Annual Report 2020 WORKING WITH CARE FOR PEOPLE Contents >> What’s inside report Also in web: Read an interactive version at https://lenta.com/ 01 Strategic Report 02 Corporate Governance Report 03 04 Financial Statements Appendices 4 At a glance 46 Board of Directors 86 Board of Directors and other officers 152 Companies subsidiaries 5 Financial and Operational Highlights 50 Senior management team 88 Management report 153 List of cities as of 31 December 2020 6 Chairman’s statement 54 Corporate governance report 92 Independent Auditor’s Report 155 Glossary 8 Chief Executive Officer’s Review 64 Board committees 98 Consolidated statement of financial position 156 Further information 12 Strategy overview 13 Market overview 16 Operating review 66 Audit committee report 70 Nomination committee report 74 Remuneration Committee Report 24 Corporate Social Responsibility 80 Operation and capital expenditure committee report 32 Chief Financial Officer Review 36 Risk management as at 31 December 2020 100 Consolidated statement of profit or loss and other comprehensive income for the year ended 31 December 2020 102 Consolidated statement of cash flows for the year ended 31 December 2020 104 Consolidated statement of changes in equity for the year ended 31 December 2020 106 Notes to the consolidated financial statements for the year ended 31 December 2020 157 Cautionary statements 158 Notes >>01 Strategic Report 4 At a glance 5 Financial and Operational Highlights 6 Chairman’s statement 8 Chief Executive Officer’s Review 12 Strategy overview 13 Market overview 16 Operating review 24 Corporate Social Responsibility 32 Chief Financial Officer Review 36 Risk management OUR STRATEGIC OBJECTIVE IS TO BECOME THE BEST CONSUMER-FOCUSED OMNI PLAYER IN RUSSIA FOR FOOD AND HOUSEHOLD RELATED NEEDS. At a glance >> Lenta is one of the leading Russian retailers and the largest hypermarket operator. and 254 hyper markets 139 super markets 13 DCs 16+ mn Lenta cardholders 89 cities 50,000+ employees Strategic Report Corporate Governance Report Financial Statements Appendices Financial and Operational Highlights >> Financial >> Retail sales (RUB, bn) +7.3% Free cash flow (RUB, bn)– 22.7 Gross profit marging (%) 22.9% EBITDA Margin 10.1% Operational >> Loyalty card holders +16.7% Stores +13 Online sales +566% 4 4 5 5 LENTA. Annual Report 2020.01020403 Chairman’s statement >> >> Alexey Mordashov, Chairman Dear fellow shareholders, The year 2020 has been a year like no other for Lenta, just as it has been for the entire world. The Covid-19 pandemic brought with it many new challenges, and I am proud of how the entire Lenta team has navigated the uncertainty and still delivered strong operational and financial results. As Russia’s leading hypermarket chain, we recognised early on that Lenta has an important role to play in providing a safe shopping experience for our customers in these unprecedented times. The Covid-19 Response Team we assembled in March provided us with the insight needed to quickly adapt to the ever-evolving environment, and our unwavering commitment to uphold the safety and well-being of our customers and employees has enabled the company to weather the storm and emerge more resilient and efficient than before the pandemic. Industry transformation accelerates >> Strategic Report Corporate Governance Report Financial Statements Appendices Strategy In 2020, we made important progress in preparing our new Strengthening Lenta’s management team >> growth strategy to support Lenta’s One of the most important changes between our commercial and transformation. at Lenta in 2020 was the appointment consumer activities. The changes of Vladimir Sorokin as the Company’s will enable us to further excel at Our strategic objective is to new CEO in September. Vladimir creating the most relevant сustomer become the best consumer- brings with him decades of leadership value proposition and become a focused omni player in Russia experience in both Russian and truly customer-focused retailer whilst for food and household related international retail and FMCG strengthening our strategic and needs. Our resilient hypermarket companies, most recently as Deputy transformation capabilities as Lenta business will serve as a strong CEO – Commercial Director and begins to embark on implementing its base for the next chapter of member of the Management Board new strategy. Lenta’s development, as we at Magnit, and prior to that General enhance the customer value Director of Perekrestok Supermarkets As Chairman of the Board, I am proposition (CVP) across each of (X5 Retail Group). the formats in which we operate. confident these changes to our management team will support the The Board of Directors strongly development and implementation of As we pursue our new strategy, believes that Vladimir’s extensive our new growth strategy. we aim to grow our market share professional experience, many and become the most innovative successes, and stellar reputation in and client-centric retailer in Russia. the Russian food retail sector make At the same time, we will work on him the right person to lead Lenta improving the efficiency and agility going forward, building upon our of the business. already very strong foundation. We look forward to presenting In addition, we further strengthened this refreshed strategy to our our senior management team and shareholders and the broader organisational structure in January investment community in 2021 by creating two new structural March 2021. units within the Company. These changes shall ensure faster decision making and better coordination Re-domiciliation to Russia >> Outlook Another important strategic initiative having the Company administered in Lenta’s strong operational which Lenta embarked upon in Russia rather than Cyprus will be more base, robust performance in 2020 was the re-domiciliation of our efficient and less expensive. 2020, refreshed strategy, and a management company in Russia, in reinforced executive management the Special Administrative Region Beyond practicality and risk team give me the confidence that (SAR) of Kaliningrad. This process, mitigation, it is also in the interest the Company is on the right track Even before the pandemic began, operational execution. These shifts and accelerating polarization which was completed on the 17th of of our shareholders, thanks to and well positioned for continued the Russian retail sector had been have greatly accelerated as a result between low- and high-income February 2021, is beneficial for several the potential application of 5% growth. undergoing a major transformation, of Covid-19, in particular the rapid households, reinforcing the relevance reasons. withholding tax rate on dividends to with customer experience and digital adoption of online food shopping, of the hypermarket format, but also non-Russian shareholders, exemption Rest assured, we will remain channel development becoming where Lenta made remarkable promoting the rapid growth of “no Firstly, this reflects the company’s of profits of controlled foreign focused on making the right the driving forces of growth and progress in 2020. innovation. Organic growth as the frills” grocery stores. This presents Lenta with a number of promising efforts to align its corporate structure companies and capital gains on sale operational and strategic with its now having a predominantly of Russian and foreign subsidiaries, decisions for the long-term benefit success driver has given way to At the same time, there is a noticeable opportunities. Russian shareholder base, while cost subject to conditions. of all Lenta’s stakeholders. competition in new formats and trend of decline in disposable income advantages will also be achieved as 6 6 7 7 LENTA. Annual Report 2020.01020403 Chief Executive Officer’s Review >> >> Vladimir Sorokin, Chief Executive Officer Dear shareholders, I’m pleased to present Lenta’s 2020 Annual Report; my first as CEO of the company. I have had the privilege of working in the FMCG and food retail market for several decades now, and I truly believe it is one of the most interesting and important sectors of the economy. In times like these, when the entire world is affected by the Covid-19 pandemic, the responsibility of food retailers to provide safe and reliable options for consumers has become more vital than ever. Since starting in this role in September 2020, I have had the opportunity to visit many of Lenta’s hypermarkets, supermarkets and our distribution centers across the country and meet many of my new colleagues. I have been very impressed by what I have seen and the people I have met. Lenta’s superb employees and excellent corporate culture make our stores a great place to work and an even better place to shop. Covid-19 response >> Lenta’s response throughout the year to the Covid-19 pandemic situation has been nothing short of fantastic, always keeping the safety of our customers and employees as our top priority. 8 8 By keeping our customers safe and always giving them options to shop in ways most convenient for them we also succeeded in keeping their trust in these challenging times: whether it be at our hypermarkets, our supermarkets, or using our online options. We have spent over RUB 1.5 billion on Covid-19-related safety precautions in 2020 Strategic Report Corporate Governance Report Financial Statements Appendices When the Covid-19 pandemic broke out in early 2020, we promptly assembled a Covid-19 Response Team to closely monitor the situation and advise on appropriate measures to ensure the safety and well-being of our employees and customers. Overall, we have spent over RUB 1.5 billion on Covid-19-related safety measures to empployees and customers in 2020. These investments allowed us to keep our supply chain running and our stores open in full compliance with government guidelines and regulations. This is what allowed both our customers and colleagues to feel safe shopping and working at Lenta and has resulted in more customers making Lenta their store of choice and increasing their spend in our stores. 2020 performance >> While this was a most unusual Meanwhile, like-for-like sales growth year, to say the least, it was also a remained strong at 5.4% in 2020, with year in which we saw every single average ticket growth of 11.6% and employee in Lenta stand up and customer traffic decline of 5.5%. face the challenges and together, we leveraged new opportunities to Hypermarket performance remained enhance and expand our business. As resilient in 2020, thanks to our a result, Lenta retained its undisputed competitive range of products, leadership position as Russia’s leading attractive pricing, and safer stores. hypermarket retailer; it attracted This resulted in Lenta gaining a bigger new customers, and it achieved share of our most loyal customers a remarkable Net Promoter Score (NPS) of 37%, which demonstrates our wallets. appeal to customers. In 2020, Retail Sales increased by 7.3% to RUB 438 billion despite changing customer behavior. This increase was mainly driven by an 11.6% rise in average ticket for both Hypermarkets and Supermarkets and partially offset by a 3.9% decrease in the number of tickets. Our supermarket’s turnaround continued in 2020 and delivered strong results,allowing us to take make further investments into this format. In 2020, Lenta added 13 stores on a net basis, bringing the total number of retail stores to 393 and total selling space to 1.52 million square meters as of the end of the year. We also opened our thirteenth distribution center in the Leningrad region to supply the company’s stores in St. Petersburg and the Northwest. Like-for-Like Sales growth remained strong at 5.4% in 2020, with average ticket growth of 11.6% and customer traffic decline of 5.5% 9 9 LENTA. Annual Report 2020.01020403 Lenta’s online offering continued to add value to our customers’ lives in 2020. Over the course of the year, we made robust progress in expanding the geographic coverage of our own Lentochka express delivery service and our new Click & Collect program. By the end of 2020, the Company’s online services were available in 88 Russian cities compared to 27 cities a year earlier. Lenta has also created partnerships with 36 delivery companies to fulfill online orders from its extensive store network. As a result of the geographic expansion, online sales and online orders grew by 566% and 716% respectively, to RUB 6.3 billion and 3.2 million orders. Most importantly, our growing online channels are not cannibalizing our brick-and-mortar sales, but rather providing incremental revenue streams. Lastly, towards the end of the year, we launched a completely refreshed loyalty programme, leveraging advanced data analytics to customize special offers for individual customers. So far, we have been pleased by its success in deepening customer engagement and loyalty. It is already delivering tangible results with the number of new enrollments significantly above expectations. Lenta’s refreshed strategy >> Lenta’s core strength as the leading fast-growing top-5 retailer in Russia, hypermarket retailer in Russia is based Lenta must become a true multi- on a deep understanding of the key format, omni-channel player. factors that affect our customers’ choices every day. This includes having an attractive and relevant assortment, a commitment to high quality standards, and a culture of outstanding service. Now, we will further build upon these strengths as pursue the next chapter of Lenta’s growth story. The new We have already started experimenting with a discounter format in 2020, and further pilot stores will be tested. strategy that we will unveil in March In addition, I believe that online food 2021 will take us closer to our clients retail also represents a huge new and enhance the CVP across all of our area of opportunity for Lenta, if done store formats and enable us to pursue smartly and efficiently. In fact, Lenta new growth opportunities. is uniquely positioned to become one of the dominant players in Russian While Lenta’s resilient hypermarket online food retail over the next format will remain the core of the several years. business, we fully appreciate that in order to retain our place as a 13 stores was added on a net basis in 2020 Total number of retail stores – 393 Total Selling Space – 1.52 million square meters >> We have already started experimenting with a discounter format in 2020, with pilot stores opened in Novosibirsk and Baranaul 10 10 Strategic Report Corporate Governance Report Financial Statements Appendices Looking forward >> The retail sector presents new challenges every day, but also many new opportunities. We at Lenta are determined our strategy will be informed and tested by the pandemic, as Lenta emerges a stronger and more efficient company. We will be setting some ambitious goals for Lenta and I look forward to working with our great team to deliver strong operational results and good returns for our shareholders. 11 11 LENTA. Annual Report 2020.01020403 Strategy overview >> Market overview >> Strategic Report Corporate Governance Report Financial Statements Appendices >> We look forward to presenting this refreshed strategy to our shareholders and the broader investment community in March 2021. >> In 2020, we made important progress in preparing our new growth strategy to support Lenta’s transformation. Our strategic objective is to become As we pursue our new strategy, we aim the best consumer-focused omni to grow our market share and become player in Russia for food and the most innovative and client-centric household related needs. Our resilient retailer in Russia. At the same time, we hypermarket business will serve as a will work on improving the efficiency strong base for the next chapter of and agility of the business. Lenta’s development, as we enhance the CVP across each of the formats in We look forward to presenting this which we will operate. refreshed strategy to our shareholders and the broader investment community in March 2021. Strategic priority Initiatives Actions Results Turnaround of the core business > New CVP across all formats > Online development Expansion and new formats > Convenience concept and pilots > Hypermarkets CVP development > Supermarkets CVP development > Launch of the new loyalty programme > Online presence in all cities of operation > Discounter pilot > Research new retail formats and develop concepts > Total Sales growth of 6.7% > Retail sales increase by 7.3% > Hypermarket retail sales up 7.0%. > Supermarkets retail sales growth of 9.8% > Online growth of 566% Organisational transformation to support the business growth > Introduction of organizational transformation programme > Strategic projects portfolio > Establishment of Innovation Center The macroeconomic environment and Covid-19 pandemic outbreak put a lot of pressure on Russian consumers’ budgets in 2020. Looking for saving opportunities and the best promotions continued to be the core pattern of consumer behavior. This provided the impetus to the expansion of low cost and no frills formats across the country. The Covid-19 pandemic also fostered the delivery and online services development, which, in turn, gives additional opportunities for hypermarkets concepts. GDP, % ‘17 ‘18 ‘19 ‘20 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 2017 2018 2019 2020 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q Real GDP 0,5 2,5 1,8 0,9 1,9 2,2 2,2 2,7 0,5 0,9 1,7 2,3 1,6 -8,0 -3,4 Household income, % ‘17 ‘18 ‘19 ‘20 Russian GDP recorded decrease of 3.1% in 2020 as a result of restrictive measures introduced to combat Covid-19 pandemic and contraction of global demand for energy supply1. Retail sales in the Russian Federation slowed down by 4.1% in 2020 compared to 2019 to Rub 33.5 billion with the decline in food and non-food retail sales by 2.6% and 5.2% respectively1 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 2017 3Q 2018 2019 2020 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q Real income -1,3 -1,1 1,0 0,2 0,0 -0,8 -1,8 1,0 3,1 1,1 1,8 -8,0 -4,3 -1,5 1 Source: Rosstat 12 12 13 13 LENTA. Annual Report 2020.01020403 CPI and food inflation, % ‘17 ‘18 ‘19 ‘20 Real disposable income declined by 3.5% amid the pandemic crisis and inflation recorded 4.9%, which is the highest rate from 2016, with food inflation of 6.7%1 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 2017 2018 2019 2020 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q CPI food 3,8 4,1 2,8 1,3 1,0 0,4 1,6 4,7 6,1 5,9 5,0 3,5 2,2 4,3 3,1 6,7 CPI 4,6 4,2 3,4 2,6 2,2 2,4 3,0 4,3 5,2 5,0 4,3 3,4 1,3 2,6 2,9 4,9 Food retail sales, % ‘17 ‘18 ‘19 ‘20 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 2017 2018 2019 2020 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q Real food retail sales growth -2,3 0,3 2,3 3,5 1,9 2,6 1,0 1,9 1,6 1,7 0,8 1,6 3,7 -7,0 -2,8 -4,5 1 Source: Rosstat 14 14 Strategic Report Corporate Governance Report Financial Statements Appendices Competitive environment and customer trends >> >> The competition between retailers remained intense during the year, as the need to adapt to rapidly changing customer habits has come to the fore. Prices remained an important factor for the consumers to choose a grocery store for shopping whilst the Covid-19 pandemic forced people to opt for one-stop-shop with wide varieties of both food and non-food goods. The lockdown introduced in April Online food retail sales increased by 2020 across the country entailed 314% in 2020 compared to 2019 and the skyrocketing growth of online and delivery services and spurred accounted for Rub 135 billion versus Rub 43 billion in previous year.1 retail players to actively develop this sales channel, either their own or in partnerships with delivery companies. Given severe economic situation, hard discounters are continuing to grow outpacing the total market and top players are experimenting with no frills format. The Russian food retail market is expected to further consolidate with the share of top-3 players to reach ~32% by 2025.2 Lenta is well-positioned to meet changing consumers’ preferences and market challenges. The Company puts efforts into enhancing its offer, introducing wider choice and higher quality fresh products and private label to get a competitor advantage. In the previous year, Lenta also started to exploit the potential of the on-line market with the projects that do not require heavy capital investments, aiming to strengthen its position in the new fast-evolving business model. In addition, the Company started experimenting with no frills concept searching for the winning format to unveil further growth opportunities. 1 InfoLine 2 Company’s estimation Online food retail sales increased by 314% in 2020 compared to 2019 and accounted for Rub 135 billion versus Rub 43 billion in previous year The Russian food retail market is expected to further consolidate with the share of top-3 players to reach ~32% by 2025 15 15 LENTA. Annual Report 2020.01020403 Operating review >> 2020 was the year of unprecedented challenges for the Russian retail sector, as a whole, and for Lenta in particular. The Company closed the year on a strong footing, with solid retail sales growth across its hypermarket, supermarket, and online formats. We are proud that we managed to achieve these results while maintaining our unwavering commitment to the safety and well-being of our customers and employees. In 2020 Lenta continued to grow We have also started piloting a new across all key regions. We entered one “discounter” format, which is just one new city and now have a presence in example of our initiatives to seize 89 cities across Russia. growth opportunities throughout the >> Russian food retail sector. Lenta has emerged as undisputed leader in the hypermarket segment Our online channels grew rapidly and in serving “big basket” shopping during the year. By the end of 2020, missions. Our core hypermarket Lenta’s online services were available format proved resilient during Covid-19 in 88 Russian cities compared to 27 pandemic as it gained a bigger share cities a year earlier. We believe that of wallet for our most loyal customers Lenta has a unique advantage, which cohort. During the year, we have been adjusting the CVP for all of our formats to better meet changing customer preferences. can fuel further growth. Namely, each of our hypermarkets can serve as a micro fulfillment center (MFC) offering more than 30,000 SKUs to our online customers for delivery and click-and- collect. Not only does Lenta have an industry leading geographic scope for its online services but the model of using hypermarkets as MFCs required very little additional CapEx when compared to other players’ “dark We believe that our efficiently store” warehouses. operated hypermarket format has the potential to be the source of financing Additionally, during 2020, Lenta for further market share gain. continued to implement a series of initiatives to increase the distinctive In 2020, our retail sales increased by 7.3% to RUB 437.5bn (2019: RUB 407.8 bn) despite changing customer behavior. Our LFL sales growth remained strong at 5.4% with average ticket increase of 11.6%. Online sales and online orders grew by 566% and 716% respectively, to RUB 6.3 bn and 3.2 million orders. Strategic Report Corporate Governance Report Financial Statements Appendices Covid-19 pandemic >> >> Since March 2020, the Covid-19 pandemic has had a significant impact on communities and businesses throughout Russia. Lenta has prioritized the safety and well-being of its customers and employees throughout this challenging period. The Company was quick to establish Our people were provided with safety a business-wide Covid-19 Response equipment such as masks, gloves, Team whose focus since mid- and sanitizers. We also equipped March through the year has been locker rooms with bacterial lamps. on coordinating Lenta’s effective Temperature and health checks response to the pandemic. became mandatory in our offices, stores and DCs. We changed the In response to various measures planning of scheduling to minimize implemented by authorities in March, contact between shifts in stores. consumers started to stock-up. On We also developed an action plan some days, we saw sales up more to mitigate a negative impact of a than 70%, with a great demand for temporary disruption on our operations. essential dry food and non-food items. As an example, sales of canned meat rose 10 times year-over-year, canned fish – 5 times, sales of grains were almost 7 times higher compared to the previous year. Lenta has worked closely with its suppliers throughout the crisis to ensure shelves remained sufficiently stocked with both food and non-food items during this period of increased demand. For our customers we equipped the stores with sanitizers, floor markers to keep the social distance and protective screens at cashiers and culinary section. We gave away single use masks in all our stores to ensure our customers shop safely. We also launched social initiatives to support vulnerable group of customers during this period. This included Comprehensive health and safety free delivery, volunteer and charity measures were introduced across programmes, and additional discounts Lenta’s business to ensure the ongoing to medical workers. We offered our safety of colleagues and customers in elderly shoppers additional discounts, On some days, we saw sales up more than 70%, with a great demand for essential dry food and non-food items. As an example, sales of canned meat rose 10 times year-over-year, canned fish – 5 times, sales of grains were almost 7 times its stores. the option to shop at specific hours, and dedicated separate cash registers. higher compared to the previous year Our supermarket turnaround attractiveness of Lenta’s offering to In 2020, our retail sales increased by The Company off-sited employees continued delivering robust results customers. One result was that the . 7.3% to 8B 437.5bn (2019: B 407havior. Our from our offices to remote work and Whilst the first wave Covid-19 during 2020 and we took additional number of Lenta loyalty card holders LFL sales growth remained strong at around 95% of them worked from pandemic had a temporary impact steps to invest further into this format. increased by 16.7% to over 16 million 5.4% with average ticket increase of home. Front-line workers above 55 on store traffic during the lockdown We are confident in the growth people. opportunities in the supermarket segment. 11.6%. Online sales and online orders grew by 566% and 716% respectively, to RUB 6.3 bn and 3.2 million orders. years old were offered a change period, Lenta saw a significant to their job positions to minimize increase in average ticket size across exposure to the risk of infection. both hypermarket and supermarket formats. 16 16 17 17 LENTA. Annual Report 2020.01020403 The demand that we saw in March put a lot of pressure on our commercial department, operations and logistics. As a result, we made the security and efficiency of supply-chain a top priority. When people started to stock-up, our logistics and operations departments quickly reacted to minimize the risk of out of stock-outs by quickly implementing corrective measures. For example, we used single pallets to deliver goods to our stores. This measure allowed us to refill promptly our shelves with the most demanded items. Additionally, we immediately increased inventory for popular products to last 6 to 8 weeks. The second wave of the Covid-19 pandemic continued to impact customer behavior during the fourth quarter of 2020. Lenta’s retail sales in Q4 2020 increased by 5.7% compared to Q4 2019. This was driven by a 12.4% growth in the average ticket size, supported by an increase in the number of items per receipt and a noticeable trend of trading up, but this was partially offset by a 5.9% decrease in customer traffic. Hypermarket performance remained resilient in the current environment, thanks to our competitive range of products, attractive pricing, and safer stores; while the further development of Lenta’s online sales played an Overall, our proven logistics important role in supporting growth. By infrastructure and large inventory the end of 2020, we had expanded our capacity of our hypermarkets allowed online presence to all 88 cities in which us to maintain a high level of on-shelf we have hypermarkets in Russia. Lenta’s retail sales in Q4 2020 increased by 5.7% compared to Q4 2019. This was driven by a 12.4% growth in the average ticket size, supported by an increase in the number of items per receipt and a noticeable trend of trading up, but this was partially offset by a 5.9% decrease in customer traffic availability. Additionally, we were able to carry out all operations using our own human resources so we did not need to hire extra labour. Our analysis of the customer behavior suggests that the consumers chose fewer shops for their grocery purchases after the authorities implemented restrictive measures. However, they significantly increased their average spending. Following the easing of lockdown restrictions, customer traffic in July showed signs of recovery when compared to April and May, while growth in average ticket size has eased. 18 18 Strategic Report Corporate Governance Report Financial Statements Appendices Taking Care of our Customers >> Along with creating the safe We collaborated with famous environment in all our stores, we took culinary bloggers and influencers care of our customers during the to broadcast various entertaining Covid-19 pandemic. We focused on shows on our Instagram page. We engaging and inspirational customer supported cooking at home by communication via all available launching a dedicated app with channels. recipes from Lenta Magazine. While Lenta Magazine is available in a Realizing that most of our clients restricted number of cities where spent their time at home, we provided Lenta is present, the app can be used various entertaining activities on our country-wide. web site and our official page on the Instagram. The main trend of the year that we named homing predetermined the content of our communication with the customers. We helped our customers who worked from home to keep their kids busy with activities in online camp Series of Adventures (Lenta Prikluchenyi). The activation engaged over 10.5 thousand children and lead to a 27 million Rubles sales uplift in our stores. >> We helped our customers who worked from home to keep their kids busy with activities in online camp Series of Adventures (Lenta Prikluchenyi). The activation engaged over 10.5 thousand of children and lead to Rub 27 mn sales uplift in our stores Customer value proposition >> Champion offer During the year, we have been In 2020, we pooled our efforts in further We put the Champion offer working on enhancement of our development of these categories and as a combination of relevant customer value proposition that launched some initiatives to improve assortment, unique private embraces champion offer, unique the efficiency of our assortment. labels ranges, continuous shopping experience and the highest individualization. We conducted a comprehensive study of our customers and identified 9 behaviour segments and 9 shopping missions that served as the basis for our updated CVP across all the formats. A wide product range and affordable prices are the key reasons for The Assortment Tailoring project aims at creating the best in class varieties in each of our stores that is relevant for each specific location. customers to choose Lenta. Our clients We piloted this approach in 3 stores, also appreciate the high quality of analyzed the efficiency of the ranges goods in our stores, especially fruits we sell and rotated approximately and vegetables, meat, fish, bakery 350 SKUs in 5 categories. This resulted and culinary. in 2.3 p.p sales increase in piloted categories and growth of customer satisfaction against control stores. We will develop this approach further to create most relevant ranges for our customers in all locations. goods innovations and proper price perception. 19 19 LENTA. Annual Report 2020.01020403 Private Label >> Unique Shopping Experience >> >> Our Private Label range is one of our key differentiators 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. We have seen a steady sales growth in this category, with private label sales accounting for 14.7% of our retail sales for 2020 and LFL sales up by 7.9%. In many respects, this strong performance has been underpinned by a deeper trust from our customers, who are increasingly seeking better value-for-money. In 2020, we continued development of our main and the biggest own brand LENTA along with 365, DOLCE ALBERO, LITTLE TIMES, BONVIDA, HOME CLUB, GIARDINO CLUB, ACTIWELL, BIGGA and LENTEL. specifically for the Company, as well as an array of deli and healthy products that are free from sugar, GMOs and gluten. Each brand promotes its own philosophy and value proposition. In the reported period, we introduced about 1,100 new private label SKUs and by the year-end, the portfolio of our Lenta Premium caters for the most own brands comprised 7,867 SKUs. demanding customers – a premium standard for those who value service Total sales of private labels increased quality and aesthetics, follow food by 10.3% and LFL sales grew by 7.9%, trends and are looking for new outpacing the growth of branded goods. gastronomic experiences. Our private labels assortment covers all customer categories and offers outstanding value-for-money. The products do not compromise on the quality of their branded counterparts and are produced for Lenta by leading Russian and international producers. New sub-brand product ranges comprise Greek extra virgin olive oil, stuffed olives from Spain, seasonal fruit and vegetables grown Lenta ECO offers healthy, chemical-free food and non-food products for the whole family. Promoting the principle of bare essentials, this category includes gluten, sugar and GMO free products as well as eco-friendly household chemicals, shampoos and shower gels. 20 20 Total sales of private labels increased by 10.3% 7.9%, and LFL sales grew by outpacing the growth of branded goods. Designed in a joint effort with seed producers, agronomists and farmers, Lenta Green offers fresh fruit and vegetables grown as nature intended, with all due love and care. Lenta Kids is a lineup of healthy treats for kids aged between 3 and 12. The year ahead, we will focus on developing unique private labels products that can be purchased only in Lenta stores. Strategic Report Corporate Governance Report Financial Statements Appendices Our goal is to make our stores the best place to shop. In 2020, we started working on a new production. Fruits and vegetables, supermarket concept to make our culinary and bakery, confectionary stores of this format more convenient and wine are furnished with new store and ensuring perfect representation equipment to ensure attractiveness of goods. and proper presentation of each category. We introduced a number of tactical changes to make daily shopping more convenient. The concept includes new services, such as a café, coffee machines and juicers. We changed the standard layout in order to meet different client’s needs. The layout design is made for daily shopping trips. All sections are connected with one another to give Lenta customers the ability to choose from an excellent range of produce, with a strong emphasis on fresh food and own Supermarkets in updated concept were opened in ex-SPAR premises and Moscow stores launched within the long-term agreement with ADG Group. >> In 2020, we started working on a new supermarket concept to make our stores of this format more convenient and ensuring perfect representation of goods Highest individualization >> We enhanced the processing of data In December, we launched a totally derived from our loyalty cards. With refreshed loyalty programme, which some 97% of transactions in our stores uses advanced data analytics to being made with Lenta loyalty cards, customize special offers for individual this is a valuable source of information customers. We reconsidered our about customer preferences. approach to loyalty and offered our 97% of transactions in our stores being made with the Lenta loyalty cards We focused on the improvement of our analytical models and the organisational structure of a dedicated department to align conclusions we derive from the customer data and the business decisions we make. customers more than just a discount – we invited them to a club where they gained access to numerous benefits – personalized discounts, individual offerings, exclusive goods and special offers from our partners. The essence of the new approach is 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 in deepening customer engagement and loyalty. It is already delivering tangible results with the number of new enrollments significantly above expectations. We segment our customers depending benefit from the programme. During 2021, we will continue to 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 manner. We have been pleased by the success of the new loyalty programme work on our best-in-class loyalty programme to increase the extent to which we tailor our offer, and create reasons to come to Lenta. 21 21 LENTA. Annual Report 2020.01020403 Online >> Innovations >> Strategic Report Corporate Governance Report Financial Statements Appendices 270+ participants from Europe, Israel, Asia and USA. 15 international teams presented their innovative solutions to Lenta management and, as a result, 7 promising projects were selected by an expert jury for a detailed assessment By the end of the year, the company served online customers across all 88 cities where it operates, our total online sales amounted RUB 6.3 billion, 566% which represented a growth compared to 2019 Logistics >> We are proud to have well- established, sophisticated logistics that ensures the timely delivery of goods to our stores across Russia. We operate 13 distribution centers in strategically chosen locations. We made significant progress Click & Collect service launched in developing our fast-growing in June 2020, operating in 88 cities online sales channels in 2020. Lenta covering the entire store network by possesses a unique set of assets the end of 2020. to win in the Russian online grocery market. These are wide geographical presence, significant online customer traffic and a strong team. In 2020 we made the most out of these advantages. By the end of the year, the Сompany served online customers across all 88 cities where it operates: our total online sales amounted 6.3 billion Rubles, which represented a 566% According to internal analysis, our online channels did not cannibalize offline store sales but, rather, added incremental and new revenues. growth compared to 2019. We are committed to further developing our online offering in 2021 We continued to develop our own through Lentochka, Click & Connect express delivery service, Lentochka, and cooperation with our delivery which at the end of the reporting partners, such as Sbermarket and period operated in 80 cities across iGooods. We have received positive Russia with more on the way. feedback from our customers and We have also created partnerships feedback to improve purchases via with 36 delivery companies to fulfill our app and website. we are constantly incorporating that online orders from our extensive store network. the distribution centre itself measures supply over 100 Lenta stores across approximately 70,000 m2 overall, its 20 locations in the North-Western territory covers about 20 ha, with a region, including supermarkets and reserved area allowing room for the potential expansion of another 10,000 sq.m of warehouse capacity. hypermarkets. The centre meets the latest requirements of the food retail industry, accommodating both a preparation area for ready- to-cook meals and dishes and Over 1,500 producers supply their products to the multitemperature warehouse, including those from the Leningrad Oblast. The Company continued to work on a multitemperature area with six the optimization of its logistics. In separate compartments, including the reported year, we opened our ambient, chilled, and frozen ones. The new distribution centre will enable thirteenth distribution centre located the Company to support its further in the Leningrad region. The distribution centre has created expansion plans and centralise the 650 new jobs, with all the necessary management of its own production >> In line with our priorities for 2020, we implemented various innovations and undertook a number of experiments to find solutions that will ensure our growth and support our transformation. To manage the innovation process, we Later , in October, we initiated the established a dedicated Innovations scouting of international startups in Center that is to search, test and collaboration with GeberationS. More implement innovative solutions to than 270 participants from Europe, enable us to increase the efficiency of Israel, Asia and USA applied for the business and advance towards a selection. unique shopping experience. In April, we cooperated with RetailTech to select innovative solutions for store safety. We collected 142 applications from Israel, Singapore and China and piloted several technologies in our stores in 2020. We plan to review the pilot results in the next few months and make a decision on their further roll out. After the qualifying round, 15 international teams presented their innovative solutions to Lenta management and, as a result, 7 promising projects were selected by an expert jury for detailed assessment. The Lenta team will further discuss potential cooperation with them. Selected projects include a store navigation solution, an app for shoppers with personalized prices and mobile payments, an innovative material for a cooling system in online delivery, technology for the extension of shelf life of goods, innovative packaging and a robot for positioning products, amongst others. Looking ahead Lenta is on the right track and well positioned for continued growth. We will remain focused on growth opportunities in all our formats and will test and develop new concepts to become the best omni player covering food and household The new distribution centre will office and supporting infrastructure to facilities to improve product quality, related needs. supply the Company’s stores in St. ensure the smooth running of the site. meet growing customer demand in Petersburg and the Northwest. While The new facility has the capability to this segment and speed up delivery. 