Lenta Annual Report 2018

← All annual reports

FY2018 Annual Report · Lenta

Loading PDF…

CHAMPIONING
OUR CUSTOMERS

Retailer
of choice –
р21

Making
healthier
choices –
p22

Sourcing
with
integrity –
p24

Cutting-edge
analytics –
p26

ANNUAL REPORT
ISSUE 2018

CUSTOMER FOCUSED

CONTENTS

02 Chairman’s statement
04 Chief Executive

Officer’s review

06 At a glance
08 Highlights
09 Key events
10 Where we are
12 Business model
and Strategy
14 Market overview
18 Operating review
28 Corporate social
responsibility
42 Financial review
46 Principal risks and
uncertainties

Corporate governance
56 Introduction from
the Chairman
58 Board of Directors
62 Senior Management

team

66 Our corporate

governance framework

74 Board Committees
Relations with
89
shareholders

89 Responsibility statement

Financial statements
90 Independent auditor’s

report

93 Statement of

management’s
responsibilities for the
preparation and approval
of the consolidated
financial statements
94 Consolidated statement
of financial position
Consolidated statement
of profit or loss and other
comprehensive income
96 Consolidated statement

of cash flows

97 Consolidated statement
of changes in equity

98 Notes to the
consolidated
financial statements

Appendices
138 Companies subsidiaries
138 List of cities as of

31 December 2018

140 Glossary
141 Further information
142 Cautionary statements

The retailer of choice

P.21

STRATEGIC REPORT

CORPORATE GOVERNANCE FINANCIAL STATEMENTS APPENDICES

How we create value

P.12

Russia’s largest
hypermarket
retailer

Private
label
range

Local
sourcing

Helping our customers live
better lives by providing
great value products
and a superior shopping
experience.

Price-led
hypermarket
model – low
cost execution

Flexible &
adaptable
formats

Product
range

Data insight
through
loyalty card

Catering for all tastesP.22

Developing private label

P.23

Cutting-edge analytics

P.26

LENTA ANNUAL REPORT AND ACCOUNTS 201802

Chairman’s statement

PROGRESS IN A
CHALLENGING ENVIRONMENT

The key to Lenta’s continuing success is our robust and flexible
business model. It underpins everything we do and forms the basis
for our decision-making and planning processes.

In a difficult year, Lenta delivered
a good performance. 2018 was
characterised by economic headwinds
and dwindling consumer confidence
– all of which presented the retail
industry with considerable challenges.

Consistent execution of our strategy and
a clear understanding of our customers’
requirements ensures that the products
on our shelves are appealing, affordable
– and of high quality.

MANAGEMENT CHANGES
Our senior management team
implements the strategies set by the
Board. During the year we made several
changes to this leadership group.

After nearly a decade, we have a
new Chief Executive Officer: Herman
Tinga, following the departure of Jan
Dunning. Herman was formerly Lenta’s
Chief Commercial Officer; he played a
leading role in building our world-class
commercial operations and nobody
knows our business better.

In April 2019, Rud Pedersen took over
from Jago Lemmens as Lenta’s Chief
Financial Officer. Rud’s excellent track
record and business acumen made him
the outstanding candidate for this role.

We appointed Dmitry Bogod as Chief
Strategy Officer. With his experience
of Russian and international retailers,
Dmitry has exceptional credentials – and
will ensure that we have greater clarity
of purpose and a sharper strategic focus
across the Company.

LENTA IS A ROBUST
BUSINESS – AND IT HAS
A BRIGHT FUTURE

John Oliver
Chairman

STRATEGIC REPORT

CORPORATE GOVERNANCE FINANCIAL STATEMENTS APPENDICES

Full year sales (RUB)

413.6bn

Ruslan Isamailov was promoted to
Supermarket Format Director and will
be responsible for implementing the
development strategy and improving the
operating model for this format.

Digitalisation is transforming the retail
sector, making the shopping experience
more convenient, more enjoyable and
increasingly personalised. This is a key
priority area for Lenta and – with the
appointment of Sergey Korotkov as Chief
Information Officer – we are evaluating
new and exciting ways to engage with
our customer base.

The members of our refreshed senior
team bring experience, energy and
enthusiasm to their new roles. I have
every confidence they will inspire their
colleagues and that – notwithstanding
the prevailing tough conditions – Lenta
will thrive under their leadership.

CORPORATE GOVERNANCE
As effective guardians of the Lenta
brand and its reputation, the Board is
committed to upholding the highest
standards of corporate governance.
Lenta is fortunate to benefit from the
considerable experience and knowledge
of my fellow directors, who are unafraid
to scrutinise, challenge and dissect every
issue we consider, which is exactly as it
should be.

At the AGM in June, we welcomed Julia
Solovieva to the Board. She has already
brought fresh perspective and insight to
our discussions, thanks to her extensive
Russian and international experience in
the digital, media and telecoms sectors.
Julia replaced Anton Artemyev, who had
been a Director for the last five years.

OUR PEOPLE
We are extremely lucky to have such
a talented and dedicated workforce.
Whenever I meet our employees, I am
always impressed by their commitment
to the Company and pride in what they
do, which exemplifies the Lenta spirit.
I am grateful to them all for their hard
work and loyalty.

LOOKING FORWARD
In 2018, Lenta delivered a creditable
performance in tough circumstances
– although it fell short of our own
expectations. The retail environment
remains intensely challenging; hence
we have reined-in our aggressive
short-term growth ambitions. However,
we are confident that the efficiency
improvements now underway will
facilitate a return to more vigorous
expansion in due course.

In the year ahead Lenta plans to focus
its efforts on improving performance
and efficiency. The Company retains
its focus on prudent capital allocation –
and decision-making will favour those
initiatives and activities that deliver strong
returns on investment.

As this report goes to press, the
ownership structure of Lenta is changing.
On 1 April, Severgroup agreed to
purchase the 42% share in Lenta owned
by TPG and EBRD. The transactions are
expected to close by 1 May, triggering an
immediate Mandatory Tender Offer by
Severgroup for the remainder of Lenta’s
shares.

Whatever the outcome of this process,
I wish to place on record my immense
pride in the Company and all that it
has achieved. We have built a robust,
dynamic business, which I believe has a
bright future. It has been my privilege to
serve as its Chairman.

John Oliver
Chairman

LENTA ANNUAL REPORT AND ACCOUNTS 201804

Chief Executive Officer’s review

STRENGTHENING
OUR POSITION

2018 was a challenging year for Lenta – and the retail sector overall.
Our financial results were impacted by the weakness in the third quarter,
but we recovered strongly towards the end of the year – and have seen
this momentum continue into 2019.

THE MARKETPLACE
The macro and consumer environment
were tough last year – and the Russian
economy remained under pressure
into 2019. Western sanctions and a
weaker Rouble pushed prices up –
and disposable incomes were hit by
increases in energy tariffs, fuel and
transport costs. Against this background,
competition amongst retailers inevitably
escalated, with excessive selling space
growth combined with high levels of
promotional activity.

The battle to secure – and retain – the
loyalty of consumers with squeezed
household budgets is intense. Successful
players must therefore be innovative
and agile if they are to anticipate and
respond to changing shopping habits. In
the face of growing competition, Lenta’s
customer-focused initiatives during the
year helped to ensure that we kept our
offer relevant, appealing and affordable.

2018 PERFORMANCE
Despite the tough environment, Lenta
achieved market-leading profitability.
Our full year sales grew 13.2% to RUB
413.6 billion (2017: RUB 365.2 billion),
including like-for-like retail sales growth
of 1.3%. Our headline sales growth was
affected by structural changes in our
small wholesale business, but strong
operating cash flows and reduced capital
expenditure brought us closer to positive
free cash flow.

WE KEPT OUR OFFER RELEVANT,
APPEALING AND AFFORDABLE

Herman Tinga
CEO

STRATEGIC REPORT

CORPORATE GOVERNANCE FINANCIAL STATEMENTS APPENDICES

Adjusted EBITDA margin

8.8%

Our total selling space at the year end
stood at 1,467,482 sqm, up 6.1% on
2017. We established a presence in four
new cities in Russia, bringing the total
number of cities with a Lenta store to 88.
We opened 13 new hypermarkets and
38 new supermarkets on a net basis.

Lenta has a strong market position
in hypermarkets and the long-term
fundamentals of this business remain
very attractive. We also have the right
strategy – and a highly capable team
to execute it. Much of our effort in 2018
was focused on emphasising the points
of difference between Lenta and its
competitors. We continued to attract
customers away from both federal and
local competitors in 2018 – and our sales
growth outpaced selling space growth.

We believe that our supermarkets
business also has great potential and we
are well positioned to succeed. While our
2018 results were not as good as we had
originally expected, growth accelerated
significantly towards the year end and
profitability improved. This showed that
our work to improve the performance of
this business was beginning to pay off,
albeit not as quickly as we would
have wished.

STRENGTHENING OUR TEAM
The increasingly competitive retail
environment has sharpened our focus
on strategy, innovation and digitalisation.
To develop and accelerate our activity
in these crucial areas, we made three
important additions to our senior

management team in the second half
of the year. Dmitry Bogod joined us
as Chief Strategy Officer and Sergey
Korotkov was appointed as Chief
Information Officer. Both bring valuable
knowledge and considerable experience
to Lenta and will help us drive the
business forward with renewed clarity
and vigour.

With the appointment of Ruslan
Ismailov in January 2019, we have
another excellent new leader – for our
supermarkets business. He is highly
experienced and knows Lenta well. I
am confident that he and his team will
deliver a significant improvement in our
supermarkets business model, customer
experience and financial performance in
the year ahead.

In April 2019, Rud Pedersen assumed
the role of Chief Financial Officer, taking
over from Jago Lemmens.

STRATEGY IN ACTION
In 2018 we introduced a series of
initiatives aimed at driving sales
and increasing our profitability,
competitiveness and returns.

We continued to leverage data-driven
insights obtained from customers’ use
of the Lenta loyalty card. This valuable
information enabled us to refine our
assortment, plan our store layouts and
manage our promotional activity. It also
helped us create new customer-focused
marketing tools across various media.
Behind the scenes, we continued to

develop our logistics operations and supply
chain to support our network of stores.

Towards the end of the year we began to
see the positive effects of these efforts,
which will become increasingly evident
in 2019.

LOOKING AHEAD
Our balance sheet remains strong and
we are working towards a positive free
cash flow position. We will continue to
invest in IT and our supply chain, aiming
to drive sales up and costs down. We
also see opportunities to renovate some
of our older stores; implementing new
concepts, which should attract new
customers and deliver strong returns.

We will continue to grow and strengthen
our market position in both store formats,
but our organic expansion will proceed
at a slower pace than in prior years.
We will, however, continue to evaluate
attractive acquisition opportunities
whenever they arise. The fundamentals
of Lenta’s business are strong and we
remain optimistic about the future.

Herman Tinga
Chief Executive Officer

LENTA ANNUAL REPORT AND ACCOUNTS 201806

At a glance

With 244 hypermarkets and 135
supermarkets, Lenta is Russia’s
largest hypermarket operator by
selling space and the country’s
third largest food retailer.

RUSSIA’S
LARGEST
HYPERMARKET
OPERATOR

WHAT WE DO

Our conveniently located stores
sell a wide variety of high quality,
great value products including food,
household goods and clothing.

#1No.1 hypermarket

operator

OUR STRATEGY

We have a continuous focus
on profitable growth; aiming
to balance capital expenditure
with strong shareholder returns
and a healthy balance sheet.

STRATEGIC REPORT

CORPORATE GOVERNANCE FINANCIAL STATEMENTS APPENDICES

No. 3

food retailer in
Russia

Read more on page 40

29
LENTA ANNUAL REPORT AND ACCOUNTS 2018

STRATEGIC REPORT

CORPORATE GOVERNANCE FINANCIAL STATEMENTS APPENDICES

A commitment to corporate social
responsibility is embedded in the way Lenta
operates. We aim to create value for all our
stakeholders, especially the people who work
for us – and the neighbourhoods we serve.
Our commitment to doing the right thing
extends throughout our business – from
sourcing the products we sell to finding the
right locations for our stores.

We believe that behaving responsibly is critical
to our long-term success. Based on a deep
understanding of local needs, our well-established
CSR programme encompasses a wide range of
activities that benefit the environment and the
community.

Our six pillars
Our Corporate Social Responsibility (CSR)
agenda is supported by six pillars. These shape
our approach to social responsibility and influence
our daily interactions with stakeholders.

Within the context of the six pillars there are
specific goals. These are primarily focused on
further investment in the development of our
employees, cooperation with local communities,
partners and suppliers, supporting our ‘value
for money’ proposition in our stores and
further project implementation in the field of
environmental protection.

Corporate social responsibility continued

THE
LENTA WAY

OUR ETHICS POLICY
Lenta’s Ethics Policy sets out
the standards and rules applied
with which all employees must
comply. It defines our obligations
to behave ethically and exhibit
the high standards of behaviour
we expect of our people.

These include:

no improper payments to authorities or

business partners;

upholding the integrity and good name of the

Company in developing long-term relationships
with customers, communities and suppliers;

strict prohibition against directly or indirectly

offering, paying, soliciting or accepting bribes
or kickbacks in any form;

no conflicts between personal interests and those

of the Company;

abiding by Lenta’s corporate rules and standards,

which impose stricter ethical restrictions on
employees than those provided in current legislation.

Established in 2011, the Company’s Ethics Committee
reviews complaints and non-compliance on a regular
basis. Its work is overseen by the Audit Committee and the
Board. Failure to comply with the Ethics Policy may lead to
disciplinary action, including dismissal.

Customers, employees and suppliers can contact the
Ethics Committee in a variety of ways: anonymously through
the Lenta website and Company Hotline, or via information
desks in our stores.

Although the overall number of complaints rose, the
average number per store decreased markedly. Ethics
Committee reports on the Hotline were reviewed at four
Audit Committee meetings during 2018.

CREATING VALUE FOR OUR STAKEHOLDERS –
ESPECIALLY OUR COMMUNITIES AND EMPLOYEES
– LIES AT THE HEART OF EVERYTHING WE DO

STRATEGIC REPORT

CORPORATE GOVERNANCE FINANCIAL STATEMENTS APPENDICES

The Lenta Way is a set of core
principles that underpin our business
and the way we operate. These
principles, along with our ethics policy
– form the basis of our approach to
CSR issues and support our ambitions
for long-term sustainable growth.

Customer satisfaction
We work every day to provide the best
possible service for our customers,
by constantly taking into account the
products they want and the services they
demand. Customer satisfaction is the key
to our development and improvement.

Providing customers with low
prices every day
We have always been the price leader
and are committed to providing our
customers with quality products at lower
prices than the competition. We ensure
that our costs are kept to a minimum
so that we can pass savings on to our
customers.

Selling goods of only the
highest quality
Our stores only stock fully licensed
goods that have been handled under the
most hygienic conditions.

Our employees
We know that if we want to have satisfied
customers, we must retain employees
who are well trained and motivated.

Maintaining the highest level of
respect for everyone
We pride ourselves on respecting the
opinions of our customers, suppliers
and employees, encouraging positive
criticism and friendly relations.

Innovation and the constant
generation of ideas
The key to our long-term survival is a
continuous flow of innovative ideas.
Many of these come from our own staff.
We believe that in order to stay ahead
of the competition we must continuously
implement these new ideas.

RECRUITING, TRAINING AND
RETAINING GREAT STAFF

Lenta’s culture is based around
teamwork, innovation and trust –
and our people are critical to our
long-term success. Recruiting,
training and retaining enthusiastic,
committed individuals with the right
skills enables us to provide great
customer service.

EMPLOYEE RETENTION
Lenta has an above-average staff
retention rate for the food retail
sector. We place great importance
on investing in our people; we know
from experience that this enhances
customer loyalty, boosts productivity
and improves our service levels.

Voluntary staff turnover in 2018 was
29.5%, down slightly on 2017. This
is among the lowest in the food retail
sector, reported by the Korn Ferry
Compensation Report 2018 to be
64.4%. At the same time, competition
in this sector of the labour market
remains intense; the years 2017
– 2020 represent a ‘demographic
gap’ due to the low birth rate in the
1990s. To help ensure retention,
additional discounts for employees
were implemented during the year,
along with an incentive programme for
periods of high sales.

LENTA ANNUAL REPORT AND ACCOUNTS 2018EMPLOYEE LENGTH OF SERVICE
Years

2,415 people
(4.9%)

7,447 people
(15%)

10+

5-9

Average seniority: 2.7yrs

TURNOVER OF SENIOR STAFF
2014–18

Division heads
5% (three people)

Top 100
3% (nine people)

A variety of employee engagement
initiatives help to promote a positive
working environment and strong team
spirit. Wherever we operate, we hold
events to engage and entertain our
employees and their families: from
competitions to environmental and
charity events.

Corporate social responsibility continued

We pride ourselves on providing
rewarding and challenging careers at
all levels of seniority. Our programme of
promotion from within and job rotation
– combined with individual career
plans and recognition initiatives – plays
an important role in staff retention.
Voluntary turnover among our 130 key
managers was 3.7%, compared with
the sector average of 5.2% (Korn Ferry
Compensation Report 2018). Over
70% of our top 30 managers have been
working for the Company for more than
five years.

MANAGEMENT DEVELOPMENT
Our managers ensure consistency
of performance standards across the
Company and help to forge a strong
organisational culture within Lenta.
Their role is therefore vital – so we are
constantly developing our leaders. We
continued to develop a culture of efficient
people management. We expect our
managers to act as role models for their
subordinates, ready to share knowledge
and experience, and with the ability to
develop themselves and their teams.

Our Lenta Leader 2.0 programme has
been established for three years. The
programme provides business skills
development. In 2018, we refined
the approach to project work of the
participants to increase focus on cross-
functional cooperation. This enabled
students both to efficiently exchange best
practice and achieve better outcomes.

In 2018, 115 managers completed the
programme, 56% of whom were store
managers.

Prior to the programme each participant
receives a 360 degree feedback on their
competencies which is used to identify
key areas for development and as a
follow-up of the programme, during the
year following the training, every Lenta
Leader graduate takes a personality
questionnaire and receives detailed
recommendations on further personal
development.

To date, over 15,000 employees have
benefited from our internal soft skills
programmes. During 2018, Lenta almost
doubled the number of in-house trainers
to over 2,000. Almost all trainers are
managers from our stores or department
heads from Lenta’s headquarters who
perfprm training roles in addition to their
everyday work. This approach enhances
levels of trust and enriches the learning
experience through the use of practical,
business-specific examples.

In 2018, we continued to develop people
management skills of our leaders. Some
1,500 managers were trained in how to
provide supportive and efficient feedback
to their subordinates. In 2018, five
Lenta managers were studying for
pre-MBA qualifications with the UK’s
Open University.

WE DO OUR BEST TO ENSURE THAT
EACH EMPLOYEE FEELS THEIR
RELATIONSHIP WITH LENTA IS
MORE THAN JUST A JOB – AND
THAT THEY ARE PROUD TO BE PART
OF OUR TEAM

STRATEGIC REPORT

CORPORATE GOVERNANCE FINANCIAL STATEMENTS APPENDICES

STORE AND SPECIALIST
STAFF TRAINING
We provide our people with a variety of
training opportunities, tailored to their
experience and knowledge. These
encompass all employee categories
and help colleagues to support Lenta’s
growth while advancing their own
careers.

Our store employees are the public face
of Lenta – and therefore the primary
focus of our training efforts. Each
store runs a comprehensive induction
programme for new employees, which
sets out Lenta’s values, history and
culture – as well as our policies and
standards. In 2018, more than 18,500
employees participated in our induction
programme.

All new employees are supported by
mentors in their first months of work
in Lenta. During the year, some 9,000
employees undertook mentoring training
and became mentors, almost twice as
many as in 2017.

In 2018, we delivered over 2.2 million
hours of training. On-line training
activities have proven to be highly
efficient and effective, which is why
most of our new courses are delivered
in this format. We more than doubled
the amount of on-line training delivered
in 2018, which enabled us to reduce the
number of training hours per employee
to an average of 50 hours compared with
68 hours in 2017.

Over 85% of training in Lenta was
conducted using internal resources, with
online training comprising 17% of overall
training delivered; twice as much as last
year. In 2018, one training hour cost on
average RUB 22 compared with RUB 19
in 2017.

External experts were used to provide
specialists knowledge in new products
and technologies.

RECRUITMENT AND CAREER
DEVELOPMENT
We encourage the ambitions and
aspirations of all our people – and
promote from within wherever we
can. We therefore provide numerous
opportunities for employees to advance
their careers and fulfil their potential. In
2018, we created 4,304 new jobs and
employed 2,865 newcomers and 564
internal candidates.

During the year, over 3,800 employees
were promoted and approximately 6,500
colleagues were transferred to new roles
through horizontal moves as a result of
our strong succession planning process.
Over a third of vacancies were filled by
our own employees and over 60% of
store manager vacancies were filled by
internal candidates.

We actively recruit and develop young
talent. In 2018, 153 students completed
an internship at Lenta’s headquarters,
30 of whom were subsequently
employed by the Company.

We use leading edge, efficient processes
and technology to recruit personnel.
Many aspects of the hiring process are
centralised, including the placement of
vacancies, CV processing and phone
prescreening, which is done at our
Federal Recruitment Center.

The final stages of selection are
conducted in individual stores and
distribution centres. The number
of candidates hired through our
Recruitment Centre in 2018 increased
by 76% from 2017.

We do our best to make each employee
feel their relationship with Lenta is more
than just a job -– and that they are
proud to be a part of the Lenta team.
Competitions, events for employees’
children, sports tournaments and
environmental activities are organised
throughout the year to bring colleagues
together outside the work environment.

We have more than 1,700 section
managers in our stores: a valuable
resource base for future store
management positions. In 2018,
the Company’s ‘We Grow Together’
motivational championship was held for
the third time, designed to identify high
potential individuals keen to develop their
careers in Lenta. In 2018, we launched
a new development programme: Lenta
ROSTa, in which every participant has an
individual development programme and
a mentor.

TRAINING

Feedback training

1,500+

managers

Supervision &
mentoring

9,000+

employees

In-house trainers

2,000+

LENTA ANNUAL REPORT AND ACCOUNTS 201834

Corporate social responsibility continued

In the current challenging trading
conditions, flexibility and rapid responses
to changes in consumer demand are
critical success factors for retailers.

We know that internal candidates for
management positions adapt to new
positions more quickly, since they are
familiar with our standards, procedures
and business processes. We therefore
pay particular attention to succession
planning, which enables us to promptly
fill open positions with internal
candidates.

During the year, over 3,800 employees
were promoted and approximately 6,500
colleagues transferred to new roles
through lateral moves as a result of our
strong succession planning process.
Over a third of vacancies were filled by
our own employees and over 60% of
store manager vacancies were filled by
internal candidates.

REMUNERATION
We aim to provide attractive employment
opportunities and careers, with
competitive wages, health benefits,
uniforms and all necessary protective
equipment. Our HR policy is to
acknowledge high performance with high
rewards. We measure ‘performance’
not only against our business results,
but also through our values and
competencies model.

All employees are included in our
performance management process,
which helps us evaluate their
achievements and identify their
future potential.

The process ensures constructive
dialogue between managers and their
subordinates, stimulates productivity,
rewards achievement and encourages
professional development. In line with
a set of established principles, financial
support is available for employees who
find themselves in difficult circumstances.

During the year, within motivational
initiatives, we reviewed the salaries of
our key employees, which resulted in
average base salary increases of 3.1%.

A new long-term incentive plan was
approved for middle managers. We
continued to automate and integrate our
HR processes using the Lumesse talent
management suite.

DIVERSITY
Lenta values and respects diversity; we
offer employment opportunities to all able
candidates. Recruitment or promotion
decisions are based purely on the
professional knowledge and competence
of the individual in question as well as
their potential.

Every Lenta store provides an average
of six job opportunities for people with
special needs – and every distribution
centre offers eight of these positions.

In 2018, 155 vacancies were filled by
candidates from this group. In line with
our policy to provide a wide range of
opportunities for people with special
needs, we actively support recruitment
of – and fair pay for – people working
from home.

EMPLOYEE ENGAGEMENT
Employee engagement, business
performance and customer satisfaction
are closely linked. We therefore work
hard to ensure our employees are kept
informed of Lenta’s progress and plans.
Our ‘gamification’ motivational project
rewards employees with ‘Lenta points’
for demonstrating behaviours that
support the Company’s ethos. Points
can be exchanged for a variety of prizes:
from T-shirts to household appliances.
Colleagues achieving the most points
receive special recognition, with best
practices and ideas shared freely
between stores.

In 2018, 93 Lenta employees were
awarded a Letter of Gratitude from the
Ministry of Industry and Trade of the
Russian Federation. The annual awards
take into account various criteria and
recognise employees’ achievements
and length of service.

DIVERSITY
NUMBER OF
EMPLOYEES

HQ AND REGIONAL
DIVISIONS EMPLOYEES

MIDDLE AND SENIOR
MANAGEMENT

29%

71%

32%

68%

45%

55%

LOOKING AHEAD

We continue to work at devising new
ways to support and motivate our
employees, ensuring that they remain
fulfilled in their roles and deliver
outstanding service to our customers.

STRATEGIC REPORT

CORPORATE GOVERNANCE FINANCIAL STATEMENTS APPENDICES

PRICING AND CUSTOMER SATISFACTION

Our pricing proposition is based
simply around providing value
for money, hence our extensive
range of high quality products is
competitively priced. Despite the
difficult economic conditions in
2018, we continued investing into
pricing for our customers, aiming
to help them make their budgets
go further.

LOOKING AHEAD

We will continue to help our
customers’ stretch their budgets,
through attractive promotions
on our most popular ranges and
investing in pricing to deliver great
value. We will also maintain our
customer-focused approach,
implementing new services and
communicating with shoppers in
the ways that suit them best.

Great customer service is a key
differentiator in retail – so our store
employees are trained to engage with
customers and provide the very best
care and attention. Ongoing analysis of
information obtained from loyalty card
use enabled us to identify and create
even more attractive promotions for
our customers throughout the year.

Lenta’s Social Programme provides
needy citizens with an additional
discount of between 3% and 8%
on essential food and selected
household items. During the year, we
launched the Programme in all Lenta
supermarkets – and it now operates
in all our stores. At the end of 2018
there were over 2.7 million participants,
565,000 of whom joined during
the year. The total savings in 2018
amounted to approximately RUB 6,166
per customer.

LENTA ANNUAL REPORT AND ACCOUNTS 201836

Corporate social responsibility continued

We know the farmers who grow
products for us. This traceability means
we can show complete transparency
throughout our supply chain. All the
products we sell must also meet
the relevant consumer information
requirements; they must also comply
with the appropriate standards on
safety, quality and packaging.

Lenta’s Growers Platform project
was launched in 2015. Designed to
increase direct fruit and vegetable
supplies from producers, it shortens
delivery times and enables us to
sell higher quality ranges of fresh
vegetables, mushrooms, salads and
seasonal fruit in our stores. Several
types of salad, cauliflower, broccoli,
savoy cabbage, kohlrabi and premium
quality potatoes are grown exclusively
for Lenta. We also supply varieties that
are unique to specific regions, including
rose tomatoes, peaches, apricots,
apples and sweet cherries – which
are sold exclusively in Lenta stores.
Having started with seven partners, the
number of Growers Platform suppliers
now stands at over 200.

LOCAL SOURCING

In 2018 over 93% of our products
were sourced from Russian
suppliers, including 20.1% from
regional suppliers. 47.6% of our
fresh food was locally purchased.
Sourcing locally produced items
is a distinguishing feature of
Lenta’s strategy – and one that
our customers recognise and
appreciate.

Our relationships with local suppliers
went from strength to strength in 2018.
These alliances deliver joint benefits to
Lenta and producers alike. The ability
to deal directly with producers allows
us to obtain better prices. Shorter
distances to our stores mean that lead
times and transport costs are reduced,
while our customers benefit from the
consistent quality and freshness of
locally grown produce.

Located across 44 Russian regions, our
partners include large agribusinesses
such as AFG National, Step Agricultural
Holding and Sad-Gigant Trading House.
We also work with smaller farmers who
have been able to attain new agricultural
production levels with our assistance.
At the end of the year, supplies from
Growers Platform accounted for 22.3%
of Lenta’s total fresh fruit and vegetables,
compared with 14.3% in 2017.

We continued to conduct regular quality
audits of our suppliers and carried out
10,778 laboratory tests during the year.
This included 7,228 suppliers’ goods and
3,550 private label and direct imports,
representing an increase in the number
of tests of 44% for branded goods and
63% for private labels and direct imports.
In 2018, 9% of suppliers of branded
goods failed our quality audit – and were
therefore unable to sell their products in
our stores.

Lenta adheres to the requirements of
the HACCP food safety system. This
internationally recognised method is
regularly updated in line with the growth
of our business and any changes in
State regulations.

LOOKING AHEAD

We know our customers appreciate
the wide variety and consistently high
quality of locally produced goods.
Sourcing and providing an extensive
range of these products sets us
apart from the competition. This
differentiation is a key aspect of our
strategy; we will continue to cultivate
new relationships with suppliers
and support our local and regional
economies.

STRATEGIC REPORT

CORPORATE GOVERNANCE FINANCIAL STATEMENTS APPENDICES

CARING FOR THE
ENVIRONMENT

Caring for the environment is a key
aspect of Lenta’s business. We seek
to minimise any negative impact on
the environment – whether through
the use of raw materials and
equipment, energy consumption,
transportation of goods or waste
disposal.

We work hard to take care of the
cities where we operate; striving to
make them cleaner, more beautiful
and more pleasant places to live.
Through our participation in a variety
of environmental campaigns, we
encourage Lenta’s employees to play
an active role in developing a positive
culture of care for the environment.

WASTE
Lenta produces various types of
waste, which is removed for us by third
party contractors. During the year we
reduced the amount of waste produced
and continued to improve our recycling
rates; we now recycle 60% of our
total waste. In 2018, we initiated
275 waste disposal and emissions

Lenta’s customer battery collection
project was originally launched in
St Petersburg in December 2016.
Several stores joined the project the
following year and in 2018, in partnership
with Duracell, we expanded the project
to accept batteries from the wider public.

A single used battery has the potential
to pollute 20 sqm of land. Collection of
used batteries through Lenta’s project
ensures their proper disposal at the
only Megapolysource battery recycling
plant in Russia. Materials obtained from
processing the batteries can be used
in the production of a variety of items
including pencils, mineral fertilizers
and railway tracks.

60%

OF OUR TOTAL WASTE MATERIAL IS RECYCLED

reduction projects – all of which were
fully compliant with the appropriate
legislation.

We also continued to roll out a variety
of initiatives in connection with our
waste reduction ambitions. 2019 will
see the extension of our centralised
waste collection scheme to include
30 hypermarkets in Siberia, and our
supermarkets in Moscow, increasing
our volume of recycled waste this
region by approximately 60%.

ENERGY
We installed energy saving covers
to our chiller cabinets in 238
hypermarkets and also piloted the
installation of glass doors on vertical
fridges. We plan roll these out to all our
newly opened hypermarkets – as well
as those stores with the highest levels
of energy consumption.

During the year we converted 33
hypermarkets and ten supermarkets
to energy-efficient LED lighting – and
will continue this programme in the
year ahead.

YEAR
2016
2017
2018
20191
1. Planned for 2019.

NUMBER OF
PARTICIPATING
STORES
21
28
194
245

NUMBER OF
PARTICIPATING
CITIES
1
1
51
88

SENT FOR
PROCESSING,
TONNES
0
10
28
50

LENTA ANNUAL REPORT AND ACCOUNTS 2018In July we installed our first separated
waste collection point for paper, plastic
and glass in the car park of one of our
Togliatti hypermarkets. An additional
two collection points were added during
the year. Waste is sent for recycling into
secondary raw materials, which will help
the city significantly reduce the amount of
garbage transported to landfill. Between
July and October, approximately two
tonnes of rubbish was taken, half of
which went for recycling.

In October one of our St Petersburg
stores installed an automated machine
to accept PET bottles and aluminium
cans from customers. This pilot project
paved the way for us to expand our
infrastructure of waste collection points
and at the start of 2019, we installed
11 machines in the city.

Lenta also participated in national and
international environmental initiatives
in 2018. As a partner of the ‘Clean
Games’ ecological project, we provided
the event organisers in 20 Russian
cities with essential products for the
games including food and prizes for the
participants. Our involvement highlighted
the principles of responsible behaviour to
our employees – and many of them took
part in local clean-ups. We are continuing
to work with the organisers in 2019,
extending Lenta’s involvement across
more cities.

Lenta also played a key role World
Clean-up Day, which took place on
15 September. We supported a range of
activities, providing food and equipment
for participants engaged in clean-up and
rubbish sorting in 44 cities across Russia.

Corporate social responsibility continued

SUPPORTING LOCAL
COMMUNITIES

We strive to improve the quality of
life of children and families in difficult
circumstances; we also support
elderly people and those who need
our help. Through a variety of
charitable projects, we aim to increase
levels of socialisation and unleash the
creative potential of young Russians.

In August, 211 of Lenta’s
hypermarkets from 77 cities took part
in our ‘Help to get a child to school’
scheme. The Company contributed
supplies and stationery worth
around RUB 1.5 million to 192 social
institutions as well as low income
families in need of support. Donations
included 1,175 backpacks, 30,000
notebooks and 10,000 sets of pens.
Employees personally congratulated
the children from the sponsored
institutions on the Day of Knowledge.

Lenta’s ‘Christmas Tree of Wishes’
campaign is now an established
feature of our calendar. Children from
local orphanages and institutions
place their ‘wish’ on Christmas trees
near the tills in our hypermarkets –
and our customers can choose a card
and buy the gift. The first campaign
involved five stores in two cities
in 2015. In 2018, 229 stores in 88
cities took part, making the wishes of
12,500 children come true.

YEAR
2015
2016
2017
2018

NUMBER OF
PARTICIPATING
STORES
5
32
191
229

PARTICIPATING
CITIES
2
8
77
88

RECIPIENTS

about 200
6,400
12,500

Lenta is also an information partner
of the annual ‘Our forest. Plant your
tree’ project in the Moscow region. In
September, employees from Lenta’s
Domodedovo hypermarket joined
the action, helping other companies,
schoolchildren and residents plant more
than 12,700 trees and shrubs in the city.

RESTORING THE NATURAL
ENVIRONMENT
In 2018 we became a partner of the
‘More Oxygen’ project to restore forests
in Russia. In October, we provided
financial support and employee
volunteers to plant four forests in
Krasnodar Territory and the Volgograd
Region: a total of 20,000 new trees.
In the year ahead, we will continue
to cooperate with the ‘ECA’ Green
Movement to restore forest areas of
the country.

New trees planted

20,000
39

STRATEGIC REPORT

CORPORATE GOVERNANCE FINANCIAL STATEMENTS APPENDICES

In August, Lenta was the principal
partner of the ‘Be with the City’ project
located in Palace Square, St Petersburg.
The project provides residents with
information about their neighbours in the
city who need support and help – and
how to go about providing it.

Since 2013, Lenta has been a partner of
the spring Tulip Festival in St Petersburg,
donating 30,000 Dutch tulip bulbs
every autumn.

In 2017, we expanded the geography of
the Festival – and in 2018 bulbs were
also planted in Yekaterinburg, Rostov-
on-Don, Novosibirsk and Biysk. 2019
will see Samara included for the first
time. Our employees also planted over
1,500 trees and shrubs and 3,000 annual
flowers in 2018 as part of the Kazan
Blossom promotion.

‘Lenta of good cities’ is a charity event
that benefits a wide range of non-profit
organisations. In December, NPO
volunteers accepted donations of goods
from Lenta hypermarket customers
and passed them on to those in need.
Originally held in St Petersburg in 2006,
the 2018 event collected RUB 2 million-
worth of goods for deserving causes.

In April, the second ‘Your love is in your
care’ campaign took place across 30
Lenta hypermarkets. Personal hygiene
products were collected at the stores
and distributed among the homes for the
elderly in Moscow, Leningrad and Tula
regions. The campaign was organised
jointly by Lenta, the Old Age to Joy
Foundation for Elderly People and Essity.

During the year Lenta also supported
several other projects aimed at benefiting
older people. These included the Dobry
Gorod Peterburg charitable foundation’s
‘Active Longevity’ programme, which
promotes maintenance of an active
lifestyle. We also supplied gift baskets to
veterans in local nursing homes on the
Day of the Elderly Person.

LENTA ANNUAL REPORT AND ACCOUNTS 201840

Corporate social responsibility continued

PROMOTING HEALTH
AND SAFETY

Lenta is fully committed to creating
and maintaining a safe environment
for our employees and customers.

All Lenta store managers conduct daily
and monthly ‘safety walks’ as part of
our Active Safety programme. They
aim to identify any potential risks to
staff and customers, ensure the staff’s
hazard awareness and check safety
equipment. Employees are encouraged
to report every safety-related incident,
no matter how small, so that the cause
can be identified and any likelihood of
reocurrence eliminated.

In 2018, risk checks were conducted
in a total of 183 stores and distribution
centres. Of these, 87 sites were being
checked for the second time and 24
for the third time since the programme
roll-out. Results of the checks were
included in each store’s (or distribution
centre’s) annual targets.

Our injury rate was unchanged from
last year, despite the Company opening
new stores in 2018. Working time lost
due to injuries represented 0.07% of
total hours worked.

Lenta’s main health and safety
targets in 2018 continued to be the
maintenance of high standards across
the Company – and the automation of
various processes to improve employee
safety. We centralised various
processes into specific groups; for
example: a group for investigation and
analysis of near misses and another
for ecological projects.

We also streamlined the flow of
documentation such as registers and
instructions – and automated the
process of compulsory training on
legislation. A new electronic ‘Risk-
Check’ module for risk management
also was developed and implemented,
reducing the time spent to create a risk
report from 18 hours to 90 minutes.

In 2018, we obtained waste
management permits from supervisory
bodies for 275 of our stores, both
hypermarkets and supermarkets.
This enables us to comply with
environmental legislation, calculate
and control pollutant emissions to
minimise any negative impact on the
environment.

Number of injuries
per 100,000 working hours

2018

2017

0.25

2019

41
LENTA ANNUAL REPORT AND ACCOUNTS 2018

STRATEGIC REPORT

CORPORATE GOVERNANCE FINANCIAL STATEMENTS APPENDICES

GOALS FOR

In addition to our ongoing CSR programmes, we are
focusing closely on a specific set of goals for 2019

2019

We will continue to invest
in our value-for-money
proposition to provide
the best offers for our
customers.

We will expand our
social programmes
aimed at vulnerable
citizens. Alongside our own
initiatives, we are open to
cooperation with suppliers
and other partners to
achieve this.

We will develop
partnerships with local
government to strengthen
social and economic
cooperation.

We will further increase
local sourcing opportunities
for suppliers in a range
of industries.

We will pursue
the development
of programmes in
environmental care and
social activities.

We are committed to
continued investment
in the training and
development of our
employees to ensure that
they are best-in-class
in the retail sector.

We will work with our
suppliers to ensure their
commitment to quality and
safety aligns with our own.

We will look to actively
increase employee
involvement in working
towards all of our
CSR goals.

Financial review

AN ENCOURAGING YEAR

Lenta demonstrated robust sales growth in 2018, combined with
notable improvements in supplier conditions, like-for-like store
productivity and an improved supply chain result.

DEAR SHAREHOLDERS

The beneficial effects of increased
sales, better supplier terms and store
productivity were however largely offset
by price investments. These were
mostly linked to higher promotion share,
increase in shrinkage, salary indexation,
growth in depreciation, rental expenses
and marketing costs. This led to a 2.0%
increase in adjusted EBITDA to RUB
36.2bn (2017: RUB 35.5bn), but a
decline in adjusted EBITDA margin of
97bps to 8.8%.

Gross profit (RUB, bn)

+13.5%

2018

2017

2016

88.8

78.2

67.8

Net profit (RUB, bn)

-11.0%

2018

2017

2016

11.8

13.3

11.2

WE REMAIN FOCUSED ON
STRENGTHENING THE BUSINESS

Rud Pedersen
Chief Financial Officer

STRATEGIC REPORT

CORPORATE GOVERNANCE FINANCIAL STATEMENTS APPENDICES

Adjusted EBITDA (RUB)

36.2bn

YOY GROWTH
Total sales
Retail sales
LFL retail sales
LFL retail traffic
LFL retail ticket

1H 2018
18.2%
15.4%
1.7%
1.2%
0.5%

2H 2018
9.2%
12.2%
0.9%
-0.1%
1.0%

2018
13.2%
13.6%
1.3%
0.5%
0.8%

2017
19.2%
16.8%
0.9%
-1.4%
2.3%

SALES
Total sales in 2018 increased 13.2% to
RUB 413.5bn, compared with growth of
19.2% in 2017. Retail sales rose 13.6%,
due to growth from stores opened in
2018, stores opened in 2017 that are not
yet part of the like-for-like panel and a
like-for-like retail sales increase of 1.3%.
We recorded a 6.1% increase in net
selling space. Wholesales grew 6.0%.

Sales growth in the second half of 2018
slowed slightly compared to the first half
of the year. This was due to a significant
drop in wholesale volumes in the fourth
quarter, slower selling space growth in
the second half, and negative like-for-like
retail sales growth in the third quarter –
offset by a return to positive growth in
the fourth quarter.

