Lenta Ltd.: 2017 IFRS Financial Results

LENTA PUBLISHES AUDITEDIFRS FINANCIAL RESULTS FOR THE YEAR ENDED 31 DECEMBER2017

St. Petersburg, Russia; 12March2018- 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 31December2017.

2017 Financial Highlights:

• Total sales grew 19.2% to Rub 365.2bn (2016: Rub 306.4bn);
• Adjusted EBITDA[1] of Rub35.5bn, up 11.8% (2016: Rub31.8bn) with a margin of 9.7% (2016: 10.4%);
• Gross margin of 21.4% (-0.7p.p. vs.2016)decreased due to additional price investmentsand one-off accounting effects of the new Trade Law which were not quite fully compensated by improved supplier conditions,increasedsupply-chain efficiency andin-store production productivity improvements;
• SG&A slightly increased to 15.3% of sales (0.15 p.p.higher vs. 2016)dueto higher depreciation expenseslinked to expansion which more than offset continuous operational improvements and increased productivity;
• Capital expenditures of Rub27.3bn, a decrease of 49.7% compared to2016(Rub54.3bn)due mainly to the slowerrate of expansion compared to the prior year and lower pre-investments inland and stores to be opened in future years;
• Net cash generated from operating activities,before net interest and income taxes paid, of Rub34.8bn compared to Rub27.9bn in 2016(an increase of 24.8%) primarily driven by working capital movements and higher EBITDA;
• Net interest expenses of Rub10.5bn, anincrease of 13.7% compared to 2016 (Rub9.2bn)due toan increase in average borrowings which was partly offset by much lower interest rates;
• Net Profit[2]of Rub13.3bn, up 18.4% (2016: Rub 11.2bn) with a margin of 3.6%; and
• Net Debt of Rub92.8bn as of 31December 2017 (Net debt/Adjusted EBITDA of 2.6x).

2017 Operational Highlights:

• 40 new hypermarkets and 49 new supermarkets were opened during 2017 with 236.0 th.sq.m of net selling space addition - in line with the Company's FY 2017 store opening guidance
• Total number of stores was 328 as at 31 December 2017, comprising 231 hypermarkets and 97 supermarkets with selling space of1,382,111 sq.m (+20.6% vs. 31 December 2016);
• Like-for-like ("LFL")[3] sales growth of0.9% for 2017;
• LFL average ticket increased by 2.3% in 2017;

• LFL traffic declined by 1.4% in 2017; and
• The number of active loyalty cardholders[4]increased by 17% y-o-y to a total of 12.3m as of 31 December 2017.

Events after the reported period:

• Lenta launched a co-branded loyalty programme with Raiffeisenbankwhich combines the existing Lenta loyalty programme benefits with the bank's bonus point cashbacks; and
• The Company launched a new private label range ("Bonvida") for professional customers.

Lenta'sChief Executive Officer, Jan Dunning said:

"Once again, Lentadelivered strong growth and profitability in 2017, with sales up 19% and an EBITDA margin of 9.7%- against the back-drop of a challenging marketenvironment.

Wecontinued to make progress with improving supplier conditions andsupply-chain efficiency combined with strict cost control, although this came in combination with growing promotion share and a deflationary environment.During 2017, Lenta's management team launched a series of initiatives including improvements in assortment, marketing and communication to support sales and these have started to payoff, delivering an uplift insales growth and positive operating leverage.We will continue and build on these initiatives as well as driving efficiency still further, improving ourcompetitiveness and the returns on new stores.All this, combined with stabilization of the economy makes us confidentthatLenta will be able to sustain strong growth and market-leading profitability in 2018.    

The Company will to continue organic expansion in hypermarket and supermarket formats.Our past acquisitions have proven to be very successful and we will continue looking forvalue accretive opportunities in parallel with organic growth".

