Half-year Consolidated Financial Statements of Esselunga S.p.A. as of 30 June 2017
Parent Company Esselunga S.p.A. Registered office Milan, via Vittor Pisani 20 Share Capital 100,000,000 fully paid up Tax Code and Milan Register of Companies no. 01255720169 Milan R.E.A. no. 1063
Table of Contents Consolidated statement of financial position... 3 Consolidated statement of comprehensive income... 4 Consolidated cash flow statement... 5 Consolidated statement of changes in shareholders equity... 6 Notes to the Half-year Consolidated Financial Statements as of 30 June 2017... 7 1. General information... 7 2. Summary of accounting policies... 7 2.1. Basis of preparation... 7 2.2. Format and content of the financial statements... 8 2.3. Scope of consolidation... 8 2.4. Consolidation policies and methods... 9 2.5. Measurement criteria... 10 3. Accounting standards, amendments and interpretations not yet effective and not adopted in advance by the Group... 10 4. Estimates and assumptions... 11 5. Group taxation... 11 6. Financial risk management... 12 6.1. Credit risk... 12 6.2. Liquidity risk... 13 6.3. Market risk... 14 6.4. Capital risk... 15 7. Financial assets and liabilities by category... 16 8. Information on fair value... 17 9. Operating Segments... 18 10. Seasonal events... 19 11. Notes to the consolidated statement of financial position... 19 11.1. Property, plant and equipment... 19 11.2. Investment property... 21 11.3. Intangible assets... 22 11.4. Investments measured using the equity method... 23 11.5. Other receivables and other non-current assets... 24 11.6. Closing inventories... 24 11.7. Trade receivables... 25 11.8. Cash and cash equivalents... 25 11.9. Assets held for sale... 26 11.10. Shareholders equity... 26 11.11. Current and non-current financial payables... 27 11.12. Provisions for risks and charges... 28 11.13. Deferred revenue for prize-giving promotions - current and non-current portion... 29 11.14. Other payables and other current liabilities... 29 1
12. Notes to the consolidated statement of comprehensive income... 30 12.1. Net revenues... 30 12.2. Other revenues and income and promotional activities... 30 12.3. Provisions and write-downs... 31 12.4. Other operating costs... 32 12.5. Share of income from investments measured using the equity method... 32 12.6. Finance income... 32 12.7. Finance expense... 32 12.8. Income tax expense... 33 13. Transactions with related parties that affect the statement of financial position and the income statement... 34 14. Remuneration to the Board of Statutory Auditors... 36 15. Commitments, guarantees and contingent liabilities... 37 15.1. Capex commitments... 37 15.2. Commitments for the purchase of goods... 37 15.3. Lease commitments... 37 15.4. Guarantees given... 38 15.5. Contingent liabilities and lawsuits... 38 16. Positions or transactions resulting from atypical and/or unusual operations... 39 17. Significant events after the end of the period... 39 Annex 1 - List of companies included in the scope of consolidation... 41 Independent Auditors Report... 42 Company Information... 43 2
Consolidated statement of financial position Notes As of 30 June 2017 As of 31 December 2016 ASSETS Non-current assets Property, plant and equipment 11.1 3,166,075 3,074,402 Investment property 11.2 183,920 182,900 Goodwill 6,586 6,586 Intangible assets 11.3 161,189 156,599 Investments measured using the equity method 11.4 646,794 - Investments in other companies 196 196 Deferred tax assets 69,378 65,768 Other receivables and other non-current assets 11.5 119,476 76,839 Total non-current assets 4,353,614 3,563,290 Current assets Closing inventories 11.6 416,526 394,419 Trade receivables 11.7 341,401 429,558 Current tax receivables 1,582 19,253 Other receivables and other current assets 59,390 53,189 Cash and cash equivalents 11.8 284,079 305,470 Total current assets 1,102,978 1,201,889 Assets held for sale 11.9 6,614 14,503 TOTAL ASSETS 5,463,206 4,779,682 SHAREHOLDERS EQUITY AND LIABILITIES Share capital 100,000 100,000 Share premium reserve 164,510 164,510 Other reserves 49,269 49,269 Retained earnings 2,359,555 2,215,113 Total Shareholders equity 11.10 2,673,334 2,528,892 Non-current liabilities Non-current financial payables 11.11 1,060,127 396,514 Employee severance indemnities (TFR) and other staff-related provisions 107,345 106,751 Provisions for risks and charges 11.12 29,270 30,861 Deferred revenue for prize-giving promotions 11.13 70,330 60,043 Other payables and other non-current liabilities 164 107 Total non-current liabilities 1,267,236 594,276 Current liabilities Current financial payables 11.11 29,138 28,658 Trade payables 1,177,408 1,302,844 Deferred revenue for prize-giving promotions 11.13 42,605 32,333 Current tax payables 19,555 546 Other payables and other current liabilities 11.14 253,930 292,133 Total current liabilities 1,522,636 1,656,514 TOTAL LIABILITIES AND SHAREHOLDERS EQUITY 5,463,206 4,779,682 3
Consolidated statement of comprehensive income Notes For the six months ended 30 June 2017 2016 Total sales 3,809,563 3,760,512 Other sales adjustments (74,473) 76,330 Net revenue 12.1 3,735,090 3,836,842 Other revenues and income and promotional 12.2 activities 651,036 600,814 Costs for goods and raw materials (3,195,537) (3,174,213) Costs for services (378,227) (370,629) Personnel costs (462,675) (459,033) Amortisation and depreciation (106,266) (97,894) Provisions and write-downs 12.3 (345) (41,472) Other operating costs 12.4 (26,437) (24,604) Operating profit 216,639 269,811 Share of income from investments measured using the equity method 12.5 183 - Finance income 12.6 144 535 Finance expense 12.7 (7,529) (7,751) Profit before tax 209,437 262,595 Income tax expense 12.8 (63,143) (80,434) Net profit for the period 146,294 182,161 Other comprehensive income Components that will not subsequently be reclassified to profit or loss Actuarial gain (loss) on defined benefit pension plans, net of tax effect (1,852) 1,682 Total other comprehensive income / (loss) (1,852) 1,682 Net comprehensive income for the period 144,442 183,843 4
