LNTA.L Regulatory News (LNTA)

LENTA PUBLISHES REVIEWED IFRS FINANCIAL RESULTS FOR THE HALF YEAR ENDED 30 JUNE 2018

St. Petersburg, Russia; 29 August 2018 - Lenta Ltd ("Lenta" or the "Company"), one of the largest retail chains in Russia, today announces its reviewed consolidated IFRS results for the half year ending 30 June 2018.

1H 2018 Financial Highlights:

1H 2018 Operational Highlights:

Events during and after the reported period:

Lenta's Chief Executive Officer, Jan Dunning said:

"We again delivered strong set of financial results for the first half of the year with Adjusted EBITDA margin of 8.9% and stable Net Income margin despite the challenging macro and consumer environment. We were very pleased to achieve an improvement in gross margin without any loss of competitiveness which we consider as a sign of our growing scale and improvements in our procurement processes. This didn't fully compensate expectedly higher personnel costs and rental expenses which were the key factors weighing on profitability. We expect that in the second half of the year the trajectory of the gross profit development will continue and upward pressure on SG&A will ease as our store network matures.

This makes us confident that Lenta will be able to sustain strong growth and market-leading profitability in 2018".

Store Developments and Supply Chain

Lenta opened two hypermarkets and 17 supermarkets during 1H 2018, while one supermarket was closed[4], taking the total number of hypermarkets to 233 and supermarkets to 113. The Company did not enter any new cities during the period and remains present in 84 cities[5] across the country. Total selling space as at 30 June 2018 increased to 1,403,145 sq.m, up 19.6% year-on-year.

Since the end of the reported period Lenta opened four new supermarkets, including the Company's first supermarkets in Novokuznetsk and Tomsk, as a result of which total store count reached 233 hypermarkets and 116 supermarkets with selling space as at the date of this announcement at 1,405,973 sq.m.

Lenta continues developing its logistics. The company added 22,000 sq.m of warehouse space during 1H 2018 to support volume growth. This includes a new 6,786 sq.m owned vegetable storage and packing facility was opened in Ryazan in July to ensure Lenta can provide increased volumes of high quality locally produced vegetables year-round at competitive prices.

Operating performance

Lenta's total sales in 1H 2018 increased 18.2% compared to 1H 2017 due to an increase in sales from new stores opened in 2018 and new stores opened in 2017 which are not yet part of the like-for-like panel, supported by 4.8% increase in like-for-like sales. Net selling space increased by 19.6% as of 30 June 2018 compared to 30 June 2017.

Financial Performance

Lenta demonstrated strong overall performance during the first half of the year. Gross margin increased 17bps to 21.9% as improved supplier terms and sourcing more than compensated for increased shrinkage and supply-chain costs. The Company continued to deliver efficiency improvements in the like-for-like stores, but these did not fully offset increases in personnel costs, rent expenses, depreciation and elevated utility costs and communal payments which led to an increase of SG&A expenses as % of sales in the first half of the year. As a result, Adjusted EBITDA margin for 1H 2018 decreased to 8.9%. Net profit grew 14.9% with a flat margin of 2.7% supported primarily by a reduction in interest expenses due to the lower cost of debt.

Income Statement Highlights

Gross profit margin increased to 21.9% primarily thanks to improved purchasing terms and sourcing processes. Better coverage of promotional activity by suppliers helped offset a modest y-o-y increase in promo-share in the first half of 2018. Own production result remained almost stable while shrinkage increased 67bps to 2.6% as % of sales due to higher share of some fresh food categories in total sales, bigger volume of direct import operations and increased share of supermarkets.

Supply-chain cost as % of sales increased 22bps to 1.1% in 1H 2018 vs 0.9% in 1H 2017. This increase was due to a base effect, as in 1H 2017 the company recognised a positive 20bp one-off benefit from IFRS adjustments related to recognition of supply-chain costs and income following the implementation of the new Trade Law. Aside from this one-off effect, costs as a % of sales were almost flat as an increase in the share of deliveries by the Company's own truck fleet and other efficiency gains largely offset the combined effects of higher fuel costs, road tax and transportation tariffs and a rise in cost of operations in the distribution centres due to higher personnel expenses. The average centralisation ratio increased to 55.6% in 1H 2018 from 53.6% in 1H 2017

Lenta continued successful productivity measures in the first half of the year which led to an increase in sales per FTE. However these improvements were more than offset by an increase in cost per FTE which was largely driven by above inflation salary indexation in 4Q 2017, which continues to support the Company's competitive position in the labour market. Personnel expenses as % of sales increased 60bps y-o-y. Other costs such as utilities, cleaning, repair and maintenance added another 19bps to the increase of SG&A expenses and were primarily related to the rise in tariffs and the large number of stores in the ramp-up phase.

Adjusted SG&A increased by 77bps compared to the same period of last year to 12.6% of sales in 1H 2018.

Rental expenses increased by 28bps to 1.5% of sales. Rental expenses were expected to grow more quickly than sales as a result of the record high share (54%) of new leased selling space opened last year which included leases on 14 ex-NASH hypermarkets and a substantial increase in the number of leased supermarkets. Depreciation grew 25bps to 3.1% of sales in 1H 2018 as a result of continuous expansion last year. Total SG&A as % of sales increased to 17.2% in the reported period, up 130bps vs 1H 2017.

As a result of the factors described above, Adjusted EBITDA in the first half of 2018 reached Rub 17.1bn (+9.5% vs 1H 2017) with an Adjusted EBITDA margin of 8.9%.

