O 1 › S T R A T E G I C R E P O R T
O 2 › C O R P O R A T E G O V E R N A N C E
O 3 › F I N A N C I A L S T A T E M E N T S
O 4 › APPENDICES

A N N U A L R E P O R T A N D A C C O U N T S 2019

002 L E N T A 003 C ONTENTS

L E N T A A N N U A L R E P O R T A N D A C C O U N T S 2019

O1>STRATEGIC REPORT OO4

AT A GLANCE OO6
FINANCIAL AND OPERATIONAL HIGHLIGHTS OO8
CHAIRMAN'S STATEMENT O10
CHIEF EXECUTIVE OFFICER'S REVIEW O12
MARKET OVERVIEW O14
OPERATING REVIEW O16
CORPORATE SOCIAL RESPONSIBILITY O22
FINANCIAL REVIEW O28
RISK MANAGEMENT O30

of the consolidated financial statements

O2>CORPORATE GOVERNANCE O36

BOARD OF DIRECTORS o38
SENIOR MANAGEMENT TEAM O42
CORPORATE GOVERNANCE REPORT O48
BOARD COMMITTEES O53
AUDIT COMMITTEE REPORT O54
NOMINATION COMMITTEE REPORT O57
REMUNERATION COMMITTEE REPORT O59
OPERATION AND CAPEX COMMITTEE REPORT O65

O3>FINANCIAL STATEMENTS O68

Independent auditor's report O70
Statement of management's responsibilities for the preparation and approval O73
Consolidated statement of financial position O74
Consolidated statement of profit or loss and other comprehensive income O75
Consolidated statement of cash flows O76
Consolidated statement of changes in equity O77
Notes to the consolidated financial statements O78

O4>APPENDICES 108

COMPANY subsidiaries 109
List of cities as of 31 December 2019 11o
Glossary 111
Further information 111

004

O 1 › STRATE G I C RE P ORT

O 2 › C OR P ORATE G O V ERNAN C E O 3 › FINAN C IAL STATEMENTS O 4 › A P P EN D I C ES

O 1 › STRATE G I C RE P ORT

LENTA

ANN U AL RE P ORT AN D A C C O U NTS 2019

007	O 1 › STRATE G I C RE P ORT	LENTA
	O 2 › C OR P ORATE G O V ERNAN C E
	O 3 › FINAN C IAL STATEMENTS
	O 4 › A P P EN D I C ES

ANN U AL RE P ORT AN D A C C O U NTS 2019

LENTA ANN U AL RE P ORT AN D A C C O U NTS 2019

006 AT A G LAN ^C ^E

A N N U A L R E P O R T A N D A C C O U N T S 2019

008 L E N T A 009 FINAN C IAL AN D O P ERATIONAL H I G H LI G H TS

L E N T A A N N U A L R E P O R T A N D A C C O U N T S 2019

FINANCIAL OPERATIONAL

O 2 › C O R P O R A T E G O V E R N A N C E O 3 › F I N A N C I A L S T A T E M E N T S O 4 › APPENDICES

A N N U A L R E P O R T A N D A C C O U N T S 2019

L E N T A

010 L E N T A 011 C H AIRMAN ' S STATEMENT

A N N U A L R E P O R T A N D A C C O U N T S 2019

Annual Report for 2019.

I am proud, as Chairman, to present you with Lenta's In June 2019, Severgroup became Lenta's majority shareholder, with a 78.73 % stake.

We see great potential in this business that, every day, is improving people's quality of life. We also see potential in the Russian retail industry as a whole, which is now undergoing an important transformation to meet customers' growing demands.

Widely known as an efficient grocery retailer with one of the highest growth rates in the market, Lenta is a unique asset with strong competitive advantages. Lenta and Severgroup have complementary qualities: Lenta has a highly professional management team and excellent corporate culture. Severgroup has experience in building and managing large businesses and deep expertise in both industrial and consumer sectors as well as in the digital & IT sectors. We are confident that combining these two entities will enhance Lenta's position as a leading national grocery player.

STRATEGY

Together with Lenta's management team, we are working on a new strategy for the business. We plan to announce it later this year, but I can already tell you about our core strategic priorities to ensure growth of the business:

• Client-centric business. We aim to become the first-choice retail company for the Russian consumer. We plan to grow our market share and become the most innovative and client-centric retailer in Russia. At the same time, we will work on improving the efficiency and agility of the business.

• Strong free cash flow generation. Our target is to generate sufficient cash flow to be able to support our growth ambitions and ensure strong returns to our shareholders.

• Digital transformation. Severgroup has broad experience in using cutting-edge technologies and solutions for big data analysis, machine learning and predicative analytics. I am confident that Lenta will benefit from this expertise in combination with its own profound knowledge in this field. Together, we will continue to provide an excellent shopping experience to our customers.

THE BOARD OF DIRECTORS

Following their nomination by Severgroup, Roman Vasilkov, Alexey Kulichenko and Tomas Korganas were appointed as non-executive directors of Lenta's Board of Directors. I believe their expertise in finance, strategy and economics will ensure effective leadership and stewardship of the Company.

At the same time, independent directors Stephen Johnson, Michael Lynch-Bell and Julia Solovieva will remain on the Board to ensure continuity and succession in line with best corporate governance practices.

Our Board of Directors is well-balanced, with three independent non-executive directors and three non-executive directors. The directors have diverse expertise in retail, finance, strategy, IT and innovations.

My role as Chairman is to lead the Board on strategic matters, corporate culture, key personnel development as well as corporate governance.

CHANGES INTHE CORPORATE STRUCTURE

Lenta's Board of Directors made a decision to establish a representative office of Lenta Plc in Russia which would serve the purpose of representing Lenta's interests in the country.

As a result, Russia is considered to be the place of management and control of the Company. The representative office was opened in Saint-Petersburg in October 2019. Lenta's CFO Rud Pedersen was appointed head of the representative office.

This decision is designed to rationalise the corporate structure of the Group to allow more optimal

capital allocation, optimise cost of compliance and improve corporate governance standards, reflecting the recent changes in Lenta's shareholder structure.

On February 21, 2020, Lenta accomplished its incorporation in Cyprus in the form of a public limited liability company ("Lenta PLC"). This was followed by amendments to and the replacement of the current Memorandum and Articles of Association. This should pave the way for a more optimal capital allocation going forward, while allowing us to realise efficiencies in the cost of compliance and improved corporate governance.

OUTLOOK

Lenta is well positioned for the future. The Company generated positive free cash flow in 2019 and retained its leadership in the hypermarket format.

Our main goal for 2020 is to become a truly client-centric business that continually innovates. We have to find a new successful retail model and lead the changes in the sector. We have clear priorities for 2020 and are close to finalising the new strategy.

I have great confidence that, together with the Company's team, we will make Lenta the most innovative player in the sector and that it will become the first choice for daily shopping for millions of Russian consumers.

On behalf of the Board, I would like to thank our dedicated employees and shareholders for their continued support.

SHAREHOLDERS,

O 2 › C O R P O R A T E G O V E R N A N C E O 3 › F I N A N C I A L S T A T E M E N T S O 4 › APPENDICES

012 L E N T A 013 A N N U A L R E P O R T A N D A C C O U N T S 2019

L E N T A A N N U A L R E P O R T A N D A C C O U N T S 2019

C H IEF E X E C U TI V E OFFI C ER ' S RE V IEW

HERMAN Tinga, Chief Executive

DEAR SHAREHOLDERS,

2О19 represented both a challenging and an exciting year for Lenta. We faced a tough operating environment. This was as a result of both decreasing disposable household income and increased growth of retail space, coupled with aggressive promotional activity in the industry.

We retained our leadership in the hypermarket format; we attracted new customers, and achieved the highest Net Promoter Score (NPS)¹ in the sector, which demonstrates our appeal to customers. We grew sales and we delivered positive free cash flow. However, shoppers came to our stores less frequently and bought fewer items, and our investments in price and expansion meant our EBITDA margins declined. Against that background and although many things were positive in 2019, we did not deliver on our expectations for the year.

With Severgroup becoming a majority shareholder, the year was a turning point for us at Lenta, giving us real confidence to plan for the long term.

We started developing our longer-term strategy for the business with a view to creating sustainable competitive advantage. We are now focused on building the foundations for the next phase of growth for a multi-format retailer. Work is still under way on our new strategy, which will include continued focus on the quality of our offer and further improvements in our customer value proposition. We are also planning to invest in the IT platform, enhancing our digital capabilities and our loyalty programme in order to reach out to new and existing clients. We will also be looking for further value-adding opportunities as we expand our store network.

BUSINESS ENVIRONMENT

The macroeconomic and consumer environment remained challenging, with further pressure on customer wallets resulting in declining real disposable household income and a growing consumer debt burden.

The market remained very price-competitive due to the weak macroeconomic environment combined with the rapid expansion of retail chains. Consumers continued to be price-sensitive, with more options available for making daily grocery purchases, while the retail chains have been focused on driving customer traffic by enhancing promotional activity.

PERFORMANCE

In 2019, we opened eight hypermarkets and three supermarkets, as our guidance indicated. Our selling space grew by 1.5%. Total sales grew 1.0% in 2019 to Rub 417.5bn (2018: Rub 413.6bn), including retail sales growth of 4.0% to Rub 407.9bn (2018: Rub 392.2bn) and an expected decline of 55.5% in wholesale segment.

Our EBITDA margin in 2019 declined to 8.1% from 8.8% in the previous year, affected by a lower growth rate and economic headwinds. At the same time, we generated positive free cash flow, which proves that our business is financially healthy, and gives us options to invest for further growth.

In 2019, we presented a brand new vision of shopping space. We re-opened one of our hypermarkets in Saint-Petersburg which had been damaged by a fire. We completely changed the layout of the store so it could meet the needs of different shopping missions. We put our Hero categories centre stage, and we filled the store with innovative equipment that helps to enhance both customer experience and service. We believe these changes will help us to deliver solid traffic and basket size and pave the way for in-store improvements across the chain.

Our supermarkets delivered strong sales growth of 27.5% in 2019. This format had previously proved challenging for us. But the appointment of a dedicated team and implementation of initiatives to improve customer value proposition of our supermarkets meant we saw significant improvements on EBITDA level which remained positive throughout 2019.

We have been working to enhance our shopping experience and client communication both for hypermarkets and supermarkets. In 2019 we introduced a series of initiatives aimed at driving sales and increasing our profitability, competitiveness and returns. We have put significant effort into developing our product ranges, shaping a unique and attractive selection of goods to drive footfall across our stores.

In 2019 we also focused on the optimisation of our logistics and on enhancing our capacity to support further growth. With the pilot of our own delivery service, Lentochka, we reinforced our ambition to enter the on-line segment of grocery retail.

We continued to leverage data-driven insights obtained from the Lenta loyalty card. These valuable insights enabled us to refine our product ranges, plan our store layouts and manage promotional activity. It also helped us create new customer-focused marketing tools across various media.

OUR PEOPLEAND CORPORATE CULTURE

Lenta people have always been at the heart of our business, and we aspire to provide development opportunities for every member of our team.

I am proud to lead the most stable Management Team in Russian retail. During the year, we worked on initiatives to reinforce the business and gear up

for further growth. In 2019, we conducted an Organisational Health Index (OHI) and employee engagement survey. Our engagement rate of 74% is above the world retail average. But even so, the survey showed us areas where we can improve our organisational structure and corporate culture. And we are going to do just that, with a comprehensive plan for organisational transformation.

In the year ahead, we will implement these measures to strengthen our Company from within. Our aim is to continue building a client-centric and innovation-oriented culture that will enable the growth of our business.

LOOKING AHEAD

In 2020, we expect to increase our selling space by around a relatively modest 3%. This figure is in line with our decision to focus on improvements in store performance and operational efficiency. We will continue to look for attractive growth opportunities, including expansion.

In 2020 we will continue to work on the optimisation of our SG&A expenses. We expect that the implementation of priorities set for this year will result in an EBITDA margin in 2020 above that of 2019.

Although our investments in organic expansion and supply chain will be lower in 2020, we plan to invest around 4% of our sales in capital expenditure. This includes investments in IT, digital marketing and other projects aimed to upgrade and enhance customers' experience in store, as well as drive operational efficiency.

The current plans for expansion and capital expenditure, as well as further efforts in the optimisation of operating cash flow, will result in positive free cash flow generation by the Company in 2020.

I strongly believe that Lenta's leadership position in the hypermarket sector and its growing customer base provide a very strong platform for long-term growth. Our intention is clear. We want to be the #1 shopping destination for millions of Russian consumers.

Source: Sberbank CIB Ivanov Consumer Confidence Tracker

014 L E N T A 015 A N N U A L R E P O R T A N D A C C O U N T S 2019

L E N T A A N N U A L R E P O R T A N D A C C O U N T S 2019

MARKET O V ER V IEW

MARKETOVERVIEW

The macroeconomic environment continued to put pressure on the grocery retail business in 2019. Amid weak economicgrowth and slow recovery in the dynamics of real disposable income, consumers continued to be in strong saving mode, paying attention to prices and looking for the best promotions among retail chains

Russian GDP slowed down to 1.3% in 2019 from 2.5% in 2018, constrained by both external and internal factors. The slowdown of the global economy weighed down the country's export of goods and services. Domestically, economic growth was restrained by weak dynamics of household income, the Central Bank's relatively tight monetary policy, as well as the slow implementation of national infrastructure projects.

Consumption continued to be an important factor in driving the Russian economy. For the second year in a row, retail sales outpaced the dynamics of the GDP, growing by 1.6% in real terms although slowing down from 2.8% in 2018. Food retail sales growth inevitably slowed as well from 2.1% in 2018 to 1.4% in 2019, as a result of both weak consumer purchasing power and suppressed consumer confidence.

Real disposable income increased by 0.8% - the highest rate over the last six years – due to the positive dynamics of real wages during the course of the year. Nonetheless, the growth was largely offset by higher inflation, mainly due to increased prices for communal payments and commodities, and the increase in VAT from 18% to 20% from January 2020. These factors forced consumers to be more cautious in their spending.

Even though average inflation was higher in 2019 when compared to the previous year, it came down to 3.0% in December. Food inflation slowed to 2.6% and continued slowing down at the beginning of 2020. Although lower inflation is beneficial for consumers, it can increase pressure on retailers in terms of revenue growth and force companies to intensify promotional activity to hit their targets.

Improvements in household income dynamics and consumer confidence will be the key factors to drive food retail sales. An upside can also come from the government's recent initiatives. Proposed budget spending of around Rub 400-450 bn to support low-income families, as well as other social payments, could have a positive impact on grocery consumption in the country.

COMPETITIVE ENVIRONMENT

Growth in food retail sales continued to rise in low-single-digits. Despite higher real disposable income, consumers are less confident in their future prospects and economic stability and therefore tend to save more.

The competition between retailers remained intense during the year, as the need to adapt to changing cus-

Total selling space, supermarkets

tomer habits has come to the fore. Prices remained an important factor in consumers' choice of grocery store for shopping. This alone was not, however, enough to encourage customers to visit a store frequently. Quality of goods and services, unique selection, in-store communication and digital experience are the key areas for further development of retail chains.

Lenta is well-positioned amid changing market trends. The Company put efforts into enhancing our selection of goods, introducing a wider choice and higher quality of fresh and private label products to gain competitor advantage. Our loyalty programme continued to provide insights that helped us to improve personalised offerings and digital activities that were appreciated by our customers. Lenta also started to exploit the potential of the on-line market with projects that do not require heavy capital investments, aiming to strengthen its position in the new fast-evolving business model.

The Russian food retail market remains fragmented by international standards, providing opportunities for further consolidation in the sector. The share of the Top-seven retailers reached 30.5%2 in 2019 versus 27.5% in 2018, lagging behind much more consolidated western countries, where the Top-five players can account for 50%-70% of the market.

In the previous year, fast-growing retail chain, Krasnoye & Beloye, merged with Dixy and Bristol3 , which allowed the combined company to replace Lenta in the Top-three.

Total selling space grew by 1.7 million sq.m. in 2019, with a growth rate of 6.8%, compared to 9.0% in the previous year. Selling space growth in the hypermarket segment has decelerated steadily over the last five years, and increased marginally by 0.2% in 2019. Lenta retained its position as a leading hypermarket in the country with the market share of 23% in the segment.

GROWTH POTENTIAL

After years of aggressive growth and a substantial increase in selling space, the competition in the sector gradually started to ease among the large players. Competition on prices and promotions continued to weigh down on margins, forcing more retailers to open fewer stores in order to focus on their profitability.

Lenta is no exception. The Company has already slowed down its expansion and announced its strong focus on efficiency and returns. The key priorities, therefore, will be improvements in offerings, selection, and communication with customers. Further development of digital tools should help reach a larger audience and attract new customers to stores. At the same time, the market still offers opportunities for further growth and consolidation which can be exploited in case of attractive returns to shareholders.

According to Infoline, 2019. In 2019 Dixy, Bristol and K&B merged replacing Lenta in Top-3.

DKBR Mega Retail Group Limited.

016 L E N T A 017 A N N U A L R E P O R T A N D A C C O U N T S 2019

L E N T A A N N U A L R E P O R T A N D A C C O U N T S 2019

O P ERATIN G RE V IEW

I n 2019, our total sales for the year grew 1.0% to Rub 417.5bn (2018: Rub 413.6bn), including retail sales growth of 4.0% to Rub 408bn (2018: Rub 392.2bn).

The supermarket format demonstrated strong growth, with an increase in like-for-like sales driven by higher traffic thanks to a significant increase in new, unique customers to the format. We continued working on tactical changes to the offering to enhance the attractiveness of stores to customers.

Lenta retained its presence in 88 Russian cities. Our net selling space increased by 1.5% compared to 6.1% in 2018. The total number of stores amounted our stores, especially fruits and vegetables, meat, fish, bakery and culinary.

That is why we identified these categories, along with wine, as "Hero categories". We believe that these categories distinguish Lenta from its competitors. We aimed at making Lenta the primary destination for these products by offering the best selection of products, higher quality and appealing presentation.

In 2019, we continued to work on the development of Hero categories by widening the range and supporting the offer by various marketing activities. We made good use of cross-category promotions such as festivals, tastings, recipes ideas and numerous in-store activities to focus customers' attention on the variety and quality of our products. We also rearranged relevant sections in some of our stores to draw attention to our Hero categories and exclusive offers.

All our Hero categories showed positive like-for-like retail sales of +3.5% in 2019 versus the previous year and +3.1 ppt versus other food categories.

We worked hard to shape the unique range of products in our stores. We focused on propositions that are available only in Lenta stores that will attract new shoppers to our stores at the same time retaining our loyal customers.

We are proud to be one of the largest bakeries in the country. We bake pastries and varieties of bread in our hypermarkets and supermarkets so that shoppers can enjoy fresh products every day. In March 2019, we introduced Artisan bread into our product range. This is prepared according to an authentic recipe and proved very popular with our customers. By the end of the year, Artisan bread accounted for over 6% of sales in this category.

We focused on expanding our ready-to-eat meals to satisfy the needs of customers who are looking for time-saving solutions. Our offerings include packed salads, sandwiches and a wide range of types of snacks. We care about healthy eaters and offer fresh lemonade, smoothies, milk shakes and fresh salads for them.

The development of the direct import aspect of our business enabled us to provide our customers with a wide assortment of exotic fruits. Lenta became the first retailer in the Russian market to organise direct supplies of mangoes and dragon fruit from China, and feijoas and kumquats from Azerbaijan. We supported our proposition by promotions and festivals in stores, which increased the sales by 40%.

We pride ourselves on selling one of the widest ranges of fish available, both imported and of Russian origin. In 2019 fish, which is one of our Hero category products, showed the highest result in terms of likefor-like sales of 5.3% compared with the previous year. We increased the choice of fish on offer and actively supported the ranges by communications in stores and attractive promotions.

We added 79 exclusive new SKUs of wine from a range of countries, improved in-store navigation in the category and experimented with different formats such as mini-bottles, magnums and multipacks. We supported the sales in the category with promotional techniques, such as offering customers different wines at a single price or discounts for the purchase of six bottles. These resulted in the category like-for-like sales increase of 1.3% versus the previous year.

We launched our 'Healthy World' project in 2018 and rolled this out to 221 hypermarkets in 2019, with fruitful results; we enjoyed 37.9% like-for-like sales growth in the categories in 2019 versus 2018. We offer over 1,500 individual items in our sugar- and gluten-free ranges along with natural cosmetics and domestic cleaning products. These products are located together under a single banner, so that customers looking for healthier options or special diets can find them easily and quickly.

PRIVATE LABELAND DIRECT SOURCING

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.

In 2019, retail sales of our own brands reached 14.2% of total sales versus 13.4% in 2018 and we launched 1,207 new product lines.

to 380, comprising 249 hypermarkets and 131 supermarkets, with total selling space of 1,489,497 sq.m.

During the year, the Company continued to implement a series of initiatives to increase the distinctive attractiveness of Lenta's offering to customers. These initiatives included changes in product range, marketing, Lenta's operational results programme and customer communication.

PRODUCTRANGE

A wide product range combined with affordable prices is the key reason for customers to choose Lenta. Our clients also appreciate the high quality of goods in

OPERATING REVIEW

2019 was another challenging year for the Russian food retail sector, with even stronger competition for customers in a tough trading environment.

A N N U A L R E P O R T A N D A C C O U N T S 2019

Our 365 brand showed +3.9% like-for-like sales; LENTA like-for-like sales grew by 3.2%. Dolce Albero demonstrated an impressive increase of 36.5% as did Bonvida, with +187% like-for-like sales. Sales in our non-food brand, Home Club, grew by 24% in 2019.

Our private labels were recognised for their high quality in the national contest "The Guarantee of Quality" and was awarded 22 medals.

In 2019 we developed our partnerships with Europe's leading buying alliance, EMD, and with the global sourcing agency for non-food products, Li&Fung. These partnerships bring us new cooperation models with the largest international producers and retailers and enable us to select the best goods at the best prices. This ensures both the uniqueness and the highest quality for our proposition to customers.

With Li&Fung we launched Lenta Far East platform that connects 254 factories. Our cooperative efforts focus on developing Lenta's non-food private labels and delivering a distinctive customer offering. Li&Fung ensures vendor compliance and assists in organising shipments from Asian countries to Lenta stores.

Our partnership with EMD allows the Company to fully benefit from contracts sourced by the alliance's negotiations, including those with producers of high-end brands. Joint procurement with other large European retailers enables Lenta to offer customers access to an even broader range of quality products at affordable prices, while also providing a new impetus to the on-going development of Lenta's private labels. In 2019 we leveraged the efficiency of our cooperation and launched the EMD EU sourcing platform development to source products from EMD members (copy paper, batteries, nuts and dried fruits).

We also launched 'the nuts platform', where we source directly from countries such as Chile, and work with local packaging facilities to give us fresher products of excellent quality that we can control from field to shelf.

We import fresh fruit, frozen fish and seafood directly from 127 suppliers located in 40 countries. Direct supplies enable us to optimise costs, develop unique customer propositions and offer a wide product range in these categories.

We added six new countries (Bulgaria, Chile, Estonia, Lithuania, Romania, Serbia) to our dry food import portfolio in 2019 and we added 512 new individual products to our ranges. We are committed to delighting our customers by selecting the finest goods from their contry of origin and bringing them to our stores.

We are particularly proud of the exclusive range of New Year gifts that we developed with a leading European producer. Sixty three distinctive items of confectionery, coffee and tea were delivered to our stores in plenty of time, and were 85% sold in the run up to the New Year.

In 2019, as part of our Growers platform, we increased the number of growers that supply our stores with exclusive ranges of vegetables, mushrooms, greens and other fresh food from 162 to 175. Fruit and vegetables supplied by growers within the Growers platform now account for 24.2% of our total sales of fruit and vegetables.

018 L E N T A 019 O P ERATIN G RE V IEW

Fifty growers supply a series of exclusive ranges under the brand Grown for Lenta. These include 116 individual items of berries, melons, watermelons, cabbage, tomatoes, salads and other fresh foods. The partnership ensures a winning combination of fair price, high quality standards, uniqueness and transparency. This leads to us earning our customers'

trust, as they appreciate the quality of goods they find in Lenta stores.

MARKETING

The Company has maintained its focus on digital marketing activities, reaching new and existing customers with offers tailored to each individual to increase both traffic and basket size. The number of active loyalty cardholders increased to 15.8 mn as at 31 December 2019 (+10.1% YoY).

We enhanced the processing of the data derived from our loyalty cards. With some 97% of transactions in our stores being made with the Lenta loyalty cards, this is a valuable soruce of information about customer preferences.

We focused on the improvement of our analytical models and the organisational structure of a dedicated department to align the conclusions we derive from the customer data and business decisions we make.

We segment our customers depending on their needs and life cycle. This enables us to manage our product range and promotions effectively, as well as to predict changes in customers' preferences to which we can respond in a timely fashion.

Lenta's Mobile App, launched in October 2018, had attracted more than 4.8 million users by the end of the year. We took further steps to enrich the Mobile App's functionality, delivering a better customer experience through enhancing personalised promotional offers.

We launched what we call a 'personal cabinet' on our web site and on the App, which is where our loyal customers can find personal offers based on their shopping history. They can also track what they bought before, make a shopping list and check the availability of specific products in our stores.

In late 2019, we began to pilot a new approach to the loyalty programme, rewarding customers for purchases in their favourite categories as well as for purchasing goods they never bought before. We also offered them new products at attractive prices. The more the customer shops with Lenta using their loyalty card, the more they benefit from the programme. Initial results of the pilot showed very promising results and we will develop the programme further in 2020 to increase the extent to which we tailor our offer, and create reasons to come to Lenta.

LOGISTICS

Our well-established, sophisticated logistics ensure the timely delivery of goods to our 380 stores across Russia. We operate 12 distribution centres in strategically chosen locations. Our own fleet, consisting of 330 trucks, provides over 76% of deliveries at a service level of 94%.

The Company continued to work on the optimisation of its logistics. We closed one leased distribution

127 suppliers locate4Оd in countries

We import fresh fruits, frozen fish and seafood directly from

L E N T A A N N U A L R E P O R T A N D A C C O U N T S 2019

centre in Moscow with a space of 14,990 sq.m, and replaced it with a new facility with total space of around 70,990 sq.m. It is now the largest distribution centre in Lenta's portfolio.

We also extended our distribution centre in Novosibirsk from 39,137 sq.m. to 71,837 sq.m to enlarge our capacity, centralise our own production and increase the range of fish in our stores. This enables us to secure high quality ready-to-heat and readyto-eat meals in our stores and to improve our offering to customers.

We began construction of a new 69,000 sq.m distribution centre in Saint-Petersburg that will start operations in 2020.

The new warehouses have innovative features such as units with different temperature zones and additional services to enhance optimisation of the Company's procurement and logistics, especially in fresh, frozen, and fruit and vegetable categories. Other innovations include separate units aimed to serve Lenta's "Hero categories" and also to support their centralisation and further development. This will also include space for our own production (culinary, confectionery, meat processing etc) and a central bakery to ensure common operational standards across the chain.

RETHINKING CUSTOMEREXPERIENCE

In November 2019 we were pleased to open the new Lenta hypermarket in Saint-Petersburg that we rebuilt after it was burnt down in 2018. The store is built and designed according to a new concept developed in cooperation with the Jos de Vries agency. The concept includes new services, such as a café and food service. We changed the standard layout in order to meet different clients' needs and to fulfil various customer journeys.

The layout design is made for daily and weekly shopping trips as well as for customers who are grab and go. All sections are connected with one another to give Lenta customers an excellent range of produce to choose from, with a strong emphasis on Hero categories. Fruit and vegetables, culinary and bakery, wine, and fish are furnished with new store equipment to ensure attractiveness and proper presentation of each category.

The hypermarket embraces various innovations using the latest technology, such as contrast and shelf light, self-check-outs and price checkers as well as LED screens for in-store advertising.

By launching this new concept, we represented our vision of a modern unique shopping space where all customers can find exactly what they want. We surprise customers with innovations and creativity. Bright and colourful design along with inspiring graphical concepts are bringing Lenta to a new level as an attractive, interesting store that brings customers convenience combined with an exceptional shopping experience.

We introduced elements of the new concept – café, food service, navigation and decorations – to one of our oldest stores in Saint-Petersburg. In 2020, we will be carefully analysing the customer feedback and reactions to the changes introduced, to fine tune the concept for further roll out.

We operate 12 distribution centers in strategically chosen locations. Our own fleet consisting of 330 trucks provides over 76% of deliveries with a high service level of over 94%

ON-LINE

We consider on-line as an important channel in communication with clients. It provides us with more information about the potential of the market without having to invest significant amount of capital. In 2019 we continued to partner with different companies across many of the Russian regions. Our portfolio consists of 18 partners and covers 20 Russian cities.

In 2019 we recorded approximately Rub 1 bn of sales through this channel, coming from around 400,000 on-line orders. This is just slightly above 0.2% of our total retail sales for full-year 2019 and represents 103% growth. We see on-line as an important channel to market, working in combination with our physical stores.

In November 2019 we launched a pilot of our own online delivery project, Lentochka. This is aimed at providing customers with purchases within 15-30 minutes. To achieve this, we opened several small dark-stores of around 100-150 sq.m in urban areas. These collect supplies from our distribution centres and hypermarkets, and directly from suppliers. The range is limited to approximately 1,500 individual items and it focuses mainly on fresh and dry food, as well as ready-to-eat meals. We are piloting it in three districts of Moscow.

LOOKING AHEAD

While we do not expect the macroeconomic and competitive environment to ease, we will keep working on improvements in our offer and customer communication in both formats to excel in customer experience.

In 2020, we will work on the transformation of our core business and on efficiency improvements.

We will implement innovations and undertake various experiments to find solutions that will ensure our growth and support our transformation.

It is our intention to remain the leading hypermarket chain in Russia and to sustain and grow our supermarket business.

O 2 › C O R P O R A T E G O V E R N A N C E O 3 › F I N A N C I A L S T A T E M E N T S O 4 › APPENDICES

022 L E N T A 023 A N N U A L R E P O R T A N D A C C O U N T S 2019

L E N T A

A N N U A L R E P O R T A N D A C C O U N T S 2019

C OR P ORATE SO C IAL RES P ONSI B ILITY

CORPORATE SOCIAL RESPONSIBILITY

We are convinced that responsible behaviour guarantees our long-term success and sustainable development. Our Corporate Social Responsibility (CSR) programme includes a range of initiatives that extend across all aspects of Lenta's business.

ETHICS POLICY

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

Ou r v a l u e s

Customer satisfaction

Customer satisfaction is the key to our development. We aim to provide excellent service to our clients and strive to satisfy their demand for products they want at the right price.

Affordable prices for all our customers

We are committed to being a price leader, without compromising on the quality of the goods we sell. Our lowcost business model enables us to pass savings on to our customers.

High quality of goods

In order to ensure that we offer the highest quality goods, from production site to the shelf, we sell only licensed goods that are transported and stocked under the most hygienic conditions.

Lenta people

People are the most valuable asset of our business. We retain well-trained employees to ensure they provide an excellent shopping experience for our customers.

Respect for everyone

We respect the opinions of our customers, suppliers and employees, encouraging positive criticism and friendly relations.

Innovation and ideas generation

Our employees are the source of many of the innovative ideas that enable our continuous improvement and we select and implement the ideas that offer the greatest potential. This helps us to improve our stores as well as the service we provide. We challenge our staff to share their ideas relating to specific projects.

We are committed to acting responsibly in everything we do. Creating value for all our stakeholders, especially Lenta employees, is our core objective. We conduct our business based on corporate responsibility principles, whether this is product sourcing or interaction with local communities.