GROSS MARGIN
Gross margin increased by 0.05pp
to 21.5%, as we continued to benefit
from improved supplier terms and
increased supply chain profitability.
The positive effect of these trends
was offset by further investments in
pricing and promotions and increased
shrinkage. Growth of promotional share
as a percentage of sales of almost
4pp was compensated by higher
promotional margin.

Shrinkage put pressure on gross profit
margin, growing 0.67pp year-on-year to
2.5% in 2018. This was due to changes
in procurement (including increases
in direct import operations and direct
contracts with suppliers and farmers), an
increased share of fresh food and rapid
expansion in Lenta’s supermarket format.

An increase in transportation efficiency
and a higher centralisation ratio of
56.9% were partly offset by an increase
in transportation tariffs, leading to a
slight growth in supply chain cost as
a proportion of sales to 1.2% in 2018.
However, this was more than fully
compensated by higher supply chain
income versus the previous year.

88.8bn

RUB gross profit

24.2bn

RUB operating profit

+6.1%

selling space

LENTA ANNUAL REPORT AND ACCOUNTS 201844

Financial review continued

SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES (SG&A)
Total SG&A increased to 16.7% of sales
in 2018 from 15.3% in 2017. This was
due principally to increased depreciation
linked to expansion and rent expenses
arising from the high volume of new
leased space opened at the end of 2017.

EBITDA
Adjusted EBITDA (reported EBITDA
adjusted for non-recurring one-off items
such as changes in accounting estimates
and one-off non-operating costs and
income) reached RUB 36.2bn in 2018
(2017: RUB 35.5bn), with an adjusted
EBITDA margin of 8.8% (2017: 9.7%).

This result was achieved despite visible
increases in MosPrime rates in the
second half of 2018. Lenta protected
itself from potential rate increases by
borrowing at fixed rates available in the
second half of 2018 to refinance debt
falling due in 2019. At the year end, 98%
of the Company’s debt portfolio was
long-term with extended maturity and
77% of the total debt was at fixed rate
with only one variable rate loan linked
to MosPrime.

TAX
The effective tax rate increased from
12.6% in 2017 to 20.4% in 2018. 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
Net profit of RUB 11.8bn was down
11.1% (2017: RUB 13.3bn), due mainly
to increased depreciation and a higher
effective tax rate of 20.4%. Net profit
margin declined to 2.9%.

INTEREST
Net interest expenses decreased
13.4% to RUB 9.1bn, compared with
RUB 10.5bn in 2017. This was due
to higher average levels of borrowing
being more than offset by a reduction in
interest rates. Lenta’s weighted average
cost of debt in 2018 decreased to 8.6%
(164bps lower than 2017).

The Company reduced its cost of debt
in 2018 from 9.1% in the first quarter
to 8.3% in the fourth quarter. This was
mainly due to the combined effects
of improvements in the terms and
conditions of its major long-term loan
facilities, refinancing of high cost debt
and resetting coupon rates under bond
issues to lower levels.

EBITDA
RUB (MILLIONS)
Adjusted EBITDA
One-off Expenses and income
Reported EBITDA1
1. Reported EBITDA includes all operating income and expenses excluding interest, tax, depreciation,

2018
36,294
–
36,294

2017
35,495
5
35,490

% CHANGE 2018
– 2017
2.3%
–
2.3%

amortisation and impairment of non-financial assets as well as certain other expenses.

Personnel costs increased by 50bps as
a percentage of sales to 6.1% in 2018.
Operational efficiencies in stores were
more than offset by increased FTEs
coming from expansion and new stores
ramping up as well as full year effect of
above inflation indexation of salaries in
October 2017.

Marketing costs grew 16bps due
to additional investments in new
technologies.

Professional fees grew 15bps, driven
by the implementation of new software
and services tools and rapid growth in
customer debit and credit card payments.
Increases in cleaning costs, utilities and
communal payments were related to a
significant hike in tariffs.

Adjusted SG&A as a percentage of sales
increased by 0.9pp to 12.4% in 2018,
primarily due to increases in personnel
expenses, marketing costs, cleaning,
utilities and communal payments.

Selling space (‘000 sqm)

+6.1%

2018

2017

2016

1,467

1,382.1

1,146.1

STRATEGIC REPORT

CORPORATE GOVERNANCE FINANCIAL STATEMENTS APPENDICES

INCOME STATEMENT HIGHLIGHTS
RUB (MILLIONS)
Total sales
Gross profit
Gross margin
SG&A, % of sales
Adjusted SG&A1, % of sales
Adjusted EBITDAR
Adjusted EBITDAR margin
Rental expenses, % of sales
Adjusted EBITDA2
Adjusted EBITDA margin
Operating profit
Profit before income tax
Net profit
Net profit margin

1H 2017
163,531
35,534
21.7%
15.9%
11.8%
17,601
10.8%
1.2%
15,623
9.6%
10,880
5,560
4,492
2.7%

1H 2018
193,220
42,319
21.9%
17.2%
12.6%
19,986
10.3%
1.5%
17,112
8.9%
11,027
6,354
5,161
2.7%

2H 2017
201,647
42,701
21.2%
14.9%
11.3%
22,106
11.0%
1.1%
19,871
9.9%
14,696
9,611
8,772
4.4%

2H 2018
220,342
46,475
21.1%
16.3%
12.1%
22,294
10.1%
1.4%
19,182
8.7%
13,158
8,564
6,650
3.1%

2017
365,178
78,236
21.4%
15.4%
11.5%
39,706
10.9%
1.2%
35,495
9.7%
25,577
15,172
13,264
3.6%

2018
413,562
88,794
21.5%
16.7%
12.3%
42,280
10.2%
1.4%
36,294
8.8%
24,184
14,917
11,810
2.9%

% CHANGE 2018
– 2017
13.2%
13.5%
0.05p.p
0.89p.p
0.84p.p
6.5%
-0.65p.p
0.29p.p
2.3%
-0.94p.p
-5.4%
-1.7%
-11.0%
-0.78p.p

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

including professional fees related to M&A activity.

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

NET DEBT AND LEVERAGE
As of 31 December 2018, net debt
was RUB 93.3bn. Net debt to adjusted
EBITDA stood at 2.6x, lease adjusted
net debt to adjusted EBITDAR at 3.3x
and adjusted EBITDA to net interest was
3.9x. 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.

Net debt was flat, while gross debt and
cash increased as new long-term loan
facilities with relatively low fixed rates
were secured early in the second half of
2018. These enabled Lenta to secure a
stable cost of debt amidst rising market
rates, with sufficient cash at the year end
to cover all refinancing needs in 2019
and part of 2020.

As of 31 December 2018 total debt was
RUB 127.1bn, with a cash balance of
RUB 33.8bn. All debt is denominated
in Russian Roubles; 98% of it is long-
term with an average maturity of around
two years.

Lenta’s proven low price/low cost
business model and solid financial
position mean we are well placed to
withstand the challenges presented by
current market and economic conditions.
We remain focused on strengthening
the business, keeping our costs under
tight control and continuing to deliver
profitable growth.

Rud Pedersen
Chief Financial Officer

CAPITAL EXPENDITURE
Capital expenditures in 2018 were 18.8%
lower than in 2017, amounting to RUB
22.1bn. This reduction mainly reflected
the effect of slower organic expansion in
both store formats, a higher proportion
of supermarkets in total space addition
(35% in 2018 compared with 17% in
2017) and lower pre-investments in
future pipeline than in previous years.
Capital expenditures were almost fully
funded by operating cash flow.

CASH FLOW
Net cash generated from operating
activities before net interest and income
taxes paid amounted to RUB 32.4bn,
compared with RUB 34.8bn in 2017. The
decrease of 6.9% was mainly attributable
to working capital movements. The
significant increase of inventories in
2018 compared to 2017 was related to
extension of the assortment. A decrease
of accounts payable was driven by rapid
growth of direct import operations with
pre-payment terms, but higher margin.

LENTA ANNUAL REPORT AND ACCOUNTS 201846

Principal risks and uncertainties

UNDERSTANDING
OUR RISKS

RISK MANAGEMENT
Lenta defines risk as ‘an uncertain future
event that could affect the Company’s
ability to achieve its objectives.’
Understanding how various risks
potentially influence our business is
integral to the decision-making process
within the Company. We monitor all
material risks to our operations on
an ongoing basis, acting whenever
necessary to mitigate and manage
them. We also anticipate and evaluate
new threats as and when they arise.

Our risk management process applies
across all functions and comprises
four principal stages:

• identification;

• assessment;

• response;

• monitoring, reporting and escalation.

Stage 1 – Risk identification
We conduct a ‘top down’ strategic risk
assessment on an annual basis. This
supplements a quarterly functional
‘bottom up’ evaluation, which identifies
risks at operational levels in the
Company. These activities enable us
to create a comprehensive risk profile.
Risk identification is also embedded
into key business processes including
budgeting, planning, capital expenditure
and performance management.

Stage 2 – Risk assessment
Risks are individually assessed to
determine their likelihood of occurrence
– and potential impact on the business.
They are evaluated on a ‘Current’ and
‘Target’ basis, which helps to inform
management oversight. Risks are
assessed over a three-year timescale
using Lenta’s Risk Assessment Criteria,
which comprise four-point probability
and severity scales.

Stage 3 – Risk response
When the ‘Current’ severity of a specific
risk exceeds acceptable levels, action
may be needed to align it with the
‘Target’ risk position. Risk Owners are
accountable for managing the risk, with
details of planned mitigation activities
and delivery milestones set out in risk
response plans.

Stage 4 – Risk monitoring,
reporting and escalation
This involves the timely tracking, capture
and sharing of risk information to enable
review and notification of changes in risk
exposure by management. It supports
understanding and enables decision-
making on appropriate responses,
including management interventions to
avoid a risk becoming reality in the first
place – or reduce its impact after the
event.

The process is supported by a
governance structure that clearly defines
risk-related roles and responsibilities at
each level within Lenta. The Board has
overall accountability for ensuring that
risks are effectively managed across the
business.

R i sk appetite

1 Risk identification

Risk
monitoring,
reporting
& escalation

Communication
& consultation

Risk
assessment

3 Risk response

Risk app e t

t e

STRATEGIC REPORT

CORPORATE GOVERNANCE FINANCIAL STATEMENTS APPENDICES

BOARD
Accountable for ensuring a sound system of
internal control and risk management is in place

AUDIT COMMITTEE
Oversight and challenge of the principal risks,
effectiveness of risk management and
assurance activities

S
t
r
a
t
e
g
y

SENIOR MANAGEMENT TEAM
Oversight of the identification, review and
ongoing monitoring of Lenta’s principal risks.
Review and challenge of the risks submitted
from the Functions

HEAD OF RISK MANAGEMENT
Responsible for the risk management
framework and coordination of
management activities

FUNCTIONS
Functions are accountable for implementing the Risk Management policy in their respective area
and ensuring timely and robust submissions of significant risks to the Head of Risk Management

o
v
e
r
s
g
h
t
a
n
d
c
o
m
m
u
n
c
a
t
i
o
n
s

n
o
i
t
a
a
c
s
e
d
n
a
g
n
i
t
r
o
p
e
r

t
n
e
m
e
g
a
n
a
m
k
s
R

The Audit Committee oversees and
challenges the effectiveness of our
approach. The management team
provides risk oversight of commercial
operations and undertakes a biannual
‘top down’ assessment for the Audit
Committee and Board to review.
Functional heads within the Company
are responsible for implementing risk
management activities in their areas.

RISK MANAGEMENT POLICY
Lenta’s Risk Management Policy
provides us with a comprehensive and
robust framework, enabling us to ensure
that risk is managed to a consistently
high standard across all our operations.
It sets out the Company’s principles and
standards – and establishes a common
approach and minimum requirements for
risk management activities. The policy
provides a common ‘language’ for risk
and delivers multiple benefits, including:

• informed decision-making to help
deliver consistent and improved
business performance through the
avoidance of unwanted surprises –
and the achievement of opportunities;

• identification and management of key
risks that could have a material impact
on the business;

• clear accountability and ownership of

risk management;

• an improved view of key controls,
their effectiveness and gaps in the
control environment;

• a clear path for the functions to

raise significant risks to the Senior
Management team, Audit Committee
and Board;

• a proactive, risk-aware culture

within the Company; and

• assurance to the Board and Audit
Committee that processes and
behaviours are embedded to ensure
significant risks are consistently identified,
understood and effectively managed.

The Risk Management Policy is owned by
the Chief Financial Officer and is reviewed
annually. Compliance is mandatory for
all levels of management. Guidance on
how to apply the process and supporting
tools are provided via a dedicated
Risk Management intranet site. Risk
Management awareness and training is
provided to all staff commensurate with
their roles and responsibilities.

THE RISK LANDSCAPE
The risk landscape changed significantly
during the year. In the first six months,
there were hopes for a pick-up in
consumer spending and interest rates
declined. To reduce interest rate risk,
Lenta secured additional long-term funding
in the first half of the year at relatively
low cost. The second half of the year
brought surprises – with more sanctions
and a sudden increase in interest rates.
This resulted in greater insecurity among
consumers, which impacted our sales in
Q3 and in part of Q4.

In 2018, changes in retailers’ promotional
tactics – including ‘crazy days’ on
specific assortments and increasingly
personalised promotions – challenged
Lenta’s commercial team to find ways
of obtaining supplier funding for these
activities. The team became more adept
at this during the year, managing to
sustain our gross profit margin, despite a
higher promotional share.

The main risk identified by the Board was
a further increase in interest rates. We
therefore decided to extend maturities
on existing loans and borrow additional
two-to-three year funds to cover all cash
needs for capital expenditure and debt
repayments in 2019. With no need to
borrow in the current year, interest costs
for 2019 will be stable and predictable.

The risk of increased regulations on
retail activities also materialised. In July,
a new system of exchanging digital
hygiene certificates between suppliers
and retailers came into force. Despite
regulations continuing to change during
implementation – and poor preparation by
many suppliers, our fresh food supplies
were uninterrupted.

New regulations to track alcohol excise
labels at single label – as opposed to
range – levels meant Lenta had to alter
its methods of receiving goods, but we
experienced no disruption in supply.
Nevertheless these measures led to
increased operating and control costs
to ensure proper compliance.

LENTA ANNUAL REPORT AND ACCOUNTS 2018

Principal risks and uncertainties continued

The risk management
process is closely aligned
to our strategic objectives.
We identified 18 principal
risks that could potentially
have a negative impact
on our ability to deliver
on our goals.

These are set out below,
along with their likely
impacts and the mitigating
actions taken in each
case. Each risk is graded
according to how the
possible impact would
affect the achievement of
our strategic priorities.

OUR STRATEGIC PRIORITIES

Profitable growth with the aim of sustaining market-leading returns

Maintain healthy balance sheet with conservative approach to
leverage

Continue investing in management to ensure that our team
remains one of the most effective in the industry

Develop digital capabilities to stay at the forefront of industry
innovations

Establish further differentiation from competition through better
tailored proposition for all customer segments

Further improve offering with direct imports, strategic partnerships,
and protected sourcing platforms

Number one retailer for customer satisfaction

No on
map

Risk

Impact

STRATEGIC RISKS

Strategic priorities
that would be affected

Trend

How we manage it

Change in 2018

Regulation
resulting in
major additional
compliance costs
and increase in other
operational costs

Government may introduce regulation of stores in
areas such as disabled access or food production
standards, resulting in significant compliance costs
and/or adjustments to the business model. Other
measures may affect suppliers’ cost structures,
leading to price increases for Lenta.

A B

Monitor legislative initiatives and engage in ongoing lobbying with retail

Lenta completed preparations for new legal obligations regarding

associations.

Continued investment in people and IT resources to ensure our

operational systems are capable of managing such changes.

Retail regulation
of price/margin

Government may introduce of further trade laws,
e.g. controls over price or front margin. These could
erode sales and margins and/or require changes to
the business model.

A B

Monitor legislative initiatives and engage in ongoing lobbying with retail

The July 2016 legislation prompted a sharp increase in promotional

associations.

digitalisation and tracking of quality certificates in the fresh goods

supply chain, which went live on 1 July. This remains a complex project,

since it involves multiple government institutions with different views;

hence targets are constantly changing. The system will require further

upgrading in 2019, so the Company will remain exposed to some risk

of fines. We also implemented process changes to track excise labels

by bottle rather than batch. A similar excise label tracking system for

tobacco is scheduled for early 2019. New regulations on outsourced

labour have increased its cost and rises in road tax are making transport

more costly.

activity across the market, but since then the situation has remained

relatively stable. However, at the year end, an amendment to the trade

law was implemented which limits the returns of goods with a shelf life

of less than 30 days to suppliers. This will lead to increased shrinkage

levels in food retail. There remains a constant risk of regulatory change

in the Russian retail sector, which can affect consumers and retailers.

The industry is therefore increasingly alert to new initiatives.

STRATEGIC REPORT

CORPORATE GOVERNANCE FINANCIAL STATEMENTS APPENDICES

PRINCIPAL RISKS

RISK DESCRIPTION

y
e
k

i
l

y
h
g
H

d
o
o
h

i
l
e
k
i
L

e
b
a
b
o
r
P

e
b
s
s
o
P

y
e
k

i
l

n
U

Regulation resulting in major additional compliance
costs and increase in other operational costs

2. Retail regulation of price/margin

3. Major decline in economy

Increased competition

5. Competitive sourcing

6. New store location

7. Lack of innovation and adaptation

8. Erosion of standards

9. Supply availability

10. IT system error and data theft

11. Management succession

12. Product quality issues

13. Risk of loss of wholesale transactions

Minor

Moderate

Major

Severe

14. Tax risk

Impact

Key:

Risk assessed after controls

New risk

15. Interest rate risk

16. Source of financing

17. Compliance with regulations and internal
standards regarding store operations

18. Lenta employees involved in unethical behaviour

Key: Current: risk assessed after controls

Impact

Risk

map

No on

Strategic priorities

that would be affected

Trend

How we manage it

Change in 2018

Monitor legislative initiatives and engage in ongoing lobbying with retail
associations.

Continued investment in people and IT resources to ensure our
operational systems are capable of managing such changes.

Retail regulation

of price/margin

Government may introduce of further trade laws,

e.g. controls over price or front margin. These could

erode sales and margins and/or require changes to

A B

the business model.

Monitor legislative initiatives and engage in ongoing lobbying with retail
associations.

Lenta completed preparations for new legal obligations regarding
digitalisation and tracking of quality certificates in the fresh goods
supply chain, which went live on 1 July. This remains a complex project,
since it involves multiple government institutions with different views;
hence targets are constantly changing. The system will require further
upgrading in 2019, so the Company will remain exposed to some risk
of fines. We also implemented process changes to track excise labels
by bottle rather than batch. A similar excise label tracking system for
tobacco is scheduled for early 2019. New regulations on outsourced
labour have increased its cost and rises in road tax are making transport
more costly.

The July 2016 legislation prompted a sharp increase in promotional
activity across the market, but since then the situation has remained
relatively stable. However, at the year end, an amendment to the trade
law was implemented which limits the returns of goods with a shelf life
of less than 30 days to suppliers. This will lead to increased shrinkage
levels in food retail. There remains a constant risk of regulatory change
in the Russian retail sector, which can affect consumers and retailers.
The industry is therefore increasingly alert to new initiatives.

Minor

Moderate

Major

Severe

Impact

STRATEGIC RISKS

Regulation

resulting in

major additional

compliance costs

Government may introduce regulation of stores in

areas such as disabled access or food production

standards, resulting in significant compliance costs

and/or adjustments to the business model. Other

A B

and increase in other

measures may affect suppliers’ cost structures,

operational costs

leading to price increases for Lenta.

LENTA ANNUAL REPORT AND ACCOUNTS 2018

Principal risks and uncertainties continued

No on
map

Risk

Impact

Strategic priorities
that would be affected

Trend

How we manage it

Change in 2018

STRATEGIC RISKS (CONT.)

Major decline in
economy

There may be further major decline in Russia’s
economy, devaluation of the Rouble and inflation,
resulting in reduced sales as customers curtail their
spending.

A B

Increased
competition

Lenta could face markedly increased competition as
a result of competitor desperation, consolidation – or
a major competitor benefiting from more effective
management team or additional funding. This could
lead to a price war, with a resulting impact on Lenta’s
growth and margins.

A B G

Competitive sourcing

Lenta may not be able to gain access to produce at
the ‘lowest price’, due to competitors pursuing vertical
integration or having ‘better’ relationships
with producers.

A E F G

New store location

New store site selection could be compromised due
to the desire to meet rapid growth targets. This could
result in a fall in average revenue per store and Lenta
missing forecast revenue targets.

Lack of innovation
and adaptation

Technological developments move extremely fast. Big
data, social media and digital marketing capabilities
and robotisation are changing the way consumers
gather information and how they are influenced – and
alters their shopping behaviour. Such developments
have a considerable influence on cost of servicing
customers. A lack of flexibility may render our
commercial proposition obsolete, our marketing
ineffective and could lead to reduced competitiveness.

A D E
F G

Actively monitor the main economic indicators and adjust our offer in

The Russian economy began to deteriorate during the latter half

our stores as appropriate.

of 2018.

prices again.

Food inflation reduced significantly in the first half, but a renewed

Rouble devaluation as a result of new sanctions started driving up

Real disposable income was hit by increases in energy tariffs,

petrol prices, public transport prices and communal payments. Real

disposable income growth became positive for a short period, but

turned negative at the end of the year.

Actively monitor competitors’ behaviour and changes, understand

Market growth is mainly driven by the top two, Lenta and few niche

structural changes in the market and implement changes to our own

players in alcohol, dairy and children’s goods. Service levels in a

format.

number of supermarket players improved significantly, especially in

Moscow.

Lenta established a separate sourcing team at the end of 2015.

Lenta has not only grown its local sourcing activity, but also significantly

This resulted in an increase in local sourcing and many long-term

increased direct sourcing from farmers in Russia, and direct imports of

agreements with local growers. There has also been an increase in

fresh and unique dry food (private label) goods.

direct imports, as the new trade law leads to additional benefits from

this route in some instances.

In 2017, Lenta became a member of EMD, the largest retail

purchasing alliance in Europe. This gave the Company access to

private label producers across Europe in 2018, significantly increasing

its private label assortment.

Lenta has a robust and rigorous investment approval system,

Competition for sites from shopping centre developments and peers

combined with a strong post-investment process. Investments over the

remains low, resulting in more locations being available for Lenta.

last two years have consequently been steered largely towards bigger

However, the sluggish rate of economic development means that new

cities, existing and wealthy smaller cities that currently offer better

store ramp-ups may be slower in some locations, particularly smaller

prospects. The Company is experimenting with low capex and lean

cities. Lenta’s more modest growth targets mean the Company is

management models to ensure better profitability of existing stores, as

focused exclusively on the best locations.

well as potentially opening up smaller cities in a profitable way.

Lenta has a history of using big data analysis derived from its loyalty

Developments continue to move very swiftly and peers are making

card for category management and individual promotions. The

increasing use of digital marketing tools.

Company is increasing the use of digital marketing options and has

started an initiative to organise innovation in a structured way.

Lenta has strengthened its organisational capability to manage

innovation effectively by appointing Dmitry Bogod to the new senior

role of Chief Strategy Officer and appointing Sergey Korotkov as Chief

Information Officer, as well as strengthening its marketing department

and allocating increased funding for innovations.

No on

map

Risk

Impact

STRATEGIC RISKS (CONT.)

Major decline in

There may be further major decline in Russia’s

economy

economy, devaluation of the Rouble and inflation,

resulting in reduced sales as customers curtail their

A B

spending.

Increased

competition

Lenta could face markedly increased competition as

a result of competitor desperation, consolidation – or

a major competitor benefiting from more effective

management team or additional funding. This could

lead to a price war, with a resulting impact on Lenta’s

growth and margins.

A B G

Competitive sourcing

Lenta may not be able to gain access to produce at

the ‘lowest price’, due to competitors pursuing vertical

integration or having ‘better’ relationships

with producers.

A E F G

New store location

New store site selection could be compromised due

to the desire to meet rapid growth targets. This could

result in a fall in average revenue per store and Lenta

missing forecast revenue targets.

Lack of innovation

and adaptation

Technological developments move extremely fast. Big

data, social media and digital marketing capabilities

and robotisation are changing the way consumers

gather information and how they are influenced – and

alters their shopping behaviour. Such developments

have a considerable influence on cost of servicing

customers. A lack of flexibility may render our

commercial proposition obsolete, our marketing

ineffective and could lead to reduced competitiveness.

A D E

F G

STRATEGIC REPORT

CORPORATE GOVERNANCE FINANCIAL STATEMENTS APPENDICES

Strategic priorities

that would be affected

Trend

How we manage it

Change in 2018

Actively monitor the main economic indicators and adjust our offer in
our stores as appropriate.

The Russian economy began to deteriorate during the latter half
of 2018.

Food inflation reduced significantly in the first half, but a renewed
Rouble devaluation as a result of new sanctions started driving up
prices again.

Real disposable income was hit by increases in energy tariffs,
petrol prices, public transport prices and communal payments. Real
disposable income growth became positive for a short period, but
turned negative at the end of the year.

Market growth is mainly driven by the top two, Lenta and few niche
players in alcohol, dairy and children’s goods. Service levels in a
number of supermarket players improved significantly, especially in
Moscow.

Lenta has not only grown its local sourcing activity, but also significantly
increased direct sourcing from farmers in Russia, and direct imports of
fresh and unique dry food (private label) goods.

Competition for sites from shopping centre developments and peers
remains low, resulting in more locations being available for Lenta.
However, the sluggish rate of economic development means that new
store ramp-ups may be slower in some locations, particularly smaller
cities. Lenta’s more modest growth targets mean the Company is
focused exclusively on the best locations.

Developments continue to move very swiftly and peers are making
increasing use of digital marketing tools.

Actively monitor competitors’ behaviour and changes, understand
structural changes in the market and implement changes to our own
format.

Lenta established a separate sourcing team at the end of 2015.
This resulted in an increase in local sourcing and many long-term
agreements with local growers. There has also been an increase in
direct imports, as the new trade law leads to additional benefits from
this route in some instances.

In 2017, Lenta became a member of EMD, the largest retail
purchasing alliance in Europe. This gave the Company access to
private label producers across Europe in 2018, significantly increasing
its private label assortment.

Lenta has a robust and rigorous investment approval system,
combined with a strong post-investment process. Investments over the
last two years have consequently been steered largely towards bigger
cities, existing and wealthy smaller cities that currently offer better
prospects. The Company is experimenting with low capex and lean
management models to ensure better profitability of existing stores, as
well as potentially opening up smaller cities in a profitable way.

Lenta has a history of using big data analysis derived from its loyalty
card for category management and individual promotions. The
Company is increasing the use of digital marketing options and has
started an initiative to organise innovation in a structured way.

Lenta has strengthened its organisational capability to manage
innovation effectively by appointing Dmitry Bogod to the new senior
role of Chief Strategy Officer and appointing Sergey Korotkov as Chief
Information Officer, as well as strengthening its marketing department
and allocating increased funding for innovations.

LENTA ANNUAL REPORT AND ACCOUNTS 201852

Principal risks and uncertainties continued

No on
map

Risk

Impact

Strategic priorities
that would be affected

Trend

How we manage it

Change in 2018

OPERATIONAL RISKS

Erosion of standards

Supply availability

IT system error and
data theft

Continued rapid expansion could lead to inconsistent
application of the Company’s commercial and
operational standards. This could result in a
substandard product offer (assortment, price and
quality) or levels of customer service that damage
Lenta’s profitability and brand.

A G

A E F G

D G

A ‘suppliers’ market’ may result in Lenta struggling to
purchase the full range of products required to meet
customer demand, or suppliers simply not delivering
the necessary quantities to Lenta, resulting in lost
sales and customers.

A technical malfunction (e.g. change control), could
result in an inability to operate a key supply chain
system, limiting stock availability or causing pricing
errors, resulting in loss of revenue and – potentially –
long-term customer loyalty. A cyber attack/theft could
lead to the loss of personal or valuable commercial
data, resulting in negative media headlines, loss
of commercial advantage or fines and regulatory
investigation. Greater openness of systems with apps
and personal cabinets increases this risk.

Management
succession

Product quality
issues

Lenta may not be able to attract management with
the necessary skills and experience to support its
growth plans, due to a lack of suitably experienced
management in the country and a reluctance of
international candidates to move to Russia. This could
result in management pressures and inappropriate
execution of the strategy.

A lack of independent supplier on-boarding and
ongoing health and safety audits for high risk products
(e.g. meat, dairy and fish), could result in the sale of
contaminated food. This could cause customer illness
or even loss of life, negative media headlines and a
regulatory investigation.

A F G

Loss of wholesale
transactions

A change in major suppliers’ distribution strategies
may lead to a significant decline in wholesales.

The Company’s comprehensive management development

With slower space growth and an increasing focus on like-for-like

programme ensures that it has high calibre managers for new stores

performance, this risk is declining.

and a consistent, Company-wide understanding of its operational

standards. Lenta also has rigorous in-store quality assurance

processes and commercial KPIs are followed-up on a daily and weekly

basis. Operations and commercial teams collaborate to ensure that

prices, offer and service are aligned with corporate standards and are

adapted to local conditions. Regular senior management meetings

ensure the maintenance of Lenta’s commercial and operational

standards.

See risk 5.

Extensive existing procedures ensure continuity of Lenta’s IT

Lenta operates sophisticated business systems that automate or

operations. A comprehensive external audit of IT controls and cyber

support daily decision-making.

security was conducted in 2016 and its recommendations were

implemented during 2017 and 2018. A comprehensive audit will be

conducted once every two years.

Lenta is a data-rich company – and uses customer data more and more

intensively. Although not financially sensitive, information on customer

shopping habits should not be disclosed to any third party. With the

adoption of various apps and the option for customers to maintain their

own personal data, risks are increasing.

Lenta’s fast growth and high standards mean it is a preferred employer

Lenta became increasingly attractive for employees compared to many

in food retail, which guarantees a constant inflow of new talent. A

other companies because of the career opportunities it offers. The

strong training programme and well-developed annual performance

Company enhanced its management training programmes in 2018,

appraisal processes enable Lenta to identify and develop in-house

extending the Lenta Leader programme to more employees to prepare

talent. Low staff turnover compared to the market shows that it

selected managers for promotion to higher management levels. The

manages this risk well. Lenta has a clear succession plan for senior

Company signed a new retention scheme with the management team

management.

in 2018.

Lenta’s Quality Assurance team works with its commercial team to

The share of locally produced food is increasing. However, safety

identify suppliers that are most likely to deliver substandard goods.

standards in the food industry are often very basic compared to Lenta’s

New suppliers are audited and Lenta provides free advice to suppliers

own, with responsibility often lying more with the retailer than the

that need to improve their standards. A risk-based audit approach is

supplier. The number of stores with own production operations and

applied to all existing suppliers. Self-audit practices are used during

related risks is growing.

in-store production to ensure compliance with standards.

Lenta is exploring new channels and suppliers.

At the end of 2018, Lenta noted that several suppliers were offering

significantly lower wholesale transactions. As a result, the Company

lost a significant amount of wholesale business in Q4 2018 and expects

this to continue in 2019.

STRATEGIC REPORT

CORPORATE GOVERNANCE FINANCIAL STATEMENTS APPENDICES

Strategic priorities

that would be affected

Trend

How we manage it

Change in 2018

The Company’s comprehensive management development
programme ensures that it has high calibre managers for new stores
and a consistent, Company-wide understanding of its operational
standards. Lenta also has rigorous in-store quality assurance
processes and commercial KPIs are followed-up on a daily and weekly
basis. Operations and commercial teams collaborate to ensure that
prices, offer and service are aligned with corporate standards and are
adapted to local conditions. Regular senior management meetings
ensure the maintenance of Lenta’s commercial and operational
standards.

With slower space growth and an increasing focus on like-for-like
performance, this risk is declining.

Supply availability

A ‘suppliers’ market’ may result in Lenta struggling to

See risk 5.

A E F G

Extensive existing procedures ensure continuity of Lenta’s IT
operations. A comprehensive external audit of IT controls and cyber
security was conducted in 2016 and its recommendations were
implemented during 2017 and 2018. A comprehensive audit will be
conducted once every two years.

Lenta operates sophisticated business systems that automate or
support daily decision-making.

Lenta is a data-rich company – and uses customer data more and more
intensively. Although not financially sensitive, information on customer
shopping habits should not be disclosed to any third party. With the
adoption of various apps and the option for customers to maintain their
own personal data, risks are increasing.

Lenta’s fast growth and high standards mean it is a preferred employer
in food retail, which guarantees a constant inflow of new talent. A
strong training programme and well-developed annual performance
appraisal processes enable Lenta to identify and develop in-house
talent. Low staff turnover compared to the market shows that it
manages this risk well. Lenta has a clear succession plan for senior
management.

Lenta became increasingly attractive for employees compared to many
other companies because of the career opportunities it offers. The
Company enhanced its management training programmes in 2018,
extending the Lenta Leader programme to more employees to prepare
selected managers for promotion to higher management levels. The
Company signed a new retention scheme with the management team
in 2018.

Lenta’s Quality Assurance team works with its commercial team to
identify suppliers that are most likely to deliver substandard goods.
New suppliers are audited and Lenta provides free advice to suppliers
that need to improve their standards. A risk-based audit approach is
applied to all existing suppliers. Self-audit practices are used during
in-store production to ensure compliance with standards.

Lenta is exploring new channels and suppliers.

The share of locally produced food is increasing. However, safety
standards in the food industry are often very basic compared to Lenta’s
own, with responsibility often lying more with the retailer than the
supplier. The number of stores with own production operations and
related risks is growing.

At the end of 2018, Lenta noted that several suppliers were offering
significantly lower wholesale transactions. As a result, the Company
lost a significant amount of wholesale business in Q4 2018 and expects
this to continue in 2019.

No on

map

Risk

Impact

OPERATIONAL RISKS

Erosion of standards

Continued rapid expansion could lead to inconsistent

application of the Company’s commercial and

operational standards. This could result in a

substandard product offer (assortment, price and

quality) or levels of customer service that damage

Lenta’s profitability and brand.

A G

IT system error and

A technical malfunction (e.g. change control), could

data theft

D G

purchase the full range of products required to meet

customer demand, or suppliers simply not delivering

the necessary quantities to Lenta, resulting in lost

sales and customers.

result in an inability to operate a key supply chain

system, limiting stock availability or causing pricing

errors, resulting in loss of revenue and – potentially –

long-term customer loyalty. A cyber attack/theft could

lead to the loss of personal or valuable commercial

data, resulting in negative media headlines, loss

of commercial advantage or fines and regulatory

investigation. Greater openness of systems with apps

and personal cabinets increases this risk.

Lenta may not be able to attract management with

the necessary skills and experience to support its

growth plans, due to a lack of suitably experienced

management in the country and a reluctance of

international candidates to move to Russia. This could

result in management pressures and inappropriate

execution of the strategy.

Management

succession

Product quality

A lack of independent supplier on-boarding and

issues

A F G

ongoing health and safety audits for high risk products

(e.g. meat, dairy and fish), could result in the sale of

contaminated food. This could cause customer illness

or even loss of life, negative media headlines and a

regulatory investigation.

Loss of wholesale

A change in major suppliers’ distribution strategies

transactions

may lead to a significant decline in wholesales.

LENTA ANNUAL REPORT AND ACCOUNTS 201854

Principal risks and uncertainties continued

No on
map

Risk

Impact

Strategic priorities
that would be affected

Trend

How we manage it

Change in 2018

The Company monitors changes in legislation and court practice and

The tax authorities appear to take a tougher stance on tax structuring –

reconsiders, when necessary, its tax structure.

and are finding support in the courts for this approach.

Lenta ensures that a reasonable element of its debt is in fixed rates –

After an initial drop, interest rates increased again from summer 2018

or covers upward risk with caps. The Company introduced new rules

on the back of new sanctions and a devaluation of the Rouble. Lenta

to determine the amount of floating rate debt in its portfolio. These

increased fixed rate borrowings in 2H 2018 and extended maturities to

focus on a maximum allowable effect on net income and limits for net

reduce any impact of further rate increases on its cost of debt.

debt/EBITDA and interest covers to be maintained under certain stress

scenarios.

The Company has a diverse portfolio of lenders to reduce its

Lenta significantly increased limits with most of its banks ahead of its

dependency on limited sources. It ensures it has generous limits

funding plans. With interest rates increasing and considering relatively

approved and undrawn debt available. Lenta also conducts regular

short maturities, Lenta decided to borrrow additional money in the

stress tests of projected funding requirements and leverage under a

second half of the year and extended its maturities. As a result, Lenta

variety of negative scenarios to ensure it would have adequate funding

had sufficient cash at hand at the year end to be able to service all debt

– and that leverage would remain within covenants – even with very

repayments in 2019.

pessimistic assumptions.

Construction standards are rigorously controlled. Comprehensive

The reduced number of new store openings means that this risk is

training and clear procedures ensure that all employees have a

stabilising and could go down. There are more experienced employees

thorough understanding of EHS processes. The Audit Committee

to support new stores and enforce proper standards in these new

regularly tracks the EHS status of all operations. A clear investment

stores.

programme to address non-standard situations is agreed and

executed.

Lenta has a clear ethical policy which is widely known and

There were no changes in 2018.

communicated within the Company. Third parties with whom Lenta

cooperates are actively informed about this policy.

FINANCIAL RISKS

Tax risk

Interest rate risk

Source of financing

Russia’s taxation system is changing constantly
and new rules are often ambiguous, leading to
uncertainties in the tax position.

Lenta’s debt portfolio is partly in variable interest rates,
potentially leading to a large increase in interest cost –
and potential breach of covenants

Lenta is moving from a phase of rapid growth requiring
significant additional external financing to a more
moderate growth phase in which expansion can be
fully financed from operating cash flows. Nonetheless,
refinancing of many existing loans will be required.
During disruptions in the banking system or because
of a too high leverage, Lenta may not be able to obtain
the external financing required to roll over its debts.

A B

LEGAL & COMPLIANCE RISKS

Compliance with
regulations and
internal standards
regarding store
operations

Health and safety failings, customer/staff error or
inadequate store construction or system design could
cause a disaster (eg roof collapse), leading to deaths
and injuries, negative media headlines and fines.
Stores could be closed by relevant authorities because
of non-compliance with safety or environmental
regulations.

A B

Lenta employees
involved in unethical
behaviour

Russia’s business environment could lead to an
employee acting unethically (paying or accepting a
bribe) resulting in a breach of anti-bribery regulations,
police investigations and negative media headlines.

A C

VIABILITY STATEMENT

Lenta’s long-term goal is to strengthen its
leadership in the hypermarket segment
while delivering attractive returns to
shareholders and developing a strong
multi-format platform for growth.

As a food retailer, Lenta generates large
amounts of cash daily – in a relatively
predictable way. We prefer to own the
majority of our hypermarkets, as this
allows us to build stores optimised to
our requirements to support our low cost
operations and supply chain.

Our low price/low cost business model is
aimed at generating market-leading sales
densities, by consistently implementing
our strategy of everyday low prices
(EDLP) combined with deep and frequent
promotions. Low cost is driven by the
combination of high sales densities
with efficient business processes and
store designs, which optimise store
operating and supply chain costs. This
is supported by our increasing scale and
sophistication, which enables us
to negotiate improved conditions
with suppliers.

Building our own stores also gives us
better control of the delivery of our
development pipeline. Historically, this
growth was capital intensive, requiring
additional funding over and above our
own cash flow generation. Looking
forward, from 2019 onward the company
expects to expand at somewhat slower
rate, with lower (though still substantial)
capital expenditures, which is expected
to result in positive free cash flow after
capital expenditure and financing costs.

Lenta continues to depend on banks and
the financial markets for a significant
proportion of its funding. Therefore, our
policy is to maintain a strong balance
sheet to ensure the company has access
to capital markets. As part of managing
our viability, we ensure our debt has
relatively long maturities and limited
interest rate risk. The principal risk
affecting Lenta is the impact of significant
changes in consumer spending – either
due to economic developments or
reduced appeal of our commercial offer.
We have seen that our model is quickly
accepted in new cities where we choose
to operate.

However, severe economic disturbances
would impact our business – along with
other retailers – and would therefore
influence our cash generation and debt
service capacity. This in turn will affect

A B

No on

map

Risk

Impact

FINANCIAL RISKS

Tax risk

Interest rate risk

Russia’s taxation system is changing constantly

and new rules are often ambiguous, leading to

uncertainties in the tax position.

Lenta’s debt portfolio is partly in variable interest rates,

potentially leading to a large increase in interest cost –

and potential breach of covenants

Source of financing

Lenta is moving from a phase of rapid growth requiring

significant additional external financing to a more

moderate growth phase in which expansion can be

fully financed from operating cash flows. Nonetheless,

refinancing of many existing loans will be required.

During disruptions in the banking system or because

of a too high leverage, Lenta may not be able to obtain

the external financing required to roll over its debts.

LEGAL & COMPLIANCE RISKS

Compliance with

regulations and

internal standards

regarding store

operations

Health and safety failings, customer/staff error or

inadequate store construction or system design could

cause a disaster (eg roof collapse), leading to deaths

and injuries, negative media headlines and fines.

Stores could be closed by relevant authorities because

of non-compliance with safety or environmental

regulations.

A B

Lenta employees

Russia’s business environment could lead to an

involved in unethical

employee acting unethically (paying or accepting a

behaviour

bribe) resulting in a breach of anti-bribery regulations,

police investigations and negative media headlines.

