Report on Review of Interim Financial Information for the six-month period ended August
Report on Review of Interim Financial Information Contents Page Report on Review of Interim Financial Information 3 Appendices Interim consolidated statement of financial position 5 Interim consolidated statement of comprehensive income 6 Interim consolidated statement of cash flows 7 Interim consolidated statement of changes in equity 8 Notes to the unaudited interim condensed consolidated financial statements 9 2
Ernst & Young LLC Sadovnicheskaya Nab., 77, bld. 1 Moscow, 115035, Russia Tel: +7 (495) 705 9700 +7 (495) 755 9700 Fax: +7 (495) 755 9701 www.ey.com/ru ООО «Эрнст энд Янг» Россия, 115035, Москва Садовническая наб., 77, стр. 1 Тел.: +7 (495) 705 9700 +7 (495) 755 9700 Факс: +7 (495) 755 9701 ОКПО: 59002827 Report on Review of Interim Financial Information To the Shareholders and Board of Directors of Introduction We have reviewed the accompanying interim condensed consolidated financial statements of and its subsidiaries (the Group ), which comprise the interim consolidated statement of financial position as at and the related interim consolidated statements of comprehensive income, changes in equity and cash flows for the six-month period then ended and selected explanatory notes (interim financial information). Management of the Group is responsible for the preparation and presentation of this interim financial information in accordance with IAS 34, Interim Financial Reporting. Our responsibility is to express a conclusion on this interim financial information based on our review. Scope of review We conducted our review in accordance with International Standard on Review Engagements 2410, Review of Interim Financial Information Performed by the Independent Auditor of the Entity. A review of interim financial information consists of making inquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion. A member firm of Ernst & Young Global Limited 3
Interim consolidated statement of comprehensive income For the six months ended (in thousands of Russian roubles, unless otherwise indicated) Note For the six months ended Revenue 140,952,664 158,172,893 Cost of sales (103,668,628) (115,023,605) Gross profit 37,284,036 43,149,288 Selling, general and administrative expenses (36,773,283) (41,162,650) Operating profit 510,753 1,986,638 Finance income 47,164 40,060 Finance costs (1,855,801) (2,304,848) Foreign exchange gain, net 13,661 104,303 Loss before income tax (1,284,223) (173,847) Income tax expense 12 (162,385) (266,699) Loss for the period (1,446,608) (440,546) Total comprehensive loss for the period (1,446,608) (440,546) Attributable to: Equity holders of the Parent (1,446,608) (440,546) (1,446,608) (440,546) Loss per ordinary share attributable to the equity holders of the parent, basic and diluted (in Russian roubles per share) (11.88) (3.54) The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements. 6
Interim consolidated statement of cash flows For the six months ended (in thousands of Russian roubles, unless otherwise indicated) For the six months ended Note Cash flows from operating activities Loss before income tax (1,284,223) (173,847) Adjustments for: Depreciation and impairment of property, plant, equipment and investment property 3,965,321 3,970,166 Amortisation of intangible assets 225,286 269,865 Amortisation of initial lease costs 48,639 34,561 Amortisation of unfavourable lease commitments (5,777) (6,784) (Income)/loss on disposals of property, plant, equipment, intangible assets and investment property (26,211) 92,652 Increase in provision for impairment of prepayments and capital advances 57,861 150,755 Increase in provision for impairment of trade and other receivables 10,881 43,143 (Write up) / write down of inventory to net realizable value (218,592) 153,351 Decrease in provision for loans (94) Finance costs 1,855,801 2,304,848 Finance income (47,164) (40,060) Share-based payment expense 69,769 Foreign exchange gain, net (13,661) (104,303) Operating cash flows before working capital changes 4,568,161 6,764,022 Decrease/(increase) in trade and other receivables 2,995,096 (2,721,632) Decrease in inventories 4,543,341 3,576,092 Decrease in operating lease deposits 28,848 52,573 Decrease in taxes recoverable and prepayments 1,179,080 1,382,815 Decrease in trade and other payables (*) (7,814,074) (3,353,178) Increase in tax liability, other than income tax (**) 784,657 1,160,567 Decrease in advances from customers (8,651) (344) Cash generated from operations 6,276,458 6,860,915 Income tax paid (**) (21,240) (190,066) Interest paid (1,887,715) (2,481,188) Net cash from operating activities 4,367,503 4,189,661 Cash flows from investing activities Purchase of property, plant and equipment and investment property (1,556,065) (2,874,176) Proceeds from sale of property, plant, equipment and investment property 91,425 57,404 Disbursement of loans (280,582) Interest received 47,164 38,180 Purchases of intangible assets (178,428) (375,421) Net cash used in investing activities (1,595,904) (3,434,595) Cash flows from financing activities Proceeds from loans and borrowings 5,526,361 18,747,221 Repayment of loans and borrowings (10,454,138) (19,360,527) Buy-out of shares (*) (838) (115,111) Finance lease payments (157,052) (132,418) Net cash used in financing activities (5,085,667) (860,835) Net decrease in cash and cash equivalents (2,314,068) (105,769) Cash and cash equivalents at the beginning of the period 8 4,104,326 2,920,831 Cash and cash equivalents at the end of the period 8 1,790,258 2,815,062 (*) In the amounts are shown net of non-cash items mainly related to buying out of shares and payables to management in amount of 127,456. (**) In the amounts are shown net of non-cash items mainly related to VAT payable offset against Income tax in amount of 207,580. In the loan given and interest accrued in the amount of 221,940 were netted with the payable for buying out of shares. The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements. 7
Interim consolidated statement of changes in equity For the six months ended (in thousands of Russian roubles, unless otherwise indicated) Note Share capital Additional paid-in capital Attributable to equity holders of the Parent Treasury Retained shares earnings Share-based payment reserve Total Non-controlling interest Total equity At 1 January (audited) 1,248 20,443,341 (554) 12,163,581 32,607,616 32,607,616 Total comprehensive loss for the period (440,546) (440,546) (440,546) Buy-out of shares 9 (337,051) (337,051) (337,051) Share-based payments 69,769 69,769 69,769 At 1,248 20,443,341 (337,605) 11,723,035 69,769 31,899,788 31,899,788 At 1 January (audited) 1,248 20,443,341 (790,531) 9,377,142 29,031,200 29,031,200 Total comprehensive loss for the period (1,446,608) (1,446,608) (1,446,608) Buy-out of shares 9 (128,294) (128,294) (128,294) At 1,248 20,443,341 (918,825) 7,930,534 27,456,298 27,456,298 The accompanying notes are an integral part of these unaudited interim condensed consolidated financial statements. 8
For the six months ended (in thousands of Russian roubles, unless otherwise indicated) 1. Corporate information (the Company, the Group ) is a public joint stock company established in January 2003 in the Russian Federation. The address of the Company s registered office is Bolshaya Ochakovskaya 47A, building 1, Moscow, Russia. and its subsidiaries (the Group ) operate in the retail sales business. The Group s principal activities include trading of consumer goods through stores within the Russian Federation. Since 24 May 2007 shares of are listed on the Russian Stock Exchange. As at and 31 December the Group was controlled by Dixy Holding Limited (Cyprus), which as at and 31 December owned 51.29% in. The Group is ultimately controlled by Mr. Igor Kesaev. These interim condensed consolidated financial statements of the Group were signed and authorized for release by the General Director and the Chief Financial Officer of PJSC DIXY GROUP on 14 August. 2.1 Basis of preparation and accounting policies Basis of preparation The interim condensed consolidated financial statements for the six months ended have been prepared in accordance with IAS 34 Interim Financial Reporting. The interim condensed consolidated financial statements do not include all the information and disclosures required in the annual financial statements, and should be read in conjunction with the Group s annual consolidated financial statements as at 31 December. Significant accounting policies The accounting policies adopted in the preparation of the interim condensed consolidated financial statements are consistent with those followed in the preparation of the Group s annual consolidated financial statements for the year ended 31 December, except for the adoption of new Standards and Interpretation listed below: Amendments to IAS 7 Statements of Cash Flows: Disclosure Initiative The amendments require entities to provide disclosures about changes in their liabilities arising from financing activities, including both changes arising from cash flows and non-cash changes (such as foreign exchange gains or losses). On initial application of the amendment, entities are not required to provide comparative information for preceding periods. The Group is not required to provide additional disclosures in its condensed interim consolidated financial statements, but will disclose additional information in its annual consolidated financial statements for the year ended 31 December. 9
