O'Key Group SA
Annual Report 2019

Plain-text annual report

Annual Report 2019 & QUALITY FOR EACH FAMILY & QUALITY FOR EACH FAMILY Contents Overview Overview About O’KEY Group About O’KEY Group Financial and Operational Highlights Financial and Operational Highlights Our Key Strengths Our Key Strengths Highlights 2019 Highlights 2019 Strategic Report Strategic Report CEO’s statement CEO’s statement Our Geography & History Our Geography & History Delivering on Our Strategy Delivering on Our Strategy Russia’s Food Retail Market Russia’s Food Retail Market Economic Environment Economic Environment Operational Review Operational Review O’KEY City Hypermarket Format O’KEY City Hypermarket Format DA! Discounter Format DA! Discounter Format 0202 0202 0404 0606 0808 1010 1212 1414 1616 1818 2020 2222 2424 3636 Financial Review Financial Review Risk Management Risk Management Corporate Social Responsibility Corporate Social Responsibility Our Employees Our Employees Health and Safety Health and Safety Human Rights and Diversity Human Rights and Diversity Our Communities Our Communities Environmental Responsibility Environmental Responsibility Corporate Governance Corporate Governance Our Corporate Governance Principles Our Corporate Governance Principles The General Meeting of Shareholders The General Meeting of Shareholders Board of Directors Board of Directors Committees of the Board of Directors Committees of the Board of Directors Executive Management Executive Management Information for Shareholders and Investors Information for Shareholders and Investors 4040 4646 5454 5656 6060 6060 6262 6363 6464 6666 6666 6868 7272 7474 7676 Financial Statements Financial Statements Management & Directors Responsibility Statement Management & Directors Responsibility Statement Independent Auditors’ Report Independent Auditors’ Report Consolidated Financial Statements Consolidated Financial Statements Notes to Consolidated Financial Statements Notes to Consolidated Financial Statements Glossary Glossary Abbreviations Abbreviations Contacts Contacts 7878 8080 8282 8989 9595 142142 143143 144144 ABOUT THE REPORT This Annual Report 2019 (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 2019, presents the Group’s operating and financial results, describes the Group’s corporate governance framework and corporate social responsibility. The Report has been prepared based on consolidated IFRS financial statements for 2019. 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 forward-looking 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. FURTHER INFORMATION Further information regarding O’KEY Group’s strategy, our business and performance, approach to governance and risk can be found on our corporate website An archive of annual and strategic reports as well as a full suite of additional information materials is available at www.okeygroup.lu 2 Overview Strategic Report Operational Review Financial Review Risk Management Corporate Responsibility Corporate Governance Financial Statements 3 O’KEY Group is one of the leading Russian food retailers. Since the opening of our first hypermarket in St. Petersburg in 2002, we have continued to strive for excellence. We have grown to 178 stores across Russia under two major formats: hypermarkets under the O’KEY brand and discounters under the “DA!” brand. OUR VISION We are the first among Russian major food retailers to launch and successfully develop e-commerce operations in St. Petersburg and Moscow, offering a full range of hypermarket products for home delivery. The best city hypermarket The best value for money discounter 2019 AT A GLANCE: TOTAL GROUP REVENUE RUB165.1bn NEW STORE OPENINGS 19 TOTAL NUMBER OF HYPERMARKETS TOTAL NUMBER OF DISCOUNTERS ONLINE ORDERS IN 2019 OUR MISSION 78 100 >600k ORGANIC GROUP REVENUE GROWTH1/ LFL DISCOUNTERS REVENUE GROWTH NET PROFIT 3.0 % 14.9 % RUB 0.7bn We strive for excellence We offer fresh and high quality products to each family We provide a simple and easy shopping experience We aim to create an effective working environment m Effective te a I n n o v a t i v e n e s s 1/ Organic revenue (underlying revenue) – revenue excluding the effect of supermarket business sale. Outstanding re s ults OUR VALUES e c i v r e s t n e ell c x E Atmosphere o f p r o f e s m a lis n s i o Annual Report 2019O’KEY Group S.A.& QUALITY FOR EACH FAMILY OverviewAboutO’KEY Group02 About O’KEY Group04 Financial and Operational Highlights06 Our Key Strengths08 Highlights 2019 4 Overview Strategic Report Operational Review Financial Review Risk Management Corporate Responsibility Corporate Governance Financial Statements 5 FINANCIAL HIGHLIGHTS TOTAL REVENUE 2.3% O’KEY REVENUE 0.3% DA! REVENUE 31.5% RUB165.1bn RUB147.2 bn RUB17.9 bn 17.9 175.5 176.0 162.5 161.3 165.1 169.7 167.1 161.8 13.6 10.4 147.7 147.2 5.8 0.7 2015 2016 20171/ 2018 2019 2015 2016 20171/ 2018 2019 2015 2016 2017 2018 2019 OPERATIONAL HIGHLIGHTS GROUP EBITDA2/ 62.7% O’KEY EBITDA2/ 37.1% DA! EBITDA2/ 87.8% NET RETAIL REVENUE 2.4% TRAFFIC 2.1% RUB 14.1bn 10.1 9.3 9.3 RUB14.3 bn 11.7 11.8 11.4 (RUB0.2 bn) 14.9 14.3 14.1 14.1 RUB163.1bn 201.7mln 172.5 160.3 174.3 163.1 207.4 159.4 226.8 227.7 198.3 201.7 More about Operational Results on page 22 2015 2016 2017 2018 2019 2015 2016 20171/ 2018 2019 2015 2016 20171/ 2018 2019 (1.6) (0.8) (0.2) (2.6) (2.0) 2015 2016 20171/ 2018 2019 2015 2016 20171/ 2018 2019 NET PROFIT/LOSS RUB0.7bn 3.2 1.9 0.7 2016 2018 More about Financial Results on page 40 TOTAL SELLING SPACE 2.3% NUMBER OF STORES 11.3% 598.3k m2 178 stores 593.0 622.9 577.8 584.9 598.3 146 145 164 160 178 2015 (0.1) 2017 1/ 2019 1/ In 2017 the Group sold its supermarket business, comprising of 32 supermarkets. (1.0) 2/ EBITDA 2018-19 are presented under IFRS 16 lease standard. EBITDA 2015-17 are presented under IAS 17. 2015 2016 20171/ 2018 2019 2015 2016 20171/ 2018 2019 Annual Report 2019O’KEY Group S.A.& QUALITY FOR EACH FAMILY Overview02 About O’KEY Group04 Financial and Operational Highlights06 Our Key Strengths08 Highlights 2019Financial and OperationalHighlightsOverview Overview Strategic Report Strategic Report Operational Review Operational Review Financial Review Financial Review Risk Management Risk Management Corporate Responsibility Corporate Responsibility Corporate Governance Corporate Governance Financial Statements Financial Statements 7 7 6 6 OUR KEY STRENGTHS: A strong brand, well- known in major Russian cities Two shopping formats: hypermarkets and discounters, tailored to each customer’s everyday needs Strong e-commerce platform: one of the leading online stores in Russia Strong fast- growing private labels and own products of high quality at affordable prices, as attested by multiple industry awards Wide selection of high quality fresh-category products Experienced international management team with unique multi-industry expertise Highly centralised logistics: four distribution centres in Moscow and St. Petersburg Cutting edge IT solutions NUMBER OF STORES BY FORMAT (YEAR END) HYPERMARKETS DISCOUNTER STORES 22% TOTAL 11.3% 178 145 160 78 78 78 67 82 100 20171/ 2018 2019 2017 2018 2019 20171/ 2018 2019 OUR FORMATS Hypermarkets Discounter stores One of the retail market leaders in St. Petersburg, a strong presence in Moscow, Rostov-on-Don, Ekaterinburg, Krasnodar, Ufa and other major cities in Russia. Fast-growing chain of stores in the most convenient locations providing a wide range of products and non-food items at the most attractive prices. STORES TOTAL SELLING SPACE AVERAGE PRODUCT RANGE STORES TOTAL SELLING SPACE AVERAGE PRODUCT RANGE 78 present in 26 cities in 6 Federal Districts 529k m2 >30k SKUs 100 +19 new stores in 2019 69.3k m2 2,520 SKUs 1/ Does not include the supermarket business consisting of 32 stores which was sold in 2017. Annual Report 2019O’KEY Group S.A.& QUALITY FOR EACH FAMILY Operational ReviewEconomicEnvironment Strategic reportAnnual Report 2019O’KEY Group S.A.Our KeyStrengths Operational Review& QUALITY FOR EACH FAMILY 8 Overview Strategic Report Operational Review Financial Review Risk Management Corporate Responsibility Corporate Governance Financial Statements 9 OPERATIONAL HIGHLIGHTS CORPORATE GOVERNANCE HIGHLIGHTS ruA- Stable outlook CREDIT RATING 19 DA! Discounter stores were opened in Moscow, Tver, Kaluga, Tula, and Ryazan regions, bringing the total number of discounter stores up to 100. 965 new Private Label products were introduced, including 879 new PL SKUs in ”O’KEY” hypermarkets and 86 new PL SKUs in “DA!” discounters, with the total number of private label SKUs reaching 3,501. The Assortment clusters were introduced in O’KEY hypermarkets, to standardise the assortment in stores and to increase on-shelf availability. Assortment was fully reviewed in all stores with focus on strengthening fresh and ultra-fresh categories. The Axapta 12 (Microsoft Dynamics) solution was rolled out for distribution centres. 8 July 2019: RAEX affirmed O’KEY LLC, the main operating subsidiary of O’KEY Group S.A., a credit rating of ‘ruA-’ with a Stable outlook, reflecting the Group’s stable position within the Russian food retail market. O’KEY Group focused on strengthening the top management team and made some appointments to key positions, with all new members possessing strong retail backgrounds. SUSTAINABILITY HIGHLIGHTS The “Fresh thinking” approach was implemented throughout our businesses, with improvement of internal processes, new standards and employee education. The Hot Bread project within the O’KEY Bakery segment was launched in O’KEY Hypermarkets to provide our customers with freshly baked bread three times a day. O’KEY private label products and own products were highly commended by the international Quality Guarantee awards. July 2019: O’KEY Group dispatched humanitarian aid to flood victims in Irkutsk. October 2019: The Company launched its fourth “Kind Purchase” charitable fundraising campaign aimed at helping seriously ill children, in partnership with Rusfond, one of the oldest charitable foundations in Russia. December 2019: O’KEY Group introduced a new Live Green corporate policy. December 2019: The Company held its second “100% professional” contest for O’KEY employees which included its chief, baker and cashiers, with approximately 7,000 participants. Annual Report 2019O’KEY Group S.A.& QUALITY FOR EACH FAMILY OverviewHighlights201902 About O’KEY Group04 Financial and Operational Highlights06 Our Key Strengths08 Highlights 201910 Overview Strategic Report Operational Review Financial Review Risk Management Corporate Responsibility Corporate Governance Financial Statements 11 REPORT Annual Report 2019O’KEY Group S.A.& QUALITY FOR EACH FAMILY Strategic Report12 CEO’s Statement14 Our Geography & History16 Delivering on Our Strategy18 Russia’s Food Retail Market20 Economic Environment12 The Group’s business is based on two well-balanced pillars, O’KEY city hypermarkets and DA! discounters, fulfilling the needs of different customer segments. We continued developing our ambitious DA! discounter business that has been delivering strong and stable growth in recent years, in line with our expectations. I am happy to announce that with the opening of 19 new DA! stores in 2019 we have reached a new milestone, increasing the total number of our discounters to 100, and the discounter business accounted for 11% of our overall revenue. As for the O’KEY brand, it has been the key pillar of our business since 2002. We believe the city hypermarkets format has excellent potential and we have the right strategy and management expertise to fully capitalise on the opportunities in the changing market landscape. Our two-format business model enables us to exploit synergies such as joint procurement and import to generate economies of scale – both for the Company and our customers. Engaging in joint product development also supports our search for the best suppliers on the market and enables us to profit from cost sharing without compromising product quality. As a Group, we strive to offer the best shopping proposition for our customers and to become a retailer of their choice. We aim to deliver the best value for the best possible prices, with quality as our first priority. During the reporting year, we upgraded the “fresh thinking” approach throughout our businesses, from the supply chain to the shelves. This required the improvement of internal processes, the implementation of new standards for freshness and additional training for our employees. In order to successfully reach our strategic goals, we strengthened our management team with highly experienced professionals with proven retail expertise. O’KEY Group is committed to sustainability and considers the views and needs of all stakeholders when developing the business. We maintain mutually beneficial relationships with the main social groups affected by our operational activity, make timely disclosures of significant information about our business, and strictly comply with all regulatory requirements. We are also developing long- term partnerships with charities and NGOs such as Rusfond to deliver value to vulnerable groups amongst our population. O’KEY review O’KEY hypermarkets produced satisfying sales results and we were able to achieve a general recovery in operating processes in 2019 in a stagnating macroeconomic environment. The organic net retail revenue of our hypermarkets increased by 0.3% YoY to RUB 145,298 mln in 2019. We returned to a positive sales trend in our most valuable Federal district – the North-West, delivered one of the best sets of LFL results in the market. The business showed positive dynamics for the better part of the year, driven both by average ticket growth and traffic. The current strategic priority for our hypermarkets business is to focus on our competitive advantages, such as the wide choice we provide for all types of consumers, the freshness of our assortment and our excellent service. In 2019 we significantly grew direct imports of fresh fruits and vegetables and introduced a “Hot Bread” project within the O’KEY bakery segment. We also expanded the private label range by 917 SKUs, across various price categories including private labels such as That’s What You Need, O’KEY and Selection of O’KEY. We introduced new assortment clusters which depend on various parameters of our stores and enable us to standartise assortment thus improving overall efficiency. DEAR STAKEHOLDERS, 2019 was a year of continued growth for O’KEY Group, as we steadily developed our business to achieve our strategic goals. Our customers are at the heart of our strategy and we retained a keen focus on meeting their needs and providing excellent service as we worked to enhance our offering. I am happy to report that despite the challenging macroeconomic environment and increasing competition in the retail sector, we maintained our market position and continued to deliver growth. O’KEY Group exhibited positive sales dynamics with 3.0% YoY growth in organic Group total revenue, supported by remarkable growth in our DA! discounter business, where LFL net retail revenue rose 14.9% YoY. We also maintained a stable financial position with overall net profit amounting to RUB 0.7 bn. Overview Strategic Report Operational Review Financial Review Risk Management Corporate Responsibility Corporate Governance Financial Statements Throughout the year, O’KEY Group worked diligently to optimise internal processes and embed new IT solutions in the business. As a result, the links between our departments improved our overall efficiency. We were steadily making our business “greener”, utilising new recyclable packaging and working to reduce CO2 emissions by optimising the utilisation of the delivery fleet. In the near future we plan to introduce and pilot a new O’KEY hypermarket concept which is intended to be more efficient from an operational and environmental point of view. Furthermore, we plan to renovate several stores and implement additional initiatives concerning IT solutions, logistics operations and internal process optimisation which will contribute to our future growth. DA! review We are happy to confirm that 2019 has been another successful year for DA!, in spite of certain pressures exerted by the market environment. The value-for- money concept continued to show its efficiency: net retail revenue of DA! grew by 31.7% YoY, supported by a steady increase in traffic and the average ticket (up 24.5% YoY and 5.8% YoY respectively). The opening of 19 new discounters allowed us to increase the total selling space by 13.4 k m2. In 2019 we particularly focused on developing the DA! private label assortment: we introduced 86 new SKUs, and upgraded our existing recipes and packaging to make products more attractive for customers. Currently our DA! private label brand accounts for 1,019 SKUs and 40% of our total SKU number. 13 We believe that city hypermarkets have a bright future as this retail format provides customers with the freshest food and the best shopping experience, at a reasonable price. Given the highly competitive market environment, deep expertise in managing hypermarkets is a necessity for success. We believe that our experience, along with our programme of constant business improvement, give us the right tools to succeed and vindicate our optimistic outlook. In line with our strategy, we plan to maintain low pricing strategy and rapidly develop the discounter business. We will continue the expansion of DA! stores in the Central Federal District of Russia with the opening of up to 30 new discounters in 2020. Outlook We see the development of our retail business as an ongoing process, with ongoing improvements required to keep pace with customers changing needs. Due to the current impact of oil prices decline and the coronavirus pandemic it is expected that the Russian economy slows down with customers remaining cash- constrained, this will present challenges for all market players. Therefore, in line with our strategic priorities in both segments, O’KEY Group will mainly focus on optimising its costs base, continue to enhance our assortment, recalibrate internal processes, provide extensive training to employees and increase synergies between the two businesses. We will do our best to fulfill our obligations to all our major stakeholders. The Group will continue to deliver the best quality products at a reasonable price to our customers. We will strive to become a leader in certain product categories, including fresh and ultra-fresh, wines and non-food. As for our private label development, we will maintain strict and robust quality control systems and use all synergies in cooperation with our suppliers. I would like to commend the O’KEY management team and all of our employees for their vital contribution in achieving our common goals. It’s their professionalism, enthusiasm and commitment to the Group’s values that enable us to satisfy our customers, deliver good results, maintain our market position and look positively towards the future. Armin Burger Chief Executive Officer Annual Report 2019O’KEY Group S.A.& QUALITY FOR EACH FAMILY Strategic Report12 CEO’s Statement14 Our Geography & History16 Delivering on Our Strategy18 Russia’s Food Retail Market20 Economic EnvironmentCEO’sStatement14 7 Tver region 13 17 6 Kaluga region 7 Moscow 59 Moscow region Tula region 1 Lipetsk 3 Ryazan region 1 Yaroslavl region 1 Ivanovo Overview Strategic Report Operational Review Financial Review Risk Management Corporate Responsibility Corporate Governance Financial Statements DISCOUNTERS 100 HYPERMARKETS 78 TOTAL STORES 178 23 1 Murmansk St. Petersburg NORTH-WEST FD CENTRAL FD 3 Nizhny Novgorod 1 Syktyvkar 2 Voronezh GROUP RETAIL SPACE 598.3k m2 3 2 1 4 1 Rostov-on-Don 1 Saratov Togliatti VOLGA FD 3 Ufa Sochi Krasnodar Volgograd 1 Stavropol 2 SOUTH FD 1 Orenburg CENTRAL and VOLGA region 251.3 69.3 DA! 182.9 O’KEY NORTHWEST region 180.4 SOUTH region 75.9 URALS and SIBERIA region 89.8 2 URALS FD 3 Ekaterinburg Surgut 3 Tyumen 1 Omsk 2 Novosibirsk SIBERIA FD 2 Krasnoyarsk 1 Irkutsk DA! SELLING SPACE O’KEY SELLING SPACE 69.3k m2 529k m2 Our History 15 2019 2018 2017 2016 2015 2014 - 2009 2009 - 2007 2007 - 2003 2003 - 2001 100 DISCOUNTER STORES under the DA! brand operating across Russia 2,482 AND 1,019 PRIVATE LABEL SKUs presented in our O’KEY hypermarkets and “DA!” discounters respectively DISCOUNTER’S REVENUE under the DA! brand reached 8.5% of the Group revenue OMNICHANNEL MOBILE APP launched providing a unified approach to communications with customers in stores and online O’KEY-auto and 24 hour delivery service launched for the hypermarket segment Sale of supermarket business including 32 supermarkets across Russia Mobile app for iOS and Android launched in 2016 Online sales platform launched for market-leading hypermarket DA! BRAND New discounter format RAPID EXPANSION in Moscow and key regional markets IPO on the London Stock Exchange Top-3 retailer by revenue Focus on EXPANSION in Russia’s key regional markets TOP-10 retailer by revenue 6 new regions Strategy to establish regional market leadership O’KEY Group founded First O’KEY hypermarket opened in St. Petersburg O’KEY Group S.A. Annual Report 2019O’KEY Group S.A.& QUALITY FOR EACH FAMILY Strategic Report12 CEO’s Statement14 Our Geography & History16 Delivering on Our Strategy18 Russia’s Food Retail Market20 Economic EnvironmentOurGeographyAstrakhan16 Overview Strategic Report Operational Review Financial Review Risk Management Corporate Responsibility Corporate Governance Financial Statements 17 O’KEY Group’s operational activity is based on two pillars, hypermarkets and discounters. The strategic priorities depend on the retail format, however in each business we do our best to provide customers with high quality goods, an outstanding value proposition and excellent service. DELIVER THE BEST VALUE PROPOSITION PROVIDE UNIQUE CUSTOMER SERVICE ENSURE THE BEST QUALITY CONTROL IMPROVE EFFICIENCY ENHANCE SUPPLY CHAIN GROWTH AND EXPANSION STRONG PRIVATE LABELS THE BEST VALUE PROPOSITION PRIORITIES Strengthen quality standards for suppliers Introduce new quality standards for our own production Conduct regular and thorough audits of suppliers Maintain an excellent shopping experience with the help of our modern design and well-trained personnel Further develop the e-commerce format with a wide range of SKUs, attractive pricing and convenient delivery services Upgrade the loyalty programme enabling customers to engage with us on the most attractive terms Focus on providing our customers excellent value for money Introduce new products and expand our assortment with a focus on fresh and ultra-fresh products Delist non- performing assortment or SKUs Increase the share of private label products and own products in total sales Improve product layout to offer the best customer experience Recalibrate internal processes with a focus on efficiency and implementing cutting edge IT solutions Elaborate the new hypermarkets concept of better operational efficiency and sustainability Develop synergies with the discounter business in joint procurement and import thus securing better terms with suppliers Maintain high on- shelf availability and optimal inventory levels Develop a smart supply chain with optimal centralisation level Improve the efficiency of logistics by implementing state-of-the-art IT technologies Maintain a balance between a high standard of service, stock management and logistical costs Optimise sales forecasting and replenishment Open up to 30 new stores in 2020 in Moscow and the surrounding regions Focus on developing the “every day low price” concept Offer the most competitive pricing on the market without compromising the quality Expand our assortment in the fresh and ultra-fresh categories PRIORITIES Maintain and enhance a wide portfolio of private label brands Improve the recipes and packaging of private label goods Benefit from synergies with O’KEY hypermarkets Ensure the best possible quality by carefully selecting our private label producers Increase the share of private labels in the product range and in total sales Annual Report 2019O’KEY Group S.A.& QUALITY FOR EACH FAMILY Strategic Report12 CEO’s Statement14 Our Geography & History16 Delivering on Our Strategy18 Russia’s Food Retail Market20 Economic EnvironmentDelivering onOur Strategy18 THE MARKET IN 2019 The Russian food retail market is the world’s 8th largest in monetary terms. Overview Strategic Report Operational Review Financial Review Risk Management Corporate Responsibility Corporate Governance Financial Statements 19 TOP 10 GROCERY RETAIL MARKET SIZE IN 2019, USD BN TOP 10 FOOD RETAILERS IN RUSSIA (BY NET RETAIL REVENUE),1/ % Online grocery market in Russia TOP ONLINE GROCERY RETAILERS IN RUSSIA, % Globus 0.6% Svetofor 0.7 Monetka 0.7 O’KEY 1.0 Metro 1.1% Auchan 1.5% Lenta 2.5% DKRB Mega Retail Group Ltd. 5.7% 32.9% Magnit 7.6% X5 Retail Group 11.5% In 2019, the share of the top 10 FMCG retailers in the grocery retail market increased by 1.9 p.p. to 32.9% (growth was also 1.9 p.p. in 2018). Mexico 211.8 United Kingdom 252.2 Russia 261.2 France 263.5 Germany 285.3 Brazil 324.3 Japan 468.1 India 531.3 China 1,429.2 USA 1,520.4 According to Infoline, in 2019 the total selling space of the top 200 Russian food retailers increased by 7.8% YoY to 26.9 mln m2, while their total number of stores amounted to approximately 65.5 thous. The speed of expansion showed continuous deceleration, unlike nominal food retail turnover (up 6.7% YoY): alongside a withdrawal of smaller retailers from the market that supported the LFL sales of existing retailers. 1.3 % annually EXPECTED GROWTH OF THE RUSSIAN FOOD RETAIL  MARKET BETWEEN 2019 AND 2024 32.9% SHARE OF TOP 10 FOOD RETAILERS IN RUSSIA In 2019, the online grocery retail market in Russia was on the verge of a rapid surge, driven by demand growth in big cities where customers are actively switching to online shopping. According to Infoline, the online grocery market rocketed by 64% in the reporting year and approached RUB 37.8 bn, excluding food baskets and ready meals. In the reporting year, the online grocery retail market in Russia accounted for 0.2% of the total grocery market compared with 0.15% in 2018. The market has the potential to increase 5-8x by 2025 to RUB 186-300 bn, and from a food retail contribution of almost zero to 1.3% vs. the 2-5% seen in more developed markets. RUB37.8bn TOTAL ONLINE MARKET VOLUME Others 11.5% Instamart 4.9% O’KEY 5.6% Detsky mir2/ 6.3% Azbuka Vkusa 6.3% iGoods 6.9% Wildberries 9.0% OZON 9.2% Perekrestok 13.2% Utkonos 27% 1/ Other – 67.1%. Source: IGD research Source: Infoline 2/ Includes grocery on-line retail. Source: Infoline Annual Report 2019O’KEY Group S.A.& QUALITY FOR EACH FAMILY Strategic Report12 CEO’s Statement14 Our Geography & History16 Delivering on Our Strategy18 Russia’s Food Retail Market20 Economic EnvironmentRussia’s FoodRetail Market20 In 2019, food retail sales in Russia outstriped general economic growth, with nominal food retail turnover increasing by 6.7% YoY, while nominal GDP growth was 4.8% YoY. In real terms, food retail sales saw a slower rate of growth of 1.4% YoY (vs 1.3% YoY real GDP growth) and amounted to RUB 16.08 tn. Meanwhile, the consumer confidence index marginally grew throughout 2019 from the initial drop shown during the fourth quarter of 2018 and reached –13% in the fourth quarter of 2019. The macroeconomic factors which added to the positive dynamics in retail were: a considerably lower level of inflation (3% YoY in 2019 vs 4.3% YoY in 2018); low food price inflation (2.6% YoY in 2019 vs 4.7% YoY in 2018); recovery of income: the nominal wage grew 7.8% YoY, the real wage showed growth of 2.9% YoY and real disposable income slightly increased by 0.8% YoY, after four consecutive years of falling and one year of stagnation; an increase in social spending (pension income, accounting for 12% of Russians’ total income, grew by 6% YoY, while other social payments making up 7% of total household income were up 4.6%). According to the Sberbank “Ivanov Consumer Confidence Index”, customers became less price-sensitive due to the above-mentioned factors. Freshness and a high quality of goods have become a necessity for retailers: 83% of respondents said they would visit a store with an increased fresh offering more often, and 50% were likely to buy some other items besides fresh category during their shopping. An in-house bakery is also seen as an advantage: 47% respondents would visit a grocery store for fresh bread. In order to keep up to date with the most recent trends, O’KEY Group is continuously developing its freshness approach and own production assortment (e.g. bakeries and prepared food) in the stores, both in hypermarkets and discounters. REAL GDP IN 2015–2019 1.3% REAL DISPOSABLE INCOME AND REAL WAGES IN 2015-2019, % RUB90,556bn 85,372 85,616 87,152 89,361 90,556 15 10 5 0 -5 -10 -15 Real wage Real disposable income Overview Strategic Report Operational Review Financial Review Risk Management Corporate Responsibility Corporate Governance Financial Statements 21 OUTLOOK RUSSIA’S CONSUMER PRICE INDEX, % At the time of writing this report, various events of global significance are taking place, such as the COVID-19 pandemic and a sharp decline in oil prices, which in turn is leading to further ruble devaluation. These factors are certain to impact the Russian economy at large and the retail industry: we expect a major slowdown in the economy which will lead to a more competitive and price sensitive market. 16 12 8 4 0 CPI, % YoY Food CPI, % YoY 2015 2016 2017 2018 2019 We therefore remain cautious on the outlook on Russian retail market and its existing growth opportunities. We will continue to grow our business in both segments with a focus on operational efficiency and quality, ensuring a wide assortment of goods are available at the competitive prices in our stores. 83% OF RESPONDENTS SAID THEY WOULD  VISIT A STORE WITH AN INCREASED  FRESH OFFERING MORE OFTEN 47% RESPONDENTS WOULD VISIT  A GROCERY STORE FOR FRESH BREAD 4K 3K 2K 1K 0 Source: Infoline RUSSIA’S CONSUMER CONFIDENCE INDEX IN 2015-2019, Q YOY, % 0 -5 -10 -15 -20 -25 -30 -35 2015 2016 2017 2018 2019 Source: Infoline REAL RETAIL AND FOOD SALES IN 2018–2019, RUB BN Retail sales Food sales 2018 2019 2015 2016 2017 2018 2019 2015 2016 2017 2018 2019 Source: Rosstat Source: Rosstat Source: Rosstat Annual Report 2019O’KEY Group S.A.& QUALITY FOR EACH FAMILY Strategic Report12 CEO’s Statement14 Our Geography & History16 Delivering on Our Strategy18 Russia’s Food Retail Market20 Economic EnvironmentEconomicEnvironment22 Overview Strategic Report Operational Review Financial Review Risk Management Corporate Responsibility Corporate Governance Financial Statements 23 Annual Report 2019O’KEY Group S.A.& QUALITY FOR EACH FAMILY Operational Review24 Hypermarkets36 DiscountersREVIEW24 24 O’KEY Group has a strong commitment to providing customers with the best fresh products and to ensuring the highest quality of service in our stores. In our hypermarkets, customers may find everything they need in one location, at reasonable prices. Due to our well-balanced customer value proposition, we are able to maintain our position as one of the key players in the Russian food retail market. In 2019 we updated our strategy, with hypermarket remaining the prospective format. KEY PERFORMANCE INDICATORS WE REMAIN DEDICATED TO OUR STRATEGIC PRIORITIES: 1 Excellent service 2 Freshness and a high quality of goods 3 The best assortment 4 A strong private label offering 5 Attractive promotional campaigns Overview Overview Strategic Report Strategic Report Operational Review Operational Review Financial Review Financial Review Risk Management Risk Management Corporate Responsibility Corporate Responsibility Corporate Governance Corporate Governance Financial Statements Financial Statements New Fresh Zone at hypermarkets demonstrates our commitment to freshness NUMBER OF STORES SELLING SPACE, K M² NET RETAIL REVENUE, RUB BN 78 78 78 532 528 529 164.1 145.8 145.3 2017 2018 2019 20171/ 2018 2019 20171/ 2018 2019 LFL NET RETAIL REVENUE, % LFL TRAFFIC, % LFL AVERAGE TICKET, % 2017 2018 2019 2017 2018 2019 1.9 1.4 0.4 (0.4) (3.2) (4.3) (5.0) (4.8) (1.8) 2017 2018 2019 1/ In 2017 the Group sold its supermarket business, comprising of 32 supermarkets. PERFORMANCE OVERVIEW In 2019, we continued to focus on operational efficiency and service improvement, assortment management, including the development of fresh and ultra-fresh categories. We maintained the high quality of our assortment, strengthened our presence in the Fresh and Ultra-Fresh segments and enhanced our internal processes efficiency by implementing new IT solutions in our logistics system. In the reporting year, we were especially focused on developing our fresh and ultra-fresh categories. This included the roll-out of new standards and operational procedures to guarantee the freshness of goods. We also improved our own production, upgraded our recipes and reviewed our ingredients. Furthermore, in 2019 we improved our promo offers, significantly increased direct imports of fruits and vegetables and continued the private label development programme. The above-mentioned measures enabled us to show stable operational and financial results in 2019 and maintain our market position despite the tough food retail environment: O’KEY’s underlying net retail revenue increased by 0.3% YoY to RUB 145,298 mln, LFL net retail revenue fell by 0.4% for the year on the back of a 1.8% decrease in LFL traffic and a 1.4% increase in LFL average ticket. The weaker-than- expected LFL performance was primarily attributable to lower LFL in December, which was in turn triggered by one-off factors, namely the renovation of one of our shopping malls (to be completed in Q2), and abnormal warm weather conditions, leading to weaker-than-expected sales in seasonal categories. In 2019, the Company did not open new hypermarkets: as at 31 December 2019, the total number of hypermarkets remained 78, with the total selling space at 529 k m2. 25 25 HYPERMARKET BUSINESS 2019 AT A GLANCE AVERAGE STORE SELLING SPACE 6.8k m² AVERAGE PRODUCT RANGE, SKU 30 k CLIENTS SHOPPED WITH US 160.4 mln HYPERMARKETS SHARE IN SALES 89 % NUMBER OF STORES 78 NET RETAIL REVENUE, RUB 145.3 bn Annual Report 2019O’KEY Group S.A.& QUALITY FOR EACH FAMILY Operational ReviewO’KEYCity Hypermarket Format Operational ReviewAnnual Report 2019O’KEY Group S.A.& QUALITY FOR EACH FAMILY26 Overview Strategic Report Operational Review Financial Review Risk Management Corporate Responsibility Corporate Governance Financial Statements 27 Plans Launched in January 2020, the new loyalty programme integrates innovative IT solutions, such as machine learning and personalisation analytics software, providing customers with individual offers based on their own spending patterns and purchase history, ensuring they receive the right offers at the right time. The programme will also offer our customers the facility to collect points with each shop and exchange for product or category discounts, both online and offline. We will also work on the digital customer experience to ensure that the loyalty programme is at the heart of our customer’s journey whether in the mobile app, website or in one of our stores. In 2020, we will focus on enhancing our operational efficiency, reducing our cost base and doing our best to provide customers with excellent value for money. We also expect to finalise the development of our new O’KEY hypermarkets concept, which is designed to be more sustainable and attractive for customers. LOYALTY PROGRAMME Our loyalty programme provides our customers with multiple options for purchasing goods of the highest quality on the most attractive terms. It is designed to reward customer loyalty and enable them to engage with us as their preferred hypermarket of choice. In 2019, we maintained a high level of service in our loyalty programme and introduced basic reporting on offers and communication. We also focused our efforts on the development of the new loyalty programme, which included thorough market research, both locally and internationally. In 2019, our loyalty programme did not presume accumulating of award points by customers for purchases made which entitle them to price discount on future purchases. Throughout 2020, we also plan to collaborate with other non-food retailers, financial service providers and restaurants to extend the O’KEY experience beyond our own network, by making co-promotions in particular. LOYALTY PROGRAMME IN 2019 MEMBERS UP TO10.4 mln LOYALTY TRANSACTIONS 117.6 mln 73% OF ALL TRANSACTIONS LOYALTY REVENUE, RUB 144.3 bn 88% OF TOTAL REVENUE PRIVATE LABEL /O’KEY HYPERMARKETS PRIVATE LABEL PRODUCTS/1/ Wide selection of O’KEY private label (PL) items is a competitive advantage of our hypermarkets. We provide our customers with products 15%-25% cheaper than branded alternatives without compromising in quality. 