O'Key Group SA Annual Report 2012

FY2012 Annual Report · O'Key Group SA

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O’Key Group S.A.
Annual Report 2012

O’KEY aims to improve customer
lifestyles by offering an outstanding
shopping experience and by
making a broad assortment
of high quality products more
accessible across a network of
hypermarkets throughout Russia.

Satisfying customers through…

Providing an
Outstanding
Shopping
Experience

Providing a
Broad and
Compelling
Assortment

Providing
Excellent Value
for Money

For more information
see pages

12-15

For more information
see pages

16-21

For more information
see pages

22-25

O’Key Group S.A. Annual Report & Accounts 2012

Operational Highlights

Financial Highlights

428,000m2

Of selling space
(346,000m2 in 2011)

25.3%

Increase in Unique
Loyalty Card holders
to 5.6 million

EBITDA (RUB)

9.4bn
+25.5%

(2011: 7.5bn)

Total number of
stores, up from
71 stores in 2011

Revenue (RUB)

Net proﬁt (RUB)

117.3bn
+26.0%

(2011: 93.1bn)

4.7bn
+44.4%

(2011: 3.2bn)

Major cities in Russia,
17 in 2011

LFL revenue growth

Gross proﬁt (RUB)

27.6bn
+29.8%

(2011: 21.3bn)

2.5% 22.4%

Growth in LFL number
of purchases

Increase in purchases
to 170m in 2012

Earnings per share

Gross margin

17.4 RUB
+45.0%

(2011: 12.0 RUB)

23.5%
+0.7 pp

(2011: 22.8%)

Contents
01-07

Overview
01 2012 Operational

& Financial Highlights

02 O’KEY at a Glance
04 Strategy
05 Business Model
06 Chairman’s Statement

08-29

Business Review
08

Chief Executive
Ofﬁcer’s Review

10 The Consumer Environment
12 Providing an Outstanding
Shopping Experience
16 Providing a Broad and
Compelling Assortment

22 Providing Excellent Value

for Money

26 Financial Overview

30-39

Governance
30 Risk Management
32 Board of Directors
33 Senior Management
34 Corporate Social
Responsibility

36 Corporate Governance
38 Legal & Ownership Structure
39 Management & Directors
Responsibility Statement

40-73

Financial Statements
41 Report of the Reviseur
D’entreprises Agree
42 Consolidated Statement
of Financial Position
43 Consolidated Statement
of Comprehensive Income
44 Consolidated Statement
of Changes in Equity
45 Consolidated Statement

of Cash Flows

46 Notes to the Consolidated
Financial Statements

IBC Covering Analysts

O’Key Group S.A. Annual Report & Accounts 2012

O’KEY at a glance

O’KEY is a rapidly growing food
retailer whose unique business
model has led to unequalled
customer loyalty and brand equity.

> Employing the modern hypermarket concept across
21 major Russian cities. Undergoing rapid expansion
in the regions with the intention of serving customers
in 25 cities by 2015.

> Unique business model which creates an exceptional

customer experience by focusing on providing attractive
and convenient ‘all under one roof’ stores with a wide
assortment of products priced competitively.

> Strong assortment of local produce mixed with
imported foods – attractive assortment of fresh,
delicatessen and non-food products.

> Importance placed on the individual customer through
the high levels of in-store service and an assortment
policy that is tied to customer needs.

> Retaining high levels of customer loyalty with a bigger
average basket than its peers and positive LFL trafﬁc
growth as more and more customers choose O’KEY.

> 309k Rub revenue per sqm – making O’KEY one of
the largest publicly traded food retailers in Russia.

> Highest store equity among competitors in

St. Petersburg.*

*Nielsen 2012

Customer Loyalty
Source: Company Data

Brand Equity Index of Modern Store Formats
Source: Nielsen 2012, St. Petersburg Brand Leadership 2005 – 2013

100%

90%

80%

70%

60%

50%

3.5

3.0

2.5

2.0

1.5

1.0

0.5

0.0

Jan 11

May 11

Sep 11

Jan 12

May 12

Sep 12

Dec 12

2005

2006

2007

2008

2009

2010

2011

2012

Share of card holders as % of all customers
Share of revenue from loyalty card holders

O’KEY
Lenta
Pyaterochka
Karusel

Perekrestok
Diksi
Ashan
Metro

O’Key Group S.A. Annual Report & Accounts 2012

Fast facts

23,000
employees

869
RUB

Including stores
and ofﬁces

Industry leading
average basket*

11.1%

Average LFL revenue
growth 2007-2012

New cities added
in 2012

*Among public companies

31%

24%

CAGR Retail Revenue
Growth (07-12)

Selling space CAGR
2007-2012

Hypermarket (HM)

Supermarket (SM)

Murmansk
2 HM

St Petersburg
18 SM
18 HM

Moscow
4 SM
4 HM

Lipetsk
1 HM

Voronezh
2 HM

Nizhniy Novgorod
1 HM

Rostov-on-Don
1 SM
2 HM

Togliatti
1 HM

Saratov
1 HM

Ufa
2 HM

Krasnodar
1 SM
4 HM

Sochi
1 HM

Volgograd
3 SM
1 HM

Stavropol
1 HM

Astrakhan
1 SM
2 HM

Surgut
2HM

Yekaterinburg
2HM

Tumen
1HM

Omsk
1 HM

Novosibirsk
1 HM

Krasnoyarsk
1 SM
2 HM

O’Key Group S.A. Annual Report & Accounts 2012

Strategy

The successful execution of our
The successful execution of our
strategy allows us to keep improving our
customers’ experience as we replicate
our business model throughout Russia:

Expand footprint:

> Further penetrate the Russian market focusing on Urals, Siberia and Moscow.
> Establish presence in 25 Russian cities by 2015.
> Ensure that the high standards of convenience are met by all new locations without

compromising O’KEY’s store model and commitment to the customer.

Provide broad product offering:

> Constantly develop assortment to ensure a truly ‘one stop shop’ experience.
> Cooperate with local suppliers to meet customer expectations at every city.
> Grow the share of our private labels while ensuring high quality standards

and attractive prices.

Enhance supply chain:

> Optimise supply chain for every category of products and SKUs.
> Maintain high shelf availability and optimal inventory levels as the business grows.
> Improve efﬁciency of logistics supporting import and private label operations.

Optimise information systems and business
processes:

> Enhance technological platform to support expanding the scale of operations.
> Implement innovative retailing solutions to meet and exceed customer expectations.
> Introduce best practices into existing business processes.

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O’Key Group S.A. Annual Report & Accounts 2012

Business Model

O’KEY Group opened its ﬁrst hypermarket in
O’KEY Group opened its ﬁrst hypermarket in
St. Petersburg in 2002, introducing a differentiated business
model. The strength of this business model, which had a
distinct focus on customer experience has seen O’KEY grow
its presence in St. Petersburg, one of the most competitive
markets in Russia, then seen it expand regionally and nationally
to become one of the largest food retailers in Russia.

Modern, Convenient
‘Under One Roof’
Shopping

Customer
Experience

Excellent
Customer Service

Compelling
Product Range

Assortment

High Quality
Produce

Competitive
Prices

Value

Strong Brand
Image and
Customer
Satisfaction

Our business model is
geared towards meeting
the needs of our shoppers.

Our modern and convenient
stores are located at the centre
of population hubs, with good
parking and easy access to
our stores through strong
transportation links.

Each store has an appealing
ambiance where we offer
a wide assortment of
high quality food and
non-food produce that is
priced very competitively.

Our supply chain is designed
to ensure a constant supply
of products with short lead
times whether sourced
locally, nationally or
through import to meet our
customers’ expectations.

O’Key Group S.A. Annual Report & Accounts 2012

Chairman’s Statement

2012 was a year of growth and
2012 was a year of growth and
consolidation, which led to the
opening of the largest number of
O’KEY hypermarkets in a single year.
Our key strengths have remained
constant and our strategy has
remained simple yet effective.

Dear customers, shareholders and colleagues,

It is with great pleasure that I present O’KEY Group
S.A.’s 2012 Annual Report, which gives us the
opportunity to review our ﬁnancial and operational
results for 2012, to restate the commitment made
to our shareholders to carry out business in an
efﬁcient, ethical and transparent manner, and to our
customers, to whom we are committed to delivering
a modern and convenient shopping experience.

O’KEY currently has 83 stores in 21 cities and our
ambition is to have stores in 25 cities by 2015. With
Russian GDP expected to grow by around 3% in 2013
and real wages expected to keep increasing to support
an anticipated 44% growth in per capita consumer spend
in the Russian retail market over the next three years,
the scene is set for O’KEY to grow. To capitalise on
this opportunity, O’KEY intends to focus on the regions
which have the highest levels of personal income.

2012 was a year of growth and consolidation, which
led to the opening of the largest number of O’KEY
hypermarkets in a single year. Our key strengths have
remained constant and our strategy has remained simple
yet effective. In essence, the needs of our customers are
at the very heart of our growth plans. This commitment
has ensured we retain existing customers at a rate
unmatched by our peers, while attracting new clients
as we continue our ambitious roll-out programme.

O’KEY’s focus on the customer and its strategy for
expansion enabled the Group to deliver a strong
set of results for 2012, securing growth for the tenth
successive year in our history. In 2012, we also set a
new benchmark by opening ten hypermarkets in a
single year. In St. Petersburg, the location of O’KEY’s
ﬁrst hypermarket and one of the most competitive
markets in Russia, we continue to enjoy the highest
level of brand equity amongst our competitors –
a feat we intend to replicate in other cities.

O’Key Group S.A. Annual Report & Accounts 2012

“ O’KEY currently has 83 stores in
21 cities and our ambition is to have
stores in 25 cities by 2015.”

Such levels of success bring the Board a great deal of
satisfaction and it is equally pleasing to see this level of
execution being recognised by the equity capital markets.
At the time of writing this letter, O’KEY is one of very few
issuers who ﬂoated during the ﬁnancial crisis that is trading
above its IPO price.

with each store’s environmental impact discussed before
opening. Furthermore, in O’KEY’s pursuit for customer
service, much is expected of our staff, but O’KEY is
creating an environment within which individual members
of staff are rewarded, valued and receive training.

Whilst the strategy adopted to achieve our ambitions
may be simple, a great deal of work goes on behind
the scenes to implement it. I would therefore like to take
this opportunity to thank our Board of Directors, our
top-management team and all employees nationwide,
for their commitment and professionalism in the
face of continued economic uncertainty, as this has
helped make 2012 a successful year for O’KEY.

To conclude, I would like to say that the Board of
Directors is pleased with the progress made by O’KEY
in 2012. We are delivering value and returns to our
shareholders by way of generating both earnings and
asset growth as well as through offering a dividend to
all shareholders. While the market is becoming more
competitive, growth remains fast and we expect us to
remain on this proﬁtable growth trajectory for years to
come as O’KEY capitalises on the strong offering it has.

As O’KEY expands into new towns and cities, a key
part of its corporate policy is ensuring that the Company
is contributing all it can to the social and economic
development of its regions and that it maintains a good
reputation within the general community. Given the size of
our stores, each location is carefully selected by committee

Heigo Kera
Chairman
April 2013

O’KEY’s focus on the customer and its
strategy for expansion enabled the Group
to deliver a strong set of results for 2012,
securing growth for the tenth successive
year in our history.

O’Key Group S.A. Annual Report & Accounts 2012

Chief Executive Ofﬁcer’s Review

By sticking to our core values,
upon which O’KEY’s success is
built, we ensured that 2012 was
another successful year for the
Company on several fronts.

Dear customers, shareholders and colleagues,

By sticking to our core values, upon which O’KEY’s
success is built, we ensured that 2012 was another
successful year for O’KEY on several fronts. We grew
our retail revenues by 25.7% to RUB 115.9 billion, by
7% on a like for like basis, to deliver on the sales and
LFL revenue targets that were set at the beginning
of 2012. Furthermore, our EBITDA margin of 8.0%,
demonstrates that our focus on delivering exceptional
customer experience provides high returns.

We value consistency in doing business. It means
that while our growth plans are aggressive, they
are sustainable. This means that continuous price
investments allow our customers to achieve savings on
their shopping, regardless of the market conditions. It
also means that shareholders can rely on us to deliver
earnings and asset growth on their behalf. In line with
this commitment, we opened 12 new stores during
2012, adding four new cities to our list, and ensured
that O’KEY is well on its way to meeting its target of
establishing a presence in 25 Russian cities by 2015.

While most Russian retailers beneﬁted from growing
inﬂation in 2012, few managed to deliver positive
LFL trafﬁc growth. On a like for like basis, our store
trafﬁc grew by 2.5% during 2012, and as the year
progressed, more and more customers chose to
shop at O’KEY stores. The strength of our business
model, which places a quality shopping experience
at its core, and the strength of our brand, played a
signiﬁcant role in helping us achieve these LFL results.

The high quality shopping experience behind these results
is based on a ‘one stop shop’ concept where O’KEY
ensures that each store remains true to our concept.
The concept guarantees quality and convenience
of location, availability of spacious parking, modern
store layout and the provision of additional services
to complete the offering and to make shopping at
O’KEY stores a positive and pleasant experience. Our
product range is made up of 35,000 SKUs, increasing
to 64,000 by season, but what outstrips most of our
peers is the breadth of our assortment. At the same
time, price investments we make, help to make our
proposition to the customer highly competitive.

O’Key Group S.A. Annual Report & Accounts 2012

“ While most Russian retailers
beneﬁted from growing inﬂation
in 2012, few managed to deliver
positive LFL trafﬁc growth. On a
like for like basis, our store trafﬁc
grew by 2.5% during 2012.”

Since we started out in St. Petersburg, one of the most
competitive markets in Russia, more than a decade ago,
we have built signiﬁcant expertise and know-how that has
enabled us to replicate this successful business model
on a national scale. We are proud that we have remained
true to our core principles throughout our expansion – we
want to grow as quickly as possible, but not at the cost
of compromising on the quality of our stores and our
locations. With this in mind, and given our growing scale,
we felt it important to enhance our management structure
in the cities. Responsibility for the Group’s expansion
is retained at O’KEY’s federal headquarters, as are the
responsibilities for negotiating commercial conditions
with suppliers and the development of our assortment
policy. Our local city ofﬁces do however play a major
role in ensuring that we stay in touch with and remain
focused on local customers, that we maintain the high
levels of efﬁciency achieved by local operations and that
all stores comply with a standard of service set centrally.

development and, most importantly, where each store is
in its respective stage of completion. This helps provide
clarity on our plans for growth by breaking down our actual
committed pipeline and anticipated store completion time.

In terms of our expectations moving forward, our priority
remains the organic expansion of our hypermarket
network. We currently have 26 hypermarkets in our pipeline
and we are rapidly expanding our land bank to ensure that
our ﬂow of planned new store openings remains high.

Our long-term proﬁtability target remains at 8% on
the EBITDA line, and we still think there is scope to
improve our operating efﬁciency going forward. We
continue to develop our range of products through
our non-food offering, our private labels and own
production, and as efﬁciencies are realised, we will
focus on passing these savings on to our customers.

In terms of growing our total sqm selling space, we
decided in 2012 to increase transparency and provide
greater insight into our development pipeline. You will see
that we now disclose the total number of stores under

Patrick Longuet
Chief Executive Ofﬁcer
April 2013

The high quality shopping experience behind
these results is based on a ‘one stop shop’
concept where O’KEY ensures that each store
remains true to our concept .

O’Key Group S.A. Annual Report & Accounts 2012

The Consumer Environment

Overall, Russia is the largest
market in Europe1 with the third-
highest retail turnover in EMEA1
(16%) of GDP and retail chains are
expanding quicker than ever before.

1PWC 2050 Russian Retail Market Overview

According to an Infoline Agency report, in 2012 the
top 130 Russian retail chains opened 4,059 new outlets,
a record number, higher even than pre-crisis records.

Since O’KEY’s foundation in 2001 and the current day,
Russia’s retail turnover has multiplied ﬁve times over,
to exceed $600 billion annually. Over a similar period
(that is 2003-2012), Russian consumer spending
more than doubled from RUB 2546.70 billion in
February 2003 to RUB 5,806.70 billion in 3Q 2012
(www.tradingeconomics.com/Russia/consumer-spending).

The size of O’KEY’s average basket is closely tied to total
CPI Inﬂation, which fell during the ﬁrst part of 2012 to reach
a two year low of 3.6% in May, but as inﬂation increased
during the second part of the year, peaking at 6.6% in
October, so did O’KEY’s average ticket, which by the end
of the year had increased by 4.7% to RUB 869 in 2012.

Russian real GDP grew 4.5% last year (according to the
OECD Economic Outlook) and is forecast at similar levels
for 2013.

As O’KEY has expanded, Russia has also witnessed a
general decrease in its unemployment rate from a high
of over 9-10% in 2001 and during the crisis to below 6%
coming out of 2012.

With the labour market’s increasing buoyancy, wages have
also increased from less than RUB 5,000 to an all time
high of RUB 36,450 in December 2012.

Russia Consumer Spending
Source: www.tradingeconomics.com | Federal State Statistics Service, Russia

6000

5000

4000

3000

2500

Jan 04

Jan 06

Jan 08

Jan 10

Jan 12

Russia Unemployment Rate
Source: www.tradingeconomics.com | Federal State Statistics Service, Russia

Jan 02

Jan 04

Jan 06

Jan 08

Jan 10

Jan 12

O’Key Group S.A. Annual Report & Accounts 2012

Russia’s retail turnover has multiplied 5 times
over since 2001 with Russia also witnessing
a general decrease in unemployment from
a high of 9-10% in 2001 to below 6%... these
dual trends remain robust and underline
customers’ increasing purchasing power.

These dual trends of increase in real wages and higher
employment have remained robust over the past ten
years and are predicted to continue – underlining
our consumer’s increasing purchasing power.

Per capita consumer spending in the Russian retail
market is forecast to increase by 44% between 2013 and
2016. Whilst, in PwC’s ‘World in 2050’ report, Russia
is forecast to become the largest European economy
in purchasing power parity (PPP) terms by 2020.

In addition, Russian customers have progressively
adapted their habits away from the traditional market
model. According to a 2012 GfK Russia survey, 52% of
fresh produce is now purchased in modern retail outlets.

Whilst these ﬁgures clearly highlight Russia’s ongoing
potential as a market, as well as consumers’ increased
purchasing power and disposable income, it is
O’KEY’s commitment to customer service which has
and continues to enable us to exploit the positive
macroeconomic and sector situation. The loyalty
engendered by our unique product offering is borne
out by our share of revenue generated from loyalty
card holders – a rate unmatched by our peers.

2012 Russian CPI inﬂation
Source: Bloomberg

Jan

Feb Mar

Apr May

Jun

Jul

Aug

Sep Oct Nov Dec

Russia Wages
Source: www.tradingeconomics.com | Ministry for Economic Development, Russia

40000

30000

20000

10000

Jan 02

Jan 04

Jan 06

Jan 08

Jan 10

Jan 12

O’Key Group S.A. Annual Report & Accounts 2012

Providing an
Outstanding
Shopping
Experience

O’KEY’s primary focus is to offer modern,
convenient and innovative stores that
are well-located, well-designed and
have everything under one roof.

O’KEY’s efforts to provide an excellent shopping experience combined
with a broad assortment of goods across the price spectrum have
been rewarded with high levels of customer satisfaction and loyalty.

Rapid growth in the total number of purchases thanks to O’KEY’s distinct
offering and successful growth plan

200,000

150,000

100,000

s
e
s
a
h
c
r
u
p

f
o
#

50,000

126,631
18.3% growth

139,439
10.1% growth

169,786
22.4% growth

2010

2011

2012

O’Key Group S.A. Annual Report & Accounts 2012

7,500m2

35,000

Average selling space
of a hypermarket

Person days of training in
HQ and stores in 2012

56%

Of O’KEY’s real estate
belongs to the Company
– strengthening our ability
to build hypermarkets
that provide the best
shopping experience

5.6m

Of unique loyalty card
holders

40+

Cash registers per
average O’KEY
hypermarket

3.2

Highest brand equity
in St. Petersburg

O’Key Group S.A. Annual Report & Accounts 2012

Providing an Outstanding Shopping Experience

Led by an experienced management
team who have a combined 115 years’
experience in developing and expanding
the hypermarket model across Europe,
O’KEY has unparalleled managerial expertise
in the hypermarket business.

Number of Stores (as of December 31, 2012)

100

24
7

2007

2008

2009

2010

2011

2012

Supermarket
Hypermarket

Strong Retail Expertise…
Led by an experienced management team who have
a combined 115 years’ experience in developing and
expanding the hypermarket model across Europe, O’KEY
has unparalleled managerial expertise in the hypermarket
business. We use this expertise to create a business
model with just one goal – to meet customer expectations.

Carefully Selected Store Locations
Location is the key to success in retail. The selection
process behind new O’KEY store locations is thorough
and involves a large number of experts. Generally, we
never close stores down and, as a result, we select our
store locations as though they are going to serve their
communities for a lifetime. So, choosing the right location
is vital and involves three levels of expert opinions:

> Suitable locations are vetted by the expansion

department who compile a shortlist of locations
based on O’KEY’s special criteria.

> All locations are examined by experts from
the construction, legal, sales, HR and
commercial departments.

> Accepted locations are considered by the

Expansion Committee where senior management
review the top locations and reach their ﬁnal decisions.

When selecting speciﬁc sites for new hypermarkets,
convenience for the customer is key:

> Locations within city boundaries near main public

transportation hubs and main roads. A maximum 30
minute public transportation ride and 15 minutes by car.
> Large and well-lit free parking at each location close to
the stores’ main selling areas, equal to one parking
space for every ten m2 of selling space.

> Locations where our competitive position in the area

is secure in the long term.

> Land plots are either purchased or leased, are around
four hectares in size and accommodate both a fully
sized O’KEY hypermarket and a large parking space
to provide an optimal shopping experience.
> For rented stores we choose large spacious

shopping centers that provide customers with
a modern and high quality shopping experience.
> Our stores typically have a selling area of around

7,500 m2 and around 15,000 m2 in total size built on
four hectares of land. This format enables us to display
a wide choice of products in relatively compact
premises. As a result, we can locate our hypermarkets
within city boundaries and can provide enhanced
convenience for our customers.

Making Sure O’KEY Secures the Best Stores for its Customers…

Search Team:

Identifying available
locations in target cities.

Operational
Management:

Senior Management
& Board Approval:

Architects, Designers
& Builders:

Selecting locations that
meet O’KEY’s criteria.

Development stage –
singling out the
best locations.

Developing stores that
realise a location’s
potential.

18 months lead time from the acquisition of land,
to an owned hypermarket being ready and open.

O’Key Group S.A. Annual Report & Accounts 2012

Excellent Customer Service
Friendly & Knowledgeable Staff
Store layout is important, but the quality of service
provided by our employees is what really makes
a friendly shopping environment. To promote
consistent standards and quality of customer
service, all O’KEY staff undergo a number of
compulsory training programs which comprise of:

> An Introduction to O’KEY’s corporate culture and

business practices which ensures staff appreciate
the importance of the customer to O’KEY from
the start.

> All store employees undergo training in hospitality,
which focuses on providing customers with polite,
knowledgeable and friendly service.