Consolidated cash flow statement For the six months ended 30 June 2017 2016 Cash flow from operating activities Collections from customers 3,809,563 3,760,512 Collections from promotional activities 684,834 692,986 Other receipts 26,564 21,428 Payments to suppliers (3,684,087) (3,613,389) Payments to employees (469,798) (458,025) Rent and rental expenses (84,526) (82,442) Other payments (28,624) (39,687) Cash flow from ordinary operations 253,926 281,383 Income tax paid (48,872) (70,629) A) CASH FLOW FROM OPERATING ACTIVITIES 205,054 210,754 Cash flow used in investing activities Capex on tangible and intangible assets (223,382) (233,940) Disposals of tangible and intangible assets 9,842 23,600 Disposal of investments - 33,050 Equity investments (645,013) - Advances on equity investments (40,000) - Interest collected 105 411 Dividends and interest on securities received - 2 Other (3) (131) B) CASH FLOW USED IN INVESTING ACTIVITIES (898,451) (177,008) Cash flow from / (used in) financing activities Financing received 678,350 - Other proceeds (Fidaty Oro customers) 14,056 13,160 Reimbursed financing (leasing) (14,220) (16,261) Payment of interest (6,181) (6,960) Distribution of dividends - (10,000) C) CASH FLOW FROM / (USED IN) FINANCING ACTIVITIES 672,005 (20,061) NET CASH FLOW OF THE PERIOD (A + B + C) (21,392) 13,685 Cash and cash equivalents at the beginning of the period and current account overdrafts 305,470 284,609 Cash and cash equivalents at the end of the period and current account overdrafts 284,079 298,294 5
Consolidated statement of changes in shareholders equity Notes Share capital Share premium reserve Revaluation reserve Other reserves Retained earnings Total shareholders equity As of 31 December 2016 11.10 100,000 164,510 25,975 23,294 2,215,113 2,528,892 Distribution of dividends - - - - - - Total transactions with shareholders - - - - - - Actuarial loss on defined benefit pension plans - - - - (1,852) (1,852) Profit for the period - - - - 146,294 146,294 Total comprehensive income for the period - - - - 144,442 144,442 As of 30 June 2017 11.10 100,000 164,510 25,975 23,294 2,359,555 2,673,334 Notes Share capital Share premium reserve Revaluation reserve Other reserves Retained earnings Total shareholders equity As of 31 December 2015 100,000 164,510 25,975 23,294 1,976,573 2,290,352 Distribution of dividends - - - - (10,000) (10,000) Total transactions with shareholders - - - - (10,000) (10,000) Actuarial gain on defined benefit pension plans - - - - 1,682 1,682 Profit for the period - - - - 182,161 182,161 Total comprehensive income for the period - - - - 183,843 183,843 As of 30 June 2016 100,000 164,510 25,975 23,294 2,150,416 2,464,195 6
Notes to the Half-year Consolidated Financial Statements as of 30 June 2017 1. General information Esselunga S.p.A. ( Esselunga, the Company or the Parent Company and, together with its subsidiaries the Esselunga Group, hereinafter also the Group ) is mainly engaged in the food sector of Large-Scale Retailing through a sales network comprising, at 30 June 2017, 155 stores located in Lombardy, Liguria, Veneto, Piedmont, Emilia Romagna, Tuscany and Lazio. In addition, the Group manages 86 Atlantic bars and 38 selected perfume shops under the EsserBella brand and is also engaged in the real estate sector through the research, design and implementation of new projects that are instrumental to its business activity. By deed signed on 27 June 2017, Esselunga acquired 45% of the share capital of Villata Partecipazioni S.p.A. (hereinafter Villata Partecipazioni ) from the minority shareholders for an amount of 643.5 million. Furthermore, in June 2017 Esselunga undertook to acquire an additional 22.5% stake of Villata Partecipazioni's share capital by the end of September 2017, to be purchased from the majority shareholders by paying 40 million as advance. Villata Partecipazioni owns the entire share capital of La Villata S.p.A.Immobiliare di Investimento e Sviluppo which owns 84 commercial properties for use in the business carried out by Esselunga and currently leased to it under long-term leases. The acquisition of control over Villata Partecipazioni will give the Group greater operational flexibility as the latter will be able to freely exercise control over the above-mentioned properties. The Half-year Consolidated Financial Statements (as defined below) were approved by resolution of the Board of Directors on 12 September 2017. 2. Summary of accounting policies The main accounting principles adopted in the preparation and drafting of the condensed half-year consolidated financial statements at 30 June 2017 of the Company (the Half-year Consolidated Financial Statements ) are presented below. 2.1. Basis of preparation The Half-year Consolidated Financial Statements were prepared on a going concern basis and in accordance with the standard for interim financial reporting (IAS 34). IAS 34 permits the preparation of the financial statements in a condensed form, on the basis of a minimum level of disclosure significantly lower than that required by the International Financial Reporting Standards issued by the International Accounting Standards Board and adopted by the European Union (hereinafter EU IFRS ), provided that the complete financial statements 7
prepared in accordance with EU IFRS have previously been made available to the public for the previous financial year. The Half-year Consolidated Financial Statements have been prepared in a condensed form and must therefore be read in conjunction with the Group's consolidated financial statements for the year ended 31 December 2016 (the 2016 Consolidated Financial Statements"). The Half-year Consolidated Financial Statements consist of the consolidated statement of financial position, the consolidated statement of comprehensive income, the consolidated cash flow statement, the consolidated statement of changes in shareholders equity and the related notes. In the presentation of those statements, the data required by IAS 34 are reported as comparative data (i.e. the figures at 31 December 2016 of the consolidated statement of financial position and the data for the six months ended 30 June 2016 of the consolidated statement of comprehensive income, the consolidated cash flow statement and the consolidated statement of changes in shareholders equity). The Half-year Consolidated Financial Statements have been prepared in Euro, which is the currency of the primary economic environment in which the Group carries out its activity. All amounts included in this document are presented in thousands of Euros unless otherwise stated. 2.2. Format and content of the financial statements The Group made the following choices regarding the format and content of the consolidated financial statements: The consolidated statement of financial position shows both the current and non-current assets and the current and non-current liabilities separately; The consolidated statement of comprehensive income shows a classification of costs and revenues by nature; The consolidated cash flow statement is represented using the direct method. The Group has opted for presenting a comprehensive income statement that includes, in addition to the profit (loss) for the period, also the changes in equity attributable to profit and loss items which, as required by the international accounting standards, are recognised as equity components. As outlined above, the financial statements used are those that best represent the performance of the Company. 2.3. Scope of consolidation The list of companies included in the scope of consolidation as of 30 June 2017 is provided in Annex 1. 8
