© 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.
Greetings from sunny St. Pete. Thank you all for joining us today for Lenta's Third Quarter and 9 Months Trading Update and Financial Highlights Conference Call. On today's call, we will also provide an update on the progress Lenta has made since we announced our new growth strategy at our Capital Markets Day in March. I'm Tatiana Vlasova, Head of Investor Relations. And here with me today, our Chief Executive Officer, Vladimir Sorokin; and our Chief Financial Officer, Rud Pedersen. After these prepared remarks, we will take as much time as needed to answer your questions. Please note that management will discuss the results prepared in accordance with the IAS 17 standards. The press release and presentation were published this morning and are available on our website in the Investor Relations section. We would like to remind everyone that some of the information announced during this call may contain some forward-looking statements regarding Lenta's future performance or events. Please refer to Page 12 of our press release for a full formal disclaimer. With that, let me pass the floor to our CEO, Vladimir Sorokin. Vladimir?
Thank you, Tatiana, and good afternoon, everyone. Thank you for joining our call today. Despite all the current challenges connected with the COVID-19 pandemic and the increasingly competitive food retail sector, Lenta still delivered strong results and achieved several important milestones during quarter 3. First, we had strong sales growth rate of over 13%. We also had solid like-for-like results. Our EBITDA margin was almost 9%. Total selling space was up by more than 15%. We also begin to increase the rate of openings for our new Mini Lenta format. We completed the acquisition of the Billa and Semya retail chains and our online channel is now doing over 30,000 orders per day. And during quarter 3, online sales grew almost 3x over last year. Not only am I pleased with these strong results, but just as important, I'm very proud of our Lenta team both here in headquarters and out in every single one of our stores and distribution centers. Our people deserve a lot of credit for these results. Now let me give you some color on current operating environment. We have seen an increase in number of COVID-19 cases throughout Russia. In response, the authority has recently announced new measures to counter the increase. What does this mean for Lenta? First, Lenta stores will remain open every during any so-called nonworking holiday periods. Secondly, we will, as always, ensure that our stores remain safe for both customers and employees and operate in accordance with all requirements announced by the regulatory bodies. We are committed to ensure a safe environment for our employees and customers and safety will continue to be in our focus. We believe that we are well positioned to serve this need of Russian customers during these challenging times. I would like also to give you a brief update on the progress we made on our strategic plan. As you may know, earlier this year, we announced our 2025 strategic goals. While there is still much to be done to reach them, we are already off to a good start implementing of our strategy. For example, in the last 6 months, we continue to develop our new Mini Lenta format, and we have rapidly grown our online channel. Lenta is well on its way to becoming a multi-format food retailer. One year ago, hypermarket generated almost 90% of our total sales. In supermarkets, we are less than 10%. This year, during the month of September, after closing 2 acquisitions, our supermarket format represented close to 20% of total sales, and our online channel increased to almost [ 5% ]. We expect that by the end of 2022, the new Mini Lenta format will also be a material contributor to our plans to reach RUB 1 trillion in sales by 2025. Another important achievement during quarter 3 was the completion of the Billa and Semya acquisitions. We believe that both businesses have a very strong strategic fit for Lenta, not only grow these deals about acquiring physical stores and a great location, but just importantly, we also gained several soft skills.For example, Billa brings us an expertise in operating in the supermarkets format, while Semya has deep expertise in culinary and confectionery production. And of course, we see potential for synergies in procurement, supply chain management, cost saving, back-office functionality and other business processes. Closing all these achievements in the quarter 3 gives me confidence that we are on a good path to reach our 2025 strategic objectives. Now I will pass the floor to Rud, who will walk you through a detailed recap of Lenta financial and operational performance in quarter 3.