A C

STRATEGIC REPORT

CORPORATE GOVERNANCE FINANCIAL STATEMENTS APPENDICES

Strategic priorities

that would be affected

Trend

How we manage it

Change in 2018

The Company monitors changes in legislation and court practice and
reconsiders, when necessary, its tax structure.

The tax authorities appear to take a tougher stance on tax structuring –
and are finding support in the courts for this approach.

Lenta ensures that a reasonable element of its debt is in fixed rates –
or covers upward risk with caps. The Company introduced new rules
to determine the amount of floating rate debt in its portfolio. These
focus on a maximum allowable effect on net income and limits for net
debt/EBITDA and interest covers to be maintained under certain stress
scenarios.

The Company has a diverse portfolio of lenders to reduce its
dependency on limited sources. It ensures it has generous limits
approved and undrawn debt available. Lenta also conducts regular
stress tests of projected funding requirements and leverage under a
variety of negative scenarios to ensure it would have adequate funding
– and that leverage would remain within covenants – even with very
pessimistic assumptions.

After an initial drop, interest rates increased again from summer 2018
on the back of new sanctions and a devaluation of the Rouble. Lenta
increased fixed rate borrowings in 2H 2018 and extended maturities to
reduce any impact of further rate increases on its cost of debt.

Lenta significantly increased limits with most of its banks ahead of its
funding plans. With interest rates increasing and considering relatively
short maturities, Lenta decided to borrrow additional money in the
second half of the year and extended its maturities. As a result, Lenta
had sufficient cash at hand at the year end to be able to service all debt
repayments in 2019.

Construction standards are rigorously controlled. Comprehensive
training and clear procedures ensure that all employees have a
thorough understanding of EHS processes. The Audit Committee
regularly tracks the EHS status of all operations. A clear investment
programme to address non-standard situations is agreed and
executed.

The reduced number of new store openings means that this risk is
stabilising and could go down. There are more experienced employees
to support new stores and enforce proper standards in these new
stores.

Lenta has a clear ethical policy which is widely known and
communicated within the Company. Third parties with whom Lenta
cooperates are actively informed about this policy.

There were no changes in 2018.

the level of ambition we are able to apply
to our expansion programme.

Lenta has a long-term planning horizon.
This stretches over the current year
and four consecutive years, in line
with our long-term growth targets. Our
approach to the viability of the business
is also influenced by the construction
cycle of our new stores. We closely
monitor the construction cycle, since
a reduction in capex is the main – and
most secure – method of preserving
cash flow, should operational cash flow
be lower than expected. Cancellation of
planned projects before the commitment
has been made has the most impact,
whereas cancelling store investments
already under construction leads to
capex being spent without any prospect
that it will generate returns in the
near future.

Taking the above factors into account,
the Board reviews the viability of the
business between four and six times
a year, when the management team
proposes capex commitments for new
store construction.

The most important factor affecting the
Company’s access to capital markets to
fund growth is a strong balance sheet.
Hence the focus of the analysis is on
the impact on leverage including lease
adjusted leverage, as well as other ratios
including interest cover and fixed charge
cover which takes rent into account.
Management models the impact of
various risk scenarios on sales, EBITDA
and generation of operating cash flow, as
well as the combined impact of various
scenarios happening at the same time.
The resultant leverage and other key
ratios are reviewed to ensure that in

all cases we remain comfortably below
our bank covenants, giving the Board
confidence that the potential to reduce
investment cash outflows is substantial
enough to remain viable.

The Directors have determined that
the long-term planning horizon over
the existing year and four consecutive
years is an appropriate timeframe for
assessment of the long-term viability of
Lenta. The Directors have assessed the
viability of Lenta over this period, taking
into account the Company’s current
position and the potential impact of the
scenarios described above. Based on
the results of our testing, the Directors
have a reasonable expectation that the
Company will be able to continue in
operation and meet its liabilities as
they fall due during this period.

LENTA ANNUAL REPORT AND ACCOUNTS 201856

Introduction from the Chairman

ROBUST AND EFFECTIVE
LEADERSHIP

Acting with openness, fairness and integrity
is essential to our sustainable success.

DEAR SHAREHOLDERS

My responsibilities as Chairman
of Lenta include the oversight and
promotion of the highest standards
of corporate governance. All aspects
of our business are influenced by
how we conduct ourselves.

This report sets out an overview of our
governance practices; I am pleased
to share it.

BEST PRACTICE
Lenta is not required to comply with
the UK Corporate Governance Code
(‘the Code’). However we believe
that adhering to its provisions – as
far as is reasonably practicable and
appropriate – is in the best interests
of our shareholders.

Recent years have seen us implement
a series of improvements to our
governance model – and we aspire
to be a ‘best practice’ example for
a Russian operating company. We
continue to review and refine our
governance framework on an
ongoing basis.

WE ASPIRE TO BE A ‘BEST
PRACTICE’ EXAMPLE FOR A
RUSSIAN OPERATING COMPANY

John Oliver
Chairman

STRATEGIC REPORT

CORPORATE GOVERNANCE FINANCIAL STATEMENTS APPENDICES

INVESTOR RELATIONS
Engaging with shareholders on a regular
basis is an essential component of
effective corporate governance. Along
with the CEO and CFO, members of
the Board and I met with institutional
shareholders and sell-side analysts
during the year. Our investor relations
team ensures that we are kept fully
appraised of their activities – as well as
any variations in shareholder sentiment
towards Lenta.

LOOKING FORWARD
We are driven by the desire to secure
a sustainable future for Lenta and its
stakeholders. Despite the multiple
challenges and distractions of the
prevailing tough trading environment,
we remain wholeheartedly committed
to maintaining the highest standards
of corporate governance across the
business.

John Oliver
Chairman

OBJECTIVES AND
RESPONSIBILITIES
The principal objective of Lenta’s Board
is to secure the Company’s long-term
success and deliver sustainable returns
for its shareholders. This involves a
range of tasks including establishment
of strategic goals, oversight of financial
and human resources, review of
management performance and
determination of our risk appetite. In
addition, we play a vital complementary
role in providing advice and support to
the executive team as they implement
Lenta’s strategy. We also set the overall
tone for the management culture of
the Company.

Lenta’s governance framework
combines leadership with collaboration
and delegation – and these are the
foundations of our robust decision-
making process. Specific responsibilities
are delegated to the four Board
Committees: Audit, Remuneration,
Nomination and Capital Expenditure.
Details of their remits are set out on
pages 74 to 88, along with their activities
during the year.

Lenta is exposed to a variety of financial,
operational and compliance risks. The
Board is responsible for ensuring that
the measures in place to mitigate these
are both appropriate and effective. The
Company’s risk management framework
is overseen by the Audit Committee.

LENTA ANNUAL REPORT AND ACCOUNTS 201858

Board of Directors

COMMITTED TO
RESPONSIBLE STEWARDSHIP

The Board believes that it has the necessary skills and experience
to provide effective leadership and control of the Company.

Tenure of Non-executive Directors

Board expertise

Board nationality

0-2 years

3-4 years

5-6 years

>7 years

Strategy

Financial

Marketing

Retail

Technology/
digital

1. Russia

2. Netherlands

3. UK

4. US

5. Denmark

STRATEGIC REPORT

CORPORATE GOVERNANCE FINANCIAL STATEMENTS APPENDICES

Board committees:

Capital Expenditure

Nomination

Remuneration

Audit

JOHN OLIVER (59)
Chairman

HERMAN TINGA (61)
Chief Executive Officer

RUD PEDERSEN (49)
Chief Financial Officer

John Oliver was appointed a non-
executive Director of the Company in
October 2009 and has been Chairman
of the Board since 2011.

Experience
John is a former TPG partner and led
TPG’s European Operating Group until
December 2013. Prior to joining TPG in
2006, John spent 15 years with General
Electric. His roles at GE included CEO
of GE Equipment Services Europe and
CEO of GE IT Solutions Europe. Prior to
this, he held various roles at GE Medical
Systems including GM EMEA Services,
VP Global Radiation Therapy and VP
Global Vascular Systems. He started his
career in 1981 with Schlumberger oilfield
services and then worked for Boston
Consulting Group before joining GE.

Other roles
Senior Advisor to TPG and a non-
executive director of Yandex-Market.

Qualifications
John graduated with a BSc in Chemical
Engineering from Imperial College
and with an MBA from INSEAD.

Herman Tinga joined Lenta in 2013
as Chief Commercial Officer and was
appointed CEO in December 2018.

Rud Pedersen was appointed Chief
Financial Officer on 1 April 2019.

Experience
Prior to joining Lenta, Herman was Non-
Food Global Category Management &
Sourcing Director at Metro AG. He has
32 years’ experience in retail and cash
& carry. Herman has held Board and VP
positions with METRO Cash & Carry
in Netherlands and Russia and senior
management roles in Dutch department
stores chain V&D as well as supervisory
roles with Electric City and shoe importer
REMO. At Metro Cash & Carry he
was involved as international Sponsor
in sourcing across Asia and Europe
and helped lead the development of
customer-centric category management
for Metro group.

Qualifications
Herman has a Bachelor’s degree from
the Netherlands Institute of Marketing.

Experience
Before his current role, Rud served
as CFO of Carlsberg Eastern Europe
and was responsible for operations
in five FSU markets. Over the last 25
years he has held a number of senior
management positions in a diverse range
of businesses including FMCG, fashion
and apparel retail and pharma. Rud has
had experience in regional and group-
level roles, including Cadbury (Russia),
Astrazeneca (Belgium), Levi Strauss
(Belgium) and IC Group (Denmark).
He started his career with Deloitte.

Qualifications
Rud holds the Master of Science degree
in International Business Administration
& Commercial Law from Aarhus School
of Business (Denmark). He also has
an EMBA from London Business
School (UK).

LENTA ANNUAL REPORT AND ACCOUNTS 2018
60

Board of Directors continued

JULIA SOLOVIEVA (46)
Independent non-executive Director

STEVEN HELLMAN (54)
Director

MICHAEL LYNCH-BELL (65)
Director

Julia Solovieva was appointed an
independent non-executive Director
of Lenta Ltd in 2018.

Steven Hellman has been a non-
executive Director of Lenta Ltd
since 2017.

Michael Lynch-Bell was appointed an
independent non-executive Director
of Lenta Ltd in 2013.

Experience
Julia has over 20 years’ experience in
the internet search, media, retail and
telecoms sectors. She joined Google
in 2013 as Managing Director/Country
Manager Russia. From 2007 to 2012
she held various senior positions
including the role of President at
Prof-Media, one of Russia’s largest
media groups. Prior to this she held
various corporate development and
other leadership roles in the telecoms
sector and also has experience in
strategy consulting with Booz Allen
Hamilton Netherlands and as Director of
Operations for Mary Kay Russia and CIS.

Experience
Steven has over 25 years’ experience in
banking, legal services and operations.
From 2004 to 2016 he held senior
positions at Credit Suisse in investment
banking, securities sales & trading and
private banking, including six years as a
Managing Director and Regional CEO for
Russia and the CIS. He had previously
held a number of senior roles at Oak
Advisory, Credit Suisse First Boston,
Lehman Brothers, Unisite and Bank
of America. He began his career with
international law firm Latham & Watkins
in Los Angeles and then with Salans,
Hertzfeld & Heilbronn in Moscow.

Other roles
Julia is Director, Business Operations
Emerging Markets EMEA, Google.

Other roles
Steven is currently Chief
Restructuring Officer for FESCO.

Qualifications
Julia holds an MBA from Harvard
Business School and a BA in foreign
languages from Moscow State Linguistic
University.

Qualifications
Steven graduated from the University
of California, Berkeley with a Bachelor
of Arts degree in Soviet Studies and
a Juris Doctor degree.

Experience
Michael was a member of Ernst &
Young’s audit practice from 1974 to
1997, becoming a partner in 1985. As
well as supervising the audit of several
multinational groups, he advised
companies on systems and controls,
corporate governance, risk management
and accounting issues. In 1997, Michael
moved to Ernst & Young’s Transaction
Advisory practice, where he founded
and led its UK IPO and Global Natural
Resources transaction teams. He
has advised many CIS companies
on fundraising, reorganisations,
transactions, corporate governance
and IPOs.

Other roles
Michael is Deputy Chair and Senior
Independent Director of KazMinerals Plc,
Senior Independent Director and Audit
Committee Chairman of Gem Diamonds
Limited, Chairman at Seven Energy
Ltd and a non-executive Director of
Barloworld Limited. He is also active
with charity 21st Century Legacy.

Qualifications
Michael holds a BA in Economics and
Accounting from Sheffield University.
He is an English Chartered Accountant
and was awarded an Honorary Doctorate
of Humane Letters from Schiller
International University.

STRATEGIC REPORT

CORPORATE GOVERNANCE FINANCIAL STATEMENTS APPENDICES

c c

STEPHEN JOHNSON (55)
Senior Independent Director

DMITRY SHVETS (46)
Director

MARTIN ELLING (65)
Director

Steve Johnson has been an
independent non-executive Director
of Lenta Ltd since 2010. He was
appointed as Lenta’s Senior
Independent Director in 2013.

Experience
Steve has over 20 years’ experience in
the retail industry, having been part of the
team that turned around and successfully
sold Asda to Walmart. Whilst at Asda,
Steve held several senior positions
including Trading Director, Commercial
Finance Director and Marketing Director.
Following his time at Asda, he was CEO
of Focus DIY Ltd and of Woolworths
Plc, as well as Sales & Marketing
Director at GUS Plc. He started his
career in management consultancy
with Bain & Co.

Other roles
Steve is currently a non-executive
Director of Big Yellow Group Plc. He also
works with a number of private equity
firms primarily focused on Southern and
Eastern Europe.

Qualifications
Steve graduated from Cambridge
University with an Engineering degree.

Dmitry Shvets was appointed a
non-executive Director of Lenta Ltd
in 2009.

Experience
Prior to joining TPG Capital in 2008,
Dmitry was Operating Director in the
mining and metallurgical company
Norilsk Nickel, where he was in charge
of optimisation of the company’s
key production assets and was also
responsible for the integration of
newly acquired assets. From 1998 to
2004 Dmitry worked for McKinsey &
Company, where he led projects in
industries including consumer goods,
retail, transportation, metals and
mining, and oil extraction in the areas of
strategy, organisation and operational
effectiveness. He also worked for
the Coca-Cola Company in various
marketing roles.

Other roles
Dmitry is the Head of TPG Capital Russia
and is a Director at Fesco Transportation
Group.

Qualifications
Dmitry holds an MBA from Emory
University and graduated with honours
from the Moscow State Institute of
International Relations (‘MGIMO’).

Martin Elling joined Lenta Ltd as a
non-executive Director in 2011.

Experience
Martin started his career with the UN
Food and Agriculture Organization where
he worked for 11 years as a financial
analyst and economist mostly on World
Bank agribusiness and infrastructure.
He then joined the European Bank
for Reconstruction and Development
(‘EBRD’), where he was responsible
for agribusiness, financial services and
energy investments in Ukraine, Romania
and Russia. In 1997, Martin left the
EBRD to concentrate on investment
opportunities in agribusiness, leasing
and B2B services in Ukraine and Russia,
achieving two successful exits in Ukraine
and one in Russia.

Other roles
Martin advises a number of companies
on restructuring and corporate
governance. He also occasionally
advises the African Parks Foundation
on the operational strategy of individual
national parks.

Qualifications
Martin holds an Economics degree
from the University of Amsterdam and a
postgraduate degree from the University
of Wageningen.

LENTA ANNUAL REPORT AND ACCOUNTS 201862

Senior Management team

AN EXPERIENCED
LEADERSHIP TEAM

Under the leadership of the CEO, our highly skilled Senior Management team
implements the strategies set by the Board. With a breadth of experience across
the food retail sector, both on the domestic and international front, their leadership
is vital to the success of Lenta’s day-to-day operations.

STRATEGIC REPORT

CORPORATE GOVERNANCE FINANCIAL STATEMENTS APPENDICES

HERMAN TINGA (61)
Chief Executive Officer

EDWARD DOEFFINGER (62)
Chief Operational Officer (COO)

DMITRY B0GOD (35)
Chief Strategy Officer

Herman Tinga joined Lenta in 2013
as Chief Commercial Officer and was
appointed CEO in December 2018.
Herman’s biography can be found
on page 59.

2
RUD PEDERSEN (49)
Chief Financial Officer1

Rud Pedersen was appointed
Chief Financial Officer on
1 April 2019. Rud’s biography
can be found on page 59.

1. Jago Lemmens served as Chief Financial Officer

until his retirement on 1 April 2019.

Edward Doeffinger joined Lenta in
2011 as Chief Operational Officer.

Dmitry Bogod joined Lenta in 2018
as Chief Strategy Officer.

Experience
Prior to joining Lenta, Edward served as
Deputy General Director of Metro Cash &
Carry Kazakhstan. He has over 30 years
experience in the retail industry. Edward
started his career in Germany where
he held several positions in wholesale
companies and at the Trade Ministry of
the GDR before joining Metro Cash &
Carry in 1991. He held senior operational
and development positions with Metro
Cash & Carry in Hungary and China
before moving to Russia in 2001.

Qualifications
Edward has a degree in Economics from
the Hochschule fuer Oekonomie Berlin.

Experience
Dmitry has over ten years of experience
in strategy consulting for international
companies. Before joining Lenta, Dmitry
was an associate partner in McKinsey’s
Moscow office, where he focused on
strategy and marketing projects for
Russian and international retailers and
FMCGs. Prior to that, Dmitry worked
at Oliver Wyman, advising companies
on consumer related strategy and
operational topics. Prior to consulting,
Dmitry worked with Aon Benfield
Securities, RBC Capital Markets, and
Manulife Financial.

Qualifications
Dmitry has an Honours Bachelor of
Science Degree in Applied Mathematics
from the University of Toronto.

LENTA ANNUAL REPORT AND ACCOUNTS 201864

Senior Management team continued

TATIANA YURKEVICH (46)
Human Resources Director

Tatiana Yurkevich joined Lenta in 2012
as Human Resources Director.

Experience
Prior to joining Lenta, Tatiana served
as Human Resources Director at Fazer
Bakeries & Confectionery, Russia. During
her 17 years in HR management, she
has held senior positions including Head
of HR at United Heavy Machinery Group
and Izhora Plants, and HR Director of
Caterpillar European Fabrications and
Caterpillar Tosno. Tatiana has experience
in leading Six Sigma Programme
implementation as a Deployment
Champion in Caterpillar.

Qualifications
Tatiana has a master’s degree
in International Economics from
St. Petersburg State University as well as
English and German language degrees
from Novosibirsk State Pedagogical
University and an MBA in Strategy from
International Management Institute Link
(the UK’s Open University).

SERGEY PROKOFIEV (50)
Legal and Government
Relations Director

Sergey Prokofiev joined Lenta as
Legal and Government Relations
Director in 2012.

Experience
Prior to joining Lenta, Sergey worked
for Metro Cash & Carry for 11 years in
different positions including Legal and
Compliance Director. He started his
career as an expert interpreter and later
worked as a lawyer in a major Russian
law firm and as a defending attorney at
the Moscow City Bar.

Qualifications
Sergey graduated from the Military
Institute of Foreign Languages (‘VKIMO’)
and the Institute of Law. He holds a PhD
in Law from the Institute of Legislation
and Comparative Law under the
Government of the Russian Federation
and an MBA in Strategic Management
from California State University.

MAXIM SHCHEGOLEV (52)
Integration and Format
Development Director

Maxim Shchegolev joined Lenta
in 2012 as Integration and Format
Development Director.

Experience
Prior to joining Lenta, Maxim held the
positions of Administrative Director
and Director of Trade Development
of O’Key group. He has 15 years’
experience in the retail industry, including
Director of Expansion for O’Key and a
similar position in Start company. He
is responsible for landplot acquisition,
construction and redevelopment of
shopping centres, letting out premises
owned by the Company, and the
development of new stores in leased
premises.

JOERN ARNHOLD (48)
Supply Chain Director

Joern Arnhold joined Lenta in 2011
as Supply Chain Director.

Experience
Prior to joining Lenta, Joern had 13
years’ experience with Metro Group
Logistics (‘MGL’) where he held various
key positions in Germany, Turkey
and Russia. As Managing Director of
MGL in Russia, Joern was responsible
for developing and running logistics
operations for the Metro Group sales
divisions in Russia.

Qualifications
Joern holds a degree in Business
Administration from the Georg August
University Goettingen.

Qualifications
Maxim graduated from St. Petersburg
University of Economics and Finance,
the Russian-Dutch School of Marketing
and the Higher School of the Ministry of
Economic Development and Trade.

STRATEGIC REPORT

CORPORATE GOVERNANCE FINANCIAL STATEMENTS APPENDICES

TATIANA SAFUTINA (48)
Commercial Department Director

JAAP VAN VREDEN (57)
Sourcing and Procurement Director

RUSLAN ISMAILOV (41)
Supermarket Format Director

Tatiana Safutina joined Lenta in
April 2015 as Commercial Director,
Fresh Food.

Experience
Tatiana has more than 20 years’
experience in the Russian food retail
sector. Prior to joining Lenta, she was
with the O’KEY retail chain for ten
years, where she worked her way up
from Head of Deli and Fresh Food in
St. Petersburg to the company’s Head of
Fresh Food. Before that, Tatiana oversaw
the procurement of fresh produce at AKT
Zdorovye and Uniland in St. Petersburg.

Qualifications
Tatiana holds a degree from Saint-
Petersburg State Institute of Technology.

Jaap van Vreden joined Lenta as
Procurement Director in 2015.

Ruslan Ismailov was appointed
Supermarket Format Director in 2019.

Experience
Jaap has over 30 years’ international
experience in the retail industry across
sourcing, procurement, marketing and
brand management. Prior to joining
Lenta, he was a consultant for Li
& Fung and implemented category
and procurement management in
supermarket and hypermarket chains.
Earlier in his career, Jaap worked as
CCO for Modis in Russia and for over
eight years held VP positions in Ahold
USA and CEE.

Qualifications
Jaap holds a diploma in Retail, Economic
and Administrative studies from the
Deltion College in the Netherlands.

Experience
Ruslan has over sixteen years’
experience in retail and FMCG
companies. Prior to joining Lenta in
2007, he held operational positions in
Metro Cash & Carry. In Lenta, Ruslan
previously served as Regional Director,
Chief Operational Officer and
Divisional Director.

Qualifications
Ruslan has a bachelor’s degree in
International Economic Relations
from the State University of Customer
Cooperation, Moscow.

Qualifications
Sergey graduated with honours from
Moscow State University with a Master’s
Degree in Applied Mathematics.

SERGEY KOROTKOV (48)
Chief Information Officer

Sergey Korotkov joined Lenta in 2018
as Chief Information Officer.

Experience
Sergey has extensive expertise in
information technology, supported by
25 years of experience in both Russian
and international companies. Before
joining Lenta, Sergey was most recently
Senior Vice President and CIO at Gloria
Jeans, where he led the company’s
digital transformation. Prior to that, he
was CIO at Dixy Group, where he led
the development and implementation of
its IT strategy. He has also held similar
positions at PepsiCo, Transaero Airlines,
and Bristol-Myers Squibb Russia.

LENTA ANNUAL REPORT AND ACCOUNTS 201866

Corporate Governance Report

CORPORATE
GOVERNANCE REPORT

The Chairman holds one-to-one and
group meetings with the non-executive
Directors – without the executive
Directors being present – four times a
year. The Chairman was not independent
upon his appointment to the Board since,
at that time, he was a partner in TPG
Capital, one of the Company’s major
shareholders.

THE CEO’S RESPONSIBILITIES
INCLUDE:
• leading the development of the

Company’s strategic direction and
implementing the agreed strategy;

• identifying and executing new business

opportunities;

• managing the Group’s risk profile and
implementing and maintaining an
effective framework of internal controls;

• building and maintaining an effective

management team;

• ensuring effective communication with
shareholders and regularly updating
institutional shareholders on business
strategy and performance.

COMPLIANCE WITH
UK CORPORATE
GOVERNANCE CODE

The UK Corporate Governance Code
(‘the Code’) sets out principles and
specific provisions on how a company
should be directed and controlled to
achieve good standards of corporate
governance. As a company incorporated
in the British Virgin Islands (‘BVI’) with
GDRs admitted to the Official List, we
are not required to comply with the
provisions of the 2016 Code. However,
we have chosen to comply with the Code
to an appropriate and practicable extent.

As of the date of this report, the Board
considers that Lenta fully complies in all
material respects with the Code, with the
exception of the following provisions:

• the Chairman of the Board was not
independent on his appointment;

• there is not a majority of independent

directors on the Board;

• the whole Board is available to attend

the AGM but it is not a requirement that
each member attends.

The Board does not consider that the
above areas of non-compliance expose
the Company to any additional risks.

The Code was revised in July 2018
for application to accounting periods
beginning on or after 1 January 2019.
We have begun our own review of the
new Code, and are putting necessary
processes in place to ensure that we will
be in substantial compliance with these
changes during the 2019 financial year.

While BVI law imposes certain general
duties on company directors (including
the duty to act in the best interests
of the company), there is no specific
corporate governance code or corporate
governance regime in the BVI.

LEADERSHIP

The Chairman leads the Board, ensuring
its effectiveness while taking account
of the interests of the Group’s various
stakeholders and promoting high
standards of corporate governance.

There is a clear distinction between the
role of Chairman and CEO. Updated
descriptions of the roles were agreed by
the Board in 2017 and are summarised
as follows:

THE CHAIRMAN’S
RESPONSIBILITIES INCLUDE:
• ensuring the Directors receive

accurate, timely and clear information;

• facilitating the effective contribution
of non-executive Directors and
engagement between executive
and non-executive Directors;

• building an effective Board;

• the induction of new Directors and
further training for all Directors as
required;

• communicating effectively with

shareholders and other stakeholders
and ensuring the Board develops
an understanding of the view of
stakeholders;

• ensuring an annual evaluation of the
Board is conducted and leading the
performance evaluation of the CEO
and non-executive Directors.

STRATEGIC REPORT

CORPORATE GOVERNANCE FINANCIAL STATEMENTS APPENDICES

THE KEY ROLES AND
RESPONSIBILITIES OF
THE SID INCLUDE:
• acting as a sounding board for

the Chairman;

• serving as an intermediary for the other

Directors when necessary;

• being available to assist in resolving

shareholder concerns, should
alternative channels be exhausted;

• holding at least one meeting each

year with the non-executive Directors
without the Chairman present;

• monitoring the training and

development requirements of
Directors;

• overseeing the Chairman’s appraisal

and succession, and

• ensuring that Committee chairmen

conduct performance evaluations of
their Committees.

Stephen Johnson was the Senior
Independent Director (‘SID’) throughout
the year ending 31 December 2018.

He was selected for the role because of
his experience and expertise, both as
an executive and non-executive Director
with retail and international experience.

NON-EXECUTIVE DIRECTORS
The non-executive Directors provide
an essential independent element to
the Board – and a solid foundation
for strong corporate governance.
Although all Directors are equally
accountable under BVI law, the non-
executive Directors fulfil a vital role
in corporate accountability. They
have responsibility for constructively
challenging the strategies proposed by
the executive Directors and scrutinising
the performance of management
in achieving agreed goals and
objectives. They also play a key role
in the functioning of the Board and
its Committees. Between them, the
current non-executive Directors have an
appropriate balance of skills, experience,
knowledge and independent judgement
to undertake their roles effectively.

Audit
Committee

Nomination
Committee

Shareholders’
meeting

Board of
Directors

Senior
Management

Remuneration
Committee

Capital
Expenditure
Committee

MATTERS SPECIFICALLY RESERVED
FOR THE DECISION OF THE LENTA
LTD BOARD OF DIRECTORS
Management, strategy and planning
The Board has responsibility for the
overall management of the Group.
The Board discharges some of its
responsibilities directly and discharges
others through Board Committees and
the Senior Management team. This
includes approval of the strategy, for
which it has collective responsibility,
business plans and budgets, as well as
approval of any material restructuring or
reorganisation and establishment of new
material areas of business. The Board
also reviews performance in light of the
strategy, objectives, business plans and
budgets, ensuring that any necessary
corrective action is taken.

Operations and transactions
This includes approval of significant
capital and non-capital expenditure as
well as approval of significant asset
disposals and any other transactions
that could have a material effect on
the strategic or financial plans of
the Company, including making or
responding to takeover bids.

Capital structure
The Board approves changes relating to
capital structure including allotment of
shares, reduction of capital (except under
employee share plans) and share buy-
backs. It also approves major changes
to the Group’s corporate structure and
the Company’s listings or its status as a
company limited by shares.

Loans and dividends
This includes approval of any substantial
new loan or similar facility (including
financial leases) from third parties or
material amendment to any such facilities
including material loans or similar
facilities made available to third parties.

The Board also oversees the Company’s
dividend policy, declaration of interim
and recommendation of final dividends
and approval of other distributions
to shareholders, as well as any new
pension schemes or significant changes
to existing pension schemes.

Public reporting and controls
The Board approves the preliminary
trading and half-yearly results
announcements as well as the Annual
Report and Accounts. It also approves
appropriate press releases, material
changes in principal accounting policies
and practices, treasury policies and
related risk management strategy and
framework. On recommendation of
the Audit Committee, the Board also
appoints or removes the external auditor.

LENTA ANNUAL REPORT AND ACCOUNTS 2018
REMUNERATION
This includes approving the Directors’
and Officers’ insurance cover and
establishing policies and rules relating
to share-based incentive schemes. The
Board also determines the remuneration
policy for executive Directors and certain
senior executives and approves the
remuneration of non-executive Directors.

CORPORATE GOVERNANCE
The Board reviews its own performance
and that of its Committees and
individual Directors. It is responsible
for determining the risk appetite of the
Group and ensuring maintenance of an
effective system of internal control and
risk management. It also approves and
revises policies, including health, safety
and environment policies, share dealing
rules, code of conduct, anti- bribery
and corruption policy and corporate
governance arrangements.

The Board also calls any general
meetings and approves documents sent
to shareholders. It also recommends any
changes to the Company’s Memorandum
and Articles of Association and
considers material litigation or regulatory
investigations affecting the Lenta Group.
It is responsible for the approval of
political donations and the appointment
of key corporate advisors.

Corporate Governance Report continued

OTHER
The Board also considers other matters
of strategic or reputational importance
likely to have a significant impact on the
Company. When, exceptionally, decisions
on matters specifically reserved for the
Board are required to be taken urgently
between Board meetings, such decisions
shall be taken by a Directors’ written
resolution pursuant to Article 12.9 of the
Articles of Association of the Company.

The Board is responsible for managing
our business and may exercise all of the
business’s powers in doing so, except
to the extent that any such power must
be exercised by the shareholders in
accordance with applicable BVI law
or the Company’s Memorandum and
Articles (‘M&A’). The Board also, by
virtue of direct or indirect shareholdings
in our consolidated subsidiaries, provides
strategic management of our affairs and
those of our consolidated subsidiaries.
The day-to-day operations of our
operating company, Lenta LLC, are
managed by Senior Management
as described below.

BOARD OF DIRECTORS
The Board of Directors manages,
directs and supervises the business
of the Company. The Board oversees
the officers of the Company and
succession planning.

The Board, in some circumstances, may
elect a Director to fill an empty seat on
the Board. The Board may also establish
committees and set their responsibilities.

As shown below, our Directors have a
wide range of complementary skills and
experience. The Board currently consists
of nine Directors, of which three: Michael
Lynch-Bell, Julia Solovieva and Stephen
Johnson are judged by the Board to
be independent Directors according
to the provisions of the UK Corporate
Governance Code.

None of the factors or circumstances set
out in the Code as potential indicators of
non-independence apply to Mr Lynch-
Bell or Ms Solovieva.

Mr Johnson carried out remunerated
consultancy work for Lenta and one of its
Major Shareholders, TPG Capital, prior to
2014. He was remunerated as Chairman
of another TPG Capital investee
company during the period 2015-18,
but currently has no ongoing business
relationship with any TPG entities. The
Board is satisfied that these factors had
no effect on his independence.

Our CEO and CFO, who are also the
General Director and Chief Financial
Officer of Lenta LLC, are Directors,
but are ineligible to serve on Board
Committees. The remaining four
Directors – including the Chairman
– were elected by the shareholders
pursuant to the nomination rights of the
Major Shareholders.

POSITION

NAME

CAT.

DIRECTOR
SINCE

COMMITTEES

AUDIT NOMINATION REMUNERATION CAPEX

Chairman John Oliver

TPG 2009

Sen. INED Stephen Johnson

INED 2010

Director Michael Lynch-Bell

INED 2013

Director1

Julia Solovieva1

INED 2018

Director

Dmitry Shvets

TPG 2009

Director

Steven Hellman

TPG 2017

Director Martin Elling

EBRD 2011

Director

Herman Tinga

CEO 2018

Director

Rud Pedersen

CFO 2019

Audit Committee
(3 Directors)
Read more on page 76

Nomination Committee
(5 Directors)
Read more on page 74

Remuneration
Committee
(5 Directors)
Read more on page 79

Capex Committee
(5 Directors)
Read more on page 87

1. Julia Solovieva was elected to serve as an independent Director at the AGM on 22 June 2018. She replaced Anton Artemyev, who served as an independent Director

and was a member of the Audit, Nomination and Remuneration Committees.

STRATEGIC REPORT

CORPORATE GOVERNANCE FINANCIAL STATEMENTS APPENDICES

BOARD FOCUS DURING
THE YEAR
In 2018, the Board considered a
wide range of matters, including:

• strategy

• budgets and long-term plans for

the Company

• review of estimates of future cash
flows, financing arrangements and
fundraising

• industry and competitive

environment

• responding to the changing

dynamics of the Russian economy

• maintaining and increasing
efficiency of the Company’s
development

• individual business and overall
Group performance and future
capital expenditures

• the review and execution of
mergers and acquisitions
transactions

• development of the Company’s

corporate governance

• financial statements and

announcements

• reviewing reports from its

Committees

• shareholder feedback and reports

from brokers and analysts

• risk management and risk

oversight.

AS PROVIDED UNDER THE M&A:
• the CEO and CFO hold office by virtue
of their positions, and are appointed,
and may be removed by the Board.

• the Major Shareholders may nominate

Major Shareholder-nominated
Directors (and remove such Directors),
and shareholders are obliged to vote to
approve the appointment or removal of
such candidates, as follows:

» TPG Capital: three Directors

including the Chairman whilst it
holds directly or indirectly an interest
in 22.5% or more of the shares; two
Directors including the Chairman
whilst it holds directly or indirectly
an interest in 15% or more of the
shares; one Director whilst it holds
directly or indirectly an interest in
5% or more of the shares;

» EBRD: one Director whilst it holds
an interest in 5% or more of the
shares. When a Major Shareholder’s
shareholding falls below a
threshold listed above, one of the
Directors nominated by that Major
Shareholder must resign no later
than the next general meeting, but
may be re-nominated and re-elected
by a simple majority resolution of the
shareholders. These Directors may
otherwise only be removed by their
nominating Major Shareholder. The
Major Shareholders may not assign
or transfer these nomination rights
to third parties.

As at the date of this report there are four
Major Shareholder-nominated Directors
on the Board. The Major Shareholder-
nominated Directors have a fiduciary duty
under the laws of the BVI to act in the
best interests of our business. Under the
M&A, a Director who has an interest in a
transaction likely to give rise to a conflict
of interest may not vote on any resolution
relating to the transaction, unless fewer
than three Directors are entitled to vote
on such a resolution, in which case each
interested Director may vote provided his
interest is duly disclosed or certain other
exceptions apply.

There should be at least three
independent Directors at all times.
Independent Directors are elected by
a majority resolution of the Board from
a list of candidates proposed by the
Board and considered by the Board to
be independent, taking into account the
criteria for independence set forth in
the Code. Each independent Director
shall be deemed to resign at the first
general meeting following their election
by the Board, at which general meeting
they shall be put forward for re-election.
These Directors may be removed by
a majority resolution of the Board or
by a simple majority resolution of the
shareholders upon a proposal made by
shareholders holding more than 15% of
the shares.

Each of the other Directors (if any)
shall be elected by a simple majority
resolution of the shareholders from
a list of candidates. This will include
those candidates proposed by the
Board, retiring Directors consenting to
being put forward for re-election and
any candidates put forward for election
by shareholders holding at least 15%
of the shares within the timeframe
stipulated in the M&A. These Directors
may be removed in the same way as the
independent Directors.

The Board may appoint a Director to fill
a vacancy (subject to the rights of the
Major Shareholders). In this case, that
Director shall resign at the next general
meeting and be put forward for
re-election.

While the Board has overall accountability,
in order to operate more effectively,
responsibility for specific functions
is delegated to four specialist Board
Committees: Nomination, Audit,
Remuneration and Capital Expenditure.
The responsibility for formulating and,
after approval, implementing strategic
plans and the management of day-
to-day operations is delegated to the
Chief Executive Officer and the Senior
Management team.

LENTA ANNUAL REPORT AND ACCOUNTS 201870

Corporate Governance Report continued

ANTI-BRIBERY AND CORRUPTION
Lenta Group has in place a Compliance
Programme, which includes our Ethics
Policy, Hotline and Corporate Guidelines.
The purpose of the Programme is to
assist in the prevention of unlawful
activities by individuals and to comply
with current Russian legislation and
best practice.

The Board takes a firm stance on
bribery and corruption and attaches the
utmost importance to the Programme in
clarifying the standards expected of all
employees of the Group.

The Foundation of the Programme is
our Ethics Policy, along with the subset
of policies and internal guidelines,
which provide a process for operating
in accordance with the rules in specific
situations. These policies and guidelines
include procedures for dealing with
public officials, giving and receipt of gifts
and hospitality, due diligence processes
carried out on third party business
partners, and policies on conflicts
of interest.

Regular awareness campaigns are
carried out across Lenta, and monitoring
and assurance of processes is
undertaken by both the Internal Audit
Team and external advisers. Anti-bribery
and corruption clauses are included
in contracts with the Group’s business
partners. Lenta’s Compliance Officer and
Ethics Committee investigates hotline
complaints of unethical behaviour. As a
result appropriate measures are taken to
enhance control and compliance with the
Programme.

Lenta LLC undertakes due diligence
checks on potential suppliers, customers,
consultants, agents, distributors and
other business partners to check they
are suitable to do business with, are
reputable and ethical and do not commit
or engage in any form of violations.

During 2018, new employees were
trained on the Compliance Programme.
The Group’s policies were reviewed
and updated during the year. A number
of these policies can be viewed on the
corporate website at http://lentainvestor.
ru/en/about/corporate-governance/
internal-policies.

RISK MANAGEMENT AND CONTROL
The Board has overall responsibility for
risk management and determines the
Group’s risk strategy, assesses and
approves risk appetite and monitors
risk exposure consistent with strategic
priorities. The Board has established a
Group-wide system of risk management
and internal control, which identifies and
enables risk management and the Board
to evaluate and manage the Group’s
principal risks. Due to the limitations
inherent in any system of internal control,
this system provides robust, but not
absolute, assurance against material
misstatement or loss and is designed to
manage rather than eliminate risk. The
effectiveness of the Group’s system of
internal control is regularly reviewed
by the Board, as is the Group’s risk
management framework, with specific
consideration given to material financial.
operational and sustainability risks and
controls, with appropriate steps taken

to address any issues identified. During
2018, no significant internal control
failings were identified.

The Board has authorised the Audit
Committee to oversee the risk
management framework and the
effectiveness of the Group’s financial
reporting, internal control and assurance
systems. Each Board Committee
provides updates on any risks considered
within its remit when providing regular
updates to the Board.

The Board confirms that throughout
2018 and up to the date of approval
of this Annual Report and Accounts,
there have been rigorous processes in
place to identify, evaluate and manage
the principal risks faced by the Group,
including those that would threaten its
business model, future performance,
solvency or liquidity in accordance
with Principle C.2 of the Code and the
Guidance on Risk Management, Internal
Control and Related Financial and
Business Reporting published by the UK
Financial Reporting Council. The Group’s
approach to risk management, the risks
identified and how it profiles these risks is
set out in the Risk management overview
and Principal risks section on pages 46
to 55.

STRATEGIC REPORT

CORPORATE GOVERNANCE FINANCIAL STATEMENTS APPENDICES

INTERNAL AUDIT
Internal Audit provides independent,
objective assurance to the Group
designed to improve the Group’s
operations and safeguard the Group’s
assets and integrity. It advises
management on the extent to which
systems of internal control and
governance processes are appropriate
and effective to manage business risk,
safeguard the Group’s resources and
maintain compliance with the Group’s
policies and legal and regulatory
requirements. It advises on ways in
which areas of risk can be addressed
and provides objective assurance on risk
and controls to senior management, the
Audit Committee and the Board. Internal
Audit’s work is focused on the Group’s
principal risks; the Head of Internal
Audit and the Group Risk function
work together when considering the
appropriate scope and focus of internal
audits. The programme of work of the
Internal Audit department is considered
and approved by the Audit Committee,
subject to any additional suggestions
from the Committee. The audit plan has
space for ad hoc audits as required by
the Committee or management.

Under the Internal Audit plan, a number
of audits take place across the Group’s
operations and functions to identify
areas for improvement of the Group’s
internal controls. Findings are reported
to relevant operational management who
put in place processes for strengthening
controls. Internal Audit follows up on the
implementation of recommendations
and reports on progress to senior
management and to the Audit
Committee.

The Head of Internal Audit reports
regularly to the Chair of the Audit
Committee and attends Audit Committee
meetings four times a year to present the
findings from internal audits.

