O’KEY Group S.A.
Annual Report
2016
BRINGING FRESHNESS
TO OUR CUSTOMERS
1
Annual Report 2016 O’KEY IS A MODERN, MULTI-
FORMAT FOOD RETAILER
IN RUSSIA WITH A PASSION
FOR QUALITY, BEST VALUE
PROPOSITION AND THE AMBITION
TO DELIVER A UNIQUE CUSTOMER
EXPERIENCE
15 years
OF HISTORY
623 K m2
OF SELLING SPACE
compared to 593 k m2 in 2015
14.5%
CAGR REVENUE
growth in RUB terms (2009–2016)
Overview
Corporate Governance
Corporate Governance System
— Board of Directors
— Committees of the Board of Directors
— Senior Management
Financial & Operational Highlights
3
Risk Management
At a Glance
Highlights of 2016
4
Shareholder and Investor Information
6
Management & Directors Responsibility Statement
48
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41
45
Strategic Report
Financial Statements
Report of the Réviseur d’Entreprises Agréé
Consolidated Financial Statements
Notes to the Consolidated Financial Statements
Chairman and Chief Executive’s Statement
Market Overview
Our Strategy
Operational Review
— Hypermarkets and Supermarkets
— Discounter Stores
— Private Label Relaunch
in Hypermarkets and Supermarkets
— Online Shopping
— Supply Chain Transformation
in Hypermarkets and Supermarkets
Financial Review
Corporate Social Responsibility
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10
12
14
24
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Get the latest news on
O’KEY Group’s website
www.okeyinvestors.ru
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50
55
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Annual Report 2016 Overview
Overview
Strategic Report
Corporate Governance
Financial Statements
REVENUE GROWTH
IN 2016
2
2
Overview
FINANCIAL & OPERATIONAL
HIGHLIGHTS
We delivered solid operational results in 2016
with the Group’s total annual revenue increasing by 8.0%,
driven by the Company’s ambitious transformation
of key business processes and the development
of the discounter format.
623 K m2
SELLING SPACE
compared to 593 k m2 in 2015
+2.2 %
yoy
GROUP LFL
REVENUE
175,471
RUB mln
TOTAL REVENUE
↗ 8.0%
110 stores
NET OF DISCOUNTERS
+4.5
%
yoy
RETAIL REVENUE
GROWTH
net of discounters
11,845
RUB mln
EBITDA
net of discounters
↗ 1.5%
164 stores
TOTAL NUMBER
compared to 146 in 2015
+27.7
%
yoy
GROUP OPERATING
CASH FLOW GROWTH
9,253
RUB mln
GROUP EBITDA
↙ 8.5%
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Annual Report 2016 Overview
Overview
Strategic Report
Corporate Governance
Financial Statements
AT A GLANCE
O’KEY Group is the seventh largest food retailer in Russia by revenue.
Our primary retail format is the modern, Western European style
hypermarket under the O’KEY brand. This is underpinned by our chain of
O’KEY supermarkets and our DA! discounter chain. We opened our first
hypermarket in St Petersburg in 2002 and have continued to grow ever since.
O’KEY is the first among Russian food retailers to launch and actively develop
e-commerce operations in St Petersburg and Moscow offering a full range
of hypermarket products for home delivery.
Key facts:
15 years history
Experienced management team
One of the market leaders in St Petersburg with
a strong presence in Moscow and other large cities
in Russia
Strong brand known for the quality of products
and best-in-class shopping experience
THree differentiated formats of modern food retail:
hypermarket, supermarket and discounter format
High logistics centralisation level: one federal and
two regional distribution centres for hypermarket
and supermarket segment, one distribution centre
for discounter stores
more than 25,000 employees
Our History:
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
O’KEY GROUP
was founded
FIRST O’KEY
HYPERMARKET
opened in
St Petersburg
Strategy of establishing
REGIONAL MARKET
LEADERSHIP
8 HYPERMARKETS
AND 2 SUPERMARKETS
opened in St Petersburg
×15 TIMES increased
selling space to 87 k m2
Focus on EXPANSION
in Russia’s key regional markets
Emergence as a ONE OF THE
LEADING national Russian retailers
6 NEW REGIONS
TOP-10
retailer by revenue
37 total stores
RAPID EXPANSION
in Moscow and key regional markets
IPO on the London Stock Exchange
>100 total stores
DOUBLED selling space to >190 k m2
>550 K M2 selling space
ONLINE SALES PLATFORM
launched for market-leading hypermarket
STRENGTHENING of international management team
NEW DISCOUNTER FORMAT under the DA! brand
146 total stores
>590 K M2 selling space
40% logistics centralisation level
Presence in 27 REGIONS
MOBILE APP
for iOS and Android launched in 2016
164 total stores
>600 K M2 selling space
4
2015
2016
Number of stores by format*
146
35
40
71
108
39
69
164
54
36
74
2014
2015
2016
3
Kaluga region
5
Tula region
2
Tver region
11
Moscow
31
Moscow region
2
Ryazan region
1
Murmansk
2219
St Petersburg
stores in 32 Russian cities
74
Hypermarkets
36
Supermarkets
54
Discounter stores
11 7
Moscow
1 1
Lipetsk
1
Cherepovets
1
Ivanovo
3
Nizhny Novgorod
1
Syktyvkar
2 1
Voronezh
2 1
Rostov-on-Don
4 1
Krasnodar
1
Sochi
1
Stavropol
1 1
Togliatti
1 1
Saratov
3
Ufa
1
Sterlitamak
1
Orenburg
1 2
Volgograd
2 1
Astrakhan
Hypermarket
Supermarket
Discounter store
Distribution centre
Distribution centre for discounter stores
* As at 31 December 2016.
2
Surgut
2
Yekaterinburg
3
Tyumen
1 1
Omsk
2
Novosibirsk
2
Krasnoyarsk
1
Irkutsk
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Annual Report 2016 Overview
Overview
Strategic Report
Corporate Governance
Financial Statements
HIGHLIGHTS OF 2016
Customer focus
In 2016, our efforts were aimed at enhancing the best
customer value proposition, which is based on
competitive pricing and availability of a wide range of
high-quality goods, including our private label products,
as well as providing attractive promotions for even
more outstanding customer experience. During 2016
in order to support our customer focus, we completed
the build-up of our commercial team under a new
management structure, comprising four divisions for
long shelf life products, short shelf life products, non-
food products and private label products.
Renewed
hypermarket concept
In 2016, O’KEY launched a "compact city" hypermarket
concept and renewed its hypermarket concept.
The new "compact city" concept, featured in a recently
opened hypermarket in St Petersburg, offers a big
choice of fresh produce, including farm products,
and an extended range of our own production items.
Renewed concept is more functional and has product
zones organised by category, a smart and efficient
concept of non-food, a better in-store navigation,
enabling customers to easily find the required products.
These features also allow us to use selling space more
efficiently and boost sales per square metre.
For more details see p. 14
Private labels and
partnership with
local producers
O’KEY continues the global relaunch of its private
label products for hypermarket and supermarket
segment. In April 2016, the Company launched
an “O’KEY” line-up in the middle price segment.
Also we have strengthened our supplier base to
include market leaders as well as the most popular
producers in the regions. Local enterprises are often
able to produce high quality products and offer
reasonable prices; cooperation with them is therefore
beneficial for us due to the reduction of logistics costs.
Logistics
In 2015-2016, O'KEY opened one federal and two
regional distribution centers in Moscow and
St Petersburg for hypermarket and supermarket
segment. Our transformed supply chain gives
opportunities for further improvement of the
inventory turnover, on-shelf availability and working
capital management. In addition to this it leads to
the shrinkage rate decrease and margin improvement
through tight control over the supply chain.
For more details see p. 19
For more details see p. 22
6
IT systems
Loyalty programme
We continued to roll out the new IT infrastructure
in hypermarkets and supermarkets supported
by the latest IT solutions aimed at increasing
business efficiency. In 2016, we continued to
implement the ERP system (MS Dynamics AX 2012)
complemented by the business oriented solutions
such as Oracle RPAS. In addition, the project aimed
at improving merchandise planning (JDA) was
completed in 2016. The transformation of processes
and systems will continue and is expected to improve
the performance of the Company significantly
over 2017-2018.
In 2016, we continued to focus on our customer
needs, including the launch of a pilot project
designed to make personalised special offers to
customers based on their loyalty card information.
Another milestone was the launching a new co-
branded credit card jointly with ROSBANK. The new
debit card also gives customers additional savings
opportunities.
Online shopping
DA! discounter stores
In 2016, we significantly expanded our delivery
zones which now include the whole of the Moscow
and St Petersburg areas.
We also expanded the product range
to 25,000 SKUs.
In 2016, O’KEY launched an iOS and Android
mobile app to facilitate online shopping.
In 2016, we continued to develop our discounter
business segment in line with our strategic plans.
As of December 31, 2016, O’KEY now operates
54 discounter stores located in Moscow and
the surrounding regions. In 2016 we have put
considerable emphasis on improving the product range
(PLs, branded products, in-outs) and fine-tuning it to
the needs of our customers.
For more details see p. 21
For more details see p. 17
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Annual Report 2016 Overview
Corporate Governance
Financial Statements
Strategic Report
Strategic Report
CHAIRMAN
AND CHIEF EXECUTIVE’S STATEMENT
DEAR CUSTOMERS, INVESTORS,
COLLEAGUES AND PARTNERS,
2016 was an eventful and challenging year for O’KEY
and the Russian retail sector as a whole. The retail sector
in Russia continued to be adversely affected by the weak
macroeconomic environment. Economic uncertainty and
rising inflation led to a reduction in both real wages and
disposable income, resulting in the lower purchasing
power of Russian consumers. The larger retail formats
also faced aggressive competition from a growing
number of convenience stores.
Looking back at 2016, I can say that we successfully
managed to implement our business transformation
programme while responding in a timely manner to both
market challenges and customer needs.
In order to address the twin challenges of preserving
traffic and average ticket size, we focused on our
customer needs enhancing the best customer value
proposition, which is based on competitive pricing
and availability of a wide range of high-quality goods,
including our private label and local products, as well
as providing attractive promotions for even more
outstanding customer experience.
We put considerable effort into improving efficiency in
our hypermarket and supermarket business segment as
well as further expanding our discounter stores. We have
strengthened our senior management team with best-
in-class professionals and completed the build-up of our
commercial team under a new management structure,
comprising four divisions for long shelf life products,
short shelf life products, non-food products and private
label products. The organisational changes we have
made in commercial purchasing are aimed at increasing
our focus on individual product categories.
Overall, our strategy delivered strong operating results in
2016 with the Group's total annual revenue increasing by
8.0%, while traffic grew by 9.3% over the same period.
Total revenue in the hypermarket and supermarket
segment rose by 4.9% for the year, with traffic growing
by 2.6% and average ticket size increasing by 1.7% over
the same period. The main annual LFL indicators were
also positive in this segment with the retail revenue of all
the Group's LFL stores up by 2.2% in 2016.
8
As for financial results, EBITDA declined by 8.5% due to
continuing roll-out of discounters, although the Group
considers this to have now peaked with a significant
improvement in EBITDA now expected in this and future
years. EBITDA net of discounters increased by 1.5%,
as a result of continuing efforts to boost efficiency of
the business. We maintain a conservative approach to
borrowing – our debt leverage remains sustainable, based
on such metrics as a net debt to EBITDA ratio of 2.7 as
of the end of 2016.
Our approach to the expansion of traditional retail
formats remained conservative; as planned, we opened
four new hypermarkets and one new supermarket in
2016. In our stores we implemented some elements of
a new concept offering customers a unique “complete
solution“ experience. At the same time, we also
launched our new “compact city” concept hypermarket
in St Petersburg. Our strategic objective is to transform
O’KEY in order to cater better to the needs of the modern
customer by offering stores which are more functional
and most convenient for shopping.
By opening new distribution centres in Moscow and
St Petersburg, we were able to increase our logistics
centralisation level from 15% in 2015 to 40% in 2016,
and, by the end of 2017, we plan to increase this
figure to 60%.
We derived considerable benefits in 2016 from
the transformation of our supply chain and stock
management activities, which included a new automatic
ordering, forecasting and replenishment process, as
well as increased supplier centralisation. This resulted
in significant on stock availability improvements, less
shrinkage, reduced labour costs and commercial margin
improvement.
Last year we also began to see the first benefits from
the implementation of a number of IT projects designed to
automate our most important commercial operations such
as space planning, product range and demand forecasting,
price management and others. We have been able to
reduce operating costs while maintaining a high level of
quality as the new system ensures that our shelves are
always filled with a wide range of fresh products.
We maintain superiority in online
shopping in Russia, offering
a wide range of both food and
non-food products. In 2016 we
began to receive the results of our
significant investment in this area
to date, registering a very positive
response from consumers, with
sales for the year increasing tenfold
compared to the prior year to reach
RUB 661 million.
In 2016, we put great emphasis on
transforming our corporate culture
in order to maintain operational
stability in the face of difficult
market conditions, while retaining
and developing our key talent.
During the year, we implemented
a variety of new HR projects
which focused on the improved
assessment of employee
performance, motivation and
development.
We ended the fourth quarter of
2016 with 54 discounter stores in
Moscow and surrounding regions.
We have worked tirelessly on
the range of products we offer our
customers (PLs, branded products,
in-outs), fine-tuning it to their needs.
As a result of these successful
changes and the growing awareness
of our private labels brands as well
as the discounter store concept
itself, we were pleased to see that
LFL revenue at our discounter stores
grew by 64.1% in Q4 2016 with
traffic volume and basket value
increasing by 36.4% and 20.4%,
respectively.
Outlook
While we do see some upside this coming year
from a recovery in consumer spending through
real wage growth and slowing consumer
price inflation, our strategy is based on
a more cautious scenario for 2017.
We believe that by continuing to invest
in our business today, with a strong
focus on improved efficiency and price
competitiveness, together with our
established reputation for quality and
service, we will be one of the best-
positioned retailers in the Russian
marketplace, ready to capitalise on
future growth opportunities as and
when they occur.
In 2017 we will focus on making
further progress towards
becoming a multi-format retailer,
enhancing our operating efficiency,
accelerating our growth and
strengthening our relationship
with investors. The quality of our
products mix and private label
brands will remain one of the key
priorities in 2017 and we remain
fully committed to improving
an overall in-store shopping
experience for our customers.
I have no doubt that O’KEY is
on an excellent path towards
achieving its key strategic
goals. On behalf of the Board
of Directors and Management
Team, I would like to thank all
of our stakeholders for their
continued belief in the O’KEY
story and for staying with us
during this challenging year.
Yours truly,
HEIGO KERA
Chairman of the Board of Directors
and Chief Executive Officer of Hypermarket & Supermarket Segment
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Annual Report 2016 Overview
Corporate Governance
Financial Statements
Strategic Report
Strategic Report
MARKET OVERVIEW
Headwinds
In 2016, the retail sector in Russia continued to
be adversely affected by the weak macroeconomic
environment and increasing competition.
Macro picture remained subdued with GDP falling
by 0.6% on consensus numbers. Low consumer
confidence, real wage decline have resulted in
the lower purchasing power of a Russian consumer,
which has led to 5.2% decline of real retail sales.
While at the end of last year negative impulse
started diminishing with confidence improving
on sequential basis (from 26 in Q2 to 18 points
in Q4) and real wages growth accelerating to 1.8%
in Q4 vs. 0.3% in Q2, we have not observed any
improvement in our numbers yet.
Competitive environment remained challenging
in Russia. While consumer wallet has not been
expanding, top 10 retailers added 2.2 million of square
metres to 2015 net space according to Infoline.
Top 3 retailers added 1.7 million of square metres to
their base in 2016 cannibalising not only competitors
stores but their own store base as well. Despite this
challenging environment, we managed to grow our
LFLs across all formats.
Outlook
While financial analysts according to Bloomberg
have a constructive outlook for 2017 expecting
Russian GDP to grow by 1.2% in real terms, we
remain cautiously optimistic. While we expect some
moderate recovery of consumer sentiment, signs of
which we have already seen at the end of last year,
we expect competitive pressure to persist overall
and to remain a key headwind for our business.
Russian Consumer Price Index 2012-2016,
YoY change, %
Russian Consumer Confidence Index, 2016,
Quarterly, %
Source: Rosstat
Source: Rosstat
0
–5
–10
–15
–20
–25
–30
–35
2012
2013
2014
2015
2016
Q1
Q2
Q3
Q4
16
12
8
4
0
10
We believe there are limited opportunities to grow
for us in the big box segment thus we will focus on
quality expansion of “compact city” hypermarkets in
cities where we have strong brand presence already.
In addition, we see significant potential to improve
productivity not only in our stores but also in our
headquarters, which, in our view, will drive profitability
of our business higher.
Discounters will remain our engine of growth.
Recent results are very encouraging and we remain
optimistic of the future of the classic discounter
concept in Russia. We will therefore continue investing
in this format in 2017 and beyond. We believe our
discounters are well positioned to withstand growing
competitive pressure and the volatile Russian
consumer environment.
Real Disposable Income Growth, 2012-2016,
YoY change, %
Real Retail Sales Growth, 2012-2016,
YoY change, %
8
4
0
–4
–8
Source: Rosstat
8
4
0
–4
–8
–12
Source: Rosstat
2012
2013
2014
2015
2016
2012
2013
2014
2015
2016
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Annual Report 2016 Overview
Corporate Governance
Financial Statements
Strategic Report
Strategic Report
OUR STRATEGY
Our strategy is built around developing a modern,
multi-format food retailer in Russia with a passion for
quality, best value proposition and the ambition to
deliver a unique customer experience.
We are very optimistic about the future of our
discounter format in Russia which will be the growth
engine of the Group in the coming years. We plan
to more than triple our presence in Moscow and
surrounding regions in the the next 3 years aiming
to grow significantly our revenues while improving
profitability of the business.
In our hypermarket and supermarket segment we see
a significant opportunity to improve productivity thus
decreasing cost of operations not only at the store
level, but also at the headquarter level. In the last
12 months we launched a number of strategic
initiatives which in the next 2-3 years should lower
our cost structure significantly. At the store level we
aim at improving a dynamic, customer driven product
range, delivering quality and value at the same time.
DA!
