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Good day, and welcome to the Lenta Q4 and Full Year 2020 Operating Results Call. Today's conference is being recorded.At this time, I would like to turn the conference over to Tim Post. Please go ahead.
Thank you, Christina, and greetings from soon-to-be-snowy St. Pete. Thank you all for taking the time to join us today for the Lenta Fourth Quarter and Full Year 2020 Operational Results Conference Call. Today, you will hear remarks from Lenta's CEO, Vladimir Sorokin; and Lenta's CFO, Rud Peterson, who will discuss fourth quarter market trends and Lenta's operational highlights before we open up the call to your questions. The prepared remarks will take about 15 minutes, and then we will take as much time as needed for your questions.With that, I will hand the floor over to Vladimir.
Thank you, Tim, and thanks, everyone, who have joined our conference call. I'm delighted to speak to you again to discuss Lenta's operational results for the fourth quarter and the full year 2020.As you know, 2020 was an extraordinary year for the retail sector as a whole, for Lenta, in particular, and also for our customers. It was a year of many challenges, but also a year in which we overcome many challenges and leverage the new opportunities to enhance and expand our businesses, including our major progressing online sales offering. I'm quite proud of how Lenta has responded throughout the year to the COVID-19 situation, always keeping the safety of our customers and employees as our top priority. In these challenging times, we succeeded in keeping the trust and loyalty of our customers by protecting them and always giving them options to shop in the most -- in the way most convenient for them, whatever it be, our hypermarkets or our supermarkets or our online options. Our solid operational results demonstrate that we found out effective ways to do that.The second wave of COVID-19 pandemic hit Russia during the fourth quarter, having an effect on customer behavior and consumer confidence. That said, our overall retail sales and like-for-like performance were in line with our expectations. Lenta retail sales rose by 5.7% year-over-year in the quarter 4, driven by 12.4% increase in average ticket and despite a 5.9% drop in traffic. Hypermarket sales grew by 6%, while supermarkets saw a 3.3% increase. Both results were due to higher average tickets despite lower traffic figures. Meanwhile, our like-for-like numbers experienced similar strong dynamics. Like-for-like sales grew by 4% year-over-year in the fourth quarter. Like-for-like average ticket came at 13.2%, and like-for-like traffic was down by 8.1%.Lenta's online sales continue to show strong results. Its total online sales in the fourth quarter grew almost 10x compared to the fourth quarter 2019. I'm proud to say that we now offer online services in all 88 cities where Lenta stores are located. We added 8 stores on a net basis in the fourth quarter, bringing our total store count to 393 hypermarkets and supermarkets, and total selling space of 1.52 million square meters at the end of 2020. In October, we opened our 13th distribution center in the Leningrad regions to more efficiently supply our stores in St. Petersburg and Northwest.And now a bit of context on the trading environment. With the resurgence of COVID-19 cases in November and December, we saw a return to one-stop-shop mentality in the first quarter as customer preferred to purchase both their food and nonfood items under a single roof and in a single visit in a safe environment. Lenta hypermarket format is appealing to the customer as the large floor space reduces the number of closed social interaction. As a result, our hypermarkets delivered solid results for the quarter. COVID-19 clearly impacted how many customers spent their new year holiday. Fewer people traveled abroad. And obviously, there were not as many large gatherings of corporate events as they are in typical year. Most customers spent their holidays at home and they stock up on food and safety items during the final days of December. We expected this to be in the case, so our sales channels and inventories were well prepared to handle the strong demand.I mentioned the development of our online services, and I would like to elaborate on that because it is a very important aspect of our growth. We see online is aiding incremental sales and not cannibalizing our brick-and-mortar sales. We have worked hard to expand the presence of our online services to the new cities in quarter 4. By the end of the year, Lenta offered its online services across 88 Russian cities compared to 82 cities at the end of quarter 3 and 27 cities at the end of quarter 4 2019. As a result, total online sales totaled more than RUB 3 billion in quarter 4, up over 900% year-over-year. We have also seen strong pickup and see the success of our online services in the regions. Presently, the average ticket for online is almost RUB 2,000. We are committed to favor development of our online offerings in 2021 through Lentochka Click and Collect in collaboration with our delivery partners, such as Sbermarket and Igooods. Altogether, Lenta is working with [ 36 ] delivery partners. We have received positive feedback from our customers, and we are constantly listening to their feedback to improve our apps and website.Continuing on the topic of digital initiatives, there were a few more interesting development to note. In the fourth quarter, we launched a totally refreshed loyalty program, which uses advanced data analytics to customize special offers for individual customers. It is still early, but I'm proud to say we are off to a good start. So far, we have been pleased