Except for the above mentioned acquisition of 45% of Villata Partecipazioni's share capital, there have been no changes in the scope of consolidation since 31 December 2016. 2.4. Consolidation policies and methods The consolidation policies and methods adopted for the preparation of the Halfyear Consolidated Financial Statements are consistent with those used for the preparation of the 2016 Consolidated Financial Statements to which reference is made and are supplemented by the following disclosures. Investments in associated companies Associates are companies in which the Group exercises a significant influence on administrative and management decisions, although it does not have control or joint control over them. Generally, significant influence is presumed when the Group directly or indirectly holds between 20% and 50% of voting rights. Investments in associates are measured using the equity method. The following paragraphs describe how the equity method is implemented: (i) (ii) (iii) (iv) the carrying amount of the investments is aligned with the entity s equity, adjusted where necessary to reflect the application of accounting standards that are consistent with those applied by the Company and, where applicable, includes any goodwill identified upon acquisition; profits or losses attributable to the Group are recognised in the consolidated income statement as of the date the significant influence began and until the date the significant influence ceases. If, due to losses, the company reports negative equity, the carrying amount of the investment is cancelled and any excess attributable to the Group is recognised in a specific provision if the Group has a commitment to meet legal or constructive obligations of the investee or in any case to cover its losses. Any changes in the investees equity that are not determined by profit or loss are recognized directly in the Group's equity reserves; any unrealised gains arising on transactions between the Company and the investees are eliminated to the extent of the Group s interest in the investees. Unrealised losses are eliminated, except where they reflect an impairment; where an associated company recognizes an adjustment directly in equity, the Group recognizes its share of interest and, where applicable, discloses it in the statement of changes in shareholders' equity. 9
2.5. Measurement criteria The measurement criteria adopted for the preparation of the Half-year Consolidated Financial Statements are consistent with those used for the preparation of the 2016 Consolidated Financial Statements to which reference is made, with the exception of income taxes, which in interim periods are recognized on the basis of the average tax rate estimated with reference to the entire financial year. 3. Accounting standards, amendments and interpretations not yet effective and not adopted in advance by the Group Description IFRS 14 Regulatory Deferral Accounts Amendments to IAS 12 Income taxes on the recognition of deferred tax assets on tax losses Amendments to IAS 7, Statement of Cash Flows Standard effective date IFRS 14 became effective on 1 January 2016, but the European Commission has suspended the approval process pending the new "rate-regulated activities standard Periods beginning on 1 January 2017 but the European Commission has not yet concluded the endorsement process for the amendment Periods beginning on 1 January 2017 but the European Commission has not yet concluded the endorsement process for the amendment IFRS 9: Financial Instruments Periods beginning on 1 January 2018 Amendments to IFRS 2, Classification and measurement of Share-based payment Periods beginning on 1 January 2018 transactions IFRS 15: Revenue from contracts with customers Annual Improvements to IFRS 2014-2016 Periods beginning on 1 January 2018 Periods beginning on 1 January 2017/2018 Amendments to IFRS 4: Implementation of IFRS 9 - Financial Instruments Periods beginning on 1 January 2018 Amendments to IAS 40, Investment Property Periods beginning on 1 January 2018 IFRIC 22, Foreign currency transactions and advance consideration Periods beginning on 1 January 2018 Clarifications to IFRS 15, Revenue from contracts with customers Periods beginning on 1 January 2018 IFRS 16: Leases Periods beginning on 1 January 2019 IFRIC 23, Uncertainty over Income Tax Treatments Periods beginning on 1 January 2019 The Group is currently analysing the above standards in order to assess the impacts deriving from their application. 10
4. Estimates and assumptions For a description of the use of accounting estimates, reference is made to the 2016 Consolidated Financial Statements. It should be noted that certain measurement processes, especially the most complex ones, such as the determination of any impairment losses on non-current assets, are generally fully carried out when preparing the annual financial statements, when all necessary information is available, except when there are impairment indicators that require an immediate assessment of any impairment losses. 