2019 was marked by an intensive development of our private label product lines. We actively worked to expand assortment in of our “That’s What You Need!” and “O’KEY” brands: in total, 833 new SKUs were added to the two brands, including 423 seasonal non-food products, while 101 SKUs were relaunched. With the ultimate goal to offer the premium goods in all categories we introduced “Selection of O’KEY” with 84 SKUs. This brand is distinguished by a better affordability of premium products despite the comparable quality. The total share of the private label products (including non-food PLs) within the assortment range grew from 6.6% in 2018 to 7.1% in 2019. The share of private label products under the brands That’s what you need!, O’KEY and O’KEY Selection increased to 6.7% (vs 6.3% in 2018). That’s what you need! O’KEY Selection of O’KEY 914 SKUs 1.484 SKUs 84 SKUs Entry segment Medium segment Premium segment 2,482 private label SKUs available in O’KEY hypermarkets To ensure the high quality of our private label goods, we conduct regular checkups at the production facilities and test samples in independent and accredited laboratories under the “Trademark O’KEY – Customers’ guarantee” programme. In 2019, O’KEY continued to strengthen the private label quality standards. Our efforts in this area were recognised with various quality awards received throughout the year. Five O’KEY private label products, Selection of O’KEY Roasted Almonds, O’KEY Pilau Rice, O’KEY Brined Calamari, Selection of O’KEY Honey-Roasted Peanuts, and O’KEY Ukrainian Style Fried Sausage, won top awards at the prestigious international Quality Guarantee 2019 competition, and the O’KEY Ukrainian Style Fried Sausage received the special “Meat Oscar” award. Our private labels were also rewarded by independent customer surveys such as Roskontrol which named the O’KEY private label ketchup the best in the rating which included well-known brands. Plans In the end of 2019 we started to renew our packaging of all three major PL brands. It is planned that during 2020 all private label SKUs will be relaunched in the new design. We expect that this redesign will help us to increase sales and brand awareness, especially in the medium and premium segments. We will continue to ensure the highest quality of private label goods and further increase margins and profitability of O’KEY private label products. We will continue the mutually beneficial collaboration with DA! discounters in terms of choosing common producers of our private label goods. 1/ In O’KEY Hypermarkets, we offer customers an extensive variety of private label products under three major brands covering entry, medium and new premium price segments. Annual Report 2019O’KEY Group S.A.& QUALITY FOR EACH FAMILY Operational Review24 Hypermarkets36 DiscountersO’KEYCity Hypermarket Format28 OWN PRODUCTION In 2019 the Company continued to enhance its own production unit, with the aim of increasing the level of customer satisfaction and improving operational efficiency. The fast pace of life in a big city creates demand for ready-to-eat food of high quality and impeccable freshness. To meet customers’ needs, O’KEY hypermarkets provide a wide range of freshly prepared salads, hot meals, pastries and confectionery. We strictly adhere to our “Ultra Freshness” approach and offer evening promotions and discounts every day. Inside and outside our stores, O’KEY customers can also benefit from the “sit and eat” format and enjoy a hot drink or snack. Own production unit 2019 at a glance: we developed and implemented our own production standards; we’ve begun to educate our chefs and technologists to improve their culinary and baking skills; we significantly upgraded our own production assortment by introducing a new variety of pizzas, and expanding our range of meatloaves, breakfast porridges, hot meals and salads; we launched the “Hot Bread” project within the O’KEY Bakery segment to provide our customers with freshly baked bread three times a day; and we reviewed and launched planograms to improve store layout and convenience for our customers. In September 2019, the Company participated for the first time in the “Quality guarantee 2019”1/ contest with own production. Our products were awarded two silver medals and diplomas, while our grilled chicken was awarded a special prize called the “Meat Oscar”. Freshness approach THE QUALITY CONTROL SYSTEM FOR OUR OWN PRODUCTION INCLUDES: We strictly control our own production at all stages, including storage at distribution centres where products are preserved before reaching the customer, and in hypermarkets. Quality control includes daily optical and hygiene checks, as well as employee control and education. OWN PRODUCTION HIGHLIGHTS UP TO 300SKUs IN THE ASSORTMENT 160 products INTRODUCED IN 2019 40 SKUs UNIVERSAL SKUS IN EVERY STORE +0.2 % LFL Control of raw materials from suppliers during delivery to hypermarkets and storage Degustation, optical freshness check, shelf-life control Staff education, hygiene control and process control System of quality checks Plans In 2020, we intend to: review the assortment range in accordance with recent trends; increase the share of raw materials and ingredients requiring little preparation; further improve the quality control system for our own production; continue our employee training programme. 1/ The contest is held by the Federal science centre of food systems named after V.M Gorbatov under the Russian Academy of Sciences and supported by the Committee of the Federation Council on agricultural and food policy and the Ministry of Agriculture of Russian Federation. Overview Strategic Report Operational Review Financial Review Risk Management Corporate Responsibility Corporate Governance Financial Statements 29 QUALITY AND SAFETY O’KEY Group does not accept any compromises in the area of quality management. Our top priority is maintaining the high quality of goods in our stores, in strict compliance with major quality and food safety legislation. O’KEY’s quality management system covers all stages of our operations and complies with the requirements of Russian laws and the HACCP system. The Company also has implemented internal quality standards which often go beyond the necessary requirements. Quality and safety monitoring in O’KEY is executed by our quality control department. The standard procedures include preliminary quality control measures, assortment monitoring both in stores and warehouses, and internal and external auditing of stores and the supply chain. We strictly pay attention to the quality of our own production and private labels, which is confirmed by laboratory control. O’KEY Group participates in regional and national initiatives, such as “Made in Don Land”, “St. Petersburg Quality Mark”, and North-Western and Central regional voluntary certification initiatives. This ensures the high quality of goods and the Company’s conformity to international standards. We also take part in ACORT quality committee initiatives such as rolling tests, a single checklist for supplier auditing and communication with the authorities on legislative initiatives. In case of any incidents regarding quality and safety occur, the Company immediately reacts by a thorough audit and all measures to prevent similar cases in the future. If necessary, it may include withdrawing the product from the stores, returning it to the producer, and ceasing a contract with a supplier. Following the principle of continuous quality improvement, in 2019 the Company undertook the following actions: Plans In the future, the Company intends to further improve its quality management system and food safety control procedures. We will continue to refine the quality of our private label brands, develop our own production certification and improve our approach towards supplier auditing. Improving our auditing of suppliers entails educating audit specialists and conducting our own audits of new suppliers of high risk categories, as well as updating the auditing checklist with a focus on our potential risks. O’KEY continued the transition to electronic veterinary control under the State information system “Mercury”. Dairy products, including cheeses, were added to the system, minimising the risk of the fraud in these categories; public catering facilities in Moscow and St. Petersburg successfully underwent surveillance audits; the Company optimised its business processes in accordance with the legislative changes in the certification and declaration of directly imported goods; and O’KEY successfully underwent planned periodic audits under the “St. Petersburg Quality Mark” and “Made in Don Land” programmes and confirmed the validity of the certificates. Annual Report 2019O’KEY Group S.A.& QUALITY FOR EACH FAMILY Operational Review24 Hypermarkets36 DiscountersO’KEYCity Hypermarket Format 30 OPERATIONS Our Hypermarkets business functions as a single ecosystem with its own needs and rhythms. Therefore it is necessary to improve the business by taking a holistic approach, encompassing different aspects of operational activity. This ensures we can deliver the best experience for our customers and a satisfying level of profitability for us. In 2019, we continued to focus on operational efficiency, implemented several new initiatives and pursued the realisation of previously launched projects: we improved cashier zone management, which enabled us to avoid queues even in the high season (the month of December); we raised the on-shelf availability of our goods by 1.1% while reducing personnel involvement; we piloted initiatives such as Retail Daily Routines, control instruments, operational standards and new store structures; we successfully continued to develop an electronic veterinary certification system “Mercury”, which allows employees to receive tasks via scanners and improve their productivity; we launched a new approach toward the management of Fresh and Ultra Fresh categories by developing and rolling out improved operational procedures and freshness standards. Overview Strategic Report Operational Review Financial Review Risk Management Corporate Responsibility Corporate Governance Financial Statements 31 SUPPLY CHAIN O’KEY has a well-balanced supply chain which allows us to serve our customers’ needs in all regions of operation. In 2019, we worked to improve it further with a focus on efficiency and productivity. In particular, we developed the warehouse infrastructure, built mutually beneficial partnerships with suppliers and transport carriers, and introduced cutting-edge IT solutions. O’KEY hypermarkets operate three distribution centres: one federal in Moscow and two regionals in St. Petersburg. The federal distribution centre located in Moscow is specialised in the distribution of fresh products, fruits and vegetables, FMCG, non-food and alcohol products to all stores across the country. Both regional distribution centres are based in St. Petersburg, with one of them specialising in FMCG and the other in fruits and vegetables and fresh products. This supply chain organisation is among O’KEY’s competitive advantages as it enables the Company to keep a balance between logistical costs, stock management and high levels of service. In 2019, we: developed a system of centralised forecasting and replenishment; rolled out a new AXAPTA 12 IT solution in our distribution centres; launched the JDA solution used in assortment and implantation management; expanded our storage capacities in line with our assortment extension; and optimised the number of transport carriers and introduced a new system for their evaluation. Plans In 2020, we plan to finalise the rollout of ORACLE RPAS for all categories. We will also increase centralisation in the fresh category which will further contribute to the overall rate of centralisation. In addition, we plan to continue the development of our warehouse infrastructure and supply models to provide our hypermarkets with service of the highest quality. LOCATION AND SERVICE AREAS OF O’KEY DISTRIBUTION CENTRES (DCS) OVERALL NUMBER OF DCS Plans In 2020, we will continue improving our operational efficiency and will fully roll- out initiatives piloted the year before. We will finalise the development of new planograms and introduce a new hypermarket concept which will require updated equipment. 23 23 1 1 Murmansk Murmansk St. Petersburg – 2 St. Petersburg St. Petersburg Moscow – 1 NORTH-WEST FD NORTH-WEST FD 1 1 Syktyvkar Syktyvkar 13 13 CENTRAL FD Moscow CENTRAL FD Moscow 3 3 3 3 2 2 1 1 4 4 1 1 Rostov-on-Don Rostov-on-Don 1 1 Saratov Saratov Togliatti Togliatti Sochi Sochi Krasnodar Krasnodar Volgograd Volgograd 1 1 Stavropol Stavropol 2 2 SOUTH FD SOUTH FD 1 1 Orenburg Orenburg 3 3 Ufa Ufa Nizhny Novgorod Nizhny Novgorod VOLGA FD VOLGA FD 2 2 URALS FD URALS FD 3 3 Ekaterinburg Ekaterinburg Surgut Surgut 3 3 Tyumen Tyumen 1 1 Omsk Omsk 2 2 Novosibirsk Novosibirsk SIBERIA FD SIBERIA FD 2 2 Krasnoyarsk Krasnoyarsk 1 1 Irkutsk Irkutsk Categories of products the distribution centre specialises in: Fruits and vegetables Fast Moving Non-Food Fresh Alcohol 3 MOSCOW – 1 52 K m2 ST. PETERSBURG – 2 21.8 and 7.6 K m2 CENTRALISATION RATE 62 % (+2 p.p.) Annual Report 2019O’KEY Group S.A.& QUALITY FOR EACH FAMILY Operational Review24 Hypermarkets36 DiscountersO’KEYCity Hypermarket FormatAstrakhanAstrakhan32 IT SOLUTIONS O’KEY strives to be at the forefront of the retail industry which is currently undergoing a rapid transformation. We believe that the implementation and development of cutting-edge IT systems and mobile applications is necessary to maintain our market position and our level of competitiveness. New digital technologies allow us to deeply analyse customer preferences, develop new ways to communicate with customers and provide other beneficial opportunities. Our operational activity is supported by various digital solutions covering the main aspects of our business. Our multi-faceted IT infrastructure allows us to achieve our strategic goals, increase customer loyalty and optimise our costs. In 2019, we continued to implement and improve our integrated IT platform using cutting-edge solutions and widely recognised software. The updates will contribute to business efficiency, facilitate sales forecasting and enhance general business processes. In 2019, the Group did not carry out any significant research and development. In 2019, we: Plans extended EDI by implementing the internal document flow initiative, the rollout of the automation of penalties, facilitating the exchange of electronic documents for service procurement and extending functionality for exchanging electronic invoices; continued the implementation of the new ERP platform and finished the roll- out of Axapta 12 (Microsoft Dynamics) for distribution centres, which will enable an increase in operational efficiency going forward; finalised the Oracle RPAS rollout for sales forecasting and replenishment optimisation, which already covered approximately 70% of our assortment; upgraded the POS platform to the newest version of CSI solution (SET 10), with an ongoing project to upgrade store servers to SET 10; fully implemented a Boss HR solution with core HR functions, and extended its functionality to employee self- service. In 2020, we plan to continue the implementation and extension of innovative IT technologies. We will complement EDI functionality with implementation of a vendor portal and with extended services, such as Master data information management, logistics and finance vendor collaboration. This will further reduce paper workflows. We plan to extend Oracle RPAS to cover UltraFresh and Non-Food categories. We will also complete the implementation of a new ERP platform, finalising master data and finance functionality in Axapta 12. We will also work to improve supply chain efficiency by implementing Transport Management and Yard Management solutions, as well as upgrading store servers to SET 10. In February 2020 we launched a new bonus loyalty programme, with the use of modern data analysis solutions and CRM Manzana. All of this will allow O’KEY to provide customers with targeted personalised offers. /OUR MULTI-FACETED IT INFRASTRUCTURE/ ERP Supply chain Category management Microsoft Dynamics AXAPTA 2012 Manhattan WMS JDA Software1/ Cash Register Online Store HR System Crystal Service Integration IBM Web-Sphere Commerce (CMS, Promo) Boss HR application Customer relations CRM Manzana Oracle RPAS Oracle RPAS POS platform CSI solution (SET 10) 1/ In the process of implementation. Overview Strategic Report Operational Review Financial Review Risk Management Corporate Responsibility Corporate Governance Financial Statements 33 E-COMMERCE O’KEY Group is one of the leaders in the Russian e-commerce food market. Among our competitive advantages are our wide assortment, affordablity and high quality service. We use cutting-edge IT solutions and constantly develop our e-commerce system in order to provide excellent service to our customers. In 2019, e-commerce continued to grow strongly in Russia, especially in the food segment. Online grocery shopping has become a daily routine for many customers, who prefer online stores to convenience stores or hypermarkets. The popularity of grocery delivery services is accelerating especially rapidly in Moscow, St. Petersburg and in other big cities of Russia. New players in Russian retail are also developing online stores, making the market environment more competitive. Fast market growth requires flexibility and swiftness from retailers: currently, one of the leading trends is customer demand for delivery within 1-2 hours, are ready to pay more to get their orders which requires market players to develop the logistics system, including the deployment of cutting-edge IT solutions. Another important trend is the unification of the customer base, which means retailers increasingly need to approach the same customers through both online and offline channels. In 2019, O’KEY Group was among the top eight market players by revenue in the industry. Despite strong competition in the sector, our online revenue increased by 20% and reached RUB 2 bn, while our online customer base grew to 200 thous. people. We strive to improve our quality of service and facilitate the purchase process for our customers. In the reporting year, we continued to develop our omnichannel system, with every initiative thoroughly reviewed before implementation. We automated and optimised several business processes, fully modernised our e-commerce platform, updated our website, increased productivity in our logistics and thus established a strong platform for further development. The Company is a member of the Association of Internet Trade Companies, which strives to promote fair competition, innovation and the positive development of the industry in Russia. O’KEY GROUP E-COMMERCE 2019 VS. 2018 ORDERS VIA WWW.OKEYDOSTAVKA.RU  118 k orders 2018 484 k TONNES DELIVERED  4k tonnes 11.000 2019 602 k ORDERS MADE VIA THE MOBILE APP 30 % E-COMMERCE REVENUE >15,000 6 % OF HYPERMARKET REVENUE WHERE  ECOMMERCE IS PRESENT ORDERS VIA WWW.OKEYDOSTAVKA.RU 602k Annual Report 2019O’KEY Group S.A.& QUALITY FOR EACH FAMILY Operational Review24 Hypermarkets36 DiscountersO’KEYCity Hypermarket Format34 Overview Strategic Report Operational Review Financial Review Risk Management Corporate Responsibility Corporate Governance Financial Statements 35 Logistics and infrastructure /MOSCOW AND ST. PETERSBURG DELIVERY ZONE MAPS/1/ The Company has 12 pick up points in Moscow and St. Petersburg, spread equally between the two cities. Over 100 transport vehicles go on routes each day in two cities. In 2019, the Company continued to develop its logistics IT system. The most ambitious initiative of the year was the launch of the latest version of the Web Sphere Commerce 9 platform, which uses modern technology and opens up new opportunities for business development. As a result, our website loading speed increased significantly. As for the logistics function, in 2019 we started to use new software systems which enabled us to increase efficiency in the following ways: A new system for planning and optimisation of delivery routes helped us to reduce route planning times by 30% and delays to customers by 20%, meaning couriers began to spend more time with the client than on the road. This also resulted in better energy efficiency: mileage and fuel consumption decreased by 20%. An order delivery management system and mobile app monitors the location and work of couriers. This application enabled us to promptly respond to changes in instructions by the client and to build an objective motivation system for our couriers. Moscow delivery zone St. Petersburg delivery zone MOSCOW ST. PETERBURG 1. HM “Vesna Altufevo” 4. HM “Svyatoozerskaya” 1. HM “Vyborgskoye” 4. HM “Bolshevikov” 2. HM “Putilkovo” 5. HM “GOOD ZONE” 3. HM “Rostokino” 6. HM “Kirovograd Columbus” 2. HM “Bogatyrskiy Yakhtennaya” 3. HM “Ladozhskaya” 5. HM “Pulkovskoye” 6. HM “Tallinskoe shosse” 12 pick points in Moscow and St. Petersburg MOBILE APP AND WEBSITE The popularity of the O’KEY mobile app is increasing among our customers: in 2019, over 30% of orders were made through the application. In 2019, we continued to develop the mobile app and launched a voice assistant in the Android version which can search for products and add them to the cart as well as showing detailed product information. Customers tend to prefer smartphones over laptops and computers. To meet this trend, in 2019 we adapted the okeydostavka web-site for mobile devices which increased conversion for mobile users. We also launched push notifications which proved successful with customers. Furthermore, our website page loading speed was more than doubled, allowing us to reduce the bounce rate. We actively developed the personal accounts of users and improved overall usability. In particular, in their personal accounts customers can now view available coupons (valid both online and in offline stores), check their purchase statistics (with categorisation), and add their loyalty cards to Apple Wallet. We also prepared to launch a new bonus system which will cover all O’KEY stores. Customers can accumulate bonus points with online and offline purchases, and check statistics, active balance and promotion goods in their personal accounts. 1/ In 2019, the Rostokino pick point was temporary closed for reconstruction until 2020. Plans In 2020 the development of e-commerce and expansion of both online and offline will remain our priority. We plan to further improve the usability of the website including the optimisation of product search. For the convenience of online store customers, we plan to launch an English version of the okeydostavka site. We will update the mobile app and expand the range of services in personal accounts. We will test an express delivery service and launch sales of additional assortments from our distribution centres. O’KEY mobile app allows customers to: purchase goods use search and filters share basket between users view promotions pay online view order history view offline catalogues locate the nearest store; create an electronic loyalty card; access the shopping history; check accumulated loyalty; NEW! use the voice assistant Annual Report 2019O’KEY Group S.A.& QUALITY FOR EACH FAMILY Operational Review24 Hypermarkets36 DiscountersO’KEYCity Hypermarket Format 36 Overview Strategic Report Operational Review Financial Review Risk Management Corporate Responsibility Corporate Governance Financial Statements DA! discounters profit from synergies with O’KEY hypermarkets in procurement, imports, and relations with suppliers and producers. This creates economies of scale, increasing our purchasing power and supporting a high level of quality in the goods we source. STRATEGIC PRIORITIES OF DA!: O’KEY Group’s discounter business continued its expansion 1 Growth and expansion 2 Strong private labels 3 The best value proposition KEY FIGURES OF 2019 NUMBER OF STORES, 2019 SELLING SPACE, K M² NET RETAIL REVENUE, RUB BN 100 82 67 46.2 56.8 69.3 17.9 10.3 13.6 2017 2018 2019 2017 2018 2019 2017 2018 2019 In 2019, O’KEY Group’s discounter business continued its expansion, with a significant 31.7% increase in net retail revenue and continuous growth in average ticket and traffic. We are delighted to see the great appreciation customers have for our DA! stores, which underpins our motivation to further expand the discounter chain. In 2019, we opened 19 new DA! stores across the Central Federal district, bringing the total number of discounters to 100. The affordability of goods in stores is guaranteed by our well-developed private label offering and regular promotions with leading brands. The convenient locations of DA! Stores helps to facilitate the shopping experience. Our commitment is to maintain the high efficiency of our internal operations and logistics and provide customers with the best assortment and supply solutions. NET RETAIL REVENUE, % LFL NET RETAIL REVENUE, % LFL TRAFFIC, % +31.7% +14.9% +8.6% +32.0% +81.8% +12.7% +52.0% +9.5% +34.8% Our discounters adhere to the “every day low price” principle, maintaining a high quality of goods and ensuring an excellent level of service. 2017 2018 2019 2017 2018 2019 2017 2018 2019 37 DISCOUNTERS BUSINESS AT A GLANCE NET RETAIL REVENUE IN 2019 RUB17.9 bn AVERAGE STORE SELLING SPACE 693 m2 PRODUCT RANGE, SKUS 2,520 PRIVATE LABEL SKUS 1,019 PERCENTAGE OF OWNED SPACE 27 % DISCOUNTER SHARE IN GROUP SALES 2019 11 % Annual Report 2019O’KEY Group S.A.& QUALITY FOR EACH FAMILY Operational Review24 Hypermarkets36 DiscountersDA! Discounter Format38 PERFORMANCE In 2019, net retail revenue generated by DA! grew by 31.7% YoY to RUB 17,856 mln, supported by a steady growth in traffic (up 24.5% YoY) and the average ticket (up 5.8%) which reached 17.856 RUB by the end of the reporting year. This significant growth was achieved in all major segments. To ensure robust growth, we continued to effectively manage our assortment and maintain a competitive pricing policy, including our private labels. We focused on optimisation and extention of ultra-fresh and fresh products, such as dairy, fresh meat and poultry, fruits and vegetables. A total of 182 SKUs were added to our portfolio throughout the year, including 86 private label SKUs. OUR PEOPLE At DA!, we aim to hire the best professionals in the field, creating a team consisting of loyal employees who are passionate about their work. Due to our continued expansion, in 2019 we grew the total number of our employees by more than 19.8% compared to the previous year. As of 31 December 2019, DA! discounters employed 2,331 people. We adhere to the principles of gender diversity and provide equal opportunities to both men and women: 58% of our employees are female. We treat our employees equally regardless of their age, gender or nationality and make hiring decisions based on candidates education, qualifications and readiness to develop their professional skills. WIDE RANGE OF GOODS OF THE HIGHEST QUALITY AT THE MOST ATTRACTIVE PRICES DA! keeps up with the latest trends to make our stores the best value for money for our customers. In 2019, we: Every day low price DA! NET RETAIL REVENUE GROWTH YOY +31.7% introduced local pricing for fresh fruits and vegetables; improved logistics to provide customers with the freshest goods; expanded our assortment in the fresh and ultra-fresh categories; improved our standard planograms to provide more consumer friendly layouts and to profit from better stock rotation; intensified our direct import efforts regarding goods that need to be obtained from abroad; equipped our stores with chillers for cold drinks; optimised the bulk food facilities in our confectionery and frozen sections, introduced nuts and dried fruits in the bulk food section; remodelled our merchandising equipment at the check-out tills. DA! EMPLOYEES BY AGE Age Number of employees Share, % TOTAL 2,331 388 1,009 < 25 YEARS 25-35 YEARS 35-45 YEARS 743 >55 YEARS 191 17% 43% 32% 8% Overview Strategic Report Operational Review Financial Review Risk Management Corporate Responsibility Corporate Governance Financial Statements 39 PRIVATE LABELS AND OWN PRODUCTION According to our research, retail customers tend to appreciate products at attractive prices and of high quality, which are a close equivalent to branded products. Therefore, one of our strategic priorities is strengthening our private label products. While developing the PL assortment, we follow the latest trends in the retail industry and seek to meet customers’ changing preferences. The frequency of such audits depends on previous audit results and the potential risk factors of the particular goods. In addition, we initiate checks in independent accredited laboratories to evaluate and ensure the quality of the product. The frequency of laboratory checks depends on the risk parameters for different product categories and may vary from one to twelve checks per year. Private label products significantly contribute to our turnover: they comprise 40% of our total number of SKUs. In 2019, PL sales grew slightly better than branded products. In the reporting year we introduced 86 new private label SKUs, some of them under the “farm label” which represents regional and traditional high quality production. Meanwhile, we also revised 125 existing private label SKUs with regard to their layout and design. Our total number of private label SKUs reached 1,019 SKUs. For our private label, we use 84 registered brands which are used as umbrella brands for different categories and quality levels. The quality of our private label goods is ensured by strictly following legal requirements and imposing additional quality checks at the supplier and product levels. Producers of our private label products have to undergo external audits which are based on GFSI (Global Food Safety Initiative) requirements. Our goal is to keep the private label assortment modern and trendy, and in the future we will continue to introduce new private label SKUs and improve the packaging layout. Plans In 2020, we will continue the expansion of the discounter chain and plan to open up to 30 new DA! stores. We will do our upmost to progress the development of private label products in terms of quality, packaging layout and number of SKUs. We strive to be a fast-mover in a competitive environment, identifying trends and reacting quickly to meet customer needs. We strive to develop relationships with regional producers and in 2020 we will test local supplies of traditional dairy products in the Ryazan, Kaluga and Tula regions. We will focus on the productivity improvement of our stores, developing the product layout schemes, merchandising and logistics. PRIVATE LABEL, SKUs 1,019 OF TOTAL NUMBER OF SKUs, % 40% TWO-LEVEL QUALITY CHECK: Supply level – GFSI certification Product level – laboratory checks Annual Report 2019O’KEY Group S.A.& QUALITY FOR EACH FAMILY Operational Review24 Hypermarkets36 DiscountersDA! Discounter Format 40 Overview Strategic Report Operational Review Financial Review Risk Management Corporate Responsibility Corporate Governance Financial Statements 41 Annual Report 2019O’KEY Group S.A.& QUALITY FOR EACH FAMILY Financial ReviewREVIEW42 Overview Strategic Report Operational Review Financial Review Risk Management Corporate Responsibility Corporate Governance Financial Statements 43 Cost of goods sold and gross profit The table below provides a breakdown of the cost of goods sold in 2019 and 2018: REVENUE In 2019, total Group revenue increased by 2.3% YoY to RUB 165,086 mln. The revenue increase was primarily triggered by the continuing expansion of DA! and higher shelf inflation. At the same time, organic Group total revenue, excluding the effect of the supermarket business sale, increased by 3.0% YoY, on the back of continuing double-digit growth in the discounter business. KEY FINANCIAL RESULTS The value-for-money concept continued to show its efficiency: LFL revenue of DA! grew by 14.9% YoY, supported by a steady increase in LFL traffic and average ticket (up 8.6% YoY and 5.8% YoY respectively). IFRS 16 IMPLEMENTATION under IAS 17. The associated right-of-use assets for leases were measured at their carrying amounts as if the standard had been applied since the commencement date, but discounted using the Group’s incremental borrowing rate at the date of initial application. The Group has applied IFRS 16 since 1 January 2019. Upon adopting IFRS 16, the Group recognised its lease liabilities in relation to leases which had previously been classified as “operating leases” Upon implementing the standard, the Group’s management began to assess its performance based on the figures presented in accordance with IFRS 16. 12M 2019 % of revenue 12M 2018 (IFRS 16 unaudited) % of revenue ∆ YoY, bps 12M 2018 (IAS 17) % of revenue ∆ YoY, bps 165,086 100% 161,303 100.0% — 161,303 100.0% RUB mln Total revenue Cost of trading stock (less supplier bonuses) Inventory shrinkage Logistics costs Cost of goods sold (125,987) 76.3% (123,400) 76.5% (19) (123,922) 76.8% (118,330) 71.7% (115,981) 71.9% (22) (115,981) 71.9% (3,127) (3,896) 1.9% 2.4% 0.4% (2,875) (3,902) (642) 1.8% 2.4% 0.4% Labelling and packaging costs (633) Gross profit 39,100 23.7% 37,904 23.5% 11 (6) (1) 19 (2,875) (4,424) (642) 1.8% 2.7% 0.4% 37,382 23.2% — (51) (22) 11 (38) (1) 51 The Group’s gross profit margin increased by 19 bps YoY on a comparable basis while increasing in absolute terms by RUB 1,196 mln, driven by better sales and optimisation of assortment matrix and continuing improvement of purchasing conditions. Increase of import of own brand assortment in different categories also positively affected gross margin. Shrinkage costs increased by 8.8% YoY, mainly due to cancelling supplier returns of products with a shelf-life of less than 30 days. Logistics costs remained flat at 2.4% of revenue in 2019, as two opposing factors offset one another: as quality standards were increased, processing costs also grew, however that was compensated for by a substantial decrease in delivery tariffs through a tender process. RUB mln Total Group revenue O’KEY DA! Organic Group revenue O’KEY DA! Gross profit Gross profit margin Group EBITDA Group EBITDA margin EBITDA O’KEY EBITDA margin O’KEY EBITDA DA! EBITDA margin DA! Net profit (loss) Net profit (loss) margin 12M 2019 12M 2018 (IFRS 16 unaudited) ∆ YoY 2019 / 18 12M 2018 (IAS 17) ∆ YoY 2019 / 18 GENERAL, SELLING, AND ADMINISTRATIVE COSTS 165,086 147,175 17,911 165,086 147,175 17,911 39,100 23.7% 14,061 8.5% 14,277 9.7% (215) -1.2% 747 0.5% 161,303 147,688 13,616 160,322 146,706 13,616 37,904 23.5% 14,133 8.8% 14,926 10.1% (793) -5.8% (1,047) -0.6% 2.3% -0.3% 31.5% 3.0% 0.3% 31.5% 3.2% 19 -0.5% (24) -4.4% (41) -72.8% 462 -171.3% 110 161,303 147,688 13,616 160,322 146,706 13,616 37,382 23.2% 8,644 5.4% 10,416 7.1% (1,772) -13% (599) -0.4% 2.3% -0.3% 31.5% 3.0% 0.3% 31.5% 4.6% 51 62.7% 316 37.1% 265 -87.8% 1,181 -224.7% 82 The table below provides the general, selling, and administrative expenses breakdown for 12M 2019 and 12M 2018: RUB mln Personnel costs Depreciation and amortisation Communication and utilities Advertising and marketing Repairs and maintenance Operating taxes Insurance and bank commissions Security expenses Legal and professional expenses Expense relating to variable lease payments / Operating lease expense Materials and supplies Other costs Total 12M 2019 % of revenue 12M 2018 (IFRS 16 unaudited) % of revenue ∆ YoY, bps 12M 2018 (IAS 17) % of revenue ∆ YoY, bps 14,672 8,100 3,656 2,268 1 317 638 918 713 656 347 321 24 8.9% 4.9% 2.2% 1.4% 0.8% 0.4% 0.6% 0.4% 0.4% 0.2% 0.2% 0.0% 14,068 7,782 3,503 2,012 1,228 803 817 736 630 461 294 29 8.7% 4.8% 2.2% 1.2% 0.8% 0.5% 0.5% 0.5% 0.4% 0.3% 0.2% 0.0% 33,630 20.4% 32,362 20.1% 17 8 4 13 4 (11) 5 (2) 1 (8) 1 (0) 31 14,068 4,367 3,503 2,012 1,230 803 817 736 630 5,426 294 29 8.7% 2.7% 2.2% 1.2% 0.8% 0.5% 0.5% 0.5% 0.4% 3.4% 0.2% 0.0% 33,915 21.0% 17 220 4 13 4 (11) 5 (2) 1 (315) 1 (0) (65) Annual Report 2019O’KEY Group S.A.& QUALITY FOR EACH FAMILY Financial ReviewFinancialReview44 In 2019, personnel costs as a percentage of revenue increased by 17 bps to 8.9% or by RUB 604 mln YoY. This increase was largely attributable to necessary wage increases at the hypermarkets business in the second half of 2018 and to new discounter openings, partly offset by the sale of the supermarket business. Communications, utilities, repairs, and maintenance expenses increased as a percentage of revenue by 8 bps YoY or by 5.1% in absolute amount. The increase was primarily caused by indexing utility tariffs in the second half of 2019, rising tariffs for cleaning services and planned equipment repairs in 2019. The Group continues to work towards optimising related costs and efficiency improvements. Advertising and marketing expenses as a percentage of revenue increased by 13 bps driven mostly by higher expenses related to promotional campaigns and introduced regular issuance of leaflets for Fresh categories. Insurance and banking expenses as a percentage of revenue increased by 5 bps due to the growing usage of cards for payment by our clients and increase in traffic. Depreciation and amortisation increased by 85.5% YoY in comparison with 2018 figure under IFRS 17 due to the implementation of new IFRS 16 standard. OTHER OPERATING INCOME AND EXPENSES In June 2019, the Group signed an agreement with a third party for the sale of subsidiaries holding rights for lease of land plots and other related non-current assets in Moscow. According to the agreement, the total proceeds are RUB 1,553 mln. Additionally, the Group recognised an impairment loss in the amount of RUB 821 mln (vs RUB 369 mln in 2018), primarily in respect of mature low- performing stores, including some stores in both the O’KEY and DA! segments. FOREIGN EXCHANGE GAIN /(LOSS) The foreign exchange gain was due to a substantial difference in exchange rates at both the end and the beginning of the reporting period, arising primarily from intragroup USD-denominated loans. NET FINANCE COSTS Finance costs on loans and borrowings decreased as a percentage of revenue by 0.3% YoY, driven by a decline in the weighted average interest rate from 8.8% in 12M 2018 to 8.5% in 12M 2019. At the same time, total finance costs increased by 58.3% YoY as a result of additional interest costs on lease liabilities in the amount of RUB 2,223 mln under the new IFRS 16 standard. 