> Employees who interact with customers directly

receive compulsory conﬂict management training.
The training teaches employees how to resolve
difﬁcult situations when helping customers.
> To ensure uniformity when it comes to the layout

of stores, employees are trained and ﬁlmed working
in the same sales area in different shops. When it
comes to selling and merchandising, two training
groups exist through which employees gain an initial
understanding of the principles of merchandising
and customer perception.

All our hypermarkets have an information desk
where well-trained employees are available at all
times to provide advice and assist customers.

An Efﬁcient Check-Out Service
The O’KEY shopping experience concludes with quick and
easy service at the check-out point. Once ready to pay,
our customers are met by a large number of manned cash
registers. Our cashiers’ schedules are carefully managed
and our target is to minimise queuing time so that not more
than three customers are in a line at any time. To achieve
that result our hypermarkets are equipped with more than
40 cash registers serviced by more than 100 employees.

A Bright, Modern Layout
On entering our stores, shoppers are greeted by
a bright, warm and well-ventilated ambiance with
well-presented produce immediately catching one’s
attention. Store layouts are convenient, with sections
clearly signed and differentiated by bright light schemes
that also ensure customers can see the produce. Our
selling area is set up with low shelving to ensure that
all produce is easy to reach while buffer inventories are
kept at the back of the store. To minimise discomfort
for our customers and to keep unnecessary clutter
at a minimum, discrete replenishment occurs during
the course of the day whereby our employees
deliver products to the ﬂoor using trolleys.

Consistent store layouts maintain a level of familiarity
for customers across all O’KEY stores. So, if they go
to a different O’KEY store, they still know where to ﬁnd
their goods and they experience the same high quality
of premises.

Bringing convenience to family shopping is a key part
of our store philosophy and the contribution made by
our broad scope of services is critical to this offering.
We provide supervised playgrounds for babies
within our selling area, while third parties provide
supervised areas for toddlers alongside pharmacies,
dry cleaners, toy stores and bank services, all under
one roof. We pay a lot of attention to the breadth
and variety of what is offered in O’KEY premises.

O’Key Group S.A. Annual Report & Accounts 2012

Providing a
Broad and
Compelling
Assortment

O’KEY’s wide product assortment of
both food and non-food produce that
is high in quality and freshness makes
O’KEY a destination of choice.

O’KEY Group and Peer SKUs
Companies’ data; for Megamart, Lenta and Magnit – average number of SKUs

(1)

(2)

(3)

20.5

18.0

(1) As of 30 June 2012 (2) As of December 2011 (3) As of 30 November 2011

O’Key Group S.A. Annual Report & Accounts 2012

92%

Share of direct
deliveries

70%

Non-food share in the
2012 assortment

500

Unique recipes used in
owned production

35,000

SKUs sold constantly in
a store

93%

Average on-shelf
availability of products

3,000

Customer needs
recognised and
addressed

O’Key Group S.A. Annual Report & Accounts 2012

Providing a Broad and Compelling Assortment

Broad Assortment of Quality
Food & Non-Food Products
Customers are presented with a wide and well-balanced
choice across a range of basic, average and average-plus
products in all of our stores. We build our assortment
around approximately 3,000 recognised customers
needs. We develop an assortment with each of these
customer needs in mind and we respond to different
quality and price expectations. The resulting 35,000 SKUs
we constantly sell represent a well-balanced portfolio
of products that meet differing expectations and needs
regardless of customers’ income levels and preferences.

O’KEY’s selection of non-food products is an important
differentiator for the Company. Customers travel near
and far to buy goods they cannot ﬁnd anywhere else
and these non-food goods represent more than 70%

Total Assortment by SKUs

5.9

18.0

7.8

12.9

3.1

14.1

7.4

18.0

12.8

(cid:132) Ultra Fresh
(cid:132) Fresh food
(cid:132) Dry food
(cid:132) Alcohol

(cid:132) Health & Beauty
(cid:132) Products for home
(cid:132) Clothing
(cid:132) Seasonal merchandise
(cid:132) CE & DIY

Customers travel near and far to buy goods
they cannot ﬁnd anywhere else and these
non-food goods represent more than 70%
of our assortment in hypermarkets.

of our assortment in hypermarkets. To make the most
of its scale and location, a hypermarket needs to offer
more than just foods that are widely available across
a variety of outlets. Providing an extensive non-food
selection and putting special emphasis on our non-food
range, differentiates O’KEY’s proposition, which helps us
generate high levels of trafﬁc and customer satisfaction.

The most popular non-food categories include cosmetics,
health and beauty, consumer electronics, clothing, DIY,
toys and crockery, but it is not limited by these and we
constantly work to enhance our non-food offering and
provide customers with new product.

O’KEY’s fresh food & delicatessen produce is also
a forte, with freshly prepared baked goods also very
popular. O’KEYs 50 bread recipes and more than 100
different salads is an O’KEY signature that has contributed
signiﬁcantly to O’KEY’s high level of customer recognition
and differentiation. A fresh food and delicatessen selection
has been part of our offering from the very beginning and
we have never lost this focus.

Our private label range includes non-branded ﬁrst price
items and O’KEY labelled products manufactured
by large and renowned Russian and international
producers. O’KEY’s private labels improve the value

Well-balanced assortment

40%

Basic

25%

Average +

Average

35%

(cid:132) Basic basket: Price sensitive customers
(cid:132) Average basket: Well-known brands
(cid:132) Average Plus basket: More expensive branded

products and imported goods

O’Key Group S.A. Annual Report & Accounts 2012

of our proposition as our branded private labels provide
high quality for a moderate price – the private label range
completes O’KEY’s price assortment and ensures there
is something available at all price points. The private
label range also generates additional store trafﬁc and
provides better value for money for our customers.

O’KEY’s careful management of third party providers at
each store complements O’KEY’s own offering by selling
products and services that are not offered by O’KEY itself.
This includes jewellers, banks, dry cleaners, toy stores,
consumer electronics stores, crockery stores and food
court operators.

Tailoring Assortment to Differentiate
O’KEY and Meet Customer Expectations
By offering customers an extensive choice of quality
products and by tailoring our assortment in response
to evolving preferences, O’KEY differentiates itself from
its competitors and builds long-lasting relationships
with customers.

We recognise the importance of providing a localised
assortment, where part of the assortment in our stores is
different in each city so that local tastes and expectations
are catered for. We aim to maintain a high share of local
assortment in every city and in some places it reaches
40% of total store purchases. Naturally, fresh foods
form a large part of our local assortment, which brings

O’KEY’s careful management of third party
providers at each store complements O’KEY’s
own offering by selling products and services
that are not offered by O’KEY itself.

numerous advantages such as shorter lead time when
it comes to their sourcing, a longer subsequent shelf life,
high brand recognition and better inventory rotation.
Of the current assortment, fresh food and own production
accounted for approximately 45% of O’KEY’s total revenue
in 2012, reinforcing O’KEY’s belief that such products are
driving trafﬁc and encouraging greater overall spend.

O’KEY is also looking to increase the share of private
label and non-branded products as they represent
excellent value to customers, while offering similar levels
of quality to branded products. The contribution of private
label goods to O’KEY’s revenue reached 8% in 2012.

O’KEY is constantly looking at ways of developing new
categories. By developing private label goods and
monitoring the performance of third party providers
inside the store, O’KEY becomes more ﬂexible
and able to adapt to new trends as they emerge,
to ensure that its goods assortment is optimal.

O’Key Group S.A. Annual Report & Accounts 2012

Providing a Broad and Compelling Assortment

Enhancing Quality Controls
As for any food retailer, the quality of our assortment
is regulated and closely watched by both government
bodies and local communities. To ensure compliance
with rules and regulations on quality and sanitary norms
and to guarantee high levels of service to our customers,
we have developed and introduced several monitoring
units within the Company. Their target is to maintain
permanent quality monitoring in stores, detect and
bring to the attention of management any deviations
from norms, to educate and develop store personnel’s
level of awareness and involvement in quality control.

We have established a system whereby one food safety
and health inspector is on call in every city to conduct
regular food safety and health spot-checks on food
preparation areas and to conduct medical checks on
employees who work with food. Approximately 480
store checks are carried out annually, which means that
almost every hypermarket is subjected to strict checks
once a month for cleanliness and sanitary control.

Produce is also checked for pathogens, parasites
and infusions of any harmful elements. Food products
are subject to random physical inspection on arrival
at warehouses and stores, whether they are branded
or own produced goods, with approximately 20
products taken away for testing on a monthly basis.

O’KEY has also developed internal policies that regulate
the quality of service provided inside our stores and how
retail processes are organised. Quality managers perform
quarterly checks in stores to ensure compliance with
internal policies and regulations, such as merchandising
and warehousing norms. Service checks are thorough,
can last two or three days per visit and are repeated
on a quarterly basis with detailed reports following
each inspection. The standards of service provided
within each store impacts our results and how our
customers perceive our stores. As a result, store
management compensation correlates to the results
of these service inspections which provide scores that
determine around 25% of store managers’ bonuses.

Our food assortment is also subject to regular quality
inspections, which our food safety and health inspectors
are responsible for. Products are randomly selected and
sent to laboratories for inspection. Laboratories verify
the consistency between how the food is described
on its packaging and whether that reﬂects its content.

Effective Supply Chain to Deliver Quality,
Variety, Freshness and Value…
Ensuring that all our customers have ready access to
a wide variety of high quality produce is our supply
chain’s key priority. Being a federal company we work
with international, federal and local suppliers as well as

Quality and variety are among the critical
factors behind the loyalty of our customers,
and the logic behind our supply chain
maintains and improves high levels in both.

O’Key Group S.A. Annual Report & Accounts 2012

their distributors. In some cases completing deliveries
ourselves is the most efﬁcient way of getting products to
a store, in which case we use our cross dock platforms.
This model gives us considerable ﬂexibility and a high
degree of supply chain efﬁciency. Maintaining the quality
and variety of our assortment is critical for success of
our business model, and the logic behind our supply
chain is to maintain and improve high levels in both.

become useful when producers are international and
we need to take care of the logistics ourselves.

O’KEY’s cross-docking facilities also enhance our supply
chain as they reduce our dependence on the logistical
capabilities of our suppliers and distributors, leading to
improved inventory rotation for slow moving products
and in some cases improved product proﬁtability.

Regardless of which of the 21 cities our customers
are based, they have all come to expect access
to a wide range of quality products. Delivering this
means working closely with our suppliers, keeping
a tight grip on our distribution network, on inventory
controls and educating our staff in-store.

Our supply model is set up to bring O’KEY and
its customers a number of advantages:

> Wide range of fresh food and high quality goods,

tailored to suit local tastes.

> Low inventory costs as products hit shelves directly

upon delivery.

In essence, our supply chain revolves around direct
delivery which accounts for around 92% of all deliveries.
Direct delivery provides signiﬁcant ﬂexibility in terms of
assortment management and store roll-out. It also enables
us to quickly and easily tailor product assortments to local
preferences without restrictions, minimises our inventories
and most importantly provides high shelf availability.

> Time lags between order, delivery and shelf availability

are short with produce rarely out of stock.
> Growth model enables O’KEY to leverage both
national and regional economies of scale.

> Efﬁcient roll-out of new stores and new city stores as

we have little infrastructure constraints.

> Minimised expenditure and management time spent

Direct deliveries are supplemented by O’KEY’s
storage warehouses where imported and private
label products are stored. These warehouses also

on supply chain.

> Costs of warehousing and delivery rest with suppliers.

O’Key Group S.A. Annual Report & Accounts 2012

Providing
Excellent
Value for
Money

Generating Loyalty and
Trafﬁc by Delivering Value.

869 RUB

Leading average basket
among Russian
hypermarkets

170m

1,000

Purchases made in 2012

Prices checked weekly

82%

2.5%

13+

Of sales were with
loyalty cards

LFL growth in the
number of purchases

Items per average
basket in a hypermarket

O’Key Group S.A. Annual Report & Accounts 2012

Providing Excellent Value for Money

Generating Loyalty and Trafﬁc
by Exceeding Customer Price Expectations

O’KEY has historically focused on a number of areas
that differentiate upscale stores from the rest. O’KEY
creates an excellent customer experience and provides
a broad and well balanced assortment of products. From
our very beginnings, our pricing policy has been set to ﬁght
competition. O’KEY’s proposition to the customer is clear
and we are constantly working to enchance this so that
our strengths become more visible. However, we do not
want to be known for being expensive.

Operating hypermarket formats, as O’KEY does as its
core operation, presents a number of opportunities,
particularly when it comes to pricing policy. Due to the
breadth of our assortment of up to 64,000 SKUs, as well
as the availability of non-food products which represents
70% of our merchandise and the additional services
we can offer, hypermarkets become destination points
for shoppers. Customers travel longer distances to our
stores in most cases, and when they come they take a
sizable basket, more than 13 items per average basket,

Supporting Higher than Average Basket
(hypermarkets)

869

593

548

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Magnit
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O’KEY’s store concept and value proposition
translates directly to a higher average ticket.

which contains different types of goods. While the
prices of individual items may not seem too important,
the monetary value of the ﬁnal basket does matter. It
is at the checkout that customers evaluate whether
the value of the products in the basket correspond to
their price, and whether or not the store is expensive.

We don’t believe that our customers shop at O’KEY stores
because of our prices, but we know that they could easily
leave because of high prices. We therefore have a price
monitoring system in place to ensure that our prices always
stay highly competitive in the marketplace. We are not
leading the market by setting low prices, but we constantly
make sure that we are in line with market leaders. To
accomplish this we invest all available resources in our
prices and we increase our competitiveness by passing
surplus margin and cost savings into selling prices, offering
private labels and regularly offering promotions and sales.

Several key elements within our pricing policy help us
enhance the competitiveness of our prices. Products that
are directly comparable with other stores are price matched
with the lowest local competitor prices. Prices are monitored
on a daily basis for the top 50 selling products, on a weekly
basis for the next 1,000 most popular products and an
extended range is monitored every two weeks.

O’Key Group S.A. Annual Report & Accounts 2012

We give customers plenty of choice so that
they are fully satisﬁed with the products they
buy, and our pricing policy means they keep
returning to our stores.

Products that do not have an exact match in competitor
stores or where we have lower purchase prices are subject
to gross margin limits. Only small price differences are
maintained between each of O’KEY’s product lines to
encourage customers to trade up to higher quality goods.

In addition to direct price reductions, customers are also
offered promotions and catalogues containing special
offers twice a month in each city. Additional potential for
savings is created by O’KEY’s ﬁrst price concept which
applies to the entry point of each product category.

O’KEY has greater control over the prices of Private
Label goods due to their higher gross margins. O’KEY’s
private label products have a slimmer supplier chain, so
they generate higher margin products, enabling O’KEY
to pass savings directly to the customer. Private label
products are increasing in popularity as their quality
now more closely resembles branded products. In
2012, they accounted for 8% of O’KEY’s revenues.

Our overall objective when it comes to pricing is to
provide our customers with the best value offer. We
give customers plenty of choice so that they can
make a balanced decision on the products they buy,
and our pricing policy ensures that they receive a
good offer whether they look for quality or price.

Товары для рыбалки

Все представленные товары имеют необходимые
от 24.10.2003; Лиц. № 0401174/228 от 22.03.2004. Количествотовара ограничено. Цена указана в рублях.
Акция действует при условии наличия товара. Внешний вид товара может отличаться от представленного.
В гипермаркетах по адресу: г. Санкт-Петербург, пр. Индустриальный, д. 25; г. Астрахань, ул. Вокзальная,
д. 1; г. Ставрополь, ул. Доваторцев, д. 61 ОРТЦ «Ставрополь»; г. Волгоград, ул. Дзержинского, д. 18; г. Уфа,
лицензии и сертификаты. Лиц. ХV № 022013
ул. Комсомольская, д. 112 ТРЦ «Июнь»; г. Новосибирск, ул. Военная, д. 5 ТРЦ «Аура»; г. Мурманск, пр. Кольский,
д. 134 ТРЦ «Форум» данные товары не представлены или представлены ограниченным ассортиментом.
фикаты. Лиц. ХV № 02201313
но. Цена указана в рублях.х.
отличаться от представленного.о.
г. Астрахань, ул. Вокзальная,я,
л. Дзержинского, д. 18; г. Уфа,а,
ура»; г. Мурманск, пр. Кольский,й,
ограниченным ассортиментомм.

нзии и сертиф
вара ограничено
овара может от
льный, д. 25;
Волгоград, ул
, д. 5 ТРЦ «Аур
редставлены о

WWW.OKM
Старые це
В гиперма
1; г. Ставр
Комсомол
омсомол
д. 134 ТРЦ
д. 134 ТРЦ

WWW.OKMARKET.RU Цены действительны с 11 апреля по 15 мая 2013 года в гипермаркетах О’КЕЙ.
Старые цены, указанные в каталоге, в разных магазинах сети О’КЕЙ могут незначительно отличаться.
В гипермаркетах по адресу: г. Санкт-Петербург, пр. Индустриальный, д. 25; г. Астрахань, ул. Вокзальная, д.
1; г. Ставрополь, ул. Доваторцев, д. 61 ОРТЦ «Ставрополь»; г. Волгоград, ул. Дзержинского, д. 18; г. Уфа, ул.
Комсомольская, д. 112 ТРЦ «Июнь»; г. Новосибирск, ул. Военная, д. 5 ТРЦ «Аура»; г. Мурманск, пр. Кольский,
д. 134 ТРЦ «Форум» данные товары не представлены или представлены ограниченным ассортиментом.

нского, д. 18; г. Уфа, ул.
урманск, пр. Кольский,
енным ассортиментом.

Защита от грызунов и насекомых

р ур у

55
5

Кротоотпугиватель,

37 см

цены действительны
с 11 апреля
по 15 мая
2013 года
при условии наличия товара

(cid:105) (cid:200) (cid:263) (cid:211) (cid:169) (cid:174)
(cid:176) (cid:203) (cid:207) (cid:186) (cid:211)

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599
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499
-
.-
Ящик
рыболовный,
37 х 19 х 18 см,
3 лотка

УЗ Н А Й
П Е Р В Ы М
о скидках и специальных
оо
предложениях от О'КЕЙ
пп
www.okmarket.ru

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.
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O’Key Group S.A. Annual Report & Accounts 2012

Financial Overview

Our 2012 Financial Results can be Summarised as Follows:

>
>
>
>

Total revenue increased to RUB 117.3 billion.
Gross margin reached 23.5%.
Net proﬁt margin of 4.0%.
Operating cash ﬂow generated RUB 8.9 billion.

Revenue
Revenue for the year ended 31 December 2012 was RUB 117,333.2 million, a 26.0% increase over the 2011 ﬁgure of RUB 93,134.4 million. Both an
increase in the amount of selling space and like for like revenue growth contributed to the growth in revenue ﬁgures.

2012 saw a 7.0% year-on-year (y-o-y) increase in like for like (LFL) revenue, with a 4.3% increase in the LFL basket driven primarily by rising inﬂation.
LFL number of transactions increased by 2.5% in 2012 showing healthy growth dynamics throughout most of the year. We attribute this growth to
the strength of our business model, the attractiveness of our proposal and our competitive pricing policy. Among speciﬁc factors that had a positive
impact on store trafﬁc generation in 2012 is the low base effect for the ﬁrst quarter, intensiﬁed promotional activities for several cities and O’KEY’s
tenth anniversary sale campaign.

LFL analysis includes the 66 stores that we opened before 30 November 2011 and were not subsequently closed, expanded or downsized.

Cost of Goods Sold and Gross Proﬁt
Cost of goods sold were up 24.8%, or RUB 17,852.9 million, in 2012 when compared to 2011. Higher sales of trading stock driven by new store
openings and LFL revenue expansion resulted in this increase.

In the following table, revenue, cost of goods sold, gross proﬁt and gross margin in years ended 31 December 2012 and 2011 are set out:

(RUB millions, except percentages)

Revenue

Cost of goods sold (less supplier bonus)

Gross proﬁt

Gross margin

Year ended
31 December
2012

117,333.2

(89,706.3)

27,627.0

Year ended
31 December
2011

93,134.4

(71,853.4)

21,281.0

23.5 %

22.8%

Percentage
change (%)

26.0

25.9

29.8

0.7

In the following table, we provide further detail of our cost of goods sold in the years ended 31 December 2012 and 2011:

Cost of trading stock sold (less supplier bonuses)

Inventory shrinkage

Logistic costs

Packing and labelling costs

Total cost of goods sold

Year
ended
31 December 2012
(RUB millions)

Percentage
of revenue
(%)

Year
ended
31 December 2011
(RUB millions)

Percentage
of revenue
(%)

Change, p.p.

(87,404.3)

(1,381.3)

(295.6)

(625.0)

74.5

1.2

0.3

0.5

(70,176.9)

(953.2)

(304.8)

(418.6)

(89,706.3)

76.5

(71,853.4)

75.4

1.0

0.3

0.5

77.2

(0.9)

0.2

0.0

(0.7)

In the year ended 31 December 2012 we achieved an increase in gross proﬁt of 29.8% to RUB 27,627.0 million, compared to RUB 21,281.0 million
in the year ended 31 December 2011.

In 2012 we improved our gross margin compared to 2011. General improvement in commercial terms due to the growing purchasing power
contributed the most signiﬁcant part of the increase in gross margin which was partially offset by higher inventory shrinkage. The level of shrinkage
increased due to a higher number of new stores and change of warehouses. New store shrinkage levels normally higher than in mature stores and
decreases gradually as the store matures. In 2012 we also cancelled a warehousing contract and moved merchandise from one St. Petersburg
warehouse to another which resulted in additional losses.

The tenth anniversary campaign also led to the gross margin expansion during the second half of 2012. A greater number of promotions and sales
during the campaign also resulted in additional gross margin improvements. The impact of this factor on gross margin is estimated around 0.1%
of revenue.

General, Selling and Administrative Expenses
These expenses for the year ended 31 December 2012 totalled RUB 20,363.9 million, representing a 29.3% increase on RUB 15,749.9 million
reported in year ended 31 December 2011.

O’Key Group S.A. Annual Report & Accounts 2012

In the following table, we provide further details relating to our general, selling and administrative expenses for the years ended 31 December 2012
and 2011:

Year
ended
31 December 2012
(RUB millions)

Percentage
of revenue
(%)

Year
ended
31 December 2011
(RUB millions

Percentage
of revenue
(%)

Change, p.p.

Personnel costs

Depreciation and amortisation

Operating leases

Communication and utilities

Security expenses

Advertising and marketing

Materials and supplies

Operating taxes

Insurance and bank commission

Repairs and maintenance costs

Legal and professional expenses

Other costs

(10,235.9)

(2,149.9)

(2,298.0)

(1,812.4)

(707.3)

(990.3)

(258.8)

(497.6)

(505.8)

(452.2)

(306.1)

(149.6)

8.7

1.8

2.0

1.5

0.6

0.8

0.2

0.4

0.3

0.1

(7,538.3)

(1,977.3)

(1,672.6)

(1,503.2)

(659.7)

(508.3)

(404.6)

(369.1)

(349.4)

(308.1)

(262.0)

(197.3)

8.1

2.1

1.8

1.6

0.7

0.5

0.4

0.3

0.2

Total general, selling and administrative expenses

(20,363.9)

17.4

(15,749.9)

16.9

0.6

(0.2)

0.2

(0.1)

0.3

(0.2)

0.0

(0.1)

0.5

In 2012 general, selling and administrative expenses increased mainly due to the growth of our operations and increased costs related to personnel,
operating leases and advertising costs.

