LNTA.L Regulatory News (LNTA)

LENTA PUBLISHES REVIEWED IFRS FINANCIAL RESULTS FOR THE HALF YEAR ENDED 30 JUNE 2015

St. Petersburg, Russia; 27 August 2015 - 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 2015.

1H 2015 Financial Highlights:

· Total sales grew 33.8% to RUB 114.9bn (1H 2014: RUB 85.9bn);

· Adjusted EBITDA1 of RUB 11.7bn, up 44.6% (1H 2014: RUB 8.1bn) with a margin of 10.2% (1H 2014: 9.5%);

· Gross margin of 21.7% (+0.3p.p. vs. 1H 2014) rose due to supply chain improvements while investing in prices;

· Adjusted SG&A decreased to 11.2% of sales (-0.9p.p. vs. 1H 2014) primarily due to operational improvements and cost control measures;

· Total SG&A decreased 0.4p.p. despite an increase in the share of leased selling space and associated rental expenses and a higher depreciation expense as a result of our continuous investments in growth.

· Total SG&A as % of sales of the same store base2 decreased by 1.4p.p. vs 1H 2014;

· Capital expenditures of RUB 11.8bn, in line with investments made in 1H 2014 (RUB 11.8bn) linked to a larger number of new leased stores to be opened in 2015;

· Net cash generated from operating activities, before net interest and income taxes paid, of RUB 5.1bn compared to RUB 4.5bn in 1H 2014 (an increase of 14.2%) driven by EBITDA growth;

· Net interest expenses of RUB 5.1bn, an increase of 76.0% compared to 1H 2014 (RUB 2.9bn) due to higher interest rates and additional borrowing in the reporting period;

· Net Profit3 of RUB 3.0bn, up 10.7% (1H 2014: RUB 2.7bn) with a margin of 2.6% mainly affected by increased interest expenses; and

· Net Debt of RUB 59.5bn as of 30 June 2015 (Net debt/Adjusted EBITDA of 2.4x) reflecting prudent financial policy and the successful primary capital increase in March 2015.

1H 2015 Operational Highlights:

· Eight hypermarkets and three supermarkets opened during 1H 2015;

· Total number of hypermarkets at 30 June 2015 was 116, with 27 supermarkets in operation; selling space was c. 751,447 sq.m. as of 30 June 2015 (+38.6% vs. 30 June 2014);

· Like-for-like ("LFL")4 sales growth of 11.5% vs 1H 2014;

· LFL traffic growth of 4.7% combined with a 6.5% increase in LFL ticket; and

· 33% increase in the number of active loyalty cardholders y-o-y to a total of 7.6mm as of 30 June 2015.

Material events in 1H 2015 and after the reported period:

· In March Lenta completed a primary capital increase of 35.2 million new GDRs via an accelerated bookbuilding, raising gross proceeds of US$225.3 million;

· Lenta has signed a Rub 15bn three-year revolving loan facility with VTB Bank;

· Lenta has signed a Rub 37.3bn unsecured loan agreement with VTB Bank with a seven-year term replacing a secured loan which was due to 2018;

· Lenta has signed an amendment to Rub 4.6bn loan agreement with the European Bank for Reconstruction and Development (EBRD);

· Fitch Ratings has assigned Lenta with long-term foreign and local currency Issuer Default Ratings of 'BB-' and a National Long-term rating of 'A+(rus)', both with a positive outlook;

· S&P Ratings Services upgraded the long-term credit rating of Lenta Ltd. and its main operating company Lenta LLC to BB- with a stable outlook; and

· Lenta has issued Rub 5bn bonds on MoEx with a 10 years maturity and a 2.5 year put option. The semi-annual coupon was set at 12.4%.

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

2 Stores opened up to 31st December 2013

3 Net Profit equates to "Profit for the year" in the attached IFRS Financial Statements

4 Lenta 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 deliver industry-leading growth in sales and selling space despite a challenging consumer and macro environment.

We achieved significantly higher profitability during the first half of 2015 compared to the same period of the previous year, with Adjusted EBITDA growth of around 45% and an EBITDA margin improvement of around 80 basis points. These improvements are testament to Lenta's operational excellence, as they were driven primarily by efficient cost control and supply chain improvements which we consider sustainable in the future. This will enable us to continue actively investing in prices in the second half of the year wherever necessary to provide best offers to our customers and remain very price competitive across all key regions.

Lenta's balance sheet has also been strengthened with a significant fall in leverage, a reduction in interest rates and an increase in the amount of undrawn debt available to fund expansion. Our healthy financial position, higher profitability and greater cash generation enables us to maintain our store opening guidance for 2015 to open at least 25 hypermarkets and provides us with even more confidence in our plans to successfully drive the further expansion of Lenta".