45 RUB mln Net cash from operating activities Net cash (used in) / from investing activities Net cash used in financing activities Net (decrease) / increase in cash and cash equivalents Effect of exchange rate on cash and cash equivalents FINANCIAL LIABILITIES 12M 2019 (IFRS 16) 12M 2018 (IAS 17) 11,078 (1,352) (12,922) (3,196) (9) 4,762 3,479 (7,248) 993 (31) By 31 December 2019, net debt had increased by 1.9% YoY to RUB 26,212 mln. With its major creditors, the Group negotiated a new covenant calculated as total interest-bearing liabilities (net debt and lease liabilities) divided by the EBITDA based on IFRS 16. The Group complies well with all bank covenants as of 31 December 2019. RUB mln EBITDA LTM Total debt Short-term debt Long-term debt Cash & cash equivalents Net Debt Total Lease Liabilities Short-term lease liabilities Long-term lease liabilities As of 31 December 2019 (IFRS16) As of 31 December 2018 (IAS17) 14,061 31,719 1,629 30,090 5,507 26,212 25,122 3,950 21,173 8,644 34,425 2,461 31,964 8,712 25,713 — — — Total Interest-Bearing Liabilities (Net of сash & сash equivalents) Total Interest-Bearing Liabilities (Net of сash & сash equivalents) / EBITDA 51,334 25,713 3.7 2.97 Overview Strategic Report Operational Review Financial Review Risk Management Corporate Responsibility Corporate Governance Financial Statements CASH FLOW AND WORKING CAPITAL Net cash from operating activities during the reporting period improved from RUB 4,762 mln in 12M 2018 to RUB 11,078 mln in 12M 2019, due to, amongst other factors, the implementation of IFRS 16. Repayment of the principal amount of lease liabilities and interest paid on them in the amount of RUB 6,370 mln were presented in cash flows from financing activities, while in 2018 under IAS 17 all lease payments were presented in cash flows from operating activities. Net cash used in investing activities amounted to negative RUB 1,352 mln in 2019. This was primarily a result of RUB 1,553 mln in proceeds received from the sale of subsidiaries owning lease rights for two land plots and other non-current assets, which partly offset the Group’s 2019 capital expenditures (CAPEX) of RUB 2,919 mln (excluding VAT). During the reporting period, the Group paid RUB 1,004 mln (excluding VAT) for the development of its hypermarket business and RUB 1,915 mln (excluding VAT) for the development of its discounter business. Net cash used in financing activities in 12M 2019 amounted to RUB 12,922 mln. Over the reporting period, the Group attracted RUB 13,253 mln in financing and made repayments of loans and borrowings totalling RUB 15,844 mln. As at 31 December 2019, the Group had RUB 15,947 mln of undrawn, committed borrowing facilities available in Russian roubles on a fixed and floating basis, in respect of which all conditions have been met. Proceeds from these facilities may be used to finance operating and investing activities as necessary. Annual Report 2019O’KEY Group S.A.& QUALITY FOR EACH FAMILY Financial ReviewFinancialReview46 Overview Strategic Report Operational Review Financial Review Risk Management Corporate Responsibility Corporate Governance Financial Statements 47 MANAGEMENT Annual Report 2019O’KEY Group S.A.& QUALITY FOR EACH FAMILY Risk Management48 RISK MANAGEMENT SYSTEM Our risk management system is aimed at providing a reasonable guarantee that the Company’s strategic goals will be achieved in a timely manner and that the level of risks faced by the Group remains acceptable for management and shareholders. We operate a unified approach to risk management through the Group Risk Standard, which comprises a range of relevant tools and methodologies aimed at early risk detection and risk mitigation. Internal Audit undertakes both regular and ad hoc reviews of risk management controls and procedures, the results of which are reported to the Audit Committee. The Group, through its training and management standards and procedures, aims to develop a disciplined and constructive control environment in which all employees understand their roles and obligations. Identified risk areas are monitored quarterly and followed by a coordinated improvement programme. The Board of Directors has overall responsibility for the establishment and oversight of the Group’s risk management framework. The Group’s Audit Committee oversees how management monitors compliance with the Group’s risk management policies and procedures, and reviews the adequacy of the risk management framework in relation to the risks faced by the Group. Internal Audit assists the Group’s Audit Committee in its oversight role. In 2019, Company ensured the effective functioning of its risk management system by identifying and assessing risks in a timely manner, developing and implementing measures to manage those risks. Senior management devoted significant attention to managing key risks that have a high impact and a high probability. The Board of Directors reviewed information on managing the Company’s key risks on a quarterly basis. In 2019, the Company continued to develop its risk management system: A declaration and provision on the Company’s risk appetite were approved by the Board of Directors. Risk appetite establishes the level of risk that is acceptable in terms of achieving the Company’s goals and facilitates effective decision-making while taking risks into account. The Company’s bylaws establishing a unified methodology and procedure for cooperation and responsibility regarding risk management were updated. No significant changes were made to the Company’s corporate governance system in 2019 overall as a result of changes to the risk management system. The Board of Directors • Overall responsibility for the establishment and oversight of the Group’s risk management framework The Audit Committee • Oversees how management monitors compliance with the Group’s risk management policies and procedures • Reviews the adequacy of the risk management framework in relation to the risks faced by the Group Executive management (CEO and Management Board) • Oversees implementation of, and adherence to, risk management policies • Monitors and manages risks relevant to job function • Carries out risk identification and reporting • Performs operational risk management Internal Audit • Assists the Group’s Audit Committee in its oversight role • Undertakes both regular and ad hoc reviews of risk management controls and procedures, the results of which are reported to the Audit Committee 49 Overview Strategic Report Operational Review Financial Review Risk Management Corporate Responsibility Corporate Governance Financial Statements /MAP OF PRINCIPLE RISKS/ High k s i r e h t f o y t i l i b a b o r P 4 1 2 5 6 14 9 11 7 8 12 3 10 13 Low Strategic risks 1. Economic outlook 2. Competition risk 3. Political risk 4. Regulatory risk Materiality (affect) of the risk High Operational risks 5. Changing customer expectations Financial risks 10. Providing sufficient level of financing 6. Employee recruitment and retention 11. Tax regulations 7. Supply chain risk 12. Changes in working capital 8. IT platform developpment 13. Risk of misstatements in financial statements 9. IT security threats 14. Risks of currency and interest rates volatility – estimated likelihood /risk impact Annual Report 2019O’KEY Group S.A.& QUALITY FOR EACH FAMILY Risk ManagementRiskManagement 50 Overview Strategic Report Operational Review Financial Review Risk Management Corporate Responsibility Corporate Governance Financial Statements 51 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 our share price and our reputation. Additional risks not known to us or those risks that we currently consider immaterial, may also impair our business operations. We do not expect to incur any risks that may jeopardise the continuity of our business. /PRINCIPLE RISKS/ Name of Risk Definition & Potential Impact Mitigating Actions Name of Risk Definition & Potential Impact Mitigating Actions STRATEGIC RISKS 1. Economic outlook 2. Competition 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 impact of the weaker macroeconomic environment exacerbated by declining oil prices and sustained rouble volatility, as well as the coronavirus pandemic. 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. In order to avoid potential supply disruption due to the coronavirus pandemic, we strengthen the loading of our distribution centres. We also take various preventive measures against the virus spreading, such as regular disinfection and employees’ daily temperature checks. The retail sector in Russia is highly competitive. We face strong competition from other retailers (Russian and international), some of which are larger and have greater resources. Retail chains compete mainly over store locations, product ranges, price, service and store conditions. Some competitors might be more effective and faster in capturing certain market opportunities, which in turn may negatively impact our market share and our ability to achieve our performance and expansion targets. We focus 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 2019 we also launched several projects such as the redesign of our private labels package (“That’s what you need!”, “O’KEY”), development & implementation of new brands in the “O’KEY Selection” private label line (“Farmers collection”, “Organic”). 3. Political risk Although political stability in Russia has improved, Russia is still a state whose political, economic and financial systems are rapidly developing and changing. Although these risks are outside the control of the Group, O’KEY monitors political developments closely and maintains strong relationships with various national industry bodies. 4. Regulatory risk Our operations are subject to various government regulations and industry specific legislation with respect to quality, packaging, health and safety, labelling, distribution and other standards. Some regulations are still being developed in Russia. Current and future government regulations or changes thereto may require us to change the way we run our operations and could result in cost increases. Failure to comply with regulations can also lead to reputational damage. We aim to ensure compliance with all applicable regulations by monitoring regulatory developments and changes, and following up and responding to changes in regulations and standards in a timely manner. The new requirements for the marking of products (tobacco products, shoes and clothing) and for digital veterinary certificates had a significant influence on all players on the market. For this reason, during 2019, we developed and implemented timely and essential changes in Company’s main business processes (such as goods ordering/receiving/return, stocktaking), and updated relevant internal policies, procedures and information systems. Additionally, on its own initiative, O’KEY Group S.A. was the first Russian food retailer to fully stop selling primary oil plastic bags. This step was inspired by O’KEY’s environmental concerns and the introduction of new Live Green corporate policy requirements. To maximise the efficiency and relevance of such assessments, we monitor internal and external reports on retail market development and changes in O’KEY positioning. As the result of these activities, in 2019, product of our private label “O’KEY” received six gold and three silver medals on international competition “Quality guarantee 2019”. Additionally, during the FY 2019, we enhanced the volume and quality of our promo campaign. In this context, we launched the new promo concept, "Fresh weekly offers", that will propose fresh goods that meet expectations of our clients in part of prices, volume and quality. To improve motivation we have developed coaching in our stores, the Performance Appraisal system that is conducted on a regular basis and rewards employees based on their individual results. We also promote internal opportunities for career development via regular trainings and special programmes. During 2019, we continued to increase the effectiveness of operations at distribution centres, stores and head office levels. We finished the implementation of the new system Axapta 12 (Microsoft Dynamics) in our distribution centres and optimised the number of transport carriers with introducing a new evaluation system for them. We also implemented Oracle RPAS for sales forecasting and replenishment optimisation (70% of core categories are covered). OPERATIONAL RISKS 5. Changing customer expectations We strive to provide our customers with a wide range of goods and services, at competitive prices. However, we recognise that our customers’ shopping habits and expectations are influenced by the economic environment and will change over time. 6. Employee recruitment and retention 7. Supply chain risk Competition for highly qualified management and store personnel remains intense in Russia. To meet our expansion plans we need highly skilled employees. Our future success depends in part on our continued ability to hire, and retain new employees. We understand that any inability to attract and retain highly qualified employees and key personnel in the future could have a material adverse effect on our business. Our financial performance depends in part on reliable and effective supply chain management. We rely on third parties to supply us with merchandise and services. The third parties that supply us with merchandise and services also have other customers and may not have sufficient capacity to meet all of their customers’ needs, including ours, during periods of excess demand. Shortages and delays could materially harm our business. Unanticipated increases in prices could also adversely affect our performance. Furthermore, we may be exposed to risk of delays and interruptions to our supply chain because of natural disasters, in case we are unable to identify alternative sources of supply in a timely manner. – estimated likelihood /risk impact Annual Report 2019O’KEY Group S.A.& QUALITY FOR EACH FAMILY Risk ManagementRiskManagement52 /PRINCIPLE RISKS/ Overview Strategic Report Operational Review Financial Review Risk Management Corporate Responsibility Corporate Governance Financial Statements 53 Name of Risk Definition & Potential Impact Mitigating Actions Name of Risk Definition & Potential Impact Mitigating Actions 8. IT Platform Development Execution of our strategic targets requires adaptation of current IT infrastructure to the changing business needs. As the business grows the complexity of processes supporting it and diversity of tasks around such growth are increasing. Delayed or inappropriate decisions on development of the infrastructure can lead to failures in meeting Group goals and impede attainment of longer-term goals. In 2019, we completed the implementation of several key applications and systems in accordance with our strategy: • Axapta 12 (Microsoft Dynamics) for distribution centres; • Boss HR solution with core HR functions, and extended its functionality to employee self-service; • Upgrade of the POS platform to the newest version of CSI solution (SET 10). 9. IT security threats FINANCIAL RISKS 10. Providing sufficient level of financing Already by the end of 2019, we noticed positive improvements in our store and head office processes. 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, virus scanners and others) in attempt to reduce the threats to our IT & business infrastructure. We are observing an increase in IT security threats and higher levels of professionalism in computer crime. Our systems and solutions, as well as those of our counterparties remain potentially vulnerable to attacks. Depending on their nature and scope, such attacks could potentially lead to the leakage of confidential information, improper use of our systems, manipulation and destruction of data, sales downtimes and supply shortages, which in turn could adversely affect our reputation, competitiveness, and business, financial and operational performance. Recent changes in the macroeconomic situation might result in a liquidity squeeze and tightening of lending policies by Russian banks. Given the expansion programme in the coming periods, issues with availability of external financing or significant changes in its cost can negatively impact our Group’s ability to execute its expansion programme. We maintain available lines of credit to close potential liquidity gaps. We diversify and enlarge the list of partnering banks to increase our control over the availability and cost of financing. Our securities are listed on the London Stock Exchange, allowing us to utilise the secondary placement of shares as an alternative source of financing. 11. Tax regulations Russian tax law has complex tax rules, which may be interpreted in different ways and tax rules are subject to frequent changes. Examinations by tax authorities and changes in tax regulations could adversely affect our business, and financial and operational performance. Our tax and legal specialists review compliance with applicable tax regulations, current interpretations issued by the authorities and judicial precedents resulting from tax disputes. This work is conducted on a regular basis and in a consistent manner and ensures we are aware of any changes that we may need to enforce. Changes in 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. 12. Changes in working capital Inability to control and manage elements of the working capital can result in negative changes for the operating cash flow and lead to liquidity gaps and excessive reliance on external financing. We exercise constant control over working capital, which is detailed in our monetary policy. The aim of this policy is to minimise prepayment balances and control of overdue receivables. We are also taking steps to improve stock management efficiency by establishing and monitoring KPIs and organising training sessions for store employees. 13. Risk of misstatements in financial statements We face exposure to risks relating to failures in proper financial reporting and the classification of accounting entries, and risks of making inaccurate accounting estimates. We regularly monitor internal controls over financial reporting to prevent misstatements in financial statements. We have a qualified team of finance professionals who prepare our financial statements, and our consolidated IFRS financial statements preparation process is largely automated. For a description of financial risks and exposure calculations, please refer to the note 29 and 31 in the Group Consolidated Financial Statements 14. Risks of currency and interest rates volatility We are exposed to fluctuations in exchange rates because of loans received in USD and contractual obligations in USD and EUR. Although measures are taken to minimise this risk, it is likely that exchange rate and interest rate fluctuations occurred in Q1 2020 will influence our results. Certain currency risks are controlled through switching payments into roubles, setting caps or hedged using derivative financial instruments. On 31 December 2019 more than 80% of the portfolio are fixed interest rate loans and approximately 96% of the portfolio are RUB loans. Internal control and risk management system Regarding the internal controls in the area of accounting and financial reporting, the following should be noted: Controls have been established in the processing of accounting transactions to ensure appropriate autorisations for transactions, effective segregation of duties and the complete and accurate recording of financial information. The Board also approves all significant investments. The Board receives monthly financial reports setting out the company's financial performance in comparison to the approved budget and prior year figures. Staff involved in the company's accounting and financial reporting are appropriately qualified and are kept up-to-date with relevant changes in International Financial Reporting Standards (“IFRS”). Additionally, specific training and written guidance on particular matters is provided where needed. Written guidance, regularly updated for business developments and regulatory changes, is available to all relevant staff members and provides a summary of the company's accounting and financial reporting policies and procedures. – estimated likelihood /risk impact Completeness and timely recording of financial information is ensured through regular reviews, monitoring of specific key performance indicators, validation procedures by functional leaders and as an additional check, the process of internal and external audit. The company relies on a comprehensive system of financial information and oversight. Strategic plans, business plans, budgets and the interim and full-year consolidated accounts of the company are drawn up and brought to the Board for approval. Any weaknesses in the system of internal controls identified by either internal or external auditors are promptly and fully addressed. The external auditors perform a limited review of the company's half-year consolidated financial statements and a full audit of the annual consolidated financial statements. In accordance with the requirements of IFRS, we disclose detailed information on the market, credit and foreign exchange risk to which it is exposed, as well as strategy for managing the risks. Annual Report 2019O’KEY Group S.A.& QUALITY FOR EACH FAMILY Risk ManagementRiskManagement54 Overview Strategic Report Operational Review Financial Review Risk Management Corporate Responsibility Corporate Governance Financial Statements 55 Annual Report 2019O’KEY Group S.A.& QUALITY FOR EACH FAMILY Corporate Responsibility56 Corporate Social Responsibility56 Our Employees60 Health and Safety60 Human Rights and Diversity62 Our Communities63 Environmental ResponsibilityRESPONSIBILITY56 Overview Strategic Report Operational Review Financial Review Risk Management Corporate Responsibility Corporate Governance Financial Statements O’KEY believes that social responsibility is an essential factor of long-term development for any business. Instead of considering only financial and operational results, we develop a responsible approach towards society. 57 THE NUMBER OF EMPLOYEES 18,344 REDUCE OUR STAFF TURNOVER 37% BREAKDOWN OF STAFF Breakdown of staff by gender, % Breakdown of staff by age, % MALE 28% 7% 29% 18-25 YEARS 26-35 YEARS Our team in numbers In 2019, average headcount of our hypermarkets reached 18,344, which was comparable to 2018. In 2019, we managed to reduce our staff turnover for the retail division of the Company by 37%. FEMALE 72% 31% 36-45 YEARS 25% 46-55 YEARS 8% >56 YEARS Annual Report 2019O’KEY Group S.A.& QUALITY FOR EACH FAMILY Corporate ResponsibilityCorporate SocialResponsibility56 Corporate Social Responsibility56 Our Employees60 Health and Safety60 Human Rights and Diversity62 Our Communities63 Environmental ResponsibilityO’KEY SOCIAL RESPONSIBILITYO’KEY Group operates in different geographical areas of Russia, from large cities to small towns and affects various stakeholders, such as business partners, local communities, governmental bodies, media and NGOs. We continuously develop different communication tools with our stakeholders, which helps us to create and sustain mutually beneficial partnerships, ensures continuous progress and promotes general business development. Our key stakeholders are:customers and partners;shareholders and financial community; мemployees;government and local authorities; local communities;media. OUR EMPLOYEES O’KEY’s HR policy is focused on the continuous improvement its HR processes and services, including onboarding, training and development, and professional recognition of the Company’s specialists. We strive to create a productive working environment and open up new opportunities for employees to realise their professional and personal potential. We are aware of the impact that our corporate climate has on in-store service quality. Therefore, in 2019 we took the first steps in implementing the “HAPPY WORK” culture across the Company and will continue to do so in the following years.Key focus areas of the HR strategy: introducing modern technologies and automating HR services;building an effective organisational structure and management team;creating a positive image of the O’KEY brand in the Russian labour market;creating a culture of engagement and effectiveness;systematic staff turnover management;implementing the best HR practices.In 2019, we focused on quality and service ownership, reshaping our leadership role and building a mentoring culture in our stores. To achieve these goals the Company launched or expanded two major projects:”You are the face of the Company”, a project aimed at raising awareness of the significance of each employee for the Company’s successful performance, competitive edge, and attractiveness to its staff and customer base;The “100% Professional” competition, aimed at recognising professional excellence and increasing the social capital of linear careers, was first held in 2018 but was further expand in 2019, increasing its scale and impact and ensuring our culture recognises employee performance and professional skills.O’KEY seeks to improve labour productivity and effectiveness and to automate all pro-cesses, including HR. Therefore, in 2018–2019 the Company completed an ambitious transition to a new advanced “BOSS-Kadrovik” system. The new system automates all key HR processes, from HR activities and payroll calculations to managing compensation and benefits and employees’ online accounts. In 2020, we will add modules for managing per-sonnel costs and budgeting, and health and safety, and will integrate the HR system with recruitment and business trip management.Within the new HR system we implemented a tool designed especially for O’KEY which allows store management teams to easily and efficiently arrange the flexible planning of schedules. The need for such a tool arose as the Company uses various forms of employment and changes working hours depending on business needs. In 2020, we will concentrate on programmes supporting the further enhancement of our service culture and our employer brand. Our focus will be on:the quality of training and onboarding processes;developing non-directive management skills and a coaching leadership style for retail management;ensuring service excellence at stores for internal and external customers;employee health;managing skills development;occupational safety;committees for continuous improvement of processes. 58 /O’KEY VALUES/ Overview Strategic Report Operational Review Financial Review Risk Management Corporate Responsibility Corporate Governance Financial Statements Effective team Outstanding results Professional environment Excellent service Innovation Corporate culture In 2019, the key tasks of the Company included enhancing customer-focused service and building a mentoring culture in our stores. The “You are the face of the Company” project is aimed at creating the right environment for developing our mentoring culture and improving conscious working quality management. The main goal of the project is to ensure high quality onboarding and employee training. To achieve this goal, each store has set up and operates Mentoring Councils to work on the continuous improvement of service for internal and external customers. As of now, these Mentoring Councils cover 5% of retail staff across the Company (80% – line personnel, 20% – management). Our Mentoring Councils have already promoted 123 ideas on board, with 53 of them developed and introduced in our stores, 70 ideas being in the pilot and development stage. Due to higher personnel engagement in pursuing the goals and objectives of the Company, the project contributed to a reduction of turnover. In 2019 we also expanded the “100% Professional” professional skills contest. The second wave of the project included four main retail professions – chef, baker, sales assistant, cashier, and focused on three pillars of a successful retail business – service, technology, and skill. In 2019, the “100% Professional” contest engaged with the wider retail industry: the Company invited external experts from the V. M. Gorbatov Federal Research Centre for Food Systems of RAS and the World Association of Chefs’ Societies (WACS) to sit on the jury of the final round. The number of contestants almost tripled in 2019 and amounted to 1,700 vs 755 in 2018. Staff training and development O’KEY puts a lot of effort into the personal and professional growth of its employees which ensures high efficiency in our business activity. In 2019, we continued to develop an efficient system of training and development, focusing on its economic feasibility, flexibility and availability in every city. The key areas of personnel development were: functional training; retail talent bench. We continued to reinforce the blended learning system, which allows every employee to receive a high quality education. The Company operates the “O’KEY Academy” training portal with 80 courses available. The content is constantly updated through collaboration with the business. In order to develop the managerial staff for each level of management, face-to-face training pools have been created, where managers can practice managing their teams’ performance . The Company maintained momentum with its Leadership School where potential store directors are detected and educated. The Leadership School comprises three faculties: Store Director, Deputy Store Director, Head of Division. Our talent bench currently has seven directors, 25 deputy directors and 53 heads of divisions. In 2019, the Company’s head office conducted assessment processes in the following divisions: Commercial Department, Supply Chain Management Department, Economic Security Service. In total, the assessment measures encompassed 180 employees. “O’KEY ACADEMY”: 98 % OF PERSONNEL WERE TRAINED 80 COURSES AVAILABLE ON THE PORTAL 68,549 TRAININGS WERE UNDERTAKEN 59 In particular, O’KEY provides the following employee benefits: voluntary health insurance policies cofinanced at 80%-90%; free meals for some employee categories; gift vouchers for the O’KEY retail chain and holiday gifts for children; financial assistance to employees in a difficult life situations; the opportunity to pay for gym memberships in instalments. Reporting violations In order to promote an environment of transparency and trust, O’KEY developed a whistleblowing policy which regulates violations of ethics, labour laws, and interactions between employees and managers. The Company has several channels for reporting violations: a call centre, dedicated manager–employee meeting hours, and morning kick-offs. Plans Staff retention and motivation WERE RECEIVED IN 2019 In 2020, our main focus will be on aligning all regions to unified HR process standards for staff training and assessment, developing high quality guidelines and processes. We plan to place a special focus on developing line managers and heads of HR divisions as well as onboarding programmes, both in the head office and retail. The head office will also prioritise improvements in the recruitment process by using different hiring tools. In 2020, we will continue rolling out our Freshness Experts project: an experienced dedicated mentor will be appointed in each region to educate and help the newly appointed heads of divisions and heads of low-performing divisions. We also plan to launch an all-in e-platform where our best managers will share their experience and knowledge of the business. O’KEY effectively uses advanced well- balanced financial and non-financial incentives, providing its employees with competitive wages which allow the Company to attract and retain the best talents. The Company has a KPI system that takes into account both individual and corporate goals. The bonus amount depends on the results achieved against those KPIs. Compensation and benefits O’KEY provides necessary social support to its employees in full compliance with the requirements of applicable laws and regulations, and also implements additional programmes aimed at creating the most comfortable environment for our staff. 202 REPORTS WERE PROCESSED AND GIVEN FEEDBACK 100 % REPORTS These results were made possible through effectively raising staff awareness of HR administration processes and the Company’s standards. Annual Report 2019O’KEY Group S.A.& QUALITY FOR EACH FAMILY Corporate ResponsibilityCorporate SocialResponsibility56 Corporate Social Responsibility56 Our Employees60 Health and Safety60 Human Rights and Diversity62 Our Communities63 Environmental Responsibility 60 Overview Strategic Report Operational Review Financial Review Risk Management Corporate Responsibility Corporate Governance Financial Statements 61 HEALTH AND SAFETY O’KEY strives to constantly reduce work-related hazards, providing safe working conditions for every employee and a comfortable experience for each customer. /KEY 2019 RESULTS/ What we do: monitoring workplace conditions; monitoring employee health; training employees in safe working practices; investigate injury incidents; take measures to prevent similar incidents in the future; accompany labour protection inspections conducted by governmental supervisory authorities. all workplaces 25 occupational injuries 0 fatalities working conditions were specially assessed -29% compared to 2018 The Group has an efficient occupational health and safety management system, which fully complies with Russian legislative norms. The main regulating document is the Labour Protection and Occupational Health, Environmental, Industrial and Fire Safety Policy, valid until 2023. We conduct regular occupational health audits in our stores and distribution centres. In 2019, 305 comprehensive inspections of our premises were conducted to assess labour protection. HUMAN RIGHTS AND DIVERSITY All occupational injuries involving our employees and customers are tracked and systematically investigated. The total number of accidents amounted 25 in 2019 (vs 35 in 2018), two of them severe (head injuries in a fall). In 2020, O’KEY Group plans to implement a professional occupational risk management system and conduct the professional risks assessments throughout the Company. TRAINED IN OCCUPATIONAL SAFETY 1,976 PEOPLE TRAINED TRAINED IN FIRE SAFETY 1,020 PEOPLE TRAINED O’KEY Group commitments include adhering to the fundamental principles of human rights, supporting diversity, and maintaining the highest standards of business ethics and integrity. We strictly comply with relevant internal regulations as well as with Russian legislation and international best practices. Ethics and compliance We treat our employees equally and with respect, regardless of their gender, background, ethnicity or nationality. We understand the positive impact of a multi-cultural working environment on business productivity and aim to increase ethnic diversity throughout our business. The Company does not tolerate discrimination, human trafficking and slavery in any form and constantly monitors its business operations to ensure that no risks in these areas arise. In building its team, O’KEY follows the principles of partnership, mutual respect and common goals. Our employees are expected to abide by a set of clearly communicated formal policies, which include: Supplier selection Policy; Policy of choosing a counterparty; Policy of interaction with state bodies; Anti-corruption policy. In all situations and under any circumstances, the actions of employees must comply with our high professional and ethical standards and generally accepted moral values. Our employees regularly undergo special training programmes on compliance with legislation on consumer protection, interaction with government agencies and others. These programmes are regularly updated to comply in a timely manner with changes in Russian legislation and global best practices. Preventing Corruption /ANTI-CORRUPTION MEASURES// O’KEY Group has a zero-tolerance policy towards any kind of corruption at all levels. The Company strives to ensure a high level of transparency in all operations and procedures, continuously improves its anti-corruption processes and promotes training on the topic for the employees. The Company’s corruption prevention activities are regulated by its Anti- corruption policy, which is imposed both internally and externally. Any suspicious behaviour, including information reported inside the Company or from our partners via a hotline, is thoroughly investigated in line with our rules and policies, and appropriate measures are taken. In 2019 we also improved our commercial secrets policy and deployed new methodologies and tools to ensure the security of the Company’s confidential commercial information. This included further development of control measures in the IT network and infrastructure to secure our commercial information from unauthorised external and internal access attempts and misuse. We also implemented “Red flag” reports which enable instant action on information security incidents and are contributing to the rapid discovery of any anomalies and violations to the Company’s policies. We also renewed our information posters about correct behavior in our offices and reminded employees of contact details to report any suspicious behavior. All potential conflicts of interests are immediately reported to our internal audit and security departments. Internal anti-corruption measures External anti-corruption measures all employees voluntarily sign a commitment to follow the Anti-Corruption policy; prior to hiring, potential employees are screened for risks of corruption; the activity of employees in our procurement and real estate departments is constantly monitored; contract development is monitored and analysed every six months; control procedures for critical business processes (such as receiving, write-offs/ scraping and returns) are implemented and conducted via IT monitoring software; thematic briefings and trainings are held for employees in the procurement and real estate departments and in our stores. all potential suppliers and service providers are thoroughly checked before obtaining any contracts, by verifying their: • records and documentation, • financial health (balance sheets, assets, turnover, debts, credits, and court proceedings, • absence of affiliation to our other suppliers or our employees, • customer base, turnover matching with the declared taxes history; local suppliers are placed under additional monitoring; our suppliers sign an obligatory agreement where they accept all the clauses related to anti-corruption policy; in the event that suppliers and contractors do not comply with the Policy, O’KEY is entitled to terminate their contracts immediately. Anonymous hotline numbers are displayed openly for all employees and service providers in all our stores as well on our website. For this purpose, we maintain a confidential whistleblower e-mail address and hotline to which anyone can report a complaint. In 2019, we received several messages. The messages related to violation of Company’s rules and standards were promptly investigated by the Risk Department’s anti-corruption team. Confirmed corruption cases were handed over to the police for further proceedings. In 2019, we investigated nine cases related to the violation of our anti-corruption policy in accordance with our standard process. Three cases involving employees or subcontractors were handed over to the police; in the remaining cases we took internal measures and appropriate actions. Furthermore, we updated related procedures to receive earlier warnings and to eliminate further occurrences of similar incidents.In 2020 we plan to continue transferring the commercial buying process for several categories onto an automated trading platform to provide more transparency and prevent hazardous behaviour or attempts. This will also simplify and speed up investigations related to anonymous warnings, disputes or legal requests, related to commercial purchasing. Annual Report 2019O’KEY Group S.A.