As a percentage of revenue, our general, selling and administrative expenses increased by 0.5 percentage points to 17.4% for the year ended
31 December 2012. We give more detail below on those categories of expenses where signiﬁcant changes were seen in 2012.

Personnel Costs
2012 saw a 35.8% increase in personnel costs to RUB 10,235.9 million. Payroll costs mainly increased due to stafﬁng requirements for the 12 stores
we opened in 2012 and an indexation of salaries that took place in July 2012. In 2012 headcount increased by approximately 20% as a result of new
store openings and ofﬁce expansion, which constitutes the largest part of the increase in personnel costs. Mid-year salary indexation of 8%, higher
pre-store opening costs due to delays, the addition of local ofﬁces in four new cities and growing expenses of the supermarket project further
accelerated growth in this expense.

Due to the above factors, as a percentage of revenue, personnel costs increased in 2012 by 0.6 p.p. to 8.7%.

Operating Leases
Expenses for operating lease equalled RUB 2,298.0 million in 2012, an increase of RUB 625.3 over the 2011 ﬁgure. The opening of 11 rented stores
in 2011, which completed their ﬁrst full year of operations in 2012 were the largest contributors to this increase. A second major contributor by size of
impact is the increase in rents of existing stores which grew in line with their revenue growth. Lastly, during 2012 we opened 5 rented hypermarkets
and 2 supermarkets and increased leased areas by 17% which resulted in additional lease expenses.

Advertising and Marketing
Advertising and marketing costs increased to RUB 990.3 million in 2012, representing an 94.8% increase over the previous period. Half of this
increase relates to advertising and marketing support behind the tenth anniversary campaign. The campaign included dedicated advertising
in media, distribution of printed materials, decorations and promotions inside the stores as well as gifts and presents for the customers.

The other half is tied to intensiﬁed promotional activities in existing locations and the addition of new cities. In 2012 we signiﬁcantly intensiﬁed our
billboard and media advertising in cities like St. Petersburg, Moscow, N.Novgorod, Togliatti, Murmansk, Krasnoyarsk and Ufa. During 2012 we also
started advertising activities in new cities like Ekaterinburg, Tumen, Surgut, Sochi, Saratov and Omsk.

Communications and Utilities
Communications and utility charges increased to RUB 1,812.3 million in 2011, representing a 20.6% increase over the previous period. Most of this
cost increase is due to the addition of new stores during the year. As a result of the tariff freeze during the ﬁrst half of 2012, communication and
utilities declined as a percent of revenue to 1.5%.

Security
Security costs equalled RUB 707.3 million in 2012, representing a 7.2% increase over the previous period which is below the revenue and space
growth for 2012. We managed to reduce security cost to 0.6% of revenues by reviewing responsibilities and optimizing the number of security posts
per store.

Other Operating Income and Expenses
Net other operating income and expenses resulted in a gain of RUB 63.2 million in the year ended 31 December 2012, compared to a loss in the year
ended 31 December 2011. In 2011 we had other operating expenses of RUB 174.3 million associated with the accident at one of our stores. These
expenses were one-off and did not recur in 2012, which led to a signiﬁcant improvement in this line.

O’Key Group S.A. Annual Report & Accounts 2012

Financial Overview continued

Operating Proﬁt/(Loss)
In the year ended 31 December 2012 operating proﬁt increased by RUB 1,937.7 million to RUB 7,326.2 million. Operating proﬁt increased ahead
of the revenue growth due to a strong increase in gross proﬁt described above which exceeded the increase in operating expenses.

Finance Costs
Finance costs increased by RUB 257.7 million to RUB 1,035.2 million in the year ended 31 December 2012, in principle due to the Group having
higher average loan portfolio in 2012 and increasing interest rates. Following the IPO we used part of the cash proceeds to reduce our loan portfolio
at the beginning of 2011 and resumed borrowings in the second part of the year. As a result the average loan balance in 2011 was below 2012 levels.
With regards to effective interest rate, it increased from 8.1% for the year ended 31 December 2011 to 9.4% for the year ended 31 December 2012
driven by changing market conditions and issuance of the rouble bonds.

Proﬁt Before Income Tax
Proﬁt before income tax increased by RUB 2,098.5 million to RUB 6,468.1 million in the year ended 31 December 2012, with the improvement over
operating proﬁt was achieved due to the gains on foreign exchange which was partially offset by growing ﬁnance costs.

The table below sets out our income tax expense in the years ended 31 December 2010 and 2011.

Reconciliation of Effective Tax Rate:

Proﬁt/(loss) before income tax

Income tax at applicable tax rate (2012: 20%, 2011: 20%)

Effect of income taxed at different rates

Tax effect of items which are not deductible or assessable for taxation purposes:

– Inventory shrinkage expenses

– Other non-deductible expenses

Tax withheld on dividends received from subsidiaries

Adjustments to current income tax for previous periods

Tax concessions

Other items

Income tax expense for the year

2012

6,468.1

(1,293.6)

(6.4)

2011

4,369.7

(873.9)

2.9

(429.3)

(60.5)

(266.3)

–

246.0

20.8

(307.3)

(58.7)

(91.2)

201.4

(2.9)

(1,789.3)

(1,129.7)

The total income tax expense increased by 58.4% to RUB 1,789.3 million in the year ended 31 December 2012, primarily due to the growth in proﬁt
before income tax.

The effective income tax rate amounted to 27.7% in the year ended 31 December 2012, which compares to 25.9% in 2011. The effective tax rate
increased mostly due to the substantial increase in the amount of tax withheld on dividends. In 2012 O’KEY received tax concessions for operations
in St. Petersburg, which reduced the amount of income tax expense. Such tax concessions provides a reduction in the income tax rate once a
certain level of capital expenses and investment is reached in a region.

Proﬁt for the Year
As a result of the various developments and changes described above, our proﬁt for the year ending 31 December 2012 increased by 44.4% to RUB
4,678.9 million ahead of the revenue and operating proﬁt growth.

Liquidity and Capital Resources
Our liquidity needs arise principally in relation to ﬁnancing our existing retail operations, the acquisition of land plots to enable new stores to be built,
the acquisition or construction of new stores, the purchase of the machinery and equipment we need to support the growth of our operations and
ﬁnancing on-going improvements to our IT systems. In 2012 we partly met our liquidity needs through net cash generated from operations and
proceeds from borrowings.

We continue to expect that net cash generated from our retail operations, short and long-term loans, bond issuances and leasing will represent
important sources of cash in the years ahead.

Cash Flows and Working Capital
The following table sets out summary cash ﬂow information for the years ended 31 December, 2012 and 2011:

(RUB millions)

Net cash from operating activities

Net cash used in investing activities

Net cash used in ﬁnancing activities

Net increase/(decrease) in cash and cash equivalents

Effect of exchange rate ﬂuctuations on cash and cash equivalents

2012

8,937.7

(8,491.0)

1,135.7

(1,582.3)

11.4

2011

6,400.9

(8,692.5)

(449.3)

(2,740.9)

(24.4)

O’Key Group S.A. Annual Report & Accounts 2012

Cash Flows from Operating Activities
In 2012 net cash from operating activities increased by RUB 2,536.8 to RUB 8,937.7 million compared to 2011. Higher proﬁtability and better working
capital secured the increase in operating cash ﬂow.

This higher level of proﬁtability generated RUB 1,507.4 million of additional operating cash in 2012, while working capital accounted for the remaining
part of the improvement or RUB 1,029.4 million. Proﬁtability has been reviewed in the previous sections of this report, while working capital changes
are analysed below.

Trade and other payables increased ahead of the sales volumes as a result of improved purchasing conditions and generated cash inﬂow of RUB
4,416.8 million. Uptake in payables was partially offset by growing inventories and trade and other receivables. Increase in inventories was below the
revenue growth due to a lower number of upcoming openings and better inventory management at the year-end. Prepayments for current assets
increased signiﬁcantly which resulted in cash outﬂow for net trade and other receivables. The increase in prepayments is mostly due to a larger
number of rented stores in 2012 resulting in higher rent prepayments and medical insurance pre-paid under the new contract.

Cash Flows from Investing Activities
Cash used in investing activities was principally used for purchases of property, plant and equipment, and increased to RUB 8,491.0 million in 2012.
The major part of this was spent on the completion of the ten new hypermarkets, of which six were constructed, and the two supermarkets that were
opened during the year. Signiﬁcant investments were made in acquiring plots and long-term lease rights on land and into intangible assets, which is
reﬂected in the increase of other non-current assets by the end of 2012.

Cash Flows from Financing Activities
Financing activities generated RUB 1,135.7 million of cash inﬂow mostly due to the issuance of rouble bonds at the end of 2012. The Group raised
bonds as a source of long-term ﬁnancing for the expansion program and as a mean to optimise the structure of borrowings.

Working Capital
Our primary sources of liquidity are cash derived from operating activities and debt ﬁnancing. As of 31 December 2012, our working capital,
deﬁned as current assets (excluding cash and cash equivalents and short-term investments) less current liabilities (excluding short-term loans),
was negative RUB 7,923.0 million. Working capital ﬁgures in the food retail industry are usually negative, and we intend to maintain a negative
working capital position.

We consider the ratio of net debt to EBITDA as the principal means for evaluating the impact of the total size of our borrowings on our operations.
At 31 December 2012, our net debt to EBITDA ratio was 1.0.

RUB million

Total debt

Short-term debt

Long-term debt

Less, cash and cash equivalents

Net debt

EBITDA

Net debt/EBITDA

2012

13,690

3,826

9,864

(4,536)

9,154

9,427

1.0

2011

12,071

5,303

6,768

(2,942)

9,129

7,510

1.2

Research and Development
In the period under review, and as of the date of this report, while the Company was not involved in any material research and development activities,
O’KEY does monitor market trends on an on-going basis to identify additional areas of opportunity and ensure the Company has the ﬂexibility to
respond to the needs of its customers and the potential of all its local market places.

O’Key Group S.A. Annual Report & Accounts 2012

Risk Management

Risk management at O’KEY is based on a comprehensive and management-oriented Enterprise Risk Management (ERM) approach. Our ERM
approach is based on the globally accepted “Enterprise Risk Management- Integrated Framework” developed by the “Committee of Sponsoring
Organisation of the Treadway Commission” (COSO).

Our risk management process helps us to achieve our business objectives and deliver long-term value to our shareholders. By implementing a risk
management process we provide more conﬁdence to our shareholders, employees, customers and suppliers.

Our risk management policy stems from a philosophy of pursuing sustainable growth while avoiding and managing risks at an appropriate level.

Risk management plays an integral part of how we plan and execute our business strategies.

Our risk management process aims to identify, evaluate and respond to, those risks and opportunities that could materially affect the achievement
of our business objectives as early as possible. Our operational directors review and consider the risk register for the whole business twice a year
and within the framework of the Risk Committee meeting.

Our risk register covers strategic, operational, ﬁnancial and compliance risks. Risks are identiﬁed, analysed and rated in a consistent manner using
common methodology. For every risk we develop, initiate and monitor the appropriate response measures. Our risk management process is based
on a net risk approach, covering risks and opportunities that remain after the execution of existing control measures.

Below we describe the risks that could have a material adverse effect on our business, our ﬁnancial condition and the results of our operations, the
price of our shares and our reputation. The order in which the risks are presented in each of the four categories reﬂects current estimated exposure
estimates for O’KEY. It is important to note however, that risks that are currently considered to have a lower risk exposure could potentially result
in a higher negative impact for O’KEY Group S.A. than risks currently considered as higher risk.

Additional risks not known to us or that we currently consider immaterial may also impair our business operations. We do not expect to incur any
risks that may jeopardise the continuity of our business.

Strategic Risks

Risk

Mitigation

Risk of decreased
customer demand.

Our business is affected by uncertainties associated with changing macroeconomic conditions, particularly
in the current environment, which is characterised by an on-going ﬁnancial crisis and global economic instability.

We may face decreases in customer demand as the income and spending capacity of customers decrease.

Risk of high competition.

The retail sector in Russia is highly competitive. We face strong competition from other retailers (Russian and
international), some of which are larger and may have greater resources.

Retail chains compete mainly for store locations, product assortment, price, service and store conditions.
Some competitors might be more effective and faster in capturing certain market opportunities, which in
turn may negatively impact our market share and our ability to achieve our performance and expansion targets.
The successful expansion depends on our ability to locate, acquire or lease appropriate sites on commercially
reasonable terms, open new stores in a timely manner, employ, train and retain additional store and supervisory
personnel and integrate the new stores into our existing operations on a proﬁtable basis.

Risk of negative political
factors in Russia.

There is risk that political actions may adversely impact macroeconomic parameters and the market in which the
Company operates.

Although political stability in Russia has improved, Russia is still a state whose political, economic and ﬁnancial
systems are rapidly developing and changing.

Risk of negative changes in
industry speciﬁc conditions.

Negative changes in industry speciﬁc conditions or standards, or negative changes in Russian legislation may
alone or in combination also negatively impact our business, ﬁnancial condition and results of operations.

Operational Risks

Risk

Mitigation

Risk of failure to meet
customer expectations on
quality, price, assortment,
etc.

We strive to provide our customers with the best quality of goods and services, the most competitive prices
and a product assortment they require. We are constantly assessing and improving our business processes
to meet this goal.

We understand that key to this success is to identify and adapt to the following in a timely manner:

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changes in consumer preferences and demands; and
changes in overall economic conditions that impact consumer spending.

Risk of failure to hire and
retain highly qualiﬁed
management and store
personnel.

Competition for highly qualiﬁed management and store personnel remains intense in Russia. To meet our
expansion plans we need highly skilled employees. Our future success depends in part on our continued ability
to hire, assimilate and retain new employees. We understand that any inability to attract and retain highly qualiﬁed
employees and key personnel in the future could have a material adverse effect on our business. To retain our
employees we constantly organise and improve training programs and personnel development courses.

O’Key Group S.A. Annual Report & Accounts 2012

Risk of suppliers being
unable to deliver
merchandise and risk of
rising purchase prices.

Our ﬁnancial performance depends in part on reliable and effective supply chain management. Our supply
chain approach is based on direct delivery to stores organised from suppliers. This model combined with large
proportion of local suppliers allows us to achieve good shelf-availability at our stores. Nevertheless, we rely
on third parties to supply us with merchandise and services. The third parties that supply us with merchandise
and services also have other customers and may not have sufﬁcient capacity to meet all of their customers’
needs, including ours, during periods of excess demand. Although we work closely with our suppliers to avoid
supply-related problems, there can be no assurance that we will not encounter supply problems in the future or
that we will be able to replace a supplier that is not able to meet demand. Shortages and delays could materially
harm our business. Unanticipated increases in prices could also adversely affect our performance. Furthermore,
we may be exposed to risk of delays and interruptions to our supply chain as a consequence of natural disasters,
in case we are unable to identify alternative sources of supply in a timely manner.

Increased IT security threats
and higher levels of
professionalism in computer
crime could pose a risk to
our systems and solutions
as well as to those of our
contra-agents.

We are observing a global increase in IT security threats and higher levels of professionalism in computer
crime. We attempt to mitigate these risks by employing a number of measures, including employee training,
comprehensive monitoring of our networks and systems and maintenance of backup and protective systems
such as ﬁrewalls and virus scanners. Also in order to meet our strategic plans and to reduce the risk of non-
sufﬁcient IT facilities to provide business continuity we are planning the long-term development of our business
support processes and the necessary infrastructure we will require. Nonetheless, our systems and solutions,
as well as those of our contra-agents remain potentially vulnerable to attacks. Depending on their nature and
scope, such attacks could potentially lead to the leakage of conﬁdential information, improper use of our systems,
manipulation and destruction of data, sales downtimes and supply shortages, which in turn could adversely affect
our reputation, competitiveness, business, ﬁnancial condition and the results of our operations.

Risk of construction delays.

The achievement of our expansion strategy depends in part upon our ability to construct new stores in a timely
fashion. Although we have taken proper precautions to meet construction deadlines, there are several factors
which may affect our ability to open new stores:

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weather conditions (windows for construction);
increasing real estate, construction and development costs;
risks associated with developers’ ability to execute projects;
local land use and other regulations restricting the construction of the type of buildings in which we operate
our formats; and
local community action opposed to the location of speciﬁc stores at speciﬁc sites, etc.

These factors alone or in combination may negatively impact our business, ﬁnancial condition and the results of
our operations.

Financial Risks

Risk

Mitigation

Exposure to currency and
interest rate risks.

We are exposed to ﬂuctuations in exchange rates because of loans received in USD and that some businesses
operate using USD and EUR. Certain currency risks as well as interest rate risks are hedged using derivative
ﬁnancial instruments. Interest rate risks are managed also by borrowing money at both variable and ﬁxed interest
rates. Although measures are taken to minimise this risk, there can be no assurance that exchange rate and
interest rate ﬂuctuations will not negatively inﬂuence our results.

Risk of non-compliance with
tax regulations resulting in
adverse tax consequences.

Risk of misstatements in
ﬁnancial statements.

Russian tax law has complex tax rules which may be interpreted in different ways and tax rules are subject to
frequent changes. Examinations by tax authorities and changes in tax regulations could adversely affect our
business, ﬁnancial condition and the results of our operations. Changes in tax law could result in higher tax
expense and payments. Furthermore, legislative changes could materially impact tax receivables and liabilities
as well as deferred tax assets and deferred tax liabilities.

Our tax and legal specialists regularly review compliance with applicable tax regulations, current interpretations
issued by the authorities and judicial precedents resulting from tax disputes.

We regularly test internal controls over ﬁnancial reporting to prevent misstatements in ﬁnancial statements. We have
a qualiﬁed team of ﬁnance professionals preparing our ﬁnancial statements and we are currently implementing a
new accounting system that will help us improve automation during the preparation of our consolidated IFRS
ﬁnancial statements.

Nevertheless, we are still exposed to risks relating to failures in proper ﬁnancial reporting and the classiﬁcation
of accounting entries, and risks of making inaccurate accounting estimates.

Compliance Risks

Risk

Mitigation

Risk of non-compliance with
all applicable international
and statutory laws and
regulations resulting in loss
of reputation.

Our operations are subject to various government regulations with respect to quality, packaging, health
and safety, labeling, distribution and other standards. Some regulations are still being developed in Russia.
Current and future government regulations or changes thereto may require us to change the way we run
our operations and could result in cost increases. Our goal in this environment is to organise compliance
to all applicable regulations, monitor regulatory developments and changes, and follow up to and respond
to changes in regulations and standards in a timely manner.

O’Key Group S.A. Annual Report & Accounts 2012

Board of Directors

In 2012 O’KEY consolidated the progress previously made in creating a professional, visionary Board of Directors who focus on the implementation
of good corporate governance practices and risk management in O’KEY’s day-to-day business. The Board is always looking ahead to ensure that
Company’s strategy leaves O’KEY well-placed to take maximum advantage of a developing market and sector, thus continuing to build long-term
value for shareholders.

Members of the Board of Directors at the end of 2012

Dmitrii Troitckii
Director

Dmitrii was elected as a member of the Company’s Board of Directors
on 30 June 2010, with effect from 13 July 2010. From 2005 until 2007,
he served as a member of the Board of Directors of the Ochakovo Dairy
Plant. He also serves as a member of the Supervisory Board of Bank
Saint Petersburg, a position he has held since December 2005 and as
Development Director of Neva-Rus, a position he has held since 2005.
He graduated from Leningrad Shipbuilding Institute, currently known
as the State Marine Technical University of St. Petersburg, and holds
a degree in engineering. Dmitrii indirectly owns 24.91% of the shares
of O’KEY Group S.A.

Dmitry Korzhev
Director

Dmitry was elected as a member of the Company’s Board of Directors
on 30 June 2010, with effect from 13 July 2010. From 2005 until April
2010, he served as a member of the Supervisory Board of Bank
St. Petersburg. He graduated from Leningrad Shipbuilding Institute,
currently known as the State Marine Technical University of
St. Petersburg, and holds a degree in engineering. Dmitry
indirectly owns 24.91% of the shares of O’KEY Group S.A.

Boris Volchek
Director

Boris was elected as a member of the Company’s Board of Directors
on 30 June 2010, with effect from 13 July 2010. He has also served
as President of the Union Group of companies since 1995. In addition,
since 2000 he has served as General Director of St. Petersburg
Automobile Museum. He graduated from the Leningrad Institute
of Railway Engineers, currently known as the St. Petersburg State
University of Communications, and holds a degree in engineering.
Boris indirectly owns 24.78% of the shares of O’KEY Group S.A.

Heigo Kera
Independent Director,
Chairman of the Board

Heigo was elected as a member of the Company’s Board of Directors
on 30 June 2010, with effect from 13 July 2010. He is the owner and,
since 2008, a member of the Board of Directors of Silverko Consult OU,
an Estonian consulting company specialising in providing consulting
services in different countries. Since 2008 he has been working as
a Retail Projects Manager with HT Project Management OU and is
responsible for starting a gourmet supermarket in Ukraine. Prior to
that, from 2002 until 2008, he provided private consulting services,
including research on retail markets in Belarus, Kazakhstan and China.
He was hired by O’KEY management to provide consultation on the
development of a hypermarket format concept in Russia from 1998
until 2002. Heigo is a graduate of the Tallinn Technical University
(Estonia) and holds a degree in economics.

Mykola Buinyckyi
Independent Director

Mykola was elected as a member of the Company’s Board of Directors
on 6 October 2010, with his effective date of appointment being
2 November 2010. His experience includes more than 35 years
in international ﬁnancial management with major companies in Moscow,
London, Paris, Brussels, Prague, Vilnius and Lagos. He has more than
18 years of experience working in Russia for both Russian and
international companies. Prior to Russia, he worked for seven years as a
management consultant with Coopers & Lybrand and prior to that for a
number of years in senior ﬁnancial management positions in oil support
services, construction, and the IT and retail sectors. He also has
experience in corporate ﬁnance including investment appraisals, raising
funds on public and private equity/debt markets, as well as in dealing
with international ﬁnancial institutions/ agencies, commercial and
investment banks, the International Finance Corporation, the European
Bank for Reconstruction and Development and various rating agencies.
He is a graduate of Edinburgh University (UK) and is also a fellow of the
Chartered Institute of Management Accountants and a member of the
Institute of British Management. Mykola holds a Joint Diploma in
Management Accounting.

O’Key Group S.A. Annual Report & Accounts 2012

Senior Management

O’KEY ﬁrmly believes that the experience, expertise and enthusiasm of our management team drive our success. We have recruited within
Russia and in other countries to ensure we have the best people, who are able to bring a global perspective on the business combined with
deep knowledge of local conditions and tastes. Their success is evidenced not just by our ﬁnancial results, but by the look and atmosphere
of our stores and, most importantly, by the satisfaction of our customers.

