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Good afternoon, ladies and gentlemen, and welcome to Lenta's Q4 and Full Year 2021 Earnings Conference Call on the 21st of February 2022. [Operator Instructions] The format of today's recorded call will be a presentation by Lenta's management team, followed by a question-and-answer session. So without further ado, I would now like to Lenta's Head of Investor Relations, Tatyana Vlasova. Please go ahead, Tatyana.
[Foreign Language] Thank you all for taking your time to join us today for the Lenta's Full year 2021 Operating and IFRS Audited Financial Results Conference Call. Here with me today to discuss the results, our CEO, Vladimir Sorokin; and our CFO, Rud Pedersen. The announcement and the presentation are now available on our newly launched corporate website at corp.lenta.com. As usual, after our prepared remarks, we look forward to taking your questions. Please note that today, we will be discussing our financial results, which are prepared in accordance with IAS 17 Accounting Standards. For your convenience, you can find both IAS 17 and IFRS 16 financial highlights in our press release on the Lenta corporate website. We also would like to remind you that some of the information announcement during this call may contain projections and forward-looking statements regarding Lenta's future financial performance or events. Please refer to our press release for a full formal disclaimer. With that, I will hand the floor over to Vladimir.
Thank you, Tatyana. Good day, everyone. Thanks to all of you who have joined our conference call today. It's good to speak to you again to discuss Lenta's operating and financial results for last year. Today I would like to focus on our key achievements in 2021 and share with you our priorities for 2022. We started previous year by announcing our 2025 strategy and our long-term strategic goals. After that, we quickly got to work. The small form as organic, online business development and the strategic acquisition of Billa, Semya and Utkonos. This year, we will continue to work on the strategy execution to achieve our long-term goals. First of all, I would like to share with you key 2021 operating and financial highlights. Our total sales growth accelerated in the first quarter to reach 18.6%, while the full year total sales increased by 8.6%. We delivered 18.9% retail sales growth, bringing 8.8% growth for the full year. We doubled our sales quarter-on-quarter, 37% in quarter 4 last year. We put up the rollout of mini formats with 85 new stores opened in the first quarter, bringing the total number of new mini Lenta stores to 133. Online continues to be in our focus. This full year, online sales growing by more than 200% and making up to a 4% of Lenta total sales in 2021. Despite the expansion and increasing share of online in our total sales, we managed to maintain our EBITDA level at an industry leading level of 8.1%. Rud will provide more financial highlights later in the call, while I would like to walk you through some operating details. In the end of 2020, we launched a new loyalty card as a part of our revamped loyalty program. Since the beginning of this new program, more than 19 million Lenta #1 cards have been issued. And as of December 2021, lenta has more than 9 million monthly active loyal customers. In 2021, loyalty card penetration in our sales continues to be higher than 98% the average ticket for purchases made using new loyalty card is 5x higher than the average ticket for non-loyal customers. This year, we will further develop our loyal program and promo. We plan to focus primarily on adopting the program for our small formats in order to meet the expectation of our customers and provide them with an attractive offer in all our stores. Hypermarkets continue to be the core segment of Lenta's business. Despite lower customer interest in shopping in big boxes, we see a stable growth of sales in our hypermarkets, which means that we are growing our market share in each segment of the market. Our hypermarkets delivered 9% sales growth in the first quarter, while overall sales increased by almost 8% on the back of LPL average ticket growth by 10.5%, driven by on-shelf inflation and trading up. The traffic in some of our hypermarkets was affected by COVID-related restrictions, primarily in euro and world divisions. Last 12 months, sales density in hypermarket grew by 2.7%. We continue to focus on improving our in-store operations, which should enable us to deliver better result in our core segment. In 2021, we tested dedicated zones for online order picking and freight of our hypermarkets, which will improve the productivity and quality of our online delivery and increase the efficiency of our big boxes. In 2021, our small format's revenue increased by more than 50%. Thanks to the acquisition of Billa and Semya, and lot of Lenta mini stores. The share of small format store sales in total retail sales reached 12% compared with 9% as of the end of previous year. In 2021, we converted 118 Billa stores to the Lenta brand, and we plan to integrate the remaining Billa stores and Semya stores in the first half of this year. Despite the significant growth of small format sales, our small formats do not yet met our expectations in terms of their