O'Key Group SA Annual Report 2017

Plain-text annual report

Transformation for Excellence Annual Report 2017 12 In this Report: 02 OVERVIEW 04 About O’KEY Group 08 Financial & Operational Highlights 10 Highlights of 2017 12 STRATEGIC REPORT 14 O’KEY CEO’s Statement 15 DA! CEO’s Statement 16 Russia’s Food Retail Market 18 Delivering on Our Strategy 20 OPERATIONAL REVIEW 22 Hypermarkets 34 Discounters 38 MANAGEMENT DISCUSSION AND ANALYSIS 42 CORPORATE SOCIAL RESPONSIBILITY 52 CORPORATE GOVERNANCE 54 Corporate Governance System 62 Risk Management System 66 69 Management & Directors Responsibility Information for Shareholders and Investors Statement 70 FINANCIAL STATEMENTS 71 Report of the Réviseur D`Entreprises Agréé 76 Consolidated Financial Statements 81 Notes to the Consolidated Financial Statements 117 GLOSSARY 118 CONTACTS MORE AVAILABLE ONLINE You can learn about O’KEY Group’s strategy, our businesses and performance, approach to governance and risk online, where latest and archived annual and strategic reports are available to view or download. For further information and a fuller understanding of the results and the state of affairs of the Group, please refer to the full suite of documents at www.okeyinvestors.ru O’KEY Group of Companies01 About the Report This Annual Report 2017 (the ‘Report’) has been prepared by O’KEY GROUP S.A. (‘O’KEY Group’, the ‘Group’, or the ‘Company’). This Report discloses information on the implementation of the Group’s strategy in 2017, presents the Group’s operating and financial results, describes the Group’s corporate governance system and corporate social responsibility. The Report has been prepared based on consolidated IFRS financial statements for 2017. The Report has been prepared based on the information available to the Group as at the time when this Report was prepared, including information obtained from third parties. The Company reasonably believes that this information is complete and accurate as at the publication date of this Report; however, it does not make any representation or warranty that this information will not be updated, revised, or otherwise amended in the future. This Report includes estimates or forward-looking statements related to operating, financial, economic, social and other measures that can be used to assess the performance of O’KEY GROUP S.A. The Company does not make any representation or warranty that the results anticipated by such forwardlooking statements will be achieved. The Company shall not be liable to any individual or legal entity for any loss or damage which may arise from their reliance on such forward-looking statements. Annual Report 2017 OVERVIEW 02 02 Overview i s e n a p m o C f o p u o r G Y E K O ’ OUR VISION The best compact hypermarket The best value for money discounter OUR MISSION We strive for excellence We provide a simple and easy shopping experience We aim to create an effective working environment O’KEY Group of Companies 0303 7 1 0 2 t r o p e R l a u n n A O u t s t a nding results I m p e c c a b l e s e r v i c e OUR VALUES ess n e tiv a v o n n I E ff e c tiv e team o f e ssio nalism A t m o s p here r o f p Annual Report 2017 OVERVIEW 04 04 About O’KEY Group i s e n a p m o C f o p u o r G Y E K O ’ O’KEY Group is one of the largest retail chains in Russia. The Group operates two main formats: hypermarkets under the O’KEY brand and discounters under the DA! brand. O’KEY Group opened its first hypermarket in St. Petersburg in 2002 and has shown continuous growth since then. O’KEY is the first Russian food retailer to launch and actively develop e-commerce operations in St. Petersburg and Moscow, offering a full range of products for home delivery. KEY FACTS: Experienced international 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 Two differentiated formats of modern food retail: hypermarket and discounter formats Highly centralised logistics: the Group operates 4 distribution centres across the Russian Federation About 23,000 employees O’KEY Group of Companies 05 15 years of history 145 total number of stores 4 distribution centres 577.8 of selling space, K m2 177.5 total Group revenue in 2017, RUB bn 12.8% CAGR revenue, growth in RUB terms (2009-2017) Annual Report 2017 OVERVIEW 06 OUR HISTORY 2002 2003 2007 2009 O’KEY GROUP was founded FIRST O’KEY HYPERMARKET opened in St. Petersburg Strategy of establishing REGIONAL MARKET LEADERSHIP Focus on EXPANSION in Russia’s key regional markets 8 HYPERMARKETS 6 NEW REGIONS AND 2 SUPERMARKETS opened in St. Petersburg TOP-10 retailer by revenue 37 total stores DOUBLED selling space to >190 K m2 OWN PRODUCTION launched in 2003 ×15 TIMES increased selling space to 87 K m2 NEW FORMAT launched FIRST SUPERMARKET opened in 2006 OUR GEOGRAPHY 145 total number of stores Number of stores by format (year end) 2017 2016 2015 2014 2013 73 5 74 71 69 36 40 39 108 60 34 94 67 145 54 164 35 146 Emergence as a ONE OF THE LEADING national Russian retailers RAPID EXPANSION in Moscow and key regional markets IPO on the London Stock Exchange TOP-3 retailer by revenue >100 total stores >550 K m2 selling space 73 Hypermarkets 67 Discounter stores 51 Supermarkets St. Petersburg 1 22 1 Murmansk Moscow 2 11 Ivanovo 1 Syktyvkar 1 3 Lipetsk 1 2 Voronezh Nizhny Novgorod 1 1 Saratov 1 Togliatti 3 Ufa 2 Surgut 3 Yekaterinburg 3 Tyumen Rostov-on-Don 2 Krasnodar 4 Sochi 1 Volgograd 1 Stavropol 1 2 Astrakhan 1 Orenburg Hypermarket Supermarket Discounter store Distribution centre for hypermarkets Distribution centre for discounter stores 1 1 Omsk 2 Novosibirsk 2 Krasnoyarsk 1 Irkutsk 1 In 2017, the Company sold a supermarket business consisting of 32 stores. The remaining five supermarkets will be refurbished into compact hypermarkets in 2018. O’KEY Group of Companies07 2015 2016 2017 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 STRATEGIC PARTNERSHIP WITH FAMILIA the leading off-price retailer in Russia O’KEY-AUTO AND 24 HOUR DELIVERY SERVICE launched for hypermarket segment SALE OF SUPERMARKET BUSINESS including 32 supermarkets over Russia 145 total stores >577 K m2 selling space St. Petersburg 1 22 Moscow 2 11 1 Murmansk 2 Tver region 14 Moscow 39 Moscow region Kaluga region 3 Tula region 6 3 Ryazan region Lipetsk 2 1 Voronezh Rostov-on-Don 2 Krasnodar 4 Volgograd 1 1 Saratov 1 Sochi 1 1 Stavropol 1 3 Ivanovo 1 Syktyvkar Nizhny Novgorod 1 Togliatti 3 Ufa 2 Surgut 3 Yekaterinburg 3 Tyumen 51 Supermarkets 2 Astrakhan 1 Orenburg Hypermarket Supermarket Discounter store Distribution centre for hypermarkets Distribution centre for discounter stores 1 1 Omsk 2 Novosibirsk 2 Krasnoyarsk 1 Irkutsk Annual Report 2017 OVERVIEW 08 08 Financial & Operational i s e n a p m o C Highlights f o p u o r G Y E K O ’ FINANCIAL HIGHLIGHTS Total revenue, RUB bn O’KEY Revenue, RUB bn DA! Revenue, RUB bn 2017 2016 2015 2014 2013 177.5 175.5 162.5 151.9 139.5 2017 2016 2015 2014 2013 167.1 2017 10.4 169.7 2016 5.8 161.8 2015 0.7 151.9 139.5 Group EBITDA, RUB bn O’KEY EBITDA, RUB bn DA! EBITDA, RUB bn 2017 2016 2015 2014 2013 9.3 9.3 10.1 11.3 11.0 2017 2016 2015 2014 2013 11.4 2017 -2.0 2016 -2.6 2015 -1.6 11.8 11.7 11.3 11.0 O’KEY Group of Companies 0909 7 1 0 2 t r o p e R l a u n n A OPERATIONAL HIGHLIGHTS Gross profit, RUB bn Net retail revenue, RUB bn Total selling space, K m2 2017 2016 2015 2014 2013 40.4 40.2 38.4 37.2 33.3 2017 2016 2015 2014 2013 174.3 172.5 160.3 149.9 137.6 2017 2016 2015 2014 2013 577.8 622.9 593 552 489 Net profit/loss, RUB bn Traffic, mln Number of stores 3.2 1.9 2017 2016 -0.1 2015 2014 2013 5.2 4.9 2017 2016 2015 2014 2013 227.7 226.8 207.4 193.5 185.6 2017 2016 2015 2014 2013 145 146 164 108 94 Annual Report 2017 OVERVIEW 1010 Highlights of 2017 Jan 21 O’KEY Group arranged a fair of locally produced cheese with the support of the Republic of Bashkortostan, State Committee on Trade and Consumer Protection. 1—28 Feb O’KEY Group in partnership with one of the largest fundraising Charity Foundations Rusfond held a charity event ‘Buy a toy – save a child’s life’ as part of the charity programme ‘Kind Purchase’. Mar 2 O’KEY Group launched O’KEY Auto, a new service within its Online Shopping platform, which allows its customers to have the groceries delivered right to their car. Mar 22 O’KEY Group announced the appointment of Miodrag Borojevic as its new Chief Executive Officer of the hypermarket & supermarket business. Mar 30 Within 3 months, the number of ‘ROSBANK O’KEY Mastercard’ co-branded credit cards exceeded 60,000. Apr 11 At the Fourth International PRIVATE LABEL AWARDS in 2017 held by IPLS, O’KEY Group received the highest award in the category ‘Best private label in Non-food’ in the economy segment and two other nominations in the ‘Best private label in Economy segment’ and ‘Responsible approach to private label’ categories. May 10 O’KEY Group’s River House hypermarket in St. Petersburg passed the certification procedure and received the ‘St. Petersburg mark of quality’ in the retail category. O’KEY Group of Companies 11 Sep 22 One of the O’KEY Group hypermarkets received an award in the category ‘Best Specialised Retailer in St. Petersburg’ in the XIII annual Golden Hermes contest , conducted with the support of the St. Petersburg City Administration in the urban consumer market. Dec 13 O’KEY Group has launched a fundamentally new trading format in Russia. The first compact hypermarket with an area of 5 K m2, comprising special areas for ‘ultra fresh’ and ‘fresh’ products, has been opened in Yekaterinburg. May 26 O’KEY Group Online Shop announced 24-hour delivery service of products to Moscow customers. May 28 The annual international creative festival for children and youth with disabilities ‘Step towards!’ was held in St. Petersburg for the tenth time with the support of O’KEY Group. Jul 10 O’KEY Group announced a strategic partnership with Familia, the leading off-price retailer in Russia. O’KEY Group announced the appointment of Ivan Dropuljic as Commercial Operations Director of the hypermarket & supermarket business. Dec 15 O’KEY Group and X5 Retail Group have reached an agreement for X5 to acquire the supermarkets business currently operating under the O’KEY brand1. 1 In 2017, the Company sold a supermarket business consisting of 32 stores. The remaining five supermarkets will be refurbished into compact hypermarkets in 2018. Annual Report 2017 STRATEGIC REPORT 12 12 Strategic Report i s e n a p m o C f o p u o r G Y E K O ’ The Group managed to withstand the challenges of a competitive market environment and achieved strong results that matched our expectations. We continued to implement our business transformation plan by sale of supermarkets business and revamping our focus on the hypermarkets and discounter store segments. We are confident these initiatives will help the Group to fully realise its growth strategy. O’KEY Group of Companies Strategic Report 1313 7 1 0 2 t r o p e R l a u n n A Annual Report 2017 STRATEGIC REPORT 14 O’KEY CEO’s Statement DEAR STAKEHOLDERS, In 2017, the economy demonstrated the first signs of recovery supported by gradual improvement of consumer sentiment. At the same time the competitive environment in retail sector remained strong. Aggressive selling space growth ahead of food retail sales continued to put pressure on the performance of more mature stores. In 2017, the Group made a strategic decision to focus on its key businesses: hypermarkets under the O’KEY brand where it already has strong footprint, and on the rapidly growing discounters segment under the DA! brand which has proven successful and has significant potential for further growth. The sale of supermarket business completed in 2017 will help the Group to concentrate on these two areas where we see the most promising opportunities for the Group. The Group’s strategy remains centred on ensuring the best shopping experience for our clients. The Group strives to become a destination point for its customers, offering a wide range of opportunities for convenient and high quality shopping. Throughout the year, the Russian retail market remained highly competitive, encouraging O’KEY to introduce a new commercial model, new marketing initiatives and further product range improvements. One of our priorities in 2017 was to change customer perceptions of our price proposition. Therefore, we put considerable marketing efforts into the promotion of our new commercial model that aims to guarantee the best value for money for our customers. These steps helped O’KEY to reverse the traffic outflow observed in the first half of the year and build strong fundamentals for correcting price perceptions and growing brand loyalty of customers. In addition, we continued to develop our e-commerce platform and significantly improved the functionality of our mobile app and website which enabled us to achieve record online sales in 2017. We constantly seek out opportunities to increase the efficiency of the hypermarket selling space. With this in mind, we continued to develop the format of compact hypermarkets and signed an agreement for a strategic partnership with Familia, the leading off-price retailer in Russia. This strategic alliance will provide opportunities to grow EBITDA per m2 by securing additional rent income and boosting customer traffic. To further streamline our operations, we carried out a restructuring of our head office in 2017 which has made our organisational structure even more transparent and efficient. During the year we worked tirelessly to increase overall operational efficiency and enhance the centralisation rate of our supply chain. The latter improved to almost 60% by the end of 2017 from around 40% a year before. In 2017, we also strengthened our management team by introducing Ivan Dropuljic as our new Commercial Operations Director. Mr Dropuljic will lead the combined forces of our commercial, marketing, space management and quality control departments. We believe that this level of centralisation in our commercial operations will be highly beneficial for O’KEY’s strategic development. O’KEY employs over 21,000 people, and each member of our team matters. We believe that our strong corporate values, team expertise and strategic vision are integral in securing our success in the years to come. In 2018, we will continue work for the benefit of all our stakeholders, and I firmly believe that together we are able to achieve all our goals, strengthen our market position and provide our customers with even more moments of unforgettable shopping. Miodrag Borojevic CEO of O’KEY O’KEY Group of CompaniesDA! CEO’s Statement DEAR STAKEHOLDERS, In 2017, DA! achieved solid operating results, leaving us very pleased with the pace of growth. Net retail revenue increased by 81.5% YoY to RUB 10.2 bn. LFL net retail revenue generated by DA! increased by 52.0% YoY, driven by a 34.8% YoY increase in LFL traffic and a 12.7% YoY increase in LFL average ticket. EBITDA generated by DA! improved from negative RUB 2,592 mln (44.9% of sales) in 2016 to negative RUB 2,024 mln (19.5% of sales) in 2017 driven by new store openings and higher LFL sales. In 2017, 13 new stores were opened in Moscow and the Moscow Region, pushing the total number of our discounters to 67 with a total selling space of 46.2 K m2. During the year, we put significant effort into improving our value proposition and introduced a large number of high quality private label brand products, many of which are produced exclusively for DA!. At the same time, we continued to exercise close control over the total number of SKUs on our shelves. Having a compact product range carefully tailored to the needs of our customers is integral to the success of our business and enables us to achieve higher turnover per m2 while maintaining lower in-store operating costs. Ultimately, this enabled us to secure consistent price levels throughout the year and further increase the price gap between DA! and our main competitors. In 2017, we also focused on building a more positive in- shop environment and improving the overall customer experience. To achieve this, we conducted numerous staff training sessions, ensuring that our employees 15 not only provide the highest level of customer service, but also enjoy their working environment and become drivers of our in-store productivity. In 2018, we intend to continue with the accelerated expansion of discounters in Moscow and surrounding regions and plan to open up to 30 DA! stores. We are confident that the discounter segment has significant growth potential in the price-sensitive Russian market. I am confident that our strategic approach to delivering the best value-for-money proposition will enable DA! to establish itself among the leading Russian food retailer brands in the near future. Armin Burger CEO of DA! Annual Report 2017 STRATEGIC REPORT 16 Russia’s Food Retail Market MARKET IN 2017 Having suffered several years of headwinds arising from weak oil prices, interest rate increases and the impact of international sanctions in 2017 Russian economy demonstrated the signs of recovery. Supported by slowing inflation and growing real wages throughout 2016-2017 Russian food retail sales moved to positive territory, posting 4.4% YoY growth in 2017. Despite the gradual recovery on the macro front, the operating environment remained challenging in 2017. While consumer demand demonstrated modest signs of recovery, and consumer confidence remained healthy overall, the supply-side recorded disproportionate growth owing to the aggressive pursuit of selling space expansion on the part of retailers. According to Infoline, the top 10 retailers added 2.2 mln m2 in additional space in 2017, 15.2% growth YoY, with the three largest retailers accounting for 84% of this growth. The continuous aggressive roll-out of the selling space across top-10 retailers on the one hand remained the key pillar of the double digit net retail revenue growth in 2017, on the other hand continued to dilute the sales density and cannibalise not only competitors stores, but their own store base as well. As a result of aggressive selling space roll-out, modern trade penetration reached 71% (according Goldman Sachs research) as of the end of the year and is estimated to increase up to 81% in the next several years in line with developed market levels. However, the nature of the penetration is rather uneven with one third of Russian territory accounting for 85% of the retail market and quite fragmented with top-5 retailers accounting for around quarter of the market. While the former is the function of the low population density in Russia (one of the lowest in the world) suggesting the potential growth to come from already well-penetrated regions, the latter sets the solid ground for market consolidation around the largest players. This suggest the room for larger players, such as O’KEY, to deliver sustainable growth, using differentiated formats to reach target consumer segments. Building our strategy around two main formats – compact hypermarkets and discounters – we aim to cover the needs and preferences of all consumer segments. Striving for efficiency and productivity across all business processes in our compact hypermarkets, we aim to create a distinctive competitive advantage in the food retail market, attracting new customers and increasing customer loyalty by greatly expanding the range of consumer needs that can be met in a single location. We remain committed to developing a unique for Russia value-for-money discounter concept with an aim to become a destination point. The results demonstrated by the segment in 2017 are very encouraging and we aspire to continue the active store roll-out in 2018. O’KEY Group of Companies Real GDP growth, % Russia Consumer Price Index 2014-2017, Monthly YoY % 17 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% -1.0% -2.0% -3.0% -4.0% 25% 20% 15% 10% 5% 0% -5% jan mar may jul sep nov jan mar may jul sep nov jan mar may jul sep nov jan mar may jul sep nov 2014 2015 2016 2017 2011 2012 2013 2014 2015 2016 2017F CPI Food CPI Source: Rosstat Source: Rosstat Real Wages 2014-2017, Monthly YoY % 10% 5% 0% -5% -10% -15% jan mar may jul sep nov jan mar may jul sep nov jan mar may jul sep nov jan mar may jul sep nov Retail Sales and Food Retail Sales Growth 2014-2017, real terms, Monthly YoY % 10% 5% 0% -5% -10% -15% -20% jan mar may jul sep nov jan mar may jul sep nov jan mar may jul sep nov jan mar may jul sep nov 2014 2015 2016 2017 2014 2015 2016 2017 Source: Rosstat Retail sales Food retail sales Source: Rosstat Russia Consumer Conﬁdence Index, 2014-2017, Monthly YoY % OUTLOOK 0% -5% -10% -15% -20% -25% -30% -35% 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 2014 2015 2016 2017 Source: Rosstat Modern Trade Penetration 2014-2017 72% 70% 68% 66% 64% 62% 60% 58% 2014 2015 2016 2017 Source: Infoline Given official estimates place real GDP growth in Russia in 2018-2019 within the range of 2 to 2.2%, we remain cautiously optimistic on the outlook for the Russian economy. We expect that the marginal recovery of consumer sentiment witnessed in 2017 will continue in 2018, though competitive pressures will continue to weight on the market. Taking into account that the level of modern trade penetration in Russia increased to 71% by the end of the year, we contend that going forward sales densities will tend to decline driven by increasing competition. While we do see some upside from a recovery in consumer spending through improvement in real wages and slowing inflation, our strategy is based on a more cautious scenario. We believe by investing in our business today to enhance efficiency and ensure price competitiveness alongside our established reputation for quality and service, we will be one of the best-positioned retailers in the Russian marketplace to benefit from market growth opportunities. Annual Report 2017 STRATEGIC REPORT i s e n a p m o C 18 Delivering on Our Strategy f o p u o r G Y E K O ’ The Group’s strategy is built around developing a modern food retailer in Russia, operating in hypermarket and discounter formats. Within our strategy, we aspire to deliver the highest quality, best- value proposition and a unique customer experience. In 2017, the Board of Directors made strategic decision to focus on its key businesses: hypermarkets under the O’KEY brand where it already has strong footprint, and on the rapidly growing discounters under the DA! brand which has proved to be successful and has significant potential for further growth. The sale of the supermarkets business completed in 2017 will help the Group to concentrate on these two niches in order to attain greater efficiency and higher gains for shareholders. Improve efficiency Strengthen our presence Enhance supply chain Deliver the best value PRIORITIES » 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 CHALLENGES » Provision of sufficient financing » Employee recruitment and retention » Supply chain risks » IT Platform Development » IT security threats STAKEHOLDERS ENGAGED proposition » Expand our key compact hypermarket » Optimise the supply chain for every » Develop our customer-centric format, where shopping becomes product category and SKU, and approach enhancing the best customer a truly enjoyable experience implement a smart, end-to-end supply value proposition » Ensure the sustainable growth of our chain with a high level of centralisation » Ensure a truly ‘one-stop shop hypermarket footprint in regions where » Maintain high shelf availability and experience’ while offering quality we have strong brand leadership optimal inventory levels products for all wallets » Develop online shopping with a wide » Improve efficiency of logistics » Increase the share of our affordable range of food and FMCG products supporting imports and private label private label products in total sales with attractive pricing and convenient products delivery services » Provision of sufficient financing » Changing customer expectations » Supply chain risks » Competition risks » Supply chain risks » Changes in working capital » IT Platform Development » IT security threats » Employee recruitment and retention » Introduce new products & services which ensure the sustainable growth of our company » Supply chain risks » Economic outlook » Competitive risks » Changing customer expectations PRIORITIES Growth and expansion » Open more than 30 new stores in 2018 in Moscow and surrounding regions CHALLENGES STAKEHOLDERS ENGAGED » Provision of sufficient financing » Changing customer expectations » Economic outlook » Competitive risks Customers and partners Shareholders and financial community Strong private labels Deliver the best value proposition » We seek to maintain and enhance a strong portfolio of » We are focused on the creation of a unique value-for-money » Ensure the best possible quality by carefully selecting our » Offer the highest quality products through daily deliveries of concept with an aim to becoming a destination point fresh produce to all our stores by our own logistics team private label brands private label producers » Increase the share of private labels in the product range » Maintain an excellent shopping experience with the help of » Offer the most competitive pricing on the market our modern design and well-trained personnel » Improve merchandising to offer the most customer-friendly » Changing customer expectations » Supply chain risks experience » Changing customer expectations » Supply chain risks » Competition risks Improve efficiency Strengthen our presence Enhance supply chain PRIORITIES » 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 CHALLENGES » Provision of sufficient financing » Employee recruitment and retention » Supply chain risks » IT Platform Development » IT security threats STAKEHOLDERS ENGAGED » Expand our key 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 » Improve efficiency of logistics supporting imports and private label products » Provision of sufficient financing » Changing customer expectations » Supply chain risks » Competition risks » Supply chain risks » Changes in working capital » IT Platform Development » IT security threats » Employee recruitment and retention 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 » Introduce new products & services which ensure the sustainable growth of our company » Supply chain risks » Changing customer expectations » Economic outlook » Competitive risks 19 7 1 0 2 t r o p e R l a u n n A Growth and expansion PRIORITIES » Open more than 30 new stores in 2018 in Moscow and surrounding regions Strong private labels » We seek to maintain and enhance a strong portfolio of private label brands » Ensure the best possible quality by carefully selecting our private label producers » Increase the share of private labels in the product range » Offer the most competitive pricing on the market Deliver the best value proposition » We are focused on the creation of a unique value-for-money concept with an aim to becoming a destination point » Offer the highest quality products through daily deliveries of fresh produce to all our stores by our own logistics team » Maintain an excellent shopping experience with the help of our modern design and well-trained personnel » Improve merchandising to offer the most customer-friendly CHALLENGES » Provision of sufficient financing » Changing customer expectations » Changing customer expectations » Supply chain risks experience » Changing customer expectations » Supply chain risks » Competition risks » Economic outlook » Competitive risks STAKEHOLDERS ENGAGED Employees Government and loca authorities Local communities Media OPERATIONAL REVIEW 20 20 Operational Review i s e n a p m o C f o p u o r G Y E K O ’ O’KEY Group of Companies Operational Review 2121 7 1 0 2 t r o p e R l a u n n A Annual Report 2017 OPERATIONAL REVIEW Hypermarkets O’KEY Group Hypermarkets business is a modern Western-European style food retail format, with a passion for quality, best value proposition and the ambition to deliver a unique customer experience. 