(continued) 2.1 Basis of preparation and accounting policies (continued) Significant accounting policies (continued) Amendments to IAS 12 income Taxes: Recognition of Deferred Tax Assets for Unrecognized Losses The amendments clarify that an entity needs to consider whether tax law restricts the sources of taxable profits against which it may make deductions on the reversal of that deductible temporary difference. Furthermore, the amendments provide guidance on how an entity should determine future taxable profits and explain the circumstances in which taxable profit may include the recovery of some assets for more than their carrying amount. Entities are required to apply the amendments retrospectively. However, on initial application of the amendments, the change in the opening equity of the earliest comparative period may be recognized in opening retained earnings (or in another component of equity, as appropriate), without allocating the change between opening retained earnings and other components of equity. Entities applying this relief must disclose that fact. Application of these amendments has no effect on the Group s financial position and performance as the Group has no deductible temporary differences or assets that are in the scope of the amendments. 3. Seasonality of operations Due to the seasonal nature of the Group s operations, higher revenues in all operating segments (Note 4) are usually expected in the second half of the year. Higher sales during the fourth quarter are mainly attributable to the increase in customer demand for food and beverages during the peak holiday season (Christmas and New Year eve period). 4. Segment information For management purposes, the operations of the Group are classified in accordance with the formats of shops on three operating segments: Dixy representing retail sales through a chain of neighbourhood stores, which are present in Central, North-West and Chelyabinsk region. Megamart representing retail sales through chains of compact hypermarkets and economy supermarkets (Minimart), which are present in Ural region. Victoria representing retail sales through a chain of compact hypermarkets and neighbourhood stores in Kaliningrad and Moscow region. Management monitors the operating results of its business units separately for the purpose of making decisions about resource allocation and performance assessment. Segment performance is evaluated based on operating profit or loss and is measured consistently with operating profit or loss in the interim condensed consolidated financial statements. Transfer prices between segments are set on an arm s length basis in a manner similar to transactions with third parties. During the six months ended and there were no material transfers between reportable operating segments. 10
(continued) 4. Segment information (continued) Segment information for the main reportable business segments of the Group for the six months ended and is set out below: Dixy Megamart Victoria Group Six months ended Total segment revenue 112,035,645 9,662,014 19,255,005 140,952,664 Profit/(loss) before taxation (2,653,576) 1,029,852 339,501 (1,284,223) Depreciation and amortisation 3,463,507 154,605 572,495 4,190,607 Other non-cash expenses Amortisation of initial lease costs and unfavourable lease rights 2,652 40,212 42,864 The Group improved segment information in by allocating separately presented Adjustments to segments Dixy, Megamat, Victoria. Adjustments previously composed of corporate expenses (head office employees, amortisation and depreciation of corporate assets and other expenses related to general management), finance costs, finance income, net foreign exchange, depreciation and amortization. Adjustments in comparative information were allocated respectively to segments Dixy, Megamat, Victoria. Dixy Megamart Victoria Group Six months ended Total segment revenue 129,917,771 9,413,223 18,841,899 158,172,893 Profit/(loss) before taxation (1,634,262) 942,004 518,411 (173,847) Depreciation and amortisation 3,555,750 142,182 542,099 4,240,031 Other non-cash expenses Amortisation of initial lease costs and unfavourable lease rights 19,735 8,043 27,778 5. Balances and transactions with related parties Transactions between related parties may not be effected on the same terms, conditions and amounts as transactions between unrelated parties. The management considers that the Group has appropriate procedures in place to identify, account and properly disclose transactions with related parties. The nature of the related party relationships for those related parties with whom the Group entered into significant transactions for the six-month period ended and or had significant balances outstanding at and 31 December are detailed below: Entities under common control 31 December (audited) Trade receivables 362 5,950 Prepayments 869 771 Other receivables 3,732 201 Capital advances 425 Trade and other payables 1,046,809 1,875,585 11