POLITICAL DONATIONS
It is the policy of the Group not to give
any money for political purposes, nor
to make any donations to any political
organisations. No such expenditure was
incurred during the year.

LENTA ANNUAL REPORT AND ACCOUNTS 201872

Corporate Governance Report continued

BOARD COMMITTEES
BOARD AND COMMITTEE ATTENDANCE DURING THE YEAR
Normally the Board holds at least four meetings in person and a number of ad hoc meetings in person or via teleconference.
We consider that any Director, participating via teleconference, videoconference or other electronic means shall be considered
to be physically present, provided each Director is able to hear all other Directors and, in turn, be heard by all other Directors.

The Board also holds regular update calls during the year, but participation is not mandatory.

2018 attendance

DIRECTOR
John Oliver
Jan Dunning (until his replacement by
Herman Tinga on 7 December 2018)1
Herman Tinga (from his appointment
on 7 December 2018)1
Stephen Johnson
Michael Lynch-Bell
Anton Artemyev (until his retirement
on 22 June 2018) 2
Julia Solovieva (from her appointment
on 22 June 2018) 2
Jago Lemmens 3
Dmitry Shvets
Martin Elling
Steven Hellman

BOARD
7

AUDIT
–

CAPEX
11

NOMINATION
4

REMUNERATION
6

–
7
7

4
7
7
7
7

–

–
12
12

5
–
–
–
–

–

–
11
–

–

–
–
11
11
11

–

–
4
4

3
–
4
–
–

–

–
6
6

4
–
6
–
–

A quorum for Board meetings consists of a minimum of five members of the Board.

CHANGES TO THE BOARD IN 2018
1. Herman Tinga was appointed CEO on 7 December 2018 to replace Jan Dunning who served as CEO up to this date.

2. Julia Solovieva was appointed as an Independent Non-Executive Director at the Lenta AGM on 22 June replacing

Anton Artemyev who served up to this date.

3. Rud Pedersen was appointed CFO on 1 April 2019 to replace Jago Lemmens who served as CFO up to this date.

LENGTH OF SERVICE AND INDEPENDENCE OF NON-EXECUTIVE DIRECTORS
Stephen Johnson (Independent)
Michael Lynch-Bell (Independent)
Julia Solovieva (Independent)

Since 2010
Since 2013
Since 2018

Considered to be independent by the Board
Considered to be independent by the Board
Considered to be independent by the Board

The following Board and Committee meetings are scheduled for 2019.

2019 planned

Meeting
Board call

BOARD
7
5

AUDIT
10
–

CAPEX
12
–

NOMINATION
4
–

REMUNERATION
6
–

The terms of reference for Lenta’s Board Committees were last revised and updated in November 2015. Details are set out in the
Corporate Governance section of the Company website: www.lentainvestor.com/en/about/corporate-governance/internal-policies.

STRATEGIC REPORT

CORPORATE GOVERNANCE FINANCIAL STATEMENTS APPENDICES

EFFECTIVENESS
The appointment of new Directors is
led by the Nomination Committee,
the majority of whose members are
independent non-executive Directors.
Details of the appointments process
can be found on page 75.

All new Directors receive a personalised
induction programme, tailored to
their experience, background and
particular area of focus. This is
designed to develop their knowledge
and understanding of the Company’s
culture and operations. The programme
incorporates a wide-ranging schedule
of meetings with Senior Management
across the Company, comprehensive
briefing materials and opportunities to
visit the Company’s operations, including
spending time at new store openings,
in store and in our distribution network.

All Directors have the opportunity
to increase their knowledge of
the Company through visits to the
Company’s operations and meetings with
senior executives across the business.

The Board makes a careful assessment
of the time commitments required
from the Chairman and non-executive
Directors to discharge their roles
properly. This is discussed with
candidates as part of the recruitment
process and a commitment to the
appropriate time requirements is included
in engagement letters. Directors are
expected to attend every Board meeting
and every meeting of any Committee of
which they are a member, unless there
are exceptional circumstances preventing
their attendance. Scheduled Board and
Committee meetings are arranged at
least a year in advance to allow Directors
to manage other commitments.

The Chairman reviews each Director’s
development needs as part of the annual
performance evaluation process and
puts appropriate arrangements in place
for specific training. The Nomination
Committee reviews the Directors’ skills
and experience as a group against
those needed to oversee and support
the Company’s future operations, and
identifies any gaps. Training is arranged
to develop the knowledge and skills
of the Directors in a variety of areas
relevant to Lenta’s business.

Board papers are, ordinarily, circulated
a week before each meeting to give
the Directors and Committee members
sufficient time to fully consider the
information. All Directors have access to
the Company Secretary and may take
independent professional advice at the
Company’s expense in conducting their
duties.

CONFLICTS OF INTEREST
Directors have a statutory duty to avoid
situations in which they have or could
have a direct or indirect interest that
conflicts or may conflict with the interests
of the Company. A Director has a duty
to disclose to the Board any transaction
or arrangement under consideration by
the Company in which he has a personal
interest. The Board has a procedure for
authorising conflicts or potential conflicts
of interest. Under this procedure,
Directors are required to declare all
directorships or other appointments
outside the Company that could give
rise to a conflict or potential conflict of
interest.

LENTA ANNUAL REPORT AND ACCOUNTS 201874

Corporate Governance Report continued

NOMINATION
COMMITTEE REPORT

Stephen Johnson
Chairman

COMMITTEE MEMBERS
Stephen Johnson
(Independent, Chairman)

Michael Lynch-Bell
(Independent)

Julia Solovieva
(Independent)

John Oliver
(Major Shareholder nominee)

Dmitry Shvets
(Major Shareholder nominee)

The Company was also able to promote
Tatiana Safutina from her position as
Commercial Director, Fresh Food to the
role of Commercial Department Director.

The Committee recommended the
appointment of a new independent
non-executive director to replace Anton
Artemyev, who was retiring at the 2018
Annual General Meeting. The Committee
appointed SpencerStuart (which has
no connection with the Company) as
external search consultant to identify
candidates for the non-executive role
and Julia Solovieva was identified
and chosen. We are delighted to
welcome Julia to the Board and as a
member of the Audit, Nominations and
Remuneration committees with effect
from 22 June 2018.

In addition to these important Board
and senior management changes, the
Committee focused on several other
issues. These included monitoring the
success of the performance appraisal
system, continuing to ensure that the
Company’s succession planning process
is fit for purpose and also ensuring that
the Board’s performance was appraised
and developed.

DEAR SHAREHOLDERS

2018 was a busy year for the Nomination
Committee. During the year we
undertook the planned replacement
of our Chief Financial Officer Jago
Lemmens. The Committee put in place
a thorough external search process
using external search firm Egon Zehnder
(which has no connection with the
Company), and created a high quality
short list of well-qualified candidates.
Following a rigorous interview process,
in September 2018 the Board gave
unanimous approval for the Committee’s
recommendation to appoint Rud
Pedersen as CFO. Rud joined Lenta on
1 April 2019 following completion of his
notice period. Following the decision to
appoint Rud, the Nomination Committee
put in place suitable handover
arrangements with Jago Lemmens to
ensure an orderly transition.

On 27 November 2018 Jan Dunning,
Chief Executive Officer of Lenta,
informed the Board of his intention to
resign forthwith. As this decision was
unexpected, the Nomination Committee
immediately approached the previously
identified internal candidates using the
Company’s well-established succession
planning process.

Following a brief process, the Committee
was delighted to recommend to the
Board the appointment of Herman Tinga,
formerly Lenta’s Commercial Director,
as the new CEO of the Company. The
Board approved Herman’s appointment
on 7 December 2018.

STRATEGIC REPORT

CORPORATE GOVERNANCE FINANCIAL STATEMENTS APPENDICES

BOARD PERFORMANCE
Lenta’s policy is to assess Board
performance annually, with an external
review every three years. An external
Board assessment was carried out in
2018 by Prism CoSec (which has no
connection with the Company). The
review was completed just before the
end of the year; a draft report is currently
being considered by the Nominations
Committee.

Stephen Johnson
Chairman
Nomination Committee

PERFORMANCE APPRAISAL
SYSTEM
Lenta has a very well developed
system for performance appraisal
across all functions in the business.
This is embedded in the way the
Company works and is used to manage
performance and identify high achievers
with development needs and the
potential to move into more senior roles.

Lenta’s appraisal system plays an
important part in the Company’s
succession planning process. The
Committee receives regular reports on
the conduct of the appraisal process
and the outputs from appraisals for all
levels of employees, with particular
focus on the more senior levels of the
management team.

During the year Lenta promoted around
3,800 people within the business, as well
as providing 2.2m man hours of external
training and development investment for
its employees.

SUCCESSION PLANNING
Lenta continues to be able to offer
significant and exciting opportunities
for its high-performing employees. The
recent internal promotions of Herman
Tinga as CEO, Tatiana Safutina as
Commercial Department Director and
Ruslan Ismailov as Supermarket Format
Director are testament to the robust
approach that Lenta takes to succession
planning. One of our key objectives is
to ensure there are ample opportunities
for talented people to progress their
careers at Lenta – and that any vacant
positions can be filled with the minimum
of disruption to the business.

Our approach is kept under constant
review within the business and is
regularly examined by the Committee.

ROLE AND RESPONSIBILITIES
The key roles and responsibilities of
the Nomination Committee include:

• ensuring that proper procedures

are established for the nomination,
selection and training of the
Company’s Directors and Senior
Management;

• keeping under review the size,
structure, balance of skills,
experience, independence,
knowledge and general diversity
of the Board to ensure the balance
and composition of the Board
and its Committees remains
appropriate;

• making recommendations to the
Board on Directors’ conflicts of
interest for authorisation, where
appropriate;

• making recommendations to the
Board regarding the appointment
of new Directors, and identifying,
interviewing, selecting, and
determining the independence of
candidates with suitable industry
or key competency experience;

• reviewing Board level, Senior

Management and Company-wide
succession planning and other
human resources-related matters;

• reviewing the leadership needs
of the Company, both executive
and non-executive, to ensure
the continued ability of the
organisation to compete in the
marketplace.

A copy of the Committee’s full
terms of reference is available on
the Company’s website: http://
www.lentainvestor.com/en/about/
corporate-governance/internal-
policies.

The Human Resources Director may
be invited to attend any meeting
of the Committee, except for
portions of the meetings where their
presence would be inappropriate,
as determined by the Committee
Chairman. There are four Committee
meetings scheduled for 2019.

LENTA ANNUAL REPORT AND ACCOUNTS 201876

Corporate Governance Report continued

AUDIT COMMITTEE REPORT

Michael Lynch-Bell
Chairman

COMMITTEE MEMBERS
Michael Lynch-Bell
(Independent, Chairman)

Julia Solovieva
(Independent)

Stephen Johnson
(Independent)

DEAR SHAREHOLDERS

I am delighted to present the report
of the Audit Committee. It sets out the
Committee’s responsibilities, how it
discharged its duties during the year
and the key matters discussed at our
meetings.

At the heart of the Committee’s remit
is the need to provide confidence
in the integrity of Lenta’s processes
and procedures in relation to internal
control, risk management and corporate
reporting. As part of our commitment
to good corporate governance, we aim
to do this in line with international best
practice.

In 2018, the Committee reviewed the
Company’s financial results, including
significant financial reporting estimates
and judgements, as well as the financial
disclosures in the interim management
statements. It also monitored the
Company’s system of internal control
and management of the Company’s
risks and oversaw the relationship with
the external auditor and with the internal
audit function.

We reviewed the reports from our risk
manager and the recommendations
for changes to our risk matrix. As
the Company has made a long-term
viability statement in this Annual

Report, the Committee also considered
management’s assumptions and
disclosures relating to it.

We continued to monitor the
implementation of the recommendations
from the IT security review completed
during 2018.

With the appointment of our new Head
of Internal Audit we took the opportunity
to review the internal audit programme
and the resources it needs. We also
oversaw the implementation of an
updated reporting and recommendation
monitoring framework.

We are very grateful for the assistance
of the Company’s external auditor
Ernst & Young (‘EY’) in this capacity.
EY contributes a further independent
perspective on certain aspects of the
Company’s financial control systems
and reports both to the Audit Committee
and directly to the Board.

Looking ahead to the coming year,
the Committee will maintain its focus
on the audit and assurance processes
within the business. These include the
monitoring of key risks as well as tax
developments that might affect the Group.

In conjunction with management, the
Committee will also review and assess
the implications of new and proposed
accounting standards.

Julia Solovieva replaced Anton Artemyev on the Committee following her
appointment as a Director at the AGM in June. The membership of the
Committee is fully Code compliant and includes retail, liquidity, financial, risk
management and geographic expertise. The Chairman is deemed to be the
member with recent and relevant financial experience.

The Audit Committee supports the Board in its responsibilities with regard
to corporate reporting and risk management and internal controls, as well as with
maintaining a relationship with the Company’s auditor. The Committee’s activities
include the review of internal control systems and risk management, compliance
with financial reporting requirements and the scope, results and cost effectiveness
of the external audit and the internal audit function.

STRATEGIC REPORT

CORPORATE GOVERNANCE FINANCIAL STATEMENTS APPENDICES

ROLE AND RESPONSIBILITIES
The key roles and responsibilities of
the Audit Committee include:

• monitoring and challenging,

where necessary, the integrity of
the financial statements and half
yearly results, interim management
statements and any other formal
announcement relating to financial
performance;

• reviewing and challenging,

where necessary, the actions
and judgements of management,
taking into account the views of the
external auditor, in relation to the
Company’s financial statements,
strategic review, financial review,
governance statement and half-yearly
reports, including the going concern
assumption and the long-term
viability statement;

• reviewing the Company’s internal

controls, including financial controls
and updated risk management
systems;

• reviewing the Company’s IT security
measures and IT control systems

• reviewing the content of the Annual

Report and Accounts when requested
by the Board;

• reviewing reports on changes in

tax legislation and management’s
proposed response

• reviewing the Company’s significant

insurance arrangements;

• reviewing the Company’s treasury

policy;

• reviewing the Company’s procedures
for detecting and preventing bribery
and fraud;

• reviewing the Company’s compliance
with the UK Corporate Governance
Code;

• overseeing and reviewing the Internal
Audit function, its terms of reference,
effectiveness, plan, budget and
reporting;

• reviewing the Company’s speak-

up policy and receiving reports on
matters raised via the speak-up
facilities;

• recommending the appointment of
the external auditor and overseeing
the relationship;

• reviewing the terms of reference of
the Committee, the results of the
performance evaluation and the
training requirements of Committee
members;

• reporting to the Board on how the
Committee has discharged its
responsibilities.

A copy of the Committee’s full terms of
reference is available on the Company’s
website: http://www.lentainvestor.
com/en/about/corporate-governance/
internal-policies.

The Audit Committee considered a
number of issues during the year,
taking into account the views of the
Company’s management, its tax
advisors and the external auditor.

The Audit Committee’s main
responsibilities involve overseeing,
monitoring and reviewing the
Company’s financial reporting, internal
control and assurance processes.
Although the Committee’s terms of
reference set out very specific duties,
it serves a much wider purpose in

reassuring shareholders that their
interests are properly protected with
regard to the Company’s financial
management and reporting.

The Committee regularly reports to
the Board on the matters it discusses.
The Board has delegated responsibility
to the Committee for reviewing the
Company’s procedures and system
of internal control in relation to
risk management, with a focus on
the methodology used by senior
management. It also oversees the
internal and external audit processes
that report to it.

The Chairman, CEO and CFO
are invited to attend all Committee
meetings. The Company Secretary,
Head of Internal Audit, Chief Legal
Counsel and the external auditor are
also usually invited to attend meetings,
with the exception of those called solely
to approve the financial disclosures
in Company announcements made
in respect of the full year preliminary
results and March and September
quarters.

Other members of senior management
are invited to attend to discuss any
matters specifically relevant to them. At
the end of each meeting, where they
are in attendance, the Committee offers
both the external auditor and Head of
Internal Audit the opportunity to meet
with them without members of senior
management being present.

EXTERNAL AUDITOR
The Committee approved the terms
of engagement of the external auditor,
the fees paid to it and the scope of
work undertaken. It also reviewed the
performance and effectiveness of the
external auditor in respect of the year
ended 31 December 2018.

Consideration was given to the
performance, objectivity, independence,
resources and relevant experience of
the external auditor. In this process, the
Committee reviewed a report from the
external auditor on all relationships that

might reasonably have a bearing on
its independence and the audit partner
and staff’s objectivity, and the related
safeguards and procedures.

The Committee also performed its annual
review of the policies on the external
auditor’s independence and objectivity,
their use for non-audit services and the
recruitment of former employees of the
external auditor.

To safeguard auditor objectivity and
independence, the Committee oversees
the process for the approval of all
non-audit services provided by EY.

Consideration is given to whether it is
in Lenta’s best interests that non-audit
services are purchased from EY.

The Committee received reports on the
findings of the external auditor during its
half yearly review and annual audit.

It reviewed the recommendations made
to management by the external auditor
and management’s responses – as well
as the letters of representation to the
external auditor.

LENTA ANNUAL REPORT AND ACCOUNTS 201878

Corporate Governance Report continued

Inventories and inventory allowances
The Committee reviewed the accounting
for inventories and the recognition of
write-downs during the period. The
review took into consideration the
calculation of the cost of inventories, the
identification of slow-moving inventories
and the reasons why shrinkage had
occurred. Based on this review, the
Committee agreed with the accounting
treatment and disclosures adopted by
management.

Capital construction
The Committee examined the accounting
for capital construction including the
recognition of direct costs incurred,
the allocation of directly attributable
overheads and land lease expense.
The review included a consideration
of potential fraud risk, the construction
tender process and the acquisition or
leasing of land. The Committee agreed
with the accounting treatment and
disclosures adopted by management.

Ethics Committee
The Committee reviewed the work of
the Ethics Committee; in particular its
report on the Company hotline. The
Audit Committee approved measures
taken by management to mitigate risks of
impropriety and hold culpable employees
to account.

Taxation
The Committee received regular
updates on tax developments in
Russia from management and the
Company’s advisors, together with
management’s interpretation of the
impact of current tax legislation on the
Company. The Committee concurred
with management’s judgement on
the positions adopted and the related
disclosures.

Going concern
The Committee reviewed management’s
adoption of the going concern basis of
accounting. Management had taken
into account the Company’s financial
position, available borrowing facilities,
loan covenant compliance, planned store
opening programme and the anticipated
cash flows and related expenditures
from our retail stores. The Committee
considered the position taken by
management and, taking into account
the external auditor’s review, concluded
that management’s recommendation to
prepare the financial statements on a
going concern basis was appropriate.

The annual report also includes a long-
term viability statement, which can be
found on pages 54-55. The Committee
considered the statement and approved
management’s disclosures.

Share-based payments
The Committee reviewed the
considerations made by management
in relation to the accounting for
remuneration received by certain
employees in the form of share-based
payments. In addition, management
had evaluated the required disclosures
for inclusion in the financial statements.
Having challenged the appropriateness
of key assumptions used by
management, the Committee agreed
with management’s assessment and
disclosures.

Michael Lynch-Bell
Chairman
Audit Committee

As indicated in last year’s annual
report, we put the audit out for tender
for audits commencing with the 2019
financial year. Following a competitive
tender Ernst & Young LLC (EY) was
reappointed as the Company’s auditor
for the following 7 years.

EY will be put forward for reappointment
as the Company’s auditor by
shareholders at the 2019 AGM.
Professional fees billed by Ernst &
Young LLC are shown in the table below.

AUDITOR’S FEES
(Ernst & Young LLC)

Audit of consolidated
financial statements
Consulting and other
non-audit services
Total fees

2018
‘000 RUB

2017
‘000 RUB

27,510 23,628

3,613

8,971
31,123 32,599

SIGNIFICANT ISSUES CONSIDERED
BY THE AUDIT COMMITTEE
The significant issues – and how they
were addressed – are set out below.

Impairment
An assessment of indicators of
impairment at our poorly performing
stores was made, and none were found
that would have led to a provision against
their underlying value. Management did
propose that certain assets should be
written off and the Committee agreed
with their recommendation.

Suppliers’ allowances
The Committee reviewed the accounting
for and recognition of suppliers’
allowances received for the provision
of services. The review included
consideration of the types of allowances
received, the period of coverage and
the timing of receipt. Based on this
review, the Committee is satisfied that
the allowances are recognised in the
period in which they are earned and that
appropriate disclosure has been made in
the financial statements.

STRATEGIC REPORT

CORPORATE GOVERNANCE FINANCIAL STATEMENTS APPENDICES

REMUNERATION
COMMITTEE REPORT

ROLE AND RESPONSIBILITIES
The key roles and responsibilities
of the Remuneration Committee
include:

• determining and recommending
the broad policy for executive
remuneration within the Group;

• determining, on behalf of the

Board, the remuneration of the
executive Directors and senior
management;

• approving the design of, and
determining targets for any
performance-related plans;

• making recommendations
regarding employee equity
participation schemes;

• determining the policy for and

scope of service agreements and
termination payments.

A copy of the Committee’s full terms
of reference is available on the
Company’s website:
http://www.lentainvestor.com/
en/about/corporate-governance/
internal-policies.

DEAR SHAREHOLDERS

The principal task of the Remuneration
Committee is to ensure that Lenta is
able to recruit, motivate and retain the
right talented and experienced people,
enabling it to continue delivering its
growth plans as well as managing
successfully an increasingly large and
diverse business.

The Committee seeks to do this in
several ways:

Salaries: Base salaries are kept
under review with internal and external
benchmarking. The Committee works
closely with the management team to
ensure that necessary salary increases
are identified and implemented in a
timely manner.

Annual Bonus: Lenta operates a
Company-wide annual bonus plan. The
KPIs for this plan are set annually by
the Committee in consultation with the
CEO and HR Director. The Committee
is mindful that the annual bonus
payments are not just a reward for
great performance but also a significant
element in retaining and recruiting good
people. During 2018, performance
against the 2017 bonus plan was
assessed and an overall payment of
53% of the maximum was agreed.

Long-Term Incentive Plans: The
Company operates a number of long-
term incentive plans for both senior
and middle management. These are
designed to ensure reward for – and
retention of – managers against a set of
performance criteria, which are aligned
with shareholder interests.

Stephen Johnson
Chairman

COMMITTEE MEMBERS
Stephen Johnson
(Independent, Chairman)

Michael Lynch-Bell
(Independent)

Julia Solovieva
(Independent)

John Oliver
(Major Shareholder nominee)

Dmitry Shvets
(Major Shareholder nominee)

The work of the Remuneration
Committee is set out on pages 79 to
86. The interests in the Company’s
share capital held by Senior
Management and the remuneration
received by the Chairman and the
non-executive Directors are set out
on pages 84 to 85. The Directors’
interests in the Company’s share
capital are set out on page 85.

LENTA ANNUAL REPORT AND ACCOUNTS 201880

Corporate Governance Report continued

As a result of this Review the Committee
has decided to make a number of
changes to the LTI programme for both
senior and middle management to
assure long-term employee retention and
to keep alignment between management
and shareholder interests.

1. From 2019 the LTI programme,

vesting in 2022, will consist of two
equal parts, one shares and one
cash based. The total LTIP allocation
amount will remain the same as a
percent of salary.

2. To ensure retention of key managers
between 2019 and 2022, two types
of cash-based Special Awards were
approved in addition to share-based
LTIP. These awards are one-off and
are designed to ensure that historic
share and LTIP awards made to senior
management retain their effectiveness.

3. For senior management the

operational performance criteria will
be removed for the 2016, 2017 and
2018 LTIPs. As these awards are
all in shares, the ultimate monetary
value of award still depends on the
share price dynamic, thus keeping
management interests aligned with
those of shareholders. All other
criteria, particularly those relating to
vesting and therefore retention have
been retained.

OVERVIEW OF LONG-
TERM INCENTIVE
PROGRAMME FOR SENIOR
MANAGEMENT IN 2018
SHARE-BASED AWARDS
The Long-Term Incentive Programme
for Senior Management was launched
in 2016, first vesting expected in 2019,
in order to ensure retention of the
Senior Management team beyond the
Management Incentive Programme
vesting period (which vests in
2018/2019).

LONG-TERM INCENTIVE
PROGRAMME FOR SENIOR
MANAGEMENT

The Company operates a number of
long-term incentive plans for both senior
and middle management.

During the year the Committee spent
considerable time reviewing its approach
to each of these remuneration elements.
This review focused on a number of
areas. First, was the Lenta programme
competitive when measured against
similar Russian retailers; and second, did
the programme still achieve its aims of
both retaining important colleagues and
incentivising strong performance?

The review concluded that the Lenta LTI
programme does indeed require some
changes in order to continue to achieve
its aims. Firstly, the Lenta LTI programme
is entirely based on performance shares.
There is no guaranteed cash element.
An analysis of LTI programmes of
Russian retail companies demonstrated
that majority of them choose a deferred
cash-based solution in current macro
economic conditions (Korn Ferry
Compensation Report for Russian retail
sector 2018). The Lenta plan needs to
incorporate a cash element as a result.

Secondly, the Lenta LTI programme has
3 layers of performance hurdle – first of
all the vesting of the LTIs over 3 years
is dependent on certain operational
performance criteria being hit; second,
the individual manager has to remain in
post for the 3 year period; and third the
ultimate value of the award is entirely
dependent on the share price at the point
of time of vesting. Given the high volatility
in short-term operating metrics in the
Russian retail market resulting from the
impact of multiple external factors outside
of the management team’s control and
the fact that medium-term share price
performance has become decoupled
from actual operational results, the
Review concluded that the original
retention objective of the programme
was no longer being achieved as a result
of the high uncertainty about quantum
of award at the end of 3 years. This
also requires some amendment to the
programme.

Starting from 2018, the programme
operates according to the following rules:

• shares are granted annually with a

vesting period of three years;

• the amount of shares depends on job
grade (percentage of annual salary),
share price and individual performance
evaluation of the manager;

• a manager’s eligibility to receive shares
is conditional on his or her employment
with Lenta and compliance with certain
covenants, including confidentiality,
non-competition and non-solicitation.

The LTIP 2018 with a vesting date in
2021 was approved, granting a total
of 179,147 shares, which represents
around 120% of the annual salary of this
group (including Currency Adjustment
Pay).

SPECIAL ONE-OFF AWARD 2018
This programme is cash based and
aimed to protect the value of the
long-term incentives and retain Senior
Management.

Special Management Award Programme
was granted in Q4, 2018 to 7 key senior
managers on the following conditions:

• full vesting period is 4 years, each year

vesting a certain percentage.

• the amount of award was defined

individually and fixed in cash;

• a manager’s eligibility to receive shares
is conditional on his or her employment
with Lenta and compliance with certain
covenants, including confidentiality,
noncompetition and non-solicitation.

STRATEGIC REPORT

CORPORATE GOVERNANCE FINANCIAL STATEMENTS APPENDICES

2018 ANNUAL BONUS
SCHEME APPROVAL

The Committee approved the bonus
KPIs, target and payout scales for 2018.

SALARY REVIEW IN COMPARISON
TO LABOUR MARKET
The Committee reviewed the labour
market situation and salary dynamics
in Russia, based on Mercer and Hay
surveys, it was decided not to apply an
overall company salary indexation in
2018.

Specific store level positions in different
regions and key employees in head
office received salary increases based
on competitiveness vs the labour market,
contributing to 3% increase of base
salary. The Board and management
believe salary and benefits are
competitive with existing market.

OVERVIEW OF LONG-TERM
INCENTIVE PROGRAMME
FOR MIDDLE MANAGERS
2018
SHARE-BASED PROGRAMME
2018 was the second year in which the
Long-term incentive programme for
middle managers began vesting. Forty
seven managers were allocated a total
of 21,800 shares.

The Committee also approved a new
annual long-term incentive plan with
a vesting period of three years for 86
key middle managers. The total value
of this award is 69,279 shares, which
represents around 45% of this group’s
annual salary. The allocation of the
LTIP is linked to overall Company
performance in the previous year and
individual performance evaluation.

SPECIAL ONE-OFF AWARD FOR
MIDDLE MANGERS
As explained earlier, to ensure the
retention of key managers, special one-
off cash awards were approved. For
middle managers the programme was
offered to high performers critical for
business.

The Special Award Programme was
granted in Q4, 2018 to 56 key middle
and upper managers on the following
conditions:

• full vesting period is 3 years, vesting

in equal parts each year.

• the amount of award was defined

individually and fixed in cash;

LENTA ANNUAL REPORT AND ACCOUNTS 201882

Corporate Governance Report continued

SUMMARY OF SENIOR MANAGEMENT TEAM REMUNERATION POLICY

Element

Principles

Base pay

Base pay is reviewed annually by the Remuneration Committee,
considering a number of factors, including:

• Individual performance evaluation

• Salaries in comparable roles in the same industry and activities

scope.

Currency
adjustment

According to Russian legislation, base salaries are fixed in Roubles,
which leads to a negative pay trend for senior management with a drop
in the RUB/EUR rate. To maintain competitive pay levels, currency
adjustment pay is used as decided by the Committee in 2014.

Benefits

• Company car, for some Directors with a driver

• Medical insurance with family coverage

• Relocation support

• Partial reimbursement of school fees for expatriates’ children

attending school in Russia.

Annual
bonus

All senior management are eligible for the annual bonus scheme, which
is a discretionary, non-contractual scheme.

Management
incentive
plan

Performance is measured against quantifiable financial targets, which
are set at the start of the year and approved by the Remuneration
Committee.

In addition to financial targets, the bonus may be affected by the
individual performance evaluation, which may increase or decrease
the payout.

Annual bonus is paid on the condition that a ‘threshold’ level of EBITDA
is achieved.

Six senior managers are eligible for the share-settled Management
Incentive Plan (MIP).

Participating managers are allocated a specified number of phantom
shares, in relation to which their entitlement under the MIP is
calculated.

The plan is based on share price dynamics vs. IPO price in RUB and
is subject to a hurdle reference price.

The plan has fixed vesting periods.

A senior manager’s eligibility to receive shares is conditional on his or
her employment with Lenta and compliance with certain covenants,
including confidentiality, non-competition and nonsolicitation covenants.

Opportunity

There is no set maximum or
minimum, it is in line with labour
market trends and/or individual role
scope changes.

Currency adjustment pay is the
difference between individual salary
calculated in Euro at recruitment
and current RUB salary expressed
in Euro. For some senior managers,
only partial compensation is applied.

There are maximums set for each
compensation element depending on
the job grade.

Total maximum annual bonus
opportunity for senior management is
120% of annual base pay.

There is no maximum set for the MIP;
actual reward depends on the number
of phantom shares allocated and
share price development.

Long-term
incentive
plan

All senior managers are eligible for the share-based long-term incentive
plan (LTIP) as decided by the Remuneration Committee.

LTIP is a conditional grant of shares depending on the job grade, base
salary share price.

Shares vesting depend on Company performance during the three
years following the allocation.

Vesting period is three years from the grant date.

A senior manager’s eligibility to receive shares is conditional on his or her
employment with Lenta and compliance with certain covenants, including
confidentiality, non-competition and non-solicitation covenants.

Maximum LTIP annual value is 150%
of annual salary; the actual amount
varies between senior managers
based on their job grade and
individual performance evaluation.

Special
Management
Award
Programme

Participants of MIP (6 senior managers) are eligible for one time award
in the form of deferred cash award conditioned on his/her employment
with Lenta and compliance with certain covenants.

Set individually

STRATEGIC REPORT

CORPORATE GOVERNANCE FINANCIAL STATEMENTS APPENDICES

PAY STRUCTURE OF CEO, CFO AND SENIOR MANAGEMENT TEAM

Chief Executive Officer (Herman Tinga)

CEO total cash reward (fixed vs. variable target)

Minimum

100%

Target

28.6%

42.9%

Maximum

27%

32.4%

40.5%

Base salary

Annual incentive

Long-term incentive (LTIP)

Fixed

Base Salary
28.6%

Variable

Annual incentive
28.6%
Long-term
42.9%

Chief Financial Officer (Rud Pedersen)

CFO total cash reward (fixed vs. variable target)

Minimum

100%

Target

31.3%

37.5%

Maximum

29.4%

35.3%

Base salary

Annual incentive

Long-term incentive (LTIP)

Fixed

Base Salary
31.3%

Variable

Annual incentive
31.3%
Long-term
37.5%

Other Senior Team members

Other Senior Team members total cash reward

Minimum

100%

Target

32.3%

35.5%

Maximum

30.3%

36.4%

33.3%

Base salary

Annual incentive

Long-term incentive (LTIP)

Fixed

Base Salary
32.3%

Variable

Annual incentive
32.3%
Long-term
35.5%

LENTA ANNUAL REPORT AND ACCOUNTS 201884

Corporate Governance Report continued

The key terms of each member of Senior Management’s participation in the MIP are set out below:

MANAGER
Herman Tinga
1st grant
2nd grant
3rd grant

Edward Doeffinger
Joern Arnhold
Sergey Prokofiev
Maxim Schegolev
Tatiana Yurkevich

NUMBER OF
PHANTOM SHARES

BASE PRICE
(RUB)

HURDLE
REFERENCE PRICE
(RUB)

HURDLE
REFERENCE DATE

VESTING PERIOD
COMMENCEMENT
DATE

102,823
35,000
42,000
102,823
85,686
35,988
35,988
35,988

1,516
1,516
2,214
1,516
1,516
1,516
1,516
1,516

1,375
1,375
1,375
764
764
1,375
1,375
1,375

01.04.2013
01.04.2013
01.04.2013
23.09.2011
23.09.2011
01.04.2013
01.04.2013
01.04.2013

01.04.2013
01.04.2014
01.04.2019
01.04.2012
01.04.2012
01.04.2013
01.04.2013
01.04.2013

Summary of MIP conditions by two allocation waves is shown below

NUMBER
OF PHANTOM
SHARES
TOTAL
188,509
245,787
42,000

VESTED
SHARES
35,422
46,166
–

BASE PRICE
(RUB)
1,516
1,516
2,214

HURDLE
REFERENCE
HURDLE
PRICE
REFERENCE
(RUB)
DATE
764 23.09.2011
1,375 01.04.2013
1,375 01.04.2013

Wave 1
Wave 2
Wave 21

1. Herman Tinga 2016 additional tranche.

VESTING SCHEDULE

2017
56,553
73,736
–

2018
94,255
122,894
–

2019
–
10,500
21,000

2020
–
–
21,000

2021
–
17,500
–

On 06 July 2018 the Company allotted and issued 91,302 new ordinary shares (456,510 additional global depositary receipts) in
connection with its management incentive plan (“MIP”) and long term incentive plan (“LTIP”). 347,510 new GDRs (69,502 new
shares) were delivered to existing employees of Lenta and its subsidiaries to satisfy outstanding awards under the MIP and up
to a further 109,000 (21,800 new shares) new GDRs were delivered to existing employees as their awards under the LTIP. The
holdings of the recipients under the MIP and holdings of the senior management as of 31 December 2018 are summarised below:

MANAGER
Herman Tinga
Edward Doeffinger
Joern Arnhold
Sergey Prokofiev
Maxim Shchegolev
Tatiana Yurkevich

TOTAL HOLDINGS AS
OF 31 DEC 2017
(INTEREST IN
SHARES)
18,874
103,054
94,545
3,392
4,277
3,392

SHARES GRANTED
UNDER THE MIP
IN 2018
12,896
9,621
8,018
3,368
3,368
3,368

TOTAL HOLDINGS
AS OF 31 DEC 2018
(INTEREST IN
SHARES)
31,770
112,675
102,563
6,760
7,645
6,760

APPROXIMATE
HOLDING AS OF
31 DEC 2018
(% OF SHARE CAPITAL)
0.03%
0.12%
0.09%
Less than 0.01%
Less than 0.01%
Less than 0.01%

1. There have been no changes to Senior Managements shareholding’s between 31 December 2018 and the date of this report.

2. Jago Lemmens who retired from his CFO role on 1 April 2019 held 115,394 shares and 125,015 shares respectively on 31 December 17 and 31 December 18.

STRATEGIC REPORT

CORPORATE GOVERNANCE FINANCIAL STATEMENTS APPENDICES

SUMMARY OF NON-EXECUTIVE DIRECTORS’ REMUNERATION POLICY

Element

Principles and opportunities

Letter of
appointment

Chairman and
non-executive
Director

• The Chairman and other non-executive Directors of Lenta LLC each have a letter of appointment; they do

not have service contracts.

• There is no notice period for termination.

• Fees are reviewed periodically by the Committee taking into consideration:

» Time commitment, demands and the responsibility of the role; and
» External market practice.

• There has been no increase in the level of fees paid to the Chairman and the non-executive Directors since

the Company’s IPO in February 2014. The Committee and Board have agreed that no increase will be
payable for the coming year.

Additional fees

• Additional fees are paid for undertaking the extra responsibilities of:

» Board Chairman
» Senior Independent Director
» Committee Chairman.

Other benefits

• The Chairman and the other non-executive Directors do not participate in any of our employee incentive

arrangements, nor do they receive any pension provision.

• No further benefits are provided to the Chairman or non-executive Directors.

Recruitment

• Fees for the Chairman and the other non-executive Directors are determined by the Board as a whole,

upon the recommendation of the Remuneration Committee.

• Fees are set at a level sufficient to attract, motivate and retain the world-class talent necessary to contribute

to a high-performing board.

NON-EXECUTIVE DIRECTORS’ FEES

Base fee for non-executive Directors
Additional fees:
Chairman
Senior Independent Director
Chairman of the Audit Committee
Chairman of the Capital Expenditure Committee
Chairman of the Nomination and Remuneration Committee
Members of the Audit and Capital Expenditure Committee
Members of the Nomination and Remuneration Committee

AMOUNT PAYABLE
(USD)
165,000

285,000
25,000
40,000
30,000
17,500
15,000
10,000

INTERESTS OF NON-EXECUTIVE DIRECTORS IN LENTA SHARES ARE SUMMARISED IN THE TABLE BELOW:

NAME OF DIRECTOR
John Oliver
Stephen Johnson
Martin Elling
Michael Lynch-Bell

There have been no changes to Directors’ shareholdings between 31 December 2018 and the date of this report.

TOTAL HOLDING
AS OF 31 DEC 2018
(INTEREST IN SHARES)
125,000
80,000
10,000
3,200

APPROXIMATE
HOLDING AS OF
31 DEC 2018
(% OF SHARE CAPITAL)
0.13%
0.08%
0.01%
less than 0.01%

LENTA ANNUAL REPORT AND ACCOUNTS 201886

STRATEGIC ALIGNMENT OF PAY

The table below shows the integration between Lenta’s financial key performance indicators and the senior remuneration
framework for 2017/18. This clearly demonstrates a clear linkage between performance metrics, payments to Managers and
business performance over the short and long term.

FINANCIAL OBJECTIVES
Company revenue
Increase earnings and returns
Increase shareholder value

KPI
Turnover
EBITDA
Share price

INCENTIVE SCHEME
Annual Bonus Scheme
Annual Bonus Scheme
MIP, LTIP

NON-FINANCIAL OBJECTIVES
Efficient operations
Sales space growth

INCENTIVE SCHEME
KPI
Productivity
Annual Bonus Scheme
Number of stores opened and in pipeline Annual Bonus Scheme

ANNUAL BONUS SCHEME

Target bonus

35% of Target
bonus
OEBITDA
multiplier

30% of
Target bonus
Sales
multiplier

35% of Sales
LFL multiplier

Individual
performance
coefficient

EUR/RUB
base to
actual rate
adjustment

Bonus
achieved
(as % of
base salary)

In April 2018, the 2017 annual bonus award was completed, with an overall award across the Company for those participating in
the scheme of 53% of the maximum.

Within this overall award, the Senior Management team was awarded annual bonuses averaging 54% of the maximum, with
the CEO achieving 60%. The Committee also agreed the annual bonus targets for 2018, providing for similarly stretching
performance.

STRATEGIC REPORT

CORPORATE GOVERNANCE FINANCIAL STATEMENTS APPENDICES

CAPITAL EXPENDITURE
COMMITTEE REPORT

Dmitry Shvets
Chairman

COMMITTEE MEMBERS
Dmitry Shvets
(Major Shareholder nominee,
Chairman)

Stephen Johnson
(Independent)

John Oliver
(Major Shareholder nominee)

Martin Elling
(Major Shareholder nominee)

Steven Hellman
(Major Shareholder nominee)

DEAR SHAREHOLDERS

2018 was a challenging year for the
Russian retail sector and Lenta. We
opened 13 hypermarkets and 38
supermarkets in Russia, but did not
meet our initial guidance.

Capital expenditure in 2018 amounted
to RUB 22.1bn, a decrease of 18.8%
compared to 2017 (RUB 27.3bn). This
was due mainly to the slower rate of
expansion compared to the prior year, as
well as lower pre-investments in land and
stores to be opened in future years.

We announced that we will rein-in our
organic expansion in future to focus on
operational efficiency and returns and
will review this decision when the macro
situation improves.

The economic environment remained
challenging. In this context, the
Committee paid particular attention to
balancing capital expenditure for land
purchases and the construction and
fitting-out of stores with our commitment
to deliver value for shareholders.

We will, as usual, be reviewing
all opportunities as they present
themselves. However, the Board and
senior management agree that, in the
present circumstances, it is particularly
important to maintain an appropriate
balance of prudent leverage levels,
whilst also pursuing high growth and
high investment project returns. We are
confident of being able to continue to
do so.