by success in deepening customer engagement and loyalty. It is already delivering tangible results with a number of new enrollment significantly above expectations. Together with GenerationS, a Russian venture company corporation -- corporate information platform, Lenta held its first-ever retail click -- start-up competition in which [ 15 ] international start-ups pitched their ideas to Lenta's management. Several of these start-ups were selected to advance into a discussion with Lenta regarding potential cooperation and pilot projects fully paid for and supported by Lenta. So technology is just one tool we are using to adapt to the new reality and fuel our growth.Lastly, I know that many of you are looking forward to the announcement of Lenta's new growth strategy, which we will announce on the March 18 at our Strategy Day. You have probably also seen the announcement we made last Thursday about changes to Lenta's senior management team and organizational structure. These changes are meant to support the new strategy of the company. We have established 2 new structural units, the Commercial and Marketing Department and the Strategy and Transformation Department. Dmitry Bogod, who has served as our Chief Strategy Officer for several years now, will serve in the newly created role of Chief Commercial Officer. In addition, we have hired Anastasia Volokhova, former of Magnit and BCG, she has joined Lenta as our new Strategy and Transformation Officer. We believe these changes will promote faster decision-making and better coordination between our commercial and consumer activities. Additionally, it will strengthen our strategy and transformation leadership at an exciting time as Lenta embarks on implementing its new strategy. As we have mentioned, we will be unveiling the new strategy on March 18 at our virtual Strategy Day event. More information on how to participate will be provided in the coming weeks. We look forward to having you at the presentation.With that, I will pass the floor to our CFO, Rud Pedersen.
Thank you, Vladimir, and good day to everyone. Let me spend a little bit of time drilling down further into some of the specific trends that Vladimir mentioned with regard to our business environment and customer behavior in our fourth quarter. And then at the end of my little speech, I'll provide a few high-level views on our outlook and how things are shaping up as we begin 2021.Firstly, our COVID-19 response team continues to monitor the situation, so we can maintain our operational excellence and provide a safer place for our customers to shop. While we haven't introduced any significant new measures since our last investor call in October, we continue to focus on strictly maintaining the strong measures that had already been implemented thus far and observing all our safety protocols. In this respect, I'd like to reiterate the resilient performance of our hypermarket format in the fourth quarter. In addition to the return to one-stop-shop mentality that Vladimir flagged earlier and where our hypermarkets are well positioned to meet changing customer demands, this was also supported by successful commercial and marketing campaigns. A couple of examples would be our Black November promotions and our Moomin Trolls Christmas loyalty program.Our supermarket segment also performed well in Q4. Our retail sales in supermarkets were up 3.3% year-on-year, supported by higher average ticket. As you know, coronavirus restrictions meant that the Russian population was largely working remotely and still preparing most meal at home. This supported elevated food retail sales. In this respect, we saw gastronomy, fruit and vegetables and our Lenta private label brands performed quite strongly in Q4. Specifically on the strong performance we had in our private label products through Q4, during the period, all our private label brands increased in terms of like-for-like sales. This is important for a number of reasons. First and foremost, our private label products are a key differentiator and a way for us to provide extra value to our customers. In addition, it provides with a range of competitively priced quality products that are unique to Lenta. Secondly, our core customers have a higher level of trust in Lenta and our private label brands. Many of these products carry a Lenta sub-brand, such as, for instance, Lenta premium, Lenta green or Lenta kits. So this is a way for us to come closer to our customers, and our data shows that private label is a successful way to draw customers to our stores and to build customer loyalty.We also saw a significant growth in our electronics category, driven by a successful Polaris promotional loyalty program. And of course, as usual, the Christmas and new year goods category showed strong performance towards the end of the year, and they demonstrated even better results than what we saw in 2019. In addition, we saw certain fresh food categories perform particularly well in the lead up to the new year holidays. Needless to say that the traditional new year purchases, such as champagne, juices, other beverages; citrus fruits; cakes; chocolate; and candy, all experienced a surge in sales during the last week of the year.The retail sector promotional activities tend to intensify in the fourth quarter, and I have to say that this year was not an exception. Though if we look at the percentage of sales in terms of promo sales, it was more or less at the same level of quarter 4 last year. At Lenta, we've been focused on making our promo more efficient, and I'm quite pleased with our success both in Q4 and in 2020 as a whole. And I would say that it was important to step up promo activity in Q4 when we compare with Q3 as