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Good day, and welcome to the Lenta Third Quarter 2019 Operating Results Conference Call. Today's conference is being recorded.At this time, I would like to turn the conference over to Mr. Albert, please go ahead, sir.
Good evening, good afternoon, and good morning, ladies and gentlemen. Thank you for joining us to review Lenta's third quarter 2019 sales and operating results. With me to review the results are our CEO, Herman Tinga; and CFO, Rud Pedersen. The announcement and presentation are available on our website at lentainvestor.com.After our remarks, we look forward to taking your questions.I will now turn the call to Lenta's CEO, Herman Tinga. Herman, please.
Thank you, Albert. And good day, everyone, and thank you for joining us. First of all, I would like to emphasize that I'm not satisfied with the results since we did not succeed in driving sales as expected.As you have seen from the announcement that in the third quarter, Lenta's retail sales came weaker than in the previous quarters. One other thing, this was a result of intensified competition, especially in South and Volga regions. While macroeconomic environment continues to make -- provide little support to the retail industry.But before taking you through the details of Lenta's operating results, I would like to pass the floor to Rud to provide some highlights on corporate development.
Thank you, Herman, and good day to everyone. As we previously informed the market, we are on the way to optimize our corporate structure amongst others to provide for better flexibility in terms of capital allocation, and we thought it would be appropriate to start with a few updates in this respect.In October, Lenta established a representative office of Lenta Ltd. in St. Petersburg, and we applied for Russian tax residency. As the Group's CFO, I was appointed as Head of this representative office.Last week, Lenta also held an extraordinary General Meeting, which resolved that the company will continue its incorporation in the Republic of Cyprus. Under the laws of the Republic of Cyprus, this will require amendments and replacement of our current memorandum [indiscernible] of association as well as establishing a par value for the company's shares. You may find the full text of the resolution, our future articles and the result of the EGM on our website.As we announced earlier this year, these decisions were made to rationalize and to make our corporate structure more efficient. This will allow for a more optimal capital allocation. It will optimize the cost of compliance and improve corporate governance standards reflecting the recent changes in our shareholder structure.We do not expect any implications to the GDR holders from such decisions, and we don't expect any impact on the company's financial results. The work related to continuing incorporation in the Republic of Cyprus is expected to be completed not later than Q1 next year.And with that short update, I'd like to hand back to Herman to talk a little bit about our Q3 trade results.
Thank you, Rud. Yes. And I would like to proceed with the discussion of our operating results for the third quarter. Now you've seen the respective announcements, so I will go to main development on some of the details.Please also note that we have started producing monthly sales growth by format as well as ticket and certain dynamics. First, looking at the environment, we can say that despite some improvements in the third quarter, macro environment and competition remains tough. In the third quarter, disposable income shoots by 3% year-over-year compared to a decline of 0.1% in the second quarter. So income growth during the quarter was not [indiscernible] in the retail sales, which rose only 0.4% and it was fourth month of growth deceleration.Food inflation decelerated to 5% during the quarter from 5.9% than the previous one, substantially exceeding the growth of consumer income. At the same time, the pace of extension of some retail chains remains in a double-digit territory, offering consumers more options for daily shopping. In addition, promo activity intensified in the third quarter, putting extra pressure on the retail sales.In the interest environment, Lenta delivered weaker set of results in the third quarter compared to the previous one. Due to some retail issue that total sales declined 0.4%, being affected by a decline in our wholesale business and slower growth of our retail sales. Retail sales grew 2.9%, slowing down from 4.7% in the previous quarter due to slower pace of selling space development and retail like-for-like sales growth. Like-for-like declined to 0.5%, excluding 380. I'd like to recall your attention that Lenta reports both sales and like-for-like [ stores ] excluding 380. Our like-for-like customer traffic declined 2%. We continue observing quite healthy growth of number of unit customers, while this was not enough to compensate the decline in the frequency. The level especially is reachable with newly gained customers who come to us less often than they used to be in the past. A lot of impact of frequency came from increased share of cherry-pickers in August, September with high share of promo articles in their basket and the low visit frequency.So look at ticket. The like-for-like ticket developed by 1.5%. Like-for-like ticket accelerated from the previous quarter due to higher trading up effects and better basket size. While number of articles in the basket remained secured than a year ago, it improved however versus the previous quarter. However, disposable development was partly offset by own shelf deflation. So after 2 quarters of inflation on the shelves, we again face a deflationary environment. The reason for that is promotional activity [indiscernible] shelve inflation. The lower selling prices came as a result of intensifying strong activity in the market place, especially. We recorded historically high promo shares in our stores in both September and the quarter. This was partly explained by structure out of some seasonal nonfood and dry food