Net interest expenses decreased 14.8% to Rub 4.6bn largely due to the significantly lower cost of debt - the weighted-average effective interest rate decreased 187bps from 10.71% for 1H 2017 to 8.84% for 1H 2018 through the combined effects of improvements in the terms and conditions of major long-term loan facilities, debt repayments, refinancing and continuing reductions in MosPrime rates. The average level of borrowings remained almost unchanged.

Net income was up 14.9% compared to the same period of last year to Rub 5.2bn. Net income margin remained stable at 2.7%. The reduction in interest expenses was a key factor supporting net income growth and a slightly more favourable effective tax rate of 18.8% in 1H2018 (19.2% in 1H12017) also contributed. In the reported period the lower effective tax rate was due to reclassification of some capital expenditures related to reconstruction and repair to operating expenses for the fiscal years of 2014-2016, while last year it was impacted by a reversal of the effect of permanent difference related to acquisition of Kesko food retail business in 4Q 2016.

Cash Flow and Balance Sheet

Net cash generated from operating activities before net interest and income taxes paid amounted to Rub 5.1bn compared to Rub 7.3bn in 1H 2017 (-30.1%). Cash generation from operations remained strong but this was partly offset by movements in working capital. A significant increase in inventories was driven by assortment extensions in both hypermarkets and supermarkets. Trade payables reduced due to an increase in the share of fresh food with shorter payment days prescribed by the new Trade Law and a rise in pre-paid direct imports. Trade receivables decreased as a result of reduced bonuses and service income applicable under the new Trade Law.

Capital expenditures in 1H 2018 were 8.4% higher than in 1H 2017 and amounted to RUB 10.8bn, mainly reflecting larger investments in supermarket format related to faster store openings in the reported period vs last year and higher share of new owned stores. Capital expenditures were funded primarily by operating cash flow and to a lesser extent by debt.

As of 30 June 2018, Net Debt to Adjusted EBITDA stood at 2.8x, Lease Adjusted Net Debt to Adjusted EBITDAR[9] at 3.4x and Adjusted EBITDA to Net Interest at 3.8x. As of 31 December 2017, Net debt to Adjusted EBITDA stood at 2.6x, Lease Adjusted Net Debt to Adjusted EBITDAR at 3.2x and Adjusted EBITDA to Net Interest was 3.4x. In addition to its total drawn debt of Rub 108.3bn, Lenta had Rub 78.7bn of undrawn short- and long-term facilities and a cash balance of Rub 4.9bn as of 30 June 2018. Net Debt was Rub 103.4bn as at the end of the reported period. All of Lenta's debt is denominated in Russian Roubles and is unsecured. 96% of debt is long-term of which 19% is due within one year. Average debt maturity is around 2.0 years. The weighted-average cost of debt decreased 187bps from 10.71% in 1H 2017 to 8.84% in 1H 2018. The company projects the effective cost of debt to decrease in 3Q 2018 to 8.4% (based on the current MosPrime rates) and sees more opportunities to further reduce the cost of debt in the coming quarters.

Guidance

As a result of some delays in construction, Lenta reduces its 2018 store opening guidance to about 18 new hypermarkets and about 40 new supermarkets. 2018 capex guidance is reduced to Rub 25-30bn.

The full set of accounts for Lenta Ltd. for 1H 2018 and financial years of 2011-2017 are available at www.lentainvestor.com

About Lenta

Lenta is the largest hypermarket chain in Russia (in terms of selling space) and the country's third largest retail chain (in terms of 2017 sales). The Company was founded in 1993 in St. Petersburg. Lenta operates 233 hypermarkets in 84 cities across Russia and 116 supermarkets in Moscow, St. Petersburg, Siberia, Urals and the Central region with a total of approximately 1,405,973 sq.m of selling space. The average Lenta hypermarket store has selling space of approximately 5,600 sq.m. The average Lenta supermarket store has selling space of approximately 800 sq.m. The Company operates seven owned distribution centres.

The Company's price-led hypermarket formats are differentiated in terms of their promotion and pricing strategies as well as their local product assortment. The Company employed approximately 50,600 people as of 30 June 2018[10].

The Company's management team combines a mix of local knowledge and international expertise coupled with extensive operational experience in Russia. Lenta's largest shareholders include TPG Capital and the European Bank for Reconstruction and Development, both of which are committed to maintaining high standards of corporate governance. Lenta is listed on the London Stock Exchange and on the Moscow Exchange and trades under the ticker: 'LNTA'.

A brief video summary on Lenta's business and its Big Data initiative can be seen here.

For further information please visit www.lentainvestor.com, or contact:

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.

[1] Adjusted EBITDA is reported EBITDA as set out in Note 3 of the IFRS financial statements adjusted for non-recurring one-off items such as changes in accounting estimates and one-off non-operating costs and income

[2] Net Profit equates to "Profit for the period" in the attached 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

[4] In May 2018 the Company closed one leased supermarket in Moscow with selling space of 721 sq.m.

[5] According to Lenta's methodology for calculating number of cities of presence, since 1 May 2015 all cities located in Moscow City and the Moscow region are shown as Moscow, and all cities located in the Leningrad region and St. Petersburg are shown as St. Petersburg.

[6] Adjusted SG&A is SG&A before rent paid on land, equipment and premises leases, depreciation and one-off non-operating costs

[7] Adjusted EBITDAR is Adjusted EBITDA before rent paid on land, equipment and premises leases

[8] Reported EBITDA (as set out in Note 3 of the IFRS financial statements) includes all operating income and expenses excluding interest, tax, depreciation and amortisation as well as certain other expenses

[9] Lease adjusted Net Debt calculated as Net Debt plus operating leases multiplied by capitalization rate of 8.0x in accordance with credit rating agencies approach

[10] FTE (full-time equivalent). Average FTE for 1H2018 was 49,643 employees