O’KEY Group S.A. Annual Report 2013
O’KEY aims to improve customer
lifestyles by offering an outstanding
shopping experience and making
a broad assortment of high quality
products more accessible across a
network of hypermarkets, supermarkets
and discounters throughout Russia.
In pursuit of this aim the Group will rapidly expand its store
portfolio and capitalise on the commercial opportunities
within the grocery market.
1-3
Overview
1 Operational and
Financial Highlights
2 O’KEY at a Glance
28-34
Governance
28 Board of Directors
29 Senior Management
31 Corporate Governance
33 Legal & Ownership
Structure
34 Management & Directors
Responsibility Statement
4-27
Strategic Report
5 Statement by Tony Maher
8
Strategy
9 Business Model
10 Key Performance
Indicators
12 The Consumer
Environment
14 Providing an Outstanding
Shopping Experience
16 Providing a Broad and
Compelling Assortment
18 Providing Excellent Value
for Money
20 Corporate Social
Responsibility
22 Financial Overview
25 Risk Management
35-69
Consolidated
Financial
Statements
36 Report of the Réviseur
D’entreprises Agréé
37 Consolidated Statement
of Financial Position
38 Consolidated Statement
of Profit or Loss and Other
Comprehensive Income
39 Consolidated Statement
of Changes in Equity
41 Consolidated Statement
of Cash Flows
42 Notes to the Consolidated
Financial Statements
IBC Covering Analysts
Operational Highlights
489k
94
22
16.4%
‘000m2 of selling space
(428k in 2012)
Total number of stores,
up from 83 in 2012
Presence in 22 major cities
in Russia
Increase in unique loyalty
card holders to 6.5 million
845 RUB
8%
0.5%
9.3%
Average basket value
Like-for-Like revenue growth
Growth in Like-for-like
number of purchases
Increase in purchases
to 185.6 million in 2013
Financial Highlights
Revenue (RUB)
Gross profit (RUB)
EBITDA (RUB)
Net profit (RUB)
+18.9%
139.5bn
+20.7%
33.3bn
117.3bn
27.6bn
9.4bn
+17%
11.0bn
4.7bn
+6.4% 5.0bn
2012
2013
2012
2013
2012
2013
2012
2013
Net debt to EBITDA
Gross margin
EBITDA margin
Earnings per share
1.2x
+0.4pp
23.5%
23.9%
1.0x
8.0% -0.1pp
7.9%
+6.3%
18.5 RUB
17.4 RUB
2012
2013
2012
2013
2012
2013
2012
2013
Satisfying customers through…
Providing an Outstanding
Shopping Experience
Providing a Broad
and Compelling
Assortment
Providing Excellent
Value for Money
For more information see pages
14-15
For more information see pages
16-17
For more information see pages
18-19
1
O’KEY Group S.A. Annual Report & Accounts 2013 O’KEY at a Glance
“ O’KEY is one of the largest
retail chains in Russia.
Its primary retail format
is the modern Western
European hypermarket
under the ‘O’KEY’ brand,
complemented by ‘O’KEY-
Express’ supermarkets.”
– Headquartered in Moscow
– Global Depositary Receipts listed on the London
Stock Exchange
–
Employing more than 24,500 people
What we do:
–
Employ the “all under one roof” modern hypermarket
concept and operate in 22 major Russian cities.
The Group also operates the O’KEY-Express
supermarket concept
– Apply a differentiated business model which creates
an exceptional in-store customer experience through
an attractive environment and well balanced
assortment structure supported by high levels
of service
– Provide a wide assortment which includes local
produce, exclusive imported products and
an attractive range of fresh, delicatessen and
own produce
High level of customer loyalty
Source: Company data
84.0 84.1
83.7
83.2
82.5 83.6
83.1 83.9
82.5
82.6
86.1
84.4
Jan
Feb Mar
Apr May
Jun
Jul
Aug Sep Oct Nov Dec
Share of revenue from loyalty card holders, as percent
Our History:
2001
O’KEY Group is founded
in St. Petersburg
2002
First O’KEY hypermarket opens
– First hypermarket is launched
in St. Petersburg
– Strategy centred around
becoming the leading food
retailer in St. Petersburg
2003-2006
Taking leading positions
in St. Petersburg
– Eight hypermarkets and
two supermarkets launched
in St. Petersburg
– Total selling space increased
from 6,000 to 87,000m2
2007-2008
Regional expansion
– Strong, international
management team
joins O’KEY
– Stores opened in six
new regions in three
Federal districts
2009-2013
Becoming a leading national
retailer
– Development in the
Moscow market
– ‘O’KEY’ breaks into Russia’s
top five food retailers in terms
of revenues
– Number of stores grows
– Launch of an Initial Public
to 37, doubling selling space
to more than 190,000m
– O’KEY breaks into Russia’s
top ten retailers by revenue
Offering (IPO) on the London
Stock Exchange
– Number of stores grows
to 94, with selling space
of 489,000m2
2
O’KEY Group S.A. Annual Report & Accounts 2013 Geographical coverage
Murmansk
2 HM
St Petersburg
19 HM
18 SM
Moscow
7 HM
6 SM
Lipetsk
1 HM
Voronezh
2 HM
Ivanovo
1 HM
Nizhniy Novgorod
1 HM
Rostov-on-Don
2 HM
1 SM
Volgograd
1 HM
3 SM
Togliatti
1 HM
1 SM
Saratov
1 HM
1 SM
Ufa
3 HM
Stavropol
1 HM
Astrakhan
2 HM
1 SM
Krasnodar
4 HM
1 SM
Sochi
1 HM
Hypermarket (HM)
Supermarket (SM)
Fast facts
Surgut
2 HM
Yekaterinburg
2 HM
Tumen
1 HM
Omsk
1 HM
1 SM
Novosibirsk
2 HM
Krasnoyarsk
3 HM
1 SM
60
34
24,500
6.5 million
Hypermarkets in 22 cities
Supermarkets in 10 cities
Employees
Unique loyalty card holders
186 million
35,000
69%
20%
Customer transactions
in 2013
Stock Keeping Units
Sold constantly in a store
Share of non-food products
in the assortment
Revenue and selling space
CAGR 2009-2013
3
O’KEY Group S.A. Annual Report & Accounts 2013 Strategic Report
4
O’KEY Group S.A. Annual Report & Accounts 2013 Strategic Report
A Statement by Tony Maher, Chairman and Chief Executive
“ In terms of revenue growth, we will continue
our organic expansion in high value cities
and maintain our commitment to a strong
customer proposition.”
Our belief in the potential and scale of the underexploited
Russian retail opportunity remains strong given the
long-term macroeconomic trends, such as improving
household incomes and growth in consumption.
Our firm conviction remains to offer an outstanding
shopping experience and make a broad range of
products at attractive prices more accessible to
customers across Russia.
The current environment is characterised by a number
of challenges. Market conditions were primarily affected
by greater competition not just for customers, but
also for qualified labour and future store locations.
In response we are focussing on near-term objectives
which will enhance our value proposition and appeal to
customers. We monitor our performance against these
objectives via the system of Key Performance Indicators
(on pages 10 and 11) that measures the efficiency with
which the Group manages customer satisfaction and
maintains high value proposition.
As the marketplace evolves, our notably strong brand
equity and customer proposition will need to be matched
by an equally strong operating discipline in all aspects
of the Group’s activities. Indeed, current market
conditions and the creation of a new fully-fledged
supermarket division present a valuable opportunity
to pay particular attention to internal efficiency and
management effectiveness. We are committed to
making these the key features of our future growth.
Strategy
The central pillars of the O’KEY strategic vision remain
unchanged: in terms of revenue growth, we will
continue our organic expansion in large and medium
sized cities and maintain our commitment to a strong
customer proposition.
In terms of products, this means a broad assortment
and distinctive offerings which combine private label,
branded and self-produced ranges. Superior quality
is a competitive differentiator and our consistent
emphasis on fresh produce, in-store preparation and
delicatessen selections remains important within both
the hypermarket and supermarket formats.
Tony Maher
Chairman and Chief Executive
5
O’KEY Group S.A. Annual Report & Accounts 2013 Strategic Report (continued)
Loyalty is a key feature of the O’KEY Group’s success.
Our regular customers contribute 85% of our stores
revenues. We also enjoy one of the lowest staff
turnover rates among Russian retailers. The Group
has successfully built this loyalty through an unrelenting
focus on the details which have become hallmarks of
our customer service, notably well-trained staff providing
consistency in the way O’KEY delivers its proposition
and thereby creating strong brand equity.
The format of our stores and the shopping environment
is at or above the standards of Western Europe which
makes O’KEY a differentiated concept in the Russian
market. Our hypermarkets, with good transport links
complemented by supermarkets within walking distance
of residential districts, provide consumers with exciting
options and convenience.
In every case our customers expect the same O’KEY
in-store experience and, as the Group expands and its
formats develop, meeting these expectations requires
a greater level of management discipline. Naturally no
business expands without also managing the risks
encountered both internally and externally. We realise
the risks and challenges that our business faces now
and will focus on managing those to deliver profitable
growth in the future. Further information on risks is
contained on pages 25 to 27.
“ We are working on a number
of improvements to address
the rate and manner in which
we execute new store openings.
Given the number of locations
we have secured to date,
we will accelerate our store
opening programme.”
Priorities going forward
Looking ahead there is a need to focus on better
execution of our strategy with the aim of maintaining
our strong market position and achieving our growth
potential in a way which adds value. We will be paying
particular attention to the following areas:
There are opportunities for overhead reduction, both
as a percentage of revenue and in absolute terms,
and we are taking steps to decrease our general and
administrative expenses as a percentage of our revenue.
We are working on a number of improvements to
address the rate and manner in which we execute new
store openings. Given the number of locations we have
secured to date, we will accelerate our store opening
programme and achieving this will depend on more
disciplined and responsible project management as
well as greater control throughout the different stages
of store construction.
In addition we aim to ensure that the pipeline of sites
for future store locations is secured, on a rolling basis,
a full three years in advance of proposed opening.
In relation to new openings we have announced
plans to develop a discounted store format that will
clearly be differentiated from other small formats in
the Russian market today. Compared to our larger
stores the discounter format will trade from store sizes
of 750 square metres, will have a smaller assortment
and will be entirely based on its own logistics platform.
The discounted format will clearly be different from
our existing stores, yet we intend to maintain our
high standards of service and comfortable in store
environment. We are finalising the team who will deliver
this project and are on track to build the distribution
centre this year and secure the necessary locations
for the first openings in 2015.
6
O’KEY Group S.A. Annual Report & Accounts 2013 Strategic Report (continued)
In general the Group aims to increase its margins
going forward but not at the expense of our overall
competitiveness. Through measures that improve our
working capital and efficiencies across the businesses,
we will improve our price competitiveness and deliver
higher value to our customers. Our ambition is to
maximise long-term value by achieving a balanced
set of results in terms of our key indicators and to
ensure that this balance is sustained as our growth
plans are realised.
Overall, the long-term outlook for our business model
remains compelling and the growth trajectory in the
Russian grocery markets is positive. O’KEY has
successfully grown to serve 6.5 million satisfied
customers a year from 500 thousand square metres
of high quality trading space and today employs around
25,000 hardworking and loyal employees. I am therefore
confident the actions we are taking now will deliver
superior results for our stakeholders in the year ahead.
Review of the year and growth history
The last five years have shown a commitment
to delivering growth:
– Growth in gross and net profit
– Stable EBITDA margins
– Managed expansion: of stores, products,
selling space, infrastructure
– High revenue per square foot
–
Improved net debt profile
– Growth in market share in core markets
– Secured sites for a further 70 stores
Tony Maher
Chairman and Chief Executive
April 2014
7
O’KEY Group S.A. Annual Report & Accounts 2013 Strategy
“ The successful execution
of our strategy allows us
to keep improving our
customers’ experience as
we replicate our business
model throughout Russia.”
Expand
footprint
Provide broad
product offering
Enhance
supply chain
–
–
–
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.
– Constantly develop assortment to ensure a truly “one-stop-
shop experience”.
– Cooperate with local suppliers to meet customer
expectations in every city.
– Grow the share of our private labels while ensuring high
quality standards and attractive prices.
– Optimise supply chain for every category of products and
SKU (Stock Keeping Unit).
– 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.
8
O’KEY Group S.A. Annual Report & Accounts 2013 Business Model
“ Since opening our first hypermarket in 2002, O’KEY
has developed a differentiated business model that,
uniquely for the Russian market, focusses on
delivering a positive customer experience.”
As a result, customer loyalty is high, with regular customers accounting for around 85% of revenues.
This positioning has enabled us to compete successfully in the most competitive market in Russia – St. Petersburg
– and then roll out our stores across Russia to become one of the country’s largest food retailers.
In store
experience
Assortment
Value for
money
Supply
chain
– Our stores are
– Our stores provide a
– Our products are
– Our supply chain
competitively priced
and we constantly
seek new ways
to deliver value
to our customers.
ensures a constant
supply of products
with optimal lead times
whether sourced
locally, nationally
or internationally.
modern, convenient
and have good
transport links
providing a positive
shopping experience.
– We put special
emphasis both on
the ambience of our
stores and quality
of in-store service.
wide range of superior
quality food and
non-food produce
combining private
label, branded and
cost-competitive
ranges with in-store
preparation and
delicatessen offerings.
– We work closely
with local suppliers
to ensure we exactly
meet customer
expectations in
every city.
Customer satisfaction & loyalty
– We relentlessly focus on delivering consistently high
quality shopping experience at all of our stores.
9
O’KEY Group S.A. Annual Report & Accounts 2013 Key Performance Indicators
Financial KPIs
Revenue (in RUB)
Like-for-like revenue growth
Gross margin
EBITDA (in RUB)
Earnings per share (in RUB)
Strategic KPIs
2013
Definition
139.5bn
8%
Measures the value of merchandise and services rendered to
customers. Maintaining high pace of revenue growth is crucial
for our longer-term success.
Measures the change in same store revenue. One of the most
important operational indicators that evaluates the underlying
progress without new additions.
23.9% Measures the profit left after deducting costs and expenses
directly associated with the sale of goods as a percent of revenue.