categories as well as by Lenta's Birthday and Back to School campaigns.On top of that, we had quite a successful scratch card campaign for providing an additional 10% to 15% discounts for the next purchase for customers with ticket size above a certain threshold. As a result, customers were granted scratch cards in August which they redeemed in September. Although this discount on total ticket was not related to any specific SKU or product category, but was reflected in our reporting as part of promo sales. We also have seen customers becoming more product-driven, looking for wants and switching from regular items to seasonal catalogues. However, those promo articles in the end attracted mostly cherry-pickers and didn't result in [indiscernible] of our loyal customers. Our promo activity in the first 2 weeks of October went down substantially and stays now at a level slightly below the third quarter. Although we did report our financial results in [indiscernible], I'd like to mention that despite the high share of promo sales, we have not seen any impact on our margins, so we've got that under control.Then I would like to say some several words about our hypermarket developments and supermarket. Starting with the hypermarkets, sales growth in hypermarket's direct selling space [indiscernible] growth in the third quarter. Retail sales growth in the hypermarket still is negative in quarter driven by weaker traffic growth. Average ticket continued to benefit from a strong trading up and was totally supported by better basket size. Decline in fixed frequency is notable of continuous trend reflecting intensifying competition with fast-growing retail chains in some of the Russian regions. And if you look at the least distribution, we see strong trading and strategic growth, positive like-for-like sales growth coming even from very odd source. And by the way, this could be a very nice example of circulate in city, with sales growth in some space and a very healthy competitive landscape.Moscow and the regions [indiscernible] as well, South and Volga, these are the most competitive areas with regional political change becoming more aggressive in prices, and they're also growing their selling space even faster than from the [indiscernible]. These are also the areas that are the weakest in [ Lenta's ] fumigation.Then some words about the supermarkets. The performance in our supermarket during the quarter by far outpaced the 7-stage growth. The total sales in the supermarket shows by 21% year-on-year driven by 9% of like-for-like sales growth, while an increase in selling space came at 6.5%. This was a result of further inflows of new customers combined with increased ticket. Customers are responding positively to our ongoing changes in our offering, especially regarding some of the marketing communication.Yes. Then I will not spend much time on the wholesale as it shows -- it has been preannounced that it's expected development at the moment. But this time, I would like to give some information about our efficiencies and activities from online. As you are aware, Lenta is studying potential solutions for developing online channel as part of our communication and services for our customers. We are actively partnering with different companies, platforms across many of the Russian regions to get more knowledge of the potential of these markets. So for example, at the mall we cooperate with 14 online shops in 18 large cities, with the largest one operating in 8 cities. And we are looking for new partners in the existing new city.For the 9-month period year-to-date, we have recorded RUB 660 million of sales through this channel coming from 264,000 of online orders. And this is just slightly above 0.2% of our total retail sales since the beginning of the year, so it's small, but we believe in the potential of the online market in combination with our very strong physical footprint. So we will continue studying opportunities in e-commerce, and we'll definitely update the market on our next steps that will come.Now I would like to hand over to Rud to talk about our expansion phase.
Thank you very much, Herman. We have not made any changes to our expansion plans this year. As such, we're still looking to open 8 new hypermarkets with 4 stores still to be opened in Q4. We're especially looking forward to reopening [indiscernible] in St. Petersburg. This store has been closed due to a fire in November last year. It was always one of our top-performing hypermarkets both in terms of sales and in terms of EBITDA margin. It has now been reconstructed in a new concept, and we expect it to become our flagship store. I'm not going to much detail on the concept right now as we plan to disclose that at the opening.Moving to supermarkets. We continue to target to open 3 stores in 2019. But I'd like to add a few more comments on supermarkets. As some of you may recall, we signed a lease contract back in 2017 with a real estate developed company called ADG. They're building a network of neighborhood, shopping and entertainment centers across Moscow's residential area. Last week, our Board approved investment of around RUB 2 billion into 29 Lenta supermarkets, with a total selling space of approximately 24,000 square meters. These supermarkets will be located in these neighborhood centers. We expect these supermarkets to open in the period from the beginning of 2020 into the first half of 2021. And we expect that these stores will be an important addition to our existing portfolio of supermarkets in Moscow.I'd like to emphasize that this decision shall be seen as our confidence in the format itself is growing. On top of that, it also shows our intention to continue growing the business as and when we see opportunities for value creation, and it's also the first major investment that the Board has signed off under our new major shareholder.Those supermarkets, however, will not have any impact on our 2019 guidance for CapEx. Hence, we maintain the guidance that we have previously given on CapEx for 2019.So with that, I'll turn back to Herman for a few closing remarks.