22 22 23 23 LENTA. Annual Report 2020.01020403 Corporate Social Responsibility >> Ethics Policy >> >> Lenta’s Ethics Policy sets out the standards and rules of business conduct. It defines our obligations to behave ethically and exhibit the high standards of behaviour we expect of our people. The policy sets the basis for the way we run our business and formulates pointers for the composition of our CSR agenda. These include: > upholding the integrity and Its work is overseen by the Audit good name of the Company in developing long-term relationships Committee and the Board. Failure to comply with the Ethics Policy may with customers, communities and lead to disciplinary action, including suppliers; dismissal. > strict prohibition against directly or indirectly offering, paying, soliciting or accepting bribes or kickbacks in any form; > no conflicts between personal interests and those of the Company; > abiding by Lenta’s corporate rules and standards, which impose stricter ethical restrictions on 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 approach to stakeholders’ engagement builds upon the employees than those provided in principles of transparency, current legislation partnership and ethical behaviour to ensure sustainable development of >> 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. 24 24 Strategic Report Corporate Governance Report Financial Statements Appendices Employees Customers Investors Media Government authorities Suppliers Local communities > communications programme, including annual reports, quarterly trading updates and financial results disclosures, Capital Market Day, roadshows and regular meetings Sustainable profitable growth, strong corporate governance and transparency Way of engagement > Omni channel employee communication > Regular business updates > Training and development platform > The Ethics Committee > Customer- centric programmes > Tailored offers and loyalty programme > Various sales channels Ethics Committee Stakeholder expectations > Respect for labour legislation and human rights > Fair salary,safe working conditions, rewarding > Recognition and development opportunities > Wide choice of qualitative goods at affordable prices > Unique shopping experience > Attractive promotions > High level of service Value for the business Unique shopping experience, attraction of new customers and retention of loyal ones. Recruiting, development and retention of high potential employees who shape the client- centric culture of the Company and make our stores the first customer choice > Established platform for regular communication embracing various formats of the information exchange > compliance with the legislative requirements > Responsible use of labour and environmental Resources > Partnerships with local suppliers > Fair, open and ethical collaboration with business partners > Regular meetings and updates > Common profitable growth programme > Cooperation on social, economic and environmental initiatives > cooperation focused on addressing specific social needs > Availability of the Company’s official representatives to comment on relevant issues and state of the business > Regular news flow from the Company A reliable, responsible partner contributing to regional social and economic development, creating jobs for locals > Long-term – partnerships aimed at profitable growth > Timely payment Support of the business growth Distinctive image of the Company in front of the target audiences, Support of the regional expansion of the Company and development of local varieties of goods. High level of the availability of goods, fair prices for customers, profitability of the business > Meeting the needs of people, support to economic development of the region > Respect for environmental and social obligations Improvement the quality of life of local residents, social partnerships Corporate Social Responsibility >> >> We are committed to conducting our business in a responsible way to ensure its sustainable development. The principals of corporate social responsibility are incorporated into all the processes within the organization. In 2020, we started working on our ESG strategy to align the Company’s efforts with the best practices in both internationally and the Russian market and to precisely report on actions undertaken by the Company within the sustainability agenda. Impact area People Planet Society Initiatives Employee engagement Recruitment and career development Store and Specialist Staff Training Remuneration Promoting Health and Safety Diversity Waste reduction Tackling plastic pollution Pricing and Customer Satisfaction High quality of goods Local Sourcing Supporting Local Communities >> In the reported year, we focused our efforts on the company’s impact in three areas of our CSR agenda: people, planet and society. 25 25 Established in 2011, the Company’s the Company. We strive to meet the Ethics Committee regularly reviews expectations of all the stakeholders Our intention is to approve and announce the strategy in the first half complaints and non-compliance. and, thus, add value to the business. of 2021. LENTA. Annual Report 2020.01020403 Strategic Report Corporate Governance Report Financial Statements Appendices People >> >> Our people are the most valuable asset of the business. We treat our employees with great respect and care about their growth within the organisation. In 2020, voluntary staff turnover in Lenta was flat versus 2019 and comprised approximately 30%. To help ensure that we retain our employees, we implemented a number of employee engagement projects in 2020. These include Recruitment and career development We provide numerous opportunities In 2020, we identified 954 of our for our employees to build their employees having high potential careers in the organisation. In 2020, we for promotion. 80% of managerial created 2,971 new jobs and hired over positions among TOP 1,000 32,470 people. employeesand 76% of TOP-5,000 are supported by a talent pool, which is We pay particular attention to sufficient to compensate turnover succession planning, which enables future next few years. us to promptly fill open positions with The essence of our culture is Lenta is proud to have a staff additional incentive programmes, internal candidates. In 2020, out of During the year, we promoted over teamwork, innovation and trust. We retention rate that is above the social and charitable initiatives as 32,475 vacancies, 14,168 were fulfilled by 4,400 employees, and approximately recruit the best professionals in the average for the food retail sector. well as training and educational internal candidates. 8,265 people were transferred to market, provide training and career Investment in our workforce is our endeavours. opportunities for all our employees strategic priority. This is the key to and we do our best to retain them. customer loyalty through greater productivity and service level. new roles through horizontal moves, as part of the succession planning process. We promoted over 4,400 employees, and approximately 8,265 people were transferred to new roles through horizontal moves Store and Specialist Staff Training Taking care of employees during Covid-19 pandemic Employee engagement The Covid-19 pandemic and related We have been doing our best to restrictions introduced by the support employees who did get authorities entailed spikes in customer infected. The Company established demand across the country. Therefore, a business-wide volunteering the workload of our staff in stores, programme, Lenta Friend, that distribution centers and in transport involved 350 employees as corporate sharply increased. In March and April, volunteers. They helped their we incentivized over 47,000 workers by colleagues to cope with isolation and paying an additional 15% of monthly provided food delivery to their homes. salary. We provided regular Business Updates held online for our key managers to maintain the high level of awareness of the current state of the organisation and used our internal communication channels to keep informing people of the current status, projects, changes in the company as well as initiating activities that helped to increase morale. >> In 2020, for the first time, Lenta conducted a comprehensive Pulse survey that involved 91% of our employees. The feedback and results from this survey indicated a high level of engagement and satisfaction with the overall working environment and communication process within the business of 67%. In cooperation with Talent Tech, we Having analysed the results and carried a research to learn how our feedback from employees, we set people felt and to what extent they up an improvement plan which is were able to cope with the remote the process of being implemented. working mode. The survey results The key areas of focus of this plan showed that 99% of Lenta employees are further improvements of the We introduced comprehensive measures to protect our employees during the pandemic. We off-sited employees from our offices to remote work and around 95% of them worked from home. Front- line workers above 55 years old were offered a change in their job positions to minimize exposure to the risk of infection. As a result, we recorded a relatively low rate of contaminations of 1.6%. 26 26 We provide our people with a variety of training opportunities, 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. 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 Our store employees are the public On-line training activities have proven face of Lenta, so they are the primary to be highly efficient and effective, focus of our training efforts. Each which is why most of our new courses store runs a comprehensive induction are delivered in this format. programme for new employees. This sets out Lenta’s values, history and culture, as well as our policies and standards. All new employees are supported by mentors in their first months working at Lenta. During the year, we delivered over 0.8 million hours of training. 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 established principles, financial support is available for employees who find themselves in difficult circumstances. >> All employees are included in our performance management process, which helps us evaluate their achievements and identify their future potential. 27 27 successfully adapted to the new organisational structure, revisiting model. conditions; 94% confirmed they felt business processes to ensure the secure and confident. flexibility of the organisation and development of the recognition and incentive system for the employees of all organisational levels. All employees are included in our performance management process, which helps us evaluate their achievements and identify their future potential. LENTA. Annual Report 2020.01020403 Promoting Health and Safety Accident number Accident numbers and the number of lost working hours increased in per 100,000 working hours 2020, which was driven by higher work 2019 0.27 2020 0.29 intensity during the stocking up period. We elaborated an improvement plan and started to implement it. Lenta’s main health and safety Number of lost working hours targets in 2020 continued to be the per 100,000 working hours maintenance of high standards 2019 63.6 2020 70.8 across the Company, and the automation of various processes to improve employee safety. All Lenta store managers conduct daily and monthly “safety walks” as Lenta is fully committed to creating part of our Active Safety programme. and maintaining a safe environment These walks aim to identify any for employees and customers alike. potential risks to staff and customers, We implemented a risk-oriented ensure that the staff check safety model in our approach to safety at equipment and are fully aware of work and delivered additional training hazards. Employees are encouraged and supporting materials to promote to report every safety-related the rules of safe behaviour in the work incident, nonmatter how small, so that place. the cause can be identified and any likelihood of recurrence eliminated. Diversity Lenta values and respects diversity; Gender diversity we offer employment opportunities to all able candidates. Recruitment Diversity or promotion decisions are based Number of employees (%) purely on the professional knowledge HQ and regional divisions employees (%) 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 TOP-10 employees (people) TOP-100 employees (people) TOP-1,000 employees (people) centre offers eight of these positions. Length of service >> Lenta is fully committed to creating and maintaining a safe environment for employees and customers alike. We implemented a risk- oriented model in our approach to safety at work and delivered additional training and supporting materials to promote the rules of safe behaviour in the work place. Male 29.4% 32.4% 11 68 174 Female 70.6% 67.6% 2 67 265 In 2020, 197 vacancies were filled Length of service Number of people % of employees Over 10 years 3-9 years Average length of service 3,215 21,701 3,6 6.2% 41.9% by candidates from this group. They hold various positions in store management, distribution centres, transport logistics, own production division, client services and other departments. 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. 28 28 Strategic Report Corporate Governance Report Financial Statements Appendices Planet >> >> We take care of the cities where we operate, striving to make them cleaner, more beautiful and more pleasant places to live. Through our participation in a variety of environmental campaigns, we encourage Lenta’s employees to play an active role in developing a positive culture of care for the environment. Waste reduction Tackling plastic pollution Lenta produces various types of During the year, we undertook various We extended the infrastructure for waste, which is removed for us by third activities aiming at tackling plastic the collection of plastic bottles from party contractors. We now recycle pollution. We have been implementing our customers by installing plastic 100 % of the cardboard and plastic a communication plan with clients in collection machines in our stores wrap that we use in our stores and stores on the opportunities to reduce and piloted an incentive programme Distribution Centres, which helps to plastic waste while shopping with in 20 of our hypermarkets in reduce the volume of non-disposable Lenta. Saint-Petersburg. waste sent to landfills. Over 50 % of plastic containers we use We continued our batteries collection for food and for our own produced project in cooperation with Duracell. dishes are made of recyclable Special boxes are installed in all Lenta plastics. We worked on increasing hypermarkets. In 2020, we arranged customers’ awareness of recyclability a month-long event in 40 cities of our of different types of plastics to presence to provide an opportunity encourage shoppers to make an for our customers to drop off used environmently friendly choice. This batteries in a special container. was done by placing communication We managed to collect 87 tons of materials in our stores. batteries and sent them for recycling to plants in Chelyabinsk and Yaroslavl. 83% of our stores are equipped with LED lightning. This is not only enables us to significantly reduce energy consumption but also to reduce the volume of hazardous luminescent lamps. We introduced and widely promoted multiple use and paper bags along with sacks for fruits and vegetables, as alternatives to plastic bags for carrying goods. We now recycle 100 % of the cardboard and plastic wrap that we use in our stores and Distribution Centres, which helps to reduce the volume of non- disposable waste sent to landfills. 29 29 LENTA. Annual Report 2020.01020403 Strategic Report Corporate Governance Report Financial Statements Appendices 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. As a response to the Covid-19 In August, 300 Lenta stores in 88 cities pandemic, we supported medical took part in our “Help prepare a child workers in the country by providing for school” initiative. The Company them with an additional discount contributed supplies and stationery for all goods except for alcoholic to 300 social institutions as well beverages and tobacco. Over 85,000 as low income families in need of of doctors and other medical staff got support. Over 14,200 children from the the opportunity to save money. sponsored institutions received all necessary supplies before the new In cooperation with Severstal, we school year. donated 500,000 pieces of respirators for medical institutions in Saint- Lenta’s “Good Deeds” campaign is Petersburg to support doctors fighting a traditional New Year charitable The donations are distributed by the foundation among needy people. By the end of 2020, 133 tons of food were donated by our customers and distributed among 17,000 needy families Society >> Pricing and Customer Satisfaction tailored promotions and investment with them untill the correction plan is Covid-19. in pricing. We will further develop the implemented. ranges of private labels in all price Customer satisfaction is the key to segments to ensure we meet the our development. We aim to provide needs of all our customers. We will excellent service to our clients and also maintain our customer-focused Local Sourcing strive to satisfy their demand for approach, implementing new services We partner with local producers in products they want at the right price. and communicating with shoppers in regions throughout our operation. Our ways that suit them best. customers search for local goods in We supplied ready meals to 6 clinics in Saint-Petersburg during the first wave of the pandemic. activity. Children from local orphanages and institutions place their “wish” on Christmas trees in our tons of food were donated by our stores, and our customers can choose customers and distributed among a card and buy the gift. In 2020, 289 17,000 needy families. stores in 89 cities took part in the project, making the wishes of 18,674 For seven years, Lenta has been a children come true. partner of the spring Tulip Festival in St Petersburg, donating 30,000 We serve over 16 million loyal our stores and appreciate the local In 2020 we expanded the partnership Dutch tulip bulbs every autumn. In customers in 89 Russian cities. We We kept prices in our stores affordable produce that we offer. In 2020, we In Saint-Petersburg, Novosibirsk and with the “Give Food!” Foundation. We 2020, bulbs were planted in Saint- work hard to provide affordable prices for all the customers’ groups during sourced over 94 % of our products Yekaterinburg, we arranged a special installed boxes for food donations in Petersburg, Yekaterinburg, Novosibirsk to all types of customers, without the Covid-19 pandemic outbreak from Russian suppliers, including hot line for elderly people who could all our hypermarkets. Our customers and Rostov-on-Don. We consider compromising on quality. We strive providing them with additional saving approximately 20% from regional order food from Lenta by phone to be can buy goods and leave them in the project as our contribution to offer the right range of products opportunities. suppliers. delivered by volunteers. This initiative a special box. The donations are to the development of the urban for our customers, including large well-known brands, local produce and our private label ranges. In this way, we achieve price efficiency and High quality of goods We target producers who can supply us directly as well as mid-sized growers. That way, we can obtain satisfy the needs of all shoppers who choose Lenta. Despite the challenging In order to ensure that we offer the highest quality goods, from better prices and more consistent quality of locally grown foods. Shorter economic conditions in 2020, we production site to shelf, we sell only distances to our stores mean that continued to invest in pricing and to licensed goods that are transported lead times and transport costs are create attractive promotions for our and stocked under the most hygienic reduced, which enables us to deliver customers throughout the year. conditions. savings to our customers and minimize the environmental impact. As part of the Social Programme We continued to conduct regular that we operate in all Lenta stores, quality audits of our suppliers and Regional economies benefit from such we provide additional discounts carried out over 7,294 laboratory tests partnerships as do our customers. for essential goods for citizens with during the year. This included 7,207 We will continue to develop new limited budgets. In 2020, 3.3 million of suppliers’ goods and 737 private label partnerships with local suppliers our customers benefited from this and direct imports. programme; over 256 thousand joined and growers in 2021. We will focus on differentiation from the competition the programme in 2020. In 2020, 7% of suppliers of branded to offer a unique selection to our goods failed our quality audit – and customers. We will continue to help our customers therefore we suspended contracts manage within their budgets, through 30 30 united over 600 of our customers who distributed by the foundation among environment in the cities of our were incentivized by Lenta points. needy people. By the end of 2020, 133 presence. 31 31 LENTA. Annual Report 2020.01020403 Chief Financial Officer Review >> >> Rud Pedersen, Chief Financial Officer In 2020, we faced a great deal of volatility and unpredictability due to the Covid-19 pandemic. Thanks to our swift response and a prudent commitment to the well-being of our customers and employees, we were able to ensure that Lenta stores remained safe and reliable places for our customers to shop. Concurrently, we also remained focused on improving our operational efficiency and controlling expenditures, while pursuing exciting new opportunities, such as the further development of our online channels. As a result, I am proud to report that Lenta’s total sales and EBITDA reached all-time highs in 2020, underpinned by strong cash flow from operations, tight cost management, and an improved leverage position. 32 32 Strategic Report Corporate Governance Report Financial Statements Appendices Sales >> Total sales demonstrated robust growth of 6.7% and amounted to RUB 445.5 billion (2019: RUB 417.5 billion). Total sales were driven by a higher average ticket, despite lower traffic throughout the year. Retail Sales grew by 7.3% to RUB 437.5 billion (2019: Rub 407.8 billion), as a result of an increased demand due to the Covid-19 pandemic, successful promotional activities, enhancements to Lenta’s loyalty programme, and a noticeable trend of trading up through much of the year. Lenta stores, especially hypermarkets, At the same time, we made continued to show good results in remarkable progress in expanding 2020, amid the pandemic, further and developing our Online Sales proving the resilience of our channels through the launch hypermarket format. Retail sales at of our own Lentochka express our hypermarkets were up 7.0% year- delivery platform and our unique Gross Margin In 2020, Lenta’s gross profit margin improved to 22.9% from 22.0% in 2019 as a result of shrinkage improvement, higher retail margins, and better trade terms with suppliers. Additional positive effects came from a 17.3% decline in our low-margin wholesale business throughout the year, which partially offset higher stock provisions. During the Covid-19 pandemic, Lenta made certain investments into protective equipment and gave price discounts to medical personnel working in hospitals and clinics, as over-year thanks to growth in the Click & Collect programme, as well well as to vulnerable groups like-for-like average ticket of 11.6% and as partnerships with 36 delivery of customers in order to fulfil a 5.6% decline in like-for-like traffic. companies. By the end of 2020, we what it perceived were its Additionally, our supermarket format served online customers across all responsibilities to be a good showed robust retail sales growth of 88 cities where we operate brick- corporate citizen. 9.8% year-over-year, with its like-for- and-mortar stores, resulting in RUB like average ticket surging by 14.0%. 6.3 billion of total online sales, which We believe that these results solidify represents a 566% growth rate Lenta as the best hypermarketailer in compared to 2019. Russia and positions us to take further market share in the future from other “bighypermarketrs. The Company’s average centralization ratio increased to 63.9% 60.5% from in 2019 Cost Controls >> We remained focused on strict cost our senior management team, bonus management amidst the volatile compensation in connection with and unpredictable environment of certain milestones being reached, 2020. During the year, unforeseen new store expansion, and the further and one-off Covid-19 related costs roll-out of Lentochka express delivery in the amount of RUB 1.5 billion put service. extra pressure on profitability. Sales, General, and Administrative (SG&A) Marketing cost – investments into expenses increased by approximately new communication programmes RUB 5 billion year-over-year, but still with customers (e.g. a new loyalty remained flat as a percentage of total program). sales, at 18.0%. Supply-chain costs as a percentage Personnel costs rose by 11% year-over- of total sales also remained at the year due to special bonuses paid same level as in 2019 at 1.3% of Total to frontline staff during the Covid-19 Sales. The Company’s average pandemic, salary indexation for store centralization ratio increased to 63.9% and supply chain staff, changes to from 60.5% in 2019. 33 33 LENTA. Annual Report 2020.01020403 Strategic Report Corporate Governance Report Financial Statements Appendices Interest >> Depreciation >> Cash Flow >> EBITDA In 2020, EBITDA in absolute terms reached an all-time Lenta’s Net Interest expenses in 2020 amounted to RUB 8.9 billion, which was a decrease by 25.8% compared to 2019 (RUB 12.0 billion), as we made high for Lenta, while our EBITDA strong progress in reducing our gross margin also showed significant debt and refinancing at better rates. improvement. EBITDA rose These improvements enabled Lenta to by 13.7% year-over-year and improve its interest cover ratio to 5.04x amounted to RUB 44.9 billion, compared to only 3.29x in 2019. while the EBITDA margin rose to 10.1%, up 60 bps from 9.5% in the previous year. This improvement was primarily driven by strong retail sales growth coupled with a higher gross margin and a steady cost-to-sales ratio. In 2020, Net Income >> Lenta delivered a significant Lenta continued to maintain improvement in Net Income of RUB 16.5 an industry-leading EBITDA billion in 2020, compared to a net loss margin through a combination of RUB 2.8 billion in 2019, due mainly to of improved efficiency and strong retail sales. This equated to a cost management. net income margin of 3.7 % in 2020, one of the best amongst publicly traded Russian food retailers. Depreciation as a percentage of total sales decreased by 25 bps year- over-year, which was mainly a result of a deceleration in new store expansion, the end of depreciation from equipment purchased in 2014 and 2015, and some one-offs effects in 2019 (such as a change of parking depreciation period). The absolute amount of depreciation is 54bps higher than in 2019. >> Net cash generated from operating activities before net interest and income taxes paid decreased to RUB 43.8 billion compared to Rub 48.4 billion in 2019. Net Working Capital movement amounted to RUB -2.1 billion, compared to RUB 7.5 billion in the previous year, mostly due to increased inventories and higher trade receivables due to higher bonuses from suppliers. CAPEX >> Capital expenditures (CapEx) in 2020 was 45.7% lower than in 2019 and amounted to RUB 7.6 billion. The reduction in the 2020 figure mainly reflects hypermarket openings and slow implementation of maintenance and improvements projects, taking into account the Covid-19 situation. As of 31 December 2020, Lenta had contractual capital expenditure commitments connected to property, plant and equipment (PP&E) and Intangible assets totalling RUB 4.3 billion net of VAT compared to RUB 6.2 billion net of VAT on 31 December 2019. 34 34 Net Debt and Leverage >> We materially improved our leverage position over the course of 2020, and together with our shareholders we are proud of reaching this achievement. As of 31 December 2020, our Net Debt to EBITDA ratio under IFRS 16 stood at 2.0x compared to 2.8x one year earlier, under IAS 17 – 1.5x compared to 2.3x as of the end of 2019. We closed 2020 with Gross Debt under IFRS 16 of RUB 113.4 billion, compared to RUB 182.7 billion as of the end of 2019. Gross Debt under IAS 17 was RUB 78.95 billion, compared to RUB 150.5 billion as of the end of 2019. We also had a Cash and Cash Equivalents of Rub 21.8 billion on hand, bringing Net Debt under IFRS 16 to Rub 91.6 billion and Net Debt under IAS 17 to Rub 57.1 billion at the end of 2020. Looking ahead Our resilient operational base and strong balance sheet make us well positioned to grow as we invest in our new strategy and pursue exciting organic and inorganic growth opportunities. The past year has shown that Lenta can successfully navigate the storm, thus validating our business model, management team, and strategic objectives. I remain confident as we head into 2021 that Lenta can overcome any challenges we encounter as we strive to deliver strong returns for the benefit of all our shareholders. 35 35 LENTA. Annual Report 2020.01020403 Risk management >> Lenta is managing its risks focusing on the most critical threats of the business. Lenta defines risk as ‘an uncertain future event that could affect the Group’s ability to achieve its objectives’. Understanding how various risks potentially influence our business is integral to the decision-making process within the Group. We monitor all Stage 1 – Risk Identification We conduct a ‘top down’ strategic risk identification on an annual basis. This supplements a biannual functional ‘bottom up’ evaluation, which identifies material risks to our operations risks at operational levels in the Our risk identification process ensures that new risks are identified, assessed and responded to, while risks no longer relevant are excluded from the risk register, and that the information is up-to- date and appropriate for monitoring, escalation and mitigation. Group. These activities enable us to create a comprehensive risk profile. Risk identification is also embedded into key business processes including budgeting, planning, capital expenditure and performance management. Stage 2 – Risk Assessment Risks are individually assessed to determine their likelihood of occurrence, and 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 is comprised of a four step probability and severity scale. The impact assessment is based on a qualified and formal review of how the risk occurrence may influence the Group’s operations and financial performance. on an ongoing basis, acting whenever necessary to mitigate and manage them. We also anticipate and evaluate new threats as and when they arise. Our risk management process applies across all functions and comprises the following principal stages: > identification; > assessment; > response; > monitoring, reporting and escalation. The risk management process stages are performed by risk experts across the whole organization twice a year in June-July and December-January. 36 36 Strategic Report Corporate Governance Report Financial Statements Appendices Stage 3 – Risk Response When the ‘Current’ severity of a specific risk exceeds acceptable levels, action may be needed to align it with the ‘Target’ risk position. Risk Owners are accountable for managing risks, with details of planned mitigation activities and delivery milestones set out in their risk response plans. Stage 4 – Risk Monitoring, Reporting and Escalation This final stage involves the timely The Audit Committee oversees tracking, capture, and sharing and evaluates the effectiveness of risk information to enable the of management’s approach. The review and notification of changes management team provides risk in risk exposure by management. oversight of commercial operations The process supports a more full and undertakes a biannual ‘top down’ understanding of risk and enables assessment for the Audit Committee decision making on the appropriate and Board to review. Functional heads response. Such responses include within the Group are responsible management interventions to avoid a for implementing risk management risk becoming reality in the first place activities in their areas. In 2020, the Lenta updated the risk register and performed the above four stage process twice during the year. We have updated our risk management policy with regard to the assessment thresholds of the risks’ impact. The Group assessed the impact of a risk occurring as a percentage of its annual EBITDA. or, if not possible, then to reduce its impact after the event. The process is supported by a governance structure that clearly defines risk-related roles and responsibilities at each level within Lenta. The Board has overall accountability for ensuring that the risks are effectively managed across functional business units. Risk management policy >> Lenta’s Risk Management Policy provides a comprehensive and robust framework, enabling us to ensure that > identification and management of key risks that could have a material impact on the business; risk is managed to a consistently high > clear accountability and ownership standard across all of our operations. of risk management; It sets out the Group’s principles > an improved view of key controls, and standards and establishes a their effectiveness, and gaps in the common approach and the minimum control environment; requirements for risk management activities. The policy provides a “common language” for risk, and delivers multiple benefits, including: > informed decision-making to help deliver consistent and improved business performance through the avoidance of unwanted surprises, as well as, the achievement of opportunities; The Risk Management Policy is overseen 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 the supporting tools is provided via a dedicated Risk Management intranet site. Risk Management awareness and training is provided to all staff commensurate with their roles and responsibilities. During 2020 we made minor updates to our Risk Management policy, including the EBITDA-driven criteria of impact assessment, and references to a functional approach of managing cyber risks. 37 37 >>4>>2>>1>>3LENTA. Annual Report 2020.01020403 Business continuity management framework >> >> Due to the Covid-19 pandemic we framework consisting of clearly established a response team under articulated and structured emergency our business continuity framework. response plans, disaster recovery Based on experience from the Group’s plans, and crisis communication response to Covid-19 it undertook plans. The Group integrated crisis a review of its approach to crisis management reviews as part of its management and its readiness regular management board meetings in situations when risks occur. on a quarterly basis. Accordingly, we have strengthened our business continuity framework with the aim of providing resilience and efficiency with more formalized approach, including clear roles and responsibilities around business continuity planning and execution. In the 2nd half of 2020, the Group In addition, a series of BCM trainings were conducted for risk experts and management. updated its business continuity The Group is going to continue to management (BCM) and rolled it out develop its BCM framework in 2021 as a Group-wide frame work. After a and plans to perform testing of a review of the existing documentation, variety of disruption scenarios. Lenta further developed its BCM Due to the Covid-19 pandemic we established a response team under our business continuity framework. Based on experience from the Group’s response to Covid-19 it undertook a review of its approach to crisis management and its readiness in situations when risks occur. The risk landscape >> >> Covid-19 was not a risk but tough reality for all the businesses as well as individuals in Russia. Measures to contain the virus had its negative impact on business operations throughout societies. As governments and companies took aggressive measures to protect their citizens, customers, operations, and employees at home and abroad, such actions could lead to business interruptions, travel risks, and other effects that could affect the Group’s supply chain. Lenta, like many other companies, the challenges of remote interaction faced unprecedented challenges between the functional and regional caused by the global Covid-19 teams quite well. Employees working pandemic. Given the situation, the in our stores and in our supply >> 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 businesses. Therefore, the Group works continuously to attract and retain employees and its ability to do so is a principal risk 38 38 Strategic Report Corporate Governance Report Financial Statements Appendices In addition to the pandemic specific challenges, the Russian retail industry also had to deal with a weak macro- economic environment, changes in the legal and regulatory requirements, as well as, continued fierce competition. In 2020 we made important progress in preparing our new growth strategy to support Lenta’s transformation and implementation will start in 2021. Nonetheless, due to a focus on efficiency and Group delivered risk for Lenta. At the same time, Lenta’s in-store production of goods for sale is growing due to an increasing demand. Consequently, we need to ensure that the 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 positive cash flow. Consequently, the Lenta continues to engage and the retail industry’s core employee Group’s external net debt decreased cooperate across its value chain with capabilities are easily transferable and exposure towards the risks numerous suppliers, partners, and between Lenta and its competition, associated with having sufficient authorities both at a local, regional not only in food retail, but across external financing were reduced. In and federal level. In doing so, Lenta various types of retail businesses. addition, during 2020 the Central Bank must ensure that all its dealings Therefore, the Group works of Russia lowered its key interest rate, are in line with relevant legislation, continuously to attract and retain which, together with low inflation, as well as, external and internal employees and its ability to do so is a improved the Group’s average cost of standards and regulations, including principal risk. debt and its associated risks. policies regarding ethical behavior. Operating across a significant During 2020 no new significant risks geographical span with, at times, were identified through our risk long supply routes and a multitude management process and it resulted of suppliers, food safety is a principal in no change to the risk map. Assessment of the Group’s prospects >> >> Lenta is doing business in an industry less exposed to cyclical shocks due to consumer demand for food and food related products, while being highly competitive and challenging. Therefore the Company takes a long term view and is focused on its strategy development and ability deliver sustainable growth. Changes in categories and products that consumers demand and in consumer behavior require Lenta maintain a flexible business model. Lenta’s presence in 88 cities across Russia through its store network provides access to data on consumers that enable fast reaction to changing demand and behavior. Going Concern The going concern assessment is undertaking an analysis of how appropriate the Company’s financial statements on a going concern basis. Based on the financial indicators, the Directors have a reasonable opinion that Lenta has robust business model, sufficient resources for sustainable operations for the forthcoming future. Thus, they continue to adopt the going concern basis in preparing the consolidated financial statements (in accordance with the ‘Guidance on Risk Group was forced to react urgently in chain were provided with personal Lenta carries out on an annual basis their achievement are reviewed by the Management, Internal Control the unknown environment to ensure protection equipment and various its planning process which includes Board as part of its strategy review and Related Financial and the safety of its customers, employees, forms of signage and physical barriers short-term (one year) and longer-term and budget approval processes. Business Reporting’ issued by and partners. The Group’s office- were installed in our stores to ensure (five year) financial forecasts. This The processes for identifying and the UK’s Financial Reporting based personnel were transferred the appropriate social distancing planning process is based on inputs managing the Principal Risks are Council). to a remote mode of work starting in between employees and/or our from the business. The annual and five described above. the early spring of 2020 and handled customers. year financial forecasts and risks to 39 39 LENTA. Annual Report 2020.01020403 Strategic Report Corporate Governance Report Financial Statements Appendices No on map. Risk Description Risk Impact Risk category Current Severity Impact Likelihood Objectives affected Outlook/ trend How we manage it 1 Changing legal and regulatory environment Introduction of new and complexity of existing legal and regulatory requirements drives cost of compliance and may disrupt our value chain. Strategic 2 Macro-economic and political instability Impact of pandemic on economic situation, supply chain, compliance with security of customers and personnel. Potential instability of customer behavior caused by economy stagnation in the mid-term perspective. Strategic 3 Increased competition from existing and new formats as well as industry consolidation Increased competition or aggressive marketing and pricing practices by competitors may negatively impact sales and margins through decline in customer traffic and basket. Strategic 4 Competitive sourcing and security supply 5 Lack of innovation and adaptation Slower growth may result in weaker competitive bargain power towards 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, suppliers and where competitors dominate Strategic Lack of innovation can result in non-competitiveness, lost of customers, our ability to communicate with customers in a proper way will be limited. This can impact frequence of visits, decline in average ticket. Strategic 6 Attracting and retaining a qualified, diverse workforce Failure to attract and retain the required capability could not allow us to support our efficiency at the target level, implement our strategic goals and implement the succession plan. Operational 7 Food safety and quality There is a risk that customers may suffer from the consumption of food and non-food goods sold by Lenta, whether they are contaminated or defective. Realization of the risk could seriously destroy the Lenta reputation, impact revenue, loss sales and market share. Operational 8 Taxation Negative impact on the Company’s financial performance caused by potential threats of tax payments and fines. Additionally, in case of the risk realisation, the Company might face reputational risks. Financial 9 Capital markets and liquidity Access to funding markets being restricted or limited, and growing cost of capital with negative impact on Lenta financial performance, cash liquidity and ability to fund operations. Financial 10 Legal and compliance Changes in, or failure to comply with, laws and regulations could impact the operations and reduce the profitability of Lenta. It could affect our revenue, profitability and image. Governance 11 Strategy development and execution Failure to deliver a consistent, coherent and sharp enough strategy to respond to changes in market conditions resulting in a loss of market share and deterioration of profitability becoming eventually a redundant hypermarket operator. Slow response on changing external environment and decision making process caused by inefficient business processes resulting in potential threat of losing Lenta’s position to its competitors Strategic 2 2 2 3 3 2 4 2 2 1 4 4 C Stable We monitor legislative and regulatory initiatives as well as actively engage in dialog with lawmakers directly and through retail associations. Continued update to and investment in process optimization and automization. 