& QUALITY FOR EACH FAMILY Corporate ResponsibilityCorporate SocialResponsibility56 Corporate Social Responsibility56 Our Employees60 Health and Safety60 Human Rights and Diversity62 Our Communities63 Environmental Responsibility 62 Overview Strategic Report Operational Review Financial Review Risk Management Corporate Responsibility Corporate Governance Financial Statements 63 OUR COMMUNITIES O’KEY strives to provide a better quality of life to local communities in the areas in which we operate, including the most vulnerable groups in society. For this purpose, we support several charity and social investment initiatives in partnership with different stakeholders, such as local authorities, businesses, non-governmental organisations, the media and our customers. Our social initiatives include supporting sporting and cultural events, developing social infrastructure and supporting vulnerable groups in society, such as orphans, children lacking parental care, people in difficult situations in life, veterans of the Great Patriotic war and seriously ill children. These programmes enable the O’KEY to support the population and ensure the Company meets its commitments as a responsible industry leader. Treatment Support In 2019, O’KEY Group continued its cooperation with Rusfond to help children with serious health conditions and held the fourth national Kind Purchase charitable campaign. All of our customers could participate in the charity campaign which ran from 24 October to 20 November 2019, simply by purchasing any products under O’KEY private labels (over 1,700 SKUs) at any O’KEY hypermarket and on the www.okeydostavka.ru online store. The Company donated a proportion of the revenue generated through sales of these products to the charity. The total amount of funds raised through Kind Purchase in 2019 reached RUB 7 mln. RUB 7 mln RAISED THROUGH JOINT CHARITY  CAMPAIGNS WITH RUSFOND IN 2019 Priorities of O’KEY charity programmes Major charity partners in 2019: Outcomes of our assistance: help children with serious illnesses; Rusfond; Advita; help people in difficult situations in life; help veterans of the Great Patriotic war. service for Consumer Market and Licensing of the Irkutsk region. targeted assistance; heightened consumer awareness about issues and increased participation in solutions; the attraction of other benefactors. The money will be used for the treatment and rehabilitation of seriously ill children in Rusfond’s wards. Another of O’KEY Group’s committed charity partners is AdVita, a St. Petersburg- based charity fund specialising in help for children and adults suffering from cancer. Throughout 2019 we organised a variety of campaigns in our St. Petersburg stores to raise funds for AdVita, including the placement of donation boxes next to counters so that our customers could donate to help people in need. Humanitarian aid In July 2019, O’KEY Group dispatched humanitarian aid to residents impacted by flooding in the Irkutsk Region. The relief effort included a 16-pallet container holding more than 8,000 items, including household items, clothing and textiles. The cargo worth RUB 2.35 mln was delivered to the disaster zone in Tulun and distributed among flood victims in the affected area. Supporting Vulnerable Groups We have an ongoing programme aimed at helping vulnerable groups. O’KEY hypermarkets offer holders of state social cards an additional 3% discount at our stores in Moscow and the Moscow region, and various discounts for retired people in Krasnoyarsk, Murmansk, Syktyvkar, Tyumen and two stores in St. Petersburg. The discount does not apply to alcohol and tobacco products. In St. Petersburg, we also offer holders of a special social card for new mothers additional discounts on children’s goods. In order to support families in difficult situations and children from dysfunctional families, before the New Year we held a social campaign called “Blizzard of Wonders” in the cities of Moscow, Rostov- on-Don and Ekaterinburg. Our customers could bring gifts for vulnerable population groups, which were later sent to foundations providing targeted assistance. Overall, we gathered more than 500 gifts. RUB 26 mln RAISED SINCE 2017 RUB1.87 mln RAISED THROUGH DONATION BOXES  RUB 9 mln RAISED SINCE 2016 ENVIRONMENTAL RESPONSIBILITY We believe that environmental responsibility of business is a necessity for keeping market positions in the long-term perspective. This is proved by growing eco-awareness of customers and changes in environmental legislation. We promote the responsible approach and try to minimise our environmental footprint by implementing different measures. We ensure the strict compliance with Russian environmental legislation through regular internal audits. We also 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. In 2019, the Company implemented a new Live Green corporate policy and plans to follow its principles in 2020. In line with the policy, O’KEY hypermarkets will fully stop selling primary oil plastic bags in Q1 2020. Instead, our customers will be offered various packaging options such as biodegradable corn starch and 100%-recycled plastic bags, reusable shopping bags of different materials and capacities, from heavy-duty paper bags to jute, cotton, nylon and PVC durable items. led-lights and led-signboards, replace outdated refrigeration elements and conditional systems with leading edge energy-saving devices. As a result of these measures, in 2019 the total energy consumption YoY decreased by 3%. Waste management Waste management processes in O’KEY Group are regulated by the Waste management policy, which is implemented in all our stores. The amount of waste buried on the landfills is reduced by separate waste collection implemented in all our stores. Furthermore, biological waste and lamps are transported to special factories, recyclable waste such as polythene film, plastic boxes and wastepaper is pressed and sold for further recycling. We collect and sell for recycling banana boxes, waste oil, pallets and metal scrap. Our key operational locations have water- treatment facilities, including 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. ENERGY CONSUMPTION (NET), K KWT/H PROCEEDS FROM SALES OF RECYCLABLE MATERIALS, RUB MLN Energy efficiency 436,052 We care about energy efficiency of our business and make efforts to gradually reduce our total energy consumption. O’KEY controls the energy use in its supermarkets. We equip our stores with modern recuperators and energy-efficient 401,116 389,648 267 233 215 2017 2018 2019 2017 2018 2019 Annual Report 2019O’KEY Group S.A.& QUALITY FOR EACH FAMILY Corporate ResponsibilityCorporate SocialResponsibility56 Corporate Social Responsibility56 Our Employees60 Health and Safety60 Human Rights and Diversity62 Our Communities63 Environmental Responsibility64 Overview Strategic Report Operational Review Financial Review Risk Management Corporate Responsibility Corporate Governance Financial Statements 65 Annual Report 2019O’KEY Group S.A.& QUALITY FOR EACH FAMILY Corporate Governance66 Our Corporate Governance Principles66 The General Meeting of Shareholders68 Board of Directors72 Committees of the Board of Directors74 Executive Management76 Information for Shareholders and InvestorsGOVERNANCE66 Overview Strategic Report Operational Review Financial Review Risk Management Corporate Responsibility Corporate Governance Financial Statements 67 We recognise our obligation to our shareholders to adopt highest 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. Heigo Kera Group Chairman 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. 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. O’KEY Group is committed to managing and conducting its operations in accordance with applicable regulations of Luxembourg and the London Stock Exchange. 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. OUR CORPORATE GOVERNANCE PRINCIPLES PROFESSIONALISM ACCOUNTABILITY 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. 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 EQUALITY 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. O’KEY Group’s corporate governance system is designed to protect shareholders’ rights and ensure equal treatment of all shareholders. 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 2020. 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 2019, 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). Control System in Employee Share Scheme 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. The Company does not have an employee share scheme allowing employees to acquire equity in the Company. Appointment of the Directors, Amendment 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 by Shareholders for them to take part in any meeting of shareholders in person or by proxy (Article 15 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 Significant Agreements or Essential Business Contracts The Board is not aware of any significant agreements to which O’KEY Group S.A. 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 is none. Annual Report 2019O’KEY Group S.A.& QUALITY FOR EACH FAMILY Corporate GovernanceCorporateGovernance66 Our Corporate Governance Principles66 The General Meeting of Shareholders68 Board of Directors72 Committees of the Board of Directors74 Executive Management76 Information for Shareholders and Investors68 Overview Strategic Report Operational Review Financial Review Risk Management Corporate Responsibility Corporate Governance Financial Statements 69 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 repurchase by the Company of its own shares is subject to the conditions set out in the Company Law and the Articles. By the resolution of the meeting of the shareholders held on April 27, 2018, the board is authorised to start a buyback programme with the parameters set out in aforementioned resolution. The authorisation is valid until April 27, 2020. As of March 27, 2020, the Company has not started the buyback programme. Our current Board of Directors was elected at the General Meeting of Shareholders held on 13 October 2015. 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 without approval of the shareholders meeting. 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/. Meetings of the Board of Directors Meetings of Board of Directors are held regularly in compliance with the approved work schedule for the year. The Board’s work schedule is determined on the basis of strategic planning and the reporting cycle. Whenever an urgent matter needs to be considered, Extraordinary Board meetings are organised, or, if a personal meeting cannot be organised due to short notice, the Board can adopt a circular resolution by a unanimous vote. It is the Board Chairman’s responsibility to determine the Board’s work plan and to include additional items in the plan. In 2019, the Board of Directors worked on the following key tasks: Remuneration Diversity preparation of the financial statements and annual report, and review of the results for the year 2018; approval of the budget and business strategy for the year 2019; review of the quarterly financial results, approval of financial statements for six months of 2019 and monitoring of compliance with risk management strategy; determination of the Group’s strategic and operational priorities; 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. 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. /MEETINGS OF THE BOARD OF DIRECTORS/ /CHANGES MADE TO THE SENIOR MANAGEMENT TEAM IN 2019/ Member Heigo Kera Board of Directors (3 meetings) Audit Committee (4 meetings) Remuneration Committee (1 meeting) attended 3 attended 4 attended Dmitrii Troitskii 3 by proxy not a member by proxy Dmitry Korzhev attended 3 attended 4 not a member Name Pavel Lokshin Sergey Shadrin Olga Surnina Date 19/02/2019 20/05/2019 15/09/2019 Change Operating Director Supply Chain Director Marketing Director Boris Volchek 3 by proxy attended 1, 3 by proxy by proxy Tatiana Bukanova 02/10/2019 Real Estate Director Mykola Buinyckyi attended 3 attended 4 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://okeygroup.lu/sharedocs Annual Report 2019O’KEY Group S.A.& QUALITY FOR EACH FAMILY Corporate GovernanceCorporateGovernance66 Our Corporate Governance Principles66 The General Meeting of Shareholders68 Board of Directors72 Committees of the Board of Directors74 Executive Management76 Information for Shareholders and Investors 70 Overview Strategic Report Operational Review Financial Review Risk Management Corporate Responsibility Corporate Governance Financial Statements 71 /MEMBERS OF THE BOARD OF DIRECTORS OF O’KEY GROUP S.A. AS AT 31 DECEMBER 2019/ Member HEIGO KERA Group Chairman Member of the Audit Committee Chairman of the Remuneration Committee Election Education Skills and Experience First elected to the Board of Directors in June 2010 and repeatedly re-elected since then. University degree, Tallinn Technical University (Estonia) 2015-2017: CEO of O’KEY effective 1 May 2015 2008-present: 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 Shares in O’KEY Mr. Kera does not hold shares of O’KEY Group S.A. DMITRII TROITSKII Director Member of the Remuneration committee First elected to the Board of Directors in June 2010 and repeatedly re-elected since then. University degree, State Marine Technical University of St. Petersburg BORIS VOLCHEK Caraden Director Member of the Audit and Remuneration Committee First elected to the Board of Directors in June 2010 and repeatedly re-elected since then. University degree, Leningrad Institute of Railway Engineers (now St. Petersburg State University of Communications) DMITRY KORZHEV Director Member of the Audit Committee First elected to the Board of Directors in June 2010 and repeatedly re-elected since then. University degree, State Marine Technical University of St. Petersburg MYKOLA BUINYCKYI Independent Director Chairman of the Audit Committee First elected to the Board of Directors in June 2010 and repeatedly re-elected since then. 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 2005-2007: Member of the Board of Directors of the Ochakovo Dairy Plant Mr. Troitskii indirectly owns ca. 2005-2012: Member of the Supervisory Board of Bank St. Petersburg 2005-present: Development Director of Capital Group JSC (formerly Neva-Rus CJSC) 29.046% of the shares of O’KEY Group S.A. 1995-present: President of the Union Group of companies Mr. Volchek indirectly owns ca. 2000-present: General Director of St. Petersburg Automobile Museum 29.52 % of the shares of O’KEY Group S.A. 2005-2009: Member of the Supervisory Board of Bank Saint Petersburg Mr. Korzhev indirectly owns ca. 2005-present: General Director of Sovmestniy Capital CJSC 2015-2019: Director of Capital Group JSC 2019-present: Commercial Director of Capital Group JSC 10.31% of the shares of O’KEY Group S.A. Over 35 years in international financial management and over 20 years’ experience in Russia. Mr. Buinyckyi does not hold shares of O’KEY Group S.A. Seven years as a management consultant with Coopers & Lybrand. Annual Report 2019O’KEY Group S.A.& QUALITY FOR EACH FAMILY Corporate GovernanceCorporateGovernance66 Our Corporate Governance Principles66 The General Meeting of Shareholders68 Board of Directors72 Committees of the Board of Directors74 Executive Management76 Information for Shareholders and Investors 72 Overview Strategic Report Operational Review Financial Review Risk Management Corporate Responsibility Corporate Governance Financial Statements COMMITTEES OF THE BOARD OF DIRECTORS AUDIT COMMITTEE 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. There are two committees on the Board of Directors: the Audit Committee and the Remuneration Committee. REMUNERATION COMMITTEE Committee members The Committee’s remit includes: As of 31 December 2019, the Remuneration Committee comprised: reviewing the compensation policy; reviewed the amount of remuneration to be allocated to the management of the Group in 2018; advising on any benefit or incentive schemes; approved the Remuneration Committee Report; making proposals to the full Board of Directors regarding the remuneration of Executive Directors and management (including Chief Executive Officer). suggested the total maximum amount of remuneration of Directors for 2019 to be submitted for the approval of the shareholders of the Company. Heigo Kera, Committee Chairman, Chairman of the Board of Directors; Boris Volchek, Committee Member, Non-executive Director of the Board of Directors; Dmitrii Troitskii, Committee Member, Non-executive Director of the Board of Directors; Ilya Ilin, Committee Member, Non-director, external consultant; Irina Nikiforova, Committee Member, Non-director, external consultant. Committee members The Committee’s remit includes: As of 31 December 2019, the Audit Committee comprised: reviewing the IFRS financial statements for integrity and transparency; Mykola Buinyckyi, Committee Chairman, Independent Director of the Board of Directors; Boris Volchek, Committee Member, Non-executive Director of the Board of Directors; Dmitry Korzhev, Committee Member, Non-executive Director of the Board of Directors; Heigo Kera, Committee Member, Chairman of the Board of Directors; Ilya Ilin, Committee Member, Non-director, external consultant; Irina Nikiforova, Committee Member, Non-director, external consultant. analysing financial reporting processes, including carrying out regular reviews and making recommendations; recommending appointment 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 drafting of recommendations for their improvement. Activities in 2019 Activities in 2019 Plans for 2020 Key areas during the reporting period, the Remuneration Committee held one meeting; In 2020 the Group plans to keep the remuneration and bonus policy in line with 2019. reviewed the report on the remuneration, bonuses and expenses of the Board and its Committees; The Audit Committee oversees the internal audit function, the effectiveness of risk management and the internal controls of the Company and the Group. It also approves and monitors the performance of the internal audit plan for the year. The Audit Committee assists the Boards of Directors in fulfilling its oversights 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 not fewer than three current members of the Board of Directors and shall be chaired by an independent director. during the reporting period, the Audit Committee held four meetings; fulfilled oversight responsibilities relating to integrity of the Company’s annual financial statements; fulfilled oversight responsibilities relating to integrity of the Company’s half yearly financial statements; reviewed reports prepared by Internal Audit department; reviewed effectiveness of the Company’s risk management and internal control systems; 73 reviewed policies and procedures published in the Company; monitored reports per the Company’s Whistleblowing Policy; planned and agreed the scope of the audit of financial statements for year ended 2019 with the external auditor of O’KEY Group; reviewed and approved provisions of non-audit services for the Company by the external auditor; approved the Internal Audit plan for the year 2020. Plans for 2020 The Audit Committee and the Company continue to focus on following areas in 2020: 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 of internal business processes involved in preparation of financial reporting. Annual Report 2019O’KEY Group S.A.& QUALITY FOR EACH FAMILY Corporate GovernanceCorporateGovernance66 Our Corporate Governance Principles66 The General Meeting of Shareholders68 Board of Directors72 Committees of the Board of Directors74 Executive Management76 Information for Shareholders and Investors74 EXECUTIVE MANAGEMENT O’KEY Management Board brings together the best professionals with broad expertise and deep understanding of the Russian retail market. Within the country and worldwide, we recruit the most enthusiastic managers whose vision and perspective contribute to the development of our business. In 2019, we further strengthened our team with professionals with solid retail backgrounds. Overview Strategic Report Operational Review Financial Review Risk Management Corporate Responsibility Corporate Governance Financial Statements 75 ARMIN BURGER KONSTANTIN ARABIDIS PAVEL LOKSHIN IVAN DROPULJIC SERGEY SHADRIN ELENA POLOZOVA OLGA SURNINA Chief Executive Officer Chief Financial Officer Operating Director Commercial Director Supply Chain Director Human Resources Director Marketing Director Member of the Management Board since 2013 Member of the Management Board since 2016 Member of the Management Board since 2019 Member of the Management Board since 2017 Member of the Management Board since 2019 Member of the Management Board since 2015 Member of the Management Board since 2019 University of Freiburg, Department of Economics . 2012-2013: CEO and a Member of the Supervisory Board of Praktiker AG Peter the Great St.Petersburg Polytechnic University, Department of Technical Cybernetics; St. Petersburg University Department of Economics; Moscow Aviation Technological University, Department of Economics; London Business School, Senior Executive Programme. 2008-2011: Member of the Supervisory Board Aldi Süd Member of ACCA. 2016-2018: CEO of Perekrestok Express 1999-2008: CEO of Hofer KG, Sattledt, Austria 2012-2016: Various positions in O’KEY Group 2013-2016: CEO of K-Rauta Russia 1990-1998: Various positions in Aldi GmbH Before 2012: Various positions in PwC 2001-2012: Various positions in METRO Cash & Carry The University of Zagreb, Department of Economics. 2012-2017: Purchasing and Marketing Director, Member of the Board of Kaufland Croatia 2007-2012: Fresh Food Director at Kaufland Croatia Plekhanov Russian University of Economics, PhD degree in Economics; Moscow International Higher School of Business (MIRBIS), MBA; Almaty Technological University, Department of Economics; Vlerick Business School, Belgium, MBA. 2017-2018: Supply Chain Director of Auchan Moscow Lipetsk State Technical University, Department of Psychology. 2013-2015: Senior HR, O’KEY KIMEP, MA, Department of Economics; Chartered Institute of Marketing, Post Graduate Professional Diploma, UK. Before 2007: Various positions at Pik Vrbovec and Jamnica 2004-2018: various positions at Danone Russia, Ukraine, Saudi Arabia 2003-2013: HR Business partner in Magnit 2018-2019: Marketing Director Russia & CIS at JSC Arnest 2016-2018: Head of Own Production at Magnit 2013-2016: Marketing and PR Director at Nautica 2010-2013: Marketing Director at Nokia International South CIS Branch Annual Report 2019O’KEY Group S.A.& QUALITY FOR EACH FAMILY Corporate GovernanceCorporateGovernance66 Our Corporate Governance Principles66 The General Meeting of Shareholders68 Board of Directors72 Committees of the Board of Directors74 Executive Management76 Information for Shareholders and Investors76 SHARE CAPITAL Share Capital Structure – Direct Holdings 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. The Company does not hold any of its own shares and has not acquired it during the 2019 financial year. Significant Shareholdings The three major indirect shareholders of the Group are its founders: Mr. Dmitrii Troitskii (who indirectly owns approximately 29.046% of the outstanding share capital of O’KEY Group S.A. and together with Mr. Korzhev controls 44.79% in the share capital of the Company); Mr. Dmitry Korzhev (who indirectly owns approximately 10.31% of the outstanding share capital of O’KEY Group S.A. and together with Mr. Troitskiy controls 44.79% in the share capital of the Company); Mr. Boris Volchek (who indirectly owns approximately 29.52% of the outstanding share capital of O’KEY Group S.A.). NISE MAX Co Ltd GSU Ltd Freefloat 44.79% 29.52% 25.69% Global Depositary Receipts (GDRs) Stock Exchange As of 31 December 2019, O’KEY Group S.A. GDRs were traded on the London Stock Exchange. /TRADING FLOOR OF O’KEY GROUP S.A. GDRS/ Trading floor Ticker code London Stock Exchange OKEY 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. /O’KEY GROUP S.A. SECURITIES IDENTIFICATION NUMBERS/ 6CUSIP1/ Code Regulation S GDRs 670866201 Rule 144A GDRs 670866102 As of 31 December 2019, GDRs represented 38.172% of O’KEY Group S.A. share capital. No other securities have been issued by the Company. O’KEY Group S.A. GDRs Trading Information (market transactions, Bloomberg) Annual maximum price, USD Annual minimum price, USD Year-end price, USD 2019 2018 2.7 1.4 1.4 2.7 1.8 2.5 Trading volume (mln units) 11.5 24.5 7ISIN2/ Code Regulation S GDRs US6708662019 Rule 144A GDRs US6708661029 Credit Ratings In July 2019 RAEX (Expert RA) affirmed the Company’s credit rating of ‘ruA-’ with a stable outlook. The rating reflects the Group’s stable position within the Russian food retail market, its strong liquidity and debt repayment capacity as well as high standards of corporate governance and risk management. Credit rating Outlook RAEX ruA- Stable Last rating date 08 July 2019 Source: Bloomberg – applicable to all the tables above Overview Strategic Report Operational Review Financial Review Risk Management Corporate Responsibility Corporate Governance Financial Statements Analyst Coverage 9 equity research analysts from leading banks, including Goldman Sachs, 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. DIVIDENDS Dividend Policy 77 Company Aton BCS Analyst Victor Dima Maria Boyko Phone number +7 (495) 213-03-44 +7 (495) 213-15-94 Gazprombank Marat Ibragimov +7 (495) 980-41-87 Goldman Sachs Maxim Nekrasov +7 (495) 645-42-97 J. P. Morgan Elena Jouronova +7 (495) 967-38-88 Raiffeisen Bank Egor Makeev +7 (495) 221-98-51 Sberbank CIB Sova Capital VTB Capital Mikhail Krasnoperov +7 (495) 933-98-38 Mikhail Terentiev +7 (495) 213-18-34 Maria Kolbina +7 (495) 663-46-48 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. Taxation As a general rule, the Company withholds 15% WHT from the dividend paid from Luxembourg for distribution to the holders of GDRs. 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. Period Record date Amount of dividend per GDR (USD cents, gross) Amount of accrued dividend (USD, gross) Interim dividends 2011 12.09.2011 Interim dividends 2012 23.02.2012 Interim dividends 2013 15.02.2013 Interim dividends 2014 18.02.2014 Interim dividends 2014 17.10.2014 Interim dividends 2015 11.09.2015 Interim dividends 2016 08.07.2016 Interim dividends 2017 20.01.2017 Interim dividends 2018 25.01.2018 Interim dividends 2019 03.10.2019 9.9481 10.254 18.953 22.670 7.433 8.920 8.548 9.167 12.367 0.05635 26,767,750.594 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 15,162,319.90 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. */ Information provided from page 4 to 77 of the Annual report fully corresponds to Consolidated Directors’ report. Annual Report 2019O’KEY Group S.A.& QUALITY FOR EACH FAMILYInformationfor Shareholders and Investors66 Our Corporate Governance Principles66 The General Meeting of Shareholders68 Board of Directors72 Committees of the Board of Directors74 Executive Management76 Information for Shareholders and Investors Corporate Governance78 Overview Strategic Report Operational Review Financial Review Risk Management Corporate Responsibility Corporate Governance Financial Statements 79 Annual Report 2019O’KEY Group S.A.& QUALITY FOR EACH FAMILY Financial Statements80 Management and Directors Responsibility Statement 81 Independent Auditors’ Report 89 Consolidated Financial Statements95 Notes to Consolidated Financial StatementsSTATEMENTS80 MANAGEMENT & DIRECTORS RESPONSIBILITY STATEMENT We confirm, to the best of our knowledge, that the consolidated financial statements which have been prepared in accordance with the International Financial Reporting Standards as adopted by the European Union, give a true and fair view of the assets, liabilities, financial position and profit or loss of O’KEY Group S.A., and the undertakings included in the consolidation taken as a whole, and that the consolidated Directors’ report includes a fair review of the development and performance of the business and the position of O’KEY Group S.A. and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties they face. Luxembourg, 27 March 2020 DMITRY KORZHEV Member of the Board of Directors MYKOLA BUINYCKIY Member of the Board of Directors HEIGO KERA Chairman ARMIN BURGER CEO of O’KEY KONSTANTIN ARABIDIS CFO Overview Strategic Report Operational Review Financial Review Risk Management Corporate Responsibility Corporate Governance Financial Statements CONTENTS INDEPENDENT AUDITOR’S REPORT CONSOLIDATED FINANCIAL STATEMENTS Consolidated Statement of Financial Position Consolidated Statement of Profit or Loss and Other Comprehensive Income Consolidated Statement of Changes in Equity Consolidated Statement of Cash Flows Notes to the Consolidated Financial Statements 1 Background 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 Basis of preparation Functional and presentation currency Use of estimates and judgments New and amended standards and interpretations adopted by the Group Segment information Principal subsidiaries General, selling and administrative expenses Other operating income and expenses, net Personnel costs Finance income and finance costs Foreign exchange gain/(loss) Income tax Investment property Property, plant and equipment and construction in progress Right-of-use assets Intangible assets Prepayments Other non-current assets Inventories Trade and other receivables Cash and cash equivalents Equity Earnings/(loss) per share Loans and borrowings Lease liabilities Trade and other payables Reconciliation of movements of liabilities to cash flows arising from financing activities Financial risk management Capital commitments Contingencies Related party transactions Events subsequent to the reporting date Fair value disclosures Significant accounting policies 81 82 89 91 92 94 95 95 96 96 98 100 102 103 103 104 104 104 105 107 108 110 111 112 112 112 113 113 113 114 114 115 116 117 118 124 125 126 128 128 129 Annual Report 2019O’KEY Group S.A.& QUALITY FOR EACH FAMILY Financial Statements80 Management and Directors Responsibility Statement 81 Independent Auditors’ Report89 Consolidated Financial Statements95 Notes to Consolidated Financial StatementsManagement and Directors Responsibility Statement82 To the Shareholders of O’KEY GROUP S.A. Overview Strategic Report Operational Review Financial Review Risk Management Corporate Responsibility Corporate Governance Financial Statements 83 REPORT ON THE AUDIT OF THE CONSOLIDATED FINANCIAL STATEMENTS KEY AUDIT MATTER HOW OUR AUDIT ADDRESSED THE KEY AUDIT MATTER To the best of our knowledge and belief, we declare that we have not provided non-audit services that are prohibited under Article 5(1) of the EU Regulation No 537/2014. The non-audit services that we have provided to the Company and its controlled undertakings, if applicable, for the year then ended, are disclosed in Note 8 to the consolidated financial statements. Key audit matters Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the consolidated financial statements of the current period. These matters were addressed in the context of our audit of the consolidated financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. Our opinion Basis for opinion We conducted our audit in accordance with the EU Regulation No 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 No 537/2014, the Law of 23 July 2016 and ISAs as adopted for Luxembourg by the CSSF are further described in the “Responsibilities of the “Réviseur d’entreprises agréé” for the audit of the consolidated financial statements” section of our report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. We are 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. We have fulfilled our other ethical responsibilities under those ethical requirements. In our opinion, the accompanying consolidated financial statements give a true and fair view of the consolidated financial position of O’KEY GROUP S.A. (the “Company”) and its subsidiaries (the “Group”) as at 31 December 2019, 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. Our opinion is consistent with our additional report to the Audit Committee or equivalent. What we have audited The Group’s consolidated financial statements comprise: the consolidated statement of financial position as at 31 December 2019; the consolidated statement of profit or loss and other comprehensive income for the year then ended; the consolidated statement of changes in equity for the year then ended; the consolidated statement of cash flows for the year then ended; and the notes to the consolidated financial statements, which include a summary of significant accounting policies. Adoption of IFRS 16 'Leases' We have performed the following audit procedures to address the key audit matter: Refer to Notes 4, 5, 16, 26 and 35 to the consolidated financial statements of the Group. The Group has adopted IFRS 16 ‘Leases’ from 1 January 2019 under the modified retrospective approach, as permitted by the standard’s transitional provisions. As the result of the adoption on the transition date, the Group recognised right-of-use assets in the amount of RUB 25,226,179 thousand representing its rights to use the underlying leased assets and lease liabilities of RUB 29,227,792 thousand representing its obligations to make lease payments. Adoption of the new lease standard was considered by us to be one of the key audit matters because of the large number of the Group’s lease arrangements, variety of underlying contractual terms and the fact that recognition of the leases required applying judgement by the Group, in particular, in determining the lease term for the leases that contain extension options, and the discount rate. We obtained an understanding of and evaluated the Group’s processes and relevant control activities relating to identification of leases and their accounting under IFRS 16. We gained understanding of the Group’s accounting policy for leases and the selected transition approach and assessed their compliance with the requirements of the new lease standard. We assessed completeness of the Group’s listing of the lease contracts in place, including through reading minutes of meetings and review of expense accounts. For a sample of leases, we performed detailed testing of key inputs used in the calculation of the right-of-use assets and lease liabilities recognised on the transition date by tracing them to supporting lease contracts and other relevant documentation, as well as independently recalculated the amounts selected. We evaluated whether the Group’s approach to determination of the lease terms for the leases that contain extension options is in line with the requirements of IFRS 16 and whether the judgements applied therein are reasonable. With involvement of our internal valuation experts, we considered adequacy of the Group’s methodology for the calculation of the discount rates applied in the lease calculations. We evaluated reasonableness of application by the Group of IAS 36 ‘Impairment of assets’ to the right-of-use-assets recognised at 1 January 2019. We considered adequacy of IFRS 16 adoption disclosures in the consolidated financial statements. Annual Report 2019O’KEY Group S.A.