Lenta
Annual Report 2019

Plain-text annual report

annUal rePort issUe 2019 year of milestones 002 C o n t e n t s 003 Contents oo4 OO6 OO8 O10 O12 O14 O16 O22 O28 O30 o36 O38 O42 O48 O53 O54 O57 O59 O65 o1>strateGiC rePort AT A GLANCE FINANCIAL AND OPERATIONAL HIGHLIGHTS CHAIRMAN’S STATEMENT CHIEF EXECUTIVE OFFICER’S REVIEW MARKET OVERVIEW OPERATING REVIEW CORPORATE SOCIAL RESPONSIBILITY FINANCIAL REVIEW RISK MANAGEMENT o2>CorPorate GoVernanCe BOARD OF DIRECTORS SENIOR MANAGEMENT TEAM CORPORATE GOVERNANCE REPORT BOARD COMMITTEES AUDIT COMMITTEE REPORT NOMINATION COMMITTEE REPORT REMUNERATION COMMITTEE REPORT OPERATION AND CAPEX COMMITTEE REPORT o68 O70 O73 O74 O75 O76 O77 O78 108 109 11O 111 111 o3>finanCial statements INDEPENDENT AUDITOR’S REPORT STATEMENT OF MANAGEMENT’S RESPONSIBILITIES FOR THE PREPARATION AND APPROVAL OF THE CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED STATEMENT OF FINANCIAL POSITION CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME CONSOLIDATED STATEMENT OF CASH FLOWS CONSOLIDATED STATEMENT OF CHANGES IN EqUITY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS o4>aPPenDiCes COMPANY SUBSIDIARIES LIST OF CITIES AS OF 31 DECEMBER 2019 GLOSSARY FURTHER INFORMATION O1›STRATEGIC REPORT O2›CORPORATE GOVERNANCE O3›FINANCIAL STATEMENTS O4›APPENDICESLENTA ANNUAL REPORT AND ACCOUNTS 2019LENTA ANNUAL REPORT AND ACCOUNTS 2019 004 l e n t a a n nU a l r eP o r t a nD a C C oUn t s 2 0 1 9 o1 › s t r a t e GiC r eP o r t o2 › C o rP o r a t e Go Ve r n a nC e o3 › f i n a nC i a l s t a t e m e n t s o4 › aP Pe nDiC e s o1 › s t r a t e GiC r eP o r t 006 a t a Gl a nC e l e n t a a n nU a l r eP o r t a nD a C C oUn t s 2 0 1 9 007 o1 › s t r a t e GiC r eP o r t l e n t a o2 › C o rP o r a t e Go Ve r n a nC e a n nU a l r eP o r t o3 › f i n a nC i a l s t a t e m e n t s a nD a C C oUn t s o4 › aP Pe nDiC e s 2 0 1 9 nr1Partner for sUPPliers HiGHest nPs sCore 88 Cities lenta is one of tHe leaDinG rUssian retailers anD tHe larGest HyPermarket oPerator 12 DCs 249 HyPermarkets anD sUPermarkets 131 008 f i n a nC i a l a nD oPe r a t i o n a l HiG Hl iG Ht s 009 finanCial oPerational retail sales Gross Profit (rUB, Bn) +4.o% +3.2% 17 free CasH flow Bn loyalty CarD HolDers stores +10.1% +11 +1.5% sellinG sPaCe (sqm) O1›STRATEGIC REPORT O2›CORPORATE GOVERNANCE O3›FINANCIAL STATEMENTS O4›APPENDICESLENTA ANNUAL REPORT AND ACCOUNTS 2019LENTA ANNUAL REPORT AND ACCOUNTS 2019 010 C Ha i r m a n ’ s s t a t e m e n t 011 Alexey MordAshov, CHAIRMAN Dear sHareHolDers, I am proud, as Chairman, to present you with Lenta’s Annual Report for 2019. In June 2019, Severgroup became Lenta’s ma- jority shareholder, with a 78.73 % stake. We see great potential in this business that, every day, is improving people’s quality of life. We also see potential in the Russian retail industry as a whole, which is now undergoing an impor- tant transformation to meet customers’ growing demands. Widely known as an efficient grocery retailer with one of the highest growth rates in the market, Lenta is a unique asset with strong competitive advantages. Lenta and Severgroup have comple- mentary qualities: Lenta has a highly professional management team and excellent corporate cul- ture. Severgroup has experience in building and managing large businesses and deep expertise in both industrial and consumer sectors as well as in the digital & IT sectors. We are confident that combining these two entities will enhance Lenta’s position as a leading national grocery player. strateGy Together with Lenta’s management team, we are working on a new strategy for the business. We plan to announce it later this year, but I can already tell you about our core strategic priorities to ensure growth of the business: • Client-centric business. We aim to become the first-choice retail company for the Russian consumer. We plan to grow our market share and become the most innovative and client-centric retailer in Russia. At the same time, we will work on improving the effi- ciency and agility of the business. • Strong free cash flow generation. Our target is to gener- ate sufficient cash flow to be able to support our growth ambitions and ensure strong returns to our shareholders. • Digital transformation. Severgroup has broad experience in using cutting-edge technologies and solutions for big data analysis, machine learning and predicative analytics. I am confident that Lenta will benefit from this expertise in combination with its own profound knowledge in this field. Together, we will continue to provide an excellent shopping experience to our customers. widely known as an efficient grocery retailer with one of the highest growth rates in the market, lenta is a unique asset with strong competitive advantages. lenta and severgroup have complementary qualities: lenta has a highly professional management team and excellent corporate culture tHe BoarD of DireCtors Following their nomination by Severgroup, Roman Vasilkov, Alexey Kulichenko and Tomas Korganas were appointed as non-executive directors of Lenta’s Board of Directors. I believe their expertise in finance, strategy and economics will ensure effective leadership and stewardship of the Company. At the same time, independent directors Stephen Johnson, Michael Lynch-Bell and Julia Solovieva will remain on the Board to ensure continuity and succes- sion in line with best corporate governance practices. Our Board of Directors is well-balanced, with three independent non-executive directors and three non-executive directors. The directors have diverse expertise in retail, finance, strategy, IT and innovations. My role as Chairman is to lead the Board on strategic matters, corporate culture, key personnel development as well as corporate governance. CHanGes in tHe CorPorate strUCtUre Lenta’s Board of Directors made a decision to es- tablish a representative office of Lenta Plc in Russia which would serve the purpose of representing Lenta’s interests in the country. As a result, Russia is considered to be the place of management and control of the Company. The representative office was opened in Saint-Petersburg in October 2019. Lenta’s CFO Rud Pedersen was ap- pointed head of the representative office. This decision is designed to rationalise the cor- porate structure of the Group to allow more optimal capital allocation, optimise cost of compliance and improve corporate governance standards, reflecting the recent changes in Lenta’s share- holder structure. On February 21, 2020, Lenta accomplished its in- corporation in Cyprus in the form of a public limited liability company (“Lenta PLC”). This was followed by amendments to and the replacement of the current Memorandum and Articles of Association. This should pave the way for a more optimal capital allocation going forward, while allowing us to realise efficiencies in the cost of compliance and improved corporate governance. oUtlook Lenta is well positioned for the future. The Company generated positive free cash flow in 2019 and retained its leadership in the hypermarket format. Our main goal for 2020 is to become a truly cli- ent-centric business that continually innovates. We have to find a new successful retail model and lead the changes in the sector. We have clear priorities for 2020 and are close to finalising the new strategy. I have great confidence that, together with the Company’s team, we will make Lenta the most inno- vative player in the sector and that it will become the first choice for daily shopping for millions of Russian consumers. On behalf of the Board, I would like to thank our dedicated employees and shareholders for their continued support. O1›STRATEGIC REPORT O2›CORPORATE GOVERNANCE O3›FINANCIAL STATEMENTS O4›APPENDICESLENTA ANNUAL REPORT AND ACCOUNTS 2019LENTA ANNUAL REPORT AND ACCOUNTS 2019012 C Hi e f eXe C Ut iVe o f f iC e r ’ s r eVi e w 013 herMAN TiNgA, CHIEF EXECUTIVE OFFICER Dear sHareHolDers, 2О19 represented both a challenging and an exciting year for Lenta. We faced a tough operating environment. This was as a result of both decreasing disposable household income and increased growth of retail space, coupled with aggressive promotional activity in the industry. We retained our leadership in the hypermarket format; we attracted new customers, and achieved the highest Net Promoter Score (NPS)1 in the sector, which demonstrates our appeal to customers. We grew sales and we delivered positive free cash flow. However, shoppers came to our stores less frequently and bought fewer items, and our investments in price and expansion meant our EBITDA margins declined. Against that background and although many things were positive in 2019, we did not deliver on our ex- pectations for the year. With Severgroup becoming a majority shareholder, the year was a turning point for us at Lenta, giving us real confidence to plan for the long term. 1Source: Sberbank CIB Ivanov Consumer Confidence Tracker We started developing our longer-term strategy for the business with a view to creating sustainable competitive advantage. We are now focused on building the foundations for the next phase of growth for a multi-format retailer. Work is still under way on our new strategy, which will include continued focus on the quality of our offer and further improvements in our customer value proposition. We are also plan- ning to invest in the IT platform, enhancing our digital capabilities and our loyalty programme in order to reach out to new and existing clients. We will also be looking for further value-adding opportunities as we expand our store network. BUsiness enVironment The macroeconomic and consumer environment remained challenging, with further pressure on customer wallets resulting in declining real dispos- able household income and a growing consumer debt burden. The market remained very price-competitive due to the weak macroeconomic environment combined with the rapid expansion of retail chains. Consumers continued to be price-sensitive, with oUr sUPermarkets DeliVereD stronG sales GrowtH of 27.5% in 2019 oUr PeoPle anD CorPorate CUltUre Lenta people have always been at the heart of our business, and we aspire to provide development opportunities for every member of our team. I am proud to lead the most stable Management Team in Russian retail. During the year, we worked on initiatives to reinforce the business and gear up for further growth. In 2019, we conducted an Organisational Health Index (OHI) and employee engagement survey. Our engagement rate of 74% is above the world retail average. But even so, the survey showed us areas where we can improve our organisational structure and corporate culture. And we are going to do just that, with a comprehensive plan for organisational transformation. In the year ahead, we will implement these meas- ures to strengthen our Company from within. Our aim is to continue building a client-centric and innova- tion-oriented culture that will enable the growth of our business. lookinG aHeaD In 2020, we expect to increase our selling space by around a relatively modest 3%. This figure is in line with our decision to focus on improvements in store performance and operational efficiency. We will continue to look for attractive growth opportunities, including expansion. In 2020 we will continue to work on the optimisation of our SG&A expenses. We expect that the imple- mentation of priorities set for this year will result in an EBITDA margin in 2020 above that of 2019. Although our investments in organic expansion and supply chain will be lower in 2020, we plan to invest around 4% of our sales in capital expenditure. This includes investments in IT, digital marketing and other projects aimed to upgrade and enhance customers’ experience in store, as well as drive op- erational efficiency. The current plans for expansion and capital ex- penditure, as well as further efforts in the optimisation of operating cash flow, will result in positive free cash flow generation by the Company in 2020. I strongly believe that Lenta’s leadership position in the hypermarket sector and its growing customer base provide a very strong platform for long-term growth. Our intention is clear. We want to be the #1 shopping destination for millions of Russian consumers. more options available for making daily grocery purchases, while the retail chains have been fo- cused on driving customer traffic by enhancing promotional activity. PerformanCe In 2019, we opened eight hypermarkets and three supermarkets, as our guidance indicated. Our selling space grew by 1.5%. Total sales grew 1.0% in 2019 to Rub 417.5bn (2018: Rub 413.6bn), including retail sales growth of 4.0% to Rub 407.9bn (2018: Rub 392.2bn) and an expected decline of 55.5% in wholesale segment. Our EBITDA margin in 2019 declined to 8.1% from 8.8% in the previous year, affected by a lower growth rate and economic headwinds. At the same time, we generated positive free cash flow, which proves that our business is financially healthy, and gives us options to invest for further growth. In 2019, we presented a brand new vision of shop- ping space. We re-opened one of our hypermarkets in Saint-Petersburg which had been damaged by a fire. We completely changed the layout of the store so it could meet the needs of different shopping missions. We put our Hero categories centre stage, and we filled the store with innovative equipment that helps to enhance both customer experience and service. We believe these changes will help us to deliver solid traffic and basket size and pave the way for in-store improvements across the chain. Our supermarkets delivered strong sales growth of 27.5% in 2019. This format had previously proved chal- lenging for us. But the appointment of a dedicated team and implementation of initiatives to improve customer value proposition of our supermarkets meant we saw significant improvements on EBITDA level which remained positive throughout 2019. We have been working to enhance our shopping experience and client communication both for hypermarkets and supermarkets. In 2019 we intro- duced a series of initiatives aimed at driving sales and increasing our profitability, competitiveness and returns. We have put significant effort into developing our product ranges, shaping a unique and attractive selection of goods to drive footfall across our stores. In 2019 we also focused on the optimisation of our logistics and on enhancing our capacity to support further growth. With the pilot of our own delivery ser- vice, Lentochka, we reinforced our ambition to enter the on-line segment of grocery retail. We continued to leverage data-driven insights obtained from the Lenta loyalty card. These valuable insights enabled us to refine our product ranges, plan our store layouts and manage promotional activity. It also helped us create new customer-focused mar- keting tools across various media. O1›STRATEGIC REPORT O2›CORPORATE GOVERNANCE O3›FINANCIAL STATEMENTS O4›APPENDICESLENTA ANNUAL REPORT AND ACCOUNTS 2019LENTA ANNUAL REPORT AND ACCOUNTS 2019014 m a r k e t o Ve r Vi e w 015 market oVerView sHare of GroCery retail sales % 75% 74% 72% 7o% tHe maCroeConomiC enVironment ContinUeD to PUt PressUre on tHe GroCery retail BUsiness in 2019. amiD weak eConomiC GrowtH anD slow reCoVery in tHe DynamiCs of real DisPosaBle inCome, ConsUmers ContinUeD to Be in stronG saVinG moDe, PayinG attention to PriCes anD lookinG for tHe Best Promotions amonG retail CHains Russian GDP slowed down to 1.3% in 2019 from 2.5% in 2018, constrained by both external and internal fac- tors. The slowdown of the global economy weighed down the country’s export of goods and services. Domestically, economic growth was restrained by weak dynamics of household income, the Central Bank’s relatively tight monetary policy, as well as the slow implementation of national infrastructure projects. Consumption continued to be an important factor in driving the Russian economy. For the second year in a row, retail sales outpaced the dynamics of the GDP, growing by 1.6% in real terms although slowing down from 2.8% in 2018. Food retail sales growth inevitably slowed as well from 2.1% in 2018 to 1.4% in 2019, as a result of both weak consumer purchasing power and suppressed consumer confidence. Real disposable income increased by 0.8% - the highest rate over the last six years – due to the positive dynamics of real wages during the course of the year. Nonetheless, the growth was largely offset by higher inflation, mainly due to increased prices for communal payments and commodities, and the increase in VAT from 18% to 20% from January 2020. These factors forced consumers to be more cautious in their spending. Even though average inflation was higher in 2019 when compared to the previous year, it came down to 3.0% in December. Food inflation slowed to 2.6% and continued slowing down at the beginning of 2020. Although lower inflation is beneficial for consumers, it can increase pressure on retailers in terms of revenue growth and force companies to intensify promotional activity to hit their targets. Improvements in household income dynamics and consumer confidence will be the key factors to drive food retail sales. An upside can also come from the government’s recent initiatives. Proposed budget spending of around Rub 400-450 bn to support low-income families, as well as other social payments, could have a positive impact on grocery consumption in the country. ComPetitiVe enVironment Growth in food retail sales continued to rise in low-sin- gle-digits. Despite higher real disposable income, consumers are less confident in their future prospects and economic stability and therefore tend to save more. The competition between retailers remained intense during the year, as the need to adapt to changing cus- 1O% 8% 6% 4% 2% O% -2% -4% -6% -8% 3% 3% 2% 2% 1% 1% O% -1% -1% 2O% 15% 1O% 5% O% -5% -1O% HoUseHolD inCome 25% 26% 28% 3О% 2O16 2O17 top 7 2O18 2O19 other modern retail 2O16 2O17 2O18 2O19 real income nominal income real GDP toP-6 sellinG sPaCe 23% lenta 15% auchan 6% X5 retal Group 2O16 2O17 2O18 2O19 real GDP total sellinG sPaCe, sUPermarkets fooD retail sales GrowtH 2O16 2O17 2O18 2O19 normal food retail sales growth real food retail sales growth 26% X5 4% sPar 8% magnit 6% auchan 12% metro Group 9% o'key 35% other 4% rewe 3% lenta 35% other tomer habits has come to the fore. Prices remained an important factor in consumers’ choice of grocery store for shopping. This alone was not, however, enough to encourage customers to visit a store frequently. Quality of goods and services, unique selection, in-store communi- cation and digital experience are the key areas for further development of retail chains. Lenta is well-positioned amid changing market trends. The Company put efforts into enhancing our selection of goods, introducing a wider choice and higher quality of fresh and private label products to gain competitor advantage. Our loyalty programme continued to provide insights that helped us to improve personalised offerings and digital activities that were appreciated by our cus- tomers. Lenta also started to exploit the potential of the on-line market with projects that do not require heavy capital investments, aiming to strengthen its position in the new fast-evolving business model. The Russian food retail market remains fragmented by international standards, providing opportunities for further consolidation in the sector. The share of the Top-seven retailers reached 30.5%2 in 2019 versus 27.5% in 2018, lag- ging behind much more consolidated western countries, where the Top-five players can account for 50%-70% of the market. In the previous year, fast-growing retail chain, Krasnoye & Beloye, merged with Dixy and Bristol3 , which allowed the combined company to replace Lenta in the Top-three. Total selling space grew by 1.7 million sq.m. in 2019, with a growth rate of 6.8%, compared to 9.0% in the previous year. Selling space growth in the hypermarket segment has decelerated steadily over the last five years, and increased marginally by 0.2% in 2019. Lenta retained its position as a leading hypermarket in the country with the market share of 23% in the segment. GrowtH Potential After years of aggressive growth and a substantial increase in selling space, the competition in the sector gradually started to ease among the large players. Competition on prices and promotions continued to weigh down on margins, forcing more retailers to open fewer stores in order to focus on their profitability. Lenta is no exception. The Company has already slowed down its expansion and announced its strong focus on efficiency and returns. The key priorities, therefore, will be improvements in offerings, selection, and communication with customers. Further development of digital tools should help reach a larger audience and attract new customers to stores. At the same time, the market still offers opportunities for further growth and consolidation which can be exploited in case of attractive returns to shareholders. 2According to Infoline, 2019. In 2019 Dixy, Bristol and K&B merged replacing Lenta in Top-3. 3DKBR Mega Retail Group Limited. O1›STRATEGIC REPORT O2›CORPORATE GOVERNANCE O3›FINANCIAL STATEMENTS O4›APPENDICESLENTA ANNUAL REPORT AND ACCOUNTS 2019LENTA ANNUAL REPORT AND ACCOUNTS 2019016 oPe r a t i nG r eVi e w 017 our stores, especially fruits and vegetables, meat, fish, bakery and culinary. That is why we identified these categories, along with wine, as “Hero categories”. We believe that these categories distinguish Lenta from its competitors. We aimed at making Lenta the primary destination for these products by offering the best selection of products, higher quality and appealing presentation. In 2019, we continued to work on the development of Hero categories by widening the range and sup- porting the offer by various marketing activities. We made good use of cross-category promotions such as festivals, tastings, recipes ideas and numerous in-store activities to focus customers’ attention on the variety and quality of our products. We also rear- ranged relevant sections in some of our stores to draw attention to our Hero categories and exclusive offers. All our Hero categories showed positive like-for-like retail sales of +3.5% in 2019 versus the previous year and +3.1 ppt versus other food categories. We worked hard to shape the unique range of products in our stores. We focused on propositions that are available only in Lenta stores that will attract new shoppers to our stores at the same time retaining our loyal customers. We are proud to be one of the largest bakeries in the country. We bake pastries and varieties of bread in our hypermarkets and supermarkets so that shoppers can enjoy fresh products every day. In March 2019, we introduced Artisan bread into our product range. This is prepared according to an authentic recipe and proved very popular with our customers. By the end of the year, Artisan bread accounted for over 6% of sales in this category. We focused on expanding our ready-to-eat meals to satisfy the needs of customers who are looking for time-saving solutions. Our offerings include packed salads, sandwiches and a wide range of types of snacks. We care about healthy eaters and offer fresh lemonade, smoothies, milk shakes and fresh salads for them. The development of the direct import aspect of our business enabled us to provide our customers with a wide assortment of exotic fruits. Lenta became the first retailer in the Russian market to organise direct supplies of mangoes and dragon fruit from China, and feijoas and kumquats from Azerbaijan. We supported our proposition by promotions and festivals in stores, which increased the sales by 40%. We pride ourselves on selling one of the widest ranges of fish available, both imported and of Russian origin. In 2019 fish, which is one of our Hero category products, showed the highest result in terms of like- for-like sales of 5.3% compared with the previous year. We increased the choice of fish on offer and actively supported the ranges by communications in stores and attractive promotions. We added 79 exclusive new SKUs of wine from a range of countries, improved in-store navigation in the category and experimented with different formats such as mini-bottles, magnums and multi- packs. We supported the sales in the category with promotional techniques, such as offering customers different wines at a single price or discounts for the purchase of six bottles. These resulted in the category like-for-like sales increase of 1.3% versus the previous year. We launched our ‘Healthy World’ project in 2018 and rolled this out to 221 hypermarkets in 2019, with fruitful results; we enjoyed 37.9% like-for-like sales growth in the categories in 2019 versus 2018. We offer over 1,500 individual items in our sugar- and gluten-free ranges along with natural cosmetics and domestic clean- ing products. These products are located together under a single banner, so that customers looking for healthier options or special diets can find them easily and quickly. PriVate laBel anD DireCt soUrCinG Our Private Label range is one of our key differentia- tors and gives us great competitive advantage. We offer affordable goods of the highest quality under 13 of our own brands, both food and non-food, in all price segments. In 2019, retail sales of our own brands reached 14.2% of total sales versus 13.4% in 2018 and we launched 1,207 new product lines. we launched our ‘Healthy world’ project in 2018 and rolled this out to 221 hypermarkets in 2019, with fruitful results; we enjoyed 37.9% like-for-like sales growth in the categories in 2019 versus 2018 oPeratinG reView 2019 was anotHer CHallenGinG year for tHe rUssian fooD retail seCtor, witH eVen stronGer ComPetition for CUstomers in a toUGH traDinG enVironment. In 2019, our total sales for the year grew 1.0% to Rub 417.5bn (2018: Rub 413.6bn), including retail sales growth of 4.0% to Rub 408bn (2018: Rub 392.2bn). The supermarket format demonstrated strong growth, with an increase in like-for-like sales driven by higher traffic thanks to a significant increase in new, unique customers to the format. We contin- ued working on tactical changes to the offering to enhance the attractiveness of stores to customers. Lenta retained its presence in 88 Russian cities. Our net selling space increased by 1.5% compared to 6.1% in 2018. The total number of stores amounted to 380, comprising 249 hypermarkets and 131 super- markets, with total selling space of 1,489,497 sq.m. During the year, the Company continued to imple- ment a series of initiatives to increase the distinctive attractiveness of Lenta’s offering to customers. These initiatives included changes in product range, mar- keting, Lenta’s operational results programme and customer communication. ProDUCt ranGe A wide product range combined with affordable prices is the key reason for customers to choose Lenta. Our clients also appreciate the high quality of goods in O1›STRATEGIC REPORT O2›CORPORATE GOVERNANCE O3›FINANCIAL STATEMENTS O4›APPENDICESLENTA ANNUAL REPORT AND ACCOUNTS 2019LENTA ANNUAL REPORT AND ACCOUNTS 2019 018 oPe r a t i nG r eVi e w 019 we imPort fresH frUits, frozen fisH anD seafooD DireCtly from 1274О sUPPliers loCateD in CoUntries Our 365 brand showed +3.9% like-for-like sales; LENTA like-for-like sales grew by 3.2%. Dolce Albero demonstrated an impressive increase of 36.5% as did Bonvida, with +187% like-for-like sales. Sales in our non-food brand, Home Club, grew by 24% in 2019. Our private labels were recognised for their high quality in the national contest “The Guarantee of Quality” and was awarded 22 medals. In 2019 we developed our partnerships with Europe’s leading buying alliance, EMD, and with the global sourcing agency for non-food prod- ucts, Li&Fung. These partnerships bring us new cooperation models with the largest international producers and retailers and enable us to select the best goods at the best prices. This ensures both the uniqueness and the highest quality for our proposition to customers. With Li&Fung we launched Lenta Far East platform that connects 254 factories. Our cooperative efforts focus on developing Lenta’s non-food private labels and delivering a distinctive customer offering. Li&Fung ensures vendor compliance and assists in organising shipments from Asian countries to Lenta stores. Our partnership with EMD allows the Company to fully benefit from contracts sourced by the alli- ance’s negotiations, including those with producers of high-end brands. Joint procurement with other large European retailers enables Lenta to offer cus- tomers access to an even broader range of quality products at affordable prices, while also providing a new impetus to the on-going development of Lenta’s private labels. In 2019 we leveraged the efficiency of our cooperation and launched the EMD EU sourcing platform development to source products from EMD members (copy paper, batteries, nuts and dried fruits). We also launched ‘the nuts platform‘, where we source directly from countries such as Chile, and work with local packaging facilities to give us fresher products of excellent quality that we can control from field to shelf. We import fresh fruit, frozen fish and seafood di- rectly from 127 suppliers located in 40 countries. Direct supplies enable us to optimise costs, develop unique customer propositions and offer a wide product range in these categories. We added six new countries (Bulgaria, Chile, Estonia, Lithuania, Romania, Serbia) to our dry food import portfolio in 2019 and we added 512 new individual products to our ranges. We are committed to delight- ing our customers by selecting the finest goods from their contry of origin and bringing them to our stores. We are particularly proud of the exclusive range of New Year gifts that we developed with a leading European producer. Sixty three distinctive items of confectionery, coffee and tea were delivered to our stores in plenty of time, and were 85% sold in the run up to the New Year. In 2019, as part of our Growers platform, we in- creased the number of growers that supply our stores with exclusive ranges of vegetables, mushrooms, greens and other fresh food from 162 to 175. Fruit and vegetables supplied by growers within the Growers platform now account for 24.2% of our total sales of fruit and vegetables. Fifty growers supply a series of exclusive ranges under the brand Grown for Lenta. These include 116 individual items of berries, melons, watermelons, cabbage, tomatoes, salads and other fresh foods. The partnership ensures a winning combination of fair price, high quality standards, uniqueness and transparency. This leads to us earning our customers’ trust, as they appreciate the quality of goods they find in Lenta stores. marketinG The Company has maintained its focus on digi- tal marketing activities, reaching new and existing customers with offers tailored to each individual to increase both traffic and basket size. The number of active loyalty cardholders increased to 15.8 mn as at 31 December 2019 (+10.1% YoY). We enhanced the processing of the data derived from our loyalty cards. With some 97% of transactions in our stores being made with the Lenta loyalty cards, this is a valuable soruce of information about cus- tomer preferences. We focused on the improvement of our analytical models and the organisational structure of a dedicated department to align the conclusions we derive from the customer data and business decisions we make. We segment our customers depending on their needs and life cycle. This enables us to manage our product range and promotions effectively, as well as to predict changes in