In 2019, voluntary staff turnover in Lenta was flat versus 2018 and comprised approximately 30%. To help ensure that we retain our employees, we implemented a number of employee engagement projects in 2019. These include additional incentive programmes, corporate social responsibility and charitable initiatives as well as training and educational activities.

RECRUITMENT AND CAREER DEVELOPMENT

We provide numerous opportunities for our employees to build their careers in the organisation. In 2019, we created 2,746 new jobs.

We pay particular attention to succession planning, which enables us to promptly fill open positions with internal candidates. In 2019, out of 27,582 vacancies, 10,563 were fulfilled by internal candidates.

In 2019, we identified 1,736 of our employees as high potential for promotion. Twenty six per cent of managerial positions among TOP 1,000 group and 29 % of TOP-5,000 are supported by personnel reserve, which is sufficient to compensate the turnover the nearest two years.

During the year, we promoted over 4,000 employees, and approximately 5,000 people were transferred to new roles through horizontal moves, as part of the succession planning process.

EMPLOYEE ENGAGEMENT

High levels of employee engagement directly influences the Company's performance and the satisfaction of our customers.

In 2019, 6,444 people from our regional offices and Headquarters took part in a study of our

employee engagement. The survey showed quite a high level of engagement of 74%. We received over 14,000 comments and recommendations on how we can improve our business.

These include:

• upholding the integrity and good name of the Company in developing long-term relationships with customers, communities and suppliers;

• strict prohibition against directly or indirectly offering, paying, soliciting or accepting bribes or kickbacks in any form;

• no conflicts between personal interests and those of the Company;

• abiding by Lenta's corporate rules and stand-

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

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

dismissal.

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

our stores.

Our six pillars

Our CSR agenda is founded on six

pillars.

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

protection.

Along with our Ethics Policy, our CSR principles support our ambitions for long-term sustainable growth.

RECRUITING, TRAINING AND RETAINING

PROFESSIONAL STAFF

The essence of our culture is teamwork, innovation and trust. We recruit the best professionals in the market, we train our people, and we do our best

to retain them.

Lenta is proud to have a staff retention rate that is above the average for

the food retail sector4

. Investment in our

workforce is our strategic priority. This is the key to customer loyalty through greater productivity and service level. There is intense competition for labour in the retail sector. Low birth rates in the 1990s mean that the years between 2017–2020 are affected by a noticeable "demographic gap". This makes the recruitment of qualified staff a challenge. Our target is to retain a best-in-class workforce that

enables the sustainable growth of our business.

O 2 › C O R P O R A T E G O V E R N A N C E O 3 › F I N A N C I A L S T A T E M E N T S O 4 › APPENDICES

024 L E N T A 025 A N N U A L R E P O R T A N D A C C O U N T S 2019

L E N T A

A N N U A L R E P O R T A N D A C C O U N T S 2019

C OR P ORATE SO C IAL RES P ONSI B ILITY

After processing the feedback, we held 45 focus groups at which we presented areas for improvements in the Company. These served as the basis for 19 workshops in which we developed improvement action plans for each department and function.

MANAGEMENT DEVELOPMENT

We are constantly developing our leaders. We continued to develop a culture of efficient people management. We expect our managers to act as role models for their team members, ready to share knowledge and experience, and with the ability to develop themselves and their colleagues.

In 2019 we continued the Lenta Leader Programme developed in partnership with the Saint-Pertersburg Higher School of Economics; 110 of our managers completed the course. They worked on 32 group projects focused on innovative business solutions. These projects have been successfully implemented in the Company.

The programme started with personal development training. This was a new element of the course, aimed at raising students' awareness of the importance of the subject.

In 2019, we launched an important new initiative in our management training programme, in which leaders train future leaders at our Headquarters. Previously, our internal trainers carried out training at our stores and distribution centres.

We selected 28 motivated and experienced managers for the role of internal trainers. These are employees who can share their expertise with colleagues, helping to build their skills and improve their competencies. These new internal trainers held 30 training courses in three months in 2019.

We continued to develop our leaders' people management skills in 2019. Some 125 managers were trained in how to provide supportive and efficient feedback to their team members. Another 127 managers were trained in our Situational Leadership course.

STORE AND SPECIALIST STAFF TRAINING

We provide our people with a variety of training 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.

Our store employees are the public face of Lenta, so they are the primary focus of our training efforts. Each store runs a comprehensive induction programme for new employees. This sets out Lenta's values, history and culture, as well as our policies and standards. In 2019, more than 18,500 employees participated in our induction programme.

All new employees are supported by mentors in their first months working at Lenta. During the year, some 9,000 employees undertook mentoring training and became mentors, almost twice as many as in 2018.

In 2019, we delivered over 1.8 million hours of training. On-line training activities have proven to be highly efficient and effective, which is why most of our new courses are delivered in this format.

REMUNERATION

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

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

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

DIVERSITY

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

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

In 2019, 175 vacancies were filled by candidates from this group. In line with our policy to provide a wide range of opportunities for people with special needs, we actively support recruitment of – and fair pay for – people working from home.

Diversity

Diversity	Male	Female
Number of employees	29%	71%
HQ and Regional divisions employees	31%	69%
Middle and senior management 52%		48%

Length of service
Length of service	Number of employees	Share
10+	2,710	5,60%
3–9 years	18,437	38,10%
Average seniority – 3.5 years

PRICING AND CUSTOMERSATISFACTION

We serve 15.8 million loyal customers in 88 Russian cities. We work hard to provide affordable prices to all types of customers, without compromising on quality. We strive to offer the right range of products for our customers, including large well-known brands, local

In 2019 we continued the Lenta Leader Programme developed in partnership with the Saint-Pertersburg Higher School of Economics; 110 of our managers completed the course

million hours 1.8of training

O 2 › C O R P O R A T E G O V E R N A N C E O 3 › F I N A N C I A L S T A T E M E N T S O 4 › APPENDICES

026 L E N T A 027 A N N U A L R E P O R T A N D A C C O U N T S 2019

C OR P ORATE SO C IAL RES P ONSI B ILITY

produce and our private label ranges. In this way, we achieve price efficiency and satisfy the needs of all shoppers who choose Lenta. Despite the challenging economic conditions in 2019, we continued to invest in pricing for our customers and to create attractive promotions for our customers throughout the year.

As part of the Social Programme that we operate in all Lenta stores, we provide additional discounts for essential goods for citizens with limited budgets. In 2019, 2.4 million of our customers benefited from this programme; over 317 thousand joined the programme in 2019.

We will continue to help our customers manage within their budgets, through tailored promotions and investment in pricing. We will introduce new ranges of private labels in all price segments to ensure we meet the needs of all our customers. We will also maintain our customer-focused approach, implementing new services and communicating with shoppers in the ways that suit them best.

LOCAL SOURCING

We partner with local producers in the regions throughout our area of operation. Our customers search for local goods in our stores and appreciate the local produce that we offer. In 2019, we sourced over 94% of our products from Russian suppliers, including 20.6% from regional suppliers. Over 24% of our fresh food was purchased locally.

We focus producers who can supply us directly. That way, we can obtain better prices and more consistent quality of locally grown foods. Shorter distances to our stores mean that lead times and transport costs are reduced, which enables us to deliver savings to our customers.

Our Growers Platform provides opportunities of sustainable growth for small and middle-sized farmers. In 2019 we increased the number of our partners within the programme by 8%.

Our customers appreciate the wide variety and consistently high quality of locally produced goods. Regional economies benefit from such partnerships as do our customers. We will continue to develop new partnerships with local suppliers and growers in 2020. We will focus on differentiation from the competition to offer a unique selection to our customers and provide growth opportunities for our local partners.

CARING FORTHE ENVIRONMENT

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

Lenta produces various types of waste, which is removed for us by third party contractors. During the year we reduced the amount of waste produced and continued to improve our recycling rates; we now recycle 100% of the cardboard and plastic wrap that we use in our stores and Distribution Centres.

In 2019 we centralised our waste collection scheme and increased the volume of recycled waste.

In 2019, all our hypermarkets were equipped with special containers for battery collection within the project we started three years back. We sent over 90 tonnes of batteries for recycling, which is twice as much as in 2018.

We focused our efforts on the problem of plastic consumption. We introduced and widely promoted multiple use and paper bags along with sacks for fruits and vegetables, as alternatives to plastic.

Over 50 % of plastic containers we use for food and for our own produced dishes are made of recyclable plastics. In 2020 we will increase the share of recyclable materials and will communicate to our customers the need to be aware of the various types of plastic.

ENERGY

We piloted the installation of glass doors on vertical fridges in 2019. As a result, we reduced electricity consumption by over 20%. We plan to roll this out to our stores in 2020.

208 of our hypermarkets and supermarkets are equipped with energy-efficient LED lightning.

SUPPORTING LOCAL COMMUNITIES

We strive to improve the quality of life for children and families in difficult circumstances; we also support elderly people and others who need our help.

In August, 276 Lenta stores in 88 cities took part in our "Help to get a child to school" initiative. The Company contributed supplies and stationery worth around RUB 1.5 million to 263 social institutions as well as low income families in need of support. Donations included 2,300 backpacks, 25,000 notebooks and 15,000 sets of pens. Employees personally congratulated 14,200 children from the sponsored institutions on the Day of Knowledge.

Lenta's "Good Deeds' campaign is a traditional New Year charitable activity. Children from local orphanages and institutions place their "wish" on Christmas trees in our stores, and our customers can choose a card and buy the gift. In 2019, 321 stores in 88 cities took part in the project, making the wishes of 14,400 children come true.

In 2019 we partnered with the "Give Food!" Foundation. We installed 19 boxes for food donations in our supermarkets. Our customers can buy goods and leave them in a special box. The donations are distributed by the Foundation among needy people.

"Lenta of kind cities' is a charity event that benefits a wide range of non-profit organisations. In March, volunteers from those organisations accepted donations of goods from Lenta hypermarket customers in 14 Russian cities and passed them on to those in need. The 2019 event collected over RUB 2 million worth of goods for deserving causes.

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

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

tulip bulbs every autumn. In 2019, we expanded the Festival further afield: bulbs were planted in Saint-Petersburg, Yekaterinburg, Novosibirsk, Byisk and Rostov-on-Don.

PROMOTING HEALTH AND SAFETY

Lenta is fully committed to creating and maintaining a safe environment for employees and customers alike. In 2019 we reduced the level of injury severity by 16%.

We implemented a risk-oriented model in our approach to safety at work and delivered additional training and supporting materials to promote the rules of safe behaviour in the work place. In order to improve the efficiency of training, we automated some related processes. For example, we introduced a robot that reminds employees about training courses and monitors them as they progress through the various stages. This has improved the effectiveness our training; we have been able to reduce time spent training by 70 %. We also developed an IT system for registering accidents; this allows our people, in an automated way, to inform management about the case and obtain recommendations on further action.

All Lenta store managers conduct daily and monthly "safety walks" as part of our Active Safety programme. These walks aim to identify any potential risks to staff and customers, ensure that the staff check safety equipment and are fully aware of hazards. Employees are encouraged to report every safety-related incident, no matter how small, so that the cause can be identified and any likelihood of recurrence eliminated. Our injury rate was unchanged from last year, despite the Company opening new stores in 2019.

Lenta's main health and safety targets in 2019 continued to be the maintenance of high standards across the Company, and the automation of various processes to improve employee safety. We centralised various processes into specific groups; for example: a group for

investigation and analysis of near misses and another 5О% for ecological projects. of plastic containers we use for food and for our own Over produced dishes are made of recyclable plastics

The Company contributed supplies and stationery worth around Rub 1.5 million to 263 social institutions as well as low income families in need of support

Accidents number per 100,000 working hours:

2018	2019
0.26	0.25	-4%

O 2 › C O R P O R A T E G O V E R N A N C E O 3 › F I N A N C I A L S T A T E M E N T S

O 4 › APPENDICES

028 L E N T A 029 A N N U A L R E P O R T A N D A C C O U N T S 2019

L E N T A A N N U A L R E P O R T A N D A C C O U N T S 2019

FINAN C IAL RE V IEW

I n 2019 we have been working on initiatives to achieve operational efficiency and improve our cash flow. Our efforts started to pay off as we saw some improvements in the dynamics of our SG&A in the second half of the year due to optimization of the headcount, our marketing costs, and other operating expenses. Our team also achieved good results in managing working capital, which along with tight control over capital expenditures resulted in a strong free cash flow of around Rub 17bn. Considering a new stage of the Company's development and our own efforts, we maintain our target to remain free cash flow positive and deliver value to our shareholders5 .

SALES

Total sales grew 1.0% to Rub 417.5bn (2018: Rub 413.6bn), including retail sales growth of 4.0% to Rub 408.0bn (2018: Rub 392.2bn) and wholesales decline of 55.5%.

After the robust performance in the first half, sales came under pressure in the second half of the year due to declining inflation, higher promotional activity and a decline in LFL sales, especially pronounced in the fourth quarter. Total LFL retail sales increased by 0.1% during the reported year driven by an increase in LFL ticket by 0.1%, while LFL traffic was flat versus 2018.

GROSS MARGIN

Gross profit margin improved to 22.0% from 21.5% in 2018. The Company mainly benefited from higher retail margin as an increase in promo share as % of sales by 4.p.p. y-o-y was fully compensated by a combined effect of higher promo margin and better coverage of promo activities by suppliers. Additional positive effect came from a significant decline in share of low-margin wholesale business in the total sales throughout the year.

Expansion of the Company's own production and increased volumes led to a rise in related costs by 43 bps. Share of shrinkage increased by 13 bps as a result of ongoing changes in procurement, including increased direct import and direct contracts with suppliers. At the same time, Lenta recorded declining shrinkage in fresh food category as a result of the Company's focused efforts.

SELLING, GENERAL

AND ADMINISTRATIVE EXPENSES (SG&A)

SG&A increased to 18.3% of sales (1.6 p.p. higher vs. 2018) mostly due to higher personnel expenses, higher depreciation linked to reassessment of economic useful life of land improvements and an increase in rental costs linked to the indexation of rental fees.

Supply-chain cost as % of sales rose by 17 bps to 1.3% in 2019 vs 1.2% in 2018. An increase was mainly driven by higher fuel prices and higher personnel expenses following an expansion of own truck fleet and launch of new distribution centers. Nonetheless higher transport costs were largely offset by an increase in the share of deliveries by own truck fleet, increase in supply-chain income versus the previous year and ongoing improvements in transportation efficiency. The Company's average centralization ratio increased to 60.5% from 56.9% in 2018.

Personnel costs as % of sales grew by 56 bps y-o-y due to one-off expenses related to management compensation and further stores expansion. Professional fees were higher as % of sales by 12 bps mainly due to rapid growth of the share of customer payments by debit and credit cards. Country-wide increase in tariffs resulted in higher utilities, cleaning and communal cost which increased by 27 bps.

As a result, adjusted SG&A as % of sales increased by 1.0 p.p to 13.3% in 2019 compared to 2018. Rental expenses increased marginally by 5 bps to 1.5% of sales as a result of indexation of rental fees in 2019 linked to CPI.

EBIDTA

EBITDA in 2019 reached Rub 34.0bn and EBITDA margin stood at 8.1%.

INTEREST

Net interest expenses of Rub 9.3bn, an increase of 1.9% compared to 2018 (Rub 9.1bn) as an increase in gross debt offset a decline in average cost of debt

Depreciation

Depreciation as % of sales increased by 63 bps y-o-y, which was mainly due to the Company reviewing the economic useful life of land improvements from 30 years to 7 years (as practice has proven that the factual useful life of land improvements does not exceed 7 years). Consequently, the Company recognized an additional non-cash expense of around Rub 2.3bn in 2019.

NET INCOME

Net Loss of Rub 2.1bn due to non-cash expenses, with negative Net Profit margin of 0.5% compared to Net Profit of Rub 11.8bn in 2018 with Net Profit margin of 2.9%;

CAPITAL EXPENDITURE

Capital expenditures in 2019 were 36.1% lower than in 2018 and amounted to Rub 14.1bn. The reduction mainly reflected the effect of slower organic expansion, tight control over expenses and changes in phasing of payments for some planned non-expansion projects. At 31 December 2019 the Group has contractual capital expenditure commitments in respect of property, plant and equipment and intangible assets totalling Rub 6.2bn net of VAT (30 June 2019: Rub 6.7bn net of VAT).

CASH FLOW

Net cash generated from operating activities before net interest and income taxes paid increased by 32.1% and reached Rub 42.8bn compared to Rub 32.4bn in 2018. The Company improved its inventory levels, which resulted in better working capital in the reported year. Additional positive impact came from higher trade payables compared to 2018 due to better supplier conditions.

NET DEBTAND LEVERAGE

As of 31 December 2019, Net Debt to EBITDA stood at 2.3x, Lease Adjusted Net Debt to EBITDAR at 3.2x and EBITDA to Net Interest at 3.7x. As of 31 December 2018, Net Debt to EBITDA stood at 2.6x, Lease Adjusted Net Debt to EBITDAR at 3.4x and EBITDA to Net Interest was at 3.9x.

The Company had a gross debt of Rub 150.5bn and a cash balance of Rub 73.4bn, giving Net Debt of Rub 77.1bn. In addition, Lenta had Rub 89.1bn of undrawn short- and long-term facilities.

New long-term loan facilities with lower fixed rates were placed early in the first quarter of 2019 and shortly after the closure of the second quarter. These facilities enabled the Company to secure a lower cost of debt with sufficient cash on hand to cover all of Lenta's refinancing needs in 2019 and part of 2020. All of Lenta's debt is denominated in Russian Rubles and unsecured. 69.6% of debt is long-term of which 21.2% is due within one year.

Rud Pedersen Chief Financial Officer DEAR

SHAREHOLDERS,

6 Lease adjusted Net Debt calculated as Net Debt plus operating leases multiplied by capitalization rate of 8.0x in accordance with credit rating agencies approach

⁵The figures represent the results in accordance with the standard IAS 17. In this regard, they may not coincide with the financial statements presented in this annual report, which is prepared in accordance with standard IFRS 16.

O 1 › S T R A T E G I C R E P O R T O 2 › C O R P O R A T E G O V E R N A N C E

O 3 › F I N A N C I A L S T A T E M E N T S O 4 › APPENDICES

030 L E N T A 031 A N N U A L R E P O R T A N D A C C O U N T S 2019

RISK MANA G EMENT

RISK MANAGEMENT

L enta defines risk as 'an uncertain future event that could affect the Company's ability to achieve its objectives'. Understanding how various risks potentially influence our business is integral to the decision-making process within the Company. We monitor all material risks to our operations on an ongoing basis, acting whenever necessary to mitigate and manage them. We also anticipate and evaluate new threats as and when they arise. Our risk management process applies across all functions and comprises four principal stages:

identification;
assessment;
response;
monitoring, reporting and escalation.

Stage 1 – Risk identification

We conduct a 'top down' strategic risk assessment on an annual basis. This supplements a biannual functional 'bottom up' evaluation, which identifies risks at operational levels in the Company. These activities enable us to create a comprehensive risk profile.

Risk identification is also embedded into key business processes including budgeting, planning, capital expenditure and performance management.

Stage 2 – Risk assessment

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

Stage 3 – Risk response

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

Stage 4 – Risk monitoring, reporting and escalation

This involves the timely tracking, capture and sharing of risk information to enable review and notification of changes in risk exposure by management. It supports understanding and enables decision making on appropriate responses; these include management interventions to avoid a risk becoming reality in the first place, or 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 risks are effectively managed across the business.

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

Starting in 2020, the Company is planning to update the risk register and perform the above stages twice a year. We have changed our risk management policy with regard to the assessment thresholds of the risks' impact. From 2019 onwards, the Company will assess the impact of a risk occurring as a percentage of its annual figure for EBITDA.

RISK MANAGEMENT POLICY

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

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

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

• clear accountability and ownership of risk management; • an improved view of key controls, their effectiveness, and gaps in the control environment;

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

THE RISK LANDSCAPE

The Russian retail industry continues to be challenged by weak macro-economics, changes in legal and regulatory requirements, as well as continued fierce competition.

As the market has adapted to geo-political tensions and related sanctions, our supply stability risk has decreased significantly and is no longer viewed as an immediate principal risk.

A slower pace of expansion together with a renewed focus on efficiency and company leverage delivered positive cash flow. Consequently, the Company's external net debt decreased and exposure towards risks associated with having sufficient external financing are reduced. In addition, the second half of the year saw the Central Bank of Russia lower its interest rates which, together with low inflation, helped to ease the overall financial risks.

With slowed organic expansion and increasing competition from existing and new players in the industry, Lenta needs to update its strategy with a view to ensuring the sustainability of its hypermarket format as well as developing new and sustainable growth opportunities. Otherwise, there is a risk that the Company could find itself entrenched with the majority of its business in the hypermarket segment.

In 2019 our wholesale business declined as expected and it no longer constitutes a significant part of our business. The Company performed a detailed storeby-store analysis and identified a number of significant impairment both at the mid- and year-end. Given the volatility and weak economic environment in which Lenta operates the risk of further impairments are inherent, although with the impairments made in 2019, it is no longer considered a principal risk.

Lenta continues to engage and cooperate across its value chain with numerous suppliers, partners and authorities both at local, regional and federal level. In doing so Lenta must ensure that all its dealings are in line with relevant legislation, as well as external and internal standards and regulations, including policies regarding ethical behaviour.

Operating across a significant geographical span with, at times, long supply routes and a multitude of suppliers, food safety is a principal risk for Lenta. At the same time, Lenta's in-store production of goods for re-sale is growing due to increased demand. Consequently, we need to ensure that products offered to customers are at all times of the highest quality and meet all required safety and sanitary standards.

Work force mobility is high and the retail industry's core employee capabilities are easily transferable between Lenta and its competition, not only in food retail, but across various types of retail businesses. The Company works continuously to attract and retain employees and its ability to do so is a principal risk.

The emergence of the novel Covid-19 coronavirus continues throughout China and other countries. Measures to contain the virus may impact business operations around the world. As governments and companies take measures to protect their citizens,

operations and employees at home and abroad, such actions may lead to business interruptions, travel risks and other effects that could impact the Company's supply chain.

OUR KEY PRIORITIES

A. Relentlessly focus on the customer in order to become the most preferred retailer in Russia
B. Adapt our Hypermarket format to changing customer demand in order to grow and deliver best-in-class profitability
C. Build successful offers in supermarkets and online in order to bring convenience to our customers
D. Maintain a healthy balance sheet with a conservative approach to leverage
E. Continuously innovate, experiment, develop and test new businesses in search of a winning model
F. Strengthen our agile organisational culture in order to reduce time-to-market
G. Further operational execution to maintain our position as the most cost-efficient retailer in Russia in order to maximise customer and shareholder value

DESCRIPTION OF PRINCIPAL RISKS

1. Changing legal and regulatory environment
2. Macro-economic and political instability
3. Increased competition from existing and new formats as well as industry consolidation
4. Competitive sourcing and security of supply
5. Lack of innovation and adaptation
6. Attracting and retaining a qualified, diverse workforce
7. Food safety and product quality
8. Taxation
9. Capital markets and liquidity
10. Legal and compliance
11. Strategy development and execution
12. Cyber and IT risks

O 1 › S T R A T E G I C R E P O R T O 2 › C O R P O R A T E G O V E R N A N C E

O 3 › F I N A N C I A L S T A T E M E N T S O 4 › APPENDICES

032 L E N T A 033

A N N U A L R E P O R T A N D A C C O U N T S

2019

L E N T A

A N N U A L R E P O R T A N D A C C O U N T S 2019

No on map.	Risk Description		Current Severity Risk category		Objectives Outlook/ affected trend	How we manage it	Changes in 2019
	Risk	Impact		Impact	Likelihood
1	Changing legal and regulatory environment	Introduction of new legal and regulatory requirements and the complexity of exist ing requirements drives the cost of compliance and may disrupt our value chain.	Strategic	2	4	DG	Stable	Monitor legislative and regu latory initiatives and actively engage in dialogue with legislatros, both directly and through retail associations. Continue to update and in vest in process optimisation and automation.	Introduced digitalisation and tracking of veterinary certifi cates regarding fresh goods. Changed requirements related to tracking excise labels by bottle rather than batch. Excise label tracking system for tobacco introduced. New legislation related to outsourced labour.
2	Macro-eco nomic and political instability	Weak consumer demand may impact sales growth. Instability may create unpre dictable pressure on cost as well as on our supply chain.	Strategic	3	2	G		Decreasing Monitor main economic indicators. Rolling 60-month forecast. Consistently keep our customer offer relevant to consumer spending power. Continue to improve our supply chain.	Lower oil prices and increase in VAT had an overall negative impact on the economic growth and consumption in 2019. The consumer environment started to improve in the second half of the year, with slower growth of inflation, rising wages and higher real disposable income. There were no materially negative changes in 2019 to the political environment.
3	Increased competition from existing and new formats, plus industry con solidation	Increased competition or aggressive marketing and pricing practices by competitors may negatively impact sales and margins through decline in customer traffic and basket.	Strategic	2	4	ABG	Stable	Actively track and measure competitors' behaviour and changes, understand struc tural changes in the market and implement changes to our offer, formats and price positioning.	Growth of hard discounter and ultra-convenience formats. Slower but continued organic expansion by major conve nience operators. Increased and aggressive promotional activities by many food retailers.
4	Competitive sourcing and security of supply	Slower growth may result in weaker competitive bargain ing power with suppliers and hence impact margins. Competitors investing in price may put our low price/low cost model under pressure. We may face a 'perfect storm' scenario where we have less ability to respond to customers and suppliers, and where competitors dominate.	Strategic	3	2	ABC	Stable	Increase our share of direct imports and local sourcing by taking charge of the full value chain. Consolidate purchasing power on fewer suppliers. Develop private label. Participate in retail alliance of independent retailers	There were no changes indicated.
5	Lack of inno vation and adaptation	Lack of innovation may impact our ability to compete, leading to loss of customers. It may also affect our ability to communicate and engage with customers, making us uncompetitive, which may negatively im pact traffic and basket size.	Operational 2		3	ABCDEFG	New	Continued focus on talent planning and people devel opment processes in Lenta. Employer branding through actively working with uni versities. Introduction of employee engagement programme, employee retention through LTIP and succession planning tools. Ongoing focus by the Board of Directors and management on succession planning.	Increasing labour mobility and fight for talent from retail and other industries. Attrition of senior and middle management to competitors.
6	Attracting and retain ing a quali fied, diverse workforce	Failure to attract and retain required capabilities may mean we cannot sustain our efficient operating model, execute on our strategy or ensure succession planning.	Operational 2		3	ABCDEFG	New	Continued focus on talent planning and people devel opment processes in Lenta. Employer branding through actively working with uni versities. Introduction of employee engagement programme, employee retention through LTIP and succession planning tools. Ongoing focus by the Board of Directors and management on succession planning.	Increasing labour mobility and fight for talent from retail and other industries. Attrition of senior and middle management to competitors.

No on map.		Risk Description	Current Severity Risk Objectives category affected		Outlook/ trend	How we manage it	Changes in 2019
	Risk	Impact		Impact	Likelihood
7	Food safety and product quality	Food or non-food products being offered for sale and not meeting required quality standards may impact our Lenta brand value and service perceptions, thus failing to sustain trust in our brand. Lack of trust in the Lenta brand could seriously damage our reputation and negatively impact sales and market share.	Operational 2		4	AC	Increasing	Operating integrated quality control procedures, implement ing; monitoring and controlling food safety and quality standards. Increasing control over the value chain by direct imports, direct cooperation with farmers and growers, providing increased transparency and control over product quality from field to shelf.	There were no changes indicated.
8	Taxation	Incremental tax payments, late payment interest and fines may have a negative impact on the Company's financial performance in addition to causing loss of reputation.	Financial	2	2	D		Decreasing The Company is continuously monitoring tax legislation in ac cordance with designed control procedures. By engaging external advisors, we are obtaining advice on appropriate treatment of value added taxes, deductibility and depreciation.	VAT was increased from 18% to 20%.
9	Capital markets and liquidity	Access to funding markets being restricted or limited, and growing cost of capital may lead to a negative impact on Lenta's financial performance, cash liquidity and ability to fund operations.	Financial	2	1	DG		Decreasing Lenta maintains an infrastructure of processes, policies and pro cedures securing strict discipline and oversight on financing and liquidity issues. Our liquidity levels and sources of cash are constantly reviewed and report ed to management.	The Central Bank of Russia lowered interest rates in 2019. The inflation rate has also declined. The Compa ny successfully decreased its leverage and negoti ated improved conditions on its external borrowings. Severgroup became a long-term strategic share holder in Lenta.
10	Legal and compliance	Changes in - or failure to comply with - relevant legis lation and regulations could adversely affect our opera tions and negatively impact sales, profit and reputation.	Governance 1		3	DG	Stable	Lenta manages legal and regulatory risks by regularly monitoring relevant legislation and risk assessment frameworks. The Company has developed relevant control procedures for internal controls and internal audit departments to detect, report and respond. There is regular reporting to the Board of Directors and management on the status of governance and compliance.	State authorities have been considering intro ducing changes to the state traceability systems covering wider groups of goods, although there were no signs of easing or simplifying other legal and regulatory requirements for businesses.
11	Strategy develop ment and execution	Unsuccessful development and execution of strategy due to poor prioritisation, ineffec tive change management and a failure to understand market developments may result in a loss of market share and deterioration of profitability, eventually leaving Lenta as a single format operator.	Strategic	4	2	ABCEFG	New	The Board of Directors and Management develops and challenges the strategic direc tion of our business to enhance our ability to remain competitive on price, range and service. We continued further development of supermarkets, created a dedi cated team focused on new for mats and business models and launched a new pilot project of the online format - Lentochka.	Severgroup became a long-term strategic share holder in Lenta. Food retail in Russia saw increased and tougher competition from both new and existing players with new formats, shifting the paradigm towards omni channels and increased promotional activities.
12	Cyber and IT risks	Failure to ensure data security and privacy could impact our licence to operate. The loss of sensitive information could result in reputational damage, fines or other adverse conse quences.	IT	4	2	ADEF	New	We have processes and controls established to detect, report and proactively respond to se curity incidents. We implement ed a pipeline of initiatives to enhance our security capabilities to improve data security. We introduced monitoring of the security and data privacy status and report on this to the Board of Directors and management.	The number and sophis tication of cyber threats is growing every year. The Company has launched IT based projects and intro duced on-line technologies which result in increased exposure.

RISK MANA G EMENT

O 4 › APPENDICES

034 L E N T A 035 A N N U A L R E P O R T A N D A C C O U N T S

2019

VIABILITYSTATEMENT

Lenta's viability assessment considers its solvency and liquidity over a period exceeding that of the going concern assessment. The degree of predictability inherently reduces over this longer period. Understanding our business model, our main priorities and our principal risks is a key element in the assessment of Lenta's prospects, as well as the formal consideration of viability.

Our low price/low cost business model is aimed at generating market-leading sales levels, by consistently applying everyday low prices combined with deep and frequent promotions. Low cost is driven by the combination of high sales volumes with efficient business processes and store designs which, together, optimise store operating and supply chain costs. Our federal reach and sales volumes support this, and so enable us to negotiate competitive conditions with suppliers.

We prefer to own the majority of our hypermarkets, as this allows us to operate stores optimised to our requirements to support our low-cost operations and supply chain.

Owning our stores provides an efficient cost hedge versus rent inflation, as does Lenta's incremental borrowing rate when compared to the required return on invested capital of real estate investors. With organic expansion at a somewhat slower rate, with lower (though still substantial) capital expenditures, positive free cash flow - after capital expenditure and financing costs - is expected.