Growth engine of the Group
Our strategic goal: Build leading discounter chain in Russia
GROWTH
AND EXPANSION
STRONG
PRIVATE LABELS
DELIVER THE BEST
VALUE PROPOSITION
Continue the rollout of
DA! stores in Moscow and
surrounding regions, targeting
at least 20 new stores in 2017
Ensure the best possible
quality by carefully selecting
our private label producers
Create an excellent shopping
experience thanks to our
modern design and well
trained personnel
Plan to more than triple
number of stores in the next
3 years and significantly
improve our revenues
per square metre
Optimise the product range
and increase the share
of private labels
Offer best pricing
on the market
Offer the highest quality
products through daily
deliveries of fresh products
to all our stores by our
own logistics
Improve merchandising
to offer the most customer
friendly experience
12
Hypermarkets and supermarkets
Focus on efficiency
Our strategic goals: 1. Achieve substantial cost reduction making
our operations on headquarter and
store levels more efficient
2. Strengthen leadership position
in our core regions
IMPROVE
EFFICIENCY
STRENGTHEN
OUR PRESENCE
ENHANCE
SUPPLY CHAIN
Introduce state-of-
the-art IT solutions
to improve business
processes in sales
and marketing and in
logistics and accounting
to realise efficiencies
across operations
Enhance technological
platform to support the
roll-out of new formats
and online channel
Improve commercial
margins by securing
better terms with
suppliers while
maintaining attractive
product ranges for
customers on store
shelves
Leverage ‘Big Data’ to
better understand our
customers and cater
to their needs
Expand our key
‘city compact‘
hypermarket format,
where shopping
becomes a truly
enjoyable experience
Ensure
the sustainable
growth of our
hypermarket
footprint in regions
where we have
strong brand
leadership
Develop online
shopping with a wide
range of food and
FMCG products with
attractive pricing and
convenient delivery
services
Optimise the supply
chain for every
product category and
SKU, and implement
a smart, end-to-
end supply chain
with a high level of
centralisation
Maintain high shelf
availability and
optimal inventory
levels
DELIVER
THE BEST VALUE
PROPOSITION
Develop our
customer-centric
approach enhancing
the best customer
value proposition
Ensure a truly
‘one-stop shop
experience’ while
offering quality
products for all
wallets
Increase the share of
our affordable private
label products in total
sales
Improve efficiency of
logistics supporting
imports and private
label products
Introduce new
products & services
which ensure the
sustainable growth
of our company
13
Annual Report 2016 Overview
Corporate Governance
Financial Statements
Strategic Report
Operational Review
HYPERMARKETS AND SUPERMARKETS
At O’KEY we are focused on providing an attractive product
range at competitive prices, while offering a high level of
customer service.
Performance
In 2016, we put considerable effort into boosting
efficiency in our traditional hypermarket and
supermarket segment. As a result retail revenues for
this segment rose by 4.5% to RUB 166.8 billion for
the year, with traffic growing by 2.6% and the average
ticket increasing by 1.7%. The main annual LFL
indicators were also positive in this segment.
In 2016, we used the conservative approach to
expansion. As of 31 December 2016, O’KEY operates
164 stores across Russia comprising 74 hypermarkets
and 36 supermarkets. During the year, we opened four
hypermarkets: two in St Petersburg, one in Moscow
and one in Tyumen, as well as one new supermarket
in Moscow. We also closed five supermarkets and
one hypermarket as part of our initiative to increase
overall efficiency.
14
4.5%
yoy
NET RETAIL
REVENUE
2.6%
yoy
TRAFFIC
net of discounters
2.0%
yoy
LFL REVENUE
net of discounters
GROUP NET OF DISCOUNTERS LFL
Net retail revenues, %
Traffic, %
Average ticket, %
2.0%
0.9%
4.2%
-0.7%
0.6%
-0.2%
2014
2015
2016
-4.2%
2014
2015
2016
2014
2015
2016
1.3%
1.0%
Renewed concept
We opened one hypermarket in St Petersburg featuring
our new concept of the "compact city" hypermarket,
where we offer such novel features as a “Fresh Area”,
arranged like an open market, a self-service green salad
bar and a “Farmer’s Corner” with fresh dairy products
delivered every morning from farms.
In 2016, we also launched renewed hypermarket
concept, which vary in new product zones organised
by category and more smart and efficient concept of
non-food sections, renewed multicoloured navigation,
modern look & feel to respond to the customer
expectations for fun and hassle-free shopping.
For O’KEY’s target audience of modern shoppers,
the new stores will have self-checkout counters with
Self Scanning technology.
We remain committed to the vision of the O’KEY
brand; we are focused on providing a diversified and
attractive product range at competitive prices, while
offering a high level of customer service. Our strategic
objective is to transform O’KEY to cater to the needs
of the modern customer.
15
Annual Report 2016 Overview
Corporate Governance
Financial Statements
Strategic Report
Strategic Report
54 DISCOUNTER STORES
LOCATED IN MOSCOW
AND THE SURROUNDING REGIONS
16
16
Operational Review
DISCOUNTER STORES
ARMIN BURGER
CEO of Discounter Segment
Our DA! Discounter store concept launched in
2015 meets the demands of a wide range of
customers. In particular, we are very pleased with
the high level of popularity of our private brands,
as well as our product range as a whole.
Over the medium to long term, the discounter
format provides the Group with a powerful
additional growth driver in Russia as we are able
to expand into both city neighbourhoods and in
urban locations utilising our small store footprints.
In 2017 we plan to open more than 20 new DA!
discounter stores. We will continue to improve
the product mix, focusing on the quality of
our private label brands, as well as improving
the overall in-store shopping experience for
our customers.
50%
OF TURNOVER
is private label products
+64.1%
+64.1
%
yoy
yoy
DISCOUNTERS LFL REVENUE
Performance
In September 2015, we launched our new discounter
store format under the DA! brand. The hard discounter
store format is well-established in Western and Central
Europe, but today it is still unique and innovative to
the Russian market. As of 31 December 2016, O’KEY
now operates 54 discounter stores located in Moscow
and the surrounding regions.
In 2016, we continued to develop our discounter
business segment in line with our strategic plans.
We have put a considerable emphasis on improving
the product range (PLs, branded products, in-outs)
continually adjusting it to the needs of our customers.
As a result of these changes, we have seen a growing
popularity in our private labels brands resulting
in the overall success of the discounter concept.
We are pleased to report that LFL revenue in our
discounter segment grew by an impressive 64.1% in
the fourth quarter, with the traffic and average ticket
increasing by 36.4% and 20.4%, respectively. We see
a further strengthening of this trend in Q1 2017 and
are very pleased with the overall performance.
Our unique value proposition
We believe that we managed to develop a unique
concept for the Russian market, which has been
already recognised by the consumer. Everyday low
prices, high quality products and an excellent shopping
experience are a part of our DNA. We achieve
it through:
Carefully selecting our private label producers
to ensure the best possible quality.
THe high share of private labels allows us to offer
the best prices to our customers.
Our own logistics which allow us to have a 100%
centralisation level with daily deliveries of fresh
products to all of our stores.
THe lowest in-store operating costs due to the low
number of SKUs and efficient route planning.
Our modern design and well trained personnel
create an excellent shopping experience.
17
Annual Report 2016 Overview
Corporate Governance
Financial Statements
Strategic Report
Strategic Report
UNDER O’KEY PRIVATE
LABEL BRAND MORE THAN
18
18
Operational Review
PRIVATE LABEL RELAUNCH
IN HYPERMARKETS AND SUPERMARKETS
Over the last few years, O`KEY Group commenced a private label brand
relaunch project covering mainly food categories.
The first step was to launch the “That’s What You
Need!” brand (November 2015) in the low price tier.
This initiative was followed by an O’KEY private label
brand line-up in the middle price segment (April 2016).
Currently there are 1,000+ SKUs under both brands.
In 2016, we significantly strengthened our supplier
base to include market leaders as well as the most
popular local producers in the regions. This is a key
element of our strategy as we look to grow our
margin in this segment and maintain traffic by
offering the best value for money proposition to
our customers. We believe that our key competitive
advantage is the price-quality ratio we are able to
offer: our own private label products are not burdened
with advertising and other marketing costs, so they
are 20-30% cheaper than branded alternatives; this
provides more choice for our customers and promotes
healthy competition on the shelf. Our plan is to double
the share of private label brands in the coming year,
including non-food categories.
We have implemented a special quality control
programme “Trademark O’KEY – Customers`
Guarantee” as a part of our quality control system
for products and goods under our private label.
The programme includes testing both production
facilities as well as samples in independent accredited
laboratories.
Local suppliers and local producers
O’KEY actively cooperates with local suppliers and
producers to expand its local range of produce.
The company practices this approach in all regions of
operations, implementing our programme of “retail
chain – federal, products – local”.
In 2016, we held fairs at our Krasnodar and Ufa
stores to promote local produce, where around
a hundred regional producers across a wide range
of food categories participated. The fairs attracted
a significant number of customers who were given
the opportunity to sample local products and benefit
from special price.
In May 2016, O’KEY organised a trade and
procurement conference for producers of the
Republic of Bashkortostan. We aim to offer a clear
and transparent approach to all our suppliers. We are
very interested in potential new regional partners
and local producers, especially in the popular fresh
and ultra-fresh product categories. In August 2016,
O’KEY participated in a meeting with leading national
chains and manufacturers in the Saratov region.
We are convinced that the trend of “local consumer
patriotism” will continue to increase.
125 contracts
SIGNED
with producers in the regions
Award
At the Third International Exhibition
PRIVATE LABEL AWARDS
(organised by IPLS) O’KEY received
the award for Best Private Label
Brand in the Food Segment.
WINNER
19
Annual Report 2016
Overview
Corporate Governance
Financial Statements
Strategic Report
Strategic Report
5.4 MLN VISITORS
OF ONLINE STORE IN 2016
20
20
Operational Review
ONLINE SHOPPING
We see a growing trend in online shopping in Russia, our
online store and a new mobile app take full advantage of this
by making the online shopping experience more intuitive,
quicker and more convenient.
Performance
In 2016, we continued to implement our strategy of
using the latest technology to give our customers new
shopping channels and experiences while continuing to
grow our revenues.
In the reporting period we benefited from the results
of our investment in online shopping to date, with
sales for the year in this segment increasing tenfold to
RUB 661 million, compared to 2015. The total number
of online orders also showed a similar increase, while
our online customer base grew to 99,500 people.
During 2016, O’KEY delivered 1,453 tonnes of
products via the online channel.
During 2016, we significantly expanded our delivery
zones, which now include the whole of the Moscow and
St Petersburg urban areas. As at the end of the year
we offered five “click and collect” pick-up points in
Moscow and four in St Petersburg. Another important
step, which we took in 2016, was the launch of our
new mobile online shopping app for iOS and Android
devices, designed to make the whole online shopping
experience more convenient and less time-consuming.
Our advantages
Our Online Shopping platform is based on the latest
state-of-the-art IT solutions.
1,453 tonnes
DELIVERED
compared to 126 tonnes in 2015
500,000
CUSTOMERS
the average number of visits per month
Large product range offered via the online channel
of up to 25,000 SKU.
Award
Online orders are fulfilled by the closest
hypermarket to the customer, while customers can
choose whether to receive their order via “click and
collect” at a nearby pick-up point or by using our
home delivery service.
In 2016, our Online Shopping
platform received the Global
CIO “Project of the Year
Award” for the second year
in a row in the Retail and
Distribution category.
21
Annual Report 2016 Overview
Corporate Governance
Financial Statements
Strategic Report
Operational Review
SUPPLY CHAIN TRANSFORMATION
IN HYPERMARKETS AND SUPERMARKETS
Over the last two years O’KEY has completely transformed
its hypermarket and supermarket supply chain by increasing
the centralisation rate from 10% to 40%.
Our advantages
Our new approach allows the Group to:
decrease inventory turnover and working capital
management;
reduce the shrinkage rate through tight control
over the supply chain;
improve commercial margin;
improve on-shelf availability;
reduce administration costs at the store level; and
reduce storage space in stores.
Group evolved from relying on six small distribution
centres to the establishment of one federal and
two regional distribution centres which better serve
our needs.
We have achieved a notable improvement in
efficiency during 2016, by implementing a new
category management system which is unique to
the Russian market.
The high quality of our distribution centres, the high
percentage of our own staff and our outsourcing fleet
guarantee that fresh products are delivered from
the moment of order to our stores within 18 hours.
22
• Fast logistics
• Up to 30 days
Centralisation rate, %
60
12-18 hours between order
and delivery to store for
Fresh categories
Maximum time products spend
in the distribution centres and
stores
• Inventory – smart
• 40%
management
Сentralisation
10
40
22
split of categories of goods
by supplier between DCs and
stores
level in 2016
2014
2015
2016
2017(plan)
St Petersburg
Moscow
OPENED IN 2015-2016
28 K m2
OPENED IN 2016
52 K m2
Novosibirsk
23
Annual Report 2016 Overview
Corporate Governance
Financial Statements
Strategic Report
Strategic Report
FINANCIAL REVIEW
RUB million
Revenue
Gross profit
Gross margin
EBITDA
EBITDA margin
EBITDA net of discounters
EBITDA margin net of discounters
EBITDA of discounters
Net (loss)/profit
2016
2015
Year-on-year change, %
175,471
40,209
22.9%
9,253
5.3%
11,845
7.0%
(2,592)
(138)
162,510
38,367
23.6%
10,109
6.2%
11,672
7.2%
(1,563)
1,918
8.0%
4.8%
–0.7 p.p.
–8.5%
–0.9 p.p.
1.5%
–0.2 p.p.
65.8%
–107.2%
Revenue
In 2016, the Group revenue increased by 8.0% year-on-
year with LFL revenue rising by 2.2%. The LFL revenue
growth was primarily attributable to a 0.9% increase
in the average LFL ticket due to inflation and a 1.2%
increase in LFL traffic despite significant changes in
customer behaviour driven by the deterioration in
macroeconomic conditions, the decline in disposable
incomes and intensifying competition.
To address the deteriorating macroeconomic conditions
and intensifying competition, we launched a turnaround
strategy in the summer of 2015 aimed at responding
to our customers' changing demands. As a result, during
2016 we made great progress in re balancing our product
range as well as streamlining marketing efforts to drive
traffic to our stores. During the year, the Group continued
to strengthen its presence with a focus on the most
resilient markets. Selling space rose 5.1% in 2016 to
623,000 m2 following the opening of four hypermarkets,
one supermarket and 19 discounter stores.
Sales Performance
Retail revenue growth, %
Traffic growth, %
Avg. Ticket growth, %
Trade revenue FY 2016
Trade revenue LFL FY 2016
7.6%
2.2%
9.3%
1.2%
–1.7%
0.9%
Cost of goods sold and gross profit
The cost of goods sold increased 9.0% in 2016 to RUB 135,261 million. In the table below, we provide further
detail on the cost of goods sold for 2016 and 2015:
RUB million
Revenue
Cost of goods sold, including
Cost of trading stock (less supplier bonuses)
Inventory shrinkage
Logistics costs
Packaging and labelling costs
Gross profit
24
2016
% percentage
of revenue
2015
% percentage
of revenue
175,471
(135,262)
(128,800)
(2,867)
(2,771)
(824)
40,209
100.0%
77.1%
73.4%
1.6%
1.6%
0.5%
22.9%
162,510
(124,143)
(117,724)
(3,391)
(2,214)
(814)
38,367
100.0%
76.4%
72.4%
2.1%
1.4%
0.5%
23.6%
Gross profit increased 4.8% to RUB 40,209 million
in 2016, compared to RUB 38,367 million in 2015.
However, the overall gross margin contracted by
0.7 percentage points in 2016 to 22.9% due to
better customer value proposition and the effect of
the lower gross margin in the developing discounter
format (compared to hypermarket and supermarket
segment). Total logistics costs rose by 25.2% in 2016
to RUB 2,771 million compared to 2015 as a result of
the ongoing logistics centralisation and the continued
expansion of the discounter format, however, net
logistics costs (including discounts from suppliers
included in cost of trading stock) stayed at the same
level year-on-year. Shrinkage costs in 2016 fell by
15.5% to RUB 2,867 million compared to 2015 due
to tighter controls over both purchasing and writing-
off of goods.
General, selling and administrative expenses
RUB million
2016 % percentage
of revenue
2015 % percentage
of revenue
Change, p.p.
Personnel costs
Operating leases
Depreciation and amortisation
Communication and utilities
Advertising and marketing
Repairs and maintenance costs
Security expenses
Insurance and bank commission
Operating taxes
Legal and professional expenses
Materials and supplies
Other costs
Total general, selling
and administrative expenses
(16,185)
(5,344)
(4,550)
(3,486)
(1,795)
(1,183)
(825)
(737)
(713)
(603)
(302)
(41)
9.2%
3.0%
2.6%
2.0%
1.0%
0.7%
0.5%
0.4%
0.4%
0.3%
0.2%
0.0%
(14,989)
(4,728)
(3,838)
(3,047)
(1,651)
(940)
(740)
(687)
(759)
(660)
(300)
(33)
9.2%
2.9%
2.4%
1.9%
1.0%
0.6%
0.5%
0.4%
0.5%
0.4%
0.2%
0.0%
(35,764)
20.4%
(32,371)
19.9%
0.0
0.1
0.2
0.1
0.0
0.1
0.0
0.0
–0.1
–0.1
0.0
0.0
0.5
Personnel costs
The Group’s general, selling and administrative
expenses grew by 10.5% year-on-year to
RUB 35,764 million in 2016, which was primarily
attributable to an increase in D&A resulting from
expansion of discounter stores and the opening of new
owned hypermarkets and supermarket and the higher
lease expenses of discounter format. Another reason
is an increase in communication and utilities mostly
due to adding new stores and increased utilities’ tariffs.
As a percentage of revenue, the Group’s general,
selling and administrative expenses increased by
0.5 percentage points to 20.4% in 2016.
Although personnel costs grew 8.0% year-on-year to
RUB 16,185 million in 2016, they remained stable
as a percentage of revenue compared to the prior
year. This was a result of Group’s continuing focus on
increasing labour productivity in hypermarkets and
supermarkets resulting in the 0.5 percentage points
decrease in personnel costs for this segment as
a percentage of revenue in the second half of the year.
Overall the increase in costs was primarily due to
the expansion of the discounter segment, a 5.2%
increase in average headcount and an increase in
salaries in line with industry trends.
25
Annual Report 2016 Overview
Corporate Governance
Financial Statements
Strategic Report
Operating leases
Advertising and marketing
The 13.0% year-on-year rise in lease costs in 2016 was
primarily attributable to discounter store lease payments
following the launch of this new format in September
2015, and which therefore, only operated for part of
the year, as well as the impact of the depreciation of
the rouble on lease payments of some stores which
were linked to the US dollar and euro.
Advertising and marketing costs increased by 8.8%
in 2016 but remained stable as a percentage of
revenue compared to the prior year despite the Group
renewing its hypermarket concept and implementing
new promotional activities such as personalised
communications. In addition, the increase in costs was
due to the new discounter stores’ marketing activities.