we needed to react in terms of regaining some of the share of the customer wallet that in Q3 was started to be spent on HoReCa and entertainment options, instead of food retail, as we experienced the lockdown measures being eased. On our last call, we noted a mixed trend of some customers trading down while other customers were trading up. This remained intact in the fourth quarter with no clear change. As my previous comments demonstrate, there has been and currently is a fair amount of volatility and constantly changing consumer behaviors, albeit I do believe that in Lenta, we have navigated these very well.I'll finish by briefly discussing our outlook for 2021. While we're optimistic following the development of several vaccines, we remain constantly vigilant due to the continued uncertainty around other external factors. We expect 2021 will be largely determined by COVID-19 dynamics. In this respect, we are not out of the woods yet, so we do expect continued volatility. Having said that, we do not anticipate stockpiling in Q1 as we saw in March of last year. Current customer behavioral trends will likely remain intact during the winter months, with customers limiting both the frequency of shopping trips and the numbers of different shops that they visit. As a result, we expect that the average ticket will likely continue to be higher than normal, and we may see a year-over-year softening of traffic. Specifically, on January, we are seeing like-for-like, in line with what we experienced in December, driven by increased average check and a slight decline in traffic. All that is to say, we are confident that we can provide a safe environment for our customers and employees, and we will continue to focus on the fundamental customer value proposition that's made Lenta the leading big box retailer in Russia.With that, I'll hand the call back to Tim.
Thank you, Rud, and thank you, Vladimir. Christina, operator, we are now ready to take questions.
[Operator Instructions] We'll take our first question from Egor Makeev with Raiffeisen Bank.
Congratulations on good results. I have a couple of questions actually. So my first question would be, could you please remind us what will change after the redomiciliation of Lenta in Russia finally happens.
Yes. Happy to do that. The redomiciliation has, as a consequence, that Lenta Plc will be incorporated in one of the special economic zones in Kaliningrad, registered and operating as an international holding company. As a consequence of that, it will be a legal entity fully incorporated in accordance with Russian legislation. Other than that, in terms of our operations, we do not foresee any impact on Lenta. What the redomiciliation will have as a consequence is that under certain circumstances, Lenta will be able to pay dividend at a preferential withholding tax rate of 5% to shareholders domiciled outside Russia, and for some shareholders in Russia, pay according to the Russian tax law.
If I might add briefly to that. Starting in Q2, we expect to begin to offer ordinary shares for trading on MOEX. We currently have depository receipts. The ordinary shares and DRs will trade for a interim concurrent period. The DRs will then be delisted after 1 or 2 months, and the ordinary shares will then trade themselves on MOEX. The GDRs that trade in London will not be affected in any way. They will continue to trade as they do now.
That's clear. And my second question would be on your online businesses. So could you please give us any color on their profitability?
We don't provide any earnings details on this call. For that, we would have to wait until we publish the full year results on 20th of February. Having said that, given the model that we have chosen, the investments, CapEx-wise and OpEx-wise, into our online business, ensures that we can operate it with a high degree of efficiency. But I cannot give you more specific details at this point in time.
[Operator Instructions] We'll go to our next question from Evgeniy Kipnis with Alfa-Bank.
Congratulations with a successful quarter and successful year. I actually have a question to Rud. Maybe it's super mature until we see the financial disclosure for 2020, but maybe you can comment directionally, whether do you see further improvement in your leverage in terms of net debt-to-EBITDA compared to what we have seen in the first half of 2020? And what is the incremental cost of borrowing for you currently?
Okay. I will try and give an answer without too much detail. As we, throughout the year, have had a focus on efficiency in terms of our cost of external debt as well as our leverage, I do expect that by the end of the year, both will have improved over and above what we previously reported. But I cannot go into more detail at this point in time. We continue to focus on improving our leverage as well as the cost of borrowing.
Okay. That's clear. And maybe a follow-up on that. What kind of leverage, what kind of net debt-to-EBITDA do you see as a comfortable level for you for the midterm and long term?
Long term, our target would be to have a net debt-to-EBITDA around -- somewhere between 1 and 1.5. However, we may deviate from that, and we will provide a little bit more flavor on that as we go to the Strategy Day on March 3 -- sorry, March 18. We'll have leverage between 1 and 1.5.
[Operator Instructions] We'll take a follow-up question from Egor Makeev.
Yes. Well, actually, I have one more question on your supermarkets. So if I may ask, are you happy with their performance? And what steps do you take to improve it? And also a related question is that, today, local media reported that Lenta started opening hard discounters. So maybe you could comment on that as well.