Senior Management

Patrick Longuet
CEO

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33 years of experience in the hypermarket retail business.
One of Europe’s most experienced CEOs in the food retail
industry, with a 27-year track record at Auchan, one of the
leading international food retail chains.
Previous experience as CEO of Auchan Russia, CFO of Auchan
Central Europe, and various positions from store department
manager to regional marketing director of Auchan France.

Sebastien Verhaeghe
Executive Director

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23 years of retail experience.
Supervises Finance, Performance Management, Information
Systems, Organisation and Change Management, Legal, Audit,
Strategic Planning and Investor Relations.
Previously worked for 17 years for Auchan, including Business
Performance and Information Systems Director of Auchan Russia,
Information Systems Director of Auchan International in charge of
new countries worldwide, and various positions in Auchan Poland
and International.

Vladislav Kurbatov
Operations Director

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11 years at O’KEY, since the Company started its activities.
Now responsible for day-to-day control and the development
of store operations.
Sales Director of O’KEY Group since 2004 – prior to that held
positions as Administrative Director of O’KEY Group and Director
of O’KEY’s ﬁrst hypermarket in St. Petersburg.

Natalia Potamianos
Supply Chain Director

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9 years of retail experience and 5 years at O’KEY.
Responsible for organisation of supply chain, logistics activities and
master data management.
Previously worked in the ﬁeld of audit, controlling & performance
management in multinational environment. Held various positions in
Auchan, Russia.

Georges Kowalkowski
Marketing & Sales Development Director

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36 years of retail experience.
Responsible for customer focus, product mix structure, marketing
activity and competitor analysis.
Previously worked for 30 years in Auchan operations, including
various positions in Auchan France, Poland and Russia.

Jerome Depeille
Expansion and Real Estate Director

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13 years of retail experience.
Responsible for searching and negotiating new store locations
for acquisition or rental schemes, construction of new stores,
maintenance of existing stores, general ﬁxed asset management.
Companies worked for include Auchan Russia as Expansion
Director, Spie Batignolles as Regional Development Director,
Bouygues Construction in various roles.

Vadim Korsunskiy
Commercial Director

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Ten years of retail experience.
Responsible for commercial strategy development, assortment
policy, private label and category management.
Held various senior positions at TESCO and Metro Cash & Carry.

Elmira Hadieva
HR Director

Six years at O’KEY and has vast experience in HR management
in a multinational environment.
Responsible for developing the Group’s HR business strategy
and creating an HR-system aimed at supporting the business
overall and also attracting and retaining talent in the retail industry.
Previously worked in HR for British American Tobacco during
14 years.

O’Key Group S.A. Annual Report & Accounts 2012

Corporate Social Responsibility

At O’KEY we see sustainable growth as a key part of our business model. Our Board of Directors and Executive Management are committed to the
very highest standards in CSR. For us, meeting the needs of today’s consumer means ensuring future generations are equally able to meet their own
needs. For this reason, we have enacted a full corporate social responsibility program covering major aspects of sustainability, anti-corruption and
community work. The economic success of any business depends on the wider success of the operating region and it is on this basis that we have
acted and will continue to do so in future.

Sustainability
In terms of sustainability, we have continued to pursue increasingly green friendly policies during 2012. All our stores recycle cardboard, polyethylene
and fats and we use eco-friendly biodegradable shopping bags. Our stores are hubs of greenery, adding to the attractiveness of the site and
contributing to a pleasant atmosphere for our customers.

Anti-corruption
In 2012, we adopted a new charter, signed by all managers, which sets out our Company guidelines regarding ethics and corruption. These
guidelines explicitly commit O’KEY as a Company to the principals of open partnership and business ethics and underline our zero tolerance policy
towards corruption. Managers must adhere to a strict policy concerning gifts and discounts and are encouraged to report any practice failing to meet
these standards to our dedicated whistleblower e-mail address to be investigated by the internal audit and security departments.

In addition to staff vigilance, we also adhere to the strictest standards of supplier policy. Instituted in 2010, O’KEY aims to minimise any potential
conﬂict of interest whilst choosing a supplier. With reference and due attention paid to relatives and friends (i.e people in a position to inﬂuence a
decision outside of a legitimate business framework), the policy has built in additional control layers ensuring that a full-scale tender process is
carried out with any executive decision being put to committee. Any business with a large-scale supply chain will always face challenges in terms
of ensuring complete transparency, although we strive to maintain best practice at every step of the process. Our stringent supplier policy has been
remarked upon as a particular strength compared to our peers.

In this vein, any new contract between O’KEY and a supplier now includes an addendum stipulating that the supplier will inform a speciﬁed
Company representative about any cases of corruption known to the supplier. Our partners now have an obligation to report any member of our
staff soliciting an unauthorised payment or bribe. Introduced in 2012, this cross-party agreement adds another level of security to our already robust
anti-corruption measures.

We also have implemented internal training programmes for employees and management. Our Security Department is in the process of reiterating
the Company’s stance against corruption, making sure that our staff is aware of the consequences of failing to meet our high standards as well as
educating our team on various procedures and safeguards. Any employee involved in drawing up budgets or choosing suppliers is obliged to attend.

With both internal and external whistle-blowing facilities in place as well as secure checks and balances at tender, O’KEY is in an increasingly secure
position looking ahead to 2013 to protect its business integrity and that of its employees and suppliers.

Community Work
Our community work is extremely close to the heart of all our team at O’KEY. Concentrated mainly on the Leningrad region, we are expanding
initiatives to other cities we operate in.

Our charity partners include Rodniychok, an orphanage for disabled children, the Neuropsychiatric Orphanage, the Centre for Children with
Special Needs No. 16 in St. Petersburg and the Social Rehabilitation Centre for Disabled Children in the Central district of St. Petersburg amongst
many others.

We continue to work closely with larger charities too such as the Red Cross, Caritas (a Catholic charity offering social and medical support and
rehabilitation programmes and assistance for young people in need, the homeless, the addicted and the unemployed) and RETOHope, a Moscow-
based association.

As part of our commitment to the wider community, we sponsored the annual event ‘Step Forward’ for the second consecutive year in 2012. ‘Step
Forward’ is a festival that takes place annually in St. Petersburg, which showcases the creative talents of children with disabilities. With the guidance
of internationally renowned disabled musicians and artists, the children are able to focus their creative abilities instead of on how they are limited by
their respective disabilities. Our sponsorship money covers the accommodation and transportation costs for children attending the festival from
Russia’s regions. Without such a contribution, it would be difﬁcult for children from outside St. Petersburg to attend the festival.

Recruitment
In terms of being an equal opportunity employer, O’KEY made tremendous progress in 2012 by implementing an ofﬁcially authorised Recruitment
Policy that prohibits any discrimination on the grounds of race, age, sex or religious diversity. Our HR Department is now formally entitled to monitor
the execution of this policy.

We also introduced Graduate Recruitment and Development Programme that targets talented graduates who are showing genuine interest in
building up their careers in retail. Last year we had 20 placements for the graduates to go through the one year learning and development cycle
at St. Petersburg. We also made a commitment to run the programme in every location in the year 2013.

However, this is not the only way to run mutually beneﬁcial relations in between the Company and educational institutions; we did seize numerous
opportunities to organise short-term internship activities in almost all locations – more than 100 short-term internship programmes were run locally
last year.

O’Key Group S.A. Annual Report & Accounts 2012

Retention
Retention rates varied by department in 2012. For example, our sales department set the highest standard across the Company with almost 90%
of all managerial vacancies ﬁlled internally in like for like stores.

In 2012 we introduced a Talent Management system which aims to unlock the full potential of our management pool. With assessment of over
2,000 managers completed, we are continually updating our awareness of staff’s capabilities, aspirations and performance and adjusted our
plans accordingly.

Health and Safety
The Company takes full responsibility for providing more than 23,000 employees with decent working condition adhering to all health and safety
norms and regulations. In practice, over the course of 2012, we have certiﬁed all our places of work, complying with Federal Law on Health and
Safety in the work place.

Motivation
Leveraging the full potential of our workforce has and will remain central to meeting our commitments to the customer. With this in mind, we have
a introduced a new pay and incentive scheme to maximise performance. Apart from social security norms as guaranteed by law, O’KEY provides
additional beneﬁts to its employees such as medical insurance, access to sports facilities and a provision for one-off ﬁscal aid for those in the O’KEY
family ﬁnding themselves unfortunate circumstances.

Depending on individual performance, all employees are part of a variety of incentive schemes. Moreover, we conduct an annual root and branch
salary review every July, ensuring that salaries reﬂect performance, responsibility and wider labour trends.

Open dialogue and trust between staff and management is key to maintaining motivation. In order to achieve this, we have created a performance
appraisal that manages the way performance objectives are set, regularly monitored and evaluated against management’s quarterly targets. There
are currently almost 4,000 employees in the Company whose performance is managed through the system.

Finally, 2012 saw the introduction of innovative ‘Social Committees’. Looking to resolve any labour related issues arising between management and
employees at the earliest possible moment, these committees ensure that the O’KEY team is pulling together and heading in the same direction.
In the last year, we ran 20 such Social Committee meetings.

Training and Development
Over the last year, we have instigated a new training programme for our 30 most senior managers: the Top Team Development Programme.
Adhering to the principals of constant learning and growth, the programme focuses on strategic vision and leadership qualities. As opposed to a
one-off box-ticking exercise, the programme is held throughout the year including modules on personal executive coaching and business simulation.

For middle and junior management, we created REX (Retail Excellence Programme) and REX Light which over 1,500 managers now attend.
Aimed at developing managerial skills with a retail focus, the uptake and feedback from this scheme has been overwhelmingly positive.

Equality
At O’KEY, we are particularly proud of our managerial gender balance: in 2012, more than 60% of store directors were women, whilst women
constitute more than 70% of the Company’s entire workforce. Of our 30 most senior managers, 15% are women. This executive equality is logical
for any forward-thinking 21st century business and, although it remains an area of weakness for many of our peers, our diversity is one of the key
strengths of our managerial team.

Outreach
In what is rapidly becoming an O’KEY tradition, we held anniversary celebrations for all employees in 2012. Held at every store, a variety of events
were staged for employees and their families.

In addition, in 2012, we also re-launched our corporate newspaper in a new format and with a larger print run to keep employees up to date with
key Company news.

O’Key Group S.A. Annual Report & Accounts 2012

Corporate Governance

O’KEY Group is committed to managing and conducting its operations in accordance with internationally recognised principles of corporate
governance. The Company not only strives to ensure that its Board of Directors follows such guidelines, but also that management teams within
the Company adopt these principles. As a Company listed on London stock exchange we recognise our obligation to our shareholders to put such
systems in place.

Key elements of O’KEY’s corporate governance policy include:

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Having experienced people as independent directors on our Board of Directors – they occupy key positions and thus participate fully in the
most senior level of management in the Company (the members of our Board are listed in the section of this Annual Report entitled “Board
of Directors”).
Key decisions relating to strategy are made by the Board.
Having a comprehensive system of Board committees, which ensures that due consideration is given to important decisions by experienced
people and that a good system of checks and balances exists, including in the areas of remuneration and incentives (the committees, their
functions and their membership are also listed in the “Board of Directors” section).
The Board exercising oversight of the Company’s well-deﬁned control and risk management procedures.

Composition of the Board of Directors
There are ﬁve members of our Board, including two independent Directors. The General Meeting of Shareholders appoints Board members by
a simple majority of votes cast, for a period not exceeding six years or until their successors are elected.

Structure of the Board and Committees
Our Board of Directors is responsible for the Company’s overall strategic development, and ultimately for ensuring that O’KEY achieves long-term
growth for its shareholders. The Board generally plans four meetings per year, to enable regularly review of ﬁnancial reporting, the Company’s
strategic performance and proposed new initiatives.

The Board’s committees conduct an initial review and discussion of the issues for which they are responsible, before making recommendations
to the full Board.

The key responsibilities of the Board’s committees are described below:

Remuneration Committee
Members

Heigo Kera
Chairman

Boris Volchek
Member

Dmitrii Troitckii
Member

Alvidas Brusokas
Member, non-director
appointed April 2011

Ilya Ilin
Member, non-director
appointed August 2012

O’Key Group S.A. Annual Report & Accounts 2012

The responsibilities of the Remuneration Committee include reviewing compensation policy, making proposals to the full Board regarding the
remuneration of executive Directors and management, and advising on any beneﬁt or incentive schemes. The remuneration and any bonuses
paid to the Chief Executive Ofﬁcer of O’KEY Group LLC are also determined by the Board.

Audit Committee
Members

Mykola Buinyckyi
Chairman

Boris Volchek
Member

Dmitriy Korzhev
Member

Ilya Ilin
Member, non-director
appointed April 2013

Sergey Eganov
Member, non-director
appointed April 2011

The Audit Committee has oversight responsibilities relating to the integrity of the Company’s ﬁnancial statements, including periodically reporting
to the full Board of Directors on its activities and on the adequacy of internal control systems over ﬁnancial reporting. The committee also makes
recommendations regarding the appointment, compensation, retention and supervision of the external auditors, and monitors their independence.
The committee performs such other duties as are imposed by applicable laws and regulations of the regulated market or markets on which the
Company’s shares or global depositary receipts may be listed, as well as any other duties entrusted to it by the Board of Directors. The ultimate
responsibility for preparing the annual report and accounts and the half yearly reports remains with the full Board of Directors.

Board of Directors and Management Remuneration
In 2012, O’KEY management were paid an aggregate amount of RUB 242 million remuneration and other compensation. Members of the Board
of Directors were paid a net fee of US$ 232,246. No more than US$ 300,000 is to be paid per year in compensation to the entire Board.

O’Key Group S.A. Annual Report & Accounts 2012

Corporate Governance continued

Legal and Ownership Structure

13.9%

Freeﬂoat

24.78%

54.04%

7.28%

GSU Ltd

NISEMAX Co Ltd

Bytenem

O’KEY Group S.A. (Luxembourg)

O’KEY LLC

O’KEY Group
LLC

Dorinda JSC

Mir Torgovil
CJSC

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Retail operations
Employer of all store personnel

Employer
for senior
management

Owner of real
estate and
long-term
lease rights

Owner of assets
under construction
Holder of
short-term
lease rights

O’KEY Logistics LLC

Fresh Market LLC

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Import operations
Supplier of non-
food products,
non-branded and
private label goods

Employer of personnel
and holder of
properties for new
supermarket projects

O’Key Group S.A. Annual Report & Accounts 2012

Management and Directors Responsibility Statement

We conﬁrm, to the best of our knowledge, that the consolidated ﬁnancial statements which have been prepared in accordance with the International
Financial Reporting Standards as adopted by the European Union, give a true and fair view of the assets, liabilities, ﬁnancial position and proﬁt or loss
of O’KEY Group S.A. and the undertakings included in the consolidation taken as a whole, and that the consolidated Directors’ report includes a fair
review of the development and performance of the business and the position of O’KEY Group S.A. and the undertakings included in the consolidation
taken as a whole, together with a description of the principal risks and uncertainties they face.

Luxembourg, 26 April 2013

Member of the Board of Directors

CEO
Patrick Longuet

Financial Director
Dmitry Pryanikov

O’Key Group S.A. Annual Report & Accounts 2012

O’Key Group S.A.

Consolidated Financial Statements
for the year ended 31 December 2011

(with the report of the Réviseur d’Entreprises Agréé thereon)

Contents
Report of the Réviseur d’Entreprises Agréé

Consolidated Statement of Financial Position

Consolidated Statement of Comprehensive Income

Consolidated Statement of Changes in Equity

Consolidated Statement of Cash Flows

Notes to the Consolidated Financial Statements

1 Background

2 Basis of preparation

3 Signiﬁcant accounting policies

4 Determination of fair values

5 Operating segments

6 Revenue

7 General, selling and administrative expenses

8 Other operating income and expenses

9 Personnel costs

10 Share-based payment arrangements

11 Finance income and ﬁnance costs

12 Foreign exchange gain/(losses)

13 Income tax expense

14 Property, plant and equipment

15 Intangible assets

16 Investment property

17 Other non-current assets

18 Deferred tax assets and liabilities

19 Inventories

20 Trade and other receivables

21 Cash and cash equivalents

22 Equity

23 Earnings per share

24 Loans and borrowings

25 Trade and other payables

26 Financial instruments and risk management

27 Operating leases

28 Capital commitments

29 Contingencies

30 Related party transactions

31 Subsidiaries

32 Events subsequent to the reporting date

O’Key Group S.A. Annual Report & Accounts 2012

To the Shareholders of
O’KEY GROUP S.A.
23, rue Beaumont
L-1219 Luxembourg

Report of the Reviseur D’entreprises Agree

Report on the consolidated ﬁnancial statements
We have audited the accompanying consolidated ﬁnancial statements of O’KEY GROUP S.A., which comprise the consolidated statement of
ﬁnancial position as at December 31, 2012 and the consolidated statement of comprehensive income, consolidated statement of changes in equity
and consolidated cash ﬂow statement for the year then ended, and a summary of signiﬁcant accounting policies and other explanatory information.

Board of Directors’ responsibility for the consolidated ﬁnancial statements
The Board of Directors is responsible for the preparation and fair presentation of these consolidated ﬁnancial statements in accordance with
International Financial Reporting Standards as adopted by the European Union, and for such internal control as the Board of Directors determines
is necessary to enable the preparation of consolidated ﬁnancial statements that are free from material misstatement, whether due to fraud or error.

Responsibility of the Réviseur d’Entreprises agréé
Our responsibility is to express an opinion on these consolidated ﬁnancial statements based on our audit. We conducted our audit in accordance
with International Standards on Auditing as adopted for Luxembourg by the Commission de Surveillance du Secteur Financier. Those standards
require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated
ﬁnancial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated ﬁnancial statements. The
procedures selected depend on the judgement of the Réviseur d’Entreprises agréé, including the assessment of the risks of material misstatement
of the consolidated ﬁnancial statements, whether due to fraud or error. In making those risk assessments, the Réviseur d’Entreprises agréé considers
internal control relevant to the entity’s preparation and fair presentation of the consolidated ﬁnancial statements 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 entity’s internal control. An
audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the Board
of Directors, as well as evaluating the overall presentation of the consolidated ﬁnancial statements.

We believe that the audit evidence we have obtained is sufﬁcient and appropriate to provide a basis for our audit opinion.

Opinion
In our opinion, the consolidated ﬁnancial statements give a true and fair view of the consolidated ﬁnancial position of O’KEY GROUP S.A. as of
December 31, 2012, and of its consolidated ﬁnancial performance and its consolidated cash ﬂows for the year then ended in accordance with
International Financial Reporting Standards as adopted by the European Union.

Report on other legal and regulatory requirements
The consolidated Directors’ report, which is the responsibility of the Board of Directors, is consistent with the consolidated ﬁnancial statements.
The Corporate Governance Statement on pages 36 to 39 of the Annual Report 2012 which is the responsibility of the Board of Directors, is
consistent with the consolidated ﬁnancial statements and includes the information required by the law.

Luxembourg, April 25, 2013

KPMG Luxembourg S.à r.l.
Cabinet de révision agréé

Thierry Ravasio

O’Key Group S.A. Annual Report & Accounts 2012

Consolidated Statement of Financial Position
as at 31 December 2012

’000 RUB

Assets

Non-current assets

Investment property

Property, plant and equipment

Construction in progress

Intangible assets

Deferred tax asset

Other non-current assets

Total non-current assets

Current assets

Inventories

Trade and other receivables

Prepayments for current assets

Cash and cash equivalents

Total current assets

Total assets

Equity and liabilities

Equity

Non-current liabilities

Loans and borrowings

Deferred income tax liability

Other non-current liabilities

Total non-current liabilities

Current liabilities

Loans and borrowings

Trade and other payables

Current income tax payable

Total current liabilities

Total liabilities

Total equity and liabilities

Note

2012

2011

632,000

573,000

25,692,464

20,435,107

1,720,181

3,136,848

566,595

375,126

518,099

356,034

7,905,066

5,530,502

36,891,432

30,549,590

9,212,315

1,917,634

856,948

7,917,657

1,924,108

398,595

4,535,693

2,941,947

16,522,590

13,182,307

53,414,022

43,731,897

18,090,056

14,303,743

9,863,769

6,768,282

667,719

470,839

1,056,447

1,137,192

11,587,935

8,376,313

3,826,135

5,302,948

19,613,734

15,337,559

296,162

411,334

23,736,031

21,051,841

35,323,966

29,428,154

53,414,022

43,731,897

The consolidated statement of ﬁnancial position is to be read in conjunction with the notes to, and forming part of, the consolidated ﬁnancial
statements set out on pages 46 to 73.

O’Key Group S.A. Annual Report & Accounts 2012

Consolidated Statement of Comprehensive Income
for the year ended 31 December 2012

’000 RUB

Revenue

Cost of goods sold

Gross proﬁt

General, selling and administrative expenses

Other operating income and expenses

Operating proﬁt

Finance income

Finance costs

Foreign exchange gain/(losses)

Proﬁt before income tax

Income tax expense

Proﬁt for the year

Other comprehensive income

Foreign currency translation differences for foreign operations

Change in fair value of hedges and reclassiﬁcation from hedging reserve

Income tax on other comprehensive income

Other comprehensive income for the year, net of income tax

Total comprehensive income for the year

Earnings per share

Note

2012

2011

117,333,236

93,134,430

(89,706,251)

(71,853,387)

27,626,985

21,281,043

(20,363,950)

(15,749,895)

63,180

(142,628)

7,326,215

5,388,520

11,428

(1,035,206)

165,683

25,216

(777,463)

(266,619)

6,468,120

4,369,654

(1,789,259)

(1,129,774)

4,678,861

3,239,880

23,963

(103,746)

(58,636)

201,422

20,749

(40,285)

(59,034)

102,501

4,619,827

3,342,381

Basic and diluted earnings per share (RUB)

17.4

12.0

The consolidated statement of comprehensive income is to be read in conjunction with the notes to, and forming part of, the consolidated ﬁnancial
statements set out on pages 46 to 73.