performance. In the fourth quarter, retail sales in small formats were a negative 2.8%, primarily resulting from a traffic decline of 6.3%, which only partly resulted from COVID-related restrictions. We fully understand that the investment we have made into our business are currently negatively impacting our consolidated margin. This is our key priority for 2022. We are now revising the assortment promo loyalty program as well as other accreted companies of our small format stores. We will be able to share positive results of these activities over the course of the year. Our online business continues to gain pace and support Lenta's growth. The competition last year intensified on the Russian e-grocery market, all players made significant investments in marketing, client acquisition and penetration -- and retention. Our Lenta online team also made considerable efforts to gain market share and expand our online presence. Thanks to the diligent work of our online team. Lenta online sales increased by 208%, while the number of orders more than tripled and surpassed 10 million.The number of monthly active users of Lenta online app increased more than 3x compared to quarter 4 2020. As of end of 2021, over 300 stores were connected to Lenta online, providing online services in all locations where we have off-line credit. Now express delivery prevails in big cities. With that trend in mind in quarter 4, 2021, we launched express delivery from 24 supermarkets in Moscow, Saint Petersburg and Novosibirsk. We will further expand our express delivery this year to provide the best-in-class online services, covering all shopping missions from express top-up to schedule stock up mission. We finished the year with 14 partners delivering goods from Lenta in different regions. In the fourth quarter, we entered into a partnership with [indiscernible]. In 2022, we will optimize our partnership and focus on working with larger players. In December, we announced the acquisition of Utkonos. And 2022 is an important year. The combined online business team as they have this task is finding the best way how to drive our online business. In conclusion, let me highlight our priorities for this year. In 2022, we will continue to expand our market share while developing Lenta as a client-centric and profitable retailer. We plan to expand our retail footprint by opening more than 200 new stores. The majority will be convenient stores and the rest will be supermarkets. Given successful result of Lenta Online 2021, we plan to continue growing the business, including the expansion of our express delivery services. The acquisition of Utkonos enables Lenta to increase our market share in Moscow e-grocery market. Now we must focus all our efforts on improving unit economy and retaining a loyal customer base in developing a model for the combined online business, which will allow us to attain the required synergies. And last but not least, I'm grateful and to all Lenta employees including the many new team members who joined us in 2021 for keeping Lenta on track to achieve our ambitious goals. I am confident that Lenta's greatest achievement are still ahead of us. With that, I would like to pass the floor to Rud to discuss our financial results for 2021.
Thank you, Vladimir, and good afternoon to everyone. Let's begin with some comments on our income statement. As Vladimir already mentioned, we delivered strong top line growth both in Q4 and for the full year 2021. Our gross profit rose by 9.5% year-on-year in absolute terms as our gross margin improved by 19 basis points to 23%. This, despite the growing share of promo in our hypermarkets, where we managed to increase the promotional margin by improving our promo campaigns. Our gross margin was also supported by positive dynamics from stock provisions and higher centralization. On the negative side, we invested slightly more into our cash back program through the revamped loyalty program. We continued to put significant efforts into cutting our shrinkage and despite the fact that we are in the process of integrating acquired businesses as well as the rollout of our convenience format, we managed to decrease our shrinkage as a percentage of sales by 4 basis points. Let's take a look at our SG&A expenses, and let me first share you with some key events which impacted our SG&A last year. We opened 133 Lenta Mini stores and acquired 234 Billa and Semya stores. So we finished last year with a significant share of stores in ramp-up and with a declining share of owned selling space. While for the acquired stores, we are still in process of harvesting synergies. We also continued to invest into our growing online business. And furthermore, we faced intensified competition for professionals underpinned by the current deficit of qualified people in the market resulting from the COVID-19 outbreak. The ability to attract and retain employees is a continuing challenge in the retail sector. And last but not least, we saw increasing inflation, which, in general, put pressure on our cost base. With those things in mind, let me come back to our numbers. Our total SG&A increased by 14.1% year-on-year to RUB 93 billion. At the same time, our SG&A as a percentage of total sales increased by 94 basis points to 19.2%. This growth was mainly