ROLE AND RESPONSIBILITIES
The key roles and responsibilities of
the Capital Expenditure Committee
include:

• advising the Board with regard

to the overall capital expenditure
strategy of the Group;

• reviewing the Company’s

processes for approving capital
expenditure projects;

• setting the limits of authority for

capex-related decisions;

• reviewing and approving all capex

and mergers and acquisitions
projects within the Committee’s
limits of authority;

• reviewing and making

recommendations on how the
overall capex plan aligns with the
Company’s strategy;

• endeavouring to ensure that

improvement programmes relating
to the design, construction and
operation of new stores are
defined and implemented in
cooperation with management;

• monitoring capex projects’ returns
and making adjustments to the
capex processes to reflect the
lessons learned.

There are twelve Committee
meetings scheduled for 2019;
this number may be increased
as necessary.

A copy of the Committee’s full
terms of reference is available
on the Company’s website:
http://www.lentainvestor.com/
en/about/corporate-governance/
internal-policies.

LENTA ANNUAL REPORT AND ACCOUNTS 201888

Corporate Governance Report continued

ACTIVITIES DURING
THE YEAR

During 2018, the Capital Expenditure
Committee focused on a number of
issues on the Board’s behalf. It continued
to evaluate the best opportunities in
the market; reviewing and making
recommendations to the Board on the
Company’s investment strategy, policy
and risk management.

The Committee approved 28 investment
proposals for new stores in 2018, laying
the foundations for future organic growth.
It also approved new investments in
Lenta’s logistics infrastructure, including
the expansion of the Company’s truck
fleet, the construction of two new
distribution centres and the extension
of an existing distribution centre.

We also worked together with
management on improving the efficiency
of the existing stores and maintaining
their strict compliance with all applicable
regulations. We continued to focus on the
post-IP evaluation process to ensure that
any lessons learned are applied in future
store and other investment projects.

The Committee also reviewed and
evaluated several potential acquisition
opportunities.

Dmitry Shvets
Chairman
Capital Expenditure Committee

STRATEGIC REPORT

CORPORATE GOVERNANCE FINANCIAL STATEMENTS APPENDICES

RELATIONS WITH SHAREHOLDERS

We are committed to conducting constructive dialogue with shareholders to ensure
that we understand what is important to them and enable clear communication of
our position. The Chairman, CEO and CFO hold regular meetings with shareholders
and update the Board on the outcomes of those meetings. Investor Relations keeps
the Board informed of investor, broker and analyst views, and reports and presents
formally to the Board at each scheduled Board meeting.

We support engagement with institutional shareholders as envisaged by the
Stewardship Code and have a dedicated investor relations website.

At our AGM, all resolutions are proposed and voted upon individually by shareholders
or their proxies. All votes taken during the AGM are by way of a poll. This follows
best practice guidelines and allows the Company to count all votes, not just those
of shareholders attending the meeting.

SCHEDULE OF INVESTOR CALLS IN 2019

MONTH
January
February
April
July
August
October

DATE
24
22
25
25
28
23

DAY
Thursday
Friday
Thursday
Thursday
Wednesday
Wednesday

MOSCOW TIME
17.00 – 18.00
17.00 – 18.00
15.00 – 16.00
16.00 – 17.00
16.00 – 17.00
16.00 – 17.00

RESPONSIBILITY
STATEMENT

We, members of the Board, confirm
that, to the best of our knowledge:

The consolidated financial
statements, prepared in accordance
with IFRS, give a true and fair view
of the assets, liabilities, financial
position and profit and loss of Lenta
Ltd and its subsidiaries taken as a
whole. This annual report includes
a fair review of the development
and performance of the business
and the position of Lenta Ltd and
its subsidiaries, taken as a whole,
together with a description of the
principal risks and uncertainties that
they face.

By order of the Board.

John Oliver
Chairman, Lenta Ltd

27 April 2019

LENTA ANNUAL REPORT AND ACCOUNTS 201890

INDEPENDENT AUDITOR’S REPORT

To the Shareholder and Board of Directors of Lenta Limited

OPINION
We have audited the consolidated
financial statements of Lenta Limited
and its subsidiaries (the Group), which
comprise the consolidated statement
of financial position as at 31 December
2018, and the consolidated statement of
profit or loss and other comprehensive
income, consolidated statement of
cash flows and consolidated statement
of changes in equity for the year then
ended, and notes to the consolidated
financial statements, including a
summary of significant accounting
policies.

In our opinion, the accompanying
consolidated financial statements
present fairly, in all material respects,
the consolidated financial position of
the Group as at 31 December 2018 and
its consolidated financial performance
and its consolidated cash flows for
the year then ended in accordance
with International Financial Reporting
Standards (IFRSs).

BASIS FOR OPINION
We conducted our audit in accordance
with International Standards on Auditing
(ISAs). Our responsibilities under
those standards are further described
in the Auditor’s responsibilities for
the audit of the consolidated financial
statements section of our report. We are
independent of the Group in accordance
with the International Ethics Standards
Board for Accountants’ Code of Ethics for
Professional Accountants (IESBA Code)
together with the ethical requirements
that are relevant to our audit of the
consolidated financial statements in
the Russian Federation, and we have
fulfilled our other ethical responsibilities
in accordance with these requirements
and the IESBA Code. We believe that
the audit evidence we have obtained is
sufficient and appropriate to provide a
basis for our opinion.

KEY AUDIT MATTERS
Key audit matters are those matters
that, in our professional judgment, were
of most significance in our audit of the
consolidated financial statements of
the current period. These matters were
addressed in the context of our audit of
the consolidated financial statements
as a whole, and in forming our opinion
thereon, and we do not provide a
separate opinion on these matters.
For each matter below, our description
of how our audit addressed the matter
is provided in that context.

We have fulfilled the responsibilities
described in the Auditor’s responsibilities
for the audit of the consolidated financial
statements section of our report,
including in relation to these matters.
Accordingly, our audit included the
performance of procedures designed
to respond to our assessment of the
risks of material misstatement of the
consolidated financial statements. The
results of our audit procedures, including
the procedures performed to address
the matters below, provide the basis for
our audit opinion on the accompanying
consolidated financial statements.

KEY AUDIT MATTER

HOW OUR AUDIT ADDRESSED
THE KEY AUDIT MATTER

Capitalisation of construction costs
The Group incurs significant expenditures related to the construction of new retail stores, a
part of which was capitalised under IAS 16 Property, Plant and Equipment. Capitalisation of
construction costs was a matter of most significance in our audit because the additions of
property, plant and equipment for the year ended 31 December 2018 are significant to the
consolidated financial statements. In addition, management judgement is required in the
determination of costs directly attributable to bringing the asset to the location and condition
necessary for it to be capable of operating in the manner intended by management. Information
in respect of property, plant and equipment is disclosed in Note 7 to the consolidated financial
statements.

We obtained understanding of the Group’s
capitalisation policies and tested controls
over authorisation, timeliness and accuracy
of recording property, plant and equipment
additions. We compared the Group’s
investment budget with actual capital
expenditures. On a sample basis we
tested capital expenditures to supporting
documents. We analysed the aging of assets
under construction.

Recognition of suppliers’ allowances
The Group receives various types of allowances from suppliers in connection with the purchase
of goods for resale in the form of volume rebates and other payments. The recognition of
allowances was a matter of most significance in our audit because of its material impact on
trade and other receivables, cost of goods sold and inventories. In addition, management
exercises judgement in determining the period over which these allowances should be
recognised considering the nature and the level of fulfilment of the Group’s obligations and
estimates of purchase volumes. Information about suppliers’ rebates receivable and accounts
receivable on suppliers’ advertising is disclosed in Note 14 to the consolidated financial
statements.

We understood and tested operating
effectiveness of internal controls over the
recognition of allowances from suppliers. We
agreed the terms of providing allowances to
supporting documents approved by individual
suppliers. We analysed the assumptions
underlying management estimates of
amounts receivable. On a sample basis we
received direct confirmations of outstanding
balances from suppliers. We agreed the
balances of suppliers’ allowances receivables
to the post year-end cash settlements.

STRATEGIC REPORT

CORPORATE GOVERNANCE FINANCIAL STATEMENTS APPENDICES

OTHER INFORMATION INCLUDED IN
GROUP’S ANNUAL REPORT 2018
Other information consists of the
information included in Group’s annual
report 2018, other than the consolidated
financial statements and our auditor’s
report thereon. Management is
responsible for the other information.
The Annual report is expected to be
made available to us after the date of this
auditor’s report.

Our opinion on the consolidated financial
statements does not cover the other
information and we do not express any
form of assurance conclusion thereon.

In connection with our audit of the
consolidated financial statements,
our responsibility is to read the other
information identified above when it
becomes available and, in doing so,
consider whether the other information
is materially inconsistent with the
consolidated financial statements or
our knowledge obtained in the audit
or otherwise appears to be materially
misstated.

RESPONSIBILITIES OF MANAGEMENT
AND BOARD OF DIRECTORS FOR
THE CONSOLIDATED FINANCIAL
STATEMENTS
Management is responsible for the
preparation and fair presentation of
the consolidated financial statements
in accordance with IFRSs, and for
such internal control as management
determines is necessary to enable the
preparation of consolidated financial
statements that are free from material
misstatement, whether due to fraud
or error.

In preparing the consolidated financial
statements, management is responsible
for assessing the Group’s ability to
continue as a going concern, disclosing,
as applicable, matters related to going
concern and using the going concern
basis of accounting unless management
either intends to liquidate the Group or
to cease operations, or has no realistic
alternative but to do so.

The Board of Directors are responsible
for overseeing the Group’s financial
reporting process.

AUDITOR’S RESPONSIBILITIES FOR
THE AUDIT OF THE CONSOLIDATED
FINANCIAL STATEMENTS
Our objectives are to obtain reasonable
assurance about whether the
consolidated financial statements
as a whole are free from material
misstatement, whether due to fraud or
error, and to issue an auditor’s report
that includes our opinion. Reasonable
assurance is a high level of assurance,
but is not a guarantee that an audit
conducted in accordance with ISAs will
always detect a material misstatement
when it exists. Misstatements can
arise from fraud or error and are
considered material if, individually or in
the aggregate, they could reasonably
be expected to influence the economic
decisions of users taken on the basis of
these consolidated financial statements.

As part of an audit in accordance with
ISAs, we exercise professional judgment
and maintain professional skepticism
throughout the audit. We also:

• Identify and assess the risks of
material misstatement of the
consolidated financial statements,
whether due to fraud or error, design
and perform audit procedures
responsive to those risks, and obtain
audit evidence that is sufficient and
appropriate to provide a basis for
our opinion. The risk of not detecting
a material misstatement resulting
from fraud is higher than for one
resulting from error, as fraud may
involve collusion, forgery, intentional
omissions, misrepresentations, or the
override of internal control.

• Obtain an understanding of internal
control relevant to the audit in order
to design audit procedures that are
appropriate in the circumstances, but
not for the purpose of expressing an
opinion on the effectiveness of the
Group’s internal control.

• Evaluate the appropriateness of
accounting policies used and the
reasonableness of accounting
estimates and related disclosures
made by management.

• Conclude on the appropriateness
of management’s use of the going
concern basis of accounting and,
based on the audit evidence obtained,
whether a material uncertainty exists
related to events or conditions that
may cast significant doubt on the
Group’s ability to continue as a going
concern. If we conclude that a material
uncertainty exists, we are required
to draw attention in our auditor’s
report to the related disclosures in the
consolidated financial statements or,
if such disclosures are inadequate, to
modify our opinion. Our conclusions
are based on the audit evidence
obtained up to the date of our auditor’s
report. However, future events or
conditions may cause the Group to
cease to continue as a going concern.

• Evaluate the overall presentation,

structure and content of the
consolidated financial statements,
including the disclosures, and whether
the consolidated financial statements
represent the underlying transactions
and events in a manner that achieves
fair presentation.

• Obtain sufficient appropriate
audit evidence regarding the
financial information of the entities
or business activities within the
Group to express an opinion on the
consolidated financial statements.
We are responsible for the direction,
supervision and performance of
the group audit. We remain solely
responsible for our audit opinion.

We communicate with the Board of
Directors regarding, among other
matters, the planned scope and timing
of the audit and significant audit findings,
including any significant deficiencies in
internal control that we identify during
our audit.

We also provide the Board of Directors
with a statement that we have complied
with relevant ethical requirements
regarding independence, and to
communicate with them all relationships
and other matters that may reasonably
be thought to bear on our independence,
and where applicable, related
safeguards.

LENTA ANNUAL REPORT AND ACCOUNTS 2018From the matters communicated with the
Board of Directors, we determine those
matters that were of most significance
in the audit of the consolidated financial
statements of the current period and
are therefore the key audit matters. We
describe these matters in our auditor’s
report unless law or regulation precludes
public disclosure about the matter or
when, in extremely rare circumstances,
we determine that a matter should not
be communicated in our report because
the adverse consequences of doing
so would reasonably be expected to
outweigh the public interest benefits
of such communication.

The partner in charge of the audit
resulting in this independent auditor’s
report is N.V. Lebedeva.

N.V. Lebedeva
Partner
Ernst & Young LLC

21 February 2019

Independent auditor’s report continued

Details of the audited entity
Name: Lenta Limited

Incorporated under the laws of the BVI
on 16 July 2003, State Registration
Number 1058643.

Address: Road Town, Tortola, BVI.

Details of the auditor
Name: Ernst & Young LLC

Record made in the State Register
of Legal Entities on 5 December
2002, State Registration Number
1027739707203.

Address: Russia 115035, Moscow,
Sadovnicheskaya naberezhnaya, 77,
building 1.

Ernst & Young LLC is a member
of Self-regulated organisation of
auditors “Russian Union of auditors”
(Association) (“SRO RUA”). Ernst &
Young LLC is included in the control
copy of the register of auditors and audit
organisations, main registration number
11603050648.

STRATEGIC REPORT

CORPORATE GOVERNANCE FINANCIAL STATEMENTS APPENDICES

STATEMENT OF MANAGEMENT’S RESPONSIBILITIES FOR THE PREPARATION
AND APPROVAL OF THE CONSOLIDATED FINANCIAL STATEMENTS

for the year ended 31 December 2018

The following statement is made
with a view to the respective
responsibilities of management in
relation to the consolidated financial
statements of Lenta Limited and its
subsidiaries (“the Group”).

Management is responsible for the
preparation of these consolidated
financial statements that present fairly
the financial position of Lenta Limited
and its subsidiaries (“the Group”) as at
31 December 2018 and the results of
its operations, cash flows and changes
in shareholders’ equity for the year then
ended, in compliance with International
Financial Reporting Standards (“IFRS”).

In preparing the consolidated financial
statements, management is
responsible for:

• selecting and applying accounting

policies;

• presenting information, including

accounting policies, in a manner that
provides relevant, reliable, comparable
and understandable information;

• providing additional disclosures

when compliance with the specific
requirements of IFRSs are insufficient
to enable users to understand the
impact of particular transactions, other
events and conditions on the Group’s
consolidated financial position and
financial performance;

• making an assessment of the Group’s
ability to continue as a going concern.

Management is also responsible for:

• designing, implementing and

maintaining an effective and sound
system of internal controls throughout
the Group;

• maintaining adequate accounting

records that are sufficient to show and
explain the Group’s transactions and
disclose with reasonable accuracy at
any time the consolidated financial
position of the Group, and which
enable them to ensure that the
consolidated financial statements of
the Group comply with IFRS;

• maintaining statutory accounting
records in compliance with local
legislation and accounting standards in
the respective jurisdictions in which the
Group operates;

• taking such steps as are reasonably
available to them to safeguard the
assets of the Group; and

• preventing and detecting fraud

and other irregularities.

The consolidated financial statements
of the Group for the year ended
31 December 2018 were approved by
Management on 20 February 2019.

On behalf of the Management as
authorised by the Board of Directors.

Herman Tinga
(CEO of Lenta Limited)

Jago Lemmens
(CFO of Lenta Limited)

LENTA ANNUAL REPORT AND ACCOUNTS 2018
94

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

as at 31 December 2018 (in thousands of Russian roubles)

Assets
Non-current assets
Property, plant and equipment
Prepayments for construction
Leasehold rights
Intangible assets other than leasehold rights
Other non-current assets
Total non-current assets

Current assets
Inventories
Trade and other receivables
Advances paid
Taxes recoverable
Prepaid expenses
Short-term portion of cash flow hedging instruments
Cash and cash equivalents

Assets held for sale
Total current assets
Total assets

Equity and liabilities
Equity
Share capital
Additional paid-in capital
Share options
Hedging reserve
Treasury shares
Retained earnings
Total equity

Liabilities
Non-current liabilities
Long-term borrowings
Deferred tax liabilities
Total non-current liabilities

Current liabilities
Trade and other payables
Short-term borrowings and short-term portion of long-term borrowings
Short-term portion of cash flow hedging instruments
Contract liabilities
Advances received
Other taxes payable
Current income tax payable
Total current liabilities
Total liabilities
Total equity and liabilities

NOTE

31 DECEMBER
2018

31 DECEMBER
2017
(RESTATED)1

7
8
9
11
12

13
14
15
16

31
17

177,024,063
4,929,794
3,170,537
1,905,890
896,928
187,927,212

170,308,406
2,818,543
3,075,027
1,816,716
675,676
178,694,368

41,500,851
11,272,602
2,772,184
992,378
123,101
−
33,804,860
90,465,976

36,933,128
10,957,360
2,413,511
2,874,174
124,915
8,179
14,301,859
67,613,126

−
90,465,976
278,393,188

423,094
68,036,220
246,730,588

18, 20
18
28
18

284
26,935,025
633,165
−
(291,091)
55,473,276
82,750,659

284
26,480,481
825,176
164,886
−
44,316,449
71,787,276

21
22

23
21

106,341,291
10,039,756
116,381,047

62,194,204
8,386,732
70,580,936

56,133,840
20,738,998
−
350,378
148,543
1,041,123
848,600
79,261,482
195,642,529
278,393,188

57,259,762
44,888,131
18,049
221,824
293,085
1,131,099
550,426
104,362,376
174,943,312
246,730,588

1. Certain amounts shown here do not correspond to the financial statements for the year ended 31 December 2017 and reflect adjustments described in Note 4.

The accompanying notes on pages 98 to 137 are an integral part of these financial statements.

STRATEGIC REPORT

CORPORATE GOVERNANCE FINANCIAL STATEMENTS APPENDICES

CONSOLIDATED STATEMENT OF PROFIT OR
LOSS AND OTHER COMPREHENSIVE INCOME

for the year ended 31 December 2018 (in thousands of Russian roubles)

Sales
Cost of sales
Gross profit

Selling, general and administrative expenses
Other operating income
Other operating expenses
Operating profit

Interest expense
Interest income
Foreign exchange (losses)/gains
Profit before income tax

Income tax expense
Profit for the year

Other comprehensive income (OCI)
Other comprehensive income to be reclassified to profit or loss
in subsequent periods
Net loss from cash flow hedges
Income tax relating to the cash flow hedges
Other comprehensive loss for the year, net of tax
Total comprehensive income for the year, net of tax

NOTE

26
27
27

YEAR ENDED
31 DECEMBER
2018
413,562,197
(324,767,890)
88,794,307

YEAR ENDED
31 DECEMBER
2017
365,177,586
(286,942,078)
78,235,508

(69,227,059)
4,993,245
(476,040)
24,084,453

(9,699,272)
608,472
(176,371)
14,817,282

(56,139,731)
4,129,232
(648,445)
25,576,564

(10,942,820)
445,751
92,398
15,171,893

(3,022,988)
11,794,294

(1,908,354)
13,263,539

19, 31
22

(206,108)
41,222
(164,886)
11,629,408

(333,355)
66,671
(266,684)
12,996,855

Earnings per share (in thousands of Russian roubles per share) (Note 20)
– basic and diluted, for profit for the year attributable to equity holders of the parent

0.121

0.136

The accompanying notes on pages 98 to 137 are an integral part of these financial statements.

LENTA ANNUAL REPORT AND ACCOUNTS 2018

CONSOLIDATED STATEMENT OF CASH FLOWS

for the year ended 31 December 2018 (in thousands of Russian roubles)

Cash flows from operating activities
Profit before income tax

Adjustments for:
Net loss on disposal of property, plant and equipment
Loss on disposal of intangible assets
Interest expense
Interest income
Inventory write-down to net realisable value/reversal of inventory write-down
to net realisable value
Expected credit losses of accounts receivable, impairment/reversal
of impairment of advances paid and prepayments for construction
Depreciation, amortisation and impairment
Share options expense

Movements in working capital
(Increase)/decrease in trade and other receivables
Increase in advances paid
(Increase)/decrease in prepaid expenses
Increase in inventories
Increase in trade and other payables
(Decrease)/increase in contract liabilities and advances received
Increase in net other taxes payable
Cash from operating activities

Income taxes paid
Interest received
Interest paid
Net cash generated from operating activities

Cash flows from investing activities
Purchases of property, plant and equipment
Settlements on acquisition of subsidiaries1
Purchases of intangible assets other than leasehold rights
Purchases of leasehold rights
Proceeds from sale of property, plant and equipment
Net cash used in investing activities

Cash flows from financing activities
Proceeds from borrowings
Repayments of borrowings
Purchase of treasury shares
Net cash generated from financing activities
Net decrease in cash and cash equivalents

Cash and cash equivalents at the beginning of the year
Cash and cash equivalents at the end of the year

NOTE

27
27

YEAR ENDED
31 DECEMBER
2018

YEAR ENDED
31 DECEMBER
2017

14,817,282

15,171,893

26,483
−
9,699,272
(608,472)

21,450
26,009
10,942,820
(445,751)

397,251

(333,945)

7, 26
28

13
23

16, 24

109,168
12,109,707
265,261
36,815,952

(684,178)
(548,409)
(20,686)
(4,964,974)
42,165
(15,988)
1,791,820
32,415,702

221,491
9,913,594
421,310
35,938,871

5,887,028
(199,504)
3,572
(9,108,242)
1,081,029
174,847
1,055,881
34,833,482

(871,201)
522,871
(10,440,177)
21,627,195

(709,360)
473,319
(10,852,902)
23,744,539

(21,411,263)
−
(642,512)
(267,640)
177,087
(22,144,328)

(26,761,134)
117,961
(377,301)
(462,099)
207,315
(27,275,258)

30
30
18

17
17

132,183,000
(111,871,775)
(291,091)
20,020,134
19,503,001

127,210,525
(122,415,714)
−
4,794,811
1,264,092

14,301,859
33,804,860

13,037,767
14,301,859

1. Cash inflows refunded from the seller of Kesko subsidiaries acquired by the Group in November 2016 upon finalisation of working capital adjustment and purchase

price fixing.

The accompanying notes on pages 98 to 137 are an integral part of these financial statements.

STRATEGIC REPORT

CORPORATE GOVERNANCE FINANCIAL STATEMENTS APPENDICES

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

for the year ended 31 December 2018 (in thousands of Russian roubles)

Balance at 1 January 2018
Change in the accounting
policies due to application
of IFRS 9 (Note 4)
Balance at 1 January 2018
(restated)
Profit for the year
Other comprehensive loss
Total comprehensive
(loss)/income

Share-based payments (Note 28)
Issue of shares (Note 18, 28)
Purchase of shares (Note 18)
Balance at 31 December 2018

SHARE
CAPITAL
284

ADDITIONAL
PAID-IN
CAPITAL
26,480,481

HEDGING
RESERVE
164,886

TREASURY
SHARES
−

SHARE
OPTIONS
RESERVE
825,176

RETAINED
EARNINGS
44,316,449

TOTAL
EQUITY
71,787,276

−

284

26,480,481

164,886

−

(164,886)

−

(637,467)

825,176

−

43,678,982
11,794,294
−

71,149,809
11,794,294
(164,886)

11,794,294

11,629,408

−
454,544
−
26,935,025

−
−
−
−

−
−
(291,091)
(291,091)

265,261
(457,272)
−
633,165

−
−
−
55,473,276

265,261
(2,728)
(291,091)
82,750,659

−

−
284

Balance at 1 January 2017
Profit for the year
Other comprehensive loss
Total comprehensive
(loss)/income

284

26,216,147

431,570

−

(266,684)

Share-based payments (Note 28)
Issue of shares (Note 18, 28)
Balance at 31 December 2017

−
−
284

−
264,334
26,480,481

−
−
164,886

−

−
−
−

668,200

−

31,052,910
13,263,539
−

58,369,111
13,263,539
(266,684)

− 13,263,539

12,996,855

421,310
(264,334)
825,176

−
−
44,316,449

421,310
−
71,787,276

Notes
Additional paid-in capital: Additional paid-in capital is the difference between the fair value of consideration received and nominal
value of the issued shares.

Treasury shares: Treasury shares are own equity instruments reacquired by the Group.

The accompanying notes on pages 98 to 137 are an integral part of these financial statements.

LENTA ANNUAL REPORT AND ACCOUNTS 2018

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

for the year ended 31 December 2018 (in thousands of Russian roubles)

1. THE LENTA GROUP AND
ITS OPERATIONS
The Lenta Group (the “Group”) comprises
Lenta Limited (“the Company”) and
its subsidiaries. The Group’s principal
business activity is the development
and operation of hypermarket and
supermarket stores in Russia.

The Company was incorporated as
a company limited by shares under
the laws of the British Virgin Islands
(BVI) on 16 July 2003. The Company’s
registered address is at P.O. Box 3340,
Road Town, Tortola, BVI. The registered
office of the Group’s main operating
entity, Lenta LLC, is located at 112,
Lit. B, Savushkina Street, 197374,
Saint Petersburg, Russia.

Starting from March 2014 the Company’s
shares are listed on the London Stock
Exchange and Moscow Exchange
in the form of Global Depositary
Receipts (GDR).

At 31 December 2018 and 2017 the
Group has one main operational
subsidiary, Lenta LLC (100% owned),
a legal entity registered under the
laws of the Russian Federation. Other
subsidiaries are property or investment
holding companies by their nature.

2. BASIS OF PREPARATION AND
SIGNIFICANT ACCOUNTING
POLICIES
STATEMENT OF COMPLIANCE
These consolidated financial statements
have been prepared in accordance
with International Financial Reporting
Standards (“IFRS”) as issued by the
International Accounting Standards
Board (IASB).

2.1 BASIS OF PREPARATION
The consolidated financial statements
have been prepared on a historical
cost basis, except for as described
in accounting policies below. The
consolidated financial statements are
presented in Russian roubles and all
values are rounded to the nearest
thousand (RUB 000), except when
otherwise indicated.

The principal accounting policies applied
in the preparation of these consolidated
financial statements are set out below.
These policies have been consistently
applied to all the periods presented
unless otherwise stated.

Management has considered the Group’s
cash flow forecasts for the foreseeable
future, which take into account the
current and expected economic situation
in Russia, the Group’s financial position,
available borrowing facilities, and loan
covenant compliance, planned store
opening program and the anticipated
cash flows and related expenditures from
retail stores.

Accordingly, management is satisfied
that it is appropriate to adopt the going
concern basis of accounting in preparing
the consolidated financial information for
these consolidated financial statements.

At 31 December 2018, the Group had net
current assets of RUB 11,204,494 (net
current liabilities at 31 December 2017:
36,326,156).

Unused credit facilities available as
of 31 December 2018 were RUB
83,300,000. Management believes
that operating cash flows and available
borrowing capacity will provide the Group
with adequate resources to fund its
liabilities for the next year.

2.2 BASIS OF CONSOLIDATION
The consolidated financial statements
incorporate the financial statements
of the Company and other entities
controlled by the Company (its
subsidiaries) as at 31 December 2018.
Control is achieved when the Group is
exposed, or has rights, to variable returns
from its involvement with the investee
and has the ability to affect those returns
through its power over the investee.

Specifically, the Group controls an
investee if and only if the Group has:

• Power over the investee (i.e. existing
rights that give it the current ability
to direct the relevant activities of the
investee);

• Exposure, or rights, to variable returns
from its involvement with the investee;
and

• The ability to use its power over the

investee to affect its returns.

Generally, there is a presumption that a
majority of voting rights result in control.
To support this presumption and when
the Group has less than a majority of the
voting or similar rights of an investee, the
Group considers all relevant facts and
circumstances in assessing whether it
has power over an investee, including:

• The contractual arrangement with the
other vote holders of the investee;

• Rights arising from other contractual

arrangements;

• The Group’s voting rights and potential

voting rights.

The Group re-assesses whether or
not it controls an investee if facts and
circumstances indicate that there are
changes to one or more of the three
elements of control. Consolidation of
a subsidiary begins when the Group
obtains control over the subsidiary and
ceases when the Group loses control of
the subsidiary. Assets, liabilities, income
and expenses of a subsidiary acquired or
disposed of during the year are included
in the statement of comprehensive
income from the date the Group gains
control until the date the Group ceases to
control the subsidiary.

Profit or loss and each component of
other comprehensive income (OCI) are
attributed to the equity holders of the
parent of the Group and to the non-
controlling interests, even if this results
in the non-controlling interests having
a deficit balance. When necessary,
adjustments are made to the financial
statements of subsidiaries to bring
their accounting policies into line
with the Group’s accounting policies.
All intra-group assets and liabilities,
equity, income, expenses and cash
flows relating to transactions between
members of the Group are eliminated in
full on consolidation.

STRATEGIC REPORT

CORPORATE GOVERNANCE FINANCIAL STATEMENTS APPENDICES

A change in the ownership interest of a
subsidiary, without a loss of control, is
accounted for as an equity transaction.
If the Group loses control over a
subsidiary, it derecognises the related
assets (including goodwill), liabilities,
non-controlling interest and other
components of equity while any resultant
gain or loss is recognised in profit or loss.
Any investment retained is recognised at
fair value.

Subsidiaries are those companies
(including special purpose entities) in
which the Group, directly or indirectly,
has an interest of more than one half
of the voting rights or otherwise has
power to govern the financial and
operating policies so as to obtain
economic benefits and which are neither
associates nor joint ventures. The
existence and effect of potential voting
rights that are presently exercisable or
presently convertible are considered
when assessing whether the Group
controls another entity. Subsidiaries
are consolidated from the date on
which control is transferred to the
Group (acquisition date) and are de-
consolidated from the date that control
ceases.

2.3 SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
Business combinations and goodwill
Business combinations are accounted
for using the acquisition method. The
cost of an acquisition is measured as
the aggregate of the consideration
transferred measured at acquisition
date fair value and the amount of any
non-controlling interest in the acquiree.
For each business combination, the
Group elects whether to measure the
non-controlling interest in the acquiree
at fair value or at the proportionate share
of the acquiree’s identifiable net assets.
Acquisition-related costs are expensed
as incurred and included in administrative
expenses.

When the Group acquires a business,
it assesses the financial assets and
liabilities assumed for appropriate
classification and designation in
accordance with the contractual terms,
economic circumstances and pertinent
conditions as at the acquisition date. This
includes the separation of embedded
derivatives in host contracts by the
acquiree.

If the business combination is achieved
in stages, the previously held equity
interest is remeasured at its acquisition
date fair value and any resulting gain or
loss is recognised in profit or loss.

Any contingent consideration to be
transferred by the acquirer will be
recognised at fair value at the acquisition
date. Subsequently contingent
consideration classified as an asset or
liability is measured at fair value with
changes in fair value recognised in
the consolidated statement of profit or
loss. Contingent consideration that is
classified as equity is not remeasured
and subsequent settlement is accounted
for within equity.

Goodwill is initially measured at cost,
being the excess of the aggregate of the
consideration transferred and the amount
recognised for non-controlling interest
over the net identifiable assets acquired
and liabilities assumed.

If the fair value of the net assets
acquired is in excess of the aggregate
consideration transferred, the gain is
recognised in profit or loss.

After initial recognition, goodwill is
measured at cost less any accumulated
impairment losses. For the purpose of
impairment testing, goodwill acquired
in a business combination is, from the
acquisition date, allocated to each of the
Group’s cash-generating units that are
expected to benefit from the combination,
irrespective of whether other assets or
liabilities of the acquiree are assigned to
those units.

Where goodwill has been allocated to
a cash-generating unit and part of the
operation within that unit is disposed
of, the goodwill associated with the
disposed operation is included in the
carrying amount of the operation when
determining the gain or loss from
disposal. Goodwill disposed in these
circumstances is measured based on the
relative values of the disposed operation
and the portion of the cash-generating
unit retained.

Current versus non-current
classification
The Group presents assets and liabilities
in statement of financial position based
on current/non current classification.
An asset is current when it is:

• Expected to be realised or intended

to sold or consumed in normal
operating cycle;

• Held primarily for the purpose

of trading;

• Expected to be realised within twelve
months after the reporting period; or

• Cash or cash equivalent unless

restricted from being exchanged or
used to settle a liability for at least
twelve months after the reporting
period.

All other assets are classified as non-
current. A liability is current when:

• It is expected to be settled in normal

operating cycle;

• It is held primarily for the purpose of

trading;

• It is due to be settled within twelve
months after the reporting period; or

• There is no unconditional right to defer

the settlement of the liability for at
least twelve months after the reporting
period.

The Group classifies all other liabilities as
non-current.

Deferred tax assets and liabilities are
classified as non-current assets and
liabilities.

LENTA ANNUAL REPORT AND ACCOUNTS 2018100

Notes to the consolidated financial statements continued

2. BASIS OF PREPARATION AND
SIGNIFICANT ACCOUNTING
POLICIES CONTINUED
2.3 SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES CONTINUED
Fair value measurement
The Group measures financial
instruments, such as, derivatives at
fair value at each balance sheet date.
Also, fair values of financial instruments
measured at amortised cost are
disclosed in Note 30.

Fair value is the price that would
be received to sell an asset or paid
to transfer a liability in an orderly
transaction between market participants
at the measurement date. The fair
value measurement is based on the
presumption that the transaction to sell
the asset or transfer the liability takes
place either:

• In the principal market for the asset or

liability; or

• In the absence of a principal market, in
the most advantageous market for the
asset or liability.

The principal or the most advantageous
market must be accessible by the Group.

The fair value of an asset or a liability is
measured using the assumptions that
market participants would use when
pricing the asset or liability, assuming
that market participants act in their
economic best interest.

A fair value measurement of a non-
financial asset takes into account a
market participant’s ability to generate
economic benefits by using the asset in
its highest and best use or by selling it to
another market participant that would use
the asset in its highest and best use.

The Group uses valuation techniques
that are appropriate in the circumstances
and for which sufficient data are available
to measure fair value, maximising
the use of relevant observable
inputs and minimising the use of
unobservable inputs.

All assets and liabilities for which fair
value is measured or disclosed in the
financial statements are categorised
within the fair value hierarchy, described
as follows, based on the lowest level
input that is significant to the fair value
measurement as a whole:

• Level 1 − quoted (unadjusted) market
prices in active markets for identical
assets or liabilities.

• Level 2 − valuation techniques
for which the lowest level input
that is significant to the fair value
measurement is directly or indirectly
observable.

• Level 3 − valuation techniques
for which the lowest level input
that is significant to the fair value
measurement is unobservable.

For assets and liabilities that are
recognised in the financial statements on
a recurring basis, the Group determines
whether transfers have occurred
between Levels in the hierarchy by
reassessing categorisation (based on the
lowest level input that is significant to the
fair value measurement as a whole) at
the end of each reporting period.

For the purpose of fair value disclosures,
the Group has determined classes of
assets and liabilities on the basis of the
nature, characteristics and risks of the
asset or liability and the level of the fair
value hierarchy as explained above.

Functional and presentation
currency
The presentation and functional
currency of all Group entities is the
Russian rouble (“RUB”), the national
currency of the Russian Federation, the
primary economic environment in which
operating entities function.

Transactions in foreign currencies are
initially recorded by the Group’s entities
at the functional currency spot rates at
the date the transaction first qualifies for
recognition.

Monetary assets and liabilities
denominated in foreign currencies are
translated at the functional currency
spot rates of exchange at the reporting
date. Differences arising on settlement
or translation of monetary items are
recognised in profit or loss.

Non-monetary items that are measured
in terms of historical cost in a foreign
currency are translated using the
exchange rates at the dates of the
initial transactions. Non-monetary items
measured at fair value in a foreign
currency are translated using the
exchange rates at the date when the fair
value is determined. The gain or loss
arising on translation of non-monetary
items measured at fair value is treated
in line with the recognition of gain or loss
from change in fair value of the item.

Property, plant and equipment
Property, plant and equipment are initially
recorded at purchase or construction
cost. Cost of replacing major parts
or components of property, plant and
equipment items is capitalised and the
replaced part is retired. All other repair
and maintenance costs are expensed as
incurred.

Property, plant and equipment are stated
at cost, net of accumulated depreciation
and accumulated impairment losses,
if any.

Gains and losses on disposals
determined by comparing net proceeds
with the respective carrying amount are
recognised in profit or loss.

Construction in progress comprises costs
directly related to the construction of
property, plant and equipment including
an appropriate allocation of directly
attributable variable overheads that are
incurred in construction. Depreciation of
an asset begins when it is available for
use, i.e. when it is in the location and
condition necessary for it to be capable
of operating in the manner intended by
management. Construction in progress is
reviewed regularly to determine whether
its carrying value is recoverable and
whether appropriate impairment loss has
been recognised.

Properties in the course of construction
for production, rental or administrative
purposes, or for purposes not yet
determined, are carried at cost, less any
recognised impairment loss. Depreciation
of these assets, on the same basis
as other property assets, commences
when the assets are ready for their
intended use.

101

STRATEGIC REPORT

CORPORATE GOVERNANCE FINANCIAL STATEMENTS APPENDICES

Depreciation
Depreciation of property, plant and
equipment is calculated using the
straight-line method to write off their
cost to their residual values over their
estimated useful lives:

Buildings
Land improvements
Machinery and
equipment

USEFUL LIVES
IN YEARS
30
30

2 to 15

Leasehold rights
Leasehold rights acquired as part
of hypermarket and supermarket
development projects are separately
reported at cost less accumulated
amortisation and accumulated
impairment losses. These leasehold
rights are amortised to profit or loss
over the term of the lease, which is 49
years. If the Group further purchases the
land plot previously leased, the carrying
amount of the related leasehold right
as of the date of purchase transaction
is reclassified to the cost of land plot
purchased.

Finance leases
Leases are classified as finance leases
whenever the terms of the lease transfer
substantially all the risks and rewards of
ownership to the lessee. All other leases
are classified as operating leases.

Assets held under finance leases are
recognised as assets at their fair value at
the inception of the lease or, if lower, at
the present value of the minimum lease
payments. The corresponding liability to
the lessor is included in the statement
of financial position as a finance
lease obligation.

Lease payments are apportioned
between finance charges and reduction
of the lease obligation so as to achieve a
constant rate of interest on the remaining
balance of the liability. Finance charges
are charged directly to the profit and
loss, unless they are directly attributable
to qualifying assets, in which case
they are capitalised in accordance
with the Group’s general policy on
borrowing costs.

Operating lease payments are
recognised as an expense on a straight-
line basis over the lease term, except
where another systematic basis is more
representative of the time pattern in
which economic benefits from the leased
asset are consumed.

Intangible assets
Intangible assets acquired separately are
measured on initial recognition at cost.
The cost of intangible assets acquired
in a business combination is their fair
value at the date of acquisition. Following
initial recognition, intangible assets are
carried at cost less any accumulated
amortisation and accumulated
impairment losses.

Internally generated intangible assets,
excluding capitalised development costs,
are not capitalised and expenditure is
reflected in profit and loss in the period in
which the expenditure is incurred.

The useful lives of intangible assets are
assessed as either finite or indefinite.

Intangible assets with finite lives are
amortised over the useful economic
life (which is from 3 to 7 years) using a
straight-line method to write off their cost
to their residual values and assessed
for impairment whenever there is an
indication that the intangible asset may
be impaired. The amortisation period and
the amortisation method for an intangible
asset with a finite useful life are reviewed
at least at the end of each reporting
period. Changes in the expected
useful life or the expected pattern of
consumption of future economic benefits
embodied in the asset are considered
to modify the amortisation period or
method, as appropriate, and are treated
as changes in accounting estimates.
The amortisation expense on intangible
assets with finite lives is recognised
in the statement of profit or loss and
other comprehensive income as the
expense category that is consistent with
the function of the intangible assets or
included into the carrying amount of an
asset as appropriate.

Intangible assets with indefinite
useful lives are not amortised, but are
tested for impairment annually, either
individually or at the cash-generating
unit level. The assessment of indefinite
life is reviewed annually to determine
whether the indefinite life continues to be
supportable. If not, the change in useful
life from indefinite to finite is made on a
prospective basis.

Gains or losses arising from
derecognition of an intangible asset are
measured as the difference between the
net disposal proceeds and the carrying
amount of the asset and are recognised
in the profit or loss when the asset is
derecognised.

Impairment of non-financial assets
At each reporting date, the Group
reviews the carrying amounts of its non-
financial assets to determine whether
there is any indication that those assets
have suffered an impairment loss. If any
such indication exists, the recoverable
amount of the asset is estimated in
order to determine the extent of the
impairment loss (if any). Where it is not
possible to estimate the recoverable
amount of an individual asset, the Group
estimates the recoverable amount of
the cash-generating unit to which the
asset belongs. Where a reasonable
and consistent basis of allocation can
be identified, corporate assets are also
allocated to individual cash-generating
unit, or otherwise they are allocated to
the smallest group of cash-generating
units for which a reasonable and
consistent allocation basis can be
identified.

The recoverable amount of an asset
or a cash-generating unit is the higher
of its fair value less costs to sell and
value in use. In assessing value in use,
the estimated future cash flows are
discounted to their present value using a
pre-tax discount rate that reflects current
market assessments of the time value of
money and the risks specific to the asset
for which the estimates of future cash
flows have not been adjusted.