5. Group taxation In 2016, the Company and some of its subsidiaries renewed their participation in the group taxation scheme governed by Articles 117 to 129 of the Italian Consolidated Income Tax Code (TUIR) for the three-year period ending 31 December 2018, in which the parent company Supermarkets Italiani S.p.A. is the consolidating entity. The company and the consolidating entity agreed on the following internal rules: the tax losses arisen as of the first consolidated tax period and transferred to the consolidating entity are definitively recognised by the latter at the IRES rate in force; the tax effects arising from the transfer of the losses or of the taxable profits are settled at the time the overall IRES tax due by the consolidating entity is paid; the company agrees to make available its surplus of non-deductible interest expense or its gross operating income to the Supermarkets Italiani Group so that the consolidating entity can adjust the Group's taxable income in accordance with the provisions of Art. 96, paragraph 7 of the TUIR. On the other hand, the consolidating entity agrees to pay, on an exclusive basis, to the company transferring the ACE (Aid to economic growth) and the non-deductible interest expense surplus used to adjust the consolidated income, an amount equal to the product of the then current IRES rate and the amount of the above surpluses in the manner described in the paragraph above; the effects of deferred taxation are individually determined and accounted for by the company in its financial statements. Payables and receivables vis à vis Supermarkets Italiani SpA in relation to the tax consolidation are recorded as current tax payables or receivables. 11
6. Financial risk management The Group s financial assets are exposed to the following risks: Market risk - defined as exchange rate risk, interest rate risk and price risk - liquidity risk, credit risk and equity risk. Compared to 31 December 2016, no significant changes have occurred in the Group s risk profile or in the procedures adopted by the Group s management to manage the risks to which the Group is exposed. In June 2017, the Company signed an agreement for the disbursement of a credit line (described in detail in note 11.11) for a total of 1,200 million, used for 683.5 million as of 30 June 2017 and subject to floating rate interest equal to Euribor plus a spread. As of 30 June 2017, the Group had no derivative instruments in place to hedge the interest rate risk associated with the above credit line. 6.1. Credit risk Credit risk represents the Company's exposure to potential losses arising from business and financial counterparties failing to meet their obligations. The Group s maximum exposure to credit risk as of 30 June 2017 is the carrying amount of the financial assets reported in the financial statements, as shown in the table below: As of 30 June 2017 As of 31 December 2016 Change Other receivables and other non-current assets 119,476 76,839 42,637 Trade receivables 341,580 429,735 (88,155) Current tax receivables 1,582 19,253 (17,671) Other receivables and other current assets 63,847 57,016 6,831 Total gross amount 526,485 582,843 (56,358) Provision for doubtful receivables (4,636) (4,004) (632) Total net amount 521,849 578,839 (56,990) These items are accounted for net of a provision for doubtful receivables, for a total of 4,636 thousand as of 30 June 2017 and 4,004 thousand as of 31 December 2016, respectively. The write-down is calculated based on an analysis of individual debt positions for which there are objective conditions of total or partial uncollectibility. With regard to trade receivables, there is no appreciable concentration of credit risk. The following tables provide a breakdown of receivables at 30 June 2017 and 31 December 2016 by category and by number of days past due 12
As of 30 June 2017 Not overdue Days past due 0-30 31-60 61-90 > 90 Total Other receivables and other non-current assets 119,476 - - - - 119,476 Trade receivables 316,286 6,883 30 2,984 15,397 341,580 Current tax receivables 1,582 - - - - 1,582 Other receivables and other current assets 62,593 - - - 1,254 63,847 Total gross amount 499,937 6,883 30 2,984 16,651 526,485 Provision for doubtful receivables (1,812) - - - (2,824) (4,636) Total net amount 498,125 6,883 30 2,984 13,827 521,849 As of 31 December 2016 Not overdue Days past due 0-30 31-60 61-90 > 90 Total Other receivables and other non-current assets 76,839 - - - - 76,839 Trade receivables 385,784 1,924 33,675 5,253 3,099 429,735 Current tax receivables 19,253 - - - - 19,253 Other receivables and other current assets 55,762 - - - 1,254 57,016 Total gross amount 537,638 1,924 33,675 5,253 4,353 582,843 Provision for doubtful receivables (1,812) - - - (2,192) (4,004) Total net amount 535,826 1,924 33,675 5,253 2,161 578,839 Overdue receivables as of 30 June 2017 amounted to 26,548 thousand, while the provision for doubtful receivables amounted to 4,636 thousand. Past-due receivables that are not covered by the provision refer to situations that are inherent in the Group s activities. 6.2. Liquidity risk Liquidity risk is associated with the ability to meet commitments arising from financial liabilities. The following tables provide a breakdown of liabilities by maturity as of 30 June 2017 and 31 December 2016. The various maturity ranges are determined based on the period between the reporting date and the contractual maturity of the obligations. Interest has been calculated according to the contractual terms of the loans. As described in note 17 Significant events after the end of the period, in August 2017, Esselunga entered into three agreements for three "revolving" credit lines for a total amount of 300 million in order to increase the credit facilities available to meet its commitments. 13
Less than 1 year Between 1 and 2 years As of 30 June 2017 Between 2 and 5 years Over 5 years Financial payables (current and non-current) excluding leases 4,843 688,617 - - 693,460 Finance lease payables (current and noncurrent) 41,550 41,550 115,751 316,103 514,954 Other payables and other non-current liabilities - - - 164 164 Trade payables 1,177,408 - - - 1,177,408 Current tax payables 19,555 - - - 19,555 Other payables and other current liabilities 253,930 - - - 253,930 Total 1,497,286 730,167 115,751 316,267 2,659,471 Less than 1 year Between 1 and 2 years As of 31 December 2016 Between 2 and 5 years Over 5 years Finance lease payables (current and noncurrent) excluding leases 41,550 41,550 119,625 333,004 535,729 Other payables and other non-current liabilities - - - 107 107 Trade payables 1,302,844 - - - 1,302,844 Current tax payables 546 - - - 546 Other payables and other current liabilities 292,133 - - - 292,133 Total 1,637,073 41,550 119,625 333,111 2,131,359 6.3. Market risk In carrying out its activities, the Group is potentially exposed to the following market risks: Risk of price fluctuations; Risk of exchange rate fluctuations; Risk of interest rate fluctuations. These risks are essentially managed centrally by the Parent Company. Risk of price fluctuations Given the industry in which the Group is engaged, the predominant price risk is related to fluctuations in the purchase price of goods for resale. Managing these risks is an integral part of commercial policies aimed at, inter alia, limiting the impact of purchase price fluctuations on end customers. Risk of exchange rate fluctuations Sales revenues and purchase costs for goods and products are mostly denominated in Euros. In addition, financial assets and liabilities are all denominated in Euros. Accordingly, the Group is not exposed to significant currency risks. Total Total 14