This indicator demonstrates how efficient we are in our commercial
negotiations and stock management and is one of the key
profitability metrics.
11.0bn
18.5
Earnings before interest, taxes, depreciation and amortisation.
EBITDA is the key indicator of our efficiency both internally
and externally.
Calculated by dividing the earnings of shareholders by the weighted
average number of share in issue at 31 December 2013.
Providing an outstanding shopping experience
2013
Definition
Number of loyalty card holders
(million)
Brand equity in St. Petersburg
*Nielsen 2013, St. Petersburg
Brand Leadership 2005-13
6.5
2.9
Number of purchases per annum
(million)
185.6
Measures the number of individual customers who hold an O’KEY
loyalty card and shop regularly in our stores. Loyal customers
shop with us more frequently and spend more per visit, therefore
developments in this indicator can impact revenue progress and
our ability to retain customers.
The index reflects customers’ perception of a brand and their
willingness to recommend its products or services. Values between
1.0 and 3.0 are normal for retailers, where 3.0 indicates very wide
recognition by respondents and high preparedness to recommend
a retailer and its stores. We consistently monitor this index to
evaluate the quality of service provided to customers and their
perception of OKEY brand.
Total number of purchases made in our stores per annum. It is a
measurement of how effective we are in attracting new customers.
10
O’KEY Group S.A. Annual Report & Accounts 2013 Strategic KPIs (continued)
Providing a broad and compelling assortment
2013
Definition
Share of fresh products in sales
Number of SKUs sold constantly
in a store
46%
35,000
Measures the proportion of products in a typical basket which are
fresh or prepared on-site. This category is highly demanded by our
customers and is crucial for the overall success of our offering.
Measures the number of Stock Keeping Units (SKUs) that are
regularly available in stores. Wide choice of products is one of
O’KEY’s differentiators and we intend to maintain and develop
it further.
Share of non-food in the
assortment
69%
Measures the share of non-food SKUs in the assortment.
Our strong non-food proposition helps to attract customers
and creates additional motivation to visit our stores.
Providing excellent value for money
% of purchases with loyalty cards
Size of average purchase
in hypermarkets (in RUB)
Number of items per basket
69% Measures the percentage of purchases that are made using
an O’KEY loyalty card. An important metric of how efficiently
we address the needs of our existing customers and if they
appreciate our value proposition.
934
13
Measures the size of an average purchase in our hypermarkets.
It helps to evaluate the impact of inflation and other drivers on
the spending of our customers.
Shows the number of items in an average basket of our shoppers.
This metric is a good indicator of changes in consumption whether
if it is driven by internal changes or macro conditions.
11
O’KEY Group S.A. Annual Report & Accounts 2013 The Consumer Environment
“Russia is the largest
market in Europe and
also has one of the fastest
growing retail sectors.
Per capita consumer
spend is forecast to
increase by 44% between
2013 and 2016.”
With a population of 143.3 million, Russia is the largest
market in Europe and also has one of the fastest growing
retail sectors. Between 2008 and 2013, Russian retail
turnover increased by approximately 70% in Russian
Rouble terms and 33%1 in US Dollar terms. Over the
same period, the total Russian retail market grew from
being the sixth largest by turnover globally to the third.
The Russian grocery retail market is the fifth largest
market in the world and has demonstrated steady
growth since the crisis of 2009. A key driver of this
growth is inflation, which amounted to 6.8% in 2013
on a CPI basis, and food inflation was slightly higher
at 7.7%. Moderate inflation is positive for grocery
retailers as it causes the value of the average customer
basket to rise and offsets cost increases. O’KEY’s
average basket in hypermarkets grew by 7.5% to
RUB 934 in 2013.
The unemployment rate in Russia has declined from
8.3% in 2009 to 5.5% in 2012-13 due to the positive
economic conditions in the country. Economic growth
and declining unemployment resulted in average wages
almost doubling from less than RUB 22,000 in 2008 to
an all-time high of RUB 39,648 in December 2013.
These dual trends of increasing real wages and growing
employment have remained robust over the past three
years and have created favourable conditions for retailers.
Per capita consumer spend 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.
Market size shown by retail value (excluding sales tax) (US$ bln)
Source: Euromonitor
Russia unemployment rate, %
Source: Federal State Statistics Service
629
587
547
511
8.3%
6.2%
7.3%
6.5%
5.5%
5.5%
375
242
Russia
Germany
France
UK
Italy
Spain
2008
2009
2010
2011
2012
2013
12
O’KEY Group S.A. Annual Report & Accounts 2013 Accrued average monthly nominal wages per employee
in Russia (RUB)
Source: Federal State Statistics Service
Selling space (m2) per ‘000 people
Source: Euromonitor
23,690
21,211
18,806
17,238
30,141
26,837
1,614
1,532
1,511
1,425
1,337
642
2008
2009
2010
2011
2012
2013
Italy
Germany
Spain
France
UK
Russia
In addition, Russian customers have progressively
changed their habits by moving away from their
traditional reliance on shopping at markets to more
modern retail outlets. According to a 2013 GfK Russia
survey, modern retail outlets have more than 61% share
of total retail sales. Retail chains are expanding rapidly in
Russia and, according to an Infoline Agency report, the
top 130 Russian retail chains opened more than 4,200
new outlets in 2013.
The amount of retail selling space per capita in Russia
is underdeveloped, despite rapid rates of expansion by
Russia’s largest retail chains in recent years. The number
of square metres of selling area per 1000 people in
Russia is 6421 compared to developed European
countries where this indicator is above 1,500 square
metres per 1000 people on average. 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
environment. The loyalty engendered by our unique
product offering is borne from our share of revenue
generated from loyalty card holders – a rate unmatched
by our peers.
1
2
Euromonitor data for 2013
Russian Federal State Statistics Service
13
O’KEY Group S.A. Annual Report & Accounts 2013 Providing an
Outstanding Shopping
Experience
14
O’KEY Group S.A. Annual Report & Accounts 2013 O’KEY’s primary focus is to give customers an
outstanding shopping experience by offering modern,
convenient and innovative stores that are well located,
well designed and have everything under one roof.
6.5 million
Unique loyalty card holders
185.6 million
Customer transactions
2.9
Brand equity in St. Petersburg
*Nielsen 2013, St. Petersburg Brand
Leadership 2005-13
Number of stores by format 2008-2013
94
83
60
52
71
57
42
35
46
37
23
28
2008
2009
2010
2011
2012
2013
Hypermarkets
Supermarkets
Over the years of our successful development, O’KEY
has accumulated a wealth of knowledge and expertise,
all of which we use to achieve one goal: exceeding
customer expectations. In everything we do, whether
it is choosing a store location, tailoring the product
assortment structure or controlling quality of service
and merchandise, we judge success based on the
quality of the shopping experience and the value for
money our customers receive in our stores.
The quality of a customer’s shopping experience starts
with the convenience of store location. It is not just
proximity to the customers, but also the ease of reaching
and leaving the store by various means and, in relevant
cases, the availability of parking. To ensure every store
meets customer requirements, we have embedded
a process of project evaluation to ensure consistency
throughout the Company.
Another element that differentiates O’KEY from our
competitors is the store layout. Our premises are bright,
warm and well ventilated with a convenient and well
signed section layout that utilises low shelving to ensure
all produce is easy to reach. In contrast to many local
competitors, O’KEY does not use forklift trucks in
customer areas and individual SKUs are restocked
discreetly from inventories maintained in stockrooms.
We also provide additional services and products before
our till lines in order to maximise convenience and
provide a one-stop-shopping experience. These
services include pharmacies, dry cleaners, toy stores,
banking services and even food courts which are
provided through carefully selected partners.
A fundamental feature of the shopping experience
is the level of customer service. The superior quality
of service provided and friendliness of our employees
is what underpins the friendly shopping environment
of our stores. To promote consistent quality of customer
service, we enrol employees in compulsory training
programs in corporate culture, hospitality and conflict
management. Additionally, all our hypermarkets have
an information desk where dedicated employees are
available to provide advice and assistance to customers.
The O’KEY shopping experience concludes with
quick and easy service at the check-out points which
are designed to minimise queuing time.
15
O’KEY Group S.A. Annual Report & Accounts 2013 Providing a Broad
and Compelling
Assortment
16
O’KEY Group S.A. Annual Report & Accounts 2013 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.
Our product assortment is an important differentiator
for the Company. We developed our assortment
structure around customer needs and tailored it to
appropriate quality and price expectations. The minimum
35,000 SKUs stocked all year round represent a well-
balanced portfolio of products that meet differing
expectations and needs regardless of customers’
income levels and preferences.
We offer close to 13,000 SKUs in food and almost
twice as many items in non-food, where categories
include cosmetics, health and beauty, consumer
electronics, clothing, DIY, toys and crockery. Our
selection of fresh food and delicatessen prepared in
every hypermarket has become a signature of O’KEY
and very popular with our customers. At the same time
we have developed our private label that provides high
quality for a moderate price.
We recognise that our customers appreciate the level
of quality associated with international brands and they
feature in all our stores. However, we equally recognise
that throughout Russia customers appreciate locally-
sourced produce. Therefore, when developing the
assortment structure for a particular region or city, we
make sure local tastes and expectations are catered for.
Naturally, fresh foods form a large part of our local
assortment, which brings numerous advantages such
as shorter lead-time, a longer subsequent shelf life,
high brand recognition and better inventory rotation.
Having a broad assortment allows us to meet customer
expectations in respect to choice and this is where the
quality aspect becomes the key decision trigger for a
purchase. Our product Quality Control Department and
monitoring units maintain permanent quality monitoring
in stores, detect and bring to the attention of the
management any deviations from norms. They also have
the responsibility to educate and develop staff awareness
and involvement in quality control. Our food safety and
health inspectors conduct regular spot-checks on food
preparation areas and medical checks on employees
who work with food.
As with product quality, we carefully monitor standards
of service quality. O’KEY has developed a number of
proprietary policies where Quality Managers perform
checks in store to ensure compliance and develop
improvement initiatives. The standards of service
provided within each store impacts our results and
how our customers perceive our stores and we
consider them to be very important. To highlight this,
store management compensation correlates to the
results of the service inspections: around 25% of store
managers’ bonuses are determined by the scores of
the inspections.
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.
35,000
Average of SKUs on offer
all year round
46%
Share of fresh products
in sale
69%
Share of non-food
in the assortment
Breakdown of assortment by SKU
18.0
5.9
7.8
12.9
3.1
14.1
7.4
18.0
12.8
Ultra Fresh
Fresh Food
Dry Food
Alcohol
Health & Beauty
Products for Home
Clothing
Seasonal Merchandise
CE & DIY
17
O’KEY Group S.A. Annual Report & Accounts 2013 Providing Excellent
Value for Money
18
O’KEY Group S.A. Annual Report & Accounts 2013 Generating loyalty and traffic
by delivering value.
Due to the breadth of our assortment, as well as the
availability of non-food products, private labels and the
additional services we can offer, our hypermarkets
become destination points for shoppers and customers
are often willing to travel long distances to our stores.
13
Items per basket on average
69%
of purchases made
with loyalty cards
934 RUB
Average value of basket
in our hypermarkets
We don’t believe our customers shop at O’KEY stores
only because of our prices, but we know that they could
easily stop shopping with us if we get pricing wrong.
We therefore have a price monitoring system in place
to ensure that our prices always stay highly competitive
in the marketplace. To ensure the competitiveness of our
products we align our prices on comparable items to our
competitors’ lowest prices. Price matching is done on a
daily basis for the top 30 SKUs and then on an extended
range every week. Products that do not have an exact
match in competitor stores, or where we have lower
purchase prices, are subject to gross margin limits. In
addition to direct price reductions, customers are offered
promotions and catalogues containing special discounts.
To ensure that we are in line with our major competitors
we consistently invest in our prices. We increase our
competitiveness by passing surplus margin and cost
savings into selling prices, offering private labels and
regularly offering promotions and sales.
Our overall objective with regards 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 good offers
whether they look for quality or price.
19
O’KEY Group S.A. Annual Report & Accounts 2013 Corporate Social Responsibility
Our Board of Directors and Executive Management are committed to
meeting high standards in Corporate Social Responsibility. At O’KEY
we see sustainable growth as a critical part of our business model.
For us, meeting the needs of the modern consumer means operating
responsibly to ensure that we create opportunities for future
generations to realise their potential. For this reason, we support
a full range of corporate social responsibility activities covering
our key focus areas of anti-corruption, health and safety, employee
recruitment and retention and community work.
Anti-corruption
In 2013 we have continued to implement the Company guidelines
regarding ethics and corruption that were set out in 2012 and
strengthened the anti-corruption measures we have in place to protect
our business integrity and that of our employees and suppliers.
Our guidelines explicitly commit O’KEY as a company to the principles
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.
Our supplier policy, which was instituted in 2010, sets out strict
standards and aims to minimise any potential conflict of interest when
choosing a supplier. The policy requires a full-scale tender process
is carried out to assess the merits of all potential suppliers with
a final decision subject to committee approval. While any business
with a large scale supply chain will always face challenges in terms
of ensuring complete transparency, we strive to maintain best practice
at every step of the process. 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
known cases of corruption and 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.
Further, in 2013 we have implemented tender procedures for the
selection of new service providers/subcontractors in the security and
construction departments. These procedures were implemented to
improve the efficiency of the decision-making process and reduce
the scope for abuse by individuals by introducing committees with
balanced expertise. Tender committees usually consist of three to
seven people from departments involved in the services ordered.
Participants usually include staff from the security, financial and legal
departments, and the list can be extended to involve specialists from
sales, construction and development departments.
systematised statistical reports on injuries, working conditions
and accidents that are now available on a regular basis. In 2013
we have implemented a set of measures and instructions directed
at prevention of accidents that are compulsory for store employees.
In addition, we have revised investigation process for the accidents
with our employees and customers.
As a result of our systematic approach to the management of safety
at work, the number of work related injuries has decreased from
58 in 2012 to 54 in 2013, where the most important indicator is the
decline in the number of grave injuries to zero reported in 2013.
