LNTR.L Regulatory News (LNTR)

LENTA PUBLISHES AUDITED IFRS FINANCIAL RESULTS FOR THE YEAR ENDED 31 DECEMBER 2014

St. Petersburg, Russia; 12 March 2015 - 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 31 December 20141.

2014 Financial Highlights:

· Total sales grew 34.5% to RUB 194.0bn (2013: RUB 144.3bn);

· Adjusted EBITDA2 of RUB 21.4bn, up 29.8% (2013: RUB 16.5bn) with a margin of 11.0% (2013: 11.4%);

· Gross margin of 22.6% (+0.8 p.p. vs. 2013)rose due to improved supplier conditions;

· SG&A increased to 14.5% of sales (+1.4 p.p. vs. 2013) primarily due to the increasing share of leased stores and associated expenses, increased depreciation expense as well as continuously growing proportion of stores in the ramp-up phase in the total store base;

· Capital expenditures of RUB 35.1bn, an increase of 48.6% compared to 2013 (RUB 23.6bn) linked to a larger number of new store openings in 2014, building pipeline for new store openings in 2015-2016 and the construction of two new distribution centres ("DCs");

· Net cash generated from operating activities, before net interest and income taxes paid, of RUB 23.5bn compared to RUB 15.9bn in 2013 (an increase of 48%) driven by EBITDA growth and net working capital improvement;

· Net interest expenses of RUB 6.8bn, an increase of 59.9% compared to 2013 (RUB 4.3bn) due to additional borrowing in the reporting period and a rise in interest rates;

· Net Profit3 of RUB 9.1bn, up 27.0% (2013: RUB 7.1bn) with a margin of 4.7%; and

· Net Debt of RUB 59.2bn as of 31 December 2014 (Net debt/Adjusted EBITDA of 2.8x).

2014 Operational Highlights:

· 31 hypermarkets and 14 supermarkets opened during 2014;

· Total number of hypermarkets at 31 December 2014 was 108, with 24 supermarkets in operation, selling space was c. 701,150 sq.m. as of 31 December 2014 (+38.7% vs. 31 December 2013);

· Like-for-like ("LFL")4 sales growth was 10.6% for 2014;

· LFL average ticket increased by 6.0% in 2014;

· LFL traffic increased by 4.4% in 2014; and

· 35% increase in the number of active loyalty cardholders y-o-y to a total of 6.5mm as of 31 December 2014.

1 Certain amounts do not correspond to the IFRS financial statements for the year ended 31 December 2013 and reflect adjustments made as detailed in Note 2 of the IFRS financial statements

2 Adjusted EBITDA is reported 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 and income

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

4 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:

"We are delighted that Lenta continues to win in its market; delivering industry-leading growth in sales and selling space for the second consecutive year.

Our pace of growth has accelerated further as we push on with our store opening plans and extend Lenta's geographic and format reach in the under-served Russian market. We added 39% to our total selling space in the year and we are on track to meeting our long-term expansion commitment to double our selling space by the end of 2016 despite a more difficult macro environment. Offsetting the impact of an increase in the proportion of immature stores due to our rapid expansion, improvements in operational efficiency enabled Lenta to achieve almost 50% growth in cash generated from operations and near-stable profit margins with positive year-on-year margin trends in the second half of the year.

We have adapted our offer to satisfy changing customer needs and saw accelerating sales and traffic growth in early 2015. Our low price/low cost business model is well suited to these challenging times as it enables us to help our customers by mitigating the effects of inflation. This makes us even more confident in driving successful further expansion".

***

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 31 hypermarkets and 14 supermarkets during 2014, taking the total number of hypermarkets to 108 and supermarkets to 24. Total selling space as at 31 December 2014 increased to 701,150 sq.m., up 38.7% compared to the end of 2013. Since the beginning of 2015 the Company has opened two owned standard hypermarkets in Veliky Novgorod and Chelyabinsk and one owned compact hypermarket in Engels, increasing the total store count to 135, including 111 hypermarkets in 62 cities and 24 supermarkets in Moscow and the Moscow region. Total selling space as at 12 March, 2015 reached 720,590 sq.m.

Lenta continues to invest significantly in its supply chain, with two new DCs in Rostov and Togliatti. Lenta has also started construction of a further new DC in Yekaterinburg which will complete its national network covering all regions of operation. The average centralisation ratio increased to 39.7% in 2014 from 36.7% in 2013.