driven by higher payroll and payroll-related taxes as well as increased lease expenses. Payroll and payroll-related taxes rose by 13.3% year-on-year due in part to a salary indexation of in-store and supply chain staff, which took place in the fourth quarter last year. In addition, we saw cost coming from store openings, acquisitions and the development of Lenta Online. Our lease expenses increased by 34%, driven by the rising share of leased selling space. Both Billa and Semya have a higher share of leased versus owned stores, and our organic expansion is also in these locations. In 2021, the share of owned selling space declined from 74% to 66%. As we are currently focused on small format expansion in Moscow, St. Petersburg and Novosibirsk, we saw a 33 basis point increase in lease expenses as a percentage of sales. Our store operation costs were also up in 2021, mainly driven by costs associated with physical security in our stores and DCs as well as store repairs and maintenance expenses, which were impacted by inflation. We experienced an extremely tough competition on the Russian e-grocery market. All players made significant investments to gain market share. Lenta Online is an important driver of our future growth. As such, we increased our advertising expenses to support the effort of our online team in attracting and retaining e-grocery customers. Consequently, our advertising costs were up 12.9% year-on-year as we continue to invest into our growing online channel and generally behind Lenta brand awareness. Other expenses increased by 23% year-on-year. This increase was preliminary driven by development of our online business, including higher online delivery expenses. At the same time, health and safety of our customers and employees have continued to be our highest priority. And during last year, COVID-related costs amounted to RUB 1 billion, which also put extra pressure on our cost. EBITDA for 2021 came in at RUB 39.2 billion. This was just 0.2% lower than in 2020 when we observed the abnormal search buying and stocking up customer behavior during the start of the pandemic and the lockdown period. I'm pleased to report that Lenta's EBITDA margin remained at a solid 8.1% in 2021, which, in light of the company's target for the full year, I consider to be a solid result given the ongoing investments into realizing our new strategy. If we take a look at our cash flow, our CapEx in 2021 was 23% higher than in the previous year and amounted to RUB 9.3 billion. This increase resulted from an accelerated pace of new organic store opening, the completion of construction of distribution centers, continued investments into IT and expenses related to the integration of the first lot of Billa stores. The 2021 CapEx was approximately 2% of sales as we shifted focus during the year from organic expansion to M&A. Initially, we had planned more organic store openings in 2021. However, with more than 200 stores added via acquisitions, our focus during the year turned to integration. In 2021, we integrated 118 stores. And as we have previously mentioned, we use a CapEx-light model with the main focus on repairing engineering systems in older stores, doing any necessary upgrade of fire safety systems as well as cosmetic refurbishment. In 2022 and going forward, we will evaluate the necessity of more significant renovations of the former Billa stores based on their performance and customer feedback. The remaining Billa stores and the Semya stores will, as Vladimir mentioned, be integrated in 2022. Net cash from operating activities increased by 23% and reached RUB 33.6 billion. This due to our strong sales, positive movement of trade working capital, lower interest payments and lower income tax paid. Net cash used in investing activities rose significantly year-on-year due to the acquisition of Billa and Semya. Our free cash flow for 2021 was RUB 2.8 billion, which was RUB 17 billion less than free cash flow in 2020. However, as I mentioned this was mainly due to investment into business expansion, specifically, on a net basis, we spent RUB 19.2 billion to acquire Billa and RUB 2.4 billion on acquiring Semya. Our 2021 free cash flow, excluding expenses related to the 2 acquisitions was RUB 24.4 billion compared to the RUB 19.8 billion in 2020. At the end of 2021, our net debt-to-EBITDA ratio was 1.4%. This is lower than the 1.5% we saw at the end of 2020. Our long-term leverage target remains unchanged, and we are confident in our ability to sustain our growth ambitions. Our cash and cash equivalent position increased during the year, despite the fact that we paid for the Semya acquisition from our operating cash and for the Billa acquisition, we used both operating cash and new debt. That covers our financial highlights for 2021. I'd like to close my part by providing our full year 2022 guidance that we published this morning in our press release. We anticipate that Lenta will add more than 200 stores during the full year 2022. We will primarily focus on opening convenience stores, which is in line with our 2025 strategy. As the Russian retail market continues to consolidate, we will further consider the possibility of acquisitions to strengthen our position and to gain expertise and market share. But as always, mergers and acquisitions are