© 2024 Alpha Spread Limited. All Rights Reserved.
www.alphaspread.com is not operated by a broker, a dealer, or a registered investment adviser. Under no circumstances does any information posted on www.alphaspread.com represent a recommendation to buy or sell a security. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, investment advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. In no event shall Alpha Spread Limited be liable to any member, guest or third party for any damages of any kind arising out of the use of any content or other material published or available on www.alphaspread.com, or relating to the use of, or inability to use, www.alphaspread.com or any content, including, without limitation, any investment losses, lost profits, lost opportunity, special, incidental, indirect, consequential or punitive damages. Past performance is a poor indicator of future performance.
You don't have any saved screeners yet
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good day, and welcome to the Lenta's Second Quarter Sales and Operating Results Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Mr. Albert Avetikov. Please go ahead, sir.
Thank you, Carrie. Good evening, good afternoon and good morning, ladies and gentlemen. Thank you for joining us to discuss Lenta's Second Quarter 2018 Sales and Operating Results. As usual, with me to review the results our CEO, Jan Dunning; and CFO, Jago Lemmens. The respective announcement and presentation are available on our website. And of course, after our remarks, we look forward to taking your question -- questions.And with that, I now turn the call over to Lenta's CEO, Jan. Jan, please.
Yes. Thank you, Albert. And good day, everyone. Thanks for joining us. Now you will see the announcement that sales growth remains strong, looking slightly below the previous quarter, where the continuing robust like-for-like sales growth, driven by traffic improvement, partly offset by lower ticket size.I would like to ask you -- through some highlights in a bit more detail. The second quarter growth remains strong at 17% plus, with an even faster growth of 52% in our supermarkets. Strong traffic growth demonstrated the attractiveness of our customer proposition. Having said this, the second quarter growth was slightly below the first quarter due to the combined effects of falling inflation, weak consumer spending, trading disruptions in the malls and notably the World Cup, which helped the supers but hurt the hypers. The negative factors should revert at some point in time in the relatively near future, and actually, there is already some evidence. Most specific, the World Cup effect included restrictions on alcohol sales in some cities and a fall in traffic on match days as people stayed in to watch TV and shopped in nearby smaller stores. Having the opportunity, I would like to congratulate our French investors with their World Championship.We also saw weaker sales in stores located in shopping malls, and that was actually the effect of the strategy in Kemerovo. We've seen safety inspections that was stepping up, resulting in trade interruptions. All stores are compliant, but deficiencies in other parts of some malls resulted in several temporary closures during the month of May and June. The temporary closure of the finished do-it-yourself chain, K-rauta, following its sales to Leroy Merlin in April, significantly impacted traffic in 9 Lenta stores located next to them. These do-it-yourself stores will reopen under the Leroy Merlin brand in the course of the third quarter. Like-for-like sales growth remained robust at 3.5%, driven by traffic improvements. The like-for-like traffic growth accelerated for the fourth quarter in a row to the highest level for the last 2 years. Like-for-like hypermarket traffic increased due to an increase in visit frequency and growth of unique customers, despite the negative impact of the World Cup. And the like-for-like supermarket traffic showed a big improvement from minus 5.2% to a plus 0.5%, thanks to the strong growth in the number of customers. Like-for-like ticket growth decelerated, largely to a bit weaker basket volume and continuing shelf price deflation.Shelf price deflation remained stable quarter-on-quarter, but it was below our expectation. Trading up continued year-on-year, but was slightly weaker quarter-on-quarter. And the average number of articles in the basket was weaker compared to the previous quarter but still positive. Both non-food and food sales growth remained positive. Non-food sales benefited from the assortment revisions. In June, we had over 20% sales growth in non-food, with like-for-like higher than in fresh and in dry food.Promo share in the second quarter was slightly higher versus the same period of 2017, but year-on-year increase was the smallest in the last couple of years. Promo share was almost flat quarter-on-quarter, reaching the lowest level since January 2018, which usually has a low promo share. Consumers were a bit more price-sensitive in the second quarter compared to the previous couple of quarters. The reason for, in consumer confidence, had an effect. Customers visited stores more frequently while buying less articles per visit. We see positive wage and income growth statistics from Rostov as well as good results in other consumer-related industries. We believe this reflects some catch-up of the late consumption. Rising wages will eventually translate into food retail growth -- sales growth as the