Risk of interest rate fluctuations The risk of interest rate fluctuations to which the Group is exposed arises from financial payables and receivables. The Group s fixed rate debt exposes it to a risk associated with changes in the fair value of the debt driven by market fluctuations of the reference rates. The Group s floating rate debt expose it to a cash flow risk stemming from interest rates volatility. The Group s financial debt consists of payables and loans with lending institutions, current account payables with parent companies and finance lease payables. Financial payables at floating rates accounted for 72.4% of total debt as of 30 June 2017. A positive or negative 0.5% change in interest rates, all other variables being unchanged, would have the following impacts on shareholders' equity and profit at and for the six months ended 30 June 2017 and 30 June 2016: As of 30 June 2017 As of 30 June 2016 Interest rate change at period-end 0.50% (0.50%) 0.50% (0.50%) After tax effect (in BS and P&L) in Euro / 000 (248) 248 (222) 222 In preparation of the refinancing of the Term Facility Agreement (as defined in note 11.11 below) and given the interest rate trend, on 14 and 17 July 2017 Esselunga negotiated two hedging contracts in the form of Forward Start Swap for a notional amount of 500 million, to reduce its exposure to floating rate risk, for a 7 year term as from 30 October 2017. 6.4. Capital risk Net invested capital is calculated as the sum of shareholders equity and the net debt. The gearing ratio as of 30 June 2017 and 31 December 2016 is shown in the following table: As of 30 June 2017 As of 31 December 2016 Cash and cash equivalents 284,079 305,470 Receivables from Fìdaty Oro payment card users 50,183 63,424 Financial receivables (current and non-current) - 817 Financial payables (current and non-current) (1,089,265) (425,172) Net debt (755,003) (55,461) Shareholders' equity 2,673,334 2,528,892 Net invested capital 3,428,337 2,584,353 Gearing ratio (22.0%) (2.1%) 15
The gearing ratio compares the net debt and the net invested capital (defined as the sum of net debt and Shareholders' equity) to represent the company s financial strength and its use of third party funds. The Esselunga Group s ratio as of 30 June 2017 shows that net invested capital is 78% financed by own funds, third-party funds covering the remaining portion. This indicates the Group s strong capital structure and high solvency level. The change in the gearing ratio compared to 31 December 2016 is mainly due to the use of the credit facility obtained in connection with the above mentioned acquisition of the 45.0% of the share capital of Villata Partecipazioni, for further details please see note 11.11 below. 7. Financial assets and liabilities by category The following tables provide a breakdown of financial assets and liabilities by category, with the corresponding fair value for the Group's consolidated financial statements as at 30 June 2017 and 31 December 2016: As of 30 June 2017 Financial assets and liabilities designated at fair value Investments held-tomaturity Loans and receivables Available for sale financial assets Financial liabilities at amortised cost Total Investments in other companies - - - 196-196 Other receivables and other noncurrent assets - - 119,476 - - 119,476 Trade receivables - - 341,401 - - 341,401 Other receivables and other current assets - - 59,390 - - 59,390 Cash and cash equivalents - - 284,079 - - 284,079 Total - - 804,346 196-804,542 Financial payables (current and noncurrent) excluding leases - - - - 678,315 678,315 Lease payables (current and noncurrent) - - - - 410,950 410,950 Deferred revenue for prize-giving promotions (current and non-current) 112,935 - - - - 112,935 Other payables and other non-current liabilities - - - - 164 164 Trade payables - - - - 1,177,408 1,177,408 Other payables and other current liabilities - - - - 253,930 253,930 Total 112,935 - - - 2,520,767 2,633,702 16
As of 31 December 2016 Financial assets and liabilities designated at fair value Investments held-tomaturity Loans and receivables Available for sale financial assets Financial liabilities at amortised cost Total Investments in other companies - - - 196-196 Trade receivables - - 429,558 - - 429,558 Cash and cash equivalents - - 305,470 - - 305,470 Other receivables and other noncurrent assets - - 76,839 - - 76,839 Other receivables and other current assets - - 53,189 - - 53,189 Total - - 865,056 196-865,252 Trade payables - - - - 1,302,844 1,302,844 Lease payables (current and noncurrent) - - - - 425,172 425,172 Deferred revenue for prize-giving promotions (current and non-current) 92,376 - - - - 92,376 Other payables and other non-current liabilities - - - - 107 107 Other payables and other current liabilities - - - - 292,133 292,133 Total 92,376 - - - 2,020,256 2,112,632 Carrying amount of trade receivables, trade payables and other current receivables and payables is deemed to be a reasonable approximation of respective fair value. Taking into consideration the interest rate trend and contractual expiry, the fair value of financial payables and lease payables does not significantly differ to the related carrying amount. 8. Information on fair value In relation to the assets and liabilities recognised in the statement of financial position, IFRS 13 requires that these values be classified on the basis of a hierarchy that reflects the significance of the inputs used to determine the fair value. The classification of the fair value of financial instruments on the basis of hierarchical levels is presented below: Level 1: Fair value calculated on the basis of quoted prices (unadjusted) in active markets for identical financial instruments. Therefore, in Level 1 the emphasis is on determining the following elements: (a) the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability; (b) the ability to carry out a transaction with the asset or liability at that market price at the measurement date. 17