EBITDA of the segments
RUB million
EBITDA
EBITDA margin
EBITDA net of discounters
EBITDA margin net of discounters
EBITDA of discounters
2016
9,253
5.3%
11,845
7.0%
(2,592)
2015
Year-on-year change, %
10,109
6.2%
11,672
7.2%
(1,563)
–8.5%
–0.9 p.p.
1.5%
–0.2 p.p.
65.8%
EBITDA net of discounters increased by 1.5% year-on-
year to RUB 11,845 million in 2016, with the EBITDA
margin net of discounters reaching 7.0% of revenue.
The negative EBITDA of the discounters rose by
65.8% in 2016, although the Group considers this to
have now peaked with a significant improvement in
EBITDA now expected in this and future years.
Financing costs
Financing costs increased by 4.0% to RUB 3,550 million
in 2016. The Group’s average loan portfolio
(consolidated debt stood at RUB 36,295 million as of
31 December 2016 compared to RUB 35,558 million on
31 December 2015) did not change significantly (+2.1%
vs 2015) and the Group’s weighted average interest rate
decreased to 11.0% in 2016 from 12.5% in 2015 due
to the successful refinancing of approximately 65% of
the loan portfolio.
Net (loss)/profit for the year
Net profit fell by 107.2% year-on-year to register a loss
of RUB 138 million in 2016 which was primarily due to
the expansion of discounter format and costs associated
with it. The decline in net profit was also caused by
one-off expenses. The Group is making a considerable
progress to improve business efficiency which led to
the closure of one hypermarket and five supermarkets
during the year. As a result, the loss from the disposal
of other non-current assets relating to stores and
land plots in Moscow and other regions amounted
to RUB 568 million (compared to RUB 126 million
in 2015). There was also an impairment charge of
RUB 434 million, which mainly related to several stores
in the regions.
In 2016, the Group did not benefit from any
tax reimbursements and realised a tax expense
in the amount of RUB 409 million. Whereas in
2015, the Group realised an income tax benefit
of RUB 16 million due to a tax reimbursement of
RUB 702 million in relation to 2013 and 2014.
26
Cash flow and working capital
RUB million
Net cash from operating activities
Net cash used in investing activities
Net cash used in financing activities
Net increase in cash and cash equivalents
Effect of exchange rate fluctuations on cash and cash equivalents
2016
11,673
(5,413)
(4,529)
1,730
(35)
2015
9,140
(2,332)
(2,884)
3,924
34
Cash flows from operating activities
In 2016, operating cash flow was negatively impacted
by a decline in the gross margin while working capital
demonstrated positive dynamics. As a result, net
cash from operating activities increased by 27.7%
to RUB 11,673 million in 2016. Cash receipts from
customers grew by 7.7% during the year in line with
the revenue increase.
Cash flow used in investing activities
Net cash used in investing activities increased from
RUB 2,332 million in 2015 to RUB 5,413 million in 2016
mainly due to significant asset sales in 2015. In 2016,
investments net of proceeds from sales of property,
plant and equipment and intangible assets decreased
from RUB 8,621 million to RUB 6,331 million.
Cash flow used in financing activities
Proceeds from new loans and borrowing, less
repayments, reached RUB 1,018 million in 2016 as
the Group made significant repayments during the period.
RUB million
Total debt
Short-term debt including interest accrued on loans
Long-term debt
Less cash and equivalents
Net debt
Net debt/EBITDA
In addition, dividend payments decreased by 10.4%
from RUB 1,644 million in 2015 to RUB 1,472 million
in 2016.
Working capital
As of 31 December 2016, the Group’s working capital,
defined as current assets (excluding cash and cash
equivalents) less current liabilities (excluding short-term
loans), was a negative RUB 12,734 million compared
to negative RUB 8,023 million as at the end of 2015.
This reflects the Group’s achievements in terms of
improving both stock levels and the overall efficiency
of logistics. Working capital figures in the food retail
industry are usually negative, and the Group intends to
maintain a negative working capital position.
The Group considers the net debt/EBITDA ratio as
the principal means of evaluating the impact on its
operations of the size of the Group’s borrowings.
As of 31 December 2016, O’KEY’s net debt/EBITDA
ratio was 2.7x.
Year ended
31 December 2016
Year ended
31 December 2015
36,295
4,622
31,673
11,463
24,832
2.7
35,558
12,000
23,558
9,768
25,790
2.6
27
Annual Report 2016 Overview
Corporate Governance
Financial Statements
Strategic Report
Strategic Report
CORPORATE SOCIAL RESPONSIBILITY
At the core of O’KEY’s HR Policy is the development of
a culture within the Company which focuses on a continued
drive towards competitiveness and growth through effective
human capital management*.
The HR policy is accordingly focused on two key areas:
to attract the best of the best and retain talented
employees within the Company.
Corporate culture
In 2016, we began to transform our corporate culture
based on increasing employee engagement and
efficiency. As a first step in this process, we refocused
our corporate values on business fundamentals.
The next step involved implementing a number of HR
initiatives designed to improve performance across
all business units, both retail stores and executive
support functions. This initiative has resulted in lower
staff turnover and more performance-oriented staff.
We believe that a focus on raising both employee
engagement levels and performance, will translate into
much higher levels of customer service in our stores
which in turn contributes to the improved operational
performance of the business. In essence, we believe
that “A happy employee means a happy customer”.
Innovativeness
Outstanding
results
OUR VALUES
Effective
team
Impeccable
service
Atmosphere of
professionalism
Employee engagement
During 2016, all business divisions were focused on
improving the Company’s operational performance,
which would have been impossible without
an improvement in employee engagement. In order to
better monitor and manage employee engagement,
we carried out an employee survey for the first
time last year. Approximately 20,000 employees, or
about 80% of the Company’s staff, took part and
we were encouraged by the results which found that
employee engagement at O’KEY is comparable to
the average for Russia’s Food Retailing industry as
a whole. Accordingly, we then developed an Employee
Engagement boost plan which we have rolled out
throughout the Company both by department and
by store.
Internal communications
The Company adheres to the principles of openness
and transparency in order to create a positive
working environment for our employees. All our
internal communications serve as a guide for our
new corporate values, allowing us to communicate
our acceptable standards of employee behaviour and
business organisation principles. We strive to reach
out to every one of our employees through a range
of proactive internal communication channels aimed
at involving our employees in the everyday life of
the Company. Next year we are planning to expand
our communication channels by making more use of
various digital tools of communication.
During 2016, we held a number of employee
engagement boost events in order to encourage
every division to work on improving the engagement
rate in 2017. We have developed new formats for
promoting internal strategic discussions, such as
a new ‘Leadership Forum’ and the introduction of
cross-functional meetings, which have created an open
platform to address specific operational issues.
28
* The consolidated HR profile refers to hypermarket and supermarket segment.
OKEY also participates in industry-wide retail
events and thus in June 2016, we celebrated
the 50th anniversary of the professional retail
industry in Russia by participating in the first-ever
industry-wide “retail” race, “Towards customers
2016”. The five-kilometre race involved more
than 2,500 participants from leading retailers
across the country while O’KEY’s running team
consisted of 50 employees from our stores
in 17 different cities. Thanks to their brilliant
enthusiasm and team spirit, the O’KEY team came
overall second in the event.
Health and safety
We are committed to providing our customers with
a safe shopping environment and our employees with
safe working conditions. As part of our Health and Safety
monitoring process, we conduct regular audit of our store
and work sites to ensure they are in full compliance with
Russian legislation governing workplace safety.
We have also developed and implemented integrated
systems for the regular tracking of working conditions
and for logging all accidents and injuries, in line with best
international practices. We have a systematic approach
for investigating any accidents involving our employees
or customers. Our employees are trained in work safety
in accordance with the highest professional standards.
Thanks to this approach, the number of work-related
injuries in 2016 continued to fall compared to the prior
year. We also achieved significant results in terms of
the reduction in the occupational injury rate, which fell by
22% in 2016.
Personnel Structure and Headcount
Our recruitment policy is designed to attract people of
all ages and nationalities, beliefs and gender to work in
the Company. We aim to attract potential employees with
experience and knowledge who will contribute to achieving
outstanding results for the Company. As such our
recruitment policy focuses on finding the best experience
in the market, enriching our culture and traditions.
There are currently more than 24,000 employees in
the segment, mostly employed in the food retail division,
and approximately 70% of these are women. O’KEY’s
employees form a young and dynamic team, 43% of our
employees are under 35 years old.
Retaining the talented
We understand that ensuring excellent customer
service is inextricably linked to maintaining a high
level of permanent and, therefore, fully trained staff
in our stores. In 2016 we achieved significant results
in maintaining high levels of permanent staff and
consequently reducing the level of staff turnover.
This has resulted in a 20 percentage-point reduction
in staff turnover in our stores from 65% in 2015 to 44%
in 2016.
The low staff turnover rate has also boosted the overall
percentage of trained staff from 74% of all staff at
the end of 2015 to 96% by the end of December 2016.
This has had a very positive impact on the business,
where not only have our stringent operational standards
been consistently met but we have also achieved
excellent levels of customer service as evidenced by
our highest-ever Mystery Shopping score of 94%.
Clearly training & development, as well as improved
employee engagement, can deliver outstanding results.
In line with transforming our corporate culture to focus
more on business performance, we have re-oriented our
training and development system, increasing the use of
digital training programmes and focusing on improving
employee performance. We no longer carry out “face-
to-face training” and have instead switched to a new
“blended learning” approach. In May 2016, we launched
O’KEY Academy, our new E-learning facility which now
satisfies all our basic training needs for retail staff. It has
reduced the amount of time an employee needs to
spend on basic training, allowing the employee to gain
the same practical skills which are then practiced with
a mentor afterwards.
29
Annual Report 2016 Overview
Corporate Governance
Financial Statements
Strategic Report
Corporate personnel training
and development system
O’KEY ACADEMY
35 training courses
46 tests
for management and personnel efficiency
improvement have been developed
>27,000
OF EMPLOYEES
upgraded their skills
For newly-hired employees we have developed
an introductory a training programme called “School for
Beginners“, where employees learn the basic skills to
perform their duties. There are group training sessions
for all new employees, including a “welcome” training
session, merchandising standards training and an “O’KEY
Style Leader“ training session. Approximately 96%
of our new-hires who have joined the Company since
July 2016, have completed the “School for Beginners“
training programme. In October 2016, we also launched
an updated mentoring system.
In 2016, we also launched a programme whereby
suppliers were invited to train our staff. This involved
the development of special product courses showing
employees how to provide the best advice to customers
when choosing products such as fish, meat and beer etc,
while some “live” training on beauty products was also
provided.
Compensation and benefits
Building and maintaining O’KEY’s remuneration system
is one of the key focus areas of our HR strategy in terms
of being able to attract and retain the best talent in
the industry.
30
In order to increase the productivity of employees
in our stores, distribution centres and warehouses,
in 2016 the Company made significant changes to
its remuneration system. We aim to ensure that we
offer competitive salaries to our employees through
the regular indexation of wages and, for example,
in 2016 the average salary in the company increased
by 8.9%.
O’KEY cares for the welfare of all of our employees,
providing them with a range of extra benefits in addition
to the mandatory package of social security benefits
provided under Russian legislation. For example,
O’KEY offers its employees extra benefits such as
supplementary medical insurance, subsidised access
to gym and sports facilities and, if required, access to
emergency financial aid.
Corporate whistle-blowing policy
To establish an atmosphere of transparency, confidence
and trust, and ensure that our employees comply
with our values and corporate culture, in 2016 we
implemented a corporate whistle-blowing policy.
The spectrum of issues covered under this policy includes
breaches of ethics, issues relating to the Labour Law of
the Russian Federation, interaction between colleagues
and management and staff cooperation issues.
Preventing Corruption
We have put in place clear policies to prevent corruption
in our business as well as to detect and avoid potential
conflicts of interest. The O’KEY Group has a ‘zero
tolerance’ policy towards corruption. This is applied
rigorously to our internal processes and is enshrined
in our contractual relationships with suppliers.
Our managers adhere to strict policies regarding gifts
and discounts. We maintain a confidential whistle-blower
e-mail address for reporting potential conflicts to our
internal audit and security departments. Also any person
may use the call-centre to complain.
In addition to existing procedures, we have taken
additional measures to prevent future violations.
Throughout 2016, our efforts focused on continued
awareness building, training both managers and
employees to identify potential instances of corruption
or conflicts of interest and making them aware of
the resources available for reporting these issues
without fear of negative repercussions.
O`KEY and local communities
Food aid
O’KEY endeavours to be a significant contributor to
the local communities in which we operate, as well as to
the Russian economy and society in general. Our stores
operate in more than 30 cities and towns across
Russia, including metropolitan areas as well as smaller
towns with under a thousand inhabitants. We employ
thousands of people, a responsibility which we take very
seriously, as they and their families depend on us, the
successful execution of our strategy and our business
performance, for their livelihoods.
O’KEY has built an integrated programme of both
charity and social investment designed to align
the Group’s objectives with addressing the broader
social problems of the local communities in which we
operate. This approach involves working together with
local authorities, business partners, non-governmental
organisations and our customers for the benefit of local
communities as a whole.
In line with our mission, we place particular emphasis on
targeted assistance and support programmes helping
orphans and children lacking parental care, as well as
large families with five or more children.
Our key areas of charitable activity:
Holistic support of large families, designed to improve
their financial position.
Support for gifted children lacking parental care.
Support of educational programmes for children
in orphanages.
Supporting vulnerable population groups
We consider it our responsibility, as one of Russia’s
leading food retailers, to ensure, to the best of our
ability, that vulnerable sections of society have access
to basic food products at affordable prices. For several
years now, we have been offering holders of state social
cards, additional discounts at our stores in Moscow,
the Moscow region and Saint Petersburg as well as in
Krasnoyarsk and Murmansk, and we plan to continue
this practice going forward. In the mentioned above
regions veterans, pensioners, schoolchildren, students
and pregnant women enjoy a 3-5% discount, making
purchases at our stores. In the Moscow Region, we
also provide discounts to social workers caring for the
disabled.
In December 2016, O’KEY, in partnership with the Charity
Foundation “Place under the Sun”, launched a charity
project ‘Kind Purchase’ to collect food and basic items and
provide for vulnerable families across the Leningrad Region.
This project became the first step of our charity campaign,
planned for the year of 2017.
Within the seven days of this event over 1,000 of our
customers donated more than 600 food packages, toys
and sweets to low-income families and families raising
children with disabilities, through seven of our St Petersburg
hypermarkets, which were involved in the project. Food aid
before the New Year celebration was provided to more than
700 families in the wider Leningrad region.
Treatment support
We keep being a partner of the St Petersburg charitable
organisation, helping children and adults suffering from
cancer – AdVita. O’KEY has been supporting this foundation
for more than three years organising different campaigns
in our stores in St Petersburg to raise funds and placing
donation boxes next to our check-outs for our customers
to be able to help those who suffer. AdVita supports
the leading medical institutions in St Petersburg, and all
the collected in the stores money via this organisation is
given to those people, who fight cancer.
Festival “Step towards!”
In May 2016, the annual international creative festival for
children and youth with disabilities “Step towards!” was
held in St Petersburg for the ninth time. Over four years of
collaboration with the festival, we have seen thousands
of talented children participate in a variety of prestigious
competitions with the “Step towards!” festival becoming
a springboard towards new achievements and creative
successes. The festival brought together 350 participants
from 32 regions in Russia as well as from foreign countries.
Volunteering
We are particularly proud that many of our charitable
projects have grown out of initiatives started by our
employees. We believe it is crucial to foster and support
this passion through our efforts locally. In St Petersburg, for
example, our employees are driving a major programme to
provide goods to orphanages, NGOs and religious charitable
organisations helping children. In 2017 this initiative will
be supported and the number of the aid recipients will
definitely grow.
31
Annual Report 2016 Overview
Strategic Report
Financial Statements
Corporate Governance
Corporate Governance
CORPORATE GOVERNANCE SYSTEM
O’KEY Group S.A. is a company incorporated under
the Laws of the Grand Duchy of Luxembourg with
Global Depositary Receipts (GDRs) listed on the London
Stock Exchange, and as such is not required to comply
with the UK Corporate Governance Code.
O’KEY Group is committed to managing and conducting
its operations in accordance with applicable regulations
of Luxembourg and the London Stock Exchange.
We recognise our obligation to our shareholders to adopt
appropriate standards of governance and control both at
the Board level and within our management teams and
aim to establish and support a corporate governance
framework that is necessary for development of
our business and meets the requirements of our
shareholders.
KEY ELEMENTS OF
OUR CORPORATE GOVERNANCE POLICY INCLUDE:
Appointing individuals with relevant skills and
experience to our Board of Directors and its
committees with knowledge of the Group and its
business to enable them to discharge their respective
duties and responsibilities effectively.
The Board is responsible for taking key decisions
relating to the Group strategy and strategic direction.
The Board exercises oversight of the Group’s internal
control and risk management procedures.
The Board is supplied in a timely manner with
information in a form and of a quality appropriate to
enable it to discharge its duties.
The Group 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.
BOARD OF DIRECTORS
The Company’s Board of Directors plays the key role in
organising an efficient corporate governance system.
The Board is vested with the broadest powers to
manage the business of the Company and to authorise
and perform all acts of disposal and administration falling
within the purposes of the Company.
The Board is responsible for taking the strategic
decisions in respect of operation and development of
the Group, as well as overseeing the risk management
and internal audit function of the Group. The decisions
related to the day-to-day operations of the Group
a delegated to the management (on our management
team see page 35 of the Report).
The Board is also a management body of
O’KEY Group S.A. and is authorised to take all
decisions in respect of O’KEY Group S.A. unless they
are reserved for the General Meeting. The Board is not
authorised to issue or buy back shares. The repurchase
by the Company of its own shares is subject to
the conditions set out in the Company Law and
the Articles.
There are five members of our Board, including
one independent director. 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 elected1.
Our current Board of Directors was elected at
the General Meeting of Shareholders held on
13 October 2015.
1. The rules governing the appointment and replacement of the Directors are set out under the Law of 10 August 1915 on Commercial Companies,
as amended, and the Articles (in particular Articles 8, 15 and 16). The consolidated version of the Articles is published under the Shareholders section on
http://okeyinvestors.ru/shareholder/documents/
32
MEMBERS OF THE BOARD OF DIRECTORS OF O’KEY GROUP S.A.
AS AT 31 DECEMBER 2016:
DMITRII TROITSKII
Director
Member of
the Remuneration
Committee
BORIS VOLCHEK
Caraden Director
Member of the Audit
and Remuneration
Committee
DMITRY KORZHEV
Director
Member of the Audit
Committee
MYKOLA BUINYCKYI
Independent Director
Сhair of the Audit
Committee
HEIGO KERA
Group Chairman and
CEO of Hypermarket
and Supermarket
Segment, Member
of the Audit
Committee, Chair of
the Remuneration
Committee
Born in 1966
Born in 1965
Born in 1966
Born in 1964
Born in 1950
Boris graduated
from the Leningrad
Institute of Railway
Engineers, now known
as the St Petersburg
State University of
Communications,
and holds a degree in
engineering.