LENTA ANNUAL REPORT AND ACCOUNTS 2018102

Notes to the consolidated financial statements continued

2. BASIS OF PREPARATION AND
SIGNIFICANT ACCOUNTING
POLICIES CONTINUED
2.3 SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES CONTINUED
If the recoverable amount of an asset
(or a cash-generating unit) is estimated
to be less than its carrying amount,
the carrying amount of the asset (the
cash-generating unit) is reduced to its
recoverable amount. An impairment
loss is recognised immediately in profit
or loss.

Where an impairment loss subsequently
reverses, the carrying amount of the
asset (the cash generating unit) is
increased to the revised estimate of
its recoverable amount, but so that
the increased carrying amount does
not exceed the carrying amount that
would have been determined had no
impairment loss been recognised for the
asset (the cash-generating unit) in prior
years. A reversal of an impairment loss is
recognised immediately in profit or loss.

Non-current assets held for sale and
discontinued operations
The Group classifies non-current assets
and disposal groups as held for sale if
their carrying amounts will be recovered
principally through a sale transaction
rather than through continuing use.
Non-current assets and disposal groups
classified as held for sale are measured
at the lower of their carrying amount
and fair value less costs to sell. Costs
to sell are the incremental costs directly
attributable to the disposal of an asset
(disposal group), excluding finance costs
and income tax expense.

The criteria for held for sale classification
is regarded as met only when the sale is
highly probable and the asset or disposal
group is available for immediate sale in
its present condition. Actions required to
complete the sale should indicate that it
is unlikely that significant changes to the
sale will be made or that the decision to
sell will be withdrawn.

Management must be committed to
the plan to sell the asset and the sale
expected to be completed within one
year from the date of the classification.

Property, plant and equipment and
intangible assets are not depreciated
or amortised once classified as held
for sale.

Assets and liabilities classified as held
for sale are presented separately as
current items in the statement of financial
position.

A disposal group qualifies as a
discontinued operation if it is a
component of an entity that either has
been disposed of, or is classified as held
for sale, and:

• Represents a separate major line

of business or geographical area of
operations;

• Is part of a single co-ordinated plan
to dispose of a separate major line
of business or geographical area of
operations; or

• Is a subsidiary acquired exclusively

with a view to resale.

Discontinued operations are excluded
from the results of continuing operations
and are presented as a single amount as
profit or loss after tax from discontinued
operations in the statement of profit
or loss.

Income taxes
Income taxes have been provided for
in the consolidated financial statements
in accordance with management’s
interpretation of the relevant legislation
enacted or substantively enacted as
at the reporting date. The income tax
charge comprises current tax and
deferred tax and is recognised in the
consolidated statement of profit or
loss and other comprehensive income
unless it relates to transactions that are
recognised, in the same or a different
period, directly in equity.

In the case of a business combination,
the tax effect is taken into account in
calculating goodwill or determining the
excess of the acquirer’s interest in the
net fair value of the acquiree’s identifiable
assets, liabilities and contingent liabilities
over cost of consideration paid.

Current tax is the amount expected to
be paid to or recovered from the taxation
authorities in respect of taxable profits or
losses for the current and prior periods.
Deferred income tax is recorded using
the balance sheet liability method for
tax loss carry-forwards and temporary
differences arising between the tax bases
of assets and liabilities and their carrying
amounts for financial reporting purposes.
Deferred tax balances are measured
at tax rates enacted or substantively
enacted at the reporting date, which are
expected to apply to the period when
the temporary differences will reverse
or the tax loss carry-forwards will be
utilised. Deferred tax assets and liabilities
are netted only within the individual
companies of the Group. Deferred
tax assets for deductible temporary
differences and tax loss carry-forwards
are recorded only to the extent that it is
probable that future taxable profit will be
available against which the deductions
can be utilised.

Deferred tax liabilities are recognised for
all taxable temporary differences, except:

• When the deferred tax liability arises
from the initial recognition of goodwill
or an asset or liability in a transaction
that is not a business combination
and, at the time of the transaction,
affects neither the accounting profit nor
taxable profit or loss.

• In respect of taxable temporary
differences associated with
investments in subsidiaries, associates
and interests in joint ventures,
when the timing of the reversal of
the temporary differences can be
controlled and it is probable that the
temporary differences will not reverse
in the foreseeable future.

103

STRATEGIC REPORT

CORPORATE GOVERNANCE FINANCIAL STATEMENTS APPENDICES

Deferred tax assets are recognised for
all deductible temporary differences, the
carry-forward of unused tax credits and
any unused tax losses to the extent that
it is probable that taxable profit will be
available against which the deductible
temporary differences, and the carry-
forward of unused tax credits and unused
tax losses can be utilised, except:

• When the deferred tax asset relating

to the deductible temporary difference
arises from the initial recognition of an
asset or liability in a transaction that is
not a business combination and, at the
time of the transaction, affects neither
the accounting profit nor taxable profit
or loss.

• In respect of deductible temporary

differences associated with investments
in subsidiaries, associates and
interests in joint ventures, deferred
tax assets are recognised only to
the extent that it is probable that the
temporary differences will reverse in
the foreseeable future and taxable
profit will be available against which
the temporary differences can
be utilised.

The carrying amount of deferred tax
assets is reviewed at each reporting date
and reduced to the extent that it is no
longer probable that sufficient taxable
profits will be available to allow all or
part of the asset to be recovered.

The measurement of deferred tax
liabilities and assets reflects the tax
consequences that would follow from the
manner in which the Group expects, at
the reporting date, to recover or settle
the carrying amount of its assets and
liabilities.

Deferred tax assets and liabilities are
offset when there is a legally enforceable
right to set off current tax assets against
current tax liabilities and when they
relate to income taxes levied by the
same taxation authority and the Group
intends to settle its current tax assets
and liabilities on a net basis.

Inventories
Inventories are stated at the lower of
cost and net realisable value. Cost of
inventory is determined on the weighted
average basis. Net realisable value is
the estimated selling price in the ordinary
course of business, less the cost of
completion and selling expenses. Cost
comprises the direct cost of goods,
transportation and handling costs.
Cost of sales comprises only cost of
inventories sold through retail stores
and inventory write-downs made during
the period.

Borrowing costs
Borrowing costs directly attributable
to the acquisition, construction or
production of qualifying assets are
capitalised as part of the cost of that
asset, other borrowing costs are
recognised in profit or loss in the period
in which they are incurred. A qualifying
asset is an asset that necessarily takes
a substantial period of time to get ready
for its intended use or sale. For the
purposes of borrowing costs recognition,
a substantial period of time is considered
to be a period of twelve months or more.

To the extent that the Group borrows
funds generally and uses them for the
purpose of obtaining a qualifying asset,
the Group determines the amount of
borrowing costs eligible for capitalisation
by applying a capitalisation rate to
the expenditures on that asset. The
capitalisation rate is the weighted
average of the borrowing costs
applicable to the borrowings of the
Group that are outstanding during the
period, other than borrowings made
specifically for the purpose of obtaining
a qualifying asset.

Revenue from contracts with
customers
The sole source of revenue from
contracts with customers is retail sales.

The Group recognises revenue when
control of the goods and services is
transferred to the customer, generally for
the retail customers it is occurred in the
stores at the point of sale. Payment of
the transaction price is due immediately
when the customer purchases goods.

The customers have right of return,
which is regulated by Russian legislation
and is possible within up to 14 days
since the purchase with the exception for
certain categories of goods. Accumulated
experience is used to estimate such
returns at the time of sale at a portfolio
level (expected value method). Because
the number of products returned has
been steady for years, it is highly
probable that a significant reversal in the
cumulative revenue recognised will not
occur. The validity of this assumption
and the estimated amount of returns are
reassessed at each reporting date.

The loyalty programme offered by
the Group gives rise to a separate
performance obligation because it
generally provides a material right to the
customer. The Group allocates a portion
of the transaction price to the loyalty
programme based on relative stand-
alone selling price and recognise as a
contract liability.

Other income
Income generated from rental of
spaces for small trading outlets within
the Group’s stores is recognised in the
end of each month on a straight-line
basis over the period of the lease, in
accordance with the terms of the relevant
lease agreements.

Interest income is recognised on a
time-proportion basis using the effective
interest rate method. Interest income is
included into the Interest income line in
the statement of comprehensive income.

Suppliers’ allowances
The Group receives various types of
allowances from vendors in the form
of volume discounts and other forms
of payments that effectively reduce
the cost of goods purchased from the
vendor. These allowances received from
suppliers are recorded as a reduction
in the price paid for the products and
reduce cost of goods sold in the period
the products are sold. Where a rebate
agreement with a supplier covers
more than one year, the rebates are
recognised in the period in which they
are earned.

LENTA ANNUAL REPORT AND ACCOUNTS 2018104

Notes to the consolidated financial statements continued

2. BASIS OF PREPARATION AND
SIGNIFICANT ACCOUNTING
POLICIES CONTINUED
2.3 SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES CONTINUED
Employee benefits
The Group is subject to mandatory
contributions to the Russian Federation
defined contribution state pension benefit
fund. Wages, salaries, contributions to
the state pension and social insurance
funds, paid annual leave and sick leave,
bonuses, and non-monetary benefits
are accrued in the year in which the
associated services are rendered by
the employees of the Group.

Share-based payments
Certain employees (including senior
executives) of the Group receive
remuneration in the form of share-based
payments, whereby employees render
services as consideration for equity
instruments (equity-settled transactions).

The cost of equity-settled transactions
is determined by the fair value at the
date when the grant is made using an
appropriate valuation model.

That cost is recognised, together with
a corresponding increase in share
options reserve in equity, over the
period in which the performance and/
or service conditions are fulfilled in
employee benefits expense (Note 28).
The cumulative expense recognised
for equity-settled transactions at each
reporting date until the vesting date
reflects the extent to which the vesting
period has expired and the Group’s
best estimate of the number of equity
instruments that will ultimately vest.
The statement of profit or loss expense
or credit for a period represents the
movement in cumulative expense
recognised as at the beginning and
end of that period and is recognised in
employee benefits expense (Note 28).

No expense is recognised for awards
that do not ultimately vest, except for
equity-settled transactions for which
vesting is conditional upon a market
or non-vesting condition.

These are treated as vested irrespective
of whether or not the market or non-
vesting condition is satisfied, provided
that all other performance and/or service
conditions are satisfied.

When the terms of an equity-settled
award are modified, the minimum
expense recognised is the expense had
the terms had not been modified, if the
original terms of the award are met. An
additional expense is recognised for
any modification that increases the total
fair value of the share-based payment
transaction, or is otherwise beneficial to
the employee as measured at the date of
modification.

Pre-opening costs
Operating expenses incurred during the
process of opening of new stores are
recorded in the Group’s consolidated
statement of profit or loss and other
comprehensive income. These expenses
do not meet capitalisation criteria under
IAS 16 Property, Plant and Equipment
and include rent, utilities and other
operating expenses.

Segment reporting
The Group’s business operations are
located in the Russian Federation
and relate primarily to retail sales of
consumer goods. Although the Group
operates through different stores and
in various regions within the Russian
Federation, the Group’s chief operating
decision maker reviews the Group’s
operations and allocates resources on
an individual store-by-store basis. The
Group has assessed the economic
characteristics of the individual stores
and determined that the stores have
similar margins, similar products, similar
types of customers and similar methods
of distributing such products. Therefore,
the Group considers that it only has
one reportable segment under IFRS
8. Segment performance is evaluated
based on a measure of revenue
and earnings before interest, tax,
depreciation and amortisation (EBITDA).
EBITDA is a non-IFRS measure. Other
information is measured in a manner
consistent with that in the consolidated
financial statements.

Seasonality
The Group’s business operations are
stable during the year with limited
seasonal impact, except for a significant
increase of business activities in
December.

Financial assets
Initial measurement
The classification of financial instruments
at initial recognition depends on their
contractual terms and the business
model for managing the instruments.
Financial instruments are initially
measured at their fair value and, except
in the case of financial assets and
financial liabilities recorded at FVPL,
transaction costs are added to, or
subtracted from, this amount.

Measurement categories of
financial assets
From 1 January 2018, the Group
classifies all of its financial assets based
on the business model for managing the
assets and the asset’s contractual terms,
measured at either:

• Amortised cost;

• FVOCI;

• FVPL.

Before 1 January 2018, the Group
classified its financial assets as loans
and receivables (amortised cost), FVPL,
available-for-sale or held-to-maturity
(amortised cost).

Loans and receivables
Trade receivables, loans, and
other receivables that have fixed or
determinable payments that are not
quoted in an active market are classified
as loans and receivables.

Before 1 January 2018, loans and
receivables were measured at amortised
cost using the effective interest rate
method.

105

STRATEGIC REPORT

CORPORATE GOVERNANCE FINANCIAL STATEMENTS APPENDICES

From 1 January 2018, the Group
only measures amounts of loans and
receivables at amortised cost if both of
the following conditions are met:

model, but incorporates such information
when assessing newly originated
or newly purchased financial assets
going forward.

• The financial asset is held within a

business model with the objective to
hold financial assets in order to collect
contractual cash flows;

• The contractual terms of the financial
asset give rise on specified dates to
cash flows that are solely payments of
principal and interest on the principal
amount outstanding (SPPI).

The details of these conditions are
outlined below.

Business model assessment
The Group determines its business
model at the level that best reflects how
it manages groups of financial assets to
achieve its business objective.

The Group’s business model is not
assessed on an instrument-by-instrument
basis, but at a higher level of aggregated
portfolios and is based on observable
factors such as:

• How the performance of the business

model and the financial assets
held within that business model are
evaluated and reported to the entity’s
key management personnel;

• The risks that affect the performance of
the business model (and the financial
assets held within that business model)
and, in particular, the way those risks
are managed;

• How managers of the business are
compensated (for example, whether
the compensation is based on the fair
value of the assets managed or on the
contractual cash flows collected);

• The expected frequency, value and
timing of sales are also important
aspects of the Group’s assessment.

The business model assessment is
based on reasonably expected scenarios
without taking ‘worst case’ or ‘stress
case’ scenarios into account. If cash
flows after initial recognition are realised
in a way that is different from the Group’s
original expectations, the Group does not
change the classification of the remaining
financial assets held in that business

The SPPI test
As a second step of its classification
process the Group assesses the
contractual terms of financial asset to
identify whether they meet the SPPI test.

‘Principal’ for the purpose of this test is
defined as the fair value of the financial
asset at initial recognition and may
change over the life of the financial asset
(for example, if there are repayments of
principal or amortisation of the
premium/discount).

The most significant elements of interest
within a lending arrangement are
typically the consideration for the time
value of money and credit risk. To make
the SPPI assessment, the Group applies
judgement and considers relevant
factors such as the currency in which the
financial asset is denominated, and the
period for which the interest rate is set.

In contrast, contractual terms that
introduce a more than de minimis
exposure to risks or volatility in the
contractual cash flows that are unrelated
to a basic lending arrangement do not
give rise to contractual cash flows that
are solely payments of principal and
interest on the amount outstanding.
In such cases, the financial asset is
required to be measured at FVPL.

Cash and cash equivalents
Cash and short-term deposits in the
statement of financial position comprise
cash at banks and on hand and short-
term deposits with a maturity of three
months or less.

Impairment of financial assets
Before 1 January 2018 financial
assets were assessed for indicators
of impairment at each reporting date.
Financial assets were impaired where
there is objective evidence that, as
a result of one or more events that
occurred after the initial recognition of the
financial asset, the estimated future cash
flows of the financial asset have been
impacted.

For financial assets carried at amortised
cost, the amount of the impairment
was the difference between the asset’s
carrying amount and the present value of
estimated future cash flows, discounted
at the original effective interest rate.

The carrying amount of the financial
asset was reduced by the impairment
loss directly for all financial assets with
the exception of trade receivables where
the carrying amount is reduced through
the use of an allowance account. When a
trade receivable was uncollectible, it was
written off against the allowance account.
Subsequent recoveries of amounts
previously written off were credited
against the allowance account. Changes
in the carrying amount of the allowance
account were recognised in profit or loss.

With the exception of AFS equity
instruments, if, in a subsequent period,
the amount of the impairment loss
decreases and the decrease could be
related objectively to an event occurring
after the impairment was recognised, the
previously recognised impairment loss
was reversed through profit or loss to the
extent that the carrying amount of the
investment at the date the impairment
is reversed did not exceed what the
amortised cost would have been had the
impairment not been recognised.

The adoption of IFRS 9 has
fundamentally changed the Group’s
accounting for all debt instruments not
held at fair value through profit or loss by
replacing IAS 39 incurred loss approach
with a forward-looking expected credit
loss (ECL) approach.

The Group recognises an allowance
for expected credit losses (ECLs) for all
debt instruments not held at fair value
through profit or loss. ECLs are based on
the difference between the contractual
cash flows due in accordance with the
contract and all the cash flows that the
Group expects to receive, discounted
at an approximation of the original
effective interest rate. The expected
cash flows will include cash flows from
the sale of collateral held or other credit
enhancements that are integral to the
contractual terms.

LENTA ANNUAL REPORT AND ACCOUNTS 2018106

Notes to the consolidated financial statements continued

2. BASIS OF PREPARATION AND
SIGNIFICANT ACCOUNTING
POLICIES CONTINUED
2.3 SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES CONTINUED
ECLs are recognised in two stages.
For credit exposures for which there has
not been a significant increase in credit
risk since initial recognition, ECLs are
provided for credit losses that result from
default events that are possible within
the next 12-months (a 12 month ECL).
For those credit exposures for which
there has been a significant increase in
credit risk since initial recognition, a loss
allowance is required for credit losses
expected over the remaining life of the
exposure, irrespective of the timing of
the default (a lifetime ECL).

For trade receivables and contract
assets, the Group applies a simplified
approach in calculating ECLs. Therefore,
the Group does not track changes in
credit risk, but instead recognises a
loss allowance based on lifetime ECLs
at each reporting date. The Group has
established a provision matrix that
is based on its historical credit loss
experience, adjusted for forward-looking
factors specific to the debtors and the
economic environment.

The Group’s cash and cash equivalents
have been assigned low credit risk
based on the external credit ratings
of the respective banks and financial
institutions.

Derecognition of financial assets
A financial asset is derecognised when:

• The rights to receive cash flows from

the asset have expired;

• The Group has transferred its rights
to receive cash flows from the asset
or has assumed an obligation to pay
the received cash flows in full without
material delay to a third party under
a “pass-through” arrangement; and
either (a) the Group has transferred
substantially all the risks and rewards
of the asset, or (b) the Group has
neither transferred nor retained
substantially all the risks and rewards
of the asset but has transferred control
of the asset.

When the Group has transferred its
rights to receive cash flows from an
asset or has entered into a pass-
through arrangement, and has neither
transferred nor retained substantially all
of the risks and rewards of the asset nor
transferred control of the asset, the asset
is recognised to the extent of the Group’s
continuing involvement in the asset.

In that case, the Group also recognises
an associated liability. The transferred
asset and the associated liability are
measured on a basis that reflects the
rights and obligations that the Group
has retained.

Continuing involvement that takes the
form of a guarantee over the transferred
asset is measured at the lower of the
original carrying amount of the asset and
the maximum amount of consideration
that the Group could be required
to repay.

Financial liabilities and equity
instruments issued by the Group
Treasury shares
Own equity instruments that are
reacquired (treasury shares) are
recognised at cost and deducted from
equity. No gain or loss is recognised in
the statement of profit or loss and other
comprehensive income on the purchase,
sale, issue or cancellation of the Group’s
own equity instruments. Any difference
between the carrying amount and the
consideration, if reissued, is recognised
in additional paid-in capital. Voting rights
related to treasury shares are nullified for
the Group and no dividends are allocated
to them. Share options exercised during
the reporting period are satisfied with
treasury shares.

Share capital
Ordinary shares are classified as equity.
Transaction costs of a share issue are
shown within equity as a deduction from
the equity.

Additional paid-in capital
Additional paid-in capital represents
the difference between the fair value of
consideration received and the nominal
value of the issued shares.

Earnings per share
Basic earnings per share amounts are
calculated by dividing the net profit for
the year attributable to ordinary equity
holders of the parent by the weighted
average number of ordinary shares
outstanding during the year.

Diluted earnings per share amounts
are calculated by dividing the net profit
attributable to ordinary equity holders
of the parent (after adjusting for interest
on the convertible preference shares)
by the weighted average number of
ordinary shares outstanding during the
year plus the weighted average number
of ordinary shares that would be issued
on conversion of all the dilutive potential
ordinary shares into ordinary shares.

Classification as debt or equity
Debt and equity instruments are
classified as either financial liabilities
or as equity in accordance with
the substance of the contractual
arrangement. An equity instrument is
any contract that evidences a residual
interest in the assets of an entity after
deducting all of its liabilities. Equity
instruments are recorded at the proceeds
received, net of transaction costs.

Financial liabilities
Financial liabilities of the Group,
including borrowings and trade and
other payables, are initially recognised at
fair value, net of transaction costs, and
subsequently measured at amortised
cost using the effective interest
rate method.

Derecognition of financial liabilities
The Group derecognises financial
liabilities when, and only when, the
Group’s obligations are discharged,
cancelled or they expire.

Offsetting of financial instruments
Financial assets and financial liabilities
are offset and the net amount is reported
in the consolidated statement of financial
position if there is a currently enforceable
legal right to offset the recognised
amounts and there is an intention to
settle on a net basis, to realise the assets
and settle the liabilities simultaneously.

107

STRATEGIC REPORT

CORPORATE GOVERNANCE FINANCIAL STATEMENTS APPENDICES

Designation of a hedge relationship
takes effect prospectively from the date
all of the criteria are met. In particular,
hedge accounting can be applied only
from the date all of the necessary
documentation is completed. Therefore,
hedge relationships cannot be designated
retrospectively.

Amounts recognised as OCI are
transferred to profit or loss when
the hedged transaction affects profit
or loss, such as when the hedged
financial income or financial expense
is recognised or when a forecast
sale occurs.

When the hedged item is the cost of
a non-financial asset or non-financial
liability, the amounts recognised as OCI
are transferred to the initial carrying
amount of the non-financial asset
or liability.

If the hedging instrument expires or is
sold, terminated or exercised without
replacement or rollover (as part of the
hedging strategy), or if its designation
as a hedge is revoked, or when the
hedge no longer meets the criteria for
hedge accounting, any cumulative gain
or loss previously recognised in OCI
remains separately in equity until the
forecast transaction occurs or the foreign
currency firm commitment is met.

Current versus non-current
classification
Derivative instruments are classified
as current or non-current or separated
into current and non-current portions
based on an assessment of the facts
and circumstances (i.e., the underlying
contracted cash flows):

• When the Group expects to hold a
derivative as an economic hedge
for a period beyond 12 months after
the reporting date, the derivative is
classified as non-current (or separated
into current and non-current portions)
consistent with the classification of the
underlying item.

3. SIGNIFICANT ACCOUNTING
JUDGMENTS, ESTIMATES AND
ASSUMPTIONS
In the application of the Group’s
accounting policies, which are described
in Note 2 above, management is required
to make judgments, estimates and
assumptions about the carrying amounts
of assets and liabilities that are not
readily apparent from other sources. The
estimates and associated assumptions
are based on historical experience and
other factors that are considered to be
relevant. Actual results may differ from
these estimates.

The estimates and underlying
assumptions are reviewed on an ongoing
basis. Revisions to accounting estimates
are recognised in the period in which the
estimate is revised if the revision affects
only that period or in the period of the
revision and future periods if the revision
affects both current and future periods.

Judgments that have the most significant
effect on the amounts recognised in
these consolidated financial statements
and estimates that can cause a
significant adjustment to the carrying
amount of assets and liabilities within the
next financial year include:

JUDGMENTS
Operating lease commitments −
Group as lessor
The Group has entered into premises
leases. The Group has determined,
based on an evaluation of the terms
and conditions of the arrangements,
such as the lease term not constituting
a substantial portion of the economic
life of the commercial property, that
it retains all the significant risks and
rewards of ownership of these properties
and accounts for the contracts as
operating leases.

Derivative financial instruments
and hedge accounting
Initial recognition and subsequent
measurement
The Group uses derivative financial
instruments, such as interest rate swaps
and caps, to hedge its interest rate risks.
Such derivative financial instruments
are initially recognised at fair value on
the date on which a derivative contract
is entered into and are subsequently
remeasured at fair value. Derivatives are
carried as financial assets when the fair
value is positive and as financial liabilities
when the fair value is negative.

Any gains or losses arising from changes
in the fair value of derivatives are taken
directly to profit or loss, except for the
effective portion of cash flow hedges,
which is recognised in OCI and later
reclassified to profit or loss when the
hedge item affects profit or loss.

At the inception of a hedge relationship,
the Group formally designates and
documents the hedge relationship to
which the Group wishes to apply hedge
accounting and the risk management
objective and strategy for undertaking
the hedge. The documentation includes
identification of the hedging instrument,
the hedged item or transaction, the
nature of the risk being hedged and how
the entity will assess the effectiveness
of changes in the hedging instrument’s
fair value in offsetting the exposure to
changes in the hedged item’s fair value
or cash flows attributable to the hedged
risk. Such hedges are expected to be
highly effective in achieving offsetting
changes in fair value or cash flows and
are assessed on an ongoing basis to
determine that they actually have been
highly effective throughout the financial
reporting periods for which they were
designated.

Swaps and caps used by the Group
that meet the strict criteria for hedge
accounting are accounted for as cash
flow hedges. The effective portion of the
gain or loss from the hedging instrument
is recognised in other comprehensive
income in the cash flow hedge
reserve, while any ineffective portion is
recognised immediately in profit or loss
as other operating expenses.

LENTA ANNUAL REPORT AND ACCOUNTS 2018108

Notes to the consolidated financial statements continued

3. SIGNIFICANT ACCOUNTING
JUDGMENTS, ESTIMATES AND
ASSUMPTIONS CONTINUED
JUDGMENTS CONTINUED
Assets versus business acquisition
From time to time in the normal course
of business the Group acquires the
companies that are a party to a lease
contract, own the land plot or store
in which the Group is interested. If at
the date of acquisition by the Group,
the company does not constitute an
integrated set of activities and assets
that is capable of being conducted and
managed for the purpose of providing
a return in the form of dividends, lower
costs or other economic benefits directly
to investor, the Group treats such
acquisitions as a purchase of assets (a
leasehold right, land plot or store) in the
consolidated financial statements. The
exercise of judgment determines whether
a particular transaction is treated as a
business combination or as a purchase
of assets.

ESTIMATES AND ASSUMPTIONS
The key assumptions concerning
the future and other key sources of
estimation uncertainty at the reporting
date, that have a significant risk of
causing a material adjustment to
the carrying amounts of assets and
liabilities within the next financial
year, are described below. The Group
based its assumptions and estimates
on parameters available when the
consolidated financial statements were
prepared. Existing circumstances and
assumptions about future developments,
however, may change due to market
changes or circumstances arising
beyond the control of the Group.
Such changes are reflected in the
assumptions when they occur.

LEASES RENEWAL ASSUMPTION
It is presumed that the initial land
leases contracted for short terms will
be renewed for 49 years at completion
of construction of department stores.
Thus, any long-term prepayments at the
inception of the leases are presumed
to have a 49-year useful life. Should
the Group fail to renew the land lease

contracts for a 49-year period, leasehold
rights would have to be written off at the
end of the initial lease term.

INVENTORY VALUATION
Management reviews the inventory
balances to determine if inventories can
be sold at amounts greater than or equal
to their carrying amounts plus costs
to sell. This review also includes the
identification of slow moving inventories,
which are written down based on
inventories ageing and write down rates.
The write down rates are determined by
management following the experience of
sales of such items.

TAX LEGISLATION
Russian tax, currency and customs
legislation is subject to frequent
changes and varying interpretations.
Management’s interpretation of such
legislation in applying it to business
transactions of the Group may be
challenged by the relevant regional
and federal authorities enabled by law
to impose fines and penalties. Recent
events in the Russian Federation
suggest that the tax authorities are
taking a more assertive position in
their interpretation of the legislation
and assessments and as a result, it is
possible that the transactions that have
not been challenged in the past may be
challenged. Fiscal periods remain open
to review by the tax authorities in respect
of taxes for the three calendar years
preceding the year of tax review. Under
certain circumstances reviews may
cover longer periods. While the Group
believes it has provided adequately for all
tax liabilities based on its understanding
of the tax legislation, the above facts
may create additional financial risks
for the Group.

Compensation from insurance
company for fire case
In November 2018 as the result of fire
in one of the stores the Group incurred
losses on property, plant and equipment
disposal, inventory disposal and
interruption of operations since the fire
case till 31 December 2018. The damage
incurred was insured and management
believes that indemnification for losses
is virtually certain. See Note 14 for
further description.

Fair value measurement of financial
instruments
When the fair value of financial assets
and financial liabilities recorded in the
statement of financial position cannot
be derived from active markets, their
fair value is determined using valuation
techniques including the discounted cash
flow model. The inputs to these models
are taken from observable markets
where possible, but where this is not
feasible, a degree of judgment is required
in establishing fair values. The judgments
include considerations of inputs such
as liquidity risk, credit risk and volatility.
Changes in assumptions about these
factors could affect the reported fair value
of financial instruments. See Note 30 for
further discussion.

Impairment of non-financial assets
The Group reviews the carrying amounts
of its assets to determine whether
there is any indication that those assets
are impaired. Impairment exists when
the carrying value of an asset or cash
generating unit exceeds its recoverable
amount, which is the higher of its fair
value less costs to sell and its value
in use.

The fair value less costs to sell calculation
is based on available data from binding
sales transactions, conducted at arm’s
length, for similar assets or observable
market prices less incremental costs for
disposing of the asset.

Due to their subjective nature, these
estimates will likely differ from future
actual results of operations and cash
flows, and it is possible that these
differences could be material.

The value in use calculation is based
on a discounted cash flow model. In
determining the value in use calculation,
future cash flows are estimated from
each store based on cash flows
projection utilising the latest budget
information available. The discounted
cash flow model requires numerous
estimates and assumptions regarding
the future rates of market growth, market
demand for the products and the future
profitability of products.

109

STRATEGIC REPORT

CORPORATE GOVERNANCE FINANCIAL STATEMENTS APPENDICES

Share-based payments
The Group measures the cost of equity-
settled transactions by reference to
the fair value of the equity instruments
at the date at which they are granted.
Estimating fair value for share-
based payment transactions requires
determination of the most appropriate
valuation model, which is dependent on
the terms and conditions of the grant.
This estimate also requires determination
of the most appropriate inputs to the
valuation model including the expected
life of the share option, volatility and
dividend yield and making assumptions
about them. The assumptions and
models used for estimating fair value for
share-based payment transactions are
disclosed in Note 28.

4. ADOPTION OF NEW OR REVISED
STANDARDS AND INTERPRETATIONS
The accounting policies adopted in the
preparation of the consolidated financial
statements are consistent with those
followed in the preparation of the Group’s
annual consolidated financial statements
for the year ended 31 December 2017,
except for the adoption of new or revised
standards and interpretations effective as
of 1 January 2018.

The nature and the impact of each
new standard and amendment are
described below:

IFRS 15 Revenue from Contracts
with Customers
IFRS 15 establishes a new five-step
model that will apply to revenue arising
from contracts with customers. Under
IFRS 15 revenue is recognised at an
amount that reflects the consideration
to which an entity expects to be entitled
in exchange for transferring goods or
services to a customer. The standard
requires entities to exercise judgment,
taking into consideration all of the
relevant facts and circumstances when
applying each step of the model to
contracts with their customers.

The standard also specifies the
accounting for the incremental costs
of obtaining a contract and the costs
directly related to fulfilling a contract. In
accordance with the transition provisions
of IFRS 15 the Group has elected full
retrospective method of adoption.

The Group is in the retail business and
sells its goods through stores operated
by the Group. The revenue recognised
by the Group meets the definition of
revenue from contracts with customers
as per IFRS 15. The Group recognises
revenue when control of the goods and
services is transferred to the customer,
generally for the retail customers it is
occurred in the stores at the point of
sale. Payment of the transaction price
is due immediately when the customer
purchases goods. The customers have
right of return, which is regulated by
Russian legislation and is possible within
up to 14 days since the purchase with
the exception for certain categories of
goods. Accumulated experience is used
to estimate such returns at the time
of sale at a portfolio level (expected
value method). Because the number
of products returned has been steady
for years, it is highly probable that a
significant reversal in the cumulative
revenue recognised will not occur.
The validity of this assumption and
the estimated amount of returns are
reassessed at each reporting date.

Prior to adoption of IFRS 15, the loyalty
programme offered by the Group
results in the allocation of a portion
of the transaction price to the loyalty
programme using the fair value of points
issued and recognition of the deferred
revenue in relation to points issued but
not yet redeemed or expired. Under
IFRS 15 the loyalty programme gives
rise to a separate performance obligation
because it generally provides a material
right to the customer.

Under IFRS 15, the Group need to
allocate a portion of the transaction
price to the loyalty programme based on
relative stand-alone selling price instead
of allocation using the fair value of points
issued, i.e. residual approach, as it did
under IFRIC 13. The Group determined
that, considering the relative stand-alone
selling prices, the amount allocated to
the loyalty programmes should not be
significantly different from the previous
accounting policy.

The deferred revenue in amount of
RUB 221,824 as of 31 December 2017
was reclassified to contract liabilities
in the consolidated statement of
financial position.

IFRS 9 Financial Instruments
The Group applies, for the first time,
IFRS 9 Financial Instruments. The nature
and effect of the introduced changes are
disclosed below.

IFRS 9 Financial Instruments replaces
IAS 39 Financial Instruments:
Recognition and Measurement for
annual periods beginning on or after
1 January 2018, bringing together all
three aspects of the accounting for
financial instruments: classification and
measurement, impairment and hedge
accounting. For the periods starting
1 January 2018, the Group changed its
accounting policy relating to classification
and measurement of financial assets
and liabilities in accordance with the
core principles of the standard. The
Group made a choice to continue
applying IAS 39 Financial Instruments:
Recognition and Measurement to all
existing hedge contracts (Note 31).

As a result of the change in accounting
policy financial assets were classified
as those to be measured subsequently
at amortised cost and with no need
for retrospective adjustments due to
absence of changes in classification of
assets measured at amortised cost.

The adoption of IFRS 9 has
fundamentally changed the Group’s
accounting for impairment losses for
financial assets by replacing IAS 39’s
incurred loss approach with a forward-
looking expected credit loss (ECL)
approach. The Group has chosen to
apply the simplified approach to providing
for expected credit losses prescribed
by IFRS 9, which permits the use of the
lifetime expected loss provision for all
trade and other receivables. The Group
has established a provision matrix that
is based on the Group’s historical credit
loss experience, adjusted for forward-
looking factors specific to the debtors
and the economic environment. The
loss allowance on accounts receivable
amounted to RUB 562,678. For other
debt financial assets (i.e., loans), the
ECL is based on the 12-month ECL. The
loss allowance for other financial assets
held at amortised cost was determined
as insignificant.

LENTA ANNUAL REPORT AND ACCOUNTS 2018110

Notes to the consolidated financial statements continued

4. ADOPTION OF NEW OR REVISED
STANDARDS AND INTERPRETATIONS
CONTINUED

IFRS 9 Financial Instruments
continued
The Group’s cash and cash equivalents
have been assigned low credit risk
based on the external credit ratings
of the respective banks and financial
institutions. Therefore, the Group
determined that no significant allowances
are required at 1 January 2018 in
connection with the adoption of the
new impairment model under IFRS 9.

IFRS 9 requires the Group to revise
the carrying amount of the debt
instrument when a modification is not
accounted for as an extinguishment
to reflect the net present value of the
revised cash flows discounted at the
original effective interest rate together
with a corresponding profit or loss.
The approach applied by the Group
under IAS 39 allowed not to revise the
carrying amount of the debt instrument
and to amortise debt instrument using
the updated effective interest rate. The
change in the accounting policy resulted
in increase in the carrying value of
borrowings by RUB 234,156.

The Group adopted the new standard
with the initial application date of
1 January 2018 and had elected to
apply the limited exemption in IFRS 9
relating to transition for classification
and measurement and impairment, and
accordingly did not restate comparative
periods in the year of initial application.
As a consequence, any adjustments
to carrying amounts of financial assets
or liabilities were recognised at the
beginning of the current reporting period,
with the difference recognised in opening
retained earnings.

Impact on the consolidated statement of financial position as at 1 January 2018:

Current assets
Trade and other receivables

Equity
Retained earnings

Non-current liabilities
Long-term borrowings
Deferred tax liabilities

AMOUNT
PREVIOUSLY
REPORTED

IFRS 9
ADJUSTMENTS

AMOUNT
AFTER CHANGE
IN POLICY

10,957,360

(562,678)

10,394,682

44,316,449

(637,467)

43,678,982

62,194,204
8,386,732

324,305
(159,367)

62,518,509
8,227,365

Current liabilities
Short-term borrowings and short-term
portion of long-term borrowings

44,888,131

(90,149)

44,797,982

Several other amendments and interpretations apply for the first time in 2018, but do
not have an impact on the consolidated financial statements of the Group.

IFRIC Interpretation 22 Foreign
Currency Transactions and
Advance Considerations
The Interpretation clarifies that, in
determining the spot exchange rate to
use on initial recognition of the related
asset, expense or income (or part of it)
on the derecognition of a non-monetary
asset or non-monetary liability relating
to advance consideration, the date of
the transaction is the date on which
an entity initially recognises the non-
monetary asset or non-monetary liability
arising from the advance consideration.
If there are multiple payments or
receipts in advance, then the entity must
determine a date of the transactions
for each payment or receipt of advance
consideration. This Interpretation does
not have any impact on the Group’s
consolidated financial statements.

Amendments to IAS 40 Transfers
of Investment Property
The amendments clarify when an entity
should transfer property, including
property under construction or
development into, or out of investment
property. The amendments state that
a change in use occurs when the
property meets, or ceases to meet,
the definition of investment property
and there is evidence of the change in
use. A mere change in management’s
intentions for the use of a property does
not provide evidence of a change in
use. These amendments do not have
any impact on the Group’s consolidated
financial statements as the Group has
no property that can meet definition of
investment property.

111

STRATEGIC REPORT

CORPORATE GOVERNANCE FINANCIAL STATEMENTS APPENDICES

If an entity, that is not itself an investment
entity, has an interest in an associate or
joint venture that is an investment entity,
the entity may, when applying the equity
method, elect to retain the fair value
measurement applied by that investment
entity associate or joint venture to the
investment entity associate’s or joint
venture’s interests in subsidiaries. This
election is made separately for each
investment entity associate or joint
venture, at the later of the date on which:
(a) the investment entity associate or
joint venture is initially recognised; (b) the
associate or joint venture becomes an
investment entity; and (c) the investment
entity associate or joint venture first
becomes a parent.

These amendments do not have any
impact on the Group’s consolidated
financial statements as the Group is
neither a venture capital organisation,
nor other qualifying entity.

Amendments to IFRS 1 First-time
Adoption of International Financial
Reporting Standards – deletion of
short-term exemptions for first-time
adopters
Short-term exemptions in paragraphs E3-
E7 of IFRS 1 were deleted because they
have now served their intended purpose.
These amendments do not have any
impact on the Group’s consolidated
financial statements as the Group is not
a first-time adopter.

The Group has not early adopted
any other standard, interpretation or
amendment that has been issued, but
is not yet effective.

RECLASSIFICATIONS IN THE CONSOLIDATED
STATEMENT OF FINANCIAL POSITION
Certain reclassifications were done in
terms of reclassifications of security
payments under lease agreements.

5. STANDARDS ISSUED BUT NOT
YET EFFECTIVE
The standards and interpretations that
are issued, but not yet effective, up to
the date of issuance of the Group’s
financial statements are disclosed
below. The Group intends to adopt these
standards, if applicable, when they
become effective.

IFRS 16 Leases
IFRS 16 was issued in January 2016
and it replaces IAS 17 Leases,
IFRIC 4 Determining whether an
Arrangement Contains a Lease,
SIC-15 Operating Leases – Incentives
and SIC-27 Evaluating the Substance of
Transactions Involving the Legal Form of
a Lease. IFRS 16 sets out the principles
for the recognition, measurement,
presentation and disclosure of leases
and requires lessees to account for
all leases under a single on-balance
sheet model similar to the accounting
for finance leases under IAS 17. The
standard includes two recognition
exemptions for lessees – leases of ‘low-
value’ assets (e.g., personal computers)
and short-term leases (i.e., leases with a
lease term of 12 months or less). At the
commencement date of a lease, a lessee
will recognise a liability to make lease
payments (i.e., the lease liability) and an
asset representing the right to use the
underlying asset during the lease term
(i.e., the right-of-use asset). Lessees will
be required to separately recognise the
interest expense on the lease liability and
the depreciation expense on the right-of-
use asset.

Lessees will be also required to
remeasure the lease liability upon the
occurrence of certain events (e.g., a
change in the lease term, a change in
future lease payments resulting from
a change in an index or rate used to
determine those payments). The lessee
will generally recognise the amount of the
remeasurement of the lease liability as
an adjustment to the right-of-use asset.