Level 2: Fair value calculated using valuation techniques that make use of inputs that are observable on active markets. Inputs for this level include: (a) quoted prices for similar assets or liabilities in active markets; (b) quoted prices for identical or similar assets or liabilities in markets that are not active; (c) inputs other than quoted prices that are observable for the asset or liability, for example: i. interest rates and yield curves observable at commonly quoted intervals; ii. iii. implied volatilities; credit spreads; (d) market-corroborated inputs. Level 3: Fair value calculated using valuation techniques that make use of unobservable market inputs. Deferred revenue for prize-giving promotions is measured at fair value, which falls under level 3 of the hierarchy. 9. Operating Segments An operating segment is an entity s component: that undertakes entrepreneurial activities generating revenues and costs (including revenues and costs relating to transactions with other components of the same entity); whose operating results are periodically reviewed by the highest operational decision-making level of the entity to decide on the resources to be allocated to the segment and to assess the results (for Esselunga it is the Board of Directors); and for which separate financial information is available. The management information prepared and made available to the Board of Directors for the above mentioned purposes, considers the Group s business activities as an indistinct whole; accordingly, no specific segment reporting is provided in the financial statements. The Group currently carries out its activities exclusively in Italy, therefore no disclosure by geographical segment is provided. Given the nature of the Group's business, there are no situations of revenue concentration on individual customers. 18
10. Seasonal events Historically, the profit and loss results of the Group have not shown significant sensitivity to seasonal events. 11. Notes to the consolidated statement of financial position 11.1. Property, plant and equipment During the first half of 2017, the Group opened the stores in Rome (Prenestino district) and Novara (Veveri district). In addition, on 1 March 2017, the new Clicca e Vai sales channel came into operation in Varedo (MB). The details and movements of property, plant and equipment for the six months ended 30 June 2017 are shown in the following table: As of 31 December 2016 Increases Decreases Reclassifications and transfers As of 30 June 2017 Land and buildings Historical cost 2,737,981 48,655 (3,680) 52,801 2,835,757 Accumulated depreciation (568,558) (35,400) 1,107 - (602,851) Provision for impairment (15,774) (25) - (858) (16,657) Net amount 2,153,649 13,230 (2,573) 51,943 2,216,249 Plant and machinery - Historical cost 1,171,142 31,045 (3,069) 17,001 1,216,119 Accumulated depreciation (748,950) (42,043) 2,865 - (788,128) Provision for impairment 3,769 - - - 3,769 Net amount 425,961 (10,998) (204) 17,001 431,760 Industrial and commercial equipment - Historical cost 1,738 19 (3) 2 1,756 Accumulated depreciation (1,661) (12) 3 - (1,670) Net amount 77 7-2 86 Other assets - Historical cost 481,905 21,316 (3,351) 3,591 503,461 Accumulated depreciation (353,096) (17,926) 2,940 - (368,082) Net amount 128,809 3,390 (411) 3,591 135,379 Assets under construction and advances - Historical cost 380,206 91,178 (1,561) (73,805) 396,018 Provision for impairment (14,300) 25-858 (13,417) Net amount 365,906 91,203 (1,561) (72,947) 382,601 Total - Historical cost 4,772,972 192,213 (11,664) (410) 4,953,111 Accumulated depreciation (1,672,265) (95,381) 6,915 - (1,760,731) Provision for impairment (26,305) - - - (26,305) Total net amount 3,074,402 96,832 (4,749) (410) 3,166,075 The increase in land and buildings includes 9,736 thousand of capex made principally for the construction of the Novara store in the Veveri district. In addition, capital expenditures of 3,733 thousand were made for the maintenance and development of the logistics hubs and the headquarters. Additional capital 19
expenditures concerned the maintenance of the quality standard of the existing sales network for 12,218 thousand and the Group's commercial development for 22,968 thousand. The decrease in land and buildings mainly refers to the demolition of the old store in Prato, viale Galilei, and the repayment of a security deposit for a real estate initiative no longer of interest to the Group. The increase in plant and machinery includes 8,492 thousand for new stores and for the expansion and renovation of existing ones, and 7,896 thousand for the logistic hubs, the production facilities and the headquarters. Finally, 14,654 thousand concerned the maintenance of the quality standard of the existing sales network and 3 thousand capital expenditures for the Group's commercial development. The decrease in the item in question refers to the normal replacement of the Group's tangible assets. The increase in the item other assets includes 4,081 thousand mainly in relation to the construction of new stores and expansion and renovation works in 2017; 8,730 thousand refer to capital expenditures for the logistic hubs, production facilities and headquarters. Finally, 8,493 thousand refer to capital expenditures for the maintenance of quality standard of the sales network. The decrease in the item in question refers to the normal replacement of the Group s tangible assets. The reclassifications and transfers mainly refer to capex of previous years in relation to new stores opened in the first half of the year and to the change of use of some investment property item. As of 30 June 2017, the demolition of the steelworks is being completed, which will host the new logistic hub of Ospitaletto. The item "Other assets" includes: As of 30 June 2017 As of 31 December 2016 Motor vehicles, cars and vehicles for internal use 12,924 13,410 Office furniture and equipment 81,605 76,341 Electronic office equipment 29,701 27,838 Niche perfumery furniture and furnishings 1,900 1,920 Bar furniture and furnishings 9,249 9,300 Total 135,379 128,809 The increase in assets under construction and advances includes capital expenditures for the development and completion of the logistic hubs for 20,551 thousand, for commercial development for 68,450 thousand and for renovation 20