Number of injuries
65
(1 grave)
58
(3 grave)
54
(0 grave)
2011
2012
2013
Our employees
Recruitment
O’KEY is an equal opportunities employer that aims to recruit the
most qualified candidate for each position, while taking account of
diversity. In 2012 we introduced an officially authorised Recruitment
Policy that prohibits any discrimination on the grounds of race, age,
sex or religion. In 2013 we have continued to implement and monitor
compliance with this policy across our operations and have also
increased awareness by running diversity workshops and seminars
to the management teams across the organisation.
We continue to develop our Graduate Recruitment and Development
Programme for talented graduates who are interested in building
a career in retail. Last year we recruited 45 newly-qualified graduates
to our one-year learning and development programme across the
country. In 2013 we launched the programme in every location where
we operate.
In 2013 we continued our internal anti-corruption training programmes
for employees and management which educate our teams on the
procedures and safeguards in place and ensure that they are aware
of the consequences of failing to meet our high standards. Any
employee involved in drawing up budgets or choosing suppliers
is obliged to attend.
In addition, we ran over 100 short-term internship programmes at
local colleges and universities last year as well as career days and
professional seminars and workshops to the students who take retail
related courses as their majors to enrich their capabilities with real
business environment examples.
Health and safety
The Company takes full responsibility for providing its workforce
of more than 24,500 employees with safe working conditions which
meet all the health and safety standards and regulations. Over the
course of 2013, we have performed routine assessments to ensure
that our sites comply in full with Federal Laws on Health and
Safety requirements. Assessments are performed regularly at least
12 times per year and are supported by the system of reports that
was introduced in 2013. During the year we have developed and
Retention
Retention rates varied by department in 2013. We continued to
roll out our Talent Management system, which aims to assess and
develop talented managers across all departments. With assessment
of over 2,500 managers completed, we have improved our
understanding of our staff’s capabilities, aspirations and performance
and put in place individual development plans in order to build a
succession pipeline within almost all departments.
20
O’KEY Group S.A. Annual Report & Accounts 2013 Motivation
Leveraging the full potential of our workforce has and will be
central to meeting our commitments to the customer. With this
in mind, our competitive pay and incentive schemes aim to maximise
performance. In addition to meeting statutory requirements, 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 employees in financial difficulties. All employees are also part
of a variety of incentive schemes, which are dependent on individual
performance. Moreover, we conduct an annual salary review every
July, ensuring that salaries reflect performance, responsibility and
wider labour trends.
Building trust across the organisation between staff and management
is key to maintaining motivation. In order to achieve this, we conduct
regular performance appraisals for employees in which performance
objectives are set, monitored and evaluated against management’s
quarterly targets. To ensure appraisals are conducted fairly, our HR
department monitors this process and makes recommendations as
necessary. In 2013 we expanded our “Social Committees” which aim
to resolve any labour related issues arising between management
and employees as early as possible and ensure that the O’KEY team
is pulling together and heading in the same direction. In the last year,
we ran 30 Social Committee meetings.
Training and development
We aim to provide training to develop the skills of our employees and
offer opportunities for them to progress within the Group by recruiting
internally wherever possible. Our sales department set the highest
standard across the Company with almost 90% of all managerial
vacancies filled internally in existing stores.
We also run training programmes for our management teams.
Our 30 most senior managers participate in the Top Team
Development Programme. Adhering to the principals of constant
learning and growth, the programme focusses 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 run a Retail Excellence
Programme (REX) and REX Light which over 1,700 managers
now attend. Aimed at developing managerial skills with a retail
focus, the uptake and feedback from this scheme has been
overwhelmingly positive.
Gender diversity
We believe gender diversity is important for any business, and are
particularly proud of our performance in this area: in 2013 women
made up over 60% of store directors, 70% of the Company’s entire
workforce and 45% of senior management positions.
Employee engagement
In what is rapidly becoming an O’KEY tradition, we held anniversary
celebrations for all employees in 2013. Held at every store, a variety
of events were staged for employees and their families.
In addition, in 2013, we also brought some changes to our corporate
magazine by adding new columns and sections to make it more
attractive and user friendly.
Community work
We strongly believe that the long-term economic success of any
organisation is closely related to the Company’s involvement in the
local community and its contribution to the social and economic
development of the regions where it operates.
Community work is a key area of focus for O’KEY. Our initiatives
are focused on the Leningrad Region in the North West, where our
Company has its roots; however we are also expanding our presence
to the other geographies in which we are currently operating.
Our charity partners include Rodniychok, an orphanage for
disabled children, the Neuropsychiatric Orphanage, the Centre for
Children with Special Needs № 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 major charities 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.
21
O’KEY Group S.A. Annual Report & Accounts 2013 Financial Overview
Our 2013 financial results can be summarised as follows:
– Total revenue grew to RUB 139.5 billion
– Gross margin increased by 0.4% to 23.9%
– Net profit reached RUB 5.0 billion
Revenue
Revenue for the year ended 31 December 2013 increased by 18.9% year-on-year to RUB 139,460.4 million, compared to RUB 117,333.2 million
in 2012. The increase was driven by higher levels of selling space and like-for-like revenue growth .
Like-for-like (LFL) revenue grew by 8.0% y-o-y and was driven by a 7.5% increase in the LFL basket. In addition, the LFL number of transactions
increased by 0.5% y-o-y in 2013, demonstrating growth through the majority of the year. Both LFL basket growth and the increase in the
number of transactions were supported by very successful promotional campaigns during 2013.
Selling space increased by 14.3% after eight hypermarkets and three supermarkets were opened.
Cost of goods sold and gross profit
The cost of goods sold increased by 18.3% y-o-y in 2013 to RUB 106,124.4 million. This was largely caused by higher volumes of trading stock
sales as a result of new store openings and expansion in LFL revenue.
RUB million, unless otherwise indicated
Revenue
Gross profit
Gross margin
2013
2012
Year-on-year
change
139,460.4
117,333.2
18.9%
33,336.0
27,627.0
23.9%
23.5%
20.7%
0.4 p.p.
In the following table, we provide further detail of our cost of goods sold in the years ended 31 December 2013 and 2012:
Revenue
Cost of goods sold
Cost of trading stock (less supplier bonuses)
Inventory shrinkage
Logistic costs
Packaging and labelling costs
Gross profit
Percentage
of revenue
2013
2013
Percentage
of revenue
2012
2012
Change, %
139,460
100,0%
117,333
100,0%
(106,124)
(103,372)
(1,552)
(517)
(682)
76,1%
74,1%
1,1%
0,4%
0,5%
(89,706)
(87,404)
(1,381)
(296)
(625)
76,5%
74,5%
1,2%
0,3%
0,5%
(0,4%)
(0,4%)
(0,1%)
0,1%
0,0%
33 336
23,9%
27 627
23,5%
0,4%
Gross profit increased by 20.7% to RUB 33,336.0 million in 2013, compared to RUB 27,627.0 million in 2012. The gross margin for 2013
expanded by 0.4 p.p. to 23.9%, following an improvement in purchasing conditions driven by our growing purchasing power.
3 LFL analysis included 80 stores.
22
O’KEY Group S.A. Annual Report & Accounts 2013
General, selling and administrative expenses
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
Year
ended
31 December
2013
(RUB millions)
(12,686.8)
(2,513.2)
(3,081.7)
(2,326.4)
(825.7)
(1,132.4)
(302.7)
(562.2)
(597.6)
(597.9)
(277.9)
(36.2)
Year
ended
Percentage
of revenue
(%)
31 December
2012
(RUB millions)
Percentage
of revenue
(%)
Change, p.p.
9.1
1.8
2.2
1.7
0.6
0.8
0.2
0.4
0.4
0.4
0.2
0.0
(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
1.6
0.6
0.8
0.2
0.4
0.4
0.4
0.3
0.1
0.4
0.0
0.2
0.1
0.0
0.0
0.0
0.0
0.0
0.0
(0.1)
(0.1)
0.5
Total general, selling and administrative expenses
(24,940.8)
17.9
(20,363.9)
17.4
The Group’s general, selling and administrative expenses grew by 22.5% y-o-y to RUB 24,940.8 million in 2013, mainly due to O’KEY’s expanded
operations and increased personnel, operating leases and utilities costs. As a percentage of revenue, the Group’s general, selling and
administrative expenses increased by 0.5 p. p. to 17.9% in 2013.
Personnel costs
Personnel costs grew by 23.9% y-o-y to RUB 12,686.8 million in 2013. This was mainly a result of an approximately 12.0% increase in average
headcount and by a 7.0% indexation of salaries that took place in July 2013. A further 2% increase came from recruiting, training and travel
expenses that starting 2013 are reclassified into personnel expenses from other costs.
Operating leases
Operating leases increased to RUB 3,081.7 million in 2013, a 34.1% increase from RUB 2,298.0 million in 2012. The main catalyst for this
increase was the seven rented stores, or 21% of rented space, which were added in 2012 and had their first full operational year in 2013. The
second major element of this growth is related to the expenses of nine rented stores opened during 2013, which account for 20% of additional
rented space. Operating leases for stores opened prior to 2012 increased by around 10%, which was driven by growing sales and the
weakening of the Rouble exchange rate.
Communications and utilities
Costs relating to communications and utilities increased by 28.4% y-o-y in 2013 to RUB 2,326.4 million, mostly as a result of adding new stores
and increased tariffs. Revision of utility tariffs in 2013 led to a 10% increase in this expense.
Other operating income and expenses
Net other operating income and expenses resulted in a RUB 519.0 million loss for the year ended 31 December 2013. The largest items within
this loss are expenses related to an accident in one of our stores, provision for the write-off of receivables and impairment of non-current assets.
In 2013, the Company had other operating expenses of RUB 231.6 million and a revaluation loss of RUB 92.5 million, which was associated with
the accident at one of its stores. Large part of provision for the write-off of receivables relates to RUB 100.0 million of advance payment as part
of a construction contract at one of O’KEY’s stores where a subcontractor started an insolvency process. Impairment of non-current assets
amounts to RUB 164.7 million and mostly relates to a legal dispute around land lease rights that the Company had previously acquired and also
to the closure of one of its supermarkets in Volgograd. All the expenses described above are non-recurring and are not expected to have any
further impact on future periods.
Operating profit
O’KEY reported a 7.5% increase in operating profit to RUB 7,876.2 million in 2013 from RUB 7,326.2 million in 2012.
Finance costs
Finance costs increased by 10.1% y-o-y to RUB 1,139.8 million for the full year ended 31 December 2013, mainly due to the Group’s higher
average loan portfolio. O’KEY’s weighted average interest rate for 2013 decreased to 8.9% in 2013 from 9.4% in 2012 driven by improving
market conditions.
23
O’KEY Group S.A. Annual Report & Accounts 2013 Financial Overview (continued)
Profit before income tax
Profit before income tax increased by 5.9% y-o-y to RUB 6,851.7 million in 2013, with the improvement of operating profit being partially offset
by growing finance costs.
Total income tax expense grew by 4.8% y-o-y to RUB 1,875.3 million in 2013, primarily due to increased profit before income tax.
Profit for the year
As at 31 December 2013, net profit rose by 6.4% y-o-y to RUB 4,976.4 million with a net profit margin of 3.6%.
Cash flows and working capital
(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
2013
7,908.5
(10,534.1)
1,083.5
(1,542.0)
13.0
2012
8,937.7
(8,491.0)
1,135.7
1,582.3
11.4
Cash flows from operating activities
Net cash from operating activities decreased to RUB 7,908.5 million in 2013, due to a lower contribution from working capital. Cash from
operating activities before changes in working capital increased in line with operating profit growth.
Contribution from working capital amounted to RUB 388.1 million in 2013, a decrease of RUB 1,974.6 million compared to 2012. This was
primarily due to growing trade and other receivables, which have offset the increase in trade payables. Key elements of growth in trade and
other receivables are the increases in VAT receivable and bonuses receivable from suppliers.
Cash flows from investing activities
Net cash used in investing activities increased to RUB 10,534.1 million in 2013 and was mainly used to purchase property, plant and equipment
required for fitting out new stores that were opened during 2013 and constructing future stores. In 2013 additions to construction in progress
increased four times compared to 2012 and amounted to RUB 4,172.9 million.
Cash flows from financing activities
Net cash from financing activities generated a cash inflow of RUB 1,083.5 million. During 2013, the Group raised additional financing in the form
of bonds and long-term loans to optimise the structure and costs of its credit portfolio.
Working capital
O’KEY’s primary sources of liquidity are cash derived from operating activities and debt financing. As of 31 December 2013, the Group’s
working capital, defined as current assets (excluding cash and cash equivalents and short-term investments) less current liabilities (excluding
short-term loans), was a negative RUB 9,606.4 million. Working capital figures in the food retail industry are usually negative, and the Group
intends to maintain a negative working capital position.
O’KEY considers the net debt/EBITDA ratio as the principal means for evaluating the impact of the total size of the Group’s borrowings on its
operations. As at 31 December 2013, O’KEY’s net debt/EBITDA ratio was 1.2x.
RUB million
Total debt
Short-term debt
Long-term debt
Less cash and equivalents
Net debt
Net debt/EBITDA
2013
16,754
2,313
14,442
(3,007)
13,748
2012
13,690
3,826
9,864
(4,536)
9,154
1.2
1.0
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 ongoing 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.
24
O’KEY Group S.A. Annual Report & Accounts 2013 Risk Management
Risk management plays an integral part in how we plan and execute our business strategies. Our risk management process aims to enable
us to pursue our strategy of sustainable growth while ensuring risks to the business are minimised and managed at an appropriate level.
It also provides assurance to our shareholders, employees, customers and suppliers.
Risk management at O’KEY follows a comprehensive and management-oriented approach. This approach 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.
The Group maintains a Group risk register which sets out the key strategic, operational, financial and compliance risks faced by the
Group. Risks are identified, analysed and rated in a consistent manner. For every risk, we develop, initiate and monitor the appropriate
response measures. Our operational directors review and consider the Group risk register once a year within the framework of the Risk
Committee meeting.
Below we describe the key risks that could have a material adverse effect on our business, our financial and operational performance, and,
as a result, could impact our share price and our reputation. Additional risks not known to us or those risks 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.
Principle Risks
Strategic Risks
Name of Risk
Definition and Potential Impact
Mitigating Actions
Economic outlook
Competition risk
Political risk
Regulatory risk
Our business is affected by uncertainties associated with
changing economic conditions, particularly in the current
environment of global economic instability. Therefore we
may face reduced customer demand as the income and
purchasing power of our customers decreases.