customers’ preferences to which we can respond in a timely fashion. Lenta’s Mobile App, launched in October 2018, had attracted more than 4.8 million users by the end of the year. We took further steps to enrich the Mobile App’s functionality, delivering a better cus- tomer experience through enhancing personalised promotional offers. We launched what we call a ‘personal cabinet’ on our web site and on the App, which is where our loyal customers can find personal offers based on their shopping history. They can also track what they bought before, make a shopping list and check the availability of specific products in our stores. In late 2019, we began to pilot a new approach to the loyalty programme, rewarding customers for purchases in their favourite categories as well as for purchasing goods they never bought before. We also offered them new products at attractive prices. The more the customer shops with Lenta using their loyalty card, the more they benefit from the programme. Initial results of the pilot showed very promising results and we will develop the programme further in 2020 to increase the extent to which we tailor our offer, and create reasons to come to Lenta. loGistiCs Our well-established, sophisticated logistics ensure the timely delivery of goods to our 380 stores across Russia. We operate 12 distribution centres in strate- gically chosen locations. Our own fleet, consisting of 330 trucks, provides over 76% of deliveries at a service level of 94%. The Company continued to work on the optimisa- tion of its logistics. We closed one leased distribution O1›STRATEGIC REPORT O2›CORPORATE GOVERNANCE O3›FINANCIAL STATEMENTS O4›APPENDICESLENTA ANNUAL REPORT AND ACCOUNTS 2019LENTA ANNUAL REPORT AND ACCOUNTS 2019 020 021 in 2019 we HaVe reCorDeD aPProXimately 1Bn of sales tHroUGH tHis CHannel CominG from aroUnD 4oo,ooo of on-line orDers also include space for our own production (culinary, confectionery, meat processing etc) and a central bakery to ensure common operational standards across the chain. retHinkinG CUstomer eXPerienCe In November 2019 we were pleased to open the new Lenta hypermarket in Saint-Petersburg that we rebuilt after it was burnt down in 2018. The store is built and designed according to a new concept developed in cooperation with the Jos de Vries agency. The concept includes new services, such as a café and food service. We changed the standard layout in order to meet different clients’ needs and to fulfil various customer journeys. The layout design is made for daily and weekly shopping trips as well as for customers who are grab and go. All sections are connected with one another to give Lenta customers an excellent range of pro- duce to choose from, with a strong emphasis on Hero categories. Fruit and vegetables, culinary and bakery, wine, and fish are furnished with new store equipment to ensure attractiveness and proper presentation of each category. The hypermarket embraces various innovations using the latest technology, such as contrast and shelf light, self-check-outs and price checkers as well as LED screens for in-store advertising. By launching this new concept, we represented our vision of a modern unique shopping space where all customers can find exactly what they want. We surprise customers with innovations and creativity. Bright and colourful design along with inspiring graphical concepts are bringing Lenta to a new level as an attractive, interesting store that brings customers convenience combined with an exceptional shopping experience. We introduced elements of the new concept – café, food service, navigation and decorations – to one of our oldest stores in Saint-Petersburg. In 2020, we will be carefully analysing the customer feedback and reactions to the changes introduced, to fine tune the concept for further roll out. on-line We consider on-line as an important channel in communication with clients. It provides us with more information about the potential of the market without having to invest significant amount of capital. In 2019 we continued to partner with different companies across many of the Russian regions. Our portfolio consists of 18 partners and covers 20 Russian cities. In 2019 we recorded approximately Rub 1 bn of sales through this channel, coming from around 400,000 on-line orders. This is just slightly above 0.2% of our total retail sales for full-year 2019 and represents 103% growth. We see on-line as an im- portant channel to market, working in combination with our physical stores. In November 2019 we launched a pilot of our own online delivery project, Lentochka. This is aimed at providing customers with purchases within 15-30 minutes. To achieve this, we opened several small dark-stores of around 100-150 sq.m in urban areas. These collect supplies from our distribution centres and hypermarkets, and directly from suppliers. The range is limited to approximately 1,500 individual items and it focuses mainly on fresh and dry food, as well as ready-to-eat meals. We are piloting it in three districts of Moscow. lookinG aHeaD While we do not expect the macroeconomic and competitive environment to ease, we will keep work- ing on improvements in our offer and customer communication in both formats to excel in customer experience. In 2020, we will work on the transformation of our core business and on efficiency improvements. We will implement innovations and undertake various experiments to find solutions that will ensure our growth and support our transformation. It is our intention to remain the leading hyper- market chain in Russia and to sustain and grow our supermarket business. centre in Moscow with a space of 14,990 sq.m, and replaced it with a new facility with total space of around 70,990 sq.m. It is now the largest distribution centre in Lenta’s portfolio. We also extended our distribution centre in No- vosibirsk from 39,137 sq.m. to 71,837 sq.m to enlarge our capacity, centralise our own production and increase the range of fish in our stores. This enables us to secure high quality ready-to-heat and ready- to-eat meals in our stores and to improve our offering to customers. We began construction of a new 69,000 sq.m distribution centre in Saint-Petersburg that will start operations in 2020. The new warehouses have innovative features such as units with different temperature zones and additional services to enhance optimisation of the Company’s procurement and logistics, especially in fresh, frozen, and fruit and vegetable categories. Other innovations include separate units aimed to serve Lenta’s “Hero categories” and also to support their centralisation and further development. This will we operate 12 distribution centers in strategically chosen locations. our own fleet consisting of 330 trucks provides over 76 % of deliveries with a high service level of over 94 % O1›STRATEGIC REPORT O2›CORPORATE GOVERNANCE O3›FINANCIAL STATEMENTS O4›APPENDICESxxxxxxxxxxxxxLENTA ANNUAL REPORT AND ACCOUNTS 2019LENTA ANNUAL REPORT AND ACCOUNTS 2019022 C o rP o r a t e s oC i a l r e s P o n s iBi l i t y CorPorate soCial resPonsiBility we are CommitteD to aCtinG resPonsiBly in eVerytHinG we Do. CreatinG ValUe for all oUr stakeHolDers, esPeCially lenta emPloyees, is oUr Core oBjeCtiVe. we ConDUCt oUr BUsiness BaseD on CorPorate resPonsiBility PrinCiPles, wHetHer tHis is ProDUCt soUrCinG or interaCtion witH loCal CommUnities. We are convinced that responsible be- haviour guarantees our long-term suc- cess and sustainable development. Our Corporate Social Responsibility (CSR) programme includes a range of initiatives that extend across all aspects of Lenta’s business. etHiCs PoliCy Lenta’s Ethics Policy sets out the standards and rules which are applied and with which all employees must comply. It defines our obligations to behave ethically and exhibit the high standards of behaviour we ex- pect of our people. these include: • 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 stand- ards, which impose stricter ethical restrictions on employees than those provided in current legislation 023 Established in 2011, the Company’s Ethics Committee regularly reviews complaints and non-compliance. 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. our six pillars Our CSR agenda is founded on six pillars. Within the context of the six pillars there are specific goals. These are focused primarily 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 implemen- tation in the field of environmental protection. Along with our Ethics Policy, our CSR principles support our ambitions for long-term sustainable growth. reCrUitinG, traininG anD retaininG Professional staff The essence of our culture is teamwork, innovation and trust. We recruit the best professionals in the market, we train our people, and we do our best to retain them. Lenta is proud to have a staff reten- tion rate that is above the average for the food retail sector 4. Investment in our workforce is our strategic priority. This is the key to customer loyalty through greater productivity and service level. There is intense competition for labour in the retail sector. Low birth rates in the 1990s mean that the years between 2017–2020 are affected by a noticeable “demographic gap”. This makes the recruitment of qualified staff a challenge. Our target is to retain a best-in-class workforce that enables the sustainable growth of our business. 4Korn Ferry Compensation Report Russia Retail Sector 2019 o Ur V a l Ue s CUstomer satisfaCtion Customer satisfaction is the key to our development. We aim to provide excellent service to our clients and strive to satisfy their demand for products they want at the right price. afforDaBle PriCes for all oUr CUstomers We are committed to being a price leader, without compromising on the quality of the goods we sell. Our low- cost business model enables us to pass savings on to our customers. HiGH qUality of GooDs In order to ensure that we offer the highest quality goods, from production site to the shelf, we sell only licensed goods that are transported and stocked under the most hygienic conditions. lenta PeoPle People are the most valuable asset of our business. We retain well-trained employees to ensure they provide an excellent shopping experience for our customers. resPeCt for eVeryone We respect the opinions of our customers, suppliers and employees, encouraging positive criticism and friendly relations. innoVation anD iDeas Generation Our employees are the source of many of the innovative ideas that enable our continuous improvement and we select and implement the ideas that offer the greatest potential. This helps us to improve our stores as well as the service we provide. We challenge our staff to share their ideas relating to specific projects. In 2019, voluntary staff turnover in Lenta was flat versus 2018 and comprised approximately 30 %. To help ensure that we retain our employees, we implemented a number of employee engage- ment projects in 2019. These include additional incentive programmes, corporate social responsibility and charitable initiatives as well as training and educational activities. reCrUitment anD Career DeVeloPment We provide numerous opportu- nities for our employees to build their careers in the organisa- tion. In 2019, we created 2,746 new jobs. We pay particular attention to succession planning, which enables us to promptly fill open positions with internal candi- dates. In 2019, out of 27,582 va- cancies, 10,563 were fulfilled by internal candidates. In 2019, we identified 1,736 of our employees as high po- tential for promotion. Twen- ty six per cent of managerial positions among TOP 1,000 group and 29 % of TOP-5,000 are supported by personnel reserve, which is sufficient to compensate the turnover the nearest two years. During the year, we promoted over 4,000 employees, and ap- proximately 5,000 people were transferred to new roles through horizontal moves, as part of the succession planning process. emPloyee enGaGement High levels of employee en- gagement directly influences the Company’s performance and the satisfaction of our cus- tomers. In 2019, 6,444 people from our regional offices and Headquar- ters took part in a study of our employee engagement. The survey showed quite a high level of engagement of 74 %. We received over 14,000 comments and recommendations on how we can improve our business. O1›STRATEGIC REPORT O2›CORPORATE GOVERNANCE O3›FINANCIAL STATEMENTS O4›APPENDICESLENTA ANNUAL REPORT AND ACCOUNTS 2019LENTA ANNUAL REPORT AND ACCOUNTS 2019024 C o rP o r a t e s oC i a l r e s P o n s iBi l i t y 025 oVer 1.8in 2019, we DeliVereD who can share their expertise with colleagues, helping to build their skills and improve their competencies. These new internal trainers held 30 training courses in three months in 2019. million HoUrs of traininG After processing the feedback, we held 45 focus groups at which we presented areas for improvements in the Company. These served as the basis for 19 workshops in which we developed improvement action plans for each department and function. manaGement DeVeloPment We are constantly developing our leaders. We con- tinued to develop a culture of efficient people man- agement. We expect our managers to act as role models for their team members, ready to share knowledge and experience, and with the ability to develop themselves and their colleagues. Higher School of Economics; 110 of our managers com- pleted the course. They worked on 32 group projects focused on innovative business solutions. These projects have been successfully implemented in the Company. The programme started with personal development training. This was a new element of the course, aimed at raising students’ awareness of the importance of the subject. In 2019, we launched an important new initiative in our management training programme, in which leaders train future leaders at our Headquarters. Previously, our internal trainers carried out training at our stores and distribution centres. In 2019 we continued the Lenta Leader Programme developed in partnership with the Saint-Pertersburg We selected 28 motivated and experienced manag- ers for the role of internal trainers. These are employees in 2019 we continued the lenta leader Programme developed in partnership with the saint-Pertersburg Higher school of economics; 110 of our managers completed the course We continued to develop our leaders’ people man- agement skills in 2019. Some 125 managers were trained in how to provide supportive and efficient feedback to their team members. Another 127 managers were trained in our Situational Leadership course. store anD sPeCialist staff traininG We provide our people with a variety of training op- portunities, tailored to their experience and knowledge. This applies to all employee categories and helps colleagues to support Lenta’s growth at the same time as advancing their own careers. Our store employees are the public face of Lenta, so they are the primary focus of our training efforts. Each store runs a comprehensive induction programme for new employees. This sets out Lenta’s values, history and culture, as well as our policies and standards. In 2019, more than 18,500 employees participated in our induction programme. All new employees are supported by mentors in their first months working at Lenta. During the year, some 9,000 employees undertook mentoring training and became mentors, almost twice as many as in 2018. In 2019, we delivered over 1.8 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. 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 team members; it stimulates productivity, rewards achievement and encourages professional development. In line with a set of estab- lished principles, financial support is available for em- ployees who find themselves in difficult circumstances. DiVersity Lenta values and respects diversity; we offer em- ployment opportunities to all able candidates. Re- cruitment 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 2019, 175 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. DiVersity DiVersity Number of employees HQ and Regional divisions employees male 29 % 31 % Middle and senior management 52 % lenGtH of serViCe female 71 % 69 % 48 % lenGtH of serViCe 10+ 3–9 years Average seniority – 3.5 years nUmBer of emPloyees 2,710 18,437 sHare 5,60 % 38,10 % PriCinG anD CUstomer satisfaCtion We serve 15.8 million loyal customers in 88 Russian cities. We work hard to provide affordable prices to all types of customers, without compromising on quality. We strive to offer the right range of products for our customers, including large well-known brands, local O1›STRATEGIC REPORT O2›CORPORATE GOVERNANCE O3›FINANCIAL STATEMENTS O4›APPENDICESLENTA ANNUAL REPORT AND ACCOUNTS 2019LENTA ANNUAL REPORT AND ACCOUNTS 2019026 C o rP o r a t e s oC i a l r e s P o n s iBi l i t y 027 produce and our private label ranges. In this way, we achieve price efficiency and satisfy the needs of all shoppers who choose Lenta. Despite the challenging economic conditions in 2019, we continued to invest in pricing for our customers and to create attractive promotions for our customers throughout the year. As part of the Social Programme that we operate in all Lenta stores, we provide additional discounts for es- sential goods for citizens with limited budgets. In 2019, 2.4 million of our customers benefited from this programme; over 317 thousand joined the programme in 2019. We will continue to help our customers manage within their budgets, through tailored promotions and investment in pricing. We will introduce new ranges of private labels in all price segments to ensure we meet the needs of all our customers. We will also maintain our customer-focused approach, implementing new services and communicating with shoppers in the ways that suit them best. loCal soUrCinG We partner with local producers in the regions through- out our area of operation. Our customers search for local goods in our stores and appreciate the local produce that we offer. In 2019, we sourced over 94 % of our products from Russian suppliers, including 20.6 % from regional suppliers. Over 24 % of our fresh food was purchased locally. We focus producers who can supply us directly. That way, we can obtain better prices and more consistent quality of locally grown foods. Shorter distances to our stores mean that lead times and transport costs are reduced, which enables us to deliver savings to our customers. Our Growers Platform provides opportunities of sustainable growth for small and middle-sized farm- ers. In 2019 we increased the number of our partners within the programme by 8 %. Our customers appreciate the wide variety and consistently high quality of locally produced goods. Regional economies benefit from such partnerships as do our customers. We will continue to develop new partnerships with local suppliers and growers in 2020. We will focus on differentiation from the competition to offer a unique selection to our customers and provide growth opportunities for our local partners. CarinG for tHe enVironment We take care of the cities where we operate, striv- ing 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 re- moved 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 100 % of the cardboard and plastic wrap that we use in our stores and Distribution Centres. In 2019 we centralised our waste collection scheme and increased the volume of recycled waste. In 2019, all our hypermarkets were equipped with special containers for battery collection within the project we started three years back. We sent over 90 tonnes of batteries for recycling, which is twice as much as in 2018. We focused our efforts on the problem of plastic consumption. We introduced and widely promoted multiple use and paper bags along with sacks for fruits and vegetables, as alternatives to plastic. Over 50 % of plastic containers we use for food and for our own produced dishes are made of re- cyclable plastics. In 2020 we will increase the share of recyclable materials and will communicate to our customers the need to be aware of the various types of plastic. oVer 5О% of PlastiC ProDUCeD DisHes are maDe of reCyClaBle PlastiCs Containers we Use for fooD anD for oUr own the Company contributed supplies and stationery worth around rub 1.5 million to 263 social institutions as well as low income families in need of support enerGy We piloted the installation of glass doors on vertical fridges in 2019. As a result, we reduced electricity consumption by over 20 %. We plan to roll this out to our stores in 2020. 208 of our hypermarkets and supermarkets are equipped with energy-efficient LED lightning. sUPPortinG loCal CommUnities We strive to improve the quality of life for children and families in difficult circumstances; we also support elderly people and others who need our help. In August, 276 Lenta stores in 88 cities took part in our “Help to get a child to school” initiative. The Company contributed supplies and stationery worth around RUB 1.5 million to 263 social institutions as well as low income families in need of support. Donations included 2,300 backpacks, 25,000 notebooks and 15,000 sets of pens. Employees personally congrat- ulated 14,200 children from the sponsored institutions on the Day of Knowledge. Lenta’s “Good Deeds’ campaign is a traditional New Year charitable activity. Children from local orphanages and institutions place their “wish” on Christmas trees in our stores, and our customers can choose a card and buy the gift. In 2019, 321 stores in 88 cities took part in the project, making the wishes of 14,400 children come true. In 2019 we partnered with the “Give Food!” Foun- dation. We installed 19 boxes for food donations in our supermarkets. Our customers can buy goods and leave them in a special box. The donations are distributed by the Foundation among needy people. “Lenta of kind cities’ is a charity event that benefits a wide range of non-profit organisations. In March, volunteers from those organisations accepted do- nations of goods from Lenta hypermarket customers in 14 Russian cities and passed them on to those in need. The 2019 event collected over RUB 2 million worth of goods for deserving causes. Lenta was the principal partner of the “Be with the City” project located in Palace Square, St Petersburg. The project provides city residents with information about their neighbours 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 2019, we expanded the Festival further afield: bulbs were planted in Saint-Petersburg, Yekaterinburg, Novosibirsk, Byisk and Rostov-on-Don. PromotinG HealtH anD safety Lenta is fully committed to creating and maintaining a safe environment for employees and customers alike. In 2019 we reduced the level of injury severity by 16 %. We implemented a risk-oriented model in our approach to safety at work and delivered addi- tional training and supporting materials to promote the rules of safe behaviour in the work place. In order to improve the efficiency of training, we automated some related processes. For example, we introduced a robot that reminds employees about training courses and monitors them as they progress through the various stages. This has im- proved the effectiveness our training; we have been able to reduce time spent training by 70 %. We also developed an IT system for registering accidents; this allows our people, in an automated way, to inform management about the case and obtain recommendations on further action. All Lenta store managers conduct daily and monthly “safety walks” as part of our Active Safety programme. These walks aim to identify any potential risks to staff and customers, ensure that the staff check safety equipment and are fully aware of hazards. Employees are encouraged to report every safety-related inci- dent, no matter how small, so that the cause can be identified and any likelihood of recurrence eliminated. Our injury rate was unchanged from last year, despite the Company opening new stores in 2019. Lenta’s main health and safety targets in 2019 con- tinued 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. aCCiDents nUmBer Per 100,000 workinG HoUrs: 2018 0.26 2019 0.25 -4% O1›STRATEGIC REPORT O2›CORPORATE GOVERNANCE O3›FINANCIAL STATEMENTS O4›APPENDICESLENTA ANNUAL REPORT AND ACCOUNTS 2019LENTA ANNUAL REPORT AND ACCOUNTS 2019028 f i n a nC i a l r eVi e w 029 rud PederseN CHIEF FINANCIAL OFFICER Dear sHareHolDers, In 2019 we have been working on initiatives to achieve operational efficiency and improve our cash flow. Our efforts started to pay off as we saw some improve- ments in the dynamics of our SG&A in the second half of the year due to optimization of the headcount, our marketing costs, and other operating expenses. Our team also achieved good results in managing working capital, which along with tight control over capital ex- penditures resulted in a strong free cash flow of around Rub 17bn. Considering a new stage of the Company’s development and our own efforts, we maintain our target to remain free cash flow positive and deliver value to our shareholders5. sales Total sales grew 1.0% to Rub 417.5bn (2018: Rub 413.6bn), including retail sales growth of 4.0% to Rub 408.0bn (2018: Rub 392.2bn) and wholesales decline of 55.5%. 5 The figures represent the results in accordance with the standard IAS 17. In this regard, they may not coincide with the financial statements presented in this annual report, which is prepared in accordance with standard IFRS 16. After the robust performance in the first half, sales came under pressure in the second half of the year due to declining inflation, higher promotional activity and a decline in LFL sales, especially pronounced in the fourth quarter. Total LFL retail sales increased by 0.1% during the reported year driven by an increase in LFL ticket by 0.1%, while LFL traffic was flat versus 2018. Gross marGin Gross profit margin improved to 22.0% from 21.5% in 2018. The Company mainly benefited from higher retail margin as an increase in promo share as % of sales by 4.p.p. y-o-y was fully compensated by a combined effect of higher promo margin and better coverage of promo activities by suppliers. Additional positive effect came from a significant decline in share of low-margin wholesale business in the total sales throughout the year. Expansion of the Company’s own production and increased volumes led to a rise in related costs by 43 bps. Share of shrinkage increased by 13 bps as a result of ongoing changes in procurement, including increased direct import and direct contracts with suppliers. At the same time, Lenta recorded declining shrinkage in fresh food category as a result of the Company’s focused efforts. Gross Profit marGin imProVeD to 22.o% net inCome Net Loss of Rub 2.1bn due to non-cash expenses, with negative Net Profit margin of 0.5% compared to Net Profit of Rub 11.8bn in 2018 with Net Profit margin of 2.9%; CaPital eXPenDitUre Capital expenditures in 2019 were 36.1% lower than in 2018 and amounted to Rub 14.1bn. The reduction mainly reflected the effect of slower organic ex- pansion, tight control over expenses and changes in phasing of payments for some planned non-ex- pansion projects. At 31 December 2019 the Group has contractual capital expenditure commitments in respect of property, plant and equipment and intangible assets totalling Rub 6.2bn net of VAT (30 June 2019: Rub 6.7bn net of VAT). CasH flow Net cash generated from operating activities before net interest and income taxes paid increased by 32.1% and reached Rub 42.8bn compared to Rub 32.4bn in 2018. The Company improved its inventory levels, which resulted in better working capital in the reported year. Additional positive impact came from higher trade paya- bles compared to 2018 due to better supplier conditions. net DeBt anD leVeraGe As of 31 December 2019, Net Debt to EBITDA stood at 2.3x, Lease Adjusted Net Debt to EBITDAR at 3.2x and EBITDA to Net Interest at 3.7x. As of 31 Decem- ber 2018, Net Debt to EBITDA stood at 2.6x, Lease Adjusted Net Debt to EBITDAR at 3.4x and EBITDA to Net Interest was at 3.9x. The Company had a gross debt of Rub 150.5bn and a cash balance of Rub 73.4bn, giving Net Debt of Rub 77.1bn. In addition, Lenta had Rub 89.1bn of undrawn short- and long-term facilities. New long-term loan facilities with lower fixed rates were placed early in the first quarter of 2019 and shortly after the closure of the second quarter. These facilities enabled the Company to secure a lower cost of debt with sufficient cash on hand to cover all of Lenta’s refinancing needs in 2019 and part of 2020. All of Lenta’s debt is denominated in Russian Rubles and unsecured. 69.6% of debt is long-term of which 21.2% is due within one year. sellinG, General anD aDministratiVe eXPenses (sG&a) SG&A increased to 18.3% of sales (1.6 p.p. higher vs. 2018) mostly due to higher personnel expens- es, higher depreciation linked to reassessment of economic useful life of land improvements and an increase in rental costs linked to the indexation of rental fees. Supply-chain cost as % of sales rose by 17 bps to 1.3% in 2019 vs 1.2% in 2018. An increase was mainly driven by higher fuel prices and higher personnel expenses following an expansion of own truck fleet and launch of new distribution centers. Nonetheless higher transport costs were largely offset by an in- crease in the share of deliveries by own truck fleet, increase in supply-chain income versus the previous year and ongoing improvements in transportation efficiency. The Company’s average centralization ratio increased to 60.5% from 56.9% in 2018. Personnel costs as % of sales grew by 56 bps y-o-y due to one-off expenses related to man- agement compensation and further stores ex- pansion. Professional fees were higher as % of sales by 12 bps mainly due to rapid growth of the share of customer payments by debit and credit cards. Country-wide increase in tariffs resulted in higher utilities, cleaning and communal cost which increased by 27 bps. As a result, adjusted SG&A as % of sales increased by 1.0 p.p to 13.3% in 2019 compared to 2018. Rental ex- penses increased marginally by 5 bps to 1.5% of sales as a result of indexation of rental fees in 2019 linked to CPI. eBiDta EBITDA in 2019 reached Rub 34.0bn and EBITDA margin stood at 8.1%. interest Net interest expenses of Rub 9.3bn, an increase of 1.9% compared to 2018 (Rub 9.1bn) as an increase in gross debt offset a decline in average cost of debt DePreCiation Depreciation as % of sales increased by 63 bps y-o-y, which was mainly due to the Company reviewing the economic useful life of land improvements from 30 years to 7 years (as practice has proven that the factual useful life of land improvements does not exceed 7 years). Consequently, the Company rec- ognized an additional non-cash expense of around Rub 2.3bn in 2019. 6Lease adjusted Net Debt calculated as Net Debt plus operating leases multiplied by capitalization rate of 8.0x in accordance with credit rating agencies approach O1›STRATEGIC REPORT O2›CORPORATE GOVERNANCE O3›FINANCIAL STATEMENTS O4›APPENDICESLENTA ANNUAL REPORT AND ACCOUNTS 2019LENTA ANNUAL REPORT AND ACCOUNTS 2019 030 r i s k m a n a Ge m e n t 031 risk manaGement Lenta defines risk as ‘an uncertain future event that 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 account- ability for ensuring that risks are effectively managed across the business. 