recovery progresses. Hypers benefit from rising income, but the slow recovery means this effect will come a little later in the cycle than usual and later than we had hoped. Speaking about recent trading. In the first 2 weeks of July, we saw actually the same trends as in June, but sales have picked up to over 20% in the week after the World Football championship finished. Our market position in all key regions continues to improve due to a combination of organic expansion and improvements in the attractiveness of our offer. As you know, Lenta is the first hyperplayer in Russia and became the third food retail chain in 2017. Our market position is improving in all the key cities we are in, in line with our goal to become the #1 hyper in all the areas we are present. Moscow and St. Petersburg now represent 36% of our total sales. We've been the #1 hyper in St. Pete for some time and recently became the #2 in Moscow. Moscow sales were up 53% year-on-year during the quarter, including a plus 67% in the hypers. Moscow now accounts for 14% of our sales and 12% of our selling space. In only 5 years, we built Moscow from 0 into $1 billion dollar business. Also, at Moscow and St. Pete, we saw a good ramp-up of new stores in the regions, including in the next -- in the ex-NASH hypermarkets, which are actually exceeding our original expectations.Organic expansion remains our core growth driver, and we will open about 20 new hypers and about 50 new supermarkets this year. However, the pressure on smaller retailers is growing, and we will continue to look for bolt-on acquisition opportunities selectively, where the targets are a good fit and will be value-accretive for shareholders. We continue implementing a series of initiatives, designed to enhance attractiveness to consumers, with several moving initiatives on the way for both hypers and supermarket format. The impact of these actions will grow over time, we believe. We continue to upgrade our assortment, with special focus on local products in the regions, new unique assortment and private labels, but also making improvements to in-store layouts, digital activities and customer communication as well as actively working with suppliers on direct-marketing campaigns and joint loyalty programs.Our private label offering continues to demonstrate very positive developments, with over 20% sales growth and double-digit like-for-like sales growth. The strongest dynamics are shown by private labels in the medium and premium part of the range. We recently started rolling out range extensions in our hypers to increase differentiation with our competitors, and we believe that this will have an impact on the second half year on sales. Range extension and other improvements in our supermarkets offered growth and increase of like-for-like sales from minus 4% in the previous quarter to plus 0.5% in second quarter. Total sales growth increased to 51%, with customer traffic up 70%.I'll now hand it over shortly to Jago to report on the first half 2018.
Yes. Thank you, Jan. So as everybody knows, we will report on our first half 2018 IFRS financials on the 28th (sic) [ 29th ] of August, as usually we provide some trends when we disclose our second quarter trading update. So EBITDA growth was around 10% in the first half year 2018, somewhat slower than sales, while net income growth was ahead of sales.We were very pleased to achieve an improvement in gross margin, although this didn't fully compensate higher personnel costs and the rental expenses. Lower maintenance cost supported the net income. Based on the preliminary management accounts, we expect an adjusted EBITDA margin of around 8.9% of sales, which is around 70 basis points below the last year. As I mentioned, we were very pleased to be able to deliver increase in gross profit margin without a loss of competitiveness. This is a sign of our growing scale and improvements in our procurement process. It was also supported by better coverage from suppliers of our promo activities that partly offset by additional price investments.While productivity continued increasing in both like-for-like and new stores, SG&A growth came above sales growth due to salary indexation above inflation levels made in October last year. Another expected impact in SG&A came from rental expenses. As you may remember, 54% of our new selling space opened in 2017 was actually leased, which is unusually high for Lenta because we leased the ex-NASH stores in addition to expanding more quickly in supermarkets, which are mostly rented. As a result, leased selling space growth was 62% year-on-year versus a 24% growth of 2017 versus 2016. As a result, all the pressure on the EBITDA margin came from these 2 lines of SG&A, and improvement of gross profit margin was not enough to compensate this.We expected in the second half of the year the trajectory of the gross profit margin will continue and will also benefit relatively due to the low base of the second half year of 2017. Pressure from SG&A will ease in the second half year 2018 as our store network matures. Interest costs are falling rapidly, with our average interest cost down around 180 basis points year-on-year in the first half 2018, supporting net income. We expect our interest cost to continue to fall. For example, RUB 12 billion of ruble bonds with rates of around 12% will be refinanced in the third quarter this year at around 450 basis points lower cost.And then I would like to hand over back to Jan for his usual closing remarks.