2222 i s e n a p m o C f o p u o r G Y E K O ’ STRATEGIC PRIORITIES: Improve efficiency Strengthen our presence Enhance supply chain Deliver the best value proposition Key performance indicators Number of stores Selling space, K m2 Net retail revenue, % 2017 2016 2015 2014 2013 73 2017 74 2016 71 2015 69 60 2014 2013 524 2017 -1.6% 540 2016 4.5% 518 2015 6.9% 503 444 2014 2013 10.0% 19.0% LFL Net retail revenue, % LFL Traffic, % LFL Average ticket, % 2017 -3.40%-3.4% 2017 -5.3% 2017 2.0% 2016 2015 2014 2013 1.6% 1.1% 0.3% 2016 2015 2014 -3.1% 0.3% 2016 1.3% -0.2% 2015 1.3% 7.4% 2013 -0.6% 2014 2013 3.5% 8.1% O’KEY Group of Companies 2323 7 1 0 2 t r o p e R l a u n n A Net retail revenue, % 7.3 average store selling space, K m2 34 K average product range, SKU 46% owned stores, 54% leased 87% hypermarkets share in sales 2017 Annual Report 2017 OPERATIONAL REVIEW 24 24 i s e n a p m o C f o p u o r G Y E K O ’ Operationally, in 2017, we remained dedicated to increasing overall efficiency and enhancing our customer value proposition through the introduction of a competitive pricing policy, the implementation of effective marketing initiatives and assortment structure improvement. NEW COMMERCIAL MODEL At the end of 2017, O’KEY launched a new commercial model based upon the principle of providing the best value for money to customers. We have made changes to our promotion strategy, so that it now includes smarter planning of promotional campaigns with the involvement of our key suppliers, as well as a new loyalty programme for our regular customers. The new strategy is supported by changes in the placement of promo- goods in our shops, making better offers closer and more visible to customers.As part of our ambition to provide our customers with clear up-to-date information and to establish a favourable price perception, we significantly changed the layout of our catalogue by introducing vivid information about our most attractive offers and discounts. RENEWED CONCEPT — COMPACT HYPERMARKETS In 2017, the Group continued to develop the compact hypermarkets format as the centrepiece of the new generation of O’KEY stores. The compact hypermarket concept is derived from the ‘Shop-within-a-shop’ zoning principle and at its core features the integration of a broader variety of product and service offerings into larger zones. A prime example would be the inclusion of a ‘fresh market’ within a hypermarket, which could offer fresh fish, fresh fruit, delicatessen, meat and bakery areas and a comfortable café, all under one roof. This approach accords O’KEY with a distinct competitive advantage in the food retail market. Compact hypermarkets have been shown to attract new customers and increase customer loyalty by meeting a much wider range of shopping demands in each O’KEY store. PERFORMANCE In 2017, the net retail revenue of O’KEY decreased by 1.6% to RUB 164,055 mln from RUB 166,814 mln in 2016. LFL net retail revenue fell by 3.2% for the year on the back of a 5.0% decrease in LFL traffic and a 1.9% increase in LFL average ticket. Such results were mainly attributable to falling food inflation in 2017 and growing competitive pressures in the Russian retail segment. Financial performance was also negatively affected in the short- term by the sale of our supermarkets in December 2017 as part of the strategic overhaul of our business model. We are confident, however, that the temporary hit to revenues caused by the sale will be more than offset by the future growth generated by our revamped strategy. In 2017, O’KEY opened one compact hypermarket in Yekaterinburg which will serve as a reference point for us going forward. The Group also closed two hypermarkets in Cherepovets and Sterlitamak, in line with the ongoing programme of store portfolio optimisation. As a result, the total number of hypermarkets fell from 74 in 2016 to 73 in 2017. O’KEY Group of Companies 25 7 1 0 2 t r o p e R l a u n n A LOYALTY PROGRAMME Our loyalty programme is designed to reward initial customer devotion and provide our cardholders with a sense of worth, encouraging them to make even more purchases at attractive terms. Originally created as a simple discount programme, it has significantly evolved over the 2016-2017 period to now offer the following benefits to our customers: ongoing collectable loyalty and weekly promotions, special coupons promotions for high seasons, personalised offers for active customers based on their purchase history. Our loyalty cardholders can rely on O’KEY to remain committed to our mantra of running market-leading promotions and providing multiple options to save on products, offered at the best available price. In 2018, we plan to launch a new points-based loyalty programme. OPERATIONAL REVIEW 26 COOPERATION WITH LEADING OFF‑PRICE RETAILER FAMILIA In 2017, O’KEY signed an agreement to begin a strategic partnership with Familia, the leading off-price retailer in Russia. This project is part of O’KEY’s ongoing strategic initiative to enhance efficiency through the creation of a compact hypermarket. This is achieved through leasing selling space to a strategic partner without decreasing the total number of SKUs in the store. The contract involves a 5-year lease of 1.5 K m2 – 2.0 K m2 of hypermarket space with the possibility of extension. The cooperation also involves joint marketing campaigns and other activities. It is expected to result in customer traffic growth and additional rent income and consequently will lead to considerable increases in EBITDA and improve profitability. In the second half of 2017, new Familia stores were opened on the bases of two O’KEY hypermarkets in Yekaterinburg and in Tyumen. Post pilot openings will be extended to further O’KEY stores in other locations in 2018. Additionally, the Group is planning to attract other major retailers to its hypermarkets in order to generate more traffic and further selling space optimisation. PRIVATE LABEL We have continued to develop our private labels in order to provide our customers with a wider selection of high quality products at attractive prices. Private label products have proved to be an effective means to increase customer loyalty and enhance our reputation as the best value for money option in the retail market. In 2017, we worked to enhance our private label assortment by introducing the most interesting and popular products on the market. Overall, we added 720 new SKUs, including 66 re-launched and 654 brand new SKUs. The total share of private label products within the assortment range reached 6.17% in 2017 compared to 5.8% in 2016, while the share of revenue commanded by the main brands ‘That’s What You Need!’ and ‘O’KEY’ increased from 4.9% to 5.6%. A key concern of the Group this past year has been in expanding local products, particularly in fresh food categories such as milk and milk products, meat and meat products, fish semi products. By the end of 2017, the number of local private label products reached 187 SKUs. Throughout 2017, we improved the promotion policy of private label brands to now include advertising campaigns, direct mailing to the customer base and a dedicated section at the e-commerce website. Private label products are also featured in regular catalogues and in dedicated catalogues published twice a year. Ensuring a stable and high quality of food and non- food products remains a top priority for O’KEY. We continued to improve our specially-designed quality control programme ‘Trademark O’KEY – Customers` Guarantee’, which includes checking production facilities as well as testing samples in independent and accredited laboratories. O’KEY Group of Companies874 ‘That’s What You Need!’, SKUs 827 ‘O’KEY’, SKUs 1,700+ under both brands, SKUs 77 are seasonal, SKUs 27 6.2% Share of Private label brands in SKUs 5.6% Share of Private label brands in revenue This programme has been instrumental in fostering customer loyalty to our own brands and in raising demand in the segment. Ensuring a stable and high quality of food and non- food products remains a top priority for O’KEY. We continued to improve our specially-designed quality control programme ‘Trademark O’KEY – Customers` Guarantee’, which includes checking production facilities as well as testing samples in independent and accredited laboratories. This programme has been instrumental in fostering customer loyalty to our own brands and in raising demand in the segment. Plans In the coming years, we intend to focus on private label brands promotion to an even greater degree, with ambitions of doubling the share of private label brands in our SKU portfolio, including non-food categories. In 2018, we are planning to introduce a new exclusive line of O’KEY products – ‘O’KEY Selection’. AWARDS: ‘Best private label in non-food in the economy segment’ ‘Best private label in the economy segment’ ‘Responsible approach to private label’ 4th International PRIVATE LABEL AWARDS in 2017 by IPLS Our own private label products are 20-30% cheaper than branded alternatives of the same quality. Annual Report 2017 OPERATIONAL REVIEW 28 OWN PRODUCTION O`KEY strives to meet the fast pace of our customer’s lives. To this end, every day we offer a wide range of freshly prepared products from our own cookery and bakery. In 2017, we focused on improving and optimising our own production assortment by introducing healthier products. Delicious homemade cuisine, prepared with modern professional equipment, is the hallmark of any O`KEY hypermarket. Each hypermarket features a complete cycle of product preparation: ordering and receiving raw materials, processing, cutting, pickling, cooking and finally displaying for sale in the retail space. About two thousand recipes have been developed to meet the needs of our customers. Every day we offer discounts and promotions, from ‘Breakfast in O`KEY’ in the morning, to ‘Delicious Hour’ in the evening. Each hypermarket has a cafe where our customers can enjoy a cup of coffee or tea and have a snack. Culinary and bakery products are produced without preservatives, resulting in a short shelf life of up to 18 hours. Unsold products are removed from the shelves at the end of the day as per legislative requirements. Our cookery and bakery products are included in regularly published O`KEY catalogues, as well as in a dedicated section of the e-commerce website. 130 Cookery, SKUs Cold starters, salads, soups, grilled and smoked production, meat, poultry, fish and seafood, desserts and sweet dishes, a large selection of drinks. The range also includes a large selection of semi-finished products. 150 Bakery, SKUs Wheat and rye-wheat bread, baguettes, pies, donuts, croissants, muffins, cookies, cakes and pastries. O’KEY Group of Companies29 QUALITY AND SAFETY Servicing customers with the highest quality produce is the primary concern of O`KEY. The Group has developed a quality management system compliant with the requirements of Russian legislation and elements of the HACCP1 system. All products undergo strict control at all stages. The control procedures include risk assessment (safety risks and reputation risks), preliminary quality control measures, periodic assortment monitoring and both internal and external audit of stores and the supply chain. We believe that developing a clockwork quality management system is a key element of our long-term success as our customers must be fully assured of the quality of products they buy. That’s why we continued to enhance our controlling procedures throughout 2017 by implementing the following measures: » HACCP system in own production goods; » private label quality assurance procedures; » new quality standard of fruits and vegetables. 0 The number of food quality and food safety incidents in O’KEY and DA! stores in 2017. Plans In 2018, we plan to focus on: » transition to a new veterinary certification system (new legal requirements); » transition from mass production to catering service in own production; » HACCP system improvement and further elimination of food safety risks; » development of private label quality assurance processes; » quality assurance of fruits and vegetables, especially those directly imported. 1 Hazard Analysis and Critical Control Points (HACCP) — a systematic preventive approach to food safety from biological, chemical, and physical hazards in production processes that can cause a finished product to be unsafe, and designs measurements to reduce these risks to a safe level. Annual Report 2017 OPERATIONAL REVIEW 30 30 i s e n a p m o C f o p u o r G Y E K O ’ Location and Service Areas of O’KEY Distribution Centres (DCs) Warehouses Regions of service DC Moscow Regions of service DC St. Petersburg Regions with logistics without category Fresh St. Petersburg Moscow BUILDING A ROBUST SUPPLY CHAIN In 2017, we continued to steadily improve our supply chain and streamline associated business processes, reaching a 60% centralisation rate by the year’s end. In line with our corporate strategy, we continued to further develop our supply chain by focusing on efficiency and automation. We aim to build a solid warehouse infrastructure and category management system to enable us to better serve our customers’ needs in our regions of operations and to reduce logistics costs to a more competitive level. For this purpose, O’KEY operates one federal and two regional distribution centres, located in Moscow and St. Petersburg, that are responsible for the timely provision of supplies to our stores and for ensuring that requested products are always on the shelves. Our supply chain management approach, combined with innovative IT-solutions, well-trained and motivated staff, and a carrier fleet hired from the market’s largest and most renowned companies enables us deliver fresh product to our stores within 18 hours from the moment of order. In 2017, we: » increased the centralisation rate by 20 p.p.; » optimised replenishment business processes aimed at working capital reduction and improvement of on shelf availability; » enhanced our demand forecasting capabilities and implemented the Auto-Order function in stores; » optimised carrier routes and raised order-picking and delivery efficiency. Plans In 2018, we plan to: » continue growing the centralisation rate; » implement IT-systems: Mercury and EGAIS1; » master the forecasting and replenishment functions. 1 EGAIS – national automated information system for the control of alcohol production and distribution. O’KEY Group of Companies 60% Centralisation rate compared to 40% in 2016 Overall number of DCs 3 1 Moscow 52 K m2 St. Petersburg Moscow 2 St. Petersburg 21,799 m2 and 7,579 m2 Warehouses Regions of service DC Moscow Regions of service DC St. Petersburg Regions with logistics without category Fresh IT SOLUTIONS 31 In O’KEY, we believe that introducing efficient and customer- oriented IT systems and applications is an indispensable part of remaining competitive in the constantly changing retail markets. To maximise our product availability, increase revenues and eliminate lost sales opportunities, we commenced an extensive project aimed at modernising our entire IT infrastructure, using state-of-the-art IT-solutions and acknowledged software. In 2017, we: » launched a successful pilot of a new retail automation platform based on Microsoft Dynamics AXAPTA 2012; » launched the first pilot of a self-scanning system in one of our Moscow stores, which improves customer experience, increases customer loyalty and stimulates our clients to buy more per visit. Plans We aim to run all our business processes on an integrated IT platform which will enable us to achieve our strategic business goals, drive revenues and contribute to further operational cost optimisation. In 2018, we will continue to roll out Microsoft Dynamics AXAPTA 2012 and JDA software to all stores. This will be supported by the Oracle RPAS platform for our forecasting and supply chain management processes, as well as for assortment planning and price optimisation. Alongside these initiatives, we are working on CRM-solutions which will contribute to our new loyalty programme launch. As a result, O’KEY will benefit from optimised shelf design and layouts in each of our stores. This will better reflect the needs of our clients and will ensure that the optimal mix of product categories and brands are found on the shelf and in the best location in-store. ERP Supply Chain Category management Cash Register Online Store Microsoft Dynamics AXAPTA 2012 Manhattan WMS Oracle RPAS JDA Software1 Oracle RPAS Crystal Service Integration IBM Web-Sphere Commerce 1 In the process of implementation. Annual Report 2017 OPERATIONAL REVIEW 32 ONLINE SHOPPING O’KEY strengthens its leadership in the food retail e-commerce market in Russia. The Group was among the pioneers of food retail e-commerce in Russia and we believe that this ‘early start’ will give us a distinct competitive advantage in the future as the borders between offline and online shopping blur further, creating a market of omnichannel sales. In 2017, we saw further evidence that customer appetency has changed over the years. Customers now not only look for quality products, but also desire a unique shopping experience. In order to capitalise on this trend, we have developed our online services and mobile app to provide customers with a wider range of opportunities to enjoy the smart, convenient and memorable shopping experience the Group offers. Performance In 2017, O’KEY maintained its position as the market leader among online retailers as a result of the Group’s unique competitive advantages. Our online revenue increased by 108% and reached RUB 1.35 bn, while our online customer base doubled to 200,000 people. In 2017, we harmonised our online and offline pricing policies, ensuring that both offline and online customers are offered the same prices, discounts and promotions. This move means O’KEY is now a fully omnichannel retailer and will help us to provide one of the strongest online offers in the Russian food retail market. The growing demand for online purchases has directed O’KEY to update most of our online shopping tools to improve operational capacity and capitalise on market trends. We significantly improved the functionality of our mobile app, which includes adapted hero-images, promo catalogues and store location maps among other features. In 2017, more than 30% of orders were made via the mobile app. We expanded our delivery zone in 2017 to now include Moscow, St. Petersburg and their satellite regions, and also changed our delivery terms after considering feedback from our customers. Additionally, O’KEY launched another pick-up point in the Primorsky District of St. Petersburg, meaning that by the end of the year we offered five ‘click and collect’ pick-up points in Moscow and five in St. Petersburg. In line with our ambition to provide our customers with multiple delivery and pick-up options, this past year O’KEY became the first Russian food retailer to launch a unique drive-through format called ‘O’KEY Auto’. In the six months since its inception, the format has proven to be very popular with customers and we intend to extend the programme to other hypermarkets in the mid-term. Plans We expect that online shopping in Russia will continue to grow at a fast pace in the coming years and as such the consistent development of our e-commerce business will remain a strategic priority for the Group. Moscow delivery zone >8,000 tonnes delivered compared to 3,800 in 2016 1,000 average amount of orders daily via okeydostavka.ru St. Petersburg delivery zone O’KEY Group of CompaniesOUR MOBILE APP ALLOWS OUR CUSTOMERS TO: purchase goods pay online use facet search and filters view order history use easy templates view offline catalogues share basket between users find nearest store view promotions 33 In 2017, GfK ranked O’KEY the 2nd best performing online store in the food retail segment. Annual Report 2017 OPERATIONAL REVIEW OPERATIONAL REVIEW 34 34 s Discounters i e n a p m o C f o p u o r G Y E K O ’ DA! discounters are a unique store format in Russia, where the lowest prices meet quality assortment that covers the daily needs of every customer. Convenient locations, excellent customer service and exclusive private label products make DA! stores the best choice for smart shoppers looking for the best value for their money. STRATEGIC PRIORITIES: Growth and expansion Strong private labels The best value proposition Number of stores Selling space, K m2 Net retail revenue, % 2017 2016 67 54 2017 2016 46.2 2017 81.8% 37.3 2016 >100% LFL Net retail revenue, % LFL Average ticket, % LFL Traffic, % 2017 2016 52.0% 65.5% 2017 2016 12.7% 2017 2016 20.4% 34.8% 37.4% O’KEY Group of Companies 3535 7 1 0 2 t r o p e R l a u n n A Net retail revenue, % 700 average store selling space, m2 6% discounters share in sales 2017 26% owned stores, 74% leased 2,250 product range, SKU Annual Report 2017 OPERATIONAL REVIEW 36 i s e n a p m o C f o p u o r G Y E K O ’ Strong private labels >65% in SKUs Supply chain Own distribution centre – 100% centralisation Our staff More than 1,700 employees Well trained personnel Positive working environment Excellent customer service Limited product range Low prices High turnover per SKU Modern and attractive store design DA! DISCOUNTERS VALUE OUR CUSTOMERS 37 PERFORMANCE In 2017, the net retail revenue of DA! discounters increased by 81.5% to RUB 10,282 mln compared to RUB 5,666 mln in 2016. Average traffic per store per day increased by 30.5%, while average ticket rose by 11.7% and reached 450 RUB by the end of the year. These strong results were achieved thanks to the significant effort put into diversifying and enhancing our value proposition to customers by improving the assortment mix and overall customer experience. Of note, in 2017, we: » adapted our product range to the needs of our customers, increasing it to around 2,250 SKU; » introduced over 180 SKU of private labels; » maintained a consistent price-level, while our key competitors raised their prices; » conducted extensive staff-training to increase the quality of customer service. In 2017, we opened 13 new stores in Moscow and the Moscow Region, therefore increasing the total number of our discounters to 67 and total selling space to 46.2 K m2. OUR PEOPLE We truly believe that we have an inspired and dedicated team of employees who represent some of the best in their field. Due to our expansion in 2017, the number of employees increased by more than 50% compared to the previous year, as of 31 December 2017, DA! employed 1,772 people. We provide equal opportunities for both male and female employees, almost 60% of all employees are women. We have a very age-diverse talent pool and provide development and career opportunities to all of our employees. SUPPLY CHAIN DA! Discounters operate under the principle of ‘Every day low price’, while maintaining an uncompromisingly high quality of goods. One of the key factors supporting this principle is our supply chain. All our stores are supplied from our own distribution centre, with a storage capacity of over 55 K m2 located 60 km south of Moscow. Short shelf-life and ultra-fresh products are delivered to stores each morning by the time of opening. To ensure maximum freshness, they are not stored in distribution centre, but instead are shipped to stores the very day they arrive to the docks. Due to the expansion of the sales network and increase of sales per store, in 2017 we significantly optimised the operating procedures of the distribution centre, which has allowed us to process two times more volume in less time when compared to 2016. PRIVATE LABELS AND OWN PRODUCTION We constantly seek opportunities to optimise the assortment of our stores, picking up trends and fulfilling the needs and expectation of our customers. We put considerable emphasis on strengthening our private label products, many of which are made by our suppliers exclusively for DA!. In 2017, we introduced 180 new private labels, which increased the total number of private label SKUs on offer to 900. Our main goal is to further develop and introduce new private label products with an appearance and quality comparable to the most popular brands. PLANS In 2018, we plan to open up to 30 new stores. The higher number of operating stores and bigger volumes will allow us to negotiate better prices from suppliers, which in turn should increase commercial margins. As for the product range, we plan to keep the current number of