While Lenta continues to be reliant on banks and financial markets for funding, our policy is to maintain a strong balance sheet to ensure the Company has access to capital markets. As part of managing our viability, we ensure our debt has relatively long maturities, is not exposed to currency fluctuations and has limited interest rate risk. The principal risk affecting Lenta is the impact of significant changes in consumer spending due either to economic developments or to reduced appeal of our commercial offer.

Severe economic turbulences could, however, affect our business – as it could other retailers' – and could therefore influence our cash generation and debt service capacity. This in turn could affect the level of ambition we are able to apply to our further development.

Our approach to the viability of the business is influenced by our key priorities that are focused on adapting our hypermarket format to changing customer demand. This is in addition to building a successful offer in supermarkets and online that brings convenience to our customers so we can grow and deliver best-in-class profitability. This requires continued innovation, experimentation, development and testing in search of winning models. Along with an agile organisational culture that is committed to reducing time-to-market, and a meticulous focus on operational execution to maintain our position as the most cost-efficient food retailer in Russia, thereby maximising customer and shareholder value.

The Directors have determined that Lenta's longterm planning horizon - which is the existing year plus the four following consecutive years - is an appropriate timeframe for assessment of the longterm viability of Lenta. The Directors have assessed the viability of Lenta over this period, taking into account the Company's current position and the potential impact of various scenarios.

Lenta has significant financial resources, including committed and uncommitted banking and debt facilities. It also has a new long-term investor who became a majority shareholder during 2019. In assessing the Company's viability, the Directors have assumed that the existing banking and debt facilities will remain in place or mature as intended. The Directors have also considered mitigating actions available to Lenta, including restrictions on capital investment, further cost reduction opportunities and future dividend policy. The Directors have assumed that these mitigating actions can be applied on a timely basis and at insignificant or no cost.

Based on the results of our viability assessment, the Directors have a reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due during this period.

Lenta continues to engage and cooperate across its value chain with numerous suppliers, partners and authorities both at local, regional and federal level

RISK

MANA G EMENT

submissions of significant risks to the Head

of Risk Management

S trate g y, o v ersi gh

t an d c omm u n i c a t i o n s

036

O 1 › STRATE G I C RE P ORT O 2 › C OR P ORATE G O V ERNAN C E

O 3 › FINAN C IAL STATEMENTS O 4 › A P P EN D I C ES

O 2 › C OR P ORATE G O V ERNAN C E

LENTA ANN U AL RE P ORT

AN D A C C O U NTS 2019

038 L E N T A 039 A N N U A L R E P O R T A N D A C C O U N T S 2019

L E N T A A N N U A L R E P O R T A N D A C C O U N T S 2019

B OAR D OF D IRE C TORS

Alexey Mordashov,

Chairman Alexey Mordashov was appointed a nonexecutive 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 Officer in 1992. In December 1996, he was appointed as Severstal's Chief Executive Officer. Between 2002 and 2006 he served as CEO of Severstal Group and was Chairman of Severstal's Board of Directors. From December 2006 to December 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: Currently Alexey is CEO of Severgroup LLC. He is also Head of the Russian Union of Industrialists and Entrepreneurs' Committee on Integration, Trade and Customs Policy and WTO, Supervisory Board member in Non-Profit Partnership «Russian Steel Association», Co-chairman of the Northern Dimension Business Council, member of the Russian-German workgroup responsible for strategic economic and finance issues, Member of the EU-Russia Business Cooperation Council.

Other Selective Directorships: Nord Gold SE, TUI AG.

Qualifications: Alexey graduated from the Leningrad Institute of Engineering and Economics, holds an MBA from the Business School at the University of Northumbria in Newcastle, United Kingdom. He is awarded an Honorary Doctorate of Science from the Saint Petersburg University of Engineering and Economics (2001) and the Northumbria University (2003).

Michael Lynch-Bell, Independent Director

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

Board Committees: Audit (Chairman), Remuneration (Chairman), Nomination Experience: Michael retired from Ernst & Young as Senior Partner in 2012 after a 38-year career with the firm. He was a member of Ernst & Young's audit practice from 1974 to 1997, becoming a partner in 1985. During this period, as well as supervising and being involved in the audit of a number of multinational groups, he advised a wide range of companies on systems and controls, corporate governance, risk management and accounting issues. In 1997, Michael moved to Ernst & Young's Transaction Advisory practice, where he founded and led its UK IPO and Global Natural Resources transaction teams. He has been involved with the CIS since 1991 and has advised many CIS companies on fundraising, reorganisations, transactions, corporate governance and IPOs. Other roles: Michael is also Deputy Chair and Senior Independent Director of KazMinerals Plc, Senior Independent Director and Audit Committee Chairman of Gem Diamonds Limited, Chairman at Little Green Pharma Ltd and a non-executive Director of Barloworld Limited.

Qualifications: Michael graduated from Sheffield University with a BA in Economics and Accounting in 1974, qualified as an English Chartered Accountant in 1977, and was awarded an Honorary Doctorate of Humane Letters by Schiller International University in 2006.

Steve Johnson, Senior Independent Director

Steve Johnson has been an independent nonexecutive Director of Lenta Plc since 2010. He 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, having been part of the team that turned around and successfully sold Asda to Walmart. Whilst at Asda, Steve held several senior positions including Trading Director, Commercial Finance Director and Marketing Director. Following his time at Asda, he was CEO of Focus DIY Ltd and of Woolworths Plc, as well as Sales & Marketing Director at GUS Plc. He started his career in management consultancy with Bain & Co. Other roles: Steve is currently a non-executive Director of Big Yellow Group Plc. He also works with a number of private equity firms primarily focused on Southern and Eastern Europe. Qualifications: Steve graduated from Cambridge University, United Kingdom, with an Engineering degree.

BOARD OF DIRECTORS

O 4 › APPENDICES

041 L E N T A A N N U A L R E P O R T A N D A C C O U N T S 2019

A N N U A L R E P O R T A N D A C C O U N T S 2019

Tomas Korganas,

Non-Executive Director Tomas Korganas was appointed a nonexecutive Director of Lenta Plc in August 2019. Board Committees: Operation and Capital Expenditure.

Experience: Tomas Korganas started his career at BCG and Goldman Sachs, after that he worked in and led Corporate M&A at GE, Rusal and Vympelkom for the next 10 years. In 2012, Tomas joined Severstal as Head of Corporate Development and soon after he was asked to assume same role at Severgroup. Since 2018, Tomas is also heading the Strategy of Severgroup.

Other roles: Tomas currently serves as a Director for Strategy and M&A of Severgroup LLC and Head of Corporate Development of JSC «Severstal»

Qualifications: Tomas graduated with B. Sc. in Engineering from Kaunas University of Technology in 1993, M. Sc. in International Strategy from Helsinki University of Technology in 1996, and MBA from Sloan School of Management, MIT in 2000.

Herman Tinga,

Chief Executive Officer (CEO) Herman Tinga joined Lenta in 2013 as Chief Commercial Officer and was appointed CEO in

December 2018. Experience: Prior to joining Lenta, Herman was Non-Food Global Category Management & Sourcing Director at Metro AG. He has 33 years' experience in retail and cash & carry. Herman has held Board and VP positions with METRO Cash & Carry in Netherlands and Russia and senior management roles in Dutch department stores chain V&D as well as supervisory roles with Electric City and shoe importer REMO. At Metro Cash & Carry he was involved as international Sponsor in sourcing across Asia and Europe and helped lead the development of customer-centric category management for

Metro group.

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

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 group level roles, including Cadbury (Russia), Astrazeneca (Belgium), Levi Strauss (Belgium) and IC Group (Denmark). He started his career with Deloitte. Qualifications: Rud holds the Master of Science degree in International Business Administration & Commercial Law from Aarhus School of Business, Denmark. He also has an EMBA from London Business School.

Alexey Kulichenko, Non-Executive Director

040 L E N T A B OAR D OF D IRE C TORS

Alexey Kulichenko was appointed a nonexecutive Director of Lenta Plc in May 2019. Experience: In 1996–2003 Alexey held different managerial positions at Sun Interbrew, starting his career as a cash flow economist at the Rosar plant in Omsk and ending it as Efficiency Planning and Managing Director. In 2003–2005 Alexey worked 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.

Roman Vasilkov,

Non-Executive Director Roman Vasilkov was appointed a non-executive Director of Lenta Plc in May 2019 Board Committees: Operation and Capital Expenditure (Chairman)

Experience: Roman Vasilkov joined Severstal in 2006 as an analyst at the Sales department. From 2008 till 2012 he held various positions in Severstal-Invest which is part of Severstal's Russian Steel division. During this time Roman was responsible for the organization of the company's AR management system, preparation of management accounting and business-process regulation. In 2012 he joined Corporate Control at Severgroup LLC. Other roles: Currently (since 2016) Roman is the Head of Corporate Control at Severgroup LLC. His responsibilities include financial control as well as business and investment analysis of Severgroup's companies and projects. Other Selective Directorships: Nord Gold SE,

Tele2.

Qualifications: Roman graduated from the Military Engineering and Space Academy of Mozhaysky, St. Petersburg. In 2013 he graduated with honors from the Institute of Management and Information Technologies (branch of the St. Petersburg State Polytechnic University) majoring in financial management.

Julia Solovieva, Independent Director

Julia Solovieva was appointed an independent non-executive Director in 2018. Board Committees: Audit, Nomination,

Remuneration.

Experience: Julia has over 20 years experience in the internet search, media, retail and telecoms sectors. Julia joined Google in 2013 as Managing Director/Country Manager Russia, and has been Director, Business Operations for Emerging Markets EMEA since 2016. From 2007 to 2012 she held various senior positions including the role of President, at Prof-Media, one of Russia's largest media groups. Prior to this she held various corporate development and other leadership roles in the telecoms sector and also has experience in strategy consulting with Booz Allen Hamilton Netherlands and as Director of Operations for Mary Kay Russia and CIS.

Other roles: Julia is currently Director, Business Operations Emerging Markets EMEA, Google Qualifications: Julia holds an MBA from Harvard Business School and a BA in foreign languages from Moscow State Linguistic University.

A N N U A L R E P O R T A N D A C C O U N T S 2019

042 L E N T A A N N U A L R E P O R T A N D A C C O U N T S 2019

SENIOR MANA G EMENT TEAM

Edward Doeffinger, Chief Operational Officer (COO)

Edward Doeffinger joined Lenta in 2011 as Chief Operational Officer.

Experience: Prior to joining Lenta, Edward served as Deputy General Director of Metro Cash & Carry Kazakhstan. Before starting his career in 1991 at Metro Cash & Carry (Germany), Edward held several positions in wholesale companies and worked as Head of the dry food department at the Trade Ministry of the German Democratic Republic. During his 30 years' experience in the retail industry he has held senior positions in various countries. In 1994 he obtained his first assignment outside Germany as a board adviser to Metro Cash & Carry in Hungary. After a year in Hungary, Edward became a member of the Metro Jinjiang team (China) and worked as a Store General Director and later as Head of Store Development for several years in China before moving to Russia in 2001. In Russia Edward was responsible for the business operations of Metro Cash & Carry in the Privolzhsky, Ural and Siberian regions. He was also responsible for the Metro Cash & Carry Kazakhstan business operations as a Deputy CEO.

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

SENIOR MANAGEMENT TEAM HERMAN TINGA,

Chief Executive Officer Herman Tinga joined Lenta in 2013 as Chief Commercial Officer and was appointed CEO in

Qualifications: Herman has a Bachelor's egree from the Netherlands Institute of Marketing.

RUD PEDERSEN, Chief Financial Officer

Rud Pedersen was appointed Chief Financial Officer on 1 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 group level roles, including Cadbury (Russia), Astrazeneca (Belgium), Levi Strauss (Belgium) and IC Group (Denmark). He started his career with Deloitte. Qualifications: Rud holds the Master of cience degree in International Business Administration & Commercial Law from Aarhus School of Business (Denmark). He also has an EMBA from London Business School (UK).

045 L E N T A

A N N U A L R E P O R T A N D A C C O U N T S 2019

044 L E N T A A N N U A L R E P O R T A N D A C C O U N T S 2019

C OR P ORATE G O V ERNAN C E RE P ORT

Dmitry Bogod,

Chief Strategy & Marketing Officer Dmitry Bogod joined Lenta in 2018 as Chief Strategy Officer.

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

Jaap Van Vreden,

Sourcing and Procurement Director Jaap van Vreden joined Lenta as Procurement Director in 2015.

Experience: Jaap has over 30 years' international experience in the retail industry across sourcing, procurement, marketing and brand management. Prior to joining Lenta, he was a consultant for Li& Fung and implemented category and procurement management in supermarket and hypermarket chains.

Earlier in his career, Jaap worked as CCO for Modis in Russia and for over eight years held VP positions in Ahold USA and CEE.

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

Tatiana Yurkevich, HR Director

Tatiana Yurkevich joined Lenta in 2012 as

Human Resources Director.

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

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

Joern Arnhold, Supply Chain Director

Joern Arnhold joined Lenta in 2011 as Supply Chain Director.

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

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

Tatiana Safutina,

Commercial Department Director Tatiana Safutina joined Lenta in 2015 as Commercial Director, Fresh Food. Experience: Tatiana has more than 20 years' experience in the Russian food retail sector. Prior to joining Lenta, she was with the O'KEY retail chain for ten years, where she worked her way up from Head of Deli and Fresh Food in St. Petersburg to the company's Head of Fresh Food. Before that, Tatiana oversaw the procurement of fresh produce at AKT Zdorovye and Uniland in St. Petersburg.

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

A N N U A L R E P O R T A N D A C C O U N T S 2019

046 L E N T A A N N U A L R E P O R T A N D A C C O U N T S 2019

C OR P ORATE

G O V ERNAN C E RE P ORT

Anna Logunova,

Internal Audit Director Experience: Anna has twenty-one years' experience working in food retail and FMCG. Anna Logunova joined Lenta in 2011 as Director for Supply Chain Controlling; she was appointed Director for Supply Chain and Investment Controlling in 2013, taking responsibility for Operational Controlling in 2014. Since March 2018, Anna occupies the position of Chief Audit Executive (CAE) in Lenta. Prior to joining Lenta, Anna was Supervisor Costing at Philip Morris International (Russia). Qualifications: Anna graduated with honours from St. Petersburg State Technical University. She holds a master's degree in Economics and Management.

Vadim Monakhov,

Director of Business Support Vadim joined Lenta in August 2019 as the Director of Business Support. Experience: Prior to joining Lenta, Vadim was in charge of security in Utkonos. Before that, Vadim worked in law-enforcement authorities and was fighting organized crime and drug traffic. Vadim retired in the rank of major general.

Qualifications: Vadim graduated from Gorky higher school of the USSR Ministry of internal Affairs

SERGEY KOROTKOV, Chief Information Officer

Sergey Korotkov joined Lenta in 2018 as Chief Information Officer.

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

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

SERGEY PROKOFIEV, Legal and Government Relations Director

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

Experience: Prior to joining Lenta, Sergey worked for Metro Cash & Carry for 11 years in different positions including Legal and Compliance Director. He started his career as an expert interpreter and later worked as a lawyer in a major Russian law firm and as a defending attorney at the Moscow City Bar. Qualifications: Sergey graduated from the Military Institute of Foreign Languages ('VKIMO') and the Institute of Law. He holds a PhD in Law from the Institute of Legislation and Comparative Law under the Government of the Russian Federation and an MBA in Strategic Management from California State University.

A N N U A L R E P O R T A N D A C C O U N T S 2019

048 L E N T A A N N U A L R E P O R T A N D A C C O U N T S 2019

C OR P ORATE

G O V ERNAN C E RE P ORT

COMPLIANCEWITH UK

CORPORATE GOVERNANCE CODE

The UK Corporate Governance Code ('the Code') sets out principles and specific provisions on how a company should be directed and controlled to achieve good standards of corporate governance. As a company incorporated in the British Virgin Islands ('BVI') with GDRs admitted to the Official List, we are not required to comply with the provisions of the Code. However, we have chosen to comply with the Code to an appropriate and practicable extent. As of the date of this report, the Board considers that Lenta fully complies in all material respects with the Code, with the exception of the following provisions: • the Chairman of the Board was not independent on his appointment;

• there is not a majority of independent directors on the Board;

• the whole Board is available to attend the AGM but it is not a requirement that each member attends.

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

The Code was revised in July 2018 for application to accounting periods beginning on or after 1 January 2019. We reviewed new Code, and put necessary processes in place to ensure that we are in substantial compliance with these changes during the 2019 financial year.

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

REDOMICILIATION

Lenta accomplished its incorporation in Cyprus in the form of a public limited liability company) and discontinued its incorporation under the laws of the BVI effective February 21, 2020.

On July 18, 2019, the Board of Directors passed the resolution on the commencement of the Redomiciliation process. On September 26, 2019, the Board passed resolutions confirming the Redomiciliation and convened an extraordinary general meeting ("EGM") of Lenta. On October 22, 2019, the EGM on re-domiciliation was held, and the shareholders passed a resolution approving the Re-domiciliation, amendments to the new Memorandum and Articles of Association and related matters. A notice to the BVI Registry of Corporate Affairs of the intention to re-domicile to Cyprus was delivered, and an application with the Registrar of Companies in Cyprus (the «Cyprus Registrar") requesting to register Lenta as continuing in Cyprus was filed.

Redomiciliation took place upon the Cypriot Registrar issuing a temporary certificate of continuation in Cyprus. As from February 21, 2020 Lenta is considered to be a legal entity incorporated in Cyprus. As part of the redomiciliation Lenta Ltd changed its name to Lenta Plc and is subject to the Cypriot Company Law as amended, other relevant Cypriot legislation, common law principles and EU directives where applicable and implemented in Cyprus. In addition the UK Corporate Governance Code will continue to be applied.

LEADERSHIP

The Chairman leads the Board, ensuring its effectiveness at the same time as taking the interests of the Group's various stakeholders into account and promoting high standards of corporate governance. The roles of Chairman and CEO are distinct and separate.

THE CHAIRMAN'SRESPONSIBILITIES INCLUDE:

• ensuring the Directors receive accurate, timely and clear information;

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

building an effective Board;
the induction of new Directors and further training for all Directors as required;

• communicating effectively with shareholders and other stakeholders and ensuring the Board develops an understanding of the view of stakeholders;

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

CORPORATE GOVERNANCE REPORT

THE CEO'S RESPONSIBILITIES INCLUDE:

• leading the development of the Company's strategic direction and implementing the agreed strategy;

• identifying and executing new business opportunities;

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

• building and maintaining an effective management team;

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

THEKEYROLESAND RESPONSIBILITIES OF THE SENIORINDEPENDENT DIRECTOR (SID) INCLUDE:

• acting as a sounding board for the Chairman; • serving as an intermediary for the other Directors when necessary;

• being available to assist in resolving shareholder concerns, should alternative channels be exhausted;

• holding at least one meeting each year with the non-executive Directors without the Chairman present;

• monitoring the training and development requirements of Directors;

• overseeing the Chairman's appraisal and succession, and

• ensuring that Committee chairmen conduct performance evaluations of their Committees.

Stephen Johnson was the SID throughout the year ending 31 December 2019. He was selected for the role thanks to his extensive experience and expertise in both executive and non-executive capacities in the retail world, including international experience.

Though Mr. Johnson has served on the Company Board for more than nine years, the Board of Directors considers him to be independent, due to the following significant factors:

(a) he has not received and does not receive any additional remuneration from the Company apart from a director's fee, does not participate in the Company's share option or a performance-related pay scheme, and is not a member of the Company's pension scheme;

(b) he is not and has not been an employee of the Company or the Group within the last five years, does not have any close family ties with any of the Company's advisers, directors or senior employees; and

(c) he holds no cross-directorships and has no significant links with other directors through involvement in other companies or bodies, and does not represent any significant shareholder.

NON-EXECUTIVE DIRECTORS (NEDs)

The NEDs provide an essential independent element to the Board, and a solid foundation for strong corporate governance. They fulfil a vital role in corporate accountability, albeit all Directors are equally accountable under BVI law. NEDs are required to challenge, in a constructive way, the strategies proposed by the executive Directors. They are also responsible for scrutinizing the performance of management in achieving agreed goals and objectives. Furthermore, they play a key role in the functioning of the Board and its Committees. Between them, the current NEDs have an appropriate balance of skills, experience, knowledge and independent judgement to undertake their roles effectively.

MATTERS SPECIFICALLYRESERVED FORTHE DECISIONOF THE LENTALTD BOARD OF DIRECTORS

Management, strategy and planning

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

Operations and transactions

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

Capital structure

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

Loans and dividends

This includes approval of any substantial new loan or similar facility (including financial leases) from third parties or material amendment to any such facilities

A N N U A L R E P O R T A N D A C C O U N T S 2019

050 L E N T A A N N U A L R E P O R T A N D A C C O U N T S 2019

including material loans or similar facilities made available to third parties. The Board also oversees the Company's dividend policy, declaration of interim and recommendation of final dividends and approval of other distributions to shareholders, as well as any new pension schemes or significant changes to existing pension schemes.

Public reporting and controls

The Board approves half-yearly results announcements as well as the Annual Report and Accounts. It also approves material changes in principal accounting policies and practices, treasury policies and related risk management strategy and framework. On the recommendation of the Audit Committee, the Board recommends to the Shareholders the appointment or removal of the external auditor.

REMUNERATION

This includes approving the Directors' and Officers' insurance cover and establishing policies and rules relating to share-based incentive schemes. The Board also determines the remuneration policy for executive Directors and certain senior executives. It also approves the remuneration of non-executive Directors.

CORPORATE GOVERNANCE

The Board reviews its own performance and that of its Committees and individual Directors. It is responsible for determining the risk appetite of the Group and ensuring maintenance of an effective system of internal control and risk management. It also approves and revises policies, including health, safety and environment policies, share dealing rules, code of conduct, anti- bribery and corruption policy and corporate governance arrangements. The Board also calls any general meetings and approves documents sent to shareholders. It also recommends any changes to the Company's Memorandum and Articles of Association and considers material litigation or regulatory investigations affecting the Lenta Group. It is responsible for the approval of political donations and the appointment of key corporate advisors.

OTHER

The Board also considers other matters of strategic or reputational importance likely to have a significant impact on the Company. When, exceptionally, decisions on matters specifically reserved for the Board are required to be taken urgently between Board meetings, such decisions shall be taken by a Directors' written resolution pursuant to Article 12.9 of the Articles of Association of the Company. The Board is responsible for managing the business and may exercise all of the business's powers in doing so, except to the extent that any such power must be exercised by the shareholders in accordance with applicable BVI law or the Company's Memorandum and Articles ('M&A'). The Board also, by virtue of direct or indirect shareholdings in our consolidated subsidiaries, provides strategic management of our affairs and those of our consolidated subsidiaries. The day-to-day operations of our operating company, Lenta LLC, are managed by Senior Management as described below.

BOARD OF DIRECTORS

The Board of Directors manages, directs and supervises the business of the Company. The Board oversees the officers of the Company and succession planning. The Board, in some circumstances, may elect a Director to fill an empty seat on the Board. The Board may also establish committees and set their responsibilities.

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

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

BOARD FOCUS DURING THEYEAR

In 2019, the Board considered a wide range of matters, including:

strategy
budgets and long-term plans for the Company
review of estimates of future cash flows, financing arrangements and fundraising
industry and competitive environment
responding to the changing dynamics of the Russian economy
maintaining and increasing efficiency of the Company's development
individual business and overall Group performance and future capital expenditures
the review and execution of mergers and acquisitions transactions
development of the Company's corporate governance
financial statements and announcements
reviewing reports from its Committees
shareholder feedback and reports from brokers and analysts
risk management and risk oversight.

ANTI-BRIBERYAND CORRUPTION

Lenta has in place a Compliance Programme, which includes our Ethics Policy, Hotline and Corporate Guidelines. The purpose of the Programme is to assist

C OR P ORATE

G O V ERNAN C E RE P ORT

in the prevention of unlawful activities by individuals and to comply with current Russian legislation and best practice.

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

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

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

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

During 2019, new employees were trained on the Compliance Programme. We reviewed and updated the Group's policies during the year. A number of these policies can be viewed on the corporate website at http://lentainvestor.ru/en/about/corporategovernance/internal-policies.

RISK MANAGEMENTAND CONTROL

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

taken to address any issues identified. During 2019, no significant internal control failings were identified.

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

The Board confirms that throughout 2019 and up to the date of approval of this Annual Report and Accounts, rigorous processes have been in place to identify, evaluate and manage the principal risks faced by the Group, including those that would threaten its business model, future performance, solvency or liquidity in accordance with Principle C.2 of the Code and the Guidance on Risk Management, Internal Control and Related Financial and Business Reporting published by the UK Financial Reporting Council. The Group's approach to risk management, the risks identified and how it profiles these risks is set out in the Risk Management Overview and Principal Risks section on pages 30 to 34.

INTERNALAUDIT

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

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

053 L E N T A

A N N U A L R E P O R T A N D A C C O U N T S 2019

052 L E N T A A N N U A L R E P O R T A N D A C C O U N T S 2019

attends Audit Committee meetings four times a year to present the findings from internal audits.

POLITICAL DONATIONS

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

EFFECTIVENESS

The appointment of new Directors is led by the Nomination Committee, the majority of whose members are independent non-executive Directors. Details of the appointments process can be found on page 57.

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

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

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

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

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

CONFLICTSOF INTEREST

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

C OR P ORATE G O V ERNAN C E RE P ORT

BOARD COMMITTEES

BOARD AND COMMITTEEATTENDANCE DURING THEYEAR

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

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

		BoD AuCo	CapExCo (from June 5 – Operation and Capex Committee	NomCo RemCo
John Oliver (till April 30 2019)	5	-	3	1	3
Stephen Jonson	10	7	5	4	6
Michael Lynch-Bell	9	6	-	3	5
Jago Lemmens (till March, 29 2019)	3	-	-	-	-
Julia Solovieva	10	7	-	-	6
Dmitry Shvets (till April, 30 2019)	5	-	3	-	-
Marting Elling (till April 30 2019)	5	-	3	-	-
Steven Hellman (till April 30 2019)	5	-	2	-	-
Rud Pedersen (after March, 29 2019)	8	-	-	-	-
Herman Tinga	10	-	-	-	-
Alexey Mordashov (after May 28 2019)	5	-	-	-	-
Roman Vasilkov (after May 28 2019)	4	-	3	-	-
Alexey Kulichenko (after May 28 2019)	3	-	-	-	-
Maxim Bakhtin (after May 28 till August 2 2019)	2	-	1	-	-
Tomas Korganas (af ter August 26 2019)	2	-	2	-	-

CHANGES TOTHE BOARD IN 2019

Jago Lemmens retired from his CFO role on 1 April 2019. Rud Pedersen was appointed Chief Financial Officer on 1 April 2019.

Since Severgroup LLC ("Severgroup") acquired in aggregate 78.73% of the Lenta voting shares (including in the form of GDRs, excluding treasury shares), the Board has used its authority to fill the four vacated seats on the Board

1. Alexey Mordashov was elected Chairman on 28th of May 2019

2. Roman Vasilkov was appointed the non-executive Director of Lenta Plc in May 2019

3. Alexey Kulichenko was appointed the non-executive Director of Lenta Plc in May 2019.

4. Tomas Korganas was appointed the non-executive Director of Lenta Plc in August 2019.

LENGTH OF SERVICEAND INDEPENDENCE OFNON-EXECUTIVE DIRECTORS

Stephen Johnson (Inde pendent)	Since 2010	Considered to be indepen dent by the Board
Michael Lynch-Bell (Inde pendent)	Since 2013	Considered to be indepen dent by the Board
Julia Solovieva (Indepen dent)	Since 2018	Considered to be indepen dent by the Board

The following Board and Committee meetings are scheduled for 2020

	BOARD AUDIT		CAPEX	NOMINATION	REMUNERATION
Meeting	4	4	4	4	4
Board call	8	-	–	-	–

The terms of reference for Lenta's Board were last revised and updated in October 2019 and the Committees terms of reference in December 2019. Details are set out in the Corporate Governance section of the Company website: www.lentainvestor.com/en/about/ corporate-governance/internal-policies.

O 1 › S T R A T E G I C R E P O R T 055 L E N T A

O 2 › C O R P O R A T E G O V E R N A N C E O 3 › F I N A N C I A L S T A T E M E N T S O 4 › APPENDICES

A N N U A L R E P O R T A N D A C C O U N T S 2019

054 L E N T A A N N U A L R E P O R T A N D A C C O U N T S 2019

AUDIT COMMITTEE

A U D IT

C OMMITTEE RE P ORT

T he Audit Committee supports the Board in its responsibilities with regard to corporate reporting and risk management and internal controls, as well as with maintaining a relationship with the Company's external auditor. The Committee's activities include the review of internal

control systems and risk management, compliance with financial reporting requirements and the scope, results and cost effectiveness of the external audit and the internal audit function.

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

In 2019, the Committee reviewed the Company's financial results, including significant financial reporting estimates and judgements, as well as the financial disclosures in the interim management statements. It also monitored the Company's system of internal control and management of the Company's risks and oversaw the relationship with the external auditor and with the internal audit function.

The Committee reviewed the tax structuring project and matters related to establishing representative office of Lenta Plc in Russia. We approved the appointment of Ernst&Young ("EY") as a consultant for tax monitoring project. The Committee reviewed the reports on the redomiciliation of Lenta

Plc and approved the resolution on re-domiciliation to Cyprus fulfilled on the 21st of February, 2020.

We worked on improvements to our insurance processes to guarantee all insurance is properly covered by the Company's dedicated policy.

We reviewed the reports from our risk manager and the recommendations for changes to our risk matrix. As the Company has made a long-term viability statement in this Annual Report, the Committee also considered management's assumptions and disclosures relating to it.

We continued to monitor the implementation of the recommendations from the IT security review completed during 2019.

The Company's external auditor EY contributes a further independent perspective on certain aspects of the Company's financial control systems and reports both to the Audit Committee and directly to the Board.

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

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

ROLEAND RESPONSIBILITIES

The key roles and responsibilities of the Audit Committee include:

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

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

• reviewing the Company's internal controls, including financial controls and updated risk management systems;

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

• reviewing the content of the Annual Report and Accounts when requested by the Board;

• ^reviewing reports on changes in tax legislation and management's proposed response

• reviewing the Company's significant insurance arrangements;

• reviewing the Company's treasury policy;

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

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

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

• reviewing the Company's speakup policy and receiving reports on matters raised via the speakup facilities;

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

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

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

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

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

The Audit Committee's main responsibilities involve overseeing, monitoring and reviewing the Company's financial reporting, internal control and assurance processes. Although the Committee's terms of reference set out very specific duties, it serves a much wider purpose in reassuring shareholders that their interests are properly protected with regard to the Company's financial management and reporting.

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

The Chairman, CEO and CFO, the Company Secretary, Head of Internal Audit and Chief Legal Counsel are invited to attend all Committee meetings

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

EXTERNALAUDITOR

The Committee and the Board approved the terms of engagement of the external auditor, the fees paid to it and the scope of work undertaken. The Comittee also reviewed the performance and effectiveness of the external auditor in respect of the year ended 31 December 2019.

Consideration was given to the performance, objectivity, independence, resources and relevant experience of the external auditor. In this process, the Committee reviewed a report from the external auditor on all relationships that might reasonably have a bearing on its independence and the audit partner and staff's objectivity, and the related safeguards and procedures.

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

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

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

C OMMITTEE MEM B ERS

Ju lia S olo v i e v a ( I n d e p e n d ent) S t e ph en J o h nson ( I n d e p e n d ent)

At the heart of the Committee's remit is the need to provide confidence in the integrity of Lenta's processes and procedures in relation to internal control, risk management and corporate reporting

056 L E N T A 057 A N N U A L R E P O R T A N D A C C O U N T S 2019

A U D IT C OMMITTEE RE P ORT

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

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

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

Professional fees billed by Ernst & Young LLC are shown in the table below.