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 ongo- ing 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 biannual functional ‘bottom up’ evaluation, which identifies risks at opera- tional levels in the Company. These activities enable us to create a comprehensive risk profile. Risk identification is also embedded into key busi- ness processes including budgeting, planning, capital expenditure and performance management. stage 2 – risk assessment Risks are individually assessed to determine their likeli- hood of occurrence, and their 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 account- able 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 appropri- ate responses; these include management interventions to avoid a risk becoming reality in the first place, or to reduce its impact after the event. 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. Starting in 2020, the Company is planning to update the risk register and perform the above stages twice a year. We have changed our risk management policy with regard to the assessment thresholds of the risks’ impact. From 2019 onwards, the Company will assess the impact of a risk occurring as a percentage of its annual figure for EBITDA. risk manaGement PoliCy Lenta’s Risk Management Policy provides 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 avoid- ance of unwanted surprises as well as 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; 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 pro- vided to all staff commensurate with their roles and responsibilities. tHe risk lanDsCaPe The Russian retail industry continues to be challenged by weak macro-economics, changes in legal and regulatory requirements, as well as continued fierce competition. As the market has adapted to geo-political ten- sions and related sanctions, our supply stability risk has decreased significantly and is no longer viewed as an immediate principal risk. A slower pace of expansion together with a renewed focus on efficiency and company leverage delivered positive cash flow. Consequently, the Company’s ex- ternal net debt decreased and exposure towards risks associated with having sufficient external financing are reduced. In addition, the second half of the year saw the Central Bank of Russia lower its interest rates which, together with low inflation, helped to ease the overall financial risks. With slowed organic expansion and increasing competition from existing and new players in the industry, Lenta needs to update its strategy with a view to ensuring the sustainability of its hypermarket format as well as developing new and sustainable growth opportunities. Otherwise, there is a risk that the Company could find itself entrenched with the majority of its business in the hypermarket segment. In 2019 our wholesale business declined as expected and it no longer constitutes a significant part of our business. The Company performed a detailed store- by-store analysis and identified a number of significant impairment both at the mid- and year-end. Given the volatility and weak economic environment in which Lenta operates the risk of further impairments are inherent, although with the impairments made in 2019, it is no longer considered a principal risk. Lenta continues to engage and cooperate across its value chain with numerous suppliers, partners and authorities both at local, regional and federal level. In doing so Lenta must ensure that all its dealings are in line with relevant legislation, as well as external and internal standards and regulations, including policies regarding ethical behaviour. Operating across a significant geographical span with, at times, long supply routes and a multitude of suppliers, food safety is a principal risk for Lenta. At the same time, Lenta’s in-store production of goods for re-sale is growing due to increased demand. Con- sequently, we need to ensure that products offered to customers are at all times of the highest quality and meet all required safety and sanitary standards. Work force mobility is high and the retail industry’s core employee capabilities are easily transferable between Lenta and its competition, not only in food retail, but across various types of retail business- es. The Company works continuously to attract and retain employees and its ability to do so is a principal risk. The emergence of the novel Covid-19 coronavirus continues throughout China and other countries. Measures to contain the virus may impact business operations around the world. As governments and companies take measures to protect their citizens, operations and employees at home and abroad, such actions may lead to business interruptions, travel risks and other effects that could impact the Company’s supply chain. oUr key Priorities A. Relentlessly focus on the customer in order to become the most preferred retailer in Russia B. Adapt our Hypermarket format to changing customer demand in order to grow and deliver best-in-class profitability C. Build successful offers in supermarkets and online in order to bring convenience to our customers D. Maintain a healthy balance sheet with a conservative approach to leverage E. Continuously innovate, experiment, develop and test new businesses in search of a winning model F. Strengthen our agile organisational culture in order to reduce time-to-market G. Further operational execution to maintain our position as the most cost-efficient retailer in Russia in order to maximise customer and shareholder value 4 l y e k i l l y h g H i d o o h i l e k i l 3 l e b a b o r P 10 2 l i e b s s o P 1 l y e k i l n U 1 3 6 8 9 7 11 12 2 4 5 Minor 1 Moderate 2 impact Major 3 Severe 4 DesCriPtion of PrinCiPal risks 1. Changing legal and regulatory environment 2. Macro-economic and political instability 3. Increased competition from existing and new formats as well as industry consolidation 4. Competitive sourcing and security of supply 5. Lack of innovation and adaptation 6. Attracting and retaining a qualified, diverse workforce 7. Food safety and product quality 8. Taxation 9. Capital markets and liquidity 10. Legal and compliance 11. Strategy development and execution 12. Cyber and IT risks O1›STRATEGIC REPORT O2›CORPORATE GOVERNANCE O3›FINANCIAL STATEMENTS O4›APPENDICESLENTA ANNUAL REPORT AND ACCOUNTS 2019LENTA ANNUAL REPORT AND ACCOUNTS 2019 032 r i s k m a n a Ge m e n t 033 no on maP. risk DesCriPtion risk CateGory CUrrent seVerity oBjeCtiVes affeCteD oUtlook/ trenD How we manaGe it CHanGes in 2019 risk imPaCt imPaCt likeliHooD risk DesCriPtion risk CateGory CUrrent seVerity oBjeCtiVes affeCteD oUtlook/ trenD How we manaGe it CHanGes in 2019 risk imPaCt imPaCt likeliHooD 1 2 3 4 5 6 Changing legal and regulatory environment Introduction of new legal and regulatory requirements and the complexity of exist- ing requirements drives the cost of compliance and may disrupt our value chain. Macro-eco- nomic and political instability Weak consumer demand may impact sales growth. Instability may create unpre- dictable pressure on cost as well as on our supply chain. Increased competition from existing and new formats, plus industry con- solidation Increased competition or aggressive marketing and pricing practices by competitors may negatively impact sales and margins through decline in customer traffic and basket. Competitive sourcing and security of supply Lack of inno- vation and adaptation Slower growth may result in weaker competitive bargain- ing power with suppliers and hence impact margins. Competitors investing in price may put our low price/low cost model under pressure. We may face a ‘perfect storm’ scenario where we have less ability to respond to customers and suppliers, and where competitors dominate. Lack of innovation may impact our ability to compete, leading to loss of customers. It may also affect our ability to communicate and engage with customers, making us uncompetitive, which may negatively im- pact traffic and basket size. Attracting and retain- ing a quali- fied, diverse workforce Failure to attract and retain required capabilities may mean we cannot sustain our efficient operating model, execute on our strategy or ensure succession planning. Strategic 2 4 DG Stable Strategic 3 2 G Decreasing Strategic 2 4 ABG Stable Strategic 3 2 ABC Stable Operational 2 3 ABCDEFG New Operational 2 3 ABCDEFG New Monitor legislative and regu- latory initiatives and actively engage in dialogue with legislatros, both directly and through retail associations. Continue to update and in- vest in process optimisation and automation. Monitor main economic indicators. Rolling 60-month forecast. Consistently keep our customer offer relevant to consumer spending power. Continue to improve our supply chain. Actively track and measure competitors’ behaviour and changes, understand struc- tural changes in the market and implement changes to our offer, formats and price positioning. Increase our share of direct imports and local sourcing by taking charge of the full value chain. Consolidate purchasing power on fewer suppliers. Develop private label. Participate in retail alliance of independent retailers Continued focus on talent planning and people devel- opment processes in Lenta. Employer branding through actively working with uni- versities. Introduction of employee engagement programme, employee retention through LTIP and succession planning tools. Ongoing focus by the Board of Directors and management on succession planning. Continued focus on talent planning and people devel- opment processes in Lenta. Employer branding through actively working with uni- versities. Introduction of employee engagement programme, employee retention through LTIP and succession planning tools. Ongoing focus by the Board of Directors and management on succession planning. Introduced digitalisation and tracking of veterinary certifi- cates regarding fresh goods. Changed requirements related to tracking excise labels by bottle rather than batch. Excise label tracking system for tobacco introduced. New legislation related to outsourced labour. Lower oil prices and increase in VAT had an overall negative impact on the economic growth and consumption in 2019. The consumer environment started to improve in the second half of the year, with slower growth of inflation, rising wages and higher real disposable income. There were no materially negative changes in 2019 to the political environment. Growth of hard discounter and ultra-convenience formats. Slower but continued organic expansion by major conve- nience operators. Increased and aggressive promotional activities by many food retailers. There were no changes indicated. no on maP. 7 Food safety and product quality 8 Taxation Food or non-food products being offered for sale and not meeting required quality standards may impact our Lenta brand value and service perceptions, thus failing to sustain trust in our brand. Lack of trust in the Lenta brand could seriously damage our reputation and negatively impact sales and market share. Incremental tax payments, late payment interest and fines may have a negative impact on the Company’s financial performance in addition to causing loss of reputation. 9 Capital markets and liquidity Access to funding markets being restricted or limited, and growing cost of capital may lead to a negative impact on Lenta’s financial performance, cash liquidity and ability to fund operations. 10 Legal and compliance Changes in - or failure to comply with - relevant legis- lation and regulations could adversely affect our opera- tions and negatively impact sales, profit and reputation. Operational 2 4 AC Increasing Financial 2 2 D Decreasing Financial 2 1 DG Decreasing Governance 1 3 DG Stable Increasing labour mobility and fight for talent from retail and other industries. Attrition of senior and middle management to competitors. 11 Strategy develop- ment and execution Increasing labour mobility and fight for talent from retail and other industries. Attrition of senior and middle management to competitors. 12 Cyber and IT risks Unsuccessful development and execution of strategy due to poor prioritisation, ineffec- tive change management and a failure to understand market developments may result in a loss of market share and deterioration of profitability, eventually leaving Lenta as a single format operator. Failure to ensure data security and privacy could impact our licence to operate. The loss of sensitive information could result in reputational damage, fines or other adverse conse- quences. Strategic 4 2 ABCEFG New IT 4 2 ADEF New Operating integrated quality control procedures, implement- ing; monitoring and controlling food safety and quality standards. Increasing control over the value chain by direct imports, direct cooperation with farmers and growers, providing increased transparency and control over product quality from field to shelf. The Company is continuously monitoring tax legislation in ac- cordance with designed control procedures. By engaging external advisors, we are obtaining advice on appropriate treatment of value added taxes, deductibility and depreciation. Lenta maintains an infrastructure of processes, policies and pro- cedures securing strict discipline and oversight on financing and liquidity issues. Our liquidity levels and sources of cash are constantly reviewed and report- ed to management. Lenta manages legal and regulatory risks by regularly monitoring relevant legislation and risk assessment frameworks. The Company has developed relevant control procedures for internal controls and internal audit departments to detect, report and respond. There is regular reporting to the Board of Directors and management on the status of governance and compliance. The Board of Directors and Management develops and challenges the strategic direc- tion of our business to enhance our ability to remain competitive on price, range and service. We continued further development of supermarkets, created a dedi- cated team focused on new for- mats and business models and launched a new pilot project of the online format - Lentochka. We have processes and controls established to detect, report and proactively respond to se- curity incidents. We implement- ed a pipeline of initiatives to enhance our security capabilities to improve data security. We introduced monitoring of the security and data privacy status and report on this to the Board of Directors and management. There were no changes indicated. VAT was increased from 18% to 20%. The Central Bank of Russia lowered interest rates in 2019. The inflation rate has also declined. The Compa- ny successfully decreased its leverage and negoti- ated improved conditions on its external borrowings. Severgroup became a long-term strategic share- holder in Lenta. State authorities have been considering intro- ducing changes to the state traceability systems covering wider groups of goods, although there were no signs of easing or simplifying other legal and regulatory requirements for businesses. Severgroup became a long-term strategic share- holder in Lenta. Food retail in Russia saw increased and tougher competition from both new and existing players with new formats, shifting the paradigm towards omni- channels and increased promotional activities. The number and sophis- tication of cyber threats is growing every year. The Company has launched IT- based projects and intro- duced on-line technologies which result in increased exposure. O1›STRATEGIC REPORT O2›CORPORATE GOVERNANCE O3›FINANCIAL STATEMENTS O4›APPENDICESLENTA ANNUAL REPORT AND ACCOUNTS 2019LENTA ANNUAL REPORT AND ACCOUNTS 2019Directors have assumed that the existing banking and debt facilities will remain in place or mature as intended. The Directors have also considered mitigating actions available to Lenta, including restrictions on capital investment, further cost re- duction opportunities and future dividend policy. The Directors have assumed that these mitigating actions can be applied on a timely basis and at insignificant or no cost. Based on the results of our viability assessment, 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. 034 r i s k m a n a Ge m e n t 035 B o a rD a U Di t C o m m i t t e e Accountable for ensuring a sound system of internal control and risk management in place Oversight and challenge of the principal risks, effectiveness of risk management and assurance activities s e n i o r m a n a Ge m e n t t e a m H e aD o f r i s k m a n a Ge m e n t Oversight of the identification review and ongoing monitoring of Lenta’s principal risks. Review and challenge of the risks submitted from the Functions Responsible for the risk management framework and coordination of management n o i t a l 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 i r f UnC t i o n s 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 s t r a t e G y , o V e r s i G H t a n D C o m m U n i C a t i o n s ViaBility statement Lenta’s viability assessment considers its solvency and liquidity over a period exceeding that of the going concern assessment. The degree of predictability inherently reduces over this longer period. Under- standing our business model, our main priorities and our principal risks is a key element in the assessment of Lenta’s prospects, as well as the formal consider- ation of viability. Our low price/low cost business model is aimed at generating market-leading sales levels, by consistently applying everyday low prices combined with deep and frequent promotions. Low cost is driven by the combination of high sales volumes with efficient business processes and store designs which, together, optimise store operating and supply chain costs. Our federal reach and sales volumes support this, and so enable us to negotiate competitive conditions with suppliers. lenta continues to engage and cooperate across its value chain with numerous suppliers, partners and authorities both at local, regional and federal level We prefer to own the majority of our hypermarkets, as this allows us to operate stores optimised to our requirements to support our low-cost operations and supply chain. Owning our stores provides an efficient cost hedge versus rent inflation, as does Lenta’s incremental borrowing rate when compared to the required re- turn on invested capital of real estate investors. With organic expansion at a somewhat slower rate, with lower (though still substantial) capital expenditures, positive free cash flow - after capital expenditure and financing costs - is expected. While Lenta continues to be reliant on banks and financial markets for funding, 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, is not exposed to currency fluctuations and has limited interest rate risk. The principal risk affecting Lenta is the impact of sig- nificant changes in consumer spending due either to economic developments or to reduced appeal of our commercial offer. Severe economic turbulences could, however, affect our business – as it could other retailers’ – and could therefore influence our cash generation and debt service capacity. This in turn could affect the level of ambition we are able to apply to our further development. Our approach to the viability of the business is influenced by our key priorities that are focused on adapting our hypermarket format to changing customer demand. This is in addition to building a successful offer in supermarkets and online that brings convenience to our customers so we can grow and deliver best-in-class profitability. This requires continued innovation, experimentation, development and testing in search of winning models. Along with an agile organisational culture that is committed to reducing time-to-market, and a meticulous focus on operational execution to maintain our position as the most cost-efficient food retailer in Russia, thereby maximising customer and shareholder value. The Directors have determined that Lenta’s long- term planning horizon - which is the existing year plus the four following 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 various scenarios. Lenta has significant financial resources, in- cluding committed and uncommitted banking and debt facilities. It also has a new long-term investor who became a majority shareholder dur- ing 2019. In assessing the Company’s viability, the O1›STRATEGIC REPORT O2›CORPORATE GOVERNANCE O3›FINANCIAL STATEMENTS O4›APPENDICESLENTA ANNUAL REPORT AND ACCOUNTS 2019LENTA ANNUAL REPORT AND ACCOUNTS 2019 036 l e n t a a n nU a l r eP o r t a nD a C C oUn t s 2 0 1 9 o1 › s t r a t e GiC r eP o r t o2 › C o rP o r a t e Go Ve r n a nC e o3 › f i n a nC i a l s t a t e m e n t s o4 › aP Pe nDiC e s o2 › C o rP o r a t e Go Ve r n a nC e 038 Bo a rD o f Di r e C t o r s 039 BoarD of DireCtors aleXey morDasHoV, CHairman steVe joHnson, senior inDePenDent DireCtor miCHael lynCH-Bell, inDePenDent DireCtor Alexey Mordashov was appointed a non- Steve Johnson has been an independent non- Michael Lynch-Bell was appointed an executive director of Lenta Plc in May 2019 executive Director of Lenta Plc since 2010. He independent non-executive Director of Lenta Board Committees: Nomination was appointed as Lenta’s Senior Independent Plc in 2013. Experience: Born in 1965. Alexey Mordashov Director in 2013. Board Committees: Audit (Chairman), has been working for Severstal since 1988. Board Committees: Nomination (Chairman), Remuneration (Chairman), Nomination He started his career as a Senior Economist, Remuneration, Audit, Operation and Capital Experience: Michael retired from Ernst & Young becoming Chief Financial Officer in 1992. Expenditure as Senior Partner in 2012 after a 38-year In December 1996, he was appointed as Experience: Steve has over 20 years’ career with the firm. He was a member of Ernst Severstal’s Chief Executive Officer. Between experience in the retail industry, having been & Young’s audit practice from 1974 to 1997, 2002 and 2006 he served as CEO of Severstal part of the team that turned around and becoming a partner in 1985. During this period, Group and was Chairman of Severstal’s successfully sold Asda to Walmart. Whilst as well as supervising and being involved in the Board of Directors. From December 2006 to at Asda, Steve held several senior positions audit of a number of multinational groups, he December 2014 Alexey was CEO of Severstal. including Trading Director, Commercial Finance advised a wide range of companies on systems From December 2014 until May 2015 Alexey Director and Marketing Director. Following his and controls, corporate governance, risk Mordashov served as CEO of AO Severstal time at Asda, he was CEO of Focus DIY Ltd and management and accounting issues. In 1997, Management – managing company of PAO of Woolworths Plc, as well as Sales & Marketing Michael moved to Ernst & Young’s Transaction Severstal. Alexey was elected Chairman of Director at GUS Plc. He started his career in Advisory practice, where he founded and the Board of Directors of PAO Severstal in May management consultancy with Bain & Co. led its UK IPO and Global Natural Resources 2015. Other roles: Steve is currently a non-executive transaction teams. He has been involved with Other roles: Currently Alexey is CEO of Director of Big Yellow Group Plc. He also works the CIS since 1991 and has advised many CIS Severgroup LLC. He is also Head of the Russian with a number of private equity firms primarily companies on fundraising, reorganisations, Union of Industrialists and Entrepreneurs’ focused on Southern and Eastern Europe. transactions, corporate governance and IPOs. Committee on Integration, Trade and Qualifications: Steve graduated from Other roles: Michael is also Deputy Chair and Customs Policy and WTO, Supervisory Cambridge University, United Kingdom, with an Senior Independent Director of KazMinerals Board member in Non-Profit Partnership Engineering degree. «Russian Steel Association», Co-chairman of the Northern Dimension Business Council, member of the Russian-German workgroup responsible for strategic economic and finance issues, Member of the EU-Russia Business Cooperation Council. Other Selective Directorships: Nord Gold SE, TUI AG. Qualifications: Alexey graduated from the Leningrad Institute of Engineering and Economics, holds an MBA from the Business School at the University of Northumbria in Newcastle, United Kingdom. He is awarded an Honorary Doctorate of Science from the Saint Petersburg University of Engineering and Economics (2001) and the Northumbria University (2003). Plc, Senior Independent Director and Audit Committee Chairman of Gem Diamonds Limited, Chairman at Little Green Pharma Ltd and a non-executive Director of Barloworld Limited. Qualifications: Michael graduated from Sheffield University with a BA in Economics and Accounting in 1974, qualified as an English Chartered Accountant in 1977, and was awarded an Honorary Doctorate of Humane Letters by Schiller International University in 2006. O1›STRATEGIC REPORT O2›CORPORATE GOVERNANCE O3›FINANCIAL STATEMENTS O4›APPENDICESLENTA ANNUAL REPORT AND ACCOUNTS 2019LENTA ANNUAL REPORT AND ACCOUNTS 2019 040 Bo a rD o f Di r e C t o r s 041 jUlia soloVieVa, inDePenDent DireCtor aleXey kUliCHenko, non-eXeCUtiVe DireCtor roman VasilkoV, non-eXeCUtiVe DireCtor tomas korGanas, Herman tinGa, rUD PeDersen, non-eXeCUtiVe DireCtor CHief eXeCUtiVe offiCer (Ceo) CHief finanCial offiCer (Cfo) Julia Solovieva was appointed an independent Alexey Kulichenko was appointed a non- Roman Vasilkov was appointed a non-executive Tomas Korganas was appointed a non- Herman Tinga joined Lenta in 2013 as Chief Rud Pedersen was appointed Chief Financial non-executive Director in 2018. executive Director of Lenta Plc in May 2019. Director of Lenta Plc in May 2019 executive Director of Lenta Plc in August 2019. Commercial Officer and was appointed CEO in Officer in April 2019. Board Committees: Audit, Nomination, Experience: In 1996–2003 Alexey held different Board Committees: Operation and Capital Board Committees: Operation and Capital December 2018. Experience: Before his current role, Rud served Remuneration. managerial positions at Sun Interbrew, starting Expenditure (Chairman) Expenditure. Experience: Prior to joining Lenta, Herman was as CFO of Carlsberg Eastern Europe and was Experience: Julia has over 20 years experience his career as a cash flow economist at the Experience: Roman Vasilkov joined Severstal in Experience: Tomas Korganas started his career Non-Food Global Category Management & responsible for operations in five FSU markets. in the internet search, media, retail and Rosar plant in Omsk and ending it as Efficiency 2006 as an analyst at the Sales department. at BCG and Goldman Sachs, after that he Sourcing Director at Metro AG. He has 33 years’ Over the last 25 years he has held a number telecoms sectors. Julia joined Google in 2013 Planning and Managing Director. In 2003–2005 From 2008 till 2012 he held various positions worked in and led Corporate M&A at GE, Rusal experience in retail and cash & carry. Herman of senior management positions in a diverse as Managing Director/Country Manager Alexey worked as CFO at Unimilk. In December in Severstal-Invest which is part of Severstal’s and Vympelkom for the next 10 years. In 2012, has held Board and VP positions with METRO range of businesses including FMCG, fashion Russia, and has been Director, Business 2005 he joined CJSC «Severstal Resource» as Russian Steel division. During this time Tomas joined Severstal as Head of Corporate Cash & Carry in Netherlands and Russia and and apparel retail and pharma. Rud has had Operations for Emerging Markets EMEA since CFO. In July 2009 he was appointed CFO of Roman was responsible for the organization Development and soon after he was asked senior management roles in Dutch department experience in regional and group level roles, 2016. From 2007 to 2012 she held various senior JSC Severstal. of the company’s AR management system, to assume same role at Severgroup. Since stores chain V&D as well as supervisory roles including Cadbury (Russia), Astrazeneca positions including the role of President, at Other roles: Alexey currently serves as CFO of preparation of management accounting and 2018, Tomas is also heading the Strategy of with Electric City and shoe importer REMO. (Belgium), Levi Strauss (Belgium) and IC Group Prof-Media, one of Russia’s largest media JSC «Severstal Management» – managing business-process regulation. In 2012 he joined Severgroup. At Metro Cash & Carry he was involved as (Denmark). He started his career with Deloitte. groups. Prior to this she held various corporate company for PAO Severstal and CFO of Corporate Control at Severgroup LLC. Other roles: Tomas currently serves as a international Sponsor in sourcing across Asia Qualifications: Rud holds the Master of development and other leadership roles in the Severgroup LLC. Other roles: Currently (since 2016) Roman is Director for Strategy and M&A of Severgroup and Europe and helped lead the development Science degree in International Business telecoms sector and also has experience in Other Selective Directorships: PAO Severstal. the Head of Corporate Control at Severgroup LLC and Head of Corporate Development of of customer-centric category management for Administration & Commercial Law from Aarhus strategy consulting with Booz Allen Hamilton Qualifications: Alexey graduated from Omsk LLC. His responsibilities include financial control JSC «Severstal» Metro group. School of Business, Denmark. He also has an Netherlands and as Director of Operations for Institute of World Economy with a degree in as well as business and investment analysis of Qualifications: Tomas graduated with B. Sc. Qualifications: Herman has a Bachelor’s EMBA from London Business School. Mary Kay Russia and CIS. Economics. Severgroup’s companies and projects. in Engineering from Kaunas University of degree from the Netherlands Institute of Other roles: Julia is currently Director, Business Operations Emerging Markets EMEA, Google Qualifications: Julia holds an MBA from Harvard Business School and a BA in foreign languages from Moscow State Linguistic University. Other Selective Directorships: Nord Gold SE, Technology in 1993, M. Sc. in International Marketing. Tele2. Qualifications: Roman graduated from the Military Engineering and Space Academy of Mozhaysky, St. Petersburg. In 2013 he graduated with honors from the Institute of Management and Information Technologies (branch of the St. Petersburg State Polytechnic University) majoring in financial management. Strategy from Helsinki University of Technology in 1996, and MBA from Sloan School of Management, MIT in 2000. O1›STRATEGIC REPORT O2›CORPORATE GOVERNANCE O3›FINANCIAL STATEMENTS O4›APPENDICESLENTA ANNUAL REPORT AND ACCOUNTS 2019LENTA ANNUAL REPORT AND ACCOUNTS 2019 042 s e n i o r m a n a Ge m e n t t e a m 043 senior manaGement team Herman tinGa, rUD PeDersen, eDwarD DoeffinGer, CHief eXeCUtiVe offiCer CHief finanCial offiCer CHief oPerational offiCer (Coo) Herman Tinga joined Lenta in 2013 as Chief Rud Pedersen was appointed Chief Financial Edward Doeffinger joined Lenta in 2011 as Chief Commercial Officer and was appointed CEO in Officer on 1 April 2019. Operational Officer. December 2018. Experience: Before his current role, Rud served Experience: Prior to joining Lenta, Edward Experience: Prior to joining Lenta, Herman was as CFO of Carlsberg Eastern Europe and was served as Deputy General Director of Metro Non-Food Global Category Management & responsible for operations in five FSU markets. Cash & Carry Kazakhstan. Before starting Sourcing Director at Metro AG. He has 33 years’ Over the last 25 years he has held a number his career in 1991 at Metro Cash & Carry experience in retail and cash & carry. Herman of senior management positions in a diverse (Germany), Edward held several positions in has held Board and VP positions with METRO range of businesses including FMCG, fashion wholesale companies and