Boris was elected as
a Member of the Group’s
Board of Directors
on 30 June 2010,
with effect from
13 July 2010, re-elected
on 28 October 2013
and 13 October 2015,
effective from
the same date.
Boris indirectly owns
28.02% of the shares of
O’KEY Group S.A.
Work 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 St Petersburg
Automobile Museum.
Dmitry graduated
from the Leningrad
Shipbuilding Institute,
now known as
the State Marine
Technical University of
St Petersburg, and holds
a degree in engineering.
Dmitry was elected as
a Member of the Group’s
Board of Directors
on 30 June 2010,
with effect from
13 July 2010, re-
elected on 28 October
2013 and 13 October
2015, effective from
the same date.
Dmitry indirectly owns
approximately 23.49%
of the shares of
O’KEY Group S.A.
Work experience
From 2005 until
April 2010, Dmitry
served as a Member of
the Supervisory Board of
Bank Saint Petersburg.
Heigo is a graduate of
the Tallinn Technical
University (Estonia)
and holds a degree in
economics.
Heigo was elected as
a Member of the Group’s
Board of Directors
on 30 June 2010,
with effect from
13 July 2010, re-elected
on 28 October 2013
and 13 October 2015,
effective from
the same date.
Work experience
Heigo was appointed
Chief Executive Officer
of O’KEY Group effective
1 May 2015. Heigo has
been the owner and,
since 2008, a Member
of the Board of Directors
of Silverko Consult
OU, an Estonian
consulting group with
an international client
base. From 2008,
he worked as Retail
Projects Manager with
HT Project Management
OU, where he was
responsible for launching
a gourmet supermarket
in Ukraine. Prior to that,
from 2002 until 2008,
he provided private
consultancy services,
including research on
retail markets in Belarus,
Kazakhstan and China.
Dmitrii graduated
from the Leningrad
Shipbuilding Institute,
now known as
the State Marine
Technical University of
St Petersburg, and holds
a degree in engineering.
Dmitrii was elected as
a Member of the Group’s
Board of Directors
on 30 June 2010,
with effect from 13
July 2010; he was
re-elected on
28 October 2013 and
13 October 2015,
effective from
the same date.
Dmitrii indirectly owns
approximately 23.49%
of the shares of
O’KEY Group S.A.
Work 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.
There were no changes in the membership of the Board of Directors compared to 2015.
Mykola graduated from
Edinburgh University
in the UK and is also
a fellow of the Chartered
Institute of Management
Accountants and
a Member of
the Institute of
British Management.
He holds a joint diploma
in management
accounting.
Mykola was elected as
a Member of the Group’s
Board of Directors
on 13 October 2015.
He also served on the
Board in 2010-2013.
Work experience
His experience includes
over 35 years in
international financial
management and over
20 years’ experience
in Russia. Before
working in Russia,
he spent seven years
as a management
consultant with Coopers
& Lybrand. Prior to that,
he worked for several
years in senior financial
management positions
in the oil support
services, construction,
IT and retail sectors.
In addition, he has
experience in corporate
finance including
investment appraisals,
raising funds on public
and private equity and
debt markets, as well as
dealing with international
financial institutions,
banks and ratings
agencies.
33
Annual Report 2016 Overview
Strategic Report
Financial Statements
Corporate Governance
MEETINGS OF THE BOARD OF DIRECTORS
Meetings of Board of Directors are held regularly
in compliance with the approved work schedule for
the year. The Board’s work schedule is determined on
the basis of strategic planning and the reporting cycle.
Whenever an urgent matter needs to be considered
Extraordinary Board meetings are organised, or, if
a personal meeting cannot be organised due to short
notice, the Board can adopt a circular resolution
by a unanimous vote. It is the Board Chairman’s
responsibility to determine the Board’s work plan and
to include additional items in the plan.
Participation of Board members in meetings of
the Board of Directors and its Committees in 2016
Member
HEIGO
KERA
DMITRII
TROITSKII
DMITRY
KORZHEV
BORIS
VOLCHEK
Board of
Directors
(3 meetings)
Audit
Committee
(5 meetings)
Remuneration
Committee
(1 meetings)
3/3
5/5
1/1
By proxy,
3/3
Not
a member
3/3
5/5
By proxy,
3/3
By proxy,
5/5
By proxy,
1/1
Not
a member
By proxy,
1/1
Not
a member
MYKOLA
BUINYCKYI 3/3
5/5
COMMITTEES OF THE BOARD OF DIRECTORS
The main role of the Committees is to provide assistance
to the Board in preparing and adopting decisions in
its respective functional areas, as well as to ensure
that matters brought for consideration by the Board
of Directors are scrutinised prior to Board meetings.
The meetings of the Committees usually take place
before the Board meeting. Board Committees have
broad procedural powers, may engage independent
external experts, obtain any information from
the Company’s executive management that falls within
their remit and may use any other Company resources,
as well as set tasks for the Company’s management.
There are two committees on the Board of Directors,
the Audit Committee and the Remuneration Committee.
The composition and the key responsibilities of
the Board’s committees are described below.
Audit Committee
The Audit Committee oversees the internal audit
function, the effectiveness of risk management
and the internal controls of the Company
and the Group, and approves and monitors
the performance of the internal audit plan for the year.
The Audit Committee reviews and assesses the
integrity of the Company’s annual and half yearly
financial statements. In relation to the external Audit,
the Audit committee: monitors the External Auditor’s
independence, issues recommendations to the Board
as to the appointment of the external auditor, monitors
the management letter and recomendations of
the external auditor to management and follows-up
open items with management, and plans and agrees
the scope of of the audit of financial statements for
the year with the External Auditor.
The Audit Committee comprises four Board members:
Mykola Buinyckyi (Committee Chairman), Boris Volchek,
Dmitry Korzhev, Heigo Kera and two non-directors:
Ilya Ilin, Alvidas Brusokas.
Remuneration Committee
The responsibilities of the Remuneration Committee
include reviewing compensation policy, making proposals
to the full Board of Directors regarding the remuneration
of Executive Directors and management, and advising on
any benefit or incentive schemes. The Board of Directors
determines the remuneration and any bonuses paid to
the Chief Executive Officer of O’KEY Group.
The Remuneration Committee includes three Board
members: Heigo Kera (Committee Chairman),
Boris Volchek, Dmitrii Troitskii and two non-directors:
Ilya Ilin, Alvidas Brusokas.
34
Corporate Governance
SENIOR MANAGEMENT
O’KEY`s management team consists of experienced professionals, whose expertise and enthusiasm 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 deep knowledge of the Russian marketplace. The team was
further strengthened through the recruitment of selected senior managers in 2016.
HEIGO KERA
CEO of Hypermarket and Supermarket Segment
ARMIN BURGER
CEO of Discounter Segment
Heigo is a graduate of the Tallinn Technical University
(Estonia) and holds a degree in economics.
Armin has a graduate degree in economics from
the University of Freiburg, Germany.
Heigo was elected as a Member of the Group’s
Board of Directors on 30 June 2010, with effect from
13 July 2010, re-elected on 28 October 2013 and
13 October 2015, effective from the same date.
Work experience
Heigo was appointed Chief Executive Officer of
O’KEY Group effective 1 May 2015. He was with
the Group from the very beginning, and was first
employed by the O’KEY Group to provide consultancy
services on the development of a hypermarket format
concept in Russia from 1998 until 2002. Heigo has been
the owner and, since 2008, a Member of the Board
of Directors of Silverko Consult OU, an Estonian
consulting Group with an international client base.
From 2008, he worked as Retail Projects Manager with
HT Project Management OU, where he was responsible
for launching a gourmet supermarket in Ukraine.
Prior to that, from 2002 until 2008, he provided private
consultancy services, including research on retail markets
in Belarus, Kazakhstan and China.
See the next section for
hypermarket and supermarket management team p. 36
In October 2013, Armin was appointed Chief
Executive Officer (‘CEO’) of DA!, the Group’s Discounter
Chain. In his current role he oversees all aspects of
the development of the discounter format, including
operations, the management of real estate, buying,
information technology, human resources, marketing,
public and investor relations.
Work experience
Armin has extensive retail experience in both discount
and other retail formats. Prior to joining O'KEY,
he spent nearly two decades in progressively senior
roles at Aldi in both Germany and the UK, and also at
Hofer KG in Austria. From 2012 to 2013, he was CEO
and a Member of the Supervisory Board of Prakitker
AG, where he managed the company’s restructuring
process. In April 2011, he founded Vienna Estate SE,
an Austrian real-estate developer, and from February
2011 to June 2012, he headed the Supervisory Board of
Vivatis AG, in Austria.
He has a highly experienced team of managers
working with him on further development of
the discounter format.
35
Annual Report 2016 Overview
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Financial Statements
Corporate Governance
HYPERMARKET AND SUPERMARKET MANAGEMENT TEAM
DMITRY PRYANIKOV
Deputy CEO
KONSTANTIN ARABIDIS
CFO
PAVEL TOMANEK
Sales Director
Dmitry graduated from
the Department of Economics and
Management at the Peter the Great
Saint Petersburg Polytechnic
University.
Dmitry was appointed Deputy
CEO of O’KEY Group in
July 2016. He is responsible for
overseeing all business support
functions, including the business
procedures and processes division,
the IT department, the project office,
the legal and insurance department
as well as the internal control and
audit departments.
Work experience
Dmitry has been with O’KEY since
the establishment of the Group.
Initially he served as the Finance
Director of the O’KEY trading
company prior to his appointment
as CFO of the Group. Dmitry’s
leadership of the finance team
was instrumental in achieving our
successful initial public offering (‘IPO’)
on the London Stock Exchange in
November 2010. Prior to joining
O’KEY, Dmitry held various positions
at the Bank of Saint Petersburg and
other private companies from 1995
to 2001.
Konstantin is a graduate of
the Department of Technical
Cybernetics at the Peter the Great
Saint Petersburg Polytechnic
University and of the Department of
Economics at the Saint Petersburg
University. Konstantin is a member
of Association of Chartered Certified
Accountants (ACCA).
Konstantin was appointed
Chief Financial Officer ('CFO') of
the O'KEY Group in July 2016.
In his role, he is focused on
building modern business-oriented
finance function and manages all
related business streams such as
liquidity management, accounting,
controlling, investments and
others. Also, Konstantin oversees
Group’s corporate reporting and
investor relations.
Work experience
Konstantin joined the Group in
January 2012 from PwC where
he was involved in auditing and
consulting projects in various
industries. In O'KEY he was
responsible for a full array of
finance functions and a number of
essential business projects within
the Company.
Pavel graduated from Masaryk
University in Brno, the Czech
Republic, with a degree in clinical
psychology.
Pavel joined O’KEY Group in 2015 as
Sales Director for the Northwest and
Southern regions. In February 2016,
he became Sales Director for all
regions and in this role is responsible
for developing and implementing
the Group’s strategy with regard
to strengthening O’KEY’s market
leadership as well as the operational
management of stores. His role
is focused on growing store
traffic, the development and
implementation of innovative
retail solutions, increasing trade
turnover and EBITDA, and creating
and maintaining strong regional
management teams.
Work experience
Pavel has extensive retail
experience, have worked for
15 years at leading international
retail chains. For example, before
joining O’KEY, he spent three years
at X5 Retail Group and, prior to that
was responsible for operations and
logistics at Lenta and was a regional
director for Tesco in the Czech
Republic.
36
MARC LEBLOND
Supply Chain Director
ELENA POLOZOVA
Human Resources Director
ANTON FARLENKOV
Head of Strategy and M&A
Marc holds a degree in Transport
and Logistics from Val de Marne
University, Paris, as well as
professional development diplomas
in Finance and Accounting.
Marc was appointed as Supply
Chain Director in 2014 to achieve
a step-change in our supply
chain infrastructure and ensure
the success of this transformation.
Work experience
Previously, Marc served as Supply
Chain Director for X5 Retail Group.
Prior to this, he worked as IT &
Supply Chain Director for Orangina
Schweppes. As a seasoned logistics
professional with more than four
decades of expertise, he has also
worked at such companies as
Galeries Lafayette, Carrefour and
Lactalis.
Elena graduated from
the Department of Business and
Management at Lipetsk State
Technical University with a degree
MBA, with a specialisation in Human
Resources, from the Moscow
International Higher School of
Business (‘MIRBIS’).
Elena has headed the Human
Resources (‘HR’) Department for
O’KEY Group since September 2015.
She joined O’KEY in January 2013
and over the following two years
served in various HR management
positions in the Group’s Sales
Department. In her role, she
oversees the Group’s centralised HR
function, which sets the strategy
for developing the Group’s human
capital, as well as introducing
best practices in HR for increasing
employee productivity.
Work experience
Elena is highly experienced with
more than a decade of experience in
HR. Before joining O’KEY, she was
an HR business partner at Magnit,
overseeing its HR processes.
In 2016, Anton was appointed
Head of strategy and M&A.
In his current role, he has
the lead responsibility for
advising the Board of Directors
on determining the strategic
direction of the company and
overseeing the implementation
of its development plan across
formats, as well as broadening
Group’s communications with
the international business and
investment community.
Work experience
Anton joined O’KEY Group from
Goldman Sachs, where he ran
the EEMEA equity research team
and for over 9 years worked as
a senior equity research analyst
covering the consumer, retail and
transportation logistics sectors.
Prior to joining Goldman Sachs
Anton held commercial and
IT related positions in Royal Dutch
Shell (the Netherlands) and Infoshare
(the US).
37
Annual Report 2016 Overview
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Financial Statements
Corporate Governance
HYPERMARKET AND SUPERMARKET MANAGEMENT TEAM
ALLA SYNKO
Commercial Director,
Dry & Drinks, FMCG
OXANA SHULIKO
Commercial Director, Ultra Fresh & Fresh
MAXIM PLATONOV
Commercial Director, Non-Food
Alla graduated from the Saint-
Petersburg University of Economics
and Finance with a degree in
economics.
Oxana graduated from the Saint-
Petersburg State Electrotechnic
University.
In July 2016, Alla was appointed
Commercial Director of the new
Dry & Drinks, FMCG division.
Alla is responsible for the purchasing
of long shelf life products including
drinks and alcohol. As Commercial
Director of the division, she is also
responsible for improving margins,
the development of private label
products and other areas.
Work experience
Alla joined the Group from Kesko
FoodRus where she worked as
a commercial director for four years.
She joined O’KEY Group in 2005 as
a category manager and was later
promoted to Head of Purchasing
for the North-West region. In 2010,
she was appointed as Operations
Director for Supermarkets.
In July 2016, Oxana was appointed
Commercial Director of the new
Ultra Fresh & Fresh Products
division.
Oxana manages the purchasing of
short shelf life products and “fresh”
products. She is also in charge of
the own production of the Group
including bakery and culinary.
Work experience
Oxana joined O’KEY Group from
Lenta where she worked as
the director responsible for products
with a short shelf life for six years.
Prior to joining Lenta, she worked
at X5 Retail Group. She started
her career at O’KEY in 2001, at
the founding of the Company and
served as a category manager where
she was responsible for the launch
of sales of culinary products.
Maxim graduated from the Saint-
Petersburg University of Economics
and Finance with a degree in
management.
In July 2016, Maxim was appointed
Commercial Director of the new Non-
Food division.
He is responsible for the entire range
of non-food products, including
children’s products and adult
clothing and shoes.
Work experience
Maxim joined O’KEY Group from
Intertorg where he was responsible
for hypermarkets operating under
the SPAR brand. Between 2001
and 2010 he worked at O’KEY
Saint Petersburg’s hypermarket in
a variety of roles including most
latterly as Head of Purchasing and
prior to that as Product Range
Director and as Purchasing Director
for Non-food Products.
38
MILINA SEVCIKOVA MIKULOVA
Private Label Commercial Director
REMENNIKOVA ELENA
E-commerce Director
Milina graduated from the University
of Economics in Prague
(International Relations) and holds
a degree from the Commerce &
Management School (l’ECG) in
Orleans (France).
In September 2016, Milina was
appointed the Commercial Director
of the Private Label division.
In her role, Milina is responsible
for the product range, production,
supply, pricing, positioning and
promotion of the O’KEY private label
brands as well as focusing on margin
improvements in the business.
Her main priority is to improve
the quality of O’KEY private labels.
Work experience
Milina has a proven commercial,
marketing and project management
track record in Russia, Eastern
Europe and Africa. From 1998 to
2005, she worked at Carrefour,
AHOLD and Metro Group.
From 2005 to 2009, Milina
served as Commercial Director
& Management Board Member
at Lenta. More recently, she held
various executive positions at
Metrika (DIY), Yoo! Mart Ltd (Ghana,
Africa) and 585 Gold.
Elena graduated from the Saint-
Petersburg University of
Economics and trade with
a degree in economics.
She received an MBA degree
from the Stockholm school
of Economics which included
her thesis on "The History of
Creation of Private Labels".
Elena joined the company in
2013 and is responsible for
creating and developing online
sales. Under her leadership,
O’KEY created and launched its
new online shopping website,
initiated a pick-up service and
commenced regular home
deliveries.
Work experience
Prior to joining O’KEY Elena was
a head of AMF, an international
delivery network of flowers
and gifts. Previously she was
also Commercial Director
of Utkonos, where she was
responsible for purchasing,
marketing, advertising and
processing. She also worked as
a procurement director at both
Pyaterochka and Carousel.
39
Annual Report 2016 Overview
Strategic Report
Financial Statements
Corporate Governance
Changes made to the Senior Management Team in 2016
NAME
Pavel Tomanek
Alla Synko
Anton Farlenkov
Oxana Shuliko
Konstantin Arabidis
Dmitry Pryanikov
Maxim Platonov
DATE
CHANGE
February 2016
Appointed Sales Director
April 2016
May 2016
June 2016
July 2016
July 2016
July 2016
Appointed Commercial Director, Dry & Drinks, FMCG
Appointed Head of Strategy and M&A
Appointed Commercial Director, Ultra Fresh & Fresh
Appointed Chief Financial Officer
Appointed Deputy CEO
Appointed Commercial Director, Non-Food
Milina Sevcikova Mikulova
September 2016
Appointed Private Label Commercial Director
Diversity
O’KEY Group is working on adoption of the diversity
policy. However, as can be seen from the information
on the senior management team, O’KEY Group aims
to employ the members of the team most suitable
and qualified for their post and function, irrespective
of their age, gender, origin. The requirements to
educational and professional backgrounds are such
as to insure that the member of the team possesses
the skills and experience necessary to perform
their function.