Operating performance

Lenta's total sales growth in 2014 accelerated to 34.5% compared to 31.3% in 2013 due to an increase in sales from new stores opened in 2014, new stores opened in 2013 that are not yet part of the like-for-like panel and also a 10.6% increase in like-for-like sales. The increase in sales from new stores was due to the acceleration in new store openings in 2013 and 2014, with a 38.7% increase in net selling space as of 31 December 2014 compared to 31 December 2013 thanks to the opening of 31 new hypermarkets and 14 supermarkets in 2014.

While sales growth and LFL sales growth were slower in the second half of the year in part due to the deteriorating consumer environment and the effects of new restrictions on certain food imports, sales trends strengthened in November with a further marked acceleration in December 2014. As a result, Lenta sales growth for the year was in line with guidance. Strong LFL food sales growth at 12.1% was partially offset by almost flat LFL non-food sales growth of 2.0%, leading to the total LFL sales growth of 10.6% for the full year.

Financial Performance

Lenta demonstrated a strong overall performance during the year, with industry-leading sales growth and a marked increase in gross margin. The slight decrease in Adjusted EBITDA margin was attributed to the growing share of leased stores and negative operating leverage effect from the intensive pace of new store openings, whereas the net profit margin was primarily affected by the elevated growth in interest expense, but supported in a marked decrease in the effective tax rate.

Income Statement Highlights

Gross margin rose by 0.8 p.p. to 22.6% driven by increasing supply chain efficiency and improved supplier terms, partly offset by continued investment in pricing and promotions to contain the effects of inflation on customers. As expected, the higher share of new stores in the portfolio resulted in an increase in stock losses, though this improved in the second half of the year due to the continuing sales ramp-up of the respective new stores. 

SG&A development in 2014 was affected primarily by increasing depreciation due to higher pace of new store openings, infrastructure additions to support growth and rental expenses as a result of an increase in the share of leased selling space as a proportion of total selling space. Cost saving measures and ramp-up of newly opened stores resulted in a growth of Adjusted SG&A as % of sales in the second half of 2014 compared to 2013 of only 0.4pp on growth of total SG&A as % of sales of 0.9pp, compared to a growth of the Adjusted SG&A as % of sales in the first half of 2014 of 1.2pp on growth of total SG&A as % of sales of 1.9pp.

Productivity improvement in the mature stores was offset by higher overall proportion of stores in their ramp-up phase (as at 31 December 2014 the share of selling space younger than three years increased to 59% compared to 48% as at the year-end 2013).

As a result of the factors described above, growth in Adjusted EBITDA and operating profit was slightly lower than sales growth. Adjusted EBITDA for 2014 reached RUB 21.4bn (+29.8% vs 2013) with an Adjusted EBITDA margin of 11.0%.

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

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

1 One-off expenses and income in 2014 and 2013 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 Lenta's initial public offering carried out in March 2014

2 Reported EBITDA (as set out in Note 6 of the IFRS financial statements) includes all operating income and expenses excluding interest, tax, depreciation and amortisation as well as certain other expenses

Net interest expenses rose 59.9% to RUB 6.8bn due largely to increased borrowings required to fund the store opening programme and supply-chain development in 2014 and pre-investments in future expansion. Despite a rise in the average Mosprime rate of 350bps3 in 2014 compared to 2013, Lenta's weighted-average cost of debt in 2014 increased by only 64bps to 12.0%, due to the combined effects of fixed rate debt, hedging programmes, improvement in the terms and conditions of some long-term loan facilities, the impact of additional low-priced long-term financing and the use of a larger proportion of short-term credit lines.

Operating profit rose by 28.0% to Rub 13.8bn, while pre-tax profit rose at a slower rate of 18.9% to RUB 10.2bn as a result of a rise in interest costs.

Net income increased by 28.2% to RUB 9.1bn. The higher rate of growth in net income compared to pre-tax profit was due to a reduction in the effective tax rate from 22.3% in 2013 to 17.0% in 2014. The reduction in tax rate was driven by improvements to the tax treatment of shrinkage. The corrected shrinkage treatment applies for 2014 onward while a resubmission of the tax declarations for the period 2011-2013 led to a one-off tax effect of Rub 504m.