***

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

Lenta

Anna Meleshina, Director of Public Relations and Government Affairs

+7 812 363 28 53

Anna.Meleshina@lenta.com

Albert Avetikov, Director of Investor Relations

+7 812 363 28 44

Albert.Avetikov@lenta.com

Store Developments and Supply Chain

Lenta opened eight hypermarkets and three supermarkets during 1H 2015, taking the total number of hypermarkets to 116 and supermarkets to 27. Total selling space as at 30 June 2015 increased to 751,447 sq.m., up 38.6% compared to the end of 1H 2014. Since the beginning of 2015 the Company has opened six owned standard hypermarkets in Veliky Novgorod, Chelyabinsk, Orel, St.Petersburg, Murmansk and Zheleznodorozhny (Moscow region), one leased standard hypermarket in Nizhniy Tagil, one owned compact hypermarket in Kemerovo and three leased compact hypermarkets in Engels, Tyumen and Magnitogorsk. These latest openings increase the total store count to 146, including 119 hypermarkets in 63 cities and 27 supermarkets in Moscow and the Moscow region. Total selling space as at 27 August, 2015 reached 770,164 sq.m.

Lenta continues to invest significantly in its supply chain, with two new DCs in Rostov and Togliatti opened in the second part of 2014. In 1H 2015 Lenta has also started construction of a further new DC in Yekaterinburg which will complete its national network covering all regions of operation. The Company also plans to open a dedicated supermarket DC in Moscow in 2016 to improve supply-chain efficiency for the format. The average centralization ratio increased to 43% in 1H 2015 from 38% in 1H 2014.

Operating performance

Lenta's total sales growth in 1H 2015 reached 33.8% following an increase in sales from new stores opened in 2014, which are not yet part of the like-for-like panel and an increase in like-for-like sales. Consumer income continues to be under pressure and decelerating inflation and a high base for comparison led to a slowdown in year-on-year sales growth rates in the second quarter, compared to the performance in the first quarter. While LFL food sales growth in 1H 2015 was still strong at 13.4%, it was partially offset by LFL non-food sales decline of -2.2%, leading to the total LFL sales growth of 11.5% for the first six months of the year.

Financial Performance

Lenta demonstrated a strong overall performance during the first half of the year, with industry-leading sales growth and a marked increase in Adjusted EBITDA margin of 77bps. The increase in profitability was achieved thanks to effective cost management and supply chain improvements and despite of Lenta's absorption of some inflationary impacts away from our customers. While the net profit margin was primarily affected by the elevated growth in interest expense, it was supported by a reduction in the effective tax rate to a normalised level of 22%.

Income Statement Highlights

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

6 Adjusted EBITDAR is Adjusted EBITDA before rent paid on land, equipment and premises leases

Gross margin rose by 0.3p.p. to 21.7% driven by increased supply chain efficiency provided by the opening of two new distribution centres. A notable reduction of average distance for goods transportation (by 26% to 670km/pallet in 1H 2015 vs 905km/pallet in 1H 2014) and growing centralization ratio led to the decrease in supply-chain cost as % of sales to 1.2% in 1H 2015 from 1.6% in 1H 2014. These improvements were partly offset by continued investment in pricing and promotions (the share of promo sales went up above 30% as % of total sales) to contain the effects of inflation on customers. Negotiations with suppliers commenced halfway through 2Q 2015, consequently most of the benefits deriving from improved supplier conditions will fall in the second half of the year. Despite the higher share of new stores in the portfolio (as at 30 June 2015 the share of selling space younger than three years increased to 60% compared to 51% as at 30 June 2014) a decrease in stock losses was achieved in the first half of the year as a slight increase in shrinkage was compensated by a decrease in stock provisions. 

SG&A development in 1H 2015 was affected primarily by increasing depreciation and lease expenses due to an acceleration in new store openings, infrastructure additions to support growth and rental expenses as a result of an increase of leased selling space by 2.2x. Operational improvements and cost saving measures resulted in a decrease of Adjusted SG&A as % of sales in the first half of 2015 compared to 1H 2014 of 0.9p.p. - to 11.2% vs 12.1%. An even higher decrease in SG&A as % of sales was noticed in the same comparison store base opened before 31 December 2013: - 1.4p.p. vs 1H 2014. Lenta's ability to continuously optimise its store processes delivers long-term sustainable benefits and a strategic advantage.

As a result of the factors described above, Adjusted EBITDA in 1H 2015 grew much faster than sales and reached RUB 11.7bn (+44.6% vs 1H 2014) with an Adjusted EBITDA margin of 10.2%.

