts. Though it's only been a month since we last spoke, I wanted to give you a brief update on some of the progress that we made so far. We are already a multi-format retailer today, but one of our more ambitious initiatives is expansion into the proximity store format. We're calling this Mini Lenta. And since our announcement back at the Capital Markets Day, we already opened several stores. We started in our home city of St. Petersburg, where we have a large and loyal customer base and excellent brand recognition, and we have also opened 1 store in Sergiyev Posad in Moscow region. Our Mini Lenta stores are around 500 square meters and feature approximately 5,500 SKUs based on the most in-demand products. We plan to focus our rollout of the Mini Lenta format in Moscow, St. Petersburg and Novosibirsk as previously stated. This past month, we also launched our revamped market, the supermarket format in Moscow in our store on Mozaiskoe Shosse. The store features a fast-track shopping experience, enhanced services, a wide range of Ultrafresh and ready-to solutions as well as a new cozy look and feel of the store. The initial feedback that we've been getting from our customers has been very positive. And we look forward to roll it out further and provide our customers with this enhanced shopping format throughout our store network. It's worth to notice that sales at the new format have also been stronger than we initially expected. We continue to develop our online sales channel with growing geographical coverage of Lentochka Express delivery, productive partnerships with more than 35 delivery partners in over 100 localities as well as our Click & Collect service operating in all cities where we have hypermarkets. Our new loyalty program has been very well received by our customers. As we mentioned at our Capital Market Day, around 98% of our sales are made with the Lenta's loyalty card. This keeps us close to our customers, and it allows us to create tailored offers for individual customers based on their purchases and preferences. We've been very pleased with the adoption of our new #1 card and the loyalty program. Activations have exceeded our expectations, and we already have close to 10 million customers on the new loyalty program. All that is to say that we've begun executing our ambitious strategy, and we have a lot of things planned for the rest of this year and beyond. Let me now turn to the financials. As you know, this is the first time that we are publishing first quarter financial highlights. Before I walk you through the numbers, I just want to remind you that these are unaudited financial highlights. The numbers I'll be talking to relate to IAS 17, but you can find both IFRS 16 and IAS 17 in our press release. I'll start with some comments on our P&L for the first quarter. I'm very pleased to report that in Q1 2021, our gross profit increased by 2.4% year-on-year, and it amounted to RUB 23.4 billion. Our gross margin increased by 26 basis points to a strong 21.8%. This was driven by better supply chain management as well as improved shrinkage and stock provisions. Additionally, our gross margin was further supported by a 15.8% decrease year-on-year in our lower-margin wholesale business. Our SG&A expenses rose by 13.5% year-on-year in the first quarter. Total SG&A costs, including depreciation and amortization, amounted to 21 -- 20.1% of total sales. This is a 217 basis point increase from Q1 last year. This increase was driven by a number of factors, including investments into preparing Lenta for growth, salary indexation in our like-for-like stores, new store openings in 2020, investments into our online business as well as COVID-19 and other one-off related expenses. In Lenta, we remain focused on creating a safe store experience for both our employees and customers, and we continued that in the first quarter. All in all, this resulted in COVID-19-related expenses of approximately RUB 300 million, predominantly spent on mask, gloves, thermometers and disinfectants. Advertising costs during the first quarter of 2001 (sic) [ 2021 ] were up 19.8% year-on-year. This was due to a shift from off-line to the online channel to support the growth of our online channel as well as the successful launch of our new loyalty program. Our EBITDA for the period decreased by 26.9% to RUB 6.7 billion. This was mainly due to the absence in March 2020 of the sharp spike in sales seen in March last year, but it's also a reflection of the investments that we are making into preparing Lenta for growth according to our strategy. Please note that we have not attempted to normalize EBITDA for the last 2 weeks of 2020. With that, let's move on to cash flow. There are 3 main things that I would like to highlight here. In the first quarter, our CapEx was approximately 50% higher year-on-year, and it was equal to around RUB 3.2 billion. This increase mainly related to new hypermarkets and supermarkets opened in the first quarter as well as finishing the construction of our new distribution centers and in IT investments. Our new lower net debt and improved terms and conditions for our external debt resulted in notably lower financing costs in Q1 compared to Q1 of last year. And our free cash flow for the period was negative and amounted to minus RUB 5.4 