Store Developments and Supply Chain

Lenta opened 40new hypermarkets and 49 new supermarkets during 2017, taking the total number of hypermarkets to 231and supermarkets to 97. The Company entered sevennew cities in 2017 and is now present in 84 cities[5]. Total selling space as at 31December 2017 increased to 1,382,111 sq.m (+20.6% compared to the end of 2016).

Since the beginning of 2018 the Company has opened oneowned compacthypermarket in Yekaterinburg and three supermarkets in Moscow and Saint-Petersburg, increasing the total store count to 332, including 232hypermarkets in 84 cities and 100 supermarkets in Moscow, St. Petersburg, Central, Siberia and Ural regions. Total selling space as at12March 2018 reached 1,389,376sq.m. (+19.1% growth y-o-y).

Lenta continuedinvesting in its supply chain:130 new trucks with refrigerated semitrailers werepurchased in 2017 to improve supply chain performance.

Operating performance

Lenta's total sales in 2017increased 19.2% compared to 2016due to an increase in sales from new stores opened in 2017, new stores opened in 2016that are not yet part of the Like-for-Like panel and a like-for-like sales increase of0.9%. Lenta recordeda 20.6% increase in net selling space as of 31 December 2017 compared to 31 December 2016.

Sales growth came under pressure in the first half of 2017 due to continuing falls in real consumer incomes and declining inflation which led to shelf price deflation and higher promotion share. New initiatives launched by the management team to improve assortment, marketing and communication resulted in a significant uplift in sales growth during the second half of 2017.In the last quarter of 2017 the Company delivered 23.4% sales growth with 5.2% LFL sales growth on the back of 20.6% selling space growth.

Financial Performance

Lenta demonstrated strong overall performance during the year with robust sales growth combined with notable improvements in supplier conditions,supply-chain efficiency and in-store productivity. However, these effects werepartly offset by price investments mostly linked to higher promotion share and one-off accounting effects of the new Trade Law, which ledto an 11.8% increase in Adjusted EBITDA to Rub 35.5bn, but a decline in Adjusted EBITDA margin of 0.7 p.p to 9.7%.

Net profit in 2017was Rub13.3bn, and grewby 18.4%, almost in line with sales growth. The key drivers of this improvement were EBITDA growth and a lower effective tax rate of 12.6%,partly offset by increaseddepreciation and higher interest expenses. Net profit margin of 3.6% remained almost flat.

Income Statement Highlights

Gross margin decreased by 0.7p.pto 21.4% - while Lenta continued to benefit fromimproved supplier terms andincreased supply-chain efficiency, the positive effect of these trends wasoffset byfurtherinvestments in pricing and promotions. A reduction of average distance for goods transportation (by 5% to 553km/pallet in 2017 vs 579km/pallet in 2016) and a higher centralization ratio of 53.7% led to a reduction in supply-chain cost as % of sales to 1.0% in 2017 from 1.2% in 2016. In-store production costsimproved by 19bps, while shrinkage remained flat despite rapidexpansion in Lenta'shypermarket format and an increase in the proportion of supermarkets.

This rapid organic expansion and two acquisitions werecombined with strict cost control across all the P&L lines. Further operational improvements in the stores led to higher productivitywhich resulted in 12bps reduction of labour cost as % of sales (5.6% in 2017). Marketing costs and other costs remained almost unchanged as a percentage of sales.

Adjusted SG&A as % of sales increased only 0.1p.p to 11.5% in 2017 compared to 2016 primarily due increases in utilities and communal payments. Total SG&A costs were affected predominantly by increased depreciation whilerent expensesremained almost flatat 1.2% of total sales.

As a result of the factors described above, Adjusted EBITDA in 2017 grewmore slowly than sales,reaching Rub35.5bn (+11.8% vs 2016) with an Adjusted EBITDA margin of 9.7%.

Net interest expenses increased13.7% to Rub10.5bn due largely to a higher average level of borrowing which was partly offset by a reduction in interest rates. Lenta's weighted-average cost of debt in 2017decreased to 10.3% (160bps lower vs 2016). The Company managed to reduce its cost of debtthroughout the year - from 10.9% in the first quarter to 9.7% in the fourth quarter - mainly due to the combined effects of continuing reductionsin MosPrime rates, refinancingof high cost debt andimprovements in the terms and conditions of its major long-term loan facilities. The Company projectsfurther significant reductionsinthe effective cost of debt in 2018.