optimistic, and we cannot provide any additional details at this moment. In 2022, we furthermore plan to invest into our business development. We expect that our 2022 CapEx will be up to 5% of full year 2022 sales. This CapEx will mainly related to organic expansion in the small formats as well as strengthening our Lenta infrastructure. We also plan to invest in our IT infrastructure as part of the ongoing digitalization of Lenta. Taking into account the volatile macroeconomic situation, geopolitical uncertainties, integration of Billa and Semya, the development of our online business and the intensified expansion of Lenta's new online compliance services, we decided not to provide profitability guidance at this point in time. We will, however, revert to this question during the course of the year. To summarize, I believe that with our strong 2021 results, we confirm that while it is still early days for our small formats, Lenta is performing well, both operationally and financially. We are growing and diversifying our business through organic expansion into online and smaller formats as well as through being an active player in the consolidation of the Russian food retail sector. We will carefully navigate the challenging macroeconomic situation due to rising inflation and the ongoing COVID-19 pandemic. And we will remain committed to our mission of helping Lenta's customers live a better life by spending less. By all means, 2022 will be a challenging year for Lenta, but we believe we are well positioned to stay on track with our strategy and to deliver on our long-term goals. With that, thank you from my side, and I will now return the call to Tatyana so we can begin the question-and-answer session.
Thank you, Vladimir and Rud. We are now ready to take your questions. Mike, please open the line for questions.
[Operator Instructions] Our first question comes from Alexey Krivoshapko.
I actually have 1 clarification question, actually 2. The first one is -- again, sorry for this detailed one, but if you look on the gross margin, in particular, and compare Q4 '21 with Q3 '21, for instance, you will see that's down by like 100 basis points between the quarters. And I guess, typically, it's not down so much. I wonder if you have anything in particular in Q4, which I guess was not in place last year. And I thought basically, your sales by channels, i.e., hypermarket, supermarket did not change or maybe even increase more towards the supermarkets, which is a high margin. So I wonder if you can shed some light on it.
Alexey, certainly pleased to do that. A number of factors played into Q4. The first one was the integration of the 118 Billa stores where we first had to clear the inventory we had sitting in the stocks -- sorry, in the stores prior to transferring them to Lenta. And hence, we did sell out to avoid taking the goods back. Second impact we saw in Q4, again, specifically related to the transfer of the Billa stores was time to obtain new alcohol licenses, which meant that we were operating for a period of time for each of the stores without alcohol license. And then thirdly, and not related to the integration of the 118 Billa stores, we saw intensified competition. And hence, over Q3 increased promotional activities in Q4.
And I mean, can you roughly say how much of this kind of an entry clean up, it was in terms of millions of rubles, what's your best estimate?
I cannot provide an estimate for that here at this call.
Okay. Okay. And you just mentioned that I mean you basically did some wage increase in Q4 for the overall employees of Lenta and obviously acquired markets I would mention. What is the magnitude of the wage increase? And do you plan anything similar in 2022 given the inflation requirement we're in right now?
We used the staged approach depending on the position inside of the company. If you look at it for the total group of people that we indexed salary, it was about 12%. With regard to 2022, it all depends on the development in the market. Having said that, we want to make sure that we remain competitive in terms of being able to retain and attract people to Lenta.
We'll move on to the next question. The next question is from private investor, Tom from the U.S.
Do you plan to pay any dividend for the year 2021? And the second question, the company operates in Russia, the main stockholder is Russia. Shares are traded in Moscow, what's the point of holding this presentation in English?
Tom. Good questions. Let me start by answering the first one. There is no plans to pay dividends in 2022 on the back of our 2021 results. The -- we've presented a very clear capital allocation strategy, which is, first and foremost, maintaining a conservative approach to our leverage. Long-term target is 1.5; second is to invest behind growing the business and delivering on our strategy; and thirdly, to pay dividend once if you like, we've exhausted the opportunities to invest into the business. On that basis, we do not expect dividend to be paid in 2022 on the basis of 2021 results. In terms of Lenta being a Russian company, operating in Russia and with a Russian-based majority shareholder, we still have our GDRs and our listing in London. And as such, we find it most relevant to provide the update to analysts and investors in English.