billion, which was RUB 3.7 billion lower than Q1 of last year, predominantly because of the lower EBITDA in Q1 2021 and the aforementioned higher CapEx for the period. Moving to the balance sheet and our liquidity position. In Lenta, we've been focused on deleveraging over the past 2 years, and we have made significant improvement to our leverage position. At our Capital Market Day, we announced that our long-term leverage target was 1.5 net debt to EBITDA. However, we may temporarily be above or below. As you can see from the financial highlights, due to lower EBITDA in Q1, our last 12 months net debt-to-EBITDA ratio was 1.7. This is comfortably lower than the 2.2 ratio that we had at the end of Q1 2020, but slightly above the 1.5 ratio we had at the end of 2020. At the same time, our gross debt decreased slightly as at the end of Q1 as we refinanced several credit lines. With that, I covered our financial highlights for the first quarter of 2021, but let me take a few moments to remind you of our guidance that we provided at our Capital Markets Day. For the full year 2021 and while first quarter were somehow soft, we still aim to reach the following targets that we announced last month. Selling space growth of at least 100,000 square meters and EBITDA margin above 8% for the full year 2020 and CapEx that may go up to 5% of full year 2021 sales. Looking ahead, I can confirm that we still intend to list our shares on MOEX to tap into the increasing interest of retail investors, all with the interest and the intention to improve the current trading in Lenta shares. Lastly, I'd like to share some color on what we expect from the trading environment for the current quarter. First of all, we expect continued volatility compared to last year in terms of traffic and average basket. And we also expect continued uncertainty related to COVID-19 and a potential third wave. With that, I would like to thank you for listening, and then I'll pass back the call to Tim so that we can take questions and answers.
Thank you, Rud. Operator, we're now ready to take questions.
[Operator Instructions] And our first question comes from Alexey Krivoshapko.
And for your call this quarter, that I appreciate it, but as you know, the more information you give out, the more questions you have, so please take them. I guess, can you just comment on the indexation of wages in the like-for-like stores, which happened in Q1? Kind of what was the level we're talking about?
Alexey, we implemented an average indexation of just short of 3% in October last year.
So it was October last year, it wasn't Q1, yes?
Correct. It has an impact on Q1 though.
Okay. Clear. I guess, second question is like this, like, say that, I mean, P&L contains some of the costs of the projects, which are basically -- which haven't yet produced any revenue such as these openings of small stores and some of the kind of online-related costs, is it possible to quantify?
I can try and provide a little bit more detailed breakdown. So our SG&A increased by about RUB 2.5 billion in the first quarter. Of that, approximately RUB 750 million, on a year-on-year basis, I would consider to be one-off. Within that RUB 750 million, RUB 300 million relates to COVID-19 expenses, which we didn't incur in the quarter 1 of 2020. And then we have a couple of other one-offs related to closing stores in the first quarter. Then we have online and like-for-like stores and new stores opened in 2020, altogether impacting by about RUB 1 billion. And then the reminder, up to the RUB 2.5 billion is split between investing into preparing the company for growth, so building the capabilities, hiring the teams to drive the growth, build the stores, et cetera. And we have about RUB 200 million of extra marketing, which relates to further promoting the online as well as the loyalty card in the first quarter.
Okay. That's very helpful and clear. And I guess, the final question from my side is like if you talk about Lenta Mini, what is the best estimate of kind of CapEx and revenue which you have at this moment of time, per store or per square meter, whatever is more convenient for you?
I would say comparable sales densities to competition. As you recall from our Capital Markets Day, we showed that our sales densities are at par with competition. CapEx is still something we are working on to make sure that we optimize CapEx as we roll out the Mini Lenta. So I cannot give you more details on CapEx at this point in time other than what you can read from the guidance and CapEx up to 5% of sales.
Okay. And am I right thinking that this kind of 2021 CapEx when it comes to Lenta Mini would not include any major distribution CapEx such as warehousing or trucks?
There is the normal replacement of trucks built into the CapEx for this year and then there's also CapEx related to building distribution capabilities to proximity stores. You cannot have a 20- or 40-tonne truck delivered to a small neighborhood store. And as a consequence, we are going to make some CapEx investment this year into smaller vehicles.
And the DC for that matter...
The DCs this year, we expect to be able to assume any volumes running through for proximity store format through our existing capacity.
[Operator Instructions] We'll now take our next question from Egor Makeev.