(continued) 5. Balances and transactions with related parties (continued) Key Management personnel 31 December (audited) Prepayments 205,993 The income and expense items with related parties for the six months ended and were as follows: Entities under common control Six months ended Six months ended Revenue 107,540 Profit from disposal of fixed assets 34,452 44,951 Transportation expenses (96,994) (97,324) Maintenance of software (13,580) (14,060) Other expenses (12,902) Key management personnel Six months ended Six months ended Interest income 1,974 Purchase of goods During the six months ended the Group purchased goods for resale in the normal course of business in the amount of 4,150,928 (the six months ended : 4,202,572) from entities under control of the ultimate controlling party. Purchase of property, plant and equipment During the six months ended Group purchased trucks in the normal course of business in the amount of nil (the six months ended : 350,583), from entities under common control of the ultimate controlling party. Compensation to key management personnel Short-term employee benefits During the six months ended compensation paid to nineteen (the six months ended : nineteen) directors for their services in full or part time executive management positions is made up of a contractual salary and a performance bonus depending on operating results, all of which represent short-term employee benefits as defined in IAS 19, Employee Benefits. 12
(continued) 5. Balances and transactions with related parties (continued) Compensation to key management personnel (continued) Total compensation to key management personnel included in selling, general and administrative expenses in the interim consolidated statement of comprehensive income for the six months ended and amounted to 196,876 and 793,556, respectively. 6. Property, plant and equipment Movements in the carrying amount of property, plant and equipment during the six-months ended were as follows: Renovation of stores Assets under construction and uninstalled equipment Land Buildings Equipment Total Cost At 31 December (audited) 1,323,879 26,979,770 14,610,269 27,842,404 156,553 70,912,875 Additions 716 970,539 971,255 Transfers 153,476 64,971 781,405 (999,852) Transfers to investment property (486,638) 23,689 (462,949) Disposals (35,674) (478,284) (516,752) (1,030,710) At 1,324,595 26,610,934 14,220,645 28,107,057 127,240 70,390,471 Accumulated depreciation and impairment At 31 December (audited) 4,272,414 10,633,614 16,778,454 31,684,482 Disposals (659) (441,641) (525,337) (967,637) Depreciation charge 570,510 734,181 2,241,535 3,546,226 Impairment 419,095 419,095 Transfers to investment property (76,553) 14,085 (62,468) At 4,765,712 11,359,334 18,494,652 34,619,698 Net book value At 31 December (audited) 1,323,879 22,707,356 3,976,655 11,063,950 156,553 39,228,393 At 1,324,595 21,845,222 2,861,311 9,612,405 127,240 35,770,773 The carrying value of equipment held under finance lease contracts at was 1,049,142 (31 December : 1,203,839). Additions under finance lease contracts during six month amounted to nil (the six months ended : nil). The leased assets are pledged as security for the related finance lease liabilities (refer to Note 11). 13
(continued) 7. Inventories 31 December (audited) Goods for resale (net of write-down to net realizable value of: 382,595 (31 December : 601,187) 15,452,558 19,773,317 Raw materials and operating supplies (at cost) 44,331 48,321 Total inventories at the lower of cost or net realisable value 15,496,889 19,821,638 Inventory write-down due to shrinkages identified during the physical inventory counting during the six months ended and comprised 3,244,153 and 4,655,503, respectively. No inventory was pledged as at and 31 December. 8. Cash and cash equivalents 31 December (audited) Cash on hand Russian roubles 521,349 732,208 Russian rouble denominated bank balances due on demand 122,365 375,838 US dollars denominated bank balances due on demand 440 2,590 Russian rouble denominated time deposits 325,000 Cash in transit Russian roubles 821,104 2,993,690 Total cash and cash equivalents 1,790,258 4,104,326 9. Share capital and equity Share and additional paid-in capital As at the Group had 124,750,000 (31 December : 124,750,000) authorized ordinary shares of which 3,026,979 (31 December : 2,569,579) ordinary shares were held as treasury stock. All ordinary shares are fully paid. Ordinary shares have par value of 0.01 Russian rouble per share. The shares rank equally. Each share carries one vote. During the six months ended the Group bought-out 457,400 shares for 128,294 (the six months ended : 1,024,398 for 337,021). Dividends No dividends were paid during the six months ended and. No dividends were declared or paid subsequent to up to the date of authorization of these interim condensed consolidated financial statements for issue. 14
(continued) 10. Borrowings Terms and conditions in respect of borrowings are detailed below: Source of financing Maturity 31 December (audited) Currency Interest rate 31 December (audited) 31 December (audited) Long term bank loans 2018-2020 2018-2020 RR 10.10%-12.65% 10.10%-12.65% 26,809,282 28,838,759 Short term bank loans RR 10.10%-10.45% 10.10%-12.65% 36,475 2,962,939 Bank overdrafts RR 11.89%-12.02% 3,750 26,845,757 31,805,448 All borrowings are unsecured as of and 31 December. The Group does not apply hedge accounting and has not entered into any hedging arrangements in respect of its interest rate exposures. In accordance with terms and conditions of certain borrowing agreements the Group has to maintain certain ratios maximum level of Total Financial Debt (Net Debt) / EBITDA, minimum level of EBITDA / Net interest expense and Coverage ratio. As of and 31 December the Group was in compliance with the externally imposed capital requirements. 