of the head office, mainly in relation to the new Office buildings, for 2,177 thousand. The reclassifications and transfers column for this item includes the reclassification to the other tangible asset items, of expenditures made in previous years for the stores opened in 2017 and the reclassification to investment property of land and buildings not intended for use in the Group s ordinary activities. The following table details the monetary revaluations made on property, plant and equipment in accordance with statutory provisions: Revaluation pursuant to Law 72/83 Revaluation pursuant to Law 419/91 Total writeups Land and buildings 3,093 19,305 22,398 Plant and machinery 164 0 164 Other assets 125 53 175 Total 3,379 19,358 22,737 As of 30 June 2017, the amount of revaluations not yet depreciated was 60 thousand mainly pertaining to land and buildings. Property, plant and equipment include buildings held under finance leases for a net carrying amount of 463,193 thousand and 472,252 thousand as of 30 June 2017 and 31 December 2016, respectively. As of 30 June 2017, there was no evidence of impairment loss on Property, plant and equipment. Property, plant and equipment do not include assets given as collateral. 11.2. Investment property Investment property includes land or buildings that are not intended for use in the Group's ordinary activities. The movements in investment property for the six months ended 30 June 2017 are shown in the following table: Historical cost Accumulated depreciation Provision for impairment Total Balances as of 1 January 2017 400,068 (26,779) (190,389) 182,900 Increases 5,183 (1,036) (1,002) 3,145 Decreases (8,840) - 6,897 (1,943) Reclassifications (412) 230 - (182) Balances as of 30 June 2017 395,999 (27,585) (184,494) 183,920 The increase in historical cost refers to the development of areas not intended for use in the Group s ordinary activities. 21
The net decrease of 1,943 thousand refers to the sale of two plots of land no longer strategic for the Group. The breakdown by geographical location of investment property is shown in the following table: Net historical cost Provision for impairment Total Lombardy 211,290 (111,698) 99,592 Piedmont 71,869 (43,529) 28,340 Tuscany 35,915 (7,675) 28,240 Emilia Romagna 35,426 (15,538) 19,888 Veneto 8,905 (5,045) 3,860 Lazio 9,884 (6,904) 2,980 Balances as of 31 December 2016 373,289 (190,389) 182,900 Lombardy 205,679 (108,939) 96,740 Piedmont 72,117 (43,831) 28,286 Tuscany 36,460 (4,200) 32,260 Emilia Romagna 35,354 (15,460) 19,894 Veneto 8,905 (5,045) 3,860 Lazio 9,898 (7,018) 2,880 Balances as of 30 June 2017 368,413 (184,493) 183,920 As of 30 June 2017, there was no evidence of impairment loss. Therefore, based also on such consideration, fair value of investment property does not significantly differ to net carrying amount and in any case, it is not deemed to be lower than it. 11.3. Intangible assets The breakdown and movements of intangible assets for the six months ended 30 June 2017 are shown in the table below: As of 31 December 2016 Increases Decreases Reclassifications and transfers As of 30 June 2017 Software Historical cost 176,994 3,326 (5) 6,600 186,915 Accumulated amortisation (142,159) (8,097) 1 2 (150,253) Net amount 34,835 (4,771) (4) 6,602 36,662 Trademarks, concessions and similar rights - Historical cost 66,463 20 - - 66,483 Accumulated amortisation (14,704) (899) - 1 (15,602) Net amount 51,759 (879) - 1 50,881 Commercial licenses - Historical cost 77,725 350-303 78,378 Accumulated amortisation (19,870) (858) - - (20,728) Provision for impairment (3,066) - - - (3,066) Net amount 54,789 (508) - 303 54,584 Intangibles in progress and advances - Historical cost 15,216 10,163 - (6,317) 19,062 Net amount 15,216 10,163 - (6,317) 19,062 22
Others - Historical cost 2,171 - - - 2,171 Accumulated amortisation (2,171) - - - (2,171) Net amount - - - - - Total - Historical cost 338,569 13,859 (5) 586 353,009 Accumulated amortisation (178,904) (9,854) 1 3 (188,754) Provision for impairment (3,066) - - - (3,066) Total net amount 156,599 4,005 (4) 589 161,189 Additions in the six months ended 30 June 2017 amounted to 13,859 thousand and mainly refer to the purchase of software for the improvement of the Group s IT infrastructure. The increase in intangibles in progress and advances refers to the development of software not yet in use. The decrease shown in the reclassifications column refers to additions made in prior years for software and commercial licenses that have come into operation in the first half of 2017 and have therefore been reclassified in the appropriate items. Reclassifications mainly relate to intangible component of certain investments previously classified whitin property, plant and equipment in assets under construction and advances. No revaluations were made to intangible assets pursuant to Article 2427, paragraph 3-bis of the Italian Civil Code; there were no intangible assets to be written down due to impairment losses. 11.4. Investments measured using the equity method The breakdown and movements of this item as of 30 June 2017 are as follows: Amounts as of 1 January 2017 - Acquisitions 646,611 Share of profit 183 Amounts as of 30 June 2017 646,794 The acquisitions for the period entirely refer to the 45% stake in Villata Partecipazioni acquired by Esselunga on 26 June 2017 for a total of 643,501 thousand, plus transaction costs totalling 3,110 thousand. The following table summarizes the main balance sheet data of Villata Partecipazioni as of 30 June 2017, derived from its interim consolidated financial statements as of 30 June 2017: 23