Board of Directors
and Management Remuneration
In 2016, key management personnel of
O’KEY Group were paid an aggregate amount of
RUB 476,012 thousand in remuneration and other
compensation. Members of the Board of Directors
of O’KEY Group S.A. and the Audit Committee
of O’KEY Group S.A. were paid a net fee of
US$596,521.88. No more than US$800,000 is to be
paid per year in compensation to the entire Board and
other senior officers of O’KEY Group S.A.
40
Corporate Governance
RISK MANAGEMENT
Risk management system
The risk management system is aimed at providing
a reasonable guarantee that the Company’s strategic
goals will be achieved in a timely manner and
that the level of risks faced by the Group remains
acceptable for management and shareholders.
We operate a unified approach to risk management
through the Group Risk Standard which comprises
a range of relevant tools and methodologies aimed
at early risk detection and risk mitigation.
The Board of Directors has overall responsibility
for the establishment and oversight of the Group’s
risk management framework. 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. Internal Audit assists
the Group’s Audit Committee in its oversight
role. 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. 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. Identified risk areas are
monitored quarterly and followed by a coordinated
improvement programme.
The additional monitoring concept was designed
not only to ensure compliance with the Company
standards but also to support the identification of
potential improvements and initiate cross-functional
improvement projects.
The continuing market downturn has also raised
the risk of increased fraudulent activities. To mitigate
that risk we implemented several additional (Internal
Control) activities which were related to detailed
analyses of our suppliers’ commercial history and
financial reporting transparency as well additional
requirements for insurance coverage. Our risk
analysts participate fully in tender committees to
highlight any deviations from standard procedures or
additional risks.
We have responded quickly to any hotline information
suggesting fraudulent activity, with our analysts
thoroughly investigating any potential internal and/or
external fraudulent activities which might compromise
the interests of the Company.
In addition to that, in 2016 we tightened our
information security rules. All our employees now have
to pass awareness training sessions on information
security risks and have signed consent forms
confirming their awareness of, and responsibility for,
any violation of information security rules.
Our challenges in 2016
Principle risks
In 2016, we noticed that the continuing market
downturn set high demands on operating
efficiency as to maintain the profitability levels of
our store operations we had to focus more and
more on operating efficiency. We implemented
additional monitoring to ensure that any deviations
from standard operating procedures were
detected early to limit any losses to operational
efficiency and transparency as far as possible.
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.
41
Annual Report 2016 Overview
Strategic Report
Financial Statements
Corporate Governance
STRATEGIC RISKS
Name of Risk
Definition & 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
decrease under the impact of the weaker macroeconomic
environment exacerbated by declining oil prices and
sustained rouble volatility.
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 over store locations,
product ranges, 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
lend uniqueness to our offering.
We constantly monitor our customers’
perception of O’KEY and that of our main
competitors to ensure we can respond
appropriately. Our pricing policy, based
on the price-matching concept, aims
to guarantee the competitiveness of
the core product range.
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 Group, 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, labelling, 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.
Monitoring results in a timely update of
relevant internal policies/bylaws and,
consequently, the Group’s business
processes.
OPERATIONAL RISKS
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.
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, which will enable us to understand
better and react quicker to changes in
consumer behaviour.
42
Name of Risk
Definition & Potential Impact
Mitigating Actions
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.
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
programmes.
Additionally, to facilitate the adaptation of
new employees, we organise introductory
courses and coaching in our stores.
Supply chain risk
IT Platform
Development
Managing store
opening process
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.
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 fulfil an order, an alternative supplier can
provide it.
We also opened one federal and two
regional distribution centres during 2015-
2016 in hypermarket and supermarket
segment. This allows us to have the stable
trade stock at warehouse to ensure that we
will have no product shortage in stores.
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 Group 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;
— 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 actively upgrading our existing IT
systems and implementing new IT solutions
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.
IT security
threats
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 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.
43
Annual Report 2016 Overview
Strategic Report
Financial Statements
Corporate Governance
FINANCIAL RISKS
Name of Risk
Definition & Potential Impact
Mitigating Actions
Providing sufficient
level of financing
Recent changes in the macroeconomic situation might result in
a liquidity squeeze and tightening of lending policies by Russian
banks. Given the expansion programme in the coming periods,
issues with availability of external financing or significant
changes in its cost can negatively impact our Group’s ability to
execute its expansion programme.
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.
Our securities are listed on the London
Stock Exchange which allows us to utilise
the secondary placement of shares as an
alternative way of financing.
Tax regulations
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.
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.
Risks of currency
and interest rates
volatility
We are exposed to fluctuations in exchange rates because
of loans received in USD and contractual obligations in USD
and EUR. Although measures are taken to minimise this risk,
there can be no assurance that exchange rate and interest rate
fluctuations will not negatively influence our results.
Risk of
misstatements in
financial statements
We face exposure to risks relating to failures in proper
financial reporting and the classification of accounting
entries, and risks of making inaccurate accounting estimates.
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 training
sessions for store employees.
We manage interest rate risks by borrowing
money at fixed rates with the long tenor.
All facilities do not provide the lender with
the right to increase the interest rate due
to any changes on the money market.
Certain currency risks are controlled through
switching the payments into roubles,
setting caps or hedged using derivative
financial instruments.
We regularly test internal controls
over financial reporting to prevent
misstatements in financial statements.
We have a qualified team of finance
professionals preparing our financial
statements, and our consolidated IFRS
financial statements preparation process
is completely automated.
For a description of
financial risks and exposure
calculation please refer to
Note 27 in the
Group Consolidated
Financial Statements
44
Corporate Governance
SHAREHOLDER AND INVESTOR INFORMATION
General Meetings of Shareholders
Share capital structure
The General Meeting of Shareholders is the supreme
governing body of O’KEY Group S.A.
The General Meetings of shareholders are convened
and held in accordance with Luxembourg legislation and
the Articles of O’KEY Group S.A.
According to the Articles of O’KEY Group S.A. an Annual
General Meeting shall be held in Luxembourg at
the registered office of the Company, or at any such
other place as may be specified in the convening notice
of the meeting, on the last Friday of April at 10.00 a.m.
The next Annual General Meeting will be held on
April 28, 2017 at 10.00 a.m. CET. The convening notice
specifying the address of the meeting and the agenda
will be sent and published not later than fourteen days
before the meeting.
The issued share capital of the Company as of
31 December 2016 amounts to EUR 2,690,740
represented by 269,074,000 shares.
As of 31 December 2016, out of the 269,074,000
registered shares of the Company, 102,709,012
shares were admitted to trading on the London
Stock Exchange in the form of global depositary
receipts (“GDRs”).
No other securities have been issued by the Company.
All shares issued by the Company have equal rights
as provided for by the law of 10 August 1915 on
commercial companies, as amended (the “Company
Law”) and as set forth in the Articles, save for
the special rights granted to the Caraden Shareholder
set forth below (under Special control rights).
Legal and Ownership Structure
38.17%
BONY (NOMINEES)
(of them Freefloat – 21.03%)
23.02%
GSU LTD
(including GDRs – 28.02%)
38.81%
NISEMAX CO LTD
(including GDRs – 50.96%)
O’KEY GROUP S.A. (Luxembourg)
O’KEY GROUP LLC
O’KEY LLC
DORINDA JSC
Employer for senior
management
Management company for
Dorinda JSC and O’KEY LLC
Retail operations
Employer of hypermarket and
supermarket business personnel
Owner of real estate and long-
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 and operator of a new
retail chain under the DA!
trademark
45
Annual Report 2016
Overview
Strategic Report
Financial Statements
Corporate Governance
There were no substantial changes in ownership in
2016. In May 2016 GSU informed the company that
it had acquired additional GDRs increasing its own-
ership from 25.02% to 28.02% of total outstanding
share capital.
Transfer Restrictions
As of 31 December 2016 and the date hereof, to
the knowledge of the Company, all the shares in issue
in the Company are freely transferable, provided that
the transfer formalities set out under Article 6 of
the Articles are fulfilled.
The Company has no information about any
agreements between shareholders which may result
in restrictions on the transfer of securities or voting
rights, as mentioned under Article 11 (1) (g) of
the Directive 2004/25/EC of the European Parliament
and of the Council of 21 April 2004 on takeover bids.
Significant shareholdings
The three major shareholders of the Group are its
founders Mr Dmitry Korzhev (who indirectly owns
approximately 23.49% of the outstanding share capital),
Mr Dmitrii Troitskii (who indirectly owns approximately
23.49% of the outstanding share capital) and
Mr Boris Volchek (who indirectly owns approximately
28.02% of the outstanding share capital).
Special Control Rights
All the issued and outstanding shares of the Company
have equal voting rights and there are no special
control rights attaching to shares of the Company.
The Caraden Shareholder (as defined in the Articles)
has, under the condition of holding a minimum amount
of shares in the Company, a specific right with respect
to the appointment and removal of Directors since
at least one Director (designated as the Caraden
Director) must be appointed from a list of candidates
proposed from the Caraden Shareholder and may be
removed at the initiative of the Caraden Shareholder
(additional information may be found under Article 8 of
the Articles).
The positive vote of the Caraden Shareholder
is required, under certain conditions, to amend
the provisions of the Articles relating to: (i) the rights
and prerogatives of the Caraden Shareholder; and
(ii) the appointment, removal, replacement, rights,
prerogatives and positive vote of the Caraden Director
(additional information may be found under Article
16.4 of the Articles).
Control System in Employee Share Scheme
The Company doesn’t have an employees’
share scheme.
Voting Rights
Each share issued and outstanding in the Company
bears one vote.
The Articles do not provide for any voting restrictions.
In accordance with the Articles, a record date for
the admission to a general meeting may be set by
the Board (Article 15 of the Articles). Only those
Shareholders as shall be shareholders of record on any
such record date shall be entitled to be notified of and
to vote at any general meeting and any adjournment
thereof, or to give any such consent, as the case may be.
In accordance with the Articles, the Board may
determine such other conditions that must be fulfilled
by Shareholders for them to take part in any meeting
of shareholders in person or by proxy (Article 15 of
the Articles).
46
Shareholders’ Agreements
with Transfer Restrictions
The Company has no information about any
agreements between shareholders which may
result in restrictions on the transfer of securities
or voting rights.
Appointment of the Directors,
Amendment of the Articles
The rules governing the appointment and replacement
of the directors and the amendment of the Articles
are set out under the Luxembourg Company Law and
the Articles (in particular Articles 8, 15 and 16).
The consolidated version of the Articles is
published under the shareholders section on
http://okeygroup.lu/sharedocs
Significant Agreements
or Essential Business Contracts
The Board is not aware of any significant agreements
to which the Company is a party and which take
effect, alter or terminate upon a change of control of
the Company following a takeover bid. The Board has
considered essential business contracts and concluded
that there are none.
Agreements with Directors and Employees
As of the date hereof, no agreements between
the Company and its Directors or employees exist
that provide for compensation if the Directors or
the employees resign or are made redundant without
valid reason or if their employment ceases because of
a takeover bid.
Dividend policy
To determine the recommended amount of dividends
that will be payable, the Group’s Board of Directors
abides by the dividend policy. The general meeting of
shareholders, upon recommendation of the Board of
Directors, determines how the remainder of the annual
net profits of the Company should be disposed of,
including by way of stock dividend, it being understood
that, the remaining net profits of the Company left
after payment of dividends shall be used for business
development of the Company and its subsidiaries and
the development of the retail business of the Group
in Russia. Interim dividends may be declared and
paid (including by way of staggered payments) by
the Board of Directors subject to observing the terms
and conditions provided by law either by way of a cash
dividend or by way of an in kind dividend. In 2016,
O’KEY Group paid a total of US$23 million in dividends.
Disclosure
O’KEY Group S.A. makes all obligatory disclosures in
a timely manner and endeavours to comply with best
disclosure practices, even those which are not strictly
obligatory for the Company (such as the publication
of half-year and quarterly results, material events
for the Group etc.). Information is disclosed via
the RNS service of the London Stock Exchange as well
as on the Company’s website.
As the Company is the issuer of GDRs, the adoption
of MAR did not substantially change its disclosure
obligations. There have been no substantial changes
in our approach to disclosure in 2016 compared
to 2015.
Footnote: this annual financial report is drawn up and published in accordance with the applicable UK laws and regulations. The information given from
pages 1 to 47 includes most (and to some extent more) of the information included in the consolidated directors’ report but should not be considered
as being the consolidated directors’ report for the purpose of Luxembourg laws and regulations, which is drawn up and disclosed in accordance with
applicable Luxembourg laws and regulations.
47
Annual Report 2016 Overview
Strategic Report
Financial Statements
Corporate Governance
Corporate Governance
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, 27 March 2017
DMITRY KORZHEV
Member
of the Board of Directors
MYKOLA BUINYCKYI
Member
of the Board of Directors
HEIGO KERA
Chairman/CEO
KONSTANTIN ARABIDIS
CFO
48
Financial Statements
REPORT OF THE REVISEUR D’ENTREPRISES AGREE
To the Shareholders of
O’KEY GROUP S.A.
13, rue Edward Steichen
L-2540 Luxembourg
Report on the consolidated financial statements
We have audited the accompanying consolidated financial statements
and its consolidated cash flows for the year then ended in accordance
with International Financial Reporting Standards as adopted by
of O’KEY GROUP S.A., which comprise the consolidated statement of
the European Union.
financial position as at 31 December 2016, the consolidated statements
of profit or loss and other comprehensive income, changes in equity and
cash flows for the year then ended, and notes, comprising a summary of
Other information
The Board of Directors is responsible for the other information. The other
significant accounting policies and other explanatory information.
information comprises the information included in the consolidated
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
Directors’ report and the Corporate Governance Statement but does not
include the consolidated financial statements and our report of réviseur
d’entreprises agréé thereon.
Our opinion on the consolidated financial statements does not cover
the European Union, and for such internal control as the Board
the other information and we do not express any form of assurance
of Directors determines is necessary to enable the preparation
conclusion thereon.
of consolidated financial statements that are free from material
misstatement, whether due to fraud or error.
In connection with our audit of the consolidated financial statements,
our responsibility is to read the other information and, in doing so,
Responsibility of the Réviseur d’Entreprises agréé
Our responsibility is to express an opinion on these consolidated financial
consider whether the other information is materially inconsistent with
the consolidated financial statements or our knowledge obtained in
statements based on our audit. We conducted our audit in accordance
the audit or otherwise appears to be materially misstated. If, based
with International Standards on Auditing as adopted for Luxembourg by
on the work we have performed, we conclude that there is a material
the Commission de Surveillance du Secteur Financier. Those standards
misstatement of this other information, we are required to report this
require that we comply with ethical requirements and plan and perform
fact. We have nothing to report in this regard.
the audit to obtain reasonable assurance about whether the consolidated
financial statements are free from material misstatement.
Other matter
The Corporate Governance Statement includes information required
An audit involves performing procedures to obtain audit evidence
by Article 68bis paragraph (1) of the law of 19 December 2002 on
about the amounts and disclosures in the consolidated financial
the commercial and companies register and on the accounting records
statements. The procedures selected depend on the judgement of
and annual accounts of undertakings, as applicable for the year ended
the Réviseur d’Entreprises agréé, including the assessment of the risks
31 December 2016.
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
Report on other legal and regulatory requirements
The consolidated Directors’ report, is consistent with the consolidated
financial statements and has been prepared in accordance with
financial statements in order to design audit procedures that are
the applicable legal requirements.
appropriate in the circumstances, but not for the purpose of expressing
an opinion on the effectiveness of the entity’s internal control. An audit
The information required by Article 68bis paragraph (1) letters c) and d) of
also includes evaluating the appropriateness of accounting policies
the law of 19 December 2002 on the commercial and companies register
used and the reasonableness of accounting estimates made by
and on the accounting records and annual accounts of undertakings,
the Board of Directors, as well as evaluating the overall presentation of
as applicable for the year ended 31 December 2016 and included in
the consolidated financial statements.
the Corporate Governance Statement is consistent with the consolidated
financial statements and has been prepared in accordance with applicable
We believe that the audit evidence we have obtained is sufficient and
appropriate to provide a basis for our audit opinion.
legal requirements.
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 31 December 2016, and of its consolidated financial performance
Luxembourg, 27 March 2017
KPMG Luxembourg Société coopérative
Cabinet de révision agréé
Jean-Manuel Séris
49
Annual Report 2016 Overview
Strategic Report
Corporate Governance
Financial Statements
Financial Statements
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
FOR THE YEAR ENDED 31 DECEMBER 2016
’000 RUB
ASSETS
Non-current assets
Investment property
Property, plant and equipment
Construction in progress
Lease rights
Intangible assets
Deferred tax assets
Other non-current assets
Total non-current assets
Current assets
Inventories
Trade and other receivables
Prepayments
Other current assets
Cash and cash equivalents
Total current assets
Total assets
EQUITY AND LIABILITIES
Equity
Share capital
Legal reserve
Additional paid-in capital
Hedging reserve
Retained earnings
Translation reserve
Total equity
Non-current liabilities
Loans and borrowings
Deferred tax liabilities
Other non-current liabilities
Total non-current liabilities
Current liabilities
Loans and borrowings
Interest accrued on loans and borrowings
Trade and other payables
Current income tax payable
Total current liabilities
Total liabilities
Total equity and liabilities
Note
36
2016
2015
re-presented
18
15
15
16
17
20
19
21
22
23
24
26
20
26
26
27
572,542
48,241,868
3,485,879
4,578,535
893,103
1,277,273
2,002,680
61,051,880
13,706,868
5,871,010
958,467
41,250
11,463,467
32,041,062
564,000
43,088,062
6,694,671
4,847,537
635,058
654,512
2,745,910
59,229,750
12,628,304
6,937,346
1,515,881
—
9,768,130
30,849,661
93,092,942
90,079,411
119,440
10,597
8,555,657
(75,329)
13,324,398
720,301
22,655,064
31,673,078
692,091
139,304
32,504,473
4,465,260
156,870
32,480,892
830,383
37,933,405
70,437,878
93,092,942
119,440
10,597
8,903,606
(138,872)
14,757,649
838,547
24,490,967
23,558,269
826,874
99,352
24,484,495
11,750,125
249,605
28,817,333
286,886
41,103,949
65,588,444
90,079,411
50
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 55 to 89.
