2 October 2013

Lenta publishes audited IFRS financial results for the year ended 31 December 2012

Accelerated expansion combined with industry leading LFL sales growth and competitive margins highlight track record of delivering profitable growth.

St. Petersburg, Russia; 2 October 2013 – Lenta Ltd (“Lenta” or the “Company”), one of the largest retail chains in Russia, today announces its audited consolidated IFRS results for the year ending December 31, 2012, together with comparative audited IFRS results for the years ending December 31, 2010 and 2011. Lenta Ltd expects to publish IFRS financial statements for the half year ending June 30, 2013 in early October.

FY 2012 Financial Highlights:

  • Total Sales grew 22.4% to RUB 109.9bn (2011: RUB 89.8bn);
  • Gross margin of 20.6% (+2.0p.p. vs. 2011);
  • SG&A decreased to 12.3% as a percentage of sales (-0.2p.p. vs. 2011);
  • Adjusted EBITDA1 of RUB 12.7bn, up 40.1% y-o-y (2011: RUB 9.1bn);
  • Adjusted EBITDA1 margin up 1.5 p.p. to 11.6% in 2012 (2011: 10.1%);
  • Net cash generated from operating activities before net interest paid of RUB 12.3bn, up 44.4% y-o-y (2011: RUB 8.5bn);
  • Net Profit2 of RUB 5.1bn, a more than threefold increase (2011: RUB 1.7bn); and
  • Investments of RUB 15.0bn, almost 4 times higher than 2011, driven by new store openings.

FY 2012 Operational Highlights:

  • 14 new stores (hypermarkets) opened in 2012;
  • Total number of stores reached 56 and selling space exceeded 376,000 sq.m. as at 31 December 2012 (+31.0% vs. 31 December 2011);
  • Like-for-like sales (“LFL”) increased 13.5% vs. 20113; and
  • 2012 average ticket of RUB 1,061 (2011: RUB 971).

1 Adjusted EBITDA is reported EBITDA as set out in Note 6 of the IFRS financial statements adjusted for non-recurring items such as changes in accounting estimates and one-off non-operating costs
2 Net Profit equates to “Profit for the year” in the IFRS Financial Statements
3 Lenta’s stores are included in the LFL store base starting 12 months after the end of the month they are opened.

Lenta’s Chief Executive Officer, Jan Dunning said:

“Lenta continues to generate high levels of growth and profitability, due to our attractive customer proposition, increased pace of expansion and highly efficient supply chain. The significant growth in our top line for 2012 is due to a combination of the acceleration in store openings and market-leading like-for-like sales growth. Encouraged by our strong results, we are committing greater resources to increase the pace of our expansion so as to allow more consumers access to the Lenta offer. We expect our sales to grow further as our store base expands, and our like-for-like sales growth rate to benefit as our newly-opened stores mature. This planned acceleration in openings is starting to come through: having opened 3 new stores in each of 2010 and 2011, Lenta opened 14 new stores in 2012. In 2013, we plan to open at least 18 new hypermarkets as well as 7-10 supermarkets as part of a pilot scheme in Moscow, which combined are expected to result in at least a 30% year-on-year increase in our selling space in the year. We are planning to further accelerate our new store openings in 2014. Lenta is led by a strong management team that combines an extensive international track record with deep operational experience in Russia. The team has worked together to reinforce our price positioning, strengthen our promotional activities, improve our assortment and implement higher operational standards, all of which have supported our strong sales performance.”

Lenta’s Financial Performance

Lenta has delivered a year of strong growth in sales, profit, Adjusted EBITDA, Adjusted EBITDA margin and operating cash flow, driven by an increase in selling space and a very strong performance in like-for-like sales, with customers responding well to the continuous improvement in Lenta’s offer. Gross margin and expense control were also strong, allowing progress ahead of sales growth on all key profit measures.

A substantial rise in capital expenditure to RUB 15.0bn, from RUB 3.8bn in 2011, primarily related to the acceleration of our new store development program, resulted in a modest net cash outflow. Capital spending was largely self-funded by net cash generated from operating activities (before net interest paid) which increased by 44.4%, allowing the business to retain conservative, robust credit ratios of 2.0x Net Debt to Adjusted EBITDA and 4.1x Adjusted EBITDA to Net Interest.

Looking ahead we expect to deliver strong overall growth in our financial performance. However, some financial effects resulting from the acceleration in Lenta’s store opening program will become more apparent e.g. we expect to see higher SG&A costs as a proportion of overall sales and higher interest expenses. Higher SG&A costs are expected due to an increased proportion of new stores with initially higher SG&A costs as a percentage of sales, higher staffing costs in development and construction and other central functions as well as increased pre-opening expenses. The expected rise in interest expenses is a reflection of the increase in net debt supporting our accelerated store roll-out program.