AUDITOR'S FEES (Ernst & Young LLC)

	2019 «000 RUB	2018 «000 RUB
Audit of consolidated financial statements	24,282	27,510
Consulting and other non-audit services	22,729	3,613
Total fees	47,011	31,123

SIGNIFICANT ISSUES CONSIDERED BY THE AUDIT COMMITTEE

The significant issues – and how they were addressed – are set out below.

Impairment

The Company's management took a decision to reassess its impairment of assets. Impairment charge was made on 100 objects (55 hypermarkets and 40 supermarkets, and 5 objects including land, buildings, construction in progress. Management proposed to make a decision on the stores' closure subject to rent negotiations. The Committee agreed with their decision.

Suppliers' allowances

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

Inventories

and inventory allowances

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

Capital construction

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

Ethics Committee

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

Taxation

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

Going concern

The Committee reviewed management's adoption of the going concern basis of accounting. Management had taken into account the Company's financial position, available borrowing facilities, loan covenant compliance, planned store opening programme and the anticipated cash flows and related expenditures from our retail stores. The Committee considered the position taken by management and, taking into account the external auditor's review, concluded that management's recommendation to prepare the financial statements on a going concern basis was appropriate. The annual report also includes a long-term viability statement, which can be found on pages 34–35. The Committee considered the statement and approved management's disclosures.

Share-based payments

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

COMMITTEEREPORT

C OMMITTEE MEM B ERS

M i ch ael Ly n ch -Bell ( I n d e p e n d ent) Ju lia S olo v i e v a ( I n d e p e n d ent) A l e x ey M o r d a s h o v ( N on-e x e cu t i v e )

I n 2019, the Committee focused on succession planning and organisational improvement. We also oversaw the Board's performance and its appraisal. The Committee oversaw the

formation and operation of the Bid Committee during the course

of the Contemplated MTO. The Committee approved the appointment of Stephen Johnson as the interim Chair-

man of the Board after the completion of the acquisition by Sevegroup of approximately 34.45% of the issued and outstanding voting shares in Lenta from the investment vehicle of TPG Group, Luna Inc., as well as the acquisition of approximately 7.47% of the issued and outstanding voting shares in Lenta from the European Bank for Reconstruction and Development ("EBRD").

Independent Director, Stephen Johnson, as Designated Non-Executive Director for the workforce, responsible for liaising with employees, and

meetings with employee representatives are to be held twice a year. We also scrutinised our succession planning process and key personnel retention. As our competitors target Lenta employees as a highly professional workforce, our objective is to ensure that our succession planning

During the year, we worked on an organizational improvement project that was the outcome of the diagnostic of the organisational health index in the Company. The Committee approved the scope of the project to ameliorate the organisational structure of the Company. The Board has nominated the Senior • keeping under review the size, structure, balance of skills, experience, independence, knowledge and general diversity of the Board to ensure the balance and composition of the Board and its Committees remain appropriate;

process is fit for purpose and we have well trained professionals to drive our business.

ROLEAND RESPONSIBILITIES

The key roles and responsibilities of the Nomination Committee include:

• ensuring that proper procedures are established for the nomination, selection and training of the Company's Directors and Senior Management;

As our competitors target Lenta employees as a highly professional workforce, our objective is to ensure that our succession planning process is fit for purpose and we have well trained professionals to drive our business.

NOMINATION C OMMITTEE RE P ORT

O 4 › APPENDICES

058 L E N T A 059 A N N U A L R E P O R T A N D A C C O U N T S 2019

NOMINATION C OMMITTEE RE P ORT

• making recommendations to the Board of Directors' conflicts of interest for authorisation, where appropriate; • making recommendations to the Board regarding the appointment of new Directors, and identifying, interviewing, selecting, and determining the independence of candidates with suitable industry or key competency experience; • reviewing Board level, Senior Management and Com-

pany-wide succession planning and other human resources-related matters;

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

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

The Human Resources Director may be invited to attend any meeting of the Committee, except for portions of the meetings where their presence would be inappropriate, as determined by the Committee Chairman. There are four Committee meetings scheduled for 2020.

PERFORMANCEAPPRAISAL SYSTEM

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

Lenta's appraisal system plays an important part in the Company's succession planning process. The Committee receives regular reports on the conduct of the appraisal

C OMMITTEE MEM B ERS

S t e ph en J o h nson ( I n d e p e n d ent) Ju lia S olo v i e v a ( I n d e p e n d ent)

COMMITTEEREPORT

The work of the Remuneration Committee is set out on pages 59 to 61. The interests in the Company's share capital held by Senior Management and the remuneration received by the Chairman and the non-executive Directors are set out on page 64. The Directors' interests in the Company's share capital are set out on page 64.

T he 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.

The Committee seeks to do this in several ways:

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

Annual Bonus: Lenta operates a Company-wide bonus plan, monthly and quarterly for store and DC line personnel, quarterly and annual for head office employees and management in stores and the DCs. The KPIs for this plan are set annually by the Committee in consultation with the CEO and HR Director. The Committee is mindful that the annual bonus payments are not just a reward for great performance but also a significant element in retaining and recruiting good people. During 2019, performance against the 2019 targets was assessed and an overall

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.

ROLE AND RESPONSIBILITIES

The key roles and responsibilities of the Remuneration Committee include:

• determining and recommending the broad policy for executive remuneration within the Group; • determining, on behalf of the

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

payout of 50% of the maximum was agreed in the form of a one-time reward. Overall performance was 46.8%, the trigger related to OEBITDA was not met. For 2019 the LTIP consists of two equal parts, one share and one cash based. The total LTIP allocation amount remains the same as a percentage of salary.

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

• making recommendations regarding employee equity participation schemes;

• determining the policy for and scope of service agreements and termination payments.

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

LONG-TERM INCENTIVE PLAN FORSENIOR MANAGEMENT

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

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

REM U NERATION C OMMITTEE RE P ORT

process and the outputs from appraisals for all levels of employees, with particular focus on the more senior levels of the management team.

During the year Lenta promoted around 4,000 people within the business. We provided 1.8 million man hours of training and development investment for our employees.

SUCCESSION PLANNING

Lenta continues to be able to offer significant and exciting opportunities for its high-performing employees. One of our key objectives is to ensure there are role model 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

Lenta's policy is to assess Board performance annually, with an external review every three years. An external Board assessment was carried out in 2018 by Prism CoSec (which has no connection with the Company).

In 2019 the Board executed internal evaluation, the results are being analyzed.

060 L E N T A A N N U A L R E P O R T A N D A C C O U N T S 2019

REM U NERATION C OMMITTEE RE P ORT

OVERVIEWOF LONGTERM INCENTIVE PLANFORSENIOR MANAGEMENT IN 2019

SHARE-BASED AWARDS

Starting from 2019, the LTIP operates according to the following rules:

• The LTIP awards are granted annually with a vesting period of three years;

• The amount of award depends on job grade (percentage of annual salary) and individual performance evaluation of the manager;

• Тhe award is then split into two equal parts – shares and cash. The share based part of award is determined based on share price for the first quarter of the grant year. The cash award is protected against inflation.

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

The LTIP 2019 with a vesting date in 2022 was approved, granting a total of 343,316 Shares and 693.8 mn Rub which represents around 197 % of the annual salary of this group, this amount includes increased LTIPs granted as part of key talent retention program.

The change of ownership of Lenta had an effect on the LTIP awards of senior management according to their grant agreements. The plans, effective on the moment of change of control, vested proportionate to the time elapsed from grant date by the decision of the Remuneration committee with the remaining part vesting according to the original schedule but no later than 2 years from the change of ownership of Lenta. According to that decision 91.6 mn Rub were paid to Senior management on change of control; 97.9 mn Rub remaining in the retention program vesting by May 2021.

Special One Off Awards

These one-off awards were granted in Q4, 2018. These programs are cash based and aim to protect the value of the earlier granted long-term incentives and retain Senior Management.

The award has the following conditions:

• full vesting period is 4 years, each year vesting a certain percentage (the original vesting schedule was revised due to change of control).

• the amount of award was defined individually and fixed in cash;

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

The total amount of allocated award:

546.2 nm Rub First tranche of the award vested in April 2019 and May 2019 (with the change of ownership of the company payout of 180.2 mn Rub. The remaining 365.9 mn Rub shall be paid over a period of time until May 2021 according to the clause in award agreements limiting the vesting period to 2 years from change of control, in case it occurs.

OVERVIEWOF LONG-TERM INCENTIVE PROGRAMME FOR MIDDLE MANAGERS 2019

SHARE-BASED PROGRAM

2019 was the third year in which the Long-term incentive plan for middle managers began vesting. Sixty-five managers received their LTIP in the amount of 59.1 mn Rub (equivalent of 51,446 shares converted into cash).

The Committee also approved a new annual longterm incentive plan with a vesting period of three years for 92 key middle managers. The LTIP for middle managers also consists of two parts: cash and share based. The total value of this award is 83,140 shares and 94.9 mn Rub which represents around 44% of this group's annual salary. The allocation of the LTIP is linked to overall Company performance in the previous year and individual performance evaluations.

2019 ANNUAL BONUS SCHEMEAPPROVAL

The Committee approved the bonus KPIs, target and payout scales for 2019.

SALARYREVIEWIN COMPARISONTOLABOUR MARKET

The Committee reviewed the labor market situation and salary dynamics in Russia, it was decided not to apply an overall company salary indexation in 2019. However, during 2019 specific changes for critical jobs were made in situations where Lenta salaries were dropping below target pay for the specific labor market. In order to retain store and DC personnel additional fringe and benefits programs were approved with a very positive impact on overall turnover.

A special retention plan was approved by the Remuneration Committee for key managers in Lenta to assure their retention in conditions of high competition for talent. The plan consists of a salary increase calendar, individual training programs and other important employee benefits. In addition, to improve retention and attractiveness, a flexible work schedule and opportunity for remote work were offered as part of the benefits package.

SUMMARYOF SENIOR MANAGEMENT TEAM REMUNERATION POLICY

Element	Principles	Opportunity
Base pay	Base pay is reviewed annually by the Remuneration Committee, considering a number of factors, including: • Individual performance evaluation • Salaries in comparable roles in the same industry and activities scope.	There is no set maximum or minimum, it is in line with labour market trends and/or individual role scope changes.
	Currency adjustment According to Russian legislation, base salaries are fixed in Roubles, which leads to a nega tive pay trend for senior management with a drop in the RUB/EUR rate. To maintain com petitive pay levels, currency adjustment pay is used as decided by the Committee in 2014.	Currency adjustment pay is the difference between individual salary calculated in Euro at recruitment and current RUB salary expressed in Euro. For some senior manag ers, only partial compensation is applied.
Benefits	• Company car, for some Directors with a driver • Medical insurance with family coverage • Relocation support • Partial reimbursement of school fees for expatriates' children attending school in Russia.	There are maximums set for each com pensation element depending on the job grade.
Annual bonus	All senior management are eligible for the annual bonus scheme, which is a discretionary, non-contractual scheme. Performance is measured against quantifiable financial targets, which are set at the start of the year and approved by the Remuneration Committee.In addition to financial targets, the bonus may be affected by the individual performance evaluation, which may increase or decrease the payout. Annual bonus is paid on the condi tion that a 'threshold' level of EBITDA is achieved.	Total maximum annual bonus opportunity for senior management is 120% of annual base pay.
Long-term incentive plan	All senior managers are eligible for the long-term incentive plan (LTIP) consisting of two equal parts – shares and cash as decided by the Remuneration Committee. The Share based part of award is determined based on share price for the first quarter of the grant year. The cash award is protected against inflation. The LTIP awards are granted annually with a vesting period of three years. . A senior manager's eligibility to receive shares is conditional on his or her employment with Lenta and compliance with certain covenants, including confidentiality, non-competition and non-solicitation covenants.	Maximum LTIP annual value is 150% of annual salary; the actual amount varies between senior managers based on their job grade and individual performance evaluation.

The Committee also approved a new annual long-term incentive plan with a vesting period of three years for 92 key middle managers. The LTIP for middle managers also consists of two parts: cash and share based. The total value of this award is 83,140 shares and 94.9 mn Rub which represents around 44% of this group's annual salary

063	O 1 › S T R A T E G I C R E P O R T	L E N T A
	O 2 › C O R P O R A T E G O V E R N A N C E
	O 3 › F I N A N C I A L S T A T E M E N T S
	O 4 › APPENDICES	2019

062 L E N T A A N N U A L R E P O R T A N D A C C O U N T S 2019

REM U NERATION C OMMITTEE RE P ORT

PAYSTRUCTUREOF CEO, CFOAND SENIOR MANAGEMENT TEAM

Chief Financial Officer

Other Senior Team Members

100%

CFO total cash reward (fixed vs.variable target)

CEO total cash reward (fixed vs.variable target)

Other Senior Team Members Total Cash Reward

	Number of phantom shares total	Vested shares	Base price (RUB)	Hurdle reference price (RUB)	Hurdle reference date	2017	2018	2019	2020
Wave 1	188509	35422	1,516	764	23.09.2011	56553	94255	–	–
Wave 2	245787	46166	1,516	1,375	01.04.2013	73736	122894	49157	–
Wave 2*	42000	–	2,214	1,375	01.04.2013	–	–	21000	21000

* Herman Tinga 2016 additional tranche

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

Summary of MIP conditions by two allocation waves is shown below

Manager	Number of phantom shares	Base price (RUB)	Hurdle reference price (RUB)	Hurdle reference date	Vesting period commencemet date
Herman Tinga
1st grant	102 823	1,516	1,375	01.04.2013	01.04.2013
2nd grant	35 000	1,516	1,375	01.04.2013	01.04.2014
3rd grant	42 000	2,214	1,375	01.04.2013	01.04.2019
Edward Doeffinger	102 823	1,516	764	23.09.2011	01.04.2012
Joern Arnhold	85 686	1,516	764	23.09.2011	01.04.2012
Sergey Prokofiev	35 988	1,516	1,375	01.04.2013	01.04.2013
Tatiana Yurkevich	35 988	1,516	1,375	01.04.2013	01.04.2013

SUMMARYOFNON-EXECUTIVE DIRECTORS' REMUNERATION POLICY

Element	Principles and opportunities
Letter of appointment	• The independent non-executive Directors of Lenta LLC each have a letter of appointment; they do not have service contracts. • There is no notice period for termination.
	Chairman and non-executive Director• Fees are reviewed periodically by the Committee taking into consideration:»» Time commitment, demands and the responsibility of the role; and»» External market practice. • There has been no increase in the level of fees paid to the independent non-executive Directors since the Company's IPO in February 2014. The Committee and Board have agreed that no increase will be payable for the coming year.
Additional fees	Additional fees are paid for undertaking the extra responsibilities of:»» Senior Independent Director»» Committee Chair man.
Other benefits	The independent non-executive Directors do not participate in any of our employee incentive arrangements, nor do they receive any pension provision.• No further benefits are provided to the independent non-executive Directors.
Recruitment	• Fees for the independent non-executive Directors are determined by the Board as a whole, upon the recommendation of the Remuneration Committee. • Fees are set at a level sufficient to attract, motivate and retain the world-class talent necessary to contribute to a high-performing board.

064 L E N T A 065 A N N U A L R E P O R T A N D A C C O U N T S 2019

O P ERATION AN D C A P ITAL E X P EN D IT U RE C OMMITTEE RE P ORT

Roman Vasilkov Non-executive, Chairman

OPERATIONAND CAPITAL EXPENDITURE COMMITTEEREPORT

C OMMITTEE MEM B ERS

S t e ph en J o h nson ( I n d e p e n d ent) T omas K o r g a n a s ( N on-e x e cu t i v e )

I n 2019 we opened seven new hypermarkets and three supermarkets in Russia and met our initial guidance. We also restored a hypermarket in Saint-Petersburg that was damaged by fire in November 2018 and renovated one of the oldest stores in Saint-Petersburg.

Capital expenditure in 2019

amounted to RUB 14.1 bn, a decrease of 36.1% compared to 2018, mainly due to lower expansion.

During the year we focused on operational efficiency rather than on organic expansion.

We will review growth opportunities as they occur; the Board and senior management agree however that, in the present circumstances, it is particularly important to maintain an appropriate balance of leverage levels, pursuing investment project returns.

ROLEAND RESPONSIBILITIES

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

advising the Board with regard to the overall capital expenditure strategy of the Group;
reviewing the Company's processes for approving capital expenditure projects;
approving the limits of authority for capex-related decisions;

• reviewing and approving all capex and mergers and acquisitions projects within the Committee's limits of authority;

• reviewing and making recommendations on how the overall capex plan aligns with the Company's strategy;

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

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

There are 4 Committee meetings scheduled for 2020; this number may be increased as necessary.

A copy of the Committee's full terms of reference is available

on the Company's website: www.lentainvestor.com/ en/about/corporate-governance/ internal-policies.

ACTIVITIES DURING THEYEAR

In 2019, the Operation and Capital Expenditure Committee evaluated the best opportunities in the market reviewing and making recommendations to the Board on the Company's investment strategy, policy and risk management.

We worked on improvements to the Company's underperforming stores and analysed the feasibility of investments required to increase profitability of these stores. Thus, the Committee approved the remodeling of Lenta-11 (Saint-Petersburg, Rustaveli street) in line with JdV 1.75 concept to protect Lenta market position. The Committee also took a decision to extend the selling space of a Lenta-100 (Khanty-Mansiysk), Urals, to deliver sales growth.

The Committee approved investments in Lenta's logistics infrastructure, informational and technical solutions to develop client-centric activities and processes.

We approved 15 investment proposals in 2019, including opening of new hypermarkets and supermarkets in 2020. We also worked together with management on improving the efficiency of the existing stores and maintaining their compliance with applicable regulations.

REM U NERATION C OMMITTEE RE P ORT

INTERESTSOF DIRECTORS INLENTASHARESARE SUMMARISED INTHE TABLE BELOW:

NAME OF DIRECTOR	TOTAL HOLDING AS OF 31 DEC 2019 (INTEREST IN SHARES)	APPROXIMATE HOLDING AS OF 31 DEC 2019 (% OF SHARE CAPITAL)
Stephen Johnson	1	less than 0.01%
Michael Lynch-Bell	3,200	less than 0.01%
Julia Solovieva	-	-

NAME OF DIRECTOR	TOTAL HOLDING AS OF 31 DEC 2019 (INTEREST IN SHARES)	APPROXIMATE HOLDING AS OF 31 DEC 2019 (% OF SHARE CAPITAL)
Herman Tinga	31,770	less than 0.01%

NON-EXECUTIVE DIRECTORS' FEES

	AMOUNT PAYABLE (USD)
Base fee for non-executive Directors	165,000
Additional fees:
Senior Independent Director	25,000
Chairman of the Audit Committee	40,000
Chairman of the Remuneration Committee	17,500
Chairman of the Nomination Committee	17,500
Members of the Audit and Capital Expenditure Committee	15,000
Members of the Nomination and Remuneration Committee	10,000

STRATEGIC ALIGNMENTOF PAY

The table below shows the integration between Lenta's financial key performance indicators and the senior remuneration framework for 2019/20. This clearly demonstrates a clear linkage between performance metrics, payments to Managers and business performance over the short and long term.

FINAN CIAL OBJECTIVES	KPI	INCENTIVE SCHEME
Company revenue	Turnover	Annual Bonus Scheme
Increase earnings and returns	EBITDA	Annual Bonus Scheme
Increase shareholder value	Share price	LTIP

NON-FINAN CIAL OBJECTIVES	KPI	INCENTIVE SCHEME
Efficient operations	Productivity	Annual Bonus Scheme
Sales space growth	Number of stores opened and in pipeline	Annual Bonus Scheme

A N N U A L R E P O R T A N D A C C O U N T S 2019

066 L E N T A O P ERATION AN D C A P ITAL E X P EN D IT U RE C OMMITTEE RE P ORT

BID COMMITTEE

I n connection with Severgroup acquiring shares of TPG Capital and EBRD as well as the subsequent mandatory tender offering under which the first mention acquired a shareholding of 77.99% in Lenta Ltd, the Board of Directors of Lenta Ltd appointed on 26th February 2019 a Bid Committee in accordance with Regulation 13.1 of the Articles.

Accordingly the oversight of the mandatory tender offering was delegated to the Bid Committee constituting Stephen Johnson and Michael Lynch-Bell, in light of other previous members of the Board of Directors having acknowledged a potential conflict of interest arising from the possible sale of shares by their respective nominating shareholder, and as such were prohibited from voting pursuant to Regulation 15.5 of the Articles.

The Bid Committee was delegated full authority, subject to the restrictions set out in Regulation 13.2 of the Articles, to approve, amend, execute and do or procure to be executed and done all such documents, acts and things as may be necessary or desirable to have approved, executed and done in connection with the mandatory tender offering. Several meetings were held during the period up to and including the completion of the mandatory tender offering. Subsequently the Bid Committee was dissolved 18th July 2019.

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. CFO keeps the Board informed of investor, broker and analyst views, and reports and presents formally to the Board at each scheduled Board meeting.

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

RELATIONSWITH SHAREHOLDERS

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.

SCHEDULEOF INVESTOR CALLS IN 2020

MONTH	DATE	DAY	MOSCOWTIME
January	24	Friday	14.00 – 15.00
February	25	Tuesday	16.00 – 17.00
April	22	Wednesday	16.00 – 17.00
July	27	Monday	16.00 – 17.00
October	21	Wednesday	16.00 – 17.00

RESPONSIBILITYSTATEMENT

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 21 February 2020

O 1 › STRATE G I C RE P ORT O 2 › C OR P ORATE G O V ERNAN C E O 3 › FINAN C IAL STATEMENTS O 4 › A P P EN D I C ES

O 3 › FINAN C IAL STATEMENTS

LENTA ANN U AL RE P ORT AN D A C C O U NTS 2019

L enta L td . and s u b sidiaries

070 L E N T A 071

A N N U A L R E P O R T A N D A C C O U N T S 2019

L E N T A A N N U A L R E P O R T A N D A C C O U N T S 2019

Opinion

We have audited the consolidated financial statements of Lenta Ltd. and its subsidiaries (hereinafter, the "Group"), which comprise the consolidated statement of financial position as at 31 December 2019, and the consolidated statement of profit or loss and other comprehensive income, consolidated statement of cash flows and consolidated statement of changes in equity for the year then ended, and notes to the consolidated financial statements, including a summary of significant accounting policies.

In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Group as at 31 December 2019 and its consolidated financial performance and its consolidated cash flows for the year then ended in accordance with International Financial Reporting Standards (IFRSs).

Basis for opinion

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

Key audit matters

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

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

Independent auditor's report

To the Shareholders and Board of Directors of Lenta ltd.

Key audit matter How our audit addressed the key audit matter Transition to IFRS 16 Leases

Transition to IFRS 16 Leases

Effective 1 January 2019, the Group adopted IFRS 16 Leases (IFRS 16). When adopting the new standard, the Group applied a modified retrospective approach.

The adoption of the new standard resulted in the recognition of a rightof-use asset in the amount of RUB 36,357,602 thousand and additional lease liabilities in the amount of RUB 34,120,002 thousand. The adoption of IFRS 16 was one of the key audit matters because the effect of transition to the new standard is significant and changes in the accounting policy required management to make judgments with respect to approaches. In addition, identifying and processing all lease-related data is a complex process, and the valuation of the rightof-use asset and lease liabilities is based on assumptions such as the discount rate and lease term in agreements with extension options. Information about the adoption of IFRS 16 is disclosed in Note 4 to the consolidated financial statements.

We analyzed the Group's accounting policy on the recognition of leases, specific transition provisions and practical expedients set forth in IFRS 16 and applied by the Group.

We obtained an understanding of the process of the Group's transition to IFRS 16 in respect of existing leases and evaluated the effectiveness of relevant internal controls.

We analyzed the list of lease agreements to which IFRS 16 is applied and compared, on a sample basis, data in agreements with data that were used during the implementation and application of the transition provisions of IFRS 16.

We analyzed management's judgments made to determine the lease term in agreements with extension options.

We tested the mathematical accuracy of calculations of cumulative adjustments at the transition date.

We analyzed information on the adoption of IFRS 16 disclosed in the financial statements.

Impairment of property, plant and equipment

As a result of impairment testing held for the smallest group of assets that can generate independent cash flows, the Group recognized an impairment of property, plant and equipment in the amount of RUB 11,849,959 thousand.

Impairment testing for property, plant and equipment was one of the key audit matters because the balance of property, plant and equipment forms a significant portion of the Group's assets at the reporting date, the amount of recognized impairment of property, plant and equipment forms a significant portion of the Group's expenses, and the process of management's assessment of the recoverable amount is complex and requires significant judgments, including judgements about future cash flows, capital expenditures and the discount rate, as well as about assumptions used in the assessment.

Property, plant and equipment and impairment testing are disclosed in Note 7 to the consolidated financial statements.

Our procedures in relation to impairment testing of property, plant and equipment performed by management included an assessment of key management assumptions, including those in respect of revenue and operating expenses. We compared management assumptions with historical data. We also analyzed discount rates used by management. We engaged our internal valuation experts in performing these 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.

Recognition of suppliers' allowances

The Group receives various types of allowances from suppliers in connection with the purchase of goods for resale in the form of volume rebates and other payments. The recognition of allowances was a matter of most significance in our audit because of its material impact on trade and other receivables, cost of goods sold and inventories. In addition, management exercises judgement in determining the period over which these allowances should be recognised considering the nature and the level of fulfilment of the Group's obligations and estimates of purchase volumes. Information about suppliers' rebates receivable and accounts receivable on suppliers' advertising is disclosed in Note 13 to the consolidated financial statements.

We agreed the terms of providing allowances to supporting documents approved by individual suppliers. We analyzed the assumptions underlying management estimates of recognized amounts of allowances from suppliers. On a sample basis we received direct confirmations of outstanding balances from suppliers. We agreed the balances of suppliers' allowances receivables to the post year-end cash settlements.

Other information included in The Group's 2019 Annual Report

Other information consists of the information included in The Group's 2019 Annual Report, other than the consolidated financial statements and our auditor's report thereon. Management is responsible for the other information.

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

In connection with our audit of the consolidated financial statements, our responsibility is to read the other information and, in doing so, 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. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard.

Responsibilities of management Board of Directors for the consolidated financial statements

Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with IFRSs, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

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

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

Auditor's responsibilities for the audit of the consolidated financial statements

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

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

• Identify and assess the risks of material misstatement of the consolidat-

O 1 › S T R A T E G I C R E P O R T
O 2 › C O R P O R A T E G O V E R N A N C E
O 3 › F I N A N C I A L S T A T E M E N T S
O 4 › APPENDICES

L enta L td . and s u b sidiaries

072 L E N T A 073 A N N U A L R E P O R T A N D A C C O U N T S 2019

L E N T A A N N U A L R E P O R T A N D A C C O U N T S 2019

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

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

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

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

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

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

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

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

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

The partner in charge of the audit resulting in this independent auditor's report is I.Y. Ananyev.

I.Y. Ananyev Partner Ernst & Young LLC 21 February 2020

Details of the audited entity

Name: Lenta Ltd. Incorporated under the laws of the BVI on 16 July 2003, State Registration Number 1058643.Address: P.O. Box 3340, Road Town, Tortola, British Virgin Islands.

Details of the auditor

Name: Ernst & Young LLC

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

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

Ernst & Young LLC is a member of Self-regulatory organization of auditors Association "Sodruzhestvo". Ernst & Young LLC is included in the control copy of the register of auditors and audit organizations, main registration number 12006020327.

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

Management is responsible for the preparation of these consolidated financial statements that present fairly the financial position of Lenta Ltd. and its subsidiaries ("the Group") as at 31 December 2019 and the results of its operations, cash flows and changes in shareholders' equity for the year then ended, in compliance with International Financial Reporting Standards ("IFRS").

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

• selecting and applying accounting policies;

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

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

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

Management is also responsible for: • designing, implementing and maintaining an effective and sound system of internal controls throughout the Group;

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

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

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

• preventing and detecting fraud and other irregularities.

The consolidated financial statements of the Group for the year ended 31 December 2019 were approved by management on 21 February 2020.

On behalf of the Management as

authorised by the Board of Directors.

Herman Tinga (CEO of Lenta Ltd.)

Rud Pedersen (CFO of Lenta Ltd.)

Statement of management's responsibilities for the preparation and approval of the consolidated financial statements for the year ended 31 December 2019

O 1 › S T R A T E G I C R E P O R T
O 2 › C O R P O R A T E G O V E R N A N C E
O 3 › F I N A N C I A L S T A T E M E N T S
O 4 › APPENDICES

L enta L td . and s u b sidiaries

074 L E N T A 075

A N N U A L R E P O R T A N D A C C O U N T S

2019

A N N U A L R E P O R T A N D A C C O U N T S 2019

	Note	31 December 2019	31 December 2018*
Assets
Non-current assets
Property, plant and equipment	7	165,443,239	177,024,063
Prepayments for construction	8	2,312,814	4,929,794
Right-of-use assets	4	32,667,443	−
Leasehold rights		−	3,170,537
Intangible assets	10	2,270,975	1,905,890
Other non-current assets	11	444,316	896,928
Total non-current assets		203,138,787	187,927,212

Current assets
Inventories	12	38,453,265	41,500,851
Trade and other receivables	13	8,604,102	11,272,602
Advances paid	14	1,582,931	2,772,184
Taxes recoverable	15	163,364	992,378
Prepaid expenses		103,059	123,101
Cash and cash equivalents	16	73,404,760	33,804,860
Total current assets		122,311,481	90,465,976
Total assets		325,450,268	278,393,188

Equity and liabilities
Equity
Share capital	17, 18	−	−
Additional paid-in capital	17	27,062,751	26,935,309
Share options	26	390,536	633,165
Treasury shares		(1,011,190)	(291,091)
Retained earnings		51,708,795	55,473,276
Total equity		78,150,892	82,750,659

Liabilities
Non-current liabilities
Long-term borrowings	19	82,110,441	106,341,291
Deferred tax liabilities	20	6,508,488	10,039,756
Long-term lease liabilities	4	29,520,222	−
Total non-current liabilities		118,139,151	116,381,047

Current liabilities
Trade and other payables	21	54,689,103	56,133,840
Short-term borrowings and short-term portion of long-term borrowings	19	68,430,816	20,738,998
Short-term lease liabilities	4	2,639,784	−
Contract liabilities		482,160	350,378
Advances received		191,953	148,543
Other taxes payable	22	1,173,563	1,041,123
Current income tax payable		1,552,846	848,600
Total current liabilities		129,160,225	79,261,482
Total liabilities		247,299,376	195,642,529
Total equity and liabilities		325,450,268	278,393,188

	Note	Year ended 31 December 2019	Year ended 31 December 2018*
Sales		417,500,015	413,562,197
Cost of sales	23	(325,482,536)	(324,767,890)
Gross profit		92,017,479	88,794,307
Selling, general and administrative expenses	24	(75,083,513)	(69,094,871)
Other operating income	25	5,067,766	4,993,245
Other operating expenses	25	(935,698)	(476,040)
Operating profit before impairment		21,066,034	24,216,641
Impairment of non-financial assets	4,7,10	(11,849,959)	(132,188)
Operating profit		9,216,075	24,084,453
Interest expense		(15,866,946)	(9,699,272)
Interest income		3,827,178	608,472
Foreign exchange gains/(losses)		220,503	(176,371)
(Loss)/Profit before income tax		(2,603,190)	14,817,282
Income tax expense	20	(190,684)	(3,022,988)
(Loss)/Profit for the year		(2,793,874)	11,794,294
Other comprehensive income (OCI)
Other comprehensive income to be reclassified to profit or loss in subsequent periods
Net loss from cash flow hedges		−	(206,108)
Income tax relating to the cash flow hedges	20	−	41,222
Other comprehensive loss for the year, net of tax		−	(164,886)
Total comprehensive (loss)/income for the year, net of tax		(2,793,874)	11,629,408
(Loss)/earnings per share (in thousands of Russian roubles per share) (Note 18)
- basic and diluted, for (loss)/profit for the year attributable to equity holders of the parent		(0.029)	0.121

Consolidated statement of financial position as at 31 December 2019 (in thousands of Russian roubles)

Consolidated statement of profit or loss and other comprehensive income for the year ended 31 December 2019 (in thousands of Russian roubles)

* Certain amounts shown here do not correspond to the financial statements for the year ended 31 December 2018 and reflect reclassification described in Note 4.