Financial Statements
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENT OF PROFIT OR LOSS
AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 2016
’000 RUB
Note
2016
2015
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/(loss)
Profit before income tax
Income tax (expense)/benefit
(Loss)/profit for the year
8
9
10
12
12
13
14
175,470,671
(135,261,292)
40,209,379
(35,764,206)
(1,050,739)
3,394,434
281,631
(3,550,403)
145,973
271,635
(409,425)
(137,790)
162,510,392
(124,143,425)
38,366,967
(32,371,077)
(148,353)
5,847,537
81,691
(3,413,258)
(614,562)
1,901,408
16,299
1,917,707
Other comprehensive (loss)/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
Change in fair value of hedges and reclassification from hedging reserve
Other comprehensive income
Income tax on other comprehensive income
Other comprehensive (loss)/income for the year, net of income tax
12
12,14
Total comprehensive (loss)/income for the year
(Loss)/earnings per share
Basic and diluted (loss)/earnings per share (RUB)
(118,246)
266,887
79,428
(170,999)
(15,885)
(225,702)
(363,492)
(308,749)
—
61,750
19,888
1,937,595
25
(0.5)
7.1
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 55 to 89.
51
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Financial Statements
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER 2016
’000 RUB
Note
Share
capital
Legal
reserve
Additional
paid-in
capital
Hedging
reserve
Retained
earnings
Translation
reserve
Total
equity
Balance at 1 January 2015
119,440
10,597 8,903,606
108,127
14,483,713
571,660 24,197,143
Total comprehensive income for the year
—
1,917,707
— 1,917,707
—
—
—
—
—
—
—
—
—
—
—
—
12
14
—
—
—
— (308,749)
—
61,750
— (246,999)
—
—
—
—
266,887
266,887
— (308,749)
—
266,887
61,750
19,888
— (246,999)
1,917,707
266,887 1,937,595
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
Balance at 31 December 2015
24
—
—
—
—
(1,643,771)
—
(1,643,771)
—
119,440
—
—
10,597 8,903,606 (138,872)
—
(1,643,771)
14,757,649
—
(1,643,771)
838,547 24,490,967
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 55 to 89.
52
’000 RUB
Note
Share
capital
Legal
reserve
Additional
paid-in
capital
Hedging
reserve
Retained
earnings
Translation
reserve
Total
equity
Balance at 1 January 2016
119,440
10,597 8,903,606 (138,872) 14,757,649
838,547 24,490,967
Total comprehensive income for the year
(Loss) 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
12
14
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
24
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(137,790)
—
(137,790)
—
79,428
—
—
—
(118,246)
(118,246)
—
—
—
79,428
(15,885)
(170,999)
— (15,885)
—
(170,999)
63,543
(170,999)
(118,246)
(225,702)
63,543
(308,789)
(118,246)
(363,492)
—
(347,949)
—
(1,124,462)
—
(1,472,411)
—
(347,949)
—
(1,124,462)
—
(1,472,411)
Balance at 31 December 2016
119,440
10,597 8,555,657
(75,329)
13,324,398
720,301 22,655,064
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 55 to 89.
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Financial Statements
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED 31 DECEMBER 2016
’000 RUB
2016
2015
Cash flows from operating activities
Cash receipts from customers
Other cash receipts
Interest received
Cash paid to suppliers and employees
Operating taxes
Other cash payments
VAT paid
Income tax paid
199,801,345
185,480,172
684,044
257,541
381,666
49,708
(186,678,063)
(175,156,270)
(670,313)
(76,312)
(1,485,904)
(159,780)
(681,509)
(205,326)
(762,978)
34,651
Net cash from operating activities
11,672,558
9,140,114
Cash flows from investing activities
Purchase of property, plant and equipment and lease rights (excluding VAT)
Purchase of other intangible assets (excluding VAT)
Proceeds from sales of property, plant and equipment and intangible
assets (excluding VAT)
Net cash used in investing activities
Cash flows from financing activities
Proceeds from loans and borrowings
Repayment of loans and borrowings
Interest paid
Dividends paid
Other financial payments
Net cash used in financing activities
Net increase in cash and cash equivalents
Cash and cash equivalents at beginning of the period
Effect of exchange rate fluctuations on cash and cash equivalents
Cash and cash equivalents at end of the year
(5,880,420)
(8,348,734)
(450,701)
(272,017)
917,819
(5,413,302)
6,289,003
(2,331,748)
24,498,000
18,002,000
(23,480,067)
(14,911,105)
(3,939,956)
(1,472,411)
(4,303,410)
(1,643,771)
(134,577)
(4,529,011)
1,730,245
9,768,130
(28,205)
(2,884,491)
3,923,875
5,810,182
(34,908)
34,073
11,463,467
9,768,130
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 55 to 89.
54
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 2016
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 2016 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 2016 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 32.
The Company’s registered address is: Luxembourg 13,
rue Edward Steichen, L – 2540.
The Group’s principal business activity is the operation
of a retail chain in Russia under the brand name “O’KEY”.
In September 2015 the Group launched the discounter
chain under the brand name “Da!”. At 31 December
2016 the Group operated 164 stores including
54 discounter stores (31 December 2015: 146 stores
including 35 discounter 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 imposition of economic sanctions on Russian
individuals and legal entities by the European Union,
the United States of America, Japan, Canada, Australia
and others, as well as retaliatory sanctions imposed
by the Russian government, has resulted in increased
economic uncertainty including more volatile equity
markets, a depreciation of the Russian Rouble,
a reduction in both local and foreign direct investment
inflows and a significant tightening in the availability
of credit. In particular, some Russian entities may
be experiencing difficulties in accessing international
equity and debt markets and may become increasingly
dependent on Russian state banks to finance their
operations. The longer term effects of implemented
sanctions, as well as the threat of additional future
sanctions, are difficult to determine.
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 27 March 2017.
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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. Functional currency of the Company is USD and
functional currency of Russian subsidiaries is RUB.
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 the date of transaction;
— all resulting exchange differences are recognised as
translation reserve in equity.
At 31 December 2016 the principal rate of exchange
used for translating foreign currency balances were
USD1 = RUB 60.6569; EUR 1 = RUB 63.8111 (2015:
USD 1 = RUB 72.8827; EUR 1 = RUB 79.6972).
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.
56
The major part of the tax burden refers to Russian tax,
currency and customs legislation, which is subject to
varying interpretations. Refer to note 31.
Bonuses from suppliers. The Group receives
various bonuses from suppliers which represent
a significant reduction in cost of sales and inventory
cost. The calculation of these amounts is in part
dependent on an estimation of whether amounts due
under agreements with suppliers have been earned
at the reporting date based on inventory purchased
and other conditions. The process for calculating
and recording supplier bonuses involves significant
manual processes which are more susceptible to error.
Furthermore, the allocation of the bonuses to inventory
cost also has some element of judgement.
Determination of net realizable value of inventory.
The Group performs analysis of stock for write-off as
at each reporting date and writes down inventories to
their net realizable value when necessary. For details of
approach used for determination of net realizable value
refer to note 21.
Determination of recoverable amount of property,
plant and equipment. For those stores, where
impairment indicators exist as at reporting date,
the Group estimates recoverable amount being higher of
its value in use and fair value less cost of disposal.
For details of impairment testing performed as at
31 December 2016 refer to note 15.
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.
(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. Fair value of bonds payable
was determined for disclosure purposes based on active
market quotations (Level 1 fair value).
The Group recognises transfers between levels of the fair
value hierarchy at the end of the reporting period during
which the change has occurred.
6 Operating segments
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.
Appraisers considered current prices in an active market.
The appraisers used average between the income and
comparative approaches for determining the fair value.
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 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.
The Group is engaged in management of retail stores
located in Russia. Although the Group is not exposed
to concentration of sales to individual customers, all
the Group’s sales are in the Russian Federation. As such,
the Group is exposed to the economic development in
Russia, including the development of the Russian retail
industry. The Group has no significant non-current assets
outside the Russian Federation.
The Group identified its operating segments in accordance
with the criteria set in IFRS 8 Operating Segments and
based on the way the operations of the Group are regularly
reviewed by the chief operating decision maker to analyze
performance and allocate resources within the Group.
The Group’s chief operating decision maker has been
determined as the CEO.
The Group has two reportable segments: O’KEY and Da!.
Each segment has similar format of their stores which is
described below:
— O’KEY –chain of modern Western European style
hypermarkets under the “O’KEY” brand reinforced by
O’KEY supermarkets throughout Russian Federation;
— Da! – chain of discounter stores in Moscow and
Central region.
The assortment of goods in each chain is different, and
the segments are managed separately. For each of
the segments, the CEO of the Group reviews internal
management reports on at least a monthly basis.
Within each reportable segment all business components
demonstrate similar characteristics:
— the products and customers;
— the business processes are integrated and uniform:
the components manage their operations centrally.
Purchasing, logistics, finance, HR and IT functions are
centralized;
— the components’ activities are mainly limited to
Russia which has a uniform regulatory environment.
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The CEO assesses the performance of the operating
segment based on earnings before interest, tax,
depreciation and amortization (EBITDA) adjusted for
one-off items. Term EBITDA is not defined in IFRS.
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 reporting 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 2016 is as follows:
’000 RUB
O’Key
Da!
Total
2016
2015
2016
2015
2016
2015
External revenue
169,695,802
161,822,399
5,774,869
687,993
175,470,671
162,510,392
Inter-segment revenue
—
—
30,274
12,338
30,274
12,338
EBITDA
11,845,435
11,672,274
(2,592,229)
(1,563,108)
9,253,206
10,109,166
Inter-segment revenue for 2016 amounts RUB 30,274 thousand (2015: RUB 12,338 thousand) and relates to
a rental agreement between LLC Fresh Market (operator of discounter chain Da!) and LLC O’Key.
A reconciliation of EBITDA to (loss)/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 of receivables
Depreciation and amortisation
Finance income
Finance costs
Foreign exchange gain/(loss)
Other expenses
Profit before income tax
Income tax (expense)/benefit
(Loss)/profit for the year
Note
2016
2015
10
10
10
10
10
9
12
12
13
9,253,206
(27,055)
(568,004)
(434,370)
(279,015)
(395)
(4,549,933)
281,631
(3,550,403)
145,973
—
271,635
(409,425)
(137,790)
10,109,166
(49,854)
(126,069)
(41,127)
(137,696)
(848)
(3,838,115)
81,691
(3,413,258)
(614,562)
(67,920)
1,901,408
16,299
1,917,707
58
7 Subsidiaries
Details of the Company’s significant subsidiaries at 31 December 2016 and 31 December 2015 are as follows:
Subsidiary
Country
of incorporation
Nature
of operations
2016
Ownership/voting
2015
Ownership/voting
LLC O’Key
JSC Dorinda
Russian Federation
Retail
Russian Federation
Real estate
LLC O’Key Group
Russian Federation
Managing Company
LLC O’Key Logistics
Russian Federation
Import operations
LLC Fresh Market
Russian Federation
Retail and real estate
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
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
2016
2015
165,210,286
7,269,694
172,479,980
1,620,671
1,370,020
175,470,671
153,112,272
7,172,270
160,284,542
1,529,250
696,600
162,510,392
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
Note
11
29
Depreciation and amortisation
15, 16, 17
Communication and utilities
Advertising and marketing
Repairs and maintenance costs
Security expenses
Insurance and bank commission
Operating taxes
Legal and professional expenses
Materials and supplies
Other costs
2016
2015
(16,185,073)
(5,343,910)
(4,549,933)
(3,485,840)
(1,795,089)
(1,182,822)
(825,314)
(737,305)
(713,223)
(602,704)
(301,595)
(41,398)
(14,988,722)
(4,728,035)
(3,838,115)
(3,046,569)
(1,650,564)
(940,327)
(739,972)
(687,075)
(758,886)
(659,763)
(300,245)
(32,804)
(35,764,206)
(32,371,077)
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Fees billed to the Company and its subsidiaries by KPMG Luxembourg Societe coopérative, and other member firms
of the KPMG network during the year are as follows:
’000 RUB
2016
2015
Auditors’ remuneration for annual and consolidated accounts
Auditors’ remuneration for other assurance services
Auditors’ remuneration for tax advisory services
13,902
4,721
115
18,738
13,905
3,534
855
18,294
10 Other operating income and expenses
’000 RUB
Note
2016
2015
Loss from disposal of non-current assets
Impairment of non-current assets
15, 16, 17
Loss from write-off of receivables
Impairment of receivables
Loss from revaluation of investment property
18
Sundry income and expense, net
(568,004)
(434,370)
(279,015)
(395)
(27,055)
258,100
(1,050,739)
(126,069)
(41,127)
(137,696)
(848)
(49,854)
207,241
(148,353)
Loss from disposal of other non-current assets
amounted RUB 568,004 thousand (2015:
RUB 126,069 thousand) relating to stores and land
plots in Moscow and other regions which the Group
closed or disposed of during the year 2016.
Sundry income includes gain in the amount of
RUB 203,256 thousand (2015: RUB 115,871 thousand)
from one-off construction services performed
to third party.
11 Personnel costs
’000 RUB
Wages and salaries
Social security contributions
Employee benefits
Other personnel costs
Total personnel costs
2016
2015
(10,706,956)
(3,352,398)
(1,100,248)
(1,025,471)
(16,185,073)
(9,894,169)
(3,036,655)
(965,467)
(1,092,431)
(14,988,722)
During the year ended 31 December 2016 the Group employed 25 thousand employees on average (2015:
25 thousand employees on average). Approximately 95% of employees are store and warehouse employees and
the remaining part is office employees.
60
12 Finance income and finance costs
’000 RUB
2016
2015
Recognised in profit or loss
Interest income on loans, receivables and bank deposits
Other finance income
Finance income
Interest costs on loans and borrowings
Reclassification from hedging reserve
Finance costs
Net finance costs recognised in profit or loss
The above financial income and costs include the following in
respect for assets/(liabilities) not at fair value through profit
and loss:
Total interest income on financial assets
Total interest expense on financial liabilities
Recognised in other comprehensive income
Change in fair value of hedges
Income tax on income and expense recognised in other
comprehensive income
Finance income/(costs) recognised in other comprehensive
income, net of tax
During 2016 the Group has capitalised interests in
the value of property, plant and equipment. The amount
of capitalised interest comprised RUB 491,704
thousand (2015: RUB 1,054,770 thousand).
In 2016 a capitalisation rate of 11.24% was used to
determine the amount of borrowing costs eligible for
capitalisation (2015: 12.99%).
264,891
16,740
281,631
(3,497,546)
(52,857)
(3,550,403)
(3,268,772)
67,866
13,825
81,691
(3,413,258)
—
(3,413,258)
(3,331,567)
281,631
(3,550,403)
81,691
(3,413,258)
79,428
(15,885)
63,543
(308,749)
61,750
(246,999)
13 Foreign exchange gain/(loss)
During 2016 the Russian Rouble strengthened against
the USD. Net foreign exchange gain recognized in profit
and loss in the amount of RUB 145,973 thousand
for the year ended 31 December 2016 (2015: loss
RUB 614,562 thousand) mainly relates to USD-
denominated borrowing. In 2016 the Group has not
used hedging instruments to hedge foreign exchange
risks.
The Group’s risk management policy is to receive
borrowings in the same currency which generated
revenue (Russian Rouble). As at 31 December 2016,
the share of USD-denominated borrowings in Group’s
debt was not significant. The Group’s exposure to
currency risk is disclosed in note 28.
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14 Income tax (expense)/benefit
The Group’s applicable tax rate is the income tax rate of 20% for Russian companies (2015: 20%).
’000 RUB
2016
2015
Current tax (expense)/benefit
Deferred tax benefit/(expense)
Total income tax (expense)/benefit
(1,182,854)
773,429
(409,425)
559,716
(543,417)
16,299
Income tax recognised directly in other comprehensive income
’000 RUB
Before tax
2016
Tax
Net of tax
Before tax
2015
Tax
Net of tax
Foreign currency translation
differences
Change in fair value of hedges and
reclassification from hedging reserve
(118,246)
—
(118,246)
266,887
—
266,887
79,428
(15,885)
63,543
(308,749)
61,750
(246,999)
(38,818)
(15,885)
(54,703)
(41,862)
61,750
19,888
Reconciliation of effective tax rate:
’000 RUB
2016
2015
Profit before income tax
Income tax at applicable tax rate (2016: 20%, 2015: 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
Adjustments to current income tax for previous periods
Other items
Total income tax (expense)/benefit
271,635
(54,327)
(33,110)
(94,522)
(101,470)
(143,415)
7,601
9,818
(409,425)
1,901,408
(380,281)
(41,053)
(100,783)
(64,619)
(88,213)
702,255
(11,007)
16,299
During the year ended 31 December 2015 tax
authorities reimbursed to the Group RUB 702,255
thousand of income tax previously paid for 2013 and
2014.
The amount of income tax reimbursed for previous years
was recognized as reduction of income tax expense
and relates to expenses, which the Group treats as
deductible since 2014.
62
15 Property, plant and equipment
’000 RUB
Land
Buildings
Leasehold
improvements
Construction
in progress
Total
Machinery and
equipment,
auxiliary facilities
and other fixed
assets
Cost or deemed cost
Balance at 1 January 2015
6,024,426
29,540,699
5,414,339
11,627,685
7,203,116
59,810,265
Additions
Transfers
Disposals
99,682
315,512
—
2,124,001
8,775,248
11,314,443
—
3,894,591
1,901,588
974,790 (6,770,969)
—
(1,284,920)
(1,337,159)
(397,779)
(379,596)
(2,512,724)
(5,912,178)
Balance at 31 December 2015
4,839,188
32,413,643
6,918,148
14,346,880
6,694,671
65,212,530
Balance at 1 January 2016
4,839,188
32,413,643
6,918,148
14,346,880
6,694,671
65,212,530
Additions
Transfers
61,050
1,330,346
—
2,044,418
3,558,131
6,993,945
—
4,867,621
1,182,516
497,253 (6,547,390)
—
Transfers from Lease rights
Disposals
127,317
(6,079)
—
—
—
—
127,317
(9,375)
(393,091)
(1,343,184)
(219,533)
(1,971,262)
Balance at 31 December 2016
5,021,476
38,602,235
7,707,573
15,545,367
3,485,879
70,362,530
Depreciation and impairment losses
Balance at 1 January 2015
— (3,693,025)
(1,608,556)
(7,299,022)
(22,324)
(12,622,927)
Depreciation for the year
Impairment losses
Disposals
—
—
—
(41,127)
128,567
—
—
231,563
350,478
22,324
—
—
(3,498,675)
(41,127)
732,932
(1,044,440)
(462,381)
(1,991,854)
Balance at 31 December 2015
— (4,650,025)
(1,839,374)
(8,940,398)
— (15,429,797)
Balance at 1 January 2016
— (4,650,025)
(1,839,374)
(8,940,398)
— (15,429,797)
Depreciation for the year
Impairment losses
Disposals
—
—
—
(1,181,577)
(606,709)
(2,344,466)
(434,370)
—
—
31
80,095
1,282,010
—
—
—
(4,132,752)
(434,370)
1,362,136
Balance at 31 December 2016
— (6,265,941)
(2,365,988)
(10,002,854)
— (18,634,783)
Carrying amounts
At 1 January 2015
6,024,426
25,847,674
3,805,783
4,328,663
7,180,792
47,187,338
At 31 December 2015
4,839,188
27,763,618
5,078,774
5,406,482
6,694,671
49,782,733
At 31 December 2016
5,021,476
32,336,294
5,341,585
5,542,513
3,485,879
51,727,747
During 2016 the Group has capitalised interest in
the value of property, plant and equipment. The amount
of capitalised interest comprised RUB 491,704 thousand
(2015: RUB 1,054,770 thousand). In 2016 capitalisation
rate of 11.24 % was used to determine the amount
of borrowing costs eligible for capitalisation (2015:
12.99%).