Now thank you, Jago. And let me start with the first one, which is, we will report the first half year 2018 IFRS results on the 29th of August. So that you don't have the wrong date in the agenda. Now so while we -- the environment remains challenging, we are encouraged by our progress. Our main focus remains the efficiency of existing operations and creation of the shareholder value. Gradual improvement in the macro environment is now being reflected in a catch-up of deferred demand in consumer-related industries, like cash, consumer electronics, residential real estate and bank retail loans. There is a good sign for -- of a gradual recovery in consumer spending power and improving income security. In addition, fears of higher inflation, ruble depreciation and the impact of planned pension reforms, combined with lower interest rates, appear to be leading some consumers to bring forward purchasing of real estate and big-ticket items.The recovery from the recession in the food retail sector has been somewhat slower, as the upturn progresses and other demands are fulfilled. Spending on food is likely to improve. When it comes to this phase, hypermarket should actually benefit relative to the other formats. While the market will remain competitive, our competitive position is stronger than ever. We see increasing signs that small retailers will struggle to compete effectively. Our competitive position versus other hypermarket players, including both large federal and regional, continues strengthening due to our increasing scale, purchasing power with supplies, efficiency of supply chain infrastructure and growing confidence in the local purchasing. Our primary focus is to improve offer to customers, increase efficiency of our operations and the returns on the existing stores. We're long-term-oriented and continue to see many attractive opportunities for growth in the immature Russian market, but we are also return-focused and have strict capital spending discipline, with the commitment to allocate capital in the most efficient way. Of course, the team continues looking for acquisition opportunities, where they come at an attractive price and fit for our network, but we'll remain very selective and critical in our decision-making progress (sic) [ process ].Finally, it's worth noting that our cash generation from operations continue to grow strongly. And at the current level of CapEx, we would become free-cash-flow-positive next year. This creates more options for acquisitions, deleveraging or returning cash to shareholders.Thanks for listening. And yes, now we're looking actually forward to questions.
Carrie, we're ready for the Q&A session. Thank you.
[Operator Instructions] And we'll take our first question from Nikolay Kovalev with VTB Capital.
I have a couple of questions on your net openings, actually for both format, hypermarket and supermarket. So on hypermarket, you used to show us a very detailed analysis on the countrywide basis of how many hypermarkets of format like Lenta can be added. Can you share with us update based on assumption competition doesn't really change? And on supermarket format, 50 net openings, it looks like you really are putting on hold the rapid organic growth. And can you also share with us your view, what has to change? And how likely it can change so that you can consider acceleration and greater number of net openings in the supermarket format?
Yes. Thanks, Nikolay. Actually, I think we've never in the quarterly updates issued any outlook on how many hypers we think we should be opening up in the country. We did that once at a strategic session, I think, 1.5 years ago. Our view has not changed. Up till now, we opened 2 hypers, and we plan to open 20 this year, which is in the plan. We think, and that actually is in line with what I said at the end of the page, we think that quality should go ahead of speed. We have an opportunity as there's not a lot of competition with regards to the locations to be pretty selective. And that's exactly the way we continue rolling out. With regards to the supermarkets, I think the supermarket is a format which is clearly distinctive from the convenience stores and requires actually a similar approach, like with hypermarket, you have to select the locations attentively and make sure that you made the right decisions. Therefore, I do think that we should keep the speed of expansion as currently announced. By the way, the growth of supermarkets also very often depends on landlords, specific licensing, infrastructure, so that's not an easy format to roll out very, very quick. And I think we're actually, as an organization, very happy. We also said, looking at the results of the first quarter, that we should also here spend time and energy on fixing instead of growing. And I think there is evidence that we've -- that we're on the way to improve the performance of our supermarkets. And yes, I still believe that going forward, we should not overrun. We should simply do what we think is the best thing to do.
Okay. Did it answer your question, Nikolay?
More or less.
[Operator Instructions] We'll take our next question from Maryia Berasneva with Morgan Stanley.
My first question is with regards to the like-for-like. We've seen the slowing basket growth, and the press release mentions that this is partly due to World Cup effect and partly due to different mix of promotions. Now what would be really helpful, if you could take a stab at quantifying the effect of the World Cup, so that we can see what the transitory impact was. And then also, could you talk about how the mix of promotions is changing? And this is -- and whether this is just 1 quarter effect? Or whether this is something that you expect to continue to impact like-for-likes going forward?