Thank you, Vladimir. Before I walk you through our financial and operational performance in Q3, let you remind me that the numbers I'll be speaking to relates to IAS 17. For your convenience, you can find both IAS 17 and IFRS 16 financial highlights in our press release on the Lenta IR website. As usual, let's begin with some comments on our income statement. I'm pleased to report that we have delivered strong top line growth in both Q3 and during the first 9 months of the year. Retail sales were up 13.5% in Q3 and by 4.8% for the 9-month period. This growth was driven by positive like-for-like retail sales in Q3, our online business and total selling space growth. Sales in Q3 were supported by customers trading up through purchase of more premium product and an uplift from internal on-the-shelf inflation. While in Q2, we saw an increase in promotions due to the low comparatives of Q2 2020, we experienced increased promotional competition in Q3 year-on-year. In Q3, gross profit rose by nearly 20% year-on-year in absolute terms as our gross margin improved 126 basis points to 26.6%. This was in part due to better promotion margins resulting from improved promo campaigns as well as positive dynamics from stock provisions and higher centralization. On the negative side, we invested slightly more into our cashback offer through our loyalty program. If we take a look at our SG&A, which increased by 12.6% year-on-year to RUB 22.7 billion, while we invested RUB 2.5 billion in our business, our SG&A as a percentage of total sales decreased by 11 basis points to 19.1% in Q3. This decline was mainly driven by lower payroll-related taxes as well as depreciation and amortization as a percentage of sales. This more than offset increased lease expenses. Both Billa and Semya have a higher share of lease versus owned stores, and our organic expansion is also in leased stores. Once Billa and Semya are fully integrated into Lenta, we do expect, as mentioned by Vladimir, to realize synergies in procurement, supply chain and cost efficiencies from back office functions. Payroll and related taxes in Q3 rose by 6.9% year-on-year due in part to a salary indexation, which took place in Q4 2020. In addition, we had impact from new store openings, investments into building capabilities required to implement Lenta's growth strategy and investments into Lenta Online. On a positive note, personnel expenses as a percentage of total sales declined by 41 basis points because of our focus on continued higher productivity in stores in ramp-up as well as in like-for-like stores. Store operations were also up in Q3, mainly driven by costs associated with new store openings, increased security costs related to change of security vendor as well as store repair and maintenance. Having said that, store operations as a percentage of SG&A or as a percentage of sales, almost remained flat at 2.1%. Advertising costs during quarter 3 were up 18.7% year-on-year as we continue to invest into growing Lenta Online, though as a percentage of total sales, the share remained flat at 1.3%. EBITDA for Q3 came in at RUB 10.4 billion. This was 31% higher than in Q3 of last year, mainly due to our strong gross margin for the period. And our EBITDA margin for Q3 improved year-on-year 119 basis points to 8.8%. With that, let me move to our cash flow. Our Q3 CapEx was slightly lower than in the previous year and amounted to RUB 1.5 billion. While CapEx in the first 9 months of 2021 amounted to RUB 6.5 billion, an increase of 29% year-on-year. This increase resulted from an accelerated pace of new organic store openings, completion of construction of distribution centers, continued IT development costs and expenses related to the integration of the acquired Billa stores. During the first 9 months of 2021, we opened 52 new stores on a gross basis compared to 10 stores in the same period last year. And we will continue to accelerate the pace of new store openings going forward. With regard to integration CapEx, we use a CapEx-light model by transferring Billa stores into Lenta's brand. In general, Billa stores are in a good shape, and we generally focus on repairing engineering systems in older stores, fire safety work and cosmetic refurbishment. Eventually, we will evaluate necessity of a more significant renovation of Billa stores later after we will have seen the first results of their operations under the Lenta brand. In Q3, net cash from operating activities increased almost 5x to RUB 10.2 billion. This was thanks to our strong sales, positive movement in working capital, lower interest and income tax paid. Naturally, net cash used in investing activities rose significantly year-on-year due to the acquisition of Billa and Semya. Free cash flow for Q3 was negative by RUB 12.9 billion, which was RUB 13.5 billion less than our free cash flow in Q3 2020. However, as mentioned, this was due to cash used in investing activities. Specifically, on a net basis, we spent RUB 19.2 billion acquiring Billa and RUB 2.4 billion acquiring the Semya business. Our Q3 2021 free cash flow, excluding these 2 acquisitions was RUB 8.7 billion compared to RUB 700 million in the same quarter of 2020. Now moving on to our balance sheet and liquidity position. At the end of September, our net debt to last 12 months EBITDA ratio was 1.9. It is higher than the 1.5 level we saw at the end of last year, and it follow the 2 acquisitions and our investment into organic expansion. Our long-term target remains unchanged, and we are confident in our ability to sustain our growth ambitions. Our cash and cash equivalent position decreased since the beginning of the year because of the acquisitions. That said, we paid for the Semya business from our operating cash. While for the Billa acquisition, we used both our operating cash and new debt. That covers our financial highlights for Q3 and the first 9 months of 2021. Let me finish by briefly reviewing our updated full year guidance for 2021 that we published this morning in our press release. As we are now nearing the end of 2021, we have greater visibility, and hence, we are updating our guidance as follows. We're increasing our guidance on selling space growth to at least 225,000 square meters. This includes both organic and inorganic additions. Our previous guidance was at least 200,000 square meters. With at least 225,000 new square meters of selling space, it will represent a growth rate of nearly 15%, and it will put Lenta amongst the fastest-growing food retailers in Russia for this year. We are reiterating our previously committed EBITDA margin guidance as we still expect our EBITDA margin to be at least 8% for the full year. We also confirm our previously communicated guidance that CapEx will be up to 5% for the full year 2021. Lastly, we are adding guidance regarding new store openings for the full year. We anticipate that Lenta will open around 125 organic stores during 2021. To sum up, Lenta is performing very well, both operationally and financially. We are growing, and we are diversifying our total sales for expansion into online and smaller formats as well as through being an active player in the Russian food retail sector consolidation. Most importantly, even with these strategic moves, we continue to maintain our profitability as measured by EBITDA margins. That's all I would say. So I will now return the call to Tatiana, and then we can begin the Q&A session.