Depreciation expense of RUB 4,132,752 thousand
has been charged to selling, general and administrative
expenses (2015: RUB 3,498,675 thousand). Impairment
loss in the amount of RUB 434,370 thousand was
recognized in 2016 (2015: RUB 41,127 thousand).
63
Annual Report 2016 Overview
Strategic Report
Corporate Governance
Financial Statements
As at 31 December 2016 the Group performed
impairment test for low-performing stores. For four
stores carrying amount exceeded recoverable amount
and the Group recognized an impairment loss of
RUB 434,370 thousand.
For two stores relating to “O’Key” segment the Group
determined recoverable amount being their fair value
less cost of disposal. The fair value measurement has
been categorised as a Level 3 fair value based on
the inputs to the valuation technique used. An estimate
was made of annual net operating income which is
mainly based on annual net rent rate of RUB 7,200 –
10,500 per sq. m. and full occupancy. Discount rate
of 15.7%-16.7% was applied to discount future
cash flows. Recoverable amount of stores amounted
to RUB 1,676,000 thousand and impairment loss
amounted to RUB 381,420 thousand.
For two stores relating to “Da!” segment the Group
determined recoverable amount being their value in use.
Recoverable amount of stores amounted to RUB 74,000
thousand and impairment loss amounted to RUB 52,950
thousand. Discount rate of 13% was applied to discount
future cash flows.
Security
At 31 December 2016, 4 stores have been pledged to
third parties as collateral for borrowings (2015: 4 stores).
Refer to notes 26 and 31.
16 Lease rights
Leasehold rights consist of initial cost of land lease and
premises. Lease rights include purchase price and costs
directly attributable to the acquisition of lease rights for
land plots and premises.
Lease rights are amortised over the period of the lease:
49-51 years for land leases and 8-19 years for leases of
premises.
Movements in the carrying amount of lease rights were as follows:
Note
36
’000 RUB
Cost
Balance at 1 January
Additions
Transfers to land
Disposals
Balance at 31 December
Amortisation and impairment losses
Balance at 1 January
Amortisation charge
Transfers to land
Disposals
Balance at 31 December
Net book value
2016
6,287,181
36,000
(140,565)
(157,856)
6,024,760
(1,439,644)
(174,640)
13,248
154,811
(1,446,225)
4,578,535
2015
re-presented
5,880,558
761,180
—
(354,557)
6,287,181
(1,264,563)
(190,899)
—
15,818
(1,439,644)
4,847,537
Amortisation of RUB 174,640 thousand has been
charged to selling, general and administrative expenses
(2015: RUB 190,899 thousand).
As at 31 December 2016 the Group reassessed its plans
in relation to certain land lease rights which it previously
planned to lease for a period of up to 50 years.
64
Now the Group plans to acquire these land plots in
ownership within 1-10 years after reporting date.
This resulted in decrease of residual useful lives of
certain lease rights from 50 years to 1-10 years.
The Group expects that change in estimated useful life
will result in increase of lease rights amortization for
2017 by RUB 99,500 thousand.
17 Intangible assets
’000 RUB
Cost
Balance at 1 January 2015
Additions
Transfer
Note
36
Software
Other
intangible assets
851,771
241,279
(44)
49,708
78,404
44
Total
re-presented
901,479
319,683
—
Balance at 31 December 2015
1,093,006
128,156
1,221,162
Balance at 1 January 2016
Additions
Disposals
Balance at 31 December 2016
Amortisation and impairment losses
Balance at 1 January 2015
Amortisation for the year
Transfer
Balance at 31 December 2015
Balance at 1 January 2016
Amortisation for the year
Disposals
Balance at 31 December 2016
Carrying amounts
At 1 January 2015
At 31 December 2015
At 31 December 2016
1,093,006
476,499
(160,307)
1,409,198
(420,815)
(137,318)
56
(558,077)
(558,077)
(220,700)
160,252
(618,525)
430,956
534,929
790,673
128,156
24,677
(4,424)
148,409
(16,748)
(11,223)
(56)
(28,027)
(28,027)
(21,841)
3,889
(45,979)
32,960
100,129
102,430
1,221,162
501,176
(164,731)
1,557,607
(437,563)
(148,541)
—
(586,104)
(586,104)
(242,541)
164,141
(664,504)
463,916
635,058
893,103
Amortisation and impairment losses
Amortisation of RUB 242,541 thousand has been charged to selling, general and administrative expenses
(2015: RUB 148,541 thousand).
65
Annual Report 2016
Overview
Strategic Report
Corporate Governance
Financial Statements
18 Investment property
(a) Reconciliation of carrying amount
’000 RUB
Note
Investment property
Investment properties at fair value as at 1 January 2015
Expenditure on subsequent improvements
Fair value loss (unrealized)
Investment properties at fair value as at 31 December 2015
Investment properties at fair value as at 1 January 2016
Expenditure on subsequent improvements
Fair value loss (unrealized)
Investment properties at fair value as at 31 December 2016
10
10
548,500
65,354
(49,854)
564,000
564,000
35,597
(27,055)
572,542
(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 appraisers used average between the income and
comparative approaches for determining the fair value.
Under income approaches an estimate was made of
annual net operating income which is mainly based on
annual net rent rate of RUB 7,000 per sq. m. (2015:
RUB 7,000 per sq. m.) and expected occupancy of 93%
(2015: 95%). Discount rate of 13% (2015: 19%) was
applied to discount future cash flows.
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).
There were no direct operating expenses arising from
investment property that did not generate rental income
for the year ended 31 December 2016 (2015: Nil).
19 Other non-current assets
’000 RUB
Long-term prepayments to entities under
control of shareholder group
Prepayments for property plant and equipment
Long-term deposits to lessors
Note
36
2016
894,175
769,210
339,295
2,002,680
2015
re-presented
651,302
1,703,876
390,732
2,745,910
Long-term prepayments to entities under control of the shareholder group represent prepayments for rent of
hypermarkets for the period until 2034. Related party transactions are detailed in note 32.
66
20 Deferred tax assets and liabilities
(a) Recognised deferred tax assets and liabilities
Deferred tax assets and liabilities are attributable to the following:
’000 RUB
Assets
Liabilities
Net
2016
2015
2016
2015
2016
2015
Investment property
994
—
—
(1,113)
994
(1,113)
Property, plant and equipment
173,210
357,514
(974,315)
(922,764)
(801,105)
(565,250)
Construction in progress
Intangible assets
Other non-current assets
—
—
—
—
—
—
(267,198)
(210,954)
(267,198)
(210,954)
(126,179)
(95,313)
(126,179)
(95,313)
(101,467)
(118,434)
(101,467)
(118,434)
Inventories
602,017
572,154
(1,510)
(29,245)
600,507
542,909
Trade and other receivables and
payables
Long-term investments
615,767
6,613
—
—
Tax loss carry-forwards
1,234,439
537,207
(577,189)
(261,414)
38,578
(261,414)
—
—
—
6,613
—
— 1,234,439
537,207
Tax assets/(liabilities)
2,633,040
1,466,875 (2,047,858)
(1,639,237)
585,182
(172,362)
Set off of tax
(1,355,767)
(812,363)
1,355,767
812,363
—
—
Net tax assets/(liabilities)
1,277,273
654,512
(692,091)
(826,874)
585,182
(172,362)
(b) Unrecognised deferred tax liability
As at 31 December 2016 a temporary difference of RUB 23,979,879 thousand (2015: RUB 22,842,672 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 5-15% would apply.
(c) Movement in temporary differences during the year
’000 RUB
1 January
2016
Recognised
in profit or loss
Recognised in other
comprehensive
income
31 December
2016
Investment property
Property, plant and equipment
Construction in progress
Intangible assets
Other non-current assets
Inventories
Trade and other receivables and
payables
Long-term investments
Tax loss carry-forwards
(1,113)
(565,250)
(210,954)
(95,313)
(118,434)
542,909
2,107
(235,855)
(56,244)
(30,866)
16,967
57,598
—
—
—
—
—
—
(261,414)
315,877
(15,885)
—
537,207
(172,362)
6,613
697,232
—
—
773,429
(15,885)
994
(801,105)
(267,198)
(126,179)
(101,467)
600,507
38,578
6,613
1,234,439
585,182
67
Annual Report 2016
Overview
Strategic Report
Corporate Governance
Financial Statements
’000 RUB
1 January
2015
Recognised in profit
or loss
Recognised in other
comprehensive
income
31 December
2015
Investment property
Property, plant and equipment
Construction in progress
Intangible assets
Other non-current assets
Inventories
Trade and other receivables and payables
Tax loss carry-forwards
(4,203)
(669,692)
(149,162)
(14,649)
60,656
674,915
247,782
163,658
309,305
3,090
104,442
(61,792)
(80,664)
(179,090)
(132,006)
(570,946)
373,549
(543,417)
—
—
—
—
—
—
61,750
—
61,750
(1,113)
(565,250)
(210,954)
(95,313)
(118,434)
542,909
(261,414)
537,207
(172,362)
21 Inventories
’000 RUB
Goods for resale
Raw materials and consumables
Write-down to net realisable value
2016
2015
13,370,212
700,673
(364,017)
13,706,868
12,436,674
595,017
(403,387)
12,628,304
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 364,017 thousand as at 31 December 2016
(2015: RUB 403,387 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 management’s best estimate following
the experience of the discount sales.
The write-down is included in cost of goods sold.
22 Trade and other receivables
’000 RUB
Trade receivables
VAT receivable
Prepaid taxes other than income tax
Prepaid income tax
Bonuses receivable from suppliers
Other receivables
2016
2015
545,464
1,562,138
132,565
14,282
3,081,243
535,318
5,871,010
362,599
1,902,761
67,747
791,787
1,653,027
2,159,425
6,937,346
The Group’s exposure to credit and currency risks and impairment losses related to trade and other receivables
are disclosed in note 28.
68
23 Cash and cash equivalents
’000 RUB
2016
2015
Cash on hand
Bank current account
Term deposits
Cash in transit
Cash and cash equivalents
417,766
589,988
8,240,763
2,214,950
11,463,467
404,853
739,135
7,180,674
1,443,468
9,768,130
Term deposits had original maturities of less than three months.
The Group keeps its deposits in the following banks: VTB bank, Saint-Petersburg bank, Unicredit bank, BNP Paribas.
The Group’s exposure to credit and currency risks related to cash and cash equivalents is disclosed in note 28.
24 Equity
Reconciliation of number of shares from 1 January to 31 December is provided in the table below.
Number of shares unless otherwise stated
2016
2015
Ordinary shares
Par value
On issue at 1 January
On issue at 31 December, fully paid
EUR 0.01
269,074,000
269,074,000
EUR 0.01
269,074,000
269,074,000
As at 31 December 2016 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. There were no
transfers to legal reserve during 2016 (2015: nil).
In July 2016 the Group paid interim dividends
to shareholders in amount of RUB 1,472,411
thousand (2015: RUB 1,643,771 thousand).
Interim dividends paid were recognised as distribution
to owners in the Consolidated Statement of Changes in
Equity. Interim dividends for 2016 comprise distribution
of profit in the amount of RUB 1,124,462 thousand and
additional paid-in capital redemption in the amount of
RUB 347,949 thousand.
Dividends per share recognised as distribution to
shareholders for the year ended 31 December 2016
amounted to RUB 5.5 (2015: RUB 6.1).
In April 2016 shareholders of the Company approved
annual dividends for the year ended 31 December 2015.
The amount of annual dividends for 2015 was paid by
the Group to shareholders as interim dividends in 2015
in the amount of RUB 1,643,771 thousand.
69
Annual Report 2016
Overview
Strategic Report
Corporate Governance
Financial Statements
25 (Loss)/earnings per share
The calculation of basic earnings per share at 31 December 2016 was based on the loss attributable to ordinary
shareholders of RUB 137,790 thousand (2015: profit RUB 1,917,707 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
2016
2015
Issued shares at 1 January
Weighted average number of shares for the year ended 31 December
269,074,000
269,074,000
269,074,000
269,074,000
26 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 28.
’000 RUB
2016
2015
Non-current liabilities
Secured bank loans
Unsecured bank facilities
Unsecured bonds
Unsecured loans from related parties
Unsecured loans from third parties
Current liabilities
Secured bank loans
Unsecured bank facilities
Unsecured bonds
Unsecured loans from third parties
Loans and borrowings
Unsecured bonds interest
Interest accrued on loans
Interest accrued on loans and borrowings
2,500,000
23,000,000
5,243,118
929,960
—
5,000,000
17,052,875
385,144
1,117,400
2,850
31,673,078
23,558,269
2,500,000
1,000,000
—
1,770,125
962,410
9,980,000
2,850
4,465,260
146,904
9,966
156,870
—
11,750,125
238,714
10,891
249,605
4,622,130
11,999,730
As at 31 December 2016 loans and borrowings with
carrying value of RUB 5,000,000 thousand were secured
by property, plant and equipment (2015: RUB 5,000,000
thousand). Refer to note 31.
As at 31 December 2016 the Group has
RUB 15,800,000 thousand (2015: RUB 6,300,000
thousand) of undrawn, committed borrowing facilities
available in respect of which all conditions present had
been met.
70
(a) Terms and debt repayment schedule
Terms and conditions of outstanding loans were as follows:
’000 RUB
Currency
Year of
maturity
Face value
Carrying
amount
Face value
Carrying
amount
31 December 2016
31 December 2015
Unsecured bonds
Secured bank facility
Unsecured bank facility
Unsecured loans from
related parties
Unsecured loans from other
companies
RUB
RUB
RUB
USD
RUB
2017–2021
6,205,528
6,205,528
10,365,144
10,365,144
2017–2018
5,000,000
5,000,000
5,000,000
5,000,000
2017–2021
24,000,000
24,000,000
18,823,000
18,823,000
2018
929,960
929,960
1,117,400
1,117,400
2017
2,850
2,850
2,850
2,850
36,138,338
36,138,338
35,308,394
35,308,394
In April 2016 the Group placed unsecured bonds on
Moscow Exchange in the amount of RUB 5,000,000
thousand. The bonds mature after 5 years in 2021.
However, bond holders have an option to claim
repayment after 2.5 years – in October 2018.
Compliance with loan covenants
The Group monitors compliance with loan covenants on
an ongoing basis. Where noncompliance is unavoidable
in management’s 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 2016 and during the year then ended
the Group complied with all loan covenants.
27 Trade and other payables
’000 RUB
Trade payables
Advances received
Taxes payable (other than income tax)
Payables to staff
Deferred income
Interest rate swap liability
Other current payables
2016
2015
29,374,499
350,816
1,085,381
1,339,925
99,489
147,019
83,763
24,000,558
1,772,204
627,824
1,603,412
85,310
173,590
554,435
32,480,892
28,817,333
The Group’s exposure to currency and liquidity risk related to trade and other payables is disclosed in note 28.
71
Annual Report 2016
Overview
Strategic Report
Corporate Governance
Financial Statements
28 Financial instruments and risk management
(a) Overview
The Group has exposure to the following risks from its
use of financial instruments:
— credit risk;
— liquidity risk;
— market risk.
This note presents information about the Group’s
exposure to each of the above risks, the Group’s
objectives, policies and processes for measuring and
managing risk, and the Group’s management of capital.
Further quantitative disclosures are included throughout
these consolidated financial statements.
Risk management framework
The Board of Directors has overall responsibility for
the establishment and oversight of the Group’s risk
management framework.
The Group’s risk management policies are established
to identify and analyse the risks faced by the Group, to
set appropriate risk limits and controls, and to monitor
risks and adherence to limits. Risk management policies
are reviewed regularly to reflect changes in market
conditions and the Group’s activities. The Group, through
its training and management standards and procedures,
aims to develop a disciplined and constructive control
environment in which all employees understand their
roles and obligations.
The Group’s Audit Committee oversees how
management monitors compliance with the Group’s
risk management policies and procedures and reviews
the adequacy of the risk management framework in
relation to the risks faced by the Group. The Group’s
Audit Committee is assisted in its oversight role by
Internal Audit. Internal Audit undertakes both regular
and ad hoc reviews of risk management controls and
procedures, the results of which are reported to the
Audit Committee.
(b) Credit risk
Credit risk is the risk of financial loss to the Group if
a customer or counterparty to a financial instrument fails
to meet its contractual obligations, and arises principally
from the Group’s receivables from customers, bonuses
receivable 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
22
23
Carrying amount
2016
2015
4,162,025
11,463,467
15,625,492
4,175,051
9,768,130
13,943,181
Due to the fact that the Group’s principal activities are
located in the Russian Federation the credit risk is mainly
associated with its 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.
(ii) Trade and other receivables
The Group has no considerable balance of trade
receivables because the majority of its 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.
72
Impairment losses
The aging of trade and other receivables at the reporting date was:
’000 RUB
Gross 2016
Impairment 2016
Gross 2015
Impairment 2015
Not overdue and past due less than 90 days
4,045,013
Past due 90-180 days
Past due 181-360 days
More than 360 days
43,875
36,658
67,736
4,193,282
—
—
—
(31,257)
(31,257)
4,064,535
57,304
36,799
45,690
4,204,328
—
—
—
(29,277)
(29,277)
The movement in the allowance for impairment in respect of trade receivables during the year was as follows:
’000 RUB
2016
2015
Balance at beginning of the year
Impairment loss recognised
Impairment loss reversed
Balance at end of the year
29,277
1,980
—
31,257
28,429
848
—
29,277
The management has performed a thorough analysis of the recoverability of the receivables and impaired
the balances outstanding for more than 1 year. Based on past experience 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 11,463,467 thousand at 31 December 2016
(2015: RUB 9,768,130 thousand), which represents its
maximum credit exposure on these assets. Cash and
cash equivalents are mainly held with banks which are
rated from Ba2 to Ba3 based on Moody’s rating.
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 4.0;
— Monitoring of compliance with debt covenants;
— Planning: timely preparation of operating, investing
and financing cash-flow forecasts on rolling basis.