& QUALITY FOR EACH FAMILY Financial Statements80 Management and Directors Responsibility Statement 82 Independent Auditors’ Report 89 Consolidated Financial Statements95 Notes to Consolidated Financial StatementsIndependent Auditors’ Report84 Overview Strategic Report Operational Review Financial Review Risk Management Corporate Responsibility Corporate Governance Financial Statements 85 KEY AUDIT MATTER HOW OUR AUDIT ADDRESSED THE KEY AUDIT MATTER KEY AUDIT MATTER HOW OUR AUDIT ADDRESSED THE KEY AUDIT MATTER Recognition of bonuses from suppliers Our audit procedures to address the key audit matter included the following: Non-current assets impairment assessment Our audit procedures to address the key audit matter included the following: Refer to Notes 4 and 21 to the consolidated financial statements of the Group. Understanding, evaluation of design and testing of relevant control activities that the Group has established in relation to recognition of bonuses from suppliers. The Group receives various types of bonuses from suppliers relating to purchase of goods for resale. The bonuses are provided in the form of volume discounts, slotting fees and other counter payments. Recognition of these bonuses leads to a significant reduction to the cost of goods sold and inventory value. While the major portion of the bonuses is recognised and settled within the year, a material amount remains outstanding within trade and other receivables as at the reporting date. Recognition of bonuses from suppliers was one of the matters of most significance in our audit because their impact on the Group’s cost of goods sold, inventory and trade and other receivable balances is material, the number of underlying contracts with suppliers is large and their terms can be complex. Further, recognition of amounts receivable from suppliers as at the reporting date and allocation of the bonuses to cost of goods sold and the inventory balance requires a certain level of judgement by the Group, including that in relation to timing of fulfilment of the performance conditions that entitle the Group to the bonuses and evidence thereof. Understanding and evaluation of the accounting policy applied by the Group for accounting for bonuses from suppliers. Reading significant contracts with suppliers and understanding if the Group complies with the conditions that entitle the Group to bonuses from suppliers. Retrospective analysis of prior year bonuses receivable against subsequent settlements to assess accuracy of the Group’s estimates in the current year. Analytical procedures over the accuracy and existence of the bonuses recognised in the current year based on historical data. Detailed testing, on a sample basis, of bonuses recognised and settled during the year by agreeing to respective supporting documentation. Agreeing bonuses receivable as at the reporting date to external confirmations obtained from suppliers on a sample basis, or alternative procedures through tracing the amounts recognised against underlying agreements and other relevant documentation. Performing analytical procedures to assess reasonableness of the allocation of bonuses to the goods that remain in stock at the reporting date. Confirming that accounting policy for offsetting of bonuses receivable from suppliers against trade payables is in line with IFRS and that the factual offsetting is in line with the accounting policy. Considering adequacy of disclosures of information about the bonuses from suppliers in the consolidated financial statements of the Group. Refer to Notes 4, 15, 16 and 17 to the consolidated financial statements of the Group. As at 31 December 2019, the carrying value of the Group’s non-current assets that are subject to impairment assessment under IAS 36 approximates 70% of total assets. These non-current assets are primarily attributable to the Group’s stores. As at the reporting date, the Group assessed whether there is any indication that the carrying value of the non-current assets may not be recoverable and carried out an impairment testing for those individual assets or cash-generating units (CGUs) represented by individual stores where such indication was noted. Impairment loss was identified in the impairment testing performed. This is one of the key audit matters due to the magnitude of the carrying value of these non-current assets, judgement exercised by the Group in determining whether or not there are specific indicators of impairment and judgements applied in the calculation of the recoverable amount of these assets. In addition, strong competition in the Russian retail market and moderate consumer behaviour underpin the uncertainty of accounting estimates and the risk of significant adjustments in future periods to the carrying value of the Group’s non-current assets recognised in the consolidated financial statements. We obtained understanding and evaluated the design of the Group’s relevant control activities around the impairment review. We also assessed whether the Group’s approach to determination of CGUs and identification and use of the indicators that the Group’s stores and other non-current assets may be impaired is reasonable. For those significant CGUs where impairment indicators were identified, we assessed whether the value in use or fair value less costs of disposal approach applied by the Group to determine recoverable amount in each particular case is appropriate in the circumstances. We further obtained and analysed underlying calculations prepared by the Group for impairment testing. Our audit procedures were carried out with the involvement of internal valuation experts and included: Reviewing the adequacy and consistency of methods applied to calculations of value in use, and the calculations’ mathematical accuracy. Evaluating the reasonableness of the Group’s key assumptions and forecasts in the prior period, in order to assess the accuracy of the Group’s forecasts for future periods. Verifying the appropriateness of budgets of the CGUs for projected periods used in the value in use calculations through inquiries of the Group, corroborating the Group’s explanations, examining supporting documentation and comparing inputs against available external industry data. Analysing and assessing in detail the key assumptions that significantly affect future cash flows of the CGUs and the discount rate applied by the Group to calculate the recoverable amount, by comparing it to the weighted-average cost of capital determined for the Group with due regard to its inherent risks. Performing sensitivity analysis of the results of the Group’s assessment to reasonably possible changes to key assumptions. Testing the presentation and disclosure of information about the impairment test as carried out by the Group in the consolidated financial statements for its consistency with requirements of IAS 36 and its adequacy in the context of the consolidated financial statements as a whole. Annual Report 2019O’KEY Group S.A.& QUALITY FOR EACH FAMILY Financial Statements80 Management and Directors Responsibility Statement 82 Independent Auditors’ Report 89 Consolidated Financial Statements95 Notes to Consolidated Financial StatementsIndependent Auditors’ Report86 Overview Strategic Report Operational Review Financial Review Risk Management Corporate Responsibility Corporate Governance Financial Statements 87 KEY AUDIT MATTER HOW OUR AUDIT ADDRESSED THE KEY AUDIT MATTER OTHER INFORMATION The audit procedures we have performed to address the key audit matter consisted of the following: Understanding and evaluation of design of relevant control activities that the Group has in place in relation to recognition of current and deferred income taxes and long-term budget preparation. Comparing the Group’s forecasts in the long-term budget prepared in prior year to actual performance to assess adequacy of the Group’s estimates in the current year. Assessing accuracy of the deferred tax calculations. Considering any limitations to the amount and timing of utilisation of the unused tax loss as established by the Russian tax legislation. Obtaining the long-term budget prepared by the Group for LLC Fresh Market and challenging the expected future profits and assumptions regarding future earnings as reflected therein, including by comparing to actual results to date and industry trends. Analysing the treatment of differences between accounting and tax books in the planning of future taxable profit. Considering adequacy of disclosures on the deferred tax positions and assumptions used in assessing recoverability of the deferred tax assets from tax losses carry forward in the consolidated financial statements. Recoverability of deferred tax assets recognised for the carryforward of unused tax losses Refer to Notes 4 and 13 to the consolidated financial statements of the Group. As at 31 December 2019, the carrying value of the Group’s deferred tax assets amounts to RUB 4,175,871 thousand, including RUB 2,840,607 thousand arising on the accumulated tax losses carried forward by LLC Fresh Market that develops the Group’s chain of discounter stores under the DA! brand starting from 2015. A deferred tax asset shall be recognised for the carryforward of unused tax losses to the extent that it is probable that future taxable profit will be available against which the unused tax losses can be utilised. The Group performed the assessment of and concluded on the recoverability of the deferred tax assets. This analysis was based on the long-term financial projections for LLC Fresh Market, which includes estimates of future profits. This area was significant to our audit because of the history of tax losses generated by LLC Fresh Market, the complexity and subjectivity of the assessment process, which is based on assumptions that are inherently uncertain and affected by the expected pace of new openings of the discounters. In addition, we considered continued uncertainty in the Russian retail market and other relevant factors. In preparing the consolidated financial statements, the Board of Directorsis 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. 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 an audit report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with the EU Regulation No 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 No 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 scepticism 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; The Board of Directors is responsible for the other information. The other information comprises the information stated in the annual report including the consolidated directors’ report and the Corporate Governance Statement but does not include the consolidated financial statements and our audit report 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 identified above and, in doing so, consider whether the other information is materially inconsistent with the consolidated financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. Responsibilities of the Board of Directorsand those charged with governance for the consolidated financial statements The Board of Directorsis 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 Directorsdetermines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Annual Report 2019O’KEY Group S.A.& QUALITY FOR EACH FAMILY Financial Statements80 Management and Directors Responsibility Statement 82 Independent Auditors’ Report 89 Consolidated Financial Statements95 Notes to Consolidated Financial StatementsIndependent Auditors’ Report88 conclude on the appropriateness of the 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 audit report to the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our audit report. However, future events or conditions may cause the Group to cease to continue as a going concern; evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation; obtain sufficient appropriate audit evidence regarding the financial information of the entities 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 communicate to 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 audit report unless law or regulation precludes public disclosure about the matter. REPORT ON OTHER LEGAL AND REGULATORY REQUIREMENTS The consolidated directors’ report is consistent with the consolidated financial statements and has been prepared in accordance with applicable legal requirements. The Corporate Governance Statement is included in the consolidated directors’ report. 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 have been appointed as “Réviseur d’Entreprises Agréé” of the Group by the General Meeting of the Shareholders on 26 April 2019 and the duration of our uninterrupted engagement, including previous renewals and reappointments, is 2 years. PricewaterhouseCoopers, Société coopérative Represented by Overview Strategic Report Operational Review Financial Review Risk Management Corporate Responsibility Corporate Governance Financial Statements 89 CONSOLIDATED STATEMENT OF FINANCIAL POSITION /AS AT 31 DECEMBER 2019/ ’000 RUB ASSETS Non-current assets Investment property Property, plant and equipment Construction in progress Right-of-use assets Lease rights Intangible assets Deferred tax assets Other non-current assets Total non-current assets Current assets Inventories Trade and other receivables Prepayments Other current assets Cash and cash equivalents Total current assets Total assets Note 31 December 2019 31 December 2018 14 15 15 16 5 17 13 19 20 21 18 22 1,249,969 41,962,175 2,976,838 21,512,397 - 1,292,185 4,175,871 831,632 1,047,000 43,770,640 3,754,546 - 4,312,159 1,294,214 2,438,928 1,405,610 74,001,067 58,023,097 15,219,769 4,322,950 895,033 42,662 5,507,079 25,987,493 99,988,560 13,684,473 3,402,946 1,389,038 25,466 8,712,253 27,214,176 85,237,273 Andrei Chizhov Luxembourg, 27 March 2020 The consolidated statement of financial position is to be read in conjunction with the notes to, and forming part of, the consolidated financial statements set out on pages 95 to 141 Annual Report 2019O’KEY Group S.A.& QUALITY FOR EACH FAMILY Financial Statements80 Management and Directors Responsibility Statement 82 Independent Auditors’ Report 89 Consolidated Financial Statements95 Notes to Consolidated Financial StatementsIndependent Auditors’ Report90 Overview Strategic Report Operational Review Financial Review Risk Management Corporate Responsibility Corporate Governance Financial Statements 91 CONSOLIDATED STATEMENT OF FINANCIAL POSITION CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME /AS AT 31 DECEMBER 2019/ ’000 RUB 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 Lease liabilities Deferred tax liabilities Other non-current liabilities Total non-current liabilities Current liabilities Loans and borrowings Interest accrued on loans and borrowings Lease liabilities Trade and other payables Current income tax payable Total current liabilities Total liabilities Total equity and liabilities Note 31 December 2019 31 December 2018 23 25 26 13 25 25 26 27 119,440 10,597 8,555,657 (155,518) 5,233,827 1,204,897 14,968,900 30,089,758 21,172,587 527,796 - 119,440 10,597 8,555,657 - 12,200,119 1,595,368 22,481,181 31,964,302 - 679,921 112,047 51,790,141 32,756,270 1,629,220 211,181 3,949,756 2,461,437 97,364 - 27,182,739 26,861,848 256,623 33,229,519 85,019,660 99,988,560 579,173 29,999,822 62,756,092 85,237,273 /FOR THE YEAR ENDED 31 DECEMBER 2019/ ’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 gain/(loss) Profit/(loss) before income tax Income tax (expense)/ benefit Profit/(loss) for the year Other comprehensive (loss)/ income Items that will never be reclassified to profit or loss: Exchange differences on translation to presentation currency Items that are or may be reclassified subsequently to profit or loss: Change in fair value of hedges and reclassification from hedging reserve Income tax on items within other comprehensive income Other comprehensive (loss)/ income for the year, net of income tax Total comprehensive income for the year Earnings/(loss) per share Basic and diluted earnings/(loss) per share (in RUB per share) Note 2019 2018 6 8 9 11 11 12 13 13 24 165,086,202 161,303,411 (125,986,668) (123,921,850) 39,099,534 37,381,561 (33,629,825) (33,914,624) (568,606) 4,901,103 89,803 (5,054,947) 937,678 873,637 (126,679) 746,958 95,045 3,561,982 76,286 (3,192,959) (1,141,353) (696,044) 96,289 (599,755) (390,471) 609,117 (194,398) 38,880 (545,989) 200,969 124,826 (24,965) 708,978 109,223 2.8 (2.2) Annual Report 2019O’KEY Group S.A.& QUALITY FOR EACH FAMILY Financial Statements80 Management and Directors Responsibility Statement 82 Independent Auditors’ Report 89 Consolidated Financial Statements95 Notes to Consolidated Financial StatementsConsolidated Financial Statements92 Overview Strategic Report Operational Review Financial Review Risk Management Corporate Responsibility Corporate Governance Financial Statements 93 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY CONSOLIDATED STATEMENT OF CHANGES IN EQUITY /FOR THE YEAR ENDED 31 DECEMBER 2019/ /FOR THE YEAR ENDED 31 DECEMBER 2019/ ’000 RUB Note Share capital Legal reserve Additional paid-in capital Hedging reserve Retained earnings Translation reserve Total equity ’000 RUB Note Share capital Legal reserve Additional paid-in capital Hedging reserve Retained earnings Translation reserve Total equity Balance at 1 January 2018 119,440 10,597 8,555,657 (99,861) 15,025,513 639,633 24,250,979 Balance at 31 December 2018 119,440 10,597 8,555,657 - 12,200,119 1,595,368 22,481,181 (599,755) - (599,755) Balance at 1 January 2019 119,440 10,597 8,555,657 Change in accounting policy 5 - - - 609,117 609,117 Profit for the year Comprehensive income for the year 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 items within other comprehensive income Reclassification within equity Total other comprehensive income Total comprehensive income for the year Transactions with owners recorded directly in equity Contributions by and distributions to owners Dividends declared 23 Total transactions with owners recorded directly in equity - - - - - - - - - - - - - - - - - - - - - - - - - - - Balance at 31 December 2018 119,440 10,597 8,555,657 - - 124,826 (24,965) - - - - - 124,826 (24,965) - (346,618) 346,618 - 99,861 (346,618) 955,735 708,978 99,861 (946,373) 955,735 109,223 - - - (1,879,021) (1,879,021) - - (1,879,021) (1,879,021) 12,200,119 1,595,368 22,481,181 Other comprehensive loss Foreign currency translation differences Change in fair value of hedges and reclassification from hedging reserve Income tax on items within 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 Dividends declared 23 Total transactions with owners recorded directly in equity - - - - (194,398) 38,880 (155,518) (6,725,738) - (6,725,738) 5,474,381 1,595,368 15,755,443 746,958 - 746,958 - - - - (390,471) (390,471) - - (194,398) 38,880 (390,471) (545,989) (155,518) 746,958 (390,471) 200,969 - - (987,512) (987,512) - - (987,512) (987,512) - - - - - - - - - - - - - - - - - - - - - - - - Balance at 31 December 2019 119,440 10,597 8,555,657 (155,518) 5,233,827 1,204,897 14,968,900 Annual Report 2019O’KEY Group S.A.& QUALITY FOR EACH FAMILY Financial Statements80 Management and Directors Responsibility Statement 82 Independent Auditors’ Report 89 Consolidated Financial Statements95 Notes to Consolidated Financial StatementsConsolidated Financial Statements94 CONSOLIDATED STATEMENT OF CASH FLOWS Overview Strategic Report Operational Review Financial Review Risk Management Corporate Responsibility Corporate Governance Financial Statements 1 BACKGROUND (a) The Group and its operations 95 /FOR THE YEAR ENDED 31 DECEMBER 2019/ These consolidated financial statements for the year ended 31 December 2019 have been prepared for O’KEY GROUP S.A. (the “Company”) and its ’000 RUB Cash flows from operating activities Cash receipts from customers Other cash receipts Interest received Cash paid to suppliers and employees Taxes other than on income Other cash payments VAT paid Income tax paid Net cash from operating activities Cash flows from investing activities Note 2019 2018 subsidiaries (together referred to as the “Group”). 191,108,706 185,385,687 698,981 49,475 1,021,735 54,545 (175,781,669) (177,167,778) (668,837) (43,199) (859,009) (80,216) (3,494,010) (2,513,869) (791,615) (1,079,307) 11,077,832 4,761,788 The Company was incorporated and is domiciled in Luxembourg. The Company is a public limited company (société anonyme) and was set up in accordance with Luxembourg regulations. The main part of the Group is located and conducts its business in the Russian Federation. The Company does not have an immediate parent or an ultimate controlling party. As at 31 December 2019 and 2018, the Company’s major indirect shareholders are Mr. Troitskii, Mr. Volchek and Mr. Korzhev. As at 31 December 2019 and 2018, as well as throughout the years then ended, 38.172% of the Company’s shares were admitted to trading on the London Stock Exchange in the form of global depositary receipts (“GDRs”). The Company’s registered address is Luxembourg 6 rue Jean Monnet, L-2180. The Group’s principal business activity is operation of retail chains in Russia under the brand names “O’KEY” (hypermarkets) and “DA!” (discounter Purchase of property, plant and equipment (excluding VAT) (2,508,942) (3,150,785) stores). At 31 December 2019 the Group operated 178 stores including 100 discounter stores (31 December 2018: 160 stores including Purchase of intangible assets (excluding VAT) Proceeds from sale of supermarkets (excluding VAT) Proceeds from sale of subsidiaries 9 Proceeds from sale of property, plant and equipment and intangible assets (excluding VAT) Net cash (used in)/ from investing activities Cash flows from financing activities Proceeds from loans and borrowings Repayment of loans and borrowings Interest paid on loans and borrowings Repayment of principal amount of lease liabilities Interest paid on lease liabilities Dividends paid Other financial payments Net cash used in financing activities Net (decrease)/increase in cash and cash equivalents Cash and cash equivalents at the beginning of the year Effect of exchange rate fluctuations on cash and cash equivalents Cash and cash equivalents at the end of the year (410,157) - 1,552,785 14,612 (470,989) 7,069,951 - 31,084 (1,351,702) 3,479,261 13,252,720 15,006,000 (15,843,795) (16,896,776) (2,885,956) (3,337,810) (4,083,535) (2,286,559) - - 82 discounter stores) in major Russian cities, including but not limited to Moscow and towns in Moscow region, 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 which displays certain characteristics of an emerging market. Its economy is particularly sensitive to oil and gas prices. The legal, tax and regulatory frameworks continue to develop and 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 economy continued to be negatively impacted by ongoing political tension in the region and international sanctions against certain Russian companies and individuals. Firm oil prices, low unemployment and rising wages supported a modest growth of the economy in 2019. This operating environment has a significant impact on the Group’s operations and financial position. Management is taking necessary measures to ensure sustainability of the Group’s operations. However, the future effects of the current economic situation are difficult to predict and management’s current expectations and estimates could differ from actual results. 23 (987,512) (1,879,021) (87,453) (140,850) (12,922,090) (7,248,457) (3,195,960) 8,712,253 992,592 7,750,177 (9,214) (30,516) 5,507,079 8,712,253 22 22 2 BASIS OF PREPARATION (a) Statement of compliance These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRSs”) as adopted by the European Union under the historical cost convention, as modified by the initial recognition of financial instruments based on fair value, and by the revaluation of investment properties and financial instruments categorised at fair value through other comprehensive income (“FVOCI”). These consolidated financial statements were authorised for issue by the Board of Directors on 27 March 2020. Any changes to these consolidated financial statements after issue require approval of the Board of Directors. Annual Report 2019O’KEY Group S.A.& QUALITY FOR EACH FAMILY Financial Statements80 Management and Directors Responsibility Statement 82 Independent Auditors’ Report89 Consolidated Financial Statements95 Notes to Consolidated Financial StatementsConsolidated Financial Statements96 Overview Strategic Report Operational Review Financial Review Risk Management Corporate Responsibility Corporate Governance Financial Statements 97 3 FUNCTIONAL AND PRESENTATION CURRENCY Recoverability of deferred tax asset. Significant judgment is required in assessment of recoverability of deferred tax asset on tax losses of LLC Fresh Market, the Group’s entity that develops a discounter chain and does not yet generate profit. The Group performs analysis of future taxable The functional currency of each of the Group’s consolidated entities is the currency of the primary economic environment in which the entity profit to cover the accumulated tax losses on the basis of the long-term budget for the entity. Recognition of the deferred tax asset is contingent operates. The functional currency of the Company is the US Dollar (“USD”) and the functional currency of the Group’s Russian subsidiaries on the ability of the Group management to adhere to the long-term budget. Refer to Note 13. in the Russian Rouble (“RUB”). The consolidated financial statements are presented in RUB, which is the Group’s presentation currency. All financial information presented in RUB has been rounded to the nearest thousand, except when otherwise indicated. Lease term. In determining the lease term, management considers all facts and circumstances that create an economic incentive to exercise an extension option, or not exercise a termination option. Extension options (or periods after termination options) are only included in the lease term if The results and financial position of the Group entities, which functional currencies are different from RUB, are translated into the presentation the lease is reasonably certain to be extended (or not terminated). currency as follows: assets and liabilities for each statement of financial position presented are translated at the closing rate at the end of the respective reporting contractual enforceable rights beyond the written agreement to determine the lease term with reference to mutual understanding between If the contractual lease term does not align with the economics of the transaction, management considers whether there are any non- period; income and expenses are translated at the date of transaction; components of equity are translated at the historic rate; and the parties, respective laws and regulations and other relevant factors. The assessment is reviewed if a significant event or a significant change in circumstances occurs which affects this assessment and that is within the control of the lessee. The Group leases land and trade and other premises based on the lease agreements with various termination and extension options. To determine the lease term the management has applied judgement in performing its “reasonably certain” assessment and determined that it is reasonably certain that the extension options will be exercised or termination options will not be exercised during the lease period which is based all resulting exchange differences are recognised in other comprehensive income. on the Group’s business plan with the respective planning horizon. At 31 December 2019 the principal rates of exchange used for translating foreign currency balances were USD 1 = RUB 61.9057; EUR 1 = Most extension options in leases of trade premises have been included in the lease liability, because the Group is unlikely to replace the assets RUB 69.3406 (31 December 2018: USD 1 = RUB 69.4706; EUR 1 = RUB 79.4605). within the Group’s planning horizon. 4 USE OF ESTIMATES AND JUDGMENTS The lease term is reassessed if an option is actually exercised (or not exercised) or the Group becomes obliged to exercise (or not exercise) it. The assessment of reasonable certainty is only revised if a significant event or a significant change in circumstances occurs, which affects this The preparation of consolidated financial statements in conformity with IFRSs requires management to make estimates and assumptions that assessment, and that is within the control of the lessee. 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 An increase in the lease term by 1 year at the reporting date would have increased the balances of right-of-use assets and lease liabilities by RUB 1,891,481 thous. and RUB 2,089,398 thous., respectively. the estimates are revised and in any future periods affected. A decrease of the lease term by 1 year at the reporting date would have decreased the balances of right-of-use assets and lease liabilities Management also exercises certain judgements, apart from those involving estimations, in the process of applying the accounting policies. Judgments that have the most significant effect on the amounts recognised in the consolidated financial statements and estimates that can cause This analysis assumes that all other variables, in particular incremental borrowing rate, remain constant. a significant adjustment to the carrying amount of assets and liabilities within the next financial year include: by RUB 2,028,915 thous. and RUB 2,252,736 thous., respectively. Discount rates used for determination of lease liabilities. The Group uses its incremental borrowing rate as a base for calculation of the discount Tax legislation. The Group is subject to taxation in several jurisdictions. The major part of the tax burden refers to the Russian tax legislation, rate because the interest rate implicit in the lease cannot be readily determined. which is subject to varying interpretations when being applied to the transactions and activities of the Group. Significant judgement is required The Group’s incremental borrowing rate applied to lease liabilities in 2019 ranged from 4 to 10%. in determining whether the tax positions and interpretations the Group has taken can be sustained. Refer to Note 31. Bonuses from suppliers. The Group receives various bonuses from suppliers which represent a significant reduction in cost of goods sold by RUB 911,480 thous. and RUB 847,748 thous., respectively. 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. A decrease of the discount rate by 1% at the reporting date would have increased the balances of right-of-use assets and lease liabilities An increase in the discount rate by 1% at the reporting date would have decreased the balances of right-of-use assets and lease liabilities The calculation and allocation of the bonuses to inventory cost has some element of judgement. Determination of recoverable amount of non-current assets. For those non-current assets where impairment indicators exist as at reporting date, the Group estimates the recoverable amount being the higher of their value in use and fair value less costs of disposal. For details of impairment assessment performed as at 31 December 2019 refer to Notes 15-17. by RUB 988,408 thous. and RUB 914,723 thous., respectively. This analysis assumes that all other variables, in particular lease term, remain constant. Annual Report 2019O’KEY Group S.A.& QUALITY FOR EACH FAMILY Financial StatementsNotesto Consolidated Financial Statements80 Management and Directors Responsibility Statement 82 Independent Auditors’ Report89 Consolidated Financial Statements95 Notes to Consolidated Financial Statements98 Overview Strategic Report Operational Review Financial Review Risk Management Corporate Responsibility Corporate Governance Financial Statements 99 5 NEW AND AMENDED STANDARDS AND INTERPRETATIONS ADOPTED BY THE GROUP The change in accounting policy affected the following items in the consolidated statement of financial position on 1 January 2019: A number of new standards and amendments to standards became effective from 1 January 2019, including the following: IFRS 16, “Leases”. The Group has adopted IFRS 16 from 1 January 2019, but has not restated comparatives for the 2018 reporting period, ’000 RUB ASSETS as permitted under the specific transitional provisions in the standard. The reclassifications and the adjustments arising from the new leasing rules Non-current assets 31 December 2018 Change in accounting policy 1 January 2019 are therefore recognised in the opening balance sheet on 1 January 2019. The new standard sets out the principles for the recognition, measurement, presentation and disclosure of leases. All leases result in the lessee obtaining the right to use an asset at the start of the lease and, if lease payments are made over time, also obtaining financing. Accordingly, IFRS 16 eliminates the classification of leases as either operating leases or finance leases as is required by IAS 17 and, instead, introduces a single lessee accounting model. The Group as the lessee is now required to recognise: (a) assets and liabilities for all leases with a term of more than 12 months, unless the underlying asset is of low value; and (b) depreciation of right-of-use assets separately from interest on lease liabilities in the consolidated statement of profit or loss and other comprehensive income. IFRS 16 substantially carries forward the lessor accounting requirements in IAS 17. Accordingly, while the Group as the lessor had only operating leases, it continued to account for such operating leases upon adoption of IFRS 16 with no changes. On adoption of IFRS 16, the Group recognised lease liabilities in relation to leases which had previously been classified as “operating leases” under the principles of IAS 17. These liabilities were measured at the present value of the remaining lease payments, discounted using the Group’s incremental borrowing rate as of 1 January 2019. The Group’s incremental borrowing rate applied to the lease liabilities on 1 January 2019 ranged from 4 to 10%. ’000 RUB Operating lease commitments disclosed as at 31 December 2018 Add: adjustments as a result of a different treatment of extension and termination options Less: future minimum lease payments under non-cancellable land leases depending on the cadastral value as at 31 December 2018 Add: future minimum in-substance fixed lease payments as at 31 December 2018 Less: effect of discounting Lease liability recognised as at 1 January 2019 Of which are: Current lease liabilities Non-current lease liabilities 36,968,672 7,870,300 (4,531,763) 5,788,580 (16,867,997) 29,227,792 3,543,705 25,684,087 The associated right-of-use assets for leases were measured at their carrying amounts as if the standard had been applied since the commencement date, but discounted using the Group’s incremental borrowing rate at the date of initial application. Lease rights previously presented as a separate item in the consolidated statement of financial position are in substance payments made to take over the Group’s leases, and as such meet the definition of initial direct costs. In applying IFRS 16 for the first time, the Group has used the following practical expedients permitted by the standard: the accounting for operating leases with a remaining lease term of less than 12 months as at 1 January 2019 as short-term leases; and the use of hindsight in determining the lease term where the contract contains options to extend or terminate the lease and in determining the lease consideration where the contract contains options to increase of consideration in uncertain amount. Property, plant and equipment Construction in progress Right-of-use assets Lease rights Deferred tax assets Other non-current assets Total non-current assets Current assets Other current assets Total current assets Total assets EQUITY AND LIABILITIES Equity Retained earnings Total equity Non-current liabilities Lease liabilities Total non-current liabilities Current liabilities Lease liabilities Trade and other payables Total current liabilities Total liabilities Total equity and liabilities 43,770,640 3,754,546 - 4,312,159 2,438,928 1,405,610 58,023,097 25,466 27,214,176 85,237,273 12,200,119 22,481,181 - 32,756,270 - 26,861,848 29,999,822 62,756,092 85,237,273 29,522 (132,628) 25,226,179 (4,312,159) 1,681,434 (784,456) 21,707,892 (16,000) (16,000) 21,691,892 (6,725,738) (6,725,738) 25,684,087 25,684,087 3,543,705 (810,162) 2,733,543 28,417,630 21,691,892 43,800,162 3,621,918 25,226,179 - 4,120,362 621,154 79,730,989 9,466 27,198,176 106,929,165 5,474,381 15,755,443 25,684,087 58,440,357 3,543,705 26,051,686 32,733,365 91,173,722 106,929,165 Annual Report 2019O’KEY Group S.A.& QUALITY FOR EACH FAMILY Financial StatementsNotesto Consolidated Financial Statements80 Management and Directors Responsibility Statement 82 Independent Auditors’ Report89 Consolidated Financial Statements95 Notes to Consolidated Financial Statements 100 Overview Strategic Report Operational Review Financial Review Risk Management Corporate Responsibility Corporate Governance Financial Statements 101 The amounts presented in the table above were restated as compared to the amounts disclosed in the Group’s condensed consolidated interim The Group has two operating segments that also represent reportable segments: “O’Key” and “DA!”. Each segment has similar format of their stores financial statements for the six-month period ended 30 June 2019. As part of the preparation of the annual financial statements, management which is described below: identified circumstances pointing to the presence of impairment indicators of right-of-use assets as at 1 January 2019. As a result of the detailed analysis and testing of relevant assets for impairment, the adjustments were made to carrying values of respective assets against the Group’s O’Key – chain of modern style hypermarkets under the “O’KEY” brand; retained earnings on 1 January 2019. ’000 RUB Construction in progress Right-of-use assets Deferred tax assets Retained earnings Change in accounting policy as originally presented Impairment adjustments Change in accounting policy – as restated The assortment of goods in the stores of each segment is different, and the segments are managed separately. For each of the segments, the CODM of the Group reviews internal management reports at least on a monthly basis. DA! – chain of discounter stores in Moscow and Central region. 