Furthermore, we anticipate a moderation in our rate of like-for-like sales growth during this transitional period, as we exit a third year of high double-digit increases and whilst there is very limited contribution from new maturing stores in the LFL store base. Following this transition we expect a progressive increase in sales contribution from maturing space to convert into like-for-like growth, as our higher rate of expansion starts to annualize moving through 2013 and into 2014.

Key Operating Statistics

 FY 2012Change FY12 - FY11FY 2011FY 2010
Number of stores 56 33.3% 42 39
New stores 14 +11 3 3
Total selling space (‘000 sq.m.) 367 31.0% 287 266

Income Statement Highlights

RUB (millions)FY 2012Change FY12 - FY11FY 2011FY 2010
Sales 109,910 22.4% 89,766 70,628
Gross profit 22,677 35.7% 16,711 12,752
Gross margin 20.6% 2.0 p.p. 18.6% 18.1%
Adjusted EBITDA1 12,718 40.1% 9,079 7,156
Adjusted EBITDA1 margin 11.6% 1.5 p.p. 10.1% 10.1%
Operating profit 10,165 58.4% 6,419 4,222
Profit before income tax 6,982 143.8% 2,864 3,017
Net Profit2 5,136 202.7% 1,697 2,220

1 Adjusted EBITDA is EBITDA as set out in Note 6 of the IFRS financial statements adjusted for non-recurring one-off items such as changes in accounting estimates and one-off non-operating costs

2 Net Profit equates to “Profit for the year” in the IFRS Financial Statements

Sales

Sales rose by 22.4% to RUB 109.9 billion in 2012. Total sales growth was driven by an increase in the selling space following the opening of 14 new stores and a 13.5% LFL sales increase.

Gross Margin Performance

Gross profit increased by 35.7% to RUB 22.7 billion in 2012, and the gross margin for 2012 increased by 2.0 p.p. to 20.6%. The improvement was driven primarily by more favourable supplier terms, which was partly mitigated by price decreases. Efficiency improvements led to a reduction in supply chain costs as a percentage of sales.

Selling, General and Administrative Expenses

The Company’s Selling, General and Administrative expenses grew by 20.3% to RUB 13.5 billion in 2012, with most cost categories growing by approximately similar percentages. Total SG&A as a percentage of sales decreased by 0.2 p.p. year-on-year to 12.3% in 2012, contributing to a 0.7 p.p. decrease since 2010, driven by store efficiency measures and scale effects on store and head office cost.

Adjusted EBITDA

In 2012, Adjusted EBITDA increased to RUB 12.7bn (+40.1% y-o-y growth), driven by a combination of strong top-line sales growth, gross margin improvement and a lower rate of growth in SG&A costs than sales. Adjusted EBITDA margin increased 1.5 p.p. to 11.6% in 2012 (2011: 10.1%). The company’s management believes that Adjusted EBITDA is a valuable measure for evaluating Lenta’s ongoing performance.

The following table provides reconciliation between the Company’s reported EBITDA (as set out in Note 6 of the IFRS financial statements), and the Company’s unaudited calculation of Adjusted EBITDA.

RUB (millions)FY 2012Change FY12 - FY11FY 2011FY 2010
Adjusted EBITDA 12,718 40.1% 9,079 7,156
Changes in Accounting Estimates - - (214) (646)
Other One-off Expenses (977) 85.4% (527) (377)
Reported EBITDA1 11,741 40.8% 8,338 6,133

1 Reported EBITDA (as set out in Note 6 of the IFRS financial statements), includes all operating income and expenses excluding interest, tax, depreciation and amortization

Net Profit

The Company generated a net profit for 2012 of RUB 5.1 billion, a year-on-year increase of 203%. This significant improvement is due to the increase in Adjusted EBITDA in 2012 and the fact that 2011 net profit contained certain extraordinary expenses related to the shareholder dispute that was fully settled in September 2011. Most of these extraordinary expenses have been reported in the IFRS financial statements in the “Other expenses” line, which is below Operating profit; the expenses are therefore not reflected in the reported EBITDA indicated in the table above.