2 C Decreasing Monitor main economic indicators. 4 B Stable 2 BCD Stable 1 CDE Stable 3 E Stable 2 A Stable 2 - Stable 1 C Stable 3 - Stable 3 BCDE Increasing Rolling 60 months forecast. Consistently keeping our customer offer relevant to consumer spending power. Continued improvement in our supply chain Actively track and measure competitors’ behaviour and changes, understand structural changes in the market and implement changes to our offer, formats and price positioning Increasing share of direct import and local sourcing through taking charge of full value chain. Consolidate purchasing power on fewer suppliers. Developing private label. Participating retail alliance of independent retailers Establishment new department to drive innovations and innovations culture. Launched new Innovations Department, Start of innovation funnel in company. Implementation of innovative technologies (self can, self check-outs), launch of App and personal cabinet on web site Talent planning and people development processes are set up in Lenta. The Company has been developing the employee engagement programme, LTIP and succession planning tools. Talent and succession planing is discussed by the Board of Directors on a regular basis. Lenta iIntegrated quality control procedures, implemented, monitor and control food safety and quality. The Company’s focus is to ensure superb quality of goods by importing goods (explicit quality control by Lenta’s quality assurance), direct cooperation with growers, introducing the approrpiate control from field to shelf, developing a network of DCs The Company is monitoring tax legislation on a regularly basis in accordance with designed control procedures. Also Lenta uses external advisors to ensure appropriate treatment of taxation and depreciation. Lenta maintains an infrastucture of systems, policies and procedures to enable strict discipline and oversight on financing and liquidity issues. Our liquidity levels and sources of cash are regularly reviewed and reported to governance committees. Lenta manages regulatory risks by regular monitoring of legislation, risk assessment framework, implemented in the legal department. The Company has developed relevant controls procedures for internal controls and internal audit departments to detect, report and respond to the incidents in a timely manner. There is regular reporting on status of the compliance programmes to the Audit committee. Lenta launched the Transformation office program to optimize key business processes having impact on the speed to respond on the fast changing external challenges as well as ability to fix the internal open issues. We shall strengthen the transformation office competences related to business process optimization. Changes in organizational structure, consolidation of expertise in project management, usage of Agile approaches for IT and innocation projects, setup of PMOs across the organization. Changes in 2020 There were no changes indicated. The risk materialized in 2020, the Company managed the risk, was prepared to it, and responded well There were no changes indicated. There were no changes indicated. There were no changes indicated. There were no changes indicated. There were no changes indicated. There were no changes indicated. There were no changes indicated. There were no changes indicated. Need to response on the Group’s challenges lead to urgency of Lenta to execute a portfolio of projects to support its strategy implementation 12 Cyber and IT risks Failure to ensure data security and privacy resulting in inability to operate, loss of sensitive information, reputational damage, fines or other adverse consequences. IT 4 3 BCDE Increasing We have launched the Access Control infrastructure, data base protection system, segregation of duties procedures to detect, report and proactively respond to security incidents. We continue to implement a number of initiatives to enhance our security capabilities to improve data security. We introduced monitoring of the security and data privacy status and report on to governance committees. We introduced strict system of monitoring of third parties activities control. Probability of cyber threats continued to grow in 2020, both globally, and locally, including the retail market in Russia. Lenta is meticulously implementing projects to improve its protection. 40 40 41 41 LENTA. Annual Report 2020.01020403 Strategic Report Corporate Governance Report Financial Statements Appendices Description of principal risks >> Severe economic turbulences could, The Directors have determined that however, affect our business – Lenta’s longterm planning horizon’ – as it could other retailers’ – and which is the existing year plus the >> 1. Strategy development and 8. Attracting and retaining a qualified, could therefore influence our cash four following consecutive years’ – execution diverse workforce generation and debt service capacity. is an appropriate timeframe for 9. Food safety and product quality 10. Taxation 11. Capital markets and liquidity 12. Legal and compliance 2. Cyber and IT risks 3. Changing legal and regulatory environment 4. Macro-economic and political instability 5. Increased competition from existing and new formats as well as industry consolidation 6. Competitive sourcing and security of supply 7. Lack of innovation and adaptation Viability statement >> >> Lenta’s viability assessment considers its solvency and liquidity over a period exceeding that of the going concern assessment. Understanding our main priorities and our principal risks is a key element in the assessment of Lenta’s prospects, as well as the formal consideration of viability. Our low price/low cost business model While Lenta continues to be reliant is aimed at consistently applying on banks and financial markets for low prices combined with efficient funding, our policy is to maintain promotions. Our federal reach and a strong balance sheet to ensure sales volumes enable us to negotiate 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. Continued free cash flow’ – after capital expenditure and financing cost’ – is expected. competitive conditions with suppliers. We prefer to own the majority of our hypermarkets, as this provides an efficient cost hedge versus rent inflation, as does Lenta’s incremental borrowing rate when compared to the required return on invested capital of real estate investors. This in turn could affect the level of assessment of the longterm viability of ambition we are able to apply to our Lenta. Lenta has significant financial further development. resources, including committed and uncommitted banking and debt Our approach to the viability of facilities. In assessing the Company’s the business is influenced by our viability, the Directors have assumed key priorities that are focused that the existing banking and debt on adapting our customer-value facilities will remain in place or proposition across all formats we mature as intended. The Directors manage to changing customers’ have also considered mitigating preferences so we can grow and actions available to Lenta, including deliver best-in-class profitability. restrictions on capital investment, Along with an agile organisational further cost reduction opportunities culture that is committed to reducing and future dividend policy. The time-to-market, and a meticulous Directors have assumed that these focus on operational execution to mitigating actions can be applied on maintain our position as the most a timely basis and at insignificant or cost-efficient food retailer in Russia, no cost. thereby maximising customer and shareholder value. 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. 43 43 Our key priorities A. Continued focus on safety of our customers and employees B. Effective and efficient operation of our hypermarkets and supermarkets C. Execution of our new growth strategy D. Innovate, develop, pilot, and implement existing and new technologies E. Build and strengthen organizational capabilities d o o h i l e k i L 4 3 2 1 10 1 1 3 6 2 8 9 2 11 12 7 4 4 5 3 Impact 42 42 LENTA. Annual Report 2020.01020403 >>02 Corporate Governance Report 46 Board of Directors 50 Senior management team 54 Corporate governance report 64 Board committees 66 Audit committee report 70 Nomination committee report 74 Remuneration Committee Report 80 Operation and capital expenditure committee report The key objective of Lenta’s Board is to secure the Company’s long-term success and deliver sustainable returns for its shareholders. This involves a range of tasks including establishment of strategic goals, oversight of financial and human resources, review of management performance. Furthermore, the Board plays an important role in providing support to the executive team in implementing Lenta’s strategy. The Board also sets the overall tone for the management culture of the Company. Lenta’s governance framework combines leadership with collaboration and delegation – and this is the basis for our decisionmaking process. Specific responsibilities are delegated to the four Board Committees: Audit, Remuneration, Nomination and Operational and Capital Expenditure. Details of their responsibilities and activities during the year are set out on pages 74 to 81 of this report. LENTA. Annual Report 2020. Strategic Report Corporate Governance Report Financial Statements Appendices Board of Directors >> >> Alexey Mordashov, CHAIRMAN Alexey Mordashov was appointed a non-executive director of Lenta Plc in May 2019. Board Committees: Nomination Experience: Born in 1965, Alexey Mordashov has been working for Severstal since 1988. He started his career as a Senior Economist, becoming Chief Financial Steve Johnson, SENIOR INDEPENDENT DIRECTOR Michael Lynch-Bell, INDEPENDENT DIRECTOR Julia Solovieva, INDEPENDENT DIRECTOR Steve Johnson has been an Michael Lynch-Bell was appointed an Julia Solovieva was appointed an independent non-executive independent non-executive Director independent non-executive Director of Lenta Plc since 2010. He of Lenta Plc in 2013. Director in 2018. was appointed as Lenta’s Senior Independent Director in 2013. Board Committees: Nomination (Chairman), Remuneration, Audit, Operation and Capital Expenditure Experience: Steve has over 20 years’ experience in the retail industry, Board Committees: Audit (Chairman), Remuneration (Chairman), Nomination Experience: Michael retired from Ernst & Young as Senior Partner in 2012 after Board Committees: Audit, Nomination, Remuneration. Experience: Julia has over 20 years experience in the internet search, a 38-year career with the firm. He was media, retail and telecoms sectors. a member of Ernst & Young’s audit Julia joined Google in 2013 as practice, becoming a partner in 1985. n Managing Director/Country Manager having been part of the team that 1997, Michael moved to Ernst & Young’s Russia, and has been Director, turned around and successfully sold Transaction Advisory practice, where Business Operations for Emerging Asda to Walmart. Whilst at Asda, Steve he founded and led its UK IPO and Markets EMEA since 2016. From 2007 to held several senior positions including Global Natural Resources transaction 2012 she held various senior positions Trading Director, Commercial Finance teams. He has been involved with including the role of President, at Officer in 1992. In December 1996, he was appointed as Severstal’s Chief Executive Director and Marketing Director. the CIS since 1991 and has advised Prof-Media, one of Russia’s largest Officer. Between 2002 and 2006 he served as CEO of Severstal Group and was Following his time at Asda, he was CEO many CIS companies on fundraising, media groups. Prior to this she held Chairman of Severstal’s Board of Directors. From December 2006 to December of Focus DIY Ltd and of Woolworths reorganisations, transactions, various corporate development and 2014 Alexey was CEO of Severstal. From December 2014 until May 2015 Alexey Mordashov served as CEO of AO Severstal Management – managing company of PAO Severstal. Alexey was elected Chairman of the Board of Directors of PAO Severstal in May 2015. Other roles: Vice-Chairman of World Steel Association. Head of the Russian Union of Industrialists and Entrepreneurs’ Committee on Integration, Trade Plc, as well as Sales & Marketing Director at GUS Plc. He started his career in management consultancy with Bain & Co. Other roles: Steve is currently Chairman of Matalan Limited and also corporate governance and IPOs. Other roles: Michael is also Deputy Chair and Senior Independent other leadership roles in the telecoms sector and also has experience in strategy consulting with Booz Allen Director of Kaz Minerals Plc, Senior Hamilton Netherlands and as Director Independent Director and Audit of Operations for Mary Kay Russia and Committee Chairman of Gem and Customs Policy and WTO. Serves on the Entrepreneurial Council of the a non-executive Director of DFC Group Diamonds Limited, Chairman at Government of Russian Federation. Co-chairman of the «Trade as a Global Plc. He also works with a number of Little Green Pharma Ltd and a non- Driver» Taskforce of the «Business 20» of «Group of Twenty». Cochairman of the Northern Dimension Business Council. Vice-President of Russian-German chamber of commerce, member of the Russian-German workgroup responsible for strategic economic and finance issues. Member of the EU-Russia Business private equity firms primarily focused on Southern and Eastern Europe. Qualifications: Steve graduated from Cambridge University, United executive Director of Barloworld Limited. Qualifications: Michael graduated from Sheffield University with a BA in CIS. 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 Cooperation Council. Alexey earned his undergraduate degree from the Kingdom, with an Engineering degree. Economics and Accounting in 1974, State Linguistic University. Leningrad Institute of Engineering and Economics. 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). qualified as an English Chartered Accountant in 1977, and was awarded an Honorary Doctorate of Humane Letters by Schiller International University in 2006. 46 46 47 47 01020403 Strategic Report Corporate Governance Report Financial Statements Appendices Alexey Kulichenko, NON-EXECUTIVE DIRECTOR Roman Vasilkov, NON-EXECUTIVE DIRECTOR Tomas Korganas, NON-EXECUTIVE DIRECTOR Vladimir Sorokin, CHIEF EXECUTIVE OFFICER (CEO) Rud Pedersen, CHIEF FINANCIAL OFFICER (CFO) Alexey Kulichenko was appointed a Roman Vasilkov was appointed a non- Tomas Korganas was appointed a Vladimir Sorokin was appointed CEO Rud Pedersen was appointed Chief non-executive Director of executive Director of Lenta Plc in May non-executive Director of in September 2020. Financial Officer in April 2019. Lenta Plc in May 2019. 2019 Lenta Plc in August 2019. Experience: In 1996-2003 Alexey held different managerial positions at Sun Interbrew, starting his career as a cash flow economist at the Board Committees: Operation and Capital Expenditure (Chairman) Experience: Roman Vasilkov joined Severstal in 2006. From 2008 till 2012 he Board Committees: Operation and Capital Expenditure. Experience: Tomas Korganas started his career at BCG and Goldman Rosar plant in Omsk and ending it as held various positions in Severstal- Sachs, after that he worked in and Efficiency Planning and Managing Invest which is part of Severstal’s led Corporate M&A at GE, Rusal and Qualifications: Vladimir Sorokin is a graduate of St. Petersburg State Experience: Before his current role, Rud served as CFO of Carlsberg University of Trade and Economics Eastern Europe and was responsible (Engineering) and the Higher School of for operations in five FSU markets. Economics (Finance). Experience: Vladimir Sorokin started his career in 1994 at Gillette and has Over the last 25 years he has held a number of senior management positions in a diverse range of Director. In 2003-2005 Alexey worked Russian Steel division. In 2012 he joined Vympelkom for the next 10 years. In had a number of top leadership businesses including FMCG, fashion as CFO at Unimilk. In December 2005 he joined CJSC “Severstal Resource” as CFO. In July 2009 he was appointed CFO of JSC Severstal. Other roles: Alexey currently serves as CFO of JSC “Severstal Management” - managing company for PAO Severstal and CFO of Severgroup LLC. Other Selective Directorships: PAO Severstal. Qualifications: Alexey graduated from Omsk Institute of World Economy with a degree in Economics. Corporate Control at Severgroup LLC. Other roles: Since 2016 Roman is the Head of Corporate Control at 2012, Tomas joined Severstal as Head of Corporate Development and soon after he was asked to assume positions at both Russian and and apparel retail and pharma. Rud international retail and FMCG has had experience in regional and companies. In 2013, Mr. Sorokin joined grouplevel roles, including Cadbury Severgroup LLC. His responsibilities same role at Severgroup. Since 2018, the X5 Retail Group where he became (Russia), Astrazeneca (Belgium), Levi include financial control as well as Tomas is also heading the Strategy of the General Director of the Perekrestok Strauss (Belgium) and IC Group business and investment analysis of Severgroup’s companies and projects. Qualifications: Roman graduated from the Military Engineering and Severgroup. Other roles: Tomas currently serves as a Director for Strategy and M&A of Severgroup LLC and Head of Space Academy of Mozhaysky, St. Corporate Development of JSC Petersburg. In 2013 he graduated with honors from the Institute of Management and Information “Severstal” Qualifications: Tomas graduated with B.Sc. in Engineering from Kaunas Technologies (branch of the St. University of Technology in 1993, Petersburg State Polytechnic M.Sc. in International Strategy from University) majoring in financial Helsinki University of Technology in management. 1996, and MBA from Sloan School of Management, MIT in 2000. Supermarkets. In 2019, he joined (Denmark). He started his career with Magnit as the Deputy Chief Executive - Commercial Director and a member of the Management Board. Deloitte. Qualifications: Rud holds the Master of Science degree in International Business Administration & Commercial Law from Aarhus School of Business, Denmark. He also has an EMBA from London Business School. 48 48 49 49 LENTA. Annual Report 2020.01020403 LENTA. Annual Report 2020. Strategic Report Corporate Governance Report Financial Statements Appendices Senior management team >> >> Vladimir Sorokin, CHIEF EXECUTIVE OFFICER (CEO) Vladimir Sorokin was appointed CEO in September 2020. Qualifications: Vladimir Sorokin is a graduate of St. Petersburg State University of Trade and Economics (Engineering) and the Higher School of Economics (Finance). Experience: Vladimir Sorokin started his career in 1994 at Gillette and has had a number of top leadership positions at both Russian and international retail and FMCG companies. In 2013, Mr. Sorokin joined the X5 Retail Group where he Edward Doeffinger, CHIEF OPERATIONAL OFFICER (COO) Joern Arnhold, SUPPLY CHAIN DIRECTOR Dmitry Bogod, CHIEF COMMERCIAL OFFICER Edward Doeffinger joined Lenta in 2011 Joern Arnhold joined Lenta in 2011 as Dmitry Bogod joined Lenta in 2018 as Chief Operational Officer. Supply Chain Director. Experience: Prior to joining Lenta, Edward worked in Metro Cash & Experience: Prior to joining Lenta, Joern had 13 years’ experience with as Chief Strategy Officer and was appointed to Chief Commercial Officer in January 2021. Carry in various roles and countries, Metro Group Logistics (‘MGL’) where he including Germany, Hungary, China held various key positions in Germany, Experience: Dmitry has over ten years of experience in strategy consulting and Russia, and finally served as Turkey and Russia. As Managing for international companies. Before Deputy General Director of Metro Director of MGL in Russia, Joern joining Lenta, Dmitry was an associate Cash & Carry Kazakhstan. Before was responsible for developing and partner in McKinsey’s Moscow office starting his career in 1991 at Metro running logistics operations for the and prioir to that, Dmitry worked at Cash & Carry, Edward held several positions in wholesale companies and at the department at the Trade Metro Group sales divisions in Russia. Qualifications: Joern holds a degree in Business Administration from the Oliver Wyman, advising companies on consumer related strategy and operational topics. Before working became the General Director of the Perekrestok Supermarkets. In 2019, he joined Ministry of the German Democratic Georg August University Goettingen. as a consultant, he worked with Magnit as the Deputy Chief Executive - Commercial Director and a member of the Management Board. >> Rud Pedersen, CHIEF FINANCIAL OFFICER (CFO) Rud Pedersen was appointed Chief Financial Officer in April 2019. Experience: Before his current role, Rud served as CFO of Carlsberg Eastern Europe and was responsible for operations in five FSU markets. Over the last 25 years he has held a number of senior management positions in a diverse range of businesses including FMCG, fashion and apparel retail and pharma. Rud has had experience in regional and grouplevel roles, including Cadbury (Russia), Astrazeneca (Belgium), Levi Strauss (Belgium) and IC Group (Denmark). He started his career with Deloitte. Qualifications: Rud holds the Master of Science degree in International Business Administration & Commercial Law from Aarhus School of Business, Denmark. He also has an EMBA from London Business School. Republic. During his over 30 years’ experience in the retail industry he has held senior positions in Germany, Hungary and China before moving to Russia in 2001. In Russia Edward was responsible for the busines 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. Aon Benfield Securities, RBC Capital Markets, and Manulife Financial. Qualifications: Dmitry has an Honors Bachelor of Science Degree in Applied Mathematics from the University of Toronto. 50 50 51 51 01020403 Strategic Report Corporate Governance Report Financial Statements Appendices Anastasia Volokhova, STRATEGY AND TRANSFORMATION Tatiana Yurkevich, HUMAN RESOURCES DIRECTOR Sergey Prokofiev, LEGAL AND GOVERNMENT RELATIONS DIRECTOR DIRECTOR Tatiana Yurkevich joined Lenta in 2012 Anastasia Volokhova joined Lenta in as Human Resources Director. Sergey Prokofiev joined Lenta as Legal 2021 as Strategy and Transformation and Government Relations Director Director. Experience: Prior to joining Lenta, Tatiana served as Human Resources in 2012. Sergey Korotkov, CHIEF INFORMATION OFFICER Anna Logunova, INTERNAL AUDIT DIRECTOR Dmitry Gerasimov, BUSINESS SUPPORT DIRECTOR Sergey Korotkov joined Lenta in 2018 as Chief Information Officer. Experience: Sergey has extensive expertise in information technology, Experience: Anna has over twenty years experience working in food retail and FMCG. Anna Logunova joined Lenta in 2011 as Director for Dmitry Gerasimov joined Lenta in October 2020. Experience: Prior to joining Lenta, Dmitry worked for Nordgold Supply Chain Controlling; she was Management as Deputy Business Experience: Prior to joining Lenta, Anastasia held senior roles at Magnit Director at Fazer Bakeries & Confectionery, Russia. During her 18 Experience: Prior to joining Lenta, Sergey worked for Metro Cash & Carry, supported by over 25 years of appointed Director for Supply Chain Support Director and previously for experience in both Russian and and Investment Controlling in 2013, Severstal where he was responsible and the Boston Consulting Group years in HR management, she has Russia for 11 years in different positions international companies. Before taking responsibility for Operational for economic business security, he in the areas of transformation and held senior positions including Head of including Legal and Compliance joining Lenta, Sergey was most Controlling in 2014. Since March 2018, HR at United Heavy Machinery Group Director. He started his career as an recently Senior Vice President and Anna occupies the position of Internal and Izhora Plants, and HR Director expert interpreter and later worked as CIO at Gloria Jeans, where he led the Audit Director in Lenta. Prior to joining also served in the State Internal Affairs. Qualifications: In 1998 Dmitry graduated from Kolomenskoye State of Caterpillar European Fabrications a lawyer in a major Russian law firm company’s digital transformation. Lenta, Anna was Supervisor Costing at Pedagogical University. In 2018 he Business from Plekhanov Russian and Caterpillar Tosno. Tatiana has and as a defending attorney at the University of Economics. experience in leading Six Sigma Programme implementation as a Deployment Champion in Caterpillar. Qualifications: Tatiana has a master’s degree in International Economics Moscow City Bar. Qualifications: Sergey graduated from the Military Institute of Foreign Languages (‘VKIMO’) and the Institute of Law. He holds a PhD in from St. Petersburg State University Law from the Institute of Legislation as well as English and German and Comparative Law under the language degrees from Novosibirsk Government of the Russian Federation Prior to that, he was CIO at Dixy Group, where he led the development and implementation of its IT strategy. Philip Morris International, Russia. Qualifications: Anna graduated with honors from St. Petersburg State graduated from Nordgold Executive Program in Darden School of Business, University of Virginia. He has also held similar positions Technical University. She holds a at PepsiCo, Transaero Airlines, and master’s degree in Economics and Bristol-Myers Squibb Russia. Qualifications: Sergey graduated with honors from Moscow State University with a Master’s Degree in Applied Management. Anna is a Certified Internal Auditor (CIA). State Pedagogical University and an and an MBA in Strategic Management Mathematics MBA in Strategy from International from California State University. Management Institute Link (the UK’s Open University). 52 52 53 53 business efficiency. Qualifications: Anastasia holds a Master’s degree in International LENTA. Annual Report 2020.01020403 Strategic Report Corporate Governance Report Financial Statements Appendices Redomiciliation >> >> Lenta accomplished the redomiciliation to the Russian Federation in the form of an international public joint-stock company effective February 17, 2021. Earlier in 2020, the Company was redomiciled to Cyprus in the form of a public limited liability company and discontinued its incorporation under the laws of the BVI effective February 21, 2020. Redomiciliation took place upon On July 2020, a special resolution to the Cypriot Registrar issuing a approve that the company proceeds temporary certificate of continuation with deregistering from the Register in Cyprus. As from February 21, 2020 of the Registrar of Companies in Lenta is considered to be a legal Cyprus and transferring its registered entity incorporated in Cyprus. As office to and registering as a part of the redomiciliation Lenta Ltd continuing company in the form of changed its name to Lenta Plc and an International public joint-stock is subject to the Cypriot Company company under the legal regime Law as amended, other relevant of the Russian Federation without Cypriot legislation, common law being dissolved and without being principles and EU directives where re-incorporated was passed by the applicable and implemented in shareholders. Cyprus. In addition the UK Corporate Governance Code continues to be As envisioned by the shareholder applied. resolutions passed at the Extraordinary General Meetings As from February 17, 2021 Lenta is considered to be a legal entity incorporated in Russia, registered in the Unified State Register of Legal Entities of the Russian Federation. As part of the redomiciliation Lenta PLc changed its name to Lenta IPJSC and is subject to the laws of the Russian Federation. On June 2020 the company of the Company held on 22 July Accordingly, the new Lenta charter, announced an Extraordinary Meeting 2020 and 23 November 2020, Lenta in the form approved at the of Shareholders to consider the accomplished its incorporation in Extraordinary General Meeting of the proposed redomicilliation of the the Russian Federation in the form Company held on 23 November 2020, company from the Republic of Cyprus of an international public joint- has entered into force. to the Russian Federation into the stock company with its legal seat at special administrative district of Oktyabrsky Island, City of Kaliningrad, Octyabrsky Island, Kaliningrad. Kaliningrad Region, Russian Federation. Corporate governance report >> >> The Code was revised in July 2018 for application to accounting periods beginning on or after 1 January 2019 and has not been amended since then. We reviewed the new Code, and put necessary processes in place to ensure that we continued to be in substantial compliance with these changes during the 2020 financial year and beyond. Compliance with UK Corporate Governance Code >> The Code was revised in July 2018 for application to accounting periods beginning on or after 1 January 2019 and has not been amended since then. We reviewed the new Code, and put necessary processes in place to ensure that we continued to be in substantial compliance with these changes during the 2020 financial year and beyond. 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 Republic of Cyprus, 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. 54 54 55 55 LENTA. Annual Report 2020.01020403 Leadership The Chairman leads the Board, ensuring its effectiveness at the same time as taking the The Chairman’s responsibilities include >> > ensuring the Directors receive accurate, timely and clear > the induction of new Directors and further training for all Directors as interests of the Group’s various information; required; stakeholders into account and > facilitating the effective > communicating effectively promoting high standards of contribution of nonexecutive with shareholders and other corporate governance. The roles Directors and engagement stakeholders and ensuring the of Chairman and CEO are distinct between executive and non- Board develops an understanding and separate. executive Directors; of the view of stakeholders; > building an effective Board; > leading the performance evaluation of the CEO and non- executive Directors. Strategic Report Corporate Governance Report Financial Statements Appendices The key roles and responsibilities of the Senior Independent Director (SID) include >> > acting as a sounding board for the > overseeing the Chairman’s Chairman; > serving as an intermediary for the other Directors when necessary; > ensuring an annual evaluation of the Board is conducted; > being available to assist in appraisal and succession, and > ensuring that Committee chairmen conduct performance evaluations of their Committees. Stephen Johnson was the SID resolving shareholder concerns, throughout the year ending 31 should alternative channels be December 2020. He was selected exhausted; > holding at least one meeting each year with the independent non- for the role thanks to his extensive experience and expertise in both executive and non-executive executive Directors without the capacities in the retail world, including Chairman being present; > monitoring the training and development requirements of Directors; international experience. >> Stephen Johnson was the SID throughout the year ending 31 December 2020. 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 b c he has not received and does not he is not and has not been an he holds no cross-directorships and receive any additional remuneration employee of the Company or the has no significant links with other from the Company apart from a Group within the last five years, does directors through involvement in other director’s fee, does not participate not have any close family ties with any companies or bodies, and does not in the Company’s share option of the Company’s advisers, directors represent any significant shareholder. or a performance-related pay or senior employees; and scheme, and is not a member of the Company’s pension scheme The CEO’s responsibilities include >> > leading the development of the Company’s strategic direction and implementing the agreed strategy; > identifying and executing new > building and maintaining an effective management team; > ensuring effective communication with shareholders and regularly business opportunities; updating institutional shareholders > managing the Group’s risk profile on business strategy and and implementing and maintaining performance. an effective framework of internal >> Managing the Group’s risk profile and implementing and maintaining an effective framework of internal controls controls; 56 56 >> The NEDs provide an essential independent element to the Board, and a solid foundation for strong corporate governance. Non-Executive Directors (NEDs) >> The NEDs provide an essential for scrutinizing the performance of independent element to the Board, management in achieving agreed and a solid foundation for strong goals and objectives. Furthermore, corporate governance. They fulfil a they play a key role in the functioning vital role in corporate accountability, of the Board and its Committees. albeit all Directors are equally Between them, the current NEDs accountable under the Republic of have an appropriate balance of Cyprus law. NEDs are required to skills, experience, knowledge and challenge, in a constructive way, the independent judgement to undertake strategies proposed by the executive their roles effectively. Directors. They are also responsible 57 57 LENTA. Annual Report 2020.01020403 Strategic Report Corporate Governance Report Financial Statements Appendices Matters specifically reserved for the decision of the Lenta Board of Directors >> Management, strategy and planning Capital structure The Board approves changes The Board is responsible for the relating to capital structure including overall management of the Group. allotment of shares, reduction of The Board discharges some of capital (except under employee its responsibilities directly and share plans) and share buybacks. It discharges others through Board also approves major changes to the Committees and the Senior Group’s corporate structure and the Management team. This includes Company’s listings or its status as a approval of the strategy, for which it company limited by shares. has collective responsibility, business plans and budgets, as well as approval of any material restructuring Loans and dividends or reorganisation. It also includes the This includes approval of any establishment of material new areas substantial new loan or similar facility of business. The Board also reviews (including financial leases) from performance in light of the strategy, third parties or material amendment objectives, business plans and to any such facilities including budgets, ensuring that any necessary material loans or similar facilities corrective action is taken. made available to third parties. The >> The Board discharges some of its responsibilities directly and discharges others through Board Committees and the Senior Management team Public reporting and controls Operations and transactions Board also oversees the Company’s dividend policy, declaration of The Board approves half-yearly interim and recommendation of final results announcements as well as dividends and approval of other the Annual Report and Accounts. It This includes approval of significant distributions to shareholders, as also approves material changes in capital and noncapital expenditure as well as any new pension schemes principal accounting policies and well as approval of significant asset or significant changes to existing practices, treasury policies and disposals and any other transactions pension schemes. 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. 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. Corporate Governance >> Remuneration This includes approving the Committees and individual Directors. and approves documents sent to The Board reviews its own governance arrangements. The Board performance and that of its also calls any general meetings 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. Directors’ and Officers’ insurance It is responsible for determining shareholders. It also recommends As shown below, our Directors have a Our CEO and CFO, who are also the cover and establishing policies the risk appetite of the Group and any changes to the Company’s wide range of complementary skills General Director and Chief Financial and rules relating to share-based ensuring maintenance of an effective Memorandum and Articles of and experience. The Board currently Officer of Lenta LLC, are Directors, incentive schemes. The Board system of internal control and risk Association and considers material consists of nine Directors, of which but are ineligible to serve on Board also determines the remuneration management. It also approves and litigation or regulatory investigations three – Michael Lynch-Bell, Julia Committees. The remaining four policy for executive Directors and revises policies, including health, affecting the Lenta Group. It is Solovieva and Stephen Johnson – are Directors – including the Chairman – certain senior executives. It also safety and environment policies, responsible for appointment of key judged by the Board to be Independent were elected by the shareholders approves the remuneration of the share dealing rules, the code of corporate advisors. Directors according to the provisions of pursuant to the nomination rights of non-executive Directors. conduct, the anti- bribery and the UK Corporate Governance Code. the Major Shareholders. corruption policy and corporate 58 58 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. 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 law or the Company’s Memorandum and Articles. 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. >> 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. 59 59 LENTA. Annual Report 2020.01020403 Board diversity and expertise >> Board composition, % Board nationality: Board nationality: Board expertise: Board expertise: 11 89 Females Males 5 2 1 1 Russia UK Denmark Lithuania 7 4 4 3 1 Strategy Financials Retail Marketing Technology/digital Board focus during the year >> In 2020, the Board considered a wide range of matters, including but not limited to: > business strategy > Covid-19 pandemic response set of > individual business and overall Group performance and future actions > assessing and monitoring the Company culture > budgets and long-term plans for capital expenditures > the review and execution of mergers and acquisitions transactions the Company > development of the Company’s > review of estimates of future cash flows, financing arrangements and corporate governance > financial statements and fundraising announcements > industry and competitive > reviewing reports from its environment Committees > responding to the changing > shareholder feedback and reports dynamics of the Russian economy > maintaining and increasing efficiency of the Company’s from brokers and analysts > risk management and risk oversight. development >> Responding to the changing dynamics of the Russian economy >> Individual business and overall Group performance and future capital expenditures 60 60 Strategic Report Corporate Governance Report Financial Statements Appendices Covid-19 >> In 2020 the activity of the Board was influenced by the Covid-19 pandemic While travelling was constrained, the The measures included transfer Board meetings and the sessions of of approximately 95% of office the committees were held remotely. employees to home office working, The Board believes that the remote equipment of all Lenta stores with mode did not affect its performance. safety screens and supply of PPEs for the company employees. The Board oversaw the set of measures taken by the Senior The Board also signed off several Management Team to protect the social initiatives to support vulnerable health and wellbeing of Lenta’s groups of customers, people in need employees and customers as well as and medical workers. securing the supply chain. Anti-bribery and corruption >> Lenta has in place a Compliance We carry out regular awareness Programme, which includes our campaigns across Lenta, and both Ethics Policy, Hotline and Corporate the Internal Audit Team and external Guidelines. The purpose of the advisers undertake the monitoring Programme is to assist in the and assurance of processes. Anti- prevention of unlawful activities by bribery and corruption clauses are individuals and to comply with current included in contracts with the Group’s Russian legislation and best practice. business partners. Lenta’s Compliance 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. Officer and Ethics Committee investigates hotline complaints of unethical behavior with reports to the Audit Committee. 