81,720 26,473,332 1,389,134 (5,556,537) (214,348) (1,247,153) 292,300 (1,169,201) (132,628) 25,226,179 1,681,434 (6,725,738) All business components within each reportable segment demonstrate similar characteristics: the products and customers; The following amended standards also became effective from 1 January 2019, but did not have any material impact on the Group: IFRIC 23 “Uncertainty over Income Tax Treatments”; Prepayment Features with Negative Compensation – Amendments to IFRS 9; Amendments to IAS 28 “Long-term Interests in Associates and Joint Ventures”; 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 CODM assesses the performance of the operating segments based on revenue and earnings before interest, tax, depreciation and amortisation adjusted for certain one-off items outlined below (“EBITDA”). The “EBITDA” term is not defined in IFRS. Other information provided to the CODM 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 the accounting policies applied for the consolidated financial statements Annual Improvements to IFRSs 2015-2017 cycle – amendments to IFRS 3, IFRS 11, IAS 12 and IAS 23; (Note 35). Amendments to IAS 19 “Plan Amendment, Curtailment or Settlement”. Basis of segmentation used in these consolidated financial statements is consistent with that used in the prior year. 6 SEGMENT INFORMATION The segment information for the years ended 31 December 2019 and 31 December 2018 is as follows: Operating segments are components that engage in business activities that may earn revenues or incur expenses, whose operating results are regularly reviewed by the chief operating decision maker (CODM) and for which discrete financial information is available. The CODM is the person or group of persons who allocate resources and assess the performance for the entity. ’000 RUB External revenue O’Key Da! Total 2019 2018 2019 2018 2019 2018 The CODM has been determined as the CEO of the Group and the Board of Directors of the Company. The Group is engaged in management of retail stores located in the Russian Federation. Although the Group is not exposed to concentration of sales to individual customers, all of the Group’s sales are made 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 CODM to analyse performance and allocate resources within the Group. - Sales of trading stock 139,237,309 139,793,834 17,856.390 13,558,958 157,093,699 153,352,792 - Sales of self-produced catering products 6,060,468 6,027,584 - - 6,060,468 6,027,584 Revenue from contracts with customers 145,297,777 145,821,418 17,856,390 13,558,958 163,154,167 159,380,376 Rental income Total revenue Inter-segment revenue EBITDA 1,876,935 1,866,148 55,100 56,887 1,932,035 1,923,035 147,174,712 147,687,566 17,911,490 13,615,845 165,086,202 161,303,411 - - 457,651 - 457,651 - 14,276,746 10,415,634 (215,315) (1,771,626) 14,061,431 8,644,008 Annual Report 2019O’KEY Group S.A.& QUALITY FOR EACH FAMILY Financial StatementsNotesto Consolidated Financial Statements80 Management and Directors Responsibility Statement 82 Independent Auditors’ Report89 Consolidated Financial Statements95 Notes to Consolidated Financial Statements102 Overview Strategic Report Operational Review Financial Review Risk Management Corporate Responsibility Corporate Governance Financial Statements A reconciliation of EBITDA to profit/(loss) for the year is as follows: 8 GENERAL, SELLING AND ADMINISTRATIVE EXPENSES ’000 RUB EBITDA Revaluation of investment property Gain from disposal of non-current assets Impairment of non-current assets Loss from write-off of receivables Impairment of receivables Depreciation and amortisation Finance income Finance costs Foreign exchange gain/(loss) Net loss generated by sold supermarkets until cessation of their operations Other expenses Profit/(loss) before income tax Income tax (expense)/benefit Profit/(loss) for the year Note 9, 14 9 9 9 9 8 11 11 12 13 2019 2018 14,061,431 8,644,008 ’000 RUB Personnel costs (75,454) 46,885 (821,009) (191,353) (19,382) (50,142) 127,209 (368,585) (22,883) (28,048) Depreciation and amortisation Communication and utilities Advertising and marketing Repairs and maintenance costs Insurance and bank commissions (8,100,015) (4,367,254) Security expenses 89,803 (5,054,947) 937,678 - - 873,637 (126,679) 746,958 76,286 (3,192,959) (1,141,353) (159,298) (213,025) (696,044) 96,289 (599,755) Legal and professional expenses Operating taxes Variable lease expenses and expenses relating to short-term and low value leases / Operating lease expense Materials and supplies Other costs Total general, selling and administrative expenses 103 Note 10 15, 16, 17 2019 2018 14,671,629 14,067,602 8,100,015 3,656,196 2,268,126 1,316,665 918,128 713,069 655,733 638,068 4,367,254 3,503,234 2,011,700 1,230,022 816,606 736,473 629,781 802,929 347,317 5,425,712 321,077 23,802 294,030 29,281 33,629,825 33,914,624 Fees billed to the Group by PricewaterhouseCoopers, Société coopérative, the Company’s independent auditors, and affiliated companies thereof Adoption of IFRS 16 “Leases” from 1 January 2019 impacted the Group’s EBITDA for the year ended 31 December 2019, as major part of operating lease expense is now replaced with finance costs and depreciation that are not included in EBITDA. Since the Group adopted the new standard under the modified retrospective approach, comparative EBITDA information has not been restated. As a consequence, the EBITDA for the year ended 31 December 2019 is not entirely comparable to the EBITDA for the prior year. If the Group had adopted IFRS 16 from 1 January 2018 on the same principles as it has adopted as of 1 January 2019, EBITDA for the year ended 31 December 2018 would have been RUB 14,133,168 thous. which would comprise of the positive result of “O`KEY” segment in the amount of RUB 14,926,078 thous. and the negative result of “DA!” segment in the amount of RUB 792,910 thous. respectively. 7 PRINCIPAL SUBSIDIARIES are as follows: ’000 RUB Fees for statutory audit of annual and consolidated accounts Fees charged for tax advisory services Fees charged for other assurance services Fees charged for other non-audit services Total auditors’ remuneration 9 OTHER OPERATING INCOME AND EXPENSES, NET ’000 RUB Details of the Company’s significant subsidiaries at 31 December 2019 and 31 December 2018, all wholly owned and registered in the Russian Gain from modification of leases Federation, are as follows: Subsidiary LLC O’KEY LLC Fresh Market JSC Dorinda Nature of operations Retail Retail and real estate Real estate LLC O’KEY Management (formerly, LLC O’KEY group) Managing company LLC O’KEY Logistics Import operations Net gain from disposal of non-current assets Impairment of non-current assets Impairment of receivables Loss from write-off of receivables Loss from revaluation of investment property Sundry income and expense, net Total other operating income and expenses, net 2019 14,406 5,505 4,561 - 24,472 2019 376,864 46,885 (821,009) (19,382) (191,353) (75,454) 114,843 (568,606) 2018 14,517 9,090 4,027 3,700 31,334 2018 - 127,209 (368,585) (28,048) (22,883) (50,142) 437,494 95,045 Note 15 14 Annual Report 2019O’KEY Group S.A.& QUALITY FOR EACH FAMILY Financial StatementsNotesto Consolidated Financial Statements80 Management and Directors Responsibility Statement 82 Independent Auditors’ Report89 Consolidated Financial Statements95 Notes to Consolidated Financial Statements104 Overview Strategic Report Operational Review Financial Review Risk Management Corporate Responsibility Corporate Governance Financial Statements Net gain from disposal of non-current assets for the year ended 31 December 2018 includes gain on sale of the remaining 4 supermarkets business 13 INCOME TAX in the amount of RUB 336,015 thous. and loss on disposal of other non-current assets in the amount of RUB 208,806 thous. In June 2019 the Group signed agreements with a third party for sale of the Group’s two subsidiaries holding rights for lease of land plots and other related non-current assets in Moscow. Total proceeds according to the agreement comprised RUB 1,552,785 thous. with the gain recognised in the net gain from disposal on non-current assets. As of 31 December 2019, the deal was closed and the amounts due from the buyer under the agreements were received in cash in full. Income tax recognised in profit or loss ’000 RUB Current tax expense Deferred tax benefit Total income tax (expense)/benefit 105 2019 (295,433) 168,754 (126,679) 2018 (659,108) 755,397 96,289 10 PERSONNEL COSTS ’000 RUB Wages and salaries Social security contributions Bonuses to personnel Other employee benefits Total personnel costs 11 FINANCE INCOME AND FINANCE COSTS ’000 RUB Recognised in profit or loss Interest income on bank deposits Other finance income Total finance income Interest expense on loans and borrowings Interest expense on lease liabilities Finance costs on interest rate swap contracts Total finance costs Net finance costs recognised in profit or loss 2019 2018 9,189,989 8,959,215 3,020,233 1,465,547 995,860 2,872,502 1,259,695 976,190 14,671,629 14,067,602 2019 2018 70,193 19,610 89,803 69,313 6,973 76,286 (2,832,305) (2,222,642) (3,166,730) - - (26,229) (5,054,947) (3,192,959) (4,965,144) (3,116,673) Reconciliation between the tax (expense)/benefit and profit or loss multiplied by applicable tax rate The income tax rate applicable to the majority of the Group’s 2019 and 2018 income is 20%, the income tax rate established by the Russian tax legislation. A reconciliation between the expected and the actual taxation charge/ benefit is provided below. ’000 RUB Profit/(loss) before income tax Theoretical income tax at applicable tax rate of 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 Adjustments to current income tax for previous periods Other items Income tax (expense)/benefit for the year Deferred tax assets and liabilities (a) Deferred taxes in respect of subsidiaries 2019 873,637 (174,727) (14,697) (81,931) (40,223) 184,899 - (126,679) 2018 (696,044) 139,209 82,337 (85,927) (12,421) (19,428) (7,481) 96,289 The Group has not recorded a deferred tax liability in respect of temporary differences of RUB 26,827,800 thous. (31 December 2018: RUB 25,453,488 thous.) associated with investments in subsidiaries as the Group is able to control the timing of the reversal of those temporary During 2019 the Group has capitalised borrowing costs in the amount of RUB 222,356 thous. (2018: RUB 208,013 thous.) arising on financing differences and does not intend to reverse them in the foreseeable future. If the temporary difference reversed in form of distributions remitted directly attributable to the construction of the Group’s new stores. The capitalisation rate was 8.83% (2018: 9.97%). to the Company, then an enacted tax rate of 5-15% would apply. 12 FOREIGN EXCHANGE GAIN / (LOSS) (b) Recognised deferred tax asset on tax loss carried forward The Group’s risk management policy is to receive loans and borrowings in the same currency in which revenues are generated (RUB). Deferred tax asset recognised in respect of tax loss carried forward relates to the losses accumulated by the Group’s subsidiary LLC Fresh Market As at 31 December 2019, the share of the Group’s USD-denominated loans and borrowings did not exceed 3% of total loans and borrowings that develops a discounter chain and does not yet generate profit. (31 December 2018: 5%). Major amount of foreign exchange differences is caused by intragroup USD-denominated loans. The Group’s exposure to currency risk is disclosed in Note 29. Starting from 1 January 2017 the amendments to the Russian tax legislation became effective in respect of tax loss carry forwards. The amendments affect tax losses incurred and accumulated since 2007 that have not been utilised. The 10-year expiry period for tax loss carry- forwards that was in effect prior to 2017 no longer applies, and the accumulated tax losses can now be carried forward for utilisation in future periods without any time limitation, with exception of limitation on utilisation of tax loss carry forwards that applies during the period from 2017 to 2021. The amount of losses that can be utilised each year during this period is limited to 50% of annual taxable profit. Annual Report 2019O’KEY Group S.A.& QUALITY FOR EACH FAMILY Financial StatementsNotesto Consolidated Financial Statements80 Management and Directors Responsibility Statement 82 Independent Auditors’ Report89 Consolidated Financial Statements95 Notes to Consolidated Financial Statements106 Overview Strategic Report Operational Review Financial Review Risk Management Corporate Responsibility Corporate Governance Financial Statements 107 The Group determined that future taxable profits will be available at LLC Fresh Market in the foreseeable future against which its accumulated losses can be utilised. In making this assessment the Group considered that according to the discounter chain’s long-term budget the deferred tax asset of RUB 2,840,607 thous. on accumulated losses generated by LLC Fresh Market as at 31 December 2019 will be utilised in full by 2028. ’000 RUB In 2019 the Group corrected its long-term plan for opening of new stores by adjusting the pace of new openings and increasing the total number of openings. This revision was made based on the more selective approach to choosing suitable locations for new stores with reference to the Group’s accumulated experience. Tax effect of deductible/ (taxable) temporary differences and tax loss carry forwards Recognition of the deferred tax asset is contingent on the ability of the Group management to adhere to the key assumptions made in the long-term budget. These key assumptions in the discounter chain’s long-term budget covering 2020-2028 include annual expansion by approximately 20-50 new discounter stores per year; annual growth in revenue generally in line with the most recent trends of the discounter chain; and gradual decrease of share of semi-fixed costs due to economies of scale. (c) Movement in temporary differences during the year Differences between IFRS and statutory taxation regulations in Russia and other countries give rise to temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and their tax bases. The tax effect of the movements in these temporary differences is detailed below. ’000 RUB Tax effect of deductible/ (taxable) temporary differences and tax loss carry forwards Investment property Property, plant and equipment Construction in progress Right-of-use assets Intangible assets Other non-current assets Inventories Trade and other receivables and payables Long-term investments Lease liabilities Tax loss carry-forwards Net deferred tax assets Recognised deferred tax assets Recognised deferred tax liabilities 1 January 2019 Recognised in profit or loss Recognised in other comprehensive income 31 December 2019 15,091 (439,154) (46,909) 905,642 5,138 156,023 (71,031) (17,205) (828) (821,089) 483,076 168,754 80,003 (917,436) (234,732) (4,182,804) (115,105) 84,760 397,994 118,059 6,613 5,845,558 2,357,531 3,440,441 4,120,362 (679,921) - - - - - - 38,880 - - 38,880 95,094 (1,356,590) (281,641) (3,277,162) (109,967) 240,783 326,963 139,734 5,785 5,024,469 2,840,607 3,648,075 4,175,871 (527,796) 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 Net deferred tax assets Recognised deferred tax assets Recognised deferred tax liabilities 1 January 2018 Recognised in profit or loss Recycled from other comprehensive income 31 December 2018 69,975 (624,512) (261,521) (94,649) (102,825) 500,080 (280,970) 6,613 1,816,384 1,028,575 1,917,572 (888,997) 10,028 (287,020) 263 (20,456) 27,494 (102,086) 586,027 - 541,147 755,397 - - - - - - (24,965) - - (24,965) 80,003 (911,532) (261,258) (115,105) (75,331) 397,994 280,092 6,613 2,357,531 1,759,007 2,438,928 (679,921) In the context of the Group’s current structure, tax losses and current tax assets of different Group companies may not be offset against current tax liabilities and taxable profits of other Group companies and, accordingly, taxes may accrue even where there is a consolidated tax loss. Therefore, deferred tax assets and liabilities are offset only when they relate to the same taxable entity. 14 INVESTMENT PROPERTY (a) Reconciliation of carrying amount ’000 RUB Investment properties at fair value as at 1 January 2018 Expenditure on subsequent improvements Fair value gains less losses Investment properties at fair value as at 31 December 2018 Investment properties at fair value as at 1 January 2019 Transfer from property, plant and equipment and construction in progress Expenditure on subsequent improvements Fair value gains less losses Investment properties at fair value as at 31 December 2019 Note 9 9 1,075,010 22,132 (50,142) 1,047,000 1,047,000 274,302 4,121 (75,454) 1,249,969 The trade premises of the Group included in investment property are subject to operating leases. As at 31 December 2019 the Group’s investment property comprises three buildings and two land plots (31 December 2018: three buildings). Annual Report 2019O’KEY Group S.A.& QUALITY FOR EACH FAMILY Financial StatementsNotesto Consolidated Financial Statements80 Management and Directors Responsibility Statement 82 Independent Auditors’ Report89 Consolidated Financial Statements95 Notes to Consolidated Financial Statements108 (b) Measurement of fair value The investment properties are valued annually on 31 December at fair value, by an independent, professionally qualified valuator who has recent experience in valuing similar properties in the Russian Federation. The carrying values of investment properties at 31 December 2019 and 31 December 2018 agree to the valuations reported by the external valuators with the use of a combination of the market approach with reference to comparable prices for orderly transactions with similar properties and the income approach with reference to estimates of future cash flows, supported by the terms of any existing lease and other contracts and by external evidence such as current market rents for similar properties in the same location and condition, and using discount rates that reflect current market assessments of the uncertainty in the amount and timing of the cash flows. The principal assumptions underlying the estimation of the fair value with reference to the income approach are those relating to: the annual net rent rate of RUB 917 –14,793 per sq. m. (31 December 2018: RUB 2,511 – 16,281 per sq. m.); expected occupancy of 67% – 92.9% during the first year (31 December 2018: 15% – 95%) and 92.9 – 100% in the subsequent years (31 December 2018: 92.9 – 95%); and appropriate discount rate of 10.6% – 14.0% (31 December 2018: 11.4% – 14.5%). These valuations are regularly compared to actual market yield data and actual transactions by the Group, and those reported by the market. The fair value measurement of investment property has been categorised as a Level 3 fair value based on the inputs to the valuation technique used. 15 PROPERTY, PLANT AND EQUIPMENT AND CONSTRUCTION IN PROGRESS Land Buildings Leasehold improvements Machinery and equipment, auxiliary facilities and other fixed assets Total property, plant and equipment Construction in progress Total property, plant and equipment and construction in progress 4,934,476 38,006,385 7,309,159 14,928,340 65,178,360 3,313,175 68,491,535 15,487 39,568 (14,472) 18,131 940,242 (81,720) - 1,148,013 1,181,631 2,686,878 3,868,509 719,511 372,890 2,072,211 (2,072,211) - (117,748) (791,250) (1,005,190) (173,296) (1,178,486) 4,975,059 38,883,038 7,910,922 15,657,993 67,427,012 3,754,546 71,181,558 Land Buildings Leasehold improvements Machinery and equipment, auxiliary facilities and other fixed assets Total property, plant and equipment Construction in progress Total property, plant and equipment and construction in progress ’000 RUB Cost Balance at 1 January 2018 Additions Transfers Disposals Balance at 31 December 2018 ’000 RUB Balance at 1 January 2019 Additions Transfers Transfer to investment property Overview Strategic Report Operational Review Financial Review Risk Management Corporate Responsibility Corporate Governance Financial Statements ’000 RUB Depreciation and impairment losses Balance at 1 January 2018 Depreciation for the year Impairment losses Disposals Balance at 31 December 2018 ’000 RUB Balance at 1 January 2019 Depreciation for the year Impairment losses Disposals Balance at 31 December 2019 Net book value 109 Land Buildings Leasehold improvements Machinery and equipment, auxiliary facilities and other fixed assets Total property, plant and equipment Construction in progress Total property, plant and equipment and construction in progress - - - - - (7,021,978) (2,565,688) (10,626,559) (20,214,225) (1,282,196) (609,582) (1,970,791) (3,862,569) (351,195) 63,423 (17,390) 57,321 - (368,585) 668,263 789,007 (8,591,946) (3,135,339) (11,929,087) (23,656,372) - - - - - (20,214,225) (3,862,569) (368,585) 789,007 (23,656,372) Land Buildings Leasehold improvements Machinery and equipment, auxiliary facilities and other fixed assets Total property, plant and equipment Construction in progress - - - - - (8,592,043) (3,135,766) (11,929,087) (23,656,896) (1,307,099) (673,037) (1,796,354) (3,776,490) (821,009) 2,874 - 2,240 - (821,009) 718,084 723,198 (10,717,277) (3,806,563) (13,007,357) (27,531,197) - - - - - Total property, plant and equipment and construction in progress (23,656,896) (3,776,490) (821,009) 723,198 (27,531,197) At 1 January 2018 4,934,476 30,984,407 At 31 December 2018 4,975,059 30,291,092 At 1 January 2019 (Note 5) 4,975,059 30,315,169 4,743,471 4,775,583 4,781,028 4,301,781 44,964,135 3,313,175 48,277,310 3,728,906 43,770,640 3,754,546 47,525,186 3,728,906 43,800,162 3,621,918 47,422,080 At 31 December 2019 4,901,189 29,325,399 4,733,092 3,002,495 41,962,175 2,976,838 44,939,013 Depreciation expense of RUB 3,776,490 thous. has been charged to selling, general and administrative expenses (2018: RUB 3,862,569 thous.). Impairment assessment At the end of each reporting period, the Group assesses whether there is any indication that its non-current assets including property, plant and equipment, right-of-use assets / lease rights and other non-current assets may be impaired. Where the non-current assets relate to the Group’s stores, these stores are treated as separate CGUs, and impairment assessment is performed in respect of the aggregate carrying value of the non- 4,975,059 38,907,212 7,916,794 15,657,993 67,457,058 3,621,918 71,078,976 current assets attributable to these CGUs with reference to their actual and anticipated performance and other relevant factors. 92,816 8,807 - - 1,135,840 660,259 907,009 221,441 1,008,632 2,247,373 3,256,005 2,017,540 (2,017,540) - (166,348) - - - (166,348) (107,954) (274,302) For the CGUs subject to impairment testing, recoverable amount was determined based on value-in-use calculations using cash flow projections based on financial budgets and forecasts approved by management covering a one-year period. Cash flows beyond the one-year period are extrapolated using an expected growth rate for each particular CGU which depends on its maturity and other relevant factors. The discount rates are pre-tax and reflect management’s estimate of the risks specific to the Group. Disposals (338) (9,183) (37,398) (776,591) (823,510) (766,959) (1,590,469) Balance at 31 December 2019 4,901,189 40,042,676 8,539,655 16,009,852 69,493,372 2,976,838 72,470,210 Annual Report 2019O’KEY Group S.A.& QUALITY FOR EACH FAMILY Financial StatementsNotesto Consolidated Financial Statements80 Management and Directors Responsibility Statement 82 Independent Auditors’ Report89 Consolidated Financial Statements95 Notes to Consolidated Financial Statements111 Software Other intangible assets 1,739,629 729,922 (723,886) 1,745,665 1,745,665 556,076 (290,016) 2,011,725 (901,112) (367,045) 711,643 (556,514) (556,514) (543,522) 288,551 (811,485) 838,517 1,189,151 1,200,240 190,726 13,948 (23,427) 181,247 181,247 18,253 (6,491) 193,009 (68,135) (31,237) 23,188 (76,184) (76,184) (31,153) 6,273 (101,064) 122,591 105,063 91,945 Total 1,930,355 743,870 (747,313) 1,926,912 1,926,912 574,329 (296,507) 2,204,734 (969,247) (398,282) 734,831 (632,698) (632,698) (574,675) 294,824 (912,549) 961,108 1,294,214 1,292,185 Amortisation of RUB 574,675 thous. has been charged to selling, general and administrative expenses (2018: RUB 398,282 thous.). No indicators of impairment were identified for the Group’s intangible assets as at 31 December 2019 and 2018. 110 Overview Strategic Report Operational Review Financial Review Risk Management Corporate Responsibility Corporate Governance Financial Statements As the result of the impairment test performed as at 31 December 2019, the Group recognised an impairment loss in the amount 17 INTANGIBLE ASSETS ’000 RUB Cost Balance at 1 January 2018 Additions Disposals Balance at 31 December 2018 Balance at 1 January 2019 Additions Disposals Balance at 31 December 2019 Amortisation and impairment losses Balance at 1 January 2018 Amortisation for the year Disposals Balance at 31 December 2018 Balance at 1 January 2019 Amortisation for the year Disposals Balance at 31 December 2019 Carrying amounts At 1 January 2018 At 31 December 2018 At 31 December 2019 of RUB 821,009 thous. (2018: RUB 368,585 thous.), primarily in respect of mature low-performing CGUs, including RUB 784,009 thous. (2018: RUB 314,000 thous.) in O’Key segment and RUB 37,000 thous. (2018: RUB 54,585 thous.) in DA! segment. The impairment losses in 2019 and 2018 were entirely attributable to property, plant and equipment. The total recoverable amount of the impaired CGUs determined based on value in use as of 31 December 2019 amounted to RUB 874,010 thous. (31 December 2018: RUB 1,722,306 thous.). The post-tax discount rate used in the assessment as at 31 December 2019 was 11.8% (31 December 2018: 14.1%). If the revised estimated pre-tax discount rate applied to the discounted cash flows of the CGUs had been 1% higher than management’s estimates, the Group would need to recognise additional impairment of property, plant and equipment of RUB 70,909 thous. (2018: RUB 120,375 thous.). Pledged assets At 31 December 2019, 4 stores with carrying value of RUB 2,386,084 thous. have been pledged to third parties as collateral for bank borrowings (31 December 2018: 4 stores were pledged with carrying value of RUB 2,338,054 thous.). 16 RIGHT-OF-USE ASSETS The Group leases various trade premises, land and other assets. Rental contracts are typically made for fixed periods of 3 to 49 years but may have extension and early termination options. Lease terms are negotiated on an individual basis and contain a wide range of different terms and conditions. Until 31 December 2018 all of the Group’s leases were classified as operating leases. From 1 January 2019, leases are recognised as a right-of-use asset and a corresponding liability from the date when the leased asset becomes available for use by the Group. The table below presents the right-of-use assets by class of underlying assets: ’000 RUB Balance at 1 January 2019 Additions Modifications and reassessments Depreciation for the year Disposals Trade premises Land Other Total 17,448,977 5,281,087 2,496,115 25,226,179 596,249 30,932 (3,006,754) - 101,915 62,627 (271,509) (686,173) 12,899 48,826 711,063 142,385 (602,794) (3,881,057) - (686,173) Balance at 31 December 2019 15,069,404 4,487,947 1,955,046 21,512,397 The group “Other” is mostly represented by office premises and warehouses. Depreciation expense of RUB 3,748,850 thous. has been charged to general, selling and administrative expenses. Net book value of the right-of-use assets attributable to the subsidiaries sold to a third party in the reporting period amounted to RUB 531,760 thous. (Note 9). Right-of-use assets are assessed for indication of potential impairment as at each reporting date. For those assets where impairment indicators exist, the Group estimates recoverable amount being the higher of their value in use and fair value less costs of disposal, on either individual asset or CGU level. No indicators of impairment were identified for the Group’s right-of-use assets that are attributable to individual leased assets and do not relate to stores in operation as at 31 December 2019. For those right-of-use assets that relate to the Group’s stores and are therefore assessed for impairment on the store level together with the other non-current assets attributable to the stores, impairment assessment has been performed as disclosed in Note 15. No impairment attributable to the right-of-use assets was identified as at 31 December 2019. Annual Report 2019O’KEY Group S.A.& QUALITY FOR EACH FAMILY Financial StatementsNotesto Consolidated Financial Statements80 Management and Directors Responsibility Statement 82 Independent Auditors’ Report89 Consolidated Financial Statements95 Notes to Consolidated Financial Statements112 18 PREPAYMENTS ’000 RUB Prepayments for services Overview Strategic Report Operational Review Financial Review Risk Management Corporate Responsibility Corporate Governance Financial Statements 113 Note 31 December 2019 31 December 2018 ’000 RUB 31 December 2019 31 December 2018 21 TRADE AND OTHER RECEIVABLES Prepayments for variable lease payments – third parties Prepayments for goods VAT on prepayments/prepayments for lease to entities under control of shareholder group 32 Other prepayments Total prepayments 306,152 126,066 265,207 89,902 107,706 895,033 312,440 249,496 369,365 353,232 104,505 1,389,038 Short-term prepayments for lease to entities under control of the shareholder group in the amount of RUB 353,232 thous. as at 31 December 2018 were renegotiated with the lessors into long-term interest-bearing loans which principal amounts to RUB 346,025 thous. as at 31 December 2019 (Note 19, 32). 19 OTHER NON-CURRENT ASSETS ’000 RUB Note 31 December 2019 31 December 2018 Long-term loans to entities under control of shareholder group 18,31 Prepayments for non-current assets Long-term refundable deposits to lessors Prepayments for lease to entities under control of shareholder group 31 346,025 252,806 232,801 - - 280,711 391,645 733,254 Total other non-current assets 831,632 1,405,610 The long-term prepayments for lease to entities under control of the shareholder group in the amount of RUB 733,254 thous. as at 31 December 2018 represented prepayments for rent of hypermarkets for the period until 2034. Upon adoption of IFRS 16 on 1 January 2019, the prepayments net of VAT were reclassified to right-of-use assets (Note 5). Financial assets within trade and other receivables Trade receivables Bonuses receivable from suppliers Receivables from sale of supermarkets Other financial receivables 486,626 2,027,894 120,686 371,395 416,038 1,818,948 120,686 348,931 Total financial assets within trade and other receivables 3,006,601 2,704,603 Other receivables VAT receivable Prepaid income tax Prepaid taxes other than income tax Total trade and other receivables 1,088,358 180,966 47,025 528,326 44,475 125,542 4,322,950 3,402,946 The Group’s exposure to credit and currency risks and credit loss allowance as at 31 December 2019 and 31 December 2018 related to trade and other receivables are disclosed in Note 29. 22 CASH AND CASH EQUIVALENTS ’000 RUB Cash on hand Bank current accounts Term deposits Cash in transit Total cash and cash equivalents 31 December 2019 31 December 2018 229,328 1,703,444 2,512,259 1,062,048 5,507,079 236,175 4,172,848 2,570,420 1,732,810 8,712,253 20 INVENTORIES ’000 RUB Goods for resale Raw materials and consumables Write-down to net realisable value Total inventories 31 December 2019 31 December 2018 14,967,315 13,415,173 762,248 (509,794) 777,487 (508,187) 15,219,769 13,684,473 Term deposits had original maturities of less than three months. The Group’s exposure to currency risk related to cash and cash equivalents is disclosed in Note 29. 23 EQUITY As at 31 December 2019 and 31 December 2018, the Group’s authorised, issued and fully paid share capital of RUB 119,440 thous., the RUB equivalent of EUR 2,691 thous., is represented by 269,074,000 ordinary shares with a par value of 0.01 EUR each. Each share is entitled to one vote, except as may be otherwise provided by the Articles of incorporation or by applicable law. The Group tested the inventories for obsolescence and wrote down the inventories to their net realisable value, which resulted in a decrease of the carrying value of inventories by RUB 509,794 thous. as at 31 December 2019 (31 December 2018: RUB 508,187 thous.). The write down In accordance with Luxembourg Company Law, the Company is required to transfer a minimum of 5% of its net profits for each financial year to net realisable value was determined applying the percentages of discount on sales and write-offs of slow-moving goods to the appropriate to a legal reserve. This requirement ceases to be necessary once the balance of the legal reserve reaches 10% of the issued share capital. ageing of the goods. The percentages of discount were based on the management’s best estimate following the experience of the discount sales. The legal reserve is not available for distribution to the shareholders. As at 31 December 2019 and 2018, the legal reserve was formed in full. Annual Report 2019O’KEY Group S.A.& QUALITY FOR EACH FAMILY Financial StatementsNotesto Consolidated Financial Statements80 Management and Directors Responsibility Statement 82 Independent Auditors’ Report89 Consolidated Financial Statements95 Notes to Consolidated Financial Statements 114 Overview Strategic Report Operational Review Financial Review Risk Management Corporate Responsibility Corporate Governance Financial Statements 115 Additional paid-in capital represents the excess of contributions received over par value of shares issued. There were no movements in additional As at 31 December 2019 the Group had RUB 15,947,280 thous. (31 December 2018: RUB 12,206,500 thous.) of undrawn committed borrowing paid-in capital during the years ended 31 December 2019 and 31 December 2018. facilities available in RUB on fixed and floating rate basis until March 2020-December 2023 in respect of which all conditions have been met. Proceeds from these facilities may be used to finance operating and investing activities, if necessary. In October 2019 the Company declared and paid interim dividends to shareholders in the amount of RUB 987,512 thous. (USD 15,162 thous.) (2018: RUB 1,879,021 thous. (USD 33,276 thous.). Dividends declared were recognised as distribution to owners in the consolidated statement of changes During 2013 – 2017 the Group placed unsecured bonds on Moscow exchange bearing coupon rates of 8.9% – 11.7% p.a. Further, in April 2019, in equity. Dividends per share for the year ended 31 December 2019 amounted to RUB 3.7 (USD 0.05635) (2018: RUB 7.0 (USD 0.1)). the Group placed another issue of unsecured bonds in the amount of RUB 5,000,000 thous. on Moscow exchange bearing coupon rate of 9.35% 24 EARNINGS / (LOSS) PER SHARE p.a. and maturing in April 2029 with an option for the bondholders to claim early repayment in April 2022. In December 2019, the Group placed another issue of unsecured bonds in the amount of RUB 5,000,000 thous. on Moscow exchange bearing Basic earnings/(loss) per share are calculated by dividing the profit or loss attributable to owners of the Company by the weighted average number coupon rate of 7.85% p.a. and maturing in November 2024. of ordinary shares in issue during the year. The Company has no dilutive potential ordinary shares; therefore, the diluted earnings/(loss) per share 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 waive their rights to demand early redemption. At 31 December 2019 and 31 December 2018 and during the years then ended the Group complied with all its loan covenants. ’000 RUB Currency Maturity Carrying value Maturity Carrying value Modifications and reassessments equals the basic earnings/(loss) per share. Earnings/(loss) per share is calculated as follows: ‘000 RUB Profit/(loss) for the year Weighted average number of ordinary shares in issue (thousands) Basic and diluted earnings/(loss) per ordinary share (in RUB per share) 25 LOANS AND BORROWINGS 2019 746,958 269,074 2.8 2018 (599,755) 269,074 (2.2) 31 December 2019 31 December 2018 Non-current loans and borrowings Secured bank loans Unsecured bank facilities Unsecured bonds Total non-current loans and borrowings Current loans and borrowings Unsecured bank facilities Unsecured bonds Unsecured loans from related parties (Note 32) Unsecured loans from third parties Total current loans and borrowings Unsecured bonds interest Interest accrued on loans Interest accrued on loans and borrowings Total current loans and borrowings, including interest accrued Total loans and borrowings RUB RUB RUB RUB RUB USD RUB RUB RUB 2025 2021-2023 2021-2024 2020 2020 On demand 2020 4,500,000 10,538,462 15,051,296 30,089,758 464,258 213,006 949,106 2,850 1,629,220 210,112 1,069 211,181 1,840,401 31,930,159 2025 2020-2023 2020-2021 4,500,000 22,200,000 5,264,302 31,964,302 2019 1,393,500 - On demand 1,065,087 2019 2,850 2,461,437 83,844 13,520 97,364 2,558,801 34,523,103 26 LEASE LIABILITIES ’000 RUB Balance at 1 January Additions Repayment Interest expense Foreign exchange gains Balance at 31 December Non-current lease liabilities Current lease liabilities 2019 29,227,792 689,806 (234,479) (6,370,094) 2,286,559 (477,241) 25,122,343 21,172,587 3,949,756 Interest expense in the amount of RUB 2,222,642 thous. has been charged to finance costs. Total cash outflow for leases in 2019 amounted to RUB 6,677,365 thous. Some property leases contain variable payment terms that are linked to sales generated by a store. For individual stores, up to 100 per cent of lease payments are on the basis of variable payment terms and there is a wide range of sales percentages applied. Variable payment terms are used for a variety of reasons, including minimising the fixed costs base for newly established stores. Variable lease payments that depend on sales are recognised in profit or loss in the period in which the condition that triggers those payments occurs. Expense relating to variable lease payments not included in lease liabilities included in selling, general and administrative expenses for 2019 was RUB 333,751 thous. Information about property, plant and equipment pledged as collateral for the Group’s loans and borrowings is disclosed in Note 15. Expenses relating to short-term leases and to leases of low-value assets that are not included in lease liabilities, both included in selling, general and administrative expenses, amounted to RUB 1,083 thous. and RUB 12,483 thous., respectively. Annual Report 2019O’KEY Group S.A.