Consolidated Cash Flows

RUB (millions)FY 2012Change FY12 - FY11FY 2011FY 2010
Net cash generated from operating activities 9,261 36.8% 6,768 4,142
Net cash from operating activities before changes in working capital 11,649 67.9% 6,938 6,269
Changes in working capital 1,716 (38.5%) 2,791 (542)
Income taxes paid (1,084) (11.1%) (1,220) (592)
Memo: Net cash generated from operating activities before Net interest paid 12,282 44.4% 8,508 5,135
Net interest paid (3,021) 73.6% (1,740) (993)
Net cash used in investing activities (14,962) 290.0% (3,837) (1,311)
Net cash generated from financing activities 4,101 185.8% 1,435 (2,773)
Net (decrease) / increase in cash and cash equivalents (1,600) (136.6%) 4,366 58

Net cash generated from operating activities before net interest paid amounted to RUB 12.3bn in 2012 compared to RUB 8.5bn in 2011. The increase was primarily due to higher operating profit and because 2011 results reflect one-off costs related to the settlement of the shareholder dispute, partially offset by increased interest expense and lower positive effect from changes in working capital. The lower increase in cash generated from year- over-year changes in working capital was mainly due to an increase in VAT receivables at year end, linked to the ramp-up of construction in 4Q12.

Net cash used in investing activities increased to RUB 15.0bn in 2012 from RUB 3.8bn in 2011 and primarily consisted of capital expenditures on new hypermarket stores (14 new stores were opened in 2012 vs. 3 in each of 2011 and 2010), as well as the construction of two distribution centers, which became operational in Q3 2013.

Net cash from financing activities totaled RUB 4.1bn in 2012 and related to short-term credit facilities drawn to finance working capital requirements.

Liquidity Update

RUB (millions)FY 2012Change FY12 - FY11FY 2011FY 2010
Total Debt1 28,877 15.7% 24,961 7,726
of which Short-Term1 3,833 - - 7,726
of which Long-Term1 25,044 0.3% 24,961 -
Cash and Cash Equivalents (3,536) (31.2%) (5,136) (771)
Net Debt 25,341 27.8% 19,825 6,955
Net Debt / Adjusted EBITDA 2.0x (9.1%) 2.2x 1.0x
Adjusted EBITDA / Net Interest Expense2 4.1x (42.3%) 7.1x 7.3x

1 Debt includes borrowings, obligations under finance leases

2 Interest calculated as net interest expense (interest expenses less interest income)

The increase in net debt during the year to December 2011 arose largely from the final settlement of the shareholder dispute, which involved the indirect purchase of 19.96% of the shares of Lenta Ltd for a consideration of RUB 17.52bn in September 2011.

The full set of accounts for Lenta Ltd. for the financial years of 2010, 2011 and 2012, are available at www.Lenta.com.

To meet a Russian regulatory requirement, the financial statements of Lenta LLC, a wholly owned subsidiary of Lenta Ltd, for the half year ending June 30 2013 have been published (in the Russian language only). Lenta’s practice, however, is to focus on the consolidated results of Lenta Ltd, as the parent company, as they fully reflect the performance of the business. Lenta Ltd expects to publish IFRS financial statements for the half year ending June 30, 2013 in early October.

About Lenta

Lenta is one of the largest retail chains in Russia and the country’s second largest hypermarket chain (in terms of 2012 sales). The company was founded in 1993 in St. Petersburg. As of 31 August 2013, Lenta operated 62 hypermarkets and 4 supermarkets in 37 Russian cities with a total of approximately 410,000 sq.m. of retail trade space. The average Lenta hypermarket store spans approximately 6,500 sq.m. The company operates 4 distribution centers; 3 of these are dedicated to hypermarkets and one serves the supermarket pilot scheme. As of 31 December 2012, Lenta operated 56 hypermarkets in 31 Russian cities with over 376,000 sq.m. of retail trade space (31 December 2011: 42 hypermarkets in 22 Russian cities operating over 287,000 sq.m.).

The Company is focused on a price-led hypermarket format, differentiated in terms of its promotional bias and local assortment while also piloting smaller-sized supermarkets in Moscow. The Company employed 20,347 people, as at 31 August 2013.

The Company’s management team possesses a mix of local knowledge and international expertise coupled with extensive operational experience in Russia. Lenta’s largest shareholders include TPG Capital, the European Bank for Reconstruction and Developmentand VTB Capital, all of whom are committed to maintaining high standards of corporate governance.

Forward looking statements:

This announcement includes statements that are, or may be deemed to be, “forward-looking statements”. These forward-looking statements can be identified by the fact that they do not only relate to historical or current events. Forward-looking statements often use words such as “anticipate”, “target”, “expect”, “estimate”, “intend”, “expected”, “plan”, “goal”, “believe”, or other words of similar meaning.

By their nature, forward-looking statements involve risk and uncertainty because they relate to future events and circumstances, a number of which are beyond Lenta's control. As a result, actual future results may differ materially from the plans, goals and expectations set out in these forward-looking statements.

Any forward-looking statements made by or on behalf of Lenta speak only as at the date of this announcement. Save as required by any applicable laws or regulations, Lenta undertakes no obligation publicly to release the results of any revisions to any forward- looking statements in this document that may occur due to any change in its expectations or to reflect events or circumstances after the date of this document.