Net interest expenses rose 76.0% to RUB 5.1bn due largely to increased market rates in the first half of the year and partially due to a higher level of borrowing required to fund the store opening programme and supply-chain development. Despite a rise in the average Mosprime rate of 723bps9 in 1H 2015 compared to 1H 2014, Lenta's weighted-average cost of debt in 1H 2015 increased by only 349bps to 15.0%, due to the combined effects of fixed rate debt, hedging programmes, debt repayments following the primary capital increase in March and improvements in the terms and conditions of our major long-term loan facilities. The improvements in long-term loan terms with VTB Bank and EBRD, combined with effect of continuing falls in MosPrime rates reduced the average cost of Lenta's debt portfolio to 13.4% in 2Q 2015 from 16.6% in 1Q 2015. The company projects the effective cost of debt to reduce further to 12.15% in 3Q 2015 (based on the current MosPrime rates).

Net income increased by 10.7% to RUB 3.0bn. The higher rate of growth in net income compared to pre-tax profit was due to a reduction in the effective tax rate from 26.5% in 1H 2014 to 21.7% in 1H 2015. The lower effective tax rate in 1H 2015 is related to the change in the tax treatment of shrinkage which is now almost fully deductible from the tax base. This new approach was initiated in 2H 2014 and therefore was not reflected in 1H 2014 financial results.

7 One-off expenses and income in 1H 2015 and 1H 2014 were professional services fees primarily incurred in connection with optimisation of the Group corporate legal structure, development of employee incentive plans and cost and income related to capital markets transactions

8 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 as well as certain other expenses

9 Average 3M MosPrime rate of 8.7% in 1H 2014 vs 15.9% in 1H 2015 according to Bloomberg

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 4.5bn in 1H 2014.

Capital expenditures remained comparable year-on-year for 1H 2015 at Rub 11.8bn reflecting a higher share of leased selling space scheduled for open in 2015, which requires less capex. This was however partially offset by significantly higher investments in the future store pipeline. Lower investments in land acquisition for the 2015 pipeline was driven by the appearance of more rental opportunities on the market, this was offset by significantly higher investments in the construction of hypermarkets for 2016 and thereafter. Total investments in future expansion (land acquisition and new hypermarkets construction) amounted to almost 64% of total capex spent in 1H 2015. This was funded primarily by strong operating cash flow and to a lesser extent by increased borrowings.

As of 30 June 2015, Net Debt to Adjusted EBITDA stood at 2.4x and Adjusted EBITDA to Net Interest was 2.8x. As of 31 December 2014, Net debt to Adjusted EBITDA stood at 2.8x and Adjusted EBITDA to Net Interest was 3.1x. All of Lenta's debt is denominated in Russian Roubles and around 98% of it is long-term with an average maturity of 3.5 years. In addition to its total debt of RUB 71.6bn, Lenta had RUB 32.8bn of undrawn short- and long-term facilities and a cash balance of RUB 12.1bn as at 30 June 2015. Following the close of the reporting period the Company has also issued Rub 5.0bn bonds with a 10 year maturity and a 2.5 year put option, which increases the share of fixed rate long-term debt in the portfolio. Headroom against leverage and other covenants in its loan agreements remain substantial.

Guidance

Given the strength of Lenta's new store development pipeline, strong cash generation, lower interest costs, falling financial leverage and longer debt maturities Lenta confirms its store opening guidance for 2015 to open at least 25 hypermarkets. The supermarket opening target remains at 10-15 stores. Lenta expects to further increase hypermarket openings in 2016 to exceed the number of hypermarket openings in 2014 and to maintain a similar or higher pace of expansion thereafter. The number of supermarket openings is also expected to increase in 2016. Lenta expects to comfortably exceed its goal of doubling selling space over the three years to December 2016. The Company expects capital expenditures to amount around RUB 35bn in 2015 compared to a previous forecast of RUB 30bn.

Given the volatile consumer environment, the Company still keeps its full year sales growth guidance under review and may revise it following 3Q 2015 sales and operating results.

The full set of accounts for Lenta Ltd. for 1H 2015 and financial years of 2014, 2013, 2012 and 2011 are available at www.lentainvestor.com 

About Lenta

Lenta is one of the largest retail chains in Russia and the country's second largest hypermarket chain (in terms of 2013 sales). The Company was founded in 1993 in St. Petersburg. Lenta operates 119 hypermarkets in 6310 cities across Russia and 27 supermarkets in Moscow and the Moscow region, with a total of 770,164 sq.m. of selling space. The average Lenta hypermarket store has selling space of approximately 6,200 sq.m. The Company operates five owned hypermarket 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 30,65511 people as of 30 June 2015.

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, all of whom 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'.

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.

10 Lenta has changed methodology for calculating number of cities of presence and since 1 May 2015, all cities located in Moscow city and the Moscow region are shown as Moscow

11 FTE (full-time equivalent). Average FTE for 1H 2015 was 30,267 employees.