O’Key Group S.A. Annual Report & Accounts 2012

Consolidated Statement of Changes in Equity
for the year ended 31 December 2012

’000 RUB

Balance at 1 January 2011

Total comprehensive income

for the year

Proﬁt for the year

Other comprehensive income

Foreign currency translation differences

Change in fair value of hedges and

reclassiﬁcation from hedging reserve

Income tax on other comprehensive

income

Total other comprehensive income

Total comprehensive income

for the year

Transactions with owners, recorded

directly in equity

Contributions by and distributions

to owners

Dividends paid

Allocation to legal reserve

Total contributions by and distributions

to owners

Note

Share
capital

Legal
reserve

Additional
paid-in
capital

Hedging
reserve

Retained
earnings

Translation
reserve

Total
equity

119,440

111

8,903,606

7,485

2,446,795

256,755 11,734,192

–

10,486

–

3,239,880

–

3,239,880

–

201,422

(40,285)

161,137

–

(58,636)

–

201,422

(40,285)

(58,636)

102,501

161,137

3,239,880

(58,636) 3,342,381

–

(772,830)

(10,486)

(783,316)

–

(772,830)

–

(772,830)

Balance at 31 December 2011

119,440

10,597

8,903,606

168,622

4,903,359

198,119 14,303,743

’000 RUB

Balance at 1 January 2012

Total comprehensive income

for the year

Proﬁt for the year

Other comprehensive income

Foreign currency translation differences

Change in fair value of hedges and

reclassiﬁcation from hedging reserve

Income tax on other comprehensive

income

Total other comprehensive income

Total comprehensive income

for the year

Transactions with owners, recorded

directly in equity

Contributions by and distributions

to owners

Interim dividends paid

Total contributions by and distributions

to owners

Note

Share
capital

Legal
reserve

Additional
paid-in
capital

Hedging
reserve

Retained
earnings

Translation
reserve

Total
equity

119,440

10,597

8,903,606

168,622

4,903,359

198,119 14,303,743

–

4,678,861

–

4,678,861

–

(103,746)

20,749

(82,997)

–

23,963

–

(103,746)

20,749

23,963

(59,034)

(82,997) 4,678,861

23,963

4,619,827

–

(833,514)

–

(833,514)

Balance at 31 December 2012

119,440

10,597

8,903,606

85,625

8,748,706

222,082 18,090,056

The consolidated statement of changes in equity is to be read in conjunction with the notes to, and forming part of, the consolidated ﬁnancial
statements set out on pages 46 to 73.

O’Key Group S.A. Annual Report & Accounts 2012

Consolidated Statement of Cash Flows
for the year ended 31 December 2012

’000 RUB

Cash ﬂows from operating activities

Proﬁt before income tax

Adjustments for:

Depreciation and amortisation

Loss on disposal of property, plant and equipment, investment property,

intangible assets and other non-current assets

Gain from revaluation of investment property

Finance income

Finance costs

Foreign exchange (gain)/losses

Cash from operating activities before changes in working capital and provisions

Change in net trade and other receivables

Change in inventories

Change in trade and other payables

Cash ﬂows from operations before income taxes and interest paid

Interest paid

Income tax paid

Net cash from operating activities

Cash ﬂows from investing activities

Purchase of property, plant and equipment and initial cost of land lease

Purchase of intangible assets

Proceeds from sales of property, plant and equipment and investment property

Loans issued

Interest received

Net cash used in investing activities

Cash ﬂows from ﬁnancing activities

Proceeds from borrowings

Repayment of borrowings

Dividends paid

Proceeds from issue of shares in 2010

Net cash from/(used in) ﬁnancing activities

Net increase/(decrease) in cash and cash equivalents

Cash and cash equivalents at beginning of year

Effect of exchange rate ﬂuctuations on cash and cash equivalents

Note

2012

2011

6,468,120

4,369,654

14, 15, 17

2,149,949

1,977,278

40,267

(50,350)

(11,428)

1,035,206

(165,683)

18,620

(18,633)

(25,216)

777,463

266,619

9,466,081

7,365,785

(759,441)

113,696

(1,294,658)

(1,922,449)

4,416,811

3,142,085

11,828,793

8,699,117

(1,231,380)

(902,149)

(1,659,749)

(1,396,052)

8,937,664

6,400,916

(8,350,612)

(8,623,578)

(168,478)

16,640

–

11,428

(115,249)

19,703

1,369

25,216

(8,491,022)

(8,692,539)

7,500,000

16,971,297

(5,530,804)

(16,800,281)

(833,514)

–

(772,830)

152,568

1,135,682

(449,246)

1,582,324

2,941,947

11,422

(2,740,869)

5,707,185

(24,369)

Cash and cash equivalents at end of year

4,535,693

2,941,947

The consolidated statement of cash ﬂows is to be read in conjunction with the notes to, and forming part of, the consolidated ﬁnancial statements set
out on pages 46 to 73.

O’Key Group S.A. Annual Report & Accounts 2012

Notes to the Consolidated Financial Statements
for the year ended 31 December 2012

1 Background
(a) Organisation and operations
These consolidated ﬁnancial statements have been prepared in accordance with International Financial Reporting Standards (“IFRSs”) as adopted
by the European Union for the year ended 31 December 2012 for O’KEY Group S.A. and its subsidiaries (together referred to as the “Group”).

The Company was incorporated and is domiciled in Luxembourg. The Company was set up in accordance with Luxembourg regulations. The main
part of the Group is located and conducts its business in the Russian Federation.

The major shareholders of the Group are four individuals, Mr. Korzhev, Mr. Troitsky, Mr. Volchek and Mr. Teder (“the shareholder group”), who have
the power to direct the transactions of the Group at their own discretion and for their own beneﬁts. They also have a number of other business
interests outside of the Group.

As at 31 December 2012 the Company’s shares are listed on the London Stock Exchange in the form of Global Depositary Receipts (“GDRs”).

Related party transactions are detailed in note 30.

The Group’s principal business activity is operation of retail chain in Russia under brand name “O’KEY”. At 31 December 2012 the Group operated
83 stores (31 December 2011: 71 stores).

The Company’s registered address is: Luxembourg 23, rue Beaumont, L-1219 Luxembourg.

(b) Business environment
The Group’s operations are primarily located in the Russian Federation. Consequently, the Group is exposed to the economic and ﬁnancial markets
of the Russian Federation which display characteristics of an emerging market. The legal, tax and regulatory frameworks continue development,
but are subject to varying interpretations and frequent changes which together with other legal and ﬁscal impediments contribute to the challenges
faced by entities operating in the Russian Federation. The consolidated ﬁnancial statements reﬂect management’s assessment of the impact of the
Russian business environment on the operations and the ﬁnancial position of the Group. The future business environment may differ from
management’s assessment.

2 Basis of preparation
(a) Statement of compliance
These consolidated ﬁnancial statements have been prepared in accordance with International Financial Reporting Standards (“IFRSs”) as adopted
by the European Union and were authorised for issue by the Board of Directors on 25 April 2013.

(b) Basis of measurement
The consolidated ﬁnancial statements are prepared on the historical cost basis except for the following:

>
>
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derivative ﬁnancial instruments are stated at fair value;
liabilities incurred in cash-settled share-based payment transactions are remeasured at fair value; and
investment property is remeasured at fair value.

(c) Functional and presentation currency
Items included in the ﬁnancial statements of each of the Group’s entities are measured using the currency of the primary economic environment
in which the entity operates (‘the functional currency’). The consolidated ﬁnancial statements are presented in Russian Roubles.

The results and ﬁnancial position of the Group entities, which functional currencies are different from Russian roubles, are translated into the
presentation currency as follows:

>
>
>

assets and liabilities for each statement of ﬁnancial position presented are translated at the closing rate of the year end;
proﬁt and loss items for each statement of comprehensive income are translated at average exchange rates; and
all resulting exchange differences are recognised as translation reserve in equity.

At 31 December 2012 the principal rate of exchange used for translating foreign currency balances were USD 1 = RUB 30.3727;
EUR 1 = RUB 40.2286 (2011: USD 1 = RUB 32.1961; EUR 1 = RUB 41.6714).

(d) Use of estimates and judgments
The preparation of consolidated ﬁnancial statements in conformity with IFRSs requires management to make judgments, estimates and assumptions
that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from
those estimates.

Estimates and underlying assumptions are reviewed on an on-going basis. Revisions to accounting estimates are recognised in the period in which
the estimates are revised and in any future periods affected.

Judgments that have the most signiﬁcant effect on the amounts recognised in the 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:

O’Key Group S.A. Annual Report & Accounts 2012

2 Basis of preparation continued
Tax legislation
The Group is subject to income taxes in several jurisdictions. Signiﬁcant judgment is required in determining the provision for income taxes. The
major part of the tax burden refers to Russian tax, currency and customs legislation, which is subject to varying interpretations. Refer to note 29.

Revenue recognition
The Group has recognised revenue amounting to RUB 115,903 million for sales of goods during 2012 (2011: RUB 92,197 million). According to the
Group’s policy customers have the right to return the goods if they are dissatisﬁed. The Group believes that, based on past experience with similar
sales, the dissatisfaction rate will not exceed 0.1%, which is considered immaterial for recognition of a corresponding provision.

Deferred tax asset recognition
The deferred tax asset represents income taxes recoverable through future deductions from taxable proﬁts and is recorded on the consolidated
balance sheet. Deferred tax assets are recorded to the extent that realisation of the related tax beneﬁt is probable. In determining future taxable
proﬁts and the amount of tax beneﬁts that are probable in the future management makes judgments and applies estimation based on the
expectations of future income that are believed to be reasonable under the circumstances.

Determination of net realisable value of inventory
The Group performs analysis of stock for write-off as at each reporting date and writes down inventories to their net realisable value when necessary.
For details of approach used for determination of net realisable value refer to note 19.

Determination of fair value of liabilities incurred in cash-settled share-based payment transactions
The Group remeasures liabilities incurred in cash-settled share-based payment transactions at fair value as at each reporting date, which requires
making judgments and assumptions about future market and vesting conditions.

Signiﬁcant accounting policies

3
The accounting policies set out below have been consistently applied to all periods presented in these consolidated ﬁnancial statements, and have
been applied consistently by Group entities.

(a) Basis of consolidation
(i) Subsidiaries
Subsidiaries are entities controlled by the Group. The ﬁnancial statements of subsidiaries are included in the consolidated ﬁnancial statements from
the date that control commences until the date that control ceases. The accounting policies of subsidiaries have been changed when necessary to
align them with the policies adopted by the Group.

(ii) Transactions eliminated on consolidation
Intra-Group balances and transactions, and any unrealised income and expenses arising from intra-Group transactions, are eliminated in preparing
the consolidated ﬁnancial statements.

Foreign currency transactions

(b) Foreign currency
(i)
Transactions in foreign currencies are translated to the respective functional currencies of Group entities at exchange rates at the dates of the
transactions. Monetary assets and liabilities denominated in foreign currencies at the reporting date are retranslated to the functional currency at the
exchange rate at that date. The foreign currency gain or loss on monetary items is the difference between amortised cost in the functional currency
at the beginning of the period, adjusted for effective interest and payments during the period, and the amortised cost in foreign currency translated
at the exchange rate at the end of the reporting period.

Non-monetary assets and liabilities denominated in foreign currencies that are measured at fair value are retranslated to the functional currency at
the exchange rate at the date that the fair value was determined. Non-monetary items in a foreign currency that are measured based on historical
cost are translated using the exchange rate at the date of the transaction.

Foreign currency differences arising in retranslation are recognised in proﬁt or loss.

(ii) Foreign operations
The assets and liabilities of foreign operations are translated to RUB at the exchange rates at the reporting date. The income and expenses of foreign
operations are translated to RUB at exchange rates at the dates of the transactions.

Foreign currency differences are recognised directly in other comprehensive income. Since 1 January 2005, the Group’s date of transition to IFRSs,
such differences have been recognised in the foreign currency translation reserve. When a foreign operation is disposed of such that control or joint
control is lost, the cumulative amount in the translation reserve related to that foreign operation is reclassiﬁed to proﬁt or loss as part of the gain or
loss on disposal. When the Group disposes of only part of its interest in a subsidiary that includes a foreign operation while retaining control, the
relevant proportion of the cumulative amount is reattributed to non-controlling interests. When the Group disposes of only part of its investment in
joint venture that includes a foreign operation while retaining joint control, the relevant proportion of the cumulative amount is reclassiﬁed to proﬁt
or loss.

Foreign exchange gains and losses arising from a monetary item received from or payable to a foreign operation, the settlement of which is neither
planned nor likely in the foreseeable future, are considered to form part of a net investment in a foreign operation and are recognised in other
comprehensive income, and are presented within equity in the foreign currency translation reserve.

O’Key Group S.A. Annual Report & Accounts 2012

Notes to the Consolidated Financial Statements continued
for the year ended 31 December 2012

Signiﬁcant accounting policies continued

3
(c) Financial instruments
Non-derivative ﬁnancial instruments comprise trade and other receivables, cash and cash equivalents, loans and borrowings, and trade and
other payables.

(i) Non-derivative ﬁnancial assets
The Group initially recognises loans and receivables and deposits on the date that they are originated. All other ﬁnancial assets are recognised initially
on the trade date at which the Group becomes a party to the contractual provisions of the instrument.

The Group derecognises a ﬁnancial asset when the contractual rights to the cash ﬂows from the asset expire, or it transfers the rights to receive the
contractual cash ﬂows on the ﬁnancial asset in a transaction in which substantially all the risks and rewards of ownership of the ﬁnancial asset are
transferred. Any interest in transferred ﬁnancial assets that is created or retained by the Group is recognised as a separate asset or liability.

Financial assets and liabilities are offset and the net amount presented in the statement of ﬁnancial position when, and only when, the Group has
a legal right to offset the amounts and intends either to settle on a net basis or to realise the asset and settle the liability simultaneously.

The Group has the following non-derivative ﬁnancial assets: loans and receivables.

Loans and receivables are ﬁnancial assets with ﬁxed or determinable payments that are not quoted in an active market. Such assets are recognised
initially at fair value plus any directly attributable transaction costs. Subsequent to initial recognition loans and receivables are measured at amortised
cost using the effective interest method, less any impairment losses. Loans and receivables comprise trade and other receivables.

Cash and cash equivalents comprise cash balances and call deposits with original maturities of three months or less. Bank overdrafts that are
repayable on demand and form an integral part of the Group’s cash management are included as a component of cash and cash equivalents for
the purpose of the statement of cash ﬂows.

(ii) Non-derivative ﬁnancial liabilities
All ﬁnancial liabilities are recognised initially on the trade date at which the Group becomes a party to the contractual provisions of the instrument.

The Group derecognises a ﬁnancial liability when its contractual obligations are discharged or cancelled or expire.

The Group has the following non-derivative ﬁnancial liabilities: loans and borrowings, bank overdrafts, and trade and other payables.

Such ﬁnancial liabilities are recognised initially at fair value less any directly attributable transaction costs. Subsequent to initial recognition these
ﬁnancial liabilities are measured at amortised cost using the effective interest method.

(iii) Derivative ﬁnancial instruments
The Group holds derivative ﬁnancial instruments to hedge its interest rate and foreign currency risk exposures.

On initial designation of the hedge, the Group formally documents the relationship between the hedging instruments and hedged items, including
the risk management objectives and strategy in undertaking the hedge transaction, together with the methods that will be used to assess the
effectiveness of the hedging relationship. The Group makes an assessment, both at the inception of the hedge relationship as well as on an on-going
basis, whether the hedging instruments are expected to be “highly effective” in offsetting the changes in the fair value or cash ﬂows of the respective
hedged items during the period for which the hedge is designated, and whether the actual results of each hedge are within a range of 80-125%.
For a cash ﬂow hedge of a forecast transaction, the transaction should be highly probable to occur and should present an exposure to variations
in cash ﬂows that could ultimately affect reported net income.

Derivatives are recognised initially at fair value; attributable transaction costs are recognised in proﬁt or loss when incurred. Subsequent to initial
recognition, derivatives are measured at fair value, and changes therein are accounted for as described below.

When a derivative is designated as the hedging instrument in a hedge of the variability in cash ﬂows attributable to a particular risk associated with
a recognised asset or liability or a highly probable forecast transaction that could affect proﬁt or loss, the effective portion of changes in the fair value
of the derivative is recognised in other comprehensive income and presented in the hedging reserve in equity. The amount recognised in other
comprehensive income is removed and included in proﬁt or loss in the same period as the hedged cash ﬂows affect proﬁt or loss under the same line
item in the statement of comprehensive income as the hedged item. Any ineffective portion of changes in the fair value of the derivative is recognised
immediately in proﬁt or loss.

If the hedging instrument no longer meets the criteria for hedge accounting, expires or is sold, terminated, exercised, or the designation is revoked,
then hedge accounting is discontinued prospectively. The cumulative gain or loss previously recognised in other comprehensive income and
presented in the hedging reserve in equity remains there until the forecast transaction affects proﬁt or loss. If the forecast transaction is no longer
expected to occur, then the balance in other comprehensive income is recognised immediately in proﬁt or loss.

O’Key Group S.A. Annual Report & Accounts 2012

Signiﬁcant accounting policies continued

3
(d) Transactions with owners
(i) Ordinary shares/share capital
Ordinary shares are classiﬁed as equity. Incremental costs directly attributable to issue of ordinary shares and share options are recognised as
a deduction from equity, net of any tax effects.

(ii) Distributions to owners/contributions from owners
The dividends paid to the shareholders are recognised directly in equity once the decision on the payment takes place. The transfers of assets to the
related parties (companies under the control of the Group’s ultimate shareholders) or other beneﬁts to such related parties are recognised directly in
equity as distributions to the shareholders.

(e) Property, plant and equipment
(i) Recognition and measurement
Items of property, plant and equipment, except for land, are measured at cost less accumulated depreciation and impairment losses. The cost
of property, plant and equipment at 1 January 2005, the date of transition to IFRSs, was determined by reference to its fair value at that date.

Cost includes expenditure that is directly attributable to the acquisition of the asset. The cost of self-constructed assets includes the cost of materials
and direct labour, any other costs directly attributable to bringing the asset to a working condition for their intended use, the costs of dismantling and
removing the items and restoring the site on which they are located, and capitalised borrowing costs. Purchased software that is integral to the
functionality of the related equipment is capitalised as part of that equipment.

Any gain or loss on disposal of an item of property, plant and equipment is determined by comparing the proceeds from disposal with the carrying
amount of property, plant and equipment, and is recognised net within “other income” in proﬁt or loss.

(ii) Subsequent costs
The cost of replacing part of an item of property, plant and equipment is recognised in the carrying amount of the item if it is probable that the future
economic beneﬁts embodied within the part will ﬂow to the Group and its cost can be measured reliably. The carrying amount of the replaced part
is derecognised. The costs of the day-to-day servicing of property, plant and equipment are recognised in proﬁt or loss as incurred.

(iii) Depreciation
Items of property, plant and equipment are depreciated from the date that they are installed and are ready for use, or in respect of internally
constructed assets, from the date that the asset is completed and ready for use. Depreciation is based on the cost of an asset less its residual value.
Signiﬁcant components of individual assets are assessed and if a component has a useful life that is different from the remainder of that asset, that
component is depreciated separately.

Depreciation is recognised in proﬁt or loss on a straight line basis over the estimated useful lives of each part of an item of property, plant and
equipment, since this most closely reﬂects the expected pattern of consumption of the future economic beneﬁts embodied in the asset. Leased
assets are depreciated over the shorter of the lease term and their useful lives unless it is reasonably certain that the Group will obtain ownership
by the end of the lease term. Land is not depreciated.

Buildings

The estimated useful lives of signiﬁcant items of property, plant and equipment for the current and comparative periods are as follows:
>
> Machinery and equipment, auxiliary facilities
> Motor vehicles
>
>

30 years
2-20 years
5-10 years
over the term of underlying lease
2-10 years

Leasehold improvements
Other ﬁxed assets

Depreciation methods, useful lives and residual values are reviewed at each ﬁnancial year end and adjusted if appropriate.

Investment property

(f)
Investment property is property held by the Group to earn rental income or for capital appreciation and which is not occupied by the Group.

Investment property, including investment property under construction, is initially recognised at cost, including transaction costs, and subsequently
remeasured at fair value with any change therein recognised in proﬁt or loss. If fair value of investment property under construction is not reliably
determinable, the Group measures that investment property under construction at cost until either its fair value becomes reliably determinable or
construction is completed (whichever is earlier).

Fair value of the Group’s investment property is determined by independent appraisers, who hold a recognised and relevant professional qualiﬁcation
and who have recent experience in valuation of property of similar location and category.

When the use of a property changes such that it is reclassiﬁed as property, plant and equipment, its fair value at the date of reclassiﬁcation becomes
its cost for subsequent accounting.

O’Key Group S.A. Annual Report & Accounts 2012

Notes to the Consolidated Financial Statements continued
for the year ended 31 December 2012

Signiﬁcant accounting policies continued
3
(g)
Intangible assets
(i) Other intangible assets
Other intangible assets that are acquired by the Group have ﬁnite useful lives and are measured at cost less accumulated amortisation and
accumulated impairment losses. Other intangible assets primarily include capitalised computer software, patents and licenses. Acquired computer
software, licenses and patents are capitalised on the basis of the costs incurred to acquire and bring them to use.

(ii) Subsequent expenditure
Subsequent expenditure is capitalised only when it increases the future economic beneﬁts embodied in the speciﬁc asset to which it relates. All other
expenditure is recognised in the proﬁt or loss as incurred.

(iii) Amortisation
Amortisation is calculated over the cost of the asset, or other amount substituted for cost, less its residual value.

Amortisation is recognised in proﬁt or loss on a straight line basis over the estimated useful lives of intangible assets from the date that they
are available for use since this most closely reﬂects the expected pattern of consumption of future economic beneﬁts embodied in the asset.
The estimated useful lives for the current and comparative periods are as follows:

>
>
>

Lease rights
Software licenses
Other intangible assets

5-10 years
1-7 years
1-5 years

Amortisation methods, useful lives and residual values are reviewed at each ﬁnancial year end and adjusted if appropriate.

(h) Leased assets
(i) Operating leases
Where the Group is a lessee in a lease which does not transfer substantially all the risks and rewards incidental to ownership from the lessor to the
Group, the total lease payments, including those on expected termination, are charged to proﬁt or loss on a straight line basis over the period of
the lease.

Where the Group is a lessee in a land lease, the initial cost of land lease is amortised using straight line method over the period of lease being up
to 51 years.

(ii) Finance leases
Leases in terms of which the Group assumes substantially all the risks and rewards of ownership are classiﬁed as ﬁnance leases. Upon initial
recognition the leased asset is measured at an amount equal to the lower of its fair value and the present value of the minimum lease payments.
Subsequent to initial recognition, the asset is accounted for in accordance with the accounting policy applicable to that asset.

Each lease payment is allocated between the liability and ﬁnance charges so as to achieve a constant rate on the ﬁnance balance outstanding.
The corresponding rental obligations, net of future ﬁnance charges, are shown as other payables (long-term accounts payable for amounts due
after 12 months from reporting date). The interest cost is charged to the proﬁt or loss over the lease period using the effective interest method.

Inventories

(i)
Inventories are measured at the lower of cost and net realisable value. The cost of goods for resale includes its purchase price and related
transportation costs, as well as other related logistic costs.

Net realisable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and selling expenses.

Impairment
Financial assets

(j)
(i)
A ﬁnancial asset not carried at fair value through proﬁt or loss is assessed at each reporting date to determine whether there is any objective
evidence that it is impaired. A ﬁnancial asset is impaired if objective evidence indicates that a loss event has occurred after the initial recognition
of the asset, and that the loss event had a negative effect on the estimated future cash ﬂows of that asset that can be estimated reliably.

Objective evidence that ﬁnancial assets are impaired can include default or delinquency by a debtor, restructuring of an amount due to the Group
on terms that the Group would not consider otherwise, indications that a debtor or issuer will enter bankruptcy.

The Group considers evidence of impairment for receivables at both a speciﬁc asset and collective level. All individually signiﬁcant receivables are
assessed for speciﬁc impairment. All individually signiﬁcant receivables found not to be speciﬁcally impaired are then collectively assessed for any
impairment that has been incurred but not yet identiﬁed. Receivables that are not individually signiﬁcant are collectively assessed for impairment by
grouping together receivables with similar risk characteristics.