& QUALITY FOR EACH FAMILY Financial StatementsNotesto Consolidated Financial Statements80 Management and Directors Responsibility Statement 82 Independent Auditors’ Report89 Consolidated Financial Statements95 Notes to Consolidated Financial Statements 116 27 TRADE AND OTHER PAYABLES ’000 RUB Financial liabilities at amortised cost Trade payables Other financial payables Total financial liabilities at amortised cost Financial liabilities at fair value Interest rate swap liability Total financial liabilities at fair value Payables to staff Taxes payable other than income tax Advances received from lessees Contract liability related to gift cards Total trade and other payables 31 December 2019 31 December 2018 24,147,521 24,238,896 302,402 271,175 24,449,923 24,510,071 194,398 194,398 1,250,477 791,610 396,220 100,111 26,229 26,229 1,171,213 690,035 373,395 90,905 27,182,739 26,861,848 All of the Group’s contract liabilities relate to contracts with customers for periods of less than one year. RUB 90,905 thous. of revenue was recognised in the current reporting period related to the contract liabilities as at 31 December 2018, all of which related to gift cards. The Group’s exposure to currency and liquidity risks related to trade and other payables is disclosed in Note 29. Overview Strategic Report Operational Review Financial Review Risk Management Corporate Responsibility Corporate Governance Financial Statements 117 28 RECONCILIATION OF MOVEMENTS OF LIABILITIES TO CASH FLOWS ARISING FROM FINANCING ACTIVITIES The table below sets out an analysis of liabilities from financing activities and the movements in the Group’s liabilities from financing activities for each of the periods presented. The items of these liabilities are those that are reported as financing in the consolidated statement of cash flows: Note Loans and borrowings Lease liabilities Interest rate swap liability Dividends payable 34,523,103 29,227,792 26,229 ’000 RUB Balance at 1 January 2019 Cash flows from financing activities Proceeds from loans and borrowings Repayment of loans and borrowings Interest paid on loans and borrowings Repayment of principal amount of lease liabilities Interest paid on lease liabilities Dividends paid 23 13,252,720 (15,843,795) (2,885,956) - - - - - - (4,083,535) (2,286,559) - - Other financial payments (87,453) Total cash flows from financing activities Non-cash changes Additions to lease liabilities Modifications and reassessments of lease liabilities Accrued interest Dividends declared Changes in fair value of interest rate swap Effect of changes in foreign exchange rates Total non-cash changes 23 27 (5,564,484) (6,370,094) - - 689,806 (234,479) 3,054,661 2,286,559 - - - - (83,121) (477,241) 2,971,540 2,264,645 Balance at 31 December 2019 31,930,159 25,122,343 - - - - - (987,512) - Total 63,777,124 13,252,720 (15,843,795) (2,885,956) (4,083,535) (2,286,559) (987,512) (87,453) (987,512) (12,922,090) - - - 987,512 - - 689,806 (234,479) 5,341,220 987,512 168,169 (560,362) 987,512 6,391,866 - 57,246,900 - - - - - - - - - - - 168,169 - 168,169 194,398 Annual Report 2019O’KEY Group S.A.& QUALITY FOR EACH FAMILY Financial StatementsNotesto Consolidated Financial Statements80 Management and Directors Responsibility Statement 82 Independent Auditors’ Report89 Consolidated Financial Statements95 Notes to Consolidated Financial Statements 118 ’000 RUB Balance at 1 January 2018 Cash flows from financing activities Proceeds from loans and borrowings Repayment of loans and borrowings Interest paid Dividends paid Other financial payments  Total cash flows from financing activities Non-cash changes Accrued interest Dividends declared Changes in fair value of interest rate swap Effect of changes in foreign exchange rates Total non-cash changes Balance at 31 December 2018 29 FINANCIAL RISK MANAGEMENT (a) Overview Overview Strategic Report Operational Review Financial Review Risk Management Corporate Responsibility Corporate Governance Financial Statements (b) Credit risk 119 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 cash and cash equivalents, loans issued, trade receivables, bonuses receivable and other financial receivables. (i) Exposure to credit risk The carrying amounts of financial assets in the consolidated statement of financial position represent the Group’s maximum credit risk exposure. The maximum exposure to credit risk at the reporting date was: Total 36,465,957 15,006,000 (16,896,776) (3,337,810) (1,879,021) (140,850) (1,879,021) (7,248,457) - 1,879,021 - - 3,374,743 1,879,021 (98,598) 176,666 1,879,021 5,331,832 - 34,549,332 ’000 RUB Loans issued Trade and other receivables Cash and cash equivalents Total Carrying amount Note 31 December 2019 31 December 2018 19 21 22 388,688 3,006,601 5,277,751 8,673,040 25,467 2,704,603 8,476,078 11,206,148 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 creditworthiness. (ii) Trade and other receivables Note Loans and borrowings Interest rate swap liability Dividends payable - - - - (1,879,021) - 36,341,130 124,827 23 23 15,006,000 (16,896,776) (3,337,810) - (140,850) (5,369,436) 3,374,743 - - 176,666 3,551,409 34,523,103 - - - - - - - - (98,598) - (98,598) 26,229 The risk management function within the Group is carried out with respect to financial risks, operational risks and legal risks. Financial risk The Group has no considerable balance of trade receivables because the majority of its customers are retail consumers, who are not provided comprises market risk (including currency risk, interest rate risk and other price risks), credit risk and liquidity risk. The primary function of financial with any credit. The Group’s trade receivables primarily include receivables from tenants and receivables connected to provision of services. Other risk management is to establish risk limits and to ensure that any exposure to risk stays within these limits. The operational and legal risk receivables are primarily represented by bonuses receivable from suppliers. The Group manages credit risk in respect of those bonuses receivable management functions are intended to ensure the proper functioning of internal policies and procedures in order to minimise operational and legal by maintaining a stable suppliers base and monitoring collectability of amounts due on an ongoing basis. risks. Risk management framework To measure the ECL for trade and other receivables, those have been grouped based on shared credit risk characteristics and the days past due. The expected loss rates are based on the payment profiles of sales over a period of 36 months before 31 December 2019 and 31 December 2018 The Board of Directors has overall responsibility for the establishment and oversight of the Group’s risk management framework. and the corresponding historical credit losses experienced within this period. The historical loss rates are adjusted to reflect current and forward- looking information on macroeconomic factors affecting the ability of the customers to settle the receivables. 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 The ECL for bonuses receivable from suppliers is determined on portfolio level based on historical default percentages applied to the total amount conditions and the Group’s activities. The Group, through its training and management standards and procedures, aims to develop a disciplined of bonuses receivable from suppliers, adjusted to reflect relevant current and forward-looking information. 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. Annual Report 2019O’KEY Group S.A.& QUALITY FOR EACH FAMILY Financial StatementsNotesto Consolidated Financial Statements80 Management and Directors Responsibility Statement 82 Independent Auditors’ Report89 Consolidated Financial Statements95 Notes to Consolidated Financial Statements120 Overview Strategic Report Operational Review Financial Review Risk Management Corporate Responsibility Corporate Governance Financial Statements 121 The credit loss allowance as at 31 December 2019 determined with the use of provision matrix is summarised in the table below. (i) Exposure to liquidity risk ’000 RUB Trade receivables Bonuses receivable from suppliers Other financial receivables Total Gross amount ECL Carrying amount The table below shows liabilities at 31 December 2019 by their remaining contractual maturity. The amounts disclosed in the maturity table are 492,657 2,087,713 388,185 2,968,555 (6,031) (59,819) (16,790) (82,640) 486,626 2,027,894 371,395 2,885,915 the contractual undiscounted cash flows, including gross loan commitments. Such undiscounted cash flows may differ from the amount included in the consolidated statement of financial position because the consolidated statement of financial position amounts are based on discounted cash flows. Where the amount payable is not fixed, the amount disclosed is determined by reference to the conditions existing at the end of the reporting period. Foreign currency payments are translated using the spot exchange rate at the end of the reporting period. 31 December 2019 ’000 RUB Carrying amount Contractual cash flows Demand and less than 6 months From 6 to 12 months From 1 to 5 years More than 5 years The credit loss allowance as at 31 December 2018 determined with the use of provision matrix is summarised in the table below. ’000 RUB Trade receivables Bonuses receivable from suppliers Other financial receivables Total (iii) Cash and cash equivalents Gross amount ECL Carrying amount Financial liabilities at amortised cost 431,619 1,873,767 355,191 2,660,577 (15,581) (54,819) (6,260) (76,660) 416,038 1,818,948 348,931 2,583,917 Secured bank loans Unsecured bonds 4,500,000 5,819,674 163,800 165,600 4,668,813 821,461 15,474,414 19,082,129 1,064,508 674,893 17,342,728 Unsecured bank facilities 11,003,754 12,833,879 411,143 872,318 11,550,418 Unsecured loans from related parties 949,106 1,107,620 1,107,620 Unsecured loans from third parties 2,885 2,885 35 2,850 - - Lease liabilities 25,122,343 37,163,992 3,167,963 3,418,869 16,477,389 14,099,771 - - - - The Group assesses credit risk for cash and cash equivalents based on external ratings that are available publicly. Cash and cash equivalents are mainly held with banks which are rated from Ba2 to Ba3 based on Moody’s rating. Financial liabilities at fair value through OCI Interest rate swap 194,398 194,398 47,644 49,337 97,417 Trade and other payables 24,449,923 24,449,923 24,449,923 - - - - (iv) Loans issued Total 81,696,823 100,654,500 30,412,636 5,183,867 50,136,765 14,921,232 Loans issued are represented by loans given to related parties. To determine whether or not there has been a significant increase in credit risk, loans issued are assessed on a portfolio basis or an individual basis by monitoring relevant triggers. The criteria used to identify significant increase As at 31 December 2019, the Group’s current liabilities exceeded its current assets by RUB 7,242,026 thous. (31 December 2018: in credit risk are monitored and reviewed periodically. (c) Liquidity risk RUB 2,785,646 thous.). An excess of current liabilities over current assets is usual for the retail industry. The Group uses excess of trade and other payables over inventory to finance its operating and investing activities. The Group has reviewed its cash flow forecasts in the context of current and projected market conditions, as well as available undrawn credit facilities disclosed in Note 25, and is confident that it will be able to meet its 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 Net Debt / EBITDA ratio should not exceed 5.5, where Net Debt is the total of long-term and short-term loans and borrowings and lease liabilities less cash and cash equivalents as presented in the consolidated financial statements; monitoring of compliance with debt covenants; planning: timely preparation of operating, investing and financing cash flow forecasts on rolling basis. obligations as they fall due. 31 December 2018 ’000 RUB Financial liabilities at amortised cost Secured bank loans Unsecured bonds Unsecured bank facilities Carrying amount Contractual cash flows Demand and less than 6 months From 6 to 12 months From 1 to 5 years 4,502,160 6,338,722 5,348,146 6,485,121 197,640 331,926 198,720 254,482 5,942,362 5,898,713 23,604,828 28,377,991 2,390,294 975,150 25,012,547 Unsecured loans from related parties 1,065,087 1,107,340 1,107,340 Unsecured loans from third parties 2,882 2,882 32 24,510,071 24,510,071 24,510,071 26,229 26,229 26,229 59,059,403 66,848,356 28,563,532 1,431,202 36,853,622 - 2,850 - - - - - - Trade and other payables Financial liabilities at FVTPL Interest rate swap Total Annual Report 2019O’KEY Group S.A.& QUALITY FOR EACH FAMILY Financial StatementsNotesto Consolidated Financial Statements80 Management and Directors Responsibility Statement 82 Independent Auditors’ Report89 Consolidated Financial Statements95 Notes to Consolidated Financial Statements 122 Overview Strategic Report Operational Review Financial Review Risk Management Corporate Responsibility Corporate Governance Financial Statements 123 (d) Market risk Profile 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 At the reporting date the interest rate profile of the Group’s interest-bearing financial instruments at their carrying amounts was: 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. Management sets limits on the value of risk that may be accepted. However, the use of this approach does not prevent losses outside of these limits in the event of more significant market movements. (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 ’000 RUB Fixed rate instruments Cash and cash equivalents Loans issued Loans and borrowings Lease liabilities Variable rate instruments Loans and borrowings 31 December 2019 31 December 2018 4,215,703 388,688 (26,929,124) (25,122,343) 6,743,268 25,467 (29,519,373) - (5,001,035) (5,003,730) at an acceptable level. From time to time the Group converts assets and liabilities from one currency to another. Cash flow sensitivity analysis for variable rate instruments Exposure to currency risk 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 The Group’s exposure to currency risk in relation to the USD, the major foreign currency for the Group’s Russian subsidiaries, was as follows based on the same basis for 2018. on notional amounts: ’000 RUB Trade and other receivables Cash and cash equivalents Unsecured loans from related parties Lease liabilities Trade and other payables Total Sensitivity analysis 31 December 2019 31 December 2018 122,503 22,575 11,064 26,108 (949,106) (1,065,087) (2,777,094) (454,412) (4,035,534) - (387,766) (1,415,681) ’000 RUB 31 December 2019 Variable rate instruments Interest rate swap Cash flow sensitivity (net) 31 December 2018 Variable rate instruments Cash flow sensitivity (net) Profit or loss Equity 500 bp increase 500 bp decrease 500 bp increase 500 bp decrease (250,052) 375,000 124,948 (250,186) (250,186) 250,052 (375,000) (124,948) 250,186 250,186 - 690,010 690,010 - - - (704,532) (704,532) - - A 11% weakening/strengthening of the RUB against the USD at 31 December 2019 would have decreased/increased equity and profit or loss by RUB 443,909 thous. (31 December 2018: 20% weakening/strengthening of the RUB against the USD would have decreased/increased equity The Group may enter into sales and purchase agreements with the same counterparty in the normal course of business. The related amounts and profit or loss by RUB 283,136 thous.). This analysis was performed only for USD denominated monetary balances of the Group’s entities whose receivable and payable do not always meet the criteria for offsetting in the consolidated statement of financial position. This is because, while functional currency is the RUB and is based on foreign currency exchange rate variances that the Group considered to be reasonably possible generally there is an intention to settle on net basis, the Group may not have any currently legally enforceable right to offset recognised amounts, at the end of the reporting period. The analysis assumes that all other variables, in particular interest rates, remain constant. The analysis was because the right to offset may be enforceable only on the occurrence of future events. In particular, in accordance with the Russian civil law (e) Offsetting of financial assets and financial liabilities performed on the same basis for 2018. (ii) Interest rate risk The Group has material exposure to the effects of fluctuations in the prevailing levels of market interest rates on its financial position and cash flows. an obligation can be settled by offsetting against a similar claim if it is due, has no maturity or is payable on demand, unless otherwise stated in the agreement. Annual Report 2019O’KEY Group S.A.& QUALITY FOR EACH FAMILY Financial StatementsNotesto Consolidated Financial Statements80 Management and Directors Responsibility Statement 82 Independent Auditors’ Report89 Consolidated Financial Statements95 Notes to Consolidated Financial Statements124 The following table sets out the carrying amounts of recognised financial instruments that are subject to the above agreements. ’000 RUB 31 December 2019 Gross amounts before offsetting Amounts offset Net amounts presented in the consolidated statement of financial position Amounts related to recognised financial instruments that do not meet some or all of the offsetting criteria Net amount ’000 RUB 31 December 2018 Gross amounts before offsetting Amounts offset Net amounts presented in the consolidated 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 6,245,621 (3,239,020) 27,688,943 (3,239,020) 3,006,601 24,449,923 (1,688,369) (1,688,369) 1,318,232 22,761,554 Trade and other receivables Trade and other payables 5,755,557 (3,050,954) 27,561,025 (3,050,954) 2,704,603 24,510,071 (1,597,344) (1,597,344) 1,107,259 22,912,727 125 Overview Strategic Report Operational Review Financial Review Risk Management Corporate Responsibility Corporate Governance Financial Statements 31 CONTINGENCIES (a) Legal proceedings From time to time and in the normal course of business, claims against the Group are received. On the basis of its own estimates and both internal and external professional advice, the management is of the opinion that no material losses will be incurred in respect of claims outstanding. (b) Tax contingencies Russian tax legislation which was enacted or substantively enacted at the end of the reporting period, is subject to varying interpretations when being applied to the transactions and activities of the Group. Consequently, tax positions taken by management and the formal documentation supporting the tax positions may be challenged by tax authorities. Russian tax administration is gradually strengthening, including the fact that there is a higher risk of review of tax transactions without a clear business purpose or with tax incompliant counterparties. Fiscal periods remain open to review by the authorities in respect of taxes for three calendar years preceding the year when decisions about the review was made. Under certain circumstances reviews may cover longer periods. Russian transfer pricing (TP) legislation is generally aligned with the international TP principles developed by the Organisation for Economic Cooperation and Development (OECD), although it has specific features. The TP legislation provides for the possibility of additional tax assessment for controlled transactions (transactions between related parties and certain transactions between unrelated parties) if such transactions are not on an arm’s-length basis. The management has implemented internal controls to comply with current TP legislation. Tax liabilities arising from controlled transactions are determined based on their actual transaction prices. It is possible, with the evolution of the interpretation of the TP rules, that such prices could be challenged. The impact of any such challenge cannot be reliably estimated. The net amounts presented in the consolidated statement of financial position disclosed above form part of trade and other receivables The Group includes companies incorporated outside of Russia. The tax liabilities of the Group are determined on the assumption that these and trade and other payables, respectively. Other amounts included in these line items do not meet the criteria for offsetting and are not subject companies are not subject to Russian profits tax, because they do not have a permanent establishment in Russia. This interpretation of relevant to the agreements described above. legislation may be challenged. Amounts offset comprise mainly trade payables for goods and bonuses receivable from suppliers. As Russian tax legislation does not provide definitive guidance in certain areas, the Group applies its judgement in interpretations of such uncertain (f) Capital management areas. While management currently estimates that the tax positions and interpretations that it has taken can probably be sustained, there is a possible risk that an outflow of resources will be required should such tax positions and interpretations be challenged by the tax authorities. 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 The impact of any of the challenges mentioned above cannot be reliably estimated currently; however, it may be significant to the financial position of the business. Neither the Company nor its subsidiaries are subject to externally imposed capital requirements, except for statutory requirement and/or the overall operations of the Group. in relation to minimum level of share capital; the Group follows this requirement. 30 CAPITAL COMMITMENTS In addition to the above matters, management estimates that as at 31 December 2019, the Group has other possible obligations of approximately RUB 1,900,000 thous. (31 December 2018: RUB 1,900,000 thous.) from exposure to other than remote tax risks arising from certain transactions. These exposures are estimates that result from uncertainties in interpretation of applicable legislation and related documentation requirements. The Group has capital commitments to acquire property, plant and equipment, mostly relating to construction of stores, and intangible assets Management will vigorously defend the Group’s positions and interpretations that were applied in determining taxes recognised in these amounting to RUB 653,698 thous. as at 31 December 2019 (31 December 2018: RUB 659,616 thous.). The Group has already allocated consolidated financial statements if these are challenged by the authorities. the necessary resources in respect of these commitments. The Group believes that future net income and funding will be sufficient to cover these and any similar commitments. Annual Report 2019O’KEY Group S.A.& QUALITY FOR EACH FAMILY Financial StatementsNotesto Consolidated Financial Statements80 Management and Directors Responsibility Statement 82 Independent Auditors’ Report89 Consolidated Financial Statements95 Notes to Consolidated Financial Statements 126 Overview Strategic Report Operational Review Financial Review Risk Management Corporate Responsibility Corporate Governance Financial Statements 127 32 RELATED PARTY TRANSACTIONS (ii) Expenses Parties are generally considered to be related if the parties are under common control or if one party has the ability to control the other party or can exercise significant influence or joint control over the other party in making financial and operational decisions. In considering each ’000 RUB possible related party relationship, attention is directed to the substance of the relationship, not merely the legal form. Related parties may enter into transactions which unrelated parties might not, and transactions between related parties may not be effected on the same terms, conditions and amounts as transactions between unrelated parties. Related parties of the Group fall into the following categories: 1. The Company’s major indirect shareholders (see Note 1). 2. Other related parties under control of the major indirect shareholders. 3. Members of the Board of Directors of the Company and other key management personnel. (a) Transactions with key management personnel Lease of premises, including: Rental fee Reimbursement of utilities Reimbursement of other expenses Other services received Interest expenses on lease liability Other finance costs Total Expense Prepayments 2019 90,515 20,269 35,114 35,132 10,424 122,124 79,058 302,121 2018 31 December 2019 31 December 2018 833,368 713,458 62,464 57,446 40,273 - 77,287 950,928 - - - - 1,094,483 7,484 - - 1,101,967 Upon transition to IFRS 16 disclosed in Note 5, long-term prepayments for leases to other related parties were reclassified to right-of-use assets. Related VAT in the amount of RUB 89,902 thous. as at 31 December 2019 is included in prepayments. Key management received the following remuneration during the year, which is included in personnel costs (see Note 10): Short-term prepayments for lease to entities under control of the shareholder group in the amount of RUB 353,232 thous. as at 31 December 2018 were renegotiated with the lessors into long-term interest-bearing loans which principal amounts to RUB 346,025 thous. as at 31 December 2019 ’000 RUB Short-term employee benefits: Salaries and short-term bonuses Social security contributions Other short-term payments Long-term employee benefits: Long-term service bonus Total 2019 2018 343,763 13,855 17,234 38,000 412,852 396,575 13,767 3,600 38,000 451,942 (Note 18, 19). ’000 RUB Lease liabilities due to other related parties, including: Current lease liabilities Non-current lease liabilities 31 December 2019 1,272,328 382,636 889,692 Terms of the leases with other related parties are such that the Group pays rentals which include the reimbursement of all operating expenses related to the hypermarkets leased and nearby leased areas and a certain percentage of the Group’s retail revenue from the operation of these In addition, members of the Company’s Board of Directors received remuneration in the amount of RUB 59,442 thous. for the year ended hypermarkets. 31 December 2019 (2018: RUB 59,341 thous.) which is included in legal and professional expenses. (b) Transactions with other related parties (i) Revenue ’000 RUB Sale of services Total Income 2019 2,335 2,335 Receivables 2018 31 December 2019 31 December 2018 2,910 2,910 122 122 579 579 All outstanding balances with other related parties are to be settled in cash within six months of the reporting date. None of the balances are secured or impaired. (iii) Loans and borrowings ’000 RUB Loans and borrowings 31 December 2019 31 December 2018 949,106 1,065,087 Annual Report 2019O’KEY Group S.A.& QUALITY FOR EACH FAMILY Financial StatementsNotesto Consolidated Financial Statements80 Management and Directors Responsibility Statement 82 Independent Auditors’ Report89 Consolidated Financial Statements95 Notes to Consolidated Financial Statements 128 Overview Strategic Report Operational Review Financial Review Risk Management Corporate Responsibility Corporate Governance Financial Statements 129 The loans from other related parties are denominated in USD, bear interest at 8% per annum and are payable on demand but not later than 2021. (a) Recurring fair value measurements There were no movements in the loans received from related parties, except for the foreign exchange gain in the amount of RUB 115,981 thous. in 2019 (2018: foreign exchange loss in the amount of RUB 181,991 thous.). Recurring fair value measurements are those that the accounting standards require or permit in the statement of financial position at the end of each reporting period. (iv) Loans given ’000 RUB Loans given (Note 18, 19) Interest receivable Total 31 December 2019 31 December 2018 value of the swaps was determined based on observable market data (Level 2 fair value), including forward interest rates. The Group has no Financial instruments carried at fair value. Interest swaps are carried in the consolidated statement of financial position at their fair value. Fair 346,025 33,196 379,221 - - - financial assets and liabilities measured at fair value based on unobservable inputs (Level 3 fair value). Investment property. Fair value of the investment property is updated by the Group annually on 31 December applying the income approach and market approach. Refer to Note 14. The loans given to other related parties bear interest at 9% per annum, are not secured, due for repayment by not later than 2021 and represent (b) Assets and liabilities not measured at fair value but for which fair value is disclosed reclassified amounts for lease to entities under control of the shareholder group previously presented as short-term prepayments for lease to entities under control of shareholder group. Fair value was determined by the Group for initial recognition of financial assets and liabilities which are subsequently measured at amortised cost. 33 EVENTS SUBSEQUENT TO THE REPORTING DATE Fair value of the Group’s financial assets and liabilities measured at amortised cost approximates their carrying amounts. Fair value of the Group’s bonds listed on Moscow exchange was determined based on active market quotations (Level 1 fair value). Fair value of the Group’s other financial Late in 2019 news first emerged from China about the COVID-19 (Coronavirus). The situation at year end, was that a limited number of cases of an assets and liabilities at amortised cost belongs to level 2 measurements in the fair value hierarchy. unknown virus had been reported to the World Health Organisation. In the first few months of 2020 the virus had spread globally, and its negative impact has gained momentum. While this is still an evolving situation at the time of issuing these consolidated financial statements and to date 35 SIGNIFICANT ACCOUNTING POLICIES there has been no discernible impact on the Group’s sales or supply chain, the future effects cannot be predicted. Underpinned by the Coronavirus turmoil and oil price plunge in the first quarter 2020, Russian rouble has weakened 30% relative to the US dollar compared to the 2019 year-end. Apart from the accounting policy changes resulting from the adoption of IFRS 16 effective from 1 January 2019, the principal accounting policies Management considers this outbreak to be a non-adjusting post balance sheet set out below have been consistently applied to all the periods presented in these consolidated financial statements and have been applied event and will continue to monitor its potential impact as well as will take all steps possible to mitigate any operational and financial risk exposures consistently by Group entities. faced by the Group. 34 FAIR VALUE DISCLOSURES (a) Basis of consolidation (i) Subsidiaries Fair value measurements are analysed and categorised by level in the fair value hierarchy as follows: (i) Level 1 are measurements at quoted prices (unadjusted) in active markets for identical assets or liabilities; significantly affect their returns, (ii) has exposure, or rights, to variable returns from its involvement with the investees, and (iii) has the ability to use its power over the investees to affect the amount of the investor’s returns. The financial statements of subsidiaries are included in the consolidated (ii) Level 2 measurements are valuations techniques with all material inputs observable for the asset or liability, either directly (that is, as prices) financial statements from the date that control commences until the date that control ceases. The accounting policies of subsidiaries have been or indirectly (that is, derived from prices); and changed when necessary to align them with the policies adopted by the Group. Subsidiaries are those investees, that the Group controls because the Group (i) has power to direct the relevant activities of the investees that (iii) Level 3 measurements are valuations not based on observable market data (that is, unobservable inputs). (ii) Transactions eliminated on consolidation Management applies judgement in categorising financial instruments using the fair value hierarchy. If a fair value measurement uses observable Intra-group balances and transactions, and any unrealised gains arising from intra-group transactions, are eliminated in preparing the consolidated inputs that require significant adjustment, that measurement is a Level 3 measurement. financial statements. Unrealised losses are also eliminated unless the cost cannot be recovered. The significance of a valuation input is assessed against the fair value measurement in its entirety. Loans between Group entities and related foreign exchange gains or losses are eliminated upon consolidation. However, where the loan is between Group entities that have different functional currencies, the foreign exchange gain or loss cannot be eliminated in full and is recognised in the consolidated profit or loss, unless the loan is not expected to be settled in the foreseeable future and thus forms part of the net investment in foreign operation. In such a case, the foreign exchange gain or loss is recognised in other comprehensive income. Annual Report 2019O’KEY Group S.A.& QUALITY FOR EACH FAMILY Financial StatementsNotesto Consolidated Financial Statements80 Management and Directors Responsibility Statement 82 Independent Auditors’ Report89 Consolidated Financial Statements95 Notes to Consolidated Financial Statements130 Overview Strategic Report Operational Review Financial Review Risk Management Corporate Responsibility Corporate Governance Financial Statements 131 (b) Foreign currency (i) Foreign currency transactions and balances Where the business model is to hold assets to collect contractual cash flows or to hold contractual cash flows and sell, the Group assesses whether the cash flows represent solely payments of principal and interest (“SPPI”). Where the contractual terms introduce exposure to risk or volatility that is inconsistent with a basic lending arrangement, the financial asset is Monetary assets and liabilities are translated into each entity’s functional currency at the official exchange rate of the Central Bank of the Russian classified and measured at FVTPL. The SPPI assessment is performed on initial recognition of an asset and it is not subsequently reassessed. Federation (“CBRF”) at the respective end of the reporting period. Foreign exchange gains and losses resulting from the settlement of the transactions and from the translation of monetary assets and liabilities into each entity’s functional currency at year-end official exchange Financial instruments are reclassified only when the business model for managing the portfolio as a whole changes. rates of the CBRF are recognised in profit or loss as a separate line item. The reclassification has a prospective effect and takes place from the beginning of the first reporting period that follows after the change Translation at year-end rates does not apply to non-monetary items that are measured at historical cost. Non-monetary items measured at fair in the business model. value in a foreign currency, including equity investments, are translated using the exchange rates at the date when the fair value was determined. Effects of exchange rate changes on non-monetary items measured at fair value in a foreign currency are recorded as part of the fair value gain (iii) Financial assets impairment – credit loss allowance for ECL or loss. (ii) Foreign operations The Group assesses, on a forward-looking basis, the ECL for debt instruments measured at AC. The Group measures ECL and recognises net impairment losses on financial assets at each reporting date. The measurement of ECL reflects: (i) an unbiased and probability weighted amount that is determined by evaluating a range of possible outcomes, (ii) time value of money and (iii) all reasonable and supportable information that is The assets and liabilities of foreign operations are translated to RUB at the exchange rates at the reporting date. The income and expenses available without undue cost and effort at the end of each reporting period about past events, current conditions and forecasts of future conditions. 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 is The Group applies the IFRS 9 simplified approach to measuring expected credit losses which uses a lifetime expected loss allowance for trade 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 and lease receivables. For other financial assets the Group applies a three stage model for impairment, based on changes in credit quality since Debt instruments measured at AC are presented in the consolidated statement of financial position net of the allowance for ECL. 