Egor, thank you for your questions. I would say following. In general, I think performance of our supermarkets is okay. If you look at the current trends, which demonstrate this form on the market, I think we are reasonably good. And we are better than we used to be last year in almost all our P&L lines, I would say. However, I still believe we can be better. And this part of our business is going to be one of the key focus area for us like online and our main business. So we want to be better in the supermarkets as well. This is, I think, it for the supermarket part.As far as information about discounts, I would say that we, as a company, do different tests. And we'll look at our results. We believe we've got good chances to be successful in different areas. But before test is proving to be successful, from my point of view, it's not worthwhile to waste a lot of time on this. We opened just a couple of stores. And there are some good things, there are some things this year below our expectations. But we keep on testing. And I think we're going to have results in the mid of this year, and then we can share with you the information about results we achieved and tell you why we believe results were like this. But so far, I think it's okay. Nothing fantastic, but interesting. And we keep on fine tuning what we are doing to see how customers react on this format.
And we'll go to our next question from Artur Galimov with Sova Capital.
A quick question from my side. I think it was mentioned in the press release that Lenta still continued pretty strong sales momentum into the new year. Probably I missed it during the presentation, but if you could provide a little bit more color as to what sort of growth rates you're seeing month-to-date as almost 4 weeks are behind us.
So month-to-date, we see like-for-like growth, more or less in line with what we experienced in December. And we see similar underlying drivers, increased average check and a slight decline in traffic.
A clarification question. Did you disclose like-for-like growth rate in December alone?
Not like-for-like in December. I think we only just closed the total sales number for December. Let me give you our -- like-for-like for December was around 5%.
We'll go to our next question from Henrik Herbst with Morgan Stanley.
I had a question. I just want to follow-up. I think you alluded a little bit to the promotional activity in the market, and you were saying that in December, year-over-year was pretty stable. I was just wondering if you could give a little bit of -- I mean, what's your thoughts around promotional activity and competition going into 2021? I guess there are a lot of factors playing a part, but I guess, from what you're seeing in the market so far? Yes, I think that was it. Or actually, can you also, I guess, your -- some of your competitors are going into higher discount performance. I've heard as well, I guess, second hand that discounters in the market currently are doing relatively well. So I was just wondering about if you could give some thoughts on that segment of the market.
Sorry, let me try to answer your question. If we look back to the 2020, then promo share, I think, for the most of the retailers, we kept it at a relatively similar level as in 2019. And I think that was already good base to start leveraging the promo pressure in our business. In January, we started with slight reduction promo share compared to the previous year. And I think that's really the next step, how to reduce promo dependence in modern retail, I would say. I'm sure we all, when I say, all, I mean, big retailers and producers, we'll try to make promo share smaller, step by step. But it -- I think it will depend on competitive environment. If we're brave enough to keep it a bit lower than promo share of 2020, it's going to help. I think it's already progressed. But at the beginning of this year, it's difficult to predict how it's going to be for entire year. But I can tell you that in our budget, we put slightly less aggressive numbers for the promo, and we'll see how it works. But it's really a matter of market environment and how much our customers make money. And for sure, we will try to help them to get most of what they can for the money they have. But it really will depend on overall economical situation and how COVID will develop in this year.And your second question was about...
Henrik, if you can repeat the second question, please?
I think it was about discounters.
Yes, about hard discounters. I guess there are some pilot projects in the market. And I've heard that the existing or more sort of pure hard discounters are doing quite well. So I was just wondering how you -- if you're seeing any signs that consumers are more sort of leaning towards the discounter format, and yes, what your thoughts are around that.
You see, we -- of course, we are observing what our competitors do in this area. I think at this stage, we can say that very different from us is [indiscernible], and I think they enjoy quite a good growth, but they relatively not as big as top players of the market. Although they have progressed nicely, and I think that's clear demonstration that the customers need this kind of proposition. We also look what our biggest competitors do. But I will say, if we look at our size, it's still testing. And previously, I think Egor was asking about our test, we are all in the similar situation. I think in general, we look how market evolves. What helps to the consumer, our customers' demand. And we want to be prepared if something goes, let's say, fastly in that direction. So we want to have model prepared and ready. And in some regions where, as you know, we've got different level of -- let's say, different level of income in different regions. So maybe for some regions, this hard discount model will be better suitable already now. However, I don't know the exact numbers of our competitors, and I do know our numbers. But again, it's still early to judge should we switch this model or not. For sure, we need to continue experimenting and to see how it evolves.