Thank you, Vladimir and thank you, Rud. Operator, we are now ready to take the questions.
[Operator Instructions] Our first question comes from Mr. [ Artem Mihalin ] from [ Dales Capital ]. Okay. We'll come back to you shortly. In the meantime, we will take another question from Mr. Alexey Kornev from ACRA.
Thank you, dear colleagues, for your presentation and quite outstanding results. I'd like to have some explanation on Page 2 and Page 3 regarding like-for-like results, whether you include Billa and Semya supermarkets already in that statistic. And the second question is, can you explain somehow like below-average like-for-like results for the supermarket segment? Because it seems competitors have an increase in like-for-like sales and Lenta, unfortunately, doesn't look the same way.
Very good question. Thank you very much for that. In terms of the like-for-like results, we do not include Billa and Semya stores. We will consider those that are transferred to the Lenta brand this year as new store openings for 2021. And those stores that we will transfer next year, we will consider as new store openings in 2022. In terms of the performance of the existing or the old Lenta supermarket, it is correct that we have a negative like-for-like. What we have seen is that they have been hit harder from the declined traffic, and we are taking measures to revert the performance of those stores. The decline in like-for-like is driven by less customers visiting our supermarkets. There are numerous reasons for that, but one of which is the fact that all stores were operating last year in the pandemic environment, and hence, it had an increase in footfall last year, and we've seen the reversal of that this year. But as said, we are taking measures to address that issue.
[Operator Instructions] In the meantime, we do have a text question. Could you please give us a brief update on the performance of recently integrated Billa stores?
I think, in general, we are satisfied with the current status of integration. I think we are more or less in our target. I think we are going to have some stores left for the beginning of next year. And the main reason why we will stop integration is that we are heading to the high season, and we don't want to take extra risk. But most of them, I think 10, maybe 15 stores, will stay for the next year. But in general, we are doing fine from my point of view, and the results which we have more or less in line with our expectations and our investment plan.
Our next question is also coming online. Your online business demonstrated good results on the top line. Could you please elaborate on the bottom line results? Do you expect that you will be able to make it profitable one day?
If you look at our online results at a unit economics point of view, then already now, we are at almost -- we are not at almost. We are at 0. In St. Pete, we already even started making some profit. But if you look at our online performance like a separate business line, then you put overheads and the market investment, then we are still negative. But it's not -- I mean, it's not really negative. And of course, we are much better than the year before. And I think we have a pretty good chance to keep on improving even further.
Okay. The next question is about dividends. Given the leverage grew significantly, are you still planning to start paying out dividends in 2022?
Ultimately, the decision to pay a dividend is a decision of the Board of Directors. Our leverage as per end of September is in line with what we expected, including the 2 acquisitions that we made in Q3. So our expectation is that should the Board decide so and in accordance with our capital allocation priorities, dividend could still be possible next year. But we will continue to follow our capital allocation priorities, which is leverage, investing into growth, either organic or inorganic and as a third priority, to return money to our shareholders via dividend. So should we have opportunities to invest into the business, we will do so. However, as I said, ultimately, it's a decision of the Board.
Okay. The next text question relating to the rolling smaller format. Do you see any difficulties in the rolling smaller formats from operating logistics or marketing prospects?
Thank you for your questions. I think nothing is surprising, I would say. We are more or less in line with our expectation, I would say. We are facing some difficulties, but I would call them technical difficulties because we have still a hypermarket mindset. And even if we try to do all these things differently, let's say, in the way a small box require, we still quite often behave like a big box player. But I call it a learning curve, and I see the good progress we are making in every single component of this development. And from my point of view, so far, nothing critical. Just normal mistakes, which people usually do when they start doing something new. And the most important thing for me is that we see mistakes that we make, and we take correction measures. And from my point of view, again, I think so far, we are good.
Okay. A couple of more questions on the text questions. We currently see that you now have supermarkets that do not perform quite well. Do you have any action plan on how to improve the results?