The accompanying notes on pages 78 to 107 are an integral part of these financial statements

O 1 › S T R A T E G I C R E P O R T
O 2 › C O R P O R A T E G O V E R N A N C E
O 3 › F I N A N C I A L S T A T E M E N T S
O 4 › APPENDICES

A N N U A L R E P O R T A N D A C C O U N T S

2019

A N N U A L R E P O R T A N D A C C O U N T S 2019

	Note	Year ended 31 December 2019	Year ended 31 December 2018*
Cash flows from operating activities (Loss)/Profit before income tax		(2,603,190)	14,817,282

Adjustments for:
Net loss on disposal of property, plant and equipment	25	296,667	26,483
Loss on disposal of intangible assets	25	13,446	-
Cancelation of lease contracts	25	121,636	-
Interest expense		15,866,946	9,699,272
Interest income		(3,827,178)	(608,472)
Inventory write-down to net realisable value	12	411,398	397,251
Net foreign exchange gain attributable to financing activities		(102,355)	-
Impairment of advances paid and prepayments for construction, reversal of allowance for expected credit losses of accounts receivable		53,173	109,168
Depreciation and amortisation	4,7,10	18,439,679	11,977,519
Impairment of non-financial assets	4,7,10	11,849,959	132,188
Share options expense	26	435,121	265,261
		40,955,302	36,815,952
Movements in working capital
Decrease/(increase) in trade and other receivables	13	2,718,306	(684,178)
Decrease/(increase) in advances paid	14	999,233	(548,409)
Decrease/(increase) in prepaid expenses		18,042	(20,686)
Decrease/(increase) in inventories	12	2,636,188	(4,964,974)
(Decrease)/increase in trade and other payables	21	(29,309)	42,165
Increase/(decrease) in contract liabilities and advances received		175,192	(15,988)
Increase in net other taxes payable	15, 22	961,454	1,791,820
Cash from operating activities		48,434,408	32,415,702

Income taxes paid		(2,709,023)	(871,201)
Interest received		3,810,923	522,871
Interest paid		(15,663,909)	(10,440,177)
Net cash generated from operating activities		33,872,399	21,627,195
Cash flows from investing activities
Purchases of property, plant and equipment		(13,154,203)	(21,411,263)
Purchases of intangible assets		(886,872)	(642,512)
Purchases of leasehold rights		-	(267,640)
Proceeds from sale of property, plant and equipment		76,970	177,087
Net cash used in investing activities		(13,964,105)	(22,144,328)
Cash flows from financing activities
Proceeds from borrowings	19, 28	230,030,804	132,183,000
Repayments of borrowings	19, 28	(206,770,873)	(111,871,775)
Payments for the principal portion of the lease liabilities	4	(2,848,226)	-
Purchase of treasury shares	17	(720,099)	(291,091)
Net cash generated from financing activities		19,691,606	20,020,134
Net increase in cash and cash equivalents		39,599,900	19,503,001

Cash and cash equivalents at the beginning of the year	16	33,804,860	14,301,859
Cash and cash equivalents at the end of the year	16	73,404,760	33,804,860

Share capital	Additional paid-in capital	Treasury shares	Share options reserve	Retained earnings	Total equity
–	26,935,309	(291,091)	633,165	55,473,276	82,750,659
–	–	–	–	(1,234,731)	(1,234,731)
–	26,935,309	(291,091)	633,165	54,238,545	81,515,928
–	–	–	–	(2,793,874)	(2,793,874)
–	–	–	–	(2,793,874)	(2,793,874)

–	–	–	435,121	–	435,121
–	127,442	–	(127,442)	–	–
–	–	–	(550,308)	264,124	(286,184)
–	–	(720,099)	–	–	(720,099)
–	27,062,751	(1,011,190)	390,536	51,708,795	78,150,892

	Share capital	Additional paid-in capital	Hedging reserve	Treasury shares	Share options reserve	Retained earnings	Total equity
Balance at 1 January 2018	284	26,480,481	164,886	−	825,176	44,316,449	71,787,276
Reclassification (Note 4)	(284)	284					−
Change in the accounting policies due to application of IFRS 9 (Note 4)	−	−	−	−	−	(637,467)	(637,467)
Balance at 1 January 2018 (restated)	−	26,480,765	164,886	−	825,176	43,678,982	71,149,809
Profit for the year						11,794,294	11,794,294
Other compre hensive loss	−	−	(164,886)	−	−		(164,886)
Total compre hensive (loss)/ income	−	−	(164,886)	−	−	11,794,294	11,629,408
Share-based payments (Note 26)	−	−	−	−	265,261	−	265,261
Issue of shares (Notes 17, 26)	-	454,544	−	-	(457,272)	-	(2,728)
Purchase of treasury shares (Note 17)	−	−	−	(291,091)	−	−	(291,091)
Balance at 31 December 2018 *	−	26,935,309	−	(291,091)	633,165	55,473,276	82,750,659

Consolidated statement of cash flows for the year ended 31 December 2019 (in thousands of Russian roubles)

Consolidated statement of changes in equity for the year ended 31 December 2019 (in thousands of Russian roubles)

Consolidated statement of changes in equity for the year ended 31 December 2018 (in thousands of Russian roubles)

* Certain amounts shown here do not correspond to the financial statements for the year ended 31 December 2018 and reflect reclassification described in Note 4.

Notes

Additional paid-in capital: Additional paid-in capital is the difference between the fair value of consideration received and nominal value of the issued shares. Treasury shares: Treasury shares are own equity instruments reaquired by the Group.

O 2 › C O R P O R A T E G O V E R N A N C E O 3 › F I N A N C I A L S T A T E M E N T S O 4 › APPENDICES

L enta L td . and s u b sidiaries

078 L E N T A 079 A N N U A L R E P O R T A N D A C C O U N T S 2019

L E N T A A N N U A L R E P O R T A N D A C C O U N T S 2019

Notes to the consolidated financial statements for the year ended 31 December 2019

(in thousands of Russian roubles)

1. The Lenta Group and its operations

The Lenta Group (the "Group") comprises Lenta Ltd. ("the Company") and its subsidiaries. The Group's principal business activity is the development and operation of hypermarket and supermarket stores in Russia.

The Company was incorporated as a company limited by shares under the laws of the British Virgin Islands (BVI) on 16 July 2003. The Company's registered address is at P.O. Box 3340, Road Town, Tortola, BVI. The registered office of the Group's main operating entity, Lenta LLC, is located at 112, Lit. B, Savushkina Street, 197374, Saint Petersburg, Russia.

In September 2019 the Company established a representative office in St. Petersburg.

In October 2019 the Company was registered as a Russian tax resident.

In December 2019 the Company has started the process of its redomiciliation to Cyprus.

Further to obtaining shareholder approval of the redomiciliation on October 2019, the Company applied on 19 December 2019 to the Department of Registrar of Companies and Official Receiver ("DRCOR") for continuance of the Company's incorporation into Cyprus. The redomiciliation will become effective upon the issue by the DRCOR of a certificate of temporary registration in Cyprus to the Company.

Starting from March 2014 the Company's shares are listed on the London Stock Exchange and Moscow Exchange in the form of Global Depositary Receipts (GDR).

At 31 December 2019 and 31 December 2018 the Group has one main operating subsidiary, Lenta LLC (100% owned), a legal entity registered under the laws of the Russian Federation. Other subsidiaries are property or investment holding companies by their nature.

2. Basis of preparation and significant accounting policies

Statement of compliance

These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards ("IFRS") as issued by the International Accounting Standards Board (IASB).

2.1. Basis of preparation

The consolidated financial statements have been prepared on a historical cost basis, except for as described in accounting policies below. The consolidated financial statements are presented in Russian roubles and all values are rounded to the nearest thousand (RUB 000), except when otherwise indicated.

The principal accounting policies applied in the preparation of these consolidated financial statements are set out below. These policies have been consistently applied to all the periods presented unless otherwise stated.

Management has considered the Group's cash flow forecasts for the foreseeable future, which take into account the current and expected economic situation in Russia, the Group's financial position, available borrowing facilities, and loan covenant compliance, planned store opening program and the anticipated cash flows and related expenditures from retail stores.

Accordingly, management is satisfied that it is appropriate to adopt the going concern basis of accounting in preparing the consolidated financial information for these consolidated financial statements.

At 31 December 2019, the Group had net current liabilities of RUB 6,848,744 (net current assets at 31 December 2018: 11,204,494).

Unused credit facilities available as of 31 December 2019 were RUB 89,136,000. Management believes that operating cash flows and available borrowing capacity will provide the Group with adequate resources to fund its liabilities for the next year.

2.2 Summary of significant accounting policies

Business combinations and goodwill

Business combinations are accounted for using the acquisition method. The cost of an acquisition is measured as the aggregate of the consideration transferred measured at acquisition date fair value and the amount of any non-controlling interest in the acquiree. For each business combination, the Group elects whether to measure the non-controlling interest in the acquiree at fair value or at the proportionate share of the acquiree's identifiable net assets. Acquisition-related costs are expensed as incurred and included in administrative expenses.

When the Group acquires a business, it assesses the financial assets and liabilities assumed for appropriate classification and designation in accordance with the contractual terms, economic circumstances and pertinent conditions as at the acquisition date. This includes the separation of embedded derivatives in host contracts by the acquiree.

If the business combination is achieved in stages, the previously held equity interest is remeasured at its acquisition date fair value and any resulting gain or loss is recognised in profit or loss.

Any contingent consideration to be transferred by the acquirer will be recognised at fair value at the acquisition date. Subsequently contingent consideration classified as an asset or liability is measured at fair value with changes in fair value recognised in the consolidated statement of profit or loss. Contingent consideration that is classified as equity is not remeasured and subsequent settlement is accounted for within equity.

Goodwill is initially measured at cost, being the excess of the aggregate of the consideration transferred and the amount recognised for non-controlling interest over the net identifiable assets acquired and liabilities assumed.

If the fair value of the net assets acquired is in excess of the aggregate consideration transferred, the gain is recognised in profit or loss.

After initial recognition, goodwill is measured at cost less any accumulated impairment losses. For the purpose of impairment testing, goodwill acquired in a business combination is, from the acquisition date, allocated to each of the Group's cash-generating units that are expected to benefit from the combination, irrespective of whether other assets or liabilities of the acquiree are assigned to those units.

Where goodwill has been allocated to a cash-generating unit and part of the operation within that unit is disposed of, the goodwill associated with the disposed operation is included in the carrying amount of the operation when determining the gain or loss from disposal. Goodwill disposed in these circumstances is measured based on the relative values of the disposed operation and the portion of the cash-generating unit retained.

Current versus non-current classification

The Group presents assets and liabilities in statement of financial position based on current/ non current classification. An asset is current when it is: • Expected to be realised or intended to sold or consumed in normal operating cycle;

• Held primarily for the purpose of trading;

• Expected to be realised within twelve months after the reporting period; or

• Cash or cash equivalent unless restricted from being exchanged or used to settle a liability for at least twelve months after the reporting period.

non-current. A liability is current when:

All other assets are classified as • It is expected to be settled in normal

operating cycle; • It is held primцarily for the purpose

of trading;

• It is due to be settled within twelve

months after the reporting period; or • There is no unconditional right to defer the settlement of the liability for at least twelve months after the reporting period.

The Group classifies all other liabilities as non-current.

Deferred tax assets and liabilities are classified as non-current assets and liabilities.

Fair value measurement

The Group measures financial instruments, such as, derivatives at fair value at each balance sheet date. Also, fair values of financial instruments measured at amortised cost are disclosed in Note 28.

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value measurement is based on the presumption that the transaction to sell the asset or transfer the liability takes place either:

• In the principal market for the asset or liability; or

• In the absence of a principal market, in the most advantageous market for the asset or liability.

The principal or the most advantageous market must be accessible by the Group.

The fair value of an asset or a liability is measured using the assumptions that market participants would use when pricing the asset or liability, assuming that market participants act in their economic best interest.

A fair value measurement of a non-financial asset takes into account a market participant's ability to generate economic benefits by using the asset in its highest and best use or by selling it to another market participant that would use the asset in its highest and best use.

The Group uses valuation techniques that are appropriate in the circumstances and for which sufficient data are available to measure fair value, maximising the use of relevant observable inputs and minimising the use of unobservable inputs.

All assets and liabilities for which fair value is measured or disclosed in the financial statements are categorised within the fair value hierarchy, described as follows, based on the lowest level input that is significant to the fair value measurement as a whole:

• Level 1 – quoted (unadjusted) market prices in active markets for identical assets or liabilities.

• Level 2 – valuation techniques for which the lowest level input that is significant to the fair value measurement is directly or indirectly observable.

• Level 3 – valuation techniques for which the lowest level input that is significant to the fair value measurement is unobservable.

For assets and liabilities that are recognised in the financial statements on a recurring basis, the Group determines whether transfers have occurred between Levels in the hierarchy by re assessing categorisation (based on the lowest level input that is significant to the fair value measurement as a whole) at the end of each reporting period.

For the purpose of fair value disclosures, the Group has determined classes of assets and liabilities on the basis of the nature, characteristics and risks of the asset or liability and the level of the fair value hierarchy as explained above.

Functional and presentation currency

The presentation and functional currency of all Group entities is the Russian rouble ("RUB"), the national currency of the Russian Federation,

L enta L td . and s u b sidiaries

080 L E N T A 081 A N N U A L R E P O R T A N D A C C O U N T S 2019

L E N T A A N N U A L R E P O R T A N D A C C O U N T S 2019

the primary economic environment in which operating entities function.

Transactions in foreign currencies are initially recorded by the Group's entities at the functional currency spot rates at the date the transaction first qualifies for recognition.

Monetary assets and liabilities denominated in foreign currencies are translated at the functional currency spot rates of exchange at the reporting date. Differences arising on settlement or translation of monetary items are recognised in profit or loss.

Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rates at the dates of the initial transactions. Non-monetary items measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value is determined. The gain or loss arising on translation of non-monetary items measured at fair value is treated in line with the recognition of gain or loss from change in fair value of the item.

Property, plant and equipment

Property, plant and equipment are initially recorded at purchase or construction cost. Cost of replacing major parts or components of property, plant and equipment items is capitalised and the replaced part is retired. All other repair and maintenance costs are expensed as incurred.

Property, plant and equipment are stated at cost, net of accumulated depreciation and accumulated impairment losses, if any.

Gains and losses on disposals determined by comparing net proceeds with the respective carrying amount are recognised in profit or loss.

Construction in progress comprises costs directly related to the construction of property, plant and equipment including an appropriate allocation of directly attributable variable overheads that are incurred in construction. Depreciation of an asset begins when it is available for use, i.e. when it is in the location and condition necessary for it to be capable of operating in the manner intended by management. Construction in progress is reviewed regularly to determine whether its carrying value is recoverable and whether appropriate impairment loss has been recognised.

Properties in the course of construction for production, rental or administrative purposes, or for purposes not yet determined, are carried at cost, less any recognised impairment loss. Depreciation of these assets, on the same basis as other property assets, commences when the assets are ready for their intended use.

Depreciation

Depreciation of property, plant and equipment is calculated using the straight-line method to write off their cost to their residual values over their estimated useful lives:

Useful lives in years

Buildings	30
Land improvements (Notes 3, 7)	7
Machinery and equipment	2 to 15

Leases

The Group has lease contracts for land and buildings. Before the adoption of IFRS 16, the Group classified each of its leases (as lessee) at the inception date as operating lease. In an operating lease, the leased property was not capitalised and the lease payments were recognised as rent expense in the statement of profit or loss on a straight-line basis over the lease term. Any prepaid rent and accrued rent were recognised under advances paid and trade and other payables, respectively.

IFRS 16 is effective for annual periods beginning on or after 1 January 2019.

Upon adoption of IFRS 16 the Group recognises right-of-use assets and lease liabilities for those leases previously classified as operating leases, except for short-term leases.

Set out below are the new accounting policies of the Group:

Right-of-use assets

The Group recognises right-of-use assets at the commencement date of the lease (i.e., the date the underlying asset is available for use). Right-of-use assets are measured at cost, less any accumulated depreciation and impairment losses, and adjusted for any remeasurement of lease liabilities. The cost of right-of-use assets includes the amount of lease liabilities recognised, initial direct costs incurred, and lease payments made at or before the commencement date less any lease incentives received. Unless the Group is reasonably certain to obtain ownership of the leased asset at the end of the lease term, the recognised right-of-use assets are depreciated on a straight-line basis over the shorter of its estimated useful life and the lease term.

Depreciations is charged to profit or loss, except for depreciation of right-of-use assets representing right to use leased land plots during the construction process, which is included in carrying value of assets under construction. Right-of-use assets are subject to impairment.

Lease liabilities

At the commencement date of the lease, the Group recognises lease liabilities measured at the present value of lease payments to be made over the lease term. The lease payments include fixed payments (including in-substance fixed payments) less any lease incentives receivable, variable lease payments that depend on an index or a rate, and amounts expected to be paid under residual value guarantees. The lease payments also include the exercise price of a purchase option reasonably certain to be exercised by the Group and payments of penalties for terminating a lease, if the lease term reflects the Group exercising the option to terminate. The variable lease payments that do not depend on an index or a rate are recognised as expense in the period on which the event or condition that triggers the payment occurs.

In calculating the present value of lease payments, the Group uses the incremental borrowing rate at the lease commencement date if the interest rate implicit in the lease is not readily determinable. After the commencement date, the amount of lease liabilities is increased to reflect the accretion of interest and reduced for the lease payments made. In addition, the carrying amount of lease liabilities is remeasured if there is a modification, a change in the lease term, a change in the in-substance fixed lease payments or a change

in the assessment to purchase the

underlying asset.

Short-term leases

The Group applies the short-term lease recognition exemption to its short-term leases (i.e., those leases that have a lease term of 12 months or less from the commencement date or initial application date and do not contain a purchase option). Lease payments on short- term leases are recognised as expense on a straightline basis over the lease term.

Lease and non-lease components

At initial application and subsequently as well the Group accounts for lease and non-lease components (e.g. advertising, maintenance fees etc.) separately.

Intangible assets

Intangible assets acquired separately are measured on initial recognition at cost. The cost of intangible assets acquired in a business combination is their fair value at the date of acquisition. Following initial recognition, intangible assets are carried at cost less any accumulated amortisation and accumulated impairment losses. Internally generated intangible assets, excluding capitalised development costs, are not capitalised and expenditure is reflected in profit and loss in the period in which the expenditure is incurred.

The useful lives of intangible assets are assessed as either finite or indefinite.

Intangible assets with finite lives are amortised over the useful economic life (which is from 3 to 7 years) using a straight-line method to write off their cost to their residual values and assessed for impairment whenever there is an indication that the intangible asset may be impaired. The amortisation period and the amortisation method for an intangible asset with a finite useful life Intangible assets with indefinite

are reviewed at least at the end of each reporting period. Changes in the expected useful life or the expected pattern of consumption of future economic benefits embodied in the asset are considered to modify the amortisation period or method, as appropriate, and are treated as changes in accounting estimates. The amortisation expense on intangible assets with finite lives is recognised in the statement of profit or loss and other comprehensive income as the expense category that is consistent with the function of the intangible assets or included into the carrying amount of an asset as appropriate. useful lives are not amortised, but are tested for impairment annually, either individually or at the cash-generating unit level. The assessment of indefinite life is reviewed annually to determine whether the indefinite life continues to be supportable. If not, the change in useful life from indefinite to finite is made on a prospective basis.

Gains or losses arising from derecognition of an intangible asset are measured as the difference between the net disposal proceeds and the carrying amount of the asset and are recognised in the profit or loss when the asset is derecognised.

Impairment of non-financial assets

At each reporting date, the Group reviews the carrying amounts of its non-financial assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). Where it is not possible to estimate the recoverable amount of an individual asset, the Group estimates the recoverable amount of the cash-generating unit to which the asset belongs. Where a reasonable and consistent basis of allocation can be identified, corporate assets are also allocated to individual cash-generating unit, or otherwise they are allocated to the smallest group of cash-generating units for which a reasonable and consistent allocation basis can be identified.

The recoverable amount of an asset or a cash-generating unit is the higher of its fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted.

If the recoverable amount of an asset (or a cash-generating unit) is estimated to be less than its carrying amount, the carrying amount of the asset (the cash-generating unit) is reduced to its recoverable amount. An impairment loss is recognised immediately in profit or loss.

Where an impairment loss subsequently reverses, the carrying amount of the asset (the cash generating unit) is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset (the cash-generating unit) in prior years. A reversal of an impairment loss is recognised immediately in profit or loss.

The Group classifies non-current assets and disposal groups as held for sale if their carrying amounts will be recovered principally through a sale transaction rather than through continuing use. Non-current assets and disposal groups classified as held for sale are measured at the lower of their carrying amount and fair value less costs to sell. Costs to sell are the incremental costs directly attributable to the disposal of an asset (disposal group), excluding finance costs and income tax expense.

The criteria for held for sale classification is regarded as met only when the sale is highly probable and the asset or disposal group is available for immediate sale in its present condition. Actions required to complete the sale should indicate that it is unlikely that significant changes to the sale will be

O 1 › S T R A T E G I C R E P O R T O 2 › C O R P O R A T E G O V E R N A N C E

O 3 › F I N A N C I A L S T A T E M E N T S O 4 › APPENDICES

L enta L td . and s u b sidiaries

082 L E N T A 083 A N N U A L R E P O R T A N D A C C O U N T S 2019

L E N T A A N N U A L R E P O R T A N D A C C O U N T S 2019

made or that the decision to sell will be withdrawn. Management must be committed to the plan to sell the asset and the sale expected to be completed within one year from the date of the classification.

Property, plant and equipment and intangible assets are not depreciated or amortised once classified as held for sale.

Assets and liabilities classified as held for sale are presented separately as current items in the statement of financial position.

A disposal group qualifies as a discontinued operation if it is a component of an entity that either has been disposed of, or is classified as held for sale, and:

• Represents a separate major line of business or geographical area of operations;

• Is part of a single co-ordinated plan to dispose of a separate major line of business or geographical area of operations; or

• Is a subsidiary acquired exclusively with a view to resale.

Discontinued operations are excluded from the results of continuing operations and are presented as a single amount as profit or loss after tax from discontinued operations in the statement of profit or loss.

Income taxes

Income taxes have been provided for in the consolidated financial statements in accordance with management's interpretation of the relevant legislation enacted or substantively enacted as at the reporting date. The income tax charge comprises current tax and deferred tax and is recognised in the consolidated statement of profit or loss and other comprehensive income unless it relates to transactions that are recognised, in the same or a different period, directly in equity. In the case of a business combination, the tax effect is taken into account in calculating goodwill or determining the excess of the acquirer's interest in the net fair value of the acquiree's identifiable assets, liabilities and contingent liabilities over cost of consideration paid.

Current tax is the amount expected to be paid to or recovered from the taxation authorities in respect of taxable profits or losses for the current and prior periods. Deferred income tax is recorded using the balance sheet liability method for tax loss carry-forwards and temporary differences arising between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. Deferred tax balances are measured at tax rates enacted or substantively enacted at the reporting date, which are expected to apply to the period when the temporary differences will reverse or the tax loss carry-forwards will be utilised. Deferred tax assets and liabilities are netted only within the individual companies of the Group. Deferred tax assets for deductible temporary differences and tax loss carry-forwards are recorded only to the extent that it is probable that

future taxable profit will be available against which the deductions can be utilised. Deferred tax liabilities are recognised for all taxable temporary

differences, except: • When the deferred tax liability arises from the initial recognition of goodwill or an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss.

• In respect of taxable temporary differences associated with investments in subsidiaries, associates and interests in joint ventures, when the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future.

Deferred tax assets are recognised for all deductible temporary differences, the carry-forward of unused tax credits and any unused tax losses to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, and the carry-forward of unused tax credits and unused tax losses can be utilised, except:

• When the deferred tax asset relating to the deductible temporary difference arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss.

• In respect of deductible temporary differences associated with investments in subsidiaries, associates and interests in joint ventures, deferred tax assets are recognised only to the extent that it is probable that the temporary differences will reverse in the foreseeable future and taxable profit will be available against which the temporary differences can be utilised.

The carrying amount of deferred tax assets is reviewed at each reporting date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered.

The measurement of deferred tax liabilities and assets reflects the tax consequences that would follow from the manner in which the Group expects, at the reporting date, to recover or settle the carrying amount of its assets and liabilities.

Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current tax liabilities and when they relate to income taxes levied by the same taxation authority and the Group intends to settle its current tax assets and liabilities on a net basis.

Inventories

Inventories are stated at the lower of cost and net realisable value. Cost of inventory is determined on the weighted average basis. Net realisable value is the estimated selling price in the ordinary course of business, less the cost of completion and selling expenses. Cost comprises of the direct cost of goods, transportation and handling costs. Cost of sales comprises only of cost of inventories sold through retail stores and inventory write-downs made during the period.

Borrowing costs

Borrowing costs directly attributable to the acquisition, construction or production of qualifying assets are capitalised as part of the cost of that asset, other borrowing costs are recognised in profit or loss in the period in which they are incurred. A qualifying asset is an asset that necessarily takes a substantial period of time to get ready for its intended use or sale. For the purposes of borrowing costs recognition, a substantial period of time is considered to be a period

of twelve months or more.

To the extent that the Group borrows funds generally and uses them for the purpose of obtaining a qualifying asset, the Group determines the amount of borrowing costs eligible for capitalisation by applying a capitalisation rate to the expenditures on that asset. The capitalisation rate is the weighted average of the borrowing costs applicable to the borrowings of the Group that are outstanding during the period, other than borrowings made specifically for the purpose of obtaining a qualifying asset.

Revenue from contracts with

customers

The sole source of revenue from contracts with customers is retail sales. The Group recognises revenue when control of the goods and services is transferred to the customer, generally for the retail customers it is occurred in the stores at the point of sale. Payment of the transaction price is due immediately when the customer purchases goods. The customers have right of return, which is regulated by Russian legislation and is possible within up to 14 days since the purchase with the exception for certain categories of goods. Accumulated experience is used to estimate such returns at the time of sale at a portfolio level (expected value method). Because the number of products returned has been steady for years, it is highly probable that a significant reversal in the cumulative revenue recognised will not occur. The validity of this assumption and the estimated amount of returns are reassessed at each reporting date.

The loyalty programme offered by the Group gives rise to a separate performance obligation because it generally provides a material right to the customer. The Group allocates a portion of the transaction price to the loyalty programme based on relative stand-alone selling price and recognize as a contract liability.

Other income

Income generated from rental of spaces for small trading outlets within the Group's stores is recognised in the end of each month on a straight-line basis over the period of the lease, in accordance with the terms of the relevant lease agreements.

Sale from secondary materials is recognized within the other operating income in the consolidated statement of profit or loss and other comprehensive income at a point in time.

Interest income is recognised on a time-proportion basis using the effective interest rate method. Interest income is included into the Interest income line in the consolidated statement of profit or loss and other comprehensive income.

Suppliers' allowances

The Group receives various types of allowances from vendors in the form of volume discounts and other forms of payments that effectively reduce the cost of goods purchased from the vendor. These allowances received from suppliers are recorded as a reduction in the price paid for the products and reduce cost of goods sold in the period the products are sold. Where a rebate agreement with a supplier covers more than one year, the rebates are recognised in the period in which they are earned.

Employee benefits

The Group is subject to mandatory contributions to the Russian Federation defined contribution state pension benefit fund. Wages, salaries, contributions to the state pension and social insurance funds, paid annual leave and sick leave, bonuses, and non-monetary benefits are accrued in the year in which the associated services are rendered by the employees of the Group.

Share-based payments

Certain employees (including senior executives) of the Group receive remuneration in the form of sharebased payments, whereby employees render services as consideration for equity instruments (equity-settled transactions).

The cost of equity-settled transactions is determined by the fair value at the date when the grant is made using an appropriate valuation model.

That cost is recognised, together with a corresponding increase in share options reserve in equity, over the period in which the performance and/or service conditions are fulfilled in employee benefits expense (Note 26). The cumulative expense recognised for equity-settled transactions at each reporting date until the vesting date reflects the extent to which the vesting period has expired and the Group's best estimate of the number of equity instruments that will ultimately vest. The statement of profit or loss expense or credit for a period represents the movement in cumulative expense recognised as at the beginning and end of that period and is recognised in employee benefits expense (Note 26).

No expense is recognised for awards that do not ultimately vest, except for equity-settled transactions for which vesting is conditional upon a market or non-vesting condition. These are treated as vested irrespective of whether or not the market or non-vesting condition is satisfied, provided that all other performance and/or service conditions are satisfied.

When the terms of an equity-settled award are modified, the minimum expense recognised is the expense had the terms had not been modified, if the original terms of the award are met. An additional expense is recognised for any modification that increases the total fair value of the

O 1 › S T R A T E G I C R E P O R T O 2 › C O R P O R A T E G O V E R N A N C E

O 3 › F I N A N C I A L S T A T E M E N T S O 4 › APPENDICES

L enta L td . and s u b sidiaries

084 L E N T A 085 A N N U A L R E P O R T A N D A C C O U N T S 2019

L E N T A A N N U A L R E P O R T A N D A C C O U N T S 2019

share-based payment transaction, or is otherwise beneficial to the employee as measured at the date of modification.

Segment reporting

The Group's business operations are located in the Russian Federation and relate primarily to retail sales of consumer goods. Although the Group operates through different stores and in various regions within the Russian Federation, the Group's chief operating decision maker reviews the Group's operations and allocates resources on an individual store-bystore basis. The Group has assessed the economic characteristics of the individual stores and determined that the stores have similar margins, similar products, similar types of customers and similar methods of distributing such products. Therefore, the Group considers that it only has one reportable segment under IFRS 8. Segment performance is evaluated based on a measure of revenue and earnings before interest, tax, depreciation and amortisation (EBITDA). EBITDA is a non-IFRS measure. Other information is measured in a manner consistent with that in the consolidated financial statements.

Seasonality

The Group's business operations are stable during the year with limited seasonal impact, except for a significant increase of business activities in December.

Financial assets

Initial measurement

The classification of financial instruments at initial recognition depends on their contractual terms and the business model for managing the instruments. Financial instruments are initially measured at their fair value and, except in the case of financial assets and financial liabilities recorded at FVPL, transaction costs are added to, or subtracted from, this amount.

Measurement categories of financial assets

The Group classifies all of its financial assets based on the business model for managing the assets and the asset's contractual terms, measured at either:

Amortised cost;
FVOCI; • FVPL.

Loans and receivables

Trade receivables, loans, and other receivables that have fixed or determinable payments that are not quoted in an active market are classified as loans and receivables.

The Group measures amounts of loans and receivables at amortised cost if both of the following conditions are met:

• The financial asset is held within a business model with the objective to hold financial assets in order to collect contractual cash flows;

• The contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding (SPPI).