Amendments to IFRS 2 Classification
and Measurement of Share-based
Payment Transactions
The IASB issued amendments to IFRS 2
Share-based Payment that address
three main areas: the effects of vesting
conditions on the measurement of a
cash-settled share-based payment
transaction; the classification of a
share-based payment transaction with
net settlement features for withholding
tax obligations; and accounting
where a modification to the terms and
conditions of a share-based payment
transaction changes its classification
from cash settled to equity settled. On
adoption, entities are required to apply
the amendments without restating prior
periods, but retrospective application
is permitted if elected for all three
amendments and other criteria are
met. The Group’s accounting policy for
cash-settled share-based payments is
consistent with the approach clarified
in the amendments. Therefore, these
amendments do not have any impact
on the Group’s consolidated financial
statements.

Amendments to IFRS 4 Applying
IFRS 9 Financial Instruments with
IFRS 4 Insurance Contracts
The amendments address concerns
arising from implementing the new
financial instruments standard, IFRS 9,
before implementing IFRS 17 Insurance
Contracts, which replaces IFRS 4. The
amendments introduce two options for
entities issuing insurance contracts: a
temporary exemption from applying
IFRS 9 and an overlay approach.
These amendments are not relevant
to the Group.

Amendments to IAS 28 Investments
in Associates and Joint Ventures –
clarification that measuring
investees at fair value through
profit or loss is an investment-by-
investment choice
The amendments clarify that an entity
that is a venture capital organisation,
or other qualifying entity, may elect,
at initial recognition on an investment-
by-investment basis, to measure its
investments in associates and joint
ventures at fair value through profit
or loss.

LENTA ANNUAL REPORT AND ACCOUNTS 2018112

Notes to the consolidated financial statements continued

5. STANDARDS ISSUED BUT NOT
YET EFFECTIVE CONTINUED
IFRS 16 Leases continued
Lessor accounting under IFRS 16 is
substantially unchanged from today’s
accounting under IAS 17. Lessors will
continue to classify all leases using the
same classification principle as in IAS 17
and distinguish between two types of
leases: operating and finance leases.

IFRS 16 is effective for annual periods
beginning on or after 1 January 2019.
The Group plans to adopt IFRS 16 using
the modified retrospective approach.
Under this approach the comparatives
will not be restated. Lease liabilities and
right-of-use assets will be recognised
at the date of transition to IFRS 16
with corresponding effect recorded in
retained earnings. Modified retrospective
approach assumes recognition of lease
liability discounted using incremental
borrowing rate at the date of transition
and allows the Group to elect how to
measure right-of-use assets on lease-by-
lease basis:

• At amount as if IFRS 16 had been
applied from lease commencement;

• At amount equal to liability (adjusted

for accruals and prepayments).

The Group elects to apply the standard
to contracts that were previously
identified as leases applying IAS 17 and
IFRIC 4. The Group will therefore not
apply the standard to contracts that were
not previously identified as containing a
lease applying IAS 17 and IFRIC 4.

The Group elects to use the exemptions
proposed by the standard:

• On lease contracts for which the lease
terms ends within 12 months as of the
date of initial application;

• On lease contracts for which the
underlying asset is of low value;

• On initial application initial direct costs

will be excluded from the measurement
of the right-of-use asset;

• For all classes of underlying assets
each lease component and any
associated non-lease components
will be accounted as a single lease
component.

The Group is in the process of finalising
the analysis of the potential effect of
IFRS 16 on its consolidated financial
statements. The Group estimates
the possible impact that application
of IFRS 16 will have on the financial
statements in the period of initial
application as follows: increase in
the amount of lease liabilities by
RUB 37,300 m +/-5%, increase in
the amount of right-of-use assets
by RUB 35,700 m +/-5% with the
corresponding difference recognised
as a decrease in equity.

Due to the adoption of IFRS 16, the
Group’s operating profit will improve,
while its depreciation expense and
interest expense will increase. This is
due to the change in the accounting for
expenses of leases that were classified
as operating leases under IAS 17.

IFRS 17 Insurance Contracts
In May 2017, the IASB issued IFRS 17
Insurance Contracts (IFRS 17).
A comprehensive new accounting
standard for insurance contracts
covering recognition and measurement,
presentation and disclosure. Once
effective, IFRS 17 will replace IFRS 4
Insurance Contracts (IFRS 4) that
was issued in 2005. IFRS 17 applied
to all types of insurance contracts
(i.e., life, non-life, direct insurance,
and re-insurance), regardless of the
type of entities that issue them, as
well as to certain guarantees and
financial instruments with discretionary
participation features.

A few scope exceptions will apply.
The overall objective of IFRS 17 is
to provide an accounting model for
insurance contracts that is more useful
and consistent for insurers. In contrast
to the requirements in IFRS 4, which are
largely based on grandfathering previous
local accounting policies, IFRS 17
provides a comprehensive model for
insurance contracts, covering all relevant
accounting aspects. The core of IFRS 17
is the general model, supplemented by:

• A specific adaptation for contracts

with direct participation features (the
variable fee approach);

• A simplified approach (the premium
allocation approach) mainly for short-
duration contracts.

IFRS 17 is effective for reporting periods
beginning on or after 1 January 2021,
with comparative figures required. Early
application is permitted, provided the
entity also applies IFRS 9 and IFRS 15
on or before the date it first applies
IFRS 15. This standard is not applicable
to the Group.

IFRIC Interpretation 23 Uncertainty
over Income Tax Treatment
The interpretation addressed the
accounting for income taxes when tax
treatment involve uncertainty that affects
the application of IAS 12 and does not
apply to taxes or levied outside the scope
of IAS 12, nor does it specifically include
requirements relating to interest and
penalties associated with uncertain tax
treatments. The interpretation specifically
addressed the following:

• Whether an entity considers uncertain

tax treatments separately;

• The assumptions an entity makes

about the examination of tax
treatments by taxation authorities;

• How an entity considers changes in

facts and circumstances.

An entity must determine whether to
consider each uncertain tax treatment
separately or together with one or
more other uncertain tax treatments.
The approach that better predicts the
resolution of the uncertainty should
be followed. The interpretation is
effective for the annual reporting periods
beginning on or after 1 January 2019, but
certain transitions reliefs are available.
The Group will apply the interpretation
from its effective date.

Since the Group operates in a complex
multinational tax environment, applying
the interpretation may affect its
consolidated financial statements and
the required disclosures. In addition, the
Group may need to establish processes
and procedures to obtain information that
is necessary to apply the interpretation
on a timely basis. These amendments
are not expected to have significant
impact on the Group.

113

STRATEGIC REPORT

CORPORATE GOVERNANCE FINANCIAL STATEMENTS APPENDICES

Amendments to IFRS 9:
Prepayment Features with Negative
Compensation
Under IFRS 9, a debt instrument can
be measured at amortised cost or at
fair value through other comprehensive
income, provided that the contractual
cash flows are ‘solely payments of
principal and interest on the principal
amount outstanding’ (the SPPI criterion)
and the instrument is held within the
appropriate business model for that
classification. The amendments to
IFRS 9 clarify that a financial asset
passes the SPPI criterion regardless of
the event or circumstance that causes
the early termination of the contract
and irrespective of which party pays or
receives reasonable compensation for
the early termination of the contract.

The amendments should be applied
retrospectively and are effective from
1 January 2019, with earlier application
permitted. These amendments are
not expected to have any impact on
the Group.

Amendments to IFRS 10 and
IAS 28: Sale or Contribution of
Assets between an Investor and its
Associate or Joint Venture
The amendments address the conflict
between IFRS 10 and IAS 28 in dealing
with the loss of control of a subsidiary
that is sold or contributed to an associate
or joint venture. The amendments
clarify that the gain or loss resulting
from the sale or contribution of assets
that constitute a business, as defined
in IFRS 3, between an investor and its
associate or joint venture, is recognised
in full. Any gain or loss resulting from
the sale or contribution of assets that do
not constitute a business, however, is
recognised only to the extent of unrelated
investors’ interests in the associate or
joint venture. The IASB has deferred
the effective date of these amendments
indefinitely, but an entity that early
adopts the amendments must apply
them prospectively. These amendments
are not expected to have any impact on
the Group.

Amendments to IAS 19: Plan
Amendment, Curtailment or
Settlement
The amendments to IAS 19 address the
accounting when a plan amendment,
curtailment or settlement occurs during
a reporting period. The amendments
specify that when a plan amendment,
curtailment or settlement occurs during
the annual reporting period, an entity is
required to:

• Determine current service cost for the
remainder of the period after the plan
amendment, curtailment or settlement,
using the actuarial assumptions used
to remeasure the net defined benefit
liability (asset) reflecting the benefits
offered under the plan and the plan
assets after that event;

• Determine net interest for the

remainder of the period after the plan
amendment, curtailment or settlement
using: the net defined benefit liability
(asset) reflecting the benefits offered
under the plan and the plan assets
after that event; and the discount rate
used to remeasure that net defined
benefit liability (asset).

The amendments also clarify that an
entity first determines any past service
cost, or a gain or loss on settlement,
without considering the effect of the asset
ceiling. This amount is recognised in
profit or loss. An entity then determines
the effect of the asset ceiling after
the plan amendment, curtailment or
settlement. Any change in that effect,
excluding amounts included in the
net interest, is recognised in other
comprehensive income.

The amendments apply to plan
amendments, curtailments, or
settlements occurring on or after the
beginning of the first annual reporting
period that begins on or after 1 January
2019, with early application permitted.
These amendments are not expected to
have any impact on the Group.

Amendments to IAS 28: Long-term
Interests in Associates and Joint
Ventures
The amendments clarify that an entity
applies IFRS 9 to long-term interests in
an associate or joint venture to which
the equity method is not applied but
that, in substance, form part of the net
investment in the associate or joint
venture (long-term interests). This
clarification is relevant because it implies
that the expected credit loss model
in IFRS 9 applies to such long-term
interests.

The amendments also clarified that, in
applying IFRS 9, an entity does not take
account of any losses of the associate or
joint venture, or any impairment losses
on the net investment, recognised as
adjustments to the net investment in
the associate or joint venture that arise
from applying IAS 28 Investments in
Associates and Joint Ventures.

The amendments should be applied
retrospectively and are effective from
1 January 2019, with early application
permitted. Since the Group does
not have such long-term interests in
its associate and joint venture, the
amendments will not have an impact on
its consolidated financial statements.

ANNUAL IMPROVEMENTS 2015-2017 CYCLE
(ISSUED IN DECEMBER 2017)
These improvements include:

IFRS 3 Business Combinations
The amendments clarify that, when
an entity obtains control of a business
that is a joint operation, it applies the
requirements for a business combination
achieved in stages, including
remeasuring previously held interests
in the assets and liabilities of the joint
operation at fair value. In doing so, the
acquirer remeasures its entire previously
held interest in the joint operation.

The amendments are effective from
1 January 2019, with early application
permitted. These amendments are
currently not applicable to the Group.

LENTA ANNUAL REPORT AND ACCOUNTS 2018114

Notes to the consolidated financial statements continued

5. STANDARDS ISSUED BUT NOT YET EFFECTIVE CONTINUED
ANNUAL IMPROVEMENTS 2015-2017 CYCLE (ISSUED IN DECEMBER 2017) CONTINUED
IFRS 11 Joint Arrangements
A party that participates in, but does not have joint control of, a joint operation might obtain joint control of the joint operation in
which the activity of the joint operation constitutes a business as defined in IFRS 3. The amendments clarify that the previously
held interests in that joint operation are not remeasured.

The amendments are effective from 1 January 2019, with early application permitted. These amendments are currently not
applicable to the Group.

IAS 12 Income Taxes
The amendments clarify that the income tax consequences of dividends are linked more directly to past transactions or events
that generated distributable profits than to distributions to owners. Therefore, an entity recognises the income tax consequences
of dividends in profit or loss, other comprehensive income or equity according to where the entity originally recognised those past
transactions or events.

An entity applies those amendments for annual reporting periods beginning on or after 1 January 2019, with early application
is permitted. When an entity first applies those amendments, it applies them to the income tax consequences of dividends
recognised on or after the beginning of the earliest comparative period. Since the Group’s current practice is in line with these
amendments, the Group does not expect any effect on its consolidated financial statements.

IAS 23 Borrowing Costs
The amendments clarify that an entity treats as part of general borrowings any borrowing originally made to develop a qualifying
asset when substantially all of the activities necessary to prepare that asset for its intended use or sale are complete.

An entity applies those amendments to borrowing costs incurred on or after the beginning of the annual reporting period in which
the entity first applies those amendments. The amendments are effective from 1 January 2019, with early application permitted.
These amendments are not expected to have any impact on the Group.

Amendments to IFRS 3 Business Combinations – Definition of a Business
The IASB issued amendments to the definition of a business in IFRS 3 Business Combinations to help entities determine whether
an acquired set of activities and assets is a business or not. They clarify the minimum requirements for a business, remove the
assessment of whether market participants are capable of replacing any missing elements, add guidance to help entities assess
whether an acquired process is substantive, narrow the definitions of a business and of outputs, and introduce an optional fair
value concentration test.

The amendments must be applied to transactions that are either business combinations or asset acquisitions for which the
acquisition date is on or after the beginning of the first annual reporting period beginning on or after 1 January 2020. Earlier
application is permitted and must be disclosed. These amendments are currently not applicable to the Group.

Amendments to IAS 1 and IAS 8 – Definition of Material
In October 2018, the IASB issued amendments to IAS 1 Presentation of Financial Statements and IAS 8 Accounting Policies,
Changes in Accounting Estimates and Errors to align the definition of ‘material’ across the standards and to clarify certain aspects
of the definition.

The amendments clarify that materiality will depend on the nature or magnitude of information, or both. An entity will need to
assess whether the information, either individually or in combination with other information, is material in the context of the
financial statements.

115

STRATEGIC REPORT

CORPORATE GOVERNANCE FINANCIAL STATEMENTS APPENDICES

The amendments must be applied prospectively. The amendments are effective for annual periods beginning on or after 1 January
2020. Early application is permitted and must be disclosed. Although the amendments to the definition of material is not expected
to have a significant impact on an Group’s financial statements, the introduction of the term ‘obscuring information’ in the definition
could potentially impact how materiality judgments are made in practice, by elevating the importance of how information is
communicated and organised in the financial statements.

The Conceptual Framework for Financial Reporting
The IASB issued the Conceptual Framework for Financial Reporting (the Conceptual Framework) in March 2018. It sets out
a comprehensive set of concepts for financial reporting, standard setting, guidance for preparers in developing consistent
accounting policies and assistance to others in their efforts to understand and interpret the standards.

The Conceptual Framework is effective for annual periods beginning on or after 1 January 2020. The changes to the Conceptual
Framework may affect the application of IFRS in situations where no standard applies to a particular transaction or event.

6. BALANCES AND TRANSACTIONS WITH RELATED PARTIES
The transactions with related parties are made on terms equivalent to those that prevail in arm’s length transactions.

The consolidated financial statements include the following balances with related parties:

Entities with significant influence over the Group:

TPG Capital
Accrued liabilities

The following transactions were carried out with related parties:

Entities with significant influence over the Group:

TPG Capital
Directors fee
Business trip expenses

31 DECEMBER
2018

31 DECEMBER
2017

−

6,192

YEAR ENDED
31 DECEMBER
2018

YEAR ENDED
31 DECEMBER
2017

14,193
299

12,121
1,237

Remuneration to the members of the Board of Directors and key management personnel is as follows:

Short-term benefits
Long-term benefits (share-based payments, Note 28)
Termination benefits
Total remuneration

YEAR ENDED
31 DECEMBER
2018
586,771
165,538
31,821
784,130

YEAR ENDED
31 DECEMBER
2017
527,821
343,345
8,462
879,628

LENTA ANNUAL REPORT AND ACCOUNTS 2018116

Notes to the consolidated financial statements continued

7. PROPERTY, PLANT AND EQUIPMENT

Cost
Balance at 1 January 2018
Additions
Transfers from construction in progress
Transfers from leasehold rights
Transfers from assets held for sale
Disposals
Balance at 31 December 2018

LAND
IMPROVEMENTS

LAND

BUILDINGS

MACHINERY AND
EQUIPMENT

ASSETS UNDER
CONSTRUCTION

TOTAL

21,010,003
−
763,483
171,868
323,094
(31,382)
22,237,066

11,467,330 118,121,718
−
7,578,287
−
−
(874,908)
12,358,156 124,825,097

−
902,322
−
−
(11,496)

52,948,637
−
7,689,055
−
−
(651,009)
59,986,683

18,174,541
(16,933,147)
−
−
(57,877)

2,586,799 206,134,487
18,174,541
−
171,868
323,094
(1,626,672)
3,770,316 223,177,318

Accumulated depreciation and impairment
Balance at 1 January 2018
Charge for the year
Disposals
Balance at 31 December 2018

−
−
−
−

1,646,511
400,454
(2,693)
2,044,272

15,000,631
4,704,031
(626,826)
19,077,836

19,178,939
6,351,622
(499,414)
25,031,147

−
−
−
−

35,826,081
11,456,107
(1,128,933)
46,153,255

Net book value
Balance at 1 January 2018
Balance at 31 December 2018

21,010,003
22,237,066

9,820,819 103,121,087
10,313,884 105,747,261

33,769,698
34,955,536

2,586,799 170,308,406
3,770,316 177,024,063

Cost
Balance at 1 January 2017
Additions
Transfers from construction in progress
Transfers from leasehold rights
Transfers to assets held for sale
Disposals
Balance at 31 December 2017

LAND
IMPROVEMENTS

LAND

BUILDINGS

MACHINERY AND
EQUIPMENT

ASSETS UNDER
CONSTRUCTION

TOTAL

17,870,601
−
2,739,073
898,288
(378,611)
(119,348)
21,010,003

10,063,825 100,491,459
−
17,701,414
−
−
(71,155)
11,467,330 118,121,718

−
1,403,505
−
−
−

42,961,063
313
10,261,262
−
−
(274,001)
52,948,637

31,575,451
(32,105,254)
−
(124,298)
(47,166)

3,288,066 174,675,014
31,575,764
−
898,288
(502,909)
(511,670)
2,586,799 206,134,487

Accumulated depreciation and impairment
Balance at 1 January 2017
Charge for the year
Disposals
Balance at 31 December 2017

−
−
−
−

1,300,128
346,383
−
1,646,511

11,325,932
3,678,008
(3,309)
15,000,631

14,236,665
5,151,841
(209,567)
19,178,939

−
−
−
−

26,862,725
9,176,232
(212,876)
35,826,081

Net book value
Balance at 1 January 2017
Balance at 31 December 2017

17,870,601
21,010,003

8,763,697
89,165,527
9,820,819 103,121,087

28,724,398
33,769,698

3,288,066 147,812,289
2,586,799 170,308,406

During the years ended 31 December 2018 and 2017 the Group was not involved in acquisition or contribution of any assets that
would satisfy the definition of qualifying assets for the purposes of borrowing costs capitalisation. Thus, no borrowings costs were
capitalised during those periods.

No property, plant and equipment is held by the Group under finance leases at 31 December 2018 and as at 31 December 2017.

117

STRATEGIC REPORT

CORPORATE GOVERNANCE FINANCIAL STATEMENTS APPENDICES

DEPRECIATION AND AMORTISATION EXPENSE
The amount of depreciation charged during the year ended 31 December 2018 and year ended 31 December 2017 is presented
within depreciation and amortisation in the Group’s consolidated statement of profit or loss and other comprehensive income and
statement of cash flows as follows:

Depreciation and impairment of property, plant and equipment
Amortisation of intangible assets (Note 11)
Impairment of assets held for sale
Leasehold rights amortisation (Note 9)
Total depreciation, amortisation and impairment

See Note 29 for capital commitments.

YEAR ENDED
31 DECEMBER
2018
11,456,107
553,338
−
100,262
12,109,707

YEAR ENDED
31 DECEMBER
2017
9,176,232
424,753
222,147
90,462
9,913,594

8. PREPAYMENTS FOR CONSTRUCTION
Prepayments for construction are made to the contractors for the building of the stores and to suppliers.

Prepayments are regularly monitored on the subject of impairment. An impairment analysis is performed at each reporting date on
an individual basis for counterparties. A provision for impairment is established when there is objective evidence that the Group
will not be able to collect all amounts due according to the original terms of prepayments. As at 31 December 2018 the Group
accounted for the reversal of impairment of prepayments in the amount of RUB 22,291 (31 December 2017: the Group impaired
RUB 125,749 of prepayments).

9. LEASEHOLD RIGHTS
Leasehold rights as at 31 December 2018 consist of the following:

Cost
At 1 January 2018
Additions
Transfer to PPE
Transfer from assets held for sale
At 31 December 2018

Accumulated amortisation
At 1 January 2018
Charge for the year
Transfer to PPE
Transfer to assets held for sale
At 31 December 2018

Net book value
At 1 January 2018
At 31 December 2018

LEASEHOLD
RIGHTS

3,342,281
267,640
(190,294)
100,000
3,519,627

267,254
100,262
(18,426)
−
349,090

3,075,027
3,170,537

LENTA ANNUAL REPORT AND ACCOUNTS 2018

118

Notes to the consolidated financial statements continued

9. LEASEHOLD RIGHTS CONTINUED
Leasehold rights as at 31 December 2017 consisted of the following:

Cost
At 1 January 2017
Additions
Transfer to PPE
Transfer to assets held for sale
At 31 December 2017

Accumulated amortisation
At 1 January 2017
Charge for the year
Transfer to PPE
Transfer to assets held for sale
At 31 December 2017

Net book value
At 1 January 2017
At 31 December 2017

LEASEHOLD
RIGHTS

3,979,647
462,099
(946,465)
(153,000)
3,342,281

235,638
90,462
(48,178)
(10,668)
267,254

3,744,009
3,075,027

Amortisation expense is included in selling, general and administrative expenses (Note 26).

10. OPERATING SEGMENTS
The Group’s principal business activity is the development and operation of food retail stores located in Russia. Risks and returns
are affected primarily by economic development in Russia and by the development of Russian food retail industry.

The Group has no significant assets outside the Russian Federation (excluding investments in its foreign wholly owned
intermediate holding subsidiary Zoronvo Holdings Limited, which is eliminated on consolidation). Due to the similar economic
characteristics of food retail stores, the Group’s management has aggregated its operating segments represented by stores into
one reportable operating segment. Within the segment all business components are similar in respect of:

• The products;

• The customers;

• Centralised Group structure (commercial, operational, logistic, finance, HR and IT functions are centralised).

The Group’s operations are regularly reviewed by the chief operating decision maker, represented by the CEO, to analyse
performance and allocate resources within the Group. The CEO assesses the performance of operating segments based on the
dynamics of revenue and earnings before interest, tax, depreciation, amortisation (EBITDA). EBITDA is a non-IFRS measure.
Other information is measured in a manner consistent with that in the consolidated financial statements.

The accounting policies used for the operating segment are the same as accounting policies applied for the consolidated financial
statements.

The segment information for the year ended 31 December 2018 and 2017 is as follows:

Sales
EBITDA

YEAR ENDED
31 DECEMBER
2018
413,562,197
36,194,160

YEAR ENDED
31 DECEMBER
2017
365,177,586
35,490,158

119

STRATEGIC REPORT

CORPORATE GOVERNANCE FINANCIAL STATEMENTS APPENDICES

Reconciliation of EBITDA to IFRS profit for the year is as follows:

EBITDA
Interest expense
Interest income
Income tax expense (see Note 22)
Depreciation/amortisation and impairment (see Note 7, 9, 11, 26)
Foreign exchange gains
Profit for the year

YEAR ENDED
31 DECEMBER
2018
36,194,160
(9,699,272)
608,472
(3,022,988)
(12,109,707)
(176,371)
11,794,294

YEAR ENDED
31 DECEMBER
2017
35,490,158
(10,942,820)
445,751
(1,908,354)
(9,913,594)
92,398
13,263,539

11. INTANGIBLE ASSETS OTHER THAN LEASEHOLD RIGHTS
Intangible assets other than leasehold rights as at 31 December 2018 consist of the following:

Cost
At 1 January 2018
Additions
Disposals
At 31 December 2018

Accumulated amortisation
At 1 January 2018
Amortisation for the year
Disposals
At 31 December 2018

Net book value
At 1 January 2018
At 31 December 2018

SOFTWARE

TRADE MARKS

TOTAL

3,461,608
642,512
(199,666)
3,904,454

1,644,892
553,338
(199,666)
1,998,564

1,816,716
1,905,890

549
−
(549)
−

3,462,157
642,512
(200,215)
3,904,454

1,645,441
553,338
(200,215)
1,998,564

−
−

1,816,716
1,905,890

Intangible assets other than leasehold rights as at 31 December 2017 consisted of the following:

Cost
At 1 January 2017
Additions
Disposals
At 31 December 2017

Accumulated amortisation
At 1 January 2017
Amortisation for the year
Disposals
At 31 December 2017

Net book value
At 1 January 2017
At 31 December 2017

SOFTWARE

TRADE MARKS

TOTAL

3,167,431
377,301
(83,124)
3,461,608

1,277,256
424,753
(57,117)
1,644,892

1,890,176
1,816,716

549
−
−
549

3,167,980
377,301
(83,124)
3,462,157

1,277,805
424,753
(57,117)
1,645,441

−
−

1,890,176
1,816,716

Amortisation expense is included in selling, general and administrative expenses (Note 26). As of 31 December 2018 and 2017
the trademarks are fully amortised.

LENTA ANNUAL REPORT AND ACCOUNTS 2018

120

Notes to the consolidated financial statements continued

12. OTHER NON-CURRENT ASSETS
Other non-current assets are represented by long-term advances given to the lessors and guarantee payments under lease
contracts.

13. INVENTORIES

Goods for resale (at lower of cost and net realisable value)
Raw materials
Total inventories

31 DECEMBER
2018
40,193,130
1,307,721
41,500,851

31 DECEMBER
2017
35,969,948
963,180
36,933,128

Raw materials are represented by inventories used in own production process in butchery, bakery and culinary.

Goods for resale (at cost)
Write down to net realisable value
Goods for resale (at lower of cost and net realisable value)

31 DECEMBER
2018
41,495,079
(1,301,949)
40,193,130

31 DECEMBER
2017
36,881,127
(911,179)
35,969,948

During the reporting period the Group accounted for write down of inventories to their net realisable value, which resulted in
recognition of expenses within cost of sales in the consolidated statement of profit or loss and other comprehensive income for the
year ended 31 December 2018 in the amount of RUB 397,251 (31 December 2017: reversal of write down in the amount of
RUB 333,945).

14. TRADE AND OTHER RECEIVABLES

Accounts receivable on rental and other services and on suppliers’ advertising
Suppliers’ rebates receivable
Other receivables
Expected credit losses of accounts receivable
Total trade and other receivables

31 DECEMBER
2018
6,627,239
4,065,760
844,002
(264,399)
11,272,602

31 DECEMBER
2017
7,908,931
2,944,202
261,143
(156,916)
10,957,360

As at 31 December 2018 the Group recognised within the other receivables the amount due from insurance company
of RUB 655,018 which relates to compensation for lost property, plant, and equipment of RUB 271,541, lost inventory of
RUB 186,568 and for interruption of operations of RUB 196,909 as the result of fire case in one of the stores.

Customer credit risk is managed by each business unit subject to the Group’s established policy, procedures and control relating
to customer credit risk management. Credit quality of a customer is assessed based on an extensive credit rating scorecard and
individual credit limits are defined in accordance with this assessment.

An impairment analysis is performed at each reporting date using a provision matrix to measure expected credit losses. The
provision rates are based on days past due for groupings of various customer segments with similar loss patterns (i.e., by
customer type and rating) and the likelihood of default over a given time horizon. The calculation reflects the probability-weighted
outcome, the time value of money and reasonable and supportable information that is available at the reporting date about past
events, current conditions and forecasts of future economic conditions.

121

STRATEGIC REPORT

CORPORATE GOVERNANCE FINANCIAL STATEMENTS APPENDICES

Set out below is the information about the credit risk exposure on the Group’s trade and other receivables as at 31 December
2018 using a provision matrix:

Expected credit loss rate
Estimated total gross carrying amount
at default
Expected credit loss

CURRENT
0%-1.5%

10,749,050
118,461

<60 DAYS
OVERDUE
3%-5%

598,869
17,359

60-120 DAYS
OVERDUE
20%-40%

>120 DAYS
OVERDUE
70%-100%

TOTAL

23,848
9,437

165,234
119,142

11,537,001
264,399

Set out below is the movement in the allowance for expected credit losses of trade and other receivables:

As at 1 January 20181
Provision for expected credit losses
Write-off
As at 31 December 2018

719,594
(86,312)
(368,883)
264,399

1. Opening balance is adjusted in accordance with the change in the accounting policies due to application of IFRS 9 (Note 4).

Ageing of trade and other receivables that were past due but not impaired as at 31 December 2017:

Suppliers’ volume rebates receivable
Accounts receivable on rental and other
services
Other receivables
Total

0-60 DAYS
OVERDUE
29,007

388,767
62,623
480,397

60-120 DAYS
OVERDUE
10,057

120-365 DAYS
OVERDUE
13,397

NEITHER PAST DUE
NOR IMPAIRED
2,825,699

5,485
5,291
20,833

16,963
7,647
38,007

7,434,682
157,742
10,418,123

TOTAL
2,878,160

7,845,897
233,303
10,957,360

The Group does not hold any collateral or other credit enhancements over these balances.

15. ADVANCES PAID

Advances to suppliers of goods
Advances for services
Total advances paid

31 DECEMBER
2018
1,242,760
1,529,424
2,772,184

31 DECEMBER
2017
1,847,513
565,998
2,413,511

16. TAXES RECOVERABLE
Taxes recoverable as at 31 December 2018 are represented by a VAT recoverable of RUB 992,378 (31 December 2017:
RUB 2,874,174).

LENTA ANNUAL REPORT AND ACCOUNTS 2018122

Notes to the consolidated financial statements continued

17. CASH AND CASH EQUIVALENTS

Rouble short-term deposits
Rouble denominated cash in transit
Rouble denominated cash on hand and balances with banks
Foreign currency denominated cash on hand and balances with banks
Total cash and cash equivalents

31 DECEMBER
2018
15,086,436
6,837,498
11,706,057
174,869
33,804,860

31 DECEMBER
2017
2,540,825
7,135,388
4,530,925
94,721
14,301,859

Cash in transit represents cash receipts made during the last days of the reporting period (29-31 December), which were sent to
banks but not deposited into the respective bank accounts until the next reporting period.

Significant rouble denominated cash in transit result from the business seasonality, indicating higher levels of retail sales in holiday
periods such as the New Year’s Eve as well as the closing day in relation to the official banking days in Russia. If the closing day is
on non-banking days, the amount of cash in transit increases.

Short-term deposits are made for varying periods of between one day and three months, depending on the immediate cash
requirements of the Group, and earn interest at the respective short-term deposit rates.

18. ISSUED CAPITAL AND RESERVES
ISSUED CAPITAL
As at 31 December 2018 the Company’s share capital is comprised of 97,508,265 authorised and issued ordinary shares (as
at 31 December 2017: 97,416,963) with equal voting rights. Paid value of shares with no par value is fully accounted for within
additional paid-in capital.

All outstanding ordinary shares are entitled to an equal share in any dividend declared by the Company. According to the BVI
Business Companies Act No. 16 of 2004, no dividends can be declared and paid unless the Board of Directors determines that
immediately after the payment of the dividend the Group will be able to satisfy its liabilities as they become due in the ordinary
course of its business and the realisable value of the assets of the Group will not be less than the sum of its total liabilities, other
than deferred taxes, as shown in the books of account, and its capital. In accordance with Russian legislation, Lenta LLC, the
Company’s primary operating subsidiary registered under the laws of the Russian Federation, may distribute profits as dividends
or transfer them to reserves (fund accounts) limited to the retained earnings recorded in its financial statements prepared
in accordance with Russian Accounting Rules. No dividends to holders of ordinary shares are declared for the years ended
31 December 2018 and 2017.

The movements in the number of shares for the years ended 31 December 2018 and 2017 are as follows:

Authorised share capital (ordinary shares)
Issued and fully paid (no par value)
Treasury shares

Balance of shares outstanding at beginning of financial year
Additional issue of shares
Shares buy-back
Balance of shares outstanding at the end of financial year

31 DECEMBER
2018
NO.
unlimited
97,508,265
(235,319)

31 DECEMBER
2018
NO.
97,416,963
91,302
(235,319)
97,272,946

31 DECEMBER
2017
NO.
unlimited
97,416,963
−

31 DECEMBER
2017
NO.
97,318,746
98,217
−
97,416,963

During the year ended 31 December 2018 the Group issued 91,302 shares of no par value with respect to long-term incentive
plans to certain members of management (21,800 shares) and share value appreciation rights to top management (69,502
shares) (see Note 28).The issued shares were transferred into GDR and distributed to relevant participants.

123

STRATEGIC REPORT

CORPORATE GOVERNANCE FINANCIAL STATEMENTS APPENDICES

Total expense for the services received from the employees previously recognised with respect to issued shares under long-term
incentive plans was RUB 52,040. Total expense for the services received from the employees recognised with respect to shares
issued under share value appreciation rights was RUB 405,232.

In October 2018 the Group launched GDR repurchase programme up to an aggregate value of RUB 11,600,000, as the result of
which 235,319 shares were repurchased at the year end.

Share options reserve
The share options reserve is used to recognise the value of equity-settled share-based payments provided to employees,
including key management personnel, as part of their remuneration. Refer to Note 28 for further details of these plans.

Hedging reserve
The hedging reserve is used to recognise the effective portion of the gain or loss from the hedging instrument and later reclassified
to profit or loss when the hedge item affects profit or loss.

19. COMPONENTS OF OTHER COMPREHENSIVE INCOME (OCI)

Cash flow hedges
Reclassification during the year to profit or loss
Related tax effect
Gain/(loss) arising during the year
Related tax effect
Net loss during the year

20. EARNINGS PER SHARE

Earnings per share (in thousands of Russian roubles per share)
– basic and diluted, for profit for the period attributable to equity holders of the parent

YEAR ENDED
31 DECEMBER
2018

YEAR ENDED
31 DECEMBER
2017

(203,887)
40,778
(2,221)
444
(164,886)

(212,248)
42,450
(121,107)
24,221
(266,684)

YEAR ENDED
31 DECEMBER
2018

YEAR ENDED
31 DECEMBER
2017

0.121

0.136

The calculation of basic earnings per share for reporting periods is based on the profit attributable to shareholders (for the year
ended 31 December 2018: RUB 11,794,294, for the year ended 31 December 2017: RUB 13,263,539) and a weighted average
number of ordinary shares outstanding during the respective periods, calculated as shown below.

Number of issued shares at the beginning of period
Number of shares issued in June 2017
Number of shares issued in July 2018
Number of shares repurchased in November-December 2018
Number of shares at the end of reporting period
Weighted average number of shares

YEAR ENDED
31 DECEMBER
2018
97,416,963
−
91,302
(235,319)
97,272,946
97,445,815

YEAR ENDED
31 DECEMBER
2017
97,318,746
98,217
−
−
97,416,963
97,327,428

The Group has issued share-based payments (Note 28) instruments that could potentially dilute basic earnings per share in the
future. These instruments have no material effect on dilution of earnings per share for the periods presented.

LENTA ANNUAL REPORT AND ACCOUNTS 2018124

Notes to the consolidated financial statements continued

21. BORROWINGS
SHORT-TERM BORROWINGS:

Fixed rate long-term bonds (liability for interests)
Fixed rate long-term bank loans (liability for interests)
Floating rate long-term bank loans (liability for interests)
Fixed rate short-term bonds (liability for interests)
Fixed rate short-term bank loans (liability for interests)
Short-term portion of fixed rate long-term bank loans
Short-term portion of fixed rate long-term bonds
Total short-term borrowings and short-term portion of long-term borrowings

LONG-TERM BORROWINGS:

Fixed rate bonds
Fixed rate long-term bank loans
Floating rate long-term bank loans
Total long-term borrowings

CURRENCY
RUB
RUB
RUB
RUB
RUB
RUB
RUB

31 DECEMBER
2018
56,680
208,537
564,138
1
38,258
19,871,363
21
20,738,998

31 DECEMBER
2017
39,333
115,400
609,503
719,442
49,591
26,390,004
16,964,858
44,888,131

CURRENCY
RUB
RUB
RUB

31 DECEMBER
2018
5,559,870
74,648,179
26,133,242
106,341,291

31 DECEMBER
2017
4,993,339
31,410,105
25,790,760
62,194,204

The Groups’ borrowings as at 31 December 2018 and 2017 are denominated in Russian roubles and are not secured by any pledge.

On 5 February 2018 the Group executed an offer of BO-03 series bonds with total nominal value of RUB 4,461,535.

On 6 February 2018 the Group signed 4 year loan agreement of RUB 4,100,000 with UniCredit Bank JSC. The loan bears
financial covenant.

On 27 February 2018 the Group signed master agreement on general terms and conditions for short-term lending transactions
with UniCredit Bank JSC for 1 year with auto-prolongation.

On 10 April 2018 the Group signed non-revolving credit line of RUB 15,000,000 with Sberbank PJSC with maturity date
7 January 2021. The loan bears financial covenant.

On 15 June 2018 the Group signed master agreement on general terms and conditions for lending transactions with
Gazprombank JSC for indefinite term.

On 30 August 2018 the Group executed an offer of 03 series bonds with total value of RUB 3,975,928.

On 5 September 2018 the Group signed non-revolving credit line of RUB 10,000,000 with Rosbank PJSC with maturity date
5 March 2020. The loan bears financial covenant.

On 6 September 2018 the Group executed an offer of 01 series bonds with total value of RUB 2,998,648.

On 10 September 2018 the Group executed an offer of BO-06 series bonds with total nominal value of RUB 4,999,950.

On 23 October 2018 the Group signed non-revolving credit line of RUB 15,000,000 with Sberbank PJSC with maturity date
1 February 2021. The loan bears financial covenant.

On 26 October 2018 the Group signed loan agreement of RUB 5,000,000 with Promsvyazbank PJSC with maturity date
19 November 2021. The loan bears financial covenant.

On 14 December 2018 the Group signed non-revolving credit line of RUB 5,000,000 with Sberbank PJSC with maturity date
13 December 2021. The loan bears financial covenant.

During the year ended 31 December 2018 the Group received RUB 76,300,000 under credit agreements concluded before
1 January 2018 and repaid RUB 93,535,714.

As at 31 December 2018 the Group had RUB 83,300,000 of unused credit facilities (as at 31 December 2017: RUB 61,550,000).

As at 31 December 2018 the Group is in compliance with all financial covenants of loan agreements.

125

STRATEGIC REPORT

CORPORATE GOVERNANCE FINANCIAL STATEMENTS APPENDICES

22. INCOME TAXES
The Group’s income tax expense for the year ended 31 December 2018 and 31 December 2017 is as follows:

Current tax expense
Deferred tax expense
Income tax expense recognised in profit for the year

YEAR ENDED
31 DECEMBER
2018
1,169,375
1,853,613
3,022,988

YEAR ENDED
31 DECEMBER
2017
691,450
1,216,904
1,908,354

Tax effect related to effective portion of change in the fair value of cash flow hedging instruments
Income tax benefit recognised in OCI

(41,222)
(41,222)

(66,671)
(66,671)

Profit before tax
Theoretical tax charge at 20% being statutory tax rate in Russia
Difference in tax rates for foreign companies and specific tax regime in Russia
Add tax effect of non-taxable income and non-deductible expenses:
– share option expenses
– others
Recognition of previously unrecognised tax losses
Income tax expense

YEAR ENDED
31 DECEMBER
2018
14,817,282
(2,963,456)
133,176
(192,708)
(53,052)
(139,656)
−
(3,022,988)

YEAR ENDED
31 DECEMBER
2017
15,171,893
(3,034,379)
69,752
(161,860)
(84,262)
(77,598)
1,218,133
(1,908,354)

Differences between IFRS and Russian statutory tax regulations give rise to temporary differences between the carrying amount
of assets and liabilities for financial reporting purposes and their tax bases. The tax effect of the movements in these temporary
differences, recorded at the rate of 20% is detailed below.