SKUs at the same level while strengthening our private label offering and further developing our supplier base to ensure that our customers are offered the best quality products. Annual Report 2017 MANAGEMENT DISCUSSION AND ANALYSISREVIEW 38 Management Discussion and Analysis GROUP PROFIT AND LOSSES RUB mln Total Group revenue Gross profit Gross profit margin SG&A GS&A as % of revenue Group EBITDA Group EBITDA margin Net profit/(loss) REVENUE 2017 177,455 40,444 22.8% (36,189) 20.4% 9,335 5.3% 3,167 2016 175,471 40,209 22.9% (35,764) 20.4% 9,253 5.3% (138) ∆ YoY 1.1% 0.6% (10 bps) 1.2% 0 bps 1.0% 0 bps >100% In 2017, total Group revenue increased by 1.1% YoY to RUB 177,455 mln while LFL revenue decreased by 1.4% YoY. The LFL revenue dynamics is largely attributable to a 2.2% YoY decrease in LFL customer traffic driven by intensifying competition, and an increase in LFL average ticket by 0.8% YoY affected by falling food inflation. While consumer sentiment has been largely on track to recovery the strong selling space growth ahead of food retail sales continued to put pressure on the performance of more mature stores. By the end of the reporting period, total selling space decreased by 7.2% to 577,804 m2. O’KEY selling space decreased by 9.3% to 531,589 m2 and selling space of DA! increased by 25.3% to 46,215 m2. COST OF GOODS SOLD AND GROSS PROFIT The cost of goods sold as a percentage of revenue increased by 10 bps in 2017 to RUB 137,010 mln. The table below provides the breakdown of cost of goods sold for 2017 and 2016: RUB mln Total revenue Cost of goods sold Cost of trading stock (less supplier bonuses) Inventory shrinkage Logistic cost Labelling and packaging costs Gross profit 2017 % of revenue 2016 % of revenue ∆ YoY 177,455 (137,010) (129,262) (3,086) (3,834) (828) 40,444 77.2% 72.8% 1.7% 2.2% 0.5% 22.8% 175,471 (135,261) (128,800) (2,867) (2,771) (824) 40,209 100.0% 77.1% 73.4% 1.6% 1.6% 0.5% 22.9% 10 bps (60 bps) 10 bps 60 bps 0 bps (10 bps) In 2017, gross profit increased 0.6% YoY to RUB 40,444 mln while the gross margin remained virtually unchanged YoY at 22.8%. These results were, for the most part, influenced by more favourable purchasing conditions and better customer value proposition across all store formats. The ongoing work on logistics centralisation together with continued expansion of the discounters format during the year, resulted in a logistic cost increase of 60 bps, as percentage of revenue, to RUB 3,834 mln. Improvements are expected in the net logistics costs by the end of 2018, as the centralisation of logistics progresses and its processes become more efficient. Shrinkage costs as a percentage of revenue increased by 10 bps YoY partially affected by one-off write offs. O’KEY Group of Companies SELLING, GENERAL AND ADMINISTRATIVE COSTS 39 The general, selling and administrative expenses as a percentage of revenue remained flat YoY, reflecting the Group’s ongoing work on increasing efficiency across all business processes. The table below provides the general, selling and administrative expenses breakdown for 2017 and 2016: RUB mln Personnel costs Operating leases Depreciation and amortisation Communication and utilities Advertising and marketing Repairs and maintenance Security expense Insurance and bank commissions Operating taxes Legal and professional expenses Materials and supplies Other costs Total SG&A PERSONNEL COSTS 2017 % of revenue 2016 % of revenue (15,619) (5,758) (4,613) (3,525) (2,116) (1,254) (869) (819) (730) (520) (329) (36) 8.8% 3.2% 2.6% 2.0% 1.2% 0.7% 0.5% 0.5% 0.4% 0.3% 0.2% 0.0% (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% (36,189) 20.4% (35,764) 20.4% ∆ YoY (40 bps) 20 bps 0 bps 0 bps 20 bps 0 bps 0 bps 0 bps 0 bps 0 bps 0 bps 0 bps 0 bps In 2017, personnel costs as a percentage of revenue decreased by 40 bps to 8.8% or by RUB 566 mln YoY. The realised cost savings were, for the most part, attributable to ongoing business processes efficiency increase on both store and head office levels. In 2018, the Group will continue to focus on enhancing the effectiveness of business processes across all store formats. OPERATING LEASES Operating lease costs as a percentage of revenue increased by 20 bps YoY to 3.2%. This was primarily attributable to the rollout of discounters in the second half of the year in line with previously announced plans and a revision of lease agreements of two hypermarkets during the year. The operating lease expenses as percentage of revenue are expected to decrease as the discounters continue to gain momentum. COMMUNICATION AND UTILITIES COSTS Communication and utilities expenses as a percentage of revenue remained unchanged at 2.0%. The Company aims to continue the work on further optimization of the respective costs and efficiency improvement. ADVERTISING AND MARKETING EXPENSES Advertising and marketing expenses as a percentage of revenue increased by 20 bps YoY to 1.2%, while in absolute terms the growth amounted to 17.9% YoY. This YoY increase was primarily driven by continuous work on our customer value proposition and enhancing and implementing a number of marketing initiatives aimed at aligning of our formats price perception with the ‘best value for money’ concept. Annual Report 2017 MANAGEMENT DISCUSSION AND ANALYSISREVIEW 40 EBITDA RUB mln Revenue EBITDA EBITDA margin O’KEY 2017 2016 167,062 169,696 11,359 6.8% 11,845 7.0% Change, YoY (1.6%) (4.1%) (20 bps) DA! 2017 10,393 (2,024) - 2016 5,775 (2,592) - ∆ YoY 80.0% (21.9%) - Group EBITDA increased 1.0% YoY to RUB 9,335 mln with EBITDA margin remaining flat YoY at 5.3%. EBITDA generated by O’KEY fell 4.1% YoY to RUB 11,359 mln with the margin decreasing by 20 bps to 6.8% primarily on the back of growing competitive pressure and higher logistics costs on the back of aggressive centralization. EBITDA generated by DA! improved from negative RUB 2,592 mln (44.9% of sales) in 2016 to negative RUB 2,024 mln (19.5% of sales) in 2017 driven by new store openings and higher LFL sales. DEPRECIATION AND AMORTISATION Depreciation and amortisation as a percentage of revenue remained flat YoY at 2.6%. In absolute terms, the 1.4% growth YoY was in line with revenue and for the most part triggered by the replacement of old in-store equipment and new store openings. NET FINANCE COSTS Whilst net finance costs as percentage of revenue remained unchanged YoY, in absolute terms the increase amounted to 4.6% YoY due to decrease in finance income. The Group’s average loan portfolio stayed virtually unchanged YoY. NET PROFIT In 2017, net profit amounted to RUB 3,167 mln versus a net loss of RUB 138 mln a year ago. This trend was for the most part underpinned by the gain on the sale of the supermarket business in December 2017. . CASH FLOW AND WORKING CAPITAL RUB mln Net cash (used in)/from operating activities Net cash used in investing activities Net cash used in financing activities Net decrease in cash and cash equivalents Effect of exchange rate on cash and cash equivalents 2017 4,874 (3,365) (5,187) (3,678) (35) 2016 11,673 (5,413) (4,529) 1,730 (35) O’KEY Group of CompaniesNET CASH (USED IN)/FROM OPERATING ACTIVITIES 41 As of 31 December 2017, the Group’s working capital, defined as current assets (excluding cash and cash equivalents and short-term investments) less current liabilities (excluding short-term loans), was a negative RUB 4,633 mln compared to negative RUB 12,734 mln as of 31 December 2016. The working capital turnover decrease was primarily attributable to the amendments in the Trade Law and temporary effect from reorganization of the logistics processes which accompany the centralization. As a result, notwithstanding the growth of cash receipts from customers by 1.4% YoY, net cash from operating activities during the reported period amounted to RUB 4,874 mln, while in 2016 the Group reported operating cash of RUB 11,673 mln. NET CASH USED IN INVESTING ACTIVITIES Net cash used in investing activities declined from RUB 5,413 mln in 2016 to RUB 3,365 mln in 2017 in line with the Group’s conservative investment strategy. The consideration received from the sale of supermarket business will be reflected in the Group’s consolidated cash flows for 1H 2018. NET CASH USED IN FINANCING ACTIVITIES Net cash used in financing activities in 2017 amounted to RUB 5,187 mln. Over the reported period, the Group attracted RUB 7,686 mln of financing through the placement of exchange-traded bonds and made repayments totaling RUB 7,663 mln. In January 2017, the Group distributed a dividend in the amount of RUB 1,466 mln. DEBT The Group considers the Net Debt/EBITDA ratio as the principal means for evaluating the impact of the Group’s borrowings on its operations. As of 31 December 2017, Net Debt/EBITDA ratio was 3.1x compared to 2.7x at 31 December 2016. We maintain a conservative approach to borrowing and expect Net Debt/EBITDA to be below 3.0x by the end of 2018. RUB mln Total debt Short-term debt1 Long-term debt Cash&cash equivalents Net Debt Net debt/EBITDA As of 31 December 2017 As of 31 December 2016 As of 31 December 2015 36,341 11,662 24,679 7,750 28,591 3.1x 36,295 4,622 31,673 11,463 24,832 2.7x 35,558 12,000 23,558 9,768 25,790 2.6x 1 Short-term debt includes interest accrued on loans and borrowings. Annual Report 2017 CORPORATE SOCIAL RESPONSIBILITY 42 Corporate Social Responsibility Customers and partners Shareholders and financial community Employees Government and local authorities Local communities Media WHY WE ENGAGE The reliable and transparent relationship with our customers and partners forms a vital element of our strategy and drives the Group’s performance. As one of the leading Russian retailers, O’KEY aims to sustain this mutually beneficial partnership to ensure progress and promote development in all spheres. KEY FOCUS AREAS CUSTOMERS » The variety and quality of provided goods » Guarantee of the best price » High level of provided services PARTNERS » Reliability of supplies » Mandatory compliance with contract provisions and legal requirements » Rigorous due diligence of all partners to establish their integrity and solvency WHAT WE ARE DOING » Customer surveys and focus groups » Feedback on call centre » Meetings with (potential) suppliers and business partners » Participation in industry conferences » Conclusion of supply contracts for products and monitoring performance of requirements for counterparties As a publicly listed company, we need to provide open, timely and transparent information to help our investors make informed decisions about our financial and non-financial performance. » Corporate governance » Financial and non-financial results » Strategy and KPIs » Risks Every aspect of our strategy is based on the commitment of our people. Their knowledge, their willingness to work and their satisfaction are the keys to the Group’s successful operations. We put an emphasis on creating the conditions for professional and career growth for our people as it strengthens their loyalty to the business. » Principles of social partnership » Mutual respect and trust that underpin HR Policy » Financial and non-financial incentives » Learning and development opportunities » Health and safety standards » Presentations and conference calls » Implementation of updated HR Policy » Information disclosure and reporting » Meetings with representatives of local » Press releases on material issues and between management and the financial community » Website publication of relevant GM/ EGM documents » Meetings between management and the financial community, including industry conferences » Investor and analyst site visits » General meetings of shareholders » Press releases on material issues and key Group events and Health and Safety Policy » Developing a system of internal communication and feedback » Regular meetings between management and employees » Ensuring safety in the workplace » Implementation of social programmes and financial incentive programmes » Employee satisfaction and employee engagement surveys The Group strictly follows industry The development of the Group needs to The Group needs accurate and timely standards and complies with all laws and be supported by the local communities coverage by the various media channels regulations. wherever it operates. A better quality of when disclosing its financial and operational O’KEY aims to establish and maintain life for our people and local communities, results, key external and internal events, stable and constructive relations with established through our social and cultural community activities and participation in national and local government authorities projects, contributes to regional social and industry conferences, etc. The adequate based on the principles of accountability, economic development and ensures the perception of O’KEY and its strategy by all good faith and mutual benefit. sustainability of our operations, helping us stakeholders is mutually beneficial for the fulfil our commitments as an industry leader. Group and its target audiences. » Reporting to regulators » Environmental safety » Accurate media coverage of the » Social infrastructure development and Group’s strategic messages, corporate » Implementing local community modernisation events and news development projects and social » Supporting cultural events » Getting feedback from society and » Taxation projects » Supporting vulnerable population media » Maintaining the relationship with stakeholders at all levels » Maintaining a dialogue with groups government authorities on current legislative and regulatory issues » Corporate philanthropy » Dialogue with government authorities communities key events on legislative and regulatory issues » Economic, environmental and social » Interviews with management » Participation in workshops and expert initiatives » Press tours and press conferences panels » Implementation of joint projects » Local community development » Publications in local media » Public hearings » Maintaining contact with NGOs O’KEY Group of CompaniesO’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, from large metropolitan areas to smaller towns with under a thousand inhabitants. We employ thousands of people, a responsibility which we take very seriously, as we acknowledge that they and their families depend on us for their livelihoods. 43 Customers and partners Shareholders and financial community Employees WHY WE ENGAGE The reliable and transparent relationship As a publicly listed company, we need Every aspect of our strategy is based on with our customers and partners forms to provide open, timely and transparent the commitment of our people. Their a vital element of our strategy and drives information to help our investors make knowledge, their willingness to work the Group’s performance. informed decisions about our financial and their satisfaction are the keys to the As one of the leading Russian retailers, and non-financial performance. Group’s successful operations. We put an emphasis on creating the conditions for professional and career growth for our people as it strengthens their loyalty to the business. » The variety and quality of provided » Financial and non-financial results » Mutual respect and trust that underpin » Corporate governance » Principles of social partnership » Strategy and KPIs » Risks HR Policy » Financial and non-financial incentives » Learning and development opportunities » Health and safety standards O’KEY aims to sustain this mutually beneficial partnership to ensure progress and promote development in all spheres. KEY FOCUS AREAS CUSTOMERS goods » Guarantee of the best price » High level of provided services PARTNERS » Reliability of supplies » Mandatory compliance with contract provisions and legal requirements » Rigorous due diligence of all partners to establish their integrity and solvency WHAT WE ARE DOING » Customer surveys and focus groups » Presentations and conference calls » Implementation of updated HR Policy » Feedback on call centre between management and the financial and Health and Safety Policy » Meetings with (potential) suppliers and community » Developing a system of internal business partners » Website publication of relevant GM/ communication and feedback » Participation in industry conferences EGM documents » Regular meetings between » Conclusion of supply contracts for » Meetings between management and management and employees products and monitoring performance the financial community, including » Ensuring safety in the workplace of requirements for counterparties industry conferences » Investor and analyst site visits » Implementation of social programmes and financial incentive programmes » General meetings of shareholders » Employee satisfaction and employee » Press releases on material issues and engagement surveys key Group events Government and local authorities Local communities Media The Group strictly follows industry standards and complies with all laws and regulations. O’KEY aims to establish and maintain stable and constructive relations with national and local government authorities based on the principles of accountability, good faith and mutual benefit. The development of the Group needs to be supported by the local communities wherever it operates. A better quality of life for our people and local communities, established through our social and cultural projects, contributes to regional social and economic development and ensures the sustainability of our operations, helping us fulfil our commitments as an industry leader. The Group needs accurate and timely coverage by the various media channels when disclosing its financial and operational results, key external and internal events, community activities and participation in industry conferences, etc. The adequate perception of O’KEY and its strategy by all stakeholders is mutually beneficial for the Group and its target audiences. » Reporting to regulators » Taxation » Implementing local community development projects and social projects » Maintaining a dialogue with government authorities on current legislative and regulatory issues » Corporate philanthropy » Environmental safety » Social infrastructure development and modernisation » Supporting cultural events » Supporting vulnerable population groups » Accurate media coverage of the Group’s strategic messages, corporate events and news » Getting feedback from society and media » Maintaining the relationship with stakeholders at all levels » Information disclosure and reporting » Dialogue with government authorities on legislative and regulatory issues » Participation in workshops and expert panels » Implementation of joint projects » Local community development » Meetings with representatives of local » Press releases on material issues and communities key events » Economic, environmental and social initiatives » Publications in local media » Public hearings » Maintaining contact with NGOs » Interviews with management » Press tours and press conferences Annual Report 2017 CORPORATE SOCIAL RESPONSIBILITY 44 Our Employees1 The HR policy of O’KEY is focused on the recruitment and retention of qualified and promising employees. The basic priorities of the Company are centred around increasing the productivity of our personnel and providing customers with the highest level of service. We strive to create an effective working environment for our employees and ensure they have the opportunity to develop both personally and professionally. The mission of our HR strategy is to create an atmosphere conducive to improving competitiveness through the efficient management of human capital. As part of our HR strategy we are concerned with the following objectives: » building a strong brand of O’KEY as an employer in Russia; » creating a working culture of involvement and high-performance; » formation of an efficient organisational structure; » formation of an efficient management team; » recruitment and retention of talent; » system management of turnover. In 2018, we will continue to work on strengthening O’KEY’s brand as we develop the corporate culture and projects aimed at improving the Company’s efficiency. OUR TEAM IN NUMBERS CEO announced a strategic focus on developing the Group’s efficiency through continuous improvement and modernisation at the corporate conference under the slogan ‘The Company’s result is my responsibility’. In 2017, a new organisational structure was developed for the stores and the headoffice, based on the functional diagnostics. The new structure excludes duplicate functions, which decreased the cost of the labour compensation fund, increased the efficiency of processes and brought clarity to the responsibilities of employees. In 2017, staff numbers were optimised as part of a deal that sold the Group’s supermarket business. A significant number of employees have since been employed in the stores of the buying company, with the remainder transferred to other O’KEY divisions. Owing to the efficient efforts aimed at optimising the quantity of staff and an accomplished deal, the total number of personnel decreased by 12.5% year-on-year and amounted to around 21, 000 persons. 1 Information in this section is provided for O’KEY company only and does not include the business of discounters. O’KEY Group of Companies45 Breakdown of personnel by gender identity, % Breakdown of personnel by age, % 28% 72% Men Women 9% 33% 29% 22% 18-25 years 26-35 years 36-45 years 46-55 years 7% 56+ years CORPORATE CULTURE In 2017, we continued to work on the introduction of corporate values into the everyday work of our employees with the aim of establishing an atmosphere of professionalism and performance. In 2017, O’KEY presented a new value – ‘Innovativeness’. Throughout the year O’KEY has carried out two leadership forums devoted to summarising the results for the year and updating strategic objectives. The updated strategy of the Group as well as a film about the Group and its history have been presented at the forums. O u t s t a nding results I m p e c c a b l e s e r v i c e OUR VALUES ess n e tiv a v o n n I E ff e ctiv e team o f e ssio nalism A t m o s p here r o f p Annual Report 2017 CORPORATE SOCIAL RESPONSIBILITY 46 CORPORATE PERSONNEL TRAINING AND DEVELOPMENT SYSTEM O’KEY remains committed to the personal and professional growth of its employees. O’KEY continues its development as a self-training organisation. In 2017, we continued to develop distance learning facilities for employees and increased the number of ‘face-to- face’ training courses from 16 to 38. We also launched a corporate online and offline library and an ambitious educational project – ‘O’KEY knowledge marathon’. TRAINING COURSES TOGETHER WITH SUPPLIERS In 2016, we conducted courses together with large suppliers on product-related training of store employees to increase staff knowledge of brands and service quality. Training courses have been developed and carried out at O’KEY on brands such as: Johnson’s baby, Libero, Zewa, Efes, Nestle, Heinz, Philip Morris. O’KEY’S ACADEMY CORPORATE LIBRARY In 2017, 38 new courses were developed and launched, 28 of which were established by the internal staff. >50 courses are available for distance learning at O’KEY Academy 46,332 employees, man/courses were trained at O’KEY Academy in 2017 ‘O’KEY KNOWLEDGE MARATHON’ The project is aimed at strengthening our corporate values and corresponds to a strategic focus on efficiency. We have organised masterclasses as part of the project dedicated to developing leadership, efficiency, lean production, management of human resources, reviews and trends of retail services market. Top managers at O’KEY participated in training for the first time as part of the project on such topics as information technologies, finance, quality and sales. Conferences and business games for enhancing teamwork alongside brainstorming events have also been organised. The corporate library exists in three formats: » generally accessible online library on the basis of a distance learning system – 25 books; » online library – more than 1,000 books; » bookcrossing project in the offices of Moscow and St. Petersburg. >100 different events have been organised within one month in the Group’s operating cities 800 unique employees have passed training within the project’s framework O’KEY Group of Companies47 7 1 0 2 t r o p e R l a u n n A PERSONNEL RETENTION AND MOTIVATION CORPORATE WHISTLEBLOWING POLICY In order to create the atmosphere of transparency and confidence the Group strives for, O’KEY has enacted a policy to report infringements of our best practices, which cover the issues of violating ethics, labour legislation, issues of interaction between employees, between employees and management. There are several channels to report infringements at O’KEY including a call centre, mandatory management visiting hours and morning meetings. 