The details of these conditions are outlined below.

Business model

assessment

The Group determines its business model at the level that best reflects how it manages groups of financial assets to achieve its business objective.

The Group's business model is not assessed on an instrument-by-instrument basis, but at a higher level of aggregated portfolios and is based on observable factors such as:

• How the performance of the business model and the financial assets held within that business model are evaluated and reported to the entity's key management personnel;

• The risks that affect the performance of the business model (and the financial assets held within that business model) and, in particular, the way those risks are managed;

• How managers of the business are compensated (for example, whether the compensation is based on the fair value of the assets managed or on the contractual cash flows collected);

• The expected frequency, value and timing of sales are also important aspects of the Group's assessment.

The business model assessment is based on reasonably expected scenarios without taking "worst case" or "stress case" scenarios into account. If cash flows after initial recognition are realised in a way that is different from the Group's original expectations, the Group does not change the classification of the remaining financial assets held in that business model, but incorporates such information when assessing newly originated or newly purchased financial assets going forward.

The SPPI test

As a second step of its classification process the Group assesses the contractual terms of financial asset to identify whether they meet the SPPI test.

"Principal" for the purpose of this test is defined as the fair value of the financial asset at initial recognition and may change over the life of the financial asset (for example, if there are repayments of principal or amortisation of the premium/discount).

The most significant elements of interest within a lending arrangement are typically the consideration for the time value of money and credit risk. To make the SPPI assessment, the Group applies judgement and considers relevant factors such as the currency in which the financial asset is denominated, and the period for which the interest rate is set.

In contrast, contractual terms that introduce a more than de minimis exposure to risks or volatility in the contractual cash flows that are unrelated to a basic lending arrangement do not give rise to contractual cash flows that are solely payments of principal and interest on the amount outstanding. In such cases, the financial asset is required to be measured at FVPL.

Cash and cash equivalents

Cash and short-term deposits in the statement of financial position comprise cash at banks and on hand and short-term deposits with a maturity of three months or less.

Impairment of financial assets

The Group recognises an allowance for expected credit losses (ECLs) for all debt instruments not held at fair value through profit or loss. ECLs are based on the difference between the contractual cash flows due in accordance with the contract and all the cash flows that the Group expects to receive, discounted at an approximation of the original effective interest rate. The expected cash flows will include cash flows from the sale of collateral held or other credit enhancements that are integral to the contractual terms.

ECLs are recognised in two stages. For credit exposures for which there has not been a significant increase in credit risk since initial recognition, ECLs are provided for credit losses that result from default events that are possible within the next 12-months (a 12-month ECL). For those credit exposures for which there has been a significant increase in credit risk since initial recognition, a loss allowance is required for credit losses expected over the remaining life of the exposure, irrespective of the timing of the default (a lifetime ECL).

For trade receivables and contract assets, the Group applies a simplified approach in calculating ECLs. Therefore, the Group does not track changes in credit risk, but instead recognises a loss allowance based on lifetime ECLs at each reporting date. The Group has established a provision matrix that is based on its historical credit loss experience, adjusted for forward-looking factors specific to the debtors and the economic environment.

The Group's cash and cash equivalents have been assigned low credit risk based on the external credit ratings of the respective banks and financial institutions.

Derecognition of financial assets

A financial asset is derecognised when:

• The rights to receive cash flows from the asset have expired;

• The Group has transferred its rights to receive cash flows from the asset or has assumed an obligation to pay the received cash flows in full without material delay to a third party under a "pass-through" arrangement; and either (a) the Group has transferred substantially all the risks and rewards of the asset, or (b) the Group has neither transferred nor retained substantially all the risks and rewards of the asset but has transferred control of the asset. When the Group has transferred its rights to receive cash flows from an asset or has entered into a passthrough arrangement, and has neither transferred nor retained substantially all of the risks and rewards of the asset nor transferred control of the asset, the asset is recognised to the extent of the Group's continuing involvement

in the asset.

In that case, the Group also recognises an associated liability. The transferred asset and the associated liability are measured on a basis that reflects the rights and obligations that the Group has retained.

Continuing involvement that takes the form of a guarantee over the transferred asset is measured at the lower of the original carrying amount of the asset and the maximum amount of consideration that the Group could be required to repay.

Financial liabilities and equity instruments issued by the Group Treasury shares

Own equity instruments that are reacquired (treasury shares) are recognised at cost and deducted from equity. No gain or loss is recognised in the statement of profit or loss and other comprehensive income on the purchase, sale, issue or cancellation of the Group's own equity instruments. Any difference between the carrying amount and the consideration, if reissued, is recognised in additional paid-in capital. Voting rights related to treasury shares are nullified for the Group and no dividends are allocated to them. Share options exercised during the reporting period are satisfied with treasury shares.

Share capital

Ordinary shares are classified as equity. Transaction costs of a share issue are shown within equity as a deduction from the equity.

Additional paid-in capital

Additional paid-in capital represents the difference between the fair value of consideration received and the nominal value of the issued shares.

Earnings per share

Basic earnings per share amounts are calculated by dividing the net profit for the year attributable to ordinary equity holders of the parent by the weighted average number of ordinary shares outstanding during the year.

Diluted earnings per share amounts are calculated by dividing the net profit attributable to ordinary equity holders of the parent (after adjusting for interest on the convertible preference shares) by the weighted average number of ordinary shares outstanding during the year plus the weighted average number of ordinary shares that would be issued on conversion of all the dilutive potential ordinary shares into ordinary shares.

Classification as debt or equity

Debt and equity instruments are classified as either financial liabilities or as equity in accordance with the substance of the contractual arrangement. An equity instrument is any contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities. Equity instruments are recorded at the proceeds received, net of transaction costs.

Financial liabilities

Financial liabilities of the Group, including borrowings and trade and other payables, are initially recognised at fair value, net of transaction costs, and subsequently measured at amortised cost using the effective interest rate method.

Derecognition of financial liabilities

The Group derecognises financial liabilities when, and only when, the Group's obligations are discharged, cancelled or they expire.

Offsetting of financial instruments

Financial assets and financial liabilities are offset and the net amount is reported in the consolidated state-

L enta L td . and s u b sidiaries

086 L E N T A 087 A N N U A L R E P O R T A N D A C C O U N T S 2019

L E N T A A N N U A L R E P O R T A N D A C C O U N T S 2019

ment of financial position if there is a currently enforceable legal right to offset the recognised amounts and there is an intention to settle on a net basis, to realise the assets and settle the liabilities simultaneously.

Derivative financial instruments and hedge accounting

Initial recognition and subsequent measurement

The Group uses derivative financial instruments, such as interest rate swaps and caps, to hedge its interest rate risks. Such derivative financial instruments are initially recognised at fair value on the date on which a derivative contract is entered into and are subsequently re-measured at fair value. Derivatives are carried as financial assets when the fair value is positive and as financial liabilities when the fair value is negative.

Any gains or losses arising from changes in the fair value of derivatives are taken directly to profit or loss, except for the effective portion of cash flow hedges, which is recognised in OCI and later reclassified to profit or loss when the hedge item affects profit or loss.

At the inception of a hedge relationship, the Group formally designates and documents the hedge relationship to which the Group wishes to apply hedge accounting and the risk management objective and strategy for undertaking the hedge. The documentation includes identification of the hedging instrument, the hedged item or transaction, the nature of the risk being hedged and how the entity will assess the effectiveness of changes in the hedging instrument's fair value in offsetting the exposure to changes in the hedged item's fair value or cash flows attributable to the hedged risk. Such hedges are expected to be highly effective in achieving offsetting changes in fair value or cash flows and are assessed on an ongoing basis to determine that they actually have been highly effective throughout the financial reporting periods for which they were designated.

Swaps and caps used by the Group that meet the strict criteria for hedge accounting are accounted for as cash flow hedges. The effective portion of the gain or loss from the hedging instrument is recognised in other comprehensive income in the cash flow hedge reserve, while any ineffective portion is recognised immediately in profit or loss as other operating expenses.

Designation of a hedge relationship takes effect prospectively from the date all of the criteria are met. In particular, hedge accounting can be applied only from the date all of the necessary documentation is completed. Therefore, hedge relationships cannot be designated retrospectively.

Amounts recognised as OCI are transferred to profit or loss when the hedged transaction affects profit or loss, such as when the hedged financial income or financial expense is recognised or when a forecast sale occurs.

When the hedged item is the cost of a non-financial asset or non-financial liability, the amounts recognised as OCI are transferred to the initial carrying amount of the non-financial asset or liability.

If the hedging instrument expires or is sold, terminated or exercised without replacement or rollover (as part of the hedging strategy), or if its designation as a hedge is revoked, or when the hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss previously recognised in OCI remains separately in equity until the forecast transaction occurs or the foreign currency firm commitment is met.

Current versus non-current classification

Derivative instruments are classified as current or non-current or separated into current and non current portions based on an assessment of the facts and circumstances (i.e., the underlying contracted cash flows):

• When the Group expects to hold a derivative as an economic hedge for a period beyond 12 months after the reporting date, the derivative is classified as non-current (or separated into current and non-current portions) consistent with the classification of the underlying item.

2.3 Basis of consolidation

The consolidated financial statements incorporate the financial statements of the Company and other entities controlled by the Company (its subsidiaries) as at 31 December 2019. Control is achieved when the Group is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee.

Specifically, the Group controls an investee if and only if the Group has:

• Power over the investee (i.e. existing rights that give it the current ability to direct the relevant activities of the investee);

• Exposure, or rights, to variable returns from its involvement with the investee; and

• The ability to use its power over the investee to affect its returns.

Generally, there is a presumption that a majority of voting rights result in control. To support this presumption and when the Group has less than a majority of the voting or similar rights of an investee, the Group considers all relevant facts and circumstances in assessing whether it has power over an investee, including:

• The contractual arrangement with the other vote holders of the investee;

• Rights arising from other contractual arrangements;

• The Group's voting rights and potential voting rights.

The Group re-assesses whether or not it controls an investee if facts and circumstances indicate that there are changes to one or more of the three elements of control. Consolidation of a subsidiary begins when the Group obtains control over the subsidiary and ceases when the Group loses control of the subsidiary. Assets, liabilities, income and expenses of a subsidiary acquired or disposed of during the year are included in the statement of comprehensive income from the date the Group gains control until the date the Group ceases to control the subsidiary.

Profit or loss and each component of other comprehensive income (OCI) are attributed to the equity holders of the parent of the Group and to the non-controlling interests, even if this results in the non-controlling interests having a deficit balance. When necessary, adjustments are made to the financial statements of subsidiaries to bring their accounting policies into line with the Group's accounting policies. All intra-group assets and liabilities, equity, income, expenses and cash flows relating to transactions between members of the Group are eliminated

in full on consolidation. A change in the ownership interest of a subsidiary, without a loss of control, is accounted for as an equity transaction. If the Group loses control over a subsidiary, it derecognises the related assets (including goodwill), liabilities, non-controlling interest and other components of equity while any resultant gain or loss is recognised in profit or loss. Any investment retained is recognised at fair value.

Subsidiaries are those companies (including special purpose entities) in which the Group, directly or indirectly, has an interest of more than one half of the voting rights or otherwise has power to govern the financial and operating policies so as to obtain economic benefits and which are neither associates nor joint ventures. The existence and effect of potential voting rights that are presently exercisable or presently convertible are considered when assessing whether the Group controls another entity. Subsidiaries are consolidated from the date on which control is transferred to the Group (acquisition date) and are de-consolidated from the date that control ceases.

3. Significant accounting judgments, estimates and assumptions

In the application of the Group's accounting policies, which are described in Note 2 above, management is required to make judgments, estimates and assumptions about the carrying amounts of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates.

The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period or in the period of the revision and future periods if the revision affects both current and future periods.

Judgments that have the most significant effect on the amounts recognised in these consolidated financial statements and estimates that can cause a significant adjustment to the carrying amount of assets and liabilities within the next financial year include:

Judgments

Assets versus business acquisition

From time to time in the normal course of business the Group acquires the companies that are a party to a lease contract, own the land plot or store in which the Group is interested. If at the date of acquisition by the Group, the company does not constitute an integrated set of activities and assets that is capable of being conducted and managed for the purpose of providing a return in the form of dividends, lower costs or other economic benefits directly to investor, the Group treats such acquisitions as a purchase of assets (a leasehold right, land plot or store) in the consolidated financial statements. The exercise of judgment determines whether a particular transaction is treated as a business combination or as a purchase of assets.

Estimates and assumptions

The key assumptions concerning the future and other key sources of estimation uncertainty at the reporting date, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year, are described below. The Group based its assumptions and estimates on parameters available when the consolidated financial statements were prepared. Existing circumstances and assumptions about future developments, however, may change due to market changes or circumstances arising beyond the control of the Group. Such changes are reflected in the assumptions when they occur.

Inventory valuation

Management reviews the inventory balances to determine if inventories can be sold at amounts greater than or equal to their carrying amounts plus costs to sell. This review also includes the identification of slow moving inventories, which are written down based on inventories ageing and write down rates. The write down rates are determined by management following the experience of sales of such items.

Tax legislation

Russian tax, currency and customs legislation is subject to frequent changes and varying interpretations. Management's interpretation of such legislation in applying it to business transactions of the Group may be challenged by the relevant regional and federal authorities enabled by law to impose fines and penalties. Recent events in the Russian Federation suggest that the tax authorities are taking a more assertive position in their interpretation of the legislation and assessments and as a result, it is possible that the transactions that have not been challenged in the past may be challenged. Fiscal periods remain open to review by the tax authorities in respect of taxes for the three calendar years preceding the year of tax review. Under certain circumstances reviews may cover longer periods. While the Group believes it has provided adequately for all tax liabilities based on its understanding of the tax legislation, the above facts may create additional financial risks for the Group.

Fair value measurement of financial instruments

When the fair value of financial assets and financial liabilities recorded in the statement of financial position cannot be derived from active markets, their fair value is determined using valuation techniques including the discounted cash flow model. The inputs to these models are taken from observable markets where possible, but where this

L enta L td . and s u b sidiaries

088 L E N T A 089 A N N U A L R E P O R T A N D A C C O U N T S 2019

L E N T A A N N U A L R E P O R T A N D A C C O U N T S 2019

is not feasible, a degree of judgment is required in establishing fair values. The judgments include considerations of inputs such as liquidity risk, credit risk and volatility. Changes in assumptions about these factors could affect the reported fair value of financial instruments. See Note 28 for further discussion.

Impairment of non-financial assets

The Group reviews the carrying amounts of its assets to determine whether there is any indication that those assets are impaired. Impairment exists when the carrying value of an asset or cash generating unit exceeds its recoverable amount, which is the higher of its fair value less costs to sell and its value in use.

The fair value less costs to sell calculation is based on available data from binding sales transactions, conducted at arm's length, for similar assets or observable market prices less incremental costs for disposing of the asset.

Due to their subjective nature, these estimates will likely differ from future actual results of operations and cash flows, and it is possible that these differences could be material.

The value in use calculation is based on a discounted cash flow model. In determining the value in use calculation, future cash flows are estimated from each store based on cash flows projection utilising the latest budget information available. The discounted cash flow model requires numerous estimates and assumptions regarding the future rates of market growth, market demand for the products and the future profitability of products.

Share-based payments

The Group measures the cost of equity-settled transactions by reference to the fair value of the equity instruments at the date at which they are granted. Estimating fair value for share-based payment transactions requires determination of the most appropriate valuation model, which is

dependent on the terms and conditions of the grant. This estimate also requires determination of the most appropriate inputs to the valuation model including the expected life of the share option, volatility and dividend yield and making assumptions about them. The assumptions and models used for estimating fair value for share-based payment transactions are disclosed in Note 26.

Property, plant and equipment

Since 1 January 2019 the Group reviewed economic useful life of Land improvements class of property, plant and equipment from 30 years to 7 years, as practice has proven that factual useful life of land improvements does not exceed 7 years. The effect of the change in accounting estimate was recognized prospectively by including it in profit or loss for the year ended 31 December 2019 in the amount of RUB 2,324,185 and also will affect future periods.

Lease term of contracts with renewal options

The Group determines the lease term as the non-cancellable term of the lease, together with any periods 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.

The Group has the option, under some of its leases to lease the assets for additional terms. The Group applies judgement in evaluating whether it is reasonably certain to exercise the option to renew. That is, it considers all relevant factors that create an economic incentive for it to exercise the renewal. After the commencement date, the Group reassesses the lease term if there is a significant event or change in circumstances that is within its control and affects its ability to exercise (or not to exercise) the option to renew (e.g., a change in business strategy).

For leased land plots under the stores the Group defines lease term as the longest of non-cancellable term of the lease or remaining useful life of a store. The Group typically exercises its option to renew for these leases because it has an exclusive right as an owner of real estate.

The periods covered by termination options are included as part of the lease term only when they are 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 term, • the amount needed to obtain an asset of a similar value to the rightof-use asset and

• in a similar economic environment.

4. New standards, interpretations and amendments adopted by the Group

The accounting policies adopted in the preparation of the consolidated financial statements are consistent with those followed in the preparation of the Group's annual consolidated financial statements for the year ended 31 December 2018, except for the adoption of new standards effective as of 1 January 2019. The Group has not early adopted any other standard, interpretation or amendment that has been issued but is not yet effective.

IFRS 16

The Group applies, for the first time, IFRS 16 Leases using the modified retrospective approach for all leases where it is the lessee, except for short-term leases.

The comparatives are not restated and the cumulative effect of initially applying the standard is recognised as an adjustment to the opening balance of retained earnings at the date of initial application. The Group recognised lease liabilities to make lease payments and right-of-use assets representing the right to use the underlying assets with corresponding effect recorded in retained earnings.

9	01 › S
	02 › C
	1

The nature and effect of these changes are disclosed below

Impact on the statement of financial position (increase/ (decrease)) as at 1 January 2019:

Non-current assets
Right-of-use assets	36,357,602
Leasehold rights	(3,170,537)
Other non-current assets	(468,753)
	32,718,312
Current assets
Advances paid	(141,724)
	(141,724)
Total assets	32,576,588
Equity
Retained earnings	(1,234,731)
Total equity	(1,234,731)
Non-current liabilities
Deferred tax liabilities	(308,683)

Long-term lease liabilities 32,081,145 31,772,462

Current liabilities Short-term lease liabilities 2,038,857

2,038,857 Total liabilities 33,811,319 Total equity and liabilities 32,576,588

The right-of-use assets for most leases were recognised based on the amount equal to the lease liabilities, adjusted for any related prepaid and accrued lease payments or leasehold rights previously recognised. In some leases, the right-of-use assets were recognized based on the carrying amount as if the standard had always been applied, apart from the use of incremental borrowing rate at the date of initial application.

The lease liabilities were measured at the present value of the remaining lease payments, discounted using the lessee's incremental borrowing rate at the date of initial application.

The Group also applied the available practical expedients wherein it: a) Used a single discount rate to a portfolio of leases with reasonably similar characteristics

b) Relied on its assessment of whether leases are onerous immediately before the date of initial application

c) Applied the short-term leases exemptions to leases with lease term that ends within 12 months at the date of initial application d) Used hindsight in determining the lease term where the contract contains options to extend or terminate the lease

Based on the foregoing, as at 1 January 2019:

a) Right-of -use assets of RUB 36,357,602 were recognised and presented separately in the statement of financial position. This amount includes "key money" of RUB 3,170,537 reclassified from leasehold rights, previously recognised guarantee payments of RUB 468,753 that should be offset against the last lease payment reclassified from other non-current assets and lease prepayments of RUB 141,724 reclassified from advances paid.

b) Additional lease liabilities of RUB 34,120,002 were recognised and presented separately in the statement of financial position.

c) Deferred tax liabilities decreased by RUB 308,683 because of the deferred tax impact of the changes in assets and liabilities.

d) The net effect of these adjustments had been adjusted to retained earnings in the amount of RUB 1,234,731 (loss).

	Right-of-use assets	Lease liabilities
	Land	Buildings	Total	TotaL
As at 1 January 2019	5,810,044	30,547,558	36,357,602	34,120,002
Additions	6,689	1,575,450	1,582,139	1,581,061
Depreciation charge	(211,615)	(3,639,216)	(3,850,831)	−
Impairment charge	(235,056)	−	(235,056)	−
Cancelation of lease contracts	(169,085)	(543,027)	(712,112)	(590,476)
Transfer to property, plant and equipment resulted from pur chase of the underlining assets in the lease	(267,167)	(207,132)	(474,299)	−
Interest expense	−	−	−	2,795,074
Payments for the principal portion of the lease liabilities	−	−	−	(2,848,226)
Сash payments for the interest portion of the lease liability	−	−	−	(2,795,074)
Foreign exchange gain	−	−	−	(102,355)
As at 31 December 2019	4,933,810	27,733,633	32,667,443	32,160,006
Current lease liabilities				2,639,784

Operating lease commitments as at 31 December 2018	64,061,649
Less commitments relating to short-term leases	3,752,584
Operating lease commitments subject to capitalization under IFRS 16	60,309,065
Weighted average incremental borrowing rate as at 1 January 2019	8.3%
Lease liabilities as at 1 January 2019	34,120,002

The lease liabilities as at 1 January 2019 can be reconciled to the operating lease commitments as of 31 December 2018 as follows

Transfer to property, plant and equipment resulted from purchase of the underlining assets in the lease.

Amounts recognised in the statement of financial position and profit or loss

Set out below, are the carrying amounts of the Group's rightof-use assets and lease liabilities and the movements during the

period:

O 2 › C O R P O R A T E G O V E R N A N C E O 3 › F I N A N C I A L S T A T E M E N T S O 4 › APPENDICES

L enta L td . and s u b sidiaries

090 L E N T A 091 A N N U A L R E P O R T A N D A C C O U N T S

2019

L E N T A A N N U A L R E P O R T A N D A C C O U N T S 2019

IFRIC Interpretation 23 Uncertainty over Income Tax Treatment

The Interpretation addresses the accounting for income taxes when tax treatments involve uncertainty that affects the application of IAS 12 Income Taxes. It does not apply to taxes or levies outside the scope of IAS 12, no does it specifically include requirements relating to interest and penalties associated with uncertain tax treatments

The Interpretation specifically addresses the following:

Whether an entity considers uncertain tax treatments separately
The assumptions an entity makes about the examination of tax treatments by taxation authorities

• How an entity determines taxable profit (tax loss), tax bases, unused tax losses, unused tax credits and tax rates • How an entity considers changes in facts and circumstances

An entity has to determine whether to consider each uncertain tax treatment separately or together with one or more other uncertain tax treatments. The approach that better predicts the resolution of the uncertainty needs to be followed.

The Group applies significant judgement in identifying uncertainties over income tax treatments. Since the Group operates in a complex multinational environment, it assessed whether the Interpretation had an impact on its consolidated financial statements.

Annual Improvements 2015-2017 cycle

IFRS 3 Business Combinations.

The amendments clarify that, when an entity obtains control of a business that is a joint operation, it applies the requirements for a business combination achieved in stages, including remeasuring previously held interests in the assets and liabilities of the joint operation at fair value. In doing so, the acquirer remeasures its entire previously held interest in the joint operation.

An entity applies those amendments to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after 1 January 2019, with early application permitted.

These amendments had no impact on the consolidated financial statements of the Group as there is no transaction where a joint control is obtained.

IFRS 11 Joint Arrangements

A party that participates in, but does not have joint control of, a joint operation might obtain joint control of the joint operation in which the activity of the joint operation constitutes a business as defined in IFRS 3. The amendments clarify that the previously held interests in that joint operation are not remeasured.

An entity applies those amendments to transactions in which it obtains joint control on or after the beginning of the first annual reporting period beginning on or after 1 January 2019, with early application permitted.

These amendments had no impact on the consolidated financial statements of the Group as there is no transaction where a joint control is obtained.

IAS 12 Income Taxes

The amendments clarify that the income tax consequences of dividends are linked more directly to past transactions or events that generated distributable profits than to distributions to owners. Therefore, an entity recognises the income tax consequences of dividends in profit or loss, other comprehensive income or equity according to where it originally recognised those past transactions or events

An entity applies the amendments for annual reporting periods beginning on or after 1 January 2019, with early application permitted. When the entity first applies those amendments, it applies them to the income tax consequences of dividends recognised on or after the beginning of the earliest comparative period.

Since the Group's current practice is in line with these amendments, they had no impact on the consolidated financial statements of the Group.

IAS 23 Borrowing Costs

The amendments clarify that an entity treats as part of general borrowings any borrowing originally made to develop a qualifying asset when substantially all of the activities necessary to prepare that asset for its intended use or sale are complete.

The entity applies the amendments to borrowing costs incurred on or after the beginning of the annual reporting period in which the entity first applies those amendments. An entity applies those amendments for annual reporting periods beginning on or after 1 January 2019, with early application permitted.

Since the Group has no qualifying assets, these amendments had no impact on the consolidated financial statements of the Group.

Reclassifications in the consolidated statement of financial position

Reclassification of share capital balance in the amount of RUB 284 to additional paid-in-capital was done as the Group's shares were restated to be of no par value.

5. Standards issued but not yet effective

The new and amended standards and interpretations that are issued, but not yet effective, up to the date of issuance of the Group's financial statements are disclosed below. The Group intends to adopt these new and amended standards and interpretations, if applicable, when they become effective.

IFRS 17 Insurance Contracts

In May 2017, the IASB issued IFRS 17 Insurance Contracts (IFRS 17), a comprehensive new accounting standard for insurance contracts covering recognition and measurement, presentation and disclosure. Once effective, IFRS 17 will replace IFRS 4 Insurance Contracts (IFRS 4) that was issued in 2005. IFRS 17 applies to all types of insurance contracts (i.e., life, non-life, direct insurance and re-insurance), regardless of the type of entities that issue them, as well as to certain guarantees and financial instruments with discretionary participation features. A few scope exceptions will apply. The overall objective of IFRS 17 is to provide an accounting model for insurance contracts that is more useful and consistent for insurers. In contrast to the requirements in IFRS 4, which are largely based on grandfathering previous local accounting policies, IFRS 17 provides a comprehensive model for insurance contracts, covering all relevant accounting aspects. The core of IFRS 17 is the general model, supplemented by:

• A specific adaptation for contracts with direct participation features (the variable fee approach)

• A simplified approach (the premium allocation approach) mainly for short-duration contracts

IFRS 17 is effective for reporting periods beginning on or after 1 January 2021, with comparative figures required. Early application is permitted, provided the entity also applies IFRS 9 and IFRS 15 on or before the date it first applies IFRS 17. This standard is not applicable to the Group.

Amendments to IFRS 3: Definition of a Business

In October 2018, the IASB issued amendments to the definition of a business in IFRS 3 Business Combinations to help entities determine whether an acquired set of activities and assets is a business or not. They clarify the minimum requirements for a business, remove the assessment

	Year ended 31 December 2019
Depreciation of right-of-use assets	3,850,831
Impairment of right-of-use assets	235,056
Capitalisation of depreciation to CIP	(30,025)
Interest expense on lease liabilities	2,795,074
Interest income on security deposits	(15,005)
Foreign exchange gain	(102,355)
Rent expense – short-term leases	888,393
Rent expense – variable lease payments	270,656
Total amounts recognised in profit or loss	7,892,625

Set out below, are the amounts recognised in profit or loss:

Several other amendments and interpretations apply for the first time in 2019, but do not have an impact on the consolidated financial statements of the Group.

Upon adoption of the Interpretation, the Group considered whether it has any uncertain tax positions. The Group determined that it is probable that its tax treatments will be accepted by the taxation authorities.

The interpretation did not have an impact on the consolidated financial statements of the Group.

Amendments to IFRS 9: Prepayment Features with Negative Compensation

Under IFRS 9, a debt instrument can be measured at amortised cost or at fair value through other comprehensive income, provided that the contractual cash flows are "solely payments of principal and interest on the principal amount outstanding" (the SPPI criterion) and the instrument is held within the appropriate business model for that classification. The amendments to IFRS 9 clarify that a financial asset passes the SPPI criterion regardless of an event or circumstance that causes the early termination of the contract and irrespective of which party pays or receives reasonable compensation for the early termination of the contract.

These amendments had no impact on the consolidated financial statements of the Group.

Amendments to IAS 19: Plan Amendment, Curtailment or Settlement

The amendments to IAS 19 address the accounting when a plan amendment, curtailment or settlement occurs during a reporting period. The amendments specify that when a plan amendment, curtailment or settlement occurs during the annual reporting period, an entity is required to determine the current service cost for the remainder of the period after the plan amendment, curtailment or settlement, using the actuarial assumptions used to remeasure the net defined benefit liability (asset) reflecting the benefits offered under the plan and the plan assets after that event. An entity is also required to determine the net interest for the remainder of the period after the plan amendment, curtailment or settlement using the net defined benefit liability (asset) reflecting the benefits offered under the plan and the plan assets after that event, and the discount rate used to remeasure that net defined benefit liability (asset).

These amendments had no impact on the consolidated financial statements.

Amendments to IAS 28: Long-term interests in Associates and Joint Ventures

The amendments clarify that an entity applies IFRS 9 to long-term interests in an associate or joint venture to which the equity method is not applied but that, in substance, form part of the net investment in the associate or joint venture (long-term interests). This clarification is relevant because it implies that the expected credit loss model in IFRS 9 applies to such long-term interests.

The amendments also clarified that, in applying IFRS 9, an entity does not take account of any losses of the associate or joint venture, or any impairment losses on the net investment, recognised as adjustments to the net investment in the associate or joint venture that arise from applying IAS 28 Investments in Associates and Joint Ventures.

These amendments had no impact on the consolidated financial statements.

L enta L td . and s u b sidiaries

092 L E N T A 093 A N N U A L R E P O R T A N D A C C O U N T S 2019

L E N T A A N N U A L R E P O R T A N D A C C O U N T S 2019

of whether market participants are capable of replacing any missing elements, add guidance to help entities assess whether an acquired process is substantive, narrow the definitions of a business and of outputs, and introduce an optional fair value concentration test. New illustrative examples were provided along with the amendments.

Since the amendments apply prospectively to transactions or other events that occur on or after the date of first application, the Group will not be affected by these amendments on the date of transition.

Amendments to IAS 1 and IAS 8: Definition of Material

In October 2018, the IASB issued amendments to IAS 1 Presentation of Financial Statements and IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors to align the definition of "material" across the standards and to clarify certain aspects of the definition. The new definition states that, Information is material if omitting, misstating or obscuring it could reasonably be expected to influence decisions that the primary users of general purpose financial statements make on the basis of those financial statements, which provide financial information about a specific reporting entity." The amendments to the definition of material is not expected to have a significant impact on the Group's consolidated financial statements.

Interest Rate Benchmark Reform – Amendments to IFRS 9, IAS 39 and IFRS 7

In September 2019, the IASB issued amendments to IFRS 9, IAS 39 and IFRS 7 Financial instruments: Disclosures, which concludes phase one of its work to respond to the effects of

Interbank Offered Rates (IBOR) reform on financial reporting. Amendments are effective for annual periods beginning on or after 1 January 2020.

The amendments to IFRS 9

The amendments provide temporary reliefs which enable hedge accounting to continue during the period of uncertainty before the replacement of an existing interest rate benchmark with an alternative nearly risk-free interest rate (an RFR). A hedging relationship is affected if the reform gives rise to uncertainties about the timing and/or amount of benchmark-based cash flows of the hedged item or the hedging instrument.

Application of the reliefs is mandatory. The first three reliefs provide for:

• The assessment of whether a forecast transaction (or component thereof) is highly probable;

• Assessing when to reclassify the amount in the cash flow hedge reserve to profit and loss;

• The assessment of the economic relationship between the hedged item and the hedging instrument.