[3] Average 3M Mosprime rate of 10.5% in 2014 vs 7.0% in 2013 according to Bloomberg

Cash Flow and Balance Sheet

Net cash generated from operating activities before net interest and income taxes paid amounted to RUB 23.5bn compared to RUB 15.9bn in 2013. This was due to the combined effects of higher EBITDA and improved working capital turns.

Lenta increased capital expenditure by 48.6% to RUB 35.1bn during 2014 (from RUB 23.6bn in 2013) reflecting the increase in new store openings, investments in the future store opening pipeline (including pre-investments in land acquisition and store construction) and additional supply chain capacity. The Company significantly increased investments in future expansion - investments in land acquisition and new hypermarkets to be opened in 2015 and beyond amounted to almost 48% of total capex spent in 2014. This increase was funded by a combination of strong operating cash flow and increased net debt which was supported by additional long-term loan agreements signed with EBRD (RUB 4.6bn), Sberbank (RUB 10.0bn) and UniCredit (RUB 11.5bn) during the course of 2014.

As of 31 December 2014, Net Debt to Adjusted EBITDA stood at 2.8x and Adjusted EBITDA to Net Interest was 3.1x. As of 31 December 2013, Net debt to Adjusted EBITDA stood at 2.4x and Adjusted EBITDA to Net Interest was 3.9x. All of Lenta's debt is denominated in Russian Roubles and over 83% of it is long-term with an average maturity of 2.8 years as at 31 December 2014. In addition to its current borrowings of RUB 71.4bn, Lenta had RUB 36.3bn of undrawn short- and long-term facilities (of which RUB 17.3bn is long-term) and a cash balance of RUB 12.0bn as at 31 December 2014. Lenta's leverage ratios remain fully compliant with all the covenants in its loan agreements.

Recent trading

Lenta's sales growth has continued to accelerate month-on-month from November 2014 through February 2015. Year-to-date growth in 2015 through 10 March has been particularly strong with 37.4% growth in total sales and 15.1% LFL sales growth. This has been driven by exceptionally strong LFL traffic growth of 7.7%, the highest level since September 2013 when Lenta undertook an intensive promotion campaign on the occasion of the Company's 20th anniversary. LFL average ticket grew by 6.6% with a reduction in the number of articles per basket partly offsetting the effects of inflation. While LFL food sales growth has been strong at 17.7%, LFL non-food sales were almost flat year-to-date, continuing the trends seen in Q4 2014. We believe these patterns reflect the continuing pressure on customer incomes, the intrinsic resilience and attractiveness to customers of Lenta's low price/low cost business model, and the successful efforts Lenta has made over the last few months to adjust our offer to meet changing customer needs in this more challenging environment.

Measures to increase productivity and reduce inventory losses delivered encouraging results in January and February. This is supported by growing benefits from our investments in supply chain including the new DCs and additions to our owned truck fleet. As a result, despite the growing proportion of new and maturing stores, personnel costs and stock losses both fell as a percentage of sales, reversing the trends seen in 2014. 

Guidance

Given the current macro environment and our commitment to maintain a strong balance sheet, Lenta currently plans to open 20-25 hypermarkets (including at least 10 in the first half of 2015, three of which have already opened) and 10-15 supermarkets in 2015. The Company has made very good progress in building a strong land bank with dedicated development teams over the last 2 years and is well positioned to rapidly accelerate expansion to the levels seen in 2014 when conditions improve. Lenta expects full year 2015 total capital expenditures of around Rub 25bn. Lenta maintains its long-term target to double selling space over the three years to December 2016.

Based on recent trading, Lenta sees its full year sales growth in the range of 34-38%.

The full set of accounts for Lenta Ltd. for 2014 and for the financial years of 2010, 2011, 2012 and 2013 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 111 hypermarkets in 62 cities across Russia and 24 supermarkets in Moscow and the Moscow region, with a total of approximately 720,590 sq.m. of selling space. The average Lenta hypermarket store has selling space of approximately 6,300 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 35,1004 people as of 31 December 2014.

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, the European Bank for Reconstruction and Development and VTB Capital Private Equity, 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'.

[4] FTE (full-time equivalent). Average FTE for 2014 was 27,200 employees.

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.