100% appeals have been processed with a feedback provided thereto 322 appeals were received in 2017 O’KEY efficiently utilises market-leading of tangible and intangible incentives to motivate employees. A key performance indicator system is in effect at O’KEY which includes both individual and corporate goals. Bonuses are performance related and equate to a certain share of salary. In order to continue to be an attractive employer for our employees, we carried out a labour market investigation in 2017 and reviewed the salaries for a number of positions on the basis of the acquired analysis. COMPENSATIONS AND BENEFITS O’KEY ensures the necessary support is given to its employees in full conformity with legislative requirements. O’KEY also runs additional programmes aimed at establishing a comfortable working environment for our employees. In particular, O’KEY provides its employees with the following benefits: » long-term marginal cost under conditions of co- financing to the amount of 80-90%; » payment for lunches; » gift cards for the O’KEY network and gifts to children on holidays; » tangible incentives to employees caught in difficult life situations; » payment of membership in fitness clubs paid in installments. CORPORATE SOCIAL RESPONSIBILITY 48 Health and Safety Ethics and Compliance Ensuring the health and safety of our employees remains one of the top priorities for O`KEY. We strive to provide our employees with safe working conditions and our customers with a safe shopping environment. O’KEY Group adheres to high standards of compliance with internal discipline, legislative and regulatory requirements, ethical and socio-legal rules and principles. The Group adheres to the principle of zero tolerance for any kind of discrimination. WHAT WE DO: Monitoring workplace conditions Monitoring employee health Training employees As part of our Health and Safety monitoring process, we conduct a regular audit of our stores, distribution centres and workplaces to ensure they are in full compliance with Russian legislation governing workplace safety. In 2017, specialists from the Labour Protection Department conducted 1,347 comprehensive inspections of our premises with regards to labour protection and fire safety in order to reduce the risk of penalties from the supervisory authorities. Our employees are trained in work safety in accordance with the highest professional standards. In 2017, 3,059 members of our staff were trained to these professionally recognised levels. In line with best international practices, O`KEY has implemented integrated systems for the regular tracking of working conditions and for logging all accidents and injuries. We have a systematic approach for investigating any accidents involving our employees or customers. The number of work-related injuries in 2017 continued to fall compared to the prior year. The total number of accidents amounted to 50, with all classified as light in their severity. >6,500 workplaces have passed special assessment of working conditions during 2015-2017 The Group proceeds from the fact that its employees build their business relations on the terms of partnership, mutual respect, common goals and objectives. In any situations and circumstances, the activities and behaviour of employees of the Group must comply with high professional and ethical standards, generally accepted moral values. Adherence to ethical norms and principles helps the Group avoid unjustified risks, maintain long-term economic growth, strengthens the team and the market positions. The Group has introduced and successfully operates internal regulatory documents, including: Supplier selection Policy and Policy of choosing a counterparty Policy of interaction with state bodies Anticorruption policy The Group has developed training programmes for employees on compliance with legislation on consumer protection, interaction with government agencies and others. These programmes are regularly updated, and trainings for employees are conducted. In 2018, the Group will continue to work on the organisation and strengthening of the Compliance function, in particular through the creation of a unified system and a unified policy of Compliance, the organisation of appropriate training and controlling procedures. O’KEY Group of Companies Preventing Corruption 49 O’KEY Group has a zero tolerance policy towards 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. We keep close monitoring of O’KEY’s commercial activity internally as well related to our suppliers and partners and any deviations from standard operating procedures and Anti-corruption policy. Any suspicious behaviour is investigated according to our rules and policies and relevant measures are taken. Any of our potential suppliers and service providers are scanned prior to getting a contract. We verify accuracy (transparency) of their financial reporting and that there is no affiliation to our other suppliers or our employees. We expect our suppliers to sign a consent confirming to follow our anti-corruption policy. Training of our employees remains a priority for us. There are dedicated briefings and explanations given to most exposed departments of the business. Companywide communication is organised through leadership forums held twice a year. Additional briefings are held on store level by Risk and Compliance group leaders. All O’KEY Group employees have voluntarily signed the consent to follow Group’s anti-corruption policy. We encourage our employees to follow Group’s policies and business ethics supported by our values. We maintain a confidential whistleblower e-mail address for reporting potential conflicts to our internal audit and security departments. Also, any person may use the call centre to complain. Any information is promptly investigated by the anti-corruption team of the Risk Department. O’KEY Group systematically monitors regulatory risks in the following areas: antitrust regulation legislation on consumer protection labour law alcohol and tobacco products trading advertising, intellectual property and information protection licensing and sanitary regulation judicial work and execution of judicial acts environmental regulation corporate legislation and legislation on the securities market, disclosure of information Annual Report 2017 CORPORATE SOCIAL RESPONSIBILITY 50 Our Communities O’KEY has developed 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. FOOD AID In partnership with the Charity Foundation Place under the Sun in December 2017 O’KEY held an annual charity project ‘Kind Purchase’ to collect food and basic items on behalf of low-income families and families raising children with disabilities. Food aid was provided to more than 1,000 families in St. Petersburg before the New Year. TREATMENT SUPPORT In 2017, O’KEY, in partnership with Rusfond, held two large-scale charitable events, ‘Buy a toy – save a child’s life’ in February and ‘Kind November: helping children together’ in November. As a result of generous donations from our customers, we collected more than RUB 12.5 mln for those in need. The funds received from the sale of private label toys and goods were used for several operations, postoperative treatment, purchase of orthopedic suits, wheelchairs and even to purchase expensive medication for the vulnerable. We helped 24 critically ill children with various malformations from Irkutsk, Krasnodar, Murmansk, Orenburg, Stavropol, Ufa, St. Petersburg, Volgograd, Voronezh, Leningrad, Rostov and Tyumen regions. Since April 2016, O’KEY has been a loyal partner of the St. Petersburg charitable fund AdVita, a foundation dedicated to helping children and adults suffering from cancer. We organised a variety of campaigns in our St. Petersburg stores throughout 2017 to raise funds for AdVita and placed donation boxes next to check-outs for our customers to be able to help those in need. Since the beginning of the project, the generosity of our customers has helped us raise more than RUB 5.5 mln to put towards the treatment costs of over 20 children and adults with cancer. 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. PRIORITIES OF CHARITY PROGRAMMES 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 MAJOR CHARITIES‑PARTNERS IN 2017 Rusfond Place under the Sun Festival ‘Step towards!’ AdVita O’KEY Group of Companies51 DEVELOPMENT OF CHILDREN’S CREATIVITY For several years O’KEY has been the general partner of the St. Petersburg international creative festival for children and youth with disabilities, ‘Step towards!’. In May 2017, the festival was held for the tenth time and brought together 500 participants from 52 regions of Russia. The ‘Step towards!’ festival helped the children to work through their social anxieties and many secured a work placement among the creative professions. In May 2017, O’KEY supported the all- Russian charity event ‘Red Carnation’, hosted by the Memory of Generations fund that aims to provide veterans with high-tech medical care. SUPPORTING VULNERABLE GROUPS We consider it our responsibility, as one of Russia’s leading food retailers, to ensure, to the best of our ability, that vulnerable population groups have access to basic food products at affordable prices. For five years we have been offering holders of state social cards an additional 3% discount at our stores in Moscow and the Moscow region, the Krasnoyarsk region and Murmansk. The discount does not apply to alcohol and tobacco products. ENVIRONMENTAL RESPOSIBILITY We believe that having a responsible approach to the environment is an integral component of being successful in the market in the long term. Running our business in strict compliance with Russian environmental legislation is a key priority for O’KEY. Further to this we regularly implement our own initiatives directed to increasing our eco-friendliness: we equip our stores with modern recuperators and energy-efficient lights to reduce our total energy consumption we conduct separate waste collection in all our stores to reduce the amount of waste to be buried at city landfills we perform quarterly monitoring of atmosphere and noise pollution in the buffer zone to make sure that our stores have no negative impact on the living conditions of local communities we install water-treatment facilities in our key locations: petrol and sand catchers, filtering stormwater from parking zones and grease catchers; filtering waste from our own-production facilities before it is disposed into the public sewers Annual Report 2017 CORPORATE GOVERNANCE 52 52 Corporate Governance i s e n a p m o C f o p u o r G Y E K O ’ O’KEY Group of Companies 5353 7 1 0 2 t r o p e R l a u n n A Annual Report 2017 CORPORATE GOVERNANCE 54 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 suitable for the development of our business and meets the requirements of our shareholders. The most significant decisions affecting the life of the Company and the rights of shareholders, including the approval of financial statements and the Annual Report, appointment of the Directors, amendments of the Articles, approval of the final dividend for the financial year, are subject to review and approval at the Shareholders meeting. The Board of Directors and its committees provide overall guidance for the business and strategic planning for the Group. It sets strategic goals and oversees their implementation by the CEO and senior Management of the Group. The Management Board and the Chief Executive Officer are responsible for the day-to-day operations of the companies of the Group and implement the strategy approved by the Board of Directors. THE GENERAL MEETING OF SHAREHOLDERS The General Meeting of Shareholders is O’KEY Group S.A.’s supreme governing body. The General Meetings of Shareholders are convened and held in accordance with Luxembourg legislative requirements and the Articles of O’KEY Group S.A. According to the Articles of O’KEY Group S.A., the annual General Meeting shall be held within six (6) months of the end of each financial year in the Grand Duchy of Luxembourg at the registered office of the Company, or at any such other place in the Grand Duchy of Luxembourg as may be specified in the convening notice of the meeting. The next annual General Meeting will be held before 30 June 2018. A convening notice specifying the date, time, address of the meeting and the agenda will be sent and published no later than fourteen days before the meeting. Transfer Restrictions As of 31 December 2017, and the date hereof, to the knowledge of the Company all 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 the 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. Special Control Rights All the issued and outstanding shares of the Company have equal voting rights and there are no special control rights attached 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 as at least one Director (designated as the Caraden Director) must be appointed from a list of candidates proposed by 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 supporting 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). O’KEY Group of CompaniesPROFESSIONALISM We strive to appoint individuals with relevant skills and experience to the Board of Directors and its committees in order to enable them to discharge their respective duties and responsibilities effectively. The Board is supplied, in a timely manner, with information in a form and of a quality appropriate to allow it to discharge its duties. 55 EQUALITY O’KEY Group’s corporate governance system is designed to protect shareholders’ rights and ensure equal treatment of all shareholders. OUR CORPORATE GOVERNANCE PRINCIPLES ACCOUNTABILITY The Board of Directors is accountable to O’KEY Group’s General Meeting of Shareholders and is responsible for: » formulating the Group’s strategy; » establishing and maintaining systems, which ensure due consideration of key decisions by experienced individuals, including in the areas of remuneration and incentives, internal control and risk management; » holding management accountable for the successful implementation of the Group’s strategy. TRANSPARENCY We strive to ensure the appropriate disclosure of reliable information on all significant issues related to our operations including financial status, social performance, operating results and ownership. Control System in Employee Share Scheme The Company does not have an employee share scheme. by Shareholders for them to take part in any meeting of shareholders in person or by proxy (Article 15 of the Articles). 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 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 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 of the Company website and is available at: http://okeygroup.lu/sharedocs Annual Report 2017 CORPORATE GOVERNANCE 56 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. There are five members of our Board, including one independent director. The General Meeting of Shareholders appoints the 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. Agreements with Directors and Employees Meetings of the Board of Directors 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. 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 strategic decisions in respect of the operation and development of the Group, as well as overseeing the risk management and internal audit functions of the Group. The decisions related to the day-to-day operations of the Group are delegated to the management. 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. 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. In 2017, the Board of Directors worked on the following key tasks: » preparation of the financial statements and annual report, and review of the results for the year 2016; » approval of the budget and business strategy for the year 2017; » review of the quarterly financial results, approval of financial statements for 6 months of 2017 and monitoring of compliance with risk management strategy; » determination of the Group’s strategic and operational priorities; » entering into a major transaction with X5 retail group in connection with a strategic decision to focus on two of the Group’s most profitable business segments: hypermarkets and discounters. Meetings of the Board of Directors Member Board of Directors Audit Committee Remuneration Committee Heigo Kera Dmitrii Troitskii Dmitry Korzhev Boris Volchek Mykola Buinyckyi (4 meetings) attended 4 (4 meetings) attended 4 1 attended, 2 by proxy not a member 3 attended, 1 by proxy 4 by proxy 4 attended 4 attended 1 attended 1 attended 4 (1 meeting) attended by proxy not a member by proxy not a member 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 of the Company website, available at: http://okeyinvestors.ru/shareholder/documents/ O’KEY Group of CompaniesMEMBERS OF THE BOARD OF DIRECTORS OF O’KEY GROUP S.A. as at 31 December 2017: 57 HEIGO KERA DMITRII TROITSKII BORIS VOLCHEK Group Chairman, Member of the Audit Committee, Chair of the Remuneration Committee Member of the Board of Directors Non-Executive Director Caraden Director Member of the Audit and Remuneration Committee Election First elected to the Board of Directors in June 2010, and repeatedly re-elected since then Election First elected to the Board of Directors in June 2010 and repeatedly re-elected since then. Election First elected to the Board of Directors in June 2010 and repeatedly re elected since then. Education University degree in economics, Tallinn Technical University (Estonia) Education University degree, State Marine Technical University of St. Petersburg Skills and Experience 2015–2017: CEO of O’KEY Group effective 1 May 2015 2008–present: the owner and a Member of the Board of Directors of Silverko Consult OU 2002–2008: consultancy services, including research on retail markets in Belarus, Kazakhstan and China. Committee Membership Member of the Remuneration Committee Member of the Audit Committee Shares in O’KEY Mr. Kera does not hold shares of O’KEY Group S.A. Skills and Experience 2005–2007: Member of the Board of Directors of the Ochakovo Dairy Plant 2005-present: Member of the Supervisory Board of Bank Saint Petersburg, Development Director of Neva-Rus Committee Membership Member of the Remuneration Committee Shares in O’KEY Mr. Troitskii indirectly owns ca. 33.05% of the shares of O’KEY Group S.A. Education University degree, Leningrad Institute of Railway Engineers (now St. Petersburg State University of Communications) Skills and Experience 1995-present: President of the Union Group of companies 2000-present: General Director of St. Petersburg Automobile Museum. Committee Membership Member of the Remuneration Committee Member of the Audit Committee Shares in O’KEY Mr. Volchek indirectly owns ca. 29.52% of the shares of O’KEY Group S.A. DMITRY KORZHEV Director Member of the Audit Committee MYKOLA BUINYCKYI Independent Director Chair of the Audit Committee Election First elected to the Board of Directors in June 2010 and repeatedly re-elected since then. Election First elected to the Board of Directors in October 2015. He also served on the Board in 2010-2013. Education University degree, State Marine Technical University of St. Petersburg Skills and Experience 2005-2010: Member of the Supervisory Board of Bank Saint Petersburg Education University degree, The University of Edinburgh, UK A fellow of the Chartered Institute of Management Accountants A Member of the Institute of British Management Joint diploma in management accounting 7 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. Committee Membership Member of the Remuneration Committee Shares in O’KEY Mr. Buinyckyi does not hold shares of O’KEY Group S.A. Skills and Experience Over 35 years in international financial management and over 20 years’ experience in Russia. Committee Membership Member of the Audit Committee Shares in O’KEY Mr. Korzhev indirectly owns ca. 11.73% of the shares of O’KEY Group S.A. Member of the Audit Committee Member of the Remuneration Committee Annual Report 2017 CORPORATE GOVERNANCE 58 Committees of the Board of Directors The primary 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 the Board meetings. The meetings of the Committees usually take place before the Board meeting. The Board Committees have broad procedural powers and 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. In total, 5 Committee meetings were held in 2017. Audit Committee Audit Committee Members As of 31 December 2017, the Audit Committee comprised: » Mykola Buinyckyi, Committee Chairman, Independent Director of the Board of Directors; » Boris Volchek, Committee Member, Caraden Director of the Board of Directors; » Dmitry Korzhev, Committee Member, Director of the Board of Directors; » Heigo Kera, Committee Member, Group Chairman, Director of the Board of Directors; » Ilya Ilin, Committee Member, non-director, external consultant; » Alvidas Brusokas, Committee Member, non-director, external consultant. Key Areas 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 assists the Board of Directors in fulfilling its oversight responsibilities relating to the financial statements, including periodically reporting to the Board of Directors on its activities and the adequacy of internal control systems over financial reporting. According to the Statute of O’KEY Audit Committee, the Audit Committee shall consist of no fewer than three current members of the Board of Directors, and shall be chaired by an independent director. The Committee’s Remit » reviewing the IFRS financial statements for integrity and transparency; » analysing financial reporting processes, including carrying out regular reviews and making recommendations; » recommending appointments and remuneration of the Company’s external auditor to the Board of Directors and maintaining an ongoing relationship with the external auditor; » analysing and supporting the internal audit system and risk management procedures, including the drafting of recommendations for their improvement. Activities in 2017 The Audit Committee performed the following duties during 2017: » fulfilled oversight responsibilities relating to the integrity of the Company’s annual financial statements; » fulfilled oversight responsibilities relating to the integrity of the Company’s half-yearly financial statements; » reviewed reports prepared by the Internal Audit department; » reviewed effectiveness of the Company’s risk management and internal control systems; » reviewed policies and procedures published in the Company; » monitored reports as per the Company’s Whistleblowing Policy; » planned and agreed the scope of the audit of financial statements for the year ended 2017 with the external auditor of O’KEY Group; » approved the Internal Audit plan for the year 2018. Plans for 2018 The Audit Committee and the Company will continue to focus on the following areas in 2018: » how the Company’s 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; » optimising the internal business processes involved in the preparation of financial reporting. Internal Audit Department 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. O’KEY Group of Companies59 It is an independent department within the O’KEY Group that functionally reports to the Audit Committee of the Board of Directors and administratively reports to the Deputy of CEO. In 2017, the department audited the following business processes: human resources, marketing, operation activities, purchases, environmental compliance and industrial safety. It also hired external consultants to help audit the risk management system. The Internal Audit Department’s plans for 2018 include auditing the following business processes: e-commerce, sales, government relations & public relations, and IT. Remuneration Committee Committee members » Heigo Kera, Committee Chairman, Chairman of the Board, Director of the Board of Directors; » Boris Volchek, Committee Member, Caraden Director of the Board of Directors; » Dmitry Troitskii, Committee Member, Director of the Board of Directors; » Ilya Ilin, Committee Member, non-director, external consultant; » Alvidas Brusokas, Committee Member, non-director, external consultant. The Committee’s remit includes: » reviewing the compensation policy; » advising on any benefit or incentive schemes; » making proposals to the full Board of Directors regarding the remuneration of Executive Directors and management (including Chief Executive Officer). In 2017, the Committee worked closely with the Group management to find ways to facilitate the further optimisation of costs of the Group, as a result, some changes to the KPIs and bonus policies are to be introduced in 2018. Activities in 2017: During the reporting period, the Remuneration Committee held one meeting. At that meeting, the Committee reviewed the report on the remuneration, bonuses and expenses of the Board and its Committees. The committee reviewed the amount of remuneration to be allocated to the management of the Group in 2016, approved the Remuneration Committee Report and suggested the total maximum amount of remuneration of Directors for 2017 to be submitted for the approval of the shareholders of the Company. Remuneration Members of the Board of Directors of O’KEY Group S.A. receive remuneration of the amount approved by the General Meeting of Shareholders. Members of the Board and its Committees may be compensated for the expenses they incurred in the course of their duties, in accordance with the business and travel expenses policy of O’KEY Group S.A. Diversity O’KEY Group is working on adoption of a 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 or origin. The requirements of educational and professional backgrounds are such as to ensure that the members of the team possess the skills and experience necessary to perform their functions effectively. Changes made to the Senior Management Team in 2017 Miodrag Borojevic » 22.03.2017 » Chief Executive Officer of O’KEY Ivan Dropulic » 10.07.2017 » Chief Commercial Officer of O’KEY Annual Report 2017 CORPORATE GOVERNANCE 60 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 2017. MIODRAG BOROJEVIC CEO of O’KEY Appointment A member of the Management Board since 2017 Education The University of Belgrade, Department of Economics; The Josip Juraj Strossmayer University of Osijek, Department of Electrical Engineering. ARMIN BURGER CEO of DA! Appointment A member of the Management Board since 2013 Education University of Freiburg, Department of Economics Skills and experience 2012-2013: CEO and a Member of the Supervisory Board of Praktiker AG KONSTANTIN ARABIDIS CFO Appointment A member of the Management Board since 2016 Education St. Petersburg University, Department of Economics; Peter the Great Saint Petersburg Polytechnic University, Department of Technical Cybernetics; Skills and experience 2014-2017: CEO REWE Italy 2002-2014: various executive positions in Kaufland 2008-2011: Member of the Supervisory Board Aldi Süd 1999-2008: CEO Hofer KG, Sattledt, Austria 1990-1998: various positions in Aldi GmbH Member of Association of Chartered Certified Accountants (ACCA). Skills and experience 2012-2016: various positions in O’KEY Group Before 2012: various positions in PWC O’KEY Group of Companies61 PAVEL TOMANEK Chief Operating Officer Appointment A member of the Management Board since 2016 Education Masaryk University in Brno, Department of Clinical Psychology ELENA POLOZOVA Human Resources Director Appointment A member of the Management Board since 2015 Education Moscow International Higher School of Business (MIRBIS), MBA; Lipetsk State Technical University, Department of Psychology. ANTON FARLENKOV Corporate Development Director Appointment A member of the Management Board since 2016 Education Urals State Technical University, Department of Physics and Technology IVAN DROPULIC Chief Commercial Officer Appointment A member of the Management Board since 2017 Education The University of Zagreb, Department of Economics Skills and experience 2015-2016: O’KEY Sales Director for the Northwest and Southern regions 2012-2015: Operations Director in X5 Retail Group 2007-2008: Operations and Logistics Director in Lenta 2000-2007: Senior Executive in Tesco Skills and experience 2013-2015: Senior HR, OKEY 2003-2013: HR Business partner in Magnit Skills and experience 2006-2016: Head of EEMEA equity research at Goldman Sachs 2003-2006: various positions in Royal Dutch Shell, Infoshare Skills and experience 2012-2017: Purchasing and Marketing Director, Member of the Board of Kaufland Croatia 2007-2012: Fresh Food Director at Kaufland Croatia Up to 2007: various positions at Pik Vrbovec and Jamnica IVART PAPLI Director for Security and Risk Management Appointment A member of the Management Board since 2015 Institute of Economics (Estonia), Licence in company’s economic safety, Licence in fraud investigations (CFI). Education Tallinn University, Department of culture Baltic Business Security School, Licence in security management; Skills and experience 2012-2015: Risk & Security manager IKEA Russia 2002-2012: various positions at DHL Annual Report 2017 CORPORATE GOVERNANCE 62 Risk Management System d e t c e p x E K S I R E H T F O Y T I L I B A B O R P l y e k L i d r a z a H - w o L ) i d e v e c r e p ( ) l e b i s s o p ( y t i l i b a b o r p e t o m e R 6 7 10 11 9 8 1 2 3 14 12 5 13 4 Immaterial Minimum Medium Material Irretrievable MATERIALITY (AFFECT) OF THE RISK The risk management system is intended to provide a reasonable guarantee that the Company’s strategic goals will be achieved in a timely manner, and that the degree of risk faced by the Group remains acceptable for both 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 within 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. OUR CHALLENGES IN 2017 In 2017, we focused on the operating efficiency of the Company. With the sale of our supermarket business in December 2017, we began a new stage in the development of our company. Our organisational structure was updated in line with our strategic vision, and this will allow us to focus on the key priorities of the Group: achieving improved efficiency in our city hypermarkets and accelerating the expansion of discounters. Additionally, we focused on costs control, optimisation of commercial policies and improving our assortment mix. As a result of this process optimisation, we achieved a notable decrease in personnel costs, both at store and head office level. During 2017, we continued to increase logistics centralisation and the effectiveness of operations at store and head office levels. Through continuous and timely work with our suppliers, we achieved an improved overall centralisation rate of almost 60% by the end of 2017, up from 40% at the same period in 2016. O’KEY Group of Companies 63 PRINCIPLE RISKS 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 affect both our share price and 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. Name of Risk Definition & Potential Impact Mitigating Actions STRATEGIC RISKS 1 Economic Outlook 2 Competition Risk 3 Political Risk 4 Regulatory Risk Our business is affected by uncertainties associated with changing economic conditions, particularly in the current environment of global economic instability. Therefore, we may face reduced customer demand as the income and purchasing power of our customers decreases under the weight of a weaker macroeconomic environment, exacerbated by declining oil prices and sustained rouble volatility. 