11. Finance lease Minimum lease payments under finance leases and their present values were as follows: Due in 1 year Due between 2 and 5 years Total Minimum lease payments at 462,147 632,181 1,094,328 Less future finance charges (111,507) (63,150) (174,657) Present value of minimum lease payments at 350,640 569,031 919,671 Minimum lease payments at 31 December 462,607 864,030 1,326,637 Less future finance charges (136,870) (113,044) (249,914) Present value of minimum lease payments at 31 December (audited) 325,737 750,986 1,076,723 The Group entered into finance leases for various items of equipment (refer to Note 6). The Group s obligations under finance leases are secured by the lessor s title to the leased assets. Finance lease payables are stated in Russian roubles. 15
(continued) 12. Income taxes Income tax expense comprises the following: Six months ended Six months ended Current income tax charge 5,205 546,007 Adjustment in respect of current income tax of previous years (48,062) (60,771) Deferred income tax charge/(credit) origination and reversal of temporary differences 205,242 (218,537) Income tax expense 162,385 266,699 13. Contingencies, commitments and operating risks Operating environment of the Group Russia continues economic reforms and development of its legal, tax and regulatory frameworks as required by a market economy. The future stability of the Russian economy is largely dependent upon these reforms and developments and the effectiveness of economic, financial and monetary measures undertaken by the government. The Russian economy has been negatively impacted by a decline in oil prices and sanctions imposed on Russia by a number of countries. The rouble interest rates remained high. The combination of the above resulted in reduced access to capital, a higher cost of capital and uncertainty regarding economic growth, which could negatively affect the Group s future financial position, results of operations and business prospects. Management believes it is taking appropriate measures to support the sustainability of the Group s business in the current circumstances. Tax legislation The Group s companies operate in Russia. Russian tax, currency and customs legislation is subject to varying interpretations, and changes, which can occur frequently. Management s interpretation of such legislation as applied to the transactions and activity of the Group s subsidiary may be challenged by the relevant regional and federal authorities. Because of the uncertainties associated with the Russian tax and legal systems, the ultimate amount of taxes, penalties and interest assessed, if any, may be in excess of the amount expensed to date and accrued as of and 31 December. It is not practical to determine the amount of unasserted claims that may manifest, if any, or the likelihood of any unfavourable outcome. Should the Russian tax authorities decide to issue a claim and prove successful in the court, they would be entitled to recover the amount claimed, together with fines amounting to 20% of such amount and interest at the rate of 1/300 of the Central Bank of the Russian Federation rate for each day of delay for late payment of such amount. Fiscal periods remain open to review by the authorities in respect of taxes for the three calendar years preceeding the year of review. Under certain circumstances reviews may cover longer periods. 16
(continued) 13. Contingencies, commitments and operating risks (continued) Tax legislation (continued) Although historically there have been no significant liabilities arising from tax assessments, the potential for assessments over amounts provided or accrued remains. Management estimates that the order of magnitude as at of potential liabilities that have not been provided for because management believes they are less than probable amounts to nil (31 December : nil). Litigation The Group is involved in litigations, which arise from time to time in the course of its business activities. There are no current legal proceedings or other claims outstanding, which could have a material effect on the result of operations or financial position of the Group and which have not been accrued or disclosed. Capital expenditures commitments At the Group had contractual capital expenditure commitments in respect of property, plant and equipment amounting to 121,006 (31 December : 660,424). 14. Events after the reporting date In July, the Group early repaid long-term VTB bank loans of 13,888,889 with 12.65% interest rate and refinanced them with several revolving credit lines of 13,500,000 with average weighted interest rate of 9.15%. In July, the Board of Directors of the Company approved the share buyback program for the next 12 months. The approved share buyback program authorizes JSC Dixy Yug to buy up to 10% of the shares of on the open market at market price in the total amount of not more than 2.5 billion Russian roubles within the next 12 months. 17