I have a couple of questions. So my first question is, how is the new Lenta Mini store different from smaller supermarkets? Because I might be confused that during your Capital Markets Day presentation, you showed that you already had 49 such stores?
Egor, let me answer your question. In general, there are 2 basic things, which make them different: size and the services we provide. Basically, Lenta Mini is a convenience store, and we don't have over-the-counter service. So it's an entirely self-service. Obviously, the smaller store the smaller issue of the stores. But in general, in our classification is what we call it Lenta small format. And then we say that up to 700 square meters we have convenience and [indiscernible] where you have super markets and the difference we add counters as extra service we provide to our customers.
Okay. And one more question is, if we can expect any significant refurbishment CapEx on, for example, supermarkets or smaller stores, given that you have launched a revamped supermarket store and is opening Lenta Mini stores?
Yes. We will have some refurbishment CapEx, albeit we will manage the rollout in a phased approach. So I wouldn't see any significant spike in a given year.
I can add to that, that if we look at current store performance and where it makes sense, we will make some, let's say, equipment adjustment. For example, in St. Pete, we have very good performance stores, smaller size and what we're going to do? We want to, for example, destroy the wall and make selling space better because one of the characteristics which we want to improve is ratio between sales floor and back area. And then in these sales stores we're going to have each area of about [indiscernible] and we're going to have smaller construction. This is basically moving wall and increasing the selling space and there we will add a couple of shelves to increase the sales. Whereas in the mentioned stores, this we were talking about in our strategy session, and this we also mentioned 49 of them, where we -- in some of them, we're going to destroy all the counters and we'll put [ fridges ] for self-service and extra shelves where we'll put some dry products. But I don't think we're going to make it everywhere, only where it's economically sound. And in general, it's also pretty new. So we're going to keep them and will try and maximize performance without, I would say, extra CapEx. And all our ideas, we're going to implement in newly opened stores and because we plan to open quite a big number of stores this year, so we have a lot of things to do as well as openings for our construction team.
If you look at it, Egor, in order for us to get to RUB 1 trillion of sales in 2021, the existing 140 small formats is a relatively small number, even if we were to do a full refurbishment of them compared to the growth that we expect through the expansion of our small format stores.
Yes, sure. Got it. So it's not your first priority, I mean, the refurbishment.
Correct.
Our next question comes from Alexey [indiscernible]
I have a question about online revenue and whether you attribute it to your segment revenue? I mean is it -- is online revenue implied in the growth of hypermarket revenue or supermarket revenue? And what are the policies of attribution of this online revenue to this segment?
Because -- just I will start and Rud will continue. You see our current model online is that we've got pickers in the store, and they take orders for the customers and then they go via cash desk, so customer gets a receipt and knows how much they bought from each particular store. So from this point of view, our online sales is part of overall business. And our stores, they kind of in charge of online sales as well because people who pick up the orders, they report to store manager. And chief task is to make sure that those people are utilized at the best. So when they don't have orders, they have to fulfill other activities like -- they do the other activities like replenish the shelves or do something else, but make sure the resources which we have in store are properly utilized. That's the idea.
So in that sense, the online sales is included in our hypermarket and in our supermarket sales.
And can you give the distribution? Or is it like the same 90% from hypermarket segment than 10% of supermarket, I mean regarding online sales? Or is it more supermarket?
I don't have the number with an accurate split, but the larger part of our online sales is from hypermarket. I don't want to take -- we can follow-up on this, but the larger part of it is from hypermarkets.
And you see our current promise is that we will deliver you whatever you order it in 1 hour. And in most of the cases, we are capable to do it through our big boxes for our hypers, and we have quite, let's say, well geographical split of our hypers, which allow us to do 2 things: first of all, we can offer to the customer quite a wide range of product, up to 37,000; and secondly, we can deliver fast. However, in Saint Pete, for example, with some product we deliver from supermarkets. But in most of the cases, customers at this stage prefer go to the offer of the big boxes. However, both options are available. But we believe this -- as soon as we're going to have more and more supermarkets and convenience, we're going to improve 2 things: we're going to become faster in terms of product delivery; and secondly, we will be able to supply from different boxes offering to the customer different selection of products. So basically you can get your product in half an hour selected from 5,000 items, in 45 minutes selected from 10,000 items and in 1 hour, 2 hours, maybe selected from 30,000 items something like this.
Our next question comes from Alexey Krivoshapko.