Our next question came from the text. There's actually a few of them over here. First one is about inflation. If inflation having any noticeable impact on Lenta's margin, what are you seeing in terms of customer behavior and customers' price sensitivity to inflation?
Thank you for the question. Of course, inflation influence our performance. But traditionally, for big retailers, inflation is lower than officially -- official inflation. For example, if you take our internal numbers, then our annual inflation is 4.2 percentage points. So basically, big retailers like Lenta, they help government to fight this inflation because we negotiated with our suppliers the price increases and making efforts to make sure that product is as simple as possible to our customers. I wouldn't say it influence somehow on our margin. I think it's part of our sales increase. But in general, if you look at the market trends that the real income of customers was different from quarter-to-quarter. And last quarter, it was just a 0.5% increase, I mean, the purchasing power. And I think inflation does not always mean that people will buy more from you. In ruble terms, might be, and we see that inflation influenced our growth of the market in real. However, it does necessarily mean that people have more money. And we see the change of composition of what we buy and this reduction of frequency of flow and less volume, which retailers sell in big inflation time. I will say that inflation result in some cases in -- has increased because earlier or later, you have to increase your salary to stay competitive in the marketplace. And Lenta also faced the same situation in the fourth quarter of last year. We were in a position, then we had to compensate inflation or income level to people who have to work in our warehouses and stores. And it's not just Lenta, it was overall market situation. And I would say it was not even only retail. It was a common situation for labor market in Russia. And as soon as you grow your tax or any other cost, for example, in cleaning or whatever. Somehow, you have to compensate it by higher margin or you have to be prepared to finance from EBITDA. I think in our current situation, we, in Russia, I hope I managed to compensate that we have margin increase and still able to keep a relatively healthy EBITDA margin.
Next question came from Renaissance Capital about quarter-to-date figures can you provide quarter-to-date, and this ties to another question, which is, what trends do you see now in January to February? Should we expect an improvement of small stores like-for-like in Q1?
I think it's too early to say. What I would like to say that in general, our like-for-like in small stores is better than previous year. And I hope we will report positive like-for-like as a result of first quarter. But as I said, what we are observing now that the customer be here but keeps on sharing changing from year to year. And we see it in the big boxes, we see in the small boxes, but overall, we believe we're going to demonstrate it like-for-like. But I wouldn't be too precise at this point of time because we just went through the half of this period and it is better and see how it goes.
Just to add to what Vladimir was saying, we continue to see into Q1 of 2022 positive like-for-like in our hypermarket segment.
There are 2 questions about Utkonos. There was news related to Utkonos stop of operations. Could you please elaborate on this? And another question about Utkonos, what synergies have you determined? And how long would it take for those synergies to take effect?
If I understand the first question correctly, it was a question related to Utkonos in January, having closed down sales. That is correct. Utkonos went through a systems upgrade and the initial time to return to normal operations was longer than what was expected. The issues pertained throughout the January and somewhat into February. But at this point in time, I believe the performance is back to prior to the systems upgrade. In terms of synergies on Utkonos, we expect that they will come over a number of items. One, obviously, being the combined procurement synergies as well as synergies related to investments into the technology behind our platform and the cost of running the platform. In that sense, we are focused on making sure that the integration of Utkonos into Lenta is done in such a way. But first of all, we don't lose any business, but also that we are sure that we have found the right customer focus and combination of the 2 businesses. And hence, it's not an integration which is focused on fast integration, but rather integration focused on the right integration.
Next one is about growth of discounters. We saw a significant growth of discounters in the previous year. Does Lenta plan to develop this format this year as well?
We are also joined this trend, and we think it's possible for us that we will enter this market. However, at this point of time, I think we believe -- I think we have enough things to concentrate on to focus on. And we are relatively a small companies, limited resources, and we believe that our current resources are fully occupied by the acquisitions which we made and our current development plan. Of course, we believe there is an opportunity. And maybe late and maybe even later in the course of this year, we will come out with the ideas how to develop discount format. But today, we are not discussing any real projects in this area inside the company.