worked as Head of Cash & Carry in Netherlands and Russia and and apparel retail and pharma. Rud has the dry food department at the Trade Ministry senior management roles in Dutch department had experience in regional and group level of the German Democratic Republic. During his stores chain V&D as well as supervisory roles roles, including Cadbury (Russia), Astrazeneca 30 years’ experience in the retail industry he with Electric City and shoe importer REMO. (Belgium), Levi Strauss (Belgium) and IC Group has held senior positions in various countries. At Metro Cash & Carry he was involved as (Denmark). He started his career with Deloitte. In 1994 he obtained his first assignment outside international Sponsor in sourcing across Asia Qualifications: Rud holds the Master of cience Germany as a board adviser to Metro Cash and Europe and helped lead the development degree in International Business Administration & Carry in Hungary. After a year in Hungary, of customer-centric category management & Commercial Law from Aarhus School of Edward became a member of the Metro for Metro group. Business (Denmark). He also has an EMBA from Jinjiang team (China) and worked as a Store Qualifications: Herman has a Bachelor’s egree London Business School (UK). General Director and later as Head of Store from the Netherlands Institute of Marketing. Development for several years in China before moving to Russia in 2001. In Russia Edward was responsible for the business operations of Metro Cash & Carry in the Privolzhsky, Ural and Siberian regions. He was also responsible for the Metro Cash & Carry Kazakhstan business operations as a Deputy CEO. Qualifications: Edward has a degree in Economics from the Hochschule fuer Oekonomie Berlin. O1›STRATEGIC REPORT O2›CORPORATE GOVERNANCE O3›FINANCIAL STATEMENTS O4›APPENDICESLENTA ANNUAL REPORT AND ACCOUNTS 2019LENTA ANNUAL REPORT AND ACCOUNTS 2019044 C o rP o r a t e Go Ve r n a nC e r eP o r t 045 joern arnHolD, sUPPly CHain DireCtor tatiana safUtina, Dmitry BoGoD, jaaP Van VreDen, tatiana yUrkeViCH, CommerCial DePartment DireCtor CHief strateGy & marketinG offiCer soUrCinG anD ProCUrement DireCtor Hr DireCtor Joern Arnhold joined Lenta in 2011 as Supply Tatiana Safutina joined Lenta in 2015 as Dmitry Bogod joined Lenta in 2018 as Chief Jaap van Vreden joined Lenta as Procurement Tatiana Yurkevich joined Lenta in 2012 as Chain Director. Commercial Director, Fresh Food. Strategy Officer. Director in 2015. Human Resources Director. Experience: Prior to joining Lenta, Joern Experience: Tatiana has more than 20 years’ Experience: Dmitry has over ten years Experience: Jaap has over 30 years’ Experience: Prior to joining Lenta, Tatiana had 13 years’ experience with Metro Group experience in the Russian food retail sector. of experience in strategy consulting for international experience in the retail industry served as Human Resources Director at Fazer Logistics (‘MGL’) where he held various key Prior to joining Lenta, she was with the O’KEY international companies. Before joining Lenta, across sourcing, procurement, marketing Bakeries & Confectionery, Russia. During her positions in Germany, Turkey and Russia. As retail chain for ten years, where she worked Dmitry was an associate partner in McKinsey’s and brand management. Prior to joining 17 years in HR management, she has held Managing Director of MGL in Russia, Joern her way up from Head of Deli and Fresh Food Moscow office, where he focused on strategy Lenta, he was a consultant for Li& Fung and senior positions including Head of HR at was responsible for developing and running in St. Petersburg to the company’s Head of and marketing projects for Russian and implemented category and procurement United Heavy Machinery Group and Izhora logistics operations for the Metro Group sales Fresh Food. Before that, Tatiana oversaw the international retailers and FMCGs. Prior to management in supermarket and hypermarket Plants, and HR Director of Caterpillar European divisions in Russia. procurement of fresh produce at AKT Zdorovye that, Dmitry worked at Oliver Wyman, advising chains. Fabrications and Caterpillar Tosno. Tatiana has Qualifications: Joern holds a degree in and Uniland in St. Petersburg. companies on consumer related strategy and Earlier in his career, Jaap worked as CCO for experience in leading Six Sigma Programme Business Administration from the Georg August Qualifications: Tatiana holds a degree from operational topics. Prior to consulting, Dmitry Modis in Russia and for over eight years held implementation as a Deployment Champion in University Goettingen. Saint-Petersburg State Institute of Technology. worked with Aon Benfield Securities, RBC VP positions in Ahold USA and CEE. Caterpillar. Capital Markets, and Manulife Financial. Qualifications: Dmitry has an Honours Bachelor of Science Degree in Applied Mathematics from the University of Toronto. Qualifications: Jaap holds a diploma in Retail, Qualifications: Tatiana has a master’s degree Economic and Administrative studies from the in International Economics from St. Petersburg Deltion College in the Netherlands. 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). O1›STRATEGIC REPORT O2›CORPORATE GOVERNANCE O3›FINANCIAL STATEMENTS O4›APPENDICESLENTA ANNUAL REPORT AND ACCOUNTS 2019LENTA ANNUAL REPORT AND ACCOUNTS 2019046 C o rP o r a t e Go Ve r n a nC e r eP o r t 047 serGey ProkofieV, serGey korotkoV, leGal anD GoVernment relations CHief information offiCer DireCtor Sergey Korotkov joined Lenta in 2018 as Chief Sergey Prokofiev joined Lenta as Legal and Information Officer. Government Relations Director in 2012. Experience: Sergey has extensive expertise Experience in information technology, supported by over Experience: Prior to joining Lenta, Sergey 25 years of experience in both Russian and worked for Metro Cash & Carry for 11 years international companies. Before joining Lenta, in different positions including Legal and Sergey was most recently Senior Vice President Compliance Director. He started his career and CIO at Gloria Jeans, where he led the as an expert interpreter and later worked as company’s digital transformation. Prior to that, a lawyer in a major Russian law firm and as a he was CIO at Dixy Group, where he led the defending attorney at the Moscow City Bar. development and implementation of its IT Qualifications: Sergey graduated from strategy. He has also held similar positions at the Military Institute of Foreign Languages PepsiCo, Transaero Airlines, and Bristol-Myers (‘VKIMO’) and the Institute of Law. He holds Squibb Russia. a PhD in Law from the Institute of Legislation Qualifications: Sergey graduated with honours and Comparative Law under the Government from Moscow State University with a Master’s of the Russian Federation and an MBA in Degree in Applied Mathematics. Strategic Management from California State University. anna loGUnoVa, VaDim monakHoV, internal aUDit DireCtor DireCtor of BUsiness sUPPort Experience: Anna has twenty-one years’ Vadim joined Lenta in August 2019 as the experience working in food retail and FMCG. Director of Business Support. Anna Logunova joined Lenta in 2011 as Experience: Prior to joining Lenta, Vadim was Director for Supply Chain Controlling; she in charge of security in Utkonos. Before that, was appointed Director for Supply Chain Vadim worked in law-enforcement authorities and Investment Controlling in 2013, taking and was fighting organized crime and drug responsibility for Operational Controlling in traffic. Vadim retired in the rank of major 2014. Since March 2018, Anna occupies the general. position of Chief Audit Executive (CAE) in Lenta. Qualifications: Vadim graduated from Gorky Prior to joining Lenta, Anna was Supervisor higher school of the USSR Ministry of internal Costing at Philip Morris International (Russia). Affairs Qualifications: Anna graduated with honours from St. Petersburg State Technical University. She holds a master’s degree in Economics and Management. O1›STRATEGIC REPORT O2›CORPORATE GOVERNANCE O3›FINANCIAL STATEMENTS O4›APPENDICESLENTA ANNUAL REPORT AND ACCOUNTS 2019LENTA ANNUAL REPORT AND ACCOUNTS 2019048 C o rP o r a t e Go Ve r n a nC e r eP o r t 049 CorPorate GoVernanCe rePort 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 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 reviewed new Code, and put necessary processes in place to ensure that we are in substantial compliance with these changes during the 2019 financial year. Although 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. reDomiCiliation Lenta accomplished its incorporation in Cyprus in the form of a public limited liability company) and discontinued its incorporation under the laws of the BVI effective February 21, 2020. On July 18, 2019, the Board of Directors passed the resolution on the commencement of the Redomi- ciliation process. On September 26, 2019, the Board passed resolutions confirming the Redomiciliation and convened an extraordinary general meeting (“EGM”) of Lenta. On October 22, 2019, the EGM on re-domiciliation was held, and the shareholders passed a resolution approving the Re-domiciliation, amendments to the new Memorandum and Articles of Association and related matters. A notice to the BVI Registry of Corporate Affairs of the intention to re-domicile to Cyprus was delivered, and an appli- cation with the Registrar of Companies in Cyprus (the «Cyprus Registrar”) requesting to register Lenta as continuing in Cyprus was filed. Redomiciliation took place upon the Cypriot Reg- istrar issuing a temporary certificate of continuation in Cyprus. As from February 21, 2020 Lenta is considered to be a legal entity incorporated in Cyprus. As part of the redomiciliation Lenta Ltd changed its name to Lenta Plc and is subject to the Cypriot Company Law as amended, other relevant Cypriot legislation, common law principles and EU directives where applicable and implemented in Cyprus. In addition the UK Corporate Governance Code will continue to be applied. leaDersHiP The Chairman leads the Board, ensuring its effectiveness at the same time as taking the interests of the Group’s various stakeholders into account and promoting high standards of corporate governance. The roles of Chairman and CEO are distinct and separate. 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. 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. tHe key roles anD resPonsiBilities of tHe senior inDePenDent DireCtor (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 SID throughout the year ending 31 December 2019. He was selected for the role thanks to his extensive experience and expertise in both executive and non-executive capacities in the retail world, including international experience. Though Mr. Johnson has served on the Company Board for more than nine years, the Board of Directors considers him to be independent, due to the following significant factors: (a) he has not received and does not receive any additional remuneration from the Company apart from a director’s fee, does not participate in the Company’s share option or a performance-related pay scheme, and is not a member of the Company’s pension scheme; (b) he is not and has not been an employee of the Company or the Group within the last five years, does not have any close family ties with any of the Company’s advisers, directors or senior employees; and (c) he holds no cross-directorships and has no significant links with other directors through involvement in other companies or bodies, and does not represent any significant shareholder. non-eXeCUtiVe DireCtors (neDs) The NEDs provide an essential independent element to the Board, and a solid foundation for strong corporate governance. They fulfil a vital role in corporate accountability, albeit all Directors are equally accountable under BVI law. NEDs are required to challenge, in a constructive way, the strategies proposed by the executive Directors. They are also responsible for scrutinizing the performance of management in achieving agreed goals and objectives. Furthermore, they play a key role in the functioning of the Board and its Committees. Between them, the current NEDs have an appropriate balance of skills, experience, knowledge and independent judgement to undertake their roles effectively. matters sPeCifiCally reserVeD for tHe DeCision of tHe lenta ltD BoarD of DireCtors management, strategy and planning The Board is responsible 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. It also includes the establishment of material new 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 and the Group, 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 buybacks. 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 O1›STRATEGIC REPORT O2›CORPORATE GOVERNANCE O3›FINANCIAL STATEMENTS O4›APPENDICESLENTA ANNUAL REPORT AND ACCOUNTS 2019LENTA ANNUAL REPORT AND ACCOUNTS 2019050 C o rP o r a t e Go Ve r n a nC e r eP o r t 051 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. 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. Public reporting and controls The Board approves half-yearly results announcements as well as the Annual Report and Accounts. It also approves material changes in principal accounting policies and practices, treasury policies and related risk management strategy and framework. On the recommendation of the Audit Committee, the Board recommends to the Shareholders the appointment or removal of the external auditor. 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. It also 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. 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 the 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 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. 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. Russian economy BoarD foCUs DUrinG tHe year In 2019, the Board considered a wide range of mat- ters, 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 • maintaining and increasing efficiency of the Com- pany’s development • individual business and overall Group performance and future capital expenditures • the review and execution of mergers and acqui- sitions transactions • development of the Company’s corporate gov- ernance • financial statements and announcements • reviewing reports from its Committees • shareholder feedback and reports from brokers and analysts • risk management and risk oversight. anti-BriBery anD CorrUPtion Lenta 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. We carry out regular awareness campaigns across Lenta, and both the Internal Audit Team and external advisers undertake the monitoring and assurance of processes. Anti-bribery and corruption clauses are included in contracts with the Group’s business partners. Lenta’s Compliance Officer and Ethics Committee investigats 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 2019, new employees were trained on the Compliance Programme. We reviewed and updated the Group’s policies 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 man- agement, and determines the Group’s risk strategy; it 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 consid- eration given to material financial, operational and sustainability risks and controls, with appropriate steps taken to address any issues identified. During 2019, 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 2019 and up to the date of approval of this Annual Report and Accounts, rigorous processes have been 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 30 to 34. internal aUDit Internal Audit provides independent, objective as- surance to the Group. This is 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 manage- ment, 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 de- partment 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 O1›STRATEGIC REPORT O2›CORPORATE GOVERNANCE O3›FINANCIAL STATEMENTS O4›APPENDICESLENTA ANNUAL REPORT AND ACCOUNTS 2019LENTA ANNUAL REPORT AND ACCOUNTS 2019052 C o rP o r a t e Go Ve r n a nC e r eP o r t 053 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. effeCtiVeness The appointment of new Directors is led by the Nom- ination Committee, the majority of whose members are independent non-executive Directors. Details of the appointments process can be found on page 57. 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 or she 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. 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. BoD aUCo CaPeXCo (from jUne 5 – oPeration anD CaPeX Committee nomCo remCo John Oliver (till April 30 2019) Stephen Jonson Michael Lynch-Bell Jago Lemmens (till March, 29 2019) Julia Solovieva Dmitry Shvets (till April, 30 2019) Marting Elling (till April 30 2019) Steven Hellman (till April 30 2019) Rud Pedersen (after March, 29 2019) 5 10 9 3 10 5 5 5 8 Herman Tinga 10 Alexey Mordashov (after May 28 2019) Roman Vasilkov (after May 28 2019) Alexey Kulichenko (after May 28 2019) Maxim Bakhtin (after May 28 till August 2 2019) Tomas Korganas (af- ter August 26 2019) 5 4 3 2 2 - 7 6 - 7 - - - - - - - - - - 3 5 - - - 3 3 2 - - - 3 - 1 2 1 4 3 - - - - - - - - - - - - 3 6 5 - 6 - - - - - - - - - - CHanGes to tHe BoarD in 2019 Jago Lemmens retired from his CFO role on 1 April 2019. Rud Pedersen was appointed Chief Financial Officer on 1 April 2019. Since Severgroup LLC (“Severgroup”) acquired in aggregate 78.73% of the Lenta voting shares (including in the form of GDRs, excluding treasury shares), the Board has used its authority to fill the four vacated seats on the Board 1. Alexey Mordashov was elected Chairman on 28th of May 2019 2. Roman Vasilkov was appointed the non-executive Director of Lenta Plc in May 2019 3. Alexey Kulichenko was appointed the non-executive Director of Lenta Plc in May 2019. 4. Tomas Korganas was appointed the non-executive Director of Lenta Plc in August 2019. lenGtH of serViCe anD inDePenDenCe of non-eXeCUtiVe DireCtors Stephen Johnson (Inde- pendent) Michael Lynch-Bell (Inde- pendent) Julia Solovieva (Indepen- dent) Since 2010 Since 2013 Since 2018 Considered to be indepen- dent by the Board Considered to be indepen- dent by the Board Considered to be indepen- dent by the Board the following Board and Committee meetings are scheduled for 2020 BoarD aUDit CaPeX nomination remUneration Meeting Board call 4 8 4 - 4 – 4 - 4 – The terms of reference for Lenta’s Board were last revised and updated in October 2019 and the Committees terms of reference in December 2019. Details are set out in the Corporate Governance section of the Company website: www.lentainvestor.com/en/about/ corporate-governance/internal-policies. O1›STRATEGIC REPORT O2›CORPORATE GOVERNANCE O3›FINANCIAL STATEMENTS O4›APPENDICESLENTA ANNUAL REPORT AND ACCOUNTS 2019LENTA ANNUAL REPORT AND ACCOUNTS 2019 054 a U Di t C o m m i t t e e r eP o r t 055 MichAel lyNch-Bell INDEPENDENT, CHAIRMAN aUDit Committee rePort C o m m i t t e e m e mBe r s j Ul i a s o l o Vi eV a ( inDePe nDe n t ) s t eP He n joHn s o n ( inDePe nDe n t ) 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 external 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. 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 2019, 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. The Committee reviewed the tax structuring project and matters related to establishing representative office of Lenta Plc in Russia. We approved the appointment of Ernst&Young (“EY”) as a consultant for tax monitoring project. The Committee reviewed the reports on the redomiciliation of Lenta Plc and approved the resolution on re-domiciliation to Cyprus fulfilled on the 21st of February, 2020. We worked on improvements to our insurance processes to guarantee all insurance is properly covered by the Company’s dedicated policy. 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 2019. The Company’s external auditor 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. 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 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. role anD resPonsiBilities The key roles and responsibilities of the Audit Com- mittee include: • monitoring and challenging, where necessary, the integrity of the financial statements and half yearly results 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 speakup 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: 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, the Company Secretary, Head of Internal Audit and Chief Legal Counsel are invited to attend all Committee meetings 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 and the Board approved the terms of engagement of the external auditor, the fees paid to it and the scope of work undertaken. The Comittee also reviewed the performance and effectiveness of the external auditor in respect of the year ended 31 December 2019. 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. O1›STRATEGIC REPORT O2›CORPORATE GOVERNANCE O3›FINANCIAL STATEMENTS O4›APPENDICESLENTA ANNUAL REPORT AND ACCOUNTS 2019LENTA ANNUAL REPORT AND ACCOUNTS 2019056 a U Di t C o m m i t t e e r eP o r t 057 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. 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. 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 2019 «000 rUB 2018 «000 rUB 24,282 27,510 22,729 47,011 3,613 31,123 siGnifiCant issUes ConsiDereD By tHe aUDit Committee The significant issues – and how they were addressed – are set out below. impairment The Company’s management took a decision to reassess its impairment of assets. Impairment charge was made on 100 objects (55 hypermarkets and 40 supermarkets, and 5 objects including land, buildings, construction in progress. Management proposed to make a decision on the stores’ closure subject to rent negotiations. The Committee agreed with their decision. suppliers’ allowances The Committee reviewed the accounting for and recognition of suppliers’ allowances received for the provision of services. The review included considera- tion 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. inventories and inventory allowances The Committee reviewed the accounting for inven- tories and the recognition of write-downs during the period. The review took into consideration the calculation of the cost of inventories, the identifica- tion 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 over- heads 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 Com- mittee; 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. Man- agement had taken into account the Company’s financial position, available borrowing facilities, loan covenant compliance, planned store open- ing 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 34–35. 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. n o m i n a t i o n C o m m i t t e e r eP o r t sTePheN JohNsoN INDEPENDENT, CHAIRMAN nomination Committee rePort C o m m i t t e e m e mBe r s miC Ha e l l y nC H - B e l l ( inDePe nDe n t ) Independent Director, Stephen John- son, as Designated Non-Executive Director for the workforce, responsible for liaising with employees, and j Ul i a s o l o Vi eV a ( inDePe nDe n t ) al eXe y mo rD ( no n - eXe C Ut iVe ) a s Ho V meetings with employee repre- sentatives are to be held twice a year. We also scrutinised our succession planning process and key personnel retention. As our competitors target Lenta employees as a highly profes- sional workforce, our objective is to ensure that our succession planning process is fit for purpose and we have well trained pro- fessionals to drive our business. role anD resPonsiBilities The key roles and responsibilities of the Nomination Com- mittee 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 gen- eral diversity of the Board to ensure the balance and composition of the Board and its Committees remain appropriate; In 2019, the Committee focused on succession planning and organisational improvement. We also oversaw the Board’s performance and its appraisal. The Committee oversaw the formation and operation of the Bid Committee during the course of the Contemplated MTO. The Committee approved the appointment of Stephen Johnson as the interim Chair- man of the Board after the completion of the ac- quisition by Sevegroup of approximately 34.45% of the issued and outstanding voting shares in Lenta from the investment vehicle of TPG Group, Luna Inc., as well as the acquisition of approximately 7.47% of the issued and outstanding voting shares in Lenta from the European Bank for Reconstruction and Development (“EBRD”). During the year, we worked on an organizational improvement project that was the outcome of the diagnostic of the organisational health index in the Company. The Committee approved the scope of the project to ameliorate the organisational structure of the Company. The Board has nominated the Senior as our competitors target lenta employees as a highly professional workforce, our objective is to ensure that our succession planning process is fit for purpose and we have well trained professionals to drive our business. O1›STRATEGIC REPORT O2›CORPORATE GOVERNANCE O3›FINANCIAL STATEMENTS O4›APPENDICESLENTA ANNUAL REPORT AND ACCOUNTS 2019 058 n o m i n a t i o n C o m m i t t e e r eP o r t 059 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. • making recommendations to the Board of 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 candi- dates with suitable industry or key competency experience; • reviewing Board level, Senior Management and Com- pany-wide succession planning and other human resourc- es-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 avail- able on the Company’s website: http:// www.lentainvestor. com/en/about/corporate-governance/internalpolicies. 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 2020. PerformanCe aPPraisal system Lenta has a very well-developed system for performance appraisal across all functions in the business. This is embed- ded 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 4,000 people within the business. We provided 1.8 million man hours of training and development investment for our employees. sUCCession PlanninG Lenta continues to be able to offer significant and exciting opportunities for its high-performing employees. One of our key objectives is to ensure there are role model op- portunities 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. 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). In 2019 the Board executed internal evaluation, the results are being analyzed. r e mUn e r a t i o n C o m m i t t e e r eP o r t sTePheN JohNsoN MichAel lyNch-Bell INDEPENDENT, INDEPENDENT, CHAIRMAN CHAIRMAN remUneration Committee rePort 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 the business successfully. C o m m i t t e e m e mBe r s s t eP He n joHn s o n ( inDePe nDe n t ) j Ul i a s o l o Vi eV a ( inDePe nDe n t ) role anD resPonsiBilities The key roles and responsibilities of the Remuneration Committee include: • determining and recommend- ing the broad policy for executive remuneration within the Group; • determining, on behalf of the Board, the remuneration of the 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 bonus plan, monthly and quarterly for store and DC line personnel, quarterly and annual for head office employees and management in stores and the DCs. 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 per- formance but also a significant element in retaining and recruiting good people. During 2019, performance against the 2019 targets was assessed and an overall payout of 50 % of the maximum was agreed in the form of a one-time reward. Overall performance was 46.8 %, the trigger related to OEBITDA was not met. Long-Term Incentive Plans (LTIPs): The Company operates a number of long-term incen- tive 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. page 64. 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. lonG-term inCentiVe Plan for senior manaGement The Company operates a number of long-term incentive plans for both senior and middle man- agement. For 2019 the LTIP consists of two equal parts, one share and one cash based. The total LTIP allocation amount remains the same as a percentage of salary. 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 earlier granted share based LTIP awards to senior management retain their effectiveness. The work of the Remuneration Committee is set out on pages 59 to 61. The interests in the Company’s share capital held by Senior Man- agement and the remuneration received by the Chairman and the non-executive Directors are set out on page 64. The Directors’ interests in the Company’s share capital are set out on O1›STRATEGIC REPORT O2›CORPORATE GOVERNANCE O3›FINANCIAL STATEMENTS O4›APPENDICESLENTA ANNUAL REPORT AND ACCOUNTS 2019060 r e mUn e r a t i o n C o m m i t t e e r eP o r t 061 Special One Off Awards These one-off awards were granted in Q4, 2018. These programs are cash based and aim to protect the value of the earlier granted long-term incentives and retain Senior Management. The award has the following conditions: • full vesting period is 4 years, each year vesting a certain percentage (the original vesting schedule was revised due to change of control). • 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. The total amount of allocated award: 546.2 nm Rub First tranche of the award vested in April 2019 and May 2019 (with the change of ownership of the company payout of 180.2 mn Rub. The remaining 365.9 mn Rub shall be paid over a period of time until May 2021 according to the clause in award agreements limiting the vesting period to 2 years from change of control, in case it occurs. oVerView of lonGterm inCentiVe Plan for senior manaGement in 2019 sHare-BaseD awarDs Starting from 2019, the LTIP operates according to the following rules: • The LTIP awards are granted annually with a vesting period of three years; • The amount of award depends on job grade (per- centage of annual salary) and individual performance evaluation of the manager; • Тhe award is then split into two equal parts – shares and cash. The share based part of award is determined based on share price for the first quar- ter of the grant year. The cash award is protected against inflation. • 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 2019 with a vesting date in 2022 was approved, granting a total of 343,316 Shares and 693.8 mn Rub which represents around 197 % of the annual salary of this group, this amount includes increased LTIPs granted as part of key talent retention program. The change of ownership of Lenta had an effect on the LTIP awards of senior management according to their grant agreements. The plans, effective on the moment of change of control, vested proportionate to the time elapsed from grant date by the decision of the Remuneration committee with the remaining part vesting according to the original schedule but no later than 2 years from the change of ownership of Lenta. According to that decision 91.6 mn Rub were paid to Senior management on change of control; 97.9 mn Rub remaining in the retention program vesting by May 2021. the Committee also approved a new annual long-term incentive plan with a vesting period of three years for 92 key middle managers. the ltiP for middle managers also consists of two parts: cash and share based. the total value of this award is 83,140 shares and 94.9 mn rub which represents around 44 % of this group’s annual salary dropping below target pay for the specific labor market. In order to retain store and DC personnel additional fringe and benefits programs were approved with a very positive impact on overall turnover. A special retention plan was approved by the Remuneration Committee for key managers in Lenta to assure their retention in conditions of high competition for talent. The plan consists of a salary increase calendar, individual training programs and other important employee benefits. In addition, to improve retention and attractiveness, a flexible work schedule and opportunity for remote work were offered as part of the benefits package. oVerView of lonG-term inCentiVe ProGramme for miDDle manaGers 2019 sHare-BaseD ProGram 2019 was the third year in which the Long-term incentive plan for middle managers began vest- ing. Sixty-five managers received their LTIP in the amount of 59.1 mn Rub (equivalent of 51,446 shares converted into cash). The Committee also approved a new annual long- term incentive plan with a vesting period of three years for 92 key middle managers. The LTIP for middle managers also consists of two parts: cash and share based. The total value of this award is 83,140 shares and 94.9 mn Rub which represents around 44 % of this group’s annual salary. The allocation of the LTIP is linked to overall Company performance in the previous year and individual performance evaluations. 