We closely monitor the changes in the macroeconomic
environment, income levels, consumer confidence index
and other indicators. Therefore, if significant unfavourable
developments occur, we are ready to take corrective steps
and adjust our business model.
The retail sector in Russia is highly competitive. We face
strong competition from other retailers (Russian and
international), some of which are larger and 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.
We maintain and further develop our key differentiators
that create loyalty and uniqueness to our offering.
We constantly monitor our customers’ perception
of O’KEY and our main competitors to ensure we can
respond appropriately. Our pricing policy, based on
the price matching concept, is there to guarantee the
competitiveness of core assortment.
Political developments may adversely impact the
macroeconomic environment and the market in which our
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.
Although these risks are outside the control of the
Company, O’KEY monitors political developments closely
and maintains strong relationships with various national
industry bodies.
Our operations are subject to various government
regulations and industry specific legislation 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. Failure to comply with regulations can also lead
to reputational damage.
We aim to ensure compliance with all applicable
regulations by monitoring regulatory developments and
changes, and following up and responding to changes
in regulations and standards in a timely manner.
We participate in the regulatory development of Russian
retail through The Retail Companies Association (ACORT).
Monitoring results in a timely update of relevant internal
policies/bylaws and, consequently, the Company’s
business processes.
25
O’KEY Group S.A. Annual Report & Accounts 2013 Risk Management (continued)
Operational Risks
Name of Risk
Definition and Potential Impact
Mitigating Actions
Changing customer
expectations
We strive to provide our customers with a wide range of goods
and services, at competitive prices. However, we recognise that
our customers’ shopping habits and expectations are influenced
by the economic environment and will change over time.
Employee recruitment
and retention
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, 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.
Supply chain risk
Development of IT platform
Managing store opening
process
IT security threats
Our financial performance depends in part on reliable and
effective supply chain management. 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. 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.
Execution of our strategic targets requires adaptation of current
IT infrastructure to the changing business needs. As the business
grows the complexity of processes supporting it and diversity
of tasks around such growth are increasing. Delayed or
inappropriate decisions on development of the infrastructure
can lead to failures in meeting Company goals and impede
attainment of longer-term goals.
The achievement of our expansion strategy depends upon our
ability to locate and acquire locations for future stores, manage
counterparties involved in the construction process and obtain all
necessary permits. There are several factors which may affect our
ability to open new stores:
– Availability of locations that meet our investment criteria;
– Ability of subcontractors to deliver results in a timely manner;
– Risks associated with developers’ ability to execute projects;
– Regulatory system and permitting process run by local
administrations; and
–
Local community action opposed to the location of specific
stores at specific sites.
These factors alone or in combination may negatively impact our
store opening process and result in significant opening delays.
We are observing an increase in IT security threats and higher
levels of professionalism in computer crime. Our systems and
solutions, as well as those of our counterparties 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,
and business, financial and operational performance.
We are constantly assessing and reviewing our
business processes to ensure that we follow the
evolving customer expectations.
To maximise the efficiency and relevance of such
assessments, we monitor internal and external
reports on retail market development and changes
in O’KEY positioning.
We are developing IT solutions, particularly a Client
Relationship Management (CRM) system, that will
enable us to understand better and react quicker
to changes in consumer behaviour.
To improve motivation we have developed a system
of Performance Appraisal that is conducted on a
regular basis and rewards employees based on their
individual results.
We also promote internal opportunities for career
development via trainings and special programs.
Additionally, to facilitate adaptation of new employees,
we organise introductory courses and coaching
in stores.
To minimise the impact of potential disruptions in
deliveries, we form a short list of suppliers for every
product in every city. This ensures that if one
supplier is unable to fulfill an order, an alternative
supplier can provide it.
We also have systematised standards and
requirements for warehouse operators, and conduct
regular checks for compliance. This allows us to
promptly change the warehouse operator in the
case of service quality deterioration.
We are putting plans in place to enhance our
existing systems and are considering further
development of our IT platform to ensure that
we are well supported for the future growth.
We aim to maintain a large portfolio of approved
and secured projects for future development
to cover more than two years of expansion.
We also conduct regular performance reviews for
our subcontractors to ensure sufficient control over
construction process.
Finally, we maintain active and constructive dialogue
with local authorities in accordance with the law
to resolve emerging issues.
We employ 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 in attempt to reduce the threats to our
IT security.
26
O’KEY Group S.A. Annual Report & Accounts 2013 Financial Risks
Name of Risk
Definition and Potential Impact
Mitigating Actions
Providing sufficient level
of financing
Tax regulations
Recent changes in the macroeconomic situation might
result in a liquidity squeeze and tightening of lending
policies by Russian banks. Given the intensive expansion
program in the coming periods, issues with availability of
external financing or significant changes in its cost can
negatively impact our Company’s ability to execute its
expansion program.
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, and financial and operational performance.
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.
We maintain available lines of credit to close potential
liquidity gaps.
We diversify and enlarge the list of partnering banks to
increase our control over the availability and cost of
financing. We have issued a bond prospectus that allows
us to draw up to 25 billion Roubles in bonds, subject to
market conditions. Our securities are listed on the London
Stock Exchange that allows us to utilise secondary
placement of shares as an alternative way of financing.
Our tax and legal specialists review compliance with
applicable tax regulations, current interpretations issued by
the authorities and judicial precedents resulting from tax
disputes. This work is conducted on a regular basis and in
a consistent manner and ensures we are aware of any
changes that we may need to enforce.
Changes in working capital
Inability to control and manage elements of the working
capital can result in negative changes for the operating
cash flow and lead to liquidity gaps and excessive reliance
on external financing.
We exercise constant control over the working capital
which is detailed in our monetary policy. The aim of this
policy is to minimise prepayment balances and control
of overdue receivables.
We are also taking steps to improve stock management
efficiency by establishing and monitoring KPIs and
organising trainings for store employees.
27
O’KEY Group S.A. Annual Report & Accounts 2013 Board of Directors
In 2013 O’KEY consolidated the progress previously made in creating a professional, visionary Board of Directors with the appointment of Tony
Maher as Chairman of the Board of Directors.
Members of the Board of Directors of OKEY Group S.A. as at 31 December 2013
Dmitrii Troitckii
Director
Heigo Kera
Independent Director
Appointment: Dmitrii was elected as a member of the Company’s
Board of Directors on 30 June 2010, with effect from 13 July 2010,
and re-elected on 28 October 2013, with effect from 28 October 2013.
Appointment: Heigo was elected as a member of the Company’s
Board of Directors on 30 June 2010, with effect from 13 July 2010,
and re-elected on 28 October 2013, with effect from 28 October 2013.
Committee membership: Remuneration
Committee membership: Remuneration (Chair), Audit
Skills and experience: From 2005 until 2007, Dmitrii 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 Saint
Petersburg, and holds a degree in engineering. Dmitrii indirectly
owns 24.91% of the shares of O’KEY Group S.A.
Dmitry Korzhev
Director
Appointment: Dmitry was elected as a member of the Company’s
Board of Directors on 30 June 2010, with effect from 13 July 2010,
and re-elected on 28 October 2013, with effect from 28 October 2013.
Committee membership: Audit
Skills and experience: From 2005 until April 2010, Dmitry served
as a member of the Supervisory Board of Bank Saint-Petersburg.
He graduated from Leningrad Shipbuilding Institute, currently known
as the State Marine Technical University of Saint Petersburg, and
holds a degree in engineering. Dmitry indirectly owns 24.91% of the
shares of O’KEY Group S.A.
Boris Volchek
Director
Appointment: Boris was elected as a member of the Company’s
Board of Directors on 30 June 2010, with effect from 13 July 2010,
and re-elected on 28 October 2013 with effect from 28 October 2013.
Committee membership: Remuneration, Audit
Skills and experience: Boris has also served as President of the
Union Group of companies since 1995. In addition, since 2000
he has served as General Director of Saint Petersburg Automobile
Museum. He graduated from the Leningrad Institute of Railway
Engineers, currently known as the Saint Petersburg State University
of Communications, and holds a degree in engineering. Boris
indirectly owns 25,001% of the shares of O’KEY Group S.A.
Skills and experience: Heigo 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 employed 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.
Tony Maher
Director,
Chairman of the Board
Appointment: Tony was elected as independent Chairman of the
Company’s Board of Directors on 28 October 2013, his effective
date of appointment being 28 October 2013. In addition to this
role, on 21 February 2014 Tony succeeded Patrick Longuet as
the Company’s Chief Executive Officer and at this point he was
no longer considered independent.
Skills and experience: Tony Maher has almost 30 years of experience
in the international food and beverage sector. Mr. Maher was born
in Ireland and over the course of his career has worked in a variety
of senior roles in Western, Central and Eastern European markets
within the Coca-Cola system. Tony was Chief Executive Officer of
Wimm-Bill-Dann Foods OJSC from April 2006 to May 2011, where
he oversaw the transformation of the company into a world class,
multinational food and beverage player. In December 2010, Mr. Maher
oversaw the sale of Wimm-Bill-Dann to PepsiCo in a transaction that
valued the company at US$5.8 billion and which delivered a 33%
premium to shareholders of the NYSE-listed company. Following the
successful completion of the transaction, Mr. Maher stepped down
as CEO of the company in May of 2011.
28
O’KEY Group S.A. Annual Report & Accounts 2013 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 internationally to ensure we have the best people, who are able to bring a global perspective on the business combined with
in-depth knowledge of the local environment and tastes. Their success is evidenced not just by our financial results, but by the look and feel
of our stores and, most importantly, by levels of customer satisfaction.
Tony Maher
CEO and Chairman of the
Board of Directors
Dmitry Pryanikov
CFO
Please refer to Board of Directors on page 28 for further details.
– More than 30 years of experience in the international food and
beverage sector
– One of Europe’s most experienced CEOs in FMCG industry, with
a variety of senior roles in Western, Central and Eastern European
markets within the Coca-Cola system
– 12 years at O’KEY, been with the Company since it started its
operations
– Now responsible for financial management, treasury, internal audit,
reporting and accounting. After several years of serving as the CFO
of O’KEY LLC, he was promoted to CFO of O’KEY Group LLC
– He held various positions in the Bank St. Petersburg and other
– Previous experience as CEO of Wimm-Bill-Dann Foods where
privately-held companies between 1995 and 2001
he had completed the transformation of the company into a world
class player at multinational food and beverage sector
– Mr. Pryanikov graduated from the St. Petersburg State Institute
of Technology with a degree in economics and management
Vladislav Kurbatov
Operations Director of O’KEY
Hypermarkets
Jerome Depeille
Expansion and Real estate
Director
– 12 years at O’KEY, been within the Company since it started
its operations
– Now responsible for providing general management of
hypermarkets’ operations
– 14 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
– In charge of sales in O’KEY Group since 2004 - prior to that held
– Companies previously worked for include Auchan Russia as
positions as Sales Director of O’KEY Group, Administrative
Director of O’KEY Group and Director of O’KEY’s first hypermarket
in St. Petersburg
Expansion Director, Spie Batignolles as Regional Development
Director, Bouygues Construction in various roles
Sergey Shamov
Operations Director of O’KEY
Supermarkets
– Five years at O’KEY
– Now responsible for providing general management of
supermarkets’ operations
– Operations Director of O’KEY Supermarkets since July 2013 – prior
to that held the position of Division Director for SPb Hypermarkets
– Previously worked at Coca-Cola, Japan Tobacco International and
SmithKlein Beecham
29
O’KEY Group S.A. Annual Report & Accounts 2013
Senior Management (continued)
Vadim Korsunskiy
Commercial Director
Natalia Potamianos
Supply Chain Director
– 11 years of retail experience
– Responsible for commercial strategy development, assortment
– Six years at O’KEY
– Ten year of retail experience with responsibilities for sales,
policy, private label and category management
audit, logistics, mergers & acquisitions
– Previously held various senior positions at TESCO and Metro
Cash & Carry
– Supply Chain Director since June 2012 and in charge of ensuring
smart information and product flow to satisfy consumers’ needs
and business efficiency
Elmira Hadieva
HR Director
Vladimir Lobastov
Chief Legal officer
– Seven years at O’KEY Extensive experience of HR management
in a multinational environment
– 19 years of legal experience
– Responsible for managing legal department, government
– Responsible for developing O’KEY’s HR strategy and creating
an HR-system aimed at supporting the business overall and
attracting and retaining talent in the retail industry
relations, litigation and arbitration, real estate issues, tax planning
and optimisation
– Held various senior positions at Law Office, GLAVSTROY LLC
– Previously worked in HR for British American Tobacco for 14 years
and Coca-Cola HBC Eurasia
30
O’KEY Group S.A. Annual Report & Accounts 2013
Corporate Governance
O’KEY Group S.A.’s shares are listed on the London Stock Exchange in the form of Global Depositary Receipts (GDRs). We recognise our
obligation to our shareholders to adopt appropriate standards of governance and control both at Board level and within our management
teams.
We have adopted the following governance structure:
– The Company aims to appoint individuals with relevant skills and experience to our Board of Directors who occupy key positions and
participate fully in the most senior level of management in the Company (see page 28 for further information on the members of our Board
of Directors).
– The Board is responsible for taking key decisions relating to Company strategy and strategic direction.
– The Board exercises oversight of the Company’s internal control and risk management procedures.
– The Company has in place a system of Board committees, which ensures due consideration of key decisions by experienced individuals
and provides an appropriate system of checks and balances, including in the areas of remuneration and incentives (further information on
the committees, their functions and their membership can be found on pages 31 and 32.
Composition of the Board of 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. As at 31 December 2013, the Board of Directors consisted of five members, including two Independent Directors.
During the year, we made a number of changes to the composition of our Board to reflect the Company’s development. In October we
appointed Tony Maher, an experienced executive with almost 30 years of experience in the international food and beverage sector, to Chairman
of the Board of Directors. Heigo Kera, our previous Chairman, became an Independent Director and Mykola Buinyckyi stood down from the
Board of Directors in order to maintain the current level of Board membership.