For each of these reliefs, it is assumed that the benchmark on which the hedged cash flows are based (whether or not contractually specified) and/or, for relief three, the benchmark on which the cash flows of the hedging instrument are based, are not altered as a result of IBOR reform.

A fourth relief provides that, for a benchmark component of interest rate risk that is affected by IBOR reform, the requirement that the risk component is separately identifiable need be met only at the inception of the hedging relationship.

The reliefs continue indefinitely in the absence of any of the events described in the amendments. When an entity designates a group of items as the hedged item, the requirements for when the reliefs cease are applied separately to each individual item within the designated group of items.

The amendments to IAS 39

The corresponding amendments are consistent with those for IFRS 9, but with the following differences:

• For the prospective assessment of hedge effectiveness, it is assumed that the benchmark on which the hedged cash flows are based (whether or not it is contractually specified) and/or the benchmark on which the cash flows of the hedging instrument are based, are not altered as a result of IBOR reform.

• For the retrospective assessment of hedge effectiveness, to allow the hedge to pass the assessment even if the actual results of the hedge are temporarily outside the 80%-125% range, during the period of uncertainty arising from IBOR reform.

• For a hedge of a benchmark portion (rather than a risk component under IFRS 9) of interest rate risk that is affected by IBOR reform, the requirement that the portion is separately identifiable need be met only at the inception of the hedge.

The amendments must be applied retrospectively. However, any hedge relationships that have previously been de-designated cannot be reinstated upon application, nor can any hedge relationships be designated with the benefit of hindsight. Early application is permitted and must be disclosed.

These amendments do not have any impact on the Group's consolidated financial statements as no hedge relationships are designated at the reporting date.

The Conceptual

Framework for Financial Reporting

Conceptual Framework sets out a comprehensive set of concepts for financial reporting, standard setting, guidance for preparers in developing consistent accounting policies and assistance to others in their efforts to understand and interpret the standards. It is effective for annual periods beginning on or after 1 January 2020.

The Conceptual Framework includes some new concepts, provides updated definitions and recognition criteria for assets and liabilities and clarifies some important concepts.

It is arranged in eight chapters, as follows:

• Chapter 1 – The objective of financial reporting

• Chapter 2 – Qualitative characteristics of useful financial information

• Chapter 3 – Financial statements and the reporting entity

Chapter 4 The elements of financial statements
Chapter 5 Recognition and derecognition
Chapter 6 Measurement
Chapter 7 Presentation and disclosure

• Chapter 8 – Concepts of capital and capital maintenance

Changes to Conceptual Framework are not expected to have any significant impact on the Group's consolidated financial statements.

Amendments to IAS 1 Presentation of Financial Statements, classification

of liabilities as current or non-current On 23 January 2020, the IASB issued amendments to paragraphs 69 to 76 of IAS 1 Presentation of Financial Statements (the amendments) to specify the requirements for classifying liabilities as current or non-current.

The amendments clarify:

What is meant by a right to defer settlement;
That a right to defer must exist at the end of the reporting period;
That classification is unaffected by the likelihood that an entity will exercise its deferral right;

• That only if an embedded derivative in a convertible liability is itself an equity instrument would the terms of a liability not impact its classification

The Board added two new paragraphs (paragraphs 76A and 76B) to IAS 1 to clarify what is meant by "settlement" of a liability. "For the purpose of classifying a liability as current or non-current, settlement refers to a transfer to the counterparty that results in the extinguishment of the liability. The transfer could be of:

cash or other economic resources –
for example, goods or services; or

• the entity's own equity instruments, unless paragraph 76B applies."

Paragraph 76B states that terms of a liability that could, at the option of the counterparty, result in its settlement by the transfer of the entity's own equity instruments do not affect its classification as current or non-current if, applying IAS 32 Financial Instruments: Presentation, the entity classifies the option as an equity instrument, recognising it separately from the liability as an equity component of a compound

financial instrument.

The amendments to IAS 1 are required to be applied for annual periods beginning on or after 1 January 2022. The amendments must be applied retrospectively in accordance with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors. Earlier application is permitted.

liabilities as current or non-current are not expected to have any impact

Amendments to classification of on the Group's consolidated financial

statements.

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.

On 30 April 2019 LLC "Severgroup"

("Severgroup") has completed its acquisition of 166,383,595 Lenta GDRs, representing approximately 34.45 % of the issued and outstanding voting shares (excluding treasury shares) in the Group from the investment vehicle of TPG Group, Luna Inc., as well as the acquisition of 36,076,870 Lenta GDRs representing approximately 7.47 % of the issued and outstanding voting shares (excluding treasury shares) in the Group from the European Bank for Reconstruction and Development ("EBRD"), in each case, at a price of US\$ 3.60 per Lenta GDR. On 31 December 2019 Severgroup stake represents 77.99 % of the share capital or 78.73 % of the voting rights.

As the result of the deal Alexey Mordashov becomes the ultimate controlling party of the Group since 30 April 2019 (no ultimate controlling party as of 31 December 2018). TPG and EBRD cease to be related parties starting from May 2019.

The consolidated financial statements include the following transactions with related parties:

Severgroup






TPG Group

	Year ended 31 December 2019	Year ended 31 December 2018
Severgroup
Other operating income from related parties	6,524	−
Purchases of inventories from related parties	(8,357)	−
Selling, General and Administrative expenses	(17,808)	−
Amounts owed by related parties	7,215	−
Amounts owed to related parties	(16,469)	−
Advances received	(360)	−
Advances paid	344	−
TPG Group
Selling, General and Administrative expenses	(4,610)	(14,492)

	Year ended 31 December 2019	Year ended 31 December 2018
Short-term benefits	771,041	586,771
Long-term benefits (including share-based pay ments, Note 26)	769,872	165,538
Termination benefits	14,992	31,821
Total remuneration	1,555,905	784 130

Entities with significant influence over the Group:

Remuneration to the members of the Board of Directors and key management personnel is as follows:

L enta L td . and s u b sidiaries

094 L E N T A 095 A N N U A L R E P O R T A N D A C C O U N T S 2019

L E N T A A N N U A L R E P O R T A N D A C C O U N T S 2019

During the year ended 31 December 2019 and 2018 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.

Depreciation, amortisation and impairment expense

As at 31 December 2019 the Group performed impairment test of property, plant and equipment, intangible assets and right-of-use assets, where

7. Property, plant and equipment

	Land	Land improve ments	Buildings	Machinery and equipment	Assets under construction	Total
Cost
Balance at 1 January 2019	22,237,066		12,358,156 124,825,097	59,986,683	3,770,316	223,177,318
Additions	−	−	−	−	14,125,226	14,125,226
Transfers from construction in progress	1,024,239	332,559	7,845,616	5,665,732	(14,868,146)	−
Transfers from right-of-use assets	267,167	−	207,132	−	−	474,299
Disposals	(4,947)	(207)	(506,337)	(1,210,070)	(117,134)	(1,838,695)
Balance at 31 December 2019	23,523,525		12,690,508 132,371,508	64,442,345	2,910,262	235,938,148
Accumulated depreciation and impairment
Balance at 1 January 2019	−	2,044,272	19,077,836	25,031,147	−	46,153,255
Depreciation charge	−	2,739,002	4,521,778	6,850,077	−	14,110,857
Impairment charge	1,799,114	12,538	8,533,770	949,200	319,956	11,614,578
Disposals	−	(193)	(355,492)	(1,028,096)	−	(1,383,781)
Balance at 31 December 2019	1,799,114	4,795,619	31,777,892	31,802,328	319,956	70,494,909
Net book value	−
Balance at 1 January 2019	22,237,066	10,313,884	105,747,261	34,955,536	3,770,316	177,024,063
Balance at 31 December 2019	21,724,411		7,894,889 100,593,616	32,640,017	2,590,306	165,443,239
Cost
Balance at 1 January 2018	21,010,003	11,467,330	118,121,718	52,948,637	2,586,799	206,134,487
Additions	−	−	−	−	18,174,541	18,174,541
Transfers from construction in progress	763,483	902,322	7,578,287	7,689,055	(16,933,147)	−
Transfers from leasehold rights	171,868	−	−	−	−	171,868
Transfers to assets held for sale	323,094	−	−	−	−	323,094
Disposals	(31,382)	(11,496)	(874,908)	(651,009)	(57,877)	(1,626,672)
Balance at 31 December 2018	22,237,066		12,358,156 124,825,097	59,986,683	3,770,316	223,177,318

Accumulated depreciation and impairment
Balance at 1 January 2018	−	1,646,511	15,000,631	19,178,939	−	35,826,081
Depreciation charge	−	400,454	4,571,843	6,351,622	−	11,323,919
Impairment charge	−	–	132,188	–	–	132,188
Disposals	−	(2,693)	(626,826)	(499,414)	−	(1,128,933)
Balance at 31 December 2018	−	2,044,272	19,077,836	25,031,147	−	46,153,255
Net book value
Balance at 1 January 2018	21,010,003		9,820,819 103,121,087	33,769,698	2,586,799	170,308,406
Balance at 31 December 2018	22,237,066	10,313,884	105,747,261	34,955,536	3,770,316	177,024,063

indicators of such impairment were identified.

Continued economic uncertainty and consequent challenging market conditions has let the Group's management to reassess its impairment testing processes, models and assumptions.

Following the impairment test impairment losses in the consolidated statement of profit or loss in respect of property, plant and equipment, right-of-use assets and intangible assets amounted to RUB 11,614,578 RUB 235,056 and RUB 325 respectively.

The evaluation was performed at the lowest level of aggregation of assets that is able to generate independent cash inflows (CGU), which is generally at the individual store level.

In identifying whether cash inflows are largely independent, management considers various factors including:

• how it monitors the entity's operations or how it makes decisions about continuing or disposing of the entity's assets and operations;

• cannibalization effect;

• leakage of customers upon a store closure.

The impairment test has been carried out by comparing recoverable amount of the individual store with its carrying value. The recoverable amount was defined as the higher of its fair value less costs to sell and value in use.

Due to number of CGUs being tested for impairment it is considered impracticable to disclose detailed information for each individual CGU.

The key assumptions used in determining the value in use are:

• future cash flows are based on the current budgets and forecasts approved by the management and represented by forecasted EBITDA along with terminal value of forecasted free cash flows that are expected to be generated beyond the forecast period (12 months);

• cash flow forecasts for capital expenditure are based on past experience and include ongoing capital expenditure required to maintain the level of economic benefits from CGU in its current position

• cash flow forecast for overheads presented mainly by personnel expense being allocated on reasonable basis;

• carrying value of corporate assets that do not generate independent cash inflows (offices, distribution centers) were allocated to CGUs on consistent basis;

• projections were made in the functional currency of the Group's entities, being Russian Rouble, on a pre-tax basis and discounted at the Group pre-tax weighted average cost of capital which is then adjusted to reflect the risks specific to the respective assets (15.42%).

The Group's management believes that all of its estimates are reasonable and consistent with the internal reporting and reflect management's best knowledge.

The result of applying discounted cash flows model reflects expectations about possible variations in the amount and timing of future cash flows. If the revised estimated discount rate consistently applied to the discounted cash flows had been 50 b.p. higher than management's estimates, the Group would need to reduce the carrying value of non-current non-financial assets by RUB 906,091. If the annual revenue growth rate used in calculations of value in use had been 50 b.p. lower, the Group would need to decrease the carrying value of non-current non-financial assets by RUB 998,854. Fair value less costs of disposal of CGU was defined by an external appraiser by reference to current observable prices on an active market subsequently adjusted for specific characteristics of respective assets. The fair value measurement of these assets is classified at level 2 of the fair

value hierarchy.

The amount of depreciation and amortisation during the year ended 31 December 2019 and year ended 31 December 2018 is presented within depreciation and amortisation in the Group's consolidated statement of profit or loss and other comprehensive income and consolidated statement of cash flows as follows:

	Year ended 31 December 2019	Year ended 31 December 2018
Depreciation of property, plant and equipment	14,110,857	11,323,919
Amortisation of intangible assets (Note 10)	508,016	553,338
Amortisation of right-of-use assets (Note 4)	3,850,831	–
Capitalisation of right-of-use asset deprecia tion to CIP	(30,025)	–
Amortisation of leasehold rights	_	100,262
Total depre ciation and amortisation	18,439,679	11,977,519
See Note 27 for capital commitments.

8. Prepayments for construction

Prepayments for construction are made to contractors building stores and to suppliers.

Prepayments are regularly monitored for the indicators of impairment. As at 31 December 2019 prepayments for construction were impaired in the amount of RUB 236,851 (31 December 2018: RUB 482,130).

9. Operating segments

The Group's principal business activity is the development and operation of food retail stores located in Russia. Risks and returns are affected primarily by economic development in Russia and by the development of Russian food retail industry.

The Group has no significant assets outside the Russian Federation (excluding investments in its foreign wholly owned intermediate holding subsidiary Zoronvo Holdings Limited, which are eliminated on consolidation). Due to the similar economic characteristics of food retail stores, the Group's management has aggregated its operating segments represented by stores into one reportable operating segment.

Within the segment all business components are similar in respect of:

The products;
The customers;

• Centralised Group structure (commercial, operational, logistic, finance, HR and IT functions are centralised).

The Group's operations are regularly reviewed by the chief operating decision maker, represented by the CEO, to analyse performance and allocate resources within the Group. The CEO assesses the performance of operating segments based on the dynamics of revenue and earnings before interest, tax, depreciation, amortisation (EBITDA). EBITDA is a non-IFRS measure. Other information is measured in a manner consistent with that in the consolidated financial statements.

The segment information for the year ended 31 December 2019 and 2018 is as follows:

	Year ended 31 December 2019	Year ended 31 December 2018
Sales	417,500,015	413,562,197
EBITDA	39,505,713	36,194,160

L enta L td .

and s u b sidiaries

096 L E N T A 097 A N N U A L R E P O R T A N D A C C O U N T S 2019

L E N T A

A N N U A L R E P O R T A N D A C C O U N T S 2019

Reconciliation of EBITDA

to IFRS profit for the year is as follows:

	Year ended 31 December 2019	Year ended 31 December 2018
EBITDA	39,505,713	36,194,160
Interest expense (15,866,946)	(9,699,272)
Interest income	3,827,178	608,472
Income tax expense (see Note 20)	(190,684)	(3,022,988)
Depreciation and amortisation (see Notes 4, 7, 10, 24)	(18,439,679)	(11,977,519)
Impairment of non-financial assets (see Notes 4, 7, 10)	(11,849,959)	(132,188)
Foreign ex change gains (loss)	220,503	(176,371)
(Loss) /profit for the year	(2,793,874)	11,794,294

10. Intangible assets

Intangible assets as at 31 December 2019 consist of the following:

	Software	TotaL
Cost
At 1 January 2019	3,904,454	3,904,454
Additions	886,872	886,872
Disposals	(20,332)	(20,332)
At 31 December 2019	4,770,994	4,770,994
Accumulated amortisation and impairment
At 1 January 2019	1,998,564	1,998,564
Amortisation charge	508,016	508,016
Impairment charge	325	325
Disposals	(6,886)	(6,886)
At 31 December 2019	2,500,019	2,500,019
Net book value
At 1 January 2019	1,905,890	1,905,890
At 31 December 2019	2,270,975	2,270,975

Intangible assets as at 31 December 2018 consisted of the following:

	Software Trade	marks	TotaL
Cost
At 1 January 2018	3,461,608		549 3,462,157
Additions	642,512	–	642,512
Disposals			(199,666) (549) (200,215)
At 31 Decem ber 2018	3,904,454		– 3,904,454
Accumulated amortisation
At 1 January 2018	1,644,892		549 1,645,441
Amortisation charge	553,338	–	553,338
Disposals			(199,666) (549) (200,215)
At 31 Decem ber 2018	1,998,564		– 1,998,564
Net book value
At 1 January 2018	1,816,716		– 1,816,716
At 31 Decem ber 2018	1,905,890		– 1,905,890

Amortisation expense is included in selling, general and administrative expenses (Note 24).

11. 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.

12. Inventories

	31 December 2019	31 December 2018
Goods for resale (at lower of cost and net realis able value)	37,146,606	40,193,130
Raw materials	1,306,659	1,307,721
Total inventories 38,453,265		41,500,851

Raw materials are represented by inventories used in own production process in butchery, bakery and culinary.

During the reporting year the Group accounted for the write down of inventories to their net realisable value within cost of sales in the consolidated statement of profit or loss and other comprehensive income for the year ended 31 December 2019 in the amount of RUB 411,398 (31 December 2018: expenses within cost of sales in the amount of RUB 397,251).

13. Trade and other receivables

	31 December 2019	31 December 2018
Accounts receivable on rental and other services and on suppliers' adver tising	5,423,210	6,627,239
Suppliers' re bates receivable	3,205,036	4,065,760
Other receiv ables	154,866	844,002
Expected credit losses of accounts receiv able	(179,010)	(264,399)
Total trade and other receivables	8,604,102	11,272,602

As at 31 December 2018 the Group recognized within the other receivables the amount due from insurance company of RUB 655,018 which relates to compensation for lost property, plant, and equipment of RUB 271,541, lost inventory of RUB 186,568 and for interruption of operations of RUB 196,909 as the result of fire case in one of the stores. As at 31 December 2019 the compensation was received from the insurance company.

Debtor credit risk is managed in accordance with the Group's established policy, procedures and control relating to debtor credit risk management. Credit quality of a debtor is assessed based on an extensive credit rating scorecard and individual credit limits are defined in accordance with this assessment.

An analysis is performed at each reporting date using a provision matrix to measure expected credit losses. The provision rates are based on days past due for groupings of various customer segments with similar loss patterns (i.e., by customer type and rating) and the likelihood of default over a given time horizon. The calculation reflects the probability-weighted outcome, the time value of money and reasonable and supportable information that is available at the reporting date about past events, current conditions and forecasts of future economic conditions.

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:

	Current	<60 days overdue	60-120 days overdue	>120 days overdue	Total
Expected credit loss rate	0%-1.5%	2%-5%	15%-40%	70%-100%
Estimated total gross carry ing amount at default	8,366,420	231,286	14,912	170,494	8,783,112
Expected credit loss	33,381	4,734	2,596	138,299	179,010

Ageing of trade and other receivables that were past due but not impaired as at 31 December 2018:

	Current	<60 days overdue	60-120 days overdue	>120 days overdue	Total
Expected credit loss rate	0%-1.5%	3%-5%	20%-40%	70%-100%
Estimated total gross carry ing amount at default	10,749,050	598,869	23,848	165,234	11,537,001
Expected credit loss	118,461	17,359	9,437	119,142	264,399

The Group does not hold any collateral or other credit enhancements over these balances.

Set out below is the movement in the allowance for expected credit losses of trade and other receivables:

	2019	2018
As at 1 January	264,399	719,594
Reversal of allow ance for expected credit losses	(48,658)	(86,312)
Write-off	(36,731)	(368,883)
As at 31 December	179,010	264,399

14. Advances paid

	31 December 2019	31 December 2018
Advances to sup pliers of goods	309,833	1,242,760
Advances for services	1,327,153	1,536,965
Impairment of advances paid	(54,055)	(7,541)
Total advances paid	1,582,931	2,772,184

15. Taxes recoverable

Taxes recoverable as at 31 December 2019 are represented by a VAT recoverable of RUB 163,364 (31 December 2018: RUB 992,378).

16. Cash and cash equivalents

	31 December 2019	31 December 2018
Rouble short-term deposits	66,322,639	15,086,436
Rouble denominat ed balances with banks	3,818,264	11,440,386
Rouble denominat ed cash in transit	2,884,525	6,837,498
Rouble denominat ed cash on hand	276,419	265,671
Foreign currency denominated bal ances with banks	102,913	174,869
Total cash and cash equivalents	73,404,760 33,804,860

Cash in transit represents cash receipts during the last days of the reporting period (29–31 December), which were sent to banks but not deposited into the respective bank accounts until the next reporting period.

Significant rouble denominated cash in transit result from the business seasonality, indicating higher levels of retail sales in holiday periods such as the New Year's Eve as well as the closing day in relation to the official banking days in Russia. If the closing day is on non-banking days, the amount of cash in transit increases.

Short-term deposits are made for varying periods of between one day and three months, depending on

O 4 › APPENDICES

L enta L td . and s u b sidiaries

098 L E N T A 099 A N N U A L R E P O R T A N D A C C O U N T S 2019

L E N T A A N N U A L R E P O R T A N D A C C O U N T S 2019

the immediate cash requirements of the Group, and earn interest at the respective short-term deposit rates.

17. Issued capital and reserves Issued capital

As at 31 December 2019 the Company's share capital is comprised of 97,585,932 authorised and issued ordinary shares (as at 31 December 2018: 97,508,265) with equal voting rights. Paid value of shares with no par value is fully accounted for within additional paid-in capital.

All outstanding ordinary shares are entitled to an equal share in any dividend declared by the Company. According to the BVI Business Companies Act No. 16 of 2004, no dividends can be declared and paid unless the Board of Directors determines that immediately after the payment of the dividend the Group will be able to satisfy its liabilities as they become due in the ordinary course of its business and the realisable value of the assets of the Group will not be less than the sum of its total liabilities, other than deferred taxes, as shown in the books of account, and its capital. In accordance with Russian legislation, Lenta LLC, the Company's primary operating subsidiary registered under the laws of the Russian Federation, may distribute profits as dividends or transfer them to reserves (fund accounts) limited to the retained earnings recorded in its financial statements prepared in accordance with Russian Accounting Rules. No dividends to holders of ordinary shares are declared for the year ended 31 December 2019 and 2018.

The movements in the number of shares for the year ended 31 December 2019 and 2018

are as follows:

	31 December 2019 No.	31 December 2018 No.
Authorised share capital (ordinary shares)	unlimited	unlimited
Issued and fully paid (no par value)	97,585,932	97,508,265
Treasury shares	(910,522)	(235,319)

Balance of shares out standing at beginning of the year	97,272,946	97,416,963
Additional issue of shares	77,667	91,302
Shares buy back	(675,203)	(235,319)
Balance of shares out standing at the end of the year	96,675,410	97,272,946

During the year ended 31 December 2019 the Group issued 77,667 shares of no par value with respect to long-term incentive plans to certain members of management (see Note 26). Issued shares were distributed to relevant participants.

Total expense for the services received from the employees previously recognised with respect to issued shares under long-term incentive plans was RUB 127,442.

In October 2018 the Group launched GDR repurchase programme up to an aggregate value of RUB 11,600,000, which was terminated on 2 April 2019. As the result of the programme 910,522 shares were repurchased as at 31 December 2019. During the year ended 31 December 2019 the Group repurchased 675,203 shares of no par value for RUB 720,099.

Share options reserve

The share options reserve is used to recognise the value of equity-settled share-based payments provided to employees, including key management personnel, as part of their remuneration. Refer to Note 26 for further details of these plans.

18. Earnings per share

	Year ended 31 December 2019	Year ended 31 December 2018
(Losses) /earnings per share (in thousands of Russian roubles per share)
- basic and diluted, for (loss) /profit for the year attributable to equity holders of the parent	(0.029)	0.121

The calculation of basic earnings per share for the year is based on the (loss) /profit attributable to shareholders (loss for the year ended 31 December 2019: RUB (2,793,874) profit for the year ended 31 December 2018: RUB 11,794,294) and a weighted average number of ordinary shares outstanding during the respective periods, calculated as shown below.

	Year ended 31 December 2019	Year ended 31 December 2018
Number of issued shares at the beginning of the year	97,272,946	97,416,963
Number of shares issued in July 2018	–	91,302
Number of shares repurchased in November-De cember 2018	–	(235,319)
Number of shares issued in April 2019	77,667	–
Number of shares repurchased in January-April 2019	(675,203)	–
Number of shares at the end of the year	96,675,410	97,272,946
Weighted aver age number of shares	96,757,307	97,445,815

The Group has issued share-based payments (Note 26) instruments that could potentially dilute basic earnings per share in the future. These instruments have no material effect on dilution of earnings per share for the year.

19. Borrowings

The Groups' borrowings as at 31 December 2019 and 31 December 2018 bear market interest rates, all of them are denominated in Russian roubles and are not secured.

	Currency	31 December 2019	31 December 2018
Short-term borrowings:
Floating rate short-term bank loans	RUB	−	564,138
Fixed rate short-term bonds	RUB	5,399,643	56,702
Fixed rate short-term bank loans	RUB	63,031,173	20,118,158
Total short-term borrowings and short-term portion of long term borrowings		68,430,816	20,738,998
Long-term borrowings:
Fixed rate long-term bonds	RUB	20,519,034	5,559,870
Fixed rate long-term bank loans	RUB	61,591,407	74,648,179
Floating rate long-term bank loans	RUB	−	26,133,242
Total long-term borrowings		82,110,441	106,341,291

	1 January 2019	Change in the accounting policies due to the application of IFRS 16 (Note 4)	Differences in recognition and reversals recognised in profit or loss	31 December 2019
Tax effect of (taxable) / deductible temporary differences
Property, plant and equipment	(10,306,373)	–		1,767,908 (8,538,465)
Leasehold rights	(546,549)	546,549	–	–
Right of use	–	(7,183,435)		745,471 (6,437,964)
Unused vacation and employee bonuses accrual	253,384	–	153,897	407,281
Suppliers' bonuses	(30,844)	–	(28,936)	(59,780)
Borrowings	(62,884)	–	65,281	2,397
Intangible assets	(31,734)	–	(44,874)	(76,608)
Inventory	415,211	–	377,844	793,055
Provision for expected credit losses of accounts receivable, impairment of advances paid and prepay ments for construction	124,896	–	(54,146)	70,750
Accrued liabilities	259,726		539,970	799,696
Lease liabilities	–	6,823,992	(391,991)	6,432,001
Other	(114,589)	121,577	92,161	99,149
Total net deferred tax liabilities	(10,039,756)	308,683		3,222,585 (6,508,488)

of advances paid and prepay
ments for construction

As at 31 December 2019 the Group had RUB 89,136,000 of unused credit facilities (as at 31 December 2018: RUB 83,300,000). The loan agreements contain financial and non-financial covenants. As at 31 December 2019 the Group is in compliance with the covenants.

20. Income taxes

The Group's income tax expense for the year ended 31 December 2019 and 31 December 2018 is as follows:

	Year ended 31 December 2019	Year ended 31 December 2018
Current tax expense	3,413,269	1,169,375
Deferred tax (benefit)/ex pense	(3,222,585)	1,853,613
Income tax expense rec ognised in profit for the year	190,684	3,022,988
Tax effect related to effective por tion of change in the fair value of cash flow hedg ing instruments	−	(41,222)
Income tax ben efit recognised in OCI	−	(41,222)

Differences between IFRS and Russian statutory tax regulations give rise to temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and their tax bases. The tax effect of the movements in these temporary differences, recorded at the rate of 20% is detailed below.

	Year ended 31 December 2019	Year ended 31 December 2018
(Loss) /profit before tax	(2,603,190)	14,817,282
Theoretical tax charge at 20% being statutory tax rate in Russia	520,638	(2,963,456)
Difference in tax regimes of foreign companies	(154,996)	133,176
Add tax effect of non-taxable income and non-deductible expenses.	(176,326)	(42,980)
Recognition of previously unrecognised uncertain tax position	(380,000)	(149,728)
Income tax expense	(190,684)	(3,022,988)

Russia expenses.

O 2 › C O R P O R A T E G O V E R N A N C E O 3 › F I N A N C I A L S T A T E M E N T S

O 4 › APPENDICES

L enta L td .

and s u b sidiaries

100 L E N T A 101 A N N U A L R E P O R T A N D A C C O U N T S

2019

L E N T A A N N U A L R E P O R T A N D A C C O U N T S 2019

23. Cost of sales

Cost of goods sold is reduced by rebates and promotional bonuses received from suppliers.

Cost of sales for the year ended 31 December 2019 includes employee benefits expense of RUB 8,777,586 (year ended 31 December 2018: RUB 8,016,548) of which contributions to state pension fund are comprised of RUB 1,229,580 (year ended 31 December 2018: RUB 1,105,764).

Cost of sales for the year ended 31 December 2019 includes cost of raw materials used in own production of RUB 16,575,218 (year ended 31 December 2018: RUB 15,749,849).

24. Selling, general and administrative expenses

	Year ended 31 December 2019	Year ended 31 December 2018
Employee benefits	28,119,261	25,556,037
Depreciation and amortisation (Notes 4, 7, 10)	18,439,679	11,977,519
Utilities and communal pay ments	4,974,278	4,517,562
Professional fees	4,388,221	3,863,897
Advertising	5,177,240	5,217,256
Cleaning	3,611,966	2,882,658
Repairs and maintenance	3,019,466	2,642,799
Security services	1,973,878	1,893,165
Taxes other than income tax	1,598,841	1,509,046
Rent expense	1,159,049	6,063,665
Other	2,621,634	2,971,267
Total selling, general and administrative expenses	75,083,513	69,094,871

Employee benefits for the year ended 31 December 2019 include contributions to state pension fund of RUB 3,578,339 (year ended 31 December 2018: RUB 3,274,393).

Professional fees for the year ended 31 December 2019 include fees billed by Ernst & Young LLC: for the audit of the consolidated financial statements in the amount of RUB 24,282 (for the year ended 31 December 2018: RUB 27,510) and for consulting and other non audit services in the amount of RUB 22,729

	1 January 2018	Change in the accounting policies due to the application of IFRS 16 (Note 4)	Differences in recognition and reversals recognised in profit or loss	Differences in recognition and reversals recognised in other comprehen-sive income	31 December 2018
Tax effect of (taxable) / deductible temporary differences
Property, plant and equipment	(8,612,723)	–	(1,693,650)		– (10,306,373)
Leasehold rights	(546,387)	–	(162)	–	(546,549)
Unused vacation and employee bonuses accrual	196,153	–	57,231	–	253,384
Suppliers' bonuses	(303,860)	–	273,016	–	(30,844)
Borrowings	(115,445)	46,831	5,730	–	(62,884)
Intangible assets other than leasehold rights	(20,603)	–	(11,131)	–	(31,734)
Inventory	319,599	–	95,612	–	415,211
Provision for expected credit losses of accounts receivable, impairment of advances paid and prepayments for construction	110,253	112,536	(97,893)	–	124,896
Accrued liabilities	165,213	–	94,513	–	259,726
Cash flow hedging instruments	(91,565)	–	50,343	41,222	–
Tax losses carried forward	543,499	–	(543,499)	–	–
Other	(30,866)	–	(83,723)	–	(114,589)
Total net deferred tax liabilities	(8,386,732)	159,367	(1,853,613)		41,222 (10,039,756)

	Year ended 31 December 2019	Year ended 31 December 2018
Loss from property, plant and equipment and intangible assets disposal	352,215	167,477
Loss from cancelation of lease contracts	121,636	−
Penalties for termi nation of a contracts with service suppliers	109,291	21,996
Non-recoverable VAT	63,611	10,117
Penalties from gov ernment authorities	56,750	39,455
Impairment of advances paid and prepayments for construction, reversal of allowance for ex pected credit losses of accounts receivable	53,173	152,543
Other	179,021	84,452
Total other operating expenses	935,698	476,040

The temporary taxable differences associates with undistributed earnings of subsidiaries amount to RUB 75,842,716 and RUB 66,696,688 as of 31 December 2019 and 2018, respectively. A deferred tax liability on these temporary differences was not recognised, because management believes that it is in a position to control the timing of reversal of such differences and has no intention to reverse them in the foreseeable future.