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 The Foundation of the Programme is do business with, are reputable and our Ethics Policy, along with the subset ethical, and do not commit or engage of policies and internal guidelines in any form of violations. which provide a process for operating in accordance with the rules in During 2020, all employees, including specific situations. These policies and newcomers, were trained on the guidelines include procedures for Compliance Programme. We reviewed dealing with public officials, giving and updated the Group’s policies and receipt of gifts and hospitality, during the year. A number of these due diligence processes carried out policies can be viewed on the on third party business partners, and corporate website at policies on conflicts of interest. >> 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 61 61 LENTA. Annual Report 2020.01020403 Risk management and control >> The Board has overall responsibility the Board, as is the Group’s risk The Board confirms that throughout for risk management, and determines management framework, with 2020 and up to the date of approval the Group’s risk strategy; it assesses specific consideration given to of this Annual Report and Accounts, and approves risk appetite and material financial, operational and rigorous processes have been in monitors risk exposure consistent sustainability risks and controls, with place to identify, evaluate and with strategic priorities. The Board appropriate steps taken to address manage the principal risks faced has established a Group-wide system any issues identified. During 2020, no by the Group, including those that of risk management and internal significant internal control failings would threaten its business model, control, which identifies and enables were identified. risk management and the Board to future performance, solvency or liquidity in accordance with Principle evaluate and manage the Group’s The Board has authorised the C.2 of the Code and the Guidance principal risks. Due to the limitations Audit Committee to oversee the on Risk Management, Internal inherent in any system of internal risk management framework and Control and Related Financial and control, this system provides robust, the effectiveness of the Group’s Business Reporting published by but not absolute, assurance against financial reporting, internal control the UK Financial Reporting Council. material misstatement or loss and and assurance systems. Each Board The Group’s approach to risk is designed to manage rather than Committee provides updates on any management, the risks identified and eliminate risk. The effectiveness risks considered within its remit when how it profiles these risks is set out in of the Group’s system of internal providing regular updates to the the Risk Management Overview and control is regularly reviewed by Board. Principal Risks section on pages 36-41. >> 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. Internal audit >> This is designed to improve the management. 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 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. controls to senior management, the Findings are reported to relevant Audit Committee and the Board. operational management who put Internal Audit’s work is focused on in place processes for strengthening the Group’s principal risks; the Head controls. Internal Audit follows of Internal Audit and the Group up on the implementation of Risk function work together when recommendations and reports on considering the appropriate scope progress to senior management and and focus of internal audits. The to the Audit Committee. The Head of Strategic Report Corporate Governance Report Financial Statements Appendices 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 >> >> All new Directors receive a personalised induction programme, tailored to their experience, background and particular area of focus. >> The appointment of new Directors is led by the Nomination Committee, the majority of whose members are independent non-executive Directors. Details of the appointments process can be found on page XX. All new Directors receive a candidates as part of the recruitment All Directors have access to the personalised induction programme, process and a commitment to the Company Secretary and may take tailored to their experience, appropriate time requirements is independent professional advice at background and particular area of included in engagement letters. the Company’s expense in conducting focus. This is designed to develop their Directors are expected to attend their duties. knowledge and understanding of the every Board meeting and every wide-ranging schedule of meetings exceptional circumstances preventing with Senior Management across the their attendance. Scheduled Board Company, comprehensive briefing and Committee meetings are materials and opportunities to visit arranged at least a year in advance the Company’s operations, including to allow Directors to manage other spending time at new store openings, commitments. in store and in our distribution Conflicts of interest Directors have a statutory duty network. The Chairman reviews each Director’s to avoid situations in which they 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. development needs as part of the have or could have a direct or annual performance evaluation process and puts appropriate indirect interest that conflicts or may conflict with the interests arrangements in place for specific of the Company. A Director has training. The Nomination Committee a duty to disclose to the Board reviews the Directors’ skills and any transaction or arrangement experience as a group against those under consideration by the needed to oversee and support Company in which he or she the Company’s future operations, has a personal interest. The and identifies any gaps. Training is Board has a procedure for arranged to develop the knowledge authorising conflicts or potential and skills of the Directors in a variety conflicts of interest. Under this of areas relevant to Lenta’s business. procedure, Directors are required Internal Audit provides independent, plan has space for ad hoc audits Company’s culture and operations. meeting of any Committee of which objective assurance to the Group. as required by the Committee or The programme incorporates a they are a member, unless there are programme of work of the Internal Internal Audit reports regularly to the The Board makes a careful Board papers are, ordinarily, Audit department is considered and Chair of the Audit Committee and assessment of the time commitments circulated a week before each to declare all directorships or other appointments outside the Company that could give rise to approved by the Audit Committee, attends Audit Committee meetings required from the Chairman and non- meeting to give the Directors and a conflict or potential conflict of subject to any additional suggestions four times a year to present the executive Directors to discharge their Committee members sufficient time interest. from the Committee. The audit findings from internal audits. roles properly. This is discussed with to fully consider the information. 62 62 63 63 LENTA. Annual Report 2020.01020403 Strategic Report Corporate Governance Report Financial Statements Appendices Changes to the Board in 2020 >> >> Length of service and independence of non-executive directors Stephen Johnson (Independent) Since 2010 Michael Lynch-Bell (Independent) Since 2013 Julia Solovieva (Independent) Since 2018 Considered to be independent by the Board1 Considered to be independent by the Board Considered to be independent by the Board Vladimir Sorokin was appointed Chief Executive Officer on 3 September 2020. Herman Tinga stepped down from his role as Chief Executive Officer on 3 September 2020. The following Board and Committee meetings are scheduled for 2021 Board Audit OpCapex Nomination Remuneration Meeting Board call 4 8 4 - 4 - 4 - 4 - The terms of reference for Lenta’s Governance section of the Company Board were last revised and updated website: www.lentainvestor.com/ in October 2019 and the Committees en/about/corporate-governance/ terms of reference in December 2019. internal-policies. Details are set out in the Corporate 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. In 2020, due to the outbreak of the Covid-19 pandemic, the Board and Committees meetings were held online except for the Board and Committees meetings in February that were carried out face-to-face. The Board also holds regular update calls during the year, but participation is not mandatory. BoD AuCo Operation and Capex Committee NomCo RemCo Stephen Jonson Michael Lynch-Bell Julia Solovieva Rud Pedersen Herman Tinga (till September 2) Vladimir Sorokin (after September 2) Alexey Mordashov Roman Vasilkov Alexey Kulichenko Tomas Korganas 4 4 4 4 2 2 4 4 4 4 4 4 4 4 2 2 4 4 4 4 4 4 2 2 0 4 4 4 4 2 2 3 4 4 2 2 4 4 64 64 1 The statement on the independence of Stephen Johnson can be found on page XX. 65 65 LENTA. Annual Report 2020.01020403 In 2020, the Committee reviewed the of International public joint-stock Company’s financial results, including company under the legal regime significant financial reporting of the Russian Federation without external auditor, in relation to the performance evaluation and the to the Committee for reviewing the estimates and judgements, as well as being dissolved and without being Company’s financial statements, training requirements of Committee Company’s procedures and system the financial disclosures in the interim re-incorporated as of July 22, 2020. strategic review, financial review, members; management statements. governance statement and half- of internal control in relation to risk management, with a focus on We worked on improvements to our yearly reports, including the going > reporting to the Board on how the methodology used by senior It also monitored the Company’s insurance processes to guarantee concern assumption and the long- the Committee has discharged its management. It also oversees the system of internal control and all insurance is properly covered term viability statement; responsibilities. internal and external audit processes Audit committee report >> Michael Lynch-Bell (Independent, Chairman) Julia Solovieva (Independent) Stephen Johnson (Independent) >> Due to the Covid-19 pandemic, the Audit committee sessions in 2020 were held remotely. 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. management of the Company’s risks by the Company’s dedicated and oversaw the relationship with the policy. We reviewed the reports external auditor and with the internal from our risk manager and the audit function. The Committee reviewed the tax structuring project and matters related to establishing a representative office of Lenta Plc in Russia. We approved the appointment of Ernst&Young (“EY”) as a consultant for the 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. 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 2020. 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. 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 Strategic Report Corporate Governance Report Financial Statements Appendices Role and responsibilities >> The key roles and responsibilities of the Audit Committee include: > monitoring and challenging, where necessary, the integrity of > reviewing the Company’s speakup policy and receiving reports on processes. Although the Committee’s terms of reference set out very specific the financial statements and half matters raised via the speakup duties, it serves a much wider purpose yearly results and any other formal facilities; announcement relating to financial performance; > recommending the appointment of the external auditor and overseeing > reviewing and challenging, where the relationship; in reassuring shareholders that their interests are properly protected with regard to the Company’s financial management and reporting. necessary, the actions and judgements of management, taking into account the views of the > reviewing the terms of reference of the Committee, the results of the The Committee regularly reports to the Board on the matters it discusses. The Board has delegated responsibility > reviewing the Company’s internal A copy of the Committee’s full controls, including financial terms of reference is available The Chairman, CEO and CFO, the controls and updated risk on the Company’s website: Company Secretary, Head of Internal management systems; http://lentainvestor.ru/en/ the Audit and Chief Legal Counsel that report to it. > reviewing the Company’s IT security measures and IT control systems about/corporate-governance/ are invited to attend all Committee internal-policies. meetings. The Audit Committee considered a Other members of senior > reviewing the content of the number of issues during the year, management are invited to attend Annual Report and Accounts when taking into account the views of the to discuss any matters specifically requested by the Board; Company’s management, its tax relevant to them. At the end of > reviewing reports on changes in attendance, the Committee offers tax legislation and management’s The Audit Committee’s main both the external auditor and Head of proposed response responsibilities involve overseeing, Internal Audit the opportunity to meet advisors and the external auditor. each meeting, where they are in monitoring and reviewing the with them without members of senior > reviewing the Company’s significant insurance arrangements; Company’s financial reporting, internal control and assurance management being present. > 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 >> 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. 67 67 As part of our commitment to good The Committee approved the affect the Group. In conjunction with Governance Code; corporate governance, we aim to resolution on deregistering from the management, the Committee will also do this in line with international best Register of the Registrar of Companies review and assess the implications practice. in Cyprus and transferring company’s of new and proposed accounting registered office to and registering standards. as a continuing company in the form > overseeing and reviewing the Internal Audit function, its terms of reference, effectiveness, plan, budget and reporting; 66 66 LENTA. Annual Report 2020.01020403 External auditor >> Significant issues considered by the audit committee >> Strategic Report Corporate Governance Report Financial Statements Appendices The Committee and the Board The Committee received reports on for audits commencing with the 2020 approved the terms of engagement of the findings of the external auditor financial year. Following a competitive the external auditor, the fees paid to it during its half yearly review and tender Ernst & Young LLC (EY) was and the scope of work undertaken. annual audit. reappointed as the Company’s auditor, after redomicilliation to The significant issues – and how they were addressed –are set out below. Suppliers’ allowances Ethics Committee Share-based payments The Committee also reviewed the It reviewed the recommendations Cyprus in February 2020, Ernst & Young The Committee reviewed the The Committee reviewed the work of performance and effectiveness of the made to management by the external Cyprus Limited was appointed as accounting for and recognition of the Ethics Committee; in particular its external auditor in respect of the year auditor and management’s responses, the Company’s auditor at the Annual suppliers’ allowances received for report on the Company hotline. The The Committee reviewed ended 31December 2020. as well as the letters of representation General Meeting of the Company. the provision of services. The review Audit Committee approved measures the considerations made by to the external auditor. included consideration of the types taken by management to mitigate management in relation to the Professional fees billed by Ernst & of allowances received, the period of risks of impropriety and hold culpable accounting for remuneration 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. 68 68 As indicated in last year’s annual Young LLC and Ernst & Young Cyprus coverage and the timing of receipt. employees to account. report, we put the audit out for tender Limited are shown in the table below: Based on this review, the Committee is satisfied that the allowances are recognised in the period in which they are earned and that appropriate Taxation received by certain employees in the form of share-based payments. In addition, management had evaluated the required disclosures for Auditor ’s fees (Ernst & Young LLC and Ernst & Young Cyprus Limited) Audit of consolidated financial statements Consulting and other non-audit services TOTAL FEES 2020, kRub 2019, kRub 29,222 12,844 42,066 24,282 22,729 47,011 disclosure has been made in the The Committee received regular inclusion in the financial financial statements. updates on tax developments in statements. Having challenged Inventories and inventory allowances Russia from management and the the appropriateness of Company’s advisors, together with key assumptions used by management’s interpretation of the management, the Committee impact of current tax legislation on the agreed with management’s Company. The Committee concurred assessment and disclosures. The Committee reviewed the with management’s judgement on the accounting for inventories and the positions adopted and the related recognition of write-downs during disclosures. the period. The review took into consideration the calculation of the cost of inventories, the identification of slow-moving inventories and the Going concern reasons why shrinkage had occurred. The Committee reviewed Based on this review, the Committee management’s adoption of the agreed with the accounting treatment going concern basis of accounting. and disclosures adopted by Management had taken into account management. Capital construction the Company’s financial position, available borrowing facilities, loan covenant compliance, planned store opening programme and the anticipated cash flows and related The Committee examined the expenditures from our retail stores. accounting for capital construction including the recognition of direct The Committee considered the costs incurred, the allocation of position taken by management and, directly attributable overheads taking into account the external and land lease expense. The review auditor’s review, concluded that included a consideration of potential management’s recommendation to fraud risk, the construction tender prepare the financial statements on a process and the acquisition or going concern basis was appropriate. leasing of land. The Committee The annual report also includes a agreed with the accounting long-term viability statement, which treatment and disclosures adopted can be found on pages 42-43. by management. The Committee considered the statement and approved management’s disclosures. >> 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. >> The Committee concurred with management’s judgement on the positions adopted and the related disclosures. 69 69 LENTA. Annual Report 2020.01020403 Strategic Report Corporate Governance Report Financial Statements Appendices Nomination committee report >> Stephen Johnson (Independent, Chairman) Michael Lynch-Bell (Independent) Julia Solovieva (Independent) Alexey Mordashov (Non-executive) >> We continued working on the organisational 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 fit the organisational structure of the Company to Lenta’s long term strategy. 70 70 During 2020, much of the focus in the business was around dealing with the implications and effects of the Covid-19pandemic. This also affected the work of the Committee, with travel and face-to-face meetings constrained meaning that all of our activity was conducted remotely. Despite this, the Committee has We continued working on the had a busy year. Our focus has organisational improvement Tatiana Safutina and Jaap van survey indicated a very high level of Vreden stepped down from their roles engagement and satisfaction with been on ensuring that Lenta has project that was the outcome of as Commercial Department Director the overall working environment and adequate succession planning and the diagnostic of the organisational and as Sourcing and Procurement communication process within the >> organisational improvement, both health in the Company. The Director, respectively. for the Executive Directors and for Committee approved the scope of business. As always there are areas to improve and, having analysed the Board, as well across the wider the project to fit the organisational The Committee approved and the results and feedback from business. structure of the Company to Lenta’s supported the process of revisiting employees, the Committee approved long term strategy. As part of the project, the Committee approved the changes to Lenta’s Senior Management Team in December. Dmitry Bogod was promoted to the newly created role of Chief Commercial Officer. The Committee also approved the appointment of Anastasia Volokhova as the company’s new Strategy and Transformation Officer. During the year, the Board decided that the company required new leadership in order to achieve the ambitious growth strategy it had agreed. A rigorous headhunting process was put in place, led by the Chairman and SID, to identify a suitable leader and this process led to the appointment of Vladimir Sorokin as CEO in September. The Board is delighted to be able to appoint such a well qualified CEO and believes that it has found the right person to lead the business in the next phase of its development. Herman Tinga stepped down as CEO at the same time. The Board would like to place on record their appreciation of Herman’s contribution to the success of Lenta over his 7 years with the company as both CEO and previously as Commercial Director. the company’s values to better reflect an improvement plan which is in Lenta’s corporate culture and ensure the process of being implemented. the values support the company’s The key areas of focus of this plan long-term ambitions. The Board has nominated the Senior Independent Director, Stephen Johnson, as Designated Non- Executive Director for the workforce, responsible for liaising with employees, and meetings with employees representatives. are further improvements of the organisational structure, revisiting business processes to ensure the flexibility of the organisation and development of the recognition and incentives system for the employees of all organisational levels. Finally, we also oversaw the Board’s performance and its appraisal as well as scrutinising our succession planning process and key personnel retention. The market in Russia for talented retail employees continues to be strong and Lenta’s highly professional workforce remains As part of this responsibility, for a target for our competitors. Our the first time, Lenta conducted a objective is to ensure that our comprehensive Pulse survey that succession planning process is fit for involved 91% of employees. The purpose and we have well trained feedback and results from this professionals to drive our business. Finally, we also oversaw the Board’s performance and its appraisal as well as scrutinising our succession planning process and key personnel retention. 71 71 LENTA. Annual Report 2020.01020403 >> 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 4 Committee meetings scheduled for 2021 Strategic Report Corporate Governance Report Financial Statements Appendices Role and responsibilities >> Succession planning >> The key roles and responsibilities of the Nomination Committee remain the same as in previous years and include: > ensuring that proper procedures > reviewing Board level, Senior are established for the nomination, Management and Company-wide selection and training of the succession planning and other Company’s Directors and Senior human resources-related matters; Management; > keeping under review the size, structure, balance of skills, > reviewing the leadership needs of the Company, both executive and non-executive, to ensure experience, independence, the continued ability of the knowledge and general diversity organisation to compete in of the Board to ensure the balance the marketplace. A copy of and composition of the Board and the Committee’s full terms of 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 opportunities for talented people to progress their careers at Lenta, and that any vacant positions can be filled with the minimum of disruption to the business. Our approach is kept under constant review within the business and is regularly examined by the Committee. Board performance >> >> One of our key objectives is to ensure there are role model opportunities for talented people to progress their careers at Lenta, and that any vacant positions can be filled with the minimum of disruption to the business. its Committees remain appropriate; reference is available on the Lenta’s policy is to assess Board any recommendations has been on > making recommendations to the Board of Directors’ conflicts of Company’s website: http:// www.lentainvestor.com/en/ about/corporate-governance/ interest for authorisation, where internalpolicies. appropriate; The Human Resources Director may be > making recommendations to the invited to attend any meeting of the Board regarding the appointment Committee, except for portions of the of new Directors, and identifying, meetings where their presence would interviewing, selecting, and be inappropriate, as determined by determining the independence of the Committee Chairman. There are candidates with suitable industry or 4 Committee meetings scheduled key competency experience; for 2021. performance annually, with an external hold to allow our new CEO to assess review every three years. In 2020 the the Board processes and input into the Board executed an internal evaluation, feedback. We will be implementing any the results of which have been recommendations during the first half analysed. However, implementation of of 2021. During the year Lenta promoted around 4,420 people within the business Performance appraisal system >> >> Lenta has a very well-developed system for performance appraisal across all functions in the business. This is embedded in the way the company works and is used to manage performance and identify high achievers with development needs and the potential to move into more senior roles. Lenta’s appraisal system plays an management team. During the year important part in the Company’s Lenta promoted around 4,420 people succession planning process. within the business. We provided 0.8 The Committee receives regular million man hours of training and reports on the conduct of the development investment for our appraisal process and the outputs employees. from appraisals for all levels of employees, with particular focus on the more senior levels of the 72 72 73 73 LENTA. Annual Report 2020.01020403 Remuneration Committee Report >> Strategic Report Corporate Governance Report Financial Statements Appendices 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 Roles and responsibilities >> The key roles and responsibilities of the Remuneration Committee include: > determining and recommending the broad policy for executive > determining the policy for and scope of service agreements and remuneration within the Group; termination payments. > determining, on behalf of the Board, the remuneration of the A copy of the Committee’s full executive Directors and senior terms of reference is available on Committee Members >> 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. Michael Lynch-Bell (Independent, Chairman) Stephen Johnson (Independent) Julia Soloviova (Independent) the Company’s website: http:// www.lentainvestor.com/en/ about/corporate-governance/ internal-policies. salary increases are identified management; > approving the design of, and determining targets for any performance-related plans; > making recommendations regarding employee equity participation schemes; and implemented in a timely manner based on both labor market and individual performance. 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 these plans are set annually by the Committee in consultation with the CEO and HR Director. The Committee is mindful that annual bonus payments are not just a reward for great performance but also a significant element in retaining and recruiting good people. During 2020, Lenta achieved very good results and the bonus payout for corporate KPIs for top 100 employees is achieved at 125% of target and 119% for other categories of personnel. Long-Term Incentive Plans (LTIPs): The Company operates a number of long-term incentive plans for both senior and middle management. These are designed to ensure reward for – and retention of – managers against a set of performance criteria, which are aligned with shareholder interests. 74 74 75 75 LENTA. Annual Report 2020.01020403 Strategic Report Corporate Governance Report Financial Statements Appendices Long-term incentive plan for senior management >> The Company operates a number of long-term incentive plans for both senior and middle management. In 2020 the new Lenta Top Member Award (LTMA) combining long term > Manager’s eligibility to receive the LTMA award is conditional on his and short term incentive programme or her employment with Lenta and was intoduced as follows in order compliance with certain covenants, to assure better alignment between including confidentiality, non- interests of the management and competition and non-solicitation. shareholders and improve the retention power of award: The LTMA scheme is given below > LTMA offers the same structure of award for senior and middle management. The LTMA award is granted every year subject to approval of the Remuneration Committee. > LTMA is linked to the same KPIs as the annual bonus. LTMA is the Award = (Salary • 12) • target % of award • % of KPI achievement • performance management coefficient combination of annual bonus and The work of the Remuneration LTI award, target award amounts Committee is set out on pages 74 to 79. for both programs were merged and treated as one award pool. The interests in the Company’s share capital held by Senior Management The actual LTMA award depends on and the remuneration received by achievement of annual bonus KPIs the Chairman and the non-executive as well as individual performance Directors are set out on page 78. The evaluation. The vesting period of the Directors’ interests in the Company’s award is 3 years: 50% of this award share capital are set out on page 79. pool is paid in April of the year following grant year and remaining The combined short term (annual 50% is paid in 2 equal installments bonus) and long term (LTI) award pool over the following 2 years. 2020 was approved, granting a total > The new LTMA award is 100% cash of 946,5 mln Rub, which represents The combined short term (annual bonus) and long term (LTI) award pool 2020 was approved, granting a total of 946,5 mln Rub, 308% which represents around of the annual salary of this group. based around 308% of the annual salary of Due to re-domiciliation of Lenta Ltd, it this group. This amount is based on was agreed that it is more practical to The rules of the eligibility in the LTMA 2020 corporate KPI achievement; 50% modify share based awards granted programme remain unchanged: of it is payable in April 2021 as annual prior to 2020 into cash based awards. award target amount and eligibility is bonus and remaining 50% over next 2 The vesting period remained the based on job grade. years, fully vesting in 2023. same. 76 76 2021 annual bonus scheme approval The Committee approved the bonus KPIs, target and payout scales for 2021. Salary review in comparison to labour market >> The Committee reviewed the labour Lenta salaries were dropping below market situation and salary dynamics target pay for the specific labour in Russia and it was decided not to market. In order to retain store and DC apply an overall company salary personnel, salary adjustments were indexation in 2020. However, during made for some geographical labour 2020 specific changes for critical markets for positions where Lenta lost jobs were made in situations where its competitive position. Summary of senior management team remuneration policy >> Element Base pay Currency adjustment Benefits Annual bonus Long-term incentive plan Principles 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 negative pay trend for senior management with a drop in the RUB/ EUR rate. To maintain competitive pay levels, currency adjustment pay is used as decided by the Committee in 2014. > Company car, for some senior managers 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 is affected by the individual performance evaluation, which may increase or decrease the payout. All senior managers are eligible for the long-term incentive plan (LTIP) that is linked to business performance indicators and is cash based subject to Remuneration Committee’s approval. 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. Opportunity There is no set maximum or minimum, it is in line with labour market trends and/or individual role scope changes. Currency adjustment pay is the difference between individual salary calculated in Euro at recruitment and current RUB salary expressed in Euro. For some senior managers, only partial compensation is applied. There are maximums set for each compensation element depending on the job grade. Target annual bonus for senior management is 100% of annua base pay. Maximum target LTIP annual value is 130% of annual salary; the actual amount varies between senior managers based on their job grade and individual performance evaluation. 77 77 LENTA. Annual Report 2020.01020403 Pay structure of CEO, CFO and Senior Management Team >> Chief Executive Officer Chief Executive Officer Chief Financial Officer Chief Financial Officer Other Senior Team Members Minimum Minimum Minimum 100,0% 100,0% 100,0% Target Target Target 25,0% 37,5% 37,5% 30,3% 34,8% 34,8% 31,3% 34,4% 34,4% Maximum Maximum Maximum 15,6% 42,2% 42,2% 24,0% 38,0% 38,0% 25,6% 37,2% 37,2% Base Salary Annual Incentive LTIP Base Salary Annual Incentive LTIP Base Salary Annual Incentive LTIP CEO total cash reward (fixed vs.variable target) CEO total cash reward (fixed vs.varia- ble target) CFO total cash reward (fixed vs.variable target) Other Senior Team Members Total Cash Reward 25,0% Base Salary 37,5% Annual Incentive 37,5% LTIP 30,3% Base Salary 34,8% Annual Incentive 34,8% LTIP 31,3% Base Salary 34,4% Annual Incentive 34,4% LTIP Strategic Report Corporate Governance Report Financial Statements Appendices Strategic alignment of pay >> The table below shows the integration between Lenta’s financial key performance indicators and the senior remuneration framework for 2020/21. This clearly demonstrates a clear linkage between performance metrics, payments to Managers and business performance over the short and long term. Financial objectives Company revenue Increase earnings and returns Increase shareholder value Non-financial objectives Efficient operations Sales space growth KPI Turnover EBITDA Rolling TWC KPI Productivity Incentive scheme Annual Bonus Scheme, LTIP Annual Bonus Scheme, LTIP Annual Bonus Scheme, LTIP Incentive scheme Annual Bonus Scheme Number of openings 2020 Annual Bonus Scheme 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 Interests of Directors in Lenta shares are summarised in the table below : Name of Director Stephen Johnson Michael Lynch-Bell Julia Solovieva Alexey Kulichenko Roman Vasilkov Tomas Korganas Vladimir Sorokin Rud Pedersen Total holding as of 31 dec 2020 (interest in shares/ GDR) Approximate holding as of 31 dec 2020 (% of share capital ) 1 (share) 3,200 (GDRs) 0 0 0 0 513,445 (GDRs) 0 less than 0.01% less than 0.01% 0% 0% 0% 0% less than 0,11% 0% In addition, Alexey Mordashov is the controlling shareholder in Severgroup LLC which owns 76,110,584 shares of the Company, which represents 77.99% of the share capital or 78.73% of the voting rights. 78 78 79 79 LENTA. Annual Report 2020.01020403 Operation and capital expenditure committee report >> Strategic Report Corporate Governance Report Financial Statements Appendices Role and responsibilities >> The key roles and responsibilities of the Operation and Capital Expenditure Committee include: > advising the Board with regard > reviewing and making There are 4 Committee meetings to the overall capital expenditure recommendations on how the scheduled for 2021; this number may strategy of the Group; overall capex plan aligns with the be increased as necessary. > reviewing the Company’s processes for approving capital expenditure Company’s strategy; > endeavouring to ensure that A copy of the Committee’s full projects; improvement programmes relating terms of reference is available > approving the limits of authority for to the design, construction and on the Company’s website: capex-related decisions; operation of new stores are defined www.lentainvestor.com/en/ > reviewing and approving all capex and mergers and acquisitions projects within the Committee’s limits of authority; and implemented in cooperation about/corporate-governance/ with management; internal-policies. > monitoring capex projects’ returns and making adjustments to the capex processes to reflect the lessons learned. Committee members >> Activities during the year >> In 2020 we opened six new hypermarkets and fourteen supermarkets in Russia. Capital expenditure in 2020 amounted to RUB 7.6 bn, compared to RUB 14.0bn in 2019. Roman Vasilkov (Non-executive, Chairman) Stephen Johnson (Independent) Tomas Korganas (Non-executive) 80 80 In 2020, the Operation and Capital The Committee approved investments Expenditure Committee evaluated in Lenta’s logistics infrastructure. The opportunities in the market reviewing investments into the development and making recommendations to the of product-delivery infrastructure Board on the Company’s investment ammounted for approximately RUB 2.1 strategy, policy and risk management. billion. We worked on improvements to The Committee continued to focus on the Company’s underperforming informational and technical solutions stores and analysed the feasibility to develop client-centric activities and of investments required to increase processes. profitability of these stores. The Committee approved the lease of twelve premises in Saint-Petersburg, that were previously operated by SPAR, to extent its supermarket chain. The premises are located in proper catchment areas and meet the high standards of Lenta. The Covid-19 pandemic and further requirements to the office space introduced by Russian authorities revealed the need to reconstruct the Lenta Office located in Saint- Petersburg. The Committee recommended to the Borad of Directors to approve the renovation of the premises to ensure the safe working environment for Lenta employees. We approved 38 investment proposals in 2020, including opening of new hypermarkets and supermarkets in 2021. We also worked together with management on improving the efficiency of the existing stores and maintaining their compliance with applicable regulations. Over RUB 2.1 billion was invested into the development of product- delivery infrastructure We approved 38 investment proposals in 2020, including opening of new hypermarkets and supermarkets in 2021 81 81 LENTA. Annual Report 2020.01020403 Relations with shareholders >> We are committed to conducting constructive dialogue with shareholders to ensure that we understand what is important to them and enable clear communication of our position. The CEO and CFO hold regular meetings with shareholders and update the Board on the outcomes of those meetings. After the 1st quarter in 2020, due to the Covid-19 pandemic, all meetings with shareholders were conducted via video and conference calls. CFO keeps the Board informed of investor, broker and analyst sentiment, and presents a report on the topic 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 team focused on communicating with tnem via a dedicated investor website, one- on-one meetings and conference calls. At our AGM, all resolutions are proposed and voted upon individually by shareholders or their proxies. All votes taken during the AGM are by way of a poll. This follows best practice guidelines and allows the Company to count all votes, not just those of shareholders attending the meeting. Schedule of investor calls in 2021 Month January February April July October Date Day Moscow time 25 24 26 26 25 Monday Wednesday Monday Monday Monday 17.00 – 18.00 16.00 – 17.00 16.00 – 17.00 16.00 – 17.00 16.30 – 18.30 The Strategy Day is scheduled for March 18. Strategic Report Corporate Governance Report Financial Statements Appendices Responsibility statement >> We, members of the Board, confirm that, to the best of our knowledge: The consolidated financial statements, prepared in accordance with IFRS, give a true and fair view of the assets, liabilities, financial position and profit and loss of Lenta Plc and its subsidiaries taken as a whole. This annual report includes a fair review of the development and performance of the business and the position of Lenta 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 23 February 2021 82 82 83 83 LENTA. Annual Report 2020.01020403 >>03 Financial Statements 86 Board of Directors and other officers 88 Management report 92 Independent Auditor’s Report 98 Consolidated statement of financial position as at 31 December 2020 (in thousands of Russian roubles) 100 Consolidated statement of profit or loss and other comprehensive income for the year ended 31 December 2020 (in thousands of Russian roubles) 102 Consolidated statement of cash flows for the year ended 31 December 2020 (in thousands of Russian roubles) 104 Consolidated statement of changes in equity for the year ended 31 December 2020 (in thousands of Russian roubles) 106 Notes to the consolidated financial statements for the year ended 31 December 2020 (in thousands of Russian roubles) Board of Directors and other officers >> Strategic Report Corporate Governance Report Financial Statements Appendices Company Secretary >> Registered office >> Registration number >> Crystalserve Secretarial Limited (appointed on 21 February 2020) Karaiskaki 6, City House 3032 Limassol, Cyprus 407296 Board of Directors >> Alexey Mordashov Julia Solovieva Vladimir Sorokin Alexey Kulichenko Rud Pedersen Roman Vasilkov Tomas Korganas Stephen Johnson Michael Lynch-Bell Independent Auditors >> Ernst & Young Cyprus Limited Certified Public Accountants and Registered Auditors Jean Nouvel Tower 6 Stasinou Avenue PO Box 21656 1511 Nicosia, Cyprus 86 86 87 87 LENTA. Annual Report 2020.01020403 Principal activity The principal activity of the Company is the development and operation of food retail stores in Russia. Management report >> >> The Board of Directors presents its report and audited consolidated financial statements of Lenta PLC and its subsidiaries (the “Group”) for the year ended 31 December 2020. Incorporation >> The Company was incorporated as a company limited by shares under the laws of the British Virgin Islands (BVI) on 16 July 2003. In February 2020 the redomiciliation process to Cyprus was completed. The Department of Registrar of Companies and Official Receiver issued the Certificate of Continuation of the Company by which it certifies that the Company was registered from 21 February 2020 in accordance with the Cyprus Companies Law Cap 113, in particular section 354H as a company continuing in the Republic of Cyprus. The Company’s registered address is 6 Karaiskaki Street, City House, 3032 Limassol, Cyprus 88 88 Strategic Report Corporate Governance Report Financial Statements Appendices Review of current position, future developments and significant risks >> The Group’s development to date, There were no changes during the financial results and position as financial year in the nature of the presented in the consolidated operations of the Group. financial statements are considered satisfactory. On 22 July 2020 an Extraordinary Meeting of Shareholders approved Management has considered the the proposed redomiciliation of Group’s cash flow forecasts for the the Company from the Republic of foreseeable future, which take into Cyprus to the Russian Federation into account the current and expected the special administrative region of economic situation in Russia, the Oktyabrsky Island, Kaliningrad. Group’s financial position, available borrowing facilities, loan covenant The Group is exposed to market compliance, planned store opening risk, credit risk and liquidity risk. The program and the anticipated cash Group’s senior management oversees flows and related expenditures from the management of these risks. The retail stores. The Group does not Board of Directors reviews and agrees expect any material adverse impact policies for managing each of these from the current economic slowdown risks. to its operations. Management believes it is taking uncertainties faced by the Group are appropriate measures to support the disclosed in Note 30 and Note 31 of the sustainability of the Group’s business consolidated financial statements. The principal financial risks and in the current circumstances. Results and Dividends >> The Group’s results for the year are set in Note 10. No dividends to holders of ordinary shares were declared for the year ended 31 December 2020 and for the year ended 31 December 2019. Branches >> During the year ended 31 December 2020 the Group did not operate any branches. Authorised capital On 31 December 2020 the authorised share capital of the Company is equal to 200,000,000 shares. Share capital >> Issued capital and reserves As at 31 December 2020 the As at 31 December 2020, per Company Company’s share capital is comprised estimates, free float is about 21% of 97,585,932 authorised and issued of authorised and issued ordinary ordinary shares. For changes in the shares. issued capital and reserves of the Company refer to Note 18. 