In assessing collective impairment the Group uses historical trends of the probability of default, timing of recoveries and the amount of loss incurred,
adjusted for management’s judgement as to whether current economic and credit conditions are such that the actual losses are likely to be greater
or less than suggested by historical trends.

O’Key Group S.A. Annual Report & Accounts 2012

Signiﬁcant accounting policies continued

3
An impairment loss in respect of a ﬁnancial asset measured at amortised cost is calculated as the difference between its carrying amount, and the
present value of the estimated future cash ﬂows discounted at the asset’s original effective interest rate. Losses are recognised in proﬁt or loss and
reﬂected in an allowance account against receivables. Interest on the impaired asset continues to be recognised through the unwinding of the
discount. When a subsequent event causes the amount of impairment loss to decrease, the decrease in impairment loss is reversed through proﬁt
or loss.

(ii) Non-ﬁnancial assets
The carrying amounts of the Group’s non-ﬁnancial assets, other than investment property, inventories and deferred tax assets are reviewed at
each reporting date to determine whether there is any indication of impairment. If any such indication exists, then the asset’s recoverable amount
is estimated.

The recoverable amount of an asset or cash-generating unit is the greater of its value in use and its fair value less costs to sell. 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 or cash-generating unit. For the purpose of impairment testing, assets that cannot be
tested individually are grouped together into the smallest group of assets that generates cash inﬂows from continuing use that are largely
independent of the cash inﬂows of other assets or groups of assets (the “cash-generating unit”).

An impairment loss is recognised if the carrying amount of an asset or its cash-generating unit exceeds its recoverable amount. Impairment losses
are recognised in proﬁt or loss. Impairment losses recognised in respect of cash-generating units are allocated to reduce the carrying amount of
assets in the unit (group of units) on a pro rata basis.

Impairment losses recognised in prior periods are assessed at each reporting date for any indications that the loss has decreased or no longer
exists. An impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss
is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of
depreciation or amortisation, if no impairment loss had been recognised.

(k) Employee beneﬁts
(i) Deﬁned contribution plans
A deﬁned contribution plan is a post-employment beneﬁt plan under which an entity pays ﬁxed contributions into a separate entity and will have no
legal or constructive obligation to pay further amounts. Obligations for contributions to deﬁned contribution pension plans, including Russia’s state
pension fund, are recognised as an employee beneﬁt expense in proﬁt or loss in the periods during which services are rendered by employees.
Prepaid contributions are recognised as an asset to the extent that a cash refund or a reduction in future payments is available. Contributions to
a deﬁned contribution plan that are due more than 12 months after the end of the period in which the employees render the service are discounted
to their present value.

(ii) Other long-term employee beneﬁts
Other long-term employee beneﬁts represent long-service bonuses. Long-term employee beneﬁts are expensed evenly during the periods in which
they are earned by employees.

(iii) Short-term beneﬁts
Short-term employee beneﬁt obligations are measured on an undiscounted basis and are expensed as the related service is provided.

A liability is recognised for the amount expected to be paid under short-term bonus if the Group has a present legal or constructive obligation to pay
this amount as a result of past service provided by the employee, and the obligation can be estimated reliably.

(iv) Cash-settled share-based payment transactions
The fair value of the amount payable to employees in respect of cash-settled share-based payment transactions is recognised as an employee
expense in proﬁt and loss with a corresponding increase in liabilities, over the period that the employees become unconditionally entitled to payment.
The liability is remeasured at each reporting date and at settlement date. Any changes of the fair value of the liability are recognised as personnel
expenses in proﬁt or loss.

(l) Provisions
A provision is recognised if, as a result of a past event, the Group has a present legal or constructive obligation that can be estimated reliably, and it is
probable that an outﬂow of economic beneﬁts will be required to settle the obligation. Provisions are determined by discounting the expected future
cash ﬂows at a pre-tax rate that reﬂects current market assessments of the time value of money and the risks speciﬁc to the liability. The unwinding
of the discount is recognised as ﬁnance cost.

(m) Revenue
Revenue is measured at the fair value of the consideration received or receivable, net of VAT, returns and discounts.

(i) Goods sold
Revenues from sales of goods are recognised at the point of transfer of risks and rewards of ownership of the goods, for retail trade it is normally
at the cash register.

O’Key Group S.A. Annual Report & Accounts 2012

Notes to the Consolidated Financial Statements continued
for the year ended 31 December 2012

Signiﬁcant accounting policies continued

3
(ii) Services
Revenue from services rendered is recognised in proﬁt or loss when the services are rendered, by reference to stage of completion of the speciﬁc
transaction assessed on the basis of the actual service provided as a proportion of the total services to be provided.

Rental income from investment property is recognised in proﬁt or loss on a straight line basis over the term of the lease. When assets are leased
out under an operating lease, the lease payments receivable are recognised as rental income on a straight line basis over the lease term. Lease
incentives granted are recognised as an integral part of the total rental income.

(n) Cost of sales
Cost of sales include the purchase price of the goods sold and other costs incurred in bringing the inventories to the location and condition ready
for sale. These costs include costs of purchasing, packaging and transporting of goods to the extent that it relates to bringing the inventories to the
location and condition ready for sale.

The Group receives various types of bonuses from suppliers of inventories, primarily in the form of volume discounts and slotting fees. These
bonuses are recorded as reduction of cost of sales as the related inventory is sold.

Losses from inventory shortages are recognised in cost of sales.

(o) Finance income and costs
Finance income comprises interest income on issued loans and bank deposits. Interest income is recognised as it accrues in proﬁt or loss, using the
effective interest method.

Finance costs comprise interest expense on borrowings and unwinding of the discount on provisions. Borrowing costs that are not directly
attributable to the acquisition, construction or production of a qualifying asset are recognised in proﬁt or loss using the effective interest method.

Foreign currency gains and losses are reported on a net basis.

Income tax

(p)
Income taxes have been provided in the consolidated ﬁnancial statements in accordance with Russian legislation, as well as Luxembourg, BVI and
Cyprus legislation for corresponding companies of the Group. Income tax expense comprises current and deferred tax. Current tax and deferred
tax are recognised in proﬁt or loss except to the extent that it relates to a business combination, or items recognised directly in equity or in other
comprehensive income.

Current tax is the expected tax payable or receivable on the taxable income or loss for the year, using tax rates enacted or substantively enacted
at the reporting date, and any adjustment to tax payable in respect of previous years.

Deferred tax is recognised in respect of temporary differences between the carrying amounts of assets and liabilities for ﬁnancial reporting purposes
and the amounts used for taxation purposes. Deferred tax is not recognised for the following temporary differences: the initial recognition of assets
or liabilities in a transaction that is not a business combination and that affects neither accounting nor taxable proﬁt or loss, and differences relating
to investments in subsidiaries and jointly controlled entities to the extent that it is probable that they will not reverse in the foreseeable future. Deferred
tax is measured at the tax rates that are expected to be applied to the temporary differences when they reverse, based on the laws that have been
enacted or substantively enacted by the reporting date. Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset
current tax assets and liabilities, and they relate to income taxes levied by the same tax authority on the same taxable entity, or on different tax
entities, but they intend to settle current tax liabilities and assets on a net basis or their tax assets and liabilities will be realised simultaneously.

In accordance with the tax legislation of the Russian Federation, tax losses and current tax assets of a company in the Group may not be set off
against taxable proﬁts and current tax liabilities of other Group companies.

A deferred tax asset is recognised for unused tax losses, tax credits and deductible temporary differences, to the extent that it is probable that future
taxable proﬁts will be available against which they can be utilised. Deferred tax assets are reviewed at each reporting date and are reduced to the
extent that it is no longer probable that the related tax beneﬁt will be realised.

(q) Earnings per share
The Group presents basic and diluted earnings per share (“EPS”) data for its ordinary shares. Basic EPS is calculated by dividing the proﬁt or loss
attributable to ordinary shareholders of the Company by the weighted average number of ordinary shares outstanding during the period, adjusted for
own shares held. Diluted EPS is determined by adjusting the proﬁt or loss attributable to ordinary shareholders and the weighted average number of
ordinary shares outstanding, adjusted for own shares held, for the effects of all dilutive potential ordinary shares.

O’Key Group S.A. Annual Report & Accounts 2012

Signiﬁcant accounting policies continued

3
(r) Segment reporting
An operating segment is a component of the Group that engages in business activities from which it may earn revenues and incur expenses,
including revenues and expenses that relate to transactions with any of the Group’s other components. All operating segments’ operating results are
reviewed regularly by the Group’s CEO to make decisions about resources to be allocated to the segment and assess its performance, and for which
discrete ﬁnancial information is available.

(s) Value added tax
Input VAT is generally reclaimable against sales VAT when the right of ownership on purchased goods is transferred to the Group or when the services
are rendered to the Group. The tax authorities permit the settlement of VAT on a net basis. VAT related to sales and purchases which have not been
settled at the balance sheet date (VAT deferred) is recognised in the statement of ﬁnancial position on a gross basis and disclosed separately as an
asset and liability.

(t) New Standards and Interpretations not yet adopted
A number of new Standards, amendments to Standards and Interpretations are not yet effective as at 31 December 2012, and have not been applied
in preparing these consolidated ﬁnancial statements. Of these pronouncements, potentially the following will have an impact on the Group’s
operations. The Group plans to adopt these pronouncements when they become effective.
>

Amendments to IFRS 7 Financial Instruments: Disclosures – Offsetting Financial Assets and Financial Liabilities contain new disclosure
requirements for ﬁnancial assets and liabilities that are offset in the statement of ﬁnancial position or subject to master netting arrangements
or similar agreements. The amendments are effective for annual periods beginning on or after 1 January 2013, and are to be applied retrospectively.
Amendments to IAS 32 Financial Instruments: Presentation – Offsetting Financial Assets and Financial Liabilities do not introduce new rules for
offsetting ﬁnancial assets and liabilities; rather they clarify the offsetting criteria to address inconsistencies in their application. The amendments
specify that an entity currently has a legally enforceable right to set-off if that right is not contingent on a future event; and enforceable both in
the normal course of business and in the event of default, insolvency or bankruptcy of the entity and all counterparties. The amendments are
effective for annual periods beginning on or after 1 January 2014, and are to be applied retrospectively. The Group has not yet analysed the
likely impact of the new standard on its ﬁnancial position or performance.
IFRS 9 Financial Instruments will be effective for annual periods beginning on or after 1 January 2013 and the amendments to IFRS 9 introduced
in December 2011 will be effective for annual periods beginning on or after 1 January 2015. The new standard is to be issued in phases and is
intended ultimately to replace International Financial Reporting Standard IAS 39 Financial Instruments: Recognition and Measurement. The ﬁrst
phase of IFRS 9 was issued in November 2009 and relates to the classiﬁcation and measurement of ﬁnancial assets. The second phase
regarding classiﬁcation and measurement of ﬁnancial liabilities was published in October 2010. The remaining parts of the standard are
expected to be issued during 2013. The Group recognises that the new standard introduces many changes to the accounting for ﬁnancial
instruments and is likely to have a signiﬁcant impact on Group’s consolidated ﬁnancial statements. The impact of these changes will be analysed
during the course of the project as further phases of the standard are issued. The Group does not intend to adopt this standard early.
IFRS 12 Disclosure of Interests in Other Entities will be effective for annual periods beginning on or after 1 January 2014. The new standard
contains disclosure requirements for entities that have interests in subsidiaries, joint arrangements, associates and unconsolidated structured
entities. Interests are widely deﬁned as contractual and non-contractual involvement that exposes an entity to variability of returns from the
performance of the other entity. The expanded and new disclosure requirements aim to provide information to enable the users to evaluate the
nature of risks associated with an entity’s interests in other entities and the effects of those interests on the entity’s ﬁnancial position, ﬁnancial
performance and cash ﬂows. Entities may early present some of the IFRS 12 disclosures early without a need to early-adopt the other new and
amended standards. However, if IFRS 12 is early-adopted in full, then IFRS 10, IFRS 11, IAS 27 (2011) and IAS 28 (2011) must also be early-
adopted. The Group has not yet analysed the likely impact of the new Standard on its ﬁnancial position or performance.
IFRS 13 Fair Value Measurement will be effective for annual periods beginning on or after 1 January 2013. The new standard replaces the fair
value measurement guidance contained in individual IFRSs with a single source of fair value measurement guidance. It provides a revised
deﬁnition of fair value, establishes a framework for measuring fair value and sets out disclosure requirements for fair value measurements.
IFRS 13 does not introduce new requirements to measure assets or liabilities at fair value, nor does it eliminate the practicability exceptions to
fair value measurement that currently exist in certain standards. The standard is applied prospectively. Comparative disclosure information is not
required for periods before the date of initial application. The Group has not yet analysed the likely impact of the new standard on its ﬁnancial
position or performance.
Amendment to IAS 1 Presentation of Financial Statements: Presentation of Items of Other Comprehensive Income. The amendment requires
that an entity present separately items of other comprehensive income that may be reclassiﬁed to proﬁt or loss in the future from those that will
never be reclassiﬁed to proﬁt or loss. Additionally, the amendment changes the title of the statement of comprehensive income to statement of
proﬁt or loss and other comprehensive income. However, the use of other titles is permitted. The amendment shall be applied retrospectively
from 1 July 2012. The Group has not yet analysed the likely impact of the amendment to IAS 1 on its ﬁnancial position or performance.
Various Improvements to IFRSs have been dealt with on a standard-by-standard basis. All amendments, which result in accounting changes for
presentation, recognition or measurement purposes, will come into effect for annual periods beginning after 1 January 2013. The Group has not
yet analysed the likely impact of the improvements on its ﬁnancial position or performance.

O’Key Group S.A. Annual Report & Accounts 2012

Notes to the Consolidated Financial Statements continued
for the year ended 31 December 2012

4 Determination of fair values
A number of the Group’s accounting policies and disclosures require the determination of fair value, for both ﬁnancial and non-ﬁnancial assets and
liabilities. Fair values have been determined for measurement and for disclosure purposes based on the following methods. When applicable, further
information about the assumptions made in determining fair values is disclosed in the notes speciﬁc to that asset or liability.

Investment property

(a)
An external, independent valuation company, having appropriate recognised professional qualiﬁcations and recent experience in the location and
category of property being valued, values the Group’s investment property every year. The fair values are based on market values, being the estimated
amount for which a property could be exchanged on the date of the valuation between a willing buyer and a willing seller in an arm’s length transaction
after proper marketing wherein the parties had each acted knowledgeably and willingly.

In the absence of current prices in an active market, the valuations are prepared by considering the aggregate of the estimated cash ﬂows expected
to be received from renting out the property. A yield that reﬂects the speciﬁc risks inherent in the net cash ﬂows then is applied to the net annual cash
ﬂows to arrive at the property valuation.

Valuations reﬂect, when appropriate, the type of tenants actually in occupation or responsible for meeting lease commitments or likely to be in
occupation after letting vacant accommodation and the allocation of maintenance and insurance responsibilities between the Group and the lessee.

(b) Non-derivative ﬁnancial assets
The fair value of trade and other receivables is estimated as the present value of future cash ﬂows, discounted at the market rate of interest at the
reporting date. This fair value is determined for disclosure purposes.

(c) Derivatives
The fair value of interest rate and foreign exchange swaps is estimated by discounting estimated future cash ﬂows based on the terms and maturity
of each contract and using market interest rates for a similar instrument at the measurement date.

Fair values reﬂect the credit risk of the instrument and include adjustments to take account of the credit risk of the Group entity and counterparty
when appropriate.

(d) Non-derivative ﬁnancial liabilities
Fair value, which is determined for disclosure purposes, is calculated based on the present value of future principal and interest cash ﬂows,
discounted at the market rate of interest at the reporting date. For ﬁnance leases the market rate of interest is determined by reference to similar
lease agreements.

(e) Share-based payment transactions
The fair value of employee share options is measured using the Black-Scholes formula. Measurement inputs include the share price on the
measurement date, the exercise price of the instrument, expected volatility (based on an evaluation of Company’s historic volatility), expected term
of the instruments, expected dividends and the risk-free interest rate.

5 Operating segments
The Group is engaged in management of retail stores located in Russia and has identiﬁed retail operations as a single reportable segment. Although
the Group is not exposed to concentration of sales to individual customers, all the Group’s sales are in the Russian Federation. As such, the Group is
exposed to the economic development in Russia, including the development of the Russian retail industry. The Group has no signiﬁcant non-current
assets outside the Russian Federation.

The Group identiﬁed its operating segments in accordance with the criteria set in IFRS 8 Operating Segments and based on the way the operations
of the Group are regularly reviewed by the chief operating decision maker to analyse performance and allocate resources within the Group.

The Group’s chief operating decision maker has been determined as the CEO.

The Group operating segments represent individual retail stores. Due to similar economic characteristics (refer below) they were aggregated in one
reportable segment.

Within the reportable segment all business components demonstrate similar characteristics:

>
>

the products and customers;
the business processes are integrated and uniform: the Group manages its operations centrally. Purchasing, logistics, ﬁnance, HR and
IT functions are centralised; and
the Group’s activities are mainly limited to Russia which has a uniform regulatory environment.

O’Key Group S.A. Annual Report & Accounts 2012

5 Operating segments continued
The CEO assesses the performance of the operating segment based on earnings before interest, tax, depreciation and amortisation (EBITDA)
adjusted for one-off items. EBITDA is non-GAAP measure. Other information provided to the CEO is measured in a manner consistent with that
in the consolidated ﬁnancial statements.

The accounting policies used for the segment are the same as accounting policies applied for the consolidated ﬁnancial statements as described
in note 3.

The segment information for the year ended 31 December 2012 is as follows:

’000 RUB

Revenue

EBITDA

A reconciliation of EBITDA to proﬁt for the year is as follows:

’000 RUB

EBITDA

Revaluation of investment property

Loss from disposal of non-current assets

Loss from write-off of receivables

Reversal of impairment of receivables

Depreciation and amortisation

Impairment of raw materials (one-off)

Finance income

Finance costs

Foreign exchange gain/(losses)

Hypermarket Ozerki-accident expenses

Proﬁt before income tax

Income tax

Proﬁt for the year

2012

2011

117,333,236

93,134,430

9,426,587

7,510,137

2012

2011

9,426,587

7,510,137

50,350

(40,267)

–

39,494

18,633

(18,620)

(31,973)

61,884

(2,149,949)

(1,977,278)

–

11,428

(1,035,206)

165,683

–

(101,205)

25,216

(777,463)

(266,619)

(73,058)

6,468,120

4,369,654

(1,789,259)

(1,129,774)

4,678,861

3,239,880

In January 2011 section of roof of Group’s hypermarket in Ozerki, St. Petersburg collapsed. The store was closed for repairs until September 2011.
Hypermarket Ozerki-accident expenses comprise repairs and other expenses related to this accident.

6 Revenue

’000 RUB

Sales of trading stock

Sales of self-produced catering products

Revenue from sale of goods

Rental income

Revenue from advertising services

Total revenues

2012

2011

110,238,301

87,796,613

5,665,084

4,400,126

115,903,385

92,196,739

1,013,754

416,097

733,164

204,527

117,333,236

93,134,430

Total revenues comprise sale of goods, rental income from tenants which rent trade area in the Group stores and income from placing advertising in
the Group stores.

O’Key Group S.A. Annual Report & Accounts 2012

Notes to the Consolidated Financial Statements continued
for the year ended 31 December 2012

7 General, selling and administrative expenses

’000 RUB

Personnel costs

Depreciation and amortisation

Operating leases

Communication and utilities

Security expenses

Advertising and marketing

Materials and supplies

Operating taxes

Insurance and bank commission

Repairs and maintenance costs

Legal and professional expenses

Other costs

Note

2012

2011

(10,235,867)

(7,538,304)

(2,149,949)

(1,977,278)

(2,297,963)

(1,672,616)

(1,812,353)

(1,503,215)

(707,348)

(990,342)

(258,840)

(497,603)

(505,810)

(452,157)

(306,150)

(149,568)

(659,657)

(508,338)

(404,607)

(369,119)

(349,383)

(308,122)

(261,981)

(197,275)

(20,363,950)

(15,749,895)

Fees billed to the Company and its subsidiaries by KPMG Luxembourg S.à r.l., and other member ﬁrms of the KPMG network during the year are
as follows:

’000 RUB

Auditors’ remuneration for annual and consolidated accounts

Auditors’ remuneration for other assurance services

Auditors’ remuneration for tax advisory services

Auditors’ remuneration for non-audit services

8 Other operating income and expenses

’000 RUB

Loss from disposal of non-current assets

Loss from write-off of receivables

Reversal of impairment of receivables

Gain from revaluation of investment property

Impairment of raw materials (one-off)

Ozerki-accident expenses

Sundry income

9 Personnel costs

’000 RUB

Wages and salaries

Social security contributions

Employee beneﬁts

Share-based payments

Other

Total personnel costs

2012

9,277

5,180

816

–

15,273

2012

(40,267)

–

39,494

50,350

–

13,603

2011

15,207

7,255

3,735

26,276

2011

(18,620)

(31,973)

61,884

18,633

(101,205)

(73,058)

1,711

63,180

(142,628)

Note

2012

2011

(6,298,681)

(4,503,911)

(2,111,328)

(1,647,603)

(1,493,137)

(1,207,964)

(81,846)

(250,875)

(50,961)

(127,865)

(10,235,867)

(7,538,304)

During the year ended 31 December 2012 the Group employed 21 thousand employees on average (2011: 17 thousand employees on average).
Approximately 96% of employees are store and warehouse employees and the remaining part is ofﬁce employees.

O’Key Group S.A. Annual Report & Accounts 2012

10 Share-based payment arrangements
During the year ended 31 December 2011 the Group granted share appreciation rights to key management personnel and senior employees that
entitle them to cash payment in the years ending 31 December 2012 and 31 December 2013. The amount of cash payments is based on share price
of the Company at the dates of exercise. The payments are subject to service conditions which require employees to stay with the Group until
settlement date.

The fair value of the rights granted to the employees was measured as at 31 December 2012 based on Black-Scholes formula. Expected volatility
is estimated by considering historic average share price volatility.

The inputs used in the measurement of the fair value at 31 December 2012 were as follows:

Share price

Exercise price

Expected volatility

Risk-free rate

Annual dividend yield

Term until exercise date

USD 11.70

USD 8.88

58.8%

2.5%

0.68%

0.85 years

Total expense on share appreciation rights recognised as personnel costs in general, selling and administrative expenses in proﬁt and loss amounted
to RUB 81,846 thousand for the year ended 31 December 2012 (2011: RUB 50,961). Carrying amount of liabilities as at 31 December 2012 amounted
to RUB 76,835 thousand (2011: RUB 50,961).