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. 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. 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 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. We focused on enhancing our customer value proposition through the introduction of a competitive pricing policy, the implementation of effective marketing initiatives and assortment structure improvement. We put considerable effort into aligning our hypermarket price perceptions with the ‘best value for money’ concept. In this context, we launched an extended marketing campaign based on the price-match guarantee across the wide range of top-selling products offered at our hypermarkets. 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. We aim to ensure compliance with all applicable regulations by monitoring regulatory developments and changes, and by following up and responding to changes in regulations and standards in a timely manner. The new terms of Trade Law had significant influence on all players on the market. During the second half of 2016, and the first quarter of 2017, we developed and implemented essential changes in the Company’s main business processes and updated relevant internal policies and procedures. Annual Report 2017 CORPORATE GOVERNANCE 64 Name of Risk Definition & Potential Impact Mitigating Actions OPERATIONAL RISKS Changing Customer Expectations 5 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. To maximise the efficiency and relevance of such assessments, we monitor internal and external reports on retail market developments and changes in O’KEY positioning. During the FY 2017, as a result of continual analysis of the assortment structure and negotiations with our suppliers, we enhanced the volume of promotional campaigns and developed goods that meet the expectations of our customers with regards to price, volume and quality. 6 Employee Recruitment and Retention Competition for highly qualified management and store personnel remains intense in Russia. For our plans of expansion to materialise, 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 an 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 training and special programmes. 7 Supply Chain Risk 8 IT Platform Development 9 IT Security Threats Our financial performance depends in part on reliable and effective supply chain management. We rely on third parties to supply us with merchandise and services. The third parties that supply us with merchandise and services also have other customers and may not have sufficient capacity to meet all of their customers’ needs, including ours, during periods of excess demand. Shortages and delays could materially harm our business. Unanticipated increases in prices could also adversely affect our performance. Furthermore, we may be exposed to the risk of delays and interruptions to our supply chain as a consequence of natural disasters, in case we are unable to identify alternative sources of supply in a timely manner. Execution of our strategic targets requires the adaptation of our current IT infrastructure to changing business needs. As the business grows, the complexity of processes supporting it and diversity of tasks around such growth will increase. Delayed or inappropriate decisions on development of the infrastructure can lead to failures in meeting Group goals and impede the attainment of longer-term goals. We are observing an increase in IT security threats and higher degrees of professionalism in cybercrime. Our systems and solutions, as well as those of our counterparties, remain potentially vulnerable to attack. 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. Additionally, to facilitate the adaptation of new employees, we organise introductory courses and coaching in our stores. Throughout 2017, we continued to increase logistics centralisation and the effectiveness of operations at store and head office levels. The continuous and timely work with our suppliers resulted in an improved overall centralisation rate of almost 60% by the end of 2017, up from 40% at the end of 2016. In line with our commitment to the ‘lean store – lean office’ concept, we carried out a restructuring of our head office in Q4’17 which resulted in a more transparent and efficient organisational structure. At the end of 2016, we began the integration of several core IT systems that will allow us to meet the modern demands of the market. In 2017, we implemented these systems in several areas of operation as part of the pilot project and witnessed improvement in the operations of our store and head office processes as a result. In 2018, we plan to finish the implementation of these systems. 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 order to reduce the threats to our IT security. O’KEY Group of Companies Name of Risk Definition & Potential Impact Mitigating Actions 65 FINANCIAL RISKS Provision of Sufficient Financing 10 11 Tax Regulations Recent changes in the macroeconomic situation might result in a liquidity squeeze and the tightening of lending policies by Russian banks. Given the Group plans for expansion in the coming periods, issues with the availability of external financing or significant changes in its cost could negatively impact our ability to execute the programme. Russian tax law has complex tax rules, which may be interpreted in different ways and such rules are subject to frequent changes. Examinations by tax authorities and changes in tax regulations could adversely affect our business, and financial and operational performance. Changes in tax law could result in higher tax expense and payments. Furthermore, legislative changes could materially impact tax receivables and liabilities, as well as deferred tax assets and deferred tax liabilities. We maintain available lines of credit to close potential liquidity gaps. We diversify and enlarge the list of partnering banks to increase our control over the availability and cost of financing. Our securities are listed on the London Stock Exchange that allows us to utilise the secondary placement of shares as an alternative means of financing. Our tax and legal specialists review compliance with applicable tax regulations, current interpretations issued by the authorities and judicial precedents resulting from tax disputes. This work is conducted on a regular basis and in a consistent way, ensuring we are aware of any changes that we may need to implement. 12 Changes in Working Capital The inability to control and manage elements of the working capital can result in negative changes for the operating cash flow, leading to liquidity gaps and excessive reliance on external financing. We exercise constant control over the working capital, which is detailed in our monetary policy. The aim of this policy is to minimise prepayment balances and control overdue receivables. 13 Risk of Currency and Interest Rate Volatility 14 Risk of Misstatements in Financial Statements 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. 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 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 a long tenor. These facilities do not provide the lender with the right to increase the interest rate due to any changes in the money market. Certain currency risks are controlled through switching the payments into roubles, setting caps or are 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 30 in the Group Consolidated Financial Statements. Annual Report 2017 CORPORATE GOVERNANCE 66 Information for Shareholders and Investors SHARE CAPITAL O’KEY Group S.A. share capital amounts to EUR 2,690,740 divided into 269,074,000 ordinary shares of a nominal value of EUR 0.01 each. As at the date of this report, the Company’s share capital has remained unchanged since 30 November 2010. 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. Significant Shareholdings The three major indirect shareholders of the Group are its founders: » Mr. Dmitri Troitskii (who indirectly owns approximately 33.05% of the outstanding share capital of O’KEY Group S.A.); » Mr. Dmitry Korzhev (who indirectly owns approximately 11.73% of the outstanding share capital of O’KEY Group S.A.); » Mr. Boris Volchek (who indirectly owns approximately 29.52% of the outstanding share capital of O’KEY Group S.A.). In September 2017, Mr. Volchek informed the company that he had acquired additional GDRs, increasing his ownership from 28.02% to 29.52% of the total outstanding share capital. In November – December 2017, the share indirectly owned by Mr. Korzhev decreased from 23.49% to 11.73%, and the share indirectly owned by Mr. Troitskii increased from 23.49% to 33.05%. Global Depositary Receipts (GDRs) Global Depositary Receipts (GDRs) are issued in respect of ordinary shares at a ratio of one ordinary share per one GDR. The GDRs are traded on the London Stock Exchange. The Company’s depositary bank is The Bank of New York Mellon. As of 31 December 2017, GDRs represented 38.17% of O’KEY Group S.A. share capital. No other securities have been issued by the Company. Stock Exchange As of 31 December 2017, O’KEY Group S.A. GDRs were traded on the London Stock Exchange. Share Capital Structure – Direct Holdings Trading Floor of O’KEY Group S.A. GDRs 50.96% NICEMAX CO LTD 29.52% GSU LTD 19.52% Free ﬂoat Trading floor Ticker code London Stock Exchange OKEY O’KEY Group S.A. Securities Identification Numbers CUSIP1 Regulation S GDRs Rule 144A GDRs ISIN2 Regulation S GDRs Rule 144A GDRs Code 670866201 670866102 Code US6708662019 US6708661029 1 CUSIP (Committee on Uniform Security Identification Procedures) – identification number given to the issue of shares for the purposes of facilitating clearing. 2 ISIN (International Securities Identification Number) – international identification number of the share. O’KEY Group of CompaniesO’KEY Group S.A. Share Price Performance and Trading Volumes in 2017 London Stock Exchange (GDRs) 67 5.0 4.0 3.0 2.0 1.0 0 3.0 2.5 2.0 1.5 1.5 January February March April May June July August September October November December GDR price, US$/GDR (right axis) Trading volume, US$ mln (left axis) Total Shareholder Return3 Analyst Coverage TSR 2017 TSR 2016 TSR 2015 O'KEY Group S.A. Peer average -3.53% 28.96% -55.63% -7.42% 24.64% 7.00% 10 equity research analysts from leading banks, including Goldman Sachs, Credit Suisse, Morgan Stanley, JP Morgan, VTB Capital and Sberbank CIB, follow the Company on a regular basis. O’KEY’s IR team routinely monitors and communicates analyst consensus to the Company’s top management. O’KEY Group S.A. GDRs Trading Information (market transactions, Bloomberg) DIVIDENDS Dividend Policy Annual maximum price, US$ Annual minimum price, US$ Year-end price, US$ Trading volume (mln units) 2017 2.7 1.8 2.5 24.5 2016 2.6 1.5 2.6 29.8 Source: Bloomberg – applicable to all the tables above Credit Ratings Credit rating Outlook Fitch B+ Stable Last rating date 15 January 2018 In September 2012, the Company received an investment grade credit rating from Fitch international rating agency. In January 2018, Fitch affirmed O’KEY Group S. A.’s B+ rating with the Stable outlook. 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. Annual Report 2017 CORPORATE GOVERNANCE 68 Period Interim dividends 2011 Interim dividends 2012 Interim dividends 2013 Interim dividends 2014 Interim dividends 2014 Interim dividends 2015 Interim dividends 2016 Interim dividends 2017 Interim dividends 2018 Record date Amount of dividend per GDR (US$ cents, gross) Amount of accrued dividend (US$, gross) 12.09.2011 23.02.2012 15.02.2013 18.02.2014 17.10.2014 11.09.2015 08.07.2016 20.01.2017 25.01.2018 9.9481 10.254 18.953 22.670 7.433 8.920 8.548 9.167 12.367 26,767,750.60 27,590,847.96 50,997,595.22 60,999,075.80 20,000,270.42 24,001,400.80 23,000,445.52 24,666,013.58 33,276,381.58 Taxation Information disclosure As a general rule, the Company withholds 15% WHT from the dividend paid from Luxembourg for distribution to the holders of GDRs. The Company takes great care to ensure that any relevant information is released to all shareholders and analysts at the same time, in accordance with the transparency principles. This information is provided for information purposes only. Potential and current investors should seek the advice of professional consultants on tax matters related to investments in the shares and GDRs of the Company. INVESTOR RELATIONS Communication and Dialogue Transparent communication with all shareholders is one of O’KEY’s top priorities. The Company’s management maintains regular dialogue with institutional investors and sell-side analysts through participation in meetings, presentations, international conferences and conference calls, during which it discusses the Company’s financial results and provides an overview of the retail market. O’KEY understands the importance of keeping the investment community informed of the latest developments and provides updated outlooks in order to build an understanding of the Company’s investment case. In 2017, O’KEY maintained active communications with investors through the following activities: » a roadshow involving senior management to meet with institutional investors in the UK; » participation of the Company’s management in a number of leading international market conferences focused on emerging markets; » conference calls on financial results and an overview of the retail market. Generally, the information is distributed through the following channels: » London Stock Exchange website: the Company posts price-sensitive information on the LSE site through the information disclosure system (RNS); » O’KEY website: the Company publishes releases on important events and financial results, as well as provides regular updates in relation to O’KEY operations. Any interested parties can subscribe online to receive news updates by registering online. O’KEY posts its annual reports on its website, www.okeyinvestors.ru, on the day of the report’s official publication and sends out a press release to announce the publication. The website is regularly updated. » Social media: O’KEY selectively uses social media as an additional channel of information disclosure and to distribute Company and industry news, as well as to highlight coverage in the media. For more information, please visit O’KEY’s official Facebook page at https://facebook.com/okmarket.ru, the Vkontakte page at https://vk.com/okmarketru, and the Odnoklassniki page at https://ok.ru/okmarket. » E-mail The Investor Relations Department can be contacted with respect to any queries at: ir@okmarket.ru There have been no substantial changes in our approach to disclosure in 2017 compared to 2016. 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 68 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. O’KEY Group of CompaniesManagement & Directors Responsibility Statement 69 We confirm, to the best of our knowledge, that the consolidated financial statements which have been prepared in accordance with the International Financial Reporting Standards as adopted by the European Union, give a true and fair view of the assets, liabilities, financial position and profit or loss of O’KEY Group S.A., and the undertakings included in the consolidation taken as a whole, and that the consolidated Directors’ report includes a fair review of the development and performance of the business and the position of O’KEY Group S.A. and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties they face. Luxembourg, 26 March 2018 Dmitry Korzhev Member of the Board of Director Mykola Buinyckiy Member of the Board of Director Miodrag Borojevic CEO of O’KEY Heigo Kera Chairman Konstantin Arabidis CFO Annual Report 2017 FINANCIAL STATEMENTS 70 i s e n a p m o C f o p u o r G Y E K O ’ O’Key Group S.A. Consolidated Financial Statements for the year ended 31 December 2017 (WITH THE REPORT OF THE RÉVISEUR D’ENTREPRISES AGRÉÉ THEREON) CONTENTS Report of the Réviseur d’Entreprises Agréé Consolidated Statement of Financial Position as at 31 December 2017 Consolidated Statement of Profit or Loss and Other Comprehensive Income for the year ended 31 December 2017 Consolidated Statement of Changes in Equity for the year ended 31 December 2017 Consolidated Statement of Cash Flows for the year ended 31 December 2017 Notes to the Consolidated Financial Statements for the year ended 31 December 2017 81 1 Reporting entity 82 2 Basis of accounting 82 3 Functional and presentation currency 82 4 Use of estimates and judgments 83 5 Determination of fair values 84 6 Operating segments 85 7 Subsidiaries 85 8 Sale of supermarkets 86 9 Revenue 86 10 General, selling and administrative expenses 87 11 Other operating income and expenses, net 87 12 Personnel costs 88 13 Finance income and finance costs 88 14 Foreign exchange (loss)/gain 88 15 Income tax expense 89 16 Investment property 90 17 Property, plant and equipment 91 18 Lease rights 92 19 Intangible assets 20 Deferred tax assets and liabilities 21 Other non-current assets 22 Inventories 23 Trade and other receivables 24 Non-current assets held for sale 25 Cash and cash equivalents 26 Equity 27 Earnings/(loss) per share 28 Loans and borrowings 29 Trade and other payables 30 Financial instruments and risk management 31 Operating leases 32 Capital commitments 33 Contingencies 34 Related party transactions 35 Events subsequent to the reporting date 36 Basis of measurement 37 Significant accounting policies 71 76 77 78 80 81 93 94 95 95 95 96 96 96 97 98 99 104 105 105 106 107 107 108 KPMG Luxembourg, Société coopérative 39, Avenue John F. Kennedy L - 1855 Luxembourg Tel.: +352 22 51 51 1 Fax: +352 22 51 71 E-mail: info@kpmg.lu Internet: www.kpmg.lu Report of the Réviseur d’Entreprises Agréé 71 To the Shareholders of O’KEY GROUP S.A. 46A, Avenue J.F. Kennedy L-1855, Luxembourg REPORT ON THE AUDIT OF THE FINANCIAL STATEMENTS Opinion We have audited the consolidated financial statements of O’KEY GROUP S.A. and its subsidiaries (the “Group”), which comprise the consolidated statement of financial position as at 31 December 2017, and the consolidated statement of profit or loss and other comprehensive income, consolidated statement of changes in equity and consolidated statement of cash flows for the year then ended, and notes to the consolidated financial statements, including a summary of significant accounting policies. In our opinion, the accompanying consolidated financial statements give a true and fair view of the consolidated financial position of the Group as at 31 December 2017, and of its consolidated financial performance and its consolidated cash flows for the year then ended in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union. Basis for Opinion We conducted our audit in accordance with the EU Regulation N° 537/2014, the Law of 23 July 2016 on the audit profession (“Law of 23 July 2016”) and with International Standards on Auditing (“ISAs”) as adopted for Luxembourg by the “Commission de Surveillance du Secteur Financier” (“CSSF”). Our responsibilities under the EU Regulation N° 537/2014, the Law of 23 July 2016 and ISAs are further described in the « Responsibilities of “Réviseur d’Entreprises agréé” for the audit of the financial statements » section of our report. We are also independent of the Group in accordance with the International Ethics Standards Board for Accountants’ Code of Ethics for Professional Accountants (“IESBA Code”) as adopted for Luxembourg by the CSSF together with the ethical requirements that are relevant to our audit of the consolidated financial statements, and have fulfilled our other ethical responsibilities under those ethical requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Key audit matters Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the consolidated financial statements of the current period. These matters were addressed in the context of the audit of the consolidated financial statements as whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. Annual Report 2017 FINANCIAL STATEMENTS 72 SUPPLIERS’ BONUSES Please refer to note 4 (estimates and judgements) and note 23 (financial disclosures). a. Why the matter was considered to be one of the most significant in our audit of the annual accounts of the current period The Group receives various bonuses from suppliers based on volume-related allowance, promotional and marketing allowances and discounts received in connection with the purchase of goods. This represents a significant reduction in the cost of sales and inventory. The calculation of bonuses is in part dependent on an estimation of whether these amounts due under various agreements with suppliers have been earned at the reporting date based on inventory purchased and other conditions such as promotional activities or marketing compaign undertaken by the Group for certain goods. The process for calculating and recording supplier bonuses involves significant manual processes which are more susceptible to error. b. How the matter was addressed in our audit Our procedures over supplier bonuses included, but were not limited to: ɮ We tested key internal controls over completeness, existence and accuracy of recoginsed bonuses from suppliers, including authorisation and performance review of recorded bonuses versus budget and historical data. ɮ We tested the Group’s manual calculations made in the process of recording of supplier bonuses. With assistance of our own IT specialists we tested accuracy and completeness of system- generated reports which the Group used as input data for these manual calculations. We agreed relevant data elements in these reports to source documents on a sample basis. ɮ We compared bonuses’ trends by bonus type, product category and supplier to historical data adjusted for current market conditions where necessary. ɮ We agreed bonuses receivable as at year-end to external confirmations obtained from suppliers on a sample basis. ɮ We recalculated the effects of reduction in the inventory cost due to allocation of bonuses to unsold inventory and compared results to the amounts determined by the Group. VALUATION OF DEFERRED TAX ASSET Please refer to notes 4 (estimates and judgements) and note 20 (financial disclosures). a. Why the matter was considered to be one of the most significant in our audit of the annual accounts of the current period The Group has recognised significant deferred tax