89 89 LENTA. Annual Report 2020.01020403 Significant shareholders and related party transactions >> Board of Directors’ responsibility statement >> Strategic Report Corporate Governance Report Financial Statements Appendices Significant shareholders and related party transactions are disclosed in Note 6. Board of Directors >> The members of the Company’s Board Key management personnel of Directors as at 31 December 2020 compensation is disclosed and at the date of this report are in Note 6. presented on page 86. On September 3, 2020 Vladimir Sorokin was appointed as director, in replacement Herman Tinga. There were no other changes in the Board of Directors throughout the year 2020 and up to the date of this report. In accordance with the Company’s Articles of Association all directors presently members of the Board continue in office. Other Information >> >> Other information that is relevant to the Management Report, and which is incorporated within the Annual Report (http://www. lentainvestor.com/en/investors/annual-reports) can be located in the Annual Report as follows: Business review Future developments Risk management Corporate Governance Report Interests of Directors in the Company’s shares On behalf of the Directors as authorised by the Board of Directors Pages 2 - 35 12 36 - 43 44 - 83 79 23 February 2021 Vladimir Sorokin (Director) Rud Pedersen (Director) Directors are responsible for the preparation of these consolidated financial statements that give a true and fair view of the financial position of Lenta PLC and its subsidiaries as of 31 December 2020 and of the consolidated statements of profit or loss and other comprehensive income, changes in equity and cash flows for the year then ended and notes to the consolidated financial statements, including a summary of significant accounting policies. In preparing the consolidated comply with IFRS as adopted – give a true and fair view of financial statements, Directors are by the European Union and the assets, liabilities, financial responsible for: the requirements of the Cyprus position and profit or loss of Companies Law, Cap. 113; Lenta plc and the undertakings > selecting and applying accounting > maintaining statutory accounting included in the consolidated and policies; records in compliance with company financial statements > presenting information, including accounting policies, in a manner local legislation and accounting taken as a whole; and standards in the respective that provides relevant, reliable, jurisdictions in which the Group comparable and understandable operates; information; > taking such steps as are 2. the Management Report includes a fair review of the development and performance of the business > providing additional disclosures reasonably available to them to and the position of Lenta PLC and when compliance with the specific safeguard the assets of the Group; the undertakings included in the requirements of IFRSs as and consolidated financial statements adopted by the European Union > preventing and detecting fraud as a whole, together with a and the requirements of the and other irregularities. Cyprus Companies Law, Cap. description of the principal risks and uncertainties that they face; 113 are insufficient to enable In accordance with sections 9(3) and users to understand the impact (c) and 9(7) of the Law No. 190(I)/2007, of particular transactions, as amended, providing for the other events and conditions transparency requirements of issuers 3. the adoption of a going concern basis for the preparation of the on the Group’s consolidated whose securities are admitted to consolidated financial statements financial position and financial trading on a regulated market (‘the continues to be appropriately performance; Transparency Law’), we, the members based on the foregoing and > making an assessment of of the Board of Directors of Lenta PLC, having reviewed the forecast the Group’s ability to continue as a responsible for the preparation of the financial position of the Group and going concern. consolidated financial statements of Lenta PLC for the year ended 31 Company. Directors are also responsible for: Decembre 2020, hereby declare that The consolidated financial statements > designing, implementing and maintaining an effective and to the best of our knowledge: of the Group for the year ended 31 December 2020 were approved by 1. the consolidated financial Directors on 23 February 2021. sound system of internal controls statements which are prepared on throughout the Group; > maintaining adequate accounting pages 98 to 149: – have been prepared in On behalf of the Directors as authorised by the Board of Directors records that are sufficient to accordance with International show and explain the Group’s Financial Reporting Standards 23 February 2021 transactions and disclose with (‘IFRS’) adopted by the EU and reasonable accuracy at any in accordance with Article 9 time the consolidated financial subsection 4 of the Transparency position of the Group, and Law, the provisions of the Cyprus which enable them to ensure Companies Law, and that the consolidated financial statements of the Group Vladimir Sorokin (Director) Rud Pedersen (Director) 91 91 Significant events after the reporting date Any significant events that occurred after the reporting date are described in Note 32 to the consolidated financial statements. Branches During the year ended 31 December 2020 the Group did not operate any branches. Independent auditors The Independent auditors, Ernst & Young Cyprus Limited, were appointed by the Board of Directors and have expressed their willingness to continue in office and a resolution giving authority to the Board of Directors to fix their remuneration will be proposed at the Annual General Meeting. 90 90 LENTA. Annual Report 2020.01020403 Independent Auditor’s Report >> To the Members of Lenta PLC Report on the Audit of the Consolidated Financial Statements >> Opinion >> We have audited the consolidated financial statements of Lenta PLC (the “Company”), and its subsidiaries (the “Group”), which comprise the consolidated statement of financial position as at 31 December 2020, and the consolidated statements of profit or loss and other comprehensive income, consolidated statement of cash flows and consolidated statement of changes in equity for the year then ended, and notes to the consolidated financial statements, including a summary of significant accounting policies. Basis for Opinion We conducted our audit in accordance with International Standards on Auditing (ISAs). Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements section of our report. We remained independent of the Group throughout the period of our appointment in accordance with the International Ethics Standards Board for Accountants’ International Code of Ethics for Professional Accountants (including International Independence Standards) (IESBA Code) together with the ethical requirements that are relevant to our audit of the In our opinion, the accompanying cash flows for the year then ended consolidated financial statements in consolidated financial statements in accordance with International Cyprus, and we have fulfilled our other give a true and fair view of the Financial Reporting Standards (IFRSs) ethical responsibilities in accordance consolidated financial position of as adopted by the European Union with these requirements and the the Group as at 31 December 2020, and the requirements of the Cyprus IESBA Code. We believe that the and of its consolidated financial Companies Law, Cap. 113. audit evidence we have obtained is performance and its consolidated sufficient and appropriate to provide a basis for our opinion. Strategic Report Corporate Governance Report Financial Statements Appendices Key audit matters incorporating the most significant risks of material misstatements, including assessed risk of material misstatements due to fraud We have fulfilled the responsibilities described in the Auditor’s responsibilities for the audit of the consolidated financial statements section of our report, including in relation to these matters. Accordingly, our audit included the performance of procedures designed to respond to our assessment of the risks of material misstatement of the consolidated financial statements. The results of our audit procedures, including the procedures performed to address the matters below, provide the basis for our audit opinion on the accompanying consolidated financial statements. Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the consolidated financial statements of the current period. These matters were addressed in the context of our audit of the consolidated financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. For each matter below, our description of how our audit addressed the matter is provided in that context. >> We have fulfilled the responsibilities described in the Auditor’s responsibilities for the audit of the consolidated financial statements section of our report, including in relation to these matters. Key audit matter How our audit addressed the key audit matter Impairment of non-current non-financial assets As a result of impairment testing held for the smallest group of assets that can generate independent cash flows, the Group recognized a reversal of impairment of property, plant and equipment in the amount of RUB 2,911,431 thousand. Impairment testing for property, plant and equipment and right-of- use assets was one of the matters of most significance in our audit because the balance of property, plant and equipment and right- of-use assets forms a significant portion of the Group’s assets at the reporting date, 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 Our procedures in relation to impairment testing of property, plant and equipment and right-of-use assets performed by management included an assessment of key management assumptions, including those in respect of forecasted 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 procedures. 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 management. We verified the mathematical accuracy of impairment tests. We assessed disclosures in the consolidated financial statements. The Group receives various types of allowances from suppliers in connection with the purchase of goods for resale in the form of volume rebates and other payments. We compared the terms of providing allowances used in the calculation of allowances recognised to supporting documents approved by individual suppliers. The recognition of allowances was one of the matters of most significance in our audit because it has a significant impact on trade and other receivables, cost of goods sold and inventories. In addition, management exercises judgement in determining the period over which these allowances should be recognised considering the nature and the level of fulfilment of the Group’s obligations and estimates of purchase volumes. Information about suppliers’ rebates receivable and accounts receivable on suppliers’ advertising is disclosed in Note 14 to the consolidated financial statements. We analyzed the assumptions underlying management estimates of recognized amounts of allowances from suppliers, such as the degree of fulfillment of conditions provided for in agreements with 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. 92 92 93 93 LENTA. Annual Report 2020.01020403 Strategic Report Corporate Governance Report Financial Statements Appendices >> In connection with our audit of the consolidated financial statements, our responsibility is to read the other information identified above and, in doing so, consider whether the other information is materially inconsistent with the consolidated financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated. Reporting on other information Responsibilities of the Board of Directors and those charged with governance for the Consolidated Financial Statements The Board of Directors is responsible for the other information. The other information comprises information included in the Consolidated Management Report, the Group’s 2020 Annual Report, including the Corporate Governance Statement, but does not include the consolidated financial statements and our auditor’s report thereon. 94 94 Our opinion on the consolidated If, based on the work we have financial statements does not cover performed, we conclude that there is the other information and we do a material misstatement of this other not express any form of assurance information, we are required to report conclusion thereon. that fact. We have nothing to report in this regard. >> In connection with our audit of the consolidated financial statements, our responsibility is to read the other information identified above and, in doing so, consider whether the other information is materially inconsistent with the consolidated financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated. The Board of Directors is responsible for the preparation of consolidated financial statements that give a true and fair view in accordance with International Financial Reporting Standards as adopted by the European Union and the requirements of the Cyprus Companies Law, Cap. 113, and for such internal control as the Board of Directors 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, the Board of Directors is responsible for assessing the Group’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the Board of Directors either intends to liquidate the Group or to cease operations, or has no realistic alternative but to do so. Those charged with governance are responsible for overseeing the Group’s financial reporting process. 95 95 LENTA. Annual Report 2020.01020403 Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements >> Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements. As part of an audit in accordance audit evidence obtained, whether a We communicate with those with ISAs, we exercise professional material uncertainty exists related charged with governance regarding, judgment and maintain professional to events or conditions that may among other matters, the planned scepticism throughout the audit. We cast significant doubt on the scope and timing of the audit and also: Group’s ability to continue as a significant audit findings, including > Identify and assess the risks of material misstatement of going concern. If we conclude that any significant deficiencies in internal a material uncertainty exists, we control that we identify during our are required to draw attention in audit. the consolidated financial our auditor’s report to the related statements, whether due to fraud disclosures in the consolidated or error, design and perform audit financial statements or, if such procedures responsive to those disclosures are inadequate, to risks, and obtain audit evidence modify our opinion. Our conclusions that is sufficient and appropriate are based on the audit evidence to provide a basis for our opinion. obtained up to the date of our The risk of not detecting a material auditor’s report. However, future misstatement resulting from fraud events or conditions may cause the is higher than for one resulting Group to cease to continue as a from error, as fraud may involve going concern. collusion, forgery, intentional > Evaluate the overall presentation, omissions, misrepresentations, or structure and content of the the override of internal control. consolidated financial statements, > Obtain an understanding of including the disclosures, and internal control relevant to the whether the consolidated audit in order to design audit procedures that are appropriate in financial statements represent the underlying transactions and events the circumstances, but not for the in a manner that achieves a true purpose of expressing an opinion and fair view. on the effectiveness of the Group’s internal control. > Obtain sufficient and appropriate audit evidence regarding the > Evaluate the appropriateness of financial information of the entities We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, actions taken to eliminate threats or safeguards applied. Strategic Report Corporate Governance Report Financial Statements Appendices Report on Other Legal and Regulatory Requirements Pursuant to the requirements of Article 10(2) of the EU Regulation 537/2014 we provide the following information in our Independent Auditor’s Report, which is required in addition to the requirements of International Standards on Auditing. Appointment of the Auditor and Period of Engagement We were first appointed as auditors Our appointment is representing of the Group on 22 July 2020 at the a total period of uninterrupted Company’s Annual General Meeting. engagement appointment of 1 year. Consistency of the Additional Report to the Audit Committee We confirm that our audit opinion on Audit Committee of the Company, the consolidated financial statements which we issued on 18 February 2021 expressed in this report is consistent in accordance with Article 11 of the EU with the additional report to the Regulation 537/2014. Provision of Non-audit Services We declare that no prohibited non- no non-audit services which were audit services referred to in Article provided by us to the Group and 5 of the EU Regulation 537/2014 and which have not been disclosed in the Section 72 of the Auditors Law of 2017 consolidated financial statements or were provided. In addition, there are the consolidated management report. Other Legal Requirements Pursuant to the additional 151 of the Cyprus Companies Law, requirements of the Auditors Law of Cap. 113, and which is included as Other Matter 2017, we report the following: a specific section in the Annual This report, including the opinion, > In our opinion, based on the accordance with the requirements for the Company’s members as a Report, have been prepared in has been prepared for and only work undertaken in the course of the Cyprus Companies Law, body in accordance with Article of our audit, the consolidated Cap, 113, and is consistent with the 10(1) of the EU Regulation 537/2014 management report has been consolidated financial statements. and Section 69 of the Auditors Law prepared in accordance with the requirements of the Cyprus > In our opinion, based on the work undertaken in the course of our of 2017 and for no other purpose. We do not, in giving this opinion, Companies Law, Cap. 113, and the audit, the corporate governance accept or assume responsibility for information given is consistent statement includes all information any other purpose or to any other with the consolidated financial referred to in subparagraphs (i), (ii), person to whose knowledge this statements. > In light of the knowledge and (iii), (vi) and (vii) of paragraph 2(a) of Article 151 of the Cyprus Companies report may come to. understanding of the Group and its Law, Cap. 113. environment obtained in the course > In light of the knowledge and The engagement partner on the audit resulting in this independent of the audit, we are required to understanding of the Group and its auditor’s report is Andreas report if we have identified material environment obtained in the course Avraamides. misstatements in the consolidated of the audit, we are required to accounting policies used and the or business activities within the From the matters communicated with management report. We have report if we have identified material reasonableness of accounting Group to express an opinion those charged with governance, we estimates and related disclosures on the consolidated financial determine those matters that were of statements. We are responsible most significance in the audit of the made by the Board of Directors. > Conclude on the appropriateness nothing to report in this respect. > In our opinion, based on the work undertaken in the course of our misstatements in the corporate governance statement in relation to the information disclosed for for the direction, supervision and consolidated financial statements of audit, the information included items (iv) and (v) of subparagraph of the Board of Directors’ use performance of the group audit. the current period and are therefore in the corporate governance 2(a) of Article 151 of the Cyprus of the going concern basis of We remain solely responsible for the key audit matters. accounting and, based on the our audit opinion. statement in accordance with the Companies Law, Cap. 113. We have requirements of subparagraphs (iv) nothing to report in this respect. and (v) of paragraph 2(a) of Article 96 96 Andreas Avraamides Certified Public Accountant and Registered Auditor for and on behalf of Ernst & Young Cyprus Limited Certified Public Accountants and Registered Auditors Nicosia, 23 February 2021 97 97 LENTA. Annual Report 2020.01020403 Strategic Report Corporate Governance Report Financial Statements Appendices Note 31 December 2020 31 December 2019 Consolidated statement of financial position as at 31 December 2020 >> (in thousands of Russian roubles) Assets Non-current assets Property, plant and equipment Prepayments for construction Right-of-use assets 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 reserve 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 Vladimir Sorokin (Director) >> Short-term borrowings and short-term portion of longterm 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 >> Rud Pedersen (Director) The accompanying notes are an integral part of these consolidated financial statements. On 23 February 2021 the Board of Directors of Lenta PLC authorised these consolidated financial statements. 98 98 7 8 9 11 12 13 14 15 16 17 18 18 27 20 21 9 22 20 9 23 163,900,997 557,739 33,771,261 2,580,972 445,171 201,256,140 42,071,533 10,902,839 1,754,066 361,376 306,354 21,808,874 77,205,042 278,461,182 6,711 27,056,040 46,943 (1,011,190) 68,382,844 94,481,348 45,941,038 6,522,551 31,327,074 83,790,663 61,466,433 33,010,536 3,114,433 790,075 173,063 1,407,748 226,883 100,189,171 183,979,834 278,461,182 165,443,239 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 99 99 LENTA. Annual Report 2020.01020403 Consolidated statement of profit or loss and other comprehensive income for the year ended 31 December 2020 >> (in thousands of Russian roubles) Strategic Report Corporate Governance Report Financial Statements Appendices Note Year ended 31 December 2020 Year ended 31 December 2019 Sales Cost of sales Gross profit Selling, general and administrative expenses Other operating income Other operating expenses Operating profit before impairment 24 25 26 26 Reversal of impairment/(Impairment) of non-financial assets 7, 9, 11 Operating profit Interest expense Interest income Foreign exchange (losses)/gains Profit/(loss) before income tax Income tax expense Profit/(loss) for the year Other comprehensive income for the year, net of tax TOTAL COMPREHENSIVE INCOME/(LOSS) FOR THE YEAR, NET OF TAX Earnings/(losses) per share (in thousands of Russian roubles per share) 21 445,543,829 (343,728,186) 101,815,643 (80,114,179) 5,199,902 (522,470) 26,378,896 2,907,125 29,286,021 (9,512,254) 609,970 (386,122) 19,997,615 (3,456,984) 16,540,631 − 16,540,631 417,500,015 (325,482,536) 92,017,479 (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) basic and diluted, for profit/(loss) for the year attributable to equity holders of the parent 19 0.171 (0.029) 100 100 101 101 LENTA. Annual Report 2020.01020403 Consolidated statement of cash flows for the year ended 31 December 2020 >> (in thousands of Russian roubles) Strategic Report Corporate Governance Report Financial Statements Appendices Cash flows from operating activities Profit/(loss) before income tax 19,997,615 (2,603,190) Note Year ended 31 December 2020 Year ended 31 December 2019 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 Write-down of inventories to net realisable value Net foreign exchange loss/(gain) attributable to financing activities Change in expected credit losses of accounts receivable and write- offs of accounts receivable Impairment and write-offs of advances paid and prepayments for construction Depreciation and amortisation (Reversal of impairment)/impairment of non-financial assets Share options expense Movements in working capital (Increase)/Decrease in trade and other receivables (Increase)/decrease in advances paid (Increase)/decrease in prepaid expenses (Increase)/decrease in inventories Increase/(decrease) in trade and other payables Increase in contract liabilities and advances received Increase in net other taxes payable Cash from operating activities Income taxes paid Interest received Interest paid Net cash generated from operating activities Cash flows from investing activities Purchases of property, plant and equipment Purchases of intangible assets 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 (used in)/generated from financing activities Net (decrease)/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 26 26 26 13 26 26 7, 9, 11 7, 9, 11 27 14 15 13 22 16, 23 20, 29 20, 29 9 18 17 17 159,897 4,672 (41,448) 9,512,254 (609,970) 595,286 138,977 19,371 67,147 18,540,233 (2,907,125) 463,590 45,940,499 (2,388,253) (259,025) (203,295) (4,213,554) 4,601,050 289,025 36,173 43,802,620 (4,768,884) 660,905 (9,654,711) 30,039,930 (6,834,086) (778,002) 238,340 (7,373,748) 45,792,775 (117,240,001) (2,814,842) − (74,262,068) (51,595,886) 73,404,760 21,808,874 296,667 13,446 121,636 15,866,946 (3,827,178) 411,398 (102,355) (48,658) 101,831 18,439,679 11,849,959 435,121 40,955,302 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 (13,964,105) 230,030,804 (206,770,873) (2,848,226) (720,099) 19,691,606 39,599,900 33,804,860 73,404,760 Certain amounts shown here do not correspond to the financial statements for the period ended 31 December 2019 reflect reclassification described in Note 4. The accompanying notes are an integral part of these consolidated financial statements. 102 102 103 103 LENTA. Annual Report 2020.01020403 Consolidated statement of changes in equity for the year ended 31 December 2020 >> (in thousands of Russian roubles) Strategic Report Corporate Governance Report Financial Statements Appendices Balance at 1 January 2020 Profit for the year Total comprehensive income Share option expenses (Note 27) Share option modification t (Note 27) Share option settlement by cash (Note 27) Share option expired worthless (Note 27) − − − − − − − Amendment to par value of ordinary shares (Note 18) BALANCE AT 31 DECEMBER 2020 6,711 6,711 Share capital Additional paid-in capital Treasury shares Share options reserve 27,062,751 (1,011,190) 390,536 − − − − − − (6,711) − − − − − − − Retained earnings 51,708,795 16,540,631 16,540,631 − − 112,932 − − 463,590 (346,393) (440,304) (20,486) 20,486 − − Total equity 78,150,892 16,540,631 16,540,631 463,590 (346,393) (327,372) − − 27,056,040 (1,011,190) 46,943 68,382,844 94,481,348 Share capital Additional paid-in capital Treasury shares Share options reserve Retained earnings Total equity 26,935,309 (291,091) 633,165 54,238,545 − − − 127,442 − − 27,062,751 − − − − − − − (2,793,874) (2,793,874) 435,121 (127,442) − − 81,515,928 (2,793,874) (2,793,874) 435,121 − (550,308) 264,124 (286,184) (720,099) (1,011,190) − − (720,099) 390,536 51,708,795 78,150,892 Balance at 1 January 2019 Loss for the year Total comprehensive loss Share option expenses (Note 27) Share option settlement by shares (Notes 18, 27) Share option settlement by cash (Note 27) Purchase of treasury shares (Note 18) BALANCE AT 31 DECEMBER 2019 Notes − − − − − − − − Additional paid-in capital: Treasury shares: Treasury shares are Additional paid-in capital is the own equity instruments reacquired by difference between the fair value of the Group. consideration received and nominal value of the issued shares. 104 104 105 105 LENTA. Annual Report 2020.01020403 Notes to the consolidated financial statements for the year ended 31 December 2020 >> (in thousands of Russian roubles) 106 106 Strategic Report Corporate Governance Report Financial Statements Appendices 1. The Lenta Group and its operations >> The Lenta Group (the “Group”) comprises Lenta PLC (“the Company”) and its subsidiaries. The Group’s principal business activity is the development and operation of food retail stores in Russia. The Company was incorporated as the Company was registered from 21 a company limited by shares under February 2020 in accordance with the the laws of the British Virgin Islands Cyprus Companies Law Cap 113, in (BVI) on 16 July 2003. The Company’s particular section 354H as a company registered address was at P.O. Box continuing in the Republic of Cyprus. 3340, Road Town, Tortola, BVI. In September 2019 the Company 6 Karaiskaki Street, City House, 3032 established a representative office in Limassol, Cyprus. The Company’s registered address is St. Petersburg. In October 2019 the Company was Meeting of Shareholders approved registered as a Russian tax resident. the proposed redomiciliation of On 22 July 2020 an Extraordinary >> On 22 July 2020 the Extraordinary Meeting of Shareholders approved proposed redomiciliation of the Company from the Republic of Cyprus to the Russian Federation into the special administrative region of Oktyabrsky Island, Kaliningrad. In December 2019 the Company Cyprus to the Russian Federation into December 2019 the Group has one started the process of its redomiciliation to Cyprus. the special administrative region of main operating subsidiary, Lenta Oktyabrsky Island, Kaliningrad. LLC , a legal entity registered under the Company from the Republic of At 31 December 2020 and 31 the laws of the Russian Federation. In February 2020 the redomiciliation Starting from March 2014 the The registered office of Lenta LLC, process was completed. The Company’s shares are listed on the is located at 112, Lit. B, Savushkina Department of Registrar of Companies London Stock Exchange in the form Street, 197374, Saint Petersburg, Russia. and Official Receiver issued the of Global Depositary Receipts (GDR) Other subsidiaries are property or Certificate of Continuation of the and Moscow Exchange in the form of investment holding companies by Company by which it certifies that Depositary Receipts (DR). their nature. The following is a list of the Group’s significant subsidiaries and the effective ownership holdings therein. Country of incorporation Principal activities Holding, % 31 December 2020 31 December 2019 Lenta LLC Russia Lenta-2 LLC Russia Zoronvo Holdings Ltd Cyprus TRK Volzhsky LLC Russia TK Zheleznodorozhny LLC Russia Operation of food retail stores Holding of investments Holding of investments Holding of investments Holding of property 100 100 100 100 100 100 100 100 100 100 107 107 >>1LENTA. Annual Report 2020.01020403 2. Basis of preparation and changes to the Group’s accounting policies >> Statement of compliance >> These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (IASB) as adopted by the European Union and the requirements of the Cyprus Companies Law, Cap. 113 >> The consolidated financial statements have been prepared on a historical cost basis, except for as described in accounting policies below. The consolidated financial statements are presented in Russian roubles and all values are rounded to the nearest thousand (RUB 000), except when otherwise indicated. 2.1 BASIS OF PREPARATION The consolidated financial statements expect any material adverse impact have been prepared on a historical from the current economic slowdown cost basis, except for as described to its operations. in accounting policies below. The consolidated financial statements Management believes it is taking are presented in Russian roubles and appropriate measures to support all values are rounded to the nearest the sustainability of the Company’s thousand (RUB 000), except when business in the current circumstances. 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. A general slowdown in the global economy caused by COVID-19, continued economic uncertainty and consequent challenging market conditions may affect the ability to Accordingly, management is satisfied that it is appropriate to adopt the going concern basis of accounting in preparing the consolidated financial information for these consolidated financial statements. continue as a going concern. At 31 December 2020, the Group had Management has considered the net current liabilities of RUB 22,984,129 (net current liabilities at 31 December Group’s cash flow forecasts for the 2019: 6,848,744). foreseeable future, which take into account the current and expected Unused credit facilities available economic situation in Russia, the as of 31 December 2020 were RUB Group’s financial position, available 177,600,000. Management believes that borrowing facilities, loan covenant operating cash flows and available compliance, planned store opening borrowing capacity will provide the program and the anticipated cash Group with adequate resources to flows and related expenditures from fund its liabilities for the next year. retail stores. The Group does not Strategic Report Corporate Governance Report Financial Statements Appendices 2.2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Business combinations and goodwill Current versus non- current classification Business combinations are accounted Goodwill is initially measured at cost, for using the acquisition method. being the excess of the aggregate The Group presents assets and The cost of an acquisition is of the consideration transferred and liabilities in statement of financial measured as the aggregate of the the amount recognised for non- position based on current/ noncurrent consideration transferred measured controlling interest over the net classification. at acquisition date, fair value and identifiable assets acquired and the amount of any non-controlling liabilities assumed. An asset is current when it is: interest in the acquiree. For each business combination, the Group If the fair value of the net assets > Expected to be realised or intended elects whether to measure the non- acquired is in excess of the aggregate to sold or consumed in normal controlling interest in the acquiree consideration transferred, the gain is operating cycle; at fair value or at the proportionate recognised in profit or loss. > Held primarily for the purpose of share of the acquiree’s identifiable net trading; assets. Acquisition-related costs are After initial recognition, goodwill > Expected to be realised within expensed as incurred and included in is measured at cost less any twelve months after the reporting administrative expenses. accumulated impairment losses. For period; or the purpose of impairment testing, > Cash or cash equivalent unless When the Group acquires a business, goodwill acquired in a business restricted from being exchanged or it assesses the financial assets and combination is, from the acquisition used to settle a liability for at least liabilities assumed for appropriate date, allocated to each of the twelve months after the reporting classification and designation in Group’s cash-generating units that period. accordance with the contractual are expected to benefit from the terms, economic circumstances combination, irrespective of whether All other assets are classified as and pertinent conditions as at the other assets or liabilities of the non-current. acquisition date. This includes the acquiree are assigned to those units. separation of embedded derivatives A liability is current when: in host contracts by the acquiree. Where goodwill has been allocated to a cash-generating unit and part > It is expected to be settled in If the business combination is of the operation within that unit is normal operating cycle; achieved in stages, the previously disposed of, the goodwill associated > It is held primarily for the purpose held equity interest is remeasured at with the disposed operation is of trading; its acquisition date fair value and any included in the carrying amount of resulting gain or loss is recognised in the operation when determining the > It is due to be settled within twelve months after the reporting period; profit or loss. gain or loss from disposal. Goodwill or disposed in these circumstances > There is no unconditional right to Any contingent consideration to is measured based on the relative defer the settlement of the liability be transferred by the acquirer will values of the disposed operation and for at least twelve months after the be recognised at fair value at the acquisition date. Subsequently the portion of the cash-generating unit retained. reporting period. contingent consideration classified as an asset or liability is measured at fair value with changes in fair value recognised in the consolidated statement of profit or loss. Contingent consideration that is classified as equity is not remeasured and subsequent settlement is accounted for within equity. The Group classifies all other liabilities as non-current. Deferred tax assets and liabilities are classified as non-current assets and liabilities. 108 108 109 109 >>2LENTA. Annual Report 2020.01020403 Strategic Report Corporate Governance Report Financial Statements Appendices Fair value measurement Property, plant and equipment The Group measures financial A fair value measurement of a non- instruments, such as, derivatives at financial asset takes into account > Level 3 − valuation techniques for which the lowest level input Property, plant and equipment are Construction in progress comprises initially recorded at purchase or costs directly related to the Depreciation fair value at each balance sheet a market participant’s ability to that is significant to the fair value construction cost. Cost of replacing construction of property, plant and Depreciation of property, plant date. Also, fair values of financial generate economic benefits by using measurement is unobservable. major parts or components of equipment including an appropriate and equipment is calculated instruments measured at amortised the asset in its highest and best use cost are disclosed in Note 29. or by selling it to another market participant that would use the asset in Fair value is the price that would its highest and best use. be received to sell an asset or paid to transfer a liability in an orderly The Group uses valuation techniques transaction between market that are appropriate in the participants at the measurement circumstances and for which sufficient date. The fair value measurement is data are available to measure fair based on the presumption that the value, maximising the use of relevant transaction to sell the asset or transfer observable inputs and minimising the the liability takes place either: use of unobservable inputs. > In the principal market for the asset All assets and liabilities for which fair or liability; or value is measured or disclosed in the > In the absence of a principal financial statements are categorised market, in the most advantageous within the fair value hierarchy, market for the asset or liability. described as follows, based on the The principal or the most to the fair value measurement as a lowest level input that is significant advantageous market must be whole: accessible by the Group. For assets and liabilities that are recognised in the financial statements on a recurring basis, the Group determines whether transfers have occurred between Levels in the hierarchy by reassessing categorisation (based on the lowest level input that is significant to the fair value measurement as a whole) at the end of each reporting period. property, plant and equipment items allocation of directly attributable using the straight-line method is capitalised and the replaced part is variable overheads that are incurred to write off their cost to their retired. All other repair and maintenance in construction. Depreciation of an residual values over their costs are expensed as incurred. asset begins when it is available estimated useful lives: Property, plant and equipment are stated at cost, net of accumulated depreciation and accumulated impairment losses, if any. for use, i.e. when it is in the location and condition necessary for it to be capable of operating in the manner intended by management. Construction in progress is reviewed regularly to determine whether its carrying value is recoverable and whether appropriate impairment loss has been recognised. Properties in the course of construction for production, rental or administrative Gains and losses on disposals purposes, or for purposes not yet determined by comparing net determined, are carried at cost, less proceeds with the respective carrying any recognised impairment loss. amount are recognised in profit or loss. Depreciation of these assets, on the same basis as other property assets, Land improvements comprises costs commences when the assets are ready Useful lives in years 30 7 2 to 15 Buildings Land improvements Machinery and equipment > Level 1 − quoted (unadjusted) For the purpose of fair value related to enhancement to a plot for their intended use. The fair value of an asset or a liability market prices in active markets for disclosures, the Group has determined is measured using the assumptions that market participants would use when pricing the asset or liability, identical assets or liabilities. > Level 2 − valuation techniques for which the lowest level input classes of assets and liabilities on the basis of the nature, characteristics and risks of the asset or liability and assuming that market participants act that is significant to the fair the level of the fair value hierarchy as in their economic best interest. value measurement is directly or explained above. indirectly observable. of land adjoining a store including parking lots, driveways, walkways. Leases Right-of-use assets Functional and presentation currency The Group recognises right-of-use Land Buildings 1 to 50 years 1 to 30 years that depend on an index or a rate, and amounts expected to be paid under residual value guarantees. >> 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. 