[Operator Instructions] A few more text questions. This one relates to geography. Moscow and St. Petersburg markets are very competitive. Haven't you considered to focus development in other regions where the share of federal players is lower?
In general, market situation is very competitive. And as we said in our strategy, and we keep this logic. Today that we start our expansion in the areas where we have stronger Lenta brand positioning because we believe it gives us better chances for success. And we have strong Lenta position in St. Petersburg, Siberia and euro. And our plan so far to develop our presence evolves regions, and we believe there are still room for opportunities to open new stores. And our second priority was Moscow because Moscow competitive but very important part of the Russian food market. And Lenta, historically, didn't have a strong position there. And when we plan in our acquisition of Billa, we did it deliberately, and it was for us not just a number of stores, but also strategic move. And we are going to continue development in Moscow just because Moscow is very attractive market. And our next areas for development are going to be other regions where, again, we have Lenta and where we've got available warehouse capacity, which will allow us to open stores and better utilize our warehouses. And our next development stage would be this requirement of warehouses capacity expansion. That's -- it's pure business logic, and we believe that economically sounds and it's good for our investments that we go, let's say step-by-step from low-hanging fruits to high-hanging fruits.
Next one is about, again, small stores. My question is about small stores. Last year, small stores like-for-like was negative. Could you please elaborate on the reasons for such performance? How do you plan to improve the results?
I think we just -- for me, it's a matter of focus and resources, which we will be behind, which the company went through the big transformation. If you remember, we changed some people in the management team. So we had to become team itself plus we had to transform our hypermarkets to make sure that we keep on growing because hypermarkets is a very difficult segment. I wouldn't surprise anybody to say that it's still one of slower growing segments of the market. And I would say, it's segmental share keeps on decline. Another thing is that we were investing a lot in our online business development. Plus, we had a number of acquisitions. So number of reasons. And I believe now we are in shape and we understand that we need to put more focus behind this format. And we already did allocated some dedicated resources for that. And I believe next year is going to be much better for small formats, especially bearing in mind that it's for us, one of the strategic pillars for our strategy development.
If I were to add what Vladimir was saying, we now have around 500 small stores, which gives us the base to start driving an efficient operating model. We spent 2021 and we spent part of 2022, fine-tuning our model across from assortment, pricing, as Vladimir mentioned earlier as well to fine-tune our loyalty program towards the customer behavior in our small format as well as the operational in-store execution. We are very good at operating our hypermarket, and we need to get the in-store operations for small format to the same level as we see in our hypermarkets.
Just a final few questions. So there's one about regulations. We see the increasing pressure from the governance on the retail price regulation. How the limiting of trademarks could affect you, especially, if you will apply not only for private label goods? But also for branded products as well?
Difficult to say at the moment because we don't know what exactly decision is going to be taken. But obviously, if somebody regulates your margin or makes it lower than you should expect a lower margin. We believe it's not the best way how to manage the pricing. However, given the current situation, I think we will follow regulation and follow market practices. But most probably, it's going to affect our margin. But again, at this point of time, it's always impossible to evaluate how much just because we don't know a number of items and the final margin, which will be required for us to keep all those items.
[Operator Instructions] I'll read out the final text question, again, related to the smaller formats. How does the development of smaller formats and online effective profitability? You did not provide guidance or profitability there. Could you please give us any high-level projections in this regard?
Yes. At this point in time and for 2021, both online and small format comes with a lower margin from a format point of view than our hypermarkets. And our target is to make sure that we bring small formats in line with our long-term ambitions for our EBITDA margin while driving our online business towards breaking even. And after that, towards being a profitable business as well.
I am seeing no further questions at this point. I'll pass the line back to Tatyana and the team for the concluding remarks. Please go ahead.
Thank you all for joining us today. Thank you for your questions. Please don't hesitate to contact us if you have any further questions, use our newly launched corporate website and have a nice end of the day.
Thanks a lot.
Thank you. Have a nice day.
Thank you very much. This concludes our conference call. We'll now be closing all the lines. Have a great day. Bye-bye.