Maryia, thanks for the question. Let me start, and then I'll give a floor to Jan. Just to remind you, we mentioned actually couple of reasons in the second quarter, which affected like-for-like sales growth. And you are right, the World Football Cup, which we all enjoyed, was one of those reasons which positively impacted supermarket but negatively impacted hypermarkets. And of course, you can consider these as one-off. The other factor, which Jan mentioned, was interruptions of working hours in the shopping malls due to some security checks, post tragedy in Kemerovo, as a result of which some of the shopping malls where Lenta stores were located were closed. As an example, a shopping mall in Stavropol was closed for 20 days, a shopping mall in Engels was closed for 13 days. That can be considered as one-off as well. And the case with closures of K-rauta stores, with a complementary traffic, which were located and are located near ex-Kesko stores, which we bought back in 2016, also interrupted some traffic. Closure came as a result of the purchase of these stores by Leroy Merlin. So these factors can -- all these 3 factors can definitely be considered as one-offs. And speaking about ticket growth, you should remember that the key impact on ticket growth as well as in the first quarter came from on-shelf price deflation, which was compensated by trading-up effect and growing number of articles, while in the second quarter ticket growth slowed down versus first quarter due to a bit weaker volume growth and less -- a bit less pronounced trading up, while on-shelf price deflation was almost stable at the quite high level, almost stable versus first quarter. And with that, I will pass the floor to Jan.
Thank you, Albert, but I think you've been very, very complete. So there's very little to add from my side. So I hope, Maryia, that it provides you with the right input.
Yes, but is there any chance of quantifying just roughly the magnitude of the one-offs in the second quarter?
Now the -- for what it's worth, we did some analysis, and World Cup impact was a 0.6% negative on like-for-like. So that's the mix I can quantify for you. That's the number I know.
Sure, but on the store closures, I get it's fairly evident what it is.
Yes, yes. Maryia, I can tell you that the figure Jan mentioned is, in 2Q, while for June the impact from the World Football Cup was even 2% on like-for-like sales growth. So it is -- it was quite visible. As an example, we had 1 store where during a week, there was only 1 day with alcohol sales, while 6 days without alcohol sales.
Sure. And in terms of the different mix of promotions, is that something new? Or is that -- or is this a permanent trend? Or is this something to do with the different weather patterns emerging in the second quarter versus what we had last year? How should we look at that?
Now what we've seen at least is that the -- although the impact of promo stayed strong, the growth is diminishing. That I think we see as positive. And the mix of promo is what you see is that people -- we have, first of all, been able to negotiate better conditions with suppliers. That also meant that we have been sticking more through compensations on invoice to what we've conveyed to the consumers. So the total price impact has been less. But consumers still stay very much price-oriented. And that's actually the thing that we -- that processes for -- that we're trying to match with our private label as well. But we see that especially the smaller ticket items are in favor of our consumer, and that's part of the reason why our baskets on average is also smaller.
Maryia, in general, we mentioned that in the first half, we recorded better coverage from suppliers with our promo actions, and that was one of the key reasons of gross profit margin improvement. And we expect the trajectory of the gross profit margin development to continue in the second half. That means, we expect good coverage of our promotions from suppliers to continue.
Okay. Okay. That's clear. The less pronounced trading-up effect, is this to do with the fact that we're starting to lap the quarters where we, already in 2017, have seen trading up and the diminishing effect of trading up, that is likely to continue in the second half of 2018 as well?
I think that's correct. There is, of course, always a base effect. But what we also have done is, as part of our EMD membership, we have access to a much wider range of, call it, unique assortment, which we are introducing into our matrix. And that means that we're looking at alternatives for a branch, but also, in -- actually importing currently more Lenta branch to compete. And all this creates a bit more quality perception, and we see that although customers in the past were more quantified, like, "Okay, that's a premium -- that's a bucket customer." Also, within the basket, consumer start to swerve. And we see that the quality product is not only depending on whether it's cheap, people are willing to spend their money. And I think that’s -- so besides the base, we see that the growth is coming out of introduction of new sales articles that really are finding a positive response from the Russian consumer.