110 110 assets at the commencement date of Depreciations is charged to profit The lease payments also include the The presentation and functional settlement or translation of monetary the lease (i.e., the date the underlying or loss, except for depreciation of exercise price of a purchase option currency of all Group entities is the Russian rouble (“RUB”), the national items are recognised in profit or loss. asset is available for use). Right-of- use assets are measured at cost, less right-of-use assets representing right to use leased land plots during reasonably certain to be exercised by the Group and payments of penalties currency of the Russian Federation, Non-monetary items that are any accumulated depreciation and the construction process, which is for terminating a lease, if the lease the primary economic environment in measured in terms of historical cost impairment losses, and adjusted for included in carrying value of assets term reflects the Group exercising which operating entities function. in a foreign currency are translated any remeasurement of lease liabilities. under construction. Right-of-use the option to terminate. The variable using the exchange rates at the The cost of right-of-use assets assets are subject to impairment. lease payments that do not depend Transactions in foreign currencies dates of the initial transactions. includes the amount of lease liabilities are initially recorded by the Group’s Non-monetary items measured at recognised, initial direct costs Lease liabilities entities at the functional currency fair value in a foreign currency are incurred, and lease payments made on an index or a rate are recognised as expense in the period on which the event or condition that triggers the spot rates at the date the transaction translated using the exchange rates at or before the commencement date At the commencement date of the payment occurs. first qualifies for recognition. at the date when the fair value is less any lease incentives received. lease, the Group recognises lease determined. The gain or loss arising Unless the Group is reasonably certain liabilities measured at the present Monetary assets and liabilities on translation of non-monetary items to obtain ownership of the leased value of lease payments to be denominated in foreign currencies are measured at fair value is treated in asset at the end of the lease term, the made over the lease term. The lease translated at the functional currency line with the recognition of gain or loss recognised right-of-use assets are payments include fixed payments spot rates of exchange at the from change in fair value of the item. depreciated on a straight-line basis (including in-substance fixed reporting date. Differences arising on over the shorter of its estimated useful payments) less any lease incentives life and the lease term as follows: receivable, variable lease payments 111 111 >>2LENTA. Annual Report 2020.01020403 In calculating the present value of Short-term leases lease payments, the Group uses the Lease and non-lease components incremental borrowing rate at the The Group applies the short-term lease commencement date if the lease recognition exemption to its At initial application and subsequently interest rate implicit in the lease is short-term leases (i.e., those leases as well the Group accounts for lease not readily determinable. After the that have a lease term of 12 months and non-lease components (e.g. commencement date, the amount of or less from the commencement date advertising, maintenance fees etc.) lease liabilities is increased to reflect or initial application date and do not separately. the accretion of interest and reduced contain a purchase option). Lease for the lease payments made. In payments on short- term leases are addition, the carrying amount of lease recognised as expense on a straight- liabilities is remeasured if there is a line basis over the lease term. 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. Intangible assets Strategic Report Corporate Governance Report Financial Statements Appendices 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 immediately in profit or loss. Where an impairment loss subsequently reverses, the carrying amount of the asset (the cashgenerating unit) is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset (the cash-generating unit) in prior years. A reversal of an impairment loss is recognised immediately in profit or loss. Non-current assets held for sale and discontinued operations The Group classifies non-current it is unlikely that significant changes A disposal group qualifies as a assets and disposal groups as held to the sale will be made or that the discontinued operation if it is a for sale if their carrying amounts will decision to sell will be withdrawn. component of an entity that either Intangible assets acquired separately Intangible assets with finite lives are expense category that is consistent be recovered principally through a Management must be committed has been disposed of, or is classified are measured on initial recognition amortised over the useful economic with the function of the intangible sale transaction rather than through to the plan to sell the asset and as held for sale, and: at cost. The cost of intangible life (which is from 3 to 7 years) using assets or included into the carrying continuing use. Non-current assets the sale expected to be completed assets acquired in a business a straight-line method to write off amount of an asset as appropriate. and disposal groups classified as held within one year from the date of the combination is their fair value at the their cost to their residual values for sale are measured at the lower of classification. date of acquisition. Following initial and assessed for impairment Intangible assets with indefinite recognition, intangible assets are whenever there is an indication useful lives are not amortised, but are carried at cost less any accumulated that the intangible asset may be tested for impairment annually, either amortisation and accumulated impaired. The amortisation period individually or at the cash-generating impairment losses. Internally and the amortisation method for an unit level. The assessment of indefinite 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 generated intangible assets, excluding intangible asset with a finite useful life is reviewed annually to determine income tax expense. capitalised development costs, are life are reviewed at least at the end whether the indefinite life continues not capitalised and expenditure is of each reporting period. Changes to be supportable. If not, the change reflected in profit and loss in the in the expected useful life or the in useful life from indefinite to finite is period in which the expenditure is expected pattern of consumption of made on a prospective basis. The criteria for held for sale classification is regarded as met only when the sale is highly probable Property, plant and equipment and intangible assets are not depreciated or amortised once classified as held for sale. > Represents a separate major line of business or geographical area of operations; > Is part of a single co-ordinated plan to dispose of a separate major line of business or geographical area of operations; or > Is a subsidiary acquired exclusively with a view to resale Discontinued operations are excluded from the results of continuing incurred. future economic benefits embodied and the asset or disposal group is Assets and liabilities classified as held operations and are presented as a in the asset are considered to modify Gains or losses arising from available for immediate sale in its for sale are presented separately single amount as profit or loss after the amortisation period or method, derecognition of an intangible asset present condition. Actions required to as current items in the statement of tax from discontinued operations in The useful lives of intangible assets are assessed as either finite or indefinite. as appropriate, and are treated as changes in accounting estimates. The are measured as the difference between the net disposal proceeds amortisation expense on intangible and the carrying amount of the asset assets with finite lives is recognised and are recognised in the profit or loss in the statement of profit or loss and when the asset is derecognised. other comprehensive income as the Impairment of non-financial assets complete the sale should indicate that financial position. the statement of profit or loss. Income taxes Income taxes have been provided unless it relates to transactions that for in the consolidated financial are recognised, in the same or a statements in accordance with different period, directly in equity. In management’s interpretation of the case of a business combination, the relevant legislation enacted the tax effect is taken into account in At each reporting date, the Group order to determine the extent of the allocation can be identified, corporate or substantively enacted as at the calculating goodwill or determining reviews the carrying amounts of its impairment loss (if any). Where it is not assets are also allocated to individual reporting date. The income tax the excess of the acquirer’s interest non-financial assets to determine possible to estimate the recoverable cash-generating unit, or otherwise charge comprises current tax and in the net fair value of the acquiree’s whether there is any indication amount of an individual asset, the they are allocated to the smallest deferred tax and is recognised in the identifiable assets, liabilities and that those assets have suffered Group estimates the recoverable group of cash-generating units for consolidated statement of profit or contingent liabilities over cost of an impairment loss. If any such amount of the cash-generating unit which a reasonable and consistent loss and other comprehensive income consideration paid. indication exists, the recoverable to which the asset belongs. Where a allocation basis can be identified. amount of the asset is estimated in reasonable and consistent basis of 112 112 113 113 >>2LENTA. Annual Report 2020.01020403 Strategic Report Corporate Governance Report Financial Statements Appendices Current tax is the amount expected unused tax credits and unused tax of the direct cost of goods, The loyalty programme offered by pension and social insurance funds, are met. An additional expense is to be paid to or recovered from the losses can be utilised, except: transportation and handling costs. the Group gives rise to a separate paid annual leave and sick leave, recognised for any modification that taxation authorities in respect of taxable profits or losses for the current and prior periods. Deferred income tax > When the deferred tax asset relating to the deductible Cost of sales comprises only of cost of inventories sold through retail stores and inventory write-downs made performance obligation because it bonuses, and non-monetary benefits increases the total fair value of the generally provides a material right are accrued in the year in which the share-based payment transaction, to the customer. The Group allocates associated services are rendered by or is otherwise beneficial to the is recorded using the balance sheet temporary difference arises from during the period. a portion of the transaction price the employees of the Group. employee as measured at the date of liability method for tax loss carry- the initial recognition of an asset forwards and temporary differences or liability in a transaction that is arising between the tax bases of not a business combination and, at Borrowing costs assets and liabilities and their carrying the time of the transaction, affects Borrowing costs directly attributable amounts for financial reporting neither the accounting profit nor to the acquisition, construction or purposes. Deferred tax balances are taxable profit or loss. production of qualifying assets are measured at tax rates enacted or > In respect of deductible temporary capitalised as part of the cost of to the loyalty programme based on relative stand-alone selling price and recognize as a contract liability. Other income Share-based payments Certain employees (including senior modification. Segment reporting executives) of the Group receive The Group’s business operations are remuneration in the form of share- located in the Russian Federation Income generated from rental of based payments, whereby employees and relate primarily to retail sales of substantively enacted at the reporting differences associated with that asset, other borrowing costs spaces for small trading outlets within render services as consideration for consumer goods. Although the Group date, which are expected to apply investments in subsidiaries, are recognised in profit or loss in the the Group’s stores is recognised in equity instruments (equity-settled operates through different stores to the period when the temporary associates and interests in joint period in which they are incurred. the end of each month on a straight- transactions). differences will reverse or the tax ventures, deferred tax assets are A qualifying asset is an asset that line basis over the period of the lease, and in various regions within the Russian Federation, the Group’s chief loss carry-forwards will be utilised. recognised only to the extent that necessarily takes a substantial period in accordance with the terms of the The cost of equity-settled transactions operating decision maker reviews Deferred tax assets and liabilities it is probable that the temporary of time to get ready for its intended use relevant lease agreements. is determined by the fair value at the the Group’s operations and allocates are netted only within the individual differences will reverse in the or sale. For the purposes of borrowing date when the grant is made using an resources on an individual store-by- companies of the Group. Deferred foreseeable future and taxable costs recognition, a substantial period Sale from secondary materials appropriate valuation model. store basis. The Group has assessed tax assets for deductible temporary profit will be available against of time is considered to be a period of is recognized within the other the economic characteristics of the differences and tax loss carry- which the temporary differences twelve months or more. operating income in the consolidated That cost is recognised, together with individual stores and determined forwards are recorded only to the can be utilised. statement of profit or loss and other a corresponding increase in share that the stores have similar margins, extent that it is probable that future To the extent that the Group borrows comprehensive income at a point in options reserve in equity, over the similar products, similar types of taxable profit will be available against The carrying amount of deferred tax funds generally and uses them for time. period in which the performance and/ customers and similar methods of which the deductions can be utilised. assets is reviewed at each reporting the purpose of obtaining a qualifying or service conditions are fulfilled in distributing such products. Therefore, Deferred tax liabilities are recognised it is no longer probable that sufficient amount of borrowing costs eligible a time-proportion basis using the The cumulative expense recognised has one reportable segment under for all taxable temporary differences, taxable profits will be available to allow for capitalisation by applying a effective interest rate method. Interest for equity-settled transactions at each IFRS 8. Segment performance is except: all or part of the asset to be recovered. capitalisation rate to the expenditures income is included into the Interest reporting date until the vesting date evaluated based on a measure of date and reduced to the extent that asset, the Group determines the Interest income is recognised on employee benefits expense (Note 27). the Group considers that it only > When the deferred tax liability The measurement of deferred tax the weighted average of the borrowing statement of profit or loss and other period has expired and the Group’s tax, depreciation and amortisation arises from the initial recognition of liabilities and assets reflects the tax costs applicable to the borrowings of comprehensive income. best estimate of the number of equity (EBITDA). EBITDA is a non-IFRS measure. goodwill or an asset or liability in a consequences that would follow the Group that are outstanding during transaction that is not a business from the manner in which the Group the period, other than borrowings combination and, at the time of expects, at the reporting date, to made specifically for the purpose of Suppliers’ allowances instruments that will ultimately vest. The statement of profit or loss expense manner consistent with that in the Other information is measured in a the transaction, affects neither the recover or settle the carrying amount obtaining a qualifying asset. The Group receives various types of or credit for a period represents the consolidated financial statements. on that asset. The capitalisation rate is income line in the consolidated reflects the extent to which the vesting revenue and earnings before interest, accounting profit nor taxable profit of its assets and liabilities. or loss. > In respect of taxable temporary differences associated with investments in subsidiaries, Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off current tax Revenue from contracts with customers The sole source of revenue from allowances from vendors in the form movement in cumulative expense of volume discounts and other forms recognised as at the beginning and of payments that effectively reduce end of that period and is recognised in Seasonality the cost of goods purchased from the vendor. These allowances received employee benefits expense (Note 27). The Group’s business operations are stable during the year with associates and interests in joint assets against current tax liabilities and contracts with customers is retail sales. from suppliers are recorded as a No expense is recognised for awards limited seasonal impact, except for ventures, when the timing of when they relate to income taxes levied the reversal of the temporary by the same taxation authority and the differences can be controlled and Group intends to settle its current tax it is probable that the temporary assets and liabilities on a net basis. differences will not reverse in the foreseeable future. Inventories Deferred tax assets are recognised for Inventories are stated at the lower all deductible temporary differences, of cost and net realisable value. the carry-forward of unused tax Cost of inventory is determined on credits and any unused tax losses the weighted average basis. Net to the extent that it is probable that realisable value is the estimated taxable profit will be available against selling price in the ordinary course of which the deductible temporary business, less the cost of completion differences, and the carry-forward of and selling expenses. Cost comprises The Group recognises revenue when control of the goods and services is transferred to the customer, generally for the retail customers it is occurred in the stores at the point of sale. Payment of the transaction price is due immediately when the customer purchases goods. 114 114 reduction in the price paid for the that do not ultimately vest, except for a significant increase of business products and reduce cost of goods equity-settled transactions for which activities in December. sold in the period the products are vesting is conditional upon a market sold. Where a rebate agreement with or non-vesting condition. These are a supplier covers more than one year, treated as vested irrespective of the rebates are recognised in the whether or not the market or non- period in which they are earned. vesting condition is satisfied, provided Employee benefits that all other performance and/or service conditions are satisfied. The Group is subject to mandatory When the terms of an equity-settled contributions to the Russian award are modified, the minimum Federation defined contribution expense recognised is the expense state pension benefit fund. Wages, had the terms had not been modified, salaries, contributions to the state if the original terms of the award 115 115 >>2LENTA. Annual Report 2020.01020403 Strategic Report Corporate Governance Report Financial Statements Appendices Financial assets Initial measurement Business model assessment ‘Principal’ for the purpose of this test ECLs are recognised in two stages. The Group’s cash and cash When the Group has transferred its is defined as the fair value of the For credit exposures for which there equivalents have been assigned low rights to receive cash flows from an The Group determines its business financial asset at initial recognition has not been a significant increase credit risk based on the external credit asset or has entered into a pass- model at the level that best reflects and may change over the life of in credit risk since initial recognition, ratings of the respective banks and through arrangement, and has neither The classification of financial how it manages groups of financial the financial asset (for example, if ECLs are provided for credit losses financial institutions. transferred nor retained substantially instruments at initial recognition assets to achieve its business there are repayments of principal depends on their contractual terms objective. or amortisation of the premium/ and the business model for managing discount). the instruments. Financial instruments The Group’s business model is not 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 Derecognition of financial assets 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 are initially measured at their fair assessed on an instrument-by- The most significant elements of significant increase in credit risk since A financial asset is derecognised involvement in the asset. value and, except in the case of instrument basis, but at a higher level interest within a lending arrangement initial recognition, a loss allowance when: financial assets and financial liabilities of aggregated portfolios and is based are typically the consideration for recorded at fair value through profit on observable factors such as: the time value of money and credit or loss (FVPL), transaction costs are risk. To make the SPPI assessment, is required for credit losses expected over the remaining life of the exposure, irrespective of the timing of the default added to, or subtracted from, this > How the performance of the the Group applies judgement and (a lifetime ECL). > The rights to receive cash flows from the asset have expired; > The Group has transferred its In that case, the Group also recognises an associated liability. The transferred asset and the associated liability are measured on a basis that amount. business model and the financial considers relevant factors such as the rights to receive cash flows from reflects the rights and obligations that Measurement categories of financial assets assets held within that business currency in which the financial asset For trade receivables and contract the asset or has assumed an the Group has retained. model are evaluated and reported is denominated, and the period for assets, the Group applies a simplified obligation to pay the received to the entity’s key management which the interest rate is set. approach in calculating ECLs. Therefore, cash flows in full without material Continuing involvement that takes personnel; the Group does not track changes in delay to a third party under a the form of a guarantee over the The Group classifies all of its financial > The risks that affect the In contrast, contractual terms that credit risk, but instead recognises a “pass-through” arrangement; and transferred asset is measured at the assets based on the business model performance of the business model introduce a more than de minimis loss allowance based on lifetime ECLs either (a) the Group has transferred lower of the original carrying amount for managing the assets and the (and the financial assets held exposure to risks or volatility in at each reporting date. The Group substantially all the risks and of the asset and the maximum asset’s contractual terms, measured within that business model) and, in the contractual cash flows that has established a provision matrix rewards of the asset, or (b) the amount of consideration that the at either: particular, the way those risks are are unrelated to a basic lending that is based on its historical credit Group has neither transferred nor Group could be required to repay. managed; arrangement do not give rise to loss experience, adjusted for forward- retained substantially all the risks > Amortised cost; > Fair value through other comprehensive income (FVOCI); > Fair value through profit or loss > How managers of the business are compensated (for example, contractual cash flows that are solely payments of principal and interest whether the compensation on the amount outstanding. In such is based on the fair value of cases, the financial asset is required (FVPL). the assets managed or on the to be measured at FVPL. looking factors specific to the debtors and rewards of the asset but has and the economic environment. transferred control of the asset. Financial liabilities and equity instruments issued by the Group Loans and receivables contractual cash flows collected); > The expected frequency, value and timing of sales are also important Cash and cash equivalents Treasury shares Additional paid-in capital Trade receivables, loans, and other aspects of the Group’s assessment. Cash and short-term deposits in Own equity instruments that are Additional paid-in capital represents receivables that have fixed or the statement of financial position reacquired (treasury shares) are the difference between the fair value determinable payments that are The business model assessment comprise cash at banks and on recognised at cost and deducted of consideration received and the not quoted in an active market are is based on reasonably expected hand and short-term deposits with a from equity. No gain or loss is nominal value of the issued shares. classified as loans and receivables. scenarios without taking ‘worst maturity of three months or less. recognised in the statement of profit The Group measures amounts of loans account. If cash flows after initial Impairment of financial assets and receivables at amortised cost if both of the following conditions are recognition are realised in a way that is different from the Group’s The Group recognises an allowance case’ or ‘stress case’ scenarios into or loss and other comprehensive Earnings per share income on the purchase, sale, issue or cancellation of the Group’s own equity instruments. Any difference Basic earnings per share amounts are calculated by dividing the net profit conversion of all the dilutive potential ordinary shares into ordinary shares. Classification as debt or equity Debt and equity instruments are classified as either financial liabilities or as equity in accordance with the substance of the contractual arrangement. An equity instrument met: original expectations, the Group does for expected credit losses (ECLs) for between the carrying amount and for the year attributable to ordinary is any contract that evidences a > The financial asset is held within a business model with the objective remaining financial assets held in value through profit or loss. ECLs are recognised in additional paid-in weighted average number of ordinary an entity after deducting all of its that business model, but incorporates based on the difference between capital. Voting rights related to shares outstanding during the year. liabilities. Equity instruments are to hold financial assets in order to such information when assessing the contractual cash flows due in treasury shares are nullified for the recorded at the proceeds received, not change the classification of the all debt instruments not held at fair the consideration, if reissued, is equity holders of the parent by the residual interest in the assets of collect contractual cash flows; newly originated or newly purchased accordance with the contract and Group and no dividends are allocated Diluted earnings per share amounts net of transaction costs. financial assets going forward. all the cash flows that the Group to them. Share options exercised are calculated by dividing the net > The contractual terms of the financial asset give rise on specified dates to cash flows that The SPPI test are solely payments of principal expects to receive, discounted at an approximation of the original effective interest rate. The expected cash and interest on the principal As a second step of its classification flows will include cash flows from the amount outstanding (SPPI). process the Group assesses the sale of collateral held or other credit Share capital during the reporting period are profit attributable to ordinary equity satisfied with treasury shares. holders of the parent (after adjusting for interest on the convertible preference shares) by the weighted average number of ordinary shares contractual terms of financial asset to enhancements that are integral to the Ordinary shares are classified as outstanding during the year plus the The details of these conditions are identify whether they meet the SPPI test. contractual terms. outlined below. 116 116 equity. Transaction costs of a share weighted average number of ordinary issue are shown within equity as a shares that would be issued on deduction from the equity. 117 117 >>2LENTA. Annual Report 2020.01020403 Financial liabilities Derecognition of financial liabilities Offsetting of financial instruments 2.3 BASIS OF CONSOLIDATION Strategic Report Corporate Governance Report Financial Statements Appendices The consolidated financial statements The Group re-assesses whether or resultant gain or loss is recognised in incorporate the financial statements not it controls an investee if facts and profit or loss. Any investment retained of the Company and other entities circumstances indicate that there are is recognised at fair value. Financial liabilities of the Group, including borrowings and trade and other payables, are initially recognised at fair value, net of transaction costs, and subsequently measured at amortised cost using the effective interest rate method. The Group derecognises financial liabilities when, and only when, the Group’s obligations are discharged, cancelled or they expire. Financial assets and financial liabilities are offset and the net amount is reported in the consolidated statement of financial position if there is a currently enforceable legal right to offset the recognised amounts and there is an intention to settle on a net basis, to realise the assets and settle the liabilities simultaneously. Derivative financial instruments and hedge accounting controlled by the Company (its changes to one or more of the three subsidiaries) as at 31 December 2020. elements of control. Consolidation of Control is achieved when the Group a subsidiary begins when the Group is exposed, or has rights, to variable obtains control over the subsidiary returns from its involvement with the and ceases when the Group loses investee and has the ability to affect control of the subsidiary. Assets, those returns through its power over liabilities, income and expenses of a the investee. subsidiary acquired or disposed of during the year are included in the Specifically, the Group controls an statement of comprehensive income investee if and only if the Group has: from the date the Group gains control Initial recognition and subsequent measurement flows attributable to the hedged risk. When the hedged item is the cost of Such hedges are expected to be a non-financial asset or non-financial > Power over the investee (i.e. existing rights that give it the current ability until the date the Group ceases to control the subsidiary. highly effective in achieving offsetting liability, the amounts recognised as to direct the relevant activities of Profit or loss and each component The Group uses derivative financial changes in fair value or cash flows other comprehensive income are instruments, such as interest rate and are assessed on an ongoing transferred to the initial carrying the investee); of other comprehensive income are > Exposure, or rights, to variable attributed to the equity holders of the swaps and caps, to hedge its interest basis to determine that they actually amount of the non-financial asset or returns from its involvement with parent of the Group and to the non- rate risks. Such derivative financial have been highly effective throughout liability. instruments are initially recognised the financial reporting periods for the investee; and controlling interests, even if this results > The ability to use its power over the in the non-controlling interests having at fair value on the date on which a which they were designated. If the hedging instrument expires or is investee to affect its returns. a deficit balance. When necessary, derivative contract is entered into sold, terminated or exercised without adjustments are made to the financial and are subsequently re-measured Swaps and caps used by the Group replacement or rollover (as part of the Generally, there is a presumption that statements of subsidiaries to bring at fair value. Derivatives are carried that meet the strict criteria for hedge hedging strategy), or if its designation a majority of voting rights result in their accounting policies into line as financial assets when the fair value accounting are accounted for as as a hedge is revoked, or when the control. To support this presumption with the Group’s accounting policies. is positive and as financial liabilities cash flow hedges. The effective hedge no longer meets the criteria for and when the Group has less than a All intra-group assets and liabilities, when the fair value is negative. portion of the gain or loss from the hedge accounting, any cumulative majority of the voting or similar rights equity, income, expenses and cash hedging instrument is recognised gain or loss previously recognised in of an investee, the Group considers all flows relating to transactions between Any gains or losses arising from in other comprehensive income in other comprehensive income remains relevant facts and circumstances in members of the Group are eliminated changes in the fair value of derivatives the cash flow hedge reserve, while separately in equity until the forecast assessing whether it has power over in full on consolidation. are taken directly to profit or loss, any ineffective portion is recognised transaction occurs or the foreign an investee, including: except for the effective portion of immediately in profit or loss as other currency firm commitment is met. cash flow hedges, which is recognised operating expenses. in other comprehensive income (OCI) and later reclassified to profit or loss Designation of a hedge relationship when the hedge item affects profit or takes effect prospectively from the Current versus non-current classification loss. date all of the criteria are met. In particular, hedge accounting can Derivative instruments are classified as current or non-current A change in the ownership interest > The contractual arrangement of a subsidiary, without a loss of with the other vote holders of the control, is accounted for as an equity investee; > Rights arising from other contractual arrangements; > The Group’s voting rights and transaction. If the Group loses control over a subsidiary, it derecognises the related assets (including goodwill), liabilities, non-controlling interest and At the inception of a hedge be applied only from the date all or separated into current and potential voting rights. other components of equity while any relationship, the Group formally of the necessary documentation non-current portions based on designates and documents the is completed. Therefore, hedge an assessment of the facts and hedge relationship to which the Group relationships cannot be designated circumstances (i.e., the underlying wishes to apply hedge accounting retrospectively. contracted cash flows): and the risk management objective and strategy for undertaking the Amounts recognised as other hedge. The documentation includes comprehensive income are > When the Group expects to hold a derivative as an economic hedge identification of the hedging transferred to profit or loss when the for a period beyond 12 months after instrument, the hedged item or hedged transaction affects profit the reporting date, the derivative transaction, the nature of the risk or loss, such as when the hedged is classified as non-current (or being hedged and how the entity will financial income or financial expense separated into current and non- assess the effectiveness of changes is recognised or when a forecast sale current portions) consistent with in the hedging instrument’s fair value occurs. the classification of the underlying in offsetting the exposure to changes in the hedged item’s fair value or cash item. 118 118 Subsidiaries are those companies (including special purpose entities) in which the Group, directly or indirectly, has an interest of more than one half of the voting rights or otherwise has power to govern the financial and operating policies so as to obtain economic benefits and which are neither associates nor joint ventures. The existence and effect of potential voting rights that are presently exercisable or presently convertible are considered when assessing whether the Group controls another entity. Subsidiaries are consolidated from the date on which control is transferred to the Group (acquisition date) and are de-consolidated from the date that control ceases. 119 119 >>2LENTA. Annual Report 2020.01020403 3. Significant accounting judgments, estimates and assumptions >> >> In the application of the Group’s accounting policies, which are described in Note 2 above, management is required to make judgments, estimates and assumptions about the carrying amounts of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates. The estimates and underlying and future periods if the revision financial statements and estimates assumptions are reviewed on affects both current and future that can cause a significant an ongoing basis. Revisions to periods. accounting estimates are recognised adjustment to the carrying amount of assets and liabilities within the next in the period in which the estimate is Judgments that have the most financial year include: revised if the revision affects only that significant effect on the amounts period or in the period of the revision recognised in these consolidated JUDGMENTS Assets versus business acquisition reporting date, that have a significant risk of causing a material adjustment Tax legislation to the carrying amounts of assets Russian tax, currency and customs From time to time in the normal course and liabilities within the next financial legislation is subject to frequent of business the Group acquires the year, are described below. The changes and varying interpretations. companies that are a party to a lease Group based its assumptions and Management’s interpretation of contract, own the land plot or store estimates on parameters available such legislation in applying it to Strategic Report Corporate Governance Report Financial Statements Appendices Impairment of non- financial assets which they are granted. Estimating fair value for share-based payment transactions requires determination The Group reviews the carrying of the most appropriate valuation amounts of its assets to determine model, which is dependent on the whether there is any indication that terms and conditions of the grant. This those assets are impaired. Impairment estimate also requires determination exists when the carrying value of an of the most appropriate inputs to asset or cash generating unit exceeds the valuation model including the its recoverable amount, which is the expected life of the share option, higher of its fair value less costs to sell volatility and dividend yield and 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. making assumptions about them. The assumptions and models used for estimating fair value for share-based payment transactions are disclosed in Note 27. 