We'll go to our next question from Alexey Krivoshapko with Prosperity.
I have a few questions, if I may. Firstly, what is your current estimate of positive impact from COVID which Lenta enjoyed last year? How did you assess it? And basically to which quarter it occur?
No doubt that the changed customer behavior has had impact on Lenta's sales in 2020, especially for those customers who preferred to do big basket shopping and who limited the number of stores that they were visiting. The exact number is difficult to estimate, especially because it has a mix between the number of customers in our stores and the average check. Overall, I think COVID may have been driving somewhere between 2% and 3% sales growth in certain months, especially in Q2 when we saw customers stockpiling and significantly limiting the number of stores they visited as well as the number of times they went to shop. But over and above that, it's difficult to separate out specifically what impact COVID has had.
That's clear. Can I ask you, like if you measure like-for-like items, what was your like-for-like inflation December over December on the -- on shelf?
You mean our -- on shelf?
Yes, on shelf. On shelf. On shelf, yes.
Our on-shelf inflation was a little bit above 3% in December.
Okay.
Our on-shelf inflation was -- sure. Traditionally, it's lower than [ future ] inflation. If I remember, the annual inflation is less than 3%.
So your on shelf was a little bit above 3%, yes, December over December?
December, yes.
Yes.
But if you take annual inflation accumulate, it was even negative. So I think it's roughly something like minus 1.5%.
Sorry, what are you referring to minus -- you mean your incoming inflation?
What I am saying...
Yes, CPI for December.
What I'm saying, Alexey, is that when we started the year and we had deflation. And in the first quarter, inflation become positive. And in December, it reached the peak. But if you take our cumulative annual inflation, it was deflation, it was negative.
I see. I see. So average food inflation for Lenta was negative, that means, for the whole year.
Yes.
I see. Can I ask you, I mean, obviously, you opened 3 more hypermarkets last year -- sorry, last quarter, yes, and like 6 for the full year. How many more do you have in the pipeline which you have under development which are not yet open?
Currently, we have 4 hypermarkets, I believe, under construction.
I'm sorry, how many? The line was breaking.
Four under construction.
Four. Okay. And how many like at different stages of kind of talks and like construction permits not yet granted, but you have land plans and things of that nature?
I can't give you that...
In addition to this 4...
I don't have it. I don't have that number currently. You would have to wait until we give our guidance on that.
Okay. Okay. And obviously, you finished the year, so I guess you should know by now how much CapEx is spent in total. Do you mind sharing this number with us? Or you will be waiting for books closing?
I would like to wait until the books are closed. But we are, I guess, lower than in 2019 or less than in 2019.
And final question on the past. Like if I were average Lenta employee and worked through the whole year wearing masks and gloves and what have you, like what would be my average salary in 2020 compared with that of 2019?
I can't give you the exact number, and the reason is we put in place a number of incentive programs during 2020 to -- when we were addressing the specifics of COVID-19 and the stockpiling. However, if you're looking at the salary indexation we did in 2020, it was around the 3% mark.
Okay. And can you just help us like when do you expect the 3% inflation, which month?
We did that in the beginning of Q4.
We'll go to our next question from Maxim Nekrasov with Goldman Sachs.
I have a quick question regarding your online. So as I understand, you had over RUB 6 billion of online sales. I was wondering if you could provide a breakdown of your online sales between partners, between Click and Collect and Lentochka. And maybe you could also provide, in terms of online partners, who are your biggest partners?
Okay. At this point in time, I don't think we want to provide a breakdown of sales between the different channels. However, in terms of the biggest partners, I don't see it -- it's Sbermarket and Igooods. And it's not because we don't want to provide that information going forward, it's more to make sure that we have the numbers reconciled with our online partners in the appropriate way. So I need to wait until we close the books.
I should note that we will be publishing full year financial numbers on the 20th of February. Please note that's a Saturday, which is a working day in Russia this year. We will be doing our conference call on Wednesday the 24th, but you'll have more detail on the 20th, as Rud said.
And it appears there are no further questions at this time.
On behalf of Vladimir and Rud and all of us here at Lenta, I'd like to thank you for tuning in. As Vladimir mentioned, the big event of Q1 is we will have a Strategy Day, a Capital Markets Day on March 18. That will be a virtual broadcast with video of speakers and the presentations. I will be sending out more information in the next couple of weeks on that Strategy Day on March 18. And as I just mentioned, our next publication will be on February 20, when we'll give audited full year financial results. Thank you all very much.
Thank you.
Thank you.
This concludes today's call. Thank you for your participation. You may now disconnect.