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 initial recognition. proportion of the cumulative amount is reattributed to non-controlling interests. (iv) Financial assets – write-off (c) Financial instruments (i) Non-derivative financial assets and financial liabilities – initial recognition Non-derivative financial assets are written-off, in whole or in part, when the Group exhausted all practical recovery efforts and has concluded that there is no reasonable expectation of recovery. The write-off represents a derecognition event. The Group may write-off financial assets that are still subject to enforcement activity when the Group seeks to recover amounts that are contractually due, however, there is no reasonable expectation Non-derivative financial instruments represented by cash and cash equivalents, loans given and trade and other receivables and lease receivables of recovery. are initially recorded at fair value adjusted for transaction costs. Fair value at initial recognition is best evidenced by the transaction price. A gain or loss on initial recognition is only recorded if there is a difference between fair value and transaction price which can be evidenced by other (v) Financial assets – derecognition observable current market transactions in the same instrument or by a valuation technique whose inputs include only data from observable markets. After the initial recognition, an ECL allowance is recognised for financial assets measured at amortised cost (AC), resulting in an The Group derecognises financial assets when (a) the assets are redeemed or the rights to cash flows from the assets otherwise expire or (b) immediate accounting loss. the Group has transferred the rights to the cash flows from the financial assets or entered into a qualifying pass-through arrangement whilst (i) also transferring substantially all the risks and rewards of ownership of the assets or (ii) neither transferring nor retaining substantially all the risks (ii) Non-derivative financial assets – classification and subsequent measurement and rewards of ownership but not retaining control. All of the Group’s non-derivative financial assets belong to the AC measurement category. The classification and subsequent measurement Control is retained if the counterparty does not have the practical ability to sell the asset in its entirety to an unrelated third party without needing of debt financial assets depends on: (i) the Group’s business model for managing the related assets portfolio and (ii) the cash flow characteristics to impose additional restrictions on the sale. of the asset. The business model reflects how the Group manages the assets in order to generate cash flows – whether the Group’s objective is: (i) solely to collect the contractual cash flows from the assets (“hold to collect contractual cash flows”,) or (ii) to collect both the contractual cash flows Financial liabilities are classified as subsequently measured at AC, except for (i) financial liabilities at FVTPL: this classification is applied and the cash flows arising from the sale of assets (“hold to collect contractual cash flows and sell”) or, if neither of (i) and (ii) is applicable, to derivatives and other financial liabilities designated as such at initial recognition and (ii) financial guarantee contracts and loan commitments, if the financial assets are classified as part of “other” business model and measured at FVTPL. any (iii) financial liabilities at FVOCI: this classification is applied to financial instruments carried at fair value (swaps). (vi) Financial liabilities – measurement categories Business model is determined for a group of assets (on a portfolio level) based on all relevant evidence about the activities that the Group undertakes to achieve the objective set out for the portfolio available at the date of the assessment. Factors considered by the Group in determining the business model include the purpose and composition of a portfolio, past experience on how the cash flows for the respective assets were collected, how risks are assessed and managed, how the assets’ performance is assessed and how managers are compensated. Annual Report 2019O’KEY Group S.A.& QUALITY FOR EACH FAMILY Financial StatementsNotesto Consolidated Financial Statements80 Management and Directors Responsibility Statement 82 Independent Auditors’ Report89 Consolidated Financial Statements95 Notes to Consolidated Financial Statements132 Overview Strategic Report Operational Review Financial Review Risk Management Corporate Responsibility Corporate Governance Financial Statements 133 (vii) Financial liabilities – derecognition (xiii) Capitalisation of borrowing costs Financial liabilities are derecognised when they are extinguished (i.e. when the obligation specified in the contract is discharged, cancelled General and specific borrowing costs directly attributable to the acquisition, construction or production of assets that are not carried at fair value or expires). and that necessarily take a substantial time to get ready for intended use or sale (qualifying assets) are capitalised as part of the costs of those An exchange between the Group and its original lenders of debt instruments with substantially different terms, as well as substantial assets. modifications of the terms and conditions of existing financial liabilities, are accounted for as an extinguishment of the original financial liability The commencement date for capitalisation is when (a) the Group incurs expenditures for the qualifying asset; (b) it incurs borrowing costs; and (c) and the recognition of a new financial liability. The terms are substantially different if the discounted present value of the cash flows under it undertakes activities that are necessary to prepare the asset for its intended use or sale. the new terms, including any fees paid net of any fees received and discounted using the original effective interest rate, is at least 10% different from the discounted present value of the remaining cash flows of the original financial liability. In addition, other qualitative factors, such Capitalisation of borrowing costs continues up to the date when the assets are substantially ready for their use or sale. as the currency that the instrument is denominated in, changes in the type of interest rate, new conversion features attached to the instrument and change in loan covenants are also considered. If an exchange of debt instruments or modification of terms is accounted for as an The Group capitalises borrowing costs that could have been avoided if it had not made capital expenditure on qualifying assets. Borrowing costs extinguishment, any costs or fees incurred are recognised as part of the gain or loss on the extinguishment. If the exchange or modification is not capitalised are calculated at the Group’s average funding cost (the weighted average interest cost is applied to the expenditures on the qualifying accounted for as an extinguishment, any costs or fees incurred adjust the carrying amount of the liability and are amortised over the remaining assets), except to the extent that funds are borrowed specifically for the purpose of obtaining a qualifying asset. Where this occurs, actual term of the modified liability. borrowing costs incurred on the specific borrowings less any investment income on the temporary investment of these borrowings are capitalised. Modifications of liabilities that do not result in extinguishment are accounted for as a change in estimate using a cumulative catch up method, (d) Transactions with owners with any gain or loss recognised in profit or loss, unless the economic substance of the difference in carrying values is attributed to a capital transaction with owners. (viii) Offsetting financial instruments (i) Ordinary shares/share capital Ordinary shares are classified as equity. Incremental costs directly attributable to issue of ordinary shares are recognised as a deduction from equity, net of any tax effects. Any excess of the fair value of consideration received over the par value of shares issued is recorded Financial assets and liabilities are offset and the net amount reported in the consolidated statement of financial position only when there is as additional paid-in capital in equity. a legally enforceable right to offset the recognised amounts, and there is an intention to either settle on a net basis, or to realise the asset and settle the liability simultaneously. Such a right of set off (a) must not be contingent on a future event and (b) must be legally enforceable in all (ii) Distributions to owners/contributions from owners of the following circumstances: (i) in the normal course of business, (ii) in the event of default and (iii) in the event of insolvency or bankruptcy. (ix) Cash and cash equivalents Dividends are recorded as a liability and deducted from equity in the period in which they are declared and approved. Any dividends declared after the reporting period and before the consolidated financial statements are authorised for issue are disclosed in the subsequent events note. Cash and cash equivalents include cash in hand, deposits held at call with banks, and other short-term highly liquid investments with original (e) Property, plant and equipment and construction in progress maturities of three months or less. Cash and cash equivalents are carried at AC because: (i) they are held for collection of contractual cash flows and those cash flows represent SPPI, and (ii) they are not designated at FVTPL. (i) Recognition and measurement (x) Trade and other receivables Trade and other receivables are recognised initially at fair value and are subsequently carried at AC using the effective interest method. (xi) Trade and other payables 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 Trade payables are accrued when the counterparty performs its obligations under the contract and are recognised initially at fair value is integral to the functionality of the related equipment is capitalised as part of that equipment. and subsequently carried at AC using the effective interest method. (xii) Loans and borrowings Loans and borrowings are recognised initially at fair value, net of transaction costs incurred and are subsequently carried at AC using the effective interest method. 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 operating income and expense” in profit or loss. Annual Report 2019O’KEY Group S.A.& QUALITY FOR EACH FAMILY Financial StatementsNotesto Consolidated Financial Statements80 Management and Directors Responsibility Statement 82 Independent Auditors’ Report89 Consolidated Financial Statements95 Notes to Consolidated Financial Statements134 (ii) Subsequent costs Overview Strategic Report Operational Review Financial Review Risk Management Corporate Responsibility Corporate Governance Financial Statements 135 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 deemed cost for subsequent accounting. 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 Earned rental income is recorded in profit or loss for the year within revenue. 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. (g) Intangible assets Land and construction in progress are not depreciated. Other items of property, plant and equipment are depreciated from the date that they (i) Intangible assets 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 Intangible assets that are acquired by the Group have finite useful lives and are measured at cost less accumulated amortisation and accumulated has a useful life that is different from the remainder of that asset, that component is depreciated separately. impairment losses. 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. 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. (ii) Subsequent expenditure 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. Subsequent expenditure is capitalised only when it increases the future economic benefits embodied in the specific asset to which it relates. The estimated useful lives of significant items of property, plant and equipment for the current and comparative periods are as follows: Buildings 30 years; Machinery and equipment, auxiliary facilities 2-20 years; 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. Leasehold improvements over the term of underlying lease; The estimated useful lives for the current and comparative periods are as follows: Other fixed assets 2-10 years. software 1-7 years; Depreciation methods, useful lives and residual values are reviewed at each financial year end and adjusted if appropriate. other intangible assets 1-5 years. (f) Investment property Amortisation methods, useful lives and residual values are reviewed at each financial year end and adjusted if appropriate. Investment property is property held by the Group to earn rental income or for capital appreciation or both, including land held for a currently (h) Lease rights – accounting policies before 1 January 2019 undetermined future use, and which is not occupied by the Group. Properties that are mainly occupied by the Group and insignificant portion of which is leased out to third parties mainly for offering additional customer service are presented within property, plant and equipment. Where the Group incurs initial direct costs to negotiate and enter into new leases, such as key money payments to incumbent tenants, or where rights for favourable operating leases are acquired in business combinations, such costs are capitalised as lease rights and amortised using Investment property, including assets under construction for future use as investment property, is initially recognised at cost, including transaction straight-line method over the lease term being up to 49 years for lease of land and up to 8-19 years for lease of premises. If the Group subsequently costs, and subsequently remeasured at fair value with any change therein recognised in profit or loss within other operating income and expenses. acquires the asset previously leased, the carrying amount of the related lease rights is reclassified into property, plant and equipment and included If fair value of investment property under construction is not reliably determinable, the Group measures that investment property under in the cost of the asset acquired. construction at cost until either its fair value becomes reliably determinable or construction is completed (whichever is earlier). (i) Leases – accounting policies since 1 January 2019 Fair value of the Group’s investment property is the price that would be received from sale of the asset in an orderly transaction, without deduction of any transaction costs. The best evidence of fair value is given by current prices in an active market for similar property in the same location At inception of a contract, the Group assesses whether a contract is, or contains, a lease. A contract is, or contains, a lease if the contract conveys and condition. Market value of the Group’s investment property is determined based on reports of independent appraisers, who hold recognised the right to control the use of an identified asset for a period of time in exchange for consideration. To assess whether a contract conveys the right and relevant professional qualifications and who have recent experience in the valuation of property in the same location and category. to control the use of an identified asset, the Group assesses whether: Annual Report 2019O’KEY Group S.A.& QUALITY FOR EACH FAMILY Financial StatementsNotesto Consolidated Financial Statements80 Management and Directors Responsibility Statement 82 Independent Auditors’ Report89 Consolidated Financial Statements95 Notes to Consolidated Financial Statements136 Overview Strategic Report Operational Review Financial Review Risk Management Corporate Responsibility Corporate Governance Financial Statements 137 the contract involves the use of an identified asset – this may be specified explicitly or implicitly and should be physically distinct asset. If the supplier has a substantive substitution right, then the asset is not identified; Extension options (or period after termination options) are only included in the lease term if the lease is reasonably certain to be extended (or not terminated). Lease payments to be made under reasonably certain extension options are also included in the measurement of the liability. the Group has the right to obtain substantially all of the economic benefits from use of the asset throughout the period of use; and The lease payments are discounted using the interest rate implicit in the lease. If that rate cannot be readily determined, the Group’s incremental the Group has the right to direct the use of the asset. borrowing rate is used, being the rate that the Group would have to pay to borrow the funds necessary to obtain an asset of similar value to the right-of-use asset in a similar economic environment with similar terms, collateral and conditions. The Group has the right when it has the decision-making rights that are most relevant to changing how and for what purpose the asset is used. The right-of-use assets are measured at cost comprising the following: In rare cases where the decision about how and for what purposes the asset is used is predetermined, the Group has the right to direct the use of the asset if either: the amount of the initial measurement of the lease liability; the Group has the right to operate the asset; or any lease payments made at or before the commencement date less any lease incentives received; the Group designed the asset in a way that predetermines how and for what purpose it will be used. any initial direct costs. From 1 January 2019, leases are recognised as a right-of-use asset and a corresponding liability at the date at which the leased asset is available The lease liability is measured at amortised cost using the effective interest method. The carrying amount of liability is remeasured to reflect any for use by the Group. Each lease payment is allocated between the liability and finance cost. The finance cost is charged to profit or loss over reassessment, lease modification or revised in-substance fixed payments. It is remeasured when there is (i) a change in future lease payments the lease period so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period. The right-of-use asset arising from a change in an index or a rate;(ii) a change in the lease term depending on the reassessment of whether the Group will exercise is depreciated over the shorter of the asset’s useful life and the lease term on a straight-line basis. extension or termination options; and (iii) lease modifications, when the modification is not accounted for as a separate lease. When the lease The estimated useful lives of right-of-use asset are as follows: trade premises 3-17 years; land other 2-47 years; 1-5 years. At the commencement date, lease liabilities are measured at an amount equal to the present value of the following lease payments: liability is remeasured, a corresponding adjustment is made to the carrying amount of the right-of-use asset or is recorded in profit or loss if the carrying amount of the right-of-use asset has been reduced to zero. Payments associated with short-term leases and leases of low-value assets are recognised on a straight-line basis as an expense in profit or loss. Short-term leases are leases with a lease term of 12 months or less. Low-value assets comprise IT-equipment and refrigeration equipment. Some property leases contain variable payment terms that are linked to sales generated by a store. Such variable lease payments are recognised in profit or loss in the period in which the condition that triggers those payments occurs. The Group presents right-of-use assets and lease liabilities in the separate lines in the consolidated statement of financial position. The operating lease payments were presented in 2018 within cash used in operating activities in the consolidated statement of cash flows, whereas fixed payments (including in-substance fixed payments), less any lease incentives receivable; in 2019 all lease payments are presented by the Group as the lessee within cash flows used in financing activities. variable lease payments that are based on an index or a rate, initially measured using the index or rate as at the commencement date; Lease payments including repayment of principal lease liability and accrued interest are classified consistently with payments of other financial amounts expected to be payable by the Group under residual value guarantees; liabilities in the consolidated statement of cash flows. Lease payments which were not included in the measurement of the lease liabilities (including certain variable payments, short-term leases the exercise price of a purchase option if the Group is reasonably certain to exercise that option; and and leases of low-value assets) continue to be presented as operating cash flows. payments of penalties for terminating the lease, if the lease term reflects the Group exercising that option. (j) Inventories The following variable payments are not included in the calculation of lease liability: Inventories are measured at the lower of cost and net realisable value. The cost of inventories is based on the moving weighted average principle, and includes expenditure incurred in acquiring the inventories, production or conversion costs and other costs incurred in bringing them to their payments under land lease agreements, the calculation of which depends on the cadastral value of the land plot and other coefficients established by government decrees; 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. payments for utilities and other services, determined upon the fact of consumption; variable lease payments that depend on turnover. Annual Report 2019O’KEY Group S.A.& QUALITY FOR EACH FAMILY Financial StatementsNotesto Consolidated Financial Statements80 Management and Directors Responsibility Statement 82 Independent Auditors’ Report89 Consolidated Financial Statements95 Notes to Consolidated Financial Statements138 Overview Strategic Report Operational Review Financial Review Risk Management Corporate Responsibility Corporate Governance Financial Statements 139 (k) Impairment of non-financial assets (m) Provisions The carrying amounts of the Group’s non-financial assets, other than investment property and deferred tax assets, are reviewed at each reporting 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 date to determine whether there is any indication of impairment. If any such indication exists, then the asset’s recoverable amount is estimated. 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 recoverable amount of an asset or cash-generating unit is the greater of its value in use and its fair value less costs of disposal. In assessing The unwinding of the discount is recognised as a finance cost. 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 (n) Revenue 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”). Revenue is income arising in the course of the Group’s ordinary activities. Revenue is recognised in the amount of transaction price. Transaction price is the amount of consideration to which the Group expects to be entitled in exchange for transferring control over promised goods or services An impairment loss is recognised if the carrying amount of an asset or its cash-generating unit exceeds its recoverable amount. Impairment losses to a customer, excluding the amounts collected on behalf of third parties. 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. Revenue is recognised net of VAT, returns and discounts. Impairment losses recognised in prior periods are assessed at each reporting date for any indications that the loss has decreased or no longer (i) Revenue from contracts with customers 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 Revenue from contracts with customers is represented by retail sales of goods for resale and self-produced catering products. of depreciation or amortisation, if no impairment loss had been recognised. In testing a cash-generating unit for impairment, the Group identifies all the corporate assets that relate to the cash-generating unit under review. normally for the retail customers it is occurred in the store at the point of sale. No element of financing is deemed present, as payment Revenue from sale of goods and self-catering products is recognised when control of the goods and products has transferred to the customer, If a portion of the carrying amount of a corporate asset can be allocated on a reasonable and consistent basis to that unit, the Group compares of the transaction price is due immediately. the carrying amount of the unit, including the portion of the carrying amount of the corporate asset allocated to the unit, with its recoverable amount. If a corporate asset cannot be allocated on a reasonable and consistent basis to the cash-generating unit, the Group assesses In accordance with the Russian consumer protection legislation, the customers have the right of return of goods in a range of categories within the impairment of this corporate asset on an individual basis. 14 days after the purchase. Such estimated returns are assessed at each reporting date. Based on historical data about returns, it is probable that (l) Employee benefits (i) Short-term employee benefits a significant reversal in the cumulative revenue recognised will not occur. Gift cards issued by the Group are recorded as a contract liability within trade and other payables upon sale when prepaid by customers until they are redeemed or expire. Wages, salaries, contributions to the state pension and social insurance funds, paid annual leave and sick leave, bonuses, and non-monetary The Group did not operate any loyalty program in the reporting period where customers accumulate award points for purchases made which entitle benefits (such as health services) are measured on an undiscounted basis and accrued in the year in which the associated services are rendered them to discount on future purchases. by the employees of the Group. The Group has no legal or constructive obligation to make pension or similar benefit payments beyond the payments to the statutory defined with total value above a pre-determined amount. The discount coupons entitle the customers to a free purchase or a discount on selected goods From time to time, the Group holds promotional campaigns where the Group provides discount coupons to the customers that purchase goods contribution scheme. immediately after the campaign ends. Such coupons represent a material right to the customers and give rise to a separate performance obligation to deliver the customers additional goods. The total transaction price is allocated on the portfolio basis to the initial and the additional performance 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 obligations on a relative stand-alone selling price basis. Revenue attributable to the performance obligation not yet satisfied at the reporting date is this amount as a result of past service provided by the employee, and the obligation can be estimated reliably. recognised as a contract liability within trade and other payables until the right of the customers to obtain additional goods is realised or expires. (ii) Long-term employee benefits (ii) Rental income Long-term employee benefits represent long-term service bonuses. Long-term employee benefits are expensed evenly during the periods in which The Group leases out trade premises under operating lease. Rental income from investment property is recognised in profit or loss on a straight- they are earned by employees. 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. Annual Report 2019O’KEY Group S.A.& QUALITY FOR EACH FAMILY Financial StatementsNotesto Consolidated Financial Statements80 Management and Directors Responsibility Statement 82 Independent Auditors’ Report89 Consolidated Financial Statements95 Notes to Consolidated Financial Statements140 Overview Strategic Report Operational Review Financial Review Risk Management Corporate Responsibility Corporate Governance Financial Statements 141 (o) Cost of goods sold Deferred tax is measured at the tax rates that are expected to be applied to the temporary differences when they reverse, based on the laws that have been enacted or substantively enacted by the reporting date. Deferred tax assets and liabilities are offset if there is a legally enforceable right Cost of goods sold include the purchase price of the goods sold and other costs incurred in bringing the inventories to the location and condition 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 ready for sale. These costs include costs of purchasing, packaging and transporting of goods to the extent that it relates to bringing the inventories 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. 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, slotting fees and counter off against taxable profits and current tax liabilities of other Group companies, therefore deferred tax assets and liabilities are offset only within services to suppliers directly related to the purchases made. These bonuses decrease the cost of inventory and are recorded as reduction of cost the individual companies of the Group. 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 of sales as the related inventory is sold. Losses from inventory shortages are recognised in cost of goods sold. (p) Finance income and costs 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 Finance income comprises interest income on issued loans and bank deposits. Interest income is recognised as it accrues in profit or loss, using such a determination is made. the effective interest method. (r) Earnings per share Finance costs comprise interest expense on borrowings and lease liabilities and unwinding of the discount on provisions, if any. 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 Earnings per share are calculated by dividing the profit or loss attributable to ordinary shareholders of the Company by the weighted average interest method. number of participating shares outstanding during the year. Foreign currency gains and losses are reported on a net basis. (s) Segment reporting (q) Income tax Operating segments are reported in a manner consistent with the internal reporting provided to the Group’s chief operating decision maker. The chief operating decision-maker is responsible for allocating resources and assessing performance of the operating segments. Operating Income taxes have been provided in the consolidated financial statements in accordance with the respective legislation enacted or substantively segments whose revenue, results or assets are ten percent or more of all the segments are reported separately. enacted by the end of the reporting period. Income tax comprises current and deferred tax. Current tax and deferred tax are recognised in profit or loss except to the extent that they are recognised in other comprehensive income or directly in equity because they relate to transactions that are (t) Value added tax also recognised, in the same accounting period, in other comprehensive income or directly in equity. Current tax is the expected tax payable or receivable on the taxable profit or loss for the year, using tax rates enacted or substantively enacted 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 at the reporting date, and any adjustment to tax payable or receivable in respect of previous years. Taxes other than on income are recorded within has not been settled at the balance sheet date (VAT deferred) is recognised in the consolidated statement of financial position on a gross basis general, selling and administrative expenses. and disclosed separately as an asset and liability. Where provision has been made for the ECL of receivables, the impairment loss is recorded Input VAT is generally reclaimable against sales VAT when the right of ownership on purchased goods is transferred to the Group or when Deferred tax is recognised in respect of tax loss carried forward and 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 (u) Presentation of the consolidated statement of cash flows differences: the initial recognition of assets or liabilities in a transaction that is not a business combination and that affects neither accounting for the gross amount of the debtor, including VAT. nor taxable profit or loss, and differences relating to investments in subsidiaries to the extent that it is probable that they will not reverse The Group reports cash flows from operating activities using direct method. Cash flows from investing activities are presented net of VAT. VAT in the foreseeable future. A deferred tax asset is recognised for unused tax losses, unused tax credits and deductible temporary differences, paid to suppliers of non-current assets and VAT in proceeds from sale of non-current assets are presented in line “VAT paid” within cash flows 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 from operating activities. reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realised. (v) New accounting pronouncements 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. The new standards, amendments to standards and interpretations that have been issued by the International Accounting Standards Board (IASB), adopted by the European Union and are mandatory for the annual periods beginning on or after 1 January 2020, none of which the Group has early adopted, are not expected to affect significantly the Group’s consolidated financial statements. Annual Report 2019O’KEY Group S.A.& QUALITY FOR EACH FAMILY Financial StatementsNotesto Consolidated Financial Statements80 Management and Directors Responsibility Statement 82 Independent Auditors’ Report89 Consolidated Financial Statements95 Notes to Consolidated Financial Statements142 Overview Strategic Report Operational Review Financial Review Risk Management Corporate Responsibility Corporate Governance Financial Statements 143 GLOSSARY Average ticket – The figure calculated by dividing total sales, net of VAT, at all stores during the relevant year by the number of tickets in that year Blended learning – A style of education in which students learn via electronic and online media as well as traditional face- to-face teaching Corporate Social Responsibility – Responsible attitude in managing our impact on a range of stakeholders: customers, colleagues, investors, suppliers, the community and the environment ERP (Enterprise Resource Planning) – A modular software system designed to integrate the main functional areas of an organisation’s business processes into a unified system Global Food Safety Initiative (GFSI) – A private organisation, established and managed by the international trade association the Consumer Goods Forum under Belgian law in May 2000, the GFSI maintains a scheme to benchmark food safety standards for manufacturers as well as farm assurance standards HACCP (Hazard Analysis and Critical Control Points) – A systematic preventive approach to food safety from biological, chemical, and physical hazards in production processes that can cause the finished product to be unsafe, and designs measurements to reduce these risks to a safe level LFL (like–for–like) The method of comparing current year sales figures to prior year’s sales figures excluding the expansion effect Net revenue – The amount of a company’s gross revenue plus all negative revenue items On-shelf availability – Availability of product for sale to a shopper, in the place he expects it and at the time he wants to buy it, impacted by a host of different factors, all along the supply chain Planogram – A diagram that shows how and where specific retail products should be placed on retail shelves or displays in order to increase customer purchases Private label (PL) – 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 Real disposable income – The post-tax and benefit income available to households after an adjustment has been made for price changes Selling space – 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 SKU (stock keeping unit) – A number assigned to a particular product to identify the price, product options and manufacturer of the merchandise Stakeholder – Any individual, group, or party with an interest in an organisation and the outcomes of its actions ABBREVIATIONS ACORT – Association of retail trade companies bps – Basis point CEO – Chief Executive Officer CJSC – Closed joint stock company CRM – Client Relationship Management DC – Distribution centre IPO – Initial Public Offering IT – Information Technology JSC – Joint Stock Company k m² – A thousand square metres KPI – Key Performance Indicators m² – Square metre EBITDA – Earnings before interest, taxes, depreciation and amortisation p.p. – Percentage point NGO – Non-governmental organisation EDI – Electronic data interchange Q – Quarter of the year FD – Federal district RUB – Russian rouble FMCG – Fast-moving consumer goods VAT – value-added tax GDR – Global depositary receipt WHT – withholding tax HR – Human resources WMS – warehouse management system Traffic – The number of tickets issued for the period under review IFRS – International Financial Reporting Standards YoY – Year Over Year Annual Report 2019O’KEY Group S.A.& QUALITY FOR EACH FAMILY144 CONTACTS Contacts for media Depositary Alla Golovatenko Head of Public Relations phone: +7 926 169 91 17 Bank of New York Mellon U.S.A., 10286 New York, 101 Barclay Street email: alla.golovatenko@okmarket.ru bnymellon.com Contacts for investment community email: ir@okmarket.ru Addresses Luxembourg, 2180 Luxembourg, 6 rue Jean Monnet 117534, Moscow, Kirovogradskaya, 23A bld. 1 195027, St. Petersburg, Shaumyan avenue, 8 Auditor PricewaterhouseCoopers, Société cooperative Luxembourg, 2182 Luxembourg, 2 rue Gerhard Mercator phone: +352 49 48 48 1 pwc.lu & QUALITY FOR EACH FAMILY

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