The effective tax rate decreased from 23.0% in 2016 to12.6% in 2017. While the effective tax rate in 2016 was affected by a one-off permanent difference related to the Keskoacquisition,which generated a taxable gain,the much lower effective tax rate in 2017 was attributable to a one-off positive effect, which was mainly driven by recognition of tax loss carry forward  of the Kesko entities acquired in 2016. The underlying effective tax rate remained stable. Net income increased by 18.4% to Rub13.3bn.

Cash Flow and Balance Sheet

Net cash generated from operating activitiesbefore net interest and income taxes paid amounted to Rub34.8bn compared to Rub27.9bn in 2016.

Capital expenditures in 2017 were 49.7% lower than in 2016and amounted toRub27.3bn. The reductionmainly reflectedthe effect of somewhat slowerorganic expansion, the historically high proportion of new rented selling space (54% in 2017 vs 15% in 2016) and a higher proportion of supermarkets in total space addition (17% in 2017 vs 5% in 2016), andlower investments in land.Other significant factorsincluded lower pre-investmentsin future pipeline than in previous years, while the structure of our real estate deals resulted in deferring a greater share investments in new stores into the following year.Capital expenditures were funded primarily by operating cash flow and to a lesser extent by debt.

As of 31 December 2017 total debt was Rub 107.1bn, with a cash balance of Rub 14.3bn, giving net debt of Rub 92.8bn. All of Lenta's debt is denominated in Russian Roubles and 82% of it is long-term with an average maturity of around 1.9 years.As of 31 December 2017, Net Debt to Adjusted EBITDA stood at 2.6x, Lease Adjusted Net Debt to Adjusted EBITDAR[10] at 3.2x and Adjusted EBITDA to Net Interest was at 3.4x. As of 31 December 2016, Net debt to Adjusted EBITDA stood at 2.8x, Lease Adjusted Net Debt to Adjusted EBITDARat 3.3x and Adjusted EBITDA to Net Interest was 3.4x.

Guidance

Lentaplans to open about 20 new hypermarkets in 2018 as part of its organic expansion. The Company also expects to open about 50 new supermarkets in 2018. Organic growth remains the core ofLenta'sexpansion strategy. However, the Company continues to look for attractive acquisition opportunities in both formats in parallel with organic growth.

The Company expects capital expenditures of Rub 30-35bn in 2018. This total includes organic expansion in hypermarket and supermarket formats, increased land acquisition for future store opening, and significant investments in supply-chain infrastructureto extend capacity of the existing distribution centers and own truck fleet, further enhancing logistics efficiency. Capital spending in 2018 will also includehigher investments in IT and several other projects related to digital marketing and improvement of Lenta'sassortment.

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

About Lenta

Lenta is the largest hypermarket chain in Russia, and the country's third largest retail chain. The Company was founded in 1993 in St. Petersburg. Lenta operates 232 hypermarkets in 84 cities across Russia and 100 supermarkets in Moscow, St. Petersburg, Novosibirsk, Yekaterinburg and the Central region with a total of approximately 1,389,376sq.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 900 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 53,100 people as of 31 December 2017[11].

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 http://www.lentainvestor.comor 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.

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 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

[2]Net Profit equates to "Profit for the year" 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]Cardholders who made at least 2 purchases at Lenta during the 12 months to 31 December, 2017 are considered active

[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, including professional feesrelated to M&A activity

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

[8]One-off expenses and income in 2016were professional fees associated with M&A activity

[9]Reported EBITDA includes all operating income and expenses excluding interest, tax, depreciation,amortizationandimpairment of non-financial assetsas well as certain other expenses

[10]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

[11] FTE (full-time equivalent). Average FTE for 2017 was 42,366 employee