Okay. Just to confirm, did I understand correctly that the -- you've seen no increase in promo activity quarter-over-quarter, but year-over-year promo activity, as percentage of sales, is still up in the second quarter?
That is what...
That is what you -- yes.
Maryia, absolutely correct. And we also said that the growth, which were recorded year-on-year, is the lowest for the last 2 year. Actually, I can tell there is only 1 percentage point growth second quarter versus second quarter last year.
Yes.
So you are seeing some slowdown in the growth, but it's still up year-over-year. Okay. And my last question is with regards to the supermarket format. Now it is obviously great to see the like-for-likes moving back into the positive territory. In terms of the initiatives that you have in mind for turning the performance of the format around, would you say you are halfway through implementing the initiatives that you have outlined for supermarkets? Or are you sort of 20% -- just to understand, how far along are you in terms of implementing the sort of core key initiatives to improve the performance with supers?
Yes. There are 2 activities actually besides the one that we do for the whole company. So what do we do for the whole company is actually focus quite strongly on communication, how to reach the customer more tailored. So there are 2 additional activities that we rolled out in the supermarkets. It's -- first of all, is a flexible matrix, which means that we have 4 months, but we -- once within the 4 month, the -- to give the stores the ability to pick the format matrix. And so -- which is a -- it sounds a bit complicated, but if you have medium-size supermarkets, then in a more affluent neighborhood, you would like to see a large range of wine and a small range of commodities. And that's what we have introduced. So that flexibility is currently rolled out into the supermarkets. On top, we've looked at the ranges in itself and have identified that there are abilities to increase. And that’s -- we've done the first wave, and there's a second wave to come. Getting more to your question in percentage, I think that's difficult to say. I think we should continue this work because we see clearly that consumers are reacting to this and we are getting more tailored to the local neighborhood. The second alternative or the second initiative actually that we also rolled out in the supermarket is we're looking at, call it, more-than-shopping experience. Are there areas where we can improve? We're soon going to pilot actually a total different atmosphere within the store. And the idea is that this is going to be rolled out in October or to test in October, and then see what's the impact to see whether we can roll it out next year, specifically to certain stores in certain neighborhoods. And that’s more a store concept that's based on experience, a bit of food service insight, and it's also bigger range but also the ability to enjoy. And of course, you would like to see if -- so there's a jump of 4.5%. Is that -- are we going to see another jump of 4.5%? That is difficult to forecast for me, but what I do see is that the initiatives that we have taken and which we are developing are clearly -- we're seeing clearly the impact. And I don't believe that, that's finished yet. So I hope that we'll see some continuation of that.
And just a small clarification, whom do you define as the core competitors for your supers, which banners...
I'm sorry, I didn't get it.
Which -- when you think about the supers, who do you see as the core competitors? Which banners are the core competitors?
Now what I did -- what we did is, Maryia, we met out the competencies of our competitors. And I think, like with the hypers, I think what's important in your commercial proposition is that you're known for something, and that you're positioned clearly to consumers. And I think that's what we've done. Now core competitors, I think that depends on -- as a supermarket is a smaller catchment area, it depends on the catchment area. If we have a Victoria in or a Billa in or a Perekryostok in, then yes, we will have to adjust and position ourselves the way we think Lenta is well positioned. Overall, we try to stay as close with the positioning as that we have positioned ourselves with the hyper. But of course, supermarket is a different business than a hyper business. So it's not that we compare ourselves to someone else. I think the -- we try to emphasize that we're a real value for money, good choice, reason-to-be-back supermarket.
And we'll take our next question from Brady Martin with Citi.
First question is just a clarification on the recent trading. Did I hear, Jan, correctly that you said sales were up 20% year-on-year in the 2 weeks following the World Cup? Was that correct?
No. There's actually 1.5 week in between, Brady. And that’s correct, yes.
Right. But do you interpret this -- is this some kind of, like, delayed consumption -- hyperconsumption? Or is this like you think is a more normalized growth level for the quarter or the second half? I mean, is there some part of that just kind of delayed consumption? Or you think it's -- this is normal?
No. Actually, for us, it's we're back to normal and ready to reinforce it. We had till the middle of June actually pretty good sales. And then the World Cup started, and then that had an impact. And we saw that continuous, and we -- you could even -- I mean, we have the ability to see sales per hour, and you understand that the games were in the evening, which normally, for the hypermarket, is the moment of traffic. That was pretty disastrous. So...