Okay. Thank you, Rud. Yes, overall, the quarter was tough to intensifying competition and stronger growth of density in the market. However, I believe we clearly understand what needs to be improved in our offer to drive the sales and continue winning the customers. So we will keep focus on the underlying business to ensure profitable growth in the core format. Our key priority is to achieve positive like-for-like sales growth, including our stores. And find room for improvement in each cost line to maintain operational efficiency. Thank you.
Thank you for listening, and now we are ready for the questions.Britney, we're ready for Q&A.
[Operator Instructions]. Our first question comes from Alexander Gnusarev.
I just have a couple of questions. I wanted to know what's your current share of promo in sales year-to-date? And what's the share of fresh food and nonfood in the sale as well?
Yes. If you look at the total share, this is above 50% at the moment. And in September, it was above that number.
And coming to the next question, Alexander, if you feel that we've answered the first one. Percent of sales related to dry food, fresh food and nonfood.Nonfood takes around 11% of total sales. And the rest is more or less taxable share, I would say, around 45% of fresh food and the rest is dry food.
[Operator Instructions] We have one question from Yulia Gerasimova.
So I have question also a continuation on the -- follow-up on the previous one about the promo activity. How the promo activity is shaping up right now in Q4 compared to Q3? Do you see it on the same level or there is, I mean, slight deceleration of that because we're hearing from some of the market participants who have been quite active on promo in Q3 right now, decreasing the intensity of the price investments. So interested to see how you value the promo activity in Q4?And also, can you just talk a little bit on the -- what's kind of defining your share of the promo? Is that's your response to the traffic outflow which is outgoing to the small format? Or you're just responding to the aggressiveness of some other players? And if so, who these players are? So that's the questions I have.
So thank you, Yulia, for the questions. Let me start with the first part. What we see in October that the promo share is essentially down if you compare with the standard, and roughly around the level of the third quarter, so around 50%. So it's not increasing.What's important for us is, let's say, that we are able, let's say, to keep the margins on a good level, that we don't lose too much of a margin mix then promo share increases, and the commercial team has that pretty good under control. The other part of the question, promo share. Of course, we would like to see a lower promo share. But in principle, for us, the fourth quarter, we will remain active, and remain active means that the big part of the promotions we always did. We will also launch new campaigns to keep attracting customers because the fourth quarter is for hypermarkets, extremely important. So for example, in December, for the new year sales, we also see that our market share is higher than the rest of the year.And in general, the hypermarket has to have a little bit higher promo share than the average markets because we have to create more traffic, so that we will remain active. We don't try actively to grow it. It is not per se a reaction on the market of the other players, although we see they're all very, very active, and we have to stay attentive.Hopefully, that answers your question.
Yes. It does. And my second question was about -- we've recently heard that Carousel is selling 20 hypermarkets would let them to be interested in looking at some of these properties? Or given that you already slowed down on the expansion, you are staying away from the potential acquisition? Any comments here?
We are always looking for good opportunities where we believe we can create value in terms of our physical footprint, but I cannot comment on that specific case.
Yulia, just basically speaking, fundamentally on M&A. Definitely, we see that a lot of change in hypermarket format suffered. And we also understand that it's a buyer's market. Basically, Lenta is the only one still growing in this format.So we are not in a rush, and we will be looking very selectively for opportunities which create additional value.
Thank you, everyone. This concludes today's question-and-answer session. I will now turn the conference back over to Mr. Albert.
Okay, Britney. If there are no further questions, then we are ready to finish the call. Thank you, everyone, for listening. And we will speak to you next time when disclosed Lenta's sales, operating and financial results in the beginning of the next year. Thanks.
Thank you, everyone. This concludes today's teleconference. You may now disconnect.