After the year end on 29 January 2014, O’KEY announced its decision to appoint Tony Maher to succeed Patrick Longuet as Chief Executive
Officer in addition to his role as Chairman of the Board of Directors and he took up this position on 21 February 2014. At this point he was no
longer considered independent.
Role of the Board
Our Board of Directors is responsible for the Company’s overall strategic development, ensuring that the strategy leaves O’KEY well positioned
to take maximum advantage of a developing market and sector and ultimately for ensuring that O’KEY achieves long-term growth for its
shareholders. The Board generally holds two meetings per year, during which the Board reviews the Company’s financial reporting, the
Company’s strategic performance and proposed new initiatives and monitors the Company’s internal control and risk management procedures.
The Board held two scheduled Board meetings during 2013, with attendance of 80% at each meeting.
Board committees
There are two committees of the Board, the Audit committee and the Remuneration committee. 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.
Composition and the key responsibilities of the Board’s committees are described below:
Audit Committee
Members
Mykola Buinyckyi Chairman
Boris Volchek
Member, Director
Dmitriy Korzhev
Member, Director
Heigo Kera
Member, Independent Director
Ilya Ilin
Member, non-director
Appointed April 2013
Sergey Eganov
Member, non-director
Appointed April 2011
31
O’KEY Group S.A. Annual Report & Accounts 2013
Corporate Governance (continued)
In October 2013 Mykola Buinyckyi stood down from the Board of Directors of O’KEY but he nonetheless remains Chair of the Audit Committee.
Mr. Buinyckyi’s qualifications and extensive experience in international financial management with major companies in Moscow, London, Paris,
Brussels, Prague, Vilnius and Lagos is extremely valuable and we believe his membership of the Audit Committee will continue to benefit the Group.
The Audit Committee has responsibilities for overseeing 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.
Remuneration Committee
Members
Heigo Kera
Chairman, Independent Director
Boris Volchek
Member, Director
Dmitrii Troitckii
Member, Director
Alvidas Brusokas Member, non-director
Appointed April 2011
Ilya Ilin
Member, non-director
Appointed August 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 determined by the Board.
Board of Directors and Management Remuneration
In 2013, management of O’KEY Group were paid an aggregate amount of RUB 381 million remuneration and other compensation.
Members of the Board of Directors of OKEY Group S.A. and the Audit Committee of OKEY Group SA were paid a net fee of US$242,868.
No more than US$300,000 is to be paid per year in compensation to the entire Board.
Dividend
In 2013, O’KEY Group paid a total of US$51 million in dividends.
32
O’KEY Group S.A. Annual Report & Accounts 2013
Legal & Ownership Structure
Legal and Ownership Structure
20.959%
25.001%
54.04%
BoNY (Nominees)
GSU Ltd
NISEMAX Co Ltd
O’KEY Group S.A. (Luxembourg)
O’Key Group
LLC
O’Key Group
LLC
Dorinda
JSC
Mir Torgovil
CJSC
– Retail operations
– Employer of all store personnel
– Employer for senior
management
– Management company
for Dorinda JSC and
O’KEY Group LLC
– Owner of real estate
and long-term
lease rights
– Holder of short-term
lease rights
O’Key Logistics
LLC
Fresh Market
LLC
–
Import operations
–
– Supplier of non-food
products, non-branded
and private label goods
employer for personnel
and owner of assets for
a project of a new retail
chain under “Da!”
trademark
33
O’KEY Group S.A. Annual Report & Accounts 2013 Management & 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, April 2014
Member of the Board of Directors
Member of the Board of Directors
Chairman/CEO
Tony Maher
Financial Director
Dmitry Pryanikov
34
O’KEY Group S.A. Annual Report & Accounts 2013
Consolidated Financial Statements
for the year ended 31 December 2013
(with the report of the Réviseur d’Entreprises Agréé thereon)
Contents
Contents
Report of the Réviseur d’Entreprises Agréé
Consolidated Statement of Financial Position
Consolidated Statement of Profit or Loss and Other Comprehensive Income
Consolidated Statement of Changes in Equity
Consolidated Statement of Cash Flows
Notes to the Consolidated Financial Statements
Subsidiaries
Income tax expense
Functional and presentation currency
1 Reporting entity
2 Basis of accounting
3
4 Use of estimates and judgments
5 Determination of fair values
6 Operating segments
7
8 Revenue
9 General, selling and administrative expenses
10 Other operating income and expenses
11 Personnel costs
12 Finance income and finance costs
13 Foreign exchange gain
14
15 Property, plant and equipment
Intangible assets
16
17
Investment property
18 Other non-current assets
19 Deferred tax assets and liabilities
20
21 Trade and other receivables
22 Cash and cash equivalents
23 Equity
24 Earnings per share
25 Loans and borrowings
26 Trade and other payables
27 Financial instruments and risk management
28 Operating leases
29 Capital commitments
30 Contingencies
31 Related party transactions
32 Events subsequent to the reporting date
33 Basis of measurement
34 Changes in accounting policies
35 Significant accounting policies
Inventories
36
37
38
39
41
42
42
42
42
42
43
43
45
45
45
46
46
46
47
47
48
49
50
50
51
52
52
53
53
53
54
55
55
60
60
60
61
62
63
63
63
35
O’KEY Group S.A. Annual Report & Accounts 2013 Report of the Réviseur d’Entreprises Agréé
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, 2013 and the consolidated statement of profit or loss and other comprehensive income, consolidated
statement of changes in equity and consolidated statements of cash flows 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, 2013, 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, including the corporate governance statement, which is the responsibility of the Board of Directors,
is consistent with the consolidated financial statements and includes the information required by the law with respect to the Corporate
Governance Statement.
Luxembourg, March 24, 2014
KPMG Luxembourg S.à r.l.
Cabinet de révision agréé
Jean-Manuel Séris
36
O’KEY Group S.A. Annual Report & Accounts 2013 Consolidated Statement of Financial Position
as at 31 December 2013
’000 RUB
ASSETS
Non-current assets
Investment property
Property, plant and equipment
Construction in progress
Intangible assets
Deferred tax assets
Other non-current assets
Total non-current assets
Current assets
Inventories
Trade and other receivables
Prepayments
Cash and cash equivalents
Total current assets
Total assets
EQUITY AND LIABILITIES
Equity
Non-current liabilities
Loans and borrowings
Deferred tax liabilities
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
2013
2012
17
15
15
16
19
18
20
21
22
540,000
632,000
30,706,631
25,692,464
5,072,198
1,720,181
550,049
483,156
566,595
375,126
8,101,698
7,905,066
45,453,732
36,891,432
10,257,942
3,502,011
822,558
9,212,315
1,917,634
856,948
3,006,730
4,535,693
17,589,241
16,522,590
63,042,973
53,414,022
23
21,399,385
18,090,056
25
19
25
26
14,441,833
9,863,769
587,974
112,256
667,719
1,056,447
15,142,063
11,587,935
2,312,618
3,826,135
23,714,502
19,613,734
474,405
296,162
26,501,525
23,736,031
41,643,588
35,323,966
63,042,973
53,414,022
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 42 to 69.
37
O’Key Group S.A. Annual Report & Accounts 2013
Consolidated Statement of Profit or Loss and Other Comprehensive Income
for the year ended 31 December 2013
’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
Profit before income tax
Income tax expense
Profit for the year
Other comprehensive income
Items that will never be reclassified to profit or loss
Exchange differences on translating to presentation currency
Items that are or may be reclassified subsequently to profit or loss
Note
2013
2012
8
139,460,384
117,333,236
(106,124,418)
(89,706,251)
9
10
12
12
13
33,335,966
27,626,985
(24,940,760)
(20,363,950)
(519,013)
63,180
7,876,193
7,326,215
46,015
11,428
(1,139,827)
(1,035,206)
69,282
165,683
6,851,663
6,468,120
14
(1,875,278)
(1,789,259)
4,976,385
4,678,861
(43,395)
23,963
Change in fair value of hedges and reclassification from hedging reserve
12
(107,031)
(103,746)
Income tax on other comprehensive income
12, 14
21,406
20,749
Other comprehensive income for the year, net of income tax
Total comprehensive income for the year
Earnings per share
(129,020)
(59,034)
4,847,365
4,619,827
Basic and diluted earnings per share (RUB)
24
18.5
17.4
The consolidated statement of profit or loss and other comprehensive income is to be read in conjunction with the notes to, and forming part of,
the consolidated financial statements set out on pages 42 to 69.
38
O’Key Group S.A. Annual Report & Accounts 2013 Consolidated Statement of Changes in Equity
for the year ended 31 December 2013
’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
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
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
12
14
23
– 4,678,861
– 4,678,861
–
(103,746)
20,749
(82,997)
–
–
–
–
23,963
23,963
–
–
(103,746)
20,749
23,963
(59,034)
(82,997) 4,678,861
23,963 4,619,827
–
–
(833,514)
(833,514)
–
–
(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 42 to 69.
39
O’Key Group S.A. Annual Report & Accounts 2013 Consolidated Statement of Changes in Equity continued
for the year ended 31 December 2013
’000 RUB
Balance at 1 January 2013
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
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
85,625 8,748,706
222,082 18,090,056
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
12
14
23
– 4,976,385
– 4,976,385
–
(107,031)
21,406
(85,625)
–
–
–
–
(43,395)
(43,395)
–
–
(107,031)
21,406
(43,395),
(129,020)
(85,625) 4,976,385
(43,395) 4,847,365
– (1,538,036)
– (1,538,036)
– (1,538,036)
– (1,538,036)
Balance at 31 December 2013
119,440
10,597 8,903,606
– 12,187,055
178,687 21,399,385
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 42 to 69.
40
O’Key Group S.A. Annual Report & Accounts 2013 Consolidated Statement of Cash Flows
for the year ended 31 December 2013
’000 RUB
Cash flows from operating activities
Profit before income tax
Adjustments for:
Depreciation and amortisation
Loss on disposal of non-current assets
Loss/(Gain) from revaluation of investment property
Impairment of non-current assets
Finance income
Finance costs
Foreign exchange gain
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
Interest received
Net cash used in investing activities
Cash flows from financing activities
Proceeds from borrowings
Repayment of borrowings
Dividends paid
Net cash from financing activities
Net (decrease)/increase in cash and cash equivalents
Cash and cash equivalents at beginning of year
Effect of exchange rate fluctuations on cash and cash equivalents
Note
2013
2012
6,851,663
6,468,120
15,16,18
2,513,189
2,149,949
10
17
10
12
12
13
7,742
92,541
164,748
(46,015)
40,267
(50,350)
–
(11,428)
1,139,827
1,035,206
(69,282)
(165,683)
10,654,413
9,466,081
(1,377,637)
(759,441)
(1,045,627)
(1,294,658)
2,811,316
4,416,811
11,042,465
11,828,793
(1,196,183)
(1,231,380)
(1,937,735)
(1,659,749)
7,908,547
8,937,664
(10,415,773)
(8,350,612)
(177,347)
(168,478)
13,035
46,015
16,640
11,428
(10,534,070)
(8,491,022)
12,980,000
7,500,000
(10,358,444)
(5,530,804)
(1,538,036)
(833,514)
1,083,520
1,135,682
(1,542,003)
4,535,693
13,040
1,582,324
2,941,947
11,422
Cash and cash equivalents at end of year
22
3,006,730
4,535,693
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 42 to 69.
41
O’Key Group S.A. Annual Report & Accounts 2013 Notes to the Consolidated Financial Statements
for the year ended 31 December 2013
1 Reporting entity
(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 2013 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 three individuals, Mr. Korzhev, Mr. Troitsky and Mr. Volchek (“the shareholder group”). They also have
a number of other business interests outside of the Group.
As at 31 December 2013 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 31.
The Company’s registered address is: Luxembourg 23, rue Beaumont, L-1219 Luxembourg.
The Group’s principal business activity is operation of retail chain in Russia under brand name “O’KEY”. At 31 December 2013 the Group
operated 94 stores (31 December 2012: 83 stores) in major Russian cities, including but not limited to: Moscow, St. Petersburg, Murmansk,
Nizhniy Novgorod, Rostov-on-Don, Krasnodar, Lipetsk, Volgograd, Ekaterinburg, Novosibirsk, Krasnoyarsk, Ufa, Astrakhan and Surgut.
(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 accounting
(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 24 March 2014.
3 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. All financial
information presented in RUB has been rounded to the nearest thousand, except when otherwise indicated.
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 profit and loss and other comprehensive income are translated at average exchange rates; and
– all resulting exchange differences are recognised as translation reserve in equity.
At 31 December 2013 the principal rate of exchange used for translating foreign currency balances were USD 1 = RUB 32.7292;
EUR 1 = RUB 44.9699 (2012: USD 1 = RUB 30.3727; EUR 1 = RUB 40.2286).
4 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 ongoing 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:
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 30.
42
O’Key Group S.A. Annual Report & Accounts 2013 Notes to the Consolidated Financial Statements continued
for the year ended 31 December 2013
4 Use of estimates and judgments continued
Revenue recognition. The Group has recognised revenue amounting to RUB 137,639 million for sales of goods during 2013 (2012:
RUB 115,903 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.
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 20.
5 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.
When measuring the fair value of an asset or a liability, the Group uses market observable data as far as possible. Fair values are categorised
into different levels in a fair value hierarchy based on the inputs used in the valuation techniques as follows:
– Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities.
– Level 2: inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly (i.e. as prices)
or indirectly (i.e. derived from prices).
– Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs).
If the inputs used to measure the fair value of an asset or a liability might be categorised in different levels of the fair value hierarchy, then the fair
value measurement is categorised in its entirety in the same level of the fair value hierarchy as the lowest level input that is significant to the
entire measurement.
The Group recognises transfers between levels of the fair value hierarchy at the end of the reporting period during which the change has
occurred.
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.
(a) Investment property
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.
6 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.
43
O’Key Group S.A. Annual Report & Accounts 2013 Notes to the Consolidated Financial Statements continued
for the year ended 31 December 2013
6 Operating segments continued
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.
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 35.