asset in respect of tax losses carried forward by LLC Fresh Market, a subsidiary operating a discounter chain. The recovery of the deferred tax asset depends on achieving sufficient taxable profits by the discounter chain in the future. There is an inherent uncertainty involved in forecasting the timing and amount of future taxable profits, which supports the extent to which deferred tax asset is to be recognised. The discounter business is relatively new for the Group and historical data on financial results of the discounter chain is limited. Therefore, this is a key judgmental area our audit is concentrated on. b. How the matter was addressed in our audit Our procedures over valuation of deferred tax asset included, but were not limited to: ɮ The Group prepares taxable profits forecast model based on the long-term budget of the discounter chain. We tested design and implementation of key internal controls over preparation of the discounter chain’s long-term budget. ɮ We analysed the underlying methodology and tested the mathematical accuracy of the taxable profits forecast model used to estimate the amount of the deferred tax asset to be recognised by the Group. ɮ We evaluated the appropriateness of the Group’s key assumptions used in taxable profits forecast such as revenue growth and operating profit margin through comparison of the forecast to historical performance and observable market data, including competitors’ historical data and inflation rate forecasts. ɮ We challenged the Group’s assumptions regarding expansion of the discounter chain by comparing them to the Group’s long- term cash-flow forecast and historical cash-flow trends. ɮ We assessed the accuracy of the Group’s forecasts used in prior years to obtain information regarding the effectiveness of the Group’s forecasting process and identify potential bias. ɮ We also assessed the adequacy of Group’s disclosures in respect of deferred tax asset. O’KEY Group of Companies73 SALE OF SUPERMARKETS Please refer to note 4 (estimates and judgements) and note 8 (financial disclosures). a. Why the matter was considered to be one of the most significant in our audit of the annual accounts of the current period b. How the matter was addressed in our audit During the year ended 31 December 2017 the Group entered into a complex arrangement to sell most of its supermarket business. Our procedures over sale of supermarkets included, but were not limited to: ɮ We reconciled the consideration received for the sale to the sale The net book value of assets already disposed and to be disposed and the sale proceeds are significant to the Group’s consolidated financial statements. The arrangement is structured into several stages. Significant judgement is required to determine the part of the total consideration for the sale of supermarkets that should be recognised during the year ended 31 December 2017 and the part that should be deferred to the year ending 31 December 2018. Significant judgement is required to assess the effect of indemnities and warranties included in the sale agreement on the sale proceeds recognised in the Group’s consolidated financial statements. agreement. ɮ We assessed whether the total consideration for the sale was allocated to the components of the arrangement in the proportion to their fair values. ɮ We evaluated whether the timing of the gain recognized for each significant component corresponds to the transfer of control or substantial risks and rewards to the buyer as appropriate. ɮ We inspected key terms of the sale agreement and assessed whether the effect of the seller’s warranties and indemnities to the buyer was appropriately recognised as a part of the sale’s consideration. ɮ We also assessed the adequacy of the Group’s disclosures related to the sale of supermarkets and non-current assets held for sale. Other information The Board of Directors is responsible for the other information. The other information comprises the information included in the annual report, the consolidated 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 other information and we do not express any form of assurance conclusion thereon. In connection with our audit of the consolidated financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the consolidated financial statements or our knowledge obtained in the audit or otherwise appears to be materially misstated. If, based on the work we have performed, we conclude that there is a material misstatement of this other information we are required to report this fact. We have nothing to report in this regard. Responsibilities of the Board of Directors and Those Charged with Governance for the consolidated financial statements The Board of Directors is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with IFRSs as adopted by the European Union, and for such internal control as the Board of Directors determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. In preparing the consolidated financial statements, the Board of Directors is responsible for assessing the Group’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the Board of Directors either intends to liquidate the Group or to cease operations, or has no realistic alternative but to do so. Those charged with governance are responsible for overseeing the Group’s financial reporting process. Annual Report 2017 FINANCIAL STATEMENTS 74 Responsibilities of the Réviseur d’Entreprises agréé for the audit of the consolidated financial statements The objectives of our audit are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue a report of “Réviseur d’Entreprises agréé” that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with the EU Regulation N° 537/2014, the Law of 23 July 2016 and with ISAs as adopted for Luxembourg by the CSSF will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements. As part of an audit in accordance with the EU Regulation N° 537/2014, the Law of 23 July 2016 and with ISAs as adopted for Luxembourg by the CSSF, we exercise professional judgment and maintain professional skepticism throughout the audit. We also: » Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. » Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group’s internal control. » Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the Board of Directors. » Conclude on the appropriateness of Board of Directors’ use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our report of “Réviseur d’Entreprises agréé” to the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our report of “Réviseur d’Entreprises agréé”. However, future events or conditions may cause the Group to cease to continue as a going concern. » Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation. » Obtain sufficient appropriate audit evidence regarding the consolidated financial information of the entities and business activities within the Group to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the Group audit. We remain solely responsible for our audit opinion. We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards. From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit of the consolidated financial statements of the current period and are therefore the key audit matters. We describe these matters in our report unless law or regulation precludes public disclosure about the matter. O’KEY Group of CompaniesREPORT ON OTHER LEGAL AND REGULATORY REQUIREMENTS 75 We have been appointed as “Réviseur d’Entreprises agréé” by the General Meeting of the Shareholders on 6 October 2010 and the duration of our uninterrupted engagement, including previous renewals and reappointments, is 8 years since the Company became public interest entity. The consolidated Directors’ report, which is the responsibility of the Board of Directors, is consistent with the consolidated financial statements and has been prepared in accordance with applicable legal requirements. The Corporate Governance Statement, included in the consolidated Directors’ report, is the responsibility of the Board of Directors. The information required by Article 68ter paragraph (1) letters c) and d) of the law of 19 December 2002 on the commercial and companies register and on the accounting records and annual accounts of undertakings, as amended, is consistent with the consolidated financial statements and has been prepared in accordance with applicable legal requirements. We confirm that the audit opinion is consistent with the additional report to the audit committee or equivalent. We confirm that the prohibited non-audit services referred to in the EU Regulation No 537/2014, on the audit profession were not provided and that we remain independent of the Group in conducting the audit. OTHER MATTER The Corporate Governance Statement includes information required by Article 68ter paragraph (1) of the law of 19 December 2002 on the commercial and companies register and on the accounting records and annual accounts of undertakings, as amended. Luxembourg, 26 March 2018 KPMG Luxembourg Société coopérative Cabinet de révision agréé Jean-Manuel Séris Annual Report 2017 FINANCIAL STATEMENTS 76 CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 2017 ’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 investments Cash and cash equivalents Non-current assets held for sale 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 2017 2016 16 17 17 18 19 20 21 22 23 25 24 26 28 20 28 28 29 1 075 010 44 964 135 3 313 175 4 437 856 961 108 1 917 572 1 817 452 58 486 308 13 524 236 10 275 841 1 280 658 10 290 7 750 177 129 589 32 970 791 91 457 099 119 440 10 597 8 555 657 (99 861) 15 025 513 639 633 572 542 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 93 092 942 119 440 10 597 8 555 657 (75 329) 13 324 398 720 301 24 250 979 22 655 064 24 679 352 31 673 078 888 997 121 890 692 091 139 304 25 690 239 32 504 473 11 429 881 231 897 4 465 260 156 870 28 854 731 32 480 892 999 372 41 515 881 67 206 120 91 457 099 830 383 37 933 405 70 437 878 93 092 942 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 76to 111. O’KEY Group of CompaniesCONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 DECEMBER 2017 77 ’000 RUB Revenue Cost of goods sold Gross profit General, selling and administrative expenses Other operating income and expenses, net Operating profit Finance income Finance costs Foreign exchange (loss)/gain Profit before income tax Income tax expense Profit/(loss) for the year Other comprehensive loss Note 9 10 11 13 13 14 15 2017 2016 177 454 848 175 470 671 (137 010 445) (135 261 292) 40 444 403 40 209 379 (36 189 311) (35 764 206) 3 335 349 7 590 441 114 239 (1 050 739) 3 394 434 281 631 (3 532 915) (3 550 403) (376 375) 3 795 390 (628 477) 3 166 913 145 973 271 635 (409 425) (137 790) Items that will never be reclassified to profit or loss Exchange differences on translating to presentation currency (80 668) (118 246) Items that are or may be reclassified subsequently to profit or loss Change in fair value of hedges and reclassification from hedging reserve 13 (30 665) Other comprehensive income Income tax on other comprehensive income 13, 15 Other comprehensive loss for the year, net of income tax Total comprehensive income/(loss) for the year Earnings/(loss) per share - 6 133 (105 200) 3 061 713 79 428 (170 999) (15 885) (225 702) (363 492) Basic and diluted earnings/(loss) per share (RUB) 27 11.8 (0.5) 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 76 to 111. Annual Report 2017 FINANCIAL STATEMENTS 78 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 DECEMBER 2017 ’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 Other comprehensive income Total other comprehensive loss Total comprehensive loss for the year Transactions with owners, recorded directly in equity Contributions by and distributions to owners 13 15 Dividends paid 26 Total contributions by and distributions to owners - - - - - - - - - - - - - - - - - - (137 790) - (137 790) - - 79 428 (15 885) - - - - - - - - - - (118 246) (118 246) - - - 79 428 (15 885) (170 999) - (170 999) 63 543 (170 999) (118 246) (225 702) 63 543 (308 789) (118 246) (363 492) (347 949) (347 949) - - (1 124 462) (1 124 462) - - (1 472 411) (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 76 to 111. O’KEY Group of CompaniesCONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 DECEMBER 2017 79 ’000 RUB Note Share capital Legal reserve Additional paid-in capital Hedging reserve Retained earnings Translation reserve Total equity Balance at 1 January 2017 119 440 10 597 8 555 657 (75 329) 13 324 398 720 301 22 655 064 Total comprehensive income for the year Profit for the year Other comprehensive income Foreign currency translation differences Change in fair value of hedges and reclassification from hedging reserve Income tax on other comprehensive income Total other comprehensive loss Total comprehensive income for the year Transactions with owners, recorded directly in equity Contributions by and distributions to owners 13 15 Dividends paid 26 Total contributions by and distributions to owners - - - - - - - - - - - - - - - - - - - - - - - - - - (30 665) 6 133 (24 532) 3 166 913 - 3 166 913 - - - - (80 668) (80 668) - - (30 665) 6 133 (80 668) (105 200) (24 532) 3 166 913 (80 668) 3 061 713 - - (1 465 798) (1 465 798) - - (1 465 798) (1 465 798) Balance at 31 December 2017 119 440 10 597 8 555 657 (99 861) 15 025 513 639 633 24 250 979 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 76 to 111. Annual Report 2017 FINANCIAL STATEMENTS 80 CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 31 DECEMBER 2017 ’000 RUB 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 Net cash from operating activities Cash flows from investing activities 2017 2016 202 566 776 199 801 345 497 880 104 391 684 044 257 541 (194 385 579) (186 678 063) (672 429) (125 740) (2 182 232) (928 829) 4 874 238 (670 313) (76 312) (1 485 904) (159 780) 11 672 558 Purchase of property, plant and equipment and lease rights (excluding VAT) (3 112 061) (5 880 420) 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 (decrease)/increase in cash and cash equivalents Cash and cash equivalents at beginning of the year Effect of exchange rate fluctuations on cash and cash equivalents Cash and cash equivalents at end of the year (439 980) 186 870 (450 701) 917 819 (3 365 171) (5 413 302) 7 685 500 (7 663 017) (3 655 488) (1 465 798) (88 340) (5 187 143) (3 678 076) 11 463 467 (35 214) 7 750 177 24 498 000 (23 480 067) (3 939 956) (1 472 411) (134 577) (4 529 011) 1 730 245 9 768 130 (34 908) 11 463 467 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 76 to 111. O’KEY Group of CompaniesNotes to the Consolidated Financial Statements for the year ended 31 December 2017 81 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 2017 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. As at 31 December 2017 the Company considers as its major shareholders: Mr. Troitskii, Mr. Volchek and Mr. Korzhev. As at 31 December 2017 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 34. The Company’s registered address is: Luxembourg 46a, Avenue J.F. Kennedy, 3rd floor, L-1855. The Group’s principal business activity is the operation of a retail chain in Russia under the brand name “O’KEY”. At 31 December 2017 the Group operated 149 stores including 67 discounter stores (31 December 2016: 164 stores including 54 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. Annual Report 2017 FINANCIAL STATEMENTS 82 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 26 March 2018. 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 2017 the principal rate of exchange used for translating foreign currency balances were USD 1 = RUB 57.6002; EUR 1 = RUB 68.8668 (2016: USD 1 = RUB 60.6569; EUR 1 = RUB 63.8111). 4 USE OF ESTIMATES AND JUDGMENTS The preparation of consolidated financial statements in conformity with IFRSs requires management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from those estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimates are revised and in any future periods affected. Judgments that have the most significant effect on the amounts recognised in the consolidated financial statements and estimates that can cause a significant adjustment to the carrying amount of assets and liabilities within the next financial year include: Tax legislation. The Group is subject to income taxes in several jurisdictions. Significant judgment is required in determining the provision for income taxes. The major part of the tax burden refers to Russian tax, currency and customs legislation, which is subject to varying interpretations. Refer to note 33. 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 the 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 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 2017 refer to note 17. Recoverability of deferred tax asset. Significant judgment is required in assessment of recoverability of deferred tax assets on tax losses. The Group performs analysis of future taxable profit to cover the accumulated tax losses. Refer to note 20. Sale of O’key Supermarkets business. In December 2017 the Group signed a framework agreement with X5 Retail Group for sale of the major part of supermarkets business. Significant judgment is required in determination of amount and timing of recognition of proceeds under the agreement. For details refer to note 8. O’KEY Group of Companies5 DETERMINATION OF FAIR VALUES 83 A number of the Group’s accounting policies and disclosures require the determination of fair value, for both financial and non-financial assets and liabilities. When measuring the fair value of an asset or a liability, the Group uses market observable data as far as possible. Fair values are categorised into different levels in a fair value hierarchy based on the inputs used in the valuation techniques as follows. » Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities. » Level 2: inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices). » Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs). If the inputs used to measure the fair value of an asset or a liability might be categorised in different levels of the fair value hierarchy, then the fair value measurement is categorised in its entirety in the same level of the fair value hierarchy as the lowest level input that is significant to the entire measurement. The Group recognises transfers between levels of the fair value hierarchy at the end of the reporting period during which the change has occurred. Fair values have been determined for measurement and for disclosure purposes based on the following methods. When applicable, further information about the assumptions made in determining fair values is disclosed in the notes specific to that asset or liability. (a) Investment property An external, independent valuation company, having appropriate recognised professional qualifications and recent experience in the location and category of property being valued, values the Group’s investment property every year. The fair values are based on market values, being the estimated amount for which a property could be exchanged on the date of the valuation between a willing buyer and a willing seller in an arm’s length transaction after proper marketing wherein the parties had each acted knowledgeably and willingly. Appraisers considered current prices in an active market. The appraisers used the income approach 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. (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). Annual Report 2017 FINANCIAL STATEMENTS 84 6 OPERATING SEGMENTS 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 analyse 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 centralised; » the components’ activities are mainly limited to Russia which has a uniform regulatory environment. The CEO assesses the performance of the operating segment based on earnings before interest, tax, depreciation and amortisation (EBITDA) adjusted for one-off items. 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 37. The segment information for the year ended 31 December 2017 is as follows: ’000 RUB O’Key Da! Total 2017 2016 2017 2016 2017 2016 External revenue 167 062 312 169 695 802 10 392 536 5 774 869 177 454 848 175 470 671 Inter-segment revenue - - - 30 274 - 30 274 EBITDA 11 358 589 11 845 435 (2 023 596) (2 592 229) 9 334 993 9 253 206 O’KEY Group of CompaniesA reconciliation of EBITDA to profit/(loss) for the year is as follows: 85 ’000 RUB EBITDA Revaluation of investment property Gain/(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 loss/(gain) Other expenses Profit before income tax Income tax expense Profit/(loss) for the year 7 SUBSIDIARIES Note 11 11 11 11 11 10 13 13 14 2017 9 334 993 (200 000) 3 905 402 (279 174) (436 256) (3 626) 2016 9 253 206 (27 055) (568 004) (434 370) (279 015) (395) (4 613 172) (4 549 933) 114 239 281 631 (3 532 915) (3 550 403) (376 375) (117 726) 3 795 390 (628 477) 3 166 913 145 973 - 271 635 (409 425) (137 790) Details of the Company’s significant subsidiaries at 31 December 2017 and 31 December 2016 are as follows: Country of incorporation Nature of operations Ownership/voting Ownership/voting 2017 2016 Subsidiary LLC O’Key JSC Dorinda Russian Federation Russian Federation Retail 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 8 SALE OF SUPERMARKETS 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% In December 2017 the Group signed a framework agreement with X5 Retail Group for sale of the major part of supermarkets business comprising of 32 stores. The agreement comprises a series of transactions. Total expected proceeds according to the agreement are RUB 7 222 176 thousand. Having considered terms of the agreement, the Group concluded that in substance control over 28 of 32 stores was transferred to the buyer in December 2017 and recognized in 2017 respective proceeds in the amount of RUB 6 677 176 thousand. Assets attributable to disposed part of business mainly comprise land and buildings, equipment, lease rights and short-term receivables. Net book value of the assets attributable to the disposed part of business amounted to RUB 2 031 973 thousand. The sale of remaining part of supermarket business which consists of 4 stores is expected within 12 months after the reporting date. As a result, trading equipment and lease rights of these stores are presented as non-current assets held for sale in the consolidated statement of financial position as at 31 December 2017 (see note 24). Annual Report 2017 FINANCIAL STATEMENTS 86 9 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 2017 2016 167 314 837 165 210 286 7 022 505 7 269 694 174 337 342 172 479 980 1 738 525 1 378 981 1 620 671 1 370 020 177 454 848 175 470 671 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. 10 GENERAL, SELLING AND ADMINISTRATIVE EXPENSES ’000 RUB 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 Note 12 31 17, 18, 19 2017 2016 (15 619 123) (16 185 073) (5 757 744) (4 613 172) (3 525 377) (2 115 888) (1 253 737) (869 282) (818 668) (730 401) (520 419) (329 541) (35 959) (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) (36 189 311) (35 764 206) 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 Auditors’ remuneration for annual and consolidated accounts Auditors’ remuneration for other assurance services Auditors’ remuneration for tax advisory services 2017 12 988 4 259 2 458 19 705 2016 13 902 4 721 115 18 738 O’KEY Group of Companies11 OTHER OPERATING INCOME AND EXPENSES, NET 87 ’000 RUB Gain/(loss) from disposal of non-current assets Impairment of non-current assets Loss from write-off of receivables Impairment of receivables Loss from revaluation of investment property Sundry income and expense, net Note 17, 18 16 2017 3 905 402 (279 174) (436 256) (3 625) (200 000) 349 002 3 335 349 2016 (568 004) (434 370) (279 015) (395) (27 055) 258 100 (1 050 739) Gain from disposal of non-current assets amounted RUB 3 905 402 thousand is mainly represented by gain on sale of supermarkets business in the amount of RUB 4 645 203 thousand, described in note 8. In 2016 loss from disposal of other non-current assets amounted RUB 568 004 thousand relating to stores and land plots in Moscow and other regions which the Group closed or disposed of during the year. 12 PERSONNEL COSTS ’000 RUB Wages and salaries Social security contributions Employee benefits Other personnel costs Total personnel costs 2017 2016 (10 263 659) (10 706 956) (3 236 031) (1 093 169) (1 026 264) (3 352 398) (1 100 248) (1 025 471) (15 619 123) (16 185 073) During the year ended 31 December 2017 the Group employed 23 thousand employees on average (2016: 25 thousand employees on average). Approximately 94% of employees are store and warehouse employees and the remaining part is office employees. Annual Report 2017 FINANCIAL STATEMENTS 88 13 FINANCE INCOME AND FINANCE COSTS ’000 RUB 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 ’000 RUB 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 2017 2016 113 467 772 114 239 264 891 16 740 281 631 (3 585 772) (3 497 546) 52 857 (3 532 915) (3 418 676) (52 857) (3 550 403) (3 268 772) 114 239 281 631 (3 532 915) (3 550 403) 2017 2016 (30 665) 6 133 (24 532) 79 428 (15 885) 63 543 During 2017 the Group has capitalised interests in the value of property, plant and equipment. The amount of capitalised interest comprised RUB 243 571 thousand (2016: RUB 492 704 thousand). In 2017, a capitalisation rate of 10.11% was used to determine the amount of borrowing costs eligible for capitalisation (2016: 11.24 %). 14 FOREIGN EXCHANGE (LOSS)/GAIN During 2017 the Russian Rouble significantly fluctuated against the USD. Net foreign exchange loss recognised in profit and loss in the amount of RUB 376 375 thousand for the year ended 31 December 2017 (2016: loss RUB 145 973 thousand) mainly relates to USD-denominated payables. In 2017, 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 2017, the share of USD-denominated borrowings in Group’s debt was not significant. The Group’s exposure to currency risk is disclosed in note 30. 