21. Trade and other payables

	31 December 2019	31 December 2018
Trade payables	46,537,381	46,495,464
Accrued liabilities and other creditors	6,446,591	5,864,692
Payables for purchases of property, plant and equipment	1,705,131	3,773,684
Total trade and other payables	54,689,103	56,133,840

The trade and other payables are denominated in:

	31 December 2019	31 December 2018
Russian roubles	53,785,883	55,241,343
USD	650,158	653,509
EUR	249,815	238,953
GBP	3,246	35
Total trade and other payables	54,689,103	56,133,840

22. Other taxes payable

	31 December 2019	31 December 2018
Social taxes	805,661	675,487
Property tax	92,895	123,213
Personal income tax	238,786	223,012
Other taxes	36,221	19,411
Total other taxes payable	1,173,563	1,041,123

(for the year ended 31 December 2018: RUB 3,613).

25. Other operating income and expenses

Other operating income is comprised of the following:

	Year ended 31 December 2019	Year ended 31 December 2018
Rental income	1,605,999	1,693,100
Sale of second ary materials	1,127,996	1,020,253
Penalties due by suppliers	971,290	1,034,121
Advertising income	550,135	718,859
Insurance compensation	524,243	196,909
Gain on property, plant and equip ment disposal	42,102	140,994
Other	246,001	189,009
Total other oper ating income	5,067,766	4,993,245

In November 2018 as the result of fire in one of the stores the Group incurred losses on property, plant and equipment disposal, inventory disposal and interruption of operations since the fire case till 1 November 2019, which were insured and compensated by insurance company.

Other operating expenses are comprised of the following:

O 1 › S T R A T E G I C R E P O R T
O 2 › C O R P O R A T E G O V E R N A N C E
O 3 › F I N A N C I A L S T A T E M E N T S
O 4 › APPENDICES

L enta L td . and s u b sidiaries

102 L E N T A 103 A N N U A L R E P O R T A N D A C C O U N T S 2019

26. Share-based payments

Long-term incentive plan

During the year 2014 the Group approved a long-term incentive plan (LTIP) to certain members of senior and middle management, according to which the Company granted award shares in 2014, 2015, 2016, 2017, 2018 and 2019 along with the communication of the terms of award to participants.

The monetary amount of the award to be granted to the participants of the plan was calculated based on the annual base salary on the grant date, target award interest, business results co efficient and individual performance rating co-efficient.

The fair value of the award shares was estimated based on the GDR price on Moscow Exchange on the award grant date.

As of the year ended 31 December 2019 Tranche 2014, 2015 and 2016 fully vested.

In May 2019 for the majority of employees LTIP Tranche 2016 was settled by cash in the amount of RUB 194, 592. Also for settlement purposes the Group issued 16,182 shares of no par value. Total expense for the services received from the employees previously recognised with respect to settled tranche was RUB 434,995.

27. Capital expenditure commitments

At 31 December 2019 the Group has contractual capital expenditure commitments in respect of property, plant and equipment and intangible assets totaling RUB 6,216,727 net of VAT (31 December 2018: RUB 11,489,981 net of VAT).

28. Financial instruments

Categories of financial instruments

	31 December 2019	31 December 2018
Financial assets measured at amortised cost
Cash and cash equivalents	73,404,760 33,804,860
Trade and other receivables	8,604,102	11,272,602
Other non-cur rent financial assets	444,316	428,175
Total financial assets measured at amortised	82,453,178	45,505,637

cost

Financial liabilities measured at amortised cost

	31 December 2019	31 December 2018
Floating rate		26,697,380
long-term
bank loans
Fixed rate	82,514,982 80,473,264
long-term
bank loans and
bonds
Fixed rate	68,026,276	19,909,645
short-term
bank loans and
bonds
Trade and oth	54,689,103	56,133,840
er payables
Total financial	205,230,360	183,214,129
liabilities
measured at
amortised cost

Fair values

The following table provides the fair value measurement hierarchy of the Group's financial liabilities. Quantitative disclosures of fair value measurement hierarchy

for financial liabilities as at 31 December 2019:

	31 December 2019	Level 1	Level 2	Level 3
Financial liabilities for which fair values are disclosed
Fixed rate bonds	26,387,036	26,387,036	−	−
Fixed rate bank loans	123,200,098	−	123,200,098	–

	31 December 2018	Level 1	Level 2	Level 3
Financial liabilities for which fair values are disclosed
Fixed rate bonds	5,662,373	5,662,373	−	−
Floating rate bank loans	26,697,380	−	26,697,380	−
Fixed rate bank loans	93,370,478	−	93,370,478	−

fers between Level 1, Level 2 and Level 3 of fair value measurements.

Set out below, is a comparison by class of the carrying amounts and fair value of the Group's financial instruments, other than those with carrying amounts are reasonable approximations of fair values:

	31 December 2019		31 December 2018
	Carrying amount	Fair value Carrying	amount	Fair value
Financial liabilities
Interest-bearing loans and borrowings
Floating rate bank loans	−	−	26,697,380	26,697,380
Fixed rate bank loans and bonds	150,541,257	149,587,134	100,382,909	99,032,851
Total financial liabilities	150,541,257	149,587,134	127,080,289	125,730,231

Set out below is the information about awards settlement during year ended 31 December 2019:

	2016 tranche	2017 tranche	2018 tranche	2019 tranche	Total
Settlement by shares
number of shares issued in May, 2019	16,182	13,354	18,360	29,771	77,667
total expense recognised with regards to shares issued	37,300	25,370	30,432	34,341	127,442
Settlement by cash payment (USD 3.6\$ per GDR)
settlement by cash in May 2019	194,592	53,990	37,602	–	286,184
excess of expenses accrued vs. pay ment made	198,382	32,809	15,105	–	246,296

In April, 2019 Tranche 2017 and Tranche 2018 to senior management were amended to accelerate vesting of 66% (Tranche 2017) and 34% (Tranche 2018) of awards immediately.

Vested awards were settled by cash in the amount of RUB 53,990 (Tranche 2017) and RUB 37,603 (Tranche 2018). Also for settlement purposes the Group issued 13,354 (Tranche 2017) and 18,360 (Tranche 2018) shares of no par value.

The vesting dates of remaining awards under the Tranche 2017 and Tranche 2018 are 1 April 2020 and 30 April 2021 respectively.

The vesting dates of newly granted awards under the Tranche 2019 to senior management are 1 April 2020 (25 %), 1 April 2021 (25 %), 1 May 2021 (50 %) or 1 April 2020 (16 %), 1 April 2021 (53 %), 1 May 2021 (31 %).

The vesting dates of newly granted awards under the Tranche 2019 to middle management are 1 April 2020 (25%), 1 April 2021 (25%), 1 April 2022 (50%).

In May 2019 there was an amendment to the award under the Tranche 2019 for one employee, according to which 100 % of the award vested immediately and 29,771 shares were issued and distributed to a participant.

Share value appreciation rights

During the year 2013 and the year 2016 the Group granted share value appreciation rights (SVARs) to certain members of top management as part of management long-term incentive plan. Each SVAR entitles the holder to a quantity of ordinary shares in Lenta Ltd. based on an increase in the share price over a predetermined exercise price subject to meeting the performance conditions.

In April 2018 SVARs of 2013 year fully vested. In June 2018 the Group issued 69,502 shares of no par value. Total expense for the services received from the employees previously recognised with respect to issued shares was RUB 405,232. The shares were transferred into GDR and distributed to relevant participants.

Movements during the year

The remaining contractual life for the SVARs outstanding as at 31 December 2019 was 0.26 year (31 December 2018: 0.79 years).

The exercise price for options outstanding as at 31 December 2019 is RUB 2.214 (31 December 2018: RUB 2.214).

Fair value of options outstanding as at 31 December 2019 is RUB 0.98 (31 December 2018: RUB 0.91).

The expense recognized for the services received from the employees covered by SVARs plan during the year is shown in the following table:

	Year ended 31 December 2019	Year ended 31 December 2018
Expense arising from the equi ty-settled SVARs transaction	6,875	46,220

In April 2019 SVARs of 2016 year (21,000 phantom shares) expired worthless. Total expense for the services received from the employees previously recognised with respect to expired SVARs was RUB 17,828.

The fair value of the management SVARs is estimated at the grant date using the Black Scholes option pricing model, taking into account the terms and conditions upon which the SVARs were granted.

Total expense recognised for
the services received from the
employees covered by long-term
incentive plan for the year ended 31
December 2019 and for year ended
31 December 2018 is shown in the
following table:

	Year ended 31 December 2019	Year ended 31 December 2018
Expense arising	428,246	219,041
from the equi ty-settled long
term incentive
plan payments

The management assessed that the carrying amounts of cash and short-term deposits, trade receivables, trade payables, other liabilities approximate their fair values largely due to the short-term maturities of these instruments.

The fair value of the financial assets and liabilities is included at the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale.

The following methods and assumptions are used to estimate the fair values:

• Fair values of the Group's interest-bearing borrowings and loans are determined by using DCF method using discount rate that reflects the

		ે ક
		04

issuer's borrowing rate as at the end of the reporting period. The own non-performance risk as at 31 December 2019 and 31 December 2018 is assessed to be insignificant.

• The fair value of bonds is based on the price quotations at the reporting date at Moscow exchange where transactions with bonds take place with sufficient frequency and volume.

L enta L td . and s u b sidiaries

104 L E N T A 105 A N N U A L R E P O R T A N D A C C O U N T S 2019

L E N T A A N N U A L R E P O R T A N D A C C O U N T S 2019

29. Financial risk management

The Group's principal financial liabilities, other than derivatives, are comprised of loans and borrowings, trade and other payables. The main purpose of these financial liabilities is to finance the Group's operations and to provide guarantees to support its operations. The Group's principal financial assets include loans, trade and other receivables, and cash and short-term deposits that derive directly from its operations. The Group also enters into derivative transactions.

The Group is exposed to market risk, credit risk and liquidity risk. The Group's senior management oversees the management of these risks. The Group's financial risk activities are governed by appropriate policies and procedures and financial risks are identified, measured and managed in accordance with the Group's policies and risk objectives. All derivative activities for risk management purposes are carried out by specialists that have the appropriate skills, experience and supervision. It is the Group's policy that no trading in derivatives for speculative purposes may be undertaken.

The Board of Directors reviews and agrees policies for managing each of these risks, which are summarised below.

Market risk

Market risk is the risk that the fair value of future cash flows of a finaninterest rates. As at 31 December 2018 these obligations were represented with long-term borrowing (Note 19) which were redeemed at the end of the reporting period.

Interest rate sensitivity

The following tables demonstrate the sensitivity to a reasonably possible change in MosPrime rates, on that portion of loans and borrowings affected, after the impact of hedge accounting. With all other variables held constant, the Group's profit before tax and OCI are affected through the impact on floating rate borrowings, as follows:

The range of reasonable possible changes in MosPrime rate was prepared for the purpose of market risk disclosures in accordance with IFRS 7 and was based on risk metrics that are derived from statistical data, in particular time series analysis.

Credit risk

Credit risk is the risk that counterparty may default or not meet its obligations to the Group on a timely basis, leading to financial loss to the Group. Financial assets, which are potentially subject to credit risk, consist principally of cash in bank accounts and cash in transit, loans and receivables.

In determining the recoverability of receivables the Group uses a provision matrix to measure expected credit losses. The provision rates are based on days past due for groupings of various customer segments with similar loss patterns (i.e., by customer type and rating) and the likelihood of default over a given time horizon. The calculation reflects the probability-weighted outcome, the time value of money and reasonable and supportable information that is available at the reporting date about past events, current conditions and forecasts of future economic conditions.

Trade receivables

The Group has no significant concentrations of credit risk. Concentration of credit risk with respect to receivables is limited due to the Company's customer and vendor base being large and unrelated. Credit is only extended to counterparties subject to strict approval procedures. The Group trades only with recognised, creditworthy third parties who are registered in the Russian Federation. It is the

Group's policy that all customers who are granted credit terms have a history of purchases from the Group. The Group also requires these customers to provide certain documents such as incorporation documents and financial statements. In addition, receivable balances are monitored on an ongoing basis with the result that the Group's exposure to bad debts is not significant. Sales to retail customers are made in cash, debit cards or via major credit cards.

Cash and cash equivalents

Credit risk from investing activities is managed by the Group's treasury department in accordance with the Group's policy. Investments of surplus funds are made only with approved counterparties. Cash is placed in financial institutions, which are considered at time of deposit to have minimal risk of default.

The maximum exposure to credit risk at the reporting date of trade receivables is the carrying value as presented in the statement of financial position. The maximum exposure to credit risk at the reporting date of cash and cash equivalents is RUB 73,128,341 (31 December 2018: RUB 33,539,189).

Liquidity risk

The Group monitors its risk to a shortage of funds using a recurring liquidity planning tool. This tool considers the maturity of its financial assets and liabilities and projected cash flows from operations. The Group objective is to maintain a continuity of funding and flexibility through the use of bank overdrafts and bank loans. Each year the Group analyses its funding needs and anticipated cash flows, so that it can determine its funding needs.

The table below summarises the maturity profile of the Group's financial liabilities at 31 December 2019 and 31 December 2018 bases on contractual undiscounted cash flows of the financial liabilities based on the earliest date on which the Group is required to pay. The table includes both interest and principal cash flows.

31 December 2019

	Less than 12 months	1–5 years	Over 5 years	Total
Borrowings	75,038,997	89,522,037	–	164,561,034
Lease liabilities	5,334,247	20,116,334	28,991,802	54,442,383
Trade and other payables	54,689,103	–	–	54,689,103
Total	135,062,347	109,638,371	28,991,802	273,692,520

31 December 2018

	Less than 12 months	1–5 years	Over 5 years	Total
Borrowings	30,637,465	117,172,663	–	147,810,128
Trade and other payables	56,133,840	–	–	56,133,840
Total	86,771,305	117,172,663	–	203,943,968

	Profit or loss		OCI
	75 bp 100 bp decrease increase		75 bp increase	100 bp decrease
2018
Variable rate instruments	(196,875)	262,500	−	−
Cash flow sensitivity	(196,875)	262,500	−	−

Changes in liabilities arising from financing activities

	31 December 2018	Proceeds from borrowings	Repayments of borrowings	Reclas sifications	Other	31 December 2019
Long-term borrowings	106,341,291	35,386,518	(13,000,000)	(46,813,928)	196,560	82,110,441
Short-term borrowings	20,738,998	194,644,286	(193,770,873)	46,813,928	4,477	68,430,816
Total	127,080,289	230,030,804	(206,770,873)	−	201,037	150,541,257

Fair values (continued)

	31 December 2017	Proceeds from borrowings	Repayments of borrowings	Reclas sifications	Change in the accounting policies due to application of IFRS 9 (Note 4)	Other	31 December 2018
Long-term bank loans	62,194,204	64,683,000	(5,000,000)	(15,799,792)	324,305	(60,426)	106,341,291
Short-term bank loans	44,888,131	67,500,000	(106,871,775)	15,799,792	(90,149)	(487,001)	20,738,998
Total	107,082,335	132,183,000	(111,871,775)	–	234,156	(547,427)	127,080,289

The "Other" column includes the effect of accrued but not yet paid interest on interest bearing loans. Group classifies interest paid as cash flows from operating activities.

cial instrument will fluctuate because of changes in market prices. Market risk comprises the following types of risk: interest rate risk, currency risk, and other price risk, such as equity price risk. Financial instruments affected by market risk include loans and borrowings, cash equivalents and derivative financial instruments.

Foreign currency risk

Foreign currency risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in foreign exchange rates.

During the years ended 31 December 2019 and 2018, the Group does not attract any amounts of foreign currency denominated borrowings, and as a consequence is not materially exposed to foreign currency risk. The only balances that are exposed to foreign currency risk are accounts payables to several foreign suppliers.

Whenever possible, the Group tries to mitigate the exposure to foreign currency risk by matching the statement of financial position, and revenue and expense items in the relevant currency.

Foreign currency sensitivity

The following table demonstrates the sensitivity to a reasonably possible change in the US dollar exchange rate, with all other variables held constant.

	Change in USD rate	Effect on profit before tax
Year ended 2019	13.00%	(61,972)
	-11.00%	52,438
Year ended 2018	14.00%	(91,491)
	-14.00%	91,491

The following table demonstrates the sensitivity to a reasonably possible change in the EUR exchange rate, with all other variables held constant.

	Change in EUR rate	Effect on profit before tax
Year ended 2019	13.00%	(25,815)
	-11.00%	21,844
Year ended 2018	14.00%	(33,453)
	-14.00%	33,453

Foreign currency exchange rate reasonable possible change range was prepared for the purpose of market risk disclosures in accordance with IFRS 7 and is derived from statistical data, in particular time series analysis.

Interest rate risk

Interest rate risk is the risk that the fair value of future cash flows of the financial instrument will fluctuate because of changes in market interest rates.

The Group's exposure to the risk of changes in market interest rates relates primarily to the Group's longterm debt obligations with floating

L enta L td . and s u b sidiaries

106 L E N T A 107 A N N U A L R E P O R T A N D A C C O U N T S 2019

L E N T A A N N U A L R E P O R T A N D A C C O U N T S 2019

Capital management

The Group manages its capital to ensure that entities in the Group will be able to continue as a going concern while maximising the return to stakeholders through the optimisation of the debt and equity balance.

The Group reviews its capital needs periodically to determine actions to balance its overall capital structure through shareholders' capital contributions or new share issues, return of capital to shareholders as well as the issue of new debt or the redemption of existing debt. The Group is guided in its decisions by an established financing policy, which stipulates leverage ratios, interest coverage, covenants compliance, appropriateness of balance between long-term and short-term debt, requirements to diversification of funding sources. Dividends are to be declared based on the capital requirements of the business and with reference to continuing compliance with the financial policy.

The capital structure of the Group consists of debt, which includes the borrowings disclosed in Note 19, lease liabilities less cash and cash equivalents and equity attributable to equity holders of the parent, comprising issued capital, reserves and retained earnings.

Net debt of the Group comprises of the following:

	31 December 2019	31 December 2018
Borrowings	150,541,257	127,080,289
Lease liabilities 32,160,006		–
Cash and cash equivalents (Note 16)	(73,404,760)	(33,804,860)
Net debt	109,296,503	93,275,429

Net debt is a non-IFRS indicator and, therefore, its calculation may differ between companies, however it is one of the key indicators that are commonly used by investors and other users of financial statements in order to evaluate financial condition of the Group.

30. Contingencies

Operating environment of the Group The Group sells products that are sensitive to changes in general economic conditions that impact consumer spending. Future economic conditions and other factors, including sanctions imposed, consumer confidence, employment levels, interest rates, consumer debt levels and availability of consumer credit could reduce consumer spending or change consumer purchasing habits. A general slowdown in the Russian economy or in the global economy, or an uncertain economic outlook, could adversely affect consumer spending habits and the Group's operating results.

The future stability of the Russian economy is largely dependent upon economic reforms, development of the legal, tax and regulatory frameworks, and the effectiveness of economic, financial and monetary measures undertaken by the government of the Russian Federation.

The Russian economy has been negatively impacted by sanctions imposed on Russia by a number of countries. The Rouble interest rates remained high. The combination of the above resulted in reduced access to capital, a higher cost of capital and uncertainty regarding economic growth, which could negatively affect the Group's future financial position, results of operations and business prospects.

Management believes it is taking appropriate measures to support the sustainability of the Group's business in the current circumstances.

Legal contingencies

Group companies are involved in a number of lawsuits and disputes that arise in the normal course of business. Management assesses the maximum exposure relating to such lawsuits and disputes to be RUB 84,015 as at 31 December 2019 (31 December 2018: RUB 36,538). Management believes there is no exceptional event or litigation likely to affect materially the business, financial performance, net assets or financial position of the Group, which have not been disclosed in these consolidated financial statements.

The government of the Russian Federation continues to reform the business and commercial infrastructure in its transition to a market economy. As a result the laws and regulations affecting businesses continue to change rapidly. These changes are characterised by poor drafting, different interpretations and arbitrary application by the authorities. In particular taxes are subject to review and investigation by a number of authorities who are enabled by law to impose fines and penalties. While the Group believes it has provided adequately for all tax liabilities based on its understanding of the tax legislation, the above facts may create tax risks for the Group. Management also assesses the maximum exposure from possible tax risks to be RUB 1,750,623 (31 December 2018: RUB 975,898). Management continues to monitor closely any developments related to these risks and regularly reassesses the risk and related liabilities, provisions and disclosures.

Environmental matters

The enforcement of environmental regulation in the Russian Federation is evolving and the enforcement posture of government authorities is continually being reconsidered. The Group periodically evaluates its obligations under environmental regulations. As obligations are determined, they are recognised immediately. Potential liabilities, which might arise as a result of changes in existing regulations, civil litigation or legislation, cannot be estimated but could be material. In the current enforcement climate under existing legislation, management believes that there are no significant liabilities for environmental damage.

Events occurring after the reporting period

The Chinese economy and its outlook have been negatively affected by global trade tensions and the emergence of the Covid-19 coronavirus. Measures to contain the virus may impact business operations around the world. Restrictions on the movement of goods and services could impact the Company's supply chain.

O 1 › STRATEGIC REP O RT O 2 › C O RP O RATE G O VERNANCE O 3 › FINANCIAL STATEMENTS

O 4 › APPENDICES

LENTA

ANNUAL REP O RT AND ACC O UNTS 2019

COMPANYSUBSIDIARIES

The Company had the following subsidiaries as at 31 December 2019:

COMPANY NAME	BENEFICIAL OWNERSHIP
Lenta LLC	100%
Zoronvo holdings Ltd	100%
TRK-Volzhskiy LLC	100%
TK-Zheleznodorozhniy LLC	100%

L e n t a L t d . and subsidiaries

110 L E N T A 111 A N N U A L R E P O R T A N D A C C O U N T S 2019

A N N U A L R E P O R T A N D A C C O U N T S 2019

O1› STRATEGIC REP O RT

O 2 › C O RP O RATE G O VERNANCE O3› FINANCIAL STATEMENTS

O 4 › APPENDICES

Number on the map	Cities1	Number of hypermar kets	Number of supermar kets	Number of distribution centres
1	Achinsk	1	0	0
2	Almetyevsk	1	0	0
3	Arkhangelsk	2	0	0
4	Armavir	1	0	0
5	Astrakhan	2	0	0
6	Balakovo	1	0	0
7	Barnaul	3	5	0
8	Belgorod	2	0	0
9	Biysk	1	0	0
10	Bratsk	1	0	0
11	Bryansk	1	0	0
12	Cheboksary	1	0	0
13	Chelyabinsk	6	0	0
14	Cherepovets	3	0	0
15	Cherkessk	1	0	0
16	Dimitrovgrad	1	0	0
17	Ekaterinburg	5	10	1
18	Engels	2	0	0
19	Grozny	1	0	0
20	Irkutsk	2	0	0
21	Ivanovo	3	0	0
22	Izhevsk	3	0	0
23	Kamensk Uralsky	1	0	0
24	Kazan	5	0	0
25	Kemerovo	3	9	0
26	Khanty Mansiysk	1	0	0
27	Kostroma	1	0	0
28	Krasnodar	3	0	0
29	Krasnoyarsk	5	0	0
30	Kurgan	1	0	0
31
	Kursk	1	0	0
32	Lipetsk	2	0	0
33	Maloyaro	0	1	0
34	Magnitogorsk	2	0	0
35	Maykop	1	0	0
36	Moscow	25	51	3
37	Murmansk	2	0	0
38	Naberezhnye Chelny	2	0	0
39	Nizhnekamsk	1	0	0
40	Nizhniy Novgorod	4	0	0
41	Nizhniy Tagil	2	0	0
42	Novocherkassk	1	0	0

List of cities as of 19 February 2020

Number on the map	Cities1	Number of hy permarkets	Number of supermar kets	Number of distribution centres
44	Novorossiysk	2	0	0
45	Novoshakh tinsk	1	0	0
46	Novosibirsk	7	25	1
47	Noyabrsk	1	0	0
48	Omsk	6	0	0
49	Orel	1	0	0
50	Orenburg	5	0	0
51	Orsk	1	0	0
52	Penza	2	0	0
53	Perm	2	0	0
54	Petrozavodsk	2	0	0
55	Prokopievsk	1	0	0
56	Pskov	2	0	0
57	Rostov on-Don	4	0	1
58	Ryazan	3	0	0
59	Samara	4	0	0
60	Saransk	1	0	0
61	Saratov	3	0	0
62	Shakhty	1	0	0
63	Smolensk	1	0	0
64	St. Petersburg	39	29	2
65	Stavropol	2	0	0
66	Sterlitamak	1	0	0
67	Surgut	2	0	0
68	Syktyvkar	2	0	0
69	Taganrog	2	0	0
70	Tobolsk	1	0	0
71	Togliatti	2	0	1
72	Tomsk	3	1	0
73	Troitsk	1	0	0
74	Tula	1	0	0
75	Tver	1	0	0
76	Tyumen	5	0	0
77	Ufa	5	0	0
78	Ulyanovsk	2	0	0
79	Velikiy Novgorod	2	0	0
80	Vladimir	1	0	0
81	Volgograd	4	0	0
82	Vologda	1	0	0
83	Volzhskiy	1	0	0
84	Voronezh	2	0	0
85	Yaroslavl	5	0	0
86	Yoshkar Ola	1	0	0
87	Yurga	1	0	0
88	Zheleznovodsk	1	0	0

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'.

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 esti mates 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	Profit for the period before foreign exchange gains/losses, revaluation of financial instru ments at fair value through profit or loss, reversal of impairment of non-financial assets, other expenses, depreciation and amorti sation, interest and tax. The reconciliation of EBITDA to IFRS profit is presented in tabular format in note 6 to the Consolidated Financial Statements.
like-for-like sales	We distinguish between sales attributable to new stores and sales attributable to existing stores. We consider the sales generated by stores until the end of the 12th full calendar month of their operation to be sales attribut able to new stores. Accordingly, like-for-like sales begin with the comparison of the 13th full calendar month of operations of a store to its first full calendar month of operations, assuming the store has not subsequently closed, expanded or down sized. The number of stores in our like-for-like panel as of 31 December 2019 and 2018 was 314 (227 hyper markets and 87 supermarkets) and 228 (187 hypermarkets and 41 supermarkets) respec tively. 'Like-for-like average ticket growth', 'like-for-like average price growth per article', 'like-for-like traffic growth', and 'like-for-like average sales density' are calculated using the same methodology as like-for-like sales.
Other metrics	Net debt is calculated as the sum of short term and long-term debt (including borrow ings and obligations under finance leases, capitalised fees and accrued interest) minus cash and cash equivalents. The ratio of net debt to Adjusted EBITDA is net debt divided by Adjusted EBITDA. The ratio of Adjusted EBITDA to net interest expense is Adjusted EBITDA divided by net interest expense, which is calculated as interest expense less interest income. The ratio of Adjusted EBITDAR to net interest expense plus rental expense ratio is Adjusted EBITDAR divided by the sum of net interest expense and rental expenses. CROCI is defined as Adjusted EBITDA over average capital invested. Average capital invested is the average of the book value of gross non-current assets plus net working capital as of the beginning of the year and the book value of gross non-current assets plus net working capital as of the end of the year. Adjusted SG&A/Sales is SG&A, excluding expenses on land and equipment leases, premises leases, depreciation and amortisa tion and one-off expenses as a proportion of sales.

Glossary

Unless otherwise specified, the terms 'we', 'us', and 'our' refer to Lenta Ltd., or where the context allows, to the Lenta business more generally.

the 2014 Offering	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
active cardholder	a customer who has purchased goods at one of our stores at least twice in the past 12 months using our loyalty card
	average sales density total sales during the relevant year divided by the average selling space for that year
average ticket	the figure calculated by dividing total sales, net of VAT, at all stores during the relevant year by the number of tickets in that year
the Board	the board of directors of Lenta Ltd
BVI	the British Virgin Islands
Capex	capital expenditure
CAGR	Compounded annual growth rate
EGAIS	national automated information system for the control of alcohol production and distribution
FMCG	fast-moving consumer goods – products that are sold quickly and at relatively low cost
gamification	the application of game-design elements and game principles in non-game contexts. Gamification commonly employs game design elements which are used in non-game contexts to improve user engagement, organisational productivity, flow, learning, crowdsourcing, em ployee recruitment and evaluation, ease of use, usefulness of systems, physical exercise, traffic violations, voter apathy, and more.
GDRs	global depositary receipts
in-store availability	the number of SKUs in-store with a positive stock value as a proportion of the total number of active SKUs for sale, calculated based on the av erage daily in-store availability of all open stores
LFL	like-for-like
NPS	Net Promoter Score
P&L	profit and loss statement
SG&A	Selling, General and Administrative Expenses, which is a major non-production cost presented in the Income statement
Shares	our ordinary shares
SKU	a 'stock keeping unit', or a number assigned to a particular product to identify the price, product options and manufacturer of the merchandise
sq.m	square metre(s)
ticket	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

AI assistant

Entain PLC — Annual Report 2019

5222_10-k_2020-03-02_abce4ab0-e089-43ee-9419-4e728ec01c60.pdf

O1>STRATEGIC REPORT OO4

O2>CORPORATE GOVERNANCE O36

O3>FINANCIAL STATEMENTS O68

O4>APPENDICES 108

CONTENTS

O 1 › STRATE G I C RE P ORT

L E N T A

010 L E N T A 011 C H AIRMAN ' S STATEMENT

STRATEGY

THE BOARD OF DIRECTORS

CHANGES INTHE CORPORATE STRUCTURE

OUTLOOK

SHAREHOLDERS,

L E N T A A N N U A L R E P O R T A N D A C C O U N T S 2019

DEAR SHAREHOLDERS,

BUSINESS ENVIRONMENT

PERFORMANCE

OUR PEOPLEAND CORPORATE CULTURE

LOOKING AHEAD

L E N T A A N N U A L R E P O R T A N D A C C O U N T S 2019

COMPETITIVE ENVIRONMENT

GROWTH POTENTIAL

L E N T A A N N U A L R E P O R T A N D A C C O U N T S 2019

PRIVATE LABELAND DIRECT SOURCING

PRODUCTRANGE

OPERATING REVIEW

2019 was another challenging year for the Russian food retail sector, with even stronger competition for customers in a tough trading environment.

MARKETING

LOGISTICS

We import fresh fruits, frozen fish and seafood directly from

RETHINKING CUSTOMEREXPERIENCE

ON-LINE

LOOKING AHEAD

L E N T A

CORPORATE SOCIAL RESPONSIBILITY

ETHICS POLICY

Ou r v a l u e s

Customer satisfaction

Affordable prices for all our customers

High quality of goods

Lenta people

Respect for everyone

Innovation and ideas generation

RECRUITMENT AND CAREER DEVELOPMENT

EMPLOYEE ENGAGEMENT

These include:

L E N T A

MANAGEMENT DEVELOPMENT

STORE AND SPECIALIST STAFF TRAINING

REMUNERATION

DIVERSITY

Diversity

PRICING AND CUSTOMERSATISFACTION

million hours 1.8of training

LOCAL SOURCING

CARING FORTHE ENVIRONMENT

WASTE

ENERGY

SUPPORTING LOCAL COMMUNITIES

PROMOTING HEALTH AND SAFETY

The Company contributed supplies and stationery worth around Rub 1.5 million to 263 social institutions as well as low income families in need of support

Accidents number per 100,000 working hours:

L E N T A A N N U A L R E P O R T A N D A C C O U N T S 2019

SALES

GROSS MARGIN

SELLING, GENERAL

AND ADMINISTRATIVE EXPENSES (SG&A)

EBIDTA

INTEREST

Depreciation

NET INCOME

CAPITAL EXPENDITURE

CASH FLOW

NET DEBTAND LEVERAGE

SHAREHOLDERS,

RISK MANAGEMENT

Stage 1 – Risk identification

Entain PLC Annual Report 2019