Actually when Russian team played.
Yes, even up to the finals. It was a fantastic event in the country. So you don't hear me regret there was a world championship. I thought it was fantastic. But it had clearly impact on consumer behavior. And a good thing is -- and I -- we prepared ourselves as well, but the good thing is that as of the 15th of July, we see trading coming back to the normal situation, which we had before the middle of June. And yes, that creates confidence that, "Okay, there are offer and the activities that we are doing is recognized." And I expect that we will continue in the third quarter.
Okay. Okay. And then the second question is just on the -- your share issued to fund the Management Incentive Program. What -- I mean, for what period is this? Is this something that we should be expecting on an annual basis? Or is this like the amount of shares that you need for the next kind of 2, 3 years? I mean, how should we look at this for forecasting?
Brady, let me answer the question. This is actually the second year when we issued shares under Management Incentive Program and Long-term Incentive Program. These are 2 programs. The one is for the limited stock managers and the second one is for a much wider number of employees. And that will continue on annual basis. The shares, which are issued, are admitted to trading on the London Stock Exchange and Moscow Stock Exchange immediately. And the -- at the end of the last week, the shares were already delivered to the accounts of employees. So when the closed period for trading is over, employees are free to use the shares. That's it. And once again, that will continue every year approximately in the same period of time. That's the program -- these are the programs which were quite well disclosed in our perspectives at the time of the IPO. And there are no changes to this program.
All right. Okay. That's clear. But just maybe further question, I mean, why not just buy shares on the market? I mean, the shares that are not performing particularly well, why not just buy shares and use them to fund your program instead of issuing shares? Is there a reason why you think you need to issue new shares?
I can answer that. First of all, of course, the question if you want to spend your cash on it. Secondly, if I -- I mean, this program is funded by Lenta Limited, which is our BVI holding company. And if I would have to get cash to Lenta Limited, that is relatively tax inefficient. I would lose tax from moving it from Russia up to Lenta Limited, making the program more expensive.
It appears there are no further questions at this time. Mr. Avetikov, I'd like to turn the conference back to you for any additional or closing remarks.
I think we can ask the participants if there no further questions or if there are still some questions, and if not, then we finish.
[Operator Instructions] And we'll take a follow-up question from Maryia Berasneva with Morgan Stanley.
One thing that I wanted to clarify is the current weighted average cost of debt, if you're willing to share it. And what is the prognosis for -- by the year-end? Maybe Jago can talk about that. And the second question I wanted to ask is about the sales density. So we've had 2 quarters of sales densities improving for the group in -- with the fourth -- starting from the fourth quarter, and in the second quarter, we've seen the sales density is actually slightly declined year-over-year, at least on my estimates. And I just wanted to hear your thoughts on how you think the sales densities will evolve? And what's -- and any thoughts in terms of potential upsides for returns that you're looking for going forward? Because you've mentioned that you are more focused on the returns going forward. So if you could share any thoughts on that.
Maryia, let me start with the first question on the cost of debt. I will leave the precise figure for our financial results announcement, which is coming on 29th of August. But as we preannounced before, we expect our cost of debt in the second half to be in the range of 8%, 9%. Definitely below 9%. And all the new debt, which we take at the moment, is coming -- it's around 7%. But not above that. And definitely, we hope to continue getting our average cost of debt down in the second half as well by refinancing the existing loans, by reducing the cost of the existing loans with our lenders and by refinancing our bond obligations. But once again, precise figure we will definitely disclose when we report first half financials and, of course, provide all the details of our -- on our debt portfolio. Thank you, and the second part of your question on sales density, I think, Jan will take it.
Of course, Maryia, we look at this as well. And in this respect, we were happy and still are happy with the like-for-like performance, which is a plus. But you see that there is a bigger gap between sales space growth and sales growth, which means that there is a decline of sales density. And that's something that we need to work on because looking at returns, yes, there's only one way to improve and make sure that you got good returns is to make sure that your sales densities move up, have your assets sweat. And that's -- yes, that's something that we need to pay attention to. The good thing, though, is that on the like-for-like panel, we see a sales density increase.
Sure. I just think that in terms of the new spaces percentage of total space outstanding, we -- this is falling. So one would expect the dilutive effect from the new space also be declining, therefore sales densities to be going up, and that's what we would be looking for in the second half and going forward.