CHANGE IN THE
ACCOUNTING
POLICIES DUE TO
THE APPLICATION OF
IFRS 9 (NOTE 4)

DIFFERENCES IN
RECOGNITION AND
REVERSALS
RECOGNISED IN
PROFIT OR LOSS

1 JANUARY
2018

DIFFERENCES
IN RECOGNITION
AND REVERSALS
RECOGNISED IN
OTHER COMPRE-
HENSIVE INCOME

Tax effect of (taxable)/deductible
temporary differences
Property, plant and equipment
Leasehold rights
Unused vacation and employee bonuses
accrual
Suppliers’ bonuses
Borrowings
Intangible assets other than leasehold rights
Inventory
Provision for expected credit losses of
accounts receivable, impairment of advances
paid and prepayments for construction
Accrued liabilities
Cash flow hedging instruments
Tax losses carried forward
Other
Total net deferred tax liabilities

(8,612,723)
(546,387)

196,153
(303,860)
(115,445)
(20,603)
319,599

110,253
165,213
(91,565)
543,499
(30,866)
(8,386,732)

−
−

(1,693,650)
(162)

−
−
46,831
−
−

112,536
−
−
−
−
159,367

57,231
273,016
5,730
(11,131)
95,612

(97,893)
94,513
50,343
(543,499)
(83,723)
(1,853,613)

31 DECEMBER
2018

(10,306,373)
(546,549)

253,384
(30,844)
(62,884)
(31,734)
415,211

−
−

−
−
−
−
−

−
−
41,222
−
−
41,222

124,896
259,726
−
−
(114,589)
(10,039,756)

LENTA ANNUAL REPORT AND ACCOUNTS 2018

126

Notes to the consolidated financial statements continued

22. INCOME TAXES CONTINUED

Tax effect of (taxable)/deductible temporary differences
Property, plant and equipment
Leasehold rights
Unused vacation and employee bonuses accrual
Suppliers’ bonuses
Borrowings
Intangible assets other than leasehold rights
Inventory
Provision for impairment of receivables, advances and
prepayments for construction
Accrued liabilities
Cash flow hedging instruments
Tax losses carried forward
Other
Total net deferred tax liabilities

DIFFERENCES
IN RECOGNITION
AND REVERSALS
RECOGNISED IN
PROFIT OR LOSS

DIFFERENCES
IN RECOGNITION
AND REVERSALS
RECOGNISED IN
OTHER COMPRE-
HENSIVE INCOME

(1,124,362)
(115,560)
(65,518)
(302,986)
13,828
3,473
(250,681)

30,304
43,674
−
543,499
7,425
(1,216,904)

−
−
−
−
−
−
−

−
−
66,671
−
−
66,671

1 JANUARY
2017

(7,488,361)
(430,827)
261,671
(874)
(129,273)
(24,076)
570,280

79,949
121,539
(158,236)
−
(38,282)
(7,236,490)

31 DECEMBER
2017

(8,612,723)
(546,387)
196,153
(303,860)
(115,445)
(20,603)
319,599

110,253
165,213
(91,565)
543,499
(30,866)
(8,386,732)

The temporary taxable differences associates with undistributed earnings of subsidiaries amount to RUB 66,696,688 and
RUB 61,556,675 as of 31 December 2018 and 2017, respectively. A deferred tax liability on these temporary differences was
not recognised, because management believes that it is in a position to control the timing of reversal of such differences and has
no intention to reverse them in the foreseeable future.

23. TRADE AND OTHER PAYABLES

Trade payables
Accrued liabilities and other creditors
Payables for purchases of property, plant and equipment
Total trade and other payables

The trade and other payables are denominated in:

Russian roubles
USD
EUR
GBP
Total trade and other payables

31 DECEMBER
2018
46,495,464
5,864,692
3,773,684
56,133,840

31 DECEMBER
2017
46,716,600
5,400,930
5,142,232
57,259,762

31 DECEMBER
2018
55,241,343
653,509
238,953
35
56,133,840

31 DECEMBER
2017
56,281,962
699,959
277,266
575
57,259,762

127

STRATEGIC REPORT

CORPORATE GOVERNANCE FINANCIAL STATEMENTS APPENDICES

24. OTHER TAXES PAYABLE

Social taxes
Property tax
Personal income tax
Other taxes
Total other taxes payable

31 DECEMBER
2018
675,487
123,213
223,012
19,411
1,041,123

31 DECEMBER
2017
482,221
410,756
200,096
38,026
1,131,099

25. COST OF SALES
Cost of sales for the years ended 31 December 2018 and 31 December 2017 consists of the following:

Cost of goods sold
Cost of own production
Supply chain cost
Losses due to inventory shortages and write down to net realisable value
Total cost of sales

YEAR ENDED
31 DECEMBER
2018
287,236,892
22,428,545
4,775,548
10,326,905
324,767,890

YEAR ENDED
31 DECEMBER
2017
252,221,409
24,257,480
3,780,289
6,682,900
286,942,078

Cost of goods sold is reduced by rebates and promotional bonuses received from suppliers.

Cost of sales for the year ended 31 December 2018 includes employee benefits expense of RUB 8,016,548 (year ended
31 December 2017: RUB 6,327,761) of which contributions to state pension fund are comprised of RUB 1,105,764 (year ended
31 December 2017: RUB 860,233).

The cost of own production consists of the following:

Raw materials
Labour costs
Utilities
Repairs and maintenance
Total cost of own production

YEAR ENDED
31 DECEMBER
2018
15,749,849
5,417,029
996,781
264,886
22,428,545

YEAR ENDED
31 DECEMBER
2017
18,751,044
4,411,435
898,094
196,907
24,257,480

LENTA ANNUAL REPORT AND ACCOUNTS 2018128

Notes to the consolidated financial statements continued

26. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

Employee benefits
Depreciation, amortisation and impairment (Note 7, 9, 11)
Advertising
Premises lease
Utilities and communal payments
Professional fees
Cleaning
Repairs and maintenance
Security services
Taxes other than income tax
Land and equipment lease
Pre-opening costs
Other
Total selling, general and administrative expenses

YEAR ENDED
31 DECEMBER
2018
25,202,051
12,109,707
5,192,138
5,693,249
4,498,633
3,786,449
2,872,270
2,688,597
1,871,794
1,458,187
292,157
561,031
3,000,796
69,227,059

YEAR ENDED
31 DECEMBER
2017
20,434,789
9,913,594
3,982,726
3,903,568
3,687,108
2,782,995
2,298,450
2,013,451
1,634,708
1,688,681
308,075
995,158
2,496,428
56,139,731

Employee benefits for the year ended 31 December 2018 include contributions to state pension fund of RUB 3,243,018 (year
ended 31 December 2017: RUB 2,620,860).

Pre-opening costs for the year ended 31 December 2018 include employee benefits of RUB 267,042 (year ended 31 December
2017: RUB 561,197) of which contributions to state pension fund are comprised RUB 31,375 (year ended 31 December 2017:
RUB 70,579).

Professional fees for the year ended 31 December 2018 include fees billed by Ernst & Young LLC: for the audit of the consolidated
financial statements in the amount of RUB 27,510 (for the year ended 31 December 2017: RUB 23,628) and for consulting and
other non-audit services in the amount of RUB 3,613 (for the year ended 31 December 2017: RUB 8,971).

27. OTHER OPERATING INCOME AND EXPENSES
Other operating income is comprised of the following:

Rental income
Penalties due by suppliers
Sale of secondary materials
Advertising income
Gain on property, plant and equipment disposal
Compensation from insurance company (Note 14)
Other
Total other operating income

YEAR ENDED
31 DECEMBER
2018
1,693,100
1,034,121
1,020,253
718,859
140,994
196,909
189,009
4,993,245

YEAR ENDED
31 DECEMBER
2017
1,296,371
1,089,179
755,505
718,264
90,565
−
179,348
4,129,232

129

STRATEGIC REPORT

CORPORATE GOVERNANCE FINANCIAL STATEMENTS APPENDICES

Other operating expenses are comprised of the following:

Expected credit losses of accounts receivable, write-off and impairment
of advances paid and prepayments for construction
Loss from fixed assets and intangible assets disposal
Penalties from government authorities
Penalties for breach of a contracts with suppliers and lessors
Amounts paid in settlement of lawsuit
Non-recoverable VAT
Other
Total other operating expenses

YEAR ENDED
31 DECEMBER
2018

YEAR ENDED
31 DECEMBER
2017

109,168
167,477
39,455
21,996
−
10,117
127,827
476,040

221,491
138,024
110,907
37,706
10,287
10,669
119,361
648,445

28. SHARE-BASED PAYMENTS
LONG-TERM INCENTIVE PLAN
During the year 2014 the Group approved a long-term incentive plan (LTIP) to certain members of management, according to
which the Company granted award shares in 2014, 2015, 2016, 2017 and 2018 along with the communication of the terms of
award to participants.

The monetary amount of the award to be granted to the participants of the plan was calculated based on the annual base salary
on the grant date, target award interest, business results co-efficient and individual performance rating co-efficient.

As of the year ended 31 December 2018 Tranche 2014 and Tranche 2015 fully vested.

In July 2018 the Group issued 21,800 shares of nor par value with respect to LTIP Tranche 2015. Total expense for the services
received from the employees previously recognised with respect to issued shares was RUB 52,102. Shares were transferred into
GDR and distributed to relevant participants.

The vesting dates of award granted during the year 2016 are 31 December 2018 and 1 April 2019. With respect to Tranche 2016
no shares were issued in 2018, the Group plans to release shares in the first half of 2019.

The vesting dates of 100% of Tranche 2017 and 100% of Tranche 2018 awards are 1 April 2020 and 30 April 2021 respectively.

The fair value of the award shares was estimated based on the GDR price on Moscow Exchange on the award grant date.

Total expense recognised for the services received from the employees covered by long-term incentive plan for the year ended
31 December 2018 and the year ended 31 December 2017 is shown in the following table:

Expense arising from the equity-settled long-term incentive plan payments

YEAR ENDED
31 DECEMBER
2018
219,041

YEAR ENDED
31 DECEMBER
2017
289,462

LENTA ANNUAL REPORT AND ACCOUNTS 2018130

Notes to the consolidated financial statements continued

28. SHARE-BASED PAYMENTS CONTINUED
SHARE VALUE APPRECIATION RIGHTS
During the year 2013 and the year 2016 the Group granted share value appreciation rights (SVARs) to certain members of top
management as part of management long-term incentive plan. Each SVAR entitles the holder to a quantity of ordinary shares in
Lenta Limited based on an increase in the share price over a predetermined exercise price subject to meeting the performance
conditions.

In April 2018 SVARs of 2013 year fully vested. In July 2018 the Group issued 69,502 shares of nor par value. Total expense for the
services received from the employees previously recognised with respect to issued shares was RUB 387,419. The shares were
transferred into GDR and distributed to relevant participants.

MOVEMENTS DURING THE YEAR
The weighted average remaining contractual life for the SVARs outstanding as at 31 December 2018 was 0.79 year (31 December
2017: 0.44 years).

The weighted average exercise price for options outstanding as at 31 December 2018 is RUB 2.214 (31 December 2017:
RUB 1.585).

The weighted average fair value of options outstanding as at 31 December 2018 is RUB 0.91 (31 December 2017: RUB 0.94).

The expense recognised for the services received from the employees covered by SVARs plan during the year is shown in the
following table:

Expense arising from the equity-settled SVARs transaction

YEAR ENDED
31 DECEMBER
2018
46,220

YEAR ENDED
31 DECEMBER
2017
131,848

The fair value of the management SVARs is estimated at the grant date using the Black Scholes option pricing model, taking into
account the terms and conditions upon which the SVARs were granted.

29. COMMITMENTS
CAPITAL EXPENDITURE COMMITMENTS
At 31 December 2018 the Group has contractual capital expenditure commitments in respect of property, plant and equipment and
intangible assets totalling RUB 11,489,981 net of VAT (31 December 2017: RUB 14,089,672 net of VAT).

OPERATING LEASE COMMITMENTS
Where the Group is the lessee, the future minimum lease payments under non-cancellable operating leases are as follows:

Not later than 1 year
Later than 1 year and not later than 5 years
Later than 5 years
Total operating lease commitments

31 DECEMBER
2018
6,152,827
21,875,021
36,033,801
64,061,649

31 DECEMBER
2017
5,561,773
22,635,742
33,561,979
61,759,494

131

STRATEGIC REPORT

CORPORATE GOVERNANCE FINANCIAL STATEMENTS APPENDICES

30. FINANCIAL INSTRUMENTS
CATEGORIES OF FINANCIAL INSTRUMENTS

Financial assets measured at fair value
Cash flow hedging instruments

Financial assets measured at amortised cost
Cash
Trade and other receivables
Total financial assets measured at amortised cost

Financial liabilities measured at fair value
Cash flow hedging instruments

Financial liabilities measured at amortised cost
Floating rate long-term borrowings
Fixed rate long-term borrowings and bonds
Fixed rate short-term borrowings and bonds
Trade and other payables
Total financial liabilities measured at amortised cost

31 DECEMBER
2018

31 DECEMBER
2017

−

8,179

33,804,860
11,272,602
45,077,462

14,301,859
10,957,360
25,259,219

−

18,049

26,697,380
80,473,264
19,909,645
56,133,840
183,214,129

26,400,263
36,558,178
44,123,894
57,259,762
164,342,097

FAIR VALUES
The following table provides the fair value measurement hierarchy of the Group’s financial assets and liabilities. Quantitative
disclosures of fair value measurement hierarchy for financial assets and financial liabilities as at 31 December 2018:

Financial liabilities for which fair values are disclosed
Fixed rate bonds
Floating rate borrowings
Fixed rate borrowings

Financial assets measured at fair value
Cash flow hedging instruments

Financial liabilities measured at fair value
Cash flow hedging instruments

31 DECEMBER
2018

5,662,373
26,697,380
93,370,478

31 DECEMBER
2017

8,179

18,049

LEVEL 1

LEVEL 2

LEVEL 3

5,662,373
−
−

−
26,697,380
93,370,478

−
−
−

LEVEL 1

LEVEL 2

LEVEL 3

−

8,179

18,049

Financial liabilities for which fair values are disclosed
Fixed rate bonds
Floating rate borrowings
Fixed rate borrowings

23,276,798
26,400,263
57,621,654

23,276,798
−
−

−
26,400,263
57,621,654

During the year ended 31 December 2018 and 31 December 2017, there are no transfers between Level 1, Level 2 and Level 3 of
fair value measurements.

−

−
−
−

LENTA ANNUAL REPORT AND ACCOUNTS 2018

132

Notes to the consolidated financial statements continued

30. FINANCIAL INSTRUMENTS
FAIR VALUES
Set out below, is a comparison by class of the carrying amounts and fair value of the Group’s financial instruments, other than
those with carrying amounts are reasonable approximations of fair values:

Financial assets
Cash flow hedging instruments

Financial liabilities
Interest-bearing loans and borrowings
Floating rate borrowings
Fixed rate borrowings and bonds

Derivative liabilities
Cash flow hedging instruments
Total financial liabilities

31 DECEMBER 2018

31 DECEMBER 2017

CARRYING AMOUNT

FAIR VALUE CARRYING AMOUNT

FAIR VALUE

−

8,179

26,697,380
100,382,909

26,697,380
99,032,851

26,400,263
80,682,072

26,400,263
80,898,452

−
127,080,289

−
125,730,231

18,049
107,100,384

18,049
107,316,764

The management assessed that the carrying amounts of cash and short-term deposits, trade receivables, trade payables and
other current liabilities approximate their fair values largely due to the short-term maturities of these instruments.

The fair value of the financial assets and liabilities is included at the amount at which the instrument could be exchanged in a
current transaction between willing parties, other than in a forced or liquidation sale.

The following methods and assumptions are used to estimate the fair values:

• Fair values of the Group’s interest-bearing borrowings and loans are determined by using DCF method using discount rate that

reflects the issuer’s borrowing rate as at the end of the reporting period. The own non-performance risk as at 31 December 2018
and 31 December 2017 is assessed to be insignificant.

• The fair value of bonds is based on the price quotations at the reporting date at Moscow exchange where transactions with

bonds take place with sufficient frequency and volume.

• The Group enters into derivative financial instruments with financial institution with investment grade credit ratings. Derivatives
valued using valuation techniques with market observable inputs are interest rate swaps and caps. The most frequently applied
valuation techniques include swap models, using present value calculations, and option pricing model for caps. The models
incorporate various inputs including the credit quality of counterparties and interest rate curves. As at 31 December 2017, the
marked-to-market value of derivative positions is net of a credit valuation adjustment attributable to derivative counterparty
default risk. The changes in counterparty credit risk had no material effect on the hedge effectiveness assessment for
derivatives designated in hedge relationships and other financial instruments recognised at fair value.

CHANGES IN LIABILITIES ARISING FROM FINANCING ACTIVITIES

Long-term borrowings
Short-term borrowings
Total

31 DECEMBER
2017
62,194,204
44,888,131
107,082,335

REPAYMENTS OF
PROCEEDS FROM
BORROWINGS
BORROWINGS
64,683,000
(5,000,000)
67,500,000 (106,871,775)
132,183,000 (111,871,775)

RECLASS-
IFICATIONS
(15,799,792)
15,799,792
−

CHANGE IN THE
ACCOUNTING
POLICIES DUE TO
APPLICATION OF
IFRS 9 (NOTE 4)
324,305
(90,149)
234,156

OTHER

31 DECEMBER
2018
(60,426) 106,341,291
(487,001) 20,738,998
(547,427) 127,080,289

Long-term borrowings
Short-term borrowings
Total

31 DECEMBER
2016
66,955,931
35,245,120
102,201,051

PROCEEDS FROM
BORROWINGS
20,880,525

REPAYMENTS OF
BORROWINGS
(1,400,000)
106,330,000 (121,015,714)
127,210,525 (122,415,714)

RECLASS-
IFICATIONS
(24,377,036)
24,377,036
−

31 DECEMBER
2017
OTHER
134,784
62,194,204
(48,311) 44,888,131
86,473 107,082,335

The ‘Other’ column includes the effect of accrued but not yet paid interest on interest bearing loans. Group classifies interest paid
as cash flows from operating activities.

133

STRATEGIC REPORT

CORPORATE GOVERNANCE FINANCIAL STATEMENTS APPENDICES

31. HEDGE AND HEDGING INSTRUMENTS
In 2013-2015 the Group entered into interest rate swaps and caps provided by VTB Bank PJSC to mitigate the risk of a rising
MosPrime interest rate.

As at 31 December 2018 the Group interest rate financial instruments are expired.

Type of instrument

Interest rate swap

Interest rate cap

−

NOTIONAL AMOUNT
2018

NOTIONAL AMOUNT
2017

FIXED
INTEREST
RATE

7.64%

7.54%

12,500,000

900,000

10,000,000

12.00%

900,000

12.00%

FIXED
COMMISSION

EFFECTIVE
DATE

EXPIRY
DATE

n/a

0.54%

0.45%

31 March
2015
31 December
2013
31 December
2014
31 December
2013

12 April
2018
12 November
2018
12 April
2018
12 November
2018

Starting 1 July 2013 the Group applied cash flow hedge accounting of swaps and caps that meet prescribed criteria, including
preparation of all necessary documentation. Hedge accounting was applied prospectively from designation.

Retrospective and prospective effectiveness of cash flow hedges (swaps and caps) was measured by the Group using the “dollar
offset” method. The effective portion of the gain on or loss from the hedging instrument was recognised in other comprehensive
income in hedging reserve.

The effect from changes in fair value of financial instruments is recognised as follows:

Profit or loss
Ineffective portion of the change in the fair value of cash flow hedging instruments
Reclassification from hedge reserve into interest expense

Other comprehensive income
Effective portion of the change in the fair value of cash flow hedging instruments
Reclassification from hedge reserve into interest expense

YEAR ENDED
31 DECEMBER
2018

YEAR ENDED
31 DECEMBER
2017

−
203,887
203,887

(2,221)
(203,887)
(206,108)

−
212,248
212,248

(121,107)
(212,248)
(333,355)

32. FINANCIAL RISK MANAGEMENT
The Group’s principal financial liabilities, other than derivatives, are comprised of loans and borrowings, trade and other payables.
The main purpose of these financial liabilities is to finance the Group’s operations and to provide guarantees to support its
operations. The Group’s principal financial assets include loans, trade and other receivables, and cash and short-term deposits
that derive directly from its operations. The Group also enters into derivative transactions.

The Group is exposed to market risk, credit risk and liquidity risk. The Group’s senior management oversees the management
of these risks. The Group’s financial risk activities are governed by appropriate policies and procedures and financial risks are
identified, measured and managed in accordance with the Group’s policies and risk objectives. All derivative activities for risk
management purposes are carried out by specialists that have the appropriate skills, experience and supervision. It is the Group’s
policy that no trading in derivatives for speculative purposes may be undertaken.

LENTA ANNUAL REPORT AND ACCOUNTS 2018134

Notes to the consolidated financial statements continued

32. FINANCIAL RISK MANAGEMENT CONTINUED
The Board of Directors reviews and agrees policies for managing each of these risks, which are summarised below.

MARKET RISK
Market risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate because of changes in market
prices. Market risk comprises the following types of risk: interest rate risk, currency risk, and other price risk, such as equity
price risk. Financial instruments affected by market risk include loans and borrowings, cash equivalents and derivative financial
instruments.

FOREIGN CURRENCY RISK
Foreign currency risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in
foreign exchange rates.

During the years ended 31 December 2018 and 2017, the Group does not attract any amounts of foreign currency denominated
borrowings, and as a consequence is not materially exposed to foreign currency risk. The only balances that are exposed to
foreign currency risk are accounts payables to several foreign suppliers.

At 31 December 2018 and at 31 December 2017 there are no significant amounts in foreign currencies.

Whenever possible, the Group tries to mitigate the exposure to foreign currency risk by matching the statement of financial
position, and revenue and expense items in the relevant currency.

FOREIGN CURRENCY SENSITIVITY
The following table demonstrates the sensitivity to a reasonably possible change in the US dollar exchange rate, with all other
variables held constant.

Year ended 2018

Year ended 2017

CHANGE IN
USD RATE
14.00%
-14.00%
11.00%
-11.00%

EFFECT ON PROFIT
BEFORE TAX
(91,491)
91,491
(76,995)
76,995

The following table demonstrates the sensitivity to a reasonably possible change in the EUR exchange rate, with all other
variables held constant.

Year ended 2018

Year ended 2017

CHANGE IN
EUR RATE
14.00%
-14.00%
20.00%
-20.00%

EFFECT ON PROFIT
BEFORE TAX
(33,453)
33,453
(33,195)
33,195

Foreign currency exchange rate reasonable possible change range was prepared for the purpose of market risk disclosures in
accordance with IFRS 7 and is derived from statistical data, in particular time series analysis.

INTEREST RATE RISK
Interest rate risk is the risk that the fair value of future cash flows of the financial instrument will fluctuate because of changes in
market interest rates.

The Group’s exposure to the risk of changes in market interest rates relates primarily to the Group’s long-term debt obligations
with floating interest rates. As at 31 December 2018 and 31 December 2017 these obligations are represented with long-
term borrowing (Note 21), which bears interest of MosPrime 1-3m plus margin. In order to hedge the risk of rising MosPrime
interest rate, in 2013-2015 the Group entered into interest rate swaps and caps (Note 31), which are expired at the end of the
reporting period.

135

STRATEGIC REPORT

CORPORATE GOVERNANCE FINANCIAL STATEMENTS APPENDICES

INTEREST RATE SENSITIVITY
The following tables demonstrate the sensitivity to a reasonably possible change in MosPrime rates, on that portion of loans and
borrowings affected, after the impact of hedge accounting. With all other variables held constant, the Group’s profit before tax and
OCI are affected through the impact on floating rate borrowings, as follows:

2018
Variable rate instruments
Cash flow sensitivity

2017
Variable rate instruments
Interest rate swaps and caps
Cash flow sensitivity (net)

PROFIT OR LOSS

75 BP
INCREASE

(196,875)
(196,875)

100 BP
DECREASE

262,500
262,500

PROFIT OR LOSS

50 BP
INCREASE

150 BP
DECREASE

(157,434)
67,063
(90,371)

472,303
(201,188)
271,115

OCI

75 BP
INCREASE

−
−

OCI

50 BP
INCREASE

−
20,858
20,858

100 BP
DECREASE

−
−

150 BP
DECREASE

−
(62,501)
(62,501)

The range of reasonable possible changes in MosPrime rate was prepared for the purpose of market risk disclosures in
accordance with IFRS 7 and is based on risk metrics that are derived from statistical data, in particular time series analysis.

The Group is exposed to cash flow interest rate risk as it borrows funds at floating interest rates. During the year ended
31 December 2018 all of the Group’s borrowings are denominated in Russian roubles. The Group evaluates its interest rate
exposure and hedging activities on a regular basis and acts accordingly in order to align with the defined risk limits set by the
executive board. To ensure optimal hedging strategies various scenarios are simulated taking into consideration refinancing,
renewal of existing positions, alternative financing and financial hedging instruments.

CREDIT RISK
Credit risk is the risk that counterparty may default or not meet its obligations to the Group on a timely basis, leading to financial
loss to the Group. Financial assets, which are potentially subject to credit risk, consist principally of cash in bank accounts and
cash in transit, loans and receivables.

In determining the recoverability of receivables the Group uses a provision matrix to measure expected credit losses. The
provision rates are based on days past due for groupings of various customer segments with similar loss patterns (i.e., by
customer type and rating) and the likelihood of default over a given time horizon. The calculation reflects the probability-weighted
outcome, the time value of money and reasonable and supportable information that is available at the reporting date about past
events, current conditions and forecasts of future economic conditions.

TRADE RECEIVABLES
The Group has no significant concentrations of credit risk. Concentration of credit risk with respect to receivables is limited due
to the Company’s customer and vendor base being large and unrelated. Credit is only extended to counterparties subject to
strict approval procedures. The Group trades only with recognised, creditworthy third parties who are registered in the Russian
Federation. It is the Group’s policy that all customers who are granted credit terms have a history of purchases from the
Group. The Group also requires these customers to provide certain documents such as incorporation documents and financial
statements. In addition, receivable balances are monitored on an ongoing basis with the result that the Group’s exposure to bad
debts is not significant. Sales to retail customers are made in cash, debit cards or via major credit cards.

CASH AND CASH EQUIVALENTS
Credit risk from investing activities is managed by the Group’s treasury department in accordance with the Group’s policy.
Investments of surplus funds are made only with approved counterparties. Cash is placed in financial institutions, which are
considered at time of deposit to have minimal risk of default.

The maximum exposure to credit risk at the reporting date of trade receivables is the carrying value as presented in the statement
of financial position. The maximum exposure to credit risk at the reporting date of cash and cash equivalents is RUB 33,539,189
(31 December 2017: RUB 14,067,804).

LENTA ANNUAL REPORT AND ACCOUNTS 2018136

Notes to the consolidated financial statements continued

32. FINANCIAL RISK MANAGEMENT CONTINUED
LIQUIDITY RISK
The Group monitors its risk to a shortage of funds using a recurring liquidity planning tool. This tool considers the maturity of its
financial assets and liabilities and projected cash flows from operations. The Group objective is to maintain a continuity of funding
and flexibility through the use of bank overdrafts and bank loans. Each year the Group analyses its funding needs and anticipated
cash flows, so that it can determine its funding needs.

The table below summarises the maturity profile of the Group’s financial liabilities at 31 December 2018 and 31 December 2017
bases on contractual undiscounted cash flows of the financial liabilities based on the earliest date on which the Group is required
to pay. The table includes both interest and principal cash flows. When the amount payable is not fixed for the entire term of the
instrument, such as variable rate interest payments, the amount disclosed in the table is determined by reference to the conditions
(e.g. MosPrime index) existing at the reporting date:

31 December 2018

Borrowings
Trade and other payables
Total

31 December 2017

Borrowings
Trade and other payables
Amounts payable under swaps and caps
Total

LESS THAN
12 MONTHS
30,637,465
56,133,840
86,771,305

LESS THAN
12 MONTHS
52,153,762
57,259,762
18,049
109,431,573

1-5 YEARS
117,172,663
−
117,172,663

OVER 5 YEARS
−
−
−

TOTAL
147,810,128
56,133,840
203,943,968

1-5 YEARS
64,796,766
−
−
64,796,766

OVER 5 YEARS
7,838,694
−
−
7,838,694

TOTAL
124,789,222
57,259,762
18,049
182,067,033

CAPITAL MANAGEMENT
The Group manages its capital to ensure that entities in the Group will be able to continue as a going concern while maximising
the return to stakeholders through the optimisation of the debt and equity balance.

The Group reviews its capital needs periodically to determine actions to balance its overall capital structure through shareholders’
capital contributions or new share issues, return of capital to shareholders as well as the issue of new debt or the redemption
of existing debt. The Group is guided in its decisions by an established financing policy, which stipulates leverage ratios,
interest coverage, covenants compliance, appropriateness of balance between long-term and short-term debt, requirements
to diversification of funding sources. Dividends are to be declared based on the capital requirements of the business and with
reference to continuing compliance with the financial policy.

The capital structure of the Group consists of debt, which includes the borrowings disclosed in Note 21, obligations under finance
leases less cash and cash equivalents and equity attributable to equity holders of the parent, comprising issued capital, reserves
and retained earnings as disclosed in Note 18.

Net debt of the Group is comprises of the following:

Borrowings
Cash and cash equivalents (Note 17)
Net debt

31 DECEMBER
2018
127,080,289
(33,804,860)
93,275,429

31 DECEMBER
2017
107,082,335
(14,301,859)
92,780,476

Net debt is a non-IFRS indicator and, therefore, its calculation may differ between companies, however it is one of the key
indicators that are commonly used by investors and other users of financial statements in order to evaluate financial condition of
the Group.

137

STRATEGIC REPORT

CORPORATE GOVERNANCE FINANCIAL STATEMENTS APPENDICES

33. CONTINGENCIES
OPERATING ENVIRONMENT OF THE GROUP
The Group sells products that are sensitive to changes in general economic conditions that impact consumer spending. Future
economic conditions and other factors, including sanctions imposed, consumer confidence, employment levels, interest rates,
consumer debt levels and availability of consumer credit could reduce consumer spending or change consumer purchasing habits.
A general slowdown in the Russian economy or in the global economy, or an uncertain economic outlook, could adversely affect
consumer spending habits and the Group’s operating results.

The future stability of the Russian economy is largely dependent upon economic reforms, development of the legal, tax and
regulatory frameworks, and the effectiveness of economic, financial and monetary measures undertaken by the government of the
Russian Federation.

The Russian economy has been negatively impacted by sanctions imposed on Russia by a number of countries. The Rouble
interest rates remained high. The combination of the above resulted in reduced access to capital, a higher cost of capital and
uncertainty regarding economic growth, which could negatively affect the Group’s future financial position, results of operations
and business prospects.

Management believes it is taking appropriate measures to support the sustainability of the Group’s business in the current
circumstances.

LEGAL CONTINGENCIES
Group companies are involved in a number of lawsuits and disputes that arise in the normal course of business. Management
assesses the maximum exposure relating to such lawsuits and disputes to be RUB 36,538 as at 31 December 2018
(31 December 2017: RUB 15,805). Management believes there is no exceptional event or litigation likely to affect materially the
business, financial performance, net assets or financial position of the Group, which have not been disclosed in these consolidated
financial statements.

RUSSIAN FEDERATION TAX AND REGULATORY ENVIRONMENT
The government of the Russian Federation continues to reform the business and commercial infrastructure in its transition to
a market economy. As a result the laws and regulations affecting businesses continue to change rapidly. These changes are
characterised by poor drafting, different interpretations and arbitrary application by the authorities. In particular taxes are subject
to review and investigation by a number of authorities who are enabled by law to impose fines and penalties. While the Group
believes it has provided adequately for all tax liabilities based on its understanding of the tax legislation, the above facts may
create tax risks for the Group. Management also assesses the maximum exposure from possible tax risks to be RUB 975,898
(31 December 2017: RUB 483,211). Management continues to monitor closely any developments related to these risks and
regularly reassesses the risk and related liabilities, provisions and disclosures.

ENVIRONMENTAL MATTERS
The enforcement of environmental regulation in the Russian Federation is evolving and the enforcement posture of government
authorities is continually being reconsidered. The Group periodically evaluates its obligations under environmental regulations.
As obligations are determined, they are recognised immediately. Potential liabilities, which might arise as a result of changes in
existing regulations, civil litigation or legislation, cannot be estimated but could be material. In the current enforcement climate
under existing legislation, management believes that there are no significant liabilities for environmental damage.

34. EVENTS OCCURRING AFTER THE REPORTING PERIOD
There were no significant events after the reporting date other than disclosed elsewhere in the consolidated financial statements.

LENTA ANNUAL REPORT AND ACCOUNTS 2018138

COMPANIES SUBSIDIARIES

The Company had the following subsidiaries as at 31 December 2018 and 2017:

COMPANY NAME
Lenta LLC
Zoronvo holdings Ltd
Lenta-2 LLC
Lenta LTIP Ltd
TRK-Volzhskiy LLC
TK-Zheleznodorozhniy LLC

BENEFICIAL OWNERSHIP
100%
100%
100%
100%
100%
100%

LIST OF CITIES AS OF 31 DECEMBER 2018

NUMBER
ON THE MAP

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38

CITIES1

Achinsk
Almetyevsk
Arkhangelsk
Armavir
Astrakhan
Balakovo
Barnaul
Belgorod
Biysk
Bratsk
Bryansk
Cheboksary
Chelyabinsk
Cherepovets
Cherkessk
Dimitrovgrad
Ekaterinburg
Engels
Grozny
Irkutsk
Ivanovo
Izhevsk
Kaluga
Kamensk-Uralsky
Kazan
Kemerovo
Khanty-Mansiysk
Kostroma
Krasnodar
Krasnoyarsk
Kurgan
Kursk
Lipetsk
Magnitogorsk
Maykop
Moscow
Murmansk
Naberezhnye Chelny

NUMBER OF
HYPERMARKETS

NUMBER OF
SUPERMARKETS

NUMBER OF
DISTRIBUTION CENTRES

1
1
1
1
2
1
3
2
1
1
1
1
6
3
1
1
4
2
1
2
3
3
1
1
5
3
1
1
3
5
1
1
2
2
1
25
2
2

---

139

STRATEGIC REPORT

CORPORATE GOVERNANCE FINANCIAL STATEMENTS APPENDICES

NUMBER
ON THE MAP
39
40
41
42
43
44
45
46
47
48
49
50
51
52
53
54
55
56
57
58
59
60
61
62
63
64
65
66
67
68
69
70
71
72
73
74
75
76
77
78
79
80
81
82
83
84
85
86
87
88

CITIES1
Nizhnekamsk
Nizhniy Novgorod
Nizhniy Tagil
Novocherkassk
Novokuznetsk
Novorossiysk
Novoshakhtinsk
Novosibirsk
Noyabrsk
Obninsk
Omsk
Orel
Orenburg
Orsk
Penza
Perm
Petrozavodsk
Prokopievsk
Pskov
Rostov-on-Don
Ryazan
Samara
Saransk
Saratov
Shakhty
Smolensk
St. Petersburg
Stavropol
Sterlitamak
Surgut
Syktyvkar
Taganrog
Tobolsk
Togliatti
Tomsk
Tula
Tver
Tyumen
Ufa
Ulyanovsk
Velikiy Novgorod
Vladimir
Volgograd
Vologda
Volzhskiy
Voronezh
Yaroslavl
Yoshkar Ola
Yurga
Zheleznovodsk

NUMBER OF
HYPERMARKETS
1
4
2
1
5
2
1
7
1
1
6
1
5
1
2
2
2
1
2
4
3
3
1
3
1
1
37
2
1
2
2
2
1
2
3
1
1
5
4
2
2
1
4
1
1
2
5
1
1
1

NUMBER OF
SUPERMARKETS

NUMBER OF
DISTRIBUTION CENTRES

2
---

1
1

1. From 1 May 2015, all stores located in Moscow city and the Moscow Region are shown as ‘Moscow’; all stores located in the Leningrad Region and St. Petersburg

are shown as ‘St. Petersburg’.

LENTA ANNUAL REPORT AND ACCOUNTS 2018

140

GLOSSARY

Unless otherwise specified, the terms ‘we’, ‘us’, and ‘our’ refer to Lenta Ltd., or where the context allows, to the Lenta business
more generally.

the 2014 Offering

active cardholder

the initial public offering of our Shares, in the form of GDRs, admitted to trading on the London
Stock Exchange and the Moscow Stock Exchange on 5 March 2014

a customer who has purchased goods at one of our stores at least twice in the past 12 months
using our loyalty card

average sales density

total sales during the relevant year divided by the average selling space for that year

average ticket

the figure calculated by dividing total sales, net of VAT, at all stores during the relevant year by
the number of tickets in that year

the Board

the board of directors of Lenta Ltd

BVI

Capex

CAGR

EGAIS

FMCG

gamification

the British Virgin Islands

capital expenditure

Compounded annual growth rate

national automated information system for the control of alcohol production and distribution

fast-moving consumer goods – products that are sold quickly and at relatively low cost

the application of game-design elements and game principles in non-game contexts.
Gamification commonly employs game design elements which are used in non-game contexts to
improve user engagement, organisational productivity, flow, learning, crowdsourcing, employee
recruitment and evaluation, ease of use, usefulness of systems, physical exercise, traffic
violations, voter apathy, and more.

GDRs

global depositary receipts

in-store availability

the number of SKUs in-store with a positive stock value as a proportion of the total number of
active SKUs for sale, calculated based on the average daily in-store availability of all open stores

LFL

P&L

SG&A

SKU

sq.m

ticket

like-for-like

profit and loss statement

Selling, General and Administrative Expenses, which is a major non-production cost presented in
the Income statement

our ordinary shares

a ‘stock keeping unit’, or a number assigned to a particular product to identify the price, product
options and manufacturer of the merchandise

square metre(s)

the receipt issued to a customer for his/her basket (the amount spent by a customer on a
shopping trip)

total selling space

the area inside our stores used to sell products, excluding areas rented out to third parties, own-
production areas, storage areas and the space between store entry and the cash desk line

traffic

the number of tickets issued for the period under review

141

STRATEGIC REPORT

CORPORATE GOVERNANCE FINANCIAL STATEMENTS APPENDICES

FURTHER INFORMATION

In this annual report, we present certain operating and financial information regarding our hypermarkets and supermarkets, which
we define as follows:

Adjusted EBITDA

EBITDA adjusted for non-recurring one-off items such as changes in accounting estimates and
one-off non-operating costs

Adjusted EBITDA margin

Adjusted EBITDA as a percentage of sales

Adjusted EBITDAR

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

Adjusted EBITDAR margin

Adjusted EBITDAR as a percentage of sales

EBITDA

like-for-like sales

Other metrics

Profit for the period before foreign exchange gains/losses, revaluation of financial instruments at
fair value through profit or loss, reversal of impairment of non-financial assets, other expenses,
depreciation and amortisation, interest and tax. The reconciliation of EBITDA to IFRS profit is
presented in tabular format in note 6 to the Consolidated Financial Statements.

We distinguish between sales attributable to new stores and sales attributable to existing stores.
We consider the sales generated by stores until the end of the 12th full calendar month of their
operation to be sales attributable to new stores. Accordingly, like-for-like sales begin with the
comparison of the 13th full calendar month of operations of a store to its first full calendar month
of operations, assuming the store has not subsequently closed, expanded or down sized. The
number of stores in our like-for-like panel as of 31 December 2018: was 295 (219 hypermarkets
and 77 supermarkets). The number of stores in our like-for-like panel as of 31 December 2017:
was 213 (171 hypermarkets and 42 supermarkets). ‘Like-for-like average ticket growth’, ‘like-for-
like average price growth per article’, ‘like-for-like traffic growth’, and ‘like-for-like average sales
density’ are calculated using the same methodology as like-for-like sales.

• Net debt is calculated as the sum of short-term and long-term debt (including borrowings and
obligations under finance leases, capitalised fees and accrued interest) minus cash and cash
equivalents.

• The ratio of net debt to Adjusted EBITDA is net debt divided by Adjusted EBITDA. The ratio of
Adjusted EBITDA to net interest expense is Adjusted EBITDA divided by net interest expense,
which is calculated as interest expense less interest income.

• The ratio of Adjusted EBITDAR to net interest expense plus rental expense ratio is Adjusted

EBITDAR divided by the sum of net interest expense and rental expenses.

• CROCI is defined as Adjusted EBITDA over average capital invested.

• Average capital invested is the average of the book value of gross non-current assets plus net
working capital as of the beginning of the year and the book value of gross non-current assets
plus net working capital as of the end of the year.

• Adjusted SG&A/Sales is SG&A, excluding expenses on land and equipment leases, premises

leases, depreciation and amortisation and one-off expenses as a proportion of sales.

LENTA ANNUAL REPORT AND ACCOUNTS 2018142

CAUTIONARY STATEMENTS

FORWARD-LOOKING STATEMENTS
This document contains certain ‘forward-looking statements’ which include all statements other than those of historical facts
that relate to our plans, financial position, objectives, goals, strategies, future operations and performance, together with the
assumptions underlying such matters.

We generally use words such as ‘estimates’, ‘expects’, ‘believes’, ‘intends’, ‘plans’, ‘may’, ‘will’, ‘should’, ‘projects’, ‘anticipates’,
‘targets’, ‘aims’, ‘would’, ‘could’, ‘continues’ and other similar expressions to identify forward-looking statements. We have based
these forward-looking statements on the current views of our management with regard to future events and performance. These
views reflect management’s best judgment, but involve uncertainties and are subject to certain known and unknown risks together
with other important factors outside our control, the occurrence of which could cause actual results to differ materially from those
expressed in our forward-looking statements.

MARKET AND INDUSTRY DATA
Statements referring to our competitive position and the Russian retail food sector reflect our beliefs and, in some cases, private
and publicly available information and statistics, including annual reports, industry publications, market research, press releases,
filings under various securities laws, official data published by Russian governmental entities and data published by international
organisations and other third-party sources.

ROUNDING
Certain figures in this document have been subject to rounding adjustments. Accordingly, figures shown for the same category
presented in different tables may vary slightly, and figures shown as totals in certain tables may not be an arithmetic aggregation
of the figures that precede them.

143

STRATEGIC REPORT

CORPORATE GOVERNANCE FINANCIAL STATEMENTS APPENDICES

NOTES

LENTA ANNUAL REPORT AND ACCOUNTS 2018144

NOTES

Designed and produced by Instinctif Partners

www.creative.instinctif.com

Lenta Ltd
Registered Office
P.O. Box 3340
Road Town
Tortola
British Virgin Islands

Lenta Headquarters
112 Savushkina Street
St. Petersburg
Russia 197374
Phone: +7 (812) 380-61-31
Fax: +7 (812) 380-61-50
www.lentainvestor.com

To see the report online go to:
www.lentainvestor.com/en
/investors/annual-reports