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 covered 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. For leased land plots under the stores the Group defines lease term as the longest of non-cancelable 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 reasonably 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 determined, the Group uses its incremental borrowing rate, adjusted to take into account the specific terms and conditions of a lease and to reflect the interest rate that the Group would pay to borrow: > over a similar term to the lease in which the Group is interested. If at when the consolidated financial business transactions of the Group The value in use calculation is based the date of acquisition by the Group, statements were prepared. Existing may be challenged by the relevant the company does not constitute circumstances and assumptions regional and federal authorities an integrated set of activities and about future developments, however, enabled by law to impose fines and assets that is capable of being may change due to market changes penalties. Recent events in the Russian on a discounted cash flow model. In determining the value in use calculation, future cash flows are estimated from each store based conducted and managed for the or circumstances arising beyond the Federation suggest that the tax on cash flows projection utilising the The Group has the option, under some term; purpose of providing a return in control of the Group. Such changes authorities are taking a more assertive latest budget information available. of its leases to lease the assets for > the amount needed to obtain an the form of dividends, lower costs are reflected in the assumptions when position in their interpretation of the The discounted cash flow model additional terms. The Group applies asset of a similar value to the right- 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 they occur. Inventory valuation legislation and assessments and as a result, it is possible that the transactions that have not been challenged in the past may be requires numerous estimates and assumptions regarding the future judgement in evaluating whether it is reasonably certain to exercise the of-use asset; and > in a similar economic environment. rates of market growth, market option to renew. That is, it considers demand for the products and the all relevant factors that create an the consolidated financial statements. Management reviews the inventory challenged. Fiscal periods remain future profitability of products. economic incentive for it to exercise the The exercise of judgment determines balances to determine if inventories open to review by the tax authorities in whether a particular transaction is can be sold at amounts greater than respect of taxes for the three calendar treated as a business combination or or equal to their carrying amounts years preceding the year of tax review. Share-based payments renewal. After the commencement date, the Group reassesses the lease term if there is a significant event or change in as a purchase of assets. plus costs to sell. This review also Under certain circumstances reviews The Group measures the cost of circumstances that is within its control Estimates and assumptions includes the identification of slow may cover longer periods. While equity-settled transactions by and affects its ability to exercise (or not moving inventories, which are written the Group believes it has provided reference to the fair value of the to exercise) the option to renew (e.g., a down based on inventories ageing adequately for all tax liabilities equity instruments at the date at change in business strategy). The key assumptions concerning rates are determined by management tax legislation, the above facts may the future and other key sources following the experience of sales of create additional financial risks for the of estimation uncertainty at the such items. Group. and write down rates. The write down based on its understanding of the 120 120 121 121 >>3LENTA. Annual Report 2020.01020403 4. New standards, interpretations and amendments adopted by the Group >> >> The Group applied for the first-time certain standards and amendments, which are effective for annual periods beginning on or after 1 January 2020. The Group has not early adopted any other standard, interpretation or amendment that has been issued but is not yet effective. Amendments to IFRS 3: Definition of a Business The amendment to IFRS 3 Business Amendments to IAS 1 and IAS 8 Definition of Material Combinations clarifies that to be The amendments provide a new considered a business, an integrated definition of material that states, set of activities and assets must “information is material if omitting, include, at a minimum, an input and misstating or obscuring it could applicable standard in place and to assist all parties to understand and interpret the standards. This will affect those entities which developed their accounting policies based on the Conceptual Framework. The revised Conceptual Framework includes some new concepts, updated definitions and recognition criteria for assets and liabilities and clarifies some important concepts. These amendments had no impact on the consolidated financial statements of the Group. Amendments to IFRS 16 Covid-19 Related Rent Concessions a substantive process that, together, reasonably be expected to influence On 28 May 2020, the IASB issued Strategic Report Corporate Governance Report Financial Statements Appendices 5. Standards issued but not yet effective >> The new and amended standards and interpretations that are issued by the IASB, 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 interpretations, if applicable, when they become effective. IFRS 17 Insurance Contracts (not yet endorsed by the EU). > A specific adaptation for contracts with direct participation features (the variable fee approach) > A simplified approach (the premium allocation approach) mainly for short-duration contracts Reference to the Conceptual Framework – Amendments to IFRS 3 (not yet endorsed by the EU). In May 2020, the IASB issued IFRS 17 is effective for reporting periods Amendments to IFRS 3 Business beginning on or after 1 January 2023, Combinations - Reference to with comparative figures required. the Conceptual Framework. The Early application is permitted, amendments are intended to replace provided the entity also applies IFRS a reference to the Framework for 9 and IFRS 15 on or before the date it the Preparation and Presentation first applies IFRS 17. This standard is not of Financial Statements, issued applicable to the Group. in 1989, with a reference to the Amendments to IAS 1: Classification of Liabilities as Current or Non-current (not yet endorsed by the EU). Conceptual Framework for Financial Reporting issued in March 2018 without significantly changing its requirements. The Board also added an exception to the recognition principle of IFRS 3 significantly contribute to the ability decisions that the primary users of Covid-19-Related Rent Concessions In May 2017, the IASB issued IFRS In January 2020, the IASB issued to avoid the issue of potential ‘day to create output. Furthermore, it general purpose financial statements - amendment to IFRS 16 Leases. The 17 Insurance Contracts (IFRS 17), a amendments to paragraphs 69 to 76 2’ gains or losses arising for liabilities clarifies that a business can exist make on the basis of those financial amendments provide relief to lessees comprehensive new accounting of IAS 1 to specify the requirements for and contingent liabilities that would without including all of the inputs and statements, which provide financial from applying IFRS 16 guidance standard for insurance contracts classifying liabilities as current or non- be within the scope of IAS 37 or IFRIC 21 processes needed to create outputs. information about a specific reporting on lease modification accounting covering recognition and current. The amendments clarify: Levies, if incurred separately. These amendments had no impact on entity.” The amendments clarify that for rent concessions arising as a measurement, presentation and the consolidated financial statements materiality will depend on the nature direct consequence of the Covid-19 disclosure. Once effective, IFRS > What is meant by a right to defer At the same time, the Board decided of the Group, but may impact future or magnitude of information, either pandemic. As a practical expedient, 17 will replace IFRS 4 Insurance settlement periods should the Group enter into individually or in combination with a lessee may elect not to assess any business combinations. other information, in the context of the whether a Covid-19 related rent financial statements. A misstatement concession from a lessor is a lease Contracts (IFRS 4) that was issued in 2005. IFRS 17 applies to all types of insurance contracts (i.e., life, non-life, > That a right to defer must exist at the end of the reporting period > That classification is unaffected to clarify existing guidance in IFRS 3 for contingent assets that would not be affected by replacing the reference to the Framework for the Preparation Amendments to IFRS 7, IFRS 9 and IAS 39 Interest Rate Benchmark Reform of information is material if it could modification. A lessee that makes this direct insurance and re-insurance), by the likelihood that an entity will and Presentation of Financial reasonably be expected to influence election accounts for any change in decisions made by the primary users. lease payments resulting from the regardless of the type of entities that issue them, as well as to certain exercise its deferral right > That only if an embedded Statements. These amendments had no impact on Covid-19 related rent concession the guarantees and financial instruments derivative in a convertible liability The amendments are effective for The amendments to IFRS 9 and IAS the consolidated financial statements same way it would account for the with discretionary participation is itself an equity instrument would annual reporting periods beginning 39 Financial Instruments: Recognition and Measurement provide a number of, nor is there expected to be any future impact to the Group. change under IFRS 16, if the change were not a lease modification. of reliefs, which apply to all hedging relationships that are directly affected by interest rate benchmark reform. A hedging relationship is affected if the reform gives rise to uncertainty Conceptual Framework for Financial Reporting issued on 29 March 2018 The amendment applies to annual reporting periods beginning on or after 1 June 2020. Earlier application is permitted. This amendment had no features. A few scope exceptions will apply. The overall objective of IFRS 17 is to provide an accounting model for the terms of a liability not impact its classification on or after 1 January 2022 and apply prospectively. insurance contracts that is more useful The amendments are effective for and consistent for insurers. In contrast annual reporting periods beginning to the requirements in IFRS 4, which on or after 1 January 2023 and must are largely based on grandfathering be applied retrospectively. The about the timing and/or amount The Conceptual Framework is impact on the consolidated financial previous local accounting policies, IFRS amendments to the classification of benchmark-based cash flows not a standard, and none of the statements of the Group. of the hedged item or the hedging concepts contained therein override instrument. These amendments the concepts or requirements in have no impact on the consolidated any standard. The purpose of the financial statements of the Group as it Conceptual Framework is to assist the does not have any interest rate hedge International Accounting Standards Reclassifications in the consolidated statement of cash flows relationships. Board in developing standards, to Certain reclassifications were done help preparers develop consistent in terms of presentation of expected accounting policies where there is no credit losses of accounts receivable and write-offs of accounts receivable. 122 122 17 provides a comprehensive model of liabilities is not expected to have for insurance contracts, covering all a significant impact on the Group’s relevant accounting aspects. The consolidated financial statements. core of IFRS 17 is the general model, supplemented by: These amendments may impact future periods should the Group enter into any business combinations. 123 123 >>4-5LENTA. Annual Report 2020.01020403 Strategic Report Corporate Governance Report Financial Statements Appendices Property, Plant and Equipment: Proceeds before Intended Use – Amendments to IAS 16 (not yet endorsed by the EU) activities. General and administrative costs do not relate directly to a contract and are excluded unless they are explicitly chargeable to the counterparty under the contract. The amendments are effective for IFRS 9 Financial Instruments – Fees in the ’10 per cent’ test for derecognition of financial liabilities (not yet endorsed by the EU) measuring the fair value of assets amendments clarify how companies IFRS 4 are designed to allow insurers within the scope of IAS 41. should distinguish changes in who are still applying IAS 39 to obtain accounting policies from changes the same reliefs as those provided An entity applies the amendment in accounting estimates. That by the amendments made to IFRS 9. prospectively to fair value distinction is important because There are also amendments to IFRS 7 measurements on or after the changes in accounting estimates Financial Instruments: Disclosures to beginning of the first annual reporting are applied prospectively only to enable users of financial statements In May 2020, the IASB issued Property, annual reporting periods beginning on As part of its 2018-2020 annual period beginning on or after 1 January future transactions and other future to understand the effect of interest Plant and Equipment — Proceeds or after 1 January 2022. The Group will improvements to IFRS standards 2022 with earlier adoption permitted. events, but changes in accounting rate benchmark reform on an before Intended Use, which prohibits apply these amendments to contracts process the IASB issued amendment entities deducting from the cost of an for which it has not yet fulfilled all its to IFRS 9. The amendment clarifies item of property, plant and equipment, obligations at the beginning of the the fees that an entity includes when any proceeds from selling items annual reporting period in which it assessing whether the terms of a produced while bringing that asset to first applies the amendments. new or modified financial liability are the location and condition necessary for it to be capable of operating in the manner intended by management. Instead, an entity recognises the proceeds from selling such items, and the costs of producing those items, in profit or loss. The amendment is effective for annual reporting periods beginning on or after 1 January 2022 and must be applied retrospectively to items of property, plant and equipment made available for use on or after the beginning of the earliest period The amendments are not expected to have a material impact on the Group. IFRS 1 First-time Adoption of International Financial Reporting Standards – Subsidiary as a first- time adopter (not yet endorsed by the EU) substantially different from the terms of the original financial liability. These fees include only those paid or received between the borrower and the lender, including fees paid or received by either the borrower or lender on the other’s behalf. An entity applies the amendment to financial liabilities that are modified or exchanged on or after the beginning of the annual reporting period in which the entity first applies the amendment. The amendment is effective for annual reporting periods beginning presented when the entity first applies As part of its 2018-2020 annual on or after 1 January 2022 with earlier the amendment. improvements to IFRS standards adoption permitted. The Group will This standard is not applicable to the Group. and other past events. The amendments are effective for policies are generally also applied entity’s financial instruments and risk retrospectively to past transactions management strategy. Amendments to IAS 1 Presentation of Financial Statements and IFRS Practice Statement 2: Disclosure of Accounting policies (not yet endorsed by the EU) In February 2021 the IASB issued amendments to IAS 1 and IFRS Practice Statement 2. The amendments to IAS 1 require companies to disclose their material accounting policy information rather than their significant accounting policies. The amendments will be effective for annual periods beginning on or after annual reporting periods beginning 1 January 2021 with earlier application on or after 1 January 2023, with early permitted. While application is application permitted. retrospective, an entity is not required to restate prior periods. The amendments are not expected to have a material impact on the Group. Amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16 Interest Rate Benchmark Reform – Phase 2 (endorsed by the EU) The amendments are not expected to have a material impact on the Group due to the Group has only fixed- rate financial instruments. Amendments to IFRS 4 Insurance Contracts – deferral of IFRS9 (endorsed by the EU) process, the IASB issued an apply the amendments to financial The amendments to IFRS Practice In August 2020, the IASB published amendment to IFRS 1 First-time liabilities that are modified or Statement 2 provide guidance on how Interest Rate Benchmark Reform – The amendments are not expected to have a material impact on the Group. Adoption of International Financial exchanged on or after the beginning to apply the concept of materiality to Phase 2, Amendments to IFRS 9, IAS 39, In June 2020, the IASB published Reporting Standards. The amendment of the annual reporting period in accounting policy disclosures. IFRS 7, IFRS 4 and IFRS 16, completing Amendments to IFRS 4 Insurance permits a subsidiary that elects to which the entity first applies the its work in response to IBOR reform. Contracts – deferral of IFRS 9. The apply paragraph D16(a) of IFRS 1 to amendment. The amendments will be effective for The amendments provide temporary amendments to IFRS 4 change the Onerous Contracts – Costs of Fulfilling a Contract – Amendments to IAS 37 (not yet endorsed by the EU) measure cumulative translation differences using the amounts reported by the parent, based on the parent’s date of transition to IFRS. This amendment is also applied to an associate or joint venture that elects to apply paragraph D16(a) of IFRS 1. The amendments are not expected to have a material impact on the Group. In May 2020, the IASB issued The amendment is effective for amendments to IAS 37 to specify annual reporting periods beginning which costs an entity needs to include on or after 1 January 2022 with earlier when assessing whether a contract is adoption permitted. IAS 41 Agriculture – Taxation in fair value measurements (not yet endorsed by the EU) onerous or loss-making. The amendments apply a “directly related cost approach”. The costs that relate directly to a contract to provide goods or services include both incremental costs and an allocation of costs directly related to contract These amendments are not expected to have a material impact on the Group . As part of its 2018-2020 annual improvements to IFRS standards process the IASB issued amendment to IAS 41 Agriculture. The amendment removes the requirement in paragraph 22 of IAS 41 that entities exclude cash flows for taxation when annual reporting periods beginning reliefs which address the financial fixed expiry date for the temporary on or after 1 January 2023, with early reporting effects when an interbank exemption in IFRS 4 Insurance application permitted. offered rate (IBOR) is replaced Contracts from applying IFRS 9 The amendments are not expected to have a material impact on the Group. Amendments to IAS 8 Accounting policies, Changes in Accounting Estimates and Errors: Definition of Accounting Estimates (not yet endorsed by the EU) with an alternative nearly risk-free Financial Instruments, so that entities interest rate (RFR). In particular, the amendments provide for a practical would be required to apply IFRS 9 for annual periods beginning on or after expedient when accounting for January 1, 2023. This standard is not applicable to the Group. changes in the basis for determining the contractual cash flows of financial assets and liabilities, to require the effective interest rate to be adjusted, equivalent to a movement in a market rate of interest. Also, the amendments introduce reliefs from discontinuing hedge relationships including a temporary relief from having to meet the separately identifiable requirement when an RFR instrument is designated In February 2021 the IASB issued as a hedge of a risk component. amendments to IAS 8. The Furthermore, the amendments to 124 124 125 125 >>5LENTA. Annual Report 2020.01020403 6. Balances and transactions with related parties >> >> The transactions with related parties are made on terms substantially equivalent to those that prevail in arm’s length transactions. In 2019 “Severgroup” LLC (“Severgroup”) As at 31 December 2020 and 31 has completed its acquisition of December 2019 Alexey Mordashov is 76,109,776 shares of the Company. As at the ultimate controlling party of the 31 December 2020 76,110, 584 shares of Group. TPG and EBRD cease to be the Company belongs to Severgroup, related parties starting from May, 2019. The consolidated financial statements include the following transactions with related parties: which represents 77.99% of the share capital or 78.73% of the voting rights. Entities with significant influence over the Group: Severgroup Revenue from related parties Other operating income from related parties Prepaid expense from related parties Purchases of non-current assets from related parties Selling, General and Administrative expenses TPG Group Selling, General and Administrative expenses Severgroup Amounts owed by related parties Amounts owed to related parties Advances received Advances paid Year ended 31 December 2020 Year ended 31 December 2019 95,194 10,440 (278,187) (131,424) (460,034) − − 6,524 (8,357) − (17,808) (4,610) 31 December 2020 31 December 2019 35,304 (146,635) (197) 603 7,215 (16,469) (360) 344 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 payments, Note 27) Termination benefits TOTAL REMUNERATION Year ended 31 December 2020 Year ended 31 December 2019 1,260,167 1,002,208 98,941 2,361,316 771,041 769,872 14,992 1,555,905 Strategic Report Corporate Governance Report Financial Statements Appendices 7. Property, plant and equipment >> Cost Balance at 1 January 2020 23,523,525 12,690,508 132,371,508 64,442,345 2,910,262 235,938,148 Land Land improvements Buildings Machinery and equipment Assets under construction Total − − 1,623 9,914,019 9,915,642 758,632 4,412,725 4,664,286 (10,207,769) Additions Transfers from construction in progress Transfers from right-of-use assets Disposals − 372,126 68,201 (11,398) − − − (380,211) Balance at 31 December 2020 23,952,454 13,449,140 136,404,022 Accumulated depreciation and impairment Balance at 1 January 2020 Depreciation charge 1,799,114 4,795,619 31,777,892 − 2,757,326 4,484,206 (Reversal of impairment)/Impairment charge (606,628) (3,200) (2,579,873) Disposals − − (218,215) − (922,836) 68,185,418 31,802,328 6,803,597 (109,635) (751,541) − 68,201 − (211,401) (1,525,846) 2,405,111 244,396,145 319,956 70,494,909 − 14,045,129 387,905 (163,703) (2,911,431) (1,133,459) Balance at 31 December 2020 1,192,486 7,549,745 33,464,010 37,744,749 544,158 80,495,148 Net book value Balance at 1 January 2020 21,724,411 7,894,889 100,593,616 32,640,017 2,590,306 165,443,239 BALANCE AT 31 DECEMBER 2020 22,759,968 5,899,395 102,940,012 30,440,669 1,860,953 163,900,997 Land Land improvements 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) 207,132 (506,337) Balance at 31 December 2019 23,523,525 12,690,508 132,371,508 − − 474,299 (1,210,070) 64,442,345 (117,134) (1,838,695) 2,910,262 235,938,148 Accumulated depreciation and impairment Balance at 1 January 2019 Depreciation charge Impairment charge Disposals − − 1,799,114 − 2,044,272 19,077,836 2,739,002 12,538 (193) 4,521,778 8,533,770 (355,492) Balance at 31 December 2019 1,799,114 4,795,619 31,777,892 Net book value 25,031,147 6,850,077 949,200 (1,028,096) 31,802,328 − − 319,956 46,153,255 14,110,857 11,614,578 − (1,383,781) 319,956 70,494,909 Balance at 1 January 2019 22,237,066 10,313,884 105,747,261 BALANCE AT 31 DECEMBER 2019 21,724,411 7,894,889 100,593,616 34,955,536 32,640,017 3,770,316 177,024,063 2,590,306 165,443,239 During the year ended 31 December 2020 and year ended 31 December 2019 the Group was not involved in acquisition or contribution of any assets that would satisfy the definition of qualifying assets for the purposes of borrowing costs capitalisation. Thus, no borrowings costs were capitalised during those periods. 126 126 127 127 >>6-7LENTA. Annual Report 2020.01020403 Depreciation, amortisation and impairment expense As at 31 December 2020 the Group In identifying whether cash inflows are performed impairment test of largely independent, management > Cash flow forecast for overheads presented mainly by personnel Fair value less costs of disposal of assets is classified at level 2 of the fair depreciation and amortisation in the CGU was defined by an external value hierarchy. appraiser by reference to current Group’s consolidated statement of profit or loss and other comprehensive observable prices on an active market The amount of depreciation and income and consolidated statement property, plant and equipment, considers various factors including: expense being allocated on subsequently adjusted for specific amortisation during the year ended 31 of cash flows as follows: Strategic Report Corporate Governance Report Financial Statements Appendices intangible assets and right-of-use assets, where indicators of such impairment were identified. Following the impairment test net reversal of impairment losses was recognised in the consolidated statement of profit or loss in respect of property, plant and equipment amounted to RUB 2,911,431 (including impairment loss in respect of assets under construction in the amount of RUB 387,905) and impairment of right-of-use assets was recognised in the amount of RUB 4,306. The recognition of net reversal of impairment losses resulted from growth of sales and EBITDA during the reporting period and respective increase in forecasted free cash flows. reasonable basis; > How it monitors the entity’s operations or how it makes > Carrying value of corporate assets that do not generate independent decisions about continuing or cash inflows (offices, distribution disposing of the entity’s assets and centers) were allocated to CGUs on operations; > Cannibalization effect; > Leakage of customers upon a store closure. consistent basis; > Projections were made in the functional currency of the Group’s entities, being Russian rouble and discounted at the Group pre-tax The impairment test has been carried weighted average cost of capital out by comparing recoverable which is then adjusted to reflect characteristics of respective assets. December 2020 and the year ended The fair value measurement of these 31 December 2019 is presented within Depreciation of property, plant and equipment (Note 7) Amortisation of intangible assets (Note 11) Amortisation of right-of-use assets (Note 9) Capitalisation of right-of-use asset depreciation to assets under construction Year ended 31 December 2020 Year ended 31 December 2019 14,045,129 603,898 3,913,127 (21,921) 14,110,857 508,016 3,850,831 (30,025) TOTAL DEPRECIATION AND AMORTISATION 18,540,233 18,439,679 amount of the individual store with the risks specific to the respective See Note 28 for capital commitments. its carrying value. The recoverable assets 13.39%. amount was defined as the higher of its fair value less costs to sell and The Group’s management believes value in use. that all of its estimates are reasonable and consistent with the internal Due to number of CGUs being tested reporting and reflect management’s for impairment it is considered best knowledge. impracticable to disclose detailed information for each individual CGU. The result of applying discounted cash The key assumptions used in about possible variations in the determining the value in use are: amount and timing of future cash flows model reflects expectations 8. Prepayments for construction >> >> Prepayments for construction are made to contractors building stores and to suppliers. > Future cash flows are based on discount rate consistently applied to for the indicators of impairment. As amount of RUB 216,592 (31 December flows. If the revised estimated Prepayments are regularly monitored for construction were impaired in the the current budgets and forecasts the discounted cash flows had been at 31 December 2020 prepayments 2019: RUB 236,851). approved by the management 50 b.p. higher than management’s and represented by forecasted estimates, the Group would need to EBITDA along with terminal value of reduce the carrying value of non- forecasted free cash flows that are current non-financial assets by RUB expected to be generated beyond 718,499. If the annual revenue growth the forecast period (12 months), the rate used in calculations of value in years beyond the forecast period use had been 50 b.p. lower, the Group the long term consumer price index would need to decrease the carrying The evaluation was performed at the lowest level of aggregation of assets that is able to generate independent forecast of 4% is used; > Cash flow forecasts for capital expenditure are based on past cash inflows (CGU), which is generally experience and include ongoing value of non-current non-financial assets by RUB 737,954. at the individual store level. capital expenditure required to maintain the level of economic benefits from CGU in its current position; 128 128 129 129 >>7-8LENTA. Annual Report 2020.01020403 Strategic Report Corporate Governance Report Financial Statements Appendices Set out below are the carrying amounts of the Group’s lease liabilities and the movements during the year ended 31 December 2020 and year ended 31 December 2019: Year ended 31 December 2020 Year ended 31 December 2019 Lease liabilities at the beginning of the year Additions Cancelation of lease contracts Other changes1 Interest expense Payments for the principal portion of the lease liabilities Payments for the interest portion of the lease liability Foreign exchange gain LEASE LIABILITIES AT THE END OF THE YEAR Long-term lease liabilities Short-term lease liabilities TOTAL LEASE LIABILITIES 32,160,006 4,731,148 (810,549) 1,036,767 2,716,486 (2,814,842) (2,716,486) 138,977 34,441,507 34,120,002 993,710 (590,476) 587,351 2,795,074 (2,848,226) (2,795,074) (102,355) 32,160,006 31 December 2020 31 December 2019 31,327,074 3,114,433 34,441,507 29,520,222 2,639,784 32,160,006 Set out below are the amounts recognised in profit or loss for the year ended 31 December 2020 and year ended 31 December 2019: Depreciation of right-of-use assets Impairment of right-of-use assets Capitalisation of depreciation to assets under construction 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 2020 Year ended 31 December 2019 3,913,127 4,306 (21,921) 2,716,486 (31,532) 138,977 681,886 349,473 7,750,802 3,850,831 235,056 (30,025) 2,795,074 (15,005) (102,355) 888,393 270,656 7,892,625 9. Right-of-use assets and lease liabilities >> Set out below are the carrying amounts of the Group’s right-of-use assets and the movements during the year ended 31 December 2020 and year ended 31 December 2019: Cost Balance as at 1 January 2020 Additions Cancelation of lease contracts Transfer to property, plant and equipment resulted from purchase of the underlining assets in the lease Other changes1 Balance as at 31 December 2020 Accumulated depreciation and impairment Balance as at 1 January 2020 Depreciation charge Impairment charge/(reversal of impairment) Cancelation of lease contracts Transfer to property, plant and equipment resulted from purchase of the underlining assets in the lease Balance as at 31 December 2020 Net book value BALANCE AS AT 1 JANUARY 2020 BALANCE AS AT 31 DECEMBER 2020 Cost Balance as at 1 January 2019 Additions Cancelation of lease contracts Transfer to property, plant and equipment resulted from purchase of the underlining assets in the lease Other changes1 Balance as at 31 December 2019 Accumulated depreciation and impairment Balance as at 1 January 2019 Depreciation charge Impairment charge Cancelation of lease contracts Transfer to property, plant and equipment resulted from purchase of the underlining assets in the lease Balance as at 31 December 2019 Net book value BALANCE AS AT 1 JANUARY 2019 BALANCE AS AT 31 DECEMBER 2019 Land 5,368,027 19,227 (272,919) (72,004) 107,319 5,149,650 439,396 169,980 (93,369) (12,119) (3,803) Buildings 31,300,482 4,802,559 (824,258) − 929,448 36,208,231 Total 36,668,509 4,821,786 (1,097,177) (72,004) 1,036,767 41,357,881 3,561,670 4,001,066 3,743,147 97,675 (315,957) − 3,913,127 4,306 (328,076) (3,803) 500,085 7,086,535 7,586,620 4,928,631 4,649,565 Land 5,810,044 8,481 (176,891) (270,752) (1,792) 5,369,090 − 211,615 235,056 (7,806) (3,585) 27,738,812 29,121,696 Buildings 30,547,558 983,311 (615,394) (212,311) 592,139 31,295,303 − 3,639,216 − (72,367) (5,179) 32,667,443 33,771,261 Total 36,357,602 991,792 (792,285) (483,063) 590,347 36,664,393 − 3,850,831 235,056 (80,173) (8,764) 435,280 3,561,670 3,996,950 5,810,044 4,933,810 30,547,558 27,733,633 36,357,602 32,667,443 Transfer to property, plant and equipment resulted from purchase of the underlining assets in the lease. 1 Other changes are represented by changes in the right-of-use assets due to modifications and indexations. 1 Other changes are represented by changes in the lease liabilities due to modifications and indexations. 130 130 131 131 >>9LENTA. Annual Report 2020.01020403 10. Operating segments >> The Group’s principal business activity economic characteristics of food The Group’s operations are regularly is the development and operation of retail stores, the Group’s management reviewed by the chief operating food retail stores located in Russia. has aggregated its operating decision maker, represented by the Risks and returns are affected segments represented by stores into CEO, to analyse performance and primarily by economic development one reportable operating segment. allocate resources within the Group. in Russia and by the development of The CEO assesses the performance Russian food retail industry. Within the segment all business of operating segments based on the components are similar in respect of: dynamics of revenue and earnings The Group has no significant assets outside the Russian Federation (excluding investments in its foreign wholly owned intermediate holding > The products; > The customers; > Centralised Group structure before interest, tax, depreciation, amortisation (EBITDA). EBITDA is a non-IFRS measure. Other information is measured in a manner consistent subsidiary Zoronvo Holdings (commercial, operational, logistic, with that in the consolidated financial Limited, which are eliminated on finance, HR and IT functions are statements. consolidation). Due to the similar centralised). The segment information for the year ended 31 December 2020 and 31 December 2019 is as follows: Sales EBITDA Year ended 31 December 2020 Year ended 31 December 2019 445,543,829 44,919,129 417,500,015 39,505,713 Reconciliation of EBITDA to IFRS profit for the year is as follows: EBITDA Interest expense Interest income Income tax expense (see Note 21) Depreciation and amortisation (see Notes 7, 9, 11, 25) Reversal of impairment/(Impairment) of non-financial assets (see Notes 7, 9, 11) Foreign exchange (loss)/gains PROFIT/(LOSS) FOR THE YEAR Year ended 31 December 2020 Year ended 31 December 2019 44,919,129 (9,512,254) 609,970 (3,456,984) (18,540,233) 2,907,125 (386,122) 16,540,631 39,505,713 (15,866,946) 3,827,178 (190,684) (18,439,679) (11,849,959) 220,503 (2,793,874) Strategic Report Corporate Governance Report Financial Statements Appendices Intangible assets as at 31 December 2019 consisted of the following: Cost At 1 January 2019 Additions Disposals At 31 December 2019 Accumulated amortisation 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 3,904,454 886,872 (20,332) 4,770,994 3,904,454 886,872 (20,332) 4,770,994 1,998,564 1,998,564 508,016 325 (6,886) 508,016 325 (6,886) 2,500,019 2,500,019 1,905,890 2,270,975 1,905,890 2,270,975 Amortisation expense is included in selling, general and administrative expenses (Note 25). 12. Other non-current assets >> Other non-current assets are represented by guarantee deposits under lease contracts subject to reimbursement by cash at the end of lease. 13. Inventories >> Goods for resale (at lower of cost and net realisable value) Raw materials TOTAL INVENTORIES AT LOWER OF COST AND NET REALISABLE VALUE 31 December 2020 31 December 2019 39,817,567 2,253,966 42,071,533 37,146,606 1,306,659 38,453,265 Raw materials are represented by During the year ended 31 December loss and other comprehensive income inventories used in own production 2020 the Group wrote down for the year ended 31 December 2020 process in butchery, bakery and inventories to their net realisable in the amount of RUB 595,286 (for the 11. Intangible assets >> Intangible assets as at 31 December 2020 consist of the following: 132 132 Software Total culinary. value, which resulted in recognition year ended 31 December 2019 in the Cost At 1 January 2020 Additions Disposals At 31 December 2020 Accumulated amortisation and impairment At 1 January 2020 Amortisation charge Disposals At 31 December 2020 Net book value AT 1 JANUARY 2020 AT 31 DECEMBER 2020 4,770,994 918,567 (7,434) 5,682,127 4,770,994 918,567 (7,434) 5,682,127 2,500,019 2,500,019 603,898 (2,762) 3,101,155 2,270,975 2,580,972 603,898 (2,762) 3,101,155 2,270,975 2,580,972 of expenses within cost of sales in the amount of RUB 411,398). consolidated statement of profit or 133 133 >>10-13LENTA. Annual Report 2020.01020403 14. Trade and other receivables >> 15. Advances paid >> 31 December 2020 31 December 2019 31 December 2020 31 December 2019 Strategic Report Corporate Governance Report Financial Statements Appendices Accounts receivable on rental and other services and on suppliers’ advertising Suppliers’ rebates receivable Other receivables Expected credit losses of accounts receivable TOTAL TRADE AND OTHER RECEIVABLES 6,293,355 4,465,410 268,201 (124,127) 10,902,839 5,423,210 3,205,036 154,866 (179,010) 8,604,102 Debtor credit risk is managed on days past due for groupings Generally, trade and other receivables in accordance with the Group’s of various customer segments are written-off if past due for more established policy, procedures and with similar loss patterns (i.e., by than 3 years and are no subject to control relating to debtor credit customer type and rating) and the enforcement activity. risk management. Credit quality of likelihood of default over a given time a debtor is assessed based on an horizon. The calculation reflects the The detailed analysis of impact extensive credit rating scorecard and probability-weighted outcome, the of COVID-19 on debtors’ financial individual credit limits are defined in time value of money and reasonable conditions and review of any other accordance with this assessment. and supportable information that factors which might result in revision is available at the reporting date of the allowance matrix performed An analysis is performed at each about past events, current conditions as at 31 December 2020 led to reporting date using a provision and forecasts of future economic the conclusion that there was no matrix to measure expected credit conditions. losses. The provision rates are based significant deterioration of credit quality of customers. Set out below is the information about the credit risk exposure on the Group’s trade and other receivables as at 31 December 2020 using a provision matrix: Expected credit loss rate Current <1.5% Estimated total gross carrying amount at default 10,455,452 Expected credit loss 11,804 <60 days overdue 60-120 days overdue >120 days overdue Total 2%-5% 413,196 8,264 15%-40% 70%-100% 30,996 5,993 127,322 98,066 11,026,966 124,127 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 carrying amount at default Expected credit loss Current <1.5% 8,366,420 33,381 <60 days overdue 60-120 days overdue >120 days overdue Total 2%-5% 231,286 4,734 15%-40% 70%-100% 14,912 2,596 170,494 138,299 8,783,112 179,010 Set out below is the movement in the allowance for expected credit losses of trade and other receivables: As at 1 January Allowance/(reversal of allowance) for expected credit losses Write-off AS AT 31 DECEMBER 2020 179,010 19,371 (74,254) 124,127 2019 264,399 (48,658) (36,731) 179,010 The Group does not hold any collateral or other credit enhancements over these balances. Advances for services Advances to suppliers of goods Impairment of advances paid TOTAL ADVANCES PAID 1,362,282 415,077 (23,293) 1,754,066 1,327,153 309,833 (54,055) 1,582,931 16. Taxes recoverable >> Taxes recoverable as at 31 December 2020 are represented by a VAT recoverable of RUB 345,465 (31 December 2019: RUB 163,364) and property tax receivable in the amount of RUB 15,911 (31 December 2019: nil). 17. Cash and cash equivalents >> Rouble denominated short-term deposits Foreign currency denominated short-term deposits Rouble denominated balances with banks Rouble denominated cash in transit Rouble denominated cash on hand Foreign currency denominated balances with banks TOTAL CASH AND CASH EQUIVALENTS 31 December 2020 31 December 2019 18,489,546 354,748 1,527,464 1,065,216 276,294 95,606 21,808,874 66,312,184 10,455 3,818,264 2,884,525 276,419 102,913 73,404,760 Cash in transit represents cash Significant rouble denominated cash Short-term deposits are made for receipts during the last days of the in transit result from the business varying periods of between one day reporting period (29-31 December), seasonality, indicating higher levels and three months, depending on which were sent to banks but not deposited into the respective bank of retail sales in holiday periods such as the New Year’s Eve as well as the the immediate cash requirements of the Group, and earn interest at the accounts until the next reporting closing day in relation to the official respective short-term deposit rates. period. banking days in Russia. If the closing day is on non-banking days, the amount of cash in transit increases. 134 134 135 135 >>14-17LENTA. Annual Report 2020.01020403 Strategic Report Corporate Governance Report Financial Statements Appendices 18. Issued capital and reserves >> 19. Earnings per share >> Issued capital share in the Company has a par position in the amount of RUB 6,711 was As at 31 December 2020 the a continuation of the Company into value. Therefore immediately before made. Company’s share capital is comprised the Republic of Cyprus in February All outstanding ordinary shares are of 97,585,932 authorised and issued 2020, each share of no par value entitled to an equal share in any Earnings /(losses) per share (in thousands of Russian roubles per share) 0.171 (0.029) basic and diluted, for profit/(loss) for the year attributable to equity holders of the parent Year ended 31 December 2020 Year ended 31 December 2019 ordinary shares with EUR 0.001 par was automatically converted into an dividend declared by the Company. The calculation of basic earnings average number of ordinary shares The Group has issued share-based value (as at 31 December 2019: ordinary share of EUR 0.001 par value No dividends to holders of ordinary per share for the year is based outstanding during the respective payments instruments (Note 27) 97,585,932 with no par value). and reclassification from additional shares were declared for the year on the profit/(loss) attributable to periods (96,675,386 shares at 31 that could potentially dilute basic paid-in capital to share in the ended 31 December 2020 and for the shareholders (profit for the year ended December 2020 and 96,757,307 shares earnings per share in the future. These According to the requirement of the consolidated statement of financial year ended 31 December 2019. 31 December 2020: RUB 16,540,631, as at 31 December 2019). instruments have no material effect on dilution of earnings per share for the year. laws of the Republic of Cyprus each Authorised Ordinary shares of EUR0,001 each Issued and fully paid Balance at the beginning of the year Amendment to par value of ordinary shares BALANCE AT THE END OF THE YEAR The number of shares as at 31 December 2020 and 31 December 2019 are as follows: Number of shares 31 December 2020, kEUR 31 December 2020, kRUB 200,000,000 97,585,932 97,585,932 200 - 98 98 13,754 - 6,711 6,711 31 December 2020, No. 31 December 2019, No. Authorised share capital (ordinary shares) 200,000,000 Issued and fully paid Treasury shares 97,585,932 (910,546) unlimited 97,585,932 (910,546) The movements in the number of shares for the year ended 31 December 2020 and for the year ended 31 December 2019 are as follows: Balance of shares outstanding at beginning of the year Additional issue of shares Shares buy-back BALANCE OF SHARES OUTSTANDING AT THE END OF THE YEAR Year ended 31 December 2020, No. Year ended 31 December 2019, No. 96,675,386 − − 96,675,386 97,272,922 77,667 (675,203) 96,675,386 During the year ended 31 December 2019 the Group issued 77,667 shares of Treasury shares Share options reserve no par value with respect to long-term In October 2018 the Group launched The share options reserve is used incentive plans to certain members GDR repurchase programme up to to recognise the value of equity- of management (see Note 27). Issued an aggregate value of RUB 11,600,000, settled share-based payments shares were distributed to relevant which was terminated on 2 April 2019. provided to employees, including key participants. Total expense for the As the result of the programme 910,522 management personnel, as part of services received from the employees shares were repurchased as at 31 their remuneration. Refer to Note 27 for previously recognised with respect December 2020 and 31 December 2019. further details of these plans. to issued shares under long-term During the year ended 31 December incentive plans was RUB 127,442. 