11 Finance income and ﬁnance costs

’000 RUB

Recognised in proﬁt or loss

Interest income on loans and receivables

Other ﬁnance income

Finance income

Interest costs on loans and borrowings

Reclassiﬁcation from hedging reserve

Finance costs

Net ﬁnance costs recognised in proﬁt or loss

The above ﬁnancial income and costs include the following in respect for assets/(liabilities) not at fair value

through proﬁt and loss:

Total interest income on ﬁnancial assets

Total interest expense on ﬁnancial liabilities

’000 RUB

Recognised in other comprehensive income

Change in fair value of hedges

Reclassiﬁcation to proﬁt and loss

Income tax on income and expense recognised in other comprehensive income

Finance (costs)/income recognised in other comprehensive income, net of tax

2012

2011

10,784

644

11,428

24,800

416

25,216

(1,014,184)

(21,022)

(811,783)

34,320

(1,035,206)

(777,463)

(1,023,778)

(752,247)

11,428

25,216

(1,035,206)

(777,463)

2012

2011

(352,721)

248,975

20,749

310,811

(109,389)

(40,285)

(82,997)

161,137

During 2012 the Group has capitalised interests in the value of property, plant and equipment. The amount of capitalised interest comprised
RUB 229,652 thousand (2011: RUB 101,627 thousand).

In 2012 capitalisation rate of 6.97% was used to determine the amount of borrowing costs eligible for capitalisation (2011: 5.16%).

O’Key Group S.A. Annual Report & Accounts 2012

Notes to the Consolidated Financial Statements continued
for the year ended 31 December 2012

12 Foreign exchange gain/(losses)
During 2012 the Group had signiﬁcant borrowings denominated in US dollars. The strengthening of the Russian rouble during 2012 has resulted in
foreign exchange gain for the year amounting to RUB 165,683 thousand (2011: loss RUB 266,619 thousand). In 2012 and 2011 the Group has used
hedging instruments to hedge foreign exchange risks.

The Group’s risk management policy is to convert part of its USD denominated debt into RUB denominated debt. In order to comply with the
Group’s risk management policy, the foreign exchange risk arising from repayment of long-term USD denominated bank loan is hedged.

Income tax expense

13
The Group’s applicable tax rate is the income tax rate of 20% for Russian companies (2011: 20%).

’000 RUB

Current tax expense

Deferred tax (expense)/beneﬁt

Total income tax expense

2012

2011

(1,590,722)

(1,170,595)

(198,537)

40,821

(1,789,259)

(1,129,774)

Income tax recognised directly in other comprehensive income

’000 RUB

Before tax

Tax

Net of tax

Before tax

Tax

Net of tax

2012

2011

Foreign currency translation differences

for foreign operations

Change in fair value of hedges

23,963

(103,746)

(79,783)

–

20,749

23,963

(82,997)

(58,636)

201,422

–

(40,285)

(58,636)

161,137

(59,034)

142,786

(40,285)

102,501

Reconciliation of effective tax rate:

’000 RUB

Proﬁt before income tax

Income tax at applicable tax rate (2012: 20%, 2011: 20%)

Effect of income taxed at different rates

Tax effect of items which are not deductible for taxation purposes:

– Inventory shrinkage expenses

– Other non-deductible expenses

Tax withheld on dividends received from subsidiaries

Tax concessions

Adjustments to current income tax for previous periods

Other items

Income tax expense for the year

2012

2011

6,468,120

4,369,654

(1,293,624)

(873,931)

(6,364)

2,867

(429,269)

(60,507)

(266,339)

246,042

–

20,802

(307,301)

(58,702)

(91,204)

–

201,441

(2,944)

(1,789,259)

(1,129,774)

O’Key Group S.A. Annual Report & Accounts 2012

14 Property, plant and equipment

’000 RUB

Cost or deemed cost

Balance at 1 January 2011

Additions

Transfers

Transfers to investment property

Disposals

Land

Buildings

Leasehold
improvements

Machinery and
equipment,
auxiliary facilities
and other ﬁxed
assets

Construction in
progress

Total

2,025,851

11,891,015

1,642,159

839,019

2,034,256

–

267,896

–

832,645

51,922

–

5,638,832

1,528,951

1,204,602

2,328,914

22,402,459

7,563,785

51,937

(371,755)

–

(97,600)

(9,260)

(15,653)

–

(9,260)

(113,253)

Balance at 31 December 2011

2,864,870

14,193,167

2,526,726

7,122,120

3,136,848

29,843,731

Balance at 1 January 2012

2,864,870

14,193,167

2,526,726

Additions

Transfers

Transfers to investment property

Disposals

365,412

–

2,191,281

2,061,994

–

826,464

42,260

–

7,122,120

1,369,292

3,136,848

1,085,745

29,843,731

5,838,194

353,063

(2,457,317)

–

(6,616)

(38,479)

–

(6,616)

(121,028)

(2,698)

(79,851)

Balance at 31 December 2012

3,230,282

18,446,442

3,392,752

8,764,624

1,720,181

35,554,281

Depreciation and impairment losses

Balance at 1 January 2011

Depreciation for the year

Transfers

Disposals

Balance at 31 December 2011

Balance at 1 January 2012

Depreciation for the year

Transfers

Disposals

Balance at 31 December 2012

Carrying amounts

At 1 January 2011

–

(1,344,602)

(408,279)

(128,930)

(190,238)

(3,124,760)

(1,161,621)

(13)

–

86,654

(1,752,894)

(319,155)

(4,199,727)

(1,752,894)

(512,673)

(5,131)

–

(319,155)

(294,997)

(6,599)

101

(4,199,727)

(1,131,568)

11,730

69,277

(2,270,698)

(620,650)

(5,250,288)

–

(4,598,292)

(1,760,138)

–

86,654

(6,271,776)

(1,939,238)

–

69,378

(8,141,636)

2,025,851

10,546,413

1,513,229

2,514,072

1,204,602

17,804,167

At 31 December 2011

2,864,870

12,440,273

2,207,571

2,922,393

3,136,848

23,571,955

At 31 December 2012

3,230,282

16,175,744

2,772,102

3,514,336

1,720,181

27,412,645

Depreciation expense of RUB 1,939,238 thousand has been charged to selling, general and administrative expenses (2011: RUB 1,760,138 thousand).

Security
At 31 December 2012 property, plant and equipment carried at RUB 6,404,435 thousand (2011: RUB 4,214,640 thousand) have been pledged
to third parties as collateral for borrowings. Refer to notes 24 and 29.

In 2010 the Group has entered into agreement with third party in relation to one of its land plots with carrying value of RUB 554,967 thousand
as at 31 December 2012. Under terms of this agreement the third party will build a trade center on this land plot. Upon completion of construction
the Group will exchange part of land plot for part of trade center and will locate O’KEY hypermarket there. In 2010 the Group received guarantee
payment in relation to this transaction. Guarantee received was included in other non-current liabilities and amounted to RUB 914,307 thousand
as at the date of receipt and to RUB 911,181 thousand as at 31 December 2012.

O’Key Group S.A. Annual Report & Accounts 2012

Notes to the Consolidated Financial Statements continued
for the year ended 31 December 2012

Intangible assets

’000 RUB

Cost

Balance at 1 January 2011

Additions

Software

Lease rights

Other intangible
assets

416,206

101,219

491,475

–

14,030

Total

907,681

115,249

Balance at 31 December 2011

517,425

491,475

14,030

1,022,930

Balance at 1 January 2012

Additions

517,425

168,478

491,475

14,030

1,022,930

–

168,478

Balance at 31 December 2012

685,903

491,475

14,030

1,191,408

Amortisation and impairment losses

Balance at 1 January 2011

Amortisation for the year

Balance at 31 December 2011

Balance at 1 January 2012

Amortisation for the year

(192,744)

(91,778)

(155,685)

(63,930)

(284,522)

(219,615)

(284,522)

(54,248)

(219,615)

(62,975)

–

(694)

(2,759)

(348,429)

(156,402)

(504,831)

(119,982)

Balance at 31 December 2012

(338,770)

(282,590)

(3,453)

(624,813)

Carrying amounts

At 1 January 2011

At 31 December 2011

At 31 December 2012

223,462

335,790

–

559,252

232,903

271,860

13,336

518,099

347,133

208,885

10,577

566,595

Amortisation and impairment losses
Amortisation of RUB 119,982 thousand has been charged to selling, general and administrative expenses (2011: RUB 156,402 thousand).

Investment property

’000 RUB

Investment properties at fair value as at 1 January 2011

Transfers from property, plant and equipment

Expenditure on subsequent improvements

Fair value gain

Investment properties at fair value as at 31 December 2011

Investment properties at fair value as at 1 January 2012

Transfers from property, plant and equipment

Expenditure on subsequent improvements

Fair value gain

Investment properties at fair value as at 31 December 2012

Investment
property

517,000

9,260

28,107

18,633

573,000

6,616

2,034

50,350

632,000

The carrying amount of investment property is the fair value of the property as determined by registered independent appraisers having an
appropriate recognised professional qualiﬁcation and recent experience in the location and type of the property being valued.

The appraisers used income approach for determining the fair value. An estimate was made of annual net operating income for ﬁve years which
is mainly based on annual net rent rate of RUB 4,600 per m2 (2011: RUB 5,400) and expected occupancy of 93% (2011: 60-80%). The annual
net operating income was assumed to be constant from year six to perpetuity. Discount rate of 17.8% (2011: 17%) was applied to discount future
cash ﬂows.

Direct operating expenses arising from investment property that generated rental income amounted to RUB 83,363 thousand for the year ended
31 December 2012 (2011: RUB 70,773 thousand). There were no direct operating expenses arising from investment property that did not generate
rental income for the year ended 31 December 2012 (2011: Nil).

O’Key Group S.A. Annual Report & Accounts 2012

17 Other non-current assets

’000 RUB

Initial cost of land lease

Long-term prepayments to entities under control of shareholder group

Prepayments for non-current assets

Long-term deposits to lessors

Deferred bank commissions

Other non-current receivables

2012

2011

3,991,382

952,302

2,677,459

159,525

–

124,398

3,369,934

1,045,171

978,490

125,406

11,501

–

7,905,066

5,530,502

Initial cost of land lease includes purchase price and costs directly attributable to acquisition of lease rights and is amortised over the period of the
lease (49-51 years).

Long-term prepayments to entities under control of shareholder group represent prepayments for rent of hypermarkets for the period until 2017.
Related party transactions are detailed in note 30.

Movements in the carrying amount of initial cost of land lease were as follows:

’000 RUB

Cost

Balance at 1 January

Additions

Disposals

Balance at 31 December

Amortisation and impairment losses

Balance at 1 January

Amortisation charge

Disposals

Balance at 31 December

Net book value

2012

2011

3,946,624

717,434

(19,501)

2,950,601

1,008,702

(12,679)

4,644,557

3,946,624

(576,690)

(90,729)

14,244

(516,907)

(60,738)

955

(653,175)

(576,690)

3,991,382

3,369,934

At 31 December 2012 initial cost of land lease carried at RUB 456,971 thousand (2011: RUB 349,591 thousand) have been pledged to third parties
as collateral for borrowings. Refer to note 24.

18 Deferred tax assets and liabilities
(a) Recognised deferred tax assets and liabilities
Deferred tax assets and liabilities are attributable to the following:

’000 RUB

Investment property

Property, plant and equipment

Construction in progress

Intangible assets

Other non-current assets

Inventories

Trade and other receivables

Trade and other payables

Tax assets/(liabilities)

Set off of tax

Assets

2012

–

54,320

232,008

160,769

158,138

605,235

2011

9,391

33,711

–

88,621

257,552

110,865

82,378

582,518

(230,109)

(226,484)

Liabilities

2012

(21,135)

(448,858)

(59,064)

(1,609)

–

(285,600)

(81,562)

(897,828)

230,109

2011

–

(520,773)

(20,325)

(2,667)

(104,065)

–

(49,493)

–

(697,323)

226,484

Net

2012

(21,135)

(448,858)

(59,064)

(1,609)

54,320

232,008

(124,831)

76,576

(292,593)

–

2011

9,391

(487,062)

(20,325)

(2,667)

(15,444)

257,552

61,372

82,378

(114,805)

–

Net tax assets/(liabilities)

375,126

356,034

(667,719)

(470,839)

(292,593)

(114,805)

O’Key Group S.A. Annual Report & Accounts 2012

Notes to the Consolidated Financial Statements continued
for the year ended 31 December 2012

18 Deferred tax assets and liabilities continued
(b) Unrecognised deferred tax liability
As at 31 December 2012 a temporary difference of RUB 16,851,838 thousand (2011: RUB 14,104,538 thousand) relating to investments in
subsidiaries has not been recognised as the Group is able to control the timing of reversal of the difference, and reversal is not expected in the
foreseeable future. If the temporary difference were reversed in form of distributions remitted to the Company, then an enacted tax rate of 10-15%
would apply.

’000 RUB

Investment property

Property, plant and equipment

Construction in progress

Intangible assets

Other non-current assets

Inventories

Trade and other receivables

Trade and other payables

’000 RUB

Investment property

Property, plant and equipment

Construction in progress

Intangible assets

Investments

Other non-current assets

Inventories

Trade and other receivables

Trade and other payables

Inventories

’000 RUB

Goods for resale

Raw materials and consumables

Write-down to net realisable value

1 January
2012

Recognised in
proﬁt or loss

Recognised in
hedging reserve

31 December
2012

9,391

(487,062)

(20,325)

(2,667)

(15,444)

257,552

61,372

82,378

(30,526)

38,204

(38,739)

1,058

69,764

(25,544)

(206,952)

(5,802)

–

20,749

–

(21,135)

(448,858)

(59,064)

(1,609)

54,320

232,008

(124,831)

76,576

(114,805)

(198,537)

20,749

(292,593)

1 January
2011

Recognised in
proﬁt or loss

Recognised in
hedging reserve

31 December
2011

55,309

(473,818)

–

3,365

5,522

156,748

69,037

68,496

(115,341)

(45,918)

(13,244)

(20,325)

(2,667)

(3,365)

(20,966)

100,804

32,620

13,882

40,821

–

(40,285)

–

9,391

(487,062)

(20,325)

(2,667)

–

(15,444)

257,552

61,372

82,378

(40,285)

(114,805)

2012

2011

9,128,059

7,955,952

341,346

(257,090)

344,634

(382,929)

9,212,315

7,917,657

Due to write-off and discount given for obsolete and slow moving goods for resale the Group tested the related stock for write-off and also wrote
down the related inventories to their net realisable value, which resulted in decrease of carrying value of stock by RUB 257,090 thousand as at
31 December 2012 (2011: RUB 382,929 thousand). The write-down to net realisable value was determined applying the percentages of discount
on sales and write-offs of slow moving goods to the appropriate ageing of the goods. The percentages of discount were based on the best
management estimate following the experience of the discount sales.

The write-down is included in cost of goods sold.

O’Key Group S.A. Annual Report & Accounts 2012

20 Trade and other receivables

’000 RUB

Trade receivables

VAT receivable

Prepaid taxes

Foreign exchange and interest rate swap receivables

Other receivables

Note

2012

98,370

1,196,210

197,935

–

425,119

2011

45,883

936,920

183,433

320,167

437,705

1,917,634

1,924,108

Taxes prepaid include RUB 130,638 thousand of prepaid income tax (2011: RUB 176,783 thousand).

Other receivables include RUB 345,814 thousand (2011: RUB 336,279 thousand) of bonuses receivable from suppliers.

The Group’s exposure to credit and currency risks and impairment losses related to trade and other receivables are disclosed in note 26.

21 Cash and cash equivalents

’000 RUB

Cash on hand

RUB denominated bank current account

USD denominated bank current account

RUB term deposits (interest rate: 1.77%; 2011: 3.5%-7.06%p.a.)

Cash in transit

Cash and cash equivalents

Term deposits had original maturities of less than three months.

2012

341,447

957,771

15,824

65,679

2011

283,846

558,846

100,426

151,425

3,154,972

1,847,404

4,535,693

2,941,947

The Group keeps its cash in the following banks: Bank Saint-Petersburg, Nordea bank, OTP bank, Bank Otkrytie, Promservice bank, Sberbank,
Baltiysky Bank, Raiffeisen bank, VTB bank, Credit Evropa bank, Swedbank, TransCredit bank, BSGV, Hansa Bank, Unicredit bank and Uralsib bank.

The Group’s exposure to credit and currency risks related to cash and cash equivalents is disclosed in note 26.

22 Equity
Reconciliation of number of shares from 1 January to 31 December is provided in the table below.

Number of shares unless otherwise stated

Par value

On issue at 1 January

On issue at 31 December, fully paid

Ordinary shares

2012

2011

EUR 0.01

269,074,000

As at 31 December 2012 the Group’s subscribed share capital of RUB 119,440 thousand (EUR 2,691 thousand, 2011: EUR 2,691 thousand)
is represented by 269,074,000 shares with a par value of 0.01 EUR each.

In accordance with Luxemburg Company Law, the Company is required to transfer a minimum of 5% of its net proﬁts for each ﬁnancial year to
a legal reserve. This requirement ceases to be necessary once the balance of the legal reserve reaches 10% of the issued share capital. The legal
reserve is not available for distribution to the shareholders. During the year ended 31 December 2012 there were no transfers to legal reserve
(2011: RUB 10,486 thousand).

In February 2012 the Group paid interim dividends to shareholders in amount of RUB 833,514 thousand. Interim dividends paid were recognised
as distribution to shareholders in the Consolidated Statement of Changes in Equity.

Dividends per share recognised as distribution to shareholders for the year ended 31 December 2012 amounted to RUB 3.1 (2011: RUB 2.9).

In June 2012 shareholders of the Company approved annual dividends for the year ended 31 December 2011. The amount of annual dividends
for 2011 was paid by the Group to shareholders as interim dividends in 2011 in the amount of RUB 772,830 thousand.

There were no movements in additional paid-in capital during the year ended 31 December 2012.

O’Key Group S.A. Annual Report & Accounts 2012

Notes to the Consolidated Financial Statements continued
for the year ended 31 December 2012

23 Earnings per share
The calculation of basic earnings per share at 31 December 2012 was based on the proﬁt attributable to ordinary shareholders of RUB 4,678,861
thousand (2011: RUB 3,239,880 thousand), and a weighted average number of ordinary shares outstanding of 269,074,000, calculated as shown
below. The Company has no dilutive potential ordinary shares.

Number of shares

Issued shares at 1 January

Weighted average number of shares for the year ended 31 December

2012

2011

269,074,000

24 Loans and borrowings
This note provides information about the contractual terms of the Group’s interest-bearing loans and borrowings, which are measured at amortised
cost. For more information about the Group’s exposure to interest rate, foreign currency and liquidity risk, see note 26.

’000 RUB

Non-current liabilities

Secured bank loans

Unsecured bonds

Unsecured loans from related parties

Current liabilities

Secured bank loans

Unsecured bank facilities

Unsecured loans from third parties

2012

2011

6,236,313

3,009,934

617,522

5,807,982

–

960,300

9,863,769

6,768,282

1,819,810

2,003,457

2,868

1,417,354

3,877,808

7,786

3,826,135

5,302,948

As at 31 December 2012 loans and borrowings with carrying value of RUB 8,056,123 thousand (2011: RUB 7,225,336 thousand) were secured by
property, plant and equipment and initial cost of land lease. Refer to note 29.

(a) Terms and debt repayment schedule
Terms and conditions of outstanding loans were as follows:

’000 RUB

Secured bank loan

Unsecured bonds

Unsecured bank facility

Unsecured loans from

related parties

Unsecured loans from

related parties

Unsecured loans from

other companies

Unsecured loans from

other companies

Unsecured loans from

other companies

Currency

Nominal
interest rate

USD LIBOR + 3.9-5%

Year of
maturity

2013

USD LIBOR + 3.15%

2010-2015

RUB

8.5%

2015

RUB Mosprime 1m
+ 3.5%

2013-2017

RUB

USD

RUB

10.1%

8.85-9.85%

6.35-7.9%

8.45-9.03%

8,6%

7-12%

31 December 2012

31 December 2011

Face value

432,541

3,954,901

1,168,681

2,500,000

Carrying
amount

432,541

3,954,901

1,168,681

2,500,000

3,009,934

–

Face value

671,941

5,095,856

1,457,539

–

302

Carrying
amount

671,941

5,095,856

1,457,539

–

302

370,090

3,507,416

503,457

1,500,000

–

2017

2012

2013

2016

617,522

654,595

2013

2012

–

305,705

2,865

2,862

–

4,914

13,689,904

12,071,230

During 2012 the Group placed unsecured bonds on MICEX which expire after ﬁve years in 2017, however bonds holders have an option to claim
repayment of bonds after three years.

O’Key Group S.A. Annual Report & Accounts 2012

24 Loans and borrowings continued
(b) Compliance with loan covenants
The Group monitors compliance with loan covenants on an on-going basis. Where incompliance is unavoidable in managements’ view, the Group
requests waiver letters from the banks before the year-end, conﬁrming that the banks shall not use its right to demand early redemption.

At 31 December 2012 and during the year then ended the Group complied with all loan covenants.

25 Trade and other payables

’000 RUB

Trade payables

Advances received

Taxes payable (other than income tax)

Payables to staff

Foreing exchange and interest rate swap liabilities

Short-term liabilities incurred in share-based payment transactions

Deferred income

Other current payables

Note

2012

2011

17,344,008

13,885,863

181,083

650,827

1,099,639

32,554

76,835

28,365

200,423

120,456

395,160

791,050

–

33,334

34,309

77,387

19,613,734

15,337,559

The Group’s exposure to currency and liquidity risk related to trade and other payables is disclosed in note 26.

26 Financial instruments and risk management
(a) Overview
The Group has exposure to the following risks from its use of ﬁnancial instruments:

credit risk
>
>
liquidity risk
> market risk

This note presents information about the Group’s exposure to each of the above risks, the Group’s objectives, policies and processes for
measuring and managing risk, and the Group’s management of capital. Further quantitative disclosures are included throughout these consolidated
ﬁnancial statements.

Risk management framework
The Board of Directors has overall responsibility for the establishment and oversight of the Group’s risk management framework.

The Group’s risk management policies are established to identify and analyse the risks faced by the Group, to set appropriate risk limits and controls,
and to monitor risks and adherence to limits. Risk management policies are reviewed regularly to reﬂect changes in market conditions and the
Group’s activities. The Group, through its training and management standards and procedures, aims to develop a disciplined and constructive
control environment in which all employees understand their roles and obligations.

The Group’s Audit Committee oversees how management monitors compliance with the Group’s risk management policies and procedures and
reviews the adequacy of the risk management framework in relation to the risks faced by the Group. The Group’s Audit Committee is assisted in its
oversight role by Internal Audit. Internal Audit undertakes both regular and ad hoc reviews of risk management controls and procedures, the results
of which are reported to the Audit Committee.

(b) Credit risk
Credit risk is the risk of ﬁnancial loss to the Group if a customer or counterparty to a ﬁnancial instrument fails to meet its contractual obligations,
and arises principally from the Group’s receivables from customers and investments.

(i) Exposure to credit risk
The carrying amount of ﬁnancial assets represents the maximum credit exposure. The maximum exposure to credit risk at the reporting date was:

’000 RUB

Trade and other receivables

Interest rate and foreign exchange swap receivables

Cash and cash equivalents

Note

Carrying amount

2012

523,489

–

2011

483,588

320,167

4,535,693

2,941,947

5,059,182

3,745,702

Due to the fact that the Group’s principal activities are located in Russian Federation the credit risk is mainly associated with domestic market. The
credit risks associated with foreign counterparties are considered to be remote, as there are only few foreign counterparties and they were properly
assessed for creditability.