2019 annUal BonUs sCHeme aPProVal The Committee approved the bonus KPIs, target and payout scales for 2019. salary reView in ComParison to laBoUr market The Committee reviewed the labor market situation and salary dynamics in Russia, it was decided not to apply an overall company salary indexation in 2019. However, during 2019 specific changes for critical jobs were made in situations where Lenta salaries were sUmmary of senior manaGement team remUneration PoliCy element Base pay Currency adjustment Benefits Annual bonus Long-term incentive plan PrinCiPles oPPortUnity 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. According to Russian legislation, base salaries are fixed in Roubles, which leads to a nega- tive pay trend for senior management with a drop in the RUB/EUR rate. To maintain com- petitive pay levels, currency adjustment pay is used as decided by the Committee in 2014. • 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. All senior management are eligible for the annual bonus scheme, which is a discretionary, non-contractual scheme. 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 condi- tion that a ‘threshold’ level of EBITDA is achieved. All senior managers are eligible for the long-term incentive plan (LTIP) consisting of two equal parts – shares and cash as decided by the Remuneration Committee. The Share based part of award is determined based on share price for the first quarter of the grant year. The cash award is protected against inflation. The LTIP awards are granted annually with a vesting period of three years. . 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. 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 manag- ers, only partial compensation is applied. There are maximums set for each com- pensation element depending on the job grade. Total maximum annual bonus opportunity for senior management is 120% of annual base pay. 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. O1›STRATEGIC REPORT O2›CORPORATE GOVERNANCE O3›FINANCIAL STATEMENTS O4›APPENDICESLENTA ANNUAL REPORT AND ACCOUNTS 2019LENTA ANNUAL REPORT AND ACCOUNTS 2019062 r e mUn e r a t i o n C o m m i t t e e r eP o r t Pay strUCtUre of Ceo, Cfo anD senior manaGement team 063 CHief eXeCUtiVe offiCer (Herman tinGa) Ceo total CasH rewarD (fiXeD Vs.VariaBle tarGet) The key terms of each member of Senior Management’s participation in the MIP are set out below: 100% Minimum Target Maximum 28,6% 28,6% 42,9% 27% 32,4% 40,5% Base salary annual incentive ltiP 28,6% Base salary 28,6% annual incentive 42,9% ltiP CHief finanCial offiCer Cfo total CasH rewarD (fiXeD Vs.VariaBle tarGet) 100% Minimum Target Maximum 31,3% 31,3% 37,5% 29,4% 35,3% 35,3% Base salary annual incentive ltiP 31,3% Base salary 31,3% annual incentive 37,5% ltiP otHer senior team memBers otHer senior team memBers total CasH rewarD 100% Minimum Target Maximum 32,3% 32,3% 35,5% 30,3% 36,4% 33,3% Base salary annual incentive ltiP 32,3% Base salary 32,3% annual incentive 32,5% ltiP manaGer nUmBer of PHantom sHares Base PriCe (rUB) HUrDle referenCe PriCe (rUB) HUrDle referenCe Date VestinG PerioD CommenCemet Date Herman Tinga 1st grant 2nd grant 3rd grant Edward Doeffinger Joern Arnhold Sergey Prokofiev Tatiana Yurkevich 102 823 35 000 42 000 102 823 85 686 35 988 35 988 1,516 1,516 2,214 1,516 1,516 1,516 1,516 1,375 1,375 1,375 764 764 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 01.04.2014 01.04.2019 01.04.2012 01.04.2012 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 Wave 1 Wave 2 Wave 2* VesteD sHares Base PriCe (rUB) HUrDle referenCe PriCe (rUB) HUrDle referenCe Date 2017 2018 2019 2020 35 422 46 166 – 1,516 1,516 2,214 764 1,375 1,375 23.09.2011 56 553 94 255 – 01.04.2013 73 736 122 894 49 157 – – 01.04.2013 – – 21 000 21 000 * Herman Tinga 2016 additional tranche sUmmary of non-eXeCUtiVe DireCtors’ remUneration PoliCy element Letter of appointment • The independent 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. PrinCiPles anD oPPortUnities Chairman and non-executive Director• Fees are reviewed periodically by the Committee taking into consideration:»» Additional fees Other benefits Recruitment 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 independent 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 are paid for undertaking the extra responsibilities of:»» Senior Independent Director»» Committee Chair- man. The independent 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 independent non-executive Directors. • Fees for the independent 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. O1›STRATEGIC REPORT O2›CORPORATE GOVERNANCE O3›FINANCIAL STATEMENTS O4›APPENDICESLENTA ANNUAL REPORT AND ACCOUNTS 2019LENTA ANNUAL REPORT AND ACCOUNTS 2019 064 r e mUn e r a t i o n C o m m i t t e e r eP o r t 065 oPe r a t i o n a nD C aPi t a l eX Pe nDi tUr e C o m m i t t e e r eP o r t strateGiC aliGnment of Pay the table below shows the integration between lenta’s financial key performance indicators and the senior remuneration framework for 2019/20. this clearly demonstrates a clear linkage between performance metrics, payments to managers and business performance over the short and long term. finanCial oBjeCtiVes kPi inCentiVe sCHeme Company revenue Turnover Increase earnings and returns EBITDA Annual Bonus Scheme Annual Bonus Scheme Increase shareholder value Share price LTIP non-eXeCUtiVe DireCtors’ fees Base fee for non-executive Directors Additional fees: Senior Independent Director Chairman of the Audit Committee Chairman of the Remuneration Committee Chairman of the Nomination Committee Members of the Audit and Capital Expenditure Committee Members of the Nomination and Remuneration Committee amoUnt PayaBle (UsD) 165,000 25,000 40,000 17,500 17,500 15,000 10,000 non-finanCial oBjeCtiVes kPi inCentiVe sCHeme Efficient operations Productivity Sales space growth Number of stores opened and in pipeline Annual Bonus Scheme Annual Bonus Scheme interests of DireCtors in lenta sHares are sUmmariseD in tHe taBle Below: name of DireCtor Stephen Johnson Michael Lynch-Bell Julia Solovieva total HolDinG as of 31 DeC 2019 (interest in sHares) aPProXimate HolDinG as of 31 DeC 2019 (% of sHare CaPital) 1 less than 0.01% 3,200 less than 0.01% - - name of DireCtor total HolDinG as of 31 DeC 2019 (interest in sHares) aPProXimate HolDinG as of 31 DeC 2019 (% of sHare CaPital) Herman Tinga 31,770 less than 0.01% roMAN vAsilkov NON-EXECUTIVE, CHAIRMAN oPeration anD CaPital eXPenDitUre Committee rePort In 2019 we opened seven new hypermarkets and three supermarkets in Russia and met our initial guidance. We also restored a hypermarket in Saint-Petersburg that was dam- aged by fire in November 2018 and renovated one of the oldest stores in Saint-Petersburg. Capital expenditure in 2019 C o m m i t t e e m e mBe r s s t eP He n joHn s o n ( inDePe nDe n t ) t o m a s k o r G a n a s ( no n - eXe C Ut iVe ) • monitoring capex projects’ returns and making adjustments to the capex processes to reflect the lessons learned. There are 4 Committee meet- ings scheduled for 2020; this number may be increased as necessary. amounted to RUB 14.1 bn, a decrease of 36.1% com- pared to 2018, mainly due to lower expansion. During the year we focused on operational effi- ciency rather than on organic expansion. We will review growth opportunities as they occur; the Board and senior management agree however that, in the present circumstances, it is particularly important to maintain an appropriate balance of leverage levels, pursuing investment project returns. role anD resPonsiBilities The key roles and responsibilities of the Capital Ex- penditure 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; • approving 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 pro- grammes relating to the design, construction and operation of new stores are defined and implemented in cooperation with management; A copy of the Committee’s full terms of reference is available on the Company’s website: www.lentainvestor.com/ en/about/corporate-governance/ internal-policies. aCtiVities DUrinG tHe year In 2019, the Operation and Capital Expenditure Com- mittee evaluated the best opportunities in the market reviewing and making recommendations to the Board on the Company’s investment strategy, policy and risk management. We worked on improvements to the Company’s underperforming stores and analysed the feasibility of investments required to increase profitability of these stores. Thus, the Committee approved the remodeling of Lenta-11 (Saint-Petersburg, Rustaveli street) in line with JdV 1.75 concept to protect Lenta market posi- tion. The Committee also took a decision to extend the selling space of a Lenta-100 (Khanty-Mansiysk), Urals, to deliver sales growth. The Committee approved investments in Lenta’s logistics infrastructure, informational and technical solutions to develop client-centric activities and processes. We approved 15 investment proposals in 2019, includ- ing opening of new hypermarkets and supermarkets in 2020. We also worked together with management on improving the efficiency of the existing stores and maintaining their compliance with applicable regulations. O1›STRATEGIC REPORT O2›CORPORATE GOVERNANCE O3›FINANCIAL STATEMENTS O4›APPENDICESLENTA ANNUAL REPORT AND ACCOUNTS 2019 066 oPe r a t i o n a nD C aPi t a l eX Pe nDi tUr e C o m m i t t e e r eP o r t 067 BiD Committee resPonsiBility statement In connection with Severgroup acquiring shares of TPG Capital and EBRD as well as the subsequent mandatory tender offering under which the first mention acquired a shareholding of 77.99% in Lenta Ltd, the Board of Directors of Lenta Ltd appointed on 26th February 2019 a Bid Committee in accordance with Regulation 13.1 of the Articles. Accordingly the oversight of the mandatory tender offering was delegated to the Bid Committee con- stituting Stephen Johnson and Michael Lynch-Bell, in light of other previous members of the Board of Directors having acknowledged a potential conflict of interest arising from the possible sale of shares by their respective nominating shareholder, and as such were prohibited from voting pursuant to Regulation 15.5 of the Articles. The Bid Committee was delegated full authority, subject to the restrictions set out in Regulation 13.2 of the Articles, to approve, amend, execute and do or procure to be executed and done all such documents, acts and things as may be necessary or desirable to have approved, executed and done in connection with the mandatory tender offering. Several meetings were held during the period up to and including the completion of the mandatory tender offering. Subse- quently the Bid Committee was dissolved 18th July 2019. relations witH sHareHolDers We are committed to conducting con- structive dialogue with shareholders to ensure that we understand what is important to them and enable clear communication of our position. The CEO and CFO hold regular meetings with shareholders and update the Board on the outcomes of those meetings. CFO 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 Com- pany to count all votes, not just those of shareholders attending the meeting. sCHeDUle of inVestor Calls in 2020 montH Date January February April July October 24 25 22 27 21 Day Friday mosCow time 14.00 – 15.00 Tuesday 16.00 – 17.00 Wednesday 16.00 – 17.00 Monday 16.00 – 17.00 Wednesday 16.00 – 17.00 to the best of our knowledge: W e, members of the Board, confirm that, The consolidated financial state- ments, prepared in accordance with IFRS, give a true and fair view of the assets, liabilities, financial position and profit and loss of Lenta Plc and its subsidiaries taken as a whole. This annual report includes a fair review of the development and perfor- mance of the business and the position of Lenta Plc 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. Alexey Mordashov Chairman, Lenta Plc 21 February 2020 O1›STRATEGIC REPORT O2›CORPORATE GOVERNANCE O3›FINANCIAL STATEMENTS O4›APPENDICESLENTA ANNUAL REPORT AND ACCOUNTS 2019LENTA ANNUAL REPORT AND ACCOUNTS 2019 068 l e n t a a n nU a l r eP o r t a nD a C C oUn t s 2 0 1 9 o1 › s t r a t e GiC r eP o r t o2 › C o rP o r a t e Go Ve r n a nC e o3 › f i n a nC i a l s t a t e m e n t s o4 › aP Pe nDiC e s o3 › f i n a nC i a l s t a t e m e n t s 070 071 independent auditOr’s repOrt tO the sharehOlders and BOard Of directOrs Of lenta ltd. OpiniOn We have audited the consolidated financial statements of Lenta Ltd. and its subsidiaries (hereinafter, the “Group”), which comprise the con- solidated statement of financial po- sition as at 31 December 2019, and the consolidated statement of profit or loss and other comprehensive in- come, consolidated statement of cash flows and consolidated statement of changes in equity for the year then ended, and notes to the consolidat- ed 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 2019 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 accord- ance with International Standards on Auditing (ISAs). Our responsibilities under those standards are further described in the Auditor’s responsi- bilities for the audit of the consoli- dated 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 (including In- ternational Independence Standards) (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 ev- idence 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 opin- ion 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 finan- cial 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 transitiOn tO ifrs 16 leases Effective 1 January 2019, the Group adopted IFRS 16 Leases (IFRS 16). When adopting the new standard, the Group applied a modified retro- spective approach. The adoption of the new standard resulted in the recognition of a right- of-use asset in the amount of RUB 36,357,602 thousand and additional lease liabilities in the amount of RUB 34,120,002 thousand. The adoption of IFRS 16 was one of the key audit matters because the effect of transition to the new standard is significant and changes in the accounting policy required management to make judgments with respect to approaches. In addition, identifying and processing all lease-related data is a complex process, and the valuation of the right- of-use asset and lease liabilities is based on assumptions such as the discount rate and lease term in agreements with extension options. Information about the adoption of IFRS 16 is disclosed in Note 4 to the consolidated financial statements. hOw Our audit addressed the Key audit matter transitiOn tO ifrs 16 leases We analyzed the Group’s accounting policy on the recognition of leases, specific transition provisions and practical expedients set forth in IFRS 16 and applied by the Group. We obtained an understanding of the process of the Group’s transition to IFRS 16 in respect of existing leases and evaluated the effectiveness of relevant internal controls. We analyzed the list of lease agreements to which IFRS 16 is applied and compared, on a sample basis, data in agreements with data that were used during the implementation and application of the transition provisions of IFRS 16. We analyzed management’s judgments made to determine the lease term in agreements with extension options. We tested the mathematical accuracy of calculations of cumulative adjustments at the transition date. We analyzed information on the adoption of IFRS 16 disclosed in the financial statements. impairment Of prOperty, plant and equipment As a result of impairment testing held for the smallest group of assets that can generate independent cash flows, the Group recognized an impairment of property, plant and equipment in the amount of RUB 11,849,959 thousand. Impairment testing for property, plant and equipment was one of the key audit matters because the balance of property, plant and equip- ment forms a significant portion of the Group’s assets at the reporting date, the amount of recognized impairment of property, plant and equipment forms a significant portion of the Group’s expenses, and the process of management’s assessment of the recoverable amount is complex and requires significant judgments, including judgements about future cash flows, capital expenditures and the discount rate, as well as about assumptions used in the assessment. Property, plant and equipment and impairment testing are disclosed in Note 7 to the consolidated financial statements. recOgnitiOn Of suppliers’ allOwances The Group receives various types of allowances from suppliers in con- nection with the purchase of goods for resale in the form of volume re- bates 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 13 to the consoli- dated financial statements. Our procedures in relation to impairment testing of property, plant and equipment performed by management included an assessment of key management assumptions, including those in respect of revenue and operating expenses. We compared management assumptions with historical data. We also analyzed discount rates used by management. We engaged our internal valuation experts in performing these pro- cedures. We performed the sensitivity analysis to determine whether a reasonably possible change in key assumptions would result in the carrying amount exceeding the recoverable amount. We analyzed the accuracy of previous budget and forecast data prepared by manage- ment. We verified the mathematical accuracy of impairment tests. We assessed disclosures in the consolidated financial statements. We agreed the terms of providing allowances to supporting docu- ments approved by individual suppliers. We analyzed the assump- tions underlying management estimates of recognized amounts of allowances from suppliers. 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. Other infOrmatiOn included in the grOup’s 2019 annual repOrt Other information consists of the in- formation included in The Group’s 2019 Annual Report, other than the consolidated financial statements and our auditor’s report thereon. Management is responsible for the other information. 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 and, in doing so, con- sider 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. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. respOnsiBilities Of management 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, manage- ment is responsible for assessing the Group’s ability to continue as a going concern, disclosing, as applicable, matters related to go- ing 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 al- ternative but to do so. The Board of Directors are respon- sible for overseeing the Group’s fi- nancial reporting process. auditOr’s respOnsiBilities fOr the audit Of the cOnsOlidated financial statements Our objectives are to obtain reason- able 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. Rea- sonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accord- ance 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 ma- terial misstatement of the consolidat- O1›STRATEGIC REPORT O2›CORPORATE GOVERNANCE O3›FINANCIAL STATEMENTS O4›APPENDICESLENTA LTD. AND SubSIDIARIESLENTA ANNUAL REPORT AND ACCOUNTS 2019LENTA ANNUAL REPORT AND ACCOUNTS 2019072 073 ed 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 esti- mates 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 ob- tained, 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 au- ditor’s report to the related disclo- sures 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 consol- idated financial statements, includ- ing the disclosures, and whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation. • Obtain sufficient appropriate au- dit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the consolidated fi- nancial statements. We are respon- sible 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 oth- er 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 Direc- tors with a statement that we have complied with relevant ethical re- quirements 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. From the matters communicated with the Board of Directors, we de- termine 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 ex- pected to outweigh the public interest benefits of such communication. The partner in charge of the audit resulting in this independent auditor’s report is I.Y. Ananyev. I.Y. Ananyev Partner Ernst & Young LLC 21 February 2020 Details of the audited entity Name: Lenta Ltd. Incorporated under the laws of the BVI on 16 July 2003, State Registration Number 1058643.Address: P.O. Box 3340, Road Town, Tortola, British Virgin Islands. Details of the auditor Name: Ernst & Young LLC Record made in the State Regis- ter 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-regulatory organization of auditors Association “Sodruzhestvo”. Ernst & Young LLC is included in the control copy of the register of auditors and audit organizations, main registration number 12006020327. statement Of management’s respOnsiBilities fOr the preparatiOn and apprOval Of the cOnsOlidated financial statements fOr the year ended 31 decemBer 2019 The following statement is made with a view to the respective responsibili- ties of management in relation to the consolidated financial statements of Lenta Ltd. and its subsidiaries (“the Group”). Management is responsible for the preparation of these consolidated financial statements that present fairly the financial position of Lenta Ltd. and its subsidiaries (“the Group”) as at 31 December 2019 and the re- sults 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 fi- nancial statements, management is responsible for: • selecting and applying accounting policies; • presenting information, including accounting policies, in a manner that provides relevant, reliable, compara- ble 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 go- ing concern. Management is also responsible for: • designing, implementing and main- taining 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 accu- racy 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 leg- islation 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 state- ments of the Group for the year ended 31 December 2019 were approved by management on 21 February 2020. On behalf of the Management as authorised by the Board of Directors. Herman Tinga (CEO of Lenta Ltd.) Rud Pedersen (CFO of Lenta Ltd.) O1›STRATEGIC REPORT O2›CORPORATE GOVERNANCE O3›FINANCIAL STATEMENTS O4›APPENDICESLENTA LTD. AND SubSIDIARIESLENTA ANNUAL REPORT AND ACCOUNTS 2019LENTA ANNUAL REPORT AND ACCOUNTS 2019 074 075 cOnsOlidated statement Of financial pOsitiOn as at 31 decemBer 2019 (in thousands of russian roubles) cOnsOlidated statement Of prOfit Or lOss and Other cOmprehensive incOme fOr the year ended 31 decemBer 2019 (in thousands of russian roubles) nOte 31 decemBer 2019 31 decemBer 2018* nOte year ended 31 decemBer 2019 year ended 31 decemBer 2018* Sales Cost of sales Gross profit Selling, general and administrative expenses Other operating income Other operating expenses Operating profit before impairment Impairment of non-financial assets Operating profit Interest expense Interest income Foreign exchange gains/(losses) (Loss)/Profit before income tax Income tax expense (Loss)/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 (loss)/income for the year, net of tax (Loss)/earnings per share (in thousands of Russian roubles per share) (Note 18) - basic and diluted, for (loss)/profit for the year attributable to equity holders of the parent 23 24 25 25 4,7,10 20 20 417,500,015 (325,482,536) 92,017,479 413,562,197 (324,767,890) 88,794,307 (75,083,513) 5,067,766 (935,698) 21,066,034 (11,849,959) 9,216,075 (15,866,946) 3,827,178 220,503 (2,603,190) (190,684) (2,793,874) − − − (2,793,874) (69,094,871) 4,993,245 (476,040) 24,216,641 (132,188) 24,084,453 (9,699,272) 608,472 (176,371) 14,817,282 (3,022,988) 11,794,294 (206,108) 41,222 (164,886) 11,629,408 (0.029) 0.121 assets Non-current assets Property, plant and equipment Prepayments for construction Right-of-use assets Leasehold rights Intangible assets Other non-current assets Total non-current assets Current assets Inventories Trade and other receivables Advances paid Taxes recoverable Prepaid expenses Cash and cash equivalents Total current assets Total assets equity and liabilities Equity Share capital Additional paid-in capital Share options Treasury shares Retained earnings Total equity Liabilities Non-current liabilities Long-term borrowings Deferred tax liabilities Long-term lease liabilities Total non-current liabilities Current liabilities Trade and other payables Short-term borrowings and short-term portion of long-term borrowings Short-term lease liabilities Contract liabilities Advances received Other taxes payable Current income tax payable Total current liabilities Total liabilities Total equity and liabilities 7 8 4 10 11 12 13 14 15 16 17, 18 17 26 19 20 4 21 19 4 22 165,443,239 2,312,814 32,667,443 − 2,270,975 444,316 203,138,787 38,453,265 8,604,102 1,582,931 163,364 103,059 73,404,760 122,311,481 325,450,268 − 27,062,751 390,536 (1,011,190) 51,708,795 78,150,892 82,110,441 6,508,488 29,520,222 118,139,151 54,689,103 68,430,816 2,639,784 482,160 191,953 1,173,563 1,552,846 129,160,225 247,299,376 325,450,268 177,024,063 4,929,794 − 3,170,537 1,905,890 896,928 187,927,212 41,500,851 11,272,602 2,772,184 992,378 123,101 33,804,860 90,465,976 278,393,188 − 26,935,309 633,165 (291,091) 55,473,276 82,750,659 106,341,291 10,039,756 − 116,381,047 56,133,840 20,738,998 − 350,378 148,543 1,041,123 848,600 79,261,482 195,642,529 278,393,188 * Certain amounts shown here do not correspond to the financial statements for the year ended 31 December 2018 and reflect reclassification described in Note 4. The accompanying notes on pages 78 to 107 are an integral part of these financial statements O1›STRATEGIC REPORT O2›CORPORATE GOVERNANCE O3›FINANCIAL STATEMENTS O4›APPENDICESLENTA LTD. AND SubSIDIARIESLENTA ANNUAL REPORT AND ACCOUNTS 2019LENTA ANNUAL REPORT AND ACCOUNTS 2019 076 077 cOnsOlidated statement Of cash flOws fOr the year ended 31 decemBer 2019 (in thousands of russian roubles) cOnsOlidated statement Of changes in equity fOr the year ended 31 decemBer 2019 (in thousands of russian roubles) Cash flows from operating activities (Loss)/Profit before income tax Adjustments for: Net loss on disposal of property, plant and equipment Loss on disposal of intangible assets Cancelation of lease contracts Interest expense Interest income Inventory write-down to net realisable value Net foreign exchange gain attributable to financing activities Impairment of advances paid and prepayments for construction, reversal of allowance for expected credit losses of accounts receivable Depreciation and amortisation Impairment of non-financial assets Share options expense Movements in working capital Decrease/(increase) in trade and other receivables Decrease/(increase) in advances paid Decrease/(increase) in prepaid expenses Decrease/(increase) in inventories (Decrease)/increase in trade and other payables Increase/(decrease) 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 Purchases of intangible assets 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 Payments for the principal portion of the lease liabilities Purchase of treasury shares Net cash generated from financing activities Net increase 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 25 25 25 12 4,7,10 4,7,10 26 13 14 12 21 15, 22 19, 28 19, 28 4 17 16 16 year ended 31 decemBer 2019 year ended 31 decemBer 2018* (2,603,190) 14,817,282 296,667 13,446 121,636 15,866,946 (3,827,178) 411,398 (102,355) 53,173 18,439,679 11,849,959 435,121 26,483 - - 9,699,272 (608,472) 397,251 - 109,168 11,977,519 132,188 265,261 40,955,302 36,815,952 2,718,306 999,233 18,042 2,636,188 (29,309) 175,192 961,454 48,434,408 (2,709,023) 3,810,923 (15,663,909) 33,872,399 (13,154,203) (886,872) - 76,970 (684,178) (548,409) (20,686) (4,964,974) 42,165 (15,988) 1,791,820 32,415,702 (871,201) 522,871 (10,440,177) 21,627,195 (21,411,263) (642,512) (267,640) 177,087 (13,964,105) (22,144,328) 230,030,804 (206,770,873) (2,848,226) (720,099) 19,691,606 39,599,900 33,804,860 73,404,760 132,183,000 (111,871,775) - (291,091) 20,020,134 19,503,001 14,301,859 33,804,860 Balance at 31 December 2018 Change in the accounting policies due to application of IFRS 16 (Note 4) Balance at 1 January 2019 Loss for the year Total comprehensive loss Share option expenses (Note 26) Share option settlement by shares (Notes 17, 26) Share option settlement by cash (Note 26) Purchase of treasury shares (Note 17) Balance at 31 December 2019 – – – – – – – – – – 26,935,309 – – – – 127,442 – – 27,062,751 share capital additiOnal paid-in capital treasury shares (291,091) – share OptiOns reserve 633,165 – 26,935,309 (291,091) 633,165 retained earnings 55,473,276 (1,234,731) 54,238,545 (2,793,874) (2,793,874) tOtal equity 82,750,659 (1,234,731) 81,515,928 (2,793,874) (2,793,874) – – 435,121 – – – 435,121 (127,442) – – – – – (550,308) 264,124 (286,184) (720,099) (1,011,190) – – 390,536 51,708,795 (720,099) 78,150,892 cOnsOlidated statement Of changes in equity fOr the year ended 31 decemBer 2018 (in thousands of russian roubles) share capital additiOnal paid-in capital 284 26,480,481 hedging reserve 164,886 (284) − − − − − - − − 284 − − 26,480,765 164,886 − − − 454,544 − 26,935,309 (164,886) (164,886) − − − − Balance at 1 January 2018 Reclassification (Note 4) Change in the accounting policies due to application of IFRS 9 (Note 4) Balance at 1 January 2018 (restated) Profit for the year Other compre- hensive loss Total compre- hensive (loss)/ income Share-based payments (Note 26) Issue of shares (Notes 17, 26) Purchase of treasury shares (Note 17) Balance at 31 December 2018 * treasury shares share OptiOns reserve retained earnings tOtal equity − − − − − − - 825,176 44,316,449 71,787,276 − − (637,467) (637,467) 825,176 43,678,982 71,149,809 − − 265,261 (457,272) 11,794,294 11,794,294 (164,886) 11,794,294 11,629,408 − - − 265,261 (2,728) (291,091) (291,091) − (291,091) 633,165 55,473,276 82,750,659 * Certain amounts shown here do not correspond to the financial statements for the year ended 31 December 2018 and reflect reclassification described in Note 4. 