15 INCOME TAX EXPENSE The Group’s applicable tax rate is the income tax rate of 20% for Russian companies (2016: 20%). ’000 RUB Current tax expense Deferred tax benefit Total income tax expense 2017 2016 (1 065 737) (1 182 854) 437 260 (628 477) 773 429 (409 425) O’KEY Group of Companies Income tax recognised directly in other comprehensive income 89 ’000 RUB 2017 2016 Foreign currency translation differences Change in fair value of hedges and reclassification from hedging reserve Before tax (80 668) Tax - Net of tax Before tax (80 668) (118 246) Tax - Net of tax (118 246) (30 665) 6 133 (24 532) 79 428 (15 885) 63 543 (111 333) 6 133 (105 200) (38 818) (15 885) (54 703) Reconciliation of effective tax rate: ’000 RUB Profit before income tax Income tax at applicable tax rate (2017: 20%, 2016: 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 Income tax (expense)/benefit for the year 2017 3 795 390 (759 083) 649 935 (97 870) (91 096) (150 966) (197 370) 17 973 (628 477) 2016 271 635 (54 327) (33 110) (94 522) (101 470) (143 415) 7 601 9 818 (409 425) The amount of income tax reimbursed for previous years was recognised as reduction of income tax expense and relates to expenses, which the Group treats as deductible since 2014. 16 INVESTMENT PROPERTY (a) Reconciliation of carrying amount ’000 RUB Investment properties at fair value as at 1 January 2016 Expenditure on subsequent improvements Fair value loss (unrealised) Investment properties at fair value as at 31 December 2016 Investment properties at fair value as at 1 January 2017 Transfer from Property, plant and equipment Fair value loss (unrealised) Investment properties at fair value as at 31 December 2017 Investment property 564 000 35 597 (27 055) 572 542 572 542 702 468 (200 000) 1 075 010 11 17 During the year ended 31 December 2017 the Group transferred from property, plant and equipment to investment two buildings that were previously own-used and now held to earn rental income. As at 31 December 2017 Group’s investment property comprises three buildings. Annual Report 2017 FINANCIAL STATEMENTS 90 (b) Measurement of fair value For one building with carrying amount of RUB 181 850 thousand as at 31 December 2017 the Group determined fair value using market approach based on most recent quoted prices. For two remaining buildings the carrying amount of RUB 893 160 thousand as at 31 December 2017 is the fair value as determined by registered independent appraisers having an appropriate recognised professional qualification and recent experience in the location and type of the property being valued. The appraisers used income approach for determining the fair value. Under income approach an estimate of annual net operating income was made which is mainly based on annual net rent rate of RUB 5 387 – 8 467 per sq. m. (2016: RUB 7 000 per sq. m.) and expected occupancy of 30% – 95% (2016: 93%) during the first year and 95-98% during following years. Discount rate of 13.7-14.4% (2016: 13%) was applied to discount future cash flows. The fair value measurement of investment property has been categorised as a Level 2 (market approach) and Level 3 (income approach) fair value based on the inputs to the valuation technique used (see note 5). 17 PROPERTY, PLANT AND EQUIPMENT ’000 RUB Land Buildings Leasehold improvements Machinery and equipment, auxiliary facilities and other fixed assets Construction in progress Total Cost or deemed cost 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) - (9 375) Balance at 31 December 2016 5 021 476 38 602 235 - (393 091) 7 707 573 - - 127 317 (1 343 184) (219 533) (1 971 262) 15 545 367 3 485 879 70 362 530 ’000 RUB Land Buildings Leasehold improvements Machinery and equipment, auxiliary facilities and other fixed assets Construction in progress Total Balance at 1 January 2017 5 021 476 38 602 235 7 707 573 15 545 367 3 485 879 70 362 530 Additions Transfers Classified as asset held for sale Transfer to Investment property 53 106 10 539 - - - 2 113 770 - (1 114 282) - 633 431 (144 151) - 998 789 2 820 278 3 882 712 204 107 (2 951 308) - (312 305) - - - (456 456) (1 114 282) Disposals (140 106) (1 605 877) (887 694) (1 507 618) (41 674) (4 182 969) Balance at 31 December 2017 4 934 476 38 006 385 7 309 159 14 928 340 3 313 175 68 491 535 Depreciation and impairment losses Balance at 1 January 2016 Depreciation for the year Impairment losses Disposals Balance at 31 December 2016 - - - - - (4 650 025) (1 839 374) (1 181 577) (606 709) (434 370) - 31 80 095 (6 265 941) (2 365 988) (8 940 398) (2 344 466) - 1 282 010 (10 002 854) - - - - - (15 429 797) (4 132 752) (434 370) 1 362 136 (18 634 783) O’KEY Group of Companies’000 RUB Land Buildings Leasehold improvements Machinery and equipment, auxiliary facilities and other fixed assets Construction in progress Total 91 Balance at 1 January 2017 Depreciation for the year Impairment losses Classified as assets held for sale Transfer to Investment property Disposals Balance at 31 December 2017 - - - - - - - (6 265 941) (2 365 988) (1 316 609) (647 413) (271 640) - (7 534) 43 657 (10 002 854) (2 156 386) - 219 192 411 814 - - 420 398 411 590 (7 021 978) (2 565 688) 1 313 489 (10 626 559) - - - - - - - (18 634 783) (4 120 408) (279 174) 262 849 411 814 2 145 477 (20 214 225) Carrying amounts At 1 January 2016 4 839 188 27 763 618 At 31 December 2016 5 021 476 32 336 294 At 31 December 2017 4 934 476 30 984 407 5 078 774 5 341 585 4 743 471 5 406 482 6 694 671 49 782 733 5 542 513 3 485 879 51 727 747 4 301 781 3 313 175 48 277 310 Depreciation expense of RUB 4 120 408 thousand has been charged to selling, general and administrative expenses (2016: RUB 4 132 752 thousand). During the year ended 31 December 2017 the Group transferred two buildings from Property, plant and equipment to Investment property following change in use of these properties. Before transfer to investment property, the Group performed impairment test for these buildings are recognised impairment loss in the amount of RUB 149 877 thousand. As at 31 December 2017 the Group performed impairment test for low-performing stores and recognised an impairment loss of RUB 129 297 thousand (2016: RUB 434 370 thousand). As at 31 December 2017 the Group determined recoverable amount of the stores being their value in use. Recoverable amount of the stores amounted to RUB 200 800 thousand and impairment loss amounted to RUB 73 116 thousand. Discount rate of 13.9% was applied to discount future cash flows. Security At 31 December 2017, 4 stores have been pledged to third parties as collateral for bank borrowings (2016: 4 stores). Refer to notes 28 and 33. 18 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. Annual Report 2017 FINANCIAL STATEMENTS 92 Movements in the carrying amount of lease rights were as follows: ’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 2017 2016 6 024 760 107 695 - (259 698) 5 872 757 6 287 181 36 000 (140 565) (157 856) 6 024 760 (1 446 225) (1 439 644) (144 140) - 155 464 (174 640) 13 248 154 811 (1 434 901) (1 446 225) 4 437 856 4 578 535 Amortisation of RUB 144 140 thousand has been charged to selling, general and administrative expenses (2016: RUB 174 640 thousand). 19 INTANGIBLE ASSETS ’000 RUB Cost Balance at 1 January 2016 Additions Disposals Balance at 31 December 2016 Balance at 1 January 2017 Additions Disposals Balance at 31 December 2017 Amortisation and impairment losses Balance at 1 January 2016 Amortisation for the year Disposals Balance at 31 December 2016 Balance at 1 January 2017 Amortisation for the year Disposals Balance at 31 December 2017 Carrying amounts At 1 January 2016 At 31 December 2016 At 31 December 2017 Software Other intangible assets Total 1 093 006 476 499 (160 307) 1 409 198 1 409 198 499 154 (168 723) 1 739 629 (558 077) (220 700) 160 252 (618 525) (618 525) (323 022) 40 435 (901 112) 534 929 790 673 838 517 128 156 1 221 162 24 677 (4 424) 501 176 (164 731) 148 409 1 557 607 148 409 1 557 607 46 676 (4 359) 545 830 (173 082) 190 726 1 930 355 (28 027) (21 841) 3 889 (586 104) (242 541) 164 141 (45 979) (664 504) (45 979) (25 602) 3 446 (664 504) (348 624) 43 881 (68 135) (969 247) 100 129 635 058 102 430 123 591 893 103 961 108 O’KEY Group of Companies Amortisation and impairment losses 93 Amortisation of RUB 348 624 thousand has been charged to selling, general and administrative expenses (2016: RUB 242 541 thousand). 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 2017 69 975 268 721 - - - Investment property Property, plant and equipment Construction in progress Intangible assets Other non-current assets Inventories Trade and other receivables and payables 2016 994 Liabilities 2017 - 2016 - Net 2017 69 975 2016 994 173 210 (893 233) (974 315) (624 512) (801 105) - - - (261 521) (94 649) (102 825) - (267 198) (126 179) (101 467) (1 510) (261 521) (94 649) (102 825) 500 080 (575 124) (577 189) (280 970) 500 080 294 154 602 017 615 767 Long-term investments 6 613 6 613 Tax loss carry-forwards 1 816 384 1 234 439 - - - - Tax assets/(liabilities) 2 955 927 2 633 040 (1 927 352) (2 047 858) Set off of tax (1 038 355) (1 355 767) Net tax assets/(liabilities) 1 917 572 1 277 273 1 038 355 (888 997) 1 355 767 (692 091) 6 613 1 816 384 1 028 575 - 1 028 575 585 182 (b) Unrecognised deferred tax liability As at 31 December 2017 a temporary difference of RUB 23 909 664 thousand (2016: RUB 23 979 879 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 was reversed in form of distributions remitted to the Company, then an enacted tax rate of 5-15% would apply. (c) Recognised deferred tax asset on tax loss carried forward Deferred tax asset recognised in respect of tax loss carried forward relates to losses accumulated by Group’s subsidiary LLC Fresh Market that develops a discounter chain and does not yet generate profit. Russian tax legislation does not limit the period into which a tax loss can be carried forward. The Group determined that future taxable profits will be available in foreseeable future against which accumulated losses can be utilised. In making this assessment the Group considered that according to the discounter chain’s long- term budget tax losses accumulated as at 31 December 2017 will be utilised within 6 years after reporting date. (267 198) (126 179) (101 467) 600 507 38 578 6 613 1 234 439 585 182 - Annual Report 2017 FINANCIAL STATEMENTS 94 (d) Movement in temporary differences during the year ’000 RUB Investment property Property, plant and equipment Construction in progress Intangible assets Other non-current assets Inventories Trade and other receivables and payables Long-term investments Tax loss carry-forwards ’000 RUB Investment property Property, plant and equipment Construction in progress Intangible assets Other non-current assets Inventories Trade and other receivables and payables Long-term investments Tax loss carry-forwards 1 January 2017 Recognised in profit or loss Recognised in other comprehensive income 31 December 2017 994 (801 105) (267 198) (126 179) (101 467) 600 507 38 578 6 613 1 234 439 585 182 68 981 176 593 5 677 31 530 (1 358) (100 427) (325 681) - 581 945 437 260 - - - - - - 69 975 (624 512) (261 521) (94 649) (102 825) 500 080 6 133 (280 970) - - 6 133 6 613 1 816 384 1 028 575 1 January 2016 Recognised in profit or loss Recognised in other comprehensive income 31 December 2016 (1 113) (565 250) (210 954) (95 313) (118 434) 542 909 (261 414) - 537 207 (172 362) 2 107 (235 855) (56 244) (30 866) 16 967 57 598 315 877 6 613 697 232 773 429 - - - - - - (15 885) - - (15 885) 2017 906 496 613 421 297 535 994 (801 105) (267 198) (126 179) (101 467) 600 507 38 578 6 613 1 234 439 585 182 2016 894 175 769 210 339 295 1 817 452 2 002 680 21 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 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 34. O’KEY Group of Companies 22 INVENTORIES ’000 RUB Goods for resale Raw materials and consumables Write-down to net realisable value 95 2017 2016 13 261 136 13 370 212 671 255 (408 155) 700 673 (364 017) 13 524 236 13 706 868 The Group tested the stock for obsolescence and wrote down the inventories to their net realisable value, which resulted in a decrease of the carrying value of stock by RUB 408 155 thousand as at 31 December 2017 (2016: RUB 364 017 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. 23 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 Receivable from sale of supermarkets 2017 449 882 376 414 179 532 46 814 1 732 884 818 629 6 671 686 2016 545 464 1 562 138 132 565 14 282 3 081 243 535 318 - 10 275 841 5 871 010 The Group’s exposure to credit and currency risks and impairment losses related to trade and other receivables are disclosed in note 30. 24 NON‑CURRENT ASSETS HELD FOR SALE ’000 RUB Balance at 1 January 2017 Transfer to assets held for sale Disposals Balance at 31 December 2017 Leasehold improvements - 100 493 - 100 493 Equipment Total - 93 114 (64 018) 29 096 - 193 607 (64 018) 129 589 Non-current assets held for sale represent property, plant and equipment of 4 supermarkets that will be disposed in 2018 (see note 8). These assets are measured at net book value which is lower than their fair value less costs to sell. The fair value measurement for assets held for sale has been categorised as a Level 2 fair value measurement and is based on the prices in the agreement with the buyer. Annual Report 2017 FINANCIAL STATEMENTS 96 25 CASH AND CASH EQUIVALENTS ’000 RUB Cash on hand Bank current account Term deposits Cash in transit Cash and cash equivalents 2017 235 348 1 203 654 4 145 533 2 165 642 7 750 177 2016 417 766 589 988 8 240 763 2 214 950 11 463 467 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 30. 26 EQUITY Reconciliation of number of shares from 1 January to 31 December is provided in the table below. Number of shares unless otherwise stated Par value On issue at 1 January On issue at 31 December, fully paid Ordinary shares 2017 2016 EUR 0.01 EUR 0.01 269 074 000 269 074 000 269 074 000 269 074 000 As at 31 December 2017 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 2017 (2016: nil). In January 2017 the Group paid interim dividends to shareholders in the amount of RUB 1 465 798 thousand (2016: RUB 1 472 411 thousand). Interim dividends paid were recognised as distribution to owners in the Consolidated Statement of Changes in Equity. Dividends per share recognised as distribution to shareholders for the year ended 31 December 2017 amounted to RUB 5.5 (2016: RUB 5.5). 27 EARNINGS/(LOSS) PER SHARE The calculation of basic earnings per share at 31 December 2017 was based on the profit attributable to ordinary shareholders of RUB 3 166 913 thousand (2016: loss RUB 137 790 thousand), and a weighted average number of ordinary shares outstanding of 269 074 000, calculated as shown below. The Company has no dilutive potential ordinary shares. Number of shares Issued shares at 1 January Weighted average number of shares for the year ended 31 December 2017 2016 269 074 000 269 074 000 269 074 000 269 074 000 O’KEY Group of Companies28 LOANS AND BORROWINGS 97 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 30. ’000 RUB Non-current liabilities Secured bank loans Unsecured bank facilities Unsecured bonds Unsecured loans from related parties Current liabilities Secured bank loans Unsecured bank facilities Unsecured bonds Unsecured loans from related parties Unsecured loans from third parties Loans and borrowings Unsecured bonds interest Interest accrued on loans Interest accrued on loans and borrowings 2017 2016 - 2 500 000 19 466 346 23 000 000 5 213 006 - 5 243 118 929 960 24 679 352 31 673 078 1 600 000 3 913 823 5 030 112 883 096 2 850 2 500 000 1 000 000 962 410 - 2 850 11 429 881 4 465 260 213 776 18 121 231 897 146 904 9 966 156 870 11 661 778 4 622 130 As at 31 December 2017 loans and borrowings with carrying value of RUB 1 600 000 thousand were secured by property, plant and equipment (2016: RUB 5 000 000 thousand). Refer to note 33. As at 31 December 2017 the Group has RUB 13 800 000 thousand (2016: RUB 15 800 000 thousand) of undrawn, committed borrowing facilities available in respect of which all conditions present had been met. Proceeds from these facilities may be used to finance operating and investing activities, if necessary. (a) Terms and debt repayment schedule Terms and conditions of outstanding loans were as follows: ’000 RUB 31 December 2017 31 December 2016 Currency Year of maturity Face value Carrying amount Face value Carrying amount Unsecured bonds Secured bank facility Unsecured bank facility Unsecured loans from related parties Unsecured loans from other companies RUB RUB RUB USD RUB 2020 – 2021 10 243 118 10 243 118 6 205 528 6 205 528 2018 1 600 000 1 600 000 5 000 000 5 000 000 2018 – 2021 23 380 169 23 380 169 24 000 000 24 000 000 2021 883 096 883 096 929 960 929 960 2018 2 850 2 850 2 850 2 850 36 109 233 36 109 233 36 138 338 36 138 338 Annual Report 2017 FINANCIAL STATEMENTS 98 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 2017 and during the year then ended the Group complied with all loan covenants. (b) Reconciliation of movements of liabilities to cash flows arising from financing activities ’000 RUB Note Balance at 1 January 2017 Changes from financing cash flows Proceeds from loans and borrowings Repayment of loans and borrowings Interest paid Dividends paid Other financial payments Total changes from financing cash flows Other changes Accrued interests Dividends declared Reclassification from hedging reserve Changes in fair value of hedge recognized in other comprehensive income Effect of changes in foreign exchange rates Total other changes Balance at 31 December 2017 29 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 Loans and borrowings 36 295 208 Interest rate swap liability 147 019 7 685 500 (7 663 017) (3 655 488) - (25 140) (3 658 145) 26 - - - - (63 200) (63 200) Dividends payable - - - - (1 465 798) - Total 36 442 227 7 685 500 (7 663 017) (3 655 488) (1 465 798) (88 340) (1 465 798) (5 187 143) 3 766 143 63 200 - - 1 465 798 - - - (62 076) 3 704 067 36 341 130 (52 857) 30 665 - 41 008 124 827 - - - 1 465 798 3 829 343 1 465 798 (52 857) 30 665 (62 076) 5 210 873 - 36 465 957 2017 2016 25 946 694 29 374 499 322 048 990 862 1 216 184 106 275 124 827 147 841 350 816 1 085 381 1 339 925 99 489 147 019 83 763 28 854 731 32 480 892 The Group’s exposure to currency and liquidity risk related to trade and other payables is disclosed in note 30. O’KEY Group of Companies 30 FINANCIAL INSTRUMENTS AND RISK MANAGEMENT 99 (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 Carrying amount 23 25 2017 9 673 081 7 750 177 17 423 258 2016 4 162 025 11 463 467 15 625 492 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. Annual Report 2017 FINANCIAL STATEMENTS 100 The Group establishes an allowance for impairment that represents its estimate of incurred losses in respect of trade and other receivables. The main component of this allowance is a specific loss component that relates to individually significant exposures. Impairment losses The aging of trade and other receivables at the reporting date was: ’000 RUB Gross 2017 Impairment 2017 Not overdue and past due less than 90 days 9 496 464 Past due 90-180 days Past due 181-360 days More than 360 days 39 160 63 386 107 974 9 706 984 - - - (33 903) (33 903) Gross 2016 4 045 013 43 875 36 658 67 736 4 193 282 Impairment 2016 - - - (31 257) (31 257) The movement in the allowance for impairment in respect of trade receivables during the year was as follows: ’000 RUB Balance at beginning of the year Impairment loss recognised Impairment loss reversed Balance at end of the year 2017 31 257 2 646 - 33 903 2016 29 277 1 980 - 31 257 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 7 750 177 thousand at 31 December 2017 (2016: RUB 11 463 467 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. (c) Liquidity risk Liquidity risk is the risk that the Group will encounter difficulty in meeting the obligations associated with its financial liabilities that are settled by delivering cash or another financial asset. The Group’s approach to managing liquidity is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Group’s reputation. Liquidity risk management is a responsibility of the Treasury under the supervision of the Group’s Financial Director. The Group’s liquidity risk management objectives are as follows: » Maintaining financial independence: a share of one creditor in debt portfolio should not exceed 30%; » Maintaining financial stability: the ratio DEBT/EBITDA should not exceed 4.0; » Monitoring of compliance with debt covenants; » Planning: timely preparation of operating, investing and financing cash-flow forecasts on rolling basis. O’KEY Group of Companies (i) Exposure to liquidity risk 101 The following are the contractual maturities of financial liabilities, including future interest payments: 2017 ’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 Unsecured bank facilities Unsecured loans from related parties Unsecured loans from other companies 1 600 732 10 457 192 23 397 231 883 096 2 879 (1 702 265) (415 805) (1 286 460) - (12 556 532) (753 080) (5 447 923) (6 355 529) (28 089 592) (2 267 729) (3 727 947) (22 093 916) (900 516) (900 516) (2 878) (2 878) - - - - - - Trade and other payables 27 435 546 (27 435 546) (27 435 546) 63 776 676 (70 687 329) (31 775 554) (10 462 330) (28 449 445) As at 31 December 2017 Group’s current liabilities exceed current assets by RUB 8 545 090 thousand (2016: RUB 5 892 343 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. 2016 ’000 RUB Non-derivative financial liabilities Secured bank loan Unsecured bonds Carrying amount Contractual cash flows 0-6 mths 6-12 mths 1-5 yrs 5 001 141 6 352 432 (5 467 111) (1 445 164) (1 394 695) (2 627 252) (7 574 128) (1 076 276) (734 925) (5 762 927) Unsecured bank facilities 24 008 799 (31 602 297) (2 214 692) (1 202 048) (28 185 557) Unsecured loans from related parties Unsecured loans from other companies 929 960 2 876 (1 010 471) (2 878) (37 096) (2 878) Trade and other payables 30 945 206 (30 945 206) (30 945 206) (37 096) (936 279) - - - - 67 240 414 (76 602 091) (35 721 312) (3 368 764) (37 512 015) 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. (d) Market risk Market risk is the risk that changes in market prices, such as foreign exchange rates, interest rates and equity prices will affect the Group’s income or the value of its holdings of financial instruments. The objective of market risk management is to manage and control market risk exposures within acceptable parameters, while optimising the return. The Group buys derivatives in order to manage market risk. All such transactions are carried out within the guidelines set in Group’s policy on hedging market risk. The Group applies hedge accounting in order to manage volatility in profit or loss. (i) Currency risk The Group holds its business in 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. Annual Report 2017 FINANCIAL STATEMENTS 102 Exposure to currency risk The Group’s exposure to foreign currency risk was as follows based on notional amounts: ’000 RUB USD-denominated USD-denominated 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: 2017 2 025 7 853 (883 096) (439 046) (1 312 264) (1 312 264) 2016 1 760 3 582 (929 960) (176 595) (1 101 213) (1 101 213) Russian Rouble equals USD Sensitivity analysis Average rate Reporting date rate 2017 58.3529 2016 67.0349 2017 57.6002 2016 60.6569 A 20% weakening of the RUB against USD at 31 December 2017 would have decreased equity and profit and loss by RUB (262 453) thousand (2016: RUB 220 243 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 2016. A strengthening of the RUB against USD at 31 December 2017 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 2017, 7% of the Group’s interest bearing financial liabilities were subject to re-pricing within 6 months after the reporting date (2016: 6%). The Group uses swap to hedge its exposure to variability of interest rates. As at 31 December 2017 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 2017 fair value of swap liability was RUB 124 827 thousand (31 December 2016: RUB 147 018 thousand). 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 2017 2016 4 145 533 8 240 763 (28 637 411) (36 295 208) (7 703 719) - O’KEY Group of CompaniesCash flow sensitivity analysis for variable rate instruments 103 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 2016. ’000 RUB 2017 Variable rate instruments Interest rate swap Cash flow sensitivity (net) 2016 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 (385 000) 75 000 (310 000) - 75 000 75 000 385 000 (75 000) 310 000 - (75 000) (75 000) - 90 205 96 306 - 96 306 96 306 - (102 946) (102 946) - (96 845) (96 845) (e) Offsetting of financial assets and financial liabilities The Group may enter into sales and purchase agreements with the same counterparty in the normal course of business. The related amount receivable and payable do not always meet the criteria for offsetting in the statement of financial position. This is because the Group may not have any currently legally enforceable right to offset recognised amounts, because the right to offset may be enforceable only on the occurrence of future events. In particular, in accordance with the Russian civil law an obligation can be settled by offsetting against a similar claim if it is due, has no maturity or is payable on demand. The following table sets out the carrying amounts of recognised financial instruments that are subject to the above agreements. ’000 RUB 31 December 2017 Gross amounts Amounts offset in accordance with IAS 32 offsetting criteria Net amounts presented in the statement of financial position Amounts related to recognised financial instruments that do not meet some or all of the offsetting criteria Net amount 31 December 2016 Gross amounts Amounts offset in accordance with IAS 32 offsetting criteria Net amounts presented in the statement of financial position Amounts related to recognised financial instruments that do not meet some or all of the offsetting criteria Net amount Trade and other receivables Trade and other payables 1 155 608 (65 665) 1 089 943 2 641 689 (65 665) 2 576 025 (1 083 445) (1 083 445) 6 498 1 492 580 2 356 574 13 602 195 (5 013) 2 351 561 (2 351 561) (5 013) 13 597 182 (2 351 561) - 11 245 621 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. Annual Report 2017 FINANCIAL STATEMENTS 104 (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. 