2019 the Group repurchased 675,203 shares of no par value for RUB 720,099. loss for the year ended 31 December 2019: RUB (2,793,874)) and weighted 20. Borrowings >> Short-term borrowings: Fixed rate short-term bank loans Fixed rate short-term bonds TOTAL SHORT-TERM BORROWINGS AND SHORT-TERM PORTION OF LONG-TERM BORROWINGS Currency 31 December 2020 31 December 2019 RUB RUB 32,079,596 930,940 33,010,536 63,031,173 5,399,643 68,430,816 Long-term borrowings: Fixed rate long-term bank loans Fixed rate long-term bonds TOTAL LONG-TERM BORROWINGS Currency 31 December 2020 31 December 2019 RUB RUB 15,973,413 29,967,625 45,941,038 61,591,407 20,519,034 82,110,441 The Groups’ borrowings as at 31 As at 31 December 2020 the Group The loan agreements contain financial December 2020 and 31 December 2019 had RUB 177,600,000 of unused credit and non-financial covenants. As at bear market interest rates, all of them are denominated in Russian roubles facilities (as at 31 December 2019: RUB 89,136,000). 31 December 2020 the Group is in compliance with the covenants. and are not secured. 136 136 137 137 >>18-20LENTA. Annual Report 2020.01020403 21. Income taxes >> The Group’s income tax expense for the year ended 31 December 2020 and 31 December 2019 is as follows: Current tax expense Deferred tax (expense)/benefit Income tax expense recognised in profit for the year Profit/(loss) 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. Reversal/(recognition) of previously unrecognised uncertain tax position INCOME TAX EXPENSE Year ended 31 December 2020 Year ended 31 December 2019 (3,442,921) (14,063) (3,456,984) (3,413,269) 3,222,585 (190,684) Year ended 31 December 2020 Year ended 31 December 2019 19,997,615 (3,999,523) 237,014 (28,163) 333,688 (3,456,984) (2,603,190) 520,638 (154,996) (176,326) (380,000) (190,684) Strategic Report Corporate Governance Report Financial Statements Appendices 1 January 2019 Change in the accounting policies due to the application of IFRS 16 Differences in recognition and reversals recognised in profit or loss 31 December 2019 Tax effect of (taxable)/deductible temporary differences Property, plant and equipment Leasehold rights Right of use 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 prepayments for construction Accrued liabilities Lease liabilities Other (10,306,373) (546,549) − 253,384 (30,844) (62,884) (31,734) 415,211 124,896 259,726 − (114,589) TOTAL NET DEFERRED TAX LIABILITIES (10,039,756) − 546,549 (7,183,435) − − − − − − 6,823,992 121,577 308,683 1,767,908 (8,538,465) − 745,471 153,897 (28,936) 65,281 (44,874) 377,844 (54,146) 539,970 (391,991) 92,161 − (6,437,964) 407,281 (59,780) 2,397 (76,608) 793,055 70,750 799,696 6,432,001 99,149 3,222,585 (6,508,488) The temporary taxable differences 2020 and 2019, respectively. A deferred it is in a position to control the timing associates with undistributed earnings tax liability on these temporary of reversal of such differences and Differences between IFRS and Russian the carrying amount of assets and tax effect of the movements in these of subsidiaries amount to RUB 91,811,752 differences was not recognised, has no intention to reverse them in the statutory tax regulations give rise liabilities for financial reporting temporary differences, recorded at the and RUB 75,842,716 as of 31 December because management believes that foreseeable future. to temporary differences between purposes and their tax bases. The rate of 20% is detailed below. 1 January 2020 Differences in recognition and reversals recognised in profit or loss 31 December 2020 22. Trade and other payables >> Tax effect of (taxable)/ deductible temporary differences Property, plant and equipment Right of use 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 prepayments for construction Accrued liabilities Lease liabilities Other TOTAL NET DEFERRED TAX LIABILITIES (8,538,465) (6,437,964) 407,281 (59,780) 2,397 (76,608) 793,055 70,750 799,696 6,432,001 99,149 (6,508,488) (836,280) (223,357) 405,891 (24,605) 347 (61,147) 149,154 (6,921) 109,608 456,300 16,947 (14,063) (9,374,745) (6,661,321) 813,172 (84,385) 2,744 (137,755) 942,209 63,829 909,304 6,888,301 116,096 (6,522,551) Trade payables Accrued liabilities and other creditors Payables for purchases of property, plant and equipment TOTAL TRADE AND OTHER PAYABLES 31 December 2020 31 December 2019 48,730,068 9,213,476 3,522,889 61,466,433 46,537,381 6,446,591 1,705,131 54,689,103 The trade and other payables are denominated in: Russian roubles USD EUR GBP TOTAL TRADE AND OTHER PAYABLES 31 December 2020 31 December 2019 60,205,933 1,021,454 236,211 2,835 61,466,433 53,785,883 650,158 249,815 3,246 54,689,103 138 138 139 139 >>21-22LENTA. Annual Report 2020.01020403 23. Other taxes payable >> 26. Other operating income and expenses >> Strategic Report Corporate Governance Report Financial Statements Appendices Social taxes Personal income tax Other taxes Property tax TOTAL OTHER TAXES PAYABLE 24. Cost of sales >> 31 December 2020 31 December 2019 1,099,531 284,232 23,985 − 1,407,748 805,661 238,786 36,221 92,895 1,173,563 >> Cost of goods sold is reduced by rebates and promotional bonuses received from suppliers. Cost of sales for the year ended 31 Cost of sales for the year ended 31 December 2020 includes employee December 2020 includes cost of raw benefits expense of RUB 9,419,290 (for materials used in own production of the year ended 31 December 2019: RUB 17,194,010 (for the year ended 31 Other operating income is comprised of the following: Rental income Penalties due by suppliers Sale of secondary materials Advertising income GDR program reimbursement Insurance compensation Changes in expected credit losses of accounts receivable and write-offs of accounts receivable Gain on property, plant and equipment disposal Gain from cancelation of lease contracts Other TOTAL OTHER OPERATING INCOME Year ended 31 December 2020 Year ended 31 December 2019 1,475,979 1,152,192 1,133,736 609,191 331,111 218,038 − 45,730 47,244 186,681 5,199,902 1,605,999 971,290 1,127,996 550,135 − 524,243 48,658 42,102 − 197,343 5,067,766 RUB 8,777,586) of which contributions December 2019: RUB 16,575,218). Income generated from the GDR program represents reimbursements done by the depositary out of revenue charged from to state pension fund are comprised of RUB 1,330,005 (for the year ended 31 December 2019: RUB 1,229,580). GDR holders. Other operating expenses are comprised of the following: 25. Selling, general and administrative expenses >> Employee benefits Depreciation and amortisation (Notes 7, 9, 11) Utilities and communal payments Professional fees Advertising Cleaning Repairs and maintenance Security services Taxes other than income tax Rent expense (Note 9) Other TOTAL SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Year ended 31 December 2020 Year ended 31 December 2019 Changes in expected credit losses of accounts receivable and write-offs of accounts receivable Loss from property, plant and equipment and intangible assets disposal Impairment and write-offs of advances paid and prepayments for construction Penalties from government authorities Penalties for termination of a contracts with service suppliers Non-recoverable VAT Loss from cancelation of lease contracts Other TOTAL OTHER OPERATING EXPENSES 31,264,457 18,540,233 4,969,707 4,318,190 5,748,928 3,508,353 3,523,836 2,082,074 1,456,812 1,031,359 3,670,230 80,114,179 28,119,261 18,439,679 4,974,278 4,388,221 5,177,240 3,611,966 3,019,466 1,973,878 1,598,841 1,159,049 2,621,634 75,083,513 Year ended 31 December 2020 Year ended 31 December 2019 210,299 67,147 36,774 35,046 15,975 19,371 5,796 132,062 522,470 352,215 101,831 56,750 109,291 63,611 − 121,636 130,364 935,698 Employee benefits for the year 43,323 (during the year ended 31 the amount of RUB 29,222 (for the year ended 31 December 2020 include December 2019: 43,731). ended 31 December 2019: RUB 24,282) contributions to state pension fund and for other professional services in of RUB 3,922,267 (for the year ended Professional fees for the year ended 31 the amount of RUB 12,844 (for the year 31 December 2019: RUB 3,578,339). December 2020 include fees billed by ended 31 December 2019: RUB 22,729). The average number of employees Ernst & Young LLC and Ernst & Young employed by the Group during the Cyprus Limited: for the audit of the year ended 31 December 2020 was consolidated financial statements in 140 140 141 141 >>23-26LENTA. Annual Report 2020.01020403 Strategic Report Corporate Governance Report Financial Statements Appendices Total expense recognised for the services received from the employees covered by long-term incentive plan for the year ended 31 December 2020 and for the year ended 31 December 2019 is shown in the following table: 27. Share options reserve >> Long-term incentive plan The Group approved a long-term The monetary amount of the award The fair value of the award shares was incentive plan (LTIP) to certain to be granted to the participants of estimated based on the GDR price on Expense arising from the equity-settled long-term incentive plan payments Incremental fair value arising from conversion of the equity-setted long-term incentive plan into employee benefits under IAS 19 members of senior and middle the plan was calculated based on London Stock Exchange on the award TOTAL management, according to which the the annual base salary on the grant grant date. Group annually granted award shares date, target award interest, business in 2014, 2015, 2016, 2017, 2018 and 2019 results coefficient and individual As at 31 December 2020 Tranche 2014, Share-option modification along with the communication of the performance rating coefficient. 2015 are fully vested. In the fourth quarter of the year ended employee benefits in accordance with option reserve in the consolidated terms of award to participants. 31 December 2020 equity-settled IAS 19. statement of changes in equity. Year ended 31 December 2020 Year ended 31 December 2019 342,297 119,092 461,389 428,246 - 428,246 unvested awards Tranche 2018 and Tranche 2019 to the middle and top The incremental fair value estimated At the conversion date the total management were converted so as as excess of the fair value of the amount of fixed remuneration to become fixed renumeration but converted award over the original payable of 346,393 RUB in the extent to their terms are otherwise unchanged. share-based payment at the date which the related services have been Remaining vesting dates The number of converted instruments of conversion was recognised as received was reclassified from share Set out below is the information about awards granted in 2016, 2017, 2018 and 2019: Vested during the year ended 31 December 2019 Vested as at 31 December 2020 Top Management LTIP 2016 LTIP 2017 LTIP 2018 LTIP 2019 Middle Management LTIP 2016 LTIP 2017 LTIP 2018 LTIP 2019 100% 66% 34% 0% 100% 0% 0% 0% 100% 100% 34% 25% 100% 100% 0% 25% 0% 0% 66% in Apr 2021 Apr 2021 - 25%, May 2021 - 50% 0% 0% Apr 2021 - 100% Apr 2021 - 25%, Apr 2022 - 50% at fixed price of USD $3.6 remained expense in the extent to which the option reserve in the consolidated unchanged. The fixed renumeration specified services have been received statement of changes in equity to was accounted for as other long-term in the amount of 119,092 RUB with the trade and other payables. corresponding increase in share Conversion into employee benefits under IAS 19 Transfer from share option reserve to liability (trade and other payables) Share value appreciation rights 2018 tranche 2019 tranche Total 112,984 233,409 346,393 Set out below is the information about awards settlement during year ended 31 December 2020: During the year 2013 and the year Lenta PLC based on an increase in In April 2020 SVARs of 2016 year expired 2016 the Group granted share value the share price over a predetermined worthless. Total expense for the appreciation rights (SVARs) to certain exercise price subject to meeting the services received from the employees Settlement by cash payment during 2020 Settlement by cash Excess of expenses accrued vs. payment made 2017 tranche 2018 tranche 2019 tranche Total members of top management as part performance conditions. previously recognised with respect to of management long-term incentive expired SVARs was RUB 20,486. 79,843 64,727 23,154 11,108 224,375 37,097 327,372 112,932 plan. Each SVAR entitles the holder As at 31 December 2019 SVARs of 2013 to a quantity of ordinary shares in year fully vested. Set out below is the information about awards settlement during year ended 31 December 2019: Expense arising from the equity-settled SVARs transaction 2,201 6,875 Year ended 31 December 2020 Year ended 31 December 2019 2016 tranche 2017 tranche 2018 tranche 2019 tranche Total Settlement by shares Number of shares issued during 2019 Total expense recognised with regards to shares issued Settlement by cash payment Settlement by cash during 2019 Excess of expenses accrued vs. payment made 16,182 37,300 194,592 198,382 13,354 25,370 53,990 32,809 18,360 30,432 37,602 15,105 29,771 34,341 – – 77,667 127,442 286,184 246,296 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. 142 142 143 143 >>27LENTA. Annual Report 2020.01020403 28. Capital expenditure commitments >> >> At 31 December 2020 the Group has contractual capital expenditure commitments in respect of property, plant and equipment and intangible assets totaling RUB 4,333,015 net of VAT (31 December 2019: RUB 6,216,727 net of VAT). 29. Financial instruments >> Strategic Report Corporate Governance Report Financial Statements Appendices 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: 31 December 2020 31 December 2019 Carrying amount Fair value Carrying amount Fair value Financial liabilities Interest-bearing loans and borrowings Fixed rate bank loans and bonds TOTAL FINANCIAL LIABILITIES 78,951,574 78,951,574 79,516,819 79,516,819 150,541,257 150,541,257 149,587,134 149,587,134 The management assessed that the between willing parties, other than in the end of the reporting period. The carrying amounts of cash and short- a forced or liquidation sale. own non-performance risk as at 31 term deposits, trade receivables, December 2020 and 31 December trade payables, other liabilities The following methods and 2019 is assessed to be insignificant. approximate their fair values largely assumptions are used to estimate the due to the short-term maturities of fair values: these instruments. > The fair value of bonds is based on the price quotations at the reporting date at Moscow The fair value of the financial assets > Fair values of the Group’s interest- bearing borrowings and loans are exchange where transactions with bonds take place with sufficient Categories of financial instruments Financial assets measured at amortised cost Cash and cash equivalents Trade and other receivables Other non-current financial assets TOTAL FINANCIAL ASSETS MEASURED AT AMORTISED COST Financial liabilities measured at amortised cost Fixed rate long-term bank loans and bonds Fixed rate short-term bank loans and bonds Trade and other payables TOTAL FINANCIAL LIABILITIES MEASURED AT AMORTISED COST Fair values 31 December 2020 31 December 2019 and liabilities is included at the determined by using DCF method frequency and volume. 21,808,874 10,902,839 445,171 33,156,884 45,941,038 33,010,536 61,466,433 140,418,007 73,404,760 8,604,102 444,316 82,453,178 82,110,441 68,430,816 54,689,103 205,230,360 amount at which the instrument could using discount rate that reflects be exchanged in a current transaction the issuer’s borrowing rate as at Changes in liabilities arising from financing activities 31 December 2019 Proceeds from borrowings Repayments of borrowings Reclassifications Other Long-term borrowings Short-term borrowings TOTAL 82,110,441 68,430,816 150,541,257 30,792,775 15,000,000 45,792,775 (10,000,000) (107,240,001) (117,240,001) (56,998,068) 35,890 56,998,068 (178,347) − (142,457) 31 December 2018 Proceeds from borrowings Repayments of borrowings Reclassifications Other 31 December 2020 45,941,038 33,010,536 78,951,574 31 December 2019 Quantitative disclosures of fair value measurement hierarchy for the Group’s financial liabilities as at 31 December 2020 and 31 December 2019 are presented below: Long-term borrowings Short-term borrowings 106,341,291 20,738,998 35,386,518 194,644,286 (13,000,000) (193,770,873) (46,813,928) 196,560 82,110,441 46,813,928 4,477 68,430,816 TOTAL 127,080,289 230,030,804 (206,770,873) − 201,037 150,541,257 Financial liabilities for which fair values are disclosed Fixed rate bonds Fixed rate bank loans 31,702,693 47,814,126 31,702,693 47,814,126 − − 31 December 2020 Level 1 Level 2 Level 3 Financial liabilities for which fair values are disclosed Fixed rate bonds Fixed rate bank loans 26,387,036 123,200,098 26,387,036 − − 123,200,098 − − 31 December 2019 Level 1 Level 2 Level 3 During the reporting periods ended 31 December 2020 and 31 December 2019, there are no transfers between Level 1, Level 2 and Level 3 of fair value measurements. The ‘Other’ column includes the net effect of accrued and paid interest on interest bearing loans. Group classifies interest paid as cash flows from operating activities. 144 144 145 145 >>28-29LENTA. Annual Report 2020.01020403 30. Financial risk management >> The Group’s principal financial liabilities, other than derivatives, are Foreign currency risk Strategic Report Corporate Governance Report Financial Statements Appendices Credit risk Trade receivables Cash and cash equivalents Credit risk is the risk that counterparty The Group has no significant may default or not meet its obligations concentrations of credit risk. Credit risk from investing activities to the Group on a timely basis, leading Concentration of credit risk with is managed by the Group’s treasury to financial loss to the Group. Financial respect to receivables is limited department in accordance with the comprised of loans and borrowings, Foreign currency risk is the risk that risk. The only balances that are assets, which are potentially subject due to the Company’s customer Group’s policy. Investments of surplus trade and other payables. The main the fair value or future cash flows of exposed to foreign currency risk are to credit risk, consist principally of and vendor base being large and funds are made only with approved purpose of these financial liabilities a financial instrument will fluctuate accounts payables to several foreign cash in bank accounts and cash in unrelated. Credit is only extended counterparties. Cash is placed in is to finance the Group’s operations because of changes in foreign suppliers. transit, loans and receivables. to counterparties subject to strict financial institutions, which are and to provide guarantees to support exchange rates. approval procedures. The Group considered at time of deposit to have its operations. The Group’s principal Whenever possible, the Group tries In determining the recoverability trades only with recognised, minimal risk of default. financial assets include loans, trade During the years ended 31 December to mitigate the exposure to foreign of receivables the Group uses a creditworthy third parties who are and other receivables, and cash 2020 and 2019, the Group does not currency risk by matching the provision matrix to measure expected registered in the Russian Federation. It The maximum exposure to credit and short-term deposits that derive attract any amounts of foreign statement of financial position, and credit losses. The provision rates are is the Group’s policy that all customers risk at the reporting date of trade directly from its operations. The currency denominated borrowings, revenue and expense items in the based on days past due for groupings who are granted credit terms have receivables is the carrying value Group also enters into derivative and as a consequence is not relevant currency. of various customer segments a history of purchases from the as presented in the statement of transactions. materially exposed to foreign currency The Group is exposed to market risk, credit risk and liquidity risk. The Group’s senior management oversees Foreign currency sensitivity with similar loss patterns (i.e., by Group. The Group also requires financial position. The maximum customer type and rating) and the these customers to provide certain exposure to credit risk at the reporting likelihood of default over a given time documents such as incorporation date of cash and cash equivalents is horizon. The calculation reflects the documents and financial statements. RUB 21,532,580 (31 December 2019: RUB probability-weighted outcome, the In addition, receivable balances are 73,128,341). the management of these risks. The The following table demonstrates the sensitivity to a reasonably possible change time value of money and reasonable monitored on an ongoing basis with Group’s financial risk activities are in the US dollar exchange rate, with all other variables held constant. and supportable information that the result that the Group’s exposure governed by appropriate policies and procedures and financial risks are identified, measured and managed in accordance with the Group’s policies and risk objectives. All derivative activities for risk management purposes are carried out by specialists that have the appropriate skills, experience and supervision. It is Year ended 2020 Year ended 2019 Change in USD rate Effect on profit before tax 16.00% -16.00% 13.00% -11.00% (143,763) 143,763 (61,972) 52,438 is available at the reporting date to bad debts is not significant. Sales about past events, current conditions to retail customers are made in cash, and forecasts of future economic debit cards or via major credit cards. conditions. Liquidity risk The Group monitors its risk to a use of bank overdrafts and bank financial liabilities at 31 December the Group’s policy that no trading in The following table demonstrates the sensitivity to a reasonably possible change shortage of funds using a recurring loans. Each year the Group analyses 2019 and 31 December 2019 bases on derivatives for speculative purposes in the EUR exchange rate, with all other variables held constant. liquidity planning tool. This tool its funding needs and anticipated contractual undiscounted cash flows may be undertaken. The Board of Directors reviews and agrees policies for managing each of these risks, which are summarised below. Market risk Year ended 2020 Year ended 2019 Change in EUR rate Effect on profit before tax 16.00% -16.00% 13.00% -11.00% (36,367) 36,367 (25,815) 21,844 Market risk is the risk that the fair value prepared for the purpose of market risk disclosures in accordance with IFRS 7 of future cash flows of a financial and is derived from statistical data, in particular time series analysis. Foreign currency exchange rate reasonable possible change range was instrument will fluctuate because of changes in market prices. Market risk comprises the following types of risk: interest rate risk, currency risk, and Interest rate risk other price risk, such as equity price Interest rate risk is the risk that the rates. As at 31 December 2020 and as risk. Financial instruments affected fair value of future cash flows of the at 31 December 2019 the Group has by market risk include loans and financial instrument will fluctuate no financial instruments with floating borrowings, cash equivalents and because of changes in market interest interest rates. derivative financial instruments. considers the maturity of its financial cash flows, so that it can determine its of the financial liabilities based on assets and liabilities and projected funding needs. cash flows from operations. The Group the earliest date on which the Group is required to pay. The table includes objective is to maintain a continuity The table below summarises the both interest and principal cash flows. of funding and flexibility through the maturity profile of the Group’s 31 December 2020 Borrowings Lease liabilities Trade and other payables TOTAL Less than 12 months 37,062,819 5,765,364 61,466,433 104,294,616 1-5 years 49,167,294 20,666,697 − 69,833,991 Over 5 years − 28,338,092 − Total 86,230,113 54,770,153 61,466,433 28,338,092 202,466,699 146 146 147 147 >>30LENTA. Annual Report 2020.01020403 Strategic Report Corporate Governance Report Financial Statements Appendices 31 December 2019 Borrowings Lease liabilities Trade and other payables TOTAL Capital management Less than 12 months 75,038,997 5,334,247 54,689,103 135,062,347 1-5 years 89,522,037 20,116,334 − 109,638,371 Over 5 years − 28,991,802 − 28,991,802 Total 164,561,034 54,442,383 54,689,103 273,692,520 The Group manages its capital to return of capital to shareholders requirements of the business and with rates. Food retail was not included which could negatively affect the also assesses the maximum exposure into the list of most affected sectors. Group’s future financial position, results from possible tax risks to be RUB The Group was included into the list of operations and business prospects. 2,123,772 (31 December 2019: RUB 1,750,623). of systemically important companies. Management continues to monitor The Government of Russia provided Management believes it is taking closely any developments related to the following support measures for appropriate measures to support the these risks and regularly reassesses the companies, included into the list of sustainability of the Group’s business risk and related liabilities, provisions systemically important ones: budget in the current circumstances. and disclosures. subsidies, deferral of taxes and tax advances, state guarantees for credits and loans. The Group did not plan to apply for support measures provided Legal contingencies Environmental matters ensure that entities in the Group as well as the issue of new debt or reference to continuing compliance by the Government. Group companies are involved in a The enforcement of environmental will be able to continue as a going the redemption of existing debt. The with the financial policy. number of lawsuits and disputes that regulation in the Russian Federation concern while maximising the return to Group is guided in its decisions by an COVID-19 is having a significant impact arise in the normal course of business. is evolving and the enforcement stakeholders through the optimisation established financing policy, which The capital structure of the Group on the operations of the Group’s Management assesses the maximum posture of government authorities of the debt and equity balance. stipulates leverage ratios, interest consists of debt, which includes the business. During the reporting period exposure relating to such lawsuits is continually being reconsidered. coverage, covenants compliance, borrowings disclosed in Note 20, the Group experienced strong growth of and disputes to be RUB 89,974 as at 31 The Group periodically evaluates The Group reviews its capital needs appropriateness of balance between lease liabilities less cash and cash sales and EBITDA exceeding prior year December 2020 (31 December 2019: RUB its obligations under environmental periodically to determine actions to long-term and short-term debt, equivalents and equity attributable and budgeted amounts. At the same 84,015). Management believes there regulations. As obligations are balance its overall capital structure requirements to diversification of to equity holders of the parent, time the Group is incurring additional is no exceptional event or litigation determined, they are recognised through shareholders’ capital funding sources. Dividends are to comprising issued capital, reserves COVID-19 preventive costs, particularly likely to affect materially the business, immediately. Potential liabilities, which contributions or new share issues, be declared based on the capital and retained earnings. on additional intensity allowance financial performance, net assets or might arise as a result of changes Net debt of the Group comprises of the following: Net debt is a non-IFRS indicator and, therefore, its calculation may differ 31 December 2020 31 December 2019 between companies, however it is Borrowings Lease liabilities Cash and cash equivalents (Note 17) NET DEBT 78,951,574 34,441,507 (21,808,874) 91,584,207 150,541,257 32,160,006 (73,404,760) 109,296,503 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. 31. Contingencies >> Operating environment of the Group to personnel to meet the increased financial position of the Group, which in existing regulations, civil litigation demand, on antibacterial protection have not been disclosed in these or legislation, cannot be estimated equipment and liquids for employees consolidated financial statements. but could be material. In the current and customers, masks and gloves, cleaning services. These additional expenses are more than outweighed by the benefits of increased consumer demand. The Group performed assessment of the impact of COVID-19 Russian Federation tax and regulatory environment on the impairment of non-financial The government of the Russian assets (Note 7) and on credit risk with Federation continues to reform respect to receivables (Note 14). the business and commercial infrastructure in its transition to a While the full financial impact of market economy. As a result the laws the crisis in long-term perspective and regulations affecting businesses is impossible to predict with a high continue to change rapidly. These degree of certainty, the management changes are characterised by poor strongly believes in positive outcome drafting, different interpretations and on the performance of the Group. arbitrary application by the authorities. In particular taxes are subject to review enforcement climate under existing legislation, management believes that there are no significant liabilities for environmental damage. 32. Events occurring after the reporting period >> The Group sells products that are habits and the Group’s operating significant and prolonged impact The Russian economy has been and investigation by a number of From 17 February 2021 the sensitive to changes in general results. economic conditions that impact on global economic conditions, disruptions in supply chain, increase in negatively impacted by sanctions authorities who are enabled by law Company was registered in the imposed on Russia by a number of to impose fines and penalties. While Russian Federation in the special consumer spending. Future economic Russia continues economic reforms employee absenteeism and adversely countries. The Rouble interest rates the Group believes it has provided administrative region of Oktyabrsky conditions and other factors, including and development of its legal, tax and impact operations. remained high. The combination of the adequately for all tax liabilities based Island, Kaliningrad. As a result of the the outbreak of coronavirus infection, regulatory frameworks as required by above resulted in reduced access to on its understanding of the tax redomiciliation becoming effective, sanctions imposed, consumer a market economy. The future stability Since March 2020, the Russian capital, a higher cost of capital and legislation, the above facts may create the Company is now named Lenta confidence, employment levels, of the Russian economy is largely authorities have taken a number of uncertainty regarding economic growth, tax risks for the Group. Management IPJSC, an international public joint- interest rates, consumer debt levels dependent upon these reforms and measures to mitigate the effect of and availability of consumer credit developments, and the effectiveness COVID-19 on the Russian economy. The could reduce consumer spending or of economic, financial and monetary range of measures is very broad and change consumer purchasing habits. measures undertaken by the includes, amongst others, the deferral A general slowdown in the Russian government. economy or in the global economy, or of tax and lease payments, suspension of field audits, prolongation of various an uncertain economic outlook, could The recent outbreak and global state licenses and permits, credit adversely affect consumer spending spread of the COVID-19 may have a holidays and bank loans at reduced 148 148 stock company. 149 149 >>30-32LENTA. Annual Report 2020.01020403 >>04 Appendices 152 Companies subsidiaries 153 List of cities as of 31 December 2020 155 Glossary 156 Further information 157 Cautionary statements 158 Notes Companies subsidiaries >> The Company had the following subsidiaries as at 31 December 2020: Company name Lenta LLC Zoronvo Holdings Ltd Lenta-2 LLC TRK-Volzhskiy LLC TK-Zheleznodorozhniy LLC Beneficial ownership 100% 100% 100% 100% 100% Strategic Report Corporate Governance Report Financial Statements Appendices List of cities as of 31 December 2020 >> Cities1 1 Achinsk 2 Almetyevsk 3 Arkhangelsk 4 Armavir 5 Astrakhan 6 Balakovo 7 Barnaul 8 Belgorod 9 Biysk 10 Bratsk 11 Bryansk 12 Cheboksary 13 Chelyabinsk 14 Cherepovets 15 Cherkessk 16 Dimitrovgrad 17 18 Ekaterinburg Engels 19 Grozny 20 Irkutsk 21 22 Ivanovo Izhevsk 23 Kaluga 24 Kamensk-Uralsky 25 Kazan 26 Kemerovo 27 Khanty-Mansiysk 28 Kostroma 29 Krasnodar 30 Krasnoyarsk 31 Kurgan 32 Kursk 33 Lipetsk 34 Magnitogorsk 35 Maykop 36 Moscow 37 Murmansk 38 Naberezhnye Chelny Number of hyper markets Number of super markets Number of distribution centres 1 1 2 1 2 1 3 2 1 1 1 1 6 3 1 1 5 2 1 2 3 3 1 1 6 3 1 1 3 5 1 1 2 2 1 26 2 2 0 0 0 0 0 0 5 0 0 0 0 0 0 0 0 0 10 0 0 0 0 0 1 0 0 9 0 0 0 0 0 0 0 0 0 53 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 0 0 0 0 0 0 0 0 3 0 0 152 152 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’. 153 153 LENTA. Annual Report 2020.01020403 Cities1 Number of hyper markets Number of super markets Number of distribution centres 39 Nizhnevartovsk 40 Nizhnekamsk 41 Nizhniy Novgorod 42 Nizhniy Tagil 43 Novocherkassk 44 Novokuznetsk 45 Novorossiysk 46 Novoshakhtinsk 47 Novosibirsk 48 Noyabrsk 49 Obninsk 50 Omsk 51 Orel 52 Orenburg 53 Orsk 54 55 56 57 58 Penza Perm Petrozavodsk Prokopievsk Pskov 59 Rostov-on-Don 60 Ryazan 61 62 63 64 65 66 67 68 69 Samara Saransk Saratov Shakhty Smolensk St. Petersburg Stavropol Sterlitamak Surgut 70 Syktyvkar 71 72 73 74 75 76 77 Taganrog Tobolsk Togliatti Tomsk Tula Tver Tyumen 78 Ufa 79 Ulyanovsk 80 Velikiy Novgorod 81 Vladimir 82 Volgograd 83 Vologda 84 Volzhskiy 85 Voronezh 86 Yaroslavl 87 Yoshkar Ola 88 Yurga 89 Zheleznovodsk 1 1 4 2 1 4 2 1 7 1 1 6 1 4 1 2 3 2 1 2 4 3 4 1 3 1 1 41 2 1 2 2 2 1 2 3 1 1 5 5 2 2 1 4 1 1 2 5 1 1 1 0 0 0 0 0 1 0 0 25 0 1 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 35 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 0 0 0 0 0 1 0 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 Strategic Report Corporate Governance Report Financial Statements Appendices Glossary >> Unless otherwise specified, the terms ‘Company’, ‘the Group’, ‘we’, ‘us’, and ‘our’ refer to Lenta PLc., or where the context allows, to the Lenta business more generally. the 2014 Offering active cardholder the initial public offering of our Shares, in the form of GDRs, admitted to trading on the London Stock Exchange and the Moscow Stock Exchange on 5 March 2014 a customer who has purchased goods at one of our stores at least twice in the past 12 months using our loyalty card average sales density total sales during the relevant year divided by the average selling space for that year average ticket the figure calculated by dividing total sales, net of VAT, at all stores during the relevant year by the number of tickets in that year the Board the board of directors of Lenta PLc BVI Capex CAGR EGAIS FMCG gamification the British Virgin Islands capital expenditure Compounded annual growth rate national automated information system for the control of alcohol production and distribution fast-moving consumer goods – products that are sold quickly and at relatively low cost the application of game-design elements and game principles in non-game contexts. Gamification commonly employs game design elements which are used in non-game contexts to improve user engagement, organisational productivity, flow, learning, crowdsourcing, employee recruitment and evaluation, ease of use, usefulness of systems, physical exercise, traffic violations, voter apathy, and more. GDRs global depositary receipts in-store availability the number of SKUs in-store with a positive stock value as a proportion of the total number of active SKUs for sale, calculated based on the average daily in-store availability of all open stores LFL P&L SG&A Shares SKU sq.m ticket like-for-like profit and loss statement Selling, General and Administrative Expenses, which is a major non-production cost presented in the Income statement our ordinary shares a ‘stock keeping unit’, or a number assigned to a particular product to identify the price, product options and manufacturer of the merchandise square metre(s) the receipt issued to a customer for his/her basket (the amount spent by a customer on a shopping trip) total selling space the area inside our stores used to sell products, excluding areas rented out to third parties, own- production areas, storage areas and the space between store entry and the cash desk line traffic the number of tickets issued for the period under review 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’. 154 154 155 155 LENTA. Annual Report 2020.01020403 Further information >> In this annual report, we present certain operating and financial information regarding our hypermarkets and supermarkets, which we define as follows: Adjusted EBITDA EBITDA adjusted for non-recurring one-off items such as changes in accounting estimates and one-off non-operating costs Adjusted EBITDA margin Adjusted EBITDA as a percentage of sales Adjusted EBITDAR Adjusted EBITDA before rent paid on land, equipment and premises leases Adjusted EBITDAR margin Adjusted EBITDAR as a percentage of sales EBITDA like-for-like sales Other metrics Profit for the period before foreign exchange gains/losses, revaluation of financial instruments at fair value through profit or loss, reversal of impairment of non-financial assets, other expenses, depreciation and amortisation, interest and tax. The reconciliation of EBITDA to IFRS profit is presented in tabular format in note 6 to the Consolidated Financial Statements. We distinguish between sales attributable to new stores and sales attributable to existing stores. We consider the sales generated by stores until the end of the 12th full calendar month of their operation to be sales attributable to new stores. Accordingly, like-for-like sales begin with the comparison of the 13th full calendar month of operations of a store to its first full calendar month of operations, assuming the store has not subsequently closed, expanded or down sized. The number of stores in our like-for- like panel as of 31 December 2020 and 2019was 372 (247 hypermarkets and 125 supermarkets) and 351 (230 hypermarkets and 121 supermarkets) respectively. ‘Like-for-like average ticket growth’, ‘like-for-like average price growth per article’, ‘like-for-like traffic growth’, and ‘like-for-like average sales density’ are calculated using the same methodology as like-for-like sales. Net debt is calculated as the sum of short-term and long-term debt (including borrowings and obligations under finance leases, capitalised fees and accrued interest) minus cash and cash equivalents. The ratio of net debt to Adjusted EBITDA is net debt divided by Adjusted EBITDA. The ratio of Adjusted EBITDA to net interest expense is Adjusted EBITDA divided by net interest expense, which is calculated as interest expense less interest income. The ratio of Adjusted EBITDAR to net interest expense plus rental expense ratio is Adjusted EBITDAR divided by the sum of net interest expense and rental expenses. CROCI is defined as Adjusted EBITDA over average capital invested. Average capital invested is the average of the book value of gross non-current assets plus net working capital as of the beginning of the year and the book value of gross non-current assets plus net working capital as of the end of the year. Adjusted SG&A/ Sales is SG&A, excluding expenses on land and equipment leases, premises leases, depreciation and amortisation and one-off expenses as a proportion of sales. Strategic Report Corporate Governance Report Financial Statements Appendices Cautionary statements >> Forward-looking statements >> >> This document contains certain ‘forward-looking statements’ which include all statements other than those of historical facts that relate to our plans, financial position, objectives, goals, strategies, future operations and performance, together with the assumptions underlying such matters. Market and industry data Statements referring to our competitive position and the Russian retail food sector reflect our beliefs and, in some cases, private and publicly available information and statistics, including annual reports, industry We generally use words such as performance. These views reflect publications, market research, ‘estimates’, ‘expects’, ‘believes’, ‘intends’, management’s best judgement, but press releases, filings under ‘plans’, ‘may’, ‘will’, ‘should’, ‘projects’, involve uncertainties and are subject various securities laws, official ‘anticipates’, ‘targets’, ‘aims’, ‘would’, to certain known and unknown risks data published by Russian ‘could’, ‘continues’ and other similar together with other important factors governmental entities and expressions to identify forward- outside our control, the occurrence of data published by international looking statements. We have based which could cause actual results to organisations and other third- these forward-looking statements on differ materially from those expressed party sources. the current views of our management in our forward-looking statements. with regard to future events and Rounding >> Certain figures in this document have been subject to rounding adjustments. Accordingly, figures shown for the same category presented in different tables may vary slightly, and figures shown as totals in certain tables may not be an arithmetic aggregation of the figures that precede them. 156 156 157 157 LENTA. Annual Report 2020.01020403 Notes >> 158158 LENTA. Annual Report 2020.