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 reaquired by the Group. O1›STRATEGIC REPORT O2›CORPORATE GOVERNANCE O3›FINANCIAL STATEMENTS O4›APPENDICESLENTA LTD. AND SubSIDIARIESLENTA ANNUAL REPORT AND ACCOUNTS 2019LENTA ANNUAL REPORT AND ACCOUNTS 2019 078 079 nOtes tO the cOnsOlidated financial statements fOr the year ended 31 decemBer 2019 (in thOusands Of russian rOuBles) 1. the lenta grOup and its OperatiOns The Lenta Group (the “Group”) com- prises Lenta Ltd. (“the Company”) and its subsidiaries. The Group’s principal business activity is the development and operation of hy- permarket 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. In September 2019 the Company established a representative office in St. Petersburg. In October 2019 the Company was registered as a Russian tax resident. In December 2019 the Company has started the process of its redom- iciliation to Cyprus. Further to obtaining shareholder approval of the redomiciliation on Oc- tober 2019, the Company applied on 19 December 2019 to the Department of Registrar of Companies and Official Receiver (“DRCOR”) for continuance of the Company’s incorporation into Cyprus. The redomiciliation will be- come effective upon the issue by the DRCOR of a certificate of temporary registration in Cyprus to the Company. Starting from March 2014 the Company’s shares are listed on the London Stock Exchange and Mos- cow Exchange in the form of Global Depositary Receipts (GDR). At 31 December 2019 and 31 De- cember 2018 the Group has one main operating 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 state- ments have been prepared in ac- cordance with International Financial Reporting Standards (“IFRS”) as is- sued by the International Accounting Standards Board (IASB). 2.1. Basis of preparation The consolidated financial state- ments have been prepared on a historical cost basis, except for as described in accounting policies below. The consolidated finan- cial 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 expect- ed 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 satis- fied 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 2019, the Group had net current liabilities of RUB 6,848,744 (net current assets at 31 December 2018: 11,204,494). Unused credit facilities available as of 31 December 2019 were RUB 89,136,000. 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 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 busi- ness, it assesses the financial assets and liabilities assumed for appropriate classification and designation in ac- cordance with the contractual terms, economic circumstances and perti- nent conditions as at the acquisition date. This includes the separation of embedded derivatives in host con- tracts 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 acqui- sition 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 remeas- ured and subsequent settlement is accounted for within equity. Goodwill is initially measured at cost, being the excess of the ag- gregate of the consideration trans- ferred 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 accumu- lated impairment losses. For the pur- pose of impairment testing, goodwill acquired in a business combination is, from the acquisition date, allocated to each of the Group’s cash-gen- erating units that are expected to benefit from the combination, irre- spective of whether other assets or liabilities of the acquiree are assigned to those units. Where goodwill has been allocat- ed to a cash-generating unit and part of the operation within that unit is disposed of, the goodwill associ- ated 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 liabil- ities in statement of financial position based on current/ non current classi- fication. An asset is current when it is: • Expected to be realised or intend- ed 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 re- stricted 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 primцarily 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 lia- bilities as non-current. Deferred tax assets and liabilities are classified as non-current assets and liabilities. fair value measurement The Group measures financial in- struments, such as, derivatives at fair value at each balance sheet date. Also, fair values of financial instru- ments measured at amortised cost are disclosed in Note 28. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly trans- action 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 mar- ket, in the most advantageous market for the asset or liability. The principal or the most advan- tageous market must be accessible by the Group. The fair value of an asset or a liability is measured using the as- sumptions 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 ac- count 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 tech- niques that are appropriate in the circumstances and for which suffi- cient data are available to meas- ure 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 catego- rised 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) mar- ket prices in active markets for iden- tical assets or liabilities. • Level 2 – valuation techniques for which the lowest level input that is sig- nificant 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 meas- urement is unobservable. For assets and liabilities that are recognised in the financial statements on a recurring basis, the Group deter- mines whether transfers have occurred between Levels in the hierarchy by re assessing 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 dis- closures, 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, O1›STRATEGIC REPORT O2›CORPORATE GOVERNANCE O3›FINANCIAL STATEMENTS O4›APPENDICESLENTA LTD. AND SubSIDIARIESLENTA ANNUAL REPORT AND ACCOUNTS 2019LENTA ANNUAL REPORT AND ACCOUNTS 2019080 081 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-mon- etary 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 rec- ognition 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 con- struction 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 im- pairment losses, if any. Gains and losses on disposals de- termined by comparing net proceeds with the respective carrying amount are recognised in profit or loss. Construction in progress com- prises 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. Construc- tion 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 con- struction for production, rental or ad- ministrative 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. 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: useful lives in years Buildings Land improvements (Notes 3, 7) 30 7 Machinery and equipment 2 to 15 leases The Group has lease contracts for land and buildings. Before the adoption of IFRS 16, the Group classified each of its leases (as lessee) at the inception date as operating lease. In an op- erating lease, the leased property was not capitalised and the lease payments were recognised as rent expense in the statement of profit or loss on a straight-line basis over the lease term. Any prepaid rent and accrued rent were recognised under advances paid and trade and other payables, respectively. IFRS 16 is effective for annual peri- ods beginning on or after 1 January 2019. Upon adoption of IFRS 16 the Group recognises right-of-use assets and lease liabilities for those leases pre- viously classified as operating leases, except for short-term leases. Set out below are the new ac- counting policies of the Group: right-of-use assets The Group recognises right-of-use as- sets at the commencement date of the lease (i. e., the date the underlying asset is available for use). Right-of-use assets are measured at cost, less any accumulated depreciation and impairment losses, and adjusted for any remeasurement of lease liabilities. The cost of right-of-use assets includes the amount of lease liabilities recognised, initial direct costs incurred, and lease payments made at or before the commencement date less any lease incentives received. Unless the Group is reasonably certain to obtain ownership of the leased asset at the end of the lease term, the recognised right-of-use assets are depreciated on a straight-line basis over the shorter of its estimated useful life and the lease term. Depreciations is charged to profit or loss, except for depreciation of right-of-use assets representing right to use leased land plots during the construction process, which is includ- ed in carrying value of assets under construction. Right-of-use assets are subject to impairment. lease liabilities At the commencement date of the lease, the Group recognises lease lia- bilities measured at the present value of lease payments to be made over the lease term. The lease payments include fixed payments (including in-substance fixed payments) less any lease incentives receivable, variable lease payments that depend on an index or a rate, and amounts expect- ed to be paid under residual value guarantees. The lease payments also include the exercise price of a purchase option reasonably certain to be exercised by the Group and payments of penalties for terminat- ing a lease, if the lease term reflects the Group exercising the option to terminate. The variable lease pay- ments that do not depend on an index or a rate are recognised as expense in the period on which the event or condition that triggers the payment occurs. In calculating the present value of lease payments, the Group uses the incremental borrowing rate at the lease commencement date if the interest rate implicit in the lease is not readily determinable. After the commencement date, the amount of lease liabilities is increased to reflect the accretion of interest and reduced for the lease payments made. In ad- dition, the carrying amount of lease liabilities is remeasured if there is a modification, a change in the lease term, a change in the in-substance fixed lease payments or a change in the assessment to purchase the underlying asset. short-term leases The Group applies the short-term lease recognition exemption to its short-term leases (i.e., those leases that have a lease term of 12 months or less from the commencement date or initial application date and do not contain a purchase option). Lease payments on short- term leases are recognised as expense on a straight- line basis over the lease term. lease and non-lease components At initial application and subsequently as well the Group accounts for lease and non-lease components (e. g. advertising, maintenance fees etc.) separately. 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 ac- quisition. 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 ex- penditure is reflected in profit and loss in the period in which the expenditure is incurred. The useful lives of intangible as- sets are assessed as either finite or indefinite. Intangible assets with finite lives are amortised over the useful eco- nomic 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 when- ever there is an indication that the intangible asset may be impaired. The amortisation period and the amortisation method for an intan- gible 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 ex- pected 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 as- set 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 im- pairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impair- ment 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, cor- porate 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. 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 im- mediately in profit or loss. Where an impairment loss subse- quently 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 impair- ment loss is recognised immediately in profit or loss. 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 classi- fication 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 O1›STRATEGIC REPORT O2›CORPORATE GOVERNANCE O3›FINANCIAL STATEMENTS O4›APPENDICESLENTA LTD. AND SubSIDIARIESLENTA ANNUAL REPORT AND ACCOUNTS 2019LENTA ANNUAL REPORT AND ACCOUNTS 2019082 083 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 com- ponent 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 ex- cluded 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 state- ments in accordance with manage- ment’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 consolidat- ed statement of profit or loss and other comprehensive income unless it relates to transactions that are recognised, in the same or a differ- ent 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 expect- ed 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 ex- pected 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 rec- ognised 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 invest- ments 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. Deferred tax assets are recog- nised 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 deduct- ible temporary differences, and the carry-forward of unused tax credits and unused tax losses can be uti- lised, except: • When the deferred tax asset relat- ing to the deductible temporary differ- ence 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 invest- ments 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 re- porting 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 ex- pects, 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 en- forceable 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 of the direct cost of goods, trans- portation and handling costs. Cost of sales comprises only of 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 nec- essarily 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 de- termines the amount of borrowing costs eligible for capitalisation by applying a capitalisation rate to the expenditures on that asset. The capitalisation rate is the weight- ed 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 con- tracts with customers is retail sales. The Group recognises revenue when control of the goods and ser- vices 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 ex- ception 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 recog- nised 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 recog- nize 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. Sale from secondary materials is recognized within the other operating income in the consolidated statement of profit or loss and other compre- hensive income at a point in time. Interest income is recognised on a time-proportion basis using the effective interest rate method. Interest income is included into the Inter- est income line in the consolidated statement of profit or loss and other 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 allowanc- es received from suppliers are re- corded 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. Employee benefits The Group is subject to mandatory contributions to the Russian Fed- eration 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 employ- ees of the Group. share-based payments Certain employees (including sen- ior 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 trans- actions is determined by the fair value at the date when the grant is made using an appropriate valua- tion model. That cost is recognised, together with a corresponding increase in share options reserve in equity, over the period in which the per- formance and/or service conditions are fulfilled in employee benefits expense (Note 26). The cumula- tive expense recognised for eq- uity-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 em- ployee benefits expense (Note 26). No expense is recognised for awards that do not ultimately vest, except for equity-settled transac- tions for which vesting is conditional upon a market or non-vesting con- dition. These are treated as vested irrespective of whether or not the market or non-vesting condition is satisfied, provided that all other per- formance and/or service conditions are satisfied. When the terms of an equity-set- tled award are modified, the minimum expense recognised is the expense had the terms had not been modi- fied, 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 O1›STRATEGIC REPORT O2›CORPORATE GOVERNANCE O3›FINANCIAL STATEMENTS O4›APPENDICESLENTA LTD. AND SubSIDIARIESLENTA ANNUAL REPORT AND ACCOUNTS 2019LENTA ANNUAL REPORT AND ACCOUNTS 2019084 085 share-based payment transaction, or is otherwise beneficial to the em- ployee as measured at the date of modification. 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 op- erating 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 report- able 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 signif- icant increase of business activities in December. financial assets initial measurement The classification of financial instru- ments 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 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. loans and receivables Trade receivables, loans, and other receivables that have fixed or deter- minable payments that are not quot- ed in an active market are classified as loans and receivables. The Group measures amounts of loans and receivables at amortised cost if both of the following conditions are met: • 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 finan- cial 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 ob- jective. The Group’s business model is not assessed on an instrument-by-instru- ment basis, but at a higher level of aggregated portfolios and is based on observable factors such as: • How the performance of the busi- ness 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 perfor- mance 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 im- portant aspects of the Group’s as- sessment. The business model assessment is based on reasonably expected scenar- ios without taking “worst case” or “stress case” scenarios into account. If cash flows after initial recognition are real- ised 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 model, but incorporates such information when assessing newly originated or newly purchased financial assets going forward. the sppi test As a second step of its classifica- tion 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 am- ortisation 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 con- tractual 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 com- prise cash at banks and on hand and short-term deposits with a maturity of three months or less. Impairment of financial assets 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 con- tractual 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. 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 expo- sure, irrespective of the timing of the default (a lifetime ECL). For trade receivables and contract assets, the Group applies a simpli- fied 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 eco- nomic environment. The Group’s cash and cash equiv- alents have been assigned low cred- it 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 rec- ognises 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 instru- ments issued by the group treasury shares Own equity instruments that are re- acquired (treasury shares) are rec- ognised 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 dur- ing 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 prefer- ence 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 clas- sified as either financial liabilities or as equity in accordance with the sub- stance 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, in- cluding borrowings and trade and other payables, are initially recog- nised 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 liabili- ties are offset and the net amount is reported in the consolidated state- O1›STRATEGIC REPORT O2›CORPORATE GOVERNANCE O3›FINANCIAL STATEMENTS O4›APPENDICESLENTA LTD. AND SubSIDIARIESLENTA ANNUAL REPORT AND ACCOUNTS 2019LENTA ANNUAL REPORT AND ACCOUNTS 2019086 087 ment 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. 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 inter- est 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 re-measured 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 rela- tionship, the Group formally designates and documents the hedge relation- ship to which the Group wishes to apply hedge accounting and the risk management objective and strategy for undertaking the hedge. The doc- umentation 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 chang- es 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. Designation of a hedge relation- ship 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 com- pleted. 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-finan- cial 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 commit- ment 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 clas- sified as non-current (or separated into current and non-current portions) consistent with the classification of the underlying item. 2.3 Basis of consolidation The consolidated financial statements incorporate the financial statements of the Company and other entities controlled by the Company (its sub- sidiaries) as at 31 December 2019. 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 re- turns 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 contrac- tual arrangements; • The Group’s voting rights and po- tential 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, in- come 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 nec- essary, 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. A change in the ownership inter- est 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 ben- efits 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 as- sessing whether the Group controls another entity. Subsidiaries are consol- idated from the date on which control is transferred to the Group (acquisition date) and are de-consolidated from the date that control ceases. 3. significant accOunting judgments, estimates and assumptiOns In the application of the Group’s accounting policies, which are de- scribed in Note 2 above, manage- ment is required to make judgments, estimates and assumptions about the carrying amounts of assets and liabilities that are not readily appar- ent 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 as- sumptions are reviewed on an ongoing basis. Revisions to accounting esti- mates 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 ad- justment to the carrying amount of assets and liabilities within the next financial year include: judgments 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 inter- ested. 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 esti- mation uncertainty at the reporting date, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabil- ities within the next financial year, are described below. The Group based its assumptions and estimates on parameters available when the con- solidated financial statements were prepared. Existing circumstances and assumptions about future develop- ments, 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. 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 in- cludes 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 Feder- ation 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 cir- cumstances 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. 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 O1›STRATEGIC REPORT O2›CORPORATE GOVERNANCE O3›FINANCIAL STATEMENTS O4›APPENDICESLENTA LTD. AND SubSIDIARIESLENTA ANNUAL REPORT AND ACCOUNTS 2019LENTA ANNUAL REPORT AND ACCOUNTS 2019088 089 is not feasible, a degree of judgment is required in establishing fair values. The judgments include considera- tions 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 28 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 mar- ket growth, market demand for the products and the future profitability of products. share-based payments The Group measures the cost of eq- uity-settled transactions by reference to the fair value of the equity instru- ments 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 con- ditions 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 divi- dend yield and making assumptions about them. The assumptions and models used for estimating fair value for share-based payment transac- tions are disclosed in Note 26. property, plant and equipment Since 1 January 2019 the Group reviewed economic useful life of Land improvements class of prop- erty, plant and equipment from 30 years to 7 years, as practice has proven that factual useful life of land improvements does not exceed 7 years. The effect of the change in accounting estimate was recog- nized prospectively by including it in profit or loss for the year ended 31 December 2019 in the amount of RUB 2,324,185 and also will affect future periods. lease term of contracts with renewal options The Group determines the lease term as the non-cancellable term of the lease, together with any periods cov- ered by an option to extend the lease if it is reasonably certain to be exercised, or any periods covered by an option to terminate the lease, if it is reasonably certain not to be exercised. The Group has the option, under some of its leases to lease the assets for additional terms. The Group applies judgement in evaluating whether it is reasonably certain to exercise the option to renew. That is, it considers all relevant factors that create an eco- nomic incentive for it to exercise the renewal. After the commencement date, the Group reassesses the lease term if there is a significant event or change in circumstances that is within its control and affects its ability to exercise (or not to exercise) the option to renew (e. g., a change in business strategy). For leased land plots under the stores the Group defines lease term as the longest of non-cancellable term of the lease or remaining useful life of a store. The Group typically exercises its option to renew for these leases because it has an exclusive right as an owner of real estate. The periods covered by termination options are included as part of the lease term only when they are rea- sonably certain not to be exercised. leases - estimating the incremental borrowing rate The Group measures the lease liability by discounting lease payments using the interest rate implicit in the lease. If that rate cannot be readily deter- mined, the Group uses its incremental borrowing rate, adjusted to take into account the specific terms and con- ditions of a lease and to reflect the interest rate that the Group would pay to borrow • over a similar term to the lease term, • the amount needed to obtain an asset of a similar value to the right- of-use asset and • in a similar economic environment. 4. new standards, interpretatiOns and amendments adOpted By the grOup 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 end- ed 31 December 2018, except for the adoption of new standards effective as of 1 January 2019. The Group has not early adopted any other standard, interpretation or amendment that has been issued but is not yet effective. ifrs 16 The Group applies, for the first time, IFRS 16 Leases using the modified retro- spective approach for all leases where it is the lessee, except for short-term leases. The comparatives are not re- stated and the cumulative effect of initially applying the standard is recognised as an adjustment to the opening balance of retained earnings at the date of initial appli- cation. The Group recognised lease liabilities to make lease payments and right-of-use assets representing the right to use the underlying assets with corresponding effect recorded in retained earnings. the nature and effect Of these changes are disclOsed BelOw Impact on the statement of financial position (increase/ (decrease)) as at 1 january 2019: Non-current assets Right-of-use assets Leasehold rights 36,357,602 (3,170,537) Other non-current assets (468,753) Current assets Advances paid Total assets Equity Retained earnings Total equity 32,718,312 (141,724) (141,724) 32,576,588 (1,234,731) (1,234,731) Non-current liabilities Deferred tax liabilities (308,683) term that ends within 12 months at the date of initial application d) Used hindsight in determining the lease term where the contract con- tains options to extend or terminate the lease Based on the foregoing, as at 1 January 2019: a) Right-of -use assets of RUB 36,357,602 were recognised and pre- sented separately in the statement of financial position. This amount includes “key money” of RUB 3,170,537 reclassified from leasehold rights, previously recognised guarantee payments of RUB 468,753 that should be offset against the last lease payment reclassified from other non-current assets and lease prepayments of RUB 141,724 reclas- sified from advances paid. b) Additional lease liabilities of RUB 34,120,002 were recognised and pre- sented separately in the statement of financial position. c) Deferred tax liabilities decreased by RUB 308,683 because of the deferred tax impact of the changes in assets and liabilities. d) The net effect of these adjustments had been adjusted to retained earn- ings in the amount of RUB 1,234,731 (loss). the lease liaBilities as at 1 january 2019 can Be recOnciled tO the Operating lease cOmmitments as Of 31 decemBer 2018 as fOllOws Long-term lease liabilities 32,081,145 Operating lease commitments as at 31 December 2018 31,772,462 Less commitments relating to short-term leases Operating lease commitments subject to capitalization under IFRS 16 Weighted average incremental borrowing rate as at 1 January 2019 Lease liabilities as at 1 January 2019 64,061,649 3,752,584 60,309,065 8.3 % 34,120,002 Current liabilities Short-term lease liabilities 2,038,857 Total liabilities 2,038,857 33,811,319 Total equity and liabilities 32,576,588 The right-of-use assets for most leas- es were recognised based on the amount equal to the lease liabilities, adjusted for any related prepaid and accrued lease payments or leasehold rights previously recognised. In some leases, the right-of-use assets were recognized based on the carrying amount as if the standard had always been applied, apart from the use of incremental borrowing rate at the date of initial application. The lease liabilities were meas- ured at the present value of the remaining lease payments, dis- counted using the lessee’s incre- mental borrowing rate at the date of initial application. The Group also applied the avail- able practical expedients wherein it: a) Used a single discount rate to a portfolio of leases with reasonably similar characteristics b) Relied on its assessment of whether leases are onerous immediately before the date of initial application c) Applied the short-term leases exemptions to leases with lease Amounts recognised in the statement of financial position and profit or loss set Out BelOw, are the carrying amOunts Of the grOup’s right- Of-use assets and lease liaBilities and the mOvements during the periOd: right-Of-use assets lease liaBilities land Buildings tOtal tOtal As at 1 January 2019 5,810,044 30,547,558 36,357,602 34,120,002 Additions Depreciation charge Impairment charge Cancelation of lease contracts Transfer to property, plant and equipment resulted from pur- chase of the underlining assets in the lease Interest expense Payments for the principal portion of the lease liabilities Сash payments for the interest portion of the lease liability Foreign exchange gain As at 31 December 2019 Current lease liabilities 6,689 1,575,450 1,582,139 1,581,061 (211,615) (3,639,216) (3,850,831) − (235,056) − − (235,056) (169,085) (267,167) − − − − (543,027) (207,132) (712,112) (590,476) (474,299) − − − − − − − − − 2,795,074 (2,848,226) (2,795,074) (102,355) 4,933,810 27,733,633 32,667,443 32,160,006 2,639,784 Transfer to property, plant and equipment resulted from purchase of the underlining assets in the lease. O1›STRATEGIC REPORT O2›CORPORATE GOVERNANCE O3›FINANCIAL STATEMENTS O4›APPENDICESLENTA LTD. AND SubSIDIARIESLENTA ANNUAL REPORT AND ACCOUNTS 2019LENTA ANNUAL REPORT AND ACCOUNTS 2019 090 091 set Out BelOw, are the amOunts recOgnised in prOfit Or lOss: Depreciation of right-of-use assets Impairment of right-of-use assets Capitalisation of depreciation to CIP Interest expense on lease liabilities Interest income on security deposits Foreign exchange gain Rent expense – short-term leases Rent expense – variable lease payments Total amounts recognised in profit or loss year ended 31 decemBer 2019 3,850,831 235,056 (30,025) 2,795,074 (15,005) (102,355) 888,393 270,656 7,892,625 Several other amendments and interpretations apply for the first time in 2019, but do not have an impact on the consolidated financial statements of the Group. ifric interpretation 23 uncertainty over income tax treatment The Interpretation addresses the accounting for income taxes when tax treatments involve uncertainty that affects the application of IAS 12 Income Taxes. It does not apply to taxes or levies outside the scope of IAS 12, no does it specifically include requirements relating to interest and penalties associated with uncertain tax treatments The Interpretation specifically ad- dresses the following: • Whether an entity considers uncer- tain tax treatments separately • The assumptions an entity makes about the examination of tax treat- ments by taxation authorities • How an entity determines taxable profit (tax loss), tax bases, unused tax losses, unused tax credits and tax rates • How an entity considers changes in facts and circumstances An entity has to determine whether to consider each uncer- tain tax treatment separately or together with one or more other uncertain tax treatments. The ap- proach that better predicts the resolution of the uncertainty needs to be followed. The Group applies significant judge- ment in identifying uncertainties over income tax treatments. Since the Group operates in a complex multinational environment, it assessed whether the Interpretation had an impact on its consolidated financial statements. Upon adoption of the Interpreta- tion, the Group considered whether it has any uncertain tax positions. The Group determined that it is probable that its tax treatments will be accept- ed by the taxation authorities. The interpretation did not have an impact on the consolidated financial statements of the Group. 