Maryia, the logic is absolutely correct, while it will be much more pronounced in the fourth quarter of this year. As of now, you don't see selling space growth falling a lot. In the second quarter, we had almost the same figure as in the first quarter around 20 -- close to 20%, in the range of 19%, 20%. And this almost [indiscernible] see in the third quarter. While in the fourth quarter, yes, due to base effect, due to opening most of the stores in 4Q last year, you will see sales growth dropping. And yes, the logic is that sales growth should outpace selling space growth, correct.
But nevertheless, the -- what we -- like I said, we're working on range extension and range improvements. We're working on communication, digitalization. We've got a special program of stores that which we feel are actually underperforming in combination with the forecast or the budgeting that we head out. So that point is clearly taken, and there's actions on the way.
And we'll take our next question from Alexey Krivoshapko with Prosperity.
I have 2 clarification questions. First of all, you gave quite detailed estimates for your -- on the base of your management accounts for margins in the first half '18, and you also did say that gross margins didn't go up. Can you just give us an estimate by how much it's gone up?
Alexey, I'm sorry to have to disappoint you, but we will tell that on the 29th of August, yes.
Okay. Second question then the...
I think, Alexey...
Sorry. Yes?
Please go ahead, Alexey.
Yes. And I guess my second question, you mentioned that you expect Lenta to be free-cash-flow-positive next year. On the -- which assumptions you expect this to happen for openings like-for-like?
Alexey, let me start and then Jago can add. I think the assumption for the free cash proposition which we mentioned next year is based on the assumptions which are in our plan. I mean organic expansion with around 20 hypermarket openings this year and around 50 supermarket openings this year, without definitely any acquisition, which may come or may not. Then, Jago, if you want to add.
No. I think there's nothing to add to that. It's perfectly clear.
And the CapEx which is more or less in line with the guidance which we provided to the market.
Well, I guess, this is a big year, but I'm also curious about next year because quite a lot of openings in '19 potentially could eat up your entire price and cash flow increase. It's not [indiscernible] assumptions...
Yes, I think -- sorry.
Yes, it's not just making assumptions...
Just because what you're asking for it -- Alexey, what you're asking for is actually to -- us to give the guidance for 2019, and I think that's a bit too early.
Well, okay. So I just want to understand what is your logic when you say that the company could be free-cash-flow-positive. So basically, you're saying that just [indiscernible] for '18...
It's more a projection of trends and current developments, but I think, it's -- like I said, I think it's simply too early to share the details because that's part of the guidance as well, which we normally provide at the end of the year.
Okay. And I guess just one question toward, I think, Maryia and Nikolay were asking. This like-for-like numbers that you are reporting, do you see same trends across all your vintages? This is -- just was bundle for your panel, which is, I guess, what second month? And do you see some them similar for floors opened in many years? Or are there different trends for like older stores and new stores?
Without having the exact information, there is, of course, a difference, I will say, between stores that are in more denser areas where competition is tougher, and stores that are in areas where competition is less. So the 3.5 plus percent that you see is a outcome of a mix portfolio of like-for-likes. And what you can expect is, well, there where we see tougher competition or there where we see a competitor moving close to us, yes, we start to defend and we start to fight. And I think the outcome of a positive like-for-like on an annual base is that actually, we've shown to be pretty successful in this defense, and in the end, able to, over the whole portfolio, to come up with a pretty good customer proposition. If you would ask me, are all the stores plus? No. Are all the stores on average 3.5%? No.
Yes.
No, no. On average.
Yes, on average, but then -- yes, so there's always a mix.
And we'll take our next question from Marat Ibragimov with BCS.
I have a question which was already answered about free cash flow next year.
Okay, Marat. Anyway, thanks for listening.
I think he has to report -- repeat your question.
No, no, no.
You are right. Yes, you answered that you're expecting that free cash flow will be positive next year. That's what I was interested in.
There is -- correct. According to our current internal projections, that's correct.Operator, check and if there's no more questions, then we are ready to finish the call.
It appears there are no further questions at this time.
Okay then. Thank you, Carrie. And with that, we're ready to finish the call. Just to remind you, we will release our first half 2018 financial result on 29th of August. Thank you very much for listening, and goodbye.
Thank you.
Thank you.
This concludes today's call. Thank you for your participation. You may now disconnect.