O’Key Group S.A. Annual Report & Accounts 2012

Notes to the Consolidated Financial Statements continued
for the year ended 31 December 2012

26 Financial instruments and risk management continued
(ii) Trade and other receivables
The Group has no considerable balance of trade receivables because the majority of the customers are retail consumers, who are not provided with
any credit. Therefore the Group’s trade receivables primarily include receivables from tenants and receivables connected to provision of advertising
services. Usually the Group provides advertising services to suppliers of goods sold in O’KEY outlets. Thus, the credit risk in part of trade receivables
is mostly managed through procedures for selection of suppliers and tenants.

The Group establishes an allowance for impairment that represents its estimate of incurred losses in respect of trade and other receivables. The main
component of this allowance is a speciﬁc loss component that relates to individually signiﬁcant exposures.

Impairment losses
The aging of trade and other receivables at the reporting date was:

’000 RUB

Not overdue and past due less than 90 days

Past due 90-180 days

Past due 180-360 days

More than 360 days

Gross
2012

Impairment
2012

Gross
2011

Impairment
2011

436,509

22,227

10,595

75,635

–

(21,477)

422,770

21,527

10,262

73,255

–

(44,226)

544,966

(21,477)

527,814

(44,226)

The movement in the allowance for impairment in respect of trade receivables during the year was as follows:

’000 RUB

Balance at beginning of the year

Impairment loss recognised

Impairment loss reversed

Impairment loss utilised

Balance at end of the year

2012

44,226

–

(22,749)

–

2011

108,422

31,973

(61,884)

(34,285)

21,477

44,226

The management has performed thorough analysis of the recoverability of the receivables and impaired the balances outstanding for more than
one year. Based on past experience the management believes that normally the balances outstanding less than 360 days should not be impaired.

(iii) Cash and cash equivalents
The Group held cash and cash equivalents of RUB 4,535,693 thousand at 31 December 2012 (2011: RUB 2,941,947 thousand), which represents
its maximum credit exposure on these assets. Cash and cash equivalents are mainly held with banks which are rated AAA based on Standard and
Poor’s national rating for Russian Federation and AAA based on Moody’s Investors Service national rating for Russian Federation.

(c) Liquidity risk
Liquidity risk is the risk that the Group will encounter difﬁculty in meeting the obligations associated with its ﬁnancial liabilities that are settled by
delivering cash or another ﬁnancial asset. The Group’s approach to managing liquidity is to ensure, as far as possible, that it will always have
sufﬁcient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking
damage to the Group’s reputation.

Liquidity risk management is a responsibility of the Treasury under the supervision of the Group’s Financial Director. The Group’s liquidity risk
management objectives are as follows:

> maintaining ﬁnancial independence: a share of one creditor in debt portfolio should not exceed 30%;
> maintaining ﬁnancial stability: the ratio DEBT/EBITDA should not exceed 2.5;
> monitoring of compliance with debt covenants; and
>

planning: timely preparation of operating, investing and ﬁnancing cash-ﬂow forecasts on rolling basis.

O’Key Group S.A. Annual Report & Accounts 2012

26 Financial instruments and risk management continued
(i) Exposure to liquidity risk
The following are the contractual maturities of ﬁnancial liabilities, including future interest payments:

2012

’000 RUB

Non-derivative ﬁnancial liabilities

Secured bank loans

Unsecured bonds

Unsecured bank facilities

Unsecured loans from related parties

Unsecured loans from other companies

Trade and other payables

Other non-current liabilities

Derivative ﬁnancial assets

Carrying amount

Contractual
cash ﬂows

0-6 mths

6-12 mths

1-5 yrs

8,056,123

3,009,934

2,003,457

617,522

2,868

(9,172,269)

(1,054,656)

(1,113,462)

(7,004,151)

(3,916,444)

(151,085)

(3,614,274)

(2,046,007)

(769,789)

(2,868)

(24,363)

(1)

18,644,070

(18,644,070)

911,181

(911,181)

–

(24,363)

(2,867)

–

(721,063)

–

(911,181)

Foreign exchange and interest rate swap liability

32,554

(466,376)

(114,132)

(102,648)

(249,596)

33,277,709

(35,929,004)

(22,034,314)

(1,394,425)

(12,500,265)

During 2012 the Group placed unsecured bonds on MICEX which expire after ﬁve years in 2017, however bonds holders have an option to claim
repayment of bonds after three years, thus three years period is used for contractual cash ﬂows calculation purposes.

2011

’000 RUB

Non-derivative ﬁnancial liabilities

Secured bank loans

Unsecured bank facilities

Unsecured loans from related parties

Unsecured loans from other companies

Trade and other payables

Other non-current liabilities

Derivative ﬁnancial assets

Carrying amount

Contractual
cash ﬂows

0-6 mths

6-12 mths

1-5 yrs

(8,077,028)

(885,672)

(853,208)

(6,338,148)

7,225,336

3,877,808

(4,026,728)

(3,994,472)

960,300

(1,047,602)

7,786

(7,798)

(37,886)

(4,935)

14,754,300

(14,754,300)

965,883

(965,883)

–

(32,256)

(37,886)

(2,863)

–

(971,830)

–

(965,883)

Foreign exchange and interest rate swap receivables

(320,167)

(350,286)

(101,830)

(87,244)

(161,212)

27,471,246

(29,229,625)

(19,779,095)

(1,013,457)

(8,437,073)

There are no payments due after ﬁve years.

(d) Market risk
Market risk is the risk that changes in market prices, such as foreign exchange rates, interest rates and equity prices will affect the Group’s income
or the value of its holdings of ﬁnancial instruments. The objective of market risk management is to manage and control market risk exposures within
acceptable parameters, while optimising the return.

The Group buys derivatives in order to manage market risk. All such transactions are carried out within the guidelines set in Group’s policy on
hedging market risk. The Group applies hedge accounting in order to manage volatility in proﬁt or loss.

(i) Currency risk
The Group holds its business in Russian Federation and mainly collects receivables nominated in Russian roubles. However ﬁnancial assets and
liabilities of the Group are also denominated in other currencies, primarily US dollar.

Thus the Group is exposed to currency risk, which may materially inﬂuence the ﬁnancial position and ﬁnancial results of the Group through the
change in carrying value of ﬁnancial assets and liabilities and amounts on foreign exchange rate gains or losses. The Group ensures that its exposure
is kept to acceptable level by keeping proportion of ﬁnancial assets and liabilities in foreign currencies to total ﬁnancial liabilities at acceptable level.
From time to time the Group converts assets and liabilities from one currency to another. The Group regularly considers necessity of using derivatives
to hedge its exposure to currency risk. During 2012 the Group used currency swap in order to hedge currency risk on loan denominated in
US dollars.

O’Key Group S.A. Annual Report & Accounts 2012

Notes to the Consolidated Financial Statements continued
for the year ended 31 December 2012

26 Financial instruments and risk management continued
Exposure to currency risk
The Group’s exposure to foreign currency risk was as follows based on notional amounts:

’000 RUB

Trade and other receivables

Secured bank loans

Unsecured loans from related parties

Trade and other payables

Other non-current liabilities

Foreign exchange and interest rate swap receivables

Foreign exchange and interest rate swap liabilities

Gross exposure

Of which carrying amount of hedged secured bank loans

Net exposure

USD-
denominated
2012

USD-
denominated
2011

3,346

41,632

(4,387,442)

(5,767,797)

(617,522)

(11,250)

(911,181)

–

(32,554)

(960,300)

(118,925)

(965,883)

320,167

–

(5,956,603)

(7,451,106)

(3,954,901)

5,095,856

(2,001,702)

(2,355,250)

The following signiﬁcant exchange rates applied during the year:

Russian rouble equals

US dollar

Average rate

Reporting date rate

2012

31.0930

2011

29.3874

2012

30.3727

2011

32.1961

Sensitivity analysis
A 10% strengthening of the RUB against USD at 31 December 2012 would have increased equity by RUB 592,405 thousand (2011: RUB 745,111
thousand) and proﬁt or loss by RUB 196,915 thousand (2011: RUB 267,542 thousand). This analysis is based on foreign currency exchange rate
variances that the Group considered to be reasonably possible at the end of the reporting period. The analysis assumes that all other variables,
in particular interest rates, remain constant. The analysis is performed on the same basis for 2011.

A weakening of the RUB against USD at 31 December would have had the equal but opposite effect on equity and proﬁt and loss, on the basis that
all other variables remain constant.

Interest rate risk

(ii)
The Group has material exposure to interest rate risk. As at 31 December 2012 66% of the Group’s interest-bearing ﬁnancial liabilities were subject
to re-pricing within six months after the reporting date (2011: 76%).

The Group uses swaps to hedge its exposure to variability of interest and exchange rates. As at 31 December 2012 the Group had foreign exchange
and interest swap agreement with a bank. Under this agreement the Group swaps LIBOR rate for ﬁxed rate and swaps USD for RUB at ﬁxed rate.
At inception, the swap had maturity of ﬁve years.

The Group hedged 57% (2011: 88%) of its borrowings with variable rate applying this hedge.

Proﬁle
At the reporting date the interest rate proﬁle of the Group’s interest-bearing ﬁnancial instruments was:

’000 RUB

Fixed rate instruments

Financial assets

Financial liabilities

Variable rate instruments

Financial assets

Financial liabilities

Carrying amount

2012

2011

–

(6,802,462)

(6,303,433)

–

320,167

(6,919,996)

(5,767,797)

O’Key Group S.A. Annual Report & Accounts 2012

26 Financial instruments and risk management continued
Cash ﬂow sensitivity analysis for variable rate instruments
A change of 100 basis points in interest rates at the reporting date would have increased (decreased) equity and proﬁt or loss by the amounts shown
below. This analysis assumes that all other variables, in particular foreign currency rates, remain constant. The analysis is performed on the same
basis for 2011.

Proﬁt or loss

Equity

’000 RUB

2012

Variable rate instruments

Interest rate swap

Cash ﬂow sensitivity (net)

2011

Variable rate instruments

Interest rate swap

Cash ﬂow sensitivity (net)

100 bp
increase

100 bp
decrease

100 bp
increase

100 bp
decrease

(68,801)

39,485

68,801

(39,485)

(29,316)

29,316

(57,575)

50,870

57,575

(50,870)

(6,705)

6,705

–

40,618

–

80,942

–

5,160

–

(57,177)

(e) Fair values
Basis for determination of fair value of ﬁnancial assets and liabilities is disclosed in note 4. Fair value of Group’s ﬁnancial assets and liabilities
approximates their carrying amounts.

(f) Fair value hierarchy
Group’s derivative ﬁnancial assets and liabilities comprise foreign exchange and interest rate swap which is carried at fair value. Fair value of swap
was determined based on observable market data, including forward foreign exchange and interest rates. The Group has no ﬁnancial assets and
liabilities measured at fair value based on unobservable inputs.

(g) Capital management
The Group’s policy is to maintain a strong capital base so as to maintain investor, creditor and market conﬁdence and to sustain future development
of the business. Neither the Company nor its subsidiaries are subject to externally imposed capital requirements, except for statutory requirement
in relation to minimum level of share capital; the Group follows this requirement.

27 Operating leases
Leases as lessee
The Group has both own and leased land plots. The own land plots are included in property, plant and equipment. Leased land plots are treated as
operating leases. In case the Group incurs costs directly attributable to acquisition of operating lease rights, these costs are capitalised as initial cost
of land lease and are amortised over the period of the lease (49-51 years). The further information on leases is detailed below.

When the Group leases land plots under operating leases, the lessors for these leases are state authorities and third parties. The leases are typically
run for 2-3 years, after which long-term operating lease contract is concluded for 49 years.

The Group also rents premises under operating leases. These leases typically run up to ten years. Some of Group’s leases are non-cancellable and
contain contingent rent arrangements. The Group has subleases.

During the year ended 31 December 2012 RUB 2,388,692 thousand was recognised as an expense (including amortisation of initial cost of land
lease amounting to RUB 90,729 thousand) in the proﬁt and loss in respect of operating leases (2011: RUB 1,733,354 thousand).

Non-cancellable operating lease rentals are payable as follows:

RUB 000’

Less than one year

Between one and ﬁve years

More than ﬁve years

2012

278,099

765,382

2011

222,673

744,618

4,847,572

5,248,576

5,891,053

6,215,867

Contingent rent recognised as an expense for the year ended 31 December 2012 amounted RUB 637,255 thousand (2011: RUB 596,634 thousand).
Contingent rent is determined as excess of 3%-5% of the revenue of related stores over ﬁxed rent rate.

Leases as lessor
The Group leases out its investment property and some space in the buildings of hypermarkets. During the year ended 31 December 2012
RUB 1,013,754 thousand was recognised as rental income in the consolidated statement of comprehensive income (2011: RUB 733,164 thousand).
All leases whether the Group is lessor are cancellable. The Group has contingent rent arrangements.

Contingent rent recognised as income amounted to RUB 28,582 thousand for the year ended 31 December 2012 (2011: RUB 4,238 thousand).
Contingent rent is determined as excess of 3.5%-25% of the tenant’s revenue over ﬁxed rent rate.

O’Key Group S.A. Annual Report & Accounts 2012

Notes to the Consolidated Financial Statements continued
for the year ended 31 December 2012

28 Capital commitments
The Group has capital commitments to acquire property, plant and equipment and intangible assets amounting to RUB 5,796,762 thousand as at
31 December 2012 (2011: RUB 1,661,253 thousand).

29 Contingencies
(a) Legal proceedings
From time to time and in the normal course of business, claims against the Group are received. On the basis of its own estimates and both internal
and external professional advice the management is of the opinion that no material losses will be incurred in respect of claims.

(b) Taxation contingencies
The taxation system in the Russian Federation continues to evolve and is characterised by frequent changes in legislation, ofﬁcial pronouncements
and court decisions, which are sometimes contradictory and subject to varying interpretation by different tax authorities.

Taxes are subject to review and investigation by a number of authorities, which have the authority to impose severe ﬁnes, penalties and interest
charges. A tax year remains open for review by the tax authorities during the three subsequent calendar years; however, under certain circumstances
a tax year may remain open longer. Recent events within the Russian Federation suggest that the tax authorities are taking a more assertive and
substance-based position in their interpretation and enforcement of tax legislation.

New transfer pricing legislation enacted in the Russian Federation starting from 1 January 2012 provides for major modiﬁcations making local transfer
pricing rules closer to OECD guidelines, but creating additional uncertainty in practical application of tax legislation in certain circumstances.

The new transfer pricing rules introduce an obligation for the taxpayers to prepare transfer pricing documentation with respect to controlled
transactions and prescribe new basis and mechanisms for accruing additional taxes and interest in case prices in the controlled transactions differ
from the market level. The new transfer pricing rules eliminated the 20% price safe harbour that existed under the previous transfer pricing rules
applicable to transactions on or prior to 31 December 2011.

The new transfer pricing rules primarily apply to cross-border transactions between related parties, as well as to certain cross-border transactions
between independent parties, as determined under the Russian Tax Code. In addition, the rules apply to in-country transactions between related
parties if the accumulated annual volume of the transactions between the same parties exceeds a particular threshold (RUB 3 billion in 2012,
RUB 2 billion in 2013, and RUB 1 billion in 2014 and thereon).

Since there is no practice of applying the new transfer pricing rules by the tax authorities and courts, it is difﬁcult to predict the effect of the new
transfer pricing rules on these consolidated ﬁnancial statements.

The Group companies entered into intra-Group transactions which management believed were consistent with applicable tax law. However, based
on the uncertainty of legislation, the tax authorities could take a different position and attempt to assess additional tax and interest. The potential
amount of such assessment cannot be reasonably estimated based on the uncertainty of transfer pricing rules and practical application of the law,
but could be signiﬁcant. Management has not made any provision because it believes it is not probable that an outﬂow of funds relating to any such
assessment will take place.

The Group has treated bonuses received from suppliers based on clariﬁcations issued by the Russian Ministry of Finance, and management believes
that this approach is consistent with applicable tax law. However, based on uncertainty of tax legislation and recent development of court practice,
the tax authorities could take a different position and attempt to assess additional tax liabilities.

The potential amount of such assessment cannot be reasonably estimated due to uncertainty of legislation and absence of practice in determining of
the amount of additional tax liabilities, but could be signiﬁcant. Management has not made any provision because it believes it is not probable that an
outﬂow of funds relating to any such assessment will take place.

‘000 RUB

Fixed assets (carrying value)

Initial cost of land lease (carrying value)

Total

Note

2012

2011

6,404,435

4,214,640

456,971

349,591

6,861,406

4,564,231

O’Key Group S.A. Annual Report & Accounts 2012

30 Related party transactions
(a) Major shareholders
The major shareholders of the Group are four individuals Mr. Korzhev, Mr. Troitsky, Mr. Volchek and Mr. Teder (“the shareholder group”).

(b) Transactions with management
(i) Management remuneration
Key management received the following remuneration during the year, which is included in personnel costs (see note 9):

’000 RUB

Salaries and bonuses

Social security contributions

Long-service bonus

Share-based payments

2012

113,526

778

85,425

42,016

2011

125,339

660

71,839

31,321

241,745

229,159

In addition members of Board of Directors received remuneration in the amount of RUB 12,068 thousand for the year ended 31 December 2012
(2011: RUB 8,858 thousand) which is included in legal and professional expenses (see note 7).

(c) Transactions with other related parties
Other related parties are entities which belong to the shareholder group (see note 1(a)).

The Group’s other related party transactions are disclosed below.

(i) Revenue

’000 RUB

Services provided:

Other related parties

Transaction
value
2012

Transaction
value
2011

Outstanding
balance
2012

Outstanding
balance
2011

38,664

21,689

(5,110)

(3,786)

All outstanding balances with related parties are to be settled in cash within six months of the reporting date. None of the balances are secured.

(ii) Expenses

’000 RUB

Lease of premises

Other related parties

Including:

Rental fee

Reimbursement of utilities

Reimbursement of other expenses

Other services received:

Other related parties

Finance costs:

Other related parties

Transaction
value
2012

Transaction
value
2011

Outstanding
balance
2012

Outstanding
balance
2011

(675,140)

(647,768)

1,109,960

1,179,569

(565,526)

(557,934)

(54,831)

(54,783)

(35,735)

(54,099)

(15,908)

(24,036)

(49,430)

(70,169)

608

–

9,722

–

(740,478)

(741,973)

1,110,568

1,189,291

In 2012 no ﬁnance costs from related parties were capitalised in cost of property, plant and equipment (2011: Nil).

Outstanding balance for lease of premises as at 31 December 2012 represents net balance of prepayments for rent of hypermarkets for the period
until 2017 in the amount of RUB 1,168,638 thousand (2011: RUB 1,230,054 thousand) and current liabilities for rent of hypermarkets in the amount
RUB 58,678 thousand (2011: RUB 50,485 thousand). Long-term part of prepayments is RUB 952,302 thousand (2011: RUB 1,045,171 thousand),
refer to note 17.

O’Key Group S.A. Annual Report & Accounts 2012

Notes to the Consolidated Financial Statements continued
for the year ended 31 December 2012

30 Related party transactions continued
All other outstanding balances are to be settled in cash within six months of the reporting date. None of the balances are secured.

(iii) Loans

’000 RUB

Loans received:

Other related parties

Amount
loaned
2012

Amount
loaned
2011

Outstanding
balance
2012

Outstanding
balance
2011

–

(617,522)

(960,300)

The loans from other related parties bear interest at 8% per annum and are repayable in 2016.

(d) Pricing policies
Related party transactions are not necessarily based on market prices.

31 Subsidiaries

Subsidiary

LLC O’KEY

JSC Dorinda

JSC Mir Torgovli

Axus Financial Ltd

Starligton Ltd

Batisto Ltd

O’KEY Investments (Cyprus) Ltd

Legondia Co. Limited

LLC O’KEY Group

LLC O’KEY Logistics

LLC Vendor

PLC KSSK

JSC DRSU-34

JSC Baltika

LLC O’KEY-Finans

LLC Vega

LLC Gradstroytsentr

LLC Grand

LLC Invest-Neva

LLC Krona

LLC Skladservis

LLC Sovagro

LLC Stroyexpert

LLC Talan

LLC Tellara

LLC Triumfalnaya Marka

LLC Donskaya Zvezda

LLC Taifun

LLC Photon

LLC Tagar

LLC Tagar-City

JSC Olips D

LLC Lux Development

LLC Djemir Invest

LLC Kbr-Torg

JCS START Krasnoselsky

LLC Fresh Market

LLC TC Djemir

JCS START Primorsky

Country of incorporation

Russian Federation

BVI

Cyprus

Russian Federation

2012
Ownership/voting

2011
Ownership/voting

100%

–

100%

–

100%

–

100%

–

O’Key Group S.A. Annual Report & Accounts 2012

31 Subsidiaries continued
During 2012 the Group acquired two subsidiaries LLC TC Djemir and JCS START Primorsky, for the purpose of obtaining lease rights on the land
plots. The acquisition of subsidiaries was classiﬁed as acquisition of assets, because acquired entities do not constitute a business.

Several subsidiaries were liquidated at the end of 2012: LLC Tagar, LLC Triumfalnaya Marka and JSC Baltika.

The contibution of liquidated subsidiaries to the Group’s proﬁt for the year and the effect on Group’s assets and liabilities were not signiﬁcant.

32 Events subsequent to the reporting date
Subsequent to the reporting date the Group has opened a hypermarket in Moscow.

In February 2013 the Group paid to shareholders dividends in the amount of USD 50,997,595 (RUB 1,538,036 thousand).

Covering Analysts

Andrei Nikitin
Alfa Bank
www.alfabank.com

Ivan Nikolaev
Aton
www.aton.ru

Victor Dima
BAML
www.bankofamerica.com

Boris Vilidnitsky
Barclays
www.barcap.com

Brady Martin
Citi Bank
www.citibank.com

Victoria Petrova
Credit Suisse
ww.creditsuisse.com

Natalia Smirnova
Deutsche Bank
www.db.com

Vitaly Baikin
Gazprombank
www.gazprombank.ru

Anton Farlenkov
Goldman Sachs
www.gs.com

Elena Jouronova
J.P.Morgan
www.jpmorgan.com

Nicholas Ashworth
Morgan Stanley
www.morganstanley.com

Mikhail Terentiev
Otkritie Capital
www.otkritie.com

David Ferguson
Renaissance Capital
www.rencap.com

Mikhail Loshinin
RMG Securities
www.rmg.ru

Mikhail Krasnoperov
Sberbank
sberbank-cib.ru

Svetlana Sukhanova
UBS Limited
www.ubs.com

Maria Kolbina
VTB Capital
www.vtbcapital.com

Erik Hegedus
Wood & Company
www.wood.cz

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Investor Relations
Maksim Kravtsov
Head of investor relations
No. +7 495 663 66 77, ext. 220
e-mail: ir@okmarket.ru

Public Relations
Artem Gluschenko
Head of public relations
No. +7 495 663 66 77, ext. 338
e-mail: corpcom@okmarket.ru