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 compre- hensive 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 an event or circumstance that causes the ear- ly termination of the contract and irrespective of which party pays or receives reasonable compensation for the early termination of the contract. These amendments had no impact on the consolidated financial state- ments of the Group. amendments to ias 19: plan amend- ment, curtailment or settlement The amendments to IAS 19 ad- dress the accounting when a plan amendment, curtailment or set- tlement 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 the 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 of- fered under the plan and the plan assets after that event. An entity is also required to determine the 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). These amendments had no im- pact on the consolidated financial statements. 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 sub- stance, form part of the net in- vestment 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 invest- ment, 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. These amendments had no im- pact on the consolidated financial statements. annual improvements 2015-2017 cycle 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 combi- nation 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. An entity applies those amendments to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after 1 January 2019, with early application permitted. These amendments had no im- pact on the consolidated financial statements of the Group as there is no transaction where a joint control is obtained. 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 op- eration constitutes a business as defined in IFRS 3. The amendments clarify that the previously held in- terests in that joint operation are not remeasured. An entity applies those amend- ments to transactions in which it obtains joint control on or after the beginning of the first annual report- ing period beginning on or after 1 January 2019, with early application permitted. These amendments had no im- pact on the consolidated financial statements of the Group as there is no transaction where a joint control is obtained. ias 12 income taxes The amendments clarify that the income tax consequences of div- idends 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 it originally recognised those past transactions or events An entity applies the amendments for annual reporting periods beginning on or after 1 January 2019, with early application permitted. When the entity first applies those amendments, it applies them to the income tax con- sequences 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, they had no impact on the consolidated financial statements of the Group. 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 sub- stantially all of the activities necessary to prepare that asset for its intended use or sale are complete. The entity applies the amendments to borrowing costs incurred on or after the beginning of the annual reporting period in which the entity first applies those amendments. An entity applies those amendments for annual reporting periods beginning on or after 1 January 2019, with early application permitted. Since the Group has no qualifying assets, these amendments had no impact on the consolidated financial statements of the Group. Reclassifications in the consolidated statement of financial position Reclassification of share capital bal- ance in the amount of RUB 284 to additional paid-in-capital was done as the Group’s shares were restated to be of no par value. 5. standards issued But nOt yet effective The new and amended 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 new and amended standards and inter- pretations, if applicable, when they become effective. ifrs 17 insurance contracts In May 2017, the IASB issued IFRS 17 Insurance Contracts (IFRS 17), a com- prehensive new accounting standard for insurance contracts covering rec- ognition and measurement, presenta- tion and disclosure. Once effective, IFRS 17 will replace IFRS 4 Insurance Contracts (IFRS 4) that was issued in 2005. IFRS 17 applies 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 guar- antees 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 in- surance 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 mod- el 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 premi- um allocation approach) mainly for short-duration contracts IFRS 17 is effective for reporting periods beginning on or after 1 Jan- uary 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 17. This standard is not applicable to the Group. amendments to ifrs 3: Definition of a Business In October 2018, the IASB issued amendments to the definition of a business in IFRS 3 Business Combi- nations 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 O1›STRATEGIC REPORT O2›CORPORATE GOVERNANCE O3›FINANCIAL STATEMENTS O4›APPENDICESLENTA LTD. AND SubSIDIARIESLENTA ANNUAL REPORT AND ACCOUNTS 2019LENTA ANNUAL REPORT AND ACCOUNTS 2019092 093 of whether market participants are capable of replacing any missing ele- ments, add guidance to help entities assess whether an acquired process is substantive, narrow the defini- tions of a business and of outputs, and introduce an optional fair value concentration test. New illustrative examples were provided along with the amendments. Since the amendments apply pro- spectively to transactions or other events that occur on or after the date of first application, the Group will not be affected by these amendments on the date of transition. 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 Ac- counting Estimates and Errors to align the definition of “material” across the standards and to clarify certain aspects of the definition. The new definition states that, Information is material if omitting, misstating or obscuring it could reasonably be expected to influence decisions that the primary users of general purpose financial statements make on the basis of those financial statements, which provide financial information about a specific reporting entity.” The amendments to the definition of material is not expected to have a significant impact on the Group’s consolidated financial statements. interest rate Benchmark reform – amendments to ifrs 9, ias 39 and ifrs 7 In September 2019, the IASB issued amendments to IFRS 9, IAS 39 and IFRS 7 Financial instruments: Disclo- sures, which concludes phase one of its work to respond to the effects of Interbank Offered Rates (IBOR) re- form on financial reporting. Amend- ments are effective for annual peri- ods beginning on or after 1 January 2020. the amendments to ifrs 9 The amendments provide temporary reliefs which enable hedge account- ing to continue during the period of uncertainty before the replacement of an existing interest rate benchmark with an alternative nearly risk-free interest rate (an RFR). A hedging rela- tionship is affected if the reform gives rise to uncertainties about the timing and/or amount of benchmark-based cash flows of the hedged item or the hedging instrument. Application of the reliefs is manda- tory. The first three reliefs provide for: • The assessment of whether a forecast transaction (or component thereof) is highly probable; • Assessing when to reclassify the amount in the cash flow hedge reserve to profit and loss; • The assessment of the economic relationship between the hedged item and the hedging instrument. For each of these reliefs, it is assumed that the benchmark on which the hedged cash flows are based (whether or not contractually specified) and/or, for relief three, the benchmark on which the cash flows of the hedging instrument are based, are not altered as a result of IBOR reform. A fourth relief provides that, for a benchmark component of inter- est rate risk that is affected by IBOR reform, the requirement that the risk component is separately identifiable need be met only at the inception of the hedging relationship. The reliefs continue indefinite- ly in the absence of any of the events described in the amend- ments. When an entity designates a group of items as the hedged item, the requirements for when the reliefs cease are applied separately to each individual item within the designated group of items. the amendments to ias 39 The corresponding amendments are consistent with those for IFRS 9, but with the following differences: • For the prospective assessment of hedge effectiveness, it is assumed that the benchmark on which the hedged cash flows are based (whether or not it is contractually specified) and/or the benchmark on which the cash flows of the hedging instrument are based, are not altered as a result of IBOR reform. • For the retrospective assessment of hedge effectiveness, to allow the hedge to pass the assessment even if the actual results of the hedge are temporarily outside the 80 %-125 % range, during the period of uncertainty arising from IBOR reform. • For a hedge of a benchmark por- tion (rather than a risk component under IFRS 9) of interest rate risk that is affected by IBOR reform, the require- ment that the portion is separately identifiable need be met only at the inception of the hedge. The amendments must be applied retrospectively. However, any hedge relationships that have previously been de-designated cannot be rein- stated upon application, nor can any hedge relationships be designated with the benefit of hindsight. Early application is permitted and must be disclosed. These amendments do not have any impact on the Group’s consol- idated financial statements as no hedge relationships are designated at the reporting date. the conceptual framework for financial reporting Conceptual Framework 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. It is effective for annual periods beginning on or after 1 January 2020. The Conceptual Framework in- cludes some new concepts, pro- vides updated definitions and recognition criteria for assets and liabilities and clarifies some impor- tant concepts. It is arranged in eight chapters, as follows: • Chapter 1 – The objective of finan- cial reporting • Chapter 2 – Qualitative charac- teristics of useful financial information • Chapter 3 – Financial statements and the reporting entity • Chapter 4 – The elements of finan- cial statements • Chapter 5 – Recognition and derecognition • Chapter 6 – Measurement • Chapter 7 – Presentation and dis- closure • Chapter 8 – Concepts of capital and capital maintenance Changes to Conceptual Frame- work are not expected to have any significant impact on the Group’s consolidated financial statements. Amendments to IAS 1 Presentation of Financial Statements, classification of liabilities as current or non-current On 23 January 2020, the IASB issued amendments to paragraphs 69 to 76 of IAS 1 Presentation of Financial State- ments (the amendments) to specify the requirements for classifying liabilities as current or non-current. the amendments clarify: • What is meant by a right to defer settlement; • That a right to defer must exist at the end of the reporting period; • That classification is unaffected by the likelihood that an entity will exercise its deferral right; • That only if an embedded deriva- tive in a convertible liability is itself an equity instrument would the terms of a liability not impact its classification The Board added two new par- agraphs (paragraphs 76A and 76B) to IAS 1 to clarify what is meant by “settlement” of a liability. “For the pur- pose of classifying a liability as current or non-current, settlement refers to a transfer to the counterparty that results in the extinguishment of the liability. The transfer could be of: • cash or other economic resources – for example, goods or services; or • the entity’s own equity instruments, unless paragraph 76B applies.” Paragraph 76B states that terms of a liability that could, at the option of the counterparty, result in its settle- ment by the transfer of the entity’s own equity instruments do not affect its classification as current or non-current if, applying IAS 32 Financial Instruments: Presentation, the entity classifies the option as an equity instrument, recog- nising it separately from the liability as an equity component of a compound financial instrument. The amendments to IAS 1 are re- quired to be applied for annual periods beginning on or after 1 January 2022. The amendments must be applied retrospectively in accordance with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors. Earlier application is permitted. Amendments to classification of liabilities as current or non-current are not expected to have any impact on the Group’s consolidated financial statements. 6. Balances and transactiOns with related parties The transactions with related par- ties are made on terms substantially equivalent to those that prevail in arm’s length transactions. On 30 April 2019 LLC “Severgroup” (“Severgroup”) has completed its ac- quisition of 166,383,595 Lenta GDRs, representing approximately 34.45 % of the issued and outstanding voting shares (excluding treasury shares) in the Group from the investment vehicle of TPG Group, Luna Inc., as well as the acquisition of 36,076,870 Lenta GDRs representing approx- imately 7.47 % of the issued and outstanding voting shares (excluding treasury shares) in the Group from the European Bank for Reconstruc- tion and Development (“EBRD”), in each case, at a price of US$ 3.60 per Lenta GDR. On 31 December 2019 Severgroup stake represents 77.99 % of the share capital or 78.73 % of the voting rights. As the result of the deal Alexey Mordashov becomes the ultimate controlling party of the Group since 30 April 2019 (no ultimate controlling party as of 31 December 2018). TPG and EBRD cease to be related parties starting from May 2019. The consolidated financial state- ments include the following transac- tions with related parties: entities with significant influence Over the grOup: Severgroup Other operating income from related parties Purchases of inventories from related parties Selling, General and Administrative expenses Amounts owed by related parties Amounts owed to related parties Advances received Advances paid TPG Group year ended 31 decemBer 2019 year ended 31 decemBer 2018 6,524 (8,357) (17,808) 7,215 (16,469) (360) 344 − − − − − − − Selling, General and Administrative expenses (4,610) (14,492) remuneratiOn tO the memBers Of the BOard Of directOrs and Key management persOnnel is as fOllOws: Short-term benefits Long-term benefits (including share-based pay- ments, Note 26) Termination benefits Total remuneration year ended 31 decemBer 2019 year ended 31 decemBer 2018 771,041 769,872 14,992 1,555,905 586,771 165,538 31,821 784 130 O1›STRATEGIC REPORT O2›CORPORATE GOVERNANCE O3›FINANCIAL STATEMENTS O4›APPENDICESLENTA LTD. AND SubSIDIARIESLENTA ANNUAL REPORT AND ACCOUNTS 2019LENTA ANNUAL REPORT AND ACCOUNTS 2019094 095 7. prOperty, plant and equipment land land imprOve- ments Buildings machinery and equipment assets under cOnstructiOn tOtal Cost Balance at 1 January 2019 22,237,066 12,358,156 124,825,097 59,986,683 3,770,316 223,177,318 Additions − − − − 14,125,226 14,125,226 Transfers from construction in progress 1,024,239 332,559 7,845,616 5,665,732 (14,868,146) − Transfers from right-of-use assets Disposals 267,167 (4,947) − 207,132 − − 474,299 (207) (506,337) (1,210,070) (117,134) (1,838,695) Balance at 31 December 2019 23,523,525 12,690,508 132,371,508 64,442,345 2,910,262 235,938,148 Accumulated depreciation and impairment Balance at 1 January 2019 Depreciation charge Impairment charge Disposals − − 2,044,272 19,077,836 2,739,002 4,521,778 1,799,114 12,538 8,533,770 25,031,147 6,850,077 949,200 − (193) (355,492) (1,028,096) − − 319,956 − 46,153,255 14,110,857 11,614,578 (1,383,781) Balance at 31 December 2019 1,799,114 4,795,619 31,777,892 31,802,328 319,956 70,494,909 Net book value Balance at 1 January 2019 Balance at 31 December 2019 Cost − 22,237,066 10,313,884 105,747,261 34,955,536 3,770,316 177,024,063 21,724,411 7,894,889 100,593,616 32,640,017 2,590,306 165,443,239 Balance at 1 January 2018 21,010,003 11,467,330 118,121,718 52,948,637 2,586,799 206,134,487 Additions Transfers from construction in progress Transfers from leasehold rights Transfers to assets held for sale Disposals − 763,483 171,868 323,094 (31,382) − − − 18,174,541 18,174,541 902,322 7,578,287 7,689,055 (16,933,147) − − − − − − − − − 171,868 323,094 (11,496) (874,908) (651,009) (57,877) (1,626,672) Balance at 31 December 2018 22,237,066 12,358,156 124,825,097 59,986,683 3,770,316 223,177,318 Accumulated depreciation and impairment Balance at 1 January 2018 Depreciation charge Impairment charge Disposals Balance at 31 December 2018 Net book value Balance at 1 January 2018 Balance at 31 December 2018 − − − − − 1,646,511 15,000,631 19,178,939 400,454 4,571,843 6,351,622 – 132,188 – (2,693) (626,826) (499,414) 2,044,272 19,077,836 25,031,147 − − – − − 35,826,081 11,323,919 132,188 (1,128,933) 46,153,255 21,010,003 9,820,819 103,121,087 33,769,698 2,586,799 170,308,406 22,237,066 10,313,884 105,747,261 34,955,536 3,770,316 177,024,063 During the year ended 31 December 2019 and 2018 the Group was not involved in acquisition or contribu- tion 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. depreciation, amortisation and impairment expense As at 31 December 2019 the Group performed impairment test of prop- erty, plant and equipment, intangible assets and right-of-use assets, where indicators of such impairment were identified. Continued economic uncertainty and consequent challenging market conditions has let the Group’s manage- ment to reassess its impairment testing processes, models and assumptions. Following the impairment test impairment losses in the consoli- dated statement of profit or loss in respect of property, plant and equipment, right-of-use assets and intangible assets amounted to RUB 11,614,578 RUB 235,056 and RUB 325 respectively. The evaluation was performed at the lowest level of aggregation of assets that is able to generate inde- pendent cash inflows (CGU), which is generally at the individual store level. In identifying whether cash inflows are largely independent, management considers various factors including: • how it monitors the entity’s opera- tions or how it makes decisions about continuing or disposing of the entity’s assets and operations; • cannibalization effect; • leakage of customers upon a store closure. The impairment test has been car- ried out by comparing recoverable amount of the individual store with its carrying value. The recoverable amount was defined as the higher of its fair value less costs to sell and value in use. Due to number of CGUs being tested for impairment it is considered impracticable to disclose detailed information for each individual CGU. The key assumptions used in de- termining the value in use are: • future cash flows are based on the current budgets and forecasts approved by the management and represented by forecasted EBITDA along with terminal value of forecasted free cash flows that are expected to be generated beyond the forecast period (12 months); • cash flow forecasts for capital ex- penditure are based on past expe- rience and include ongoing capital expenditure required to maintain the level of economic benefits from CGU in its current position • cash flow forecast for overheads presented mainly by personnel ex- pense being allocated on reasonable basis; • carrying value of corporate as- sets that do not generate independ- ent cash inflows (offices, distribution centers) were allocated to CGUs on consistent basis; • projections were made in the func- tional currency of the Group’s entities, being Russian Rouble, on a pre-tax basis and discounted at the Group pre-tax weighted average cost of capital which is then adjusted to reflect the risks spe- cific to the respective assets (15.42 %). The Group’s management believes that all of its estimates are reasona- ble and consistent with the internal reporting and reflect management’s best knowledge. The result of applying discounted cash flows model reflects expec- tations about possible variations in the amount and timing of future cash flows. If the revised estimated discount rate consistently applied to the discounted cash flows had been 50 b.p. higher than manage- ment’s estimates, the Group would need to reduce the carrying value of non-current non-financial assets by RUB 906,091. If the annual revenue growth rate used in calculations of value in use had been 50 b.p. lower, the Group would need to decrease the carrying value of non-current non-financial assets by RUB 998,854. Fair value less costs of disposal of CGU was defined by an external ap- praiser by reference to current ob- servable prices on an active market subsequently adjusted for specific characteristics of respective assets. The fair value measurement of these assets is classified at level 2 of the fair value hierarchy. The amount of depreciation and amortisation during the year ended 31 December 2019 and year ended 31 December 2018 is presented within depreciation and amorti- sation in the Group’s consolidated statement of profit or loss and other comprehensive income and consolidated statement of cash flows as follows: year ended 31 decemBer 2019 year ended 31 decemBer 2018 14,110,857 11,323,919 508,016 553,338 3,850,831 (30,025) – – _ 100,262 18,439,679 11,977,519 Depreciation of property, plant and equipment Amortisation of intangible assets (Note 10) Amortisation of right-of-use assets (Note 4) Capitalisation of right-of-use asset deprecia- tion to CIP Amortisation of leasehold rights Total depre- ciation and amortisation See Note 27 for capital commitments. 8. prepayments fOr cOnstructiOn Prepayments for construction are made to contractors building stores and to suppliers. Prepayments are regularly moni- tored for the indicators of impairment. As at 31 December 2019 prepayments for construction were impaired in the amount of RUB 236,851 (31 December 2018: RUB 482,130). 9. Operating segments The Group’s principal business activity is the development and operation of food retail stores lo- cated 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 as- sets outside the Russian Federation (excluding investments in its foreign wholly owned intermediate holding subsidiary Zoronvo Holdings Limited, which are eliminated on consolida- tion). Due to the similar economic characteristics of food retail stores, the Group’s management has ag- gregated its operating segments represented by stores into one re- portable 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 regu- larly 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 consist- ent with that in the consolidated financial statements. the segment information for the year ended 31 december 2019 and 2018 is as follows: year ended 31 decemBer 2019 year ended 31 decemBer 2018 Sales 417,500,015 413,562,197 EBITDA 39,505,713 36,194,160 O1›STRATEGIC REPORT O2›CORPORATE GOVERNANCE O3›FINANCIAL STATEMENTS O4›APPENDICESLENTA LTD. AND SubSIDIARIESLENTA ANNUAL REPORT AND ACCOUNTS 2019LENTA ANNUAL REPORT AND ACCOUNTS 2019 096 097 reconciliation of eBitda to IFRS profit for the year is as follows: intangible assets as at 31 december 2018 consisted of the following: year ended 31 decemBer 2019 year ended 31 decemBer 2018 sOftware trade marKs tOtal EBITDA 39,505,713 36,194,160 Interest expense (15,866,946) (9,699,272) Interest income 3,827,178 608,472 Income tax expense (see Note 20) Depreciation and amortisation (see Notes 4, 7, 10, 24) Impairment of non-financial assets (see Notes 4, 7, 10) Foreign ex- change gains (loss) (190,684) (3,022,988) (18,439,679) (11,977,519) (11,849,959) (132,188) 220,503 (176,371) (Loss) /profit for the year (2,793,874) 11,794,294 10. intangiBle assets intangible assets as at 31 december 2019 consist of the following: Cost At 1 January 2018 3,461,608 549 3,462,157 Additions 642,512 – 642,512 Disposals (199,666) (549) (200,215) At 31 Decem- ber 2018 Accumulated amortisation At 1 January 2018 Amortisation charge 3,904,454 – 3,904,454 1,644,892 549 1,645,441 553,338 – 553,338 Disposals (199,666) (549) (200,215) At 31 Decem- ber 2018 Net book value At 1 January 2018 At 31 Decem- ber 2018 1,998,564 – 1,998,564 1,816,716 – 1,816,716 1,905,890 – 1,905,890 Cost At 1 January 2019 Additions Disposals At 31 December 2019 Accumulated amortisation and impairment At 1 January 2019 Amortisation charge Impairment charge Disposals At 31 December 2019 Net book value At 1 January 2019 At 31 December 2019 sOftware tOtal 3,904,454 3,904,454 886,872 886,872 (20,332) (20,332) 4,770,994 4,770,994 Amortisation expense is included in selling, general and administrative expenses (Note 24). 11. Other nOn-current assets Other non-current assets are rep- resented by guarantee deposits under lease contracts subject to reimbursement by cash at the end of lease. 1,998,564 1,998,564 12. inventOries 508,016 508,016 325 325 (6,886) (6,886) 2,500,019 2,500,019 1,905,890 1,905,890 2,270,975 2,270,975 31 decemBer 2019 31 decemBer 2018 37,146,606 40,193,130 Goods for resale (at lower of cost and net realis- able value) Raw materials 1,306,659 1,307,721 Total inventories 38,453,265 41,500,851 Raw materials are represented by inventories used in own production process in butchery, bakery and cu- linary. During the reporting year the Group accounted for the write down of inventories to their net realisable value within cost of sales in the con- solidated statement of profit or loss and other comprehensive income for the year ended 31 December 2019 in the amount of RUB 411,398 (31 December 2018: expenses within cost of sales in the amount of RUB 397,251). 13. trade and Other receivaBles 31 decemBer 2019 31 decemBer 2018 5,423,210 6,627,239 3,205,036 4,065,760 154,866 844,002 (179,010) (264,399) 8,604,102 11,272,602 Accounts receivable on rental and other services and on suppliers’ adver- tising Suppliers’ re- bates receivable Other receiv- ables Expected credit losses of accounts receiv- able Total trade and other receivables As at 31 December 2018 the Group recognized 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 oper- ations of RUB 196,909 as the result of fire case in one of the stores. As at 31 December 2019 the compensation was received from the insurance company. Debtor credit risk is managed in accordance with the Group’s es- tablished policy, procedures and control relating to debtor credit risk management. Credit quality of a debtor is assessed based on an extensive credit rating scorecard and individual credit limits are defined in accordance with this assessment. An analysis is performed at each reporting date using a provision ma- trix to measure expected credit loss- es. 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 calcu- lation reflects the probability-weight- ed 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. set out below is the movement in the allowance for expected credit losses of trade and other receivables: 2019 2018 264,399 719,594 (48,658) (86,312) As at 1 January Reversal of allow- ance for expected credit losses Write-off (36,731) (368,883) As at 31 December 179,010 264,399 14. advances paid 31 decemBer 2019 309,833 31 decemBer 2018 1,242,760 1,327,153 1,536,965 (54,055) (7,541) 1,582,931 2,772,184 Advances to sup- pliers of goods Advances for services Impairment of advances paid Total advances paid set out below is the information about the credit risk exposure on the group’s trade and other receivables as at 31 december 2019 using a provision matrix: Expected credit loss rate Estimated total gross carry- ing amount at default Expected credit loss current <60 days Overdue 60-120 days Overdue >120 days Overdue tOtal 0%-1.5% 2%-5% 15%-40% 70%-100% 8,366,420 231,286 14,912 170,494 8,783,112 33,381 4,734 2,596 138,299 179,010 ageing of trade and other receivables that were past due but not impaired as at 31 december 2018: Expected credit loss rate Estimated total gross carry- ing amount at default Expected credit loss current <60 days Overdue 60-120 days Overdue >120 days Overdue tOtal 0%-1.5% 3%-5% 20%-40% 70%-100% 10,749,050 598,869 23,848 165,234 11,537,001 118,461 17,359 9,437 119,142 264,399 The Group does not hold any collateral or other credit enhancements over these balances. 15. taxes recOveraBle Taxes recoverable as at 31 December 2019 are represented by a VAT recov- erable of RUB 163,364 (31 December 2018: RUB 992,378). 16. cash and cash equivalents 31 decemBer 2019 31 decemBer 2018 66,322,639 15,086,436 3,818,264 11,440,386 2,884,525 6,837,498 276,419 265,671 102,913 174,869 73,404,760 33,804,860 Rouble short-term deposits Rouble denominat- ed balances with banks Rouble denominat- ed cash in transit Rouble denominat- ed cash on hand Foreign currency denominated bal- ances with banks Total cash and cash equivalents Cash in transit represents cash receipts during the last days of the reporting period (29–31 December), which were sent to banks but not de- posited into the respective bank ac- counts until the next reporting period. Significant rouble denominated cash in transit result from the busi- ness seasonality, indicating higher levels of retail sales in holiday peri- ods 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 O1›STRATEGIC REPORT O2›CORPORATE GOVERNANCE O3›FINANCIAL STATEMENTS O4›APPENDICESLENTA LTD. AND SubSIDIARIESLENTA ANNUAL REPORT AND ACCOUNTS 2019LENTA ANNUAL REPORT AND ACCOUNTS 2019098 099 the immediate cash requirements of the Group, and earn interest at the respective short-term deposit rates. 