The segment information for the year ended 31 December 2013 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
Impairment of non-current assets
Loss from write-off of receivables
(Impairment)/Reversal of impairment of receivables
Reversal of impairment of receivables
Depreciation and amortisation
Finance income
Finance costs
Foreign exchange gain
Hypermarket Savushkina’s accident expenses
Profit before income tax
Income tax
Profit for the year
2013
2012
139,460,384
117,333,236
11,032,178
9,426,587
2013
2012
11,032,178
9,426,587
(92,541)
(7,742)
(164,748)
(121,477)
(24,699)
–
50,350
(40,267)
–
–
39,494
39,494
(2,513,189)
(2,149,949)
46,015
11,428
(1,139,827)
(1,035,206)
69,282
(231,589)
165,683
–
6,851,663
6,468,120
(1,875,278)
(1,789,259)
4,976,385
4,678,861
In July 2013 one of the Group’s hypermarket (Savushkina, St. Petersburg) suffered from a fire accident. The store was closed for repairs until
December 2013. Hypermarket Savushkina`s accident expenses comprise repairs and other expenses related to this accident.
44
O’Key Group S.A. Annual Report & Accounts 2013 Notes to the Consolidated Financial Statements continued
for the year ended 31 December 2013
7 Subsidiaries
Details of the Company’s significant subsidiaries at 31 December 2013 and 31 December 2012 are as follows:
Subsidiary
LLC O’KEY
CJSC Dorinda
Axus Financial Ltd
LLC O’KEY Group
LLC O’KEY Logistics
LLC Fresh Market
8 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
Country of incorporation
Nature of operations
2013
Ownership/voting
2012
Ownership/voting
Russian Federation
Russian Federation
BVI
Russian Federation
Russian Federation
Retail
Real estate
Financing
Managing company
Import operations
Russian Federation
Retail and real estate
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
2013
2012
130,981,110
110,238,301
6,658,351
5,665,084
137,639,461
115,903,385
1,300,867
1,013,754
520,056
416,097
139,460,384
117,333,236
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.
9 General, selling and administrative expenses
’000 RUB
Personnel costs
Operating leases
Depreciation and amortisation
Communication and utilities
Advertising and marketing
Security expenses
Repairs and maintenance costs
Insurance and bank commission
Operating taxes
Materials and supplies
Legal and professional expenses
Other costs
Note
11
28
2013
2012
(12,686,804)
(10,235,867)
(3,081,729)
(2,297,963)
(2,513,189)
(2,149,949)
(2,326,380)
(1,812,353)
(1,132,405)
(825,689)
(597,896)
(597,578)
(562,249)
(302,738)
(277,943)
(36,160)
(990,342)
(707,348)
(452,157)
(505,810)
(497,603)
(258,840)
(306,150)
(149,568)
(24,940,760)
(20,363,950)
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
2013
9,966
4,012
255
2012
9,277
5,180
816
14,233
15,273
O’Key Group S.A. Annual Report & Accounts 2013
45
45
O’Key Group S.A. Annual Report & Accounts 2013 Notes to the Consolidated Financial Statements continued
for the year ended 31 December 2013
10 Other operating income and expenses
’000 RUB
Loss from disposal of non-current assets
Impairment of non-current assets
Loss from write-off of receivables
(Impairment)/Reversal of impairment of receivables
(Loss)/Gain from revaluation of investment property
HM Savushkina – accident expenses
Sundry income
Note
15,16,18
27
17
2013
(7,742)
(164,748)
(121,477)
(24,699)
(92,541)
(231,589)
123,783
(519,013)
2012
(40,267)
–
–
39,494
50,350
–
13,603
63,180
Hypermarket Savushkina`s accident expenses comprise write-off of the goods (RUB 76,710 thousand), personnel costs (RUB 26,539 thousand)
and repairs expenses (RUB 128,340 thousand).
11 Personnel costs
’000 RUB
Wages and salaries
Social security contributions
Employee benefits
Share-based payments
Other
Total personnel costs
2013
2012
(7,382,930)
(6,298,681)
(2,559,013)
(2,111,328)
(1,677,622)
(1,493,137)
(35,889)
(1,031,350)
(81,846)
(250,875)
(12,686,804)
(10,235,867)
During the year ended 31 December 2013 the Group employed 23.5 thousand employees on average (2012: 21 thousand employees on
average). Approximately 97% of employees are store and warehouse employees and the remaining are office employees.
12 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
2013
2012
42,941
3,074
46,015
10,784
644
11,428
(849,955)
(289,872)
(1,014,184)
(21,022)
(1,139,827)
(1,035,206)
(1,093,812)
(1,023,778)
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 recognised in other comprehensive income, net of tax
46,015
11,428
(1,139,827)
(1,035,206)
2013
2012
32,554
(139,585)
21,406
(352,721)
248,975
20,749
(85,625)
(82,997)
O’Key Group S.A. Annual Report & Accounts 2013
46
46
O’Key Group S.A. Annual Report & Accounts 2013 Notes to the Consolidated Financial Statements continued
for the year ended 31 December 2013
12 Finance income and finance costs continued
Reclassification from hedging reserve to profit and loss includes finance costs in the amount of RUB 289,872 thousand for the year ended
31 December 2013 (2012: RUB 21,022 thousand) and foreign exchange gain in the amount of RUB 429,457 thousand for the year ended
31 December 2013 (2012: loss RUB 227,953 thousand).
During 2013 the Group has capitalised interests in the value of property, plant and equipment. The amount of capitalised interest comprised
RUB 443,302 thousand (2012: RUB 229,652 thousand).
In 2013 capitalisation rate of 7.98% was used to determine the amount of borrowing costs eligible for capitalisation (2012: 6.97%).
13 Foreign exchange gain
During 2013 Russian Rouble weakened against the US Dollar (USD). However, major part of the Group’s financial liabilities denominated
in USD was hedged and a net foreign exchange gain was recognized in profit and loss amounting to RUB 69,282 thousand for the year ended
31 December 2013 (2012: gain RUB 165,683 thousand).
The Group’s risk management policy is to convert part of its USD-denominated debt into RUB-denominated debt. As at 31 December 2013,
the share of USD-denominated borrowings in Group’s debt was not significant.
14 Income tax expense
The Group’s applicable tax rate is the income tax rate of 20% for Russian companies (2012: 20%).
’000 RUB
Current tax expense
Deferred tax benefit /(expense)
Total income tax expense
2013
2012
(2,041,647)
(1,590,722)
166,369
(198,537)
(1,875,278)
(1,789,259)
Income tax recognised directly in other comprehensive income
’000 RUB
Foreign currency translation differences
Before tax
(43,395)
Tax
–
Net of tax
(43,395)
Before tax
23,963
Tax
–
Net of tax
23,963
2013
2012
Change in fair value of hedges and
reclassification from hedging reserve
(107,031)
21,406
(85,625)
(103,746)
(150,426)
21,406
(129,020)
(79,783)
20,749
20,749
(82,997)
(59,034)
Reconciliation of effective tax rate:
’000 RUB
Profit before income tax
Income tax at applicable tax rate (2013: 20%, 2012: 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
2013
2012
6,851,663
6,468, 120
(1,370,333)
(1,293,624)
(9,748)
(6,364)
(554,269)
(17,058)
(33,341)
–
109,471
–
(429,269)
(60,507)
(266,339)
246,042
–
20,802
(1,875, 278)
(1,789,259)
O’Key Group S.A. Annual Report & Accounts 2013
47
47
O’Key Group S.A. Annual Report & Accounts 2013 Notes to the Consolidated Financial Statements continued
for the year ended 31 December 2013
15 Property, plant and equipment
’000 RUB
Cost or deemed cost
Balance at 1 January 2012
Additions
Transfers
Transfers to investment property
Disposals
Land
Buildings
Leasehold
improvements
2,864,870
14,193,167
2,526,726
365,412
–
–
–
2,191,281
2,061,994
–
–
826,464
42,260
–
Machinery and
equipment,
auxiliary
facilities and
other fixed
assets
Construction in
progress
Total
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
Balance at 1 January 2013
3,230,282
18,446,442
3,392,752
8,764,624
1,720,181
35,554,281
Additions
Transfers
Disposals
717,863
3,763,624
–
–
227,100
–
576,102
366,492
(569)
1,433,046
4,172,879
10,663,514
192,180
(543,738)
(785,772)
(12,766)
–
(557,073)
Balance at 31 December 2013
3,948,145
22,437,166
4,334,777
9,846,112
5,094,522
45,660,722
Depreciation and impairment losses
Balance at 1 January 2012
Depreciation for the year
Transfers
Disposals
Balance at 31 December 2012
Balance at 1 January 2013
Depreciation for the year
Impairment losses
Disposals
Balance at 31 December 2013
Carrying amounts
At 1 January 2012
–
–
–
–
–
–
–
–
–
–
(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)
(2,270,698)
(618,290)
–
–
(620,650)
(382,720)
(7,358)
520
(5,250,288)
(1,246,004)
–
(22,324)
535,919
–
(2,888,988)
(1,010,208)
(5,960,373)
(22,324)
(9,881,893)
–
–
–
–
–
–
–
(6,271,776)
(1,939,238)
–
69,378
(8,141,636)
(8,141,636)
(2,247,014)
(29,682)
536,439
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
At 31 December 2013
3,948,145
19,548,178
3,324,569
3,885,739
5,072,198
35,778,829
Depreciation expense of RUB 2,247,014 thousand has been charged to selling, general and administrative expenses
(2012: RUB 1,939,238 thousand). Impairment loss of RUB 29,682 thousand has been charged to other operating expenses (2012: Nil).
48
O’Key Group S.A. Annual Report & Accounts 2013 Notes to the Consolidated Financial Statements continued
for the year ended 31 December 2013
15 Property, plant and equipment continued
Security
At 31 December 2013 property, plant and equipment have not been pledged to third parties as collateral for borrowings
(2012: RUB 6,404,435 thousand). For further information refer to notes 25 and 30. 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 2013. Under terms of this agreement
the third party will build a trade centre on this land plot. Upon completion of construction the Group will exchange part of the land plot for part
of trade centre and will locate an O’KEY hypermarket there. In 2010 the Group received guarantee payment in relation to this transaction.
Guarantee received is included in other current payables for RUB 981,876 thousand as at 31 December 2013.
16 Intangible assets
’000 RUB
Cost
Balance at 1 January 2012
Additions
Balance at 31 December 2012
Balance at 1 January 2013
Additions
Disposals
Software
Lease rights
Other intangible
assets
Total
517,425
168,478
491,475
14,030
1,022,930
–
–
168,478
685,903
491,475
14,030
1,191,408
685,903
148,005
(141,036)
491,475
–
–
14,030
29,342
(123)
1,191,408
177,347
(141,159)
Balance at 31 December 2013
692,872
491,475
43,249
1,227,596
Amortisation and impairment losses
Balance at 1 January 2012
Amortisation for the year
(284,522)
(54,248)
(219,615)
(62,975)
(694)
(2,759)
(504,831)
(119,982)
Balance at 31 December 2012
(338,770)
(282,590)
(3,453)
(624,813)
Balance at 1 January 2013
Amortisation for the year
Impairment losses
Disposals
(338,770)
(100,743)
–
141,010
(282,590)
(58,714)
(27,565)
–
(3,453)
(6,727)
–
5
(624,813)
(166,184)
(27,565)
141,015
Balance at 31 December 2013
(298,503)
(368,869)
(10,175)
(677,547)
Carrying amounts
At 1 January 2012
At 31 December 2012
At 31 December 2013
232,903
271,860
13,336
518,099
347,133
208,885
10,577
566,595
394,369
122,606
33,074
550,049
Amortisation and impairment losses
Amortisation of RUB 166,184 thousand has been charged to selling, general and administrative expenses (2012: RUB 119,982 thousand).
Impairment loss of RUB 27,565 thousand has been charged to other operating expenses (2012: Nil).
49
O’Key Group S.A. Annual Report & Accounts 2013 Notes to the Consolidated Financial Statements continued
for the year ended 31 December 2013
17 Investment property
(a) Reconciliation of carrying amount
’000 RUB
Investment properties at fair value as at 1 January 2012
Transfers from property, plant and equipment
Expenditure on subsequent improvements
Fair value gain (unrealised)
Investment properties at fair value as at 31 December 2012
Investment properties at fair value as at 1 January 2013
Expenditure on subsequent improvements
Fair value loss (unrealised)
Investment properties at fair value as at 31 December 2013
Note
10
10
Investment
property
573,000
6,616
2,034
50,350
632,000
632,000
541
(92,541)
540,000
(b) Measurement of fair value
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 fair value measurement for investment property has been categorised as a Level 3 fair value based on the inputs to the valuation technique
used (see note 5).
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 3,900 per square metres (2012: RUB 4,600) and expected occupancy of 92% (2012: 93%).
The annual net operating income was assumed to be constant from year six to perpetuity. Discount rate of 16.3 % (2012: 17.8%) was applied
to discount future cash flows.
Rental income from investment property amounted to RUB 90,835 thousand for the year ended 31 December 2013 (2012: RUB 108,741 thousand).
Direct operating expenses arising from investment property that generated rental income amounted to RUB 53,054 thousand for the year
ended 31 December 2013 (2012: RUB 83,363 thousand).
There were no direct operating expenses arising from investment property that did not generate rental income for the year ended
31 December 2013 (2012: Nil).
18 Other non-current assets
’000 RUB
Initial cost of land lease
Long-term prepayments to entities under control of shareholder group
Prepayments for property plant and equipment
Long-term deposits to lessors
Other non-current receivables
2013
2012
3,964,858
3,991,382
735,903
952,302
2,681,295
2,677,459
264,706
454,936
159,525
124,398
8,101,698
7,905,066
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 31.
50
O’Key Group S.A. Annual Report & Accounts 2013 Notes to the Consolidated Financial Statements continued
for the year ended 31 December 2013
18 Other non-current assets continued
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
Impairment losses
Balance at 31 December
Net book value
2013
2012
4,644,557
3,946,624
180,968
–
717,434
(19,501)
4,825,525
4,644,557
(653,175)
(99,991)
–
(107,501)
(576,690)
(90,729)
14,244
–
(860,667)
(653,175)
3,964,858
3,991,382
Amortisation of RUB 99,991 thousand has been charged to selling, general and administrative expenses (2012: RUB 90,729 thousand).
Impairment loss of RUB 107,501 thousand has been charged to other expenses (2012: Nil).