31 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 capitalised as initial cost of land lease and are amortised over the period of the lease (49-51 years). The further information on leases is detailed below. When the Group leases land plots under operating leases, the lessors for these leases are State authorities and third parties. The leases are typically run for 2-3 years, after which long term operating lease contract is concluded for 49 years. The Group also rents premises under operating leases. These leases typically run up to 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 2017 RUB 5 901 883 thousand was recognised as an expense (including amortisation of Lease rights amounting to RUB 144 139 thousand) in the profit and loss in respect of operating leases (2016: RUB 5 518 550 thousand). Contingent rent recognised as an expense for the year ended 31 December 2017 amounted to RUB 241 081 thousand (2016: RUB 467 947 thousand). At 31 December, the future minimum lease payments under non-cancellable leases were payable as follows. ’000 RUB Less than one year Between one and five years More than five years 2017 2016 2 831 840 3 771 246 11 119 850 25 419 104 39 370 794 14 239 837 30 089 728 48 100 811 O’KEY Group of CompaniesLeases as lessor 105 The Group leases out its investment property and some space in the buildings of hypermarkets. During the year ended 31 December 2017 RUB 1 738 525 thousand was recognised as rental income in the consolidated statement of profit or loss and other comprehensive income (2016: RUB 1 620 671 thousand). All leases where the Group is lessor are cancellable. The Group has contingent rent arrangements. Contingent rent recognised as income amounted to RUB 100 828 thousand for the year ended 31 December 2017 (2016: RUB 79 877 thousand). Contingent rent is determined as an excess of 4%-20% of the tenant’s revenue over the fixed rent rate. 32 CAPITAL COMMITMENTS The Group has capital commitments to acquire property, plant and equipment and intangible assets amounting to RUB 867 441 thousand as at 31 December 2017 (2016: RUB 1 078 308 thousand). The capital commitments mostly consist of construction contracts for stores. 33 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 characterised by frequent changes in legislation, official pronouncements and court decisions, which are sometimes contradictory and subject to varying interpretation by different tax authorities. Taxes are subject to review and investigation by a number of authorities, which have the authority to impose severe fines, penalties and interest charges. A tax year remains open for review by the tax authorities during the three subsequent calendar years; however, under certain circumstances a tax year may remain open longer. Recent events within the Russian Federation suggest that the tax authorities are taking a more assertive and substance-based position in their interpretation and enforcement of tax legislation. 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 1 300 million as at 31 December 2017. (c) Assets pledged or restricted The Group has the following assets pledged as collateral for loans and borrowings: ’000 RUB Property, plant and equipment (carrying value) Total Note 17 2017 2 471 050 2 471 050 2016 2 529 768 2 529 768 Annual Report 2017 FINANCIAL STATEMENTS 106 34 RELATED PARTY TRANSACTIONS (a) Major shareholders As at 31.12.2017 the Company considers as its major shareholders Mr. Troitskii (indirectly holds 33.048%) and Mr. Volchek (indirectly holds 29.52%); Mr. Korzhev indirectly holds 11.73% shares of the Company. (b) Transactions with management (i) Management remuneration Key management received the following remuneration during the year, which is included in personnel costs (see note 12) ’000 RUB Salaries and bonuses Social security contributions Long-service bonus Other payments 2017 339 537 14 490 163 120 6 900 524 047 2016 359 436 10 718 98 358 7 500 476 012 In addition members of Board of Directors received remuneration in the amount of RUB 48 531 thousand for the year ended 31 December 2017 (2015: RUB 59 942 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 2017 Transaction value 2016 Trade receivable 2017 Trade receivable 2016 2 402 2 402 2 225 2 225 289 289 94 94 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. O’KEY Group of Companies(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 107 Transaction value 2017 Transaction value 2016 Prepayments 2017 Prepayments 2016 (831 117) (788 700) 1 082 999 921 195 (702 645) (57 771) (70 701) (653 097) (73 197) (62 406) - - - - - - (1 618) (2 756) 3 608 2 143 (71 483) (904 218) (81 347) (872 803) - - 1 086 607 923 338 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 1 082 999 thousand as at 31 December 2017 comprises prepayments for rent of hypermarkets for the period until 2034 amounting to RUB 1 107 623 thousand and current liabilities for rent of hypermarkets in the amount of RUB 24 624 thousand. Long-term part of prepayments amounting to RUB 906 496 thousand is disclosed in note 21. 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 71 483 thousand for the year ended 31 December 2017 (2016: RUB 81 347 thousand) and were recorded as finance costs in profit or loss. (iii) Loans ’000 RUB Loans paid back: Other related parties Amount loaned 2017 Amount loaned 2016 Outstanding balance 2017 Outstanding balance 2016 - - (883 096) (929 960) The loans from other related parties bear interest at 8% per annum and are payable on demand. (d) Pricing policies Related party transactions are not necessarily based on market prices. 35 EVENTS SUBSEQUENT TO THE REPORTING DATE In January 2018 the Group paid interim dividends to shareholders in the amount of RUB 1 883 083 thousand. 36 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. Annual Report 2017 FINANCIAL STATEMENTS 108 37 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. (a) Basis of consolidation (i) Subsidiaries Subsidiaries are entities controlled by the Group. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases. The accounting policies of subsidiaries have been changed when necessary to align them with the policies adopted by the Group. (ii) Transactions eliminated on consolidation Intra-group balances and transactions, and any unrealised income and expenses arising from intra-group transactions, are eliminated in preparing the consolidated financial statements. (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. 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. O’KEY Group of Companies(i) Non-derivative financial assets and financial liabilities – recognition and derecognition 109 The Group initially recognises loans and receivables and debt securities issued on the date that they are originated. All other financial assets and financial liabilities are recognised initially on the trade date at which the Group becomes a party to the contractual provisions of the instrument. The Group derecognises a financial asset when the contractual rights to the cash flows from the asset expire, or it transfers the rights to receive the contractual cash flows on the financial asset in a transaction in which substantially all the risks and rewards of ownership of the financial asset are transferred. Any interest in transferred financial assets that is created or retained by the Group is recognised as a separate asset or liability. The Group derecognises a financial liability when its contractual obligations are discharged or cancelled or expire. Financial assets and liabilities are offset and the net amount presented in the statement of financial position when, and only when, the Group has a legal right to offset the amounts and intends either to settle on a net basis or to realise the asset and settle the liability simultaneously. (ii) Non-derivative financial assets – measurement The Group has the following non-derivative financial assets: loans and receivables. Loans and receivables are financial assets with fixed or determinable payments that are not quoted in an active market. Such assets are recognised initially at fair value plus any directly attributable transaction costs. Subsequent to initial recognition loans and receivables are measured at amortised cost using the effective interest method, less any impairment losses. Loans and receivables comprise trade and other receivables and cash and cash equivalents. Cash and cash equivalents comprise cash balances and call deposits with original maturities of three months or less. Bank overdrafts that are repayable on demand and form an integral part of the Group’s cash management are included as a component of cash and cash equivalents for the purpose of the statement of cash flows. (iii) Non-derivative financial liabilities – measurement The Group has the following non-derivative financial liabilities: loans and borrowings, bank overdrafts, and trade and other payables. Such financial liabilities are recognised initially at fair value less any directly attributable transaction costs. Subsequent to initial recognition, these financial liabilities are measured at amortised cost using the effective interest method. (iv) Derivative financial instruments The Group holds derivative financial instruments to hedge its interest rate and foreign currency risk exposures. On initial designation of the hedge, the Group formally documents the relationship between the hedging instruments and hedged items, including the risk management objectives and strategy in undertaking the hedge transaction, together with the methods that will be used to assess the effectiveness of the hedging relationship. The Group makes an assessment, both at the inception of the hedge relationship as well as on an ongoing basis, whether the hedging instruments are expected to be “highly effective” in offsetting the changes in the fair value or cash flows of the respective hedged items during the period for which the hedge is designated, and whether the actual results of each hedge are within a range of 80-125 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. Annual Report 2017 FINANCIAL STATEMENTS 110 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. 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. O’KEY Group of CompaniesThe estimated useful lives of significant items of property, plant and equipment for the current and comparative periods are as follows: 111 » Buildings » Machinery and equipment, auxiliary facilities » Motor vehicles » Leasehold improvements » Other fixed assets 30 years; 2-20 years; 5-10 years; over the term of underlying lease; 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. (g) Intangible assets (i) Other intangible assets Other intangible assets that are acquired by the Group have finite useful lives and are measured at cost less accumulated amortisation and accumulated impairment losses. Other intangible assets primarily include capitalised computer software, patents and licenses. Acquired computer software, licenses and patents are capitalised on the basis of the costs incurred to acquire and bring them to use. (ii) Subsequent expenditure Subsequent expenditure is capitalised only when it increases the future economic benefits embodied in the specific asset to which it relates. All other expenditure is recognised in the profit or loss as incurred. (iii) Amortisation Amortisation is based on the cost of the asset less its estimated residual value. Amortisation is recognised in profit or loss on a straight-line basis over the estimated useful lives of intangible assets from the date that they are available for use since this most closely reflects the expected pattern of consumption of future economic benefits embodied in the asset. The estimated useful lives for the current and comparative periods are as follows: » 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. Annual Report 2017 FINANCIAL STATEMENTS 112 (h) Leased assets (i) Operating leases Where the Group is a lessee in a lease which does not transfer substantially all the risks and rewards incidental to ownership from the lessor to the Group, the total lease payments, including those on expected termination, are charged to profit or loss on a straight-line basis over the period of the lease. Where the Group is a lessee in a land lease, the initial cost of land lease is amortised using straight-line method over the period of lease being up to 51 years. Where the Group is a lessee in a lease of premises, the lease rights are amortised 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. O’KEY Group of Companies(ii) Non-financial assets 113 The carrying amounts of the Group’s non-financial assets, other than investment property, inventories and deferred tax assets are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists, then the asset’s recoverable amount is estimated. The recoverable amount of an asset or cash-generating unit is the greater of its value in use and its fair value less costs to sell. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset or cash-generating unit. For the purpose of impairment testing, assets that cannot be tested individually are grouped together into the smallest group of assets that generates cash inflows from continuing use that are largely independent of the cash inflows of other assets or groups of assets (the “cash-generating unit”). An impairment loss is recognised if the carrying amount of an asset or its cash-generating unit exceeds its recoverable amount. Impairment losses are recognised in profit or loss. Impairment losses recognised in respect of cash-generating units are allocated to reduce the carrying amount of assets in the unit (group of units) on a pro rata basis. Impairment losses recognised in prior periods are assessed at each reporting date for any indications that the loss has decreased or no longer exists. An impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised. (k) Employee benefits (i) Defined contribution plans A defined contribution plan is a post-employment benefit plan under which an entity pays fixed contributions into a separate entity and will have no legal or constructive obligation to pay further amounts. Obligations for contributions to defined contribution pension plans, including Russia’s State pension fund, are recognised as an employee benefit expense in profit or loss in the periods during which services are rendered by employees. Prepaid contributions are recognised as an asset to the extent that a cash refund or a reduction in future payments is available. Contributions to a defined contribution plan that are due more than 12 months after the end of the period in which the employees render the service are discounted to their present value. (ii) Other long-term employee benefits Other long-term employee benefits represent long-service bonuses. Long-term employee benefits are expensed evenly during the periods in which they are earned by employees. (iii) Short-term employee benefits Short-term employee benefit obligations are measured on an undiscounted basis and are expensed as the related service is provided. A liability is recognised for the amount expected to be paid under short-term bonus if the Group has a present legal or constructive obligation to pay this amount as a result of past service provided by the employee, and the obligation can be estimated reliably. (l) Provisions A provision is recognised if, as a result of a past event, the Group has a present legal or constructive obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation. Provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the liability. The unwinding of the discount is recognised as finance cost. (m) Revenue Revenue is measured at the fair value of the consideration received or receivable, net of VAT, returns and discounts. Annual Report 2017 FINANCIAL STATEMENTS 114 (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 recognised as rental income on a straight-line basis over the lease term. Lease incentives granted are recognised as an integral part of the total rental income. (n) Cost of sales Cost of sales include the purchase price of the goods sold and other costs incurred in bringing the inventories to the location and condition ready for sale. These costs include costs of purchasing, packaging and transporting of goods to the extent that it relates to bringing the inventories to the location and condition ready for sale. The Group receives various types of bonuses from suppliers of inventories, primarily in the form of volume discounts and slotting fees. These bonuses are recorded as reduction of cost of sales as the related inventory is sold. Losses from inventory shortages are recognised in cost of sales. (o) Finance income and costs Finance income comprises interest income on issued loans and bank deposits. Interest income is recognised as it accrues in profit or loss, using the effective interest method. Finance costs comprise interest expense on borrowings and unwinding of the discount on provisions. Borrowing costs that are not directly attributable to the acquisition, construction or production of a qualifying asset are recognised in profit or loss using the effective interest method. Foreign currency gains and losses are reported on a net basis. (p) Income tax Income taxes have been provided in the consolidated financial statements in accordance with Russian legislation, as well as Luxembourg, BVI and Cyprus legislation for corresponding companies of the Group. Income tax expense comprises current and deferred tax. Current tax and deferred tax are recognised in profit or loss except to the extent that it relates to a business combination, or items recognised directly in equity or in other comprehensive income. Current tax is the expected tax payable or receivable on the taxable income or loss for the year, using tax rates enacted or substantively enacted at the reporting date, and any adjustment to tax payable in respect of previous years. Deferred tax is recognised in respect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax is not recognised for the following temporary differences: the initial recognition of assets or liabilities in a transaction that is not a business combination and that affects neither accounting nor taxable profit or loss, and differences relating to investments in subsidiaries and joint arrangements to the extent that it is probable that they will not reverse in the foreseeable future. A deferred tax asset is recognised for unused tax losses, unused tax credits and deductible temporary differences, to the extent that it is probable that future taxable profits will be available against which they can be used. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realised. The measurement of deferred tax reflects the tax consequences that would follow the manner in which the Group expects, at the end of the reporting period, to recover or settle the carrying amount of its assets and liabilities. O’KEY Group of CompaniesDeferred 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. 115 In accordance with the tax legislation of the Russian Federation, tax losses and current tax assets of a company in the Group may not be set off against taxable profits and current tax liabilities of other Group companies. In determining the amount of current and deferred tax the Group takes into account the impact of uncertain tax positions and whether additional taxes, penalties and late-payment interest may be due. The Group believes that its accruals for tax liabilities are adequate for all open tax years based on its assessment of many factors, including interpretations of tax law and prior experience. This assessment relies on estimates and assumptions and may involve a series of judgments about future events. New information may become available that causes the Group to change its judgment regarding the adequacy of existing tax liabilities; such changes to tax liabilities will impact the tax expense in the period that such a determination is made. (q) Earnings per share The Group presents basic and diluted earnings per share (“EPS”) data for its ordinary shares. Basic EPS is calculated by dividing the profit or loss attributable to ordinary shareholders of the Company by the weighted average number of ordinary shares outstanding during the period, adjusted for own shares held. Diluted EPS is determined by adjusting the profit or loss attributable to ordinary shareholders and the weighted average number of ordinary shares outstanding, adjusted for own shares held, for the effects of all dilutive potential ordinary shares. (r) Segment reporting An operating segment is a component of the Group that engages in business activities from which it may earn revenues and incur expenses, including revenues and expenses that relate to transactions with any of the Group’s other components. All operating segments’ operating results are reviewed regularly by the Group’s CEO to make decisions about resources to be allocated to the segment and assess its performance, and for which discrete financial information is available. (s) Value added tax Input VAT is generally reclaimable against sales VAT when the right of ownership on purchased goods is transferred to the Group or when the services are rendered to the Group. The tax authorities permit the settlement of VAT on a net basis. VAT related to sales and purchases which have not been settled at the balance sheet date (VAT deferred) is recognised in the statement of financial position on a gross basis and disclosed separately as an asset and liability. (t) 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. Annual Report 2017 FINANCIAL STATEMENTS 116 (v) New Standards and interpretation not yet adopted A number of new Standards, amendments to Standards and Interpretations are not yet effective as at 31 December 2017, 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 standard will not have a significant impact on the Group’s consolidated financial statements. » 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. IFRS 15 is effective for annual periods beginning on or after 1 January 2018, with early adoption permitted. The standard will not have a significant impact on the Group’s consolidated financial statements. » 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. 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 recognised. The Group does not intend to adopt this standard early. The Group has not analysed the likely impact of the new Standard on its financial position or performance. IFRS 16 is effective for annual periods beginning on or after 1 January 2019, with early adoption permitted. » Other amended standards and interpretations are not expected to have a significant impact on the Group’s consolidated financial statements. O’KEY Group of CompaniesGlossary 117 Average ticket Big data the figure calculated by dividing total sales, net of VAT, at all stores during the relevant year by the number of tickets in that year is data sets that are so voluminous and complex that traditional data processing application software is inadequate to deal with them Click & Collect service which allows customers to place orders online for collection in store Corporate Social Responsibility (CSR) responsible attitude in managing our impact on a range of stakeholders: customers, colleagues, investors, suppliers, the community and the environment EGAIS national automated information system for the control of alcohol production and distribution FMCG (fast–moving consumer goods) In-store availability LFL (like-for-like) Mystery shopper Private label (PL) SKU (stock keeping unit) Total selling space Traffic CAGR Capex CEO CFO CPI CRM DC FY GDP GDR H HR IFRS IT K m2 KPI LSE M&A m2 NGO p.p. Q RUB TMS WMS YoY products that are sold quickly and at relatively low cost the number of SKUs in-store with a positive stock value as a proportion of the total number of active SKUs for sale, calculated based on the average daily in-store availability of all open stores the method of comparing current year sales figures to prior year’s sales figures excluding the expansion effect person hired by a market research firm or a manufacturer to visit retail stores, posing as a casual shopper to collect information about the stores’ display, prices, and quality of their sales staff brand owned not by a manufacturer or producer, but by a retailer or supplier, who gets its goods made by a contract manufacturer under its own label a number assigned to a particular product to identify the price, product options and manufacturer of the merchandise the area inside stores used to sell products, excluding areas rented out to third parties, own- production areas, storage areas and the space between store entry and the cash desk line the number of tickets issued for the period under review compounded annual rate of growth capital expenditure Chief Executive Officer Chief Financial Officer Consumer Price Index Client Relationship Management distribution centre financial year Gross domestic product global depositary receipts half of the year human resources International Financial Reporting Standards Information Technology a thousand square meters Key Performance Indicators London Stock Exchange Mergers & Acquisitions square metre non-governmental organisation percentage point quarter of the year Russian rouble transport management system warehouse management system Year Over Year Annual Report 2017118 Contacts INVESTOR RELATIONS ADDRESSES Veronika Kryachko Head of Investor Relations +7 495 663 6677 ext. 404 Veronika.Kryachko@okmarket.ru 39/1 Nizhnaya Krasnoselskaya Street, Moscow, 105066, Russia 8 Shahumyan Avenue, St. Petersburg, 195027, Russia www.okeyinvestors.ru PUBLIC RELATIONS DEPOSITARY Kirill Maslentsin Public Relations and Government Affairs Director +7 495 663 6677 ext. 152 Kirill.Maslentsin@okmarket.ru corpcom@okmarket.ru Bank of New York Mellon 101 Barclay Street, New York, NY 10286, USA www.bnymellon.com AUDITOR KPMG Luxembourg 39, Avenue John F. Kennedy Luxembourg Tel: +352 22 51 51 1 Fax: +352 22 51 71 https://home.kpmg.com/lu/en/ home/about/luxembourg-1.html O’KEY Group of Companies

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