17. issued capital and reserves issued capital As at 31 December 2019 the Com- pany’s share capital is comprised of 97,585,932 authorised and issued ordinary shares (as at 31 December 2018: 97,508,265) 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 Com- pany. 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 lia- bilities 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 legis- lation, Lenta LLC, the Company’s primary operating subsidiary regis- tered 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 Account- ing Rules. No dividends to holders of ordinary shares are declared for the year ended 31 December 2019 and 2018. the movements in the number of shares for the year ended 31 december 2019 and 2018 are as follows: 31 decemBer 2019 nO. 31 decemBer 2018 nO. unlimited unlimited 97,585,932 97,508,265 Authorised share capital (ordinary shares) Issued and fully paid (no par value) Treasury shares (910,522) (235,319) 97,272,946 97,416,963 77,667 91,302 (675,203) (235,319) 96,675,410 97,272,946 Balance of shares out- standing at beginning of the year Additional issue of shares Shares buy- back Balance of shares out- standing at the end of the year During the year ended 31 December 2019 the Group issued 77,667 shares of no par value with respect to long-term incentive plans to certain members of management (see Note 26). Issued shares were distributed to relevant participants. Total expense for the services re- ceived from the employees previously recognised with respect to issued shares under long-term incentive plans was RUB 127,442. In October 2018 the Group launched GDR repurchase pro- gramme up to an aggregate val- ue of RUB 11,600,000, which was terminated on 2 April 2019. As the result of the programme 910,522 shares were repurchased as at 31 December 2019. During the year ended 31 December 2019 the Group repurchased 675,203 shares of no par value for RUB 720,099. share options reserve The share options reserve is used to recognise the value of equi- ty-settled share-based payments provided to employees, including key management personnel, as part of their remuneration. Refer to Note 26 for further details of these plans. 18. earnings per share year ended 31 decemBer 2019 year ended 31 decemBer 2018 (0.029) 0.121 (Losses) /earnings per share (in thousands of Russian roubles per share) - basic and diluted, for (loss) /profit for the year attributable to equity holders of the parent The calculation of basic earnings per share for the year is based on the (loss) /profit attributable to shareholders (loss for the year ended 31 December 2019: RUB (2,793,874) profit for the year ended 31 December 2018: RUB 11,794,294) and a weighted average number of ordinary shares outstanding during the respective periods, calculated as shown below. year ended 31 decemBer 2019 year ended 31 decemBer 2018 97,272,946 97,416,963 – – 91,302 (235,319) 77,667 (675,203) – – 96,675,410 97,272,946 96,757,307 97,445,815 Number of issued shares at the beginning of the year Number of shares issued in July 2018 Number of shares repurchased in November-De- cember 2018 Number of shares issued in April 2019 Number of shares repurchased in January-April 2019 Number of shares at the end of the year Weighted aver- age number of shares The Group has issued share-based payments (Note 26) 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 year. 19. BOrrOwings The Groups’ borrowings as at 31 December 2019 and 31 December 2018 bear market interest rates, all of them are denominated in Russian roubles and are not secured. As at 31 December 2019 the Group had RUB 89,136,000 of unused credit facilities (as at 31 December 2018: RUB 83,300,000). The loan agreements contain financial and non-financial cove- nants. As at 31 December 2019 the Group is in compliance with the covenants. currency 31 decemBer 2019 31 decemBer 2018 short-term borrowings: Floating rate short-term bank loans Fixed rate short-term bonds Fixed rate short-term bank loans Total short-term borrowings and short-term portion of long- term borrowings long-term borrowings: Fixed rate long-term bonds Fixed rate long-term bank loans Floating rate long-term bank loans Total long-term borrowings RUB RUB RUB RUB RUB RUB − 5,399,643 63,031,173 68,430,816 20,519,034 61,591,407 − 82,110,441 564,138 56,702 20,118,158 20,738,998 5,559,870 74,648,179 26,133,242 106,341,291 20. incOme taxes the group’s income tax expense for the year ended 31 december 2019 and 31 december 2018 is as follows: year ended 31 decemBer 2019 year ended 31 decemBer 2018 3,413,269 1,169,375 (Loss) /profit before tax Theoretical tax charge at 20 % being statutory tax rate in Russia Difference in tax regimes of foreign companies Add tax effect of non-taxable income and non-deductible expenses. Recognition of previously unrecognised uncertain tax position year ended 31 decemBer 2019 year ended 31 decemBer 2018 (2,603,190) 520,638 14,817,282 (2,963,456) (154,996) (176,326) 133,176 (42,980) (380,000) (190,684) (149,728) (3,022,988) (3,222,585) 1,853,613 Income tax expense 190,684 3,022,988 − (41,222) 1 january 2019 change in the accOunting pOlicies due tO the applicatiOn Of ifrs 16 (nOte 4) differences in recOgnitiOn and reversals recOgnised in prOfit Or lOss 31 decemBer 2019 Tax effect of (taxable) / deductible temporary differences Property, plant and equipment (10,306,373) – 1,767,908 (8,538,465) Leasehold rights (546,549) 546,549 – – − (41,222) Right of use – (7,183,435) 745,471 (6,437,964) Current tax expense Deferred tax (benefit)/ex- pense Income tax expense rec- ognised in profit for the year Tax effect related to effective por- tion of change in the fair value of cash flow hedg- ing instruments Income tax ben- efit recognised in OCI Differences between IFRS and Russian statutory tax regulations give rise to temporary differences between the car- rying 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. Unused vacation and employee bonuses accrual Suppliers’ bonuses Borrowings Intangible assets Inventory Provision for expected credit losses of accounts receivable, impairment of advances paid and prepay- ments for construction Accrued liabilities Lease liabilities Other 253,384 (30,844) (62,884) (31,734) 415,211 124,896 – – – – – – 153,897 407,281 (28,936) (59,780) 65,281 2,397 (44,874) (76,608) 377,844 793,055 (54,146) 70,750 259,726 539,970 799,696 – 6,823,992 (391,991) 6,432,001 (114,589) 121,577 308,683 92,161 99,149 3,222,585 (6,508,488) Total net deferred tax liabilities (10,039,756) O1›STRATEGIC REPORT O2›CORPORATE GOVERNANCE O3›FINANCIAL STATEMENTS O4›APPENDICESLENTA LTD. AND SubSIDIARIESLENTA ANNUAL REPORT AND ACCOUNTS 2019LENTA ANNUAL REPORT AND ACCOUNTS 2019100 101 1 january 2018 change in the accOunting pOlicies due tO the applicatiOn Of ifrs 16 (nOte 4) differences in recOgnitiOn and reversals recOgnised in prOfit Or lOss differences in recOgnitiOn and reversals recOgnised in Other cOmprehen-sive incOme 31 decemBer 2018 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 (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) – – – – 46,831 – – 112,536 – – – – Total net deferred tax liabilities (8,386,732) 159,367 (1,693,650) – (10,306,373) (162) 57,231 273,016 5,730 (11,131) 95,612 (97,893) 94,513 50,343 (543,499) (83,723) (1,853,613) – – – – – – – – 41,222 – – (546,549) 253,384 (30,844) (62,884) (31,734) 415,211 124,896 259,726 – – (114,589) 41,222 (10,039,756) The temporary taxable differences associates with undistributed earn- ings of subsidiaries amount to RUB 75,842,716 and RUB 66,696,688 as of 31 December 2019 and 2018, respectively. A deferred tax liability on these tem- porary 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. 21. trade and Other payaBles the trade and other payables are denominated in: 31 decemBer 2019 31 decemBer 2018 Russian roubles 53,785,883 55,241,343 USD EUR GBP 650,158 249,815 3,246 653,509 238,953 35 Total trade and other payables 54,689,103 56,133,840 31 decemBer 2019 31 decemBer 2018 22. Other taxes payaBle 31 decemBer 2019 31 decemBer 2018 Trade payables 46,537,381 46,495,464 Social taxes 805,661 675,487 Accrued liabilities and other creditors Payables for purchases of property, plant and equipment Total trade and other payables 6,446,591 5,864,692 Property tax 92,895 123,213 1,705,131 3,773,684 54,689,103 56,133,840 Personal income tax 238,786 223,012 Other taxes 36,221 19,411 Total other taxes payable 1,173,563 1,041,123 23. cOst Of sales Cost of goods sold is reduced by rebates and promotional bonuses received from suppliers. Cost of sales for the year ended 31 December 2019 includes employee benefits expense of RUB 8,777,586 (year ended 31 December 2018: RUB 8,016,548) of which contributions to state pension fund are comprised of RUB 1,229,580 (year ended 31 December 2018: RUB 1,105,764). Cost of sales for the year ended 31 December 2019 includes cost of raw materials used in own production of RUB 16,575,218 (year ended 31 December 2018: RUB 15,749,849). 24. selling, general and administrative expenses year ended 31 decemBer 2019 year ended 31 decemBer 2018 28,119,261 25,556,037 18,439,679 11,977,519 4,974,278 4,517,562 Employee benefits Depreciation and amortisation (Notes 4, 7, 10) Utilities and communal pay- ments Professional fees 4,388,221 3,863,897 Advertising 5,177,240 5,217,256 Cleaning 3,611,966 2,882,658 Repairs and maintenance 3,019,466 2,642,799 Security services 1,973,878 1,893,165 Taxes other than income tax 1,598,841 1,509,046 Rent expense 1,159,049 6,063,665 Other 2,621,634 2,971,267 75,083,513 69,094,871 Total selling, general and administrative expenses (for the year ended 31 December 2018: RUB 3,613). 25. Other Operating incOme and expenses Other operating income is comprised of the following: year ended 31 decemBer 2019 year ended 31 decemBer 2018 Rental income 1,605,999 1,693,100 Sale of second- ary materials Penalties due by suppliers Advertising income Insurance compensation Gain on property, plant and equip- ment disposal 1,127,996 1,020,253 971,290 1,034,121 550,135 718,859 524,243 196,909 42,102 140,994 Other 246,001 189,009 Total other oper- ating income 5,067,766 4,993,245 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 interrup- tion of operations since the fire case till 1 November 2019, which were insured and compensated by insurance company. Other operating expenses are comprised of the following: year ended 31 decemBer 2019 year ended 31 decemBer 2018 352,215 167,477 121,636 − 109,291 21,996 Loss from property, plant and equipment and intangible assets disposal Loss from cancelation of lease contracts Penalties for termi- nation of a contracts with service suppliers Employee benefits for the year ended 31 December 2019 include contributions to state pension fund of RUB 3,578,339 (year ended 31 December 2018: RUB 3,274,393). Professional fees for the year ended 31 December 2019 include fees billed by Ernst & Young LLC: for the audit of the consolidated financial statements in the amount of RUB 24,282 (for the year ended 31 December 2018: RUB 27,510) and for consulting and other non audit services in the amount of RUB 22,729 Non-recoverable VAT 63,611 10,117 56,750 39,455 53,173 152,543 Penalties from gov- ernment authorities Impairment of advances paid and prepayments for construction, reversal of allowance for ex- pected credit losses of accounts receivable Other 179,021 84,452 Total other operating expenses 935,698 476,040 O1›STRATEGIC REPORT O2›CORPORATE GOVERNANCE O3›FINANCIAL STATEMENTS O4›APPENDICESLENTA LTD. AND SubSIDIARIESLENTA ANNUAL REPORT AND ACCOUNTS 2019LENTA ANNUAL REPORT AND ACCOUNTS 2019 102 103 26. share-Based payments long-term incentive plan During the year 2014 the Group ap- proved a long-term incentive plan (LTIP) to certain members of senior and middle management, according to which the Company granted award shares in 2014, 2015, 2016, 2017, 2018 and 2019 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 per- formance rating co-efficient. The fair value of the award shares was estimated based on the GDR price on Moscow Exchange on the award grant date. As of the year ended 31 December 2019 Tranche 2014, 2015 and 2016 fully vested. In May 2019 for the majority of employees LTIP Tranche 2016 was settled by cash in the amount of RUB 194, 592. Also for settlement purposes the Group issued 16,182 shares of no par value. Total expense for the services received from the employees previously recognised with respect to settled tranche was RUB 434,995. In April, 2019 Tranche 2017 and Tranche 2018 to senior management were amended to accelerate vest- ing of 66 % (Tranche 2017) and 34 % (Tranche 2018) of awards immediately. Vested awards were settled by cash in the amount of RUB 53,990 (Tranche 2017) and RUB 37,603 (Tranche 2018). Also for settlement purposes the Group issued 13,354 (Tranche 2017) and 18,360 (Tranche 2018) shares of no par value. The vesting dates of remaining awards under the Tranche 2017 and Tranche 2018 are 1 April 2020 and 30 April 2021 respectively. The vesting dates of newly grant- ed awards under the Tranche 2019 to senior management are 1 April 2020 (25 %), 1 April 2021 (25 %), 1 May 2021 (50 %) or 1 April 2020 (16 %), 1 April 2021 (53 %), 1 May 2021 (31 %). The vesting dates of newly grant- ed awards under the Tranche 2019 to middle management are 1 April 2020 (25 %), 1 April 2021 (25 %), 1 April 2022 (50 %). In May 2019 there was an amend- ment to the award under the Tranche 2019 for one employee, according to which 100 % of the award vest- ed immediately and 29,771 shares were issued and distributed to a participant. set out below is the information about awards settlement during year ended 31 december 2019: 2016 tranche 2017 tranche 2018 tranche 2019 tranche tOtal Settlement by shares number of shares issued in May, 2019 16,182 13,354 18,360 29,771 77,667 total expense recognised with regards to shares issued Settlement by cash payment (USD 3.6$ per GDR) 37,300 25,370 30,432 34,341 127,442 settlement by cash in May 2019 194,592 53,990 excess of expenses accrued vs. pay- ment made 198,382 32,809 37,602 15,105 – – 286,184 246,296 total expense recognised for the services received from the employees covered by long-term incentive plan for the year ended 31 december 2019 and for year ended 31 december 2018 is shown in the following table: Expense arising from the equi- ty-settled long- term incentive plan payments year ended 31 decemBer 2019 year ended 31 decemBer 2018 428,246 219,041 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 Ltd. 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 June 2018 the Group issued 69,502 shares of no par value. Total expense for the services received from the employees previously recognised with respect to issued shares was RUB 405,232. The shares were transferred into GDR and distributed to relevant participants. movements during the year The remaining contractual life for the SVARs outstanding as at 31 December 2019 was 0.26 year (31 December 2018: 0.79 years). The exercise price for options out- standing as at 31 December 2019 is RUB 2.214 (31 December 2018: RUB 2.214). Fair value of options outstanding as at 31 December 2019 is RUB 0.98 (31 December 2018: RUB 0.91). the expense recognized for the services received from the employees covered by svars plan during the year is shown in the following table: year ended 31 decemBer 2019 year ended 31 decemBer 2018 6,875 46,220 Expense arising from the equi- ty-settled SVARs transaction In April 2019 SVARs of 2016 year (21,000 phantom shares) expired worthless. Total expense for the services received from the employees previously recognised with respect to expired SVARs was RUB 17,828. 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. 27. capital expenditure cOmmitments At 31 December 2019 the Group has contractual capital expenditure com- mitments in respect of property, plant and equipment and intangible assets totaling RUB 6,216,727 net of VAT (31 December 2018: RUB 11,489,981 net of VAT). 28. financial instruments Categories of financial instruments 31 decemBer 2019 31 decemBer 2018 Financial assets measured at amortised cost Cash and cash equivalents Trade and other receivables Other non-cur- rent financial assets Total financial assets measured at amortised cost 8,604,102 11,272,602 444,316 428,175 82,453,178 45,505,637 fair values the following table provides the fair value measurement hierarchy of the group’s financial liabilities. Quantitative disclosures of fair value measurement hierarchy for financial liabilities as at 31 December 2019: 31 decemBer 2019 level 1 level 2 level 3 Financial liabilities for which fair values are disclosed Fixed rate bonds 26,387,036 26,387,036 − Fixed rate bank loans 123,200,098 − 123,200,098 31 decemBer 2018 level 1 level 2 level 3 Financial liabilities for which fair values are disclosed Fixed rate bonds 5,662,373 5,662,373 − − – − − − During the reporting periods ended 31 December 2019 and 31 December 2018, there are no trans- fers between Level 1, Level 2 and Level 3 of fair value measurements. 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: 73,404,760 33,804,860 Floating rate bank loans Fixed rate bank loans 26,697,380 93,370,478 − − 26,697,380 93,370,478 financial liabilities measured at amortised cost 31 decemBer 2019 31 decemBer 2018 Interest-bearing loans and borrowings Financial liabilities 31 decemBer 2019 31 decemBer 2018 carrying amOunt fair value carrying amOunt fair value Floating rate long-term bank loans Fixed rate long-term bank loans and bonds Fixed rate short-term bank loans and bonds Trade and oth- er payables Total financial liabilities measured at amortised cost 26,697,380 Floating rate bank loans − − 26,697,380 26,697,380 Fixed rate bank loans and bonds 150,541,257 149,587,134 100,382,909 99,032,851 82,514,982 80,473,264 Total financial liabilities 150,541,257 149,587,134 127,080,289 125,730,231 issuer’s borrowing rate as at the end of the reporting period. The own non-performance risk as at 31 December 2019 and 31 December 2018 is assessed to be insignificant. • The fair value of bonds is based on the price quotations at the re- porting date at Moscow exchange where transactions with bonds take place with sufficient frequency and volume. 68,026,276 19,909,645 54,689,103 56,133,840 205,230,360 183,214,129 The management assessed that the carrying amounts of cash and short-term deposits, trade receiva- bles, trade payables, other liabilities approximate their fair values largely due to the short-term maturities of these instruments. The fair value of the financial as- sets 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 as- sumptions are used to estimate the fair values: • Fair values of the Group’s inter- est-bearing borrowings and loans are determined by using DCF method using discount rate that reflects the O1›STRATEGIC REPORT O2›CORPORATE GOVERNANCE O3›FINANCIAL STATEMENTS O4›APPENDICESLENTA LTD. AND SubSIDIARIESLENTA ANNUAL REPORT AND ACCOUNTS 2019LENTA ANNUAL REPORT AND ACCOUNTS 2019 104 105 Changes in liabilities arising from financing activities 31 decemBer 2018 prOceeds frOm BOrrOwings repayments Of BOrrOwings reclas- sificatiOns Long-term borrowings 106,341,291 35,386,518 (13,000,000) (46,813,928) Short-term borrowings 20,738,998 194,644,286 (193,770,873) 46,813,928 Other 31 decemBer 2019 196,560 4,477 82,110,441 68,430,816 Total 127,080,289 230,030,804 (206,770,873) − 201,037 150,541,257 fair values (continued) 31 decemBer 2017 prOceeds frOm BOrrOwings repayments Of BOrrOwings reclas- sificatiOns change in the accOunting pOlicies due tO applicatiOn Of ifrs 9 (nOte 4) Other 31 decemBer 2018 Long-term bank loans 62,194,204 64,683,000 (5,000,000) (15,799,792) 324,305 (60,426) 106,341,291 Short-term bank loans 44,888,131 67,500,000 (106,871,775) 15,799,792 (90,149) (487,001) 20,738,998 Total 107,082,335 132,183,000 (111,871,775) – 234,156 (547,427) 127,080,289 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. interest rates. As at 31 December 2018 these obligations were represented with long-term borrowing (Note 19) which were redeemed at the end of the reporting period. interest rate sensitivity The following tables demonstrate the sensitivity to a reasonably possible change in MosPrime rates, on that por- tion 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: 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 concentra- tions 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 regis- tered in the Russian Federation. It is the 29. financial risK management The Group’s principal financial lia- bilities, 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 direct- ly 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 over- sees 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 ac- tivities 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. 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 finan- cial 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 af- fected 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 ex- change rates. During the years ended 31 De- cember 2019 and 2018, the Group does not attract any amounts of foreign currency denominated bor- rowings, 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. Whenever possible, the Group tries to mitigate the exposure to foreign currency risk by matching the state- ment 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. change in usd rate effect On prOfit BefOre tax 2018 prOfit Or lOss Oci 75 Bp increase 100 Bp decrease 75 Bp increase 100 Bp decrease Year ended 2019 13.00 % (61,972) Variable rate instruments -11.00 % 52,438 Cash flow sensitivity (196,875) 262,500 (196,875) 262,500 − − − − Year ended 2018 14.00 % (91,491) -14.00 % 91,491 The following table demonstrates the sensitivity to a reasonably possible change in the EUR exchange rate, with all other variables held constant. change in eur rate effect On prOfit BefOre tax Year ended 2019 13.00 % (25,815) -11.00 % 21,844 Year ended 2018 14.00 % (33,453) -14.00 % 33,453 Foreign currency exchange rate rea- sonable 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 finan- cial 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 The range of reasonable possible changes in MosPrime rate was pre- pared for the purpose of market risk disclosures in accordance with IFRS 7 and was based on risk metrics that are derived from statistical data, in particular time series analysis. credit risk Credit risk is the risk that counter- party 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 recoverabil- ity of receivables the Group uses a provision matrix to measure ex- pected 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 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. 31 december 2019 Borrowings Lease liabilities Trade and other payables Total 31 december 2018 Borrowings Trade and other payables Total less than 12 mOnths 1–5 years Over 5 years tOtal 75,038,997 89,522,037 – 164,561,034 5,334,247 20,116,334 28,991,802 54,442,383 54,689,103 – – 54,689,103 135,062,347 109,638,371 28,991,802 273,692,520 less than 12 mOnths 1–5 years Over 5 years tOtal 30,637,465 117,172,663 56,133,840 – 86,771,305 117,172,663 – – – 147,810,128 56,133,840 203,943,968 cash and cash equivalents Credit risk from investing activities is managed by the Group’s treasury de- partment in accordance with the Group’s policy. Investments of surplus funds are made only with approved counterpar- ties. Cash is placed in financial institu- tions, 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 73,128,341 (31 December 2018: RUB 33,539,189). liquidity risk The Group monitors its risk to a short- age of funds using a recurring liquidity planning tool. This tool considers the maturity of its financial assets and lia- bilities and projected cash flows from operations. The Group objective is to maintain a continuity of funding and flexibility through the use of bank over- drafts 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 matu- rity profile of the Group’s financial liabilities at 31 December 2019 and 31 December 2018 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. O1›STRATEGIC REPORT O2›CORPORATE GOVERNANCE O3›FINANCIAL STATEMENTS O4›APPENDICESLENTA LTD. AND SubSIDIARIESLENTA ANNUAL REPORT AND ACCOUNTS 2019LENTA ANNUAL REPORT AND ACCOUNTS 2019106 107 31. events Occurring after the repOrting periOd The Chinese economy and its out- look have been negatively affected by global trade tensions and the emergence of the Covid-19 corona- virus. Measures to contain the virus may impact business operations around the world. Restrictions on the movement of goods and ser- vices could impact the Company’s supply chain. capital management The Group manages its capital to ensure that entities in the Group will be able to continue as a go- ing 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 cap- ital structure through shareholders’ capital contributions or new share issues, return of capital to share- holders as well as the issue of new debt or the redemption of existing debt. The Group is guided in its de- cisions 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 sourc- es. 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 19, lease liabilities less cash and cash equivalents and equity attributable to equity holders of the parent, com- prising issued capital, reserves and retained earnings. net debt of the group comprises of the following: 31 decemBer 2019 31 decemBer 2018 Borrowings 150,541,257 127,080,289 Lease liabilities 32,160,006 – Cash and cash equivalents (Note 16) (33,804,860) (73,404,760) Net debt 109,296,503 93,275,429 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. 30. contingencies Operating environment of the group The Group sells products that are sensitive to changes in general economic conditions that impact consumer spending. Future eco- nomic conditions and other factors, including sanctions imposed, con- sumer 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 84,015 as at 31 December 2019 (31 December 2018: RUB 36,538). 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. The government of the Russian Federation continues to reform the business and commercial infra- structure 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 under- standing 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 1,750,623 (31 December 2018: RUB 975,898). Management continues to monitor closely any develop- ments 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 environmen- tal 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 ma- terial. In the current enforcement climate under existing legislation, management believes that there are no significant liabilities for en- vironmental damage. O1›STRATEGIC REPORT O2›CORPORATE GOVERNANCE O3›FINANCIAL STATEMENTS O4›APPENDICESLENTA LTD. AND SubSIDIARIESLENTA ANNUAL REPORT AND ACCOUNTS 2019LENTA ANNUAL REPORT AND ACCOUNTS 2019 108108 l e n t a a n n u a l r e p Or t a n d a c c Ou n t s 2 0 1 9 O 1 › s t r a t e g i c r e p Or t O 2 › c Or p Or a t e gO v e r n a n c e O 3 › f i n a n c i a l s t a t e m e n t s O 4 › a p p e n d i c e s O 4 › a p p e n d i c e s cOmpany suBsidiaries the company had the following subsidiaries as at 31 december 2019: cOmpany name Lenta LLC Zoronvo holdings Ltd TRK-Volzhskiy LLC TK-Zheleznodorozhniy LLC Beneficial Ownership 100% 100% 100% 100% 110 111 O 1 › s t r a t e g i c r e p Or t O 2 › c Or p Or a t e gO v e r n a n c e O 3 › f i n a n c i a l s t a t e m e n t s O 4 › a p p e n d i c e s list Of cities as Of 19 feBruary 2020 glOssary further infOrmatiOn numBer On the map cities1 numBer Of hypermar- Kets numBer Of supermar- Kets numBer Of distriButiOn centres numBer On the map cities1 numBer Of hy- permarKets numBer Of supermar- Kets numBer Of distriButiOn centres 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 39 40 41 42 43 Achinsk Almetyevsk Arkhangelsk Armavir Astrakhan Balakovo Barnaul Belgorod Biysk Bratsk Bryansk Cheboksary Chelyabinsk Cherepovets Cherkessk Dimitrovgrad Ekaterinburg Engels Grozny Irkutsk Ivanovo Izhevsk Kamensk- Uralsky Kazan Kemerovo Khanty- Mansiysk Kostroma Krasnodar Krasnoyarsk Kurgan Kursk Lipetsk Maloyaro Magnitogorsk Maykop Moscow Murmansk Naberezhnye Chelny Nizhnekamsk Nizhniy Novgorod Nizhniy Tagil Novocherkassk Novokuznetsk 1 1 2 1 2 1 3 2 1 1 1 1 6 3 1 1 5 2 1 2 3 3 1 5 3 1 1 3 5 1 1 2 0 2 1 25 2 2 1 4 2 1 4 0 0 0 0 0 0 5 0 0 0 0 0 0 0 0 0 10 0 0 0 0 0 0 0 9 0 0 0 0 0 0 0 1 0 0 51 0 0 0 0 0 0 1 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 1 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 3 0 0 0 0 0 0 0 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 Novorossiysk Novoshakh- tinsk Novosibirsk Noyabrsk Omsk Orel Orenburg Orsk Penza Perm Petrozavodsk Prokopievsk Pskov Rostov- on-Don Ryazan Samara Saransk Saratov Shakhty Smolensk 2 1 7 1 6 1 5 1 2 2 2 1 2 4 3 4 1 3 1 1 0 0 25 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 St. Petersburg 39 29 Stavropol Sterlitamak Surgut Syktyvkar Taganrog Tobolsk Togliatti Tomsk Troitsk Tula Tver Tyumen Ufa Ulyanovsk Velikiy Novgorod Vladimir Volgograd Vologda Volzhskiy Voronezh Yaroslavl Yoshkar Ola Yurga Zheleznovodsk 2 1 2 2 2 1 2 3 1 1 1 5 5 2 2 1 4 1 1 2 5 1 1 1 0 0 0 0 0 0 0 1 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 1 0 0 0 0 0 0 0 0 0 0 1 0 0 0 0 0 0 2 0 0 0 0 0 0 1 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Unless otherwise specified, the terms ‘we’, ‘us’, and ‘our’ refer to lenta ltd., or where the context allows, to the lenta business more generally. in this annual report, we present certain operating and financial information regarding our hypermarkets and supermarkets, which we define as follows: the 2014 Offering active cardholder average sales density average ticket 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 total sales during the relevant year divided by the average selling space for that year 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, em- ployee 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 av- erage daily in-store availability of all open stores LFL NPS P&L SG&A Shares SKU sq.m ticket total selling space like-for-like Net Promoter Score 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) 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 the number of tickets issued for the period under review Adjusted EBITDA EBITDA adjusted for non-recurring one-off items such as changes in accounting esti- mates and one-off non-operating costs Adjusted EBITDA margin Adjusted EBITDA as a percentage of sales Adjusted EBITDAR Adjusted EBITDAR margin EBITDA like-for-like sales Other metrics Adjusted EBITDA before rent paid on land, equipment and premises leases Adjusted EBITDAR as a percentage of sales Profit for the period before foreign exchange gains/losses, revaluation of financial instru- ments at fair value through profit or loss, reversal of impairment of non-financial assets, other expenses, depreciation and amorti- sation, 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 attribut- able 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 2019 and 2018 was 314 (227 hyper- markets and 87 supermarkets) and 228 (187 hypermarkets and 41 supermarkets) respec- tively. ‘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 borrow- ings 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 amortisa- tion and one-off expenses as a proportion of sales. 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’. traffic Lenta Ltd. and subsidiariesLENTA ANNUAL REPORT AND ACCOUNTS 2019LENTA ANNUAL REPORT AND ACCOUNTS 2019

Continue reading text version or see original annual report in PDF format above