Yes, we see it. We have to admit that the performance of old supermarkets slightly behind what we would expect. But for me, this is a matter of priority. I will say in -- if you remember, it was announced in our strategy, we had different areas for improvement. And the key area was for us to make our hypermarkets growing, delivering positive like-for-like and have still most of our cash to finance our development. And we as an organization put most of our efforts to make sure that we turn around hypermarkets and start growing in this area. I think we progressed quite well. I wouldn't say that we solved all issues which we had. However, I'm quite confident that we are on track. And we started putting more focus and efforts behind supermarkets. And I have to tell you that, for example, in October, our like-for-like is almost 0. So I believe there are pretty good chances that we'll finish the year with positive numbers.
Okay. A question about M&A. You've already made 2 acquisitions. Do you continue to search for other potential deals to enter? And any priorities in the businesses you are particularly looking for?
We continue to believe that the consolidation will happen in Russian food retail. And we are still committed to take part in that. We have the financial firepower to do so. And it's an element of our strategy towards achieving the RUB 1 trillion in sales in 2025. Having said that, M&A is opportunistic. And there's always more interested buyers for any given target. Nevertheless, with Billa and Semya, we've proven that we are capable of taking part in the consolidation.
Okay. It looks like we have a follow-up question from Alexey Kornev from ACRA.
I'd like to ask regarding EBITDA margins of Billa and Semya because from public records that at least I could check, it seems like Billa was negative from EBITDA or maybe close to 0. What actions do you make to turn it into the Lenta level of profitability? And where do you think you could find some synergy? Or what exactly can be improved there?
All right. If we take it through the lines of the P&L on the sales side, we believe through the combination of Billa and Lenta's assortment that we create a very strong offer that the customers will like. As we transition the stores to the Lenta brand, we will also offer the Lenta loyalty program through those stores, which is received very well by the customers. On the cost of goods sold, we believe that we are able to provide benefits to the volumes running through the Billa stores through the purchasing power that Lenta have relative to that Billa had.On the SG&A side, we will be able to deliver scale benefits on supply chain management. And we will be able to deliver scale benefit on back-office functions. So from that point of view, we consider the acquisition of Billa as an acquisition of locations, where ultimately, we are adding these locations to the existing Lenta platform and then driving efficiencies through the discontinuation of any, I'll say, cost that relates to Billa having operated as a stand-alone business.
We have another voice question and another text question. Perhaps we will take the voice question first from [ Tom O'Brien ].
I have a follow-on question. Back in July, you did mention that you expect listing of new shares to happen in the third quarter. Can you give us an update?
Yes. Happy to do that. Preparation for delisting of DRs in Moscow Exchange and listing of shares has proven to be somewhat more complicated than what we had anticipated, including getting an agreement with Moscow Stock Exchange and other external stakeholders on the formalities under which such delisting and listing should take place. Current timing is November. We hope to be able to come out with more news on this within the next few weeks.
Our next question is about general trends. What recent trends do you see on the market, including due to ongoing COVID?
Good question and a difficult one to answer. First of all, we don't see the negative development that has taken place in terms of number of COVID-19 cases, mean that we are again experiencing situation like what we saw in Q2 of last year. It seems that the consumer has accommodated the pandemic. And continuously through Q3, what we've seen is that the consumer is migrating back towards consumer behavior that they had pre COVID, so shopping in more stores, spreading their household budget over more stores. Perhaps one thing that still is visible is that -- and as we see in our numbers, is trading up. So it still appears that the Russian customer is pampering themselves and have less -- spending less of their household budget on eating out or other leisure activities. So I wouldn't say that there's been any significant changes in recent weeks or recent months. It's sort of reverting back to the pre-COVID customer behavior that we've seen in Q3. We also don't anticipate that the recently announced lockdown will materially change customer behavior back towards, as I mentioned, what we saw in Q2 of last year.
Okay. I am seeing no further questions at this point, so I'll pass the line back to the team for their concluding remarks. Actually, we did have one more question, if you don't mind, from Alexey Kornev from ACRA once again, a follow-up.
Yes. I'd like to ask whether Lenta can give us some information regarding a FAS investigation that started in August or maybe when we can expect some news regarding that investigation because there seems to be -- at least I didn't find any information about Lenta view on this.
Not much to update. FAS visits at our office. They asked a number of questions which we answered. We provide them with a number of information that they had asked for. We fully cooperate with the antimonopoly authorities. And to my knowledge, no claim has been raised against Lenta in terms of inappropriate behavior.
I will now pass the line to Timothy Post for his concluding remarks. Please go ahead.
Thank you, everyone, for joining us today. If you have any further questions, please let me know. I will answer you by e-mail or by phone. Thank you for joining us today. Have a good evening.
Thank you.
Thanks, everyone.
This concludes today's call. We'll now be closing all the lines. Thank you.