Sorry, I'd like to ask a follow-up question on quarterly numbers. Can you just tell like in principle to about the business seasonality I kind of tried to look at kind of margins, the gross level between Q1 and Q2, and it comes that kind of second quarter last year, there was a big relative boost to the gross margin as compared to the first quarter. Is it normal? Or was it more like a special situation driven by crazy demand and less share of problem? In principle, like how would you expect your normal margin to fluctuate between the quarters?
We had a good gross margin last year, driven partly by the effect of the pandemic, where you saw overall in the market that the promo share was declining. In addition to that, we saw a higher share than normally of our traditional nonfood sales in Q2 last year for the simple reason that most of the stores were closed. And hence, if you wanted to buy something for your garden or other things, then we were one of the few stores that could provide that. So the margin in Q2 in that sense was supported by the effects of the pandemic.
Just like the...
Sorry, Alexey, what do you see now is more normal than what you saw last year. Because imagine you've got a couple of billion of sales on top of your regular sales and they come from [ the heaven ]. You've got the same cost structure and you've got a tremendous sales increase. Obviously, you're going to have a much healthier, I would say, EBITDA on top of factors, which we've mentioned. Your question about the system goes down dramatically.
Of course. So tell us, of course, we all understand that it's very hypothetical, but still, what is your kind of like-for-like target for this year for hypermarket and supermarket business?
We don't disclose that. That would be a forward-looking statement. So at this point in time with the uncertainty related to the pandemic, we don't forecast externally on sales expectations.
Okay. And another question, if I may? So let's say with Lenta Mini kind of rollout, say, by the year-end, you may have hypothetically, half of your space coming from Lenta Mini of this 100,000 square meters, which you're referring to. Is it supposed to be in your kind of 8%, at least 8% EBITDA margin target? Is it supposed to be EBITDA-neutral or EBITDA loss-making? How do you think about it?
Again, that would be a forward-looking statement. We believe for the total company that we -- our EBITDA margin will be above 8%. But we don't disclose information by format.
And our next question is from Marat Ibragimov.
My question is about SG&A cost. Year-over-year, they grew in nominal terms by RUB 2.3 billion, as you said. And as you also said, RUB 750 million or about 1/3 is nonrecurring one-off costs, can you please specify what are they? And also on the other part of that increase, I guess, this increase relates to significant personnel hirings?
Thank you much, Marat, for a good question. Of the RUB 750 million, RUB 300 million is COVID-19 related cost. And the remaining RUB 450 million splits into costs associated with closing underperforming stores. And then we have made a provision for a dispute with a previous wholesale customer. And then there is a one-off effect of the impact of management's new long-term incentive program.
Okay. But COVID-related costs, you also had last year in March, I believe and still you...
It's very little in March last year. If you recall, it was virtually impossible to get masks and disinfections in the last 2 weeks of March. It was only really at the end of April that supplies of COVID PPEs were more or less normalized. And hence, it had very little cost implications for Q1 last year.
And of the remaining RUB 2.5 billion increase in SG&A, significant portion, more than RUB 1.2 billion, right, it relates to payroll expenses. And I guess this is 2 drivers for that. First is online business, you had to hire new personnel, and second is Lenta Mini, which is -- which are currently loss-making on EBITDA and they run below maturity level. Am I right?
Lenta Mini is a very small impact of the increased personnel expenses. A large part of the RUB 1.1 billion relates to the salary adjustment we did in like-for-like stores as well as the impact year-on-year from new stores opened in 2020. We opened 13 stores on a net basis in 2020, but all stores were opened in Q3 or in Q4, except, I think, for 1 or 2 supermarkets. Then you have, as you rightfully say, the impact from Lentochka. And then the fourth key driver behind the personnel cost increase is investments into building capabilities in Lenta to support the planned growth. So our development team that is responsible for finding locations, running construction projects, people-related to completing the customer value proposition for Mini Lenta, for supermarket Lenta and updated for hypermarket Lenta, et cetera.
Okay. So at this one point, what is that, RUB 2.5 billion will repeat in second, third and fourth quarter of this year, right? Some compression of SG&A, but not that much?
Yes. If you look at it, already mid last year, we had quite significant sales in online. And obviously, you don't get the same full year effect, the further you get to the end of the year as we have here in quarter 1. Example equally is the salary indexation we did in our like-for-like stores took place in October last year. So there, you will have an impact in Q2 and Q3, but it will have normalized when you come to Q4. Similar for the stores that we opened last year in Q3 and Q4. And hence, that will normalize for comparison purposes as well in Q3 and Q4.
Of course, we're going to keep on opening new stores. And I guess they're going to generate sales. And from this point of view, our expenses, our cost is going to be normalized from the sales point of view. So we're going to spend more money. But as a sales rate it should be okay.
[Operator Instructions] And another question come in from [ Maria Lukina ].
Sir, can you please comment on the impact of inflation? What impact did inflation has in the first quarter? And the second question, please, relates to government price controls. Also, I would like to know if you see some effect on you?
Okay. Let me start with the last one first in terms of those few products where price control was introduced. It's a relatively small number of our products and a relatively small part of our sales. And hence, while it did have an impact on our gross margin in Q1, it was a minor impact. CPI also had an influence in Q1, albeit given the competitive situation in the market, we did not fully reflect inflationary pressure in the prices of our products, and we continue to focus on driving efficiencies on our cost base to make sure that we can do our best to offset the inflationary pressure.
And about inflation?
That was with regard to inflation.
I would say our internal inflation is more than official inflation. But usually, it happens with the big retailer. So we kind of trying with the government to help to hold inflation because first of all we do not allow the producers to increase prices; and secondly, we've got some stock which we bought at previous price and we average the stock price.
And our next question comes from Artur Galimov.
Two questions from my side, please. First of all, could you please give some sort of update on your trading month-to-date, as we have pretty much most of the April behind us? Any indications in terms of revenue growth or maybe the like-for-likes would be helpful. And the second question is about your expansion plan for this year. Could you please remind me of the format split that fits within your 100,000 square meter selling space expansion for this year?
Okay. We continue, as we tried to indicate in our comments on Q1, to observe quite good fundamentals in our trading April to date. However, I think it's worth noticing that the base that we are comparing with is still very, I would use the word, unusual. And hence, it's very difficult to make any conclusions on trading April to date for the first quarter. What we have seen is that some of the customer behaviors that we've seen in the previous 12 months, so with less traffic, but higher average check, they seem to be somewhat reversed in April. But when you look at that, it is what is to be expected, I guess. Last year, there was restrictions on peoples movement as part of the lockdown, there was restrictions on which stores you could visit. And hence, there was a significant decline in traffic in April last year. And when our customers went to stores to shop, they spend significantly more. And it really makes it difficult to make any conclusions on the comparisons for April to date. But looking at what we observed in Q1, as I've said, we would be satisfied with the fundamentals, but having challenges of comparing to last year or to a normalized year. We expect this, I'd say, uncertainty in terms of the -- comparing to the base of last year to continue right through Q2 and potentially into Q3 as well, up until the point in time when the restrictions was lifted in the last 2 months of Q3 last year. In terms of the format split, we have not previously given any split of the 100,000 square meters, and we don't have a split that we can share externally at this point in time. It very much depends on availability of retail square meters and how successful we are in acquiring those square meters. Having said that, predominantly, the square meters will come from smaller formats.
Right. Just to follow-up on these 2 questions, if I may, please? Do your comments with regards to April trading imply that revenue growth remains in the negative territory in April?
The month-to-date is flat versus last year.
Okay. And in terms of space expansion, just to confirm, at this point of time from what you're seeing at the moment, do you think that most of the selling space expansion would come from organic openings?
I can't comment on inorganic growth in our retail space. The 100,000 square meters is what we believe we, as a minimum, can open organically this year.
Right. Okay. Vladimir, wishing you the soonest recovery.
Thank you very much. Thank you.
[Operator Instructions] And gentlemen, we have no additional questions at this time.
Thank you, Nick, and thank you all for calling in today. Just 1 housekeeping item: as Rud mentioned in his prepared remarks, we will be publishing more information regarding the ordinary share listing on MOEX and then the subsequent delisting of GDRs on MOEX that'll happen a couple of months after that. We will give very detailed investor guide for everybody. So we expect to publish that in the next couple of weeks. And as always, if you have any follow-up questions, we're happy to hear from you by e-mail or by call. Thanks very much, and have a nice evening or rest of the day.
Thanks a lot everyone for calling in.
Thank you very much for everyone for calling. Thank you.
Bye-bye.
Thank you all for your attention. This concludes today's call. You may now disconnect.