(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.
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Annual Report 2016
Overview
Strategic Report
Corporate Governance
Financial Statements
(i) Exposure to liquidity risk
The following are the contractual maturities of financial liabilities, including future interest payments:
2016
’000 RUB
Carrying
amount
Contractual
cash flows
0-6 mths
6-12
mths
1-5 yrs
Non-derivative financial liabilities
Secured bank loan
Unsecured bonds
5,001,141
6,352,432
(5,467,111)
(7,574,128)
Unsecured bank facilities
24,008,799
(31,602,297)
(1,445,164)
(1,076,276)
(2,214,692)
(1,394,695)
(734,925)
(2,627,252)
(5,762,927)
(1,202,048)
(28,185,557)
929,960
(1,010,471)
(37,096)
(37,096)
(936,279)
Unsecured loans from
related parties
Unsecured loans from
other companies
Trade and other payables
30,945,206
(30,945,206)
(30,945,206)
2,876
(2,878)
(2,878)
—
—
—
—
67,240,414
(76,602,091)
(35,721,312)
(3,368,764)
(37,512,015)
As at 31 December 2016 Group’s current liabilities
exceed current assets by RUB 5,892,343 thousand
(2015: RUB 10,254,288 thousand). Excess of current
liabilities over current assets is usual for retail industry.
The Group uses excess of trade and other payables over
inventory to finance its investing activities.
In April 2016 the Group placed unsecured bonds on
Moscow Exchange in the amount of RUB 5,000,000
thousand. The bonds mature after 5 years in 2021.
However, bond holders have an option to claim
repayment after 2.5 years – in October 2018.
2015
’000 RUB
Carrying
amount
Contractual
cash flows
0-6 mths
6-12
mths
1-5 yrs
Non-derivative financial liabilities
Secured bank loan
Unsecured bonds
5,000,000
(5,858,020)
10,603,858
(11,277,679)
Unsecured bank facilities
18,833,868
(23,184,757)
(207,034)
(5,724,587)
(1,846,406)
(210,466)
(5,440,520)
(5,125,475)
(427,617)
(2,216,104)
(19,122,247)
1,117,400
(1,303,777)
(44,329)
(44,329)
(1,215,119)
Unsecured loans from
related parties
Unsecured loans from
other companies
Trade and other payables
26,331,994
(26,331,994)
(26,331,994)
2,873
(2,878)
(25)
(1)
—
(2,852)
—
61,889,993
(67,959,105)
(34,154,375)
(7,596,375)
(26,208,355)
There are no payments due after 5 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.
74
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 the 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 an acceptable level by keeping
the proportion of financial assets and liabilities in foreign
currencies to total financial liabilities at an acceptable
level. From time to time the Group converts assets
and liabilities from one currency to another. The Group
regularly considers the necessity of using derivatives to
hedge its exposure to currency risk.
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
Cash and cash equivalents
Unsecured loans from related parties
Trade and other payables
Gross exposure
Net exposure
The following significant exchange rates applied during the year:
Russian Rouble equals
US Dollar
USD-denominated
2016
USD-denominated
2015
1,760
3,582
(929,960)
(176,595)
(1,101,213)
(1,101,213)
2,101
750
(1,117,400)
(760,753)
(1,875,302)
(1,875,302)
Average rate
Reporting date rate
2016
2015
2016
2015
67.0349
60.9579
60.6569
72.8827
Sensitivity analysis
A 20% weakening of the RUB against USD at
31 December 2016 would have decreased equity
and profit and loss by RUB 220,243 thousand (2015:
RUB 375,060 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 was performed on the same basis for 2015.
A strengthening of the RUB against USD at
31 December 2016 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 2016, 6% of the Group’s interest
bearing financial liabilities were subject to re-pricing
within 6 months after the reporting date (2015: 39%).
The Group uses swap to hedge its exposure to
variability of interest rates. As at 31 December
2016 the Group had interest swap agreement with
VTB 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 2016
fair value of swap liability was RUB 147,018 thousand
(31 December 2015: RUB 173,590 thousand).
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Annual Report 2016 Overview
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Corporate Governance
Financial Statements
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 liabilities
Carrying amount
2016
2015
8,240,763
(36,295,208)
7,180,674
(26,736,999)
—
(8,821,000)
Cash flow sensitivity analysis for variable rate instruments
A change of 500 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 was performed on the same basis for 2015.
’000 RUB
2016
Variable rate instruments
Interest rate swap
Cash flow sensitivity (net)
2015
Variable rate instruments
Interest rate swap
Cash flow sensitivity (net)
Profit or loss
Equity
500 bp increase 500 bp decrease
500 bp increase 500 bp decrease
—
75,000
75,000
—
(75,000)
(75,000)
—
96,306
96,306
—
(96,845)
(96,845)
(441,050)
441,050
163,250
(163,250)
(277,800)
277,800
—
246,893
246,893
—
(231,668)
(231,668)
(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.
76
’000 RUB
31 December 2016
Gross amounts
Amounts offset in accordance with IAS 32 offsetting criteria
Trade and
other receivables
Trade and
other payables
2,356,574
(5,013)
13,602,195
(5,013)
Net amounts presented in the statement of financial position
2,351,561
13,597,182
Amounts related to recognised financial instruments that do not meet
some or all of the offsetting criteria
Net amount
31 December 2015
Gross amounts
Amounts offset in accordance with IAS 32 offsetting criteria
(2,351,561)
—
(2,351,561)
11,245,621
1,222,653
(1,053)
9,429,773
(1,053)
Net amounts presented in the statement of financial position
1,221,600
9,428,720
Amounts related to recognised financial instruments that do not meet
some or all of the offsetting criteria
Net amount
(1,221,600)
—
(1,221,600)
8,207,120
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 Moscow Exchange.
Fair value of bonds payable was determined for
disclosure purposes based on active market quotations
(Level 1 fair value).
(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; the Group follows this requirement.
77
Annual Report 2016
Overview
Strategic Report
Corporate Governance
Financial Statements
29 Operating leases
Leases as lessee
The Group has both owned and leased land plots.
The owned 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 capitalized as initial cost of land lease
and are amortised over the period of the lease
(49-51 years). The further information on leases is
detailed below.
When the Group leases land plots under operating
leases, the lessors for these leases are State authorities
and third parties. The leases are typically run for 2-3
years, after which long term operating lease contract is
concluded for 49 years.
The Group also rents premises under operating leases.
These leases typically run up to 10 years, although some
leases may be for longer periods. 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 an excess of 2%-6% of the revenue of related stores
over the fixed rent rate.
During the year ended 31 December 2016
RUB 5,518,550 thousand was recognised as
an expense (including amortisation of Lease rights
amounting to RUB 174,640 thousand) in the profit
and loss in respect of operating leases (2015:
RUB 4,728,035 thousand). Contingent rent recognised
as an expense for the year ended 31 December
2016 amounted to RUB 467,947 thousand (2015:
RUB 359,180 thousand).
At 31 December, the future minimum lease payments under non-cancellable leases were payable as follows.
RUB 000’
2016
2015
Less than one year
Between one and five years
More than five years
Leases as lessor
The Group leases out its investment property and some
space in the buildings of hypermarkets. During the year
ended 31 December 2016 RUB 1,620,671 thousand
was recognised as rental income in the consolidated
statement of profit or loss and other comprehensive
income (2015: RUB 1,529,250 thousand). All leases
where the Group is lessor are cancellable. The Group has
contingent rent arrangements.
30 Capital commitments
3,771,246
14,239,837
30,089,728
48,100,811
3,012,410
10,775,153
20,743,629
34,531,192
Contingent rent recognised as income amounted to
RUB 79,877 thousand for the year ended 31 December
2016 (2015: RUB 67,483 thousand). Contingent rent
is determined as an excess of 4%-25% of the tenant’s
revenue over the fixed rent rate.
The Group has capital commitments to acquire property, plant and equipment and intangible assets amounting to
RUB 1,078,308 thousand as at 31 December 2016 (2015: RUB 3,570,470 thousand). The capital commitments
mostly consist of construction contracts for stores.
78
31
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 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 characterized 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.
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 the Group’s tax positions based
on its interpretations of applicable Russian tax legislation,
official pronouncements and court decisions. In addition
to tax liabilities recognised in these consolidated financial
statements, the Group is exposed to uncertain tax
positions for which no provision has been made because
management has assessed that additional payments
are not probable. However, the interpretations of
the relevant authorities could differ. If the authorities
are successful in enforcing their interpretations,
the maximum unrecognised exposures approximate
RUB 2,400 million as at 31 December 2016.
(c) Assets pledged or restricted
The Group has the following assets pledged as collateral for loans and borrowings:
’000 RUB
Note
2016
2015
Property, plant and equipment (carrying value)
15
Total
2,529,768
2,529,768
2,592,895
2,592,895
32 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)
RUB 000’
2016
2015
Salaries and bonuses
Social security contributions
Long-service bonus
Other payments
359,436
10,718
98,358
7,500
476,012
236,815
16,389
28,691
401,165
683,060
During the year ended 31 December 2016 the Group revised list of employees included in key management
personnel. Comparative information for the year ended 31 December 2015 was represented to reflect current
structure of key management personnel.
79
Annual Report 2016
Overview
Strategic Report
Corporate Governance
Financial Statements
In addition members of Board of Directors received remuneration in the amount of RUB 59,942 thousand for
the year ended 31 December 2016 (2015: RUB 32,438 thousand) which is included in legal and professional
expenses.
(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 2016
Transaction
value 2015
Trade receivable
2016
Trade payables
2015
2,225
2,225
35,562
35,562
94
94
(6,007)
(6,007)
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
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 2016
Transaction
value 2015
Prepayments
2016
Prepayments
2015
(788,700)
(726,151)
921,195
936,956
(653,097)
(616,077)
(73,197)
(62,406)
(54,518)
(55,556)
—
—
—
(2,756)
(3,922)
2,143
(81,347)
(76,095)
—
—
—
—
—
—
(872,803)
(806,168)
923,338
936,956
All outstanding balances with related parties, except for
prepayments for operating leases, are to be settled in
cash within six months of the reporting date. None of
the balances are secured.
Outstanding balance of RUB 921,195 thousand as at
31 December 2016 comprises prepayments for rent
of hypermarkets for the period until 2034 amounting
to RUB 925,704 thousand and current liabilities for
rent of hypermarkets in the amount of RUB 4,509
thousand. Long-term part of prepayments amounting
to RUB 894,175 thousand is disclosed in note 19.
Terms of the leases are such that the Group pays
rentals which include the reimbursement of all operating
expenses related to these hypermarkets and nearby
leased areas and a certain percentage of the Group’s
retail revenue from the operation of these hypermarkets.
Interest costs on loans from related parties amounted
to RUB 81,347 thousand for the year ended
31 December 2016 (2015: RUB 76,095 thousand) and
were recorded as finance costs in profit or loss.
All other outstanding balances are to be settled in
cash within six months of the reporting date. None of
the balances are secured.
80
(iii) Loans
’000 RUB
Loans paid back:
Other related parties
Amount loaned
2016
Amount loaned
2015
Outstanding
balance 2016
Outstanding
balance 2015
—
—
(929,960)
(1,117,400)
The loans from other related parties bear interest at 8% per annum and are payable in 2018.
(d) Pricing policies
Related party transactions are not necessarily based on market prices.
33 Events subsequent to the reporting date
In January 2017 the Group paid interim dividends
to shareholders in the amount of RUB 1,418,998
thousand.
(ii) Transactions eliminated on consolidation
Intra-group balances and transactions, and any
unrealised income and expenses arising from intra-group
transactions, are eliminated in preparing the consolidated
financial statements.
In March 2017 the Group announced the appointment
of Miodrag Borojevic as its new Chief Executive Officer
of hypermarket and supermarket business. He will be
succeeding Heigo Kera from May 2017.
34 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;
— Investment property is remeasured at fair value.
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 36, which addresses changes in presentation.
(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.
(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.
(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.
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Annual Report 2016 Overview
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Corporate Governance
Financial Statements
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.
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.
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.
(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,
82
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
percent. For a cash flow hedge of a forecast transaction,
the transaction should be highly probable to occur and
should present an exposure to variations in cash flows
that could ultimately affect reported net income.
Derivatives are recognised initially at fair value;
attributable transaction costs are recognised in profit
or loss when incurred. Subsequent to initial recognition,
derivatives are measured at fair value, and changes
therein are accounted for as described below.
When a derivative is designated as the hedging
instrument in a hedge of the variability in cash flows
attributable to a particular risk associated with
a recognised asset or liability or a highly probable
forecast transaction that could affect profit or loss,
the effective portion of changes in the fair value of
the derivative is recognised in other comprehensive
income and presented in the hedging reserve in equity.
The amount recognised in other comprehensive income is
removed and included in profit or loss in the same period
as the hedged cash flows affect profit or loss under
the same line item in the statement of 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
shareholder group ) 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.
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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.
(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.
The estimated useful lives of significant items of
property, plant and equipment for the current and
comparative periods are as follows:
— Buildings
30 years;
— Machinery and equipment,
2-20 years;
auxiliary facilities
— Motor vehicles
— Leasehold improvements
5-10 years;
over the term of
underlying lease;
— Other fixed assets
2-10 years.
Depreciation methods, useful lives and residual values
are reviewed at each financial year end and adjusted if
appropriate.
(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.
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(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:
— software licenses
— other intangible assets
1-7 years;
1-5 years.
Amortisation methods, useful lives and residual values
are reviewed at each financial year end and adjusted if
appropriate.
(h) Leased assets
(i) Operating leases
Where the Group is a lessee in a lease which does
not transfer substantially all the risks and rewards
incidental to ownership from the lessor to the Group,
the total lease payments, including those on expected
termination, are charged to profit or loss on a straight-
line basis over the period of the lease.
Where the Group is a lessee in a land lease, the initial
cost of land lease is amortized using straight-line
method over the period of lease being up to 51 years.
Where the Group is a lessee in a lease of premises,
the lease rights are amortized using straight-line method
over the period of lease being up to 8-19 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.
(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.
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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.
(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.
86
(m) Revenue
Revenue is measured at the fair value of the
consideration received or receivable, net of VAT, returns
and discounts.
(i) Goods sold
Revenues from sales of goods are recognised
at the point of transfer of risks and rewards of
ownership of the goods, for retail trade it is normally at
the cash register.
(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
recognized 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.
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.
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(t) Presentation of the statement of cash flows
The Group reports cash flows from operating activities
using direct method. Cash flows from investing activities
are presented net of VAT. VAT paid to suppliers of
non-current assets and VAT in proceeds from sale of
non-current assets are presented in line “VAT paid” in
operating activities.
(u) Guarantees
The Group considers that financial guarantee
contracts entered into by the Group to guarantee
the indebtedness of other parties are insurance
arrangements, and accounts for them as such. In this
respect, the Group treats the guarantee contract as
a contingent liability until such time as it becomes
probable that the Group will be required to make
a payment under the guarantee.
— IFRS 15 Revenue from Contracts with Customers
establishes a comprehensive framework for
determining whether, how much and when
revenue is recognised. It replaces existing revenue
recognition guidance, including IAS 18 Revenue,
IAS 11 Construction Contracts and IFRIC 13
Customer Loyalty Programmes. The core principle
of the new standard is that an entity recognises
revenue to depict the transfer of promised goods
or services to customers in an amount that reflects
the consideration to which the entity expects to be
entitled in exchange for those goods or services.
The new standard results in enhanced disclosures
about revenue, provides guidance for transactions
that were not previously addressed comprehensively
and improves guidance for multiple-element
arrangements.
(v) 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 2016, 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, published in July 2014,
replaces the existing guidance in IAS 39 Financial
Instruments: Recognition and Measurement. IFRS 9
includes revised guidance on the classification and
measurement of financial instruments, including
a new expected credit loss model for calculating
impairment on financial assets, and the new
general hedge accounting requirements. It also
carries forward the guidance on recognition and
derecognition of financial instruments from IAS 39.
IFRS 9 is effective for annual periods beginning on or
after 1 January 2018, with early adoption permitted.
The Group does not intend to adopt this standard
early.
The Group expects that the new Standard will not
have significant impact on its financial position or
performance.
IFRS 15 is effective for annual periods beginning
on or after 1 January 2018, with early adoption
permitted.
The Group does not intend to adopt this standard
early.
The Group expects that the new Standard will not
have significant impact on its financial position or
performance.
— IFRS 16 replaces the existing lease accounting
guidance in IAS 17 Leases, IFRIC 4 Determining
whether an Arrangement contains a lease,
SIC-15 Operating Leases – Incentives and SIC-
27 Evaluating the Substance of Transactions
Involving the Legal Form of a Lease. It eliminates
the current dual accounting model for lessees, which
distinguishes between on-balance sheet finance
leases and off-balance sheet operating leases.
Instead, there is a single, on-balance sheet accounting
model that is similar to current finance lease
accounting.
Lessor accounting remains similar to current
practice – i.e. lessors continue to classify leases as
finance and operating leases.
88
The Group is a lessee in significant number of
operating lease agreements (stores and land plots).
Application of IFRS 16 will result in recognition of
these leases as asset on balance sheet. At the same
time, a financial liability will be recognized.
The Group does not intend to adopt this standard
early as it is not yet endorsed by the European Union.
The Group has not analysed the likely impact
of the new Standard on its financial position or
performance.
— Disclosure Initiative (Amendments to IAS 7)
The amendments require disclosures that enable users
of financial statements to evaluate changes in liabilities
arising from financing activities, including both changes
arising from cash flow and non-cash changes.
The amendments are effective for annual periods
beginning on or after 1 January 2017, with early
adoption permitted.
The Group does not intend to adopt this standard early.
36 Changes in presentation
As at 31 December 2016 the Group presented lease
rights as a separate line item in the consolidated
statement of financial position. Previously lease rights
were presented as other non-current assets (initial
cost of land lease) and intangible assets (lease rights
for premises). Comparative information has been re-
presented accordingly.
The effect of change in presentation on the statement of financial position as at 31 December 2015 and
1 January 2015 was as follows:
As at 31 December 2015
’000 RUB
As at 31 December 2015
Lease rights
Other non-current assets
Intangible assets
As at 1 January 2015
’000 RUB
As at 1 January 2015
Lease rights
Other non-current assets
Intangible assets
As previously
presented
Effect of change in
presentation
Re-presented
8,228,505
—
6,934,782
1,293,723
—
4,847,537
(4,188,872)
(658,665)
8,228,505
4,847,537
2,745,910
635,058
As previously
presented
Effect of change in
presentation
Re-presented
11,543,739
—
11,543,739
—
4,615,995
11,004,304
539,435
(4,540,476)
(75,519)
4,615,995
6,463,828
463,916
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