As of 30 June 2017 Total non-current assets 959,792 Total current assets 130,050 Total assets 1,089,842 Total non-current liabilities 103,378 Total current liabilities 12,169 Total liabilities 115,547 Total shareholders equity 974,295 11.5. Other receivables and other non-current assets The breakdown of this item is as follows: As of 30 June 2017 As of 31 December 2016 Tax receivables 50,959 49,299 Other receivables 40,000 - IRES tax receivable from parent companies 25,262 25,262 Security deposits 3,255 2,278 Total 119,476 76,839 Tax receivables mainly consist of VAT receivables for real estate purchases made by the Group, the collection of which is conditional upon completion of the underlying project and its transfer to the commercial companies of the Group. The item other receivables refers to the 40 million advance paid by Esselunga to Villata Partecipazioni s majority shareholders to purchase additional shares equal to 22.5% of the share capital. IRES receivables from parent companies refer to the refund requested pursuant to Legislative Decree no. 201/2011 for deductibility for IRES tax purposes of nondeducted IRAP tax on staff costs for the years 2007 to 2011. Security deposits refer to contracts entered into for the supply of utilities. 11.6. Closing inventories The breakdown of this item is as follows: As of 30 June 2017 As of 31 December 2016 Raw materials, supplies and consumables 59,727 35,922 Finished products and goods 356,799 358,497 Total 416,526 394,419 24
Inventories of finished products and goods are shown net of the provision for inventory obsolescence. The movements in the provision are shown below. As of 30 June 2017 As of 31 December 2016 Balance at the beginning of the period 21,274 32,594 Accruals 11,787 7,459 Use (6,310) (18,779) Balance at the end of the period 26,751 21,274 At 30 June 2017, there were no inventories pledged as collateral on loans received by the Group. 11.7. Trade receivables The breakdown of this item is as follows: As of 30 June 2017 As of 31 December 2016 Receivables from suppliers for promotional activities 291,273 366,225 Receivables from customers for use of Fìdaty Oro card 50,157 63,372 Receivables from customers for use of Fidaty Oro card - nonperforming 140 140 Receivables from parent companies 10 - Provision for doubtful receivables (179) (179) Total 341,401 429,558 Receivables from suppliers for promotional activities refer to the remuneration accrued for the promotional activity carried out in favour of suppliers at Group's stores (advertising, preferential display, leaflet distribution etc.) and during openings of new stores, or expansion of existing ones. Receivables from customers for use of the Fìdaty Oro card refer to receivables from the Esselunga, Atlantic and EsserBella stores customers who used the "Fìdaty Oro payment cards in June 2017. The amount of the provision for doubtful receivables as of 30 June 2017 entirely refers to the receivables for use of the Fìdaty Oro card. 11.8. Cash and cash equivalents The breakdown of this item is as follows: As of 30 June 2017 As of 31 December 2016 Deposits with banks and post-office 275,938 298,177 Cash and cash equivalents on hand 8,134 7,287 Cheques 7 6 Total 284,079 305,470 25
There is a lien of 11.0 million on a bank account to guarantee a real estate project. 11.9. Assets held for sale Non-current assets whose carrying amount will be recovered through a sale rather than through their use in the business are shown separately in the statement of financial position as assets held for sale. The breakdown of assets held for sale is shown in the following table: Historical cost Accumulated depreciation Provision for impairment Total Balances as of 31 December 2016 64,405 (2,138) (47,764) 14,503 Increases 70 - (70) - Decreases (16,588) 2,138 6,561 (7,889) Balances as of 30 June 2017 47,887 - (41,273) 6,614 The decreases mainly refer to the sale of all plant and machinery included in the Ospitaletto business unit acquired on 25 May 2016 from Stefana S.p.A.. The net balance outstanding as of 30 June 2017, amounting to 6,614 thousand, is entirely related to a plot of land in Sesto Calende (VA) that is currently being sold. The balance refletcs the sale price as defined in the preliminary sale agreement. Assets held for sale fall under level 3 of the fair value hierarchy. 11.10. Shareholders equity The breakdown of this item is as follows: As of 30 June 2017 As of 31 December 2016 Share capital 100,000 100,000 Share premium reserve 164,510 164,510 Retained earnings 2,359,555 2,215,113 Legal reserve 20,000 20,000 Revaluation reserve 25,975 25,975 Others 3,294 3,294 Total other reserves 49,269 49,269 Equity attributable to owners of the parent 2,673,334 2,528,892 Total shareholders equity 2,673,334 2,528,892 At the reporting dates, the share capital was fully subscribed and paid and consisted of 100,000,000 ordinary shares with a par value of 1 each. 26
11.11. Current and non-current financial payables The breakdown of this item is as follows: As of 30 June 2017 As of 31 December 2016 Current Non-current Current Non-current Term Facility Agreement 47 683,500 - - Finance lease payables 29,091 381,859 28,658 396,514 Transaction expenses on loans - (5,232) - - Total 29,138 1,060,127 28,658 396,514 The breakdown of financial payables by maturity is shown below: As of 30 June 2017 As of 31 December 2016 Within 1 year 29,138 28,658 From 2 and 5 years 794,838 118,622 Over 5 years 265,289 277,892 Total financial payables 1,089,265 425,172 Term Facility Agreement On 21 June 2017, Esselunga signed an agreement for the disbursement of a credit line, expiring 18 months from the date of first disbursement (extendable by a further 6 months at the Company's request) with Citibank Europe plc, UK Branch ( Citibank ) for a maximum amount of 1,200 million of which: (a) 643.5 million to be used to finance the purchase of 45% of Villata Partecipazioni s share capital from the minority shareholders; (b) 256.5 million to be used to finance the purchase an additional 22.5% of Villata Partecipazioni s share capital from the majority shareholders; and (c) 300 million to be used to refinance certain financial debts of Supermarkets Italiani S.p.A. (hereinafter Supermarkets Italiani ), Esselunga's parent company (the Term Facility Agreement ). On 26 June 2017, 683.5 million was disbursed in favour of Esselunga, of which: 643.5 million was used to finance the acquisition of a 45% stake in Villata Partecipazioni, as referred to in (a) above; and 40 million was paid to the majority shareholders of Villata Partecipazioni as advance for the acquisition of the remaining 22.5% of capital, which the Company committed to purchase by the end of September 2017. On 14 July 2017, as the financial debts of Supermarkets Italiani referred to in paragraph (c) above no longer required to be refinanced, the maximum financing 27