At 31 December 2013 no initial cost of land lease was pledged to third parties as collateral for borrowings (2012: RUB 456,971 thousand).
Refer to note 25.
19 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 loss carry-forwards
Tax assets/(liabilities)
Set off of tax
Assets
2013
36,193
67,450
–
5,794
10,258
325,198
112,631
168,288
61,865
787,677
(304,521)
2012
–
–
–
–
54,320
232,008
160,769
158,138
–
605,235
(230,109)
Liabilities
2013
–
(727,319)
(95,823)
(3,164)
–
–
(6,561)
(59,628)
–
(892,495)
304,521
2012
(21,135)
(448,858)
(59,064)
(1,609)
–
–
(285,600)
(81,562)
–
(897,828)
230,109
Net
2013
36,193
(659,869)
(95,823)
2,630
10,258
325,198
106,070
108,660
61,865
2012
(21,135)
(448,858)
(59,064)
(1,609)
54,320
232,008
(124,831)
76,576
–
(104,818)
(292,593)
–
–
Net tax assets/(liabilities)
483,156
375,126
(587,974)
(667,719)
(104,818)
(292,593)
(b) Unrecognised deferred tax liability
As at 31 December 2013 a temporary difference of RUB 21,104,158 thousand (2012: RUB 16,851,838 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.
51
O’Key Group S.A. Annual Report & Accounts 2013 Notes to the Consolidated Financial Statements continued
for the year ended 31 December 2013
19 Deferred tax assets and liabilities continued
(c) Movement in temporary differences during the year
’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 loss carry-forwards
’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
20 Inventories
’000 RUB
Goods for resale
Raw materials and consumables
Write-down to net realisable value
1 January
2013
(21,135)
(448,858)
(59,064)
(1,609)
54,320
232,008
(124,831)
76,576
–
Recognised in
profit or loss
Recognised in
hedging reserve
31 December
2013
57,328
(211,011)
(36,759)
4,239
(44,062)
93,190
209,495
32,084
61,865
–
–
–
–
–
–
21,406
–
–
36,193
(659,869)
(95,823)
2,630
10,258
325,198
106,070
108,660
61,865
(292,593)
166,369
21,406
(104,818)
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)
2013
2012
10,111,935
9,128,059
365,976
(219,969)
341,346
(257,090)
10,257,942
9,212,315
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 219,969 thousand
as at 31 December 2013 (2012: RUB 257,090 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.
21 Trade and other receivables
’000 RUB
Trade receivables
VAT receivable
Prepaid taxes
Other receivables
2013
159,934
2012
98,370
2,111,674
1,196,210
270,081
960,322
197,935
425,119
3,502,011
1,917,634
Taxes prepaid include RUB 194,028 thousand of prepaid income tax (2012: RUB 130,638 thousand).
Other receivables include RUB 636,651 thousand (2012: RUB 345,814 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 27.
52
O’Key Group S.A. Annual Report & Accounts 2013 Notes to the Consolidated Financial Statements continued
for the year ended 31 December 2013
22 Cash and cash equivalents
’000 RUB
Cash on hand
RUB-denominated bank current account
USD-denominated bank current account
RUB term deposits (interest rate: 1.5%-6.5%; 2012: 1.77% p.a.)
Cash in transit
Cash and cash equivalents
Term deposits had original maturities of less than three months.
2013
362,742
896,988
8,115
622,444
2012
341,447
957,771
15,824
65,679
1,116,441
3,154,972
3,006,730
4,535,693
The Group keeps its cash in the following banks: Bank Saint-Petersburg, Nordea bank, Sberbank, Raiffeisen bank, VTB bank, Credit Evropa
bank, TransCredit 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 27.
23 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
2013
2012
EUR 0.01
EUR 0.01
269,074,000
269,074,000
269,074,000
269,074,000
As at 31 December 2013 the Group’s subscribed share capital of RUB 119,440 thousand (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 2013 there were no transfers to legal
reserve (2012: Nil).
In February 2013 the Group paid interim dividends to shareholders in amount of RUB 1,538,036 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 2013 amounted to 5.7 RUB (2012: RUB 3.1).
In June 2013 shareholders of the Company approved annual dividends for the year ended 31 December 2012. The amount of annual dividends
for 2012 was paid by the Group to shareholders as interim dividends in 2012 in the amount of RUB 833,514 thousand.
There were no movements in additional paid-in capital during the year ended 31 December 2013.
24 Earnings per share
The calculation of basic earnings per share at 31 December 2013 was based on the profit attributable to ordinary shareholders of
RUB 4,976,385 thousand (2012: RUB 4,678,861 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
2013
2012
269,074,000
269,074,000
269,074,000
269,074,000
53
O’Key Group S.A. Annual Report & Accounts 2013 Notes to the Consolidated Financial Statements continued
for the year ended 31 December 2013
25 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 27.
’000 RUB
Non-current liabilities
Secured bank loans
Unsecured bank facilities
Unsecured bonds
Unsecured loans from related parties
Current liabilities
Secured bank loans
Unsecured bank facilities
Unsecured bonds interest
Unsecured loans from third parties
2013
2012
–
6,236,313
5,796,400
7,980,000
665,433
–
3,009,934
617,522
14,441,833
9,863,769
–
2,204,240
105,510
2,868
1,819,810
2,003,457
–
2,868
2,312,618
3,826,135
As at 31 December 2013 all borrowings were unsecured. As at 31 December 2012 loans and borrowings with carrying value of
RUB 8,056,123 thousand were secured by property, plant and equipment and initial cost of land lease. Refer to note 30.
(a) Terms and debt repayment schedule
Terms and conditions of outstanding loans were as follows:
31 December 2013
31 December 2012
’000 RUB
Secured bank loan
Secured bank loan
Secured bank loan
Secured bank loan
Unsecured bonds
Unsecured bonds
Unsecured bank facility
Unsecured bank facility
Unsecured bank facility
Unsecured bank facility
Unsecured bank facility
Unsecured bank facility
Unsecured loans from
related parties
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
Face value
Carrying
amount
–
–
–
–
–
–
–
–
3,011,610
5,093,900
3,000,000
1,500,000
3,011,610
5,073,900
3,000,000
1,500,000
2013-2017
2017
2018
2017-2018
2014-2016
2014-2016
2,000,000
2,000,000
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
3,009,934
–
–
–
–
–
–
–
–
2014
2013
2014
640
–
640
–
503,457
503,457
1,500,000
1,500,000
1,500,000
1,500,000
–
–
2016
665,433
665,433
617,522
617,522
2014
2013
2,868
2,868
2,865
2,865
–
–
3
3
16,774,451
16,754,451
13,689,904
13,689,904
RUB 3.5% + 1 mnth
Mosprime
RUB
RUB
RUB
10.10%
8.90%
8.35%
RUB 2.5% + 1 mnth
Mosprime
RUB 2.4% + 3 mnth
Mosprime
RUB
RUB
RUB
USD
RUB
RUB
8.06%
8.60%
7.1-12%
8.00%
0.10%
12.00%
During 2012 and 2013 the Group placed unsecured bonds on MICEX which expire after five years in 2017 and 2018, accordingly. However bonds
holders have an option to claim repayment of bonds after three years.
In December 2013 the Group exercised its right to early settle loan payable to EBRD in the amount of RUB 3,582,427 thousand as at the date
of settlement (31 December 2012: RUB 3,954,901 thousand). Initially, the loan had maturity in 2010-2015.
54
O’Key Group S.A. Annual Report & Accounts 2013 Notes to the Consolidated Financial Statements continued
for the year ended 31 December 2013
25 Loans and borrowings continued
Compliance with loan covenants
The Group monitors compliance with loan covenants on an ongoing basis. Where noncompliance 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 2013 and during the year then ended the Group complied with all loan covenants.
26 Trade and other payables
’000 RUB
Trade payables
Advances received
Taxes payable (other than income tax)
Payables to staff
Foreign exchange and interest rate swap liabilities
Short-term liabilities incurred in share-based payment transactions
Deferred income
Other current payables
2013
2012
20,242,510
17,344,008
256,097
689,240
181,083
650,827
1,215,575
1,099,639
–
–
60,412
1,250,668
32,554
76,835
28,365
200,423
23,714,502
19,613,734
The Group’s exposure to currency and liquidity risk related to trade and other payables is disclosed in note 27.
27 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; and
– 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
Cash and cash equivalents
Note
21
22
Carrying amount
2013
2012
1,120,256
3,006,730
523,489
4,535,693
4,126,986
5,059,182
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.
55
O’Key Group S.A. Annual Report & Accounts 2013 Notes to the Consolidated Financial Statements continued
for the year ended 31 December 2013
27 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 stores. 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
2013
Impairment
2013
1,035,229
28,530
3,451
99,222
–
–
–
(46,176)
Gross
2012
436,509
22,227
10,595
75,635
Impairment
2012
–
–
–
(21,477)
1,166,432
(46,176)
544,966
(21,477)
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
Balance at end of the year
2013
21,477
24,699
2012
44,226
–
–
(22,749)
46,176
21,477
The management has performed a 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 3,006,730 thousand at 31 December 2013 (2012: RUB 4,535,693 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 Fitch Rating 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.
56
O’Key Group S.A. Annual Report & Accounts 2013 Notes to the Consolidated Financial Statements continued
for the year ended 31 December 2013
27 Financial instruments and risk management continued
(i) Exposure to liquidity risk
The following are the contractual maturities of financial liabilities, including future interest payments:
2013
’000 RUB
Non-derivative financial liabilities
Unsecured bonds
Unsecured bank facilities
Unsecured loans from related parties
Unsecured loans from other companies
Trade and other payables
Carrying
amount
Contractual
cash flows
0-6 mths
6-12 mths
1-5 yrs
8,085,510
8,000,640
665,433
2,868
(9,913,633)
(372,145)
(9,607,280)
(1,807,634)
(776,279)
(2,869)
(26,399)
(1)
22,708,753
(22,708,753)
(22,708,753)
(374,636)
(986,665)
(26,399)
(2,868)
–
(9,166,852)
(6,812,981)
(723,481)
–
–
39,463,204
(43,008,814)
(24,914,932)
(1,390,568)
(16,703,314)
During 2012 and 2013 the Group placed unsecured bonds on MICEX which expire after five years in 2017 and 2018, accordingly. 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.
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 liabilities
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)
(151,085)
(3,614,274)
(2,046,007)
(2,046,007)
(769,789)
(2,868)
(24,363)
(1)
18,644,070
(18,644,070)
(18,644,070)
911,181
(911,181)
–
–
(24,363)
(2,867)
–
–
–
(721,063)
–
–
(911,181)
Foreign exchange and interest rate swap liabilities
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)
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 2013 the Group settled USD-denominated loan which was hedged
with a currency swap. Accordingly, the foreign currency swap was closed.
57
O’Key Group S.A. Annual Report & Accounts 2013 Notes to the Consolidated Financial Statements continued
for the year ended 31 December 2013
27 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 liabilities
Gross exposure
Of which carrying amount of hedged secured bank loans
Net exposure
The following significant exchange rates applied during the year:
USD-
denominated
2013
107,308
USD-
denominated
2012
3,346
–
(4,387,442)
(665,433)
(1,009,339)
–
–
(617,522)
(11,250)
(911,181)
(32,554)
(1,567,464)
(5,956,603)
–
3,954,901
(1,567,464)
(2,001,702)
Russian Rouble equals
US Dollar
Average rate
Reporting date rate
2013
31.8480
2012
31.0930
2013
32.7292
2012
30.3727
Sensitivity analysis
A 10% strengthening of the RUB against USD at 31 December 2013 would have increased equity by RUB 156,746 thousand (2012:
RUB 592,405 thousand) and profit or loss by RUB 156,746 thousand (2012: RUB 196,915 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 2012.
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.
(ii) Interest rate risk
The Group has material exposure to interest rate risk. As at 31 December 2013, 30% of the Group’s interest bearing financial liabilities were
subject to re-pricing within six months after the reporting date (2012: 66%).
The Group uses swaps to hedge its exposure to variability of interest rates. As at 31 December 2013 the Group had an interest swap
agreement with a bank. Under this agreement the Group swaps Mosprime rate for fixed rate. At inception, the swap had a maturity of three
years. As at 31 December 2013 fair value of swap was Nil.
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
2013
2012
622,444
–
(13,254,451)
(6,802,462)
–
–
(3,500,000)
(6,919,996)
58
O’Key Group S.A. Annual Report & Accounts 2013 Notes to the Consolidated Financial Statements continued
for the year ended 31 December 2013
27 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 2012.
’000 RUB
2013
Variable rate instruments
Interest rate swap
Cash flow sensitivity (net)
2012
Variable rate instruments
Interest rate swap
Cash flow sensitivity (net)
Profit or loss
Equity
100 bp increase
100 bp decrease
100 bp increase
100 bp decrease
(35,000)
20,000
35,000
(20,000)
(15,000)
15,000
(68,801)
39,485
68,801
(39,485)
(29,316)
29,316
–
–
–
–
–
–
–
–
40,618
40,618
5,160
5,160
(e) Offsetting of financial assets and financial liabilities
The Group may enter into sales and purchase agreements with the same counterparty in the normal course of business. The related amount
receivable and payable do not always meet the criteria for offsetting in the statement of financial position. This is because the Group may not
have any currently legally enforceable right to offset recognised amounts, because the right to offset may be enforceable only on the occurrence
of future events. In particular, in accordance with the Russian civil law an obligation can be settled by offsetting against a similar claim if it is due,
has no maturity or is payable on demand.
The following table sets out the carrying amounts of recognised financial instruments that are subject to the above agreements.
’000 RUB
31 December 2013
Gross amounts
Amounts offset in accordance with IAS 32 offsetting criteria
Net amounts presented in the statement of financial position
Amounts related to recognised financial instruments that do not meet some or all of the offsetting criteria
Net amount
’000 RUB
31 December 2012
Gross amounts
Amounts offset in accordance with IAS 32 offsetting criteria
Net amounts presented in the statement of financial position
Trade and other
receivables
Trade and other
payables
1,778,802
11,329,566
(1,592,835)
(1,592,835)
185,967
9,736,731
185,967
9,736,731
Trade and other
receivables
Trade and other
payables
1,591,873
10,301,428
(1,491,743)
(1,491,743)
100,130
8,809,685
Amounts related to recognised financial instruments that do not meet some or all of the offsetting criteria
–
–
Net amount
100,130
8,809,685
The net amounts presented in the statement of financial position disclosed above form part of trade and other receivables and trade and other
payables, respectively. Other amounts included in these line items do not meet the criteria for offsetting and are not subject to the agreements
described above.
Amounts offset in accordance with IAS 32 offsetting criteria comprise mainly trade payables for goods and bonuses receivable from suppliers.
(f) Fair values
Basis for determination of fair value of financial assets and liabilities is disclosed in note 5. Fair value of Group’s financial assets and liabilities,
including loans and borrowings, approximates their carrying amounts.
(g) Fair value hierarchy
Group’s derivative financial assets and liabilities comprise interest rate swap which is carried at fair value. Fair value of swap was determined
based on observable market data (Level 2 fair value), including forward interest rates. The Group has no financial assets and liabilities measured
at fair value based on unobservable inputs (Level 3 fair value). Group’s bonds are listed on MICEX. Fair value of bonds payable was determined
for disclosure purposes based on active market quotations (Level 1 fair value).
59
O’Key Group S.A. Annual Report & Accounts 2013 Notes to the Consolidated Financial Statements continued
for the year ended 31 December 2013
27 Financial instruments and risk management continued
(h) 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 and the Group follows this requirement.
28 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 two to three 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, although some leases may be for longer
period. Property leases can be renewed based on mutual agreement of the lessor and the Group. The Group has subleases. Fees payable by
the Group for operating leases of stores comprise fixed payments and contingent rent which is determined as excess of 3%-5% of the revenue
of related stores over fixed rent rate.
During the year ended 31 December 2013 RUB 3,181,720 thousand was recognised as an expense (including amortisation of initial cost of land
lease amounting to RUB 99,991 thousand) in the profit and loss in respect of operating leases (2012: RUB 2,388,692 thousand). Contingent rent
recognised as an expense for the year ended 31 December 2013 amounted to RUB 818,462 thousand (2012: RUB 637,255 thousand).
At 31 December, the future minimum lease payments under non-cancellable leases were payable as follows.
RUB 000’
Less than one year
Between one and five years
More than five years
2013
2012
1,975,473
6,076,801
12,700,022
1,286,026
4,223,262
8,857,409
20,752,296
14,366,697
Future minimum lease payments as at 31 December 2013 include RUB 13,665,445 thousand (31 December 2012: RUB 8,475,644 thousand)
in respect of property leases cancellable only with the permission of the lessor. Management believes that the Group is able to negotiate early
cancellation of these leases, if necessary.
Leases as lessor
The Group leases out its investment property and some space in the buildings of hypermarkets. During the year ended 31 December 2013
RUB 1,300,867 thousand was recognised as rental income in the consolidated statement of profit or loss and other comprehensive income
(2012: RUB 1,013,754 thousand). All leases whether the Group is lessor are cancellable. The Group has contingent rent arrangements.
Contingent rent recognised as income amounted to RUB 38,503 thousand for the year ended 31 December 2013 (2012: RUB 28,582 thousand).
Contingent rent is determined as excess of 3.5%-25% of the tenant’s revenue over fixed rent rate.
29 Capital commitments
The Group has capital commitments to acquire property, plant and equipment and intangible assets amounting to RUB 11,041,167 thousand
as at 31 December 2013 (2012: RUB 5,796,762 thousand).
30 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.
60
O’Key Group S.A. Annual Report & Accounts 2013 Notes to the Consolidated Financial Statements continued
for the year ended 31 December 2013
30 Contingencies continued
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 intragroup 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.
These circumstances may create tax risks in the Russian Federation that are substantially more significant than in other countries.
Management believes that it has provided adequately for tax liabilities based on its interpretations of applicable Russian tax legislation, official
pronouncements and court decisions. However, the interpretations of the relevant authorities could differ and the effect on these consolidated
financial statements, if the authorities were successful in enforcing their interpretations, could be significant.
(c) Assets pledged or restricted
The Group has the following assets pledged as collateral:
’000 RUB
Fixed assets (carrying value)
Initial cost of land lease (carrying value)
Total
Note
15
18
2013
2012
–
–
–
6,404,435
456,971
6,861,406
31 Related party transactions
(a) Major shareholders
The major shareholders of the Group are three individuals: Mr. Korzhev, Mr. Troitsky and Mr. Volchek (“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 11):
’000 RUB
Salaries and bonuses
Social security contributions
Long-service bonus
Share-based payments
2013
111,615
2,354
248,711
18,424
2012
113,526
778
85,425
42,016
381,104
241,745
In addition members of Board of Directors received remuneration in the amount of RUB 15,073 thousand for the year ended 31 December 2013
(2012: RUB 12,068 thousand) which is included in legal and professional expenses.
61
O’Key Group S.A. Annual Report & Accounts 2013 Notes to the Consolidated Financial Statements continued
for the year ended 31 December 2013
31 Related party transactions continued
(c) Transactions with other related parties
Other related parties are entities which belong to the shareholder group (see note 1).
The Group’s other related party transactions are disclosed below.
(i) Revenue
’000 RUB
Services provided:
Other related parties
Transaction
value
2013
Transaction
value
2012
Outstanding
balance
2013
Outstanding
balance
2012
36,857
36,857
38,664
38,664
(3,543)
(3,543)
(5,110)
(5,110)
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
2013
Transaction value
2012
Outstanding
balance
2013
Outstanding
balance
2012
(699,221)
(675,140)
907,642
1,109,960
(597,794)
(565,526)
(57,875)
(43,552)
(54,831)
(54,783)
(3,880)
(15,908)
(52,026)
(49,430)
–
–
–
(24)
–
–
–
–
608
–
(755,127)
(740,478)
907,618
1,110,568
In 2013 no finance costs from related parties were capitalised in cost of property, plant and equipment (2012: Nil).
Outstanding balance for lease of premises as at 31 December 2013 represents net balance of prepayments for rent of hypermarkets for the
period until 2017 in the amount of RUB 977,078 thousand (2012: RUB 1,168,638 thousand) and current liabilities for rent of hypermarkets in the
amount RUB 3,137 thousand (2012: RUB 58,678 thousand). Long-term part of prepayments is RUB 735,903 thousand (2012: RUB 952,302
thousand), refer to note 18.
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
2013
Amount loaned
2012
Outstanding
balance
2013
Outstanding
balance
2012
–
–
(665,433)
(617,522)
The loans from other related parties bear interest at 8% per annum and are payable in 2016.
(d) Pricing policies
Related party transactions are not necessarily based on market prices.
32 Events subsequent to the reporting date
In January 2014 the Group announced the decision to appoint Tony Denis Maher as the Group’s Chief Executive Officer.
In February 2014 the Group paid interim dividends to shareholders in the amount of USD 60,999,076. (RUB 2,122,548 thousand).
After the reporting date there was a weakening of the RUB against the USD and the EURO approximately by 12%.
62
O’Key Group S.A. Annual Report & Accounts 2013 Notes to the Consolidated Financial Statements continued
for the year ended 31 December 2013
33 Basis of measurement
The consolidated financial statements are prepared on the historical cost basis except for the following:
– 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.
34 Changes in accounting policies
Except for the changes below, the Group has consistently applied the accounting policies set out in note 35 to all periods presented in these
consolidated financial statements.
The Group has adopted the following new standards and amendments to standards, including any consequential amendments to other
standards, with a date of initial application of 1 January 2013:
a. Disclosures—Offsetting Financial Assets and Financial Liabilities (Amendments to IFRS 7)
b. Presentation of Items of Other Comprehensive Income (Amendments to IAS 1)
c. IFRS 13 Fair Value Measurement
The nature and effects of the changes are explained below.
(a) Offsetting of financial assets and financial liabilities
As a result of the amendments to IFRS 7, the Group has expanded its disclosures about the offsetting of financial assets and financial liabilities
(see note 27(e)).
(b) Presentation of items of other comprehensive income
As a result of the amendments to IAS 1, the Group has modified the presentation of items of other comprehensive income in its statement
of other comprehensive income, to present separately items that would be reclassified to profit or loss from those that would never be.
Comparative information has been re-presented accordingly.
(c) Fair value measurement
IFRS 13 establishes a single framework for measuring fair value and making disclosures about fair value measurements when such
measurements are required or permitted by other IFRSs. It unifies the definition of fair value as the price that would be received to sell an asset
or paid to transfer a liability in an orderly transaction between market participants at the measurement date. It replaces and expands the
disclosure requirements about fair value measurements in other IFRSs, including IFRS 7.
The change had no significant impact on the measurements of the Group’s assets and liabilities and disclosures.
35 Significant accounting policies
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, except as explained in note 34, which addresses changes in accounting policies.
(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
Intragroup balances and transactions, and any unrealised income and expenses arising from intragroup transactions, are eliminated in preparing
the consolidated financial statements.
(b) Foreign currency
(i) Foreign currency transactions
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.
63
O’Key Group S.A. Annual Report & Accounts 2013 Notes to the Consolidated Financial Statements continued
for the year ended 31 December 2013
35 Significant accounting policies continued
(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.
(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 and financial liabilities – recognition and derecognition
The Group initially recognises loans and receivables and debt securities issued on the date that they are originated. All other financial assets and
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 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.
The Group derecognises a financial liability when its contractual obligations are discharged or cancelled or expire.
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.
(ii) Non-derivative financial assets – measurement
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 and cash and cash equivalents.
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.
(iii) Non-derivative financial liabilities – measurement
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.
(iv) 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 ongoing 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.
64
O’Key Group S.A. Annual Report & Accounts 2013 Notes to the Consolidated Financial Statements continued
for the year ended 31 December 2013
35 Significant accounting policies continued
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 profit and loss and other 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.
(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.
The estimated useful lives of significant items of property, plant and equipment for the current and comparative periods are as follows:
– Buildings
– Machinery and equipment, auxiliary facilities
– Motor vehicles
– Leasehold improvements
– Other fixed assets
30 years;
2-20 years;
5-10 years;
over the term of underlying lease; and
2-10 years.
Depreciation methods, useful lives and residual values are reviewed at each financial year end and adjusted if appropriate.
65
O’Key Group S.A. Annual Report & Accounts 2013
Notes to the Consolidated Financial Statements continued
for the year ended 31 December 2013
35 Significant accounting policies continued
(f) Investment property
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.
(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 based on the cost of the asset less its estimated 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; and
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 amortized 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.
(i) Inventories
Inventories are measured at the lower of cost and net realisable value. The cost of inventories is based on the weighted moving average
principle and includes expenditure incurred in acquiring the inventories, production or conversion costs and other costs incurred in bringing
them to their existing location and condition.
Net realisable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and selling expenses.
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O’Key Group S.A. Annual Report & Accounts 2013
Notes to the Consolidated Financial Statements continued
for the year ended 31 December 2013
35 Significant accounting policies continued
(j) Impairment
(i) Financial assets
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, observable data
indicating that there is measurable decrease in expected cash flows from a group of financial assets.
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.
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 employee 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.
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O’Key Group S.A. Annual Report & Accounts 2013 Notes to the Consolidated Financial Statements continued
for the year ended 31 December 2013
35 Significant accounting policies continued
(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 till.
(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.
(p) Income tax
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 joint arrangements to the extent that it is probable that they will not reverse in the
foreseeable future. A deferred tax asset is recognised for unused tax losses, unused 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 used. 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.
The measurement of deferred tax reflects the tax consequences that would follow the manner in which the Group expects, at the end of the
reporting period, to recover or settle the carrying amount of its assets and liabilities.
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O’Key Group S.A. Annual Report & Accounts 2013 Notes to the Consolidated Financial Statements continued
for the year ended 31 December 2013
35 Significant accounting policies continued
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.
In determining the amount of current and deferred tax the Group takes into account the impact of uncertain tax positions and whether
additional taxes, penalties and late-payment interest may be due. The Group believes that its accruals for tax liabilities are adequate for all
open tax years based on its assessment of many factors, including interpretations of tax law and prior experience. This assessment relies on
estimates and assumptions and may involve a series of judgments about future events. New information may become available that causes
the Group to change its judgment regarding the adequacy of existing tax liabilities; such changes to tax liabilities will impact the tax expense
in the period that such a determination is made.
(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.
(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 2013 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.
– IFRS 9 Financial Instruments 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 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 as it is not yet endorsed by the European Union.
– Investment Entities (Amendments to IFRS 10, IFRS 12 and IAS 27) will be effective for annual periods beginning on or after 1 January 2014.
The amendments introduce a mandatory consolidation exception for certain qualifying investment entities. A qualifying investment entity is
required to account for investments in controlled entities, as well as investments in associates and joint ventures, at fair value through profit
or loss. The consolidation exception will not apply to subsidiaries that are considered an extension of the investment entity’s investing
activities. The amendments are to be applied retrospectively unless impracticable. The Group has not yet analysed the likely impact of the
amendments on its financial position and performance.
– Amendments to IAS 32 Financial Instruments: Presentation – Offsetting Financial Assets and Financial Liabilities 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 amendments are likely to increase the Group’s trade
and other receivables from and trade and other payables to certain counterparties because it is unlikely that the Group will meet the criteria
for offsetting. In particular, the current bankruptcy legislation in Russia does not allow offsetting if this has impact on the succession of
settlements determined by the law. However, the impact has not yet been quantified.
69
O’Key Group S.A. Annual Report & Accounts 2013 Notes
70
O’Key Group S.A. Annual Report & Accounts 2013 Notes
71
O’Key Group S.A. Annual Report & Accounts 2013 Notes
72
O’Key Group S.A. Annual Report & Accounts 2013 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
O’Key Group S.A.
Annual Report 2013
Investor Relations
Maksim Kravtsov
Head of investor relations
No. +7 495 663 66 77, ext. 220
e-mail: ir@okmarket.ru
www.okeyinvestors.ru
Public Relations
Artem Gluschenko
Head of public relations
